Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note A – Organization, Operations and Basis of Presentation
Organization and Operations
Lightyear Network Solutions, Inc. (“LNSI”) was incorporated
in 1997 and operates through its wholly owned subsidiaries, Lightyear Network Solutions, LLC, a Kentucky limited liability company
organized in 2003 (“Lightyear LLC”), and SE Acquisitions, LLC d/b/a Lightyear Network Solutions of Kentucky, a Kentucky
limited liability company organized on June 22, 2010, (“Lightyear-KY”). The Company was organized for the purpose of
selling and marketing telecommunication services and solutions, and owning other companies which sell and market telecommunication
services and solutions. Lightyear provides telecommunications services throughout the United States and Puerto Rico primarily through
a distribution network of authorized independent agents and representatives. Lightyear is a licensed local carrier in 42 states
and provides long distance service in 49 states and Puerto Rico. Lightyear delivers service to approximately 70,000 customer locations
with a significant concentration in the five state area of Kentucky, Ohio, Indiana, Florida and Georgia. In addition to long distance
and local service, Lightyear currently offers a wide array of telecommunications services including internet/intranet, calling
cards, advanced data, wireless, Voice over Internet Protocol (“VoIP”) and conference calling. Lightyear maintains its
own network infrastructure and is a telecommunications reseller and competes, both directly at the wholesale level and through
agents and representatives, at the retail level. Lightyear is subject to regulatory requirements imposed by the Federal Communications
Commission (“FCC”) and state and local governmental agencies. Regulations by the FCC as well as state agencies include
limitations on types of services and service areas offered to the public.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments
(consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated
financial statements of Lightyear Network Solutions, Inc. and Subsidiaries (“Lightyear,” or the “Company”)
as of September 30, 2012 and for the three and nine months then ended. The results of operations for the three and nine months
ended September 30, 2012 are not necessarily indicative of the operating results for the full year. It is suggested that these
unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and related
disclosures of Lightyear for the year ended December 31, 2011 which were filed with the Securities and Exchange Commission on March
30, 2012. The Company evaluates events that have occurred after the balance sheet date but before the financial statements are
issued. Based upon the evaluation, the Company did not identify any recognized or nonrecognized subsequent events that would have
required further adjustment or disclosure in the unaudited condensed consolidated financial statements.
Liquidity Plan
Since February 12, 2010, the date of the Company’s reverse
merger transaction, Lightyear had an accumulated deficit of approximately $12.6 million. As of September 30, 2012, Lightyear had
a cash balance of $27,841, a working capital deficit of $2.3 million and was in violation of two of its debt covenants. On November
6, 2012, a noteholder waived two third quarter 2012 debt covenant violations that resulted from earnings forecast shortfalls. In
addition, the noteholder waived the same two debt covenants for the fourth quarter of 2012 (see Note D).
For the nine months ended September 30, 2012, the Company’s
operating activities provided $1.0 million of cash, while $0.2 million and $0.9 million were used to purchase property and equipment
and to service debt, respectively. The Company’s future capital requirements are expected to be driven by (i) network build-out
costs; (ii) debt reduction and debt service (including a $6.3 million principal payment due to a related party on November 30,
2013 – see Note E); (iii) public/investor relations costs; (iv) acquisition opportunities; and (v) the need to supplement
working capital levels. The Company believes that its current cash and cash expected to be generated from operating activities
will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. In addition,
the Company continues to investigate the capital markets for sources of funding, which could take the form of additional debt or
equity financings, however there can be no assurance that the Company will be successful in securing such capital. If the Company
is unable to raise additional funds, the Company might (a) initiate additional cost reductions; (b) forego acquisition or network
build-out opportunities; and/or (c) seek extensions of the scheduled payment obligations, including the long term related party
note payable.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note B – Summary of Significant Accounting Policies
Principles of Consolidation
The balance sheets, statements of operations and cash flows
of the Company and its wholly-owned subsidiaries have been included in our condensed consolidated financial statements. All intercompany
accounts and transactions have been eliminated. The Company and its wholly-owned subsidiaries are managed as a single business
and a single segment. Activity with its wholly-owned subsidiary, Lightyear Alliance of Puerto Rico, LLC, is insignificant.
Estimates
The preparation of condensed consolidated financial statements
in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s
significant estimates include the reserves related to receivables, the recoverability and useful lives of long lived assets, anticipated
carrier credits, the valuation allowance related to deferred tax assets and the valuation of equity instruments.
Accounts Receivable
Accounts receivable are shown net of an allowance for doubtful
accounts of $1,623,954 and $1,215,735 as of September 30, 2012 and December 31, 2011, respectively. The Company’s management
has established an allowance for doubtful accounts sufficient to cover probable and reasonably estimable losses. The allowance
for doubtful accounts considers a number of factors, including collection experience, current economic trends, estimates of forecasted
write-offs, aging of the accounts receivable portfolios, industry norms, regulatory decisions and other factors. Management’s
policy is to fully reserve all accounts that are 180 days past due. Accounts are written off after use of a collection agency is
deemed to be no longer effective.
Revenue Recognition
Telecommunications services income such as access revenue and
usage revenue are recognized on the accrual basis as services are provided. In general, access revenue is billed one month in advance
and is recognized when earned. Wireless handheld devices are sold at a discount when bundled with a long-term wireless service
contract. We recognize the equipment revenue and associated costs when title has passed and the equipment has been accepted by
the customer. The Company provides administrative and support services to its agents and pays commissions based on revenues from
the agents’ accounts. Amounts invoiced to customers in advance of services are reflected as deferred revenues.
The Company pays certain agents an initial lump sum commission.
A portion of this commission is deferred and is amortized over a three month period.
Cost of revenues represents primarily the direct costs associated
with the cost of transmitting and terminating traffic on other carriers’ facilities.
Commissions paid to acquire customer call traffic are expensed
in the period when associated call revenues are recognized.
The accounting standards guidance provides for how taxes collected
from customers and remitted to governmental authorities should be presented in the income statement. The guidance states that if
taxes are reported on a gross basis (included as revenue) a company should disclose those amounts, if significant. The Company
does not include excise and other sales related taxes in its revenues.
Fair Value of Financial Instruments
The Company’s financial instruments are cash, accounts
receivable and accounts payable each of which approximate their fair values based upon their short term nature. The Company’s
other financial instruments include notes payable, capital lease obligations and obligations payable. The carrying value of these
instruments approximates fair value, as they bear terms and conditions comparable to market for obligations with similar terms
and maturities.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note B – Summary of Significant
Accounting Policies
– Continued
Stock-Based Compensation
The Company measures the cost of services received in exchange
for an award of equity instruments based on the fair value of the award. For employees and directors, the award is measured on
the grant date. For non-employees, the award is measured on the grant date and then non-vested amounts are re-measured at each
financial reporting date. The fair value amount is then recognized over the period during which services are required to be provided
in exchange for the award, usually the vesting period.
Loss Per Common Share
Basic loss per share is computed using the weighted average
number of common shares outstanding during the period. Diluted loss per share is computed using the weighted average number of
common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options and warrants (using the treasury stock method) and the conversion
of the Company’s convertible preferred stock (using the if-converted method).
The following table reconciles the numerator and denominator
for the calculation:
|
|
For The Three Months
|
|
|
For The Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(632,957
|
)
|
|
$
|
102,645
|
|
|
$
|
(1,402,026
|
)
|
|
$
|
(454,627
|
)
|
Cumulative preferred stock dividends
|
|
|
-
|
|
|
|
(383,122
|
)
|
|
|
-
|
|
|
|
(1,136,877
|
)
|
Numerator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(632,957
|
)
|
|
$
|
(280,477
|
)
|
|
$
|
(1,402,026
|
)
|
|
$
|
(1,591,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock shares outstanding
|
|
|
22,086,641
|
|
|
|
22,089,888
|
|
|
|
22,086,641
|
|
|
|
21,528,021
|
|
Weighted average warrants outstanding with an exercise price of $0.01
or less
|
|
|
258,188
|
|
|
|
152,587
|
|
|
|
225,478
|
|
|
|
113,423
|
|
Weighted average basic and diluted shares outstanding
|
|
|
22,344,829
|
|
|
|
22,242,475
|
|
|
|
22,312,119
|
|
|
|
21,641,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per basic and diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.02
|
)
|
Cumulative preferred stock dividends
|
|
|
-
|
|
|
|
(0.02
|
)
|
|
|
-
|
|
|
|
(0.05
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
The following securities are excluded from the calculation
of weighted average dilutive common shares, because their inclusion would have been antidilutive:
|
|
As of
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Employee stock options
|
|
|
780,500
|
|
|
|
820,333
|
|
Warrants
|
|
|
1,059,327
|
|
|
|
1,047,883
|
|
Convertible preferred stock
|
|
|
-
|
|
|
|
9,500,000
|
|
Unvested restricted stock
|
|
|
-
|
|
|
|
12,987
|
|
Total potentially dilutive shares
|
|
|
1,839,827
|
|
|
|
11,381,203
|
|
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note B – Summary of Significant Accounting Policies
– Continued
Recently Issued and Adopted Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles—Goodwill and Other (Topic 350) -
Testing Indefinite-Lived Intangible Assets for Impairment." This ASU simplifies the impairment testing of indefinite-lived
intangible assets by eliminating the requirement to perform an annual quantitative test for impairment, unless a qualitative assessment
reveals that impairment is likely. While the update is effective for impairment tests performed for fiscal years beginning after
September 15, 2012, early adoption is permitted. The Company expects to early adopt ASU 2012-02 during the fourth quarter of 2012,
which is expected to alter the Company’s annual procedures, but is not expected to have a material impact on the Company’s
consolidated financial statements.
Note C – Other Liabilities
Other liabilities consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excise, state, local and property taxes payable
|
|
$
|
846,521
|
|
|
$
|
843,671
|
|
Other accrued expenses
|
|
|
141,050
|
|
|
|
165,485
|
|
Payroll, payroll taxes and bonuses
|
|
|
171,707
|
|
|
|
373,398
|
|
Deferred rent
|
|
|
215,071
|
|
|
|
260,086
|
|
Regulatory fees
|
|
|
130,464
|
|
|
|
132,133
|
|
Customer security deposits
|
|
|
111,663
|
|
|
|
101,390
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,616,476
|
|
|
$
|
1,876,163
|
|
Note D – Notes Payable
The Company has a secured promissory note arrangement with
a bank with a principal balance of approximately $1.7 million at September 30, 2012. As of September 30, 2012, Lightyear was in
violation of two of its debt covenants that resulted from earnings shortfalls. On November 6, 2012, a noteholder waived two third
quarter 2012 debt covenant violations that resulted from earnings forecast shortfalls. In addition, the noteholder waived the
same two debt covenants for the fourth quarter of 2012. The Company is in discussions with the bank with regard to resetting the
debt covenants on a go forward basis, however, there is no assurance the bank will agree to reset the covenants.
Note E – Related Party Transactions
Lightyear has significant transactions with its largest shareholder,
LY Holdings, LLC (“LY Holdings”) and members of LY Holdings. Lightyear also conducts business with certain companies
or individuals which are related parties either by having common ownership or because they are controlled by members of LY Holdings,
the directors and/or officers of the Company or by relatives of members of LY Holdings, directors of the Company and/or officers
of the Company. Aggregate related party transactions are segregated on the face of the balance sheets and statements of operations.
Commission expense – related parties includes certain
VoIP and wireless revenue override payments due to directors of the Company and/or members of LY Holdings. On June 22, 2011, all
but one holder of the override rights waived their right to such payments for the second half of 2010 and the full year 2011,
which resulted in the Company reversing approximately $86,000 of liabilities. On February 7, 2012, the same holders of the override
rights waived their right to such payments for the year 2012. During the three and nine months ended September 30, 2012, Lightyear
recorded approximately $16,000 and $45,000 of VoIP and wireless revenue override expense, respectively. During the three and nine
months ended September 30, 2011, Lightyear recorded an immaterial amount of expense related to VoIP and wireless revenue overrides.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note E – Related Party Transactions
– Continued
The Company obtained consulting services from a former officer
and director, pursuant to a one year consulting agreement which terminated on April 30, 2012. Aggregate consulting expense was
approximately $0 and $97,000 for the three and nine months ended September 30, 2012, respectively, and was approximately $75,000
and $125,000 for the three and nine months ended September 30, 2011, respectively.
On October 29, 2012, a Company director agreed to forbear from
demanding payment until November 30, 2013 of the $6,250,000 principal payment currently scheduled to be paid on August 30, 2013.
Note F – Supplier Concentration
Of the telecommunications services used in its operations,
Lightyear acquired approximately 33%, 21%, and 13% during the three months ended September 30, 2012 from three suppliers and 31%,
22% and 13% during the nine months ended September 30, 2012 from the same three suppliers. The Company acquired approximately
32% and 24% during the three months ended September 30, 2011 from two suppliers and 30%, 24% and 10% during the nine months ended
September 30, 2011 from three suppliers. Although there are other suppliers of these services, a change in suppliers could have
an adverse effect on the business which could ultimately negatively affect operating results.
Note G – Stockholders’ Deficiency
Warrants
Additional Warrants
In connection with a prior equity financing, the Company is
required to periodically issue exercisable five-year warrants to purchase shares of common stock to investors with an exercise
price of $0.01 per share and to selling agents with an exercise price of $4.00 per share (the “Additional Warrants”).
The Additional Warrants are issued pursuant to a pre-determined formula at the end of each calendar quarter during which shares
originally purchased in the equity financing are held by the original investor. The Additional Warrants are eligible to be issued
for a period of five years from the equity financing. The Company issued 105,455 Additional Warrants (95,868 were issued to investors
and 9,587 were issued to selling agents) during the nine months ended September 30, 2012. As of September 30, 2012, there were
317,267 Additional Warrants outstanding, of which 288,425 were issued to investors and 28,842 were issued to selling agents. See
Note H – Commitments and Contingencies – Warrant Dispute.
Summary
A summary of the warrant activity for the nine months ended
September 30, 2012 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
1,242,297
|
|
|
$
|
3.38
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
105,455
|
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
1,347,752
|
|
|
$
|
3.15
|
|
|
|
3.2
|
|
|
$
|
20,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2012
|
|
|
1,347,752
|
|
|
$
|
3.15
|
|
|
|
3.2
|
|
|
$
|
20,190
|
|
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note G – Stockholders’ Deficiency
–
Continued
Stock Option Grants
On December 28, 2011, the Company entered into Option Termination
Agreements with certain members of its management team (the “Optionees”), including each of the Company’s executive
officers, through which the Company agreed to terminate all of the outstanding stock options that were previously issued to the
Optionees pursuant to the Company’s 2010 Stock and Incentive Compensation Plan. The Optionees each received a total of $1.00
in consideration for the termination of their options, which accounted for 687,500 of the Company’s options outstanding.
Such options were deemed to have negligible value as of the termination date. On March 1, 2012, the Company granted ten-year incentive
stock options to the Optionees to purchase an aggregate of 732,500 shares of common stock at an exercise price of $0.22 per share.
Of the total, 50% of the options vest immediately and 50% vest on the one-year anniversary of the grants. Since cancellation and
issuance of new options is deemed to represent a modification of the original options, the approximate incremental $63,000 value
of the new options was added to the approximate $663,000 of unrecognized compensation cost associated with the original options
and the combined amount of $726,000 is being amortized proportionate to the vesting period.
On March 20, 2012, the Company granted ten-year incentive stock
options to new and existing employees to purchase an aggregate of 74,000 shares of common stock at an exercise price of $0.21
per share. The options vest as follows: (i) options to purchase an aggregate of 71,000 shares of common stock granted to existing
employees vest 50% immediately and 50% vest on the one-year anniversary of the grants; and (ii) an option to purchase 3,000 shares
of common stock granted to a new employee vests ratably on an annual basis over a three-year term. The aggregate grant date value
of approximately $6,200 is being amortized proportionate to the respective vesting periods.
The Company has computed the fair value of options granted
using the Black-Scholes option pricing model. Forfeitures are estimated at the time of valuation and reduce expense ratably over
the vesting period. This estimate will be adjusted periodically based on the extent to which actual forfeitures differ,
or are expected to differ, from the previous estimate, when it is material. The expected term of options granted represents
the estimated period of time that options granted are expected to be outstanding. The Company utilizes the “simplified”
method to develop an estimate of the expected term of “plain vanilla” option grants. Given that LNSI's shares have
only been publicly traded in their current form since February 12, 2010, until such time as LNSI has sufficient trading history
to compute the historical volatility of its common stock, the Company is utilizing an expected volatility figure based on a review
of the historical volatilities, over a period of time equivalent to the expected life of these options, of similarly positioned
public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon
bonds with a remaining term consistent with the expected term of the options.
In applying the Black-Scholes option pricing model, the Company
used the following weighted average assumptions:
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Risk free interest rate
|
|
|
n/a
|
|
|
|
1.58
|
%
|
|
|
0.95
|
%
|
|
|
1.58
|
%
|
Expected term (years)
|
|
|
n/a
|
|
|
|
6.00
|
|
|
|
5.25
|
|
|
|
6.00
|
|
Expected volatility
|
|
|
n/a
|
|
|
|
43.10
|
%
|
|
|
42.90
|
%
|
|
|
43.10
|
%
|
Expected dividends
|
|
|
n/a
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The weighted average estimated fair value of the stock options
granted during the nine months ended September 30, 2012 was $0.09 per share. The weighted average estimated fair value of the
stock options granted during the three and nine months ended September 30, 2011 was $0.36 per share.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note G – Stockholders’ Deficiency
–
Continued
Stock Option Grants
– Continued
The Company recognized approximately $68,000 and $577,000 of
stock-based compensation expense during the three and nine months ended September 30, 2012, respectively, and approximately $133,000
and $430,000 of stock-based compensation expense during the three and nine months ended September 30, 2011, respectively, related
to stock option grants, which is reflected as selling, general and administrative expense in the condensed consolidated statements
of operations. As of September 30, 2012, there was approximately $164,000 of unrecognized employee stock-based compensation expense
related to stock option grants that will be amortized over a weighted average period of 0.6 years.
A summary of the status of options issued under the 2010 Plan
during the nine months ended September 30, 2012 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
96,666
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
806,500
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(122,666
|
)
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2012
|
|
|
780,500
|
|
|
$
|
0.30
|
|
|
|
9.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2012
|
|
|
418,566
|
|
|
$
|
0.33
|
|
|
|
9.2
|
|
|
$
|
-
|
|
Restricted Stock Grants
The Company recognized approximately $15,000 and $43,000 of
stock-based compensation during the three and nine months ended September 30, 2011, respectively, related to director restricted
stock grants issued on October 12, 2010, which is reflected as selling, general and administrative expense in the condensed consolidated
statements of operations. As of September 30, 2012, there were no unvested restricted stock grants and, accordingly, there was
no unrecognized stock-based compensation expense related to restricted stock grants.
Note H – Commitments and Contingencies
Litigation
Alden Halpern v. Lightyear Network Solutions, Inc. fka Libra
Alliance Corporation
was filed in Nevada District Court on March 1, 2012. The plaintiff alleges violations of federal
and state securities laws with respect to his purchase of Lightyear securities. Mr. Halpern alleges that Lightyear falsely represented
that the shares he was purchasing were “free-trading.” Lightyear denied the allegations. Mr. Halpern claimed
damages of $750,000. On September 26, 2012, the Court granted Lightyear’s Motion to Dismiss, but provided Mr. Halpern with
30 days to amend his complaint to provide more details concerning the claim. On October 25, 2012, Mr. Halpern filed a motion to
file the First Amended Complaint. Lightyear notified its insurance carriers concerning this matter and continues to contest
the allegations vigorously. Lightyear has not recorded a provision for any loss that could be incurred as a result of the matter
as Lightyear believes the allegations are without merit.
As of September 30, 2012, other claims have been asserted against
Lightyear which arose in the normal course of business. While there can be no assurance, management believes that the ultimate
outcome of these legal claims will not have a material adverse effect on the condensed consolidated financial statements of the
Company.
Lightyear Network Solutions, Inc. and
Subsidiaries
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Note H – Commitments and Contingencies
–
Continued
Warrant Dispute
The Company’s former selling agent, on behalf of certain
investors in the Company’s private placement, has disputed the Company’s methodology for computing the quantity of
Additional Warrants that are issuable at each quarter end. The Company has issued Additional Warrants to purchase an insignificant
number of common shares in partial settlement of this dispute with some of the investors. While there can be no assurance, management
believes that the ultimate outcome of this dispute with the remaining investors will not have a material adverse effect on the
condensed consolidated financial statements of the Company.