Exhibit 99.1
Consolidated Financial Statements
Southern Light, LLC and Affiliate
Years Ended December 31, 2016 and 2015
Southern Light, LLC and Affiliate
Table of contents
Report of Independent Certified Public Accountants1
Financial statements:
Consolidated balance sheets3
Consolidated statements of comprehensive income4
Consolidated statements of changes in member’s equity5
Consolidated statements of cash flows6
Notes to consolidated financial statements7
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Grant Thornton LLP
4140 ParkLane Ave., Suite 130
Raleigh, NC 27612
T 919-881-2700
F 919-881-2795
www.GrantThornton.com
Members of
Southern Light, LLC and Affiliate:
We have audited the accompanying consolidated financial statements of Southern Light, LLC and Affiliate (the “Company”), which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of comprehensive income, changes in member’s equity, and cash flows for the years then ended, and the related notes to the financial statements.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
2
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southern Light, LLC and Affiliate as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Raleigh, North Carolina
March 18, 2017
Grant Thornton LLP
U.S. member firm of Grant Thornton International Ltd
Southern Light, LLC and Affiliate
3
Consolidated balance sheets
| | |
December 31 | 2016 | 2015 |
Assets | $ | $ |
Current assets | | |
Cash | 73,087 | - |
Accounts receivable, net of allowance of $320,378 and $1,116,740, | | |
respectively | 16,090,146 | 10,396,889 |
Other current assets | 1,030,763 | 1,109,499 |
Total current assets | 17,193,996 | 11,506,388 |
Total property and equipment, net | 186,765,418 | 152,379,772 |
Other Assets | | |
Prepaid leases | 1,707,155 | 1,637,349 |
Deferred loan fees | 1,035,553 | 1,243,690 |
Inventory | 5,564,085 | 3,114,519 |
Security deposits and other assets | 1,480,829 | 683,656 |
Total other assets | 9,787,622 | 6,679,214 |
Total assets | 213,747,036 | 170,565,374 |
Liabilities & member's equity | | |
Current liabilities | | |
Accounts payable | 10,517,545 | 7,708,762 |
Accrued expenses and other liabilities | 3,272,933 | 2,767,719 |
Unearned revenue | 5,149,680 | 2,780,885 |
Current maturities of long term debt | 94,750 | - |
Current maturities of capital leases | 909,147 | 774,757 |
Total current liabilities | 19,944,055 | 14,032,123 |
Long-term liabilities Unearned revenue | 26,178,029 | 15,279,484 |
Long term debt | 89,756,813 | 75,140,893 |
Long term capital lease obligations | 1,859,238 | 1,551,478 |
Obligation under interest rate swaps | - | 147,477 |
Total long-term liabilities | 117,794,080 | 92,119,332 |
Commitments and contingencies | | |
Member's equity Member's equity | 75,547,174 | 64,561,396 |
Accumulated other comprehensive income (loss) | 461,727 | (147,477) |
Total member's equity | 76,008,901 | 64,413,919 |
Total liabilities & member's equity | 213,747,036 | 170,565,374 |
The accompanying notes are an integral part of these financial statements.
Southern Light, LLC and Affiliate
4
Consolidated statements of comprehensive income
| | |
December 31 | 2016 | 2015 |
| $ | $ |
Revenues | 84,251,308 | 75,456,847 |
Operating costs and expenses | | |
Operating costs (excluding depreciation and amortization) | 21,216,082 | 21,019,990 |
Selling, general and administrative | 21,793,827 | 18,612,678 |
Depreciation and amortization expense | 23,640,918 | 20,712,031 |
Total operating costs and expenses | 66,650,827 | 60,344,699 |
Operating income | 17,600,481 | 15,112,148 |
Non-operating income and expenses | | |
Interest expense (net) | (3,370,246) | (3,372,255) |
Other income (net) | 535,593 | 497,604 |
Total non-operating expenses | (2,834,653) | (2,874,651) |
Net income | 14,765,828 | 12,237,497 |
Other comprehensive income | | |
Increase in fair value of interest rate swap | 609,204 | 304,395 |
Comprehensive income | 15,375,032 | 12,541,892 |
The accompanying notes are an integral part of these financial statements.
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Consolidated statements of changes in member’s equity
| | | |
| Member's equity | Accumulated other comprehensive income (loss) | Total member's equity |
$ | $ | $ |
Balance, January 1, 2015 | 54,509,869 | (451,872) | 54,057,997 |
Net income | 12,237,497 | - | 12,237,497 |
Other comprehensive income: | | | |
Increase in fair value of interest rate swap | - | 304,395 | 304,395 |
Distributions to member | (2,185,970) | - | (2,185,970) |
Balance, December 31, 2015 | 64,561,396 | (147,477) | 64,413,919 |
Net income | 14,765,828 | - | 14,765,828 |
Other comprehensive income: | | | - |
Increase in fair value of interest rate swap | - | 609,204 | 609,204 |
Distributions to member | (3,780,050) | - | (3,780,050) |
Balance, December 31, 2016 | 75,547,174 | 461,727 | 76,008,901 |
The accompanying notes are an integral part of these financial statements.
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Consolidated statements of cash flows
| | |
| 2016 | 2015 |
$ | $ |
Cash flows from operating activities | | |
Net income | 14,765,828 | 12,237,497 |
Adjustments to reconcile net income to net cash provided by | | |
operating activities: | | |
Depreciation and amortization expense | 23,640,918 | 20,712,031 |
(Gain) loss on disposals and asset sales | 236,371 | (9,779) |
Amortization of deferred loan fees | 216,380 | 172,683 |
Amortization of unearned revenue | (3,774,973) | (2,669,380) |
Additions of unearned revenue | 17,042,313 | 9,669,888 |
Provision for allowance for doubtful accounts | 37,764 | 133,000 |
Change in assets and liabilities: | | |
Accounts receivable | (5,731,021) | (2,912,467) |
Other assets | (2,640,993) | (561,821) |
Accounts payable | 778,933 | (1,153,801) |
Accrued expenses and other liabilities | 505,214 | 448,542 |
Net cash provided by operating activities | 45,076,734 | 36,066,393 |
Cash flows from investing activities | | |
Capital expenditures | (56,770,677) | (41,199,203) |
Prepaid IRU additions | (323,000) | (323,000) |
Purchases of security deposits | (104,605) | (34,310) |
Repayments of security deposits | 69,919 | 24,800 |
Proceeds from sale or disposals of assets | 118,579 | 199,623 |
Net cash used in investing activities | (57,009,784) | (41,332,090) |
Cash flows from financing activities | | |
Proceeds from long term debt | 1,895,000 | - |
Net activity - revolver loan | 12,859,107 | 75,140,893 |
Payments on long term debt | (43,437) | (68,600,000) |
Deferred loan fees | (22,690) | (1,450,972) |
Payments on capital leases | (931,645) | (811,964) |
Member distributions | (3,780,050) | (2,185,970) |
Book overdrafts | 2,029,852 | 2,181,466 |
Net cash provided by financing activities | 12,006,137 | 4,273,453 |
Net increase (decrease) in cash | 73,087 | (992,244) |
Cash at beginning of the year | - | 992,244 |
Cash at end of the year | 73,087 | - |
Supplemental disclosures of cash flow information
Non-cash purchases of property and equipment through capital leasing of $1,373,793 and $1,653,640 in 2016 and 2015, respectively
Cash paid for interest of $3,079,926 and $3,261,105 in 2016 and 2015, respectively
The accompanying notes are an integral part of these financial statements.
Southern Light, LLC and Affiliate
9
Notes to consolidated financial statements
The Company, a wholly owned subsidiary of SLF Holdings, LLC, was organized July 10, 1998 under the laws of the State of Alabama as a limited liability company for the purposes of delivering high bandwidth connectivity and colocation services for its communications intensive customers. The Company’s operations to date consist of providing large bandwidth communications solutions to customers in the southeastern United States. The Company constructs, operates, and maintains its own fiber optic infrastructure for the provision of transport services to carrier, government and enterprise customers across the region.
The Company has been certified as a competitive local exchange (CLEC) and interexchange carrier in Alabama, an alternative local exchange (ALEC) and an alternative access vendor (AAV) in Florida, and as a CLEC in Louisiana, Mississippi and Georgia. In this capacity, the Company can purchase and install the necessary switching and transmitting equipment to provide interactive voice and data communication services.
| 2 | Summary of Significant Accounting Policies |
Principles of Consolidation
The accompanying consolidated financial statements include all of the Company’s accounts and Southern Longleaf Pine, LLC (SLLP) in which it has a controlling interest and is required to be consolidated in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation.
To determine whether the Company is the primary beneficiary of a variable interest entity and therefore required to consolidate, a qualitative approach is applied to determine whether the Company has a controlling financial interest. A controlling financial interest exists if the Company has both the power to direct the economically significant activities of the entity and the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the entity.
Management Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit with banks. The Company’s cash balances held at financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. From time to time the Company has amounts that exceed the FDIC limit.
Book overdrafts occur when checks have been issued but have not been presented to the Company’s controlled disbursement bank accounts for payment. Disbursement bank accounts allow the Company to delay funding of issued checks until the checks are presented for payment. Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on the consolidated balance sheet. This activity is included in the financing activities section of the Company’s consolidated statements of cash flows.
Accounts Receivable / Allowance for Doubtful Accounts
The Company reports trade receivables net of an allowance for doubtful accounts and generally does not charge interest on its accounts receivable. Management determines the allowance for doubtful accounts based on historical losses and current economic conditions. On a continuing basis management analyzes delinquent receivables; once the receivables are determined to be uncollectible using a combination of contractual terms and historical data, they are written off through a charge against an existing allowance account.
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Other Current Assets
Other current assets are comprised of prepaid expenses, prepaid service contracts, and prepaid insurance. At December 31, 2016 and 2015, prepaid expenses were $479,685 and $465,582, respectively.
Inventory
Inventory is carried at a weighted average cost and consists of materials to be used in construction of additions to the fiber optic network and elements of the fiber optic network.
Property and Equipment
The fiber optic transmission network and related equipment are recorded at cost. Employee-related costs that are associated with network construction and service installations are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income or expense for the period. The cost of maintenance and repairs is charged to expense as incurred. Depreciation is generally computed using the straight-line method. Estimated useful lives are as follows: fiber optic network, 5-20 years; wireless network, 5 years; office furniture and equipment, 5-7 years; and telecommunication equipment, 5 years.
Deferred Financing Costs
The Company capitalizes costs associated with the issuance of debt and amortizes these costs as additional interest expense over the lives of the debt instruments using the straight line method. The Company has determined that the difference between the effective interest method and straight line method is immaterial to the financial statements. These costs are recorded as deferred loan fees within other assets in the accompanying consolidated balance sheets with amortization recorded within interest expense, net in the accompanying consolidated statements of comprehensive income.
Asset Retirement Obligations
In association with tower space leases, the Company has an obligation to remove its equipment at the conclusion of the lease terms. A liability for the cost of future removal has not been recorded on the consolidated balance sheets, as the projected cost is deemed immaterial to the current consolidated financial statements.
Derivatives
The Company uses derivatives to manage risks related to interest rate movements. Interest rate swap contracts designated and qualifying as cash flow hedges are reported at fair value. The gain or loss on the effective portion of the hedge is included as a component of other comprehensive income. The Company documents its risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. The Company’s interest rate risk management strategy is to stabilize cash flow requirements by maintaining interest rate swap contracts to convert variable-rate debt to a fixed rate.
Recognition of Revenue
The Company offers private line services (fixed amounts of capacity on fiber optic transmission lines that use optronics equipment installed by the Company) and long-term service contracts for dark fiber (fiber optic transmission lines utilized without optronics equipment installed by the Company) at fixed cost pricing over multi-year terms. Revenues from these services are recognized ratably over the term of the applicable service period or service contracts with customers, which range from 1 to 20 years. Monthly revenue under recurring agreements related to colocation, internet access, network services and managed services is recognized over the period that service is provided. Installation income is deferred and amortized over the life of its related monthly contract.
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Advertising
The Company expenses advertising costs as incurred. Advertising expense amounted to $352,907 and $296,340 for the years ended December 31, 2016 and 2015, respectively.
Patronage Income
The Company receives patronage income from one of its long term debt providers which is paid partially in cash and partially in equity in the lender. Total patronage income was $670,317 and $491,021 in 2016 and 2015, respectively, and is included in other income. Investment balances are reported using the cost method and are included in security deposits and other assets on the consolidated balance sheets in the amounts of $634,004 and
$466,424 in 2016 and 2015, respectively.
Fair Value Measurements
Fair value is defined as 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. There is a three-tier fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). Fair value measurements are classified under the following hierarchy:
| • | Level 1: Quoted prices in active markets for identical assets or liabilities. |
| • | Level 2: Pricing inputs other than level 1 which are either directly or indirectly observable. |
| • | Level 3: Unobservable pricing inputs developed using the Company’s estimates and assumptions, which reflect those that market participants would use in pricing an asset or liability. | |
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each reporting period and, based on various factors, it is possible that an asset or liability may be classified differently from period to period. However, the Company expects that changes in classifications between different levels will be rare.
Limited Liability Company / Income Taxes
The Company has elected to be treated as a partnership for federal and state income tax purposes. Accordingly, no income tax expense has been recorded in these financial statements. All income or losses will be reported on the individual member’s income tax returns.
With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2012.
As a limited liability company, each member’s liability is limited to amounts reflected in their respective member’s capital account, notwithstanding any personal guarantees.
Presentation of Certain Taxes
The Company collects various taxes from customers and remits these amounts to applicable taxing authorities. The Company’s accounting policy is to exclude these taxes from revenues and cost of sales.
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Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, as subsequently amended, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be effective for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact this standard will have on its financial statements.
In February 2016, the FASB issued ASU 2016-02 regarding ASC Topic 842, “Leases,” which amends various aspects of existing lease guidance for leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The main difference between GAAP and the amended standard is the recognition of lease assets and lease liabilities by lessees on the balance sheet for those leases classified as operating leases under previous GAAP. As a result, the Company will have to recognize a liability representing its lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its financial statements.
Date of Management’s Review
Management has evaluated all events or transactions that occurred after December 31, 2016 through March 18, 2017, the date which the consolidated financial statements were available to be issued.
| 3 | Member’s Equity as Defined by the Operating Agreement |
Member’s equity is comprised of two available classes: members, and holders of financial rights. Members and holders of financial rights have the same rights upon sale or dissolution of the limited liability company, namely, to share in the distribution of net assets in proportion to the balances in their capital accounts; however, holders of financial rights have no governance rights in the Company.
No member or holder of financial rights may sell, assign, transfer, mortgage, or pledge his interest in the limited liability company without the prior written consent of all members. As of December 31, 2016 and 2015, members held $75,547,174 and $64,561,396, respectively, of equity in Southern Light, LLC, and there were no holders of financial rights in the Company.
| 4 | Fair Value of Financial Instruments |
The Company has certain financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 2016, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
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The following table represents the Company’s fair value hierarchy for its financial instruments (asset/liability under interest rate swaps) measured at fair value on a recurring basis as of December 31, 2016 and 2015. The interest rate swaps are valued using models which are primarily based on market observable inputs including interest rate curves.
December 31, 2016Level 1Level 2Level 3
$$$$
Derivative instruments
Interest rate swaps asset*-461,727-461,727
December 31, 2015Level 1Level 2Level 3
$$$$
Derivative instruments
Interest rate swaps liability-147,477-147,477
* Included in security deposits and other assets on the consolidated balance sheets
| | |
5Property and Equipment The Company’s property and equipment consists of the following: | |
December 31 | 2016 | 2015 |
Fiber optic transmission network | $ 211,237,179 | $ 167,440,773 |
Telecommunications equipment | 64,462,775 | 59,513,380 |
NOC/Colocation facilities | 8,457,459 | 7,578,990 |
Software | 3,983,345 | 3,015,889 |
Buildings | 1,068,678 | 308,147 |
Trucks and trailers | 4,133,015 | 2,825,542 |
Land | 564,071 | 185,071 |
Other furniture & equipment | 6,958,121 | 5,991,131 |
| 300,864,643 | 246,858,923 |
Less: accumulated depreciation and amortization | (114,099,225) | (94,479,151) |
Total property and equipment, net | 186,765,418 | 152,379,772 |
Employee-related costs of $8,780,097 and $7,357,116 were capitalized in 2016 and 2015, respectively. No interest was capitalized during the years ended December 31, 2016 and 2015.
The Company had a credit agreement, with a financial institution, which provided the Company with a Term Loan Facility, two Incremental Term Loan Facilities and a Revolver Loan Facility. The Term Loan Facility dated July 27, 2011 provided for $30,000,000 of senior secured debt with five year amortizing term loans and was amended on April 19, 2013 to provide for a $20,000,000 Incremental Term Loan Facility and again on December 23, 2014 to provide for an additional $20,000,000 Incremental Term Loan Facility. The Term Loans under each facility amortized at 0.25% per quarter (for an aggregate of 1.00% per year). All unpaid balances were to be due at maturity, September 30, 2016.
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On December 22, 2015, the Company paid $68,600,000 in order to satisfy the term loan and the Company’s credit agreement was amended and restated as a Revolver Loan Facility and a Multi-Draw Term Loan Facility. These loans have been secured by substantially all assets of the Company. The amended and restated Revolver Loan Facility dated as of December 22, 2015 provides for a maximum of $130,000,000 of senior secured revolving debt, which includes a $10,000,000 Swingline subfacility and a $5,000,000 sublimit for the issuance of Letters of Credit. Any loans under the $20,000,000 Multi-Draw Term Loan Facility will be available from the closing date, December 22, 2015, through December 22, 2018. There were no amounts outstanding under the Multi-Draw Term Loan Facility during 2015 or 2016. All outstanding balances under either facility mature at December 22, 2022, with no required principal payment prior to maturity.
As of December 31, 2016 and 2015, the balances outstanding on the Revolver Loan Facility were $88,000,000 and
$75,140,893. The balances outstanding on the Multi-Draw Term Loan Facility were $0 at December 31, 3016 and 2015. The Company had a total of $62,000,000 and $74,859,107 of availability under the Revolver Loan Facility and the Multi-Draw Term Loan Facility as of December 31, 2016 and 2015, respectively.
Amounts borrowed under these agreements bear interest at the Company’s option of either a defined Base Rate plus a margin or LIBOR plus a margin. At December 31, 2016, the interest rates on the Revolver Loan Facility ranged from 3.04% to 5.38%. At December 31, 2015, the interest rates on the Revolver Loan Facility ranged from 3.04% to 5.13%.
The provisions of the loan and security agreement contain various affirmative, negative, financial and reporting covenants. The Company was in compliance with all loan covenants for all years.
During 2016, the Company’s consolidated variable interest entity, SLLP, entered into two five year Term Loans with a financial institution for the purpose of purchasing commercial property to lease to the Company. The loans, for $950,000 and $945,000, carrying a variable interest rate based on one month LIBOR, were dated June 24, 2016 and July 15, 2016, respectively, and are fully guaranteed by the Company. As of December 31, 2016, balances outstanding on each of the loans were $926,250 and $925,313. Unpaid principal balances outstanding for both Term Loans are due at maturity.
Maturities of the SLLP Term Loans as of December 31, 2016 and for each of the remaining five years and thereafter are as follows:
Amount
| |
Year ending December 31: | $ |
2017 | 94,750 |
2018 | 94,750 |
2019 | 94,750 |
2020 | 94,750 |
2021 | 1,472,563 |
Thereafter | - |
Total | 1,851,563 |
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| 7 | Derivative Financial Instruments |
As disclosed in Note 6, loan facilities bear interest at a variable rate. To minimize the effect of interest rate changes, the Company had several contracts in place during 2016 and 2015:
| | | | |
Notional amount | Start date | Maturity date | Fixed rate | Underlying |
$18,000,000 | 12/20/2012 | 7/20/2016 | 2.0100% | 1 Month LIBOR |
$6,000,000 | 12/26/2012 | 7/27/2015 | 1.6150% | 1 Month LIBOR |
$2,000,000 | 4/22/2016 | 4/22/2021 | 1.1900% | 1 Month LIBOR |
$18,000,000 | 7/20/2016 | 7/20/2021 | 1.2500% | 1 Month LIBOR |
These agreements effectively changed the interest rate on notional amounts listed above of the loan facilities from a variable rate to a fixed rate. At December 31, 2016, the effective rate for $20,000,000 of the Revolver Loan Facility was fixed at 3.869%. At December 31, 2015, the effective rate for $18,000,000 of the Revolver Loan Facility was fixed at 4.635%. All effective rates listed above in this paragraph include the fixed rates from the notional amounts listed in the table above plus the applicable margin for LIBOR rate loans.
In accordance with FASB Accounting Standards Codification (ASC) 815-10, the Company recognized the interest rate swap derivatives on the consolidated balance sheets at fair value. The derivatives were designated as and met all of the criteria for a cash flow hedge. The contracts are effective in offsetting the interest rate exposure of the forecasted interest rate payments hedged. Therefore, the Company adjusts the interest rate swaps to fair values through other comprehensive income.
The Company anticipates that these contracts will continue to be effective. As of December 31, 2016 and 2015, unrealized net gains/(losses) on the derivative instruments of $461,727 and $(147,477), respectively, were recorded in security deposits and other assets (gains), obligations under interest rate swaps (losses) and changes to these balances in other comprehensive income.
The Company has entered into multiple “Indefeasible Right of Use” (IRU) agreements for the use of certain fibers and conduit for periods ranging from 10 to 20 years. The Company is amortizing its accumulated investments totaling $4,573,622, ratably over the life of the agreements. The agreements expire at various times ranging from October 2017 through January 2037. Amortization of these leases included in depreciation and amortization expense was $237,043 and $207,435 per year for the years ended December 31, 2016 and 2015, respectively. The remaining unamortized balances included in other current assets and prepaid leases were
$1,946,890 and $1,860,933 at December 31, 2016 and 2015, respectively.
Associated with these IRU agreements are certain support and maintenance fees the Company is contractually obligated to pay over the life of the agreements. Minimum future support and maintenance fees to be paid, excluding consumer price index adjusted annual escalators, are as follows as of December 31, 2016:
Amount
| |
Year ending December 31: | $ |
2017 | 523,939 |
2018 | 445,409 |
2019 | 440,329 |
2020 | 437,348 |
2021 | 371,454 |
Thereafter | 1,256,091 |
Required minimum support and maintenance fees to be paid | 3,474,570 |
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| 9 | Capital Lease Obligations |
The Company leases telecommunications equipment and software under various capital leases. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are amortized over their estimated productive lives. Amortization of assets under capital leases is included in depreciation expense for the year ended December 31, 2016. Property held under capital lease, net of amortization, totaled $3,106,427 at December 31, 2016 and $3,227,960 at December 31, 2015. Interest rates on capitalized leases vary from 3.339% to 4.260%.
Minimum future lease payments under capital leases, including purchase options of $166,686 are as follows at December 31, 2016:
Amount
Year ending December 31:$
2017997,743
2018858,510
2019771,637
2020318,021
2021-
Thereafter-
Total2,945,911
Less amount representing interest*(177,526)
Present value of minimum lease payments2,768,385
* Interest amounts are excluded from capital lease obligations presented in the consolidated balance sheets.
| 10 | Commitments under Operating Leases |
The Company leases office space and various properties including warehouse space and colocation facilities for use in its operations under long-term real estate operating leases. These leases expire at various times through July 2036 or are under month-to-month agreements. The Company’s real estate leases provide for fixed rental payments, generally contain renewal options and certain leases require the Company to reimburse its proportionate share of building, maintenance and operating expenses which includes property taxes and insurance.
The Company also leases tower space for use in its operation under long-term operating leases, usually with an original term ranging from 24 to 60 months. The leases provide for fixed rental payments and generally contain renewal options and escalator clauses.
During 2014, the Company entered into an agreement to lease additional office space which will enable the Company to consolidate much of its professional, sales and administrative staff at one location. The lease anticipates July 1, 2017 as the beginning of the initial fifteen year lease term and provides for two five year renewal options. The lease provides for an initial rent-free period with future minimum payments beginning at $305,500 for 2018 and including an escalator ranging from 1.56% to 1.92% annually through 2032, an aggregate of
$9,623,251 over the initial term of the lease. Rental expense will be recognized on a straight line basis over the term of the lease in accordance with Accounting Standards Codification (“ASC”) 840-20-25.
Southern Light, LLC and Affiliate
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The following is a summary of the future minimum lease payments required under long-term leases at December 31, 2016:
| |
| Amount |
Year ending December 31: | $ |
2017 | 1,122,782 |
2018 | 1,087,580 |
2019 | 1,009,011 |
2020 | 911,907 |
2021 | 785,680 |
Thereafter | 7,799,056 |
Required minimum lease payments | 12,716,016 |
The Company incurred rent expense of $1,564,822 and $1,663,425 for the years ending December 31, 2016 and 2015, respectively.
Employees of the Company are eligible to participate in the Southern Light, LLC 401(k) Plan (the plan). The plan covers employees who are at least age 21 and have worked one hour. The plan allows both elective (employee) and non-elective (employer) contributions. The plan is Qualified under Code Sec. 401(k) of the Internal Revenue Code and includes discretionary profit sharing contributions.
The Company’s contribution to the plan, as determined by the Company’s management, is discretionary but cannot exceed certain maximum defined limitations. Contributions to the plan for the years ended December 31, 2016 and 2015 were $486,747 and $415,165, respectively.
| 12 | Concentrations of Credit Risk |
The Company is generally limited in establishing its customer base to the geographic area in which its fiber optic network is located.
At various times during the year, the Company’s cash in bank balances exceeded federally insured limits.
The Company extends credit to customers based on various contractual terms in the normal course of business. The Company does not generally require collateral on these receivables. Total revenues for the years ended December 31, 2016 and 2015 include sales to two major customers which accounted for more than 10% of the total service revenues of the Company. The revenues and accounts receivable from these customers accounted for the following amounts and percentages in 2016 and 2015:
Total salesAccounts receivable
| | | | | |
| 2016 | 2015 | | 2016 | 2015 |
Customer 1 | % 34.7 | % 26.4 | | $ 6,042,181 | $ 4,867,905 |
Customer 2 | 3.5 | 13.6 | | - | 74,567 |
Southern Light, LLC and Affiliate
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| 13 | Related Party Transactions |
The Company transacts business with companies that are related to the member through ownership. At December 31, 2016 and 2015, the Company had accounts receivable of $56,731 and $24,042, respectively, with these related companies.
Revenues from these related companies for the years ended December 31, 2016 and 2015 were:
| | |
Private Line | 197,220 | 178,019 |
Colocation | 102,147 | 82,005 |
Internet | 84,432 | 64,544 |
Dark Fiber | 7,200 | 6,600 |
Total Recurring Revenues | 390,999 | 331,168 |
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability (if any) with respect to these actions will not materially affect the financial position of the Company.
The Company maintains bank letters of credit as required for certain municipal franchise agreements. These letters of credit were issued by financial institutions not associated with the Revolver or Term Loan Facilities described in note 6. At December 31, 2016 and 2015, total letters of credit outstanding were $150,000 and
$150,000.
The Company purchases surety bonds in conjunction with the normal operations of constructing and maintaining a fiber optic network. At December 31, 2016 and 2015, the total amounts of surety bonds outstanding were
$1,847,865 and $1,882,525.
| 15 | Variable Interest Entities |
The Company is the primary beneficiary of a variable interest entity, SLLP, which was founded on December 8, 2015, by SLF Holdings, LLC for the purpose of acquiring real property to lease to the Company. As such, SLLP purchased two commercial properties, one on June 24, 2016 and the other on July 15, 2016, and leased them to the Company as of the purchase dates.
At December 31, 2016, the book values of the assets and liabilities associated with the variable interest entity included in the Company’s consolidated balance sheets were $1,962,173 and $1,851,563, respectively. Assets included $1,874,467 of real property, and liabilities included $1,851,563 of long term debt. The impact of consolidating this variable interest entity on the Company’s consolidated statements of comprehensive income was not significant.
Certain reclassifications have been made to the December 31, 2015 consolidated financial statement presentation to correspond to the current year’s format. Book overdrafts in the consolidated statement of cash flows were reclassified from operating activities to financing activities. Total equity and net income remain unchanged due to these reclassifications.
