Business Acquisition

12 Months Ended

Dec. 31, 2012

Business Acquisition [Abstract]

Business Acquisition

NOTE 3: BUSINESS ACQUISITION

On August 5, 2011, Warwick Valley Networks, Inc. ("WVN"), which has since changed its name to Alteva Inc., a wholly-owned subsidiary of the Company, purchased substantially all of the assets and assumed certain of the liabilities (including certain of its contracts, debt owed under specified capital leases and certain accounts payable) of Alteva, LLC, a cloud-based UC solutions provider and enterprise hosted VoIP provider, in exchange for cash and stock valued at $17.8 million pursuant to the terms of the asset purchase agreement between the Company and Alteva, LLC (the "Alteva Agreement"). The issuance of the Company's common stock contemplated under the Alteva Agreement was subject to regulatory approval by the New York State Public Service Commission ("NYPSC") and the New Jersey Board of Public Utilities ("NJBPU"), both of which approved the transaction in October 2011. The assets acquired included Alteva, LLC's VoIP line of business, which provides communication services for commercial customers and unified communication lines of business. This acquisition extended the Company's VoIP services to New Jersey, Pennsylvania and various other states and continues the Company's corporate strategy to expand its UC business.

The results of Alteva Inc.'s operations have been included in the Company's consolidated financial statements since August 5, 2011.

The Company utilized cash, issued stock and incurred certain liabilities to acquire certain assets and assume certain liabilities of Alteva, LLC as follows:

		($ in thousands)
Cash (1)	$	10,250
Issued puttable common stock (2)		4,125
Contingent consideration payable (3)		1,929
Hold-back payable (4)		750
Working capital adjustment payable (5)		648
Price protection (6)		116
Total consideration	$	17,818

1) $5.0 million of this amount was borrowed from CoBank, ACB (see Note 13).

2) The Company issued 272,479 shares of the Company's common stock to the members of Alteva, LLC with an embedded put option. The terms of the lock-up and put agreement were subsequently revised in 2012 as noted below.

3) Up to a total of $2.0 million in cash was payable to Alteva, LLC. The Company paid off the liability of $2.0 million as of December 31, 2012.

4) This hold-back amount, withheld at closing, was payable to Alteva, LLC on August 5, 2012, less any amounts offset against such amount pursuant to the terms of the Alteva Agreement. The Company repaid the balance as of December 31, 2012

5) Working capital adjustment was payable to Alteva, LLC pursuant to the terms of the Alteva Agreement. As of December 31, 2011, the Company had repaid $0.5 million to Alteva, LLC., with the remaining $0.2 million being repaid as of December 31, 2012.

6)The purchase price protection provided that if the price of the Company's common stock for the 30 trading days immediately prior to October 21, 2012 or December 15, 2012 (but excluding the three trading days prior to and after the record date for any cash dividend declared by the Company) (the "Release Date Price") was less than $11.74, then the Company would issue to the Alteva, LLC members the aggregate number of shares of the Company's common stock equal to the difference between $1.6 million and the market value of 50% of the aggregate Alteva Shares on October 21, 2012 or December 15, 2012, or 100% of the aggregate Alteva Shares if the Release Date Price is less than $11.74 on both dates. The Company recorded the valuation of the price protection derivative liability using a binomial method based on significant inputs not observed in the market and thus represented a Level 3 instrument. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company's own assumptions in measuring fair value.

During fiscal 2012, the Company and the Avetla, LLC (previously Alteva LLC) members agreed to terminate the Lock and Put agreement and put in place a new agreement, as described below.

The total purchase price has been allocated as follows:

		($ in thousands)
Accounts receivable	$	788
Prepaid expenses		70
Property, plant and equipment		530
Seat licenses		570
Trade name		2,400
Customer relationships		5,400
Goodwill		9,121
Total assets acquired		18,879
Accounts payable		(162	)
Accrued expenses		(132	)
Customer deposits		(67	)
Capital leases payable		(671	)
Deferred revenue		(29	)
Total liabilities assumed		(1,061	)
Total transaction value	$	17,818

The purchase price was allocated to the assets acquired and liabilities assumed based on their fair values on the acquisition date. The excess of the purchase consideration over the fair value of the net assets acquired has been allocated to goodwill. The Company engaged a third-party valuation group to assist them in the valuation of the assets acquired, liabilities assumed and the Lock-Up and Put Agreement.

In connection with the Company's acquisition of substantially all of the assets and assumption of certain liabilities of Alteva, LLC, the members of Alteva, LLC were granted shares of the Company's common stock as partial consideration in the acquisition (the "Alteva Shares") and entered into a Lock-Up and Put Agreement with the Company effective October 21, 2011. The Lock-up and Put Agreement included a purchase price protection that provided that if the price of the Company's common stock for the 30 trading days immediately prior to the October 21, 2012 or December 15, 2012 (but excluding the three trading days prior to and after the record date for any cash dividend declared by the Company) was less than $11.74, then the Company was to issue to the Alteva, LLC members the aggregate number of shares of the Company's common stock equal to the difference between $1.6 million and the market value of 50% of the aggregate shares on October 21, 2012 or December 15, 2012, or 100% of the aggregate shares if the Release Date was less than $11.74 on both dates (the "Purchase Price Protection").

On August 30, 2012, the Company entered into an Agreement for Sale of Shares, effective as of August 22, 2012, (the "Sale Agreement") with all the members of Avetla, LLC (previously Alteva LLC), except for David Cuthbert (the "Selling Holders") pursuant to which the Selling Holders were permitted to sell their Alteva Shares in one or more block sales. Pursuant to the terms of the Sale Agreement, the Company and the Selling Holders agreed to terminate the Lock-Up Agreement and the Company permitted the Selling Holders to sell their Alteva Shares in one or more block sales prior to October 22, 2012 (the "Sale Transaction"). If the price obtained by the Selling Holders in the Sale Transaction was less than $14.68 per share, then the Company had to pay each of the Selling Holders the difference between $14.68 and the per share price of the Sale Transaction multiplied by the number of Alteva Shares sold in the Sale Transaction (the "Additional Parent Payment"). The Selling Holders sold all of their Alteva Shares in a block trade on September 21, 2012 for $12.55 per share, resulting in a payment by the Company to the selling shareholders of $0.5 million in October 2012. The expense recorded in connection with this liability was included in other income (expense), net in the statement of operations for the year ended December 31, 2012.

On September 26, 2012, the Company entered into an amendment (the "Amendment") to the Lock-Up and Put Agreement with David Cuthbert, the Company's President and Chief Executive Officer. The Amendment increased the price at which Mr. Cuthbert may sell his Alteva Shares to the Company (the "Put") to $14.68 from the greater of (i) the closing price of the Company's common stock on the date of exercise of the Put, or (ii) $11.74. The price of the Put equaled the per share price the Selling Holders received under the Sale Agreement after taking into account the Additional Parent Payment. In addition, the Amendment permitted Mr. Cuthbert to exercise the Put for all of his Alteva Shares, not just half, from October 21, 2012 to December 20, 2012. Also on September 26, 2012, Mr. Cuthbert provided the Company with written notice of his intent to exercise the Put for all of his Alteva Shares on October 21, 2012. The Company paid Mr. Cuthbert $0.4 million for his Alteva Shares.

The customer relationships intangible asset has a weighted-average useful life of eight years and the trade name intangible asset has an estimated useful life of 15 years. In addition, the Company recorded goodwill in the amount of $9.1 million. For tax purposes goodwill will be amortized over 15 years.

The Company incurred $0.8 million of acquisition-related costs as general and administrative expenses in the consolidated statements of operations for the year ended December 31, 2011. The revenue from the Alteva business included in the Company's statement of operations for the five months (since August 2011) ended December 31, 2011 was $3.1 million and the net loss before income taxes was $0.7 million.

The following unaudited pro forma condensed consolidated results of operations for the Company for December 31, 2011 and 2010, respectively, assume that the purchase of certain assets and the assumption of certain liabilities of Alteva, LLC occurred on January 1, 2011 and 2010. The unaudited pro forma information presents the combined operating results of the acquired Alteva, LLC business and the Company, with the results prior to the date of the acquisition adjusted for amortization of intangibles and depreciation of fixed assets, based on the purchase price allocation, interest expense on borrowings and the elimination of acquisition related costs.

The unaudited pro forma results shown in the table below do not purport to be indicative of the results that would have been obtained had the Alteva, LLC Agreement been entered into as of January 1, 2011 and 2010, nor does the unaudited pro forma data intend to be a projection of results that may be obtained in the future.

		(unaudited)
		2011			2010
		($ in thousands)
Operating revenues	$	29,997		$	30,374
Net Income (loss)	$	(3,697	)	$	1,960
Basic earnings (loss) per share	$	(0.65	)	$	0.35
Dilluted earnings (loss) per share	$	(0.65	)	$	0.35