Item 7.
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
Forward-Looking Statements
The following discussion should be read in conjunction with our
consolidated financial statements included elsewhere herein. Unless
otherwise noted, all dollar amounts in tables are in
thousands.
This annual report on Form 10-K, including this Management's
Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements that are based on
management's current expectations, estimates, forecasts, and
projections about our business and operations. Our actual results
may differ materially and adversely from those currently
anticipated and expressed in any such forward-looking statements,
including as a result of the factors we describe under “Risk
Factors” and elsewhere in this annual report. See
“Special Note Regarding Forward-Looking Statements”
appearing at the beginning of this report and “Risk
Factors” set forth in Part I - Item 1A of this
report.
Business Overview
Transformation Plan
- In August 2015, we committed to and
began implementing a transformation plan pursuant to which, among
other things, we exited our mobile marketing and advertising
business and entered into the business of acquiring, financing and
leasing commercial real estate properties. The Company leases
its properties and intends to lease any future properties pursuant
to so-called “double net” or “triple net”
leases. The Company has significantly reduced its workforce
in connection with its transformation plan. Further, in order to
continue to grow our real estate portfolio in a manner designed to,
over time, help us generate profits, we may pursue higher valued
properties than the properties we currently own. We anticipate that
any such higher valued properties would likely generate relatively
higher rental income and would likely involve higher acquisition
costs and may involve higher costs of maintenance. There can be no
assurance that we will be successful in acquiring additional real
estate properties, including in any such higher valued properties
on commercially reasonable terms, if at all.
Any
future acquisitions are intended to be initially financed through
borrowings available under our Amended Note (as defined herein)
with Koala (as defined herein). See Liquidity and Capital Resources
- General
below for more
information.
Real Property Acquisitions
—In connection with the
execution of our transformation plan, on September 17, 2015,
we acquired a real estate parcel in Long Branch, New Jersey. The
property is subject to a triple net lease with JPMorgan Chase Bank,
N.A. ("Chase"), the original term of which expires in June, 2020,
(with two, five-year renewal options), pursuant to which Chase is
responsible for the payment of basic rent as well as the payment of
real estate taxes, maintenance costs, utilities, tenant's insurance
and other property related costs. Refer to
http://investor.shareholder.com/jpmorganchase/sec.cfm for the
financial statements of the tenant.
The
purchase price was approximately $3.63 million and average annual
rental income for the property over the remaining term of the
original lease is approximately $203,000, exclusive of the
amortization of the above market lease
intangible.
On May
18, 2016, we acquired a real estate parcel in Flanders, New York.
The property is subject to a double net lease with 7-Eleven, Inc.
(“7-Eleven”), the original term (the “Original
Term”) of which expires in December 2029 (with four,
five-year renewal options (the “Renewal Term,” and
together with the Original Term, the “Term”)). During
the Term, 7-Eleven is responsible for the payment of basic rent, as
well as the payment of, subject to certain exceptions, real estate
taxes, utilities, tenant’s insurance and other property
related costs. The landlord is responsible for certain maintenance
and repair costs. The purchase price was approximately $2.82
million and the average annual rental income for the property over
the remaining Original Term is approximately $164,000, exclusive of
the amortization of the above market lease intangible.
On
January 19, 2018, we, through our wholly owned subsidiary, Voltari
Holding, entered into the McClatchy Purchase Agreement. The closing
of such purchase is subject to customary conditions precedent,
including a due diligence period. The Company makes no assurances
that the conditions will be satisfied or that the purchase will be
consummated in a timely manner, if at all. See
Note 19 - Subsequent Events
to our
consolidated financial statements for more
information.
Results of Operations
In
August, 2015 we began implementing a transformation plan pursuant
to which, among other things, we exited our mobile marketing and
advertising business. As a result, residual charges related to
these operations discontinued in 2015 and prior years are reported
as discontinued operations in the consolidated financial statements
for the requisite periods presented in this Annual Report on Form
10-K. See discussion of net loss from discontinued operations below
and
Note 5 - Discontinued
Operations
to our consolidated financial statements for more
information.
Our
continuing operations for years ended December 31, 2017 and
2016 consist of revenues and expense related to commercial real
estate operations which commenced in August, 2015, as well as
general and administrative costs, depreciation and amortization,
and interest expenses which are not directly attributable to
discontinued operations. Continuing operations includes all
personnel and facilities costs related to executive management,
finance and accounting, human resources and other general corporate
staff as well as all legal and other professional fees, insurance
and other costs not directly attributable to the mobile marketing
and advertising business or our other discontinued
operations.
Total revenues
Commercial
real estate operations commenced in August 2015. Revenue from
continuing operations for the year ended December 31, 2017
consists of rental income from our real estate properties acquired
in 2016 and 2015.
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
$
1,843
|
$
2,778
|
$
(935
)
|
Depreciation and
amortization
|
178
|
289
|
(111
)
|
Impairment
charges
|
-
|
115
|
(115
)
|
Acquisition
transaction and integration costs
|
102
|
36
|
66
|
Total
operating expenses
|
$
2,123
|
$
3,218
|
$
(1,095
)
|
General and administrative, excluding depreciation &
acquisition expenses
For the
year ended December 31, 2017, general and administrative
expense, excluding depreciation, decreased $1.0 million compared to
the year ended December 31, 2016, due to:
●
$0.4
million decrease in personnel costs and severance pay, resulting
from continued staff reductions;
●
$0.5
million decrease in professional fees, primarily from renegotiated
contracts; and
●
$0.1
million decrease in insurance costs resulting from lower
fees.
Depreciation and amortization
For the
year ended December 31, 2017, depreciation and amortization
decreased by $0.1 million compared to the year ended
December 31, 2016 due to a $0.1 million decrease in our
general office computer equipment, furniture, computer software and
leasehold improvements related to the New York City
office.
Impairment Charges
In
July, 2016, in connection with the Company's ongoing transformation
plan, and in an effort to minimize expenses in light of its
significantly reduced employee headcount, the Company vacated the
office space at 601 W. 26th Street, New York, New York, and
impaired the remaining value of any office furniture, equipment and
leasehold improvements resulting in an impairment loss of
approximately $0.1 million.
Acquisition transaction and integration costs
For the
years ended December 31, 2017 and 2016, acquisition,
transaction and integration costs include costs related to the
acquisition of real estate properties, such as inspection,
appraisal, legal, title insurance and other fees. For the year
ended December 31, 2017 these costs included expenses related to
potential acquisitions, including the McClatchy Purchase Agreement.
During 2016 these costs included the Flanders Property in addition
to other properties we have investigated for potential
acquisitions. The increase of approximately $0.1 million for the
year ended December 31, 2017 reflects expenses for potential
acquisitions during 2017.
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and Revolving
Note fees
|
$
(190
)
|
$
(131
)
|
$
59
|
For the
years ended December 31, 2017 and 2016, interest expense consists
of interest on borrowings and a revolving note fee on the undrawn
amount related to our Prior Note with Koala. Under our Amended
Note, effective in March 2017, the revolving note fee related to
the undrawn portion of our Amended Note has been eliminated. See
Note 7 – Liquidity and
Capital Resources
to our consolidated financial statements
for more information.
Provision (benefit) for income taxes
No
provision for income tax was recorded in 2016 or 2017. Due to our
history of operating losses, we have accumulated substantial net
operating losses, which constitute the majority of our deferred tax
assets. Because of our history of operating losses, we maintain
full valuation allowances against our deferred tax assets and
consequently are not recognizing any tax benefit related to our
current pre-tax losses. If we achieve sustained profitability,
subject to certain provisions of the U.S. federal tax laws that may
limit our use of our accumulated losses, we will continue to
evaluate whether we should record a valuation allowance, based on a
more likely than not standard, which would result in immediate
recognition of a tax benefit and we would begin recording income
tax provisions based on our earnings and applicable statutory tax
rates going forward. Due to our large net operating loss
carryforwards, we do not expect to pay U.S. federal income taxes in
the next several years.
Net Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from
discontinued operations
|
$
-
|
$
(24
)
|
$
(24
)
|
Results
of operations for our mobile marketing and advertising business,
which terminated in August, 2015, are included in discontinued
operations for all periods presented. Results from discontinued
operations for the year ended December 31, 2016 also reflect
residual charges related to operations discontinued in 2015. See
Note 5 - Discontinued
Operations
to our consolidated financial statements for more
information.
For the
year ended December 31, 2017, the net loss from discontinued
operations decreased $24 thousand compared to the year ended
December 31, 2016. This decrease was primarily due to the
decrease in direct third-party expenses resulting from our exit
from the mobile marketing and advertising business.
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
$
(1,902
)
|
$
(3,111
)
|
$
1,209
|
For the
year ended December 31, 2017, our net loss was $1.9 million,
compared to net loss of $3.1 million for the year ended
December 31, 2016
. The
$1.2 million decrease in net loss is primarily due to:
●
increase
in revenue of $0.1 million;
●
decreased
general and administrative expenses of $1.0 million (as noted
above);
●
decreased
depreciation of $0.1 million;
●
increase in
acquisition and transaction related costs $0.1
million;
●
decreased
impairment charges of $0.1 million;
●
increased
other income of $0.1 million; and
●
increase in
interest expense $0.1 million.
Liquidity and Capital Resources
General
Our
principal needs for liquidity since we began executing our
transformation plan in August, 2015, have been to fund operating
losses, working capital requirements, capital expenditures,
restructuring expenses, acquisitions and integration and debt
service. Our principal sources of liquidity as of
December 31, 2017
consisted of cash
and cash equivalents of $0.1 million, and our ability to borrow on
our Koala loan.
On
August 7, 2015, we, as borrower, and Koala Holdings LP, as lender,
an affiliate of Mr. Carl C. Icahn, the Company’s controlling
stockholder ("Koala"), entered into a $10 million revolving loan
facility (the “Prior Note") at a rate equal to the greater of
the LIBOR rate plus 350 basis points, per annum, and 3.75%, per
annum, plus a fee of 0.25% per annum on undrawn amounts. The
Company sought and received the Prior Note to, in part, allay
potential concerns regarding the Company’s ability to invest
in and execute its transformation plan while retaining cash levels
sufficient to fund its ongoing operations. There were no
limitations on the use of proceeds under the Prior Note. As
collateral for the Prior Note, we pledged and granted to Koala a
lien on our limited liability company interest in Voltari
Holding.
On
March 29, 2017, we as borrower, and Koala, as lender, entered into
a revolving note (the “Amended Note”), which amended
and restated the Prior Note. The Amended Note provides that the net
proceeds thereunder in excess of $10 million will be used by the
Company for the acquisition, improvement, development,
modification, alteration, repair, maintenance, financing or leasing
of real property, including any fees and expenses associated with
such activities. Pursuant to the Amended Note, Koala made available
to the Company a revolving loan facility of up to $30 million in
aggregate principal amount (the “Commitment”). The
Company may, by written notice to Koala, request that the
Commitment be increased (the “Increased Commitment”),
provided that the aggregate amount of all borrowings, plus
availability under the aggregate Increased Commitment, shall not
exceed $80 million. Koala has no obligation to provide any
Increased Commitment and may refuse to do so in its sole
discretion. Borrowings under the Amended Note will bear interest at
a rate equal to the LIBOR Rate (as defined in the Amended Note)
plus 200 basis points, per annum, subject to a maximum rate of
interest of 3.75%, per annum. The Amended Note matures on the
earliest of (i) December 31, 2020, (ii) the date on which any
financing transaction, whether debt or equity, is consummated by
the Company (or its successors and assigns) with net proceeds in an
amount equal to or greater than $30 million, and (iii) at the
Company’s option, a date selected by the Company that is
earlier than December 31, 2020 (the “Maturity Date”).
The Amended Note also allows the Company to, upon written notice to
Koala not more than 60 days and not less than 30 days prior to the
Maturity Date, request that Koala extend the Maturity Date to
December 31, 2022. Koala may, in its sole discretion, agree to
extend the Maturity Date by providing written notice to the Company
on or before the date that is 20 days prior to the Maturity Date.
If an event of default exists, the Amended Note will bear interest
at a default rate equal to the greater of the LIBOR Rate plus 300
basis points, per annum, or 4.5%, per annum. Subject to the terms
and conditions of the Amended Note, the Company may repay all or
any portion of the amounts outstanding under the Amended Note at
any time without premium or penalty. The amounts available under
the Commitment or Increased Commitment, as the case may be, will
increase and decrease in direct proportion to repayments and
reborrowing’s under the Amended Note, respectively, from time
to time. As collateral for the Amended Note, the Company has
pledged and granted to Koala a lien on the Company’s limited
liability company interest in Voltari Holding.
As of
December 31, 2017, borrowings from this loan facility totaled $5.5
million, primarily due to borrowings in connection with the
acquisition of the Flanders Property and the funding of operating
losses. The outstanding balance, including accumulated interest of
$0.3 million, totaled $5.8 million as of December 31, 2017. On
January 17, 2018, we borrowed an additional $0.5 million under the
Amended Note to fund ongoing operating costs. If we consummate the
McClatchy Purchase Agreement, we would have to borrow up to an
additional $17 million under the Amended Note, which would bring
our outstanding balance to approximately $23 million.
To the
extent we are unable to replace or refinance the Amended Note prior
to its maturity we may not have sufficient capital resources to
repay any amounts borrowed thereunder. There can be no assurance
that we will be able to replace or refinance the Amended Note on
commercially reasonable terms, if at all.
As
previously noted, in August, 2015, we began implementing a
transformation plan pursuant to which, among other things, we
exited our mobile marketing and advertising business and entered
into the business of acquiring, financing and leasing commercial
real properties. We expect that the acquisition of commercial real
properties, the cost of operations and working capital requirements
will be our principal need for liquidity in the future. Our cash
flows may be affected by many factors including the economic
environment, competitive conditions in the commercial real estate
industry and the success of our transformation plan. We believe we
will have adequate resources to fund our operations, capital
expenditures and working capital needs for the next 12 months using
borrowings available under the Amended Note and our cash and cash
equivalents on hand. We currently intend to leverage real
properties that we may acquire but cannot assure that we will be
able to do so on commercially reasonable terms, if at
all.
Our
liquidity may be adversely affected if, and to the extent that, our
remaining Series J preferred stock becomes redeemable. The Company
believes that, if a redemption event were to occur, limited, if
any, funds would be available for such redemption under the terms
of the Series J preferred stock and applicable Delaware law.
As a result, in the event that a redemption event were to occur,
the Company currently expects that it would be precluded, under the
terms of the Series J preferred stock and applicable Delaware law,
from making any material redemptions.
Our
ability to achieve our business and cash flow plans is based on a
number of assumptions which involve significant judgments and
estimates of future performance, borrowing capacity and credit and
equity finance availability, which cannot at all times be assured.
Accordingly, we cannot assure that cash flows from operations and
other internal and external sources of liquidity will at all times
be sufficient for our cash requirements. If necessary, we may need
to consider actions and steps to improve our cash position and
mitigate any potential liquidity shortfall, such as modifying our
business plan, pursuing additional financing to the extent
available, pursuing and evaluating other alternatives and
opportunities to obtain additional sources of liquidity and other
potential actions to reduce costs. We cannot assure that any of
these actions would be successful, sufficient or available on
favorable terms. Any inability to generate or obtain sufficient
levels of liquidity to meet our cash requirements at the level and
times needed could have a material adverse impact on our business
and financial position.
Our
ability to obtain any additional financing depends upon many
factors, including our then existing level of indebtedness (if any)
and restrictions in any debt facilities we may establish in the
future, historical business performance, financial projections,
prospects and creditworthiness and external economic conditions and
general liquidity in the credit and capital markets. Any financing
(or subsequent refinancing) could also be extended only at costs
and require us to satisfy restrictive covenants, which could
further limit or restrict our business and results of operations or
be dilutive to our stockholders.
Cash Flows
As of
December 31, 2017,
and
2016, we had cash and cash equivalents of $0.1 million and $0.4
million, respectively. The decrease of $0.3 million primarily
reflects cash used in operating activities of $1.3 million offset
by our increase in borrowings of $1.0 million.
Net Cash Used in Operating Activities
For the
year ended December 31, 2017, net cash of $1.3 million was used in
operating activities. The change in our operating assets and
liabilities was driven by a decrease in our prepaid expenses and
other current assets of $0.2 million primarily from reductions in
prepaid insurance and prepaid service contracts, along with a
decrease in accounts payable and other accrued expenses of $0.4
million resulting primarily from the decrease in payroll costs
accrued.
Cash Used in Investing Activities
For the
year ended December 31, 2017 there was no cash used in investing
activities.
Cash Provided by Financing Activities
For the
year ended December 31, 2017, cash of $1.0 million was provided by
financing activities due to additional borrowings under our Amended
Note, which was primarily used to fund our operating
activities.
Off-Balance Sheet Arrangements
As of
December 31, 2017
, we do
not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity and capital resources
that are material to investors. Prior to the implementation of our
transformation plan, we entered into contracts with mobile
marketing and advertising customers which provided that we would
indemnify such customers against certain intellectual property
claims as well as other contractual matters. Until the expiration
of such contractual indemnification provisions, we may indemnify
our previous customers against certain copyright and patent
infringement claims that may arise from them having used our
software technology.
Critical Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the U.S. The
preparation of our financial statements and related disclosures
requires us to make estimates, assumptions and judgments that
affect the reported amount of assets, liabilities, revenue, costs
and expenses, and related disclosures. We base our estimates and
assumptions on historical experience and other factors that we
believe to be reasonable under the circumstances. We evaluate our
estimates and assumptions on an ongoing basis. Our actual results
may differ from these estimates under different assumptions and
conditions and in certain cases the difference may be material. Our
critical accounting policies and estimates include those involved
in the recognition of revenue, valuation of long lived assets,
valuation allowance on the deferred tax asset, stock-based
compensation, redeemable preferred stock, litigation and other loss
contingencies. Estimates related to the allocated cost of
investments in real estate among land, other tangible and
intangible assets affect future depreciation and amortization
expense as well as the amount of reported assets.
As a
result of our entry into the business of acquiring, financing and
leasing commercial real properties, we have adopted the significant
accounting policies described in
Note 2 - Summary of Significant Accounting
Policies to
our consolidated financial statements in this
Annual Report on Form 10-K
.
Revenue recognition
The
Company’s revenues are derived from rental income, include
rents due in accordance with the lease terms, reported on a
straight-line basis over the initial term of the leases. Our leases
are categorized as operating leases.
Real Estate Investments
Investments
in real estate are recorded at acquisition date fair value.
Improvements and replacements are capitalized when they extend the
useful life of the asset. Costs of repairs and maintenance are
expensed as incurred.
Cost of acquiring
real estate investments is allocated to tangible and intangible
assets.
The fair value of the tangible assets of an acquired
property with an in-place operating lease is determined by valuing
the property as if it were vacant, and the
“as-if-vacant” value is then allocated to the tangible
assets based on the fair value of the tangible assets. The fair
value of in-place leases is determined by considering current
market conditions, as well as costs to execute similar leases. The
fair value of above- or below-market leases is recorded based on
the present value of the difference between the contractual amount
to be paid pursuant to the in-place lease and the Company's
estimate of the fair market lease rate for the corresponding
in-place lease, measured over the remaining term of the lease,
including any below-market fixed-rate renewal options for
below-market leases. We determine these fair values primarily by
relying upon third-party appraisals conducted by independent
appraisal firms.
Depreciation
is computed using the straight-line method over the estimated
useful lives of up to 43 years for buildings, 13 years
for land improvements and the shorter of the useful life or
the remaining lease term for tenant improvements and leasehold
interests. Capitalized above-market lease values are amortized as a
reduction of rental income over the remaining terms of the
respective leases. Capitalized below-market lease values are
amortized as an increase to rental income over the remaining terms
of the respective leases and expected below-market renewal option
periods. The value of in-place leases, exclusive of the value of
above-market and below-market in-place leases, are amortized to
expense over the remaining periods of the respective
leases.
Valuation of long-lived and intangible assets
We
periodically evaluate events or changes in circumstances that
indicate the carrying amount of our long-lived and intangible
assets may not be recoverable or that the useful lives of the
assets may no longer be appropriate. Factors which could trigger an
impairment review or a change in the remaining useful life of our
long-lived and intangible assets include significant
underperformance relative to historical or projected future
operating results, significant changes in our use of the assets or
in our business strategy, loss of or changes in customer
relationships and significant negative industry or economic trends.
When indications of impairment arise for a particular asset or
group of assets, we assess the
future
recoverability of the carrying value of the asset (or asset group)
based on an undiscounted cash flow analysis. If carrying value
exceeds projected, net, undiscounted cash flows, an additional
analysis is performed to determine the fair value of the asset (or
asset group), typically a discounted cash flow analysis, based on
an income and/or cost approach, and an impairment charge is
recorded for the excess of carrying value over fair value. Any
impairment losses relating to long-lived and intangible assets are
recognized in the consolidated financial statements. For additional
information, see
Note 6 -
Impairment Charges
to our consolidated financial statements
included elsewhere in this Form 10-K.
The
process of assessing potential impairment of our long-lived and
intangible assets is highly subjective and requires significant
judgment. An estimate of future undiscounted cash flow can be
affected by many assumptions, requiring that management make
significant judgments in arriving at these estimates. Although
there are inherent uncertainties in this assessment process, the
estimates and assumptions we use to estimate future cash flows are
consistent with our internal planning. Significant future changes
in these estimates or their related assumptions could result in
additional impairment charges related to individual assets or
groups of these assets.
Provision (benefit) for income taxes
On
December 22, 2017, the U.S. Congress enacted a new tax legislation,
commonly referred to as “The Tax Cuts and Jobs Act of
2017” (the “Tax Act”). In accordance with ASC
740, Accounting for Income Taxes, companies are required to
recognize the effect of the Tax Act in the period of enactment,
even though the effective date for most provisions of the Tax Act
is January 1, 2018.
We are
subject to federal and various state income taxes in the U.S., and
to a lesser extent, income-based taxes in various foreign
jurisdictions, including, but not limited to Canada. In 2012, we
effected a restructuring of our workforce and other cost savings
initiatives. As a part of this process we have exited from our
operations in India, the Asia Pacific region, France and the
Netherlands. Deferred tax assets, related valuation allowances,
current tax liabilities and deferred tax liabilities are determined
separately by tax jurisdiction. In making these determinations, we
calculate tax assets, related valuation allowances, current tax
liabilities and deferred tax liabilities, and we assess temporary
differences resulting from differing treatment of items for tax and
accounting purposes. We recognize only tax positions that are
“more likely than not” to be sustained based solely on
their technical merits. Although we believe that our tax estimates
are reasonable, the ultimate tax determination involves significant
judgment that is subject to audit by tax authorities in the
ordinary course of business.
At
December 31, 2017
, our
gross deferred tax assets consisted primarily of domestic net
operating losses, capital loss carryforwards and research and
development credit carryforwards. As of
December 31, 2017
, we had U.S. federal
and state net operating loss carryforwards of approximately $496
million (net of $3 million of limitations) and between $114 million
to $302 million, respectively, which begin to expire at varying
dates starting in 2019 for U.S. federal income tax purposes and in
2028 for state income tax purposes.
Because
of our history of generating operating losses, we maintain full
valuation allowances against these deferred tax assets and
consequently do not recognize tax benefits for our current
operating losses. If we determine it is more likely than not that
all or a portion of the deferred tax assets will be realized, we
will eliminate or reduce the corresponding valuation allowances
which would result in immediate recognition of an associated tax
benefit. Going forward, we will reassess the need for any remaining
valuation allowances or the necessity to recognize additional
valuation allowances. In the event we do eliminate all or a portion
of the valuation allowances in the future, we will begin recording
income tax provisions based on our earnings and applicable
statutory tax rates from that time forward.
Redeemable preferred stock and common stock warrants
In
October, 2012, we issued
1,199,643
shares of Series J preferred
stock and (after giving effect to the one-for-ten reverse stock
split) warrants to purchase 1,014,982 shares of our common stock.
Net proceeds from the rights offering of
$27.8 million
were allocated between Series
J preferred stock and common stock warrants based on their
estimated relative fair market values at the date of issuance as
determined with the assistance of a third party valuation
specialist. Our Series J preferred stock contains certain
redemption features which are outside of our control. Accordingly,
our Series J preferred stock is classified as mezzanine equity and
reported as Redeemable preferred stock on our consolidated balance
sheet, net of issuance costs, at
December 31, 2017
. The difference
between the carrying value of the Series J preferred stock and its
liquidation value is being accreted over an anticipated redemption
period of five years using the effective interest method. Holders
of the Series J preferred stock are entitled to an annual dividend
of 13% (which increases to 14% on January 1, 2018), which is
payable in-cash or in-kind, at the discretion of the Company, on a
quarterly basis. Dividends declared on the Series J preferred stock
and accretion associated with the Series J preferred stock reduce
the amount of net earnings that are available to common
stockholders and are presented as separate amounts on the
consolidated statements of operations. The common stock warrants
are recorded as Additional paid-in capital on our consolidated
balance sheet at
December 31,
2017
. On October 11, 2017, the remaining warrants to
purchase 1,014,958 shares of our common stock expired without being
exercised.
Recent Accounting Pronouncements
See
Note 2
-
Summary of Significant Accounting
Policies
to the consolidated financial
statements.
Item 8.
Consolidated
Financial Statements.
Report of Independent Registered Public Accounting
Firm
Board
of Directors and Stockholders
Voltari
Corporation
Opinion
on the financial statements
We have
audited the accompanying consolidated balance sheets of Voltari
Corporation (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2017 and 2016, the
related consolidated statements of operations, comprehensive loss,
changes in stockholders’ deficit, and cash flows for each of
the two years in the period ended December 31, 2017, and the
related notes and schedules (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the
results of its operations and its cash flows for each of the two
years in the period ended December 31, 2017, in conformity with
accounting principles generally accepted in the United States of
America.
Basis
for opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/
Grant Thornton LLP
We have
served as the Company’s auditor since 2011.
New
York, New York
March
23, 2018
Voltari Corporation
Consolidated Balance Sheets
(in thousands, except share data)
|
|
|
Assets
|
|
|
Real estate
investments, net
|
$
5,995
|
$
6,215
|
Cash and cash
equivalents
|
101
|
414
|
Prepaid
expenses
|
435
|
520
|
Other
assets
|
117
|
101
|
Total
assets
|
$
6,648
|
$
7,250
|
Liabilities,
redeemable preferred stock and stockholders’
deficit
|
|
|
Accounts payable
and accrued expenses
|
$
641
|
$
508
|
Accrued
compensation
|
6
|
17
|
Deferred rent
income
|
17
|
17
|
Revolving
note
|
5,500
|
4,500
|
Interest
payable
|
331
|
141
|
Deferred rent
expense
|
15
|
25
|
Accrued preferred
stock dividends
|
1,816
|
1,598
|
Other
liabilities
|
112
|
116
|
Total
liabilities
|
8,438
|
6,922
|
Commitments
and contingencies
|
|
|
Redeemable
preferred stock, $0.001 par value; 1,200,000 shares authorized;
1,170,327 shares issued and outstanding at December 31, 2017 and
2016. Redemption value: $57,227 and $50,355 at December 31, 2017
and 2016, respectively.
|
55,411
|
48,024
|
Stockholders’
deficit
|
|
|
Common stock,
$0.001 par value; 25,000,000 shares authorized at December 31, 2017
and 2016; 8,994,814 shares issued and outstanding at December 31,
2017 and 2016.
|
9
|
9
|
Additional paid-in
capital
|
547,680
|
555,286
|
Accumulated
deficit
|
(604,951
)
|
(603,049
)
|
Accumulated other
comprehensive income
|
61
|
58
|
Total
stockholders’ deficit
|
(57,201
)
|
(47,696
)
|
Total
liabilities, redeemable preferred stock and stockholders’
deficit
|
$
6,648
|
$
7,250
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Voltari Corporation
Consolidated Statements of Operations
(in thousands, except share data and per share
amounts)
|
|
|
|
|
Revenue
|
$
322
|
$
262
|
Operating
expenses
|
|
|
General and
administrative
|
1,843
|
2,778
|
Depreciation and
amortization
|
178
|
289
|
Impairment
charges
|
—
|
115
|
Acquisition
and transaction related
|
102
|
36
|
Total
operating expenses
|
2,123
|
3,218
|
Operating
loss
|
(1,801
)
|
(2,956
)
|
Other income net of
expenses
|
89
|
—
|
Interest expense
and Revolving Note fees
|
(190
)
|
(131
)
|
Net loss from
continuing operations
|
(1,902
)
|
(3,087
)
|
Net loss from
discontinued operations, net of taxes
|
-
|
(24
)
|
Net
loss
|
$
(1,902
)
|
$
(3,111
)
|
Accretion of
redeemable preferred stock
|
(734
)
|
(848
)
|
Series J redeemable
preferred stock dividends
|
(6,872
)
|
(6,062
)
|
Net
loss attributable to common stockholders
|
$
(9,508
)
|
$
(10,021
)
|
|
|
|
Net
loss per share attributable to common stockholders - basic and
diluted:
|
|
|
Continuing
operations
|
$
(1.06
)
|
$
(1.11
)
|
Discontinued
operations
|
—
|
—
|
Total
net loss per share attributable to common stockholders
|
$
(1.06
)
|
$
(1.11
)
|
|
|
|
Weighted-average
common shares outstanding – basic and diluted
|
8,994,814
|
8,994,814
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Voltari Corporation
Consolidated Statements of Comprehensive Loss
(in thousands)
|
|
|
|
|
Net
loss
|
$
(1,902
)
|
$
(3,111
)
|
Other comprehensive
income:
|
|
|
Foreign currency
translation adjustment
|
3
|
7
|
Comprehensive
loss
|
$
(1,899
)
|
$
(3,104
)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Voltari Corporation
Consolidated Statements of Changes in Stockholders’
Deficit
(in thousands, except share data)
|
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance
as of December 31, 2015
|
8,994,814
|
$
9
|
$
562,204
|
$
(599,938
)
|
$
51
|
$
(37,674
)
|
Net
loss
|
—
|
—
|
—
|
(3,111
)
|
—
|
(3,111
)
|
Other comprehensive
income
|
—
|
—
|
—
|
—
|
7
|
7
|
Redeemable
preferred stock dividends
|
—
|
—
|
(6,062
)
|
—
|
—
|
(6,062
)
|
Accretion of
redeemable preferred stock
|
—
|
—
|
(848
)
|
—
|
—
|
(848
)
|
Stock-based
compensation expense
|
—
|
—
|
(8
)
|
—
|
—
|
(8
)
|
Balance
as of December 31, 2016
|
8,994,814
|
9
|
555,286
|
(603,049
)
|
58
|
(47,696
)
|
Net
loss
|
—
|
—
|
—
|
(1,902
)
|
—
|
(1,902
)
|
Other comprehensive
income
|
—
|
—
|
—
|
—
|
3
|
3
|
Redeemable
preferred stock dividends
|
—
|
—
|
(6,872
)
|
—
|
—
|
(6,872
)
|
Accretion of
redeemable preferred stock
|
—
|
—
|
(734
)
|
—
|
—
|
(734
)
|
Balance
as of December 31, 2017
|
8,994,814
|
$
9
|
$
547,680
|
$
(604,951
)
|
$
61
|
$
(57,201
)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Voltari Corporation
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$
(1,902
)
|
$
(3,111
)
|
Loss from
discontinued operations
|
—
|
24
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
|
|
Depreciation and
amortization
|
178
|
289
|
Amortization of
favorable lease
|
42
|
42
|
Straight-line
rental income
|
(16
)
|
(10
)
|
Stock-based
compensation expense
|
—
|
(8
)
|
Impairment
charges
|
—
|
115
|
Non-cash interest
expense
|
190
|
131
|
Changes in
operating assets and liabilities:
|
|
|
Prepaid expenses
and other assets
|
85
|
349
|
Accounts payable
and accrued expenses
|
120
|
(264
)
|
Deferred rent
expense
|
(10
)
|
(3
)
|
Net
cash used in operating activities - continuing
operations
|
(1,313
)
|
(2,446
)
|
Net
cash used in operating activities - discontinued
operations
|
-
|
(6
)
|
Net
cash used in operating activities
|
(1,313
)
|
(2,452
)
|
|
|
|
Cash
flows from investing activities:
|
|
|
Investment in real
estate
|
—
|
(2,817
)
|
Net
cash used in investing activities - continuing
operations
|
—
|
(2,817
)
|
Net
cash provided by investing activities - discontinued
operations
|
—
|
3
|
Net
cash used in investing activities
|
—
|
(2,814
)
|
|
|
|
Cash
flows from financing activities:
|
|
|
Proceeds from debt
facilities
|
1,000
|
4,500
|
Net
cash provided by financing activities - continuing
operations
|
1,000
|
4,500
|
Net
decrease in cash and cash equivalents
|
(313
)
|
(776
)
|
Cash
and cash equivalents at beginning of year
|
414
|
1,180
|
Cash
and cash equivalents at end of year
|
$
101
|
$
414
|
|
|
|
Supplemental
schedule of non-cash financing activities:
|
|
|
Series J redeemable
preferred stock dividend paid-in-kind
|
$
6,654
|
$
5,870
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Voltari Corporation
Notes to Consolidated Financial Statements
1. Organization
Voltari
Corporation (“Voltari” or the “Company”), a
Delaware corporation, was incorporated in December, 2012 as a
wholly-owned subsidiary of Motricity, Inc.
(“Motricity”). Through a reorganization, Motricity
became a wholly owned subsidiary of Voltari in April, 2013. As of
December 31, 2017, entities affiliated with Mr. Carl C. Icahn
own approximately 98.0% of our Series J preferred stock and
approximately 52.7% of our common stock.
The
Company is in the business of acquiring, financing and leasing
commercial real properties through its wholly owned subsidiary,
Voltari Real Estate Holding LLC ("Voltari Holding"). The Company
had previously been engaged in the business of providing mobile
marketing and advertising solutions to brands, marketers and
advertising agencies. In August 2015, we began implementing a
transformation plan pursuant to which, among other things, we
exited our mobile marketing and advertising business. The majority
of the remaining costs related to the transformation plan have been
incurred as of 2017. Additional amounts to be incurred subsequent
to the year ended December 31, 2017, if any, cannot be reasonably
estimated. We currently own two commercial real properties. All of
our revenue is derived from the rental income we receive under the
two leases associated with these two properties. We have been
funding our operations with borrowings under our Revolving Note as
described in
Note 7 - Liquidity
and Capital Resources.
We expect to continue to rely on
borrowings to provide working capital in the near
term.
2. Summary of Significant Accounting Policies
Basis of Presentation
The
consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany balances
and transactions have been eliminated upon consolidation. The
accompanying consolidated financial statements and related notes of
the Company have been prepared in accordance with accounting
principles generally accepted in the United States of America
(“U.S. GAAP”).
Reclassifications
Certain
prior period amounts have been reclassified in the consolidated
financial statements to conform to current period
presentation.
In
August, 2015, we began implementing a transformation plan pursuant
to which, among other things, we exited from our mobile marketing
and advertising business. As a result, these businesses are
reported as discontinued operations in the consolidated financial
statements for all periods presented. See
Note 5 - Discontinued Operations
for
further information.
Comprehensive Loss
The
Company reports consolidated comprehensive loss in a separate
statement following the consolidated statements of operations.
Comprehensive loss is defined as the change in equity resulting
from net loss and Other Comprehensive Income ("OCI"). The only
component of OCI is foreign currency translation
adjustments.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
the accounting principles generally accepted in the United States
of America (“U.S. GAAP”) requires management to make
estimates and assumptions in certain circumstances that affect the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant
estimates include those involved in allocating cost of real estate
investments, valuation of long-lived and intangible assets,
provision for income taxes, and accounting for our redeemable
preferred stock. Actual results could differ from those
estimates.
Real Estate Investments
Investments
in real estate are recorded at cost. Improvements and replacements
are capitalized when they extend the useful life of the asset.
Costs of repairs and maintenance are expensed as incurred. The fair
value of the tangible assets of an acquired property with an
in-place operating lease will be determined by valuing the property
as if it were vacant, and the “as-if-vacant” value will
then be allocated to the tangible assets based on the fair value of
the tangible assets. The fair value of in-place leases will be
determined by considering current market conditions, as well as
costs to execute similar leases. The fair value of above- or
below-market leases will be recorded based on the present value of
the difference between the contractual amount to be paid pursuant
to the in-place lease and the Company's estimate of the fair market
lease rate for the corresponding in-place lease, measured over the
remaining term of the lease, including any below-market fixed-rate
renewal options for below-market leases.
Voltari Corporation
Notes to Consolidated Financial Statements
Depreciation
is computed using the straight-line method over the estimated
useful lives of up to 43 years for buildings, up
to 13 years for improvements and the shorter of the useful
life or the remaining lease term for tenant improvements and
leasehold interests. Capitalized above-market lease values are
amortized as a reduction of rental income over the remaining terms
of the respective leases. Capitalized below-market lease values are
amortized as an increase to rental income over the remaining terms
of the respective leases and expected below-market renewal option
periods. The value of in-place leases, exclusive of the value of
above-market and below-market in-place leases, are amortized to
expense over the remaining periods of the respective
leases.
Revenue Recognition
The
Company’s revenues are derived from rental income, include
rents due in accordance with the lease terms, reported on a
straight-line basis over the initial term of the leases. Our leases
with tenants are classified as operating leases.
Cash and Cash Equivalents
We
consider all highly liquid investments with original maturities of
three months or less at the date of purchase to be cash and cash
equivalents. Other assets included restricted cash of $0.1 million
at December 31, 2017 and 2016, comprised of cash set aside to
secure a real property lease and security for our credit card.
Cash, including amounts restricted, may at times exceed the Federal
Deposit Insurance Corporation deposit insurance limit of $250,000
per institution. The Company mitigates credit risk by placing cash
with major financial institutions. To date, the Company has not
experienced any losses of cash.
Long-Lived Assets
Long-lived
assets include assets such as property and equipment and intangible
assets, other than those with indefinite lives. We assess the
carrying value of our long-lived asset groups when indicators of
impairment exist and recognize an impairment loss when the carrying
amount of a long-lived asset is not recoverable from the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset. Indicators of impairment include
significant under-performance relative to historical or projected
future operating results, significant changes in our use of the
assets or in our business strategy, loss of or changes in customer
relationships and significant negative industry or economic trends.
When indications of impairment arise for a particular asset or
group of assets, we assess the future recoverability of the
carrying value of the asset (or asset group) based on an
undiscounted cash flow analysis. If carrying value exceeds
projected net undiscounted cash flows, an additional analysis is
performed to determine the fair value of the asset (or asset
group), typically a discounted cash flow analysis, and an
impairment charge is recorded for the excess of carrying value over
fair value. See
Note 6 -
Impairment Charges
for more information.
Property
and equipment are recorded at historical cost less accumulated
depreciation, unless impaired. Depreciation is charged to
operations over the estimated useful lives of the assets using the
straight-line method or a variable method reflecting the pattern in
which the economic benefits are anticipated to be utilized. Upon
retirement or sale, the historical cost of assets disposed of and
the related accumulated depreciation are removed from the accounts
and any resulting gain or loss is recognized. Expenditures for
repairs and maintenance are charged to expense as
incurred.
All
costs related to the development of internal-use software other
than those incurred during the application development stage are
expensed, including costs for minor upgrades and enhancements when
there is no reasonable cost-effective way to separate these costs
from maintenance activities. Costs incurred during the application
development stage are capitalized and amortized over the estimated
useful life of the software, which is generally
three
years.
Identifiable
intangible assets are recorded at cost or, when acquired as part of
a business acquisition, estimated fair value. The recorded amount
is amortized to expense over the estimated useful life of the asset
using the straight-line method or a variable method reflecting the
pattern in which the economic benefits are anticipated to be
realized. At each balance sheet date, the unamortized costs for all
intangible assets are reviewed by management and reduced to net
realizable value when necessary.
Voltari Corporation
Notes to Consolidated Financial Statements
Stock-Based Compensation
We
measure and recognize stock-based compensation expense using a fair
value-based method for all share-based awards made to employees and
nonemployee directors, including grants of stock options and other
stock-based awards. We estimate the fair value of share-based
awards, including stock options, using the Black-Scholes
option-pricing model for awards with service-based conditions and
the Monte Carlo Simulation pricing model for option awards with
market-based conditions. Accounting for stock-based compensation
requires significant judgment and the use of estimates,
particularly with regards to assumptions such as stock price
volatility, expected option lives and risk-free interest rate, all
of which are utilized to value equity-based compensation. We
recognize stock compensation expense, net of estimated forfeitures,
using a straight-line method over the requisite service period of
the individual grants, which generally equals the vesting period.
There were no stock options outstanding as of December 31, 2017 and
December 31, 2016.
Redeemable preferred stock and common stock warrants
Series
J preferred stock and common stock warrants are based on their
estimated relative fair market values at the date of issuance as
determined with the assistance of a third-party valuation
specialist. Our Series J preferred stock contains certain
redemption features which are outside of our control. Accordingly,
our Series J preferred stock is classified as mezzanine equity and
reported as Redeemable preferred stock on our consolidated balance
sheet. The difference between the carrying value of the Series J
preferred stock and its liquidation value has been accreted over an
anticipated redemption period of five years using the effective
interest method.
Income Taxes
We
utilize the balance sheet method of accounting for income taxes.
Accordingly, we are required to estimate our income taxes in each
of the jurisdictions in which we operate as part of the process of
preparing our consolidated financial statements. This process
involves estimating our actual current tax exposure, including
assessing the risks associated with tax audits, together with
assessing temporary differences resulting from the different
treatment of items for tax and financial reporting purposes. These
differences result in deferred tax assets and liabilities. Due to
the evolving nature and complexity of tax rules combined with the
number of jurisdictions in which we previously operated, it is
possible that our estimates of our tax liability could change in
the future, which may result in additional tax liabilities and
adversely affect our results of operations, financial condition and
cash flows.
We
follow the authoritative accounting guidance prescribing a
threshold and measurement attribute for the financial recognition
and measurement of a tax position taken or expected to be taken in
a tax return. The guidance defines the level of assurance that a
tax position must meet in order to be recognized in the financial
statements and also provides for de-recognition of tax benefits,
classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure and transition. The
guidance utilizes a two-step approach for evaluating uncertain tax
positions. Step one, recognition, requires a company to determine
if the weight of available evidence indicates that a tax position
is more likely than not to be sustained upon audit, including
resolution of related appeals or litigation processes, if any. If a
tax position is not considered “more likely than not”
to be sustained, no benefits of the position are recognized. Step
two, measurement, is based on the largest amount of benefit which
is more likely than not to be realized on effective
settlement.
Net Loss Per Share Attributable to Common Stockholders
Basic
and diluted net loss per share attributable to common stockholders
is computed by dividing net loss attributable to common
stockholders by the weighted-average number of common shares
outstanding during the period. Our net loss attributable to common
stockholders was not allocated to preferred stock using the
two-class method, as the preferred stock does not have a
contractual obligation to share in the net loss attributable to
common stockholders.
Our
potentially dilutive shares, which include outstanding common stock
options, restricted stock and common stock warrants, have not been
included in the computation of diluted net loss per share
attributable to common stockholders for all periods presented, as
the results would be anti-dilutive. Such potentially dilutive
shares are excluded when the effect would be to reduce net loss per
share.
Voltari Corporation
Notes to Consolidated Financial Statements
Operating Segment
Effective
August, 2015, we operate and manage our business from continuing
operations as a single segment, that of acquiring, financing and
leasing commercial real estate properties. For the years ended
December 31, 2017 and 2016 two U.S. tenants comprised all revenue
from continuing operations.
Fair Value of Financial Instruments
As of
December 31, 2017,
and
2016
, we had cash and cash
equivalents of $0.1 million and
$0.4
million
, respectively. The carrying amount of certain
financial instruments, including accounts payable, revolving note
and accrued expenses, approximates fair value due to their short
maturities. There were no transfers between levels in the fair
value hierarchy during the years ended
December 31, 2017
or
2016
.
Concentration of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit
risk consist primarily of cash and cash equivalents, to the extent
balances exceed limits that are insured by the Federal Deposit
Insurance Corporation.
Foreign Currency
We have
ceased operations in all of our previously operational
international subsidiaries and are winding down these subsidiaries.
During this winding down periods the functional currencies of our
international subsidiaries are the local currencies. We translate
the financial statements of our international subsidiaries to U.S.
dollars using end-of-period exchange rates for assets and
liabilities and average currency exchange rates for revenues and
expenses. Translation adjustments resulting from this process are
included in Other comprehensive income and are reflected as a
separate component of stockholders’ equity. Realized and
unrealized transaction gains and losses are included in Other
income (expense), net in the period in which they occur, except on
intercompany balances considered to be long-term, and have not been
significant for any periods presented. Transaction gains and losses
on intercompany balances considered to be long-term are recorded in
Other comprehensive income.
Recently Adopted Accounting Pronouncements
In
March, 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-09,
Compensation - Stock Compensation.
ASU
2016-09 simplifies the accounting for share-based payment
transactions, including a policy election option with respect to
accounting for forfeitures, as well as increasing the amount an
employer can withhold to cover income taxes on equity awards.
Additionally, ASU 2016-09 requires the cash paid to a taxing
authority when shares are withheld to pay employee taxes to be
classified as a “financing activity” rather than an
“operating activity,” as was done previously on the
Statement of Cash Flows. We adopted this standard effective January
1, 2017, and, as a result we will be accounting for future
forfeitures as they occur.
Recently Issued Accounting Pronouncements
In May,
2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
.
The guidance in this ASU supersedes nearly all existing revenue
recognition guidance under U.S. GAAP and creates a single,
principle-based
revenue recognition
framework that is codified in a new FASB ASC Topic 606. The core
principle of this guidance is for the recognition of revenue to
depict the transfer of goods or services to customers at an amount
that reflects the consideration to which the company expects to be
entitled in exchange for those goods or services. The ASU also
requires additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments
and assets recognized from costs incurred to obtain or fulfill a
contract. The new revenue standard is effective for annual
reporting periods beginning after December 15, 2017, and interim
periods within those years. Earlier application is permitted only
as of annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting period.
The new standard allows for either full retrospective or modified
retrospective adoption. Currently, all revenues are derived from
lease contracts which are not within the scope of this
guidance.
Voltari Corporation
Notes to Consolidated Financial Statements
In February, 2016, the FASB issued ASU 2016-02,
Leases.
The guidance significantly changes the accounting
for leases by requiring lessees to recognize assets and liabilities
for leases greater than 12 months on their balance sheet. The
lessor model stays substantially the same; however, there were
modifications to, conform lessor accounting with the lessee model,
eliminate real estate specific guidance, further define certain
lease and non-lease components, and change the definition of
initial direct costs of leases by requiring significantly more
leasing related costs to be expensed upfront. ASU 2016-02 is
effective for us in the first quarter of 2019, and we are currently
assessing the impact of this standard to our consolidated financial
statements.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows - Restricted
Cash
. The guidance requires that the statement of cash flows
explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or
cash equivalents. Therefore, amounts generally described as
restricted cash and equivalents should be included with cash and
cash equivalents when reconciling the beginning and end of period
total amounts on the statement of cash flows. Currently, there is
no specific guidance to address how to classify or present these
changes. ASU 2016-18 is effective for us in the first quarter of
2018, and we will adjust our cash flows to reflect the new
guidance.
In
January, 2017, the FASB issued ASU 2017-01,
"
Business Combinations (Topic
805), Clarifying the Definition of a Business.”
The amendments in this ASU provide a
more robust framework to use in determining when a set of assets
and activities is a business. The amendments provide more
consistency in applying the guidance, reduce the costs of
application, and make the definition of a business more
operable.
The guidance changes the definition of a business
to exclude acquisitions where substantially all the fair value of
the assets acquired are concentrated in a single identifiable asset
or a group of similar identifiable assets. Given this change in
definition, we believe most of our real estate acquisitions will be
considered asset acquisitions. The new guidance will be
applied prospectively to any transactions occurring in the period
of adoption. ASU 2017-01 is effective for financial statements
issued for
annual periods
beginning after December 15, 2017, including interim periods within
those
periods
. Under the new
standard, transaction costs would be capitalized under asset
acquisitions and expensed for business combinations and
transactions that would be considered asset acquisitions would not
be afforded the one-year measurement period to complete any
valuation studies and resulting purchase price
allocation.
In February, 2017, the FASB issued ASU 2017-05,
"
Other
Income - Gains and Losses from the Derecognition of Nonfinancial
Assets,
Clarifying the Scope of Asset
Derecognition Guidance and Accounting for Partial Sales of
Nonfinancial Assets
." ASU
2017-05 clarifies that ASC 610-20 applies to all nonfinancial
assets (including real estate) for which the counterparty is not a
customer and clarifies that all businesses are derecognized using
the deconsolidation guidance. Additionally, it defines an in
substance nonfinancial asset as a financial asset that is promised
to a counterparty in a contract in which substantially all the fair
value of the assets promised in the contract is concentrated in
nonfinancial assets, which excludes cash or cash equivalents and
liabilities. The new guidance is expected to impact the gain
recognized when a real estate asset is sold to a non-customer and a
noncontrolling interest is retained. Under the current guidance, a
partial sale is recognized, and carryover basis is used for the
retained interest, however, the new guidance eliminates the use of
carryover basis and generally requires a full gain to be
recognized. ASU 2017-05 is effective for us in the first quarter of
2018. The adoption of this standard will not have an impact on our
consolidated financial statements.
In May, 2017, the FASB issued
ASU 2017-09,
“
Compensation - Stock
Compensation
(Topic
718),
Scope of Modification
Accounting”
to provide clarity and to reduce diversity
in practice related to a modification when applying the guidance in
ASC 718, Compensation – Stock Compensation. The guidance in
ASC 718 defines a “modification” as a change in the
terms or conditions of a share-based payment award. The amendments
provide guidance about when changes in terms or conditions of a
share-based payment award require an entity to apply the existing
modification guidance in ASC 718.
The amendments in
this Update are effective for all entities for annual periods, and
interim periods within those annual
reporting periods,
beginning after December 15, 2017. The adoption of this standard
will not have an impact on our financial statements.
In
February 2018, the FASB issued ASU 2018-02, “
Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income”
, which amends
FASB ASC Topic 220, Income Statement - Reporting Comprehensive
Income. This ASU allows a reclassification out of accumulated other
comprehensive income into retained earnings for standard tax
effects resulting from the Tax Cuts and Jobs Act (the “Tax
Act”) and consequently, eliminates the stranded tax effects
resulting from the Tax Act. This ASU is effective for fiscal years
beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted. We are currently
evaluating the impact of this guidance on our consolidated
financial statements
.
Voltari Corporation
Notes to Consolidated Financial Statements
3.
Real Estate Investments
On May
18, 2016, we, through our wholly owned subsidiary, Voltari Holding,
completed the acquisition of a real estate parcel in Flanders, New
York (the "Flanders Property”) from Flanders Holding, LLC
("Seller") pursuant to the Purchase and Sale Agreement, between
Voltari Holding and the Seller, dated December 3, 2015, as amended
on January 11, 2016, February 10, 2016 and March 10, 2016. The
purchase price was approximately $2.82 million, inclusive of all
costs, escrows and reserves. The purchase price was paid using cash
on hand and borrowings under the Company’s revolving loan
facility with Koala Holding LP ("Koala"), an affiliate of Mr. Carl
C. Icahn, the Company’s controlling stockholder.
The
revolving loan facility was amended and restated on March 29, 2017
and bears interest at a per annum rate equal to the greater of the
LIBOR rate plus 200 basis points, per annum, subject to a maximum
rate of interest of 3.75%, per annum.
The
Flanders Property is a single tenant retail convenience store,
which is subject to a double net lease (the “Lease”)
with 7-Eleven, Inc. (“7-Eleven”), the original term
(the “Original Term”), of which expires in December
2029 (with four, five-year renewal options (the “Renewal
Term,” and together with the Original Term, the
“Term”). During the Term, 7-Eleven is responsible for
the payment of base rent, as well as the payment of, subject to
certain exceptions, real estate taxes, utilities, tenant’s
insurance and other property related costs. Voltari Holding, as
landlord, is responsible for certain maintenance and repair costs.
Average annual rental income for the property over the remaining
Original Term of the lease is approximately $164,000, exclusive of
the amortization of the above market lease intangible.
On
September 17, 2015, we, through our wholly owned subsidiary,
Voltari Holding, completed the acquisition of a real estate parcel
in Long Branch, New Jersey from 160 Brighton Acquisition, LLC
(“Seller”) pursuant to the terms of an Agreement for
Sale and Purchase, dated August 7, 2015, between Voltari
Holding and Seller, for a purchase price of approximately $3.63
million which was paid from proceeds received from the sale of
stock in 2015. Refer to
http://investor.shareholder.com/jpmorganchase/sec.cfm for the
financial statements of the tenant.
The
property is subject to a triple net lease with JP Morgan Chase
Bank, N. A. ("Chase"), the original term of which expires in June,
2020 (with two, five-year renewal options), pursuant to which Chase
is responsible for the payment of basic rent as well as the payment
of real estate taxes, maintenance costs, utilities, tenant's
insurance and other property related costs. Average annual rental
income for the property over the remaining term of the original
lease is approximately $203,000, exclusive of the amortization of
the above market lease intangible.
For the
years ended December 31, 2017 and 2016, acquisition-related costs
totaled $102 thousand and $36 thousand respectively, and have been
recognized as expense. Acquisition, transaction and integration
costs include costs related to the acquisition of real estate
properties, such as inspection, appraisal, legal, title insurance
and other fees.
Information
related to major categories of real estate investments, net, is as
follows (dollars in thousands):
|
Estimated
|
|
|
|
|
|
Real Estate
Investments, at cost:
|
|
|
|
Land
|
|
$
2,345
|
$
2,345
|
Building,
fixtures and improvements
|
10 - 43
yrs.
|
3,494
|
3,494
|
Total
tangible assets
|
|
5,839
|
5,839
|
Acquired
Intangibles - In-place leases
|
5 - 13
yrs.
|
607
|
607
|
Total cost of Real
Estate Investments
|
|
6,446
|
6,446
|
Less: Accumulated
depreciation and amortization
|
|
(451
)
|
(231
)
|
Total cost of Real
Estate Investments, net
|
|
$
5,995
|
$
6,215
|
Depreciation
expense for the years ended December 31, 2017 and 2016 amounted to
$122 thousand and $101 thousand, respectively.
Voltari Corporation
Notes to Consolidated Financial Statements
Intangible
amortization expense for the years ended December 31, 2017 and
2016, amounted to $98 thousand and $93 thousand respectively, of
which $42 thousand and $42 thousand of favorable lease amortization
were reflected as a reduction in revenue,
respectively.
Included
in the accumulated depreciation and amortization balance are
amounts for in place leases and favorable leases, as of December
31, 2017 and 2016, amounting to $213 thousand and $114 thousand,
respectively.
Expected
in-place lease and favorable lease amortization for each of the
next five years, and thereafter, is as follows (dollars in
thousands):
Years
Ending December 31,
|
|
|
|
2018
|
$
99
|
2019
|
99
|
2020
|
57
|
2021
|
16
|
2022
|
16
|
Thereafter
|
108
|
Total
|
$
395
|
The
following table presents future minimum base rental receipts due to
us over the next five years (dollars in thousands):
Year
Ending December 31,
|
|
|
|
2018
|
$
348
|
2019
|
348
|
2020
|
244
|
2021
|
160
|
2022
|
160
|
Thereafter
|
1,196
|
Total
|
$
2,456
|
4. Property and Equipment, net
Information
related to major categories of our property and equipment, net, is
as follows (dollars in thousands):
|
Estimated
|
|
|
Useful
Life
|
|
|
Capitalized
software
|
3 yrs.
|
$
331
|
$
331
|
Computer software
and equipment
|
3-5
yrs.
|
—
|
23
|
Total
property and equipment
|
|
331
|
354
|
Less: Accumulated
depreciation and amortization
|
|
(331
)
|
(354
)
|
Property
and equipment, net
|
|
$
—
|
$
—
|
There
was no capitalized interest associated with property and equipment
for the years ended
December 31,
2017
and
2016
.
Depreciation expense related to property and equipment totaled $0
and $137 thousand for the years ended December 31, 2017 and 2016,
respectively.
See Note 6 -
Impairment Charges
for more information
.
5. Discontinued Operations
In
August of 2015, we began implementing a transformation plan
pursuant to which, among other things, we exited from our mobile
marketing and advertising business.
Voltari Corporation
Notes to Consolidated Financial Statements
The
effect of discontinued operations on the consolidated statements of
operations for the years ended December 31, 2017 and 2016 is as
follows (dollars in thousands):
|
|
|
Revenue
|
$
—
|
$
—
|
Operating
expenses
|
—
|
24
|
Operating
loss
|
$
—
|
$
(24
)
|
Net loss from
discontinued operations
|
$
—
|
$
(24
)
|
6. Impairment Charges
In
July, 2016, in connection with the Company's ongoing transformation
plan, and in an effort to minimize expenses in light of its
significantly reduced employee headcount, the Company vacated the
office space at 601 W. 26th Street, New York, New York, and
impaired the remaining value of any office furniture, equipment and
leasehold improvements resulting in an impairment loss of
approximately $0.1 million. The resulting carrying value of the
assets is currently zero. The eventual disposition of the assets
cannot be determined as of the date of these financial
statements.
7. Liquidity and Capital Resources
Our
principal needs for liquidity since we began executing our
transformation plan in August, 2015, have been to fund operating
losses, working capital requirements, capital expenditures,
restructuring expenses, acquisitions and integration and debt
service. Our principal sources of liquidity as of December 31,
2017 consisted of cash and cash equivalents of $0.1 million, and
our ability to borrow on our Koala loan.
On
August 7, 2015, we, as borrower, and Koala Holdings LP, as lender,
an affiliate of Mr. Carl C. Icahn, the Company’s controlling
stockholder ("Koala"), entered into a $10 million revolving loan
facility (the “Prior Note") at a rate equal to the greater of
the LIBOR rate plus 350 basis points, per annum, and 3.75%, per
annum, plus a fee of 0.25% per annum on undrawn amounts. The
Company sought and received the Prior Note to, in part, allay
potential concerns regarding the Company’s ability to invest
in and execute its transformation plan while retaining cash levels
sufficient to fund its ongoing operations. There were no
limitations on the use of proceeds under the Prior Note. As
collateral for the Prior Note, we pledged and granted to Koala a
lien on our limited liability company interest in Voltari
Holding.
On
March 29, 2017, we as borrower, and Koala, as lender, entered into
a revolving note (the “Amended Note”), which amended
and restated the Prior Note. The Amended Note provides that the net
proceeds thereunder in excess of $10 million will be used by the
Company for the acquisition, improvement, development,
modification, alteration, repair, maintenance, financing or leasing
of real property, including any fees and expenses associated with
such activities. Pursuant to the Amended Note, Koala made available
to the Company a revolving loan facility of up to $30 million in
aggregate principal amount (the “Commitment”). The
Company may, by written notice to Koala, request that the
Commitment be increased (the “Increased Commitment”),
provided that the aggregate amount of all borrowings, plus
availability under the aggregate Increased Commitment, shall not
exceed $80 million. Koala has no obligation to provide any
Increased Commitment and may refuse to do so in its sole
discretion. Borrowings under the Amended Note will bear interest at
a rate equal to the LIBOR Rate (as defined in the Amended Note)
plus 200 basis points, per annum, subject to a maximum rate of
interest of 3.75%, per annum. The Amended Note matures on the
earliest of (i) December 31, 2020, (ii) the date on which any
financing transaction, whether debt or equity, is consummated by
the Company (or its successors and assigns) with net proceeds in an
amount equal to or greater than $30 million, and (iii) at the
Company’s option, a date selected by the Company that is
earlier than December 31, 2020 (the “Maturity Date”).
The Amended Note also allows the Company to, upon written notice to
Koala not more than 60 days and not less than 30 days prior to the
Maturity Date, request that Koala extend the Maturity Date to
December 31, 2022. Koala may, in its sole discretion, agree
to
extend the Maturity Date by providing written notice to the Company
on or before the date that is 20 days prior to the Maturity Date.
If an event of default exists, the Amended Note will bear interest
at a default rate equal to the greater of the LIBOR Rate plus 300
basis points, per annum, or 4.5%, per annum. Subject to the terms
and conditions of the Amended Note, the Company may repay all or
any portion of the amounts outstanding under the Amended Note at
any time without premium or penalty. The amounts available under
the Commitment or Increased Commitment, as the case may be, will
increase and decrease in direct proportion to repayments and
reborrowings under the Amended Note, respectively, from time to
time. As collateral for the Amended Note, the Company has pledged
and granted to Koala a lien on the Company’s limited
liability company interest in Voltari Holding.
Voltari Corporation
Notes to Consolidated Financial Statements
As of
December 31, 2017, borrowings from this loan facility totaled $5.5
million, primarily due to borrowings in connection with the
acquisition of the Flanders Property. The outstanding balance,
including accumulated interest of $0.3 million totaled $5.8 million
as of December 31, 2017. On January 17, 2018, we borrowed an
additional $0.5 million under the Amended Note to fund ongoing
operating costs.
In
light of the above, the consolidated financial statements were
prepared on the basis that the Company will continue as a going
concern. Therefore, the accompanying consolidated financial
statements do not include any adjustments relating to the
recoverability and classification of recorded assets and
liabilities or any other adjustments that might result in the event
the Company is unable to continue as a going concern.
8. Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following (dollars in
thousands):
|
|
|
|
|
Accounts payable
and accrued expenses
|
$
286
|
$
156
|
Accrued taxes,
not related to income
|
355
|
352
|
Total
|
$
641
|
$
508
|
9. Revolving Note
During
the years ended December 31, 2017 and 2016, borrowings under the
Prior Note and Amended Note totaled $5.5 million and $4.5 million,
due to borrowings in connection with the acquisition of the
Flanders Property of approximately $2.82 million and working
capital requirements of approximately $2.68 million. As of December
31, 2017, and 2016, the outstanding balance, totaled $5.8 million,
including accumulated interest of $.3 million, and $4.6 million,
including accumulated interest of $.1 million, receptively. See
Note 7 - Liquidity and Capital
Resources
for more information regarding the Prior Note and
Amended Note.
10. Commitments and Contingencies
Operating Leases
Corporate Headquarters--
The Company rents approximately
8,000 square feet of office space in New York, New York, which has
been utilized as its corporate headquarters. In connection with the
Company's ongoing transformation plan, and in an effort to minimize
expenses in light of its significantly reduced employee headcount,
the Company determined that this office space was not suitable for
its needs, and therefore vacated the office space and informed its
landlord of its intention not to renew the lease when it terminates
in November 2018. This space is currently used for the storage of
furniture and equipment that was impaired in July, 2016. The
Company has sought, and continues to actively seek, a tenant to
sublease this vacated office space. As of July 1, 2016, the Company
has moved to approximately 100 square feet of office space utilized
by companies affiliated with Mr. Carl C. Icahn, the Company’s
controlling shareholder, in New York, New York. This space is being
rented on a month-to-month basis for $500 per month. This
arrangement may be terminated at any time by either party without
penalty
.
We
continue to lease office space under a non-cancellable operating
lease agreement. Rent expense for the non-cancellable operating
lease with scheduled rent increases and landlord incentives is
recognized on a straight-line basis over the lease term, beginning
with the effective lease commencement date.
Voltari Corporation
Notes to Consolidated Financial Statements
Estimated
future minimum net rentals payable under non-cancellable lease
agreements at
December 31,
2017
are as follows (in thousands):
Year
Ending December 31,
|
|
2018
|
$
266
|
Total
|
$
266
|
The
table was prepared assuming the maximum commitments currently
outstanding, but such commitments could decrease based on
termination negotiations.
Rental
expense under operating lease agreements included in continuing
operations for each of the years ended
December 31, 2017
and
2016
were $0.3 million.
Other Contractual Arrangements
We have
entered into several agreements with various vendors who provide
additional operational support and services to the Company. The
arrangements are primarily of a duration of twelve months or less
or cancellable with short-term notice. We have no material
contractual arrangements beyond 2017.
Litigation
From
time to time, we are subject to claims in legal proceedings arising
in the normal course of business. We do not believe that we are
currently party to any pending legal action that could reasonably
be expected to have a material adverse effect on our business,
financial condition, results of operations or cash flows. See
Note 18 - Legal Proceedings
for details regarding outstanding litigation.
11. Termination of 401(k) Plan
We
terminated the Voltari Operating Corp. 401(k) Plan (the
“Plan”), effective April 30, 2016. In early 2018, we
received a favorable determination letter from the Internal Revenue
Service, dated December 20, 2017, as to the Plan’s
tax-qualified status upon termination and we are in the process of
commencing the liquidation of the Plan. We currently have estimated
additional vesting costs of approximately $65 thousand in
connection with such termination and liquidation of the
Plan.
12. Redeemable Preferred Stock
In
connection with the closing of a rights offering on March 30, 2015,
entities affiliated with Mr. Carl C. Icahn, our largest
shareholder, became the owner of approximately 52.3% of our common
stock, which resulted in a change of control of the Company. This
constituted a redemption event pursuant to the terms and conditions
of the Series J preferred stock, and as a result each holder of
shares of Series J preferred stock had the right to require the
Company to redeem all or a portion of such holder’s shares of
Series J preferred stock. Entities affiliated with Mr. Carl C.
Icahn waived their option to redeem Series J preferred stock in
connection with the change in control resulting from the completion
of the rights offering that closed on March 30, 2015. On
April 13, 2015 we redeemed 29,316 shares of Series J preferred
stock for approximately $1.0 million in cash from holders not
affiliated with Mr. Carl C. Icahn. Following the April 13, 2015
redemption of Series J preferred stock, entities affiliated with
Mr. Carl C. Icahn became the owner of approximately 97.9% of our
Series J preferred stock. During 2017, entities affiliated with Mr.
Carl C. Icahn purchased additional shares of our Series J preferred
stock from third parties, which increased Mr. Carl C. Icahn’s
ownership percentage to approximately 98.0%.
Upon
completion of our rights offering in October, 2012, we issued
1,199,643
shares of Series J
preferred stock and warrants to acquire 1,014,982 common shares in
exchange for approximately
$30
million
in cash proceeds. Net proceeds from the rights
offering of approximately
$27.8
million
were allocated between Series J preferred stock and
common stock warrants based on their estimated relative fair market
values at the date of issuance as determined by management
with
the assistance of a
third party valuation specialist. The portion of the net proceeds
from the rights offering attributable to the Series J preferred
stock was determined to be approximately $26.4 million and is
included in Redeemable preferred stock on our consolidated balance
sheets at
December 31,
2017
and 2016.
Voltari Corporation
Notes to Consolidated Financial Statements
Our
Series J preferred stock contains certain redemption features and
is classified as mezzanine equity at
December 31, 2017
and 2016 since the
shares are (i) redeemable at the option of the holder upon the
occurrence of certain events and (ii) have conditions for
redemption which are not solely within our control. Our Series J
preferred stock is redeemable at the option of the holder if the
Company undergoes a change in control, which includes a person
becoming a beneficial owner of securities representing at least 50%
of the voting power of our company, a sale of substantially all of
our assets, and certain business combinations and mergers which
cause a change in 20% or more of the voting power of our company,
and if we experience an ownership change (within the meaning of
Section 382 of the Internal Revenue Code of 1986, as amended),
which results in a substantial limitation on our ability to use our
net operating losses and related tax benefits. In the event that a
redemption event were to occur, currently the Company would be
precluded, under the terms of the Series J preferred stock and
applicable Delaware law, from making any material
redemptions.
The
difference between the carrying value of the Series J preferred
stock and its liquidation value was accreted over an anticipated
redemption period of five years using the effective interest method
and has fully accreted as of September 30, 2017. The shares of
Series J preferred stock have limited voting rights and are not
convertible into shares of our common stock or any other series or
class of our capital stock.
Holders
of the Series J preferred stock are entitled to an annual dividend
of
13%
(adjusting to 14% on
January 1, 2018), which is payable in-cash or in-kind at our
discretion, on a quarterly basis. To date, we have elected to pay
all quarterly dividend payments on our Series J preferred stock, in
the cumulative amount of $26.2 million, in-kind rather than
in-cash. Accordingly, we have increased the carrying value of our
redeemable preferred stock for the amount of the paid-in-kind
dividend payments. Dividends on the Series J preferred stock and
the accretion increase the amount of net loss that is attributable
to common stockholders and are presented as separate amounts on the
consolidated statements of operations.
Our
Series J preferred stock has a preference upon dissolution,
liquidation or winding up of the Company in respect of assets
available for distribution to stockholders. The liquidation
preference of the Series J preferred stock is initially $25 per
share. If the dividend on the Series J preferred stock is paid
in-kind, which has been the case to date, the liquidation
preference is adjusted and increased quarterly (i) through December
31, 2017, by an amount equal to 3.5% of the liquidation preference
per share, as in effect at such time and (ii) thereafter by an
amount equal to 3.5% of the liquidation preference per share, as in
effect at such time. The quarterly dividend will continue until the
shares are redeemed, or until the Company's affairs are liquidated,
dissolved or wound-up.
As of
December 31, 2017, our Series J preferred stock has an
aggregate redemption value of approximately $57.2 million,
including paid-in-kind dividends of $26.2 million and accrued
dividends of $1.8 million which are included within Other
liabilities on our consolidated balance sheet. We recorded
accretion associated with our Series J preferred stock of $0.7
million and
$0.8 million
for
the years ended December 31, 2017 and 2016,
respectively.
13. Stock Options, Restricted Stock and Warrants
Overview
Pursuant
to the 2010 Long-Term Incentive Plan (“2010 LTIP”), we
may grant equity awards up to an aggregate of
636,562
shares under the 2010 LTIP. Awards
granted under the 2010 LTIP may include incentive stock options or
nonqualified stock options, stock appreciation rights, restricted
stock and other stock-based or cash-based awards. Option terms may
not exceed
10
years and the
exercise price cannot be less than
100%
of the estimated fair market value per
share of our common stock on the grant date. The maximum number of
shares subject to any performance award granted to any participant
during any fiscal year shall be
26,666
shares. The maximum cash payment
made under a performance award granted to any participant with
respect to any fiscal year shall be
$5.4 million
.
Stock Options
There
was no stock-based compensation expense associated with common
stock awards for the year ended December 31, 2017. For the year
ended December 31, 2016 there was income related to the forfeiture
of common stock awards in the amount of $8 thousand.
Stock
option awards will vest based upon a combination of employee
service and the achievement of certain specified market conditions
as follows: (i) twenty-five percent (
25%
) of the shares subject to the option
will vest in
four
(4) equal
tranches on each anniversary of the vesting commencement date
(i.e.,
6.25%
); and (ii) the
remaining seventy-five percent (
75%
) of the shares subject to the option
will vest on the third (3rd) anniversary of the applicable vesting
commencement date, subject to the achievement of 90-day period
common stock fair value targets.
Voltari Corporation
Notes to Consolidated Financial Statements
In
determining the compensation cost of stock options awards, the fair
value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model for awards with
service-based conditions and the Monte Carlo Simulation pricing
model for awards with market-based conditions. No options were
granted in 2017 or 2016.
Restricted Stock Awards
There
was no stock-based compensation expense associated with restricted
stock awards for the years ended December 31, 2017 and
2016.
Warrants
We
issued common stock warrants (the “Warrants”) to
purchase 1,014,982 common shares in connection with the closing of
our 2012 rights offering. Ten (10) Warrants had to be exercised to
purchase one (1) share of common stock, at a price of $6.50 per
common share. On October 11, 2017, the remaining Warrants to
purchase 1,014,958 shares of common stock expired without being
exercised.
Net
proceeds from the 2012 rights offering of approximately $27.8
million were allocated between Series J preferred stock and the
Warrants based on their estimated relative fair market values at
the date of issuance as determined with the assistance of a third
party valuation specialist. The portion of the net proceeds from
the rights offering attributable to the Warrants was determined to
be approximately $1.3 million and was recorded in Additional
paid-in capital on our consolidated balance sheets at
December 31, 2016.
14.
Income Taxes
All
pre-tax loss from continuing operations is derived from the U.S. No
tax expense was recorded for the years ended December 31, 2017
and 2016. We maintain a full valuation allowance against our net
deferred tax assets, which precludes us from recognizing a tax
benefit for our current operating losses. Our historical lack of
profitability is a key factor in concluding that there is
insufficient evidence to support the realizability of our deferred
tax assets.
Taxes
computed at the statutory federal income tax rate of 34% are
reconciled to the income tax provision as follows:
|
|
|
|
|
United States
federal tax at statutory rate
|
34.0
%
|
34.0
%
|
Change in valuation
allowance
|
3,439.7
|
(379.9
)
|
State taxes (net of
federal tax benefit)
|
(212.8
)
|
345.9
|
Impact of US
Federal Tax Rate Change
|
(3,262.4
)
|
—
|
Other
|
1.5
|
—
|
Effective
rate
|
—
%
|
—
%
|
Significant
components of our deferred tax assets and liabilities consist of
the following as of December 31 (in thousands):
|
|
|
|
|
Domestic net
operating loss carryforwards
|
$
122,424
|
$
187,356
|
Foreign net
operating loss carryforwards
|
8,682
|
8,682
|
Research and
development credits
|
5,436
|
5,436
|
Other
|
2,260
|
1,919
|
Deferred tax
assets
|
138,802
|
203,393
|
Valuation
allowance
|
(138,802
)
|
(203,393
)
|
Net
deferred tax assets
|
$
—
|
$
—
|
Voltari Corporation
Notes to Consolidated Financial Statements
On
December 22, 2017, the U.S. Congress enacted the Tax Act. The Tax
Act contains several significant tax reform provisions which
includes, among others, a reduction of the U.S. corporate statutory
tax rate from 34% to 21% (starting January 1, 2018), a one-time
mandatory repatriation transition tax on the net accumulated
earnings and profits of a U.S. taxpayer’s foreign
subsidiaries, and a minimum tax on certain foreign earnings in
excess of 10% of the foreign subsidiaries' tangible assets (i.e.,
global intangible low-taxed income or
“GILTI”).
The
reduction in the U.S. corporate statutory tax rate to 21% requires
the Company to re-measure its net deferred tax assets using the
newly enacted tax rate. As a result of the revaluation, the Company
reduced its deferred tax assets by $62 million, which was offset by
a reduction in valuation allowance of the same amount. Therefore,
the impact of the corporate statutory tax rate change has a net tax
effect of zero upon income tax expense and net loss.
The
mandatory tax on accumulated foreign earnings and profits requires
a one-time transition tax whereby accumulated foreign earnings
prior to the enactment of the Tax Act are deemed to be repatriated
and are taxed at a rate of 15.5% for cash and cash equivalents and
8% for non-liquid assets. As a result of an overall deficit in the
accumulated earnings and profits of the Company’s specified
foreign corporations, there is no income tax effect in the current
period.
The
GILTI provision imposes a tax on certain foreign earnings in excess
of a deemed return on the foreign subsidiaries' tangible assets.
Current FASB guidance indicates that either recording deferred
taxes on GILTI inclusions or treating any taxes on GILTI inclusions
as a period cost are both acceptable methods as an accounting
policy election. The Company has not recorded deferred taxes for
the impact of GILTI in the period of enactment due to its policy
election to consider the impact of GILTI as a period
expense.
As of
December 31, 2017, the Company provided a full valuation allowance
against its gross deferred tax assets because realization of these
benefits could not be reasonably assured. The $65 million decrease
in the valuation allowance for the period December 31, 2016 to
December 31, 2017 was primarily due to the revaluation of deferred
tax assets and adjustments to state net operating
losses.
We have
research and development credit carryforwards of $5.4 million at
December 31, 2017, that will begin to expire in 2021.
As of
December 31, 2017
, the
Company has federal net operating and other loss carryforwards of
$496 million and state net operating loss carryforwards between
$114 million to $302 million. Due to a 2012 IRC Section 382
ownership change approximately $3 million of Federal net operating
losses will expire unused. These net operating loss carryforwards
begin to expire in 2019 for U.S. federal income tax purposes and in
2028 for state income tax purposes. The ultimate availability of
the federal and state net operating loss carryforwards to offset
future income may be subject to limitation under the rules
regarding changes in stock ownership as determined by the Internal
Revenue Code. Included in “Other,” totaling $2.3
million, in the table above are; $1.2 million of international net
operating loss carryforwards, and $0.9 million of U. S. capital
loss carryforwards.
The
Company has determined that there are no unrecognized tax benefits
as of
December 31, 2017
and 2016. Historically, the Company has not incurred interest or
penalties associated with unrecognized tax benefits and no interest
or penalties were recognized during the years ended
December 31, 2017 or 2016. The Company has adopted a policy
whereby amounts related to interest and penalties associated with
unrecognized tax benefits are classified as income tax expense when
incurred.
We did
not make any income tax payments related to our continuing
operations in 2017 or 2016. The Company files income tax returns in
the U.S. federal jurisdiction, and various state and foreign
jurisdictions. Due to the generation of net operating losses, all
tax years for which the Company filed a tax return remain open. The
Company's U.S. federal tax return for the year ended December 31,
2013 was audited by the Internal Revenue Service and such audit was
completed in 2017. No adjustments were made as a result of
the audit.
The
Company discontinued operations in Indonesia in 2012. In 2013 the
Company received notification that additional income and VAT taxes
would be due from the Company's subsidiary, P. T. Motricity
Indonesia for the years ended 2010 to 2012. The assessment resulted
in tax totaling approximately $0.7 million which was recorded in
2013. Subsequently P. T. Motricity Indonesia paid taxes and
penalties as assessed. However, the Company determined that there
remained approximately $0.4 million of unpaid amounts. Currently
the Company is in the process of liquidating its corporate
structure in Indonesia and management has decided to leave the
remaining balance as a liability until such time as the liquidation
is complete. The outcome of this matter remains
uncertain.
Voltari Corporation
Notes to Consolidated Financial Statements
15. Common Stock and 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 for the period
indicated (dollars in thousands):
|
|
|
|
|
Net loss
attributable to common stockholders
|
$
(9,508
)
|
$
(10,021
)
|
|
|
|
Weighted-average
common shares outstanding - basic and diluted
|
8,994,814
|
8,994,814
|
Net loss per share
attributable to common stockholders - basic and
diluted
|
$
(1.06
)
|
$
(1.11
)
|
Basic
and diluted net loss per share attributable to common stockholders
has been computed based on net loss and the weighted-average number
of common shares outstanding during the applicable period. We have
excluded warrants and options to purchase common stock, when the
potentially issuable shares covered by these securities are
antidilutive. The following table presents the outstanding
antidilutive securities excluded from the calculation of net loss
per share attributable to common stockholders:
|
|
|
|
|
Common stock
issuable upon exercise of warrants
|
—
|
1,014,958
|
Options to purchase
common stock
|
—
|
—
|
Restricted
stock
|
—
|
—
|
Total securities
excluded from net loss per share attributable to common
stockholders
|
—
|
1,014,958
|
16. Defined Contribution Plan
We
maintained a defined contribution plan (“401(k) Savings
Plan”) for eligible employees, which was suspended in
January, 2016. The 401(k) Savings Plan assets are held in trust and
invested as directed by the plan participants, and shares of our
common stock are not an eligible investment election. We had
provided a match on a specified portion of eligible
employees’ contributions as approved by our board of
directors. Historically, we had made matching contributions equal
to
50%
of the portion of
contributions that do not exceed
6%
of eligible pay. We did not have any
matching contributions included in continuing operations in 2017
and 2016. However, during 2017 we accrued an additional
contribution of approximately $65 thousand to cover a shortfall in
contributions from prior periods.
17. Related Party Transactions
Insight
Portfolio Group LLC, owned by a number of other entities with which
Mr. Carl C. Icahn has a relationship, was formed in order to
maximize the potential buying power of participating companies in
negotiating with a wide range of suppliers of goods, services and
tangible and intangible property at negotiated rates. The Company
is a member of the buying group. During the year ended December 31,
2017, we paid no fees and during the year ended December 31, 2016,
we paid a fee of $3,000 for the services of Insight Portfolio
Group.
On
August 7, 2015, we, as borrower, and Koala, as lender, an
affiliate of Carl C. Icahn, our controlling stockholder, entered
into the Prior Note. On March 29, 2017, we as borrower, and Koala,
as lender, entered into the Amended Note, which amended and
restated the Prior Note.
See Note
7 - Liquidity and Capital Resources
for more
information.
As of
July 1, 2016, the Company has moved to approximately 100 feet of
office space utilized by companies affiliated with Mr. Carl C.
Icahn, the Company’s controlling shareholder, in New York,
New York. This space is being rented on a month-to-month basis for
$500 per month. This arrangement may be terminated at any time by
either party without penalty.
Voltari Corporation
Notes to Consolidated Financial Statements
18. Legal Proceedings
Putative Securities Class Action.
We previously announced
that Joe Callan filed a putative securities class action complaint
in the U.S. District Court, Western District of Washington at
Seattle (the "Court") on behalf of all persons who purchased or
otherwise acquired common stock of Motricity between June 18, 2010
and August 9, 2011 or in Motricity’s initial public offering.
Motricity, which was our predecessor registrant, is now our
wholly-owned subsidiary and has changed its name to Voltari
Operating Corp. The defendants in the case were Motricity, certain
of our current and former directors and officers, including Ryan K.
Wuerch, James R. Smith, Jr., Allyn P. Hebner, James N. Ryan,
Jeffrey A. Bowden, Hunter C. Gary, Brett Icahn, Lady Barbara Judge
CBE, Suzanne H. King, Brian V. Turner. and the underwriters in
Motricity’s initial public offering, including J.P. Morgan
Securities, Inc., Goldman, Sachs & Co., Deutsche Bank
Securities Inc., RBC Capital Markets Corporation, Robert W. Baird
& Co Incorporated, Needham & Company, LLC and Pacific Crest
Securities LLC. The complaint alleged violations under Sections 11
and 15 of the Securities Act of 1933, as amended, (the
“Securities Act”) and Section 20(a) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”),
by all defendants and under Section 10(b) of the Exchange Act by
Motricity and those of our former and current officers who are
named as defendants. The complaint sought, inter alia, damages,
including interest and plaintiff’s costs
and rescission. A
second putative securities class action complaint was filed by Mark
Couch in October 2011 in the same court, also related to alleged
violations under Sections 11 and 15 of the Securities Act, and
Sections 10(b) and 20(a) of the Exchange Act. On November 7, 2011,
the class actions were consolidated, and lead plaintiffs were
appointed pursuant to the Private Securities Litigation Reform Act.
On December 16, 2011, plaintiffs filed a consolidated complaint
which added a claim under Section 12 of the Securities Act to its
allegations of violations of the securities laws and extended the
putative class period from August 9, 2011 to November 14, 2011. The
plaintiffs filed an amended complaint on May 11, 2012 and a second
amended complaint on July 11, 2012. On August 1, 2012, we filed a
motion to dismiss the second amended complaint, which was granted
on January 17, 2013. A third amended complaint was filed on April
17, 2013. On May 30, 2013, we filed a motion to dismiss the third
amended complaint, which was granted by the Court on October 1,
2013. On October 31, 2013, the plaintiffs filed a notice of appeal
of the dismissal to the United States Court of Appeals for the
Ninth Circuit. On April 25, 2014, the plaintiffs filed their
opening appellate brief and on July 24, 2014 we filed our answering
brief. On May 3, 2016, following oral arguments in the case on
April 8, 2016, a three judge panel of the United States Court of
Appeals for the Ninth Circuit unanimously affirmed the Court's
decision dismissing all claims with prejudice.
In
addition to the above litigation, from time to time, we are subject
to claims in legal proceedings arising in the normal course of
business. We do not believe that we are currently party to any
pending legal action that could reasonably be expected to have a
material adverse effect on our business, financial condition,
results of operations or cash flows.
19. Subsequent Events
On
January 17, 2018 the Company borrowed an additional $0.5 million
from Koala bringing the principal balance outstanding under the
Revolving Note to $6.0 million. After that withdrawal, there is
$4.0 million remaining available for working capital
purposes.
On January 19, 2018, the Company, through its wholly owned
subsidiary, Voltari Holding (the “Purchaser”), entered
into a purchase and sale agreement (the “McClatchy Purchase
Agreement”) with The State Media Company, a South Carolina
corporation (the “Seller”), to acquire all of
Seller’s right, title and interest in a real estate parcel
located in Columbia, South Carolina (the “Property”)
for $17.0 million.
Pursuant to the terms and conditions of the McClatchy Purchase
Agreement, upon the closing of the sale of the Property, Purchaser
will enter into a triple net lease with The McClatchy Company (the
“Lease”), a publicly traded Delaware corporation and an
affiliate of the Seller (“McClatchy”). The Lease will
have an initial term of fifteen years, with three five-year
extension options (the “Term”). During the Term, in
addition to rent, McClatchy will be responsible for the payment of
all real estate taxes, utilities, tenant’s insurance and
other property related costs, and the maintenance of the Property
and its premises. The initial average annual rental income for the
Property will be approximately $1,613,000 (the “Base
Rent”). On each of the fifth (5th) and tenth (10th)
anniversaries of the commencement date of the Lease, the Base Rent
will be increased by ten percent (10%) above the then current Base
Rent.
The McClatchy Purchase Agreement contains customary
representations, warranties and covenants by the parties and the
closing of the purchase is subject to customary conditions
precedent, including a due diligence period. The Company makes no
assurances that the conditions will be satisfied or that the
purchase will be consummated in a timely manner, if at
all.
On
February 26, 2018, we, through our wholly owned subsidiary, Voltari
Holding, entered into an amendment (the “First
Amendment”) to the McClatchy Purchase Agreement, The First
Amendment, among other things extends the Review Period (as such
term is defined in the Purchase Agreement) to March 30, 2018, and
extends the Closing Date (as such term is defined in the First
Amendment) to not later than April 16, 2018.