10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2013

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES ACT OF 1934

FOR THE TRANSITION PERIOD FROM _________ TO _____

COMMISSION FILE NUMBER 000-25147

INTERNET AMERICA, INC.

(Exact name of registrant as specified in its charter)

TEXAS	86-0778979
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

6210 Rothway St, Ste 100	77040
(Address of principal executive offices)	(Zip Code)

(713) 968-2500

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x     No ¨

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨     No x

As of February 11, 2014, the registrant had 16,734,562 shares of Common Stock at $0.01 par value, outstanding.

INTERNET AMERICA, INC.

TABLE OF CONTENTS

FORM 10-Q

QUARTERLY PERIOD ENDED DECEMBER 31, 2013

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securitites and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	20

2

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31,			June 30,
	2013			2013
	(unaudited)			(audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,690,006		$	2,295,190
Accounts receivable, net of allowance for uncollectible accounts of  $13,469 and $9,801 as of December 31, 2013 and June 30, 2013, respectively		158,811			155,154
Inventory		496,231			423,947
Prepaid expenses and other current assets		85,263			71,311
Deferred tax asset		260,000			260,000
Total current assets		3,690,311			3,205,602
Property and equipment—net		1,484,530			1,431,001
Goodwill		1,968,127			1,968,127
Subscriber acquisition costs—net		843,014			420,141
Deferred tax asset		3,340,000			3,340,000
Other assets		37,174			48,455
TOTAL ASSETS	$	11,363,156		$	10,413,326
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	252,536		$	159,791
Accrued liabilities		598,080			429,275
Deferred revenue		802,299			768,379
Current portion of long-term debt		223,803			226,383
Total current liabilities		1,876,718			1,583,828
Long-term debt, net of current portion		41,061			152,677
Other liabilities		193,433			-
Total liabilities		2,111,212			1,736,505
COMMITMENTS AND CONTINGENCIES		-			-
SHAREHOLDERS' EQUITY:
Preferred stock $.01 par value: 5,000,000 shares authorized, 2,718,428  issued and outstanding as of December 31, 2013 and June 30, 2013		27,185			27,185
Common stock, $.01 par value: 40,000,000 shares authorized, 16,729,562 issued and outstanding as of December 31, 2013 and June 30, 2013		167,296			167,296
Additional paid-in capital		63,060,740			63,042,066
Accumulated deficit		(54,003,277	)		(54,559,726	)
Total shareholders' equity		9,251,944			8,676,821
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	11,363,156		$	10,413,326

See accompanying notes to condensed consolidated financial statements.

3

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2013			2012			2013			2012
REVENUES:
Internet services	$	2,027,424		$	1,952,951		$	3,994,520		$	3,864,555
TOTAL REVENUES		2,027,424			1,952,951			3,994,520			3,864,555
OPERATING  EXPENSES:
Connectivity and operations		1,006,352			929,827			1,984,633			1,921,899
Sales and marketing		86,183			112,076			186,408			217,663
General and administrative		440,508			422,412			862,146			775,700
Depreciation and amortization		197,092			203,392			376,185			412,054
TOTAL OPERATING EXPENSES		1,730,135			1,667,707			3,409,372			3,327,316
INCOME FROM OPERATIONS		297,289			285,244			585,148			537,239
OTHER INCOME (EXPENSE)
Interest income		1,225			1,105			3,670			2,094
Interest expense		(3,255	)		(5,343	)		(7,169	)		(10,691	)
OTHER INCOME (EXPENSE), net		(2,030	)		(4,238	)		(3,499	)		(8,597	)
INCOME BEFORE INCOME TAX EXPENSE		295,259			281,006			581,649			528,642
Income tax expense		12,600			12,000			25,200			24,000
NET INCOME and TOTAL COMPREHENSIVE INCOME	$	282,659		$	269,006		$	556,449		$	504,642
NET INCOME PER COMMON SHARE:
BASIC	$	0.02		$	0.02		$	0.03		$	0.03
DILUTED	$	0.01		$	0.01		$	0.03		$	0.03
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		16,729,562			16,729,562			16,729,562			16,729,562
DILUTED		19,857,158			19,696,130			19,828,461			19,663,600

See accompanying notes to condensed consolidated financial statements.

4

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	December 31,
	2013			2012
OPERATING ACTIVITIES:
Net income	$	556,449		$	504,642
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		376,185			412,054
Loss from sale or disposal of assets		5,770			4,877
Provision for (recovery of) bad debt		147			(7,953	)
Stock based compensation		18,674			10,000
Changes in operating assets and liabilities:
Accounts receivable		(3,804	)		(28,402	)
Inventory		(74,375	)		(70,685	)
Prepaid expenses and other current assets		(13,952	)		42,002
Other assets		18,962			10,296
Accounts payable and accrued liabilities		68,115			144,069
Deferred revenue		(27,405	)		(10,483	)
Net cash provided by operating activities		924,766			1,010,417
INVESTING ACTIVITIES:
Purchases of property and equipment		(283,646	)		(316,528	)
Change in restricted cash		-			6,432
Proceeds from sale of assets		-			21,403
Cash paid for acquisition		(132,108	)		(26,000	)
Net cash used in investing activities		(415,754	)		(314,693	)
FINANCING ACTIVITIES:
Principal payments of long-term debt		(114,196	)		(124,881	)
Net cash used in financing activities		(114,196	)		(124,881	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		394,816			570,843
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		2,295,190			1,433,230
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,690,006		$	2,004,073
SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	7,459		$	12,394
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued purchase consideration for acquisition of subscribers	$	386,667		$	-
Note payable issued for acquisition of subscribers	$	-		$	40,179

See accompanying notes to condensed consolidated financial statements.

5

INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to Article 8 of Regulation S-X of the Securities and Exchange Commission. The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair presentation of the consolidated financial position and results of operations of Internet America, Inc. (the "Company" or "Internet America" or "we") for the interim periods presented. All such adjustments are of a normal and recurring nature. These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for its fiscal year ended June 30, 2013.

2. Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiary, TeleShare Communication Services, Inc. ("TeleShare"). All material intercompany accounts and transactions have been eliminated.

3. Basic and Diluted Net Income Per Share

For the three and six months ended December 31, 2013 and 2012, common stock equivalent shares totaling 2,718,428 have been added to the weighted average common shares outstanding, assuming the shares of preferred stock were converted into shares of common stock as of the first day of each respective period, for the purpose of computing diluted earnings per share ("EPS"). For the three and six months ended December 31, 2013, additional common stock equivalent shares totaling 409,168 and 380,471, respectively, were included in the calculation of diluted EPS. For the three and six months ended December 31, 2012, additional common stock equivalent shares totaling 248,140 and 215,610, respectively, were included in the calculation of diluted EPS. These additional shares are attributable to outstanding in-the-money stock options and warrants. For the three and six months ended December 31, 2013, options to purchase 471,526 shares of the Company's common stock were excluded from the computation of diluted EPS. For the three and six months ended December 31, 2012, options to purchase 346,526 shares of common stock and warrants to acquire 394,922 shares of common stock were excluded from the computation of diluted EPS. These aforementioned options and warrants were excluded as their effect was anti-dilutive.

4. Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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. Actual results could differ significantly from these estimates.

5. Acquisition of Subscribers

During fiscal 2013, the Company completed two acquisitions of subscribers and tangible assets to grow the Company's subscriber base. These acquisitions were accounted for using the purchase method. The Company immediately began integrating the acquired assets of each acquisition into the Company’s existing operations and continues to operate these assets within a single business segment. The amortization period of the intangible assets acquired in each acquisition is four years, which is management's best estimate of the average economic life of a subscriber based on historical experience.

On August 1, 2012, the Company completed an acquisition of the subscribers associated with the wireless ISP operations of Pyro-tech Inc. ("AEI Wireless") conducted in and around Dallas/Fort Worth, Texas for a total purchase price consideration of $63,006, consisting of (i) $26,000 in cash payments made at closing and (ii) $37,006 in a note payable, net of a debt discount.

6

On February 1, 2013, the Company completed an acquisition of the subscribers associated with the wireless ISP operations of PC Doctors d/b/a: Internet Doctors ("Internet Doctors") conducted in and around Dallas/Fort Worth, Texas for a total purchase price consideration of $95,695, consisting of (i) $50,000 in cash payments made at closing and (ii) $45,695 in a note payable, net of a debt discount.

On November 1, 2013, the Company completed an acquisition of the subscribers associated with the wireless ISP operations of UpperSpace Corporation ("UpperSpace") conducted in and around northeast Oklahoma for an estimated total purchase consideration of $580,300, payable as follows: (i) a $193,433 cash payment, inclusive of $61,325 retained by the seller representing deferred revenues, made at closing, (ii) an estimated $193,434 cash payment to be made on the twelve month anniversary of the closing (which estimated payment is included in accrued liabilities) and (iii) a $193,433 cash payment to be made on the thirty-six month anniversary of the closing (which payment is included in other liabilities). The total estimated purchase consideration of $580,300 is allocated as follows: $530,487 to subscriber acquisition costs, $42,132 to fixed assets and $7,681 to other intangible assets. The final purchase price will be determined twelve months from the closing date.

6. Goodwill and Subscriber Acquisition Costs

Pursuant to Financial Accounting Standards Board (“FASB”) guidance on goodwill and other intangibles, the Company performs a qualitative analysis of goodwill annually during the fourth quarter of its fiscal year or more frequently when events and circumstances indicate goodwill might be permanently impaired. If that evaluation indicates an impairment has occurred, the following two-step process is applied. First, the fair value of the reporting unit is compared to the carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the implied value of the reporting unit's goodwill is compared with its carrying amount. An impairment loss is then recognized in an amount equal to the excess of the implied value over the carrying value, if any. The Company concluded that no impairment of goodwill occurred during the three months ended December 31, 2013.

The Company amortizes customer acquisition costs over the estimated life of the acquired customers. The weighted average amortization period for subscriber acquisition costs was 48 months for both dial-up and wireless broadband Internet customers during the three and six months ended December 31, 2013 and 2012. As of December 31, 2013, unrecognized amortization expense for the remainder of fiscal year ended June 30, 2014 is expected to be $152,000 and unrecognized amortization expense for fiscal years ended June 30, 2015, 2016, 2017 and 2018 is expected to be $283,000, $216,000, $148,000 and $44,000, respectively.

7. Income Taxes

During the three and six months ended December 31, 2013, the Company generated income before income tax expense of $295,259 and $581,649, respectively, and recognized Texas franchise tax expense of $12,600 and $25,200, respectively. The effective tax rate for the three and six months ended December 31, 2013 was 4.3% and 4.4%, respectively. During the three and six months ended December 31, 2012, the Company generated income before income tax expense of $281,006 and $528,642, respectively, and recognized Texas franchise tax expense of $12,000 and $24,000, respectively. The effective tax rate for the three and six months ended December 31, 2012 was 4.3% and 4.6%, respectively. No provision for federal income taxes was recorded for the three and six months ended December 31, 2013 and 2012 due to the utilization of net operating loss carryforwards.

A reconciliation of the federal statutory income tax rate to the Company's effective tax rate, as reported, is as follows for the three and six months ended December 31, 2013 and 2012.

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2013			2012			2013			2012
Income taxes at federal statutory rate		34.0	%		34.0	%		34.0	%		34.0	%
State income tax, net of federal benefit		2.8	%		2.8	%		2.9	%		3.0	%
Nondeductible expenses		-10.5	%		0.3	%		-10.5	%		0.3	%
Change in valuation allowance		-22.0	%		-32.8	%		-22.0	%		-32.7	%
Effective income tax rate		4.3	%		4.3	%		4.4	%		4.6	%

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At June 30, 2013 and December 31, 2013, the Company reversed $3,600,000 and $128,000, respectively, of the valuation allowance for deferred tax assets in expectation of generating taxable income in the future. The Company has provided a valuation allowance for the remaining $10,761,000 of net deferred tax assets at December 31, 2013. In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. Future adjustments to the valuation allowance associated with a change in management's determination of the Company's ability to realize these deferred tax assets will result in a change to income tax expense (benefit) in future periods when those determinations are made. Management will continue to assess the realizability of the deferred tax assets at each interim and annual balance sheet date based on actual and forecasted operating results.

At December 31, 2013, the Company had net operating loss carry forwards of approximately $37 million for federal income tax purposes. These net operating loss carryforwards may be carried forward in varying amounts and expire beginning in fiscal year 2019 continuing through fiscal year 2034 and may be limited in their use due to significant changes in the Company's ownership.

The preparation of various tax returns requires the use of estimates for federal and state income tax purposes. Those estimates may be subject to review by respective taxing authorities. A revision, if any, to an estimate may result in assessment of additional taxes, penalties and interest. Tax years 2009 through 2012 remain subject to examination by various federal and state tax jurisdictions. The Company performed an assessment of its various income tax positions for all periods subject to examination and concluded that no accrual of uncertain tax positions was necessary as of December 31, 2013 and June 30, 2013. The Company will account for interest and penalties related to uncertain tax positions in the current period consolidated statement of operations, as necessary.

8. Accrued Liabilities

As of December 31, 2013 and June 30, 2013, accrued liabilities consisted of:

	December 31,		June 30,
	2013		2013
Property, franchise and sales tax expense	$	209,275	$	229,972
Purchase consideration for acquisition of subscribers		193,433		-
Employee wages and benefits		116,700		114,794
Deferred rent expense		46,275		-
Professional fees		25,677		56,250
Other		6,720		28,259
Total Accrued Liabilities	$	598,080	$	429,275

9. Acquisition Credit Facility and Long-Term Debt

On October 28, 2013, the Company entered into a Loan Agreement and other related loan agreement and documents with Frost Bank (the "Bank") creating a non-revolving acquisition credit facility (the “Acquisition Facility”) designed to provide the Company with an additional source of funding for the potential acquisition of subscribers from internet companies (each, an "Acquisition").

The amount that may be borrowed under the Acquisition Facility is $2,000,000 (the “Loan Cap”). For each specific Acquisition, the maximum amount that can be borrowed under the Acquisition Facility, subject to the Loan Cap, is (i) 55% of the cost of such Acquisition in the case of an Acquisition that is partially paid for using seller financing that has a maturity of less than three years and (ii) 65% of the cost of such Acquisition in the case of an Acquisition that is partially paid for using seller financing that has a maturity of three years or more. The Acquisition Facility is currently set to terminate on April 25, 2015. Through the date of this report, there has been no borrowing under the Acquisition Facility.

Each advance made by the Bank under the Acquisition Facility will be evidenced by the Company’s execution and delivery to the Bank of a separate promissory note (an “Acquisition Note”) that will provide for a maturity of not more than three years and equal monthly principal reduction payments, plus interest, to be made over the term of the Acquisition Note. Each Acquisition Note will bear interest at a fixed rate equal to the then current index rate for one and one-half (1/2) year to two (2) year loans established by the Federal Home Loan Bank of Dallas, plus 4%.

8

There are two financial covenants under the Acquisition Facility. The first covenant requires the Company to maintain an end of quarter debt (excluding subordinated debt) to tangible net worth ratio of less than or equal to 2.5 to 1.0. The second covenant requires the Company to maintain a cash flow to debt service ratio of greater than or equal to 2.0 to 1.0, to be calculated on a rolling four-quarter basis. Both covenants are to be tested as of the end of each fiscal quarter.

Indebtedness will be secured by a perfected, continuing security interest in favor of Frost Bank in all of the Company’s assets. Advances will be conditioned on, among other things, all representations and warranties contained in the loan documents being true and correct as of the date of the advance request and there being no default under the Acquisition Facility at the time of, or as a result of, the advance request. With each advance, the Company will be charged a loan processing fee equal to the greater of $250 and one-tenth of one percent (0.10%) of the amount of the advance.

As of December 31, 2013 and June 30, 2013, long term debt consisted of:

	December 31,			June 30,
	2013			2013
Note payable due  February 15, 2015, payable in monthly payments of $4,346 with fixed interest of 4.5%	$	59,169		$	83,594
Note payable due  February 15, 2015, payable in monthly payments of $11,189 with interest imputed at 3.25% (net of unamortized discount of $3,136 and $6,239, respectively)		153,512			217,544
Note payable due February 10, 2014, payable in monthly installments of $417 with fixed interest of 8.5%		762			2,985
Note payable due January 1, 2014, payable in monthly installments of $615 with interest imputed at 8.5% (net of unamortized discount of $4 and $119, respectively)		610			4,182
Note payable due November 1, 2014, payable in monthly installments of $1,674 with interest imputed at 8% (net of unamortized discount of $716 and $1,638, respectively)		17,700			26,822
Note payable due May 1, 2015, payable in monthly installments of $2,067 with interest imputed at 8% (net of unamortized discount of $2,022 and $3,600, respectively)		33,111			43,933
		264,864			379,060
Less current portion		(223,803	)		(226,383	)
Total long-term debt, less current portion	$	41,061		$	152,677

10. Stock Options and Warrants

As of December 31, 2013, 1,311,526 stock options were outstanding and 688,474 stock options were available for future issuance under the Company’s 2007 Stock Option Plan. During the three and six months ended December 31, 2013, the Company granted 0 and 100,000 stock options, respectively. The stock options granted during the six months ended December 31, 2013 consisted of a single grant to purchase 100,000 shares of the Company's common stock at an exercise price of $0.45 per share to the Company's Chief Financial Officer. The Company determined the total fair value of such grant to be $15,700, or $0.16 per stock option. The options vest as follows: 25% vests on the grant date and the remaining 75% vests once the Company's stock price reaches $1.00 for 90 consecutive days. Stock based compensation expense of $17,166 and $18,674 was recognized during the three and six months ended December 31, 2013, respectively, based on granted options. As of December 31, 2013, the total stock based compensation expense related to non-vested awards not yet recognized was $10,900.

As of December 31, 2013, the Company had a total of 394,922 warrants issued and outstanding, previously issued in equal amounts to Steven G. Mihaylo, a current non-employee director of the Company and Ambassador John N. Palmer, a former director of the Company. No warrants were granted during the three and six months ended December 31, 2013.

9

11. Related Parties

During the three and six months ended December 31, 2013, a total of $10,000 and $21,703, respectively, was paid to three non-employee directors for serving on the Company's board of directors. For the three and six months ended December 31, 2012, a total of $8,313 and $14,563, respectively, was paid to two non-employee directors for serving on the Company’s board of directors.

12. Recent Accounting Pronouncements

The Company has reviewed recently issued accounting standards, none of which are expected to have a material impact on the Company’s financial positions or results of operations.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements, identified by words such as "anticipate," "believe," "estimate," "should," "expect" and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. Our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 and other publicly filed reports discuss some additional important factors that could cause our actual results to differ materially from those in any forward-looking statements. Some of these factors are also discussed under the heading “Safe Harbor Statement and Risk Factors” later in this Item 2.

Overview

The quarter ended December 31, 2013 continued to show positive results in operations and cash flow.  During the quarter, we closed the acquisition of UpperSpace, a Wireless Internet Service Provider (WISP) located in northeast Oklahoma. In line with our acquisition strategy we are talking to more WISP acquisition candidates than at any other time in the past, but, as of this time, none of them have reached a definitive agreement. The UpperSpace acquisition allowed us to have a stronger local presence in the area. We continue to add engineering expertise to support our growth and acquisition integration.

We continue to execute on our strategy to grow not only through acquisitions, but also through internal growth and the implementation of new technologies.  In furtherance of this strategy, we continually evaluate accretive opportunities to secure subscribers through strategic acquisitions of Internet service providers in underserved markets where we can introduce our model for delivering wireless broadband internet services. With regard to new technologies, we have entered into an agreement to test LTE in Joplin, Missouri utilizing our 2.5 GHz spectrum.  

Our cash position increased by $400,000 from $2.3 million as of June 30, 2013 to $2.7 million as of December 31, 2013. Historically, the second quarter of our fiscal year has been a heavy cash drain period with our legal and accounting fees. Additionally, we made the first of three installments to be paid for the UpperSpace acquisition during the period ended December 31, 2013.

We experienced a 4% and 3% increase in revenue to $2,027,000 and $3,995,000, respectively, for the three and six months ended December 31, 2013, as compared to the comparable prior year periods.  Our adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the three and six months ended December 31, 2013 remained consistent with the comparable prior year periods at $511,000 and $980,000, respectively, representing an EBITDA margin of 25% for each period.  Our net income for the three and six months ended December 31, 2013 also remained consistent with the comparable prior year periods at $282,000 and $557,000, respectively, representing a net income margin of 14% for each period. 

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Statement of Operations

Internet services revenue is derived from wireless access, dial-up internet access, including analog and ISDN access, DSL access, dedicated connectivity, bulk dial-up access, web hosting services, and value-added services, such as multiple e-mail boxes, personalized e-mail addresses and Fax-2-Email services.

Connectivity and operations expenses consist primarily of setup costs for new subscribers, telecommunication costs, merchant processing fees, and wages of network operations and customer support personnel. Connectivity costs include fees paid to telephone companies for subscribers' dial-up connections to our network, fees paid to backbone providers for connections from our network to the internet and equipment and tower lease costs for our new wireless networks.

Sales and marketing expenses consist primarily of creative and production costs, costs of media placement, management salaries and call center wages. Advertising costs are expensed as incurred.

General and administrative expenses consist primarily of administrative salaries, professional services, rent, bad debt expense and other general office and business expenses.

Depreciation expense is computed using the straight-line or double declining method over the estimated useful lives of the assets, as appropriate. Data communications equipment, computers, data servers and office equipment are depreciated over five years. Furniture, fixtures and leasehold improvements are depreciated over five years or the lease term. Buildings are depreciated over fifteen years. Amortization expense consists of the amortization of subscriber acquisition costs, which are amortized over four years.

Our business is not subject to any significant seasonal influences.

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Results of Operations

Three Months Ended December 31, 2013 Compared to Three Months Ended December 31, 2012

The following table sets forth certain unaudited financial data for the three months ended December 31, 2013 and December 31, 2012. Operating results for any period are not indicative of results for any future period. Amounts are shown in thousands (except share and per share data).

	Three Months Ended December 31,
	2013			% of Revenues			2012			% of Revenues
REVENUES:
Internet services	$	2,027			100.0	%	$	1,953			100.0	%
TOTAL REVENUES		2,027			100.0	%		1,953			100.0	%
OPERATING EXPENSES:
Connectivity and operations		1,006			49.6	%		930			47.6	%
Sales and marketing		86			4.2	%		112			5.7	%
General and administrative		441			21.8	%		423			21.7	%
Depreciation and amortization		197			9.7	%		203			10.4	%
TOTAL OPERATING EXPENSES		1,730			85.3	%		1,668			85.4	%
INCOME FROM OPERATIONS		297			14.7	%		285			14.6	%
OTHER INCOME (EXPENSE)
Interest income		1			0.1	%		1			0.1	%
Interest expense		(3	)		(0.1	)%		(5	)		(0.3	)%
OTHER INCOME (EXPENSE), net		(2	)		(0.1	)%		(4	)		(0.2	)%
INCOME BEFORE INCOME TAX EXPENSE		295			14.6	%		281			14.4	%
Income tax expense		13			0.6	%		12			0.6	%
NET INCOME and COMPREHENSIVE INCOME	$	282			13.9	%	$	269			13.8	%
NET INCOME PER COMMON SHARE:
BASIC	$	0.02					$	0.02
DILUTED	$	0.01					$	0.01
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		16,729,562						16,729,562
DILUTED		19,857,158						19,696,130
OTHER DATA:
Adjusted EBITDA(1)	$	511					$	498
Adjusted EBITDA margin(2)		25.2	%					25.5	%
CASH FLOW DATA:
Cash flow provided by operations	$	406					$	478
Cash flow used in investing activities	$	(309	)				$	(160	)
Cash flow used in financing activities	$	(57	)				$	(64	)
Reconciliation of net income to Adjusted EBITDA:
Net Income	$	282					$	269
Add: Depreciation and amortization		197						203
Stock based compensation		17						10
Interest expense		3						5
Income tax expense		13						12
Less: Interest income		(1	)					(1	)
Adjusted EBITDA(1)	$	511					$	498

(1)     Adjusted EBITDA, which as used herein means earnings before the effect of interest, taxes, depreciation, amortization and stock based compensation, is not a measurement of financial performance under generally accepted accounting principles (GAAP) and should not be considered an alternative to net income as a measure of performance. Management has consistently used adjusted EBITDA on a historical basis as a measurement of the Company’s current operating cash income.

(2)     Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

13

Total revenue. Total revenue increased by $74,000, or 3.8%, to $2,027,000 for the three months ended December 31, 2013, from $1,953,000 for the three months ended December 31, 2012. Wireless broadband Internet revenue increased by $156,000 to $1,673,000 during the current year period compared to $1,517,000 for the prior year period. This increase was primarily due to the stability of the subscriber base and customers migrating to upgraded service levels during the quarter ended December 31, 2013, as well as the full period results of successful acquisitions of wireless subscribers completed in the twelve months ended December 31, 2013. The increase in revenues derived from wireless broadband Internet subscribers was partially offset by a decrease in other types of Internet service revenues of $82,000 during the current year period compared to the prior year period, which is primarily attributed to the expected decline of dial-up customers.

Connectivity and operations. Connectivity and operations expense increased by $76,000, or 8.2%, to $1,006,000 for the three months ended December 31, 2013, from $930,000 for the three months ended December 31, 2012. Materials and supplies expense increased by $45,000 to $69,000 for the current year period compared to $24,000 for the prior year period primarily due to a onetime vendor concession granted in connection with a manufacturer's recall during the prior year period. Data and telecommunications expense increased by $9,000 to $237,000 for the current year period compared to $228,000 for the prior year period due to infrastructure expansion and growth. A total increase of $22,000 in tower lease costs, salaries, wages, related personnel expense and merchant fees to $700,000 was recorded for the current year period compared to $678,000 for the prior year period. These increases are all a result of the Company's growth and network expansion from successful acquisitions of wireless subscribers completed in the twelve months ended December 31, 2013.

Sales and marketing. Sales and marketing expense decreased by $26,000, or 23.2%, to $86,000 for the three months ended December 31, 2013 compared to $112,000 for the three months ended December 31, 2012. Salaries, wages and related personnel costs decreased by approximately $11,000 to $60,000 for the current year period compared to $71,000 for the prior year period due to changes in personnel. Advertising expense decreased by $8,000 to $10,000 for the current year period compared to $18,000 for the prior year period primarily due to employing more cost effective forms of advertising. Outside sales expense also decreased by $8,000 to $9,000 for the current year period compared to $17,000 for the prior year period due to increased sales efforts through in house personnel.

The above mentioned decreases were partially offset by a slight increase of $1,000 in facilities expense to $7,000 for the current year period compared to $6,000 in the prior year period due to changes in cost of utility expense.

General and administrative. General and administrative expense increased by $18,000, or 4.3%, to $441,000 for the three months ended December 31, 2013, from $423,000 for the three months ended December 31, 2012. Professional fees increased by $27,000 to $72,000 for the current year period compared to $45,000 for the prior year period due to the addition of a new Chief Financial Officer in July 2013 who is engaged as a non-employee consultant to the Company. Personnel costs increased by $19,000 to $177,000 for the current year period compared to $158,000 for the prior year period due to changes in compensation. Stock based compensation expense and directors’ fees increased by $8,000 to $27,000 for the current year period compared to $19,000 for the prior year period primarily due to additional vesting of stock options in the current year period and the addition of one director during the third quarter of fiscal year 2013.

The above mentioned increases were partially offset by the total decrease of $36,000 in travel, telecom, insurance, facilities and other general and administrative costs to $165,000 compared to $201,000 in the prior year period primarily due to recruiting fees paid in the prior year period for the addition of a senior network engineer and product development specialist.

Depreciation and amortization. Depreciation and amortization decreased by $6,000, or 3.0%, to $197,000 for the three months ended December 31, 2013, from $203,000 for the three months ended December 31, 2012. This decrease is due to a $35,000 decrease in depreciation expense caused by assets becoming fully depreciated and fewer additions, partially offset by an increase of $29,000 in amortization expense relating to acquired subscriber costs resulting from the Company’s wireless acquisitions completed during the twelve months ended December 31, 2013.

Interest income and expense. Interest expense decreased by $2,000, or 40.0%, to $3,000 for the three months ended December 31, 2013 from $5,000 for the three months ended December 31, 2012, primarily resulting from the reduction of the Company's debt balances outstanding. Interest income remained constant at $1,000 for each of the current and prior year periods.

14

Income tax expense. Income tax expense increased by $1,000, or 8.3%, for the three months ended December 31, 2013 to $13,000 as compared to $12,000 for the prior year period primarily related to higher Texas franchise tax expense accrued for increased revenues in the current year period.

15

Six Months Ended December 31, 2013 Compared to Six Months Ended December 31, 2012

The following table sets forth certain unaudited financial data for the six months ended December 31, 2013 and December 31, 2012. Operating results for any period are not indicative of results for any future period. Amounts are shown in thousands (except share and per share data).

	Six Months Ended December 31,
	2013			% of Revenues			2012			% of Revenues
REVENUES:
Internet services	$	3,995			100.0	%	$	3,865			100.0	%
TOTAL REVENUES		3,995			100.0	%		3,865			100.0	%
OPERATING EXPENSES:
Connectivity and operations		1,985			49.7	%		1,922			49.7	%
Sales and marketing		187			4.7	%		218			5.6	%
General and administrative		862			21.6	%		776			20.1	%
Depreciation and amortization		376			9.4	%		412			10.7	%
TOTAL OPERATING EXPENSES		3,410			85.4	%		3,328			86.1	%
INCOME FROM OPERATIONS		585			14.6	%		537			13.9	%
OTHER INCOME (EXPENSE)
Interest income		4			0.1	%		2			0.1	%
Interest expense		(7	)		(0.2	)%		(10	)		(0.3	)%
OTHER INCOME (EXPENSE), net		(3	)		(0.1	)%		(8	)		(0.2	)%
INCOME BEFORE INCOME TAX EXPENSE		582			14.6	%		529			13.7	%
Income tax expense		25			0.6	%		24			0.6	%
NET INCOME and COMPREHENSIVE INCOME	$	557			13.9	%	$	505			13.1	%
NET INCOME PER COMMON SHARE:
BASIC	$	0.03					$	0.03
DILUTED	$	0.03					$	0.03
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		16,729,562						16,729,562
DILUTED		19,828,461						19,663,600
OTHER DATA:
Adjusted EBITDA(1)	$	980					$	959
Adjusted EBITDA margin(2)		24.5	%					24.8	%
CASH FLOW DATA:
Cash flow provided by operations	$	925					$	1,010
Cash flow used in investing activities	$	(416	)				$	(315	)
Cash flow used in financing activities	$	(114	)				$	(125	)
Reconciliation of net income to Adjusted EBITDA:
Net Income	$	557					$	505
Add: Depreciation and amortization		376						412
Stock based compensation		19						10
Interest expense		7						10
Income tax expense		25						24
Less: Interest income		(4	)					(2	)
Adjusted EBITDA(1)	$	980					$	959

(1)     Adjusted EBITDA, which as used herein means earnings before the effect of interest, taxes, depreciation, amortization and stock based compensation, is not a measurement of financial performance under generally accepted accounting principles (GAAP) and should not be considered an alternative to net income as a measure of performance. Management has consistently used adjusted EBITDA on a historical basis as a measurement of the Company’s current operating cash income.

(2)     Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue.

16

Total revenue. Total revenue increased by $130,000, or 3.4%, to $3,995,000 for the six months ended December 31, 2013, from $3,865,000 for the six months ended December 31, 2012. Wireless broadband Internet revenue increased by $247,000 to $3,255,000 for the current year period compared to $3,008,000 for the prior year period. This increase was primarily due to the stability of the subscriber base and customers migrating to upgraded service levels during the six months ended December 31, 2013, as well as the full period results of successful acquisitions of wireless subscribers completed in the twelve months ended December 31, 2013. Increased revenues derived from wireless broadband Internet subscribers were partially offset by decreases in other types of Internet service revenues of $117,000 during the current year period compared to the prior year period, which is primarily attributed to the expected decline of dial-up customers moving to other providers’ broadband service.

Connectivity and operations. Connectivity and operations expense increased by $63,000, or 3.3%, to $1,985,000 for the six months ended December 31, 2013, from $1,922,000 for the six months ended December 31, 2012. Data and telecommunications expense increased by $10,000 to $486,000 for the current year period compared to $476,000 for the prior year period due to infrastructure expansion and growth. A total increase of $53,000 in tower leases costs, salaries, wages, related personnel expense, merchant fees and materials and supplies to $1,499,000 for the current year period compared to $1,446,000 for the prior year period. These increases are all a result of the Company's growth and network expansion from successful acquisitions of wireless subscribers completed in the twelve months ended December 31, 2013.

Sales and marketing. Sales and marketing expense decreased by $31,000, or 14.2%, to $187,000 for the six months ended December 31, 2013 compared to $218,000 for the six months ended December 31, 2012. Outside sales expense also decreased by $19,000 to $25,000 for the current year period compared to $44,000 for the prior year period due to increased sales efforts through in house personnel. Salaries, wages and related personnel costs decreased by approximately $14,000 to $122,000 for the current year period compared to $136,000 for the prior year period due to changes in personnel. Advertising expense decreased by $2,000 to $24,000 for the current year period compared to $26,000 for the prior year period primarily due to more cost effective forms of advertising.

The above mentioned decreases were partially offset by an increase of $4,000 in facilities expense to $16,000 for the current year period compared to $12,000 in the prior year period related to general increases in utility expenses.

General and administrative. General and administrative expense increased by $86,000, or 11.1%, to $862,000 for the six months ended December 31, 2013, from $776,000 for the three months ended December 31, 2012. Professional fees increased by $44,000 to $135,000 for the current year period compared to $91,000 for the prior year period due to the addition of a new Chief Financial Officer in July 2013 who is engaged as a non-employee consultant to the Company. Personnel costs increased by $27,000 to $347,000 for the current year period compared to $320,000 for the prior year period due to changes in compensation. Stock based compensation expense and directors’ fees increased by $15,000 to $40,000 for the current year period compared to $25,000 for the prior year period primarily due to options issued during the current year period and the addition of a board member.

Travel, insurance, facilities and other general and administrative costs remained constant at $340,000 for the current and prior year periods.

Depreciation and amortization. Depreciation and amortization decreased by $36,000, or 8.7%, to $376,000 for the six months ended December 31, 2013 compared to $412,000 for the six months ended December 31, 2012. This decrease is due to a $72,000 decrease in depreciation expense relating to assets becoming fully depreciated, partially offset by a $36,000 increase in amortization expense relating to acquired subscriber costs resulting from the Company’s acquisitions completed in the twelve months ended December 31, 2013.

Interest income and expense. For the six months ended December 31, 2013 and December 31, 2012, the Company recorded interest expense of $7,000 and $10,000, respectively. The decrease in interest expense of $3,000, or 30.0%, primarily results from the reduction in the Company's debt balances outstanding. Interest income increased by $2,000 to $4,000 for the current year period compared to $2,000 for the prior year period due to increased cash on hand.

17

Income tax expense. Income tax expense increased by $1,000, or 4.2%, for the six months ended December 31, 2013 to $25,000 as compared to $24,000 for the prior year period primarily related to higher Texas franchise tax expense accrued for increased revenues in the current year period.

Liquidity and Capital Resources

We have historically financed our operations primarily through cash flow from operations. During the six months ended December 31, 2013, the Company recognized net income and net cash provided by operating activities of approximately $556,000 and $925,000, respectively, enabling the Company to fund its operations from current period cash flow and resulting in cash on hand of approximately $2,690,000 as of December 31, 2013. The Company expects to continue to fund its operations during fiscal 2014 with cash flow from operations. The Company will continue to focus on sales and expense management during fiscal 2014 and expects future cash flow from operations to remain strong.

The Company plans to pursue strategic acquisitions in the near and medium term in addition to upgrading its systems to provide higher speeds and increased reliability for its customers. We expect that our capital expenditures and any future acquisitions will be funded from available cash, public or private sales of debt or equity securities, or borrowing from commercial banks and/or third parties; however there is no assurance that such financing will be able to be obtained when needed at desirable rates which could affect our success in achieving any or all of our initiatives. Any unexpected decreases in revenue or subscriber count may adversely affect our liquidity and plans for future growth.

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in operating assets and liabilities. For the six months ended December 31, 2013, cash provided by operations was $925,000 as compared to $1,010,000 for the six months ended December 31, 2012. For the six months ended December 31, 2013, net income plus non-cash items contributed cash of $957,000 as compared to $924,000 contributed during the prior year period. Changes in operating assets and liabilities used cash of $32,000 and provided cash of $87,000 for the six months ended December 31, 2013 and 2012, respectively.

Cash used in investing activities totaled $416,000 and $315,000 for the six months ended December 31, 2013 and 2012, respectively, due primarily to improvements in existing wireless broadband internet infrastructure and an acquisition of subscribers.

Cash used in financing activities totaled $114,000 and $125,000 for the six months ended December 31, 2013 and 2012, respectively, and consisted of principal payments on long term debt, including notes related to acquisitions.

Cash on hand increased by $395,000 during the six months ended December 31, 2013. As of December 31, 2013, cash on hand was $2,690,000 as compared to $2,295,000 as of June 30, 2013. We believe our continuing efforts to improve the quality and efficiency of our operations, along with our focus on increasing revenues, may lead to a more rapid rate of growth and improving cash flow from operations.

Off Balance Sheet Arrangements

None.

“Safe Harbor” Statement and Risk Factors

The following "Safe Harbor" Statement is made pursuant to the Private Securities Litigation Reform Act of 1995. 

Certain of the statements contained in the body of this Quarterly Report are forward-looking statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995.  These risks include, without limitation, that (1) we will not be able to increase our rural customer base at the expected rate, (2) we will not improve EBITDA, profitability or product margins, (3) Internet revenue in high-speed broadband will continue to increase at a slower pace than the decrease in revenue from other Internet services resulting in greater operating losses in future periods, (4) financing will not be available to us if and as needed, (5) we will not be competitive with existing or new competitors, (6) we will not keep up with industry pricing or technological developments impacting the Internet, (7) we will be adversely affected by dependence on network infrastructure, telecommunications providers and other vendors or by regulatory changes, (8) service interruptions or impediments could harm our business, (9) acts of God and other events outside our control, such as hurricanes and other dangerous weather conditions, fires and lightning, could damage or destroy our facilities and network infrastructure, (10) we may be accused of infringing upon the  intellectual property rights of third parties, which will be costly to defend and could limit our ability to use certain technologies in the future, (11) government regulations could force us to change our business practices, (12) we may be unable to hire and retain qualified personnel, including our key officers, (13) future acquisitions of wireless broadband Internet customers and infrastructure may not be available on attractive terms and, if available, we may not successfully integrate those acquisitions into our operations, (14) provisions in our certificate of incorporation, bylaws and shareholder rights plan could limit our share price and delay a change of management and (15) our stock price has historically been thinly traded and volatile and may continue to be thinly traded and volatile.  This list is intended to identify certain of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included elsewhere herein but is not a comprehensive list of all of such factors.

18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4.  CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 2013 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures, as of December 31, 2013, were effective.

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

19

ITEM 6. EXHIBITS

Exhibit	Description
10.1	Loan Agreement dated October 28, 2013 by and between Internet America, Inc. and Frost Bank (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on November 1, 2013)
31.1*	Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Randall J. Frapart
32.1*	Section 1350 Certification of William E. Ladin, Jr.
32.2*	Section 1350 Certification of Randall J. Frapart
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase
101.LAB**	XBRL Taxonomy Extension Label Linkbase
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase

 

*Filed herewith.

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

20

SIGNATURES

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

INTERNET AMERICA, INC.

(Registrant)

Date:  February 12, 2014

By:  /s/ William E. Ladin, Jr.

William E. Ladin, Jr.

Chief Executive Officer

(duly authorized officer)

Date:  February 12, 2014

By:  /s/ Randall J. Frapart

Randall J. Frapart

Chief Financial Officer

(principal financial officer)

21

INDEX TO EXHIBITS

Exhibit No.	Description
10.1	Loan Agreement dated October 28, 2013 by and between Internet America, Inc. and Frost Bank (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on November 1, 2013)
31.1*	Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.
31.2*	Rule 13a-14(a)/15d-14(a) Certification of Randall J. Frapart
32.1*	Section 1350 Certification of William E. Ladin, Jr.
32.2*	Section 1350 Certification of Randall J. Frapart
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase
101.LAB**	XBRL Taxonomy Extension Label Linkbase
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase

 

 *Filed herewith

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

22

EX-31.1

Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.

I, William E. Ladin, Jr., Chief Executive Officer of Internet America, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Internet America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 12, 2014	/s/ William E. Ladin, Jr.
	William E. (Billy) Ladin, Jr.
	Chief Executive Officer (principal executive officer)

EX-31.2

Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification of Randall J. Frapart

I, Randall J. Frapart, Chief Financial Officer of Internet America, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Internet America, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 12, 2014	/s/ Randall J. Frapart
	Randall J. Frapart
	Chief Financial Officer (principal financial officer)

EX-32.1

Exhibit 32.1 - Certification of Principal Executive Officer

CERTIFICATION IN ACCORDANCE WITH

18 U.S.C. SECTION 1350

AS ADOPTED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Internet America, Inc. (the “Company”) for the three months ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William E. Ladin, Jr., Chief Executive Officer of the Company, certify in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William E. Ladin, Jr.

William E. (Billy) Ladin, Jr.

Chief Executive Officer
(principal executive officer)

Date: February 12, 2014

EX-32.2

Exhibit 32.1 - Certification of Principal Financial Officer

CERTIFICATION IN ACCORDANCE WITH

18 U.S.C. SECTION 1350

AS ADOPTED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Internet America, Inc. (the “Company”) for the three months ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Randall J. Frapart, Chief Financial Officer of the Company, certify in accordance with 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Randall J. Frapart

Randall J. Frapart

Chief Financial Officer
(principal financial officer)

Date: February 12, 2014

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Accrued Liabilities (Details) (USD $)	Dec. 31, 2013	Jun. 30, 2013
Accrued Liabilities [Abstract]
Property, franchise and sales tax expense	$ 209,275	$ 229,972
Purchase consideration for acquisition of subscribers	193,433
Employee wages and benefits	116,700	114,794
Deferred rent expense	46,275
Professional fees	25,677	56,250
Other	6,720	28,259
Total Accrued Liabilities	$ 598,080	$ 429,275

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Use of Estimates

6 Months Ended

Dec. 31, 2013

Use of Estimates [Abstract]

Use of Estimates

4. Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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. Actual results could differ significantly from these estimates.

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Related Parties (Details) (Non-Employee Directors [Member], USD $)	3 Months Ended		6 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013	Dec. 31, 2012
Non-Employee Directors [Member]
Related Party Transaction [Line Items]
Fees paid to non-employee directors for serving on the Board of Directors	$ 10,000	$ 8,313	$ 21,703	$ 14,563

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Stock Options and Warrants (Details) (USD $)	3 Months Ended	6 Months Ended
	Dec. 31, 2013	Dec. 31, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options outstanding	1,311,526	1,311,526
Options available for future issuance	688,474	688,474
Stock options granted	0	100,000
Stock options granted, exercise price		$ 0.45
Fair value of options granted in period		$ 15,700
Fair value of options granted in period, per option		$ 0.16
Option vesting terms		25% vests on the grant date and the remaining 75% vests once the Company's stock price reaches $1.00 for 90 consecutive days
Stock compensation expense	17,166	18,674
Unrecognized compensation cost related to non-vested stock options	$ 10,900	$ 10,900
Warrants outstanding	394,922	394,922
Vesting Immediately [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting rate		25.00%
Vesting upon Achievement of Performance Target [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting rate		75.00%

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Basic and Diluted Net Income Per Share

6 Months Ended

Dec. 31, 2013

Basic and Diluted Net Income Per Share [Abstract]

Basic and Diluted Net Income Per Share

3. Basic and Diluted Net Income Per Share

For the three and six months ended December 31, 2013 and 2012, common stock equivalent shares totaling 2,718,428 have been added to the weighted average common shares outstanding, assuming the shares of preferred stock were converted into shares of common stock as of the first day of each respective period, for the purpose of computing diluted earnings per share ("EPS"). For the three and six months ended December 31, 2013, additional common stock equivalent shares totaling 409,168 and 380,471, respectively, were included in the calculation of diluted EPS. For the three and six months ended December 31, 2012, additional common stock equivalent shares totaling 248,140 and 215,610, respectively, were included in the calculation of diluted EPS. These additional shares are attributable to outstanding in-the-money stock options and warrants. For the three and six months ended December 31, 2013, options to purchase 471,526 shares of the Company's common stock were excluded from the computation of diluted EPS. For the three and six months ended December 31, 2012, options to purchase 346,526 shares of common stock and warrants to acquire 394,922 shares of common stock were excluded from the computation of diluted EPS. These aforementioned options and warrants were excluded as their effect was anti-dilutive.

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Dec. 31, 2013	Jun. 30, 2013
CURRENT ASSETS:
Cash and cash equivalents	$ 2,690,006	$ 2,295,190
Accounts receivable, net of allowance for uncollectible accounts of $13,469 and $9,801 as of December 31, 2013 and June 30, 2013, respectively	158,811	155,154
Inventory	496,231	423,947
Prepaid expenses and other current assets	85,263	71,311
Deferred tax asset	260,000	260,000
Total current assets	3,690,311	3,205,602
Property and equipment---net	1,484,530	1,431,001
Goodwill	1,968,127	1,968,127
Subscriber acquisition costs---net	843,014	420,141
Deferred tax asset	3,340,000	3,340,000
Other assets	37,174	48,455
TOTAL ASSETS	11,363,156	10,413,326
CURRENT LIABILITIES:
Accounts payable	252,536	159,791
Accrued liabilities	598,080	429,275
Deferred revenue	802,299	768,379
Current portion of long-term debt	223,803	226,383
Total current liabilities	1,876,718	1,583,828
Long-term debt, net of current portion	41,061	152,677
Other liabilities	193,433
Total liabilities	2,111,212	1,736,505
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock $.01 par value: 5,000,000 shares authorized, 2,718,428 issued and outstanding as of December 31, 2013 and June 30, 2013	27,185	27,185
Common stock, $.01 par value: 40,000,000 shares authorized, 16,729,562 issued and outstanding as of December 31, 2013 and June 30, 2013	167,296	167,296
Additional paid-in capital	63,060,740	63,042,066
Accumulated deficit	(54,003,277)	(54,559,726)
Total shareholders' equity	9,251,944	8,676,821
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 11,363,156	$ 10,413,326

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Basis of Presentation

6 Months Ended

Dec. 31, 2013

Basis of Presentation [Abstract]

Basis of Presentation

1. Basis of Presentation

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to Article 8 of Regulation S-X of the Securities and Exchange Commission. The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair presentation of the consolidated financial position and results of operations of Internet America, Inc. (the "Company" or "Internet America" or "we") for the interim periods presented. All such adjustments are of a normal and recurring nature. These condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for its fiscal year ended June 30, 2013.

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Acquisition of Subscribers (Details) (USD $)	6 Months Ended	12 Months Ended	0 Months Ended					0 Months Ended
	Dec. 31, 2013	Jun. 30, 2013 acquisitions	Aug. 01, 2012 AEI Acquisition [Member]	Feb. 01, 2013 Internet Doctors Acquisition [Member]	Nov. 01, 2013 Upperspace Corporation [Member]	Nov. 01, 2013 Upperspace Corporation [Member] Subscriber Acquisition Costs [Member]	Nov. 01, 2013 Upperspace Corporation [Member] Other Intangible Assets [Member]	Nov. 01, 2016 Upperspace Corporation [Member] Scenario, Forecast [Member]	Nov. 01, 2014 Upperspace Corporation [Member] Scenario, Forecast [Member]
Business Acquisition [Line Items]
Number of acquisitions		2
Total purchase consideration for acquisition of subscribers			$ 63,006	$ 95,695	$ 580,300
Subscriber acquisition, cash paid for consideration			26,000	50,000	193,433			193,433	193,434
Cash retained by seller					61,325
Notes payable issued for acquisition			37,006	45,695
Weighted average amortization period for subscriber acquisitions, months	48 months
Intangible assets acquired						530,487	7,681
Fixed assets acquired					$ 42,132

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Income Taxes (Details) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013	Dec. 31, 2012	Jun. 30, 2013
Income Taxes [Abstract]
Income before income tax expense	$ 295,259	$ 281,006	$ 581,649	$ 528,642
Texas franchise tax expense	12,600	12,000	25,200	24,000
Reconciliation of the federal statutory income tax rate to the effective tax rate:
Income taxes at federal statutory rate	34.00%	34.00%	34.00%	34.00%
State income tax, net of federal benefit	2.80%	2.80%	2.90%	3.00%
Nondeductible expenses	(10.50%)	0.30%	(10.50%)	0.30%
Change in valuation allowance	(22.00%)	(32.80%)	(22.00%)	(32.70%)
Effective income tax rate	4.30%	4.30%	4.40%	4.60%
Increase (decrease) in valuation allowance on deferred tax assets			(128,000)		(3,600,000)
Valuation allowance of the deferred tax asset	10,761,000		10,761,000
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	$ 37,000,000		$ 37,000,000
Minimum [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards expiration year			Jul. 01, 2019
Years open to examination			2009
Maximum [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards expiration year			Jun. 30, 2034
Years open to examination			2012

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Principles of Consolidation

6 Months Ended

Dec. 31, 2013

Principles of Consolidation [Abstract]

Principles of Consolidation

2. Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiary, TeleShare Communication Services, Inc. ("TeleShare"). All material intercompany accounts and transactions have been eliminated.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Dec. 31, 2013	Jun. 30, 2013
CONDENSED CONSOLIDATED BALANCE SHEETS [Abstract]
Allowance for uncollectible accounts	$ 13,469	$ 9,801
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, issued	2,718,428	2,718,428
Preferred stock, outstanding	2,718,428	2,718,428
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	40,000,000	40,000,000
Common stock, issued	16,729,562	16,729,562
Common stock, outstanding	16,729,562	16,729,562

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Recent Accounting Pronouncements

6 Months Ended

Dec. 31, 2013

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

12. Recent Accounting Pronouncements

The Company has reviewed recently issued accounting standards, none of which are expected to have a material impact on the Company's financial positions or results of operations.

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Document and Entity Information	6 Months Ended
	Dec. 31, 2013	Feb. 11, 2014
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Dec. 31, 2013
Entity Registrant Name	INTERNET AMERICA INC
Entity Central Index Key	0001001279
Current Fiscal Year End Date	--06-30
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2014
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		16,734,562

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Income Taxes (Tables)

6 Months Ended

Dec. 31, 2013

Income Taxes [Abstract]

Reconciliation of Federal Statutory Income Tax Rate to the Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the Company's effective tax rate, as reported, is as follows for the three and six months ended December 31, 2013 and 2012.

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2013			2012			2013			2012
Income taxes at federal statutory rate		34.0	%		34.0	%		34.0	%		34.0	%
State income tax, net of federal benefit		2.8	%		2.8	%		2.9	%		3.0	%
Nondeductible expenses		-10.5	%		0.3	%		-10.5	%		0.3	%
Change in valuation allowance		-22.0	%		-32.8	%		-22.0	%		-32.7	%
Effective income tax rate		4.3	%		4.3	%		4.4	%		4.6	%

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		6 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013	Dec. 31, 2012
REVENUES:
Internet services	$ 2,027,424	$ 1,952,951	$ 3,994,520	$ 3,864,555
TOTAL REVENUES	2,027,424	1,952,951	3,994,520	3,864,555
OPERATING EXPENSES:
Connectivity and operations	1,006,352	929,827	1,984,633	1,921,899
Sales and marketing	86,183	112,076	186,408	217,663
General and administrative	440,508	422,412	862,146	775,700
Depreciation and amortization	197,092	203,392	376,185	412,054
TOTAL OPERATING EXPENSES	1,730,135	1,667,707	3,409,372	3,327,316
INCOME FROM OPERATIONS	297,289	285,244	585,148	537,239
OTHER INCOME (EXPENSE)
Interest income	1,225	1,105	3,670	2,094
Interest expense	(3,255)	(5,343)	(7,169)	(10,691)
OTHER INCOME (EXPENSE), net	(2,030)	(4,238)	(3,499)	(8,597)
INCOME BEFORE INCOME TAX EXPENSE	295,259	281,006	581,649	528,642
Income tax expense	12,600	12,000	25,200	24,000
NET INCOME and TOTAL COMPREHENSIVE INCOME	$ 282,659	$ 269,006	$ 556,449	$ 504,642
NET INCOME PER COMMON SHARE:
BASIC	$ 0.02	$ 0.02	$ 0.03	$ 0.03
DILUTED	$ 0.01	$ 0.01	$ 0.03	$ 0.03
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC	16,729,562	16,729,562	16,729,562	16,729,562
DILUTED	19,857,158	19,696,130	19,828,461	19,663,600

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Income Taxes

6 Months Ended

Dec. 31, 2013

Income Taxes [Abstract]

Income Taxes

7. Income Taxes

During the three and six months ended December 31, 2013, the Company generated income before income tax expense of $295,259 and $581,649, respectively, and recognized Texas franchise tax expense of $12,600 and $25,200, respectively. The effective tax rate for the three and six months ended December 31, 2013 was 4.3% and 4.4%, respectively. During the three and six months ended December 31, 2012, the Company generated income before income tax expense of $281,006 and $528,642, respectively, and recognized Texas franchise tax expense of $12,000 and $24,000, respectively. The effective tax rate for the three and six months ended December 31, 2012 was 4.3% and 4.6%, respectively. No provision for federal income taxes was recorded for the three and six months ended December 31, 2013 and 2012 due to the utilization of net operating loss carryforwards.

A reconciliation of the federal statutory income tax rate to the Company's effective tax rate, as reported, is as follows for the three and six months ended December 31, 2013 and 2012.

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2013			2012			2013			2012
Income taxes at federal statutory rate		34.0	%		34.0	%		34.0	%		34.0	%
State income tax, net of federal benefit		2.8	%		2.8	%		2.9	%		3.0	%
Nondeductible expenses		-10.5	%		0.3	%		-10.5	%		0.3	%
Change in valuation allowance		-22.0	%		-32.8	%		-22.0	%		-32.7	%
Effective income tax rate		4.3	%		4.3	%		4.4	%		4.6	%

At June 30, 2013 and December 31, 2013, the Company reversed $3,600,000 and $128,000, respectively, of the valuation allowance for deferred tax assets in expectation of generating taxable income in the future. The Company has provided a valuation allowance for the remaining $10,761,000 of net deferred tax assets at December 31, 2013. In assessing the realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. Future adjustments to the valuation allowance associated with a change in management's determination of the Company's ability to realize these deferred tax assets will result in a change to income tax expense (benefit) in future periods when those determinations are made. Management will continue to assess the realizability of the deferred tax assets at each interim and annual balance sheet date based on actual and forecasted operating results.

At December 31, 2013, the Company had net operating loss carry forwards of approximately $37 million for federal income tax purposes. These net operating loss carryforwards may be carried forward in varying amounts and expire beginning in fiscal year 2019 continuing through fiscal year 2034 and may be limited in their use due to significant changes in the Company's ownership.

The preparation of various tax returns requires the use of estimates for federal and state income tax purposes. Those estimates may be subject to review by respective taxing authorities. A revision, if any, to an estimate may result in assessment of additional taxes, penalties and interest. Tax years 2009 through 2012 remain subject to examination by various federal and state tax jurisdictions. The Company performed an assessment of its various income tax positions for all periods subject to examination and concluded that no accrual of uncertain tax positions was necessary as of December 31, 2013 and June 30, 2013. The Company will account for interest and penalties related to uncertain tax positions in the current period consolidated statement of operations, as necessary.

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Goodwill and Subscriber Acquisition Costs

6 Months Ended

Dec. 31, 2013

Goodwill and Subscriber Acquisition Costs [Abstract]

Goodwill and Subscriber Acquisition Costs

6. Goodwill and Subscriber Acquisition Costs

Pursuant to Financial Accounting Standards Board ("FASB") guidance on goodwill and other intangibles, the Company performs a qualitative analysis of goodwill annually during the fourth quarter of its fiscal year or more frequently when events and circumstances indicate goodwill might be permanently impaired. If that evaluation indicates an impairment has occurred, the following two-step process is applied. First, the fair value of the reporting unit is compared to the carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the implied value of the reporting unit's goodwill is compared with its carrying amount. An impairment loss is then recognized in an amount equal to the excess of the implied value over the carrying value, if any. The Company concluded that no impairment of goodwill occurred during the three months ended December 31, 2013.

The Company amortizes customer acquisition costs over the estimated life of the acquired customers. The weighted average amortization period for subscriber acquisition costs was 48 months for both dial-up and wireless broadband Internet customers during the three and six months ended December 31, 2013 and 2012. As of December 31, 2013, unrecognized amortization expense for the remainder of fiscal year ended June 30, 2014 is expected to be $152,000 and unrecognized amortization expense for fiscal years ended June 30, 2015, 2016, 2017 and 2018 is expected to be $283,000, $216,000, $148,000 and $44,000, respectively.

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Goodwill and Subscriber Acquisition Costs (Details) (USD $)	6 Months Ended
	Dec. 31, 2013
Goodwill and Subscriber Acquisition Costs [Abstract]
Weighted average amortization period for subscriber acquisitions, months	48 months
Expected amortization expense, remainder of the fiscal year	$ 152,000
Expected future amortization expense, 2015	283,000
Expected future amortization expense, 2016	216,000
Expected future amortization expense, 2017	148,000
Expected future amortization expense, 2018	$ 44,000

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Accrued Liabilities (Tables)

6 Months Ended

Dec. 31, 2013

Accrued Liabilities [Abstract]

Schedule of accrued liabilities

As of December 31, 2013 and June 30, 2013, accrued liabilities consisted of:

	December 31,		June 30,
	2013		2013
Property, franchise and sales tax expense	$	209,275	$	229,972
Purchase consideration for acquisition of subscribers		193,433		-
Employee wages and benefits		116,700		114,794
Deferred rent expense		46,275		-
Professional fees		25,677		56,250
Other		6,720		28,259
Total Accrued Liabilities	$	598,080	$	429,275

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Stock Options and Warrants

6 Months Ended

Dec. 31, 2013

Stock Options and Warrants [Abstract]

Stock Options and Warrants

10. Stock Options and Warrants

As of December 31, 2013, 1,311,526 stock options were outstanding and 688,474 stock options were available for future issuance under the Company's 2007 Stock Option Plan. During the three and six months ended December 31, 2013, the Company granted 0 and 100,000 stock options, respectively. The stock options granted during the six months ended December 31, 2013 consisted of a single grant to purchase 100,000 shares of the Company's common stock at an exercise price of $0.45 per share to the Company's Chief Financial Officer. The Company determined the total fair value of such grant to be $15,700, or $0.16 per stock option. The options vest as follows: 25% vests on the grant date and the remaining 75% vests once the Company's stock price reaches $1.00 for 90 consecutive days. Stock based compensation expense of $17,166 and $18,674 was recognized during the three and six months ended December 31, 2013, respectively, based on granted options. As of December 31, 2013, the total stock based compensation expense related to non-vested awards not yet recognized was $10,900.

As of December 31, 2013, the Company had a total of 394,922 warrants issued and outstanding, previously issued in equal amounts to Steven G. Mihaylo, a current non-employee director of the Company and Ambassador John N. Palmer, a former director of the Company. No warrants were granted during the three and six months ended December 31, 2013.

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Accrued Liabilities

6 Months Ended

Dec. 31, 2013

Accrued Liabilities [Abstract]

Accrued Liabilities

8. Accrued Liabilities

As of December 31, 2013 and June 30, 2013, accrued liabilities consisted of:

	December 31,		June 30,
	2013		2013
Property, franchise and sales tax expense	$	209,275	$	229,972
Purchase consideration for acquisition of subscribers		193,433		-
Employee wages and benefits		116,700		114,794
Deferred rent expense		46,275		-
Professional fees		25,677		56,250
Other		6,720		28,259
Total Accrued Liabilities	$	598,080	$	429,275

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Acquisition Credit Facility and Long-Term Debt

6 Months Ended

Dec. 31, 2013

Acquisition Credit Facility and Long-Term Debt [Abstract]

Acquisition Credit Facility and Long-Term Debt

9. Acquisition Credit Facility and Long-Term Debt

On October 28, 2013, the Company entered into a Loan Agreement and other related loan agreement and documents with Frost Bank (the "Bank") creating a non-revolving acquisition credit facility (the "Acquisition Facility") designed to provide the Company with an additional source of funding for the potential acquisition of subscribers from internet companies (each, an "Acquisition").

The amount that may be borrowed under the Acquisition Facility is $2,000,000 (the "Loan Cap"). For each specific Acquisition, the maximum amount that can be borrowed under the Acquisition Facility, subject to the Loan Cap, is (i) 55% of the cost of such Acquisition in the case of an Acquisition that is partially paid for using seller financing that has a maturity of less than three years and (ii) 65% of the cost of such Acquisition in the case of an Acquisition that is partially paid for using seller financing that has a maturity of three years or more. The Acquisition Facility is currently set to terminate on April 25, 2015. Through the date of this report, there has been no borrowing under the Acquisition Facility.

Each advance made by the Bank under the Acquisition Facility will be evidenced by the Company's execution and delivery to the Bank of a separate promissory note (an "Acquisition Note") that will provide for a maturity of not more than three years and equal monthly principal reduction payments, plus interest, to be made over the term of the Acquisition Note. Each Acquisition Note will bear interest at a fixed rate equal to the then current index rate for one and one-half (1/2) year to two (2) year loans established by the Federal Home Loan Bank of Dallas, plus 4%.

There are two financial covenants under the Acquisition Facility. The first covenant requires the Company to maintain an end of quarter debt (excluding subordinated debt) to tangible net worth ratio of less than or equal to 2.5 to 1.0. The second covenant requires the Company to maintain a cash flow to debt service ratio of greater than or equal to 2.0 to 1.0, to be calculated on a rolling four-quarter basis. Both covenants are to be tested as of the end of each fiscal quarter.

Indebtedness will be secured by a perfected, continuing security interest in favor of Frost Bank in all of the Company's assets. Advances will be conditioned on, among other things, all representations and warranties contained in the loan documents being true and correct as of the date of the advance request and there being no default under the Acquisition Facility at the time of, or as a result of, the advance request. With each advance, the Company will be charged a loan processing fee equal to the greater of $250 and one-tenth of one percent (0.10%) of the amount of the advance.

As of December 31, 2013 and June 30, 2013, long term debt consisted of:

	December 31,			June 30,
	2013			2013
Note payable due  February 15, 2015, payable in monthly payments of $4,346 with fixed interest of 4.5%	$	59,169		$	83,594
Note payable due  February 15, 2015, payable in monthly payments of $11,189 with interest imputed at 3.25% (net of unamortized discount of $3,136 and $6,239, respectively)		153,512			217,544
Note payable due February 10, 2014, payable in monthly installments of $417 with fixed interest of 8.5%		762			2,985
Note payable due January 1, 2014, payable in monthly installments of $615 with interest imputed at 8.5% (net of unamortized discount of $4 and $119, respectively)		610			4,182
Note payable due November 1, 2014, payable in monthly installments of $1,674 with interest imputed at 8% (net of unamortized discount of $716 and $1,638, respectively)		17,700			26,822
Note payable due May 1, 2015, payable in monthly installments of $2,067 with interest imputed at 8% (net of unamortized discount of $2,022 and $3,600, respectively)		33,111			43,933
		264,864			379,060
Less current portion		(223,803	)		(226,383	)
Total long-term debt, less current portion	$	41,061		$	152,677

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Related Parties

6 Months Ended

Dec. 31, 2013

Related Parties [Abstract]

Related Parties

11. Related Parties

During the three and six months ended December 31, 2013, a total of $10,000 and $21,703, respectively, was paid to three non-employee directors for serving on the Company's board of directors. For the three and six months ended December 31, 2012, a total of $8,313 and $14,563, respectively, was paid to two non-employee directors for serving on the Company's board of directors.

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Basic and Diluted Net Income Per Share (Details)	3 Months Ended		6 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013	Dec. 31, 2012
Basic and Diluted Net Income Per Share [Abstract]
Common stock equivalent shares assuming conversion of preferred stock	2,718,428	2,718,428	2,718,428	2,718,428
Common stock equivalent shares attributable to outstanding in-the-money stock options and warrants	409,168	248,140	380,471	215,610
Employee Stock Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive shares excluded from the EPS calculation	471,526	346,526	471,526	346,526
Warrants [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive shares excluded from the EPS calculation		394,922		394,922

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Acquisition Credit Facility and Long-Term Debt (Narrative) (Details) (Line of Credit [Member], USD $)	6 Months Ended
	Dec. 31, 2013
Line of Credit [Member]
Line of Credit Facility [Line Items]
Amount that may be borrowed	$ 2,000,000
Percentage of cost of acquisition	55.00%
Percentage of acquisition with three year maturity	65.00%
Termination date of credit facility	Apr. 25, 2015
Basis spread over index rate	4.00%
Maximum debt to tangible net worth ratio	2.5
Minimum cash flow to debt service ratio	2.0
Debt instrument fee	$ 250
Debt instrument fee, percentage	0.10%

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
OPERATING ACTIVITIES:
Net income	$ 556,449	$ 504,642
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	376,185	412,054
Loss from sale or disposal of assets	5,770	4,877
Provision for (recovery of) bad debt	147	(7,953)
Stock based compensation	18,674	10,000
Changes in operating assets and liabilities:
Accounts receivable	(3,804)	(28,402)
Inventory	(74,375)	(70,685)
Prepaid expenses and other current assets	(13,952)	42,002
Other assets	18,962	10,296
Accounts payable and accrued liabilities	68,115	144,069
Deferred revenue	(27,405)	(10,483)
Net cash provided by operating activities	924,766	1,010,417
INVESTING ACTIVITIES:
Purchases of property and equipment	(283,646)	(316,528)
Change in restricted cash		6,432
Proceeds from sale of assets		21,403
Cash paid for acquisition	(132,108)	(26,000)
Net cash used in investing activities	(415,754)	(314,693)
FINANCING ACTIVITIES:
Principal payments of long-term debt	(114,196)	(124,881)
Net cash used in financing activities	(114,196)	(124,881)
NET INCREASE IN CASH AND CASH EQUIVALENTS	394,816	570,843
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	2,295,190	1,433,230
CASH AND CASH EQUIVALENTS, END OF PERIOD	2,690,006	2,004,073
SUPPLEMENTAL INFORMATION:
Cash paid for interest	7,459	12,394
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accrued purchase consideration for acquisition of subscribers	386,667
Note payable issued for acquisition of subscribers		$ 40,179

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Acquisition of Subscribers

6 Months Ended

Dec. 31, 2013

Acquisition of Subscribers [Abstract]

Acquisition of Subscribers

5. Acquisition of Subscribers

During fiscal 2013, the Company completed two acquisitions of subscribers and tangible assets to grow the Company's subscriber base. These acquisitions were accounted for using the purchase method. The Company immediately began integrating the acquired assets of each acquisition into the Company's existing operations and continues to operate these assets within a single business segment.The amortization period of the intangible assets acquired in each acquisition is four years, which is management's best estimate of the average economic life of a subscriber based on historical experience.

On August 1, 2012, the Company completed an acquisition of the subscribers associated with the wireless ISP operations of Pyro-tech Inc. ("AEI Wireless") conducted in and around Dallas/Fort Worth, Texas for a total purchase price consideration of $63,006, consisting of (i) $26,000 in cash payments made at closing and (ii) $37,006 in a note payable, net of a debt discount.

On February 1, 2013, the Company completed an acquisition of the subscribers associated with the wireless ISP operations of PC Doctors d/b/a: Internet Doctors ("Internet Doctors") conducted in and around Dallas/Fort Worth, Texas for a total purchase price consideration of $95,695, consisting of (i) $50,000 in cash payments made at closing and (ii) $45,695 in a note payable, net of a debt discount.

On November 1, 2013, the Company completed an acquisition of the subscribers associated with the wireless ISP operations of UpperSpace Corporation ("UpperSpace") conducted in and around northeast Oklahoma for an estimated total purchase consideration of $580,300, payable as follows: (i) a $193,433 cash payment, inclusive of $61,325 retained by the seller representing deferred revenues, made at closing, (ii) an estimated $193,434 cash payment to be made on the twelve month anniversary of the closing (which estimated payment is included in accrued liabilities) and (iii) a $193,433 cash payment to be made on the thirty-six month anniversary of the closing (which payment is included in other liabilities). The total estimated purchase consideration of $580,300 is allocated as follows: $530,487 to subscriber acquisition costs, $42,132 to fixed assets and $7,681 to other intangible assets. The final purchase price will be determined twelve months from the closing date.

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Acquisition Credit Facility and Long-Term Debt (Schedule of Long Term Debt) (Details) (USD $)	6 Months Ended
	Dec. 31, 2013	Jun. 30, 2013
Long-Term Debt
Total long-term debt	$ 264,864	$ 379,060
Less current portion	(223,803)	(226,383)
Total long-term debt, less current portion	41,061	152,677
4.5 % Note Payable Due February 15, 2015 [Member]
Long-Term Debt
Notes payable	59,169	83,594
Debt instrument, maturity date	Feb. 15, 2015
Periodic payments, frequency	monthly
Debt instrument, periodic payment	4,346
Effective interest rate	4.50%
Note Payable Due February 15, 2015 [Member]
Long-Term Debt
Notes payable	153,512	217,544
Debt instrument, maturity date	Feb. 15, 2015
Periodic payments, frequency	monthly
Debt instrument, periodic payment	11,189
Effective interest rate	3.25%
Unamortized discount	3,136	6,239
8.5% Note Payable Due February 10, 2014 [Member]
Long-Term Debt
Notes payable	762	2,985
Debt instrument, maturity date	Feb. 10, 2014
Periodic payments, frequency	monthly
Debt instrument, periodic payment	417
Effective interest rate	8.50%
Note Payable Due January 1, 2014 [Member]
Long-Term Debt
Notes payable	610	4,182
Debt instrument, maturity date	Jan. 01, 2014
Periodic payments, frequency	monthly
Debt instrument, periodic payment	615
Effective interest rate	8.50%
Unamortized discount	4	119
Note Payable Due November 1, 2014 with no Interest [Member]
Long-Term Debt
Notes payable	17,700	26,822
Debt instrument, maturity date	Nov. 01, 2014
Periodic payments, frequency	monthly
Debt instrument, periodic payment	1,674
Effective interest rate	8.00%
Unamortized discount	716	1,638
Note Payable Due May 1, 2015 with no Interest [Member]
Long-Term Debt
Notes payable	33,111	43,933
Debt instrument, maturity date	May 01, 2015
Periodic payments, frequency	monthly
Debt instrument, periodic payment	2,067
Effective interest rate	8.00%
Unamortized discount	$ 2,022	$ 3,600

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Acquisition Credit Facility and Long-Term Debt (Tables)

6 Months Ended

Dec. 31, 2013

Acquisition Credit Facility and Long-Term Debt [Abstract]

Schedule of Long-Term Debt

As of December 31, 2013 and June 30, 2013, long term debt consisted of:

	December 31,			June 30,
	2013			2013
Note payable due  February 15, 2015, payable in monthly payments of $4,346 with fixed interest of 4.5%	$	59,169		$	83,594
Note payable due  February 15, 2015, payable in monthly payments of $11,189 with interest imputed at 3.25% (net of unamortized discount of $3,136 and $6,239, respectively)		153,512			217,544
Note payable due February 10, 2014, payable in monthly installments of $417 with fixed interest of 8.5%		762			2,985
Note payable due January 1, 2014, payable in monthly installments of $615 with interest imputed at 8.5% (net of unamortized discount of $4 and $119, respectively)		610			4,182
Note payable due November 1, 2014, payable in monthly installments of $1,674 with interest imputed at 8% (net of unamortized discount of $716 and $1,638, respectively)		17,700			26,822
Note payable due May 1, 2015, payable in monthly installments of $2,067 with interest imputed at 8% (net of unamortized discount of $2,022 and $3,600, respectively)		33,111			43,933
		264,864			379,060
Less current portion		(223,803	)		(226,383	)
Total long-term debt, less current portion	$	41,061		$	152,677