Internet America 10Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013

£ 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)

10930 W. Sam Houston Pkwy., N., Suite 200	77064
(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.

Yesx 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).

Yesx 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 companyx
(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¨ Nox

As of May 10, 2013, the registrant had 16,729,562 shares of Common Stock at $0.01 par value, outstanding.

INTERNET AMERICA, INC.

TABLE OF CONTENTS

FORM 10-Q

QUARTERLY PERIOD ENDED MARCH 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	9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17

Item 4.	Controls and Procedures	17

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	18

Item 1A.	Risk Factors	18

Item 2.	Unregistered Sales of Equity Securitites and Use of Proceeds	18

Item 3.	Defaults Upon Senior Securities	18

Item 4.	Mine Safety Disclosures	18

Item 5.	Other Information	18

Item 6.	Exhibits	18

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			June 30,
	2013			2012
	(unaudited)			(audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,096,743		$	1,433,230
Restricted cash		-			6,432
Accounts receivable, net of allowance for uncollectible accounts of $10,030 and $8,123 as of March 31, 2013 and June 30, 2012, respectively		135,246			103,714
Inventory		447,732			452,591
Prepaid expenses and other current assets		126,147			150,272
Total current assets		2,805,868			2,146,239

Property and equipment—net		1,442,898			1,487,357
Goodwill		2,037,127			2,037,127
Subscriber acquisition costs—net		498,838			416,610
Other assets		6,792			27,498
TOTAL ASSETS	$	6,791,523		$	6,114,831

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	138,345		$	184,694
Accrued liabilities		551,311			404,905
Deferred revenue		773,535			780,797
Current portion of long-term debt		220,860			248,477
Total current liabilities		1,684,051			1,618,873

Long-term debt, net of current portion		180,853			308,303
Total liabilities		1,864,904			1,927,176

COMMITMENTS AND CONTINGENCIES		-			-

SHAREHOLDERS' EQUITY:
Preferred stock $0.01 par value: 5,000,000 shares authorized, 2,718,428 issued and outstanding as of March 31, 2013 and June 30, 2012		27,185			27,185
Common stock, $0.01 par value: 40,000,000 shares authorized, 16,729,562 issued and outstanding as of March 31, 2013 and June 30, 2012		167,296			167,296
Additional paid-in capital		63,040,865			63,030,865
Accumulated deficit		(58,308,727	)		(59,037,691	)
Total shareholders' equity		4,926,619			4,187,655
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	6,791,523		$	6,114,831

See accompanying notes to condensed consolidated financial statements.

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2013			2012			2013			2012
REVENUES:
Internet services	$	1,968,396		$	1,842,284		$	5,832,951		$	5,465,160
TOTAL REVENUES		1,968,396			1,842,284			5,832,951			5,465,160

OPERATING EXPENSES:
Connectivity and operations		1,009,335			1,060,379			2,931,234			3,139,829
Sales and marketing		120,770			141,222			338,433			329,608
General and administrative		403,129			348,620			1,178,829			1,059,379
Depreciation and amortization		197,672			239,364			609,726			626,676
TOTAL OPERATING EXPENSES		1,730,906			1,789,585			5,058,222			5,155,492

INCOME FROM OPERATIONS		237,490			52,699			774,729			309,668

OTHER INCOME (EXPENSE)
Interest income		3,078			1,004			5,172			3,007
Interest expense		(4,246	)		(8,027	)		(14,937	)		(28,124	)
Gain on bargain purchase		-			411,400			-			411,400
OTHER INCOME (EXPENSE), net		(1,168	)		404,377			(9,765	)		386,283

INCOME BEFORE INCOME TAX EXPENSE		236,322			457,076			764,964			695,951
Income tax expense		12,000			153,785			36,000			167,682

NET INCOME and TOTAL COMPREHENSIVE INCOME	$	224,322		$	303,291		$	728,964		$	528,269

NET INCOME PER COMMON SHARE:
BASIC	$	0.01		$	0.02		$	0.04		$	0.03
DILUTED	$	0.01		$	0.02		$	0.04		$	0.03

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		16,729,562			16,729,562			16,729,562			16,729,562
DILUTED		19,474,299			19,447,990			19,449,575			19,447,990

See accompanying notes to condensed consolidated financial statements.

INTERNET AMERICA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	March 31,
	2013			2012
OPERATING ACTIVITIES:
Net income	$	728,964		$	528,269
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		609,726			626,676
Loss from sale or disposal of assets		4,877			7,710
Provision for (recovery of) bad debt		(7,724	)		2,796
Stock based compensation		10,000			8,061
Gain on bargain purchase		-			(411,400	)
Changes in operating assets and liabilities:
Accounts receivable		(23,808	)		(16,983	)
Inventory		(21,421	)		(27,629	)
Prepaid expenses and other current assets		24,125			62,950
Other assets		20,706			(1,591	)
Accounts payable and accrued liabilities		16,287			192,308
Deferred revenue		(7,262	)		27,571
Net cash provided by operating activities		1,354,470			998,738
INVESTING ACTIVITIES:
Purchases of property and equipment		(450,718	)		(333,082	)
Change in restricted cash		6,432			-
Proceeds from sale of assets		21,403			-
Cash paid for acquisitions		(76,000	)		(70,940	)
Net cash used in investing activities		(498,883	)		(404,022	)
FINANCING ACTIVITIES:
Principal payments of long-term debt		(192,074	)		(376,089	)
Net cash used in financing activities		(192,074	)		(376,089	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		663,513			218,627
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		1,433,230			1,512,690
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	2,096,743		$	1,731,317
SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	15,246		$	28,531
Cash paid for taxes	$	5,600		$	6,400
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued purchase consideration	$	83,200		$	45,000
Note payable issued for acquisition of subscribers	$	37,006		$	14,750
Note payable issued for inventory	$	-		$	4,974

See accompanying notes to condensed consolidated financial statements.

INTERNET AMERICA, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2012.

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.

Basic and Diluted Net Income Per Share

For each of the three and nine months ended March 31, 2013 and 2012, common stock equivalent shares totaling 2,718,428 have been added to the diluted 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 nine months ended March 31, 2013, additional common stock equivalent shares totaling 26,309 and 1,585, respectively, were included in the calculation of diluted EPS. These additional shares are attributable to outstanding in-the-money stock options and warrants. For each of the three and nine months ended March 31, 2013, options to purchase 1,189,026 shares of the Company's common stock were excluded from the computation of diluted EPS. For the three and nine months ended March 31, 2013, warrants to acquire 0 and 394,922 shares of common stock, respectively, were excluded from the computation of diluted EPS. For the three and nine months ended March 31, 2012, options to purchase 1,430,944 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 would have been anti-dilutive.

There are no adjustments required to be made to net income for the purpose of computing basic and diluted EPS for the three and nine months ended March 31, 2013 and 2012.

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.

Acquisition of Subscribers

On August 1, 2012, the Company completed an acquisition of subscribers (the "AEI Acquisition"). The final purchase consideration for the AEI Acquisition totaled $66,179 and consisted of (i) $26,000 in a cash payment made at closing and (ii) a note payable in the final adjusted amount of $40,179 based on the final number of acquired subscribers as determined on November 1, 2012.

On February 1, 2013, the Company completed an acquisition of subscribers (the "Internet Doctors Acquisition"). Purchase consideration for the Internet Doctors Acquisition consisted of (i) $50,000 in a cash payment made at closing and (ii) an estimated $83,200 in additional purchase consideration, which was included in Accrued Liabilities in the accompanying consolidated balance sheet as of March 31, 2013, to be finalized and issued in the form of a note payable during the quarter ending June 30, 2013 based on the number of acquired subscribers as of May 1, 2013. As of March 31, 2013 the allocation of the final purchase price is not complete.

Goodwill and Subscriber Acquisition Costs

Pursuant to Financial Accounting Standards Board (“FASB”) guidance on goodwill and other intangibles, the Company performed its annual impairment test during the fourth quarter of its fiscal year ended June 30, 2012.

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 nine months ended March 31, 2013 and 2012. As of March 31, 2013, unrecognized amortization expense for the remainder of the fiscal year ended June 30, 2013 is expected to be $45,000 and unrecognized amortization expense for fiscal years ended June 30, 2014, 2015, 2016 and 2017 is expected to be $180,000, $160,000, $92,000 and $21,000, respectively.

Income Taxes

During the nine months ended March 31, 2013 and 2012, the Company generated income before income tax expense of $764,964 and $695,951 respectively, and recognized income tax expense of $36,000 and $167,682, respectively, which consisted solely of Texas state franchise tax expense. During the nine months ended March 31, 2012, a true up of $147,785 for past years' franchise tax due was recorded. No provision for federal income taxes was recorded for the nine months ended March 31, 2013 and 2012 due to the utilization of net operating loss carryforwards.

As of March 31, 2013, the Company had net operating loss carryforwards of approximately $37 million for federal income tax purposes, and the Company's deferred tax assets primarily consisted of assets related to these net operating loss carryforwards. The Company has provided a full valuation allowance for its deferred tax assets and considers all evidence both positive and negative when evaluating the recoverability of its deferred tax assets. As of March 31, 2013, it has been determined that it is more likely than not that these deferred tax assets will not be utilized due to inconsistent earnings in its prior operating history and the uncertainty of possible limitations on the net operating loss carryforwards for which we are in the process of completing an assessment which we expect to have completed by the end of our fiscal year ended June 30, 2013. The Company will continue to monitor the need for a full valuation allowance in future periods. Should the Company determine that it is more likely than not that a portion of its deferred tax assets will be realized, a reversal of the valuation allowance representing an estimate of what is recoverable will be recorded within income tax expense in the period that the determination is made.

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 March 31, 2013 and June 30, 2012. The Company will account for interest and penalties related to uncertain tax positions in the current period consolidated statement of operations, as necessary.

Long-Term Debt

As of March 31, 2013 and June 30, 2012, long term debt consisted of:

	March 31,			June 30,
	2013			2012
Note payable due February 15, 2015, payable in monthly payments of $4,346 with fixed interest 4.5%	$	95,602		$	130,827
Note payable due February 15, 2015, payable in monthly payments of $11,189 with interest imputed at 3.25% (net of unamortized discount of $8,178 and $15,521, respectively)		249,172			342,532
Note payable due February 10, 2014, payable in monthly installments of $417 with interest of 8.5%		4,061			7,157
Note payable due May 3, 2013, payable in monthly installments of $5,085 with interest imputed at 8.5% (net of unamortized discount of $107 and $2,306, respectively)		15,036			58,599
Note payable due January 1, 2014, payable in monthly installments of $615 with interest imputed at 8.5% (net of unamortized discount of $224 and $730, respectively)		5,922			10,947
Note payable due April 1, 2013, payable in monthly installments of $671 with no interest		672			6,718
Note payable due November 1, 2014, payable in monthly installments of $1,674 with imputed at 8.0% (net of unamortized discount of $2,233 and $0, respectively)		31,248			-
		401,713			556,780
Less current portion		(220,860	)		(248,477	)
Total long-term debt, less current portion	$	180,853		$	308,303

Stock Options and Warrants

As of March 31, 2013, 1,241,526 stock options were outstanding and 758,474 stock options were available for future issuance under the Company’s 2007 Stock Option Plan. During the three and nine months ended March 31, 2013, the Company granted to certain employees of the Company a total of 0 and 245,000, respectively, stock options to purchase shares of Common Stock at an exercise price of $0.35 per share. The Company determined the total fair value of the grants to be $30,000, or $0.12 per stock option. Options that were granted to employees who had established a year of service with the Company as of the grant date vest as follows: 25% immediately on the grant date and an additional 25% on each anniversary of the grant date until fully vested on October 30, 2015. Options that were granted to employees who had not established a year of service with the Company as of the grant date vest as follows: 25% on each anniversary of the grant date until fully vested on October 30, 2016. These options will expire ten years after grant date pursuant to the terms set forth in the written option agreements executed and delivered to the recipients of such options. As of March 31, 2013, the total compensation expense related to non-vested awards not yet recognized was $20,000 and is expected to be amortized to compensation expense over the next four years.

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

10.

Related Parties

During the three and nine months ended March 31, 2013, a total of $13,191 and $27,754, respectively, was paid to non-employee directors for serving on the Company's board of directors. For the three and nine months ended March 31, 2012, a total of $13,250 and $43,750, respectively, was paid to non-employee directors for serving on the Company’s board of directors.

11.

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.

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, 2012 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

Our primary focus during the first nine months of fiscal 2013 has been investing in the Company's senior management team and in system infrastructure upgrades. We have strengthened our management team with the addition of a Chief Operating Officer in October 2012, a more experienced Head of Sales and Marketing in January 2013 and a senior outside CPA/MBA consultant to our Corporate Development and Financial team in April 2013.

As we continue to focus on controlling operating expenses and improving internal growth, we expect to continue to see positive operating results. We are alsoconstantly evaluating 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. Finally,we are always examining potential opportunities that would significantly increase our revenue base through synergistic combinations with other companies. We are also now concentrating on our development of cloud-based services that fit our operations and marketing areas.

Over the past few years, Internet America has maintained a strong focus on controlling expenses and making strategic investments to achieve positive cash flow and profitability. We feel that this discipline has placed us in a stronger position than many of our competitors in the Internet industry, some of whom have ceased operations altogether. We will work hard in the future to take advantage of our better positioning and concentrate on more aggressive growth as a wireless service provider and in the cloud-based services of our industry. We anticipate making acquisitions of larger wireless internet service providers ("WISPs") and possibly acquisitions or mergers with other cloud-based service companies.

The quarter ended March 31, 2013 continued to show positive results in terms of revenue and cash flow. While net income increased by $201,000 for the nine months ended March 31, 2013 versus the same period in 2012, the net income for the quarter ended March 31, 2013 decreased by $45,000 from the previous quarter ended December 31, 2012. Adjusted EBITDA (as defined herein) increased by approximately $459,000 for the nine months ended March 31, 2013 compared to the same period in 2012.

Cash on hand was $2,097,000 at March 31, 2013, an increase of $664,000, or 46.3%, from June 30, 2012, despite spending $451,000 on the purchases of property and equipment, making $76,000 in cash payments for acquisitions and reducing outstanding long term debt by $192,000 during this period. Although we have invested a total of $451,000 in the purchases of property and equipment during the nine months ended March 31, 2013, we will continue to make necessary upgrades and improvements to our systems andwe believe that our capital expenditure rate over the last two years will slow down in the coming quarters.Total outstanding debt decreased by $155,000 to $402,000 at March 31, 2013 compared to $557,000 at June 30, 2012.

Statement of Operations

Internet services revenue is derived from dial-up Internet access, including analog and ISDN access, DSL access, dedicated connectivity, wireless access, 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.

A brief description of each element of our operating expenses follows:

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 and other general office and business expenses.

Bad debt expenses (recoveries) consist primarily of customer accounts that have been deemed uncollectible and will potentially be written off in future periods, net of recoveries. Historically, the expense has been based on the aging of customer accounts whereby all customer accounts that are 30 days or older have been provided for 50% as a bad debt expense, 75% for customer accounts older than 60 days and 100% for customer accounts older than 90 days.

Depreciation expense is computed using the straight-line or double declining method over the estimated useful lives of the assets or the capital lease term, 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.

Results of Operations

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

The following table sets forth certain unaudited financial data for the three months ended March 31, 2013 and March 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 March 31,
	2013			% of Revenues			2012			% of Revenues
REVENUES:
Internet services	$	1,968			100.0	%	$	1,842			100.0	%
TOTAL REVENUES		1,968			100.0	%		1,842			100.0	%
OPERATING EXPENSES:
Connectivity and operations		1,009			51.3	%		1,060			57.6	%
Sales and marketing		121			6.2	%		141			7.7	%
General and administrative		403			20.5	%		349			19.0	%
Depreciation and amortization		198			10.1	%		239			13.0	%
TOTAL OPERATING EXPENSES		1,731			88.1	%		1,789			97.3	%
INCOME FROM OPERATIONS		237			11.9	%		53			2.7	%

OTHER INCOME (EXPENSE)
Interest income		3			0.2	%		1			0.1	%
Interest expense		(4	)		(0.2	)%		(8	)		(0.5	)%
Gain on bargain purchase		-			0.0	%		411			22.4	%
OTHER EXPENSE, net		(1	)		0.0	%		404			22.0	%

INCOME BEFORE INCOME TAX EXPENSE		236			12.0	%		457			24.8	%
Income tax expense		12			0.6	%		154			8.4	%
NET INCOME and COMPREHENSIVE INCOME	$	224			11.4	%	$	303			16.4	%

NET INCOME PER COMMON SHARE:
BASIC	$	0.01					$	0.02
DILUTED	$	0.01					$	0.02
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		16,729,562						16,729,562
DILUTED		19,474,299						19,447,990
OTHER DATA:
Adjusted EBITDA(1)	$	435					$	292
Adjusted EBITDA margin(2)		22.1	%					15.9	%
CASH FLOW DATA:
Cash flow provided by operations	$	345					$	343
Cash flow used in investing activities	$	(184	)				$	(135	)
Cash flow used in financing activities	$	(67	)				$	(122	)
Reconciliation of net income to Adjusted EBITDA:
Net Income (Loss)	$	224					$	303
Add: Depreciation and amortization		198						239
Stock based compensation		-						-
Interest expense		4						8
Income tax expense		12						154
Less: Interest income		(3	)					(1	)
Gain on bargain purchase		-						(411	)
Adjusted EBITDA(1)	$	435					$	292

(1) Adjusted EBITDA, which as used herein means earnings before the effect of interest, taxes, depreciation, amortization, gain on bargain purchase 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.

Total revenue.Total revenue increased by $126,000, or 6.8%, to $1,968,000 for the three months ended March 31, 2013, from $1,842,000 for the three months ended March 31, 2012. Wireless broadband Internet revenue increased by $129,000 to $1,549,000 during the current year period compared to $1,420,000 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 March 31, 2013, and the successful acquisitions of wireless subscribers completed in fiscal years 2012 and 2013. The increase in revenues derived from wireless broadband Internet subscribers was partially offset by a net decrease in other types of Internet service revenues of $3,000 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 decreased by $51,000, or 4.8%, to $1,009,000 for the three months ended March 31, 2013, from $1,060,000 for the three months ended March 31, 2012. Data and telecommunications expense, expensed assets, and salaries, wages and personnel expense collectively decreased by $83,000 to $755,000 for the current year period compared to $838,000 for the prior year period, primarily due to renegotiating more favorable terms with telecommunications service providers.

The above described decreases in expenses were partially offset by a total increase of $32,000 in tower lease costs, personnel travel expense and merchant fees to $254,000 for the current year period compared to $222,000 for the prior year period. These increases resulted from the Company's growth and network expansion during the twelve months ended March 31, 2013.

Sales and marketing.Sales and marketing expense decreased by $20,000, or 14.2%, to $121,000 for the three months ended March 31, 2013 compared to $141,000 for the three months ended March 31, 2012. Advertising expense decreased by $15,000 to $20,000 for the current year period compared to $35,000 for the prior year period primarily due to less use of public advertising on the radio and in newspapers and more use of internal sales efforts. Outside sales expense also decreased for the current year period compared to the prior year period by $21,000 due to a decrease in revenues generated from the outside sales force for the current year period.

The above mentioned decreases were partially offset by an increase of $16,000 in salaries, wages and related personnel costs for the current year period compared to the prior year period primarily due to the addition of a Director of Sales and Marketing during the three months ended March 31, 2013. Facilities expense remained constant at $6,000 for each of the current and prior year periods.

General and administrative.General and administrative expense increased by $54,000, or 15.5%, to $403,000 for the three months ended March 31, 2013, from $349,000 for the three months ended March 31, 2012. Personnel costs increased by $60,000 to $183,000 for the current year period compared to $123,000 for the prior year period due to increased salaries and the increase in health insurance benefits effective January 1, 2013. Due to the conditions of the economy and expected higher cost of services, insurance, facilities, professional fees and other general and administrative costs increased by $6,000 for the three months ended March 31, 2013 compared to the prior year period.

The above mentioned increases were partially offset by a decrease in telecommunications expense of $12,000 to $29,000 for the current year period compared to $41,000 for the prior year period due to renegotiating more favorable terms with telecommunications service providers. Personnel travel expenses remained constant at $6,000 for each of the current and prior year periods. Stock based compensation expense and directors’ fees remained constant at $13,000 for each of the current and prior year periods.

Depreciation and amortization. Depreciation and amortization decreased by $41,000, or 17.2%, to $198,000 for the three months ended March 31, 2013, from $239,000 for the three months ended March 31, 2012. This decrease is due to a $58,000 decrease in depreciation expense related to assets becoming fully depreciated during the last nine months ended March 31, 2013, partially offset by an increase of $17,000 in amortization of acquired subscriber costs resulting from the two acquisitions completed by the Company this fiscal year.

Interest income and expense.Interest expense decreased by $4,000, or 50.0%, to $4,000 for the three months ended March 31, 2013 from $8,000 for the three months ended March 31, 2012, primarily resulting from the reduction of the Company's long-term debt balances outstanding. Interest income increased by $2,000 during the current year period compared to the prior year period due to increased cash on hand.

Gain on bargain purchase.During the three months ended March 31, 2012, the Company recognized a one-time gain of $411,000 on a bargain purchase resulting from the Joplin Acquisition, which closed on January 31, 2012.

Income tax expense. Income tax expense, consisting of Texas franchise tax, decreased $142,000, or 92.2%, to $12,000 for the three months ended March 31, 2013, as compared to $154,000 for the three months ended March 31, 2012 due to a true up for past years' franchise tax due completed in the prior year period ended March 31, 2012. As a result of this true up, the Company has adjusted its monthly accrual rate on a go-forward basis. The Company currently does not provide for federal income taxes due to the availability of its net operating loss carryforwards which are fully reserved at this time due to uncertainty of possible limitations for which we are in the process of completing an assessment which we expect to have completed by the end of our fiscal year ended June 30, 2013. The Company continually monitors its valuation allowance considering all evidence both positive and negative. Should the Company determine that it is more likely than not that a portion of its deferred tax assets will be realized, a reversal of the valuation allowance representing an estimate of what is recoverable will be recorded within income tax expense in the period that the determination is made.

Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012

The following table sets forth certain unaudited financial data for the nine months ended March 31, 2013 and March 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).

	Nine Months Ended March 31,
	2013			% of Revenues			2012			% of Revenues
REVENUES:
Internet services	$	5,833			100.0	%	$	5,465			100.0	%
TOTAL REVENUES		5,833			100.0	%		5,465			100.0	%
OPERATING EXPENSES:
Connectivity and operations		2,931			50.3	%		3,140			57.5	%
Sales and marketing		338			5.8	%		330			6.1	%
General and administrative		1,179			20.3	%		1,059			19.4	%
Depreciation and amortization		610			10.5	%		626			11.5	%
TOTAL OPERATING EXPENSES		5,058			86.9	%		5,155			94.5	%
INCOME FROM OPERATIONS		775			13.1	%		310			5.5	%

OTHER INCOME (EXPENSE)
Interest income		5			0.1	%		3			0.1	%
Interest expense		(15	)		(0.3	)%		(28	)		(0.6	)%
Gain on bargain purchase		-			0.0	%		411			7.6	%
OTHER EXPENSE, net		(10	)		(0.2	)%		386			7.1	%

INCOME BEFORE INCOME TAX EXPENSE		765			13.2	%		696			12.8	%
Income tax expense		36			0.7	%		168			3.1	%
NET INCOME and COMPREHENSIVE INCOME	$	729			12.5	%	$	528			9.7	%

NET INCOME PER COMMON SHARE:
BASIC	$	0.04					$	0.03
DILUTED	$	0.04					$	0.03
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC		16,729,562						16,729,562
DILUTED		19,449,575						19,447,990
OTHER DATA:
Adjusted EBITDA(1)	$	1,395					$	936
Adjusted EBITDA margin(2)		23.9	%					17.1	%
CASH FLOW DATA:
Cash flow provided by operations	$	1,355					$	999
Cash flow used in investing activities	$	(499	)				$	(404	)
Cash flow used in financing activities	$	(192	)				$	(376	)
Reconciliation of net income to Adjusted EBITDA:
Net Income (Loss)	$	729					$	528
Add: Depreciation and amortization		610						626
Stock based compensation		10						-
Interest expense		15						28
Income tax expense		36						168
Less: Interest income		(5	)					(3	)
Gain on bargain purchase		-						(411	)
Adjusted EBITDA(1)	$	1,395					$	936

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

Total revenue.Total revenue increased by $368,000, or 6.7%, to $5,833,000 for the nine months ended March 31, 2013, from $5,465,000 for the nine months ended March 31, 2012. Wireless broadband Internet revenue increased by $461,000 to $4,557,000 for the current year period compared to $4,096,000 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 nine months ended March 31, 2013 and the successful acquisitions of wireless subscribers completed in fiscal years 2012 and 2013. Increased revenues derived from wireless broadband Internet subscribers were partially offset by decreases in other types of Internet service revenues of $93,000 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 decreased by $209,000, or 6.7%, to $2,931,000 for the nine months ended March 31, 2013, from $3,140,000 for the nine months ended March 31, 2012. Data and telecommunications expense decreased by $217,000 to $715,000 for the current year period compared to $932,000 for the prior year period. The majority of this decrease was due to lower call volume resulting from improvements in our systems and renegotiating more favorable terms with telecommunications service providers. Expensed assets decreased by $79,000 to $136,000 for the current year period compared to $215,000 for the prior year period primarily due to a vendor concession granted in connection with a manufacturer's recall. Due to the utilization of internal labor and less use of contract labor, salaries, wages, and related personnel expense also decreased by $38,000 to $1,338,000 for the current year period compared to $1,376,000 for the prior year period.

The above described decreases in expenses were partially offset by an increase of $125,000 in tower leases costs and personnel travel expense to $618,000 for the current year period compared to $493,000 for the prior year period. These increases are all a result of the Company's growth and network expansion during the nine months ended March 31, 2013. Merchant fees remained constant at $124,000 for the current and prior year period.

Sales and marketing.Sales and marketing expense increased by $8,000, or 2.4%, to $338,000 for the nine months ended March 31, 2013 compared to $330,000 for the nine months ended March 31, 2012. Salaries, wages and related personnel costs increased by approximately $71,000 to $213,000 for the current year period compared to $142,000 for the prior year period, which is attributed mainly to the addition of sales and marketing personnel to expand sales efforts.

The above mentioned increases were partially offset by a decrease of $63,000 in advertising and postage shipping, as well as outside sales. This is primarily related to the use of internal sales and marketing efforts, compared to public radio and newspaper advertising and outside sales in the prior year period.

General and administrative.General and administrative expense increased by $120,000, or 11.3%, to $1,179,000 for the nine months ended March 31, 2013 compared to $1,059,000 for the nine months ended March 31, 2012. Personnel costs increased by $164,000 to $503,000 for the current year period compared to $339,000 for the prior year period due to the addition of full time employees and increased salaries. Due to the conditions of the economy and expected higher cost of services, travel, insurance, facilities and other general and administrative costs increased by $50,000 for the nine months ended March 31, 2013 compared to the prior year period.

The above mentioned increases were partially offset by a decrease in telecommunications expense of $67,000 to $67,000 for the current year period compared to $134,000 for the prior year period due to renegotiating more favorable terms with telecommunications service providers, and from refunds received from four telecom providers for sales tax billed in error in previous periods. In addition, professional fees decreased by $13,000 to $132,000 for the current year period compared to $145,000 for the prior year period. Directly related to the reduction of directors for the current year period and the timing of stock option grants, stock compensation and directors’ fees expense decreased by $14,000 to $38,000 for the current year period compared to $52,000 for the prior year period.

Depreciation and amortization. Depreciation and amortization decreased by $16,000, or 2.6%, to $610,000 for the nine months ended March 31, 2013, from $626,000 for the nine months ended March 31, 2012. This decrease was due to a $72,000 decrease in depreciation expense related to assets becoming fully depreciated during the last nine months ended March 31, 2013, partially offset by an increase of $56,000 in amortization of acquired subscriber costs resulting from recent acquisitions completed by the Company.

Interest income and expense. For the nine months ended March 31, 2013 and March 31, 2012, the Company recorded interest expense of $15,000 and $28,000, respectively. The decrease in interest expense of $13,000, or 46.4%, is related to a decrease in acquisition related debt and in the RUS loan outstanding due to continued payment of outstanding principal. Interest income slightly increased by $2,000 to $5,000 for the current year period compared to $3,000 for the prior year period due to increased cash on hand.

Gain on bargain purchase.During the nine months ended March 31, 2012, the Company recognized a one-time gain of $411,000 on a bargain purchase resulting from the Joplin Acquisition, which closed on January 31, 2012.

Income tax expense. Income tax expense, consisting of Texas franchise tax, decreased $132,000, or 78.6%, to $36,000 for the nine months ended March 31, 2013, as compared to $168,000 for the nine months ended March 31, 2012 due to a true up for past years' franchise tax due completed in the prior year period ended March 31, 2012. As a result of this true up, the Company has adjusted its monthly accrual rate on a go-forward basis. The Company currently does not provide for federal income taxes due to the availability of its net operating loss carryforward which is fully reserved at this time due to uncertainty of possible limitations on its net operating loss carryforwards for which we are in the process of completing an assessment which we expect to have completed by the end of our fiscal year ended June 30, 2013. The Company continually monitors its valuation allowance considering all evidence both positive and negative. Should the Company determine that it is more likely than not that a portion of its deferred tax assets will be realized, a reversal of the valuation allowance representing an estimate of what is recoverable will be recorded within income tax expense in the period that the determination is made.

Liquidity and Capital Resources

We have historically financed our operations to date primarily through (i) cash flows from operations, (ii) public and private sales of equity securities and (iii) loans from shareholders and third parties. During the nine months ended March 31, 2013, the Company recognized net income and positive cash flow from operations of approximately $729,000 and $1,354,000, respectively, enabling the Company to fund its operations from current period operating cash flow and resulting in cash on hand of $2,097,000 at March 31, 2013. The Company expects to continue to fund its operations during fiscal 2013 with cash flow from operations. The Company will continue to focus on sales and expense management during fiscal 2013 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 assets and liabilities. For the nine months ended March 31, 2013, cash provided by operations was $1,354,000 compared to $999,000 for the nine months ended March 31, 2012. For the nine months ended March 31, 2013, net income plus non-cash items contributed cash of $1,346,000 compared to $762,000 for the prior year period. Changes in operating assets and liabilities provided cash of $9,000 and $237,000 for the nine months ended March 31, 2013 and 2012, respectively.

Cash used in investing activities totaled $499,000 and $404,000 for the nine months ended March 31, 2013 and 2012, respectively, due primarily to the improvements in existing wireless broadband Internet infrastructure and acquisition of subscribers, partially offset by the release of restricted cash of $6,000 and proceeds totaling $21,000 received from the sale of assets.

Cash used in financing activities totaled $192,000 and $376,000 for the nine months ended March 31, 2013 and 2012, respectively, and consisted of principal payments on long term debt, including notes related to acquisitions.

Cash on hand increased by $664,000 during the nine months ended March 31, 2013. As of March 31, 2013, cash on hand was $2,097,000 compared to $1,433,000 as of June 30, 2012. We believe our continuing efforts to improve the quality and efficiency of our operations, along with our focus on increasing revenues, will continue to provide cash for infrastructure upgrades, acquisitions of subscribers, and increased marketing efforts.

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.

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 (The "Exchange Act"), as amended, 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, who also performs the functions of the principal 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 March 31, 2013 was conducted under the supervision and with the participation of our management, including our Chief Executive Officer, who also serves as our principal 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, also performing the function of the principal financial officer, concluded that our disclosure controls and procedures, as of March 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 March 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.

ITEM 6.

EXHIBITS

Exhibit		Description
31*		Rule 13a-14(a)/15d-14(a) Certification of William E. Ladin, Jr.
32*		Section 1350 Certification of William E. Ladin, Jr.
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.

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: May 13, 2013
By: /s/ William E. Ladin, Jr.
William E. Ladin, Jr.
Chief Executive Officer
(duly authorized officer)

Date: May 13, 2013
By: /s/ William E. Ladin, Jr.
William E. Ladin, Jr.
Chief Financial Officer
(principal financial officer)

INDEX TO EXHIBITS

Exhibit No.		Description

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

32*		Section 1350 Certification of William E. Ladin, Jr.

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. senior Avg

Internet America (GEEK) Inactive 10-Q2013 Q3 Quarterly report

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