Inteliquent (IQNT) 10-Q 2014 Q1 Quarterly report

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 March 31, 2014

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number: 001-33778

INTELIQUENT, INC.

(Exact name of registrant as specified in its charter)

Delaware	31-1786871
(State or other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

550 West Adams Street

Suite 900

Chicago, IL 60661

(Address of principal executive offices, including zip code)

(312) 384-8000

(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. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨.  (Do not check if a smaller reporting company)	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 April 15, 2014, 32,442,499 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

INTELIQUENT, INC.

INDEX

		Page
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2014 and December 31, 2013		3
	Condensed Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 2014 and March 31, 2013		4
	Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2014 and March 31, 2013		5
	Condensed Consolidated Statements of Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2014 and March 31, 2013		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		19
Item 4.	Controls and Procedures		20
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		20
Item 1A.	Risk Factors		20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 3.	Defaults Upon Senior Securities		20
Item 4.	Mine Safety Disclosure		20
Item 5.	Other Information		20
Item 6.	Exhibits		21

2

PART I. FINANCIAL INFORMATION

INTELIQUENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)	March 31, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	70,679		$	77,004
Receivables, net of allowance of $695 and $900, respectively		38,100			22,200
Deferred income taxes-current		136			720
Prepaid expenses		3,251			2,375
Other current assets		1,245			1,977
Total current assets		113,411			104,276
Property and equipment — net		25,292			25,815
Restricted cash		125			125
Deferred income taxes-non-current		5,824			5,495
Other assets		1,486			1,534
Total assets	$	146,138		$	137,245
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,846		$	2,176
Accrued liabilities:
Taxes payable		2,477			2,437
Circuit cost		9,418			8,987
Rent		2,071			2,071
Payroll and related items		2,584			3,079
Other		1,304			1,674
Total current liabilities		20,700			20,424
Shareholders’ equity:
Preferred stock — par value of $.001; 50,000 authorized shares; no shares issued and outstanding at March 31, 2014 and December 31, 2013		—			—
Common stock — par value of $.001; 150,000 authorized shares; 32,383 shares and 32,215 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively		32			32
Less treasury stock, at cost; 3,351 shares at March 31, 2014 and December 31, 2013		(51,668	)		(51,668	)
Additional paid-in capital		205,847			203,989
Accumulated deficit		(28,773	)		(35,532	)
Total shareholders’ equity		125,438			116,821
Total liabilities and shareholders’ equity	$	146,138		$	137,245

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

INTELIQUENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended March 31,
(In thousands, except per share amounts)	2014			2013
Revenue	$	56,217		$	59,288
Operating expense:
Network and facilities expense (excluding depreciation and amortization)		24,890			24,636
Operations		7,307			7,798
Sales and marketing		676			2,034
General and administrative		3,800			4,499
Depreciation and amortization		3,141			4,513
Loss on sale of Americas Data assets		1,081			—
Total operating expense		40,895			43,480
Income from operations		15,322			15,808
Other (expense) income:
Interest (expense) income		(2	)		39
Other expense		—			(5	)
Total other (expense) income		(2	)		34
Income from continuing operations before provision for income taxes		15,320			15,842
Provision for income taxes		6,127			3,606
Income from continuing operations		9,193			12,236
Loss from discontinued operations, net of provision for income taxes		—			(5,336	)
Net income	$	9,193		$	6,900
Earnings per share-continuing operations:
Basic	$	0.28		$	0.38
Diluted	$	0.28		$	0.38
Loss per share - discontinued operations:
Basic	$	—		$	(0.17	)
Diluted	$	—		$	(0.16	)
Earnings per share - net income:
Basic	$	0.28		$	0.21
Diluted	$	0.28		$	0.21
Weighted average number of shares outstanding:
Basic		32,273			32,337
Diluted		32,616			32,453
Dividends per share:	$	0.08		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements

4

INTELIQUENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended  March 31,
(In thousands)	2014		2013
Net income	$	9,193	$	6,900
Other comprehensive loss:
Foreign currency translation		—		(174	)
Total other comprehensive loss		—		(174	)
Comprehensive income		9,193		6,726

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

INTELIQUENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended  March 31,
(In thousands)	2014			2013
Operating
Net income	$	9,193		$	6,900
Adjustments to reconcile net income to net cash flows (used for) provided by operating activities:
Depreciation and amortization		3,141			5,444
Deferred income taxes		255			(1,039	)
Non-cash share-based compensation		1,024			1,870
Loss on sale of Americas Data assets		1,081			—
Loss on intercompany foreign exchange transactions		—			250
Excess tax (benefit) deficiency associated with share-based payments		(112	)		488
Changes in assets and liabilities:
Receivables		(15,900	)		(2,848	)
Other current assets		(1,225	)		2,337
Other noncurrent assets		48			(195	)
Accounts payable		634			(1,005	)
Accrued liabilities		(608	)		(164	)
Noncurrent liabilities		—			(23	)
Net cash (used for) provided by operating activities		(2,469	)		12,015
Investing
Purchase of equipment		(2,582	)		(6,154	)
Decrease in restricted cash		—			837
Net cash used for investing activities		(2,582	)		(5,317	)
Financing
Proceeds from the exercise of stock options		1,343			—
Restricted shares withheld to cover employee taxes paid		(295	)		(117	)
Excess tax benefit (deficiency) associated with share-based payments		112			(488	)
Dividends paid		(2,434	)		—
Net cash used for financing activities		(1,274	)		(605	)
Effect of exchange rate changes on cash		—			(127	)
Net (decrease) increase in cash and cash equivalents		(6,325	)		5,966
Cash and cash equivalents — Beginning		77,004			31,479
Cash and cash equivalents — End	$	70,679		$	37,445
Supplemental disclosure of cash flow information:
Cash paid for taxes	$	6,579		$	979
Supplemental disclosure of noncash flow items:
Investing activity — Accrued purchases of equipment	$	1,778		$	1,848

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

INTELIQUENT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts and as noted)

(Unaudited)

1. DESCRIPTION OF THE BUSINESS

Organization—Inteliquent, Inc. (the Company) provides voice telecommunications services primarily on a wholesale basis. The Company offers these services using an all-IP network, which enables the Company to deliver global connectivity for a variety of media, including voice and, historically, data and video. The Company’s solutions enable carriers and other providers to deliver voice traffic or other services where they do not have their own network or elect not to use their own network. These solutions are sometimes called “off-net” services.

On April 30, 2013, the Company sold its global data business to Global Telecom & Technology, Inc. (GTT) for $54.5 million, subject to certain adjustments. The total consideration consisted of $52.5 million in cash, subject to net working capital adjustments, and $2.0 million of non-cash commercial IP Transit and point-to-point Ethernet data network services to be provided to the Company by GTT free-of-charge for a three-year period. The $2.0 million of non-cash commercial services was calculated based upon the discounted present value of the market cost of such services as of the date on which the commercial services agreement was signed with GTT. In addition, the Company recorded in its condensed consolidated statement of operations, as part of its gain amount on the sale of its global data business, approximately $2.4 million for divestiture-related costs, including legal and advisory services.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation — The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Interim Condensed Consolidated Financial Statements — The accompanying condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013, the condensed consolidated statements of income for the three months ended March 31, 2014 and 2013, the condensed consolidated statements of comprehensive income for the three months ended March 31, 2014 and 2013, and the condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013 are unaudited. The condensed consolidated balance sheet data as of December 31, 2013 was derived from the audited consolidated financial statements which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) pursuant to the rules and regulations of the Securities and Exchange Commission applicable to interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the unaudited interim condensed consolidated financial statements as of March 31, 2014 and for the three months ended March 31, 2014 and 2013 have been prepared on the same basis as the audited consolidated statements and reflect all adjustments, which are normal recurring adjustments, necessary for the fair presentation of its statement of financial position, results of operations and cash flows. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the operating results for any subsequent quarter, for the full fiscal year or any future periods.

Changes in Presentation—On April 30, 2013, the Company sold its global data business to GTT for $54.5 million, subject to certain adjustments. The Company determined that the appropriate level in which to assess discontinued operations was at its reporting unit level. As such, the Company’s Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) reporting units of the global data business consist of results of operations and cash flows that can be clearly distinguished from the rest of the entity and are therefore reflected in the condensed consolidated statements of operations as discontinued operations. Historical information related to these reporting units have been reclassified accordingly. The Americas reporting unit of the global data business does not consist of results of operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. This reporting unit does not qualify for discontinued operations accounting treatment. Therefore, the Americas reporting unit of the global data business is reported in continuing operations in the condensed consolidated statements of operations. Refer to Note 9 “Business Disposition” for more information regarding the sale of the global data business.

Cash and Cash Equivalents — The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The carrying values of our cash and cash equivalents approximate fair value. At March 31, 2014, the Company had $23.9 million of cash in banks and $46.8 million in three money market mutual funds. At December 31, 2013, the Company had $35.2 million of cash in banks and $41.8 million in three money market mutual funds.

7

Fair Value Measurements —Certain assets and liabilities are required to be recorded at fair value on a recurring basis. Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Assets measured at fair value on a nonrecurring basis include long-lived assets held and used, long-lived assets held for sale, goodwill and other intangible assets. The fair value of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying values. The three-tier value hierarchy, which prioritizes valuation methodologies based on the reliability of the inputs, is:

Level 1— Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2— Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3— Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

Property and Equipment — Property and equipment is recorded at cost. These values are depreciated over the estimated useful lives of the individual assets using the straight-line method. Any gains and losses from the disposition of property and equipment are included in operations as incurred. The estimated useful life for network equipment and tools and test equipment is five years. The estimated useful life for computer equipment, computer software and furniture and fixtures is three years. Leasehold improvements are amortized on a straight-line basis over an estimated useful life of five years or the life of the lease, whichever is less. The impairment of long-lived assets is periodically evaluated when events or changes in circumstances indicate that a potential impairment has occurred.

Revenue Recognition —The Company generates revenue from sales of its voice services. The Company maintains tariffs and executed service agreements with each of its customers in which specific fees and rates are determined. Voice revenue is recorded each month on an accrual basis based upon minutes of traffic switched by the Company’s network by each customer, which is referred to as minutes of use. The rates charged per minute are determined by contracts between the Company and its customers, or by filed and effective tariffs.

Prior to the sale of the Company’s global data business in April 2013, IP Transit and Ethernet services revenues related to the Company’s Americas reporting unit for the first four months of 2013 were recorded each month on an accrual basis based upon bandwidth used by each customer. The rates charged were the total of a monthly fee for bandwidth (the Committed Traffic Rate) plus additional charges for the sustained peak bandwidth used monthly in excess of the Committed Traffic Rate.

Earnings (Loss) Per Share — Basic earnings (loss) per share is computed based on the weighted average number of common shares and participating securities outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of common shares and participating securities outstanding adjusted by the number of additional shares that would have been outstanding during the period had the potentially dilutive securities been issued. The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings (loss) per share of common stock:

Three Months Ended March 31,	2014		2013
Numerator:
Income from continuing operations	$	9,193	$	12,236
Loss from discontinued operations, net of provision for income taxes		—		(5,336	)
Net income	$	9,193	$	6,900
Denominator:
Weighted average common shares outstanding		32,273		32,337
Effect of dilutive securities:
Stock options		343		116
Denominator for diluted earnings per share		32,616		32,453
Earnings per share-continuing operations:
Basic	$	0.28	$	0.38
Diluted	$	0.28	$	0.38
Loss per share—discontinued operations:
Basic	$	—	$	(0.17	)
Diluted	$	—	$	(0.16	)
Earnings per share—net income:
Basic	$	0.28	$	0.21
Diluted	$	0.28	$	0.21

Outstanding share-based awards of 2.0 million and 3.6 million were outstanding during the three months ended March 31, 2014 and March 31, 2013, respectively, but were not included in the computation of diluted earnings per share because the effect would have been antidilutive.

8

For the three months ended March 31, 2014 and 2013, the undistributed earnings allocable to participating securities were $0.1 million and $0.2 million, respectively.

Accounting for Share-Based Payments — The fair value of stock options is determined using the Black-Scholes valuation model. This model takes into account the exercise price of the stock option, the fair value of the common stock underlying the stock option as measured on the date of grant and an estimation of the volatility of the common stock underlying the stock option. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight line method. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class and historical experience. Actual results, and future changes in estimates, may differ from the Company’s current estimates.

The amount of share-based expense recorded in the three months ended March 31, 2014 and 2013 was $1.0 million and $1.9 million, respectively.

Compensation expense for non-vested shares is measured based upon the quoted closing market price for the stock on the date of grant. The compensation cost is recognized on a straight-line basis over the vesting period. See Note 5, “Stock Options and Non-vested Shares”

Foreign Currency Translation — As a result of the sale of the global data business, the Company now operates substantially only within the United States and is no longer exposed to any foreign currency risk.

Recent Accounting Pronouncements — No new accounting pronouncement issued or effective during the three months ended March 31, 2014 had or is expected to have a material impact on the condensed consolidated financial statements.

3. LEGAL PROCEEDINGS

From time to time, the Company is a party to legal proceedings arising in the normal course of its business. Aside from the matter discussed below, the Company does not believe that it is a party to any pending legal action that could reasonably be expected to have a material effect on its business or operating results, financial position or cash flows.

Municipal Audit

The Company is sometimes subject to examination by various local authorities. These examinations, or audits, may relate to property taxes, use taxes or other telecommunications taxes. As a result of one of these audits, the Company had received a telecommunications tax assessment for approximately $1.0 million. During the first quarter of 2014, the Company resolved this audit for less than $0.1 million, which was recorded in operations.

4. INCOME TAXES

Income taxes were computed using an effective tax rate, which is subject to ongoing review and evaluation by the Company. The Company’s estimated effective income tax rate was 40.0% for the three months ended March 31, 2014, compared to 22.8% for the same period last year.

The difference in the effective tax rate for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 is due primarily to the Illinois EDGE Credit benefit in the prior year, the settlement of the net working capital adjustment related to the 2013 sale of the data business in the current year and the impact of the sale of the data business that was included in the prior year results.

The Company has recorded a valuation allowance against the capital loss created by the sale of its global data business and the Illinois EDGE Credit. The Company believes it is more likely than not that these assets will not be fully realized in the foreseeable future. The realization of deferred tax assets is dependent upon whether the Company can generate future taxable income in the appropriate jurisdiction to utilize the assets. The amount of the deferred tax assets considered realizable is subject to adjustment in future periods.

5. STOCK OPTIONS AND NON-VESTED SHARES

In 2003, the Company established the 2003 Stock Option and Stock Incentive Plan (2003 Plan), which provided for the issuance of up to 4.7 million options and non-vested shares to eligible employees, officers, and independent contractors of the Company. In 2007, the Company adopted the Neutral Tandem, Inc. 2007 Equity Incentive Plan (2007 Plan) and ceased awarding equity grants under the 2003 Plan. As of March 31, 2014, the Company had granted a total of 2.9 million options and 0.5 million non-vested shares that remained outstanding under the 2007 Plan. Awards for 1.6 million shares, representing approximately 4.8% of the Company’s outstanding common stock as of March 31, 2014, remained available for additional grants under the 2007 Plan.

9

The Company records share-based compensation expense in connection with any grant of options and non-vested shares to its employees. The Company calculates the expense associated with its stock options and non-vested shares by determining the fair value of the options and non-vested shares.

Options

All options granted under the 2003 Plan and the 2007 Plan have an exercise price equal to the market value of the underlying common stock on the date of the grant. During the three months ended March 31, 2014, the Company granted less than 0.1 million options at a weighted-average exercise price of $13.86. During the three months ended March 31, 2013, the Company granted 0.7 million options at a weighted-average exercise price of $3.40.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following table summarizes the assumptions used for estimating the fair value of options for the three months ended March 31, 2014 and March 31, 2013:

	March 31, 2014	March 31, 2013
Expected life	7.2 years	7.3 years
Risk-free interest rate range	2.08%	1.32%
Expected dividends	2.10%	—
Volatility	60.0%	45.0%

The weighted-average fair value of options granted, as determined by using the Black-Scholes valuation model, during the three months ended March 31, 2014 and 2013 was $6.90 and $1.64, respectively. The total grant date fair value of options that vested during the three months ended March 31, 2014 and 2013 was approximately $0.5 million and $0.4 million, respectively. The total intrinsic value (market value of stock less option exercise price) of stock options exercised was $0.2 million during the three months ended March 31, 2014. There were no stock options exercised during the three months ended March 31, 2013.

The following summarizes activity under the Company’s stock option plan for the three months ended March 31, 2014:

	Shares (000)		Weighted- Average Exercise Price		Aggregate Intrinsic Value ($000)		Weighted- Average Remaining Term (yrs)
Options outstanding — January 1, 2014		2,991	$	12.91
Granted		40		13.86
Exercised		111		12.53
Cancelled		—		—
Options outstanding — March 31, 2014		2,920	$	12.94	$	9,902		5.78
Vested or expected to vest — March 31, 2014		2,903	$	12.99	$	9,727		5.76
Exercisable — March 31, 2014		2,347	$	14.92	$	4,348		5.07

The unrecognized compensation cost associated with options outstanding at March 31, 2014 and December 31, 2013 was $1.7 million and $1.7 million, respectively. The weighted average remaining term that the compensation will be recorded is 2.3 years and 2.1 years as of March 31, 2014 and December 31, 2013, respectively.

10

Non-vested Shares

During the three months ended March 31, 2014 and March 31, 2013, the Company granted 0.1 million and 0.1 million non-vested shares, respectively, to members of the Company’s executive management team as well as various employees within the Company. The non-vested shares were issued as part of the 2007 Plan. The shares typically vest over a four-year period. The fair value of the non-vested shares is determined using the Company’s closing stock price on the grant date. Compensation cost, measured using the grant date fair value, is recognized over the requisite service period on a straight-line basis.

A summary of the Company’s non-vested share activity and related information for the three months ended March 31, 2014 is as follows:

	Shares (000)			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value ($000)
Non-vested shares outstanding — January 1, 2014		477		$	9.66
Granted		80			11.40
Vested		(72	)		11.65
Cancelled		—			—
Non-vested shares outstanding — March 31, 2014		485		$	9.65	$	7,047
Non-vested shares vested or expected to vest — March 31, 2014		453		$	9.65	$	6,582

The aggregate intrinsic value represents the total pre-tax intrinsic value based on the Company’s closing stock price of $14.53 on March 31, 2014. The amount changes based upon the fair market value of the Company’s common stock.

The unrecognized compensation cost associated with non-vested shares at March 31, 2014 and December 31, 2013 was $3.9 million and $3.9 million, respectively. The weighted average remaining term that the compensation will be recorded is 2.1 years and 1.7 years as of March 31, 2014 and December 31, 2013, respectively.

6. FAIR VALUE MEASUREMENT

The Company’s money market funds are recognized and disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants as of the measurement date. Fair value is measured using the fair value hierarchy and related valuation methodologies as defined in the authoritative literature. This guidance specifies a hierarchy of valuation techniques based on whether the inputs to each measurement are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about current market conditions. The prescribed fair value hierarchy and related valuation methodologies are as follows:

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

Level 3 - Valuations derived from valuation techniques, in which one or more significant inputs are unobservable.

The fair value of the Company’s financial asset by level in the fair value hierarchy as of March 31, 2014 and December 31, 2013 was as follows:

March 31, 2014	Level 1		Level 2		Level 3		Total
Assets:
Money Market Funds	$	46,828	$	—	$	—	$	46,828
December 31, 2013	Level 1		Level 2		Level 3		Total
Assets:
Money Market Funds	$	41,827	$	—	$	—	$	41,827

Valuation methodology

Level 1—Quoted market prices in active markets are available for investments in money market funds. As such, these investments are classified within Level 1.

11

7. CREDIT FACILITY

On March 5, 2013, the Company entered into a $15.0 million revolving credit facility. The credit facility has a term of three years and an interest rate of LIBOR + 3.25%. The Company may use any borrowings under the revolving credit facility for general corporate purposes. No obligations were outstanding under the revolving credit facility at any time during the year ended December 31, 2013 and for the three months ended March 31, 2014. As of March 31, 2014, the Company is currently in compliance with all of the covenants of the credit facility agreement.

8. ACCUMULATED OTHER COMPREHENSIVE LOSS

There was no balance of accumulated other comprehensive loss for the three months ended March 31, 2014. Changes in the balance of accumulated other comprehensive loss for the three months ended March 31, 2013 are summarized in the following table:

Three Months Ended March 31,	2013
Balance as of January 1	$	(4,904	)
Other comprehensive loss before reclassifications, net of tax		(174	)
Less: Amounts reclassified from AOCI, net of tax		—
Net other comprehensive loss		(174	)
Balance as of March 31	$	(5,078	)

9. BUSINESS DISPOSITION

On April 30, 2013, the Company sold its global data business to GTT and, as a result, no longer provides data services. The transaction consisted of the Americas, EMEA and APAC reporting units’ data assets and liabilities. The Americas reporting unit of the global data business did not qualify for discontinued operations because it did not constitute a separate component of the Company. The data activity associated with the Americas reporting unit is reported in continuing operations in the consolidated statements of operations and consolidated balance sheets. The data activity associated with the EMEA and APAC reporting units is reflected in the consolidated statements of operations and in the consolidated balance sheets as discontinued operations. Historical information related to these reporting units has been reclassified accordingly.

The Company sold its global data business for $54.5 million which consisted of $52.5 million in cash, subject to net working capital adjustments, and $2.0 million of non-cash commercial services to be provided by GTT to the Company over a three-year period. After an initial net working capital reduction of $3.3 million based on the balance sheet information as of March 31, 2013, the Company received $51.2 million of cash and non-cash services from GTT. Transaction costs and the additional net working capital adjustment, resulting from balance sheet changes during the month of April following the initial calculation, amounted to approximately $2.4 million and $1.0 million, respectively, reducing net cash and non-cash consideration to approximately $47.8 million. Of this amount, $43.5 million was allocated to the sale of the Americas reporting unit of the global data business and the remaining amount of $4.3 million was allocated to the EMEA and APAC reporting units of the global data business. The Company based its allocation of the $47.8 million amount based upon the relative percentage of the fair value of the Americas reporting unit and the EMEA and APAC reporting units, to the total fair value of these three reporting units combined.

The Company and GTT disagreed over the amount of certain post-closing purchase price adjustment provisions in the agreement governing the sale of the Company’s global data business to GTT. GTT claimed that the Company owed GTT $3.8 million. The Company, however, believed that GTT owed the Company $1.1 million. During the first quarter of 2014, the parties tentatively agreed to resolve their differences with respect to the post-closing adjustments to the purchase price in a manner that would require neither party to make a payment to the other and would waive all other claims. As a result of the tentative agreement, the Company reduced other assets by $1.1 million and charged $1.1 million to continuing operations within Loss on Sale of Americas Data Assets. If the parties are unable to consummate this tentative agreement or otherwise resolve their differences through negotiations, a neutral third party accounting firm will hear and decide the matter.

Disposition Not Qualifying for Discontinued Operations

The Americas reporting unit assets, which were sold as part of the sales of the global data business, had an approximate net book value of $14.7 million at the time of the sale. The purchase price allocation of $43.5 million for this portion of the global data business, less its net book basis of assets and liabilities yielded a gain from sale of $28.8 million.

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Discontinued Operations

The net book basis of the assets and liabilities for the EMEA and APAC reporting units of the global data business at the date of sale was approximately $10.1 million. In addition, the Company is entitled to approximately $1.0 million of cash that remained with the EMEA and APAC reporting units of the global data business at the time of the transaction. The purchase price allocation of $4.3 million for this portion of the global data business plus the additional $1.0 million of cash yielded a loss on the sale from discontinued operations of $4.8 million.

The following table displays summarized activity in the Company’s consolidated statements of operations for discontinued operations during the three months ended March 31, 2013.

Three Months Ended March 31,	2013
Revenue	$	10,378
Operating loss		(4,603	)
Loss before provision for income taxes		(5,109	)
Provision for income taxes		227
Loss from discontinued operations	$	(5,336	)

10. SEGMENT AND GEOGRAPHIC INFORMATION

Segment Reporting establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision maker is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis. The Company operates in one industry segment which is to provide voice interconnection services via the Company’s international telecommunications network to fulfill customer agreements. Therefore, the Company has concluded that it has one operating segment.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q are forward-looking statements. The words “anticipates,” “believes,” “efforts,” “expects,” “estimates,” “projects,” “proposed,” “plans,” “intends,” “may,” “will,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Factors that might cause such differences include, but are not limited to: the effects of competition, including direct connects, and downward pricing pressure resulting from such competition; our regular review of strategic alternatives; the impact of current and future regulation, including intercarrier compensation reform enacted by the Federal Communications Commission; the risks associated with our ability to successfully develop and market new voice services, many of which are beyond our control and all of which could delay or negatively affect our ability to offer or market new voice services; the ability to develop and provide other new services; technological developments; the ability to obtain and protect intellectual property rights; the impact of current or future litigation; the impact of any future acquisitions, mergers or divestitures; the ability to attract, develop and retain executives and other qualified employees; changes in general economic or market conditions; matters arising out of or related to the impairment charge and financial forecasting practices that were the subject of an investigation by the Company’s Audit Committee; the possibility that the Securities and Exchange Commission may disagree with the Audit Committee’s findings and may require a restatement of financial statements or additional or different remediation; the possibility of litigation or other actions related to the impairment charge and financial forecasting practices that were subject to investigation by the Audit Committee and related matters; and other important factors included in our reports filed with the Securities and Exchange Commission, particularly in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as such risk factors may be updated from time to time in subsequent reports. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

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Overview

We provide voice telecommunications services primarily on a wholesale basis. We offer these services using an all-IP network, which enables us to deliver global connectivity for a variety of media, including voice, and historically data and video. Our solutions enable carriers and other providers to deliver voice telecommunications traffic or other services where they do not have their own network or elect not to use their own network. These solutions are sometimes called “off-net” services. We also provide our solutions to customers, such as “over-the-top” providers, who also typically do not have their own network. We were incorporated in Delaware on April 19, 2001 and commenced operations in 2004. See Note 9, “Business Disposition”, for a description of the sale of our global data business.

Voice Services

We provide voice interconnection services primarily to competitive carriers, including wireless, wireline, cable and broadband telephony companies. Competitive carriers use our tandem switches to interconnect and exchange local and long distance traffic between their networks without the need to establish direct switch-to-switch connections. Competitive carriers are carriers that are not Incumbent Local Exchange Carriers, or ILECs, such as AT&T, Verizon and CenturyLink.

Prior to the introduction of our local voice service, competitive carriers generally had two alternatives for exchanging traffic with other carriers’ networks. The two alternatives were exchanging traffic through the ILEC tandems or directly connecting individual switches, commonly referred to as “direct connects”. Given the cost and complexity of establishing direct connects, competitive carriers often elected to utilize the ILEC tandem as the method of exchanging traffic. The ILECs typically required competitive carriers to interconnect to multiple ILEC tandems with each tandem serving a restricted geographic area. In addition, as the competitive telecommunications market grew, the process of establishing interconnections at multiple ILEC tandems became increasingly difficult to manage and maintain, causing delays and inhibiting the growth of competitive carriers while the purchase of ILEC tandem services became an increasingly significant component of a competitive carrier’s costs.

The tandem switching services offered by ILECs consist of local transit services, which are provided in connection with local calls, and switched access services, which are provided in connection with long distance calls. Under certain interpretations of the Telecommunications Act of 1996 and implementing regulations, ILECs are required to provide local transit services to competitive carriers. ILECs generally set per minute rates and other charges for tandem transit services according to rate schedules approved by state public utility commissions, although the methodology used to review these rate schedules varies from state to state. ILECs are also required to offer switched access services to competing telecommunications carriers under the Telecommunications Act of 1996 and implementing regulations. ILECs generally set per minute rates and other charges for switched access services according to mandated rate schedules set by the Federal Communications Commission for interstate calls and by state public utility commissions for intrastate calls. In November 2011, the FCC released an order setting forth a multi-year transition plan that will reduce, and ultimately lead to elimination of, terminating switched access charges.

A loss of ILEC market share to competitive carriers escalated competitive tensions and resulted in an increased demand for tandem switching. Growth in intercarrier traffic switched through ILEC tandems created switch capacity shortages known in the industry as ILEC “tandem exhaust,” where overloaded ILEC tandems became a bottleneck for competitive carriers. This increased call blocking and gave rise to service quality issues for competitive carriers.

We founded our company to solve these interconnection problems and better facilitate the exchange of traffic among competitive carriers and non-carriers. With the introduction of our services, we believe we became the first carrier to provide alternative tandem services capable of alleviating the ILEC tandem exhaust problem. Our solution enabled competitive carriers to exchange traffic between their networks without using an ILEC tandem for both local and long distance calls. By utilizing our managed tandem service, our customers benefit from a simplified interconnection network solution that reduces costs, increases network reliability, decreases competitive tension and adds network diversity and redundancy. We operated in 190 markets as of March 31, 2014 and have signed voice services agreements with major competitive carriers and non-carriers. Generally, these agreements do not provide for minimum revenue requirements and do not require our customers to continue to use our services.

Our business originally connected only local traffic among carriers within a single metropolitan market. In 2006, we installed a national IP backbone network connecting our major local markets. In 2008, we began offering terminating switched access services and originating switched access services. Switched access services are provided in connection with long distance calls. Our terminating switched access services allows interexchange carriers to send calls to us, and we then terminate those calls to the appropriate terminating carrier in the local market in which we operate. Our originating switched access service allows the originating carrier in the local market in which we operate to send calls to us that we then deliver to the appropriate interexchange carrier that has been selected to carry that call. In both instances, the interexchange carrier is our customer, which means that it is financially responsible for the call. Finally, we began offering international voice services as we began interconnection with non-United States carriers. As a result of the foregoing, our service offerings now include the capability of switching and carrying local, long distance and international voice traffic.

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On April 30, 2013, we announced that we sold all assets and liabilities of our global data business to GTT for $54.5 million, subject to certain adjustments. The total consideration consisted of $52.5 million in cash and $2.0 million of non-cash commercial services to be provided by GTT to us.

Revenue. We generate revenue from sales of our voice services and historically generated revenue from sales of our IP Transit and Ethernet services. Revenue is recorded each month based upon documented minutes of traffic switched and, historically, data traffic carried for which service is provided, when collection is probable. Voice revenue is recorded each month on an accrual basis based upon minutes of traffic switched by our network for each customer, which we refer to as minutes of use. The rates charged per minute are determined by contracts between us and our customers or by filed and effective tariffs.

Minutes of use of voice traffic increase as we increase our number of customers, increase the penetration of existing markets, either with new customers or with existing customers, and increase our service offerings. The minutes of use decrease due to direct connection between existing customers, consolidation between customers, a customer using a different interconnection provider or a customer experiencing a decrease in the volume of traffic it carries.

The average fee per minute of voice traffic varies depending on market forces and type of service, such as switched access or local transit. The market rate in each market is based upon competitive conditions along with the switched access or local transit rates offered by the ILECs. Depending on the markets we enter, we may enter into contracts with our customers with either a higher or lower fee per minute than our current average.

Our service solution incorporates other components beyond switching. In addition to switching, we generally provision trunk circuits between our customers’ switches and our network locations at our own expense and at no direct cost to our customers. We also provide quality of service monitoring, call records and traffic reporting and other services to our customers as part of our service solution. Our per-minute fees are intended to incorporate all of these services.

While generally not seasonal in nature, our voice revenues are affected by certain events such as holidays, the unpredictable timing of direct connects between our customers, and installation and implementation delays. These factors can cause our revenue to both increase or decrease unexpectedly.

Operating Expense. Operating expense includes network and facilities expense, operations expenses, sales and marketing expenses, general and administrative expenses, depreciation and amortization.

Network and Facilities Expense. Our network and facilities expense includes transport capacity, or circuits, signaling network costs, facility rents and utilities, together with other costs that directly support our voice services. Prior to the sale of the global data business, our network and facilities expense included transport capacity, or circuits, facility rents and utilities, together with other costs that directly supported our data services. We do not defer or capitalize any costs associated with the start-up of a new point of presence (POP). The start-up of an additional POP can take between three months to six months. During this time, we typically incur facility rent, utilities, payroll and related benefit costs along with initial non-recurring installation costs. Revenues generally follow sometime after the sixth month.

Network transport costs typically occur on a repeating monthly basis, which we refer to as recurring transport costs, or on a one-time basis, which we refer to as non-recurring transport costs. Recurring transport costs primarily include monthly usage and other charges from telecommunication carriers and are related to the circuits utilized by us to connect to our customers. As our voice traffic increases, we must utilize additional circuits. Non-recurring transport costs primarily include the initial installation of such circuits. Facility rents include the leases on our POPs, which expire through February 2025. Additionally, we pay the cost of the utilities for all of our POP locations.

Operations Expense. Operations expense includes payroll and benefits for our POP location personnel as well as individuals located at our offices who are directly responsible for maintaining and expanding our network. Other primary components of operations expenses include repair and maintenance, property taxes, property insurance and supplies.

Sales and Marketing Expense. Sales and marketing expense represents the smallest component of our operating expenses and primarily include personnel costs, sales bonuses, marketing programs and other costs related to travel and customer meetings.

General and Administrative Expense. General and administrative expense consists primarily of compensation and related costs for personnel and facilities associated with our executive, finance, human resource and legal departments and fees for professional services. Professional services principally consist of outside legal, audit, tax and transaction costs.

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Depreciation and Amortization Expense. Depreciation and amortization expense for voice-related fixed assets is applied using the straight-line method over the estimated useful lives of the assets after they are placed in service, which are five years for network equipment and test equipment, and three years for computer equipment, computer software and furniture and fixtures. Leasehold improvements are amortized on a straight-line basis over an estimated useful life of five years or the life of the respective leases, whichever is shorter.

Loss on sale of Americas Data Assets. During the three months ended March 31, 2014, we recorded a $1.1 million loss on sale of Americas data assets as a result of the expected settlement with GTT. Refer to Note 9 “Business Disposition” for more information regarding the sale of the global data business.

Other (Expense) Income. Other (expense) income includes interest expense and income, as well as foreign exchange gain or loss resulting from changes in exchange rates between the functional currency and the foreign currency in which the transaction was denominated.

Income Taxes. Income tax provision includes United States federal, state and local income taxes and is based on pre-tax income or loss. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which earnings will be generated, the impact of state and local income taxes and our ability to use tax credits and net operating loss carryforwards.

Patent Protection

Our ability to maintain profitability or positive cash flow depends, in part, on our ability to protect proprietary methods and technologies that we develop under the patent and other intellectual property laws of the United States, so that we can prevent others from using our inventions and proprietary information. If our patents are invalidated or otherwise limited, other companies will be better able to develop products that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition.

Any resulting increased competition may cause price decreases. If we are unable to offset the effects of any price reductions by carrying higher volumes of traffic, we could experience reduced revenues and gross margins.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which we filed with the Securities and Exchange Commission on March 11, 2014, includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting policies that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the first three months of 2014.

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Results of Operations

The following table sets forth our results of operations for the three months ended March 31, 2014 and 2013:

	Three Months Ended  March 31,
(Dollars in thousands)	2014			2013
Revenue	$	56,217		$	59,288
Operating expense:
Network and facilities expense (excluding depreciation and amortization)		24,890			24,636
Operations		7,307			7,798
Sales and marketing		676			2,034
General and administrative		3,800			4,499
Depreciation and amortization		3,141			4,513
Loss on sale of Americas Data assets		1,081			—
Total operating expense		40,895			43,480
Income from operations		15,322			15,808
Total other (expense) income		(2	)		34
Income from continuing operations before provision for income taxes		15,320			15,842
Provision for income taxes		6,127			3,606
Income from continuing operations		9,193			12,236
Loss from discontinued operations, net of provision for income taxes		—			(5,336	)
Net income	$	9,193		$	6,900

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

On April 30, 2013, we sold our global data business. The Americas reporting unit of the global data business did not qualify for discontinued operations treatment and, as a result, the results of operations for the three months ended March 31, 2013, include data activity associated with the Americas reporting unit for the full three-month period while the results of operations for the three months ended March 31, 2014 do not include any such data activity.

Revenue. Revenue decreased to $56.2 million in the three months ended March 31, 2014 from $59.3 million in the three months ended March 31, 2013, representing a decrease of 5.2%. The data revenue generated by our Americas reporting unit for the first three months of 2013 was $8.7 million. Excluding data revenue, revenue from continuing operations increased $5.6 million.

The increase in voice revenue is primarily due to an increase in minutes of use from 30.6 billion minutes in the three months ended March 31, 2013, compared to 33.1 billion minutes for the three months ended March 31, 2014, an increase of 8.1%. In addition to an increase in minutes, the average fee per minute increased from $0.00165 for the three months ended March 31, 2013 to $0.00170 for the three months ended March 31, 2014, an increase of 3.0%.

Operating Expenses. Operating expenses for the three months ended March 31, 2014 of $40.9 million decreased $2.6 million, or 6.0%, from $43.5 million for the three months ended March 31, 2013. The components of operating expenses are discussed further below.

Network and Facilities Expenses. Network and facilities expenses increased to $24.9 million in the three months ended March 31, 2014, or 44.3% of revenue, from $24.6 million in the three months ended March 31, 2013, or 41.5% of revenue. The data network and facilities expenses generated by our Americas reporting unit for the first three months of 2013 were $1.8 million. Excluding these data costs, the network expenses increased $2.1 million which was primarily due to an increase in minute volumes, along with an increase in costs due to changes in the mix of voice services.

Operations Expenses. Operations expenses decreased to $7.3 million in the three months ended March 31, 2014, or 13.0% of revenue, from $7.8 million in the three months ended March 31, 2013, or 13.2% of revenue. The decrease of $0.5 million in our operations expenses primarily resulted from a decrease of $0.3 million in non-cash compensation, a $0.1 million decrease in repairs and maintenance, and a $0.1 million decrease in Federal Universal Service Fund fees.

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Sales and Marketing Expense. Sales and marketing expense decreased to $0.7 million in the three months ended March 31, 2014, or 1.2% of revenue, compared to $2.0 million in the three months ended March 31, 2013, or 3.4% of revenue. The decrease of $1.3 million in sales and marketing expenses for the three months ended March 31, 2014 was primarily due to a decrease of $0.9 million in payroll, benefits and non-cash compensation, a $0.2 million decrease in customer meetings and events, and a $0.1 million decrease in sales and partnership charges. Data sales and marketing expenses generated by our Americas reporting unit for the first three months of 2013 were $0.9 million.

General and Administrative Expense. General and administrative expense decreased to $3.8 million in the three months ended March 31, 2014, or 6.8% of revenue, compared with $4.5 million in the three months ended March 31, 2013, or 7.6% of revenue. The decrease of $0.7 million in our general and administrative expense was due to a $0.3 million benefit from a vendor settlement, a $0.2 million decrease in professional fees, and a $0.2 million decrease in payroll, benefits and non-cash compensation expenses.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased to $3.1 million in the three months ended March 31, 2014, or 5.5% of revenue, compared to $4.5 million in the three months ended March 31, 2013, or 7.6% of revenue. The decrease of $1.4 million in our depreciation and amortization expense resulted from a lower depreciable base of our assets as a result of the sale of the Americas data assets.

Loss on sale of Americas Data Assets. During the three months ended March 31, 2014 we recorded a $1.1 million loss on sale of Americas data assets as a result of the expected settlement with GTT. Refer to Note 9 “Business Disposition” for more information regarding the sale of the global data business.

Other (Expense) Income. Other (expense) income was less than $0.1 million for the three months ended March 31, 2014 and 2013.

Provision for Income Taxes. Provision for income taxes of $6.1 million for the three months ended March 31, 2014 reflected an increase of $2.5 million compared to $3.6 million for the three months ended March 31, 2013. The effective tax rate for the three months ended March 31, 2014 and 2013 was 40.0% and 22.8%, respectively. The difference in the effective tax rate for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 is due primarily to the Illinois EDGE Credit benefit in the prior year and the settlement of the net working capital adjustment related to the 2013 sale of the data business in the current year.

Income from Continuing Operations. We had income from continuing operations before income taxes of $15.3 million for the three months ended March 31, 2014, compared with income from continuing operations before income taxes of $15.8 million for the three months ended March 31, 2013. After taxes, we had income from continuing operations of $9.2 million, or $0.28 per diluted share, for the three months ended March 31, 2014, compared to income from continuing operations of $12.2 million, or $0.38 per diluted share, for the three months ended March 31, 2013.

Liquidity and Capital Resources

At March 31, 2014, we had $70.7 million in cash and cash equivalents and $0.1 million in restricted cash. In comparison, at December 31, 2013, we had $77.0 million in cash and cash equivalents and $0.1 million in restricted cash. Cash and cash equivalents consist of highly liquid money market mutual funds. The restricted cash balance is pledged as collateral for certain commercial letters of credit.

	Three Months Ended
	March 31, 2014			March 31, 2013
Cash flows (used for) provided by operating activities	$	(2,469	)	$	12,015
Cash flows used for investing activities		(2,582	)		(5,317	)
Cash flows used for financing activities		(1,274	)		(605	)

Operating activities

Net cash used for operating activities was $2.5 million for the first three months of 2014, compared to net cash provided by operating activities of $12.0 million for the same period last year. Operating cash inflows are largely attributable to payments from customers. Operating cash outflows are largely attributable to personnel-related expenditures and network maintenance costs. The decrease in operating cash flow is due to an increase in accounts receivable, primarily due to a change in our largest customer’s payment terms.

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Investing activities

Net cash used for investing activities was $2.6 million for the first three months of 2014, compared to net cash used in investing activities of $5.3 million for the same period last year. Investing cash flows were primarily related to purchases of network equipment. The decrease in net cash used in investing activities was the result of a decrease in the purchases of equipment used in our business in the first three months of 2014.

In 2014, capital expenditures are expected to be approximately $10.0 million to $12.0 million, mainly due to investment in and maintenance of our voice network. We plan to fund our capital expenditures with cash generated through our ongoing operations.

Financing activities

Net cash used for financing activities was $1.3 million for the first three months of 2014, compared to net cash used for financing activities of $0.6 million for the same period last year. The change in cash used for financing activities primarily related to our regular quarterly dividend payment of $2.4 million during the three months ended March 31, 2014 partially offset by cash proceeds from the exercise of stock options.

We regularly review acquisitions and strategic opportunities, which may require additional debt or equity financing. We currently do not have any pending agreements with respect to any acquisitions or strategic opportunities which would require additional debt or equity financing.

Dividends

        On February 27, 2014, we announced an increase in our regular quarterly dividend to $0.075 per outstanding share of our common stock. With respect to the regular quarterly dividend, the expected future use of cash on an annualized basis would be approximately $9.7 million based upon a full-year dividend rate of $0.30 per share and the April 15, 2014 outstanding common stock share balance of 32,442,499.

Investments

As of March 31, 2014, we had $46.8 million in cash and cash equivalents invested in three money market mutual funds. As of December 31, 2013, we had $41.8 million in cash and cash equivalents invested in three money market mutual funds.

Credit Facility

On March 5, 2013, we entered into a $15.0 million revolving credit facility. The credit facility has a term of three years and an interest rate of LIBOR + 3.25%. We have no plans to draw on the facility at this time and remain debt-free. The facility serves to increase our financial flexibility and further strengthens our liquidity position. We are currently in compliance with all of the covenants of the credit facility agreement.

Effect of Inflation

Inflation generally affects us by increasing our cost of labor and equipment. We do not believe that inflation had any material effect on our results of operations for the three-month periods ended March 31, 2014 and 2013.

Item 3. Qualitative and Quantitative Disclosure about Market Risk

Interest rate exposure

We had cash, cash equivalents and restricted cash totaling $70.8 million at March 31, 2014. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for speculative purposes.

Based upon our overall interest rate exposure at March 31, 2014, we do not believe that a hypothetical 10% change in interest rates over a one year period would have a material impact on our earnings, fair values or cash flows from interest rate risk sensitive instruments.

Foreign Currency

As a result of the sale of the global data business, the Company now operates substantially only within the United States and is no longer exposed to any material foreign currency risk.

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Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to Inteliquent, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports, is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to Inteliquent’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2014, 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

Refer to Note 3 “Legal Proceedings” in Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for information on legal proceedings.

Item 1A. Risk Factors

See “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. As of March 31, 2014, there had been no material change in this information.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Default Upon Senior Securities

None

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None

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Item 6. Exhibits

(a) Exhibits

Exhibit 10.1	Employment Agreement, dated January 20, 2014, by and between the Company and Kurt Abkemeier, previously filed as Exhibit 10.1 with the Company’s Current Report on Form 8-K filed on January 21, 2014 and incorporated herein by reference.
Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

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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.

	INTELIQUENT, INC.
Date: May 2, 2014	By:	/s/ G. EDWARD EVANS
		G. Edward Evans, Chief Executive Officer (Principal Executive Officer)
Date: May 2, 2014	By:	/s/ KURT J. ABKEMEIER
		Kurt J. Abkemeier, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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