UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Mark One



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

For The Quarterly Period Ended ~~June~~September 30, 2016



o		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 333-142946

Broadview Networks Holdings, Inc.

(Exact name of registrant as specified in its charter)



Delaware		11-3310798
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

800 Westchester Avenue,
Suite N501 Rye Brook, NY 10573		10573
(Address of principal executive offices)		(Zip code)

(914) 922-7000

(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 o No o

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 þ No o

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at ~~August~~October 427, 2016
Common Stock, $.01 par value per share		9,999,945

Table of Contents

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	4
Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015	4
Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	4
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2016 and 2015	5
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015	5
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	6
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3. Quantitative and Qualitative Disclosures About Market Risk	24
Item 4. Controls and Procedures	24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	25
Item 1A. Risk Factors	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults Upon Senior Securities	25
Item 4. Mine Safety Disclosures	25
Item 5. Other Information	25
Item 6. Exhibits	26
Signatures	27
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 101.INS
Exhibit 101.SCH
Exhibit 101.CAL
Exhibit 101.LAB
Exhibit 101.PRE
Exhibit 101.DEF

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains both historical and forward-looking statements. All statements other than statements of historical fact included in this report that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements with words like “believe,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate” or “continue” and other words and terms of similar meaning. These forward-looking statements may be contained throughout this report, including but not limited to statements under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control and could cause our actual results to differ materially from those matters expressed or implied by forward-looking statements. Many factors mentioned in our discussion in this report will be important in determining future results. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our plans and objectives are based, in part, on assumptions involving the execution of our stated business plan and objectives. Forward-looking statements (including oral representations) are only predictions or statements of current plans, which we review and update regularly. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including, among other things, risks associated with:


•	highly competitive nature of the communications market;


•	failure to anticipate and keep up with technological changes;


•	governmental regulatory oversight;


•	elimination or relaxation of certain regulatory rights and protections;


•	regulatory uncertainties in the communications industry;


•	continued industry consolidation;


•	failure to manage and expand operations effectively;


•	failure to retain and attract management and key personnel;


•	failure to maintain interconnection and service agreements with incumbent local exchange carriers;


•	difficulties in working with incumbent local exchange carriers;


•	reliance on a limited number of non-ILEC third party service providers;


•	system disruptions or the failure of our information systems to perform as expected;


•	ability to maintain real estate leases at switch sites;


•	loss of a substantial number of customers;


•	failure to successfully integrate future acquisitions;


•	claims of intellectual property infringement;


•	misappropriation of our intellectual property and proprietary rights;


•	liability for information disseminated through our network;


•	our history of net losses;


•	billing disputes with carrier vendors;


•	difficulties collecting payment from carrier and wholesale customers;


•	liability associated with periodic audits conducted by State Taxing and other Authorities;


•	declining prices for communications services;


•	impact of debt facilities on operating flexibility; and


•	our ability to service our substantial indebtedness.

Because our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, we cannot give any assurance that any of the events anticipated by these forward-looking statements will occur or, if any of them do, what impact they will have on our business, results of operations and financial condition. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to update these forward-looking statements to reflect new information, future events or otherwise, except as may be required under federal securities laws.

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PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements

Broadview Networks Holdings, Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands, except par value)

	June 30, 2016			December 31, 2015
	September 30, 2016			December 31, 2015
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1523,~~805~~404		$	15,173
Certificates of deposit	1,022			1,022
Accounts receivable, less allowance for doubtful accounts of $7,386 and $7,967	22,382			23,225
Accounts receivable, less allowance for doubtful accounts of $6,598 and $7,967	21,679			23,225
Other current assets	68,~~871~~660			6,460
Total current assets	4654,~~080~~765			45,880
Property and equipment, net	5150,~~802~~648			54,125
Goodwill	98,238			98,238
Intangible assets, net	~~975~~774			1,376
Other assets	3,~~251~~219			3,258
Total assets	$	~~200~~207,~~346~~644		$	202,877
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current liabilities:
Accounts payable	$	4,~~008~~336		$	4,714
Accrued expenses and other current liabilities	1419,~~403~~768			15,809
Taxes payable	45,~~289~~643			4,752
Deferred revenues	98,~~701~~951			9,175
Current portion of capital lease obligations	~~218~~203			253
Total current liabilities	3238,~~619~~901			34,703
10.5% senior secured notes	150,000			150,000
Revolving credit facility	11,500			12,500
Deferred rent payable	4,~~294~~143			4,626
Deferred revenues	~~936~~891			899
Capital lease obligations, net of current portion	~~137~~205			225
Deferred income taxes payable	9,~~341~~583			8,856
Other	1,~~915~~902			1,875
Total liabilities	~~210~~217,~~742~~125			213,684
Stockholders’ deficiency:
Common stock - $.01 par value; authorized 19,000,000 shares, issued and outstanding 9,999,945 shares	100			100
Preferred stock — $.01 par value; authorized 1,000,000 shares, issued and outstanding no shares	—			—
Additional paid-in capital	306,792			306,792
Accumulated deficit	(~~317~~316,~~288~~373		)	(317,699		)
Total stockholders’ deficiency	(109,~~396~~481		)	(10,807		)
Total liabilities and stockholders’ deficiency	$	~~200~~207,~~346~~644		$	202,877

See notes to unaudited condensed consolidated financial statements.

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Broadview Networks Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(dollars in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2016

2015

2016

2015

Revenues

72,~~865~~837

73,~~079~~040

~~144~~217,~~790~~628

~~145~~218,~~931~~971

Operating expenses:

Cost of revenues (exclusive of depreciation and amortization)

30,~~818~~382

32,~~313~~101

6292,~~127~~508

6597,~~881~~982

Selling, general and administrative

29,~~844~~617

31,~~212~~188

5888,~~941~~558

6293,~~242~~430

Depreciation and amortization

76,~~134~~995

7,~~350~~348

1421,~~308~~305

1422,~~810~~157

Total operating expenses

6766,~~796~~994

70,~~875~~637

~~135~~202,~~376~~371

~~142~~213,~~933~~569

Income from operations

5,~~069~~843

2,~~204~~403

915,~~414~~257

25,~~998~~402

Interest expense

(4,~~202~~650

)

(4,~~017~~019

)

(813,~~391~~041

)

(812,~~241~~260

)

Interest income

811

1829

1319

Income (loss) before provision for income taxes

~~875~~1,204

(1,~~808~~610

)

12,~~041~~245

(56,~~230~~839

)

Provision for income taxes

(~~306~~289

)

(~~415~~332

)

(~~630~~919

)

(~~746~~1,078

)

Net income (loss)

~~569~~915

(21,~~223~~942

)

~~411~~1,326

(57,~~976~~917

)

Other comprehensive income

—

Comprehensive income (loss)

~~569~~915

(21,~~223~~942

)

~~411~~1,326

(57,~~976~~917

)

See notes to unaudited condensed consolidated financial statements.

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Broadview Networks Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities
Net income (loss)	$	~~411~~1,326		$	(57,~~976~~917	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	1320,~~907~~703			1421,~~248~~315
Amortization of intangible assets	~~401~~602			~~562~~842
Provision for doubtful accounts	~~552~~706			~~506~~688
Deferred income taxes	~~485~~727			~~485~~727
Other	4027			3247
Changes in operating assets and liabilities:
Accounts receivable	~~291~~840			(~~380~~2,659		)
Other current assets	(~~883~~2,697		)	1,~~241~~012
Other assets	739			(9712		)
Accounts payable	(~~706~~378		)	~~112~~371
Accrued expenses, other current liabilities and taxes payable	(14,~~869~~850		)	(24,~~970~~698		)
Deferred revenues	~~563~~(232		)	(~~135~~288		)
Deferred rent payable	(~~332~~483		)	(97203		)
Net cash provided by operating activities	1226,~~867~~030			718,~~531~~621
Cash flows from investing activities
Purchases of property and equipment	(1116,~~112~~729		)	(1219,~~499~~652		)
Other	—			(2251		)
Net cash used in investing activities	(1116,~~112~~729		)	(1219,~~501~~401		)
Cash flows from financing activities
Repayments of revolving credit facility	(1,000		)	—(2,000		)
Proceeds from capital lease financing	—118			~~219~~338
Payments on capital lease obligations	(~~123~~188		)	(~~152~~247		)
Net cash (used in) provided by financing activities	(1,123		)	67
Net cash used in financing activities	(1,070		)	(1,909		)
Net increase (decrease) in cash and cash equivalents	~~632~~8,231			(42,~~903~~689		)
Cash and cash equivalents at beginning of period	15,173			14,457
Cash and cash equivalents at end of period	$	1523,~~805~~404		$	911,~~554~~768

See notes to unaudited condensed consolidated financial statements.

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Broadview Networks Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)


1.	Organization and Description of Business

Basis of Presentation

Broadview Networks Holdings, Inc. (the “Company”) is a leading cloud-based service provider of communications and information technology solutions to small and medium sized business and enterprise customers nationwide. After several years of development, the Company began providing cloud-based unified communication services in 2005 and later introduced into its product portfolio a variety of cloud-based computing solutions. Today, the Company offers a full suite of cloud-based systems and services under the brand OfficeSuite^® to customers nationwide. The Company has one reportable segment.

The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. These financial statements reflect all adjustments necessary for a fair presentation of the results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results for interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited condensed financial statements should be read in conjunction with its audited financial statements as of and for the year ended December 31, 2015 contained in the Company’s Form 10-K filed with the SEC on March 15, 2016. The condensed consolidated interim financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The Company has evaluated the impact of subsequent events through the date the condensed consolidated financial statements were filed with the SEC.

The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“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 revenues and expenses during the reporting period. Management periodically reviews such estimates and assumptions as circumstances dictate. Actual results could differ from those estimates.


2.	Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, certificates of deposit, trade accounts receivable, accounts payable, revolving credit facility and long-term debt. The Company’s available cash balances are invested on a short-term basis (generally overnight) and, accordingly, are not subject to significant risks associated with changes in interest rates. All of the Company’s cash flows are derived from operations within the United States and are not subject to market risk associated with changes in foreign exchanges rates. The carrying amounts of the Company’s cash and cash equivalents, certificates of deposit, trade accounts receivable and accounts payable reported in the condensed consolidated balance sheets as of ~~June~~September 30, 2016 and December 31, 2015 were deemed to approximate fair value because of their liquidity and short-term nature.

The Company had outstanding borrowings of $11,500 and $12,500 on its revolving credit facility as of ~~June~~September 30, 2016 and December 31, 2015, respectively. The carrying amount of this debt is deemed to approximate its fair value due to its variable interest rate and its relative short term nature. The fair value of the Company’s 10.5% Senior Secured Notes due 2017 (the “Notes”) was $~~124~~147,~~670~~608 and $134,230 at ~~June~~September 30, 2016 and December 31, 2015, respectively, which was based on the most recent publicly quoted prices of the Notes as of such dates. These are considered to be Level 1 inputs.

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Broadview Networks Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(dollars in thousands)

3. Recent Accounting Pronouncements

In May 2014, a comprehensive update on the accounting standard for revenue recognition was issued. This update affects any entity that enters into contracts with customers to transfer goods or services. Under this new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update is effective for annual periods beginning on or after December 15, 2017. Early adoption is permitted only as of annual periods beginning on or after December 15, 2016. The Company is currently evaluating the potential impact of adopting this standard and cannot yet determine the impact of its adoption on its operating results and financial position. Nor has the Company determined its method of adoption, either full retrospective approach or the modified retrospective approach.

In August 2014, the accounting standard which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements was updated. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The update applies to all entities and is effective for annual periods ending after December 15, 2016. Early adoption is permitted. The ~~adoption~~Company is currently evaluating the potential impact of adopting this standard isand does not ~~expected~~expect it to have any impact on the Company’s operating results and financial position.

In February 2016, the accounting standard which provides guidance on accounting for leases was updated. The new standard requires entities to recognize assets and liabilities for leases with lease terms of more than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease, which is consistent with current GAAP. However, the new standard will require both types of leases to be recognized on the balance sheet. For public companies, the update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the potential impact of adopting this standard and cannot yet determine the impact of its adoption on its operating results and financial position.

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Broadview Networks Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(dollars in thousands)


4.	Commitments and Contingencies

The Company has employment agreements with certain key executives. These agreements provide for base salaries and performance bonuses over periods ranging from one to two years. These employment agreements also provide for severance compensation ranging from 6 to 24 months after termination.

The Company has standby letters of credit outstanding of $~~526~~509, which are fully collateralized by domestic certificates of deposit.

The Company has, in the ordinary course of its business, disputed certain billings from carriers and has recorded the estimated settlement amount of the disputed balances. The settlement estimate is based on various factors, including historical results of prior dispute settlements. The amount of such charges in dispute at ~~June~~September 30, 2016 was $1011,~~453~~233. The Company believes that the ultimate settlement of these disputes will be at amounts less than the amount disputed and has accrued the estimated settlement in accrued expenses and other current liabilities at ~~June~~September 30, 2016. It is possible that actual settlements of such disputes may differ from these estimates and the Company may settle at amounts greater than the estimates.

The Company has entered into a commercial agreement with its principal vendor under which it purchases certain services that it had previously leased under the unbundled network platform provisions of the Telecommunications Act of 1996. The Company has also entered into multiple tariffed agreements with its principal vendor under which the Company purchases special access services. During 2016, the Company entered into an extension of a commercial agreement with its principal vendor expiring in 2019.

The Company is, in the ordinary course of business, under audit with several state and local taxing authorities, including an examination to determine the Company's compliance with applicable escheat laws. The Company is complying with all examinations. Any estimated liabilities are included in taxes payable at ~~June~~September 30, 2016. It is possible that actual settlements may differ from these estimates and the Company may settle at amounts greater than the estimates. The Company does not believe that the ultimate outcome of any such audits will result in any liability that would have a material adverse effect on its financial condition, results of operations or cash flows.

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Broadview Networks Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(dollars in thousands)


5.	Debt

The Company has $150,000 of 10.5% Senior Secured Notes due on November 15, 2017 (the “Notes”) outstanding. The Company may redeem the Notes, at its option, in whole or in part at any time prior to November 15, 2017, upon not less than 30 days' or more than 60 days’ notice, at the following redemption prices (expressed as percentages of the principal amount thereof) set forth below:



Year	Percentage
42 months to 54 months following the Issue Date	102	%
54 months to 60 months following the Issue Date	100	%

The Notes are fully, unconditionally and irrevocably guaranteed on a senior secured basis, jointly and severally, by each of the Company's existing and future domestic restricted subsidiaries, which includes all subsidiaries as of ~~June~~September 30, 2016. Broadview Networks Holdings, Inc. is a holding company and depends on dividends and other distributions from its subsidiaries to generate the funds necessary to meet its obligations, including its required obligations under the Notes. Each of the Company’s subsidiaries is a legally distinct entity, and while the Company’s subsidiaries have guaranteed the Notes, such guarantees are subject to risks. The issuer has no independent assets or operations and any subsidiaries of the issuer other than the subsidiaries guarantors are minor. The Notes and the guarantees rank senior in right of payment to all existing and future subordinated indebtedness of the Company and its subsidiary guarantors, as applicable, and equal in right of payment with all existing and future senior indebtedness of the Company and of such subsidiaries.

The Notes and the guarantees are secured by a lien on substantially all of the Company’s assets provided, however, that pursuant to the terms of the intercreditor agreement, the security interest in those assets consisting of receivables, inventory, deposit accounts, securities accounts and certain other assets that secure the Notes and the guarantees are contractually subordinated to a lien thereon that secures the Company’s revolving credit facility with an aggregate principal amount of $25,000 and certain other permitted indebtedness. Any outstanding amounts under this facility are subject to a borrowing base limitation based on an advance rate of 85% of the amount of eligible receivables, as defined. The Company's borrowing base has limited the availability to $1817,~~200~~800, of which $11,500 was outstanding as of ~~June~~September 30, 2016.


6.	Income Taxes

At ~~June~~September 30, 2016, the Company had net operating loss carryforwards (“NOLs”) available totaling approximately $~~184~~183,~~218~~050 which begin to expire in 2022. The Company has provided a full valuation allowance against its net deferred tax assets, of which the NOLs are the primary component, because management does not believe it is more likely than not that this asset will be realized. If the Company achieves profitability, the net deferred tax assets may be available to offset future income tax liabilities.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere in this quarterly report and our Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (the “SEC”). Certain information contained in the discussion and analysis set forth below and elsewhere in this quarterly report, including information with respect to our plans and strategies for our business and related financing, includes forward-looking statements that involve risk and uncertainties. In evaluating such statements, existing and prospective investors should specifically consider the various factors identified in this quarterly report that could cause results to differ materially from those expressed in such forward-looking statements, including matters set forth in our Form 10-K for the year ended December 31, 2015 filed with the SEC. Many of the amounts and percentages presented in this discussion and analysis have been rounded for convenience of presentation, and all amounts included in tables are presented in thousands.

Overview

We are a leading provider of cloud-based unified communication services (“UCaaS”) and information technology solutions to small and medium sized businesses (“SMB”) and enterprise customers nationwide. We offer a broad suite of cloud-based systems and services under the brand OfficeSuite® to our end-user customers nationwide. Our end-user customers have approximately ~~165~~174,000 active licenses on our flagship product OfficeSuite® Phone. OfficeSuite® Phone comprises a growing percentage of our overall recurring revenue and the vast majority of our existing cloud-based revenue stream. In addition, we generate revenue from third-party service providers utilizing our technology and OfficeSuite® Phone on a white-label or wholesale basis. These third-party service providers offer services to their own end-user customers located in Canada, certain European countries and the United States with a similar number of currently active licenses.

We benefit from software development expertise, proprietary technology and a strong next-generation network infrastructure. This allows us to offer our customers more than just cloud-based services, but additionally products that include advanced, converged communications services and network access by leveraging our network infrastructure, on a cost-effective basis. We have provided cloud-based services in the Northeast and Mid-Atlantic United States since 2005 and offered cloud-based services nationwide since late 2009. Prior to 2009, our focus had been solely on markets across 10 states, including the major metropolitan markets of New York, Boston, Philadelphia, Baltimore and Washington, D.C. These markets remain important markets for us and we have the majority of our sales efforts focused on these markets. We sell through multiple channels including our direct sales force, our channel partners which offers all of our end-user products in the Northeast and Mid-Atlantic regions and our cloud products nationwide, our inside sales channel, and our wholesale channel which provides our services to other carriers and resellers.

As of ~~June~~September 30, 2016, we provided our services to over 20,000 business customers nationwide. For the ~~six~~nine months ended ~~June~~September 30, 2016, approximately 88% of our total revenue was generated from end-users in a wide array of industries, including professional services, health care, education, manufacturing, real estate, retail, automotive, non-profit groups and others. For the same period, approximately 12% of our total revenue was generated from wholesale, carrier access and other market channels. For the ~~six~~nine months ended ~~June~~September 30, 2016, we generated revenues of $~~144~~217.86 million and Adjusted EBITDA of $2436.19 million. For more information, see the “Adjusted EBITDA Presentation” later in this section.

For the ~~six~~nine months ended ~~June~~September 30, 2016, and the years ended December 31, 2015 and 2014, we recorded operating income of $915.43 million, $8.0 million and $8.9 million, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2016 we recorded net income of $01.43 million and for the years ended December 31, 2015 and 2014, net losses of $9.8 million and $9.2 million, respectively. We continue to search for ways of increasing operating efficiencies that could potentially offset continued pressures on revenue and margin. We have also developed new technology and products that are being sold through new and existing sales channels that are growing, which may increase revenues and gross margin.

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Our business is subject to several macro trends, some of which negatively affect our operating performance. Among these negative trends are lower wireline voice usage per customer, which translates into less usage-based revenue and lower unit pricing for certain services. In addition, we continue to face other industry-wide trends including rapid technology changes and overall increases in competition from existing large competitors such as Verizon Communications, Inc. (“Verizon”) and established cable operators, competitive local exchange carriers and newer entrants such as cloud, wireless and other service providers. These factors are partially mitigated by several positive factors. These include a more stable customer base, increasing revenue per customer due to the trend of customers buying more products from us as we deploy new technology and expand our offerings, higher contribution margins for our cloud services, a focus on larger customers and an overall increase in demand for data, managed and cloud-based services. Although our overall revenue has declined, we have partially mitigated the impact of the revenue decline on our overall operating results by various price increases, revenue assurance efforts, reducing costs of revenue and certain of our selling, general and administrative (“SG&A”) costs, and by the achievement of certain operating efficiencies throughout the organization.

As of ~~June~~September 30, 2016, we had approximately ~~155~~150 sales, sales management and sales support employees, including approximately ~~115~~110 quota-bearing representatives in all sales channels, the majority of whom target SMB and enterprise customers in the Northeast and Mid-Atlantic regions. We also offer our OfficeSuite® cloud-based solutions, including our OfficeSuite® Phone product, on a nationwide basis, where we sell through channel partners, VARs/nationwide distributors/strategic partners and web channels.

We focus our sales efforts on selling cloud-based services to communications intensive business customers who purchase multiple products, many of whom have multiple locations. These customers generally purchase higher margin services in multi-year contracts, and consequently maintain higher retention rates. Historically, our focus was on providing T-1- and IP-based products as well as our cloud-based services.

For the ~~six~~nine months ended ~~June~~September 30, 2016, revenue from customers purchasing T-1- and IP-based products and cloud-based services, including cloud-based computing services and cloud related access, represented 84% of our end-user revenue with the remaining 16% of end-user revenue coming from customers purchasing only traditional services. Of the 84% of end-user revenue from customers purchasing T-1- and IP-based products and cloud-based services, 3334% of end-user revenue was generated by cloud-based services, 3534% of end-user revenue was generated by other T-1- and IP-based products, and 16% of end-user revenue was generated by traditional voice services provided to those customers purchasing T-1- and IP-based products and cloud-based services. For the same period, T-1- and IP-based products and cloud-based services represented approximately 8587% of new end-user sales, with typical incremental gross profit margins in excess of 60%. Sales of cloud-based services, including sales of both cloud-based computing services and cloud related access, represented approximately 65% of new end-user sales while other T-1- and IP-based products represented 2022% of new end-user sales. Since 2012, cloud-based products and services, have grown at a 14% compounded annual growth rate (“CAGR”). ~~Our~~In ~~annualized sequential end-user cloud revenue growth rate, has averaged 16% over~~ the ~~past~~3rd ~~six quarters with sequential increases ranging from 2.7% to 4.9%. End-user cloud revenue for the second~~ quarter of 2016 ~~sequentially increased 3.8%~~ relative to the ~~first~~3rd quarter of ~~2016~~2015, ~~which~~our ~~equates to an annualized growth rate of 15%. Our~~ end-user pure cloud revenue ~~increased~~grew 1721% inand ~~the 2nd quarter 2016 relative to the 2nd quarter of 2015. Excluding cloud related access,~~ our end-user cloud ~~revenue~~access grew ~~4.8~~6%, resulting in ~~2nd~~overall ~~quarter~~end-user ofcloud ~~2016~~revenue ~~relative to the prior quarter, reflecting an annualized~~ growth ~~rate~~ of ~~just over 19~~17%.

Our facilities-based network encompasses approximately 3,000 route miles of metro and long-haul fiber including both owned and dark fiber, primarily pursuant to IRU's and ~~257~~254 colocations. Our network architecture pairs the strength of a traditional infrastructure with IP and MPLS platforms. These platforms, in conjunction with our software development expertise and proprietary technology, allow us to offer a product line that includes advanced, converged services, such as our cloud-based solutions, Virtual Private Network (“VPN”) and complex multi-location services, on a cost effective basis. Our network topology incorporates metro Ethernet over Copper (“EoC”) access technology, enabling us to provide multi-megabit data services through copper loops to customers from selected major metropolitan colocations, resulting in lower costs and higher margins. In addition, we are able to deliver our cloud-based communications services nationwide utilizing partner carriers for last-mile access and via customer provided access, i.e. bring your own broadband. A significant portion of our customer base has been migrated to our IP- and multiprotocol label switching (“MPLS”)-based infrastructure, which enhances the performance of our network. ~~As of June 30, 2016, approximately 76% of our total installed lines were provisioned on-net.~~

Following the restructuring of our balance sheet in the third quarter of 2012, we began making incremental investments in various organic revenue growth initiatives, including enhancements to our direct sales force and channel partners programs, marketing support, product development and software development for our hosted Voice Over Internet Protocol (“VoIP”) product offering. The total cost of these initiatives is substantial, representing several million dollars of incremental spending. These investments are likely to continue as we maintain our focus on potential growth initiatives.

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As a result of these initiatives, our recent levels of new customers, sales activations, backlog pending activation and customer and revenue retention have improved. Because of these and other factors, we believe we are in a period of relative revenue and EBITDA stability, and will continue to focus on further accelerating the growth of our cloud revenue stream. However, during the transition to improving results, we may continue to experience some volatility due to several factors, including but not limited to our ongoing growth investments and the occurrence of certain non-recurring items that affect our results.

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Results of Operations

The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenues.

	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Revenues:
Voice and data services:
Cloud	2829.64	%	2425.52	%	28.37	%	24.14	%
NonCloud	5654.36	%	6059.09	%	56.91	%	60.85	%
Ancillary	34.0	%	2.86	%	23.71	%	2.7	%
Voice and data services	8788.90	%	87.37	%	87.9	%	87.6	%
Wholesale	9.03	%	8.9.0	%	9.12	%	8.9	%
Access	21.38	%	2.50	%	2.1	%	2.12	%
Total network services	99.21	%	98.7	%	99.12	%	98.67	%
Other	0.89	%	1.3	%	0.98	%	1.43	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%
Operating expenses:
Network services	4241.36	%	4443.07	%	42.94	%	44.84	%
Other cost of revenues	—0.1	%	0.2	%	—0.1	%	0.43	%
Selling, general and administrative	4140.07	%	42.7	%	40.7	%	42.67	%
Depreciation and amortization	9.76	%	10.1	%	9.98	%	10.1	%
Total operating expenses	9392.0	%	9796.07	%	93.50	%	97.95	%
Income from operations	78.0	%	3.03	%	67.50	%	2.15	%
Interest expense, net of interest income	(56.83	)%	(5.5	)%	(56.80	)%	(5.75	)%
Income (loss) before provision for income taxes	1.27	%	(2.52	)%	01.70	%	(3.61	)%
Provision for income taxes	(0.4	)%	(0.5	)%	(0.4	)%	(0.5	)%
Net income (loss)	01.83	%	(32.07	)%	0.36	%	(43.16	)%

Key Components of Results of Operations

Revenues

Our revenues, as detailed in the table above, consist primarily of network services revenues, which consists primarily of voice and data managed and cloud-based services, wholesale services and access services. Voice and data services consist of local dial tone, long distance and data services, as well as managed and cloud-based services. Wholesale services consist of voice and data services, cloud-based services, and transport services provided to other carriers, as well as data colocation services provided to end users and other carriers. Similar to our end-user revenue, greater than 20% of our wholesale revenue stream consists of cloud-based services. Carrier access services include carrier access and reciprocal compensation revenue, which consists primarily of usage charges that we bill to other carriers to originate and terminate their calls from and to our customers. Network services revenues represents a predominantly recurring revenue stream linked to our end-user and wholesale customers.

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For the ~~six~~nine months ended ~~June~~September 30, 2016 approximately 88% of our total revenue was generated from end-user customer voice and data products and services. Revenue from data and integrated voice/data products, including cloud-based services and T-1/T-3 and other managed services has been trending to an increasing percentage of our overall revenue over the past several years, while voice revenues have been declining primarily due to the decline in revenue from traditional voice services, or Plain Old Telephone Services (“POTS”). Our cloud-based revenues have grown from 2012 to 2016 at a 14% CAGR. As a result, the average quarterly decline in our core voice and data revenue, which excludes certain ancillary voice and data revenue components, has improved significantly over the past several years. We expect our voice and data revenue will continue to be characterized by significant growth in our end-user cloud revenue offsetting most, if not all, of the decline in our traditional revenue streams. Our cloud-based products and services comprised approximately 3334% of our end-user revenue and approximately 65% of new end-user sales for the ~~six~~nine months ended ~~June~~September 30, 2016. We continue to focus on cloud-based, data and managed services as growth opportunities as we expect the industry to trend toward lower usage components of legacy products such as long distance and local usage. This lower usage is primarily driven by trends toward customers using more online and wireless communications and bundling of minutes of usage in product offerings.

Cost of Revenues (exclusive of depreciation and amortization)

Our network services cost of revenues consists primarily of both the cost of operating our network facilities and the costs related to our off-net customers. Determining our cost of revenues requires significant estimates. The network components for our facilities-based business include the cost of:


•	leasing local voice grade loops and digital lines which connect our customers to our network;


•	leasing high capacity digital lines that connect our switching equipment to our colocations;


•	leasing high capacity digital lines and related trunking that interconnect our network with the ILECs and other carrier partners;


•	leasing space, power and terminal connections in the ILEC central offices for colocating our equipment;


•	signaling system network connectivity;


•	leasing space and purchasing power to support our various switch site locations; and


•	Internet transit and peering, which is the cost of delivering Internet traffic from our customers to the public Internet.

The costs to obtain local loops, digital lines and high capacity digital interoffice transport facilities from the ILECs vary by carrier and state, are governed by our various ILEC interconnection agreements and other ILEC contracts and tariffs and are regulated under federal and state laws. Within our footprint we often obtain local loops, T-1 lines and interoffice transport capacity from the ILECs. We also obtain interoffice facilities from carriers other than the ILECs, where possible, in order to lower costs and improve network redundancy; however, in many cases, the ILECs are our only source for local loops and T-1 lines. We have entered into agreements with cable providers as another alternative for local loops. We do not expect these extensions to materially impact our future financial condition, results of operations, of cash flows.

Our off-net network services cost of revenues consists of amounts we pay to Verizon, Frontier Communications Corporation, Fairpoint Communications, Inc. (“FairPoint”) and AT&T, Inc. (“AT&T”) pursuant to our commercial agreements with them. Rates for such services are prescribed in the commercial agreements and available for the term of the agreements. The FairPoint commercial agreement operates on a month-to-month basis. Our Verizon commercial agreement expires in 2019. The Company has also entered into multiple tariffed agreements with Verizon under which the Company purchases special access services as well as an associated commercial agreement pursuant to which the Company takes a variety of high-~~bandwith~~bandwidth services; these agreements have substantial revenue commitments. These tariffed agreements and associated commercial agreement expire at the end of 2017. The Frontier Communications Corporation agreement expires in October 2017, as does the AT&T agreement.

Our network services cost of revenues also include the fees we pay for long distance, data and other services. We have entered into long-term wholesale purchasing agreements for these services. Some of these agreements contain significant termination penalties and/or minimum volume commitments.

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Gross Profit (exclusive of depreciation and amortization)

Gross profit (exclusive of depreciation and amortization), referred to herein as “gross profit”, as presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, represents income from operations, before depreciation and amortization and SG&A. Gross profit is a non-GAAP financial measure used by our management, together with financial measures prepared in accordance with GAAP such as revenue, cost of revenue, and income from operations to assess our historical and prospective operating performance.

The following table sets forth, for the periods indicated, a reconciliation of gross profit to income from operations as income from operations is calculated in accordance with GAAP:

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Income from operations	$	5,~~069~~843		$	2,~~204~~403		$	915,~~414~~257		$	25,~~998~~402
Add back non-gross profit items included in income from operations:
Depreciation and amortization	76,~~134~~995			7,~~350~~348			1421,~~308~~305			1422,~~810~~157
Selling, general and administrative	29,~~844~~617			31,~~212~~188			5888,~~941~~558			6293,~~242~~430
Gross profit	$	42,~~047~~455		$	40,~~766~~939		$	82125,~~663~~120		$	80120,~~050~~989
Percentage of total revenue	5758.73		%	5556.81		%	57.15		%	5455.83		%

Gross profit is not a financial measurement prepared in accordance with GAAP. See “Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Components of Result of Operations — Gross Profit (exclusive of depreciation and amortization)” in our Form 10-K for the year ended December 31, 2015 for our reasons for including gross profit data in this quarterly report and for material limitations with respect to the usefulness of this measurement.

Selling, General and Administrative

Selling, General and Administrative is comprised primarily of salaries and related expenses, software development expenses, occupancy costs, sales and marketing expenses, commission expenses, bad debt expense, billing expenses, professional services expenses, and insurance expenses.

Determining our allowance for doubtful accounts receivable requires significant estimates. In determining the proper level for the allowance we consider factors such as historical collections experience, the aging of the accounts receivable portfolio and economic conditions. We perform a credit review process on each new significant customer that involves reviewing the customer’s current service provider bill and payment history, matching customers with national databases for delinquent customers and, in some cases, requesting credit reviews through Dun & Bradstreet Corporation.

During the latter part of 2012, and continuing through today, we launched several new initiatives directed at supporting our revenue growth initiatives. These included recruiting expenses for new sales personnel, new quota bearing sales personnel and sales management, purchasing lead generation data bases, increasing support for channel sales, increasing software and systems development teams for OfficeSuite® and costs associated with a new sales and customer relationship management software package implementation.

Depreciation and Amortization

Our depreciation and amortization expense includes depreciation for network related voice and data equipment, fiber, back-office systems, third party conversion costs, furniture, fixtures, leasehold improvements, office equipment and computers and amortization of intangibles associated with mergers, acquisitions and software development costs.

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Adjusted EBITDA Presentation

Adjusted EBITDA as presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations represents net loss before depreciation and amortization, interest income and expense, provision for income taxes, and other non-recurring items described in the table below that are not part of our core operations. Adjusted EBITDA is not a measure of financial performance under GAAP. Adjusted EBITDA is a non-GAAP financial measure used by our management, together with financial measures prepared in accordance with GAAP such as net income (loss), income from operations and revenues, to assess our historical and prospective operating performance.

The following table sets forth, for the periods indicated, a reconciliation of Adjusted EBITDA to net loss as net loss is calculated in accordance with GAAP:

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss)	$	~~569~~915		$	(21,~~223~~942	)	$	~~411~~1,326		$	(57,~~976~~917	)
Add back non-EBITDA items included in net loss:
Depreciation and amortization	76,~~134~~995			7,~~350~~348			1421,~~308~~305			1422,~~810~~157
Interest expense, net of interest income	4,~~194~~639			4,~~012~~013			813,~~373~~012			812,~~228~~241
Provision for income taxes	~~306~~289			~~415~~332			~~630~~919			~~746~~1,078
EBITDA	12,~~203~~838			9,~~554~~751			2336,~~722~~562			1727,~~808~~559
Severance and related separation costs	—			~~147~~46			—			~~147~~193
Professional fees related to strategic initiatives	~~257~~—			—463			271			—463
Costs associated with early termination of lease, net	91—			—			91			—
Adjusted EBITDA	$	12,~~551~~838		$	910,~~701~~260		$	2436,~~084~~924		$	1728,~~955~~215
Percentage of total revenues	17.26		%	1314.30		%	1617.60		%	12.39		%

For more information regarding Adjusted EBITDA data, and for material limitations with respect to the usefulness of this measurement, see the section of the Form 10-K for the year ended December 31, 2015 entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Components of Results of Operations — Adjusted EBITDA Presentation”.

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Three Months Ended ~~June~~September 30, 2016 Compared to Three Months Ended ~~June~~September 30, 2015

Set forth below is a discussion and analysis of our results of operations for the three months ended ~~June~~September 30, 2016 and 2015.

The following table provides a breakdown of components of our gross profit for the three months ended ~~June~~September 30, 2016 and 2015:

	Three Months Ended June 30,
	Three Months Ended September 30,
	2016				2015
	Amount		% of TotalRevenues		Amount		% of TotalRevenues		% Change
Revenues:
Network services	$	72,~~305~~216	99.21	%	$	72,~~162~~125	98.7	%	0.21	%
Other	~~560~~621		0.89	%	~~917~~915		1.3	%	(3832.91	)%
Total revenues	72,~~865~~837		100.0	%	73,~~079~~040		100.0	%	(0.3	)%
Cost of revenues:
Network services	30,~~809~~298		4241.36	%	3231,~~185~~910		4443.07	%	(45.31	)%
Other	984		—0.1	%	~~128~~191		0.23	%	(9356.0	)%
Total cost of revenues	30,~~818~~382		4241.37	%	32,~~313~~101		4443.29	%	(45.64	)%
Gross profit:
Network services	41,~~496~~918		5657.95	%	3940,~~977~~215		5455.71	%	34.82	%
Other	~~551~~537		0.8	%	~~789~~724		1.10	%	(3025.28	)%
Total gross profit	$	42,~~047~~455	5758.73	%	$	40,~~766~~939	5556.81	%	3.17	%

Revenues

Revenues for the three months ended ~~June~~September 30, 2016 and 2015 were as follows:

	Three Months Ended June 30,
	Three Months Ended September 30,
	2016				2015
	Amount		% of TotalRevenues		Amount		% of TotalRevenues		% Change
Revenues:
Voice and data services:
Cloud	$	2021,~~858~~422	2829.64	%	$	1718,~~898~~374	2425.52	%	16.56	%
NonCloud	4139,~~003~~777		5654.36	%	43,~~845~~777		6059.09	%	(69.51	)%
Ancillary	2,~~191~~866		34.0	%	21,~~022~~880		2.86	%	852.4	%
Voice and data services	64,~~052~~065		8788.90	%	6364,~~765~~031		87.37	%	0.51	%
Wholesale	6,~~594~~760		9.03	%	6,~~493~~607		8.9.0	%	12.63	%
Access	1,~~659~~391		21.38	%	1,~~904~~487		2.50	%	(126.95	)%
Total network services	72,~~305~~216		99.21	%	72,~~162~~125		98.7	%	0.21	%
Other	~~560~~621		0.89	%	~~917~~915		1.3	%	(3832.91	)%
Total revenues	$	72,~~865~~837	100.0	%	$	73,~~079~~040	100.0	%	(0.3	)%

Revenues from voice and data services ~~increased~~were ~~$0.3~~unchanged ~~million, or 0.5%,~~ between 2015 and 2016. Within voice and data services, revenues from cloud-based services increased $3.0 million, or 16.56%. This increase is due to our expanded efforts on selling our cloud-based services. Revenues from core voice and data services, excluding cloud-based services, decreased $24.80 million, or 69.51%~~; and ancillary voice and data revenues increased $0~~.2 ~~million.~~ The decrease in non-cloud core services was due to: i) a lower number of lines and customers, ii) lower usage revenue per customer and iii) lower prices per unit for certain traditional services. Ancillary voice and data revenues increased $1.0 million primarily due to nonrecurring revenue. Wholesale revenues increased by $0.12 million or 12.63%. Access revenues decreased by $0.21 million, or 126.95%, ~~which includes a net negative change in non-recurring amounts. Excluding the non-recurring revenue, core access revenues increased~~ due to several factors, including: i) ~~increased levels of traffic to which access charges are applicable, offset by ii)~~ lower per-minute rates charged to carriers as a result of Federal Communications Commission-mandated rate decreases, offset by ii) increased levels of traffic to which access charges are applicable. Other revenues decreased $0.43 million ~~or 38.9%~~ between 2015 and 2016 as a result of a reduction in certain non-recurring ancillary revenues associated with our contracting traditional revenue stream.

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Cost of Revenues (exclusive of depreciation and amortization)

Cost of revenues were $30.84 million for the three months ended ~~June~~September 30, 2016, a decrease of 45.64% from $32.31 million for the same period in 2015. The decrease is primarily due to the increased proportion of cloud-based services, the identification and elimination of certain inefficiencies in our operating platforms, and negotiations of lower costs from our vendors. As a percentage of revenues, cost of revenues decreased to 4241.37% for the three months ended ~~June~~September 30, 2016 from 4443.29% for the same period in 2015.

Gross Profit (exclusive of depreciation and amortization)

Gross profit was $42.05 million for the three months ended ~~June~~September 30, 2016, an increase of 3.17% from $40.89 million for the same period in 2015. As a percentage of revenues, gross profit increased to 5758.73% in 2016 from 5556.81% in 2015. We are focusing sales initiatives towards increasing the amount of cloud-based services, as we believe that these initiatives will produce incrementally higher margins than those currently reported from traditional voice services. In addition, as we continue to drive additional cost saving initiatives, including provisioning customers to our on-net facilities, identifying additional inaccuracies in billing from existing carriers, renegotiating existing agreements and executing new agreements with additional vendors, we believe that our gross profit as a percentage of revenue will continue to improve over time.

Selling, General and Administrative

SG&A expenses were $29.86 million, 4140.07% of revenues, for the three months ended ~~June~~September 30, 2016, a decrease of 45.40% from $31.2 million, 42.7% of revenues, for the same period in 2015. This decrease is primarily due to i) $01.53 million reduction in headcount and related expenses, along with ii) $0.93 million net reductions in various other expenses.

We continue to seek additional cost savings in various categories including headcount and professional services.

Depreciation and Amortization

Depreciation and amortization expense was $7.10 million for the three months ended ~~June~~September 30, 2016, a decrease of 24.98% from $7.43 million for the same period in 2015. This decrease in depreciation and amortization expense is primarily the result of property and equipment becoming fully depreciated in 2015.

Interest

Interest expense was $4.26 million for the three months ended ~~June~~September 30, 2016 an increase of 415.67% from $4.0 million for the same period in 2015. The increase is primarily due to the recording of non-debt related interest expense associated with contingent liabilities. Our effective annual interest rates for the three months ended ~~June~~September 30, 2016 and 2015 are as follows:

	Three Months Ended June 30,
	Three Months Ended September 30,
	2016			2015
Interest expense	$	4,~~202~~650		$	4,~~017~~019
Weighted average debt outstanding	$	161,~~807~~881		$	160,~~424~~452
Effective interest rate	10.39		%	10.02		%
Effective interest rate (1)	11.49		%	10.02		%

⁽¹⁾ Without the additional non-debt related interest expense as described above, the effective interest rate was 10.44% for the three months ended September 30, 2016.

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~~Six~~Nine Months Ended ~~June~~September 30, 2016 Compared to ~~Six~~Nine Months Ended ~~June~~September 30, 2015

Set forth below is a discussion and analysis of our results of operations for the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015.

The following table provides a breakdown of components of our statements of operations for the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015:

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2016				2015
	Amount		% of TotalRevenues		Amount		% of TotalRevenues		% Change
Revenues:
Network services	$	~~143~~215,~~632~~849	99.12	%	$	~~143~~216,~~931~~056	98.67	%	(0.21	)%
Other	1,~~158~~779		0.98	%	2,~~000~~915		1.43	%	(4239.10	)%
Total revenues	~~144~~217,~~790~~628		100.0	%	~~145~~218,~~931~~971		100.0	%	(0.86	)%
Cost of revenues:
Network services	6292,~~064~~362		42.94	%	6597,~~339~~248		44.84	%	(5.0	)%
Other	63146		—0.1	%	~~542~~734		0.43	%	(8880.41	)%
Total cost of revenues	6292,~~127~~508		42.95	%	6597,~~881~~982		4544.27	%	(5.76	)%
Gross profit:
Network services	81123,~~568~~487		56.28	%	78118,~~592~~808		5354.83	%	3.89	%
Other	1,~~095~~633		0.98	%	12,~~458~~181		1.0	%	(2425.91	)%
Total gross profit	$	82125,~~663~~120	57.15	%	$	80120,~~050~~989	5455.83	%	3.34	%

Revenues

Revenues for the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015 were as follows:

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2016				2015
	Amount		% of TotalRevenues		Amount		% of TotalRevenues		% Change
Revenues:
Voice and data services:
Cloud	$	4062,~~957~~379	28.37	%	$	3553,~~102~~476	24.14	%	16.76	%
NonCloud	82122,~~349~~126		56.91	%	88132,~~797~~575		60.85	%	(7.39	)%
Ancillary	36,~~980~~847		23.71	%	35,~~962~~841		2.7	%	017.52	%
Voice and data services	~~127~~191,~~286~~352		87.9	%	~~127~~191,~~861~~892		87.6	%	(0.43	)%
Wholesale	1319,~~180~~939		9.12	%	1219,~~952~~559		8.9	%	1.89	%
Access	34,~~166~~558		2.1	%	34,~~118~~605		2.12	%	(1.50	)%
Total network services	~~143~~215,~~632~~849		99.12	%	~~143~~216,~~931~~056		98.67	%	(0.21	)%
Other	1,~~158~~779		0.98	%	2,~~000~~915		1.43	%	(4239.10	)%
Total revenues	$	~~144~~217,~~790~~628	100.0	%	$	~~145~~218,~~931~~971	100.0	%	(0.86	)%

Revenues from voice and data services have decreased $0.65 million or 0.43% between 2015 and 2016. Within voice and data services, revenues from cloud-based services increased $58.9 million, or 16.76%;. ~~revenues~~This increase is due to our expanded efforts on selling our cloud-based services. Revenues from core voice and data services, excluding cloud-based services decreased $610.4 million, or 7.39%; ~~and ancillary voice and data revenues were unchanged. The decrease in revenues for non-cloud core services was~~ due to: i) a lower number of lines and customers, ii) lower usage revenue per customer, and iii) lower prices per unit for certain traditional services. Ancillary voice and data revenue increased $1 million due to nonrecurring revenue. Wholesale revenues increased by $0.24 million or 1.89%. The increase is attributable to growth from new customers and included some non-recurring revenue. Carrier access revenues, which includes a net negative change in non-recurring amounts, ~~increased~~decreased by 1.50%. Excluding the non-recurring revenue, core access revenues increased due to several factors, including: increasing levels of traffic to which access charges are applicable, offset by lower per-minute rates charged to carriers as a result of Federal Communications Commission-mandated rate decreases. Other revenues decreased $01.81 million or ~~42.1~~39% between 2015 and 2016 as a result of a reduction in certain non-recurring ancillary revenues associated with our contracting traditional revenue stream.

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Cost of Revenues (exclusive of depreciation and amortization)

Cost of revenues were $6292.15 million for the ~~six~~nine months ended ~~June~~September 30, 2016, a decrease of 5.76% from $6598.90 million for the same period in 2015. The decrease is primarily due to the increased proportion of cloud-based services, the identification and elimination of certain inefficiencies in our operating platforms, and negotiations of lower costs from our vendors. As a percentage of revenues, cost of revenues decreased to 42.95% in 2016 from 4544.27% in 2015.

Gross Profit (exclusive of depreciation and amortization)

Gross profit was $82125.71 million for the ~~six~~nine months ended ~~June~~September 30, 2016, an increase of 3.34% from $80121.10 million for the same period in 2015. As a percentage of revenues, gross profit increased to 57.15% in 2016 from 5455.83% in 2015. We are focusing sales initiatives towards increasing the amount of cloud-based services, as we believe that these initiatives will produce incrementally higher margins than those currently reported from traditional voice services. In addition, as we continue to drive additional cost saving initiatives, including provisioning customers to our on-net facilities, identifying additional inaccuracies in billing from existing carriers, renegotiating existing agreements and executing new agreements with additional vendors, we believe that our gross profit as a percentage of revenue will continue to improve over time.

Selling, General and Administrative

SG&A expenses were $5888.96 million, 40.7% of revenues, for the ~~six~~nine months ended ~~June~~September 30, 2016, a decrease of 5.32% from $6293.24 million, 42.67% of revenues, for the same period in 2015. This decrease is primarily due to i) $12.19 million reduction in headcount and related expenses, ii) $0.68 million reduction in ~~outside~~repairs ~~services, iii) $0.3 million reduction in property leases~~ and ~~utilities~~contract maintenance, and iviii) $1.31 million net reductions in various other expenses.

We continue to seek additional cost savings in various categories including headcount and professional services.

Depreciation and Amortization

Depreciation and amortization expense was $1421.3 million for the ~~six~~nine months ended ~~June~~September 30, 2016, a decrease of 3.48% from $1422.82 million for the same period in 2015. This decrease in depreciation and amortization expense is primarily the result of property and equipment becoming fully depreciated in 2015.

Interest

Interest expense was $813.40 million for the ~~six~~nine months ended ~~June~~September 30, 2016, an increase of 16.84% from $812.23 million for the same period in 2015. The increase is primarily due to the recording of non-debt related interest expense associated with contingent liabilities. Our effective annual interest rates for the ~~six~~nine months ended ~~June~~September 30, 2016 and 2015 are as follows:

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2016			2015
Interest expense	$	813,~~391~~041		$	812,~~241~~260
Weighted average debt outstanding	$	161,~~797~~834		$	160,~~430~~443
Effective interest rate	10.37		%	10.27		%
Effective interest rate (1)	10.74		%	10.19		%

⁽¹⁾ Without the additional non-debt related interest expense as described above, the effective interest rate was 10.39% for the nine months ended September 30, 2016.

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Off-Balance Sheet Arrangements

We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support, and we do not currently engage in hedging, research and development services, or other relationships that expose us to any liabilities that are not reflected on the face of our financial statements.

Liquidity and Capital Resources

Our principal sources of liquidity are cash from operations, cash and cash equivalents on hand and a revolving credit facility. Our revolving credit facility has a current maximum availability of $25.0 million and is due in October 2017. Any outstanding amounts under the revolving credit facility are subject to a borrowing base limitation based on an advance rate of 85% of the amount of eligible receivables, as defined. Our borrowing base has limited our availability to $1817.28 million, of which $11.5 million was outstanding as of ~~June~~September 30, 2016. In addition to our normal operating requirements, our short-term liquidity needs consist of interest on the Notes, which are due in November 2017, capital expenditures and working capital. As of ~~June~~September 30, 2016, our $1523.84 million of cash and cash equivalents was being held in several large financial institutions, although most of our balances exceed the Federal Deposit Insurance Corporation insurance limits. We anticipate that our current cash and cash equivalents balances, along with cash generated from operations, will be sufficient to meet working capital requirements for at least the next twelve months.

As of ~~June~~September 30, 2016, we will require approximately $23.6 million in cash to service the interest due on the Notes throughout the remaining life of the Notes. For the ~~six~~nine months ended ~~June~~September 30, 2016, the Company incurred capital expenditures of $1116.17 million. Fixed and success-based capital expenditures will continue to be a significant use of liquidity and capital resources. A majority of our planned capital expenditures are “success-based” expenditures, meaning that they are directly linked to new revenue.

Disputes

We continue to be involved in a variety of disputes with multiple carrier vendors relating to billings of approximately $1011.52 million as of ~~June~~September 30, 2016. While we hope to resolve these disputes through negotiation, we may be compelled to arbitrate these matters. We believe we have accrued an amount appropriate to settle all outstanding disputed charges. However, it is possible that the actual settlement of any outstanding disputes may differ from our reserves and that we may settle at amounts greater than the estimates. We believe we will have sufficient cash on hand to fund any differences between our expected and actual settlement amounts. In the event that disputes are not resolved in our favor and we are unable to pay the vendor charges in a timely manner, the vendor may deny us access to the network facilities that we require to serve our customers. If the vendor notifies us of an impending “embargo” of this nature, we may be required to notify our customers of a potential loss of service, which may cause a substantial loss of customers. It is not possible at this time to predict the outcome of these disputes.

~~these~~Nine ~~matters.~~Months WeEnded ~~believe we have accrued an amount appropriate to settle all outstanding disputed charges. However~~September 30, it2016 isCompared possible that the actual settlement of any outstanding disputes may differ from our reserves and that we may settle at amounts greater than the estimates. We believe we will have sufficient cash on hand to ~~fund~~Nine ~~any~~Months ~~differences~~Ended ~~between our expected and actual settlement amounts. In the event that disputes are not resolved in our favor and we are unable to pay the vendor charges in a timely manner~~September 30, ~~the~~2015 vendor may deny us access to the network facilities that we require to serve our customers. If the vendor notifies us of an impending “embargo” of this nature, we may be required to notify our customers of a potential loss of service, which may cause a substantial loss of customers. It is not possible at this time to predict the outcome of these disputes.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Cash Flows from Operating Activities

Cash provided by operating activities was $1226.90 million for the ~~six~~nine months ended ~~June~~September 30, 2016, compared to $718.56 million for the same period in 2015. This increase in cash flow from operating activities is primarily due to higher consolidated earnings and timing differences.

Cash Flows from Investing Activities

Cash used in investing activities was $1116.17 million for the ~~six~~nine months ended ~~June~~September 30, 2016, compared to $1219.54 million for of the same period in 2015. The change in cash flow from investing activities was primarily due to a decrease in capital expenditures of $12.49 million.

Cash Flows from Financing Activities

Cash flows used in financing activities was $1.1 million for the ~~six~~nine months ended ~~June~~September 30, 2016, compared to ~~cash provided by financing activities of~~ $0.1.9 million for the same period in 2015. The change in cash flows from financing activities was primarily due to lower repayments on our revolving credit facility ofin $12016.~~0 million.~~

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Application of Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements in accordance with GAAP requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. We use historical experience and all available information to make these judgments and estimates and actual results could differ from those estimates and assumptions that are used to prepare our financial statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the accompanying Unaudited Condensed Consolidated Financial Statements and Notes to Unaudited Condensed Consolidated Financial Statements provide a meaningful and fair perspective of our financial condition and our operating results.

We consider an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.

For more information, see the section of our Form 10-K for the year ended December 31, 2015 entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations — Application of Critical Accounting Policies and Estimates”.

Other Matters

At ~~June~~September 30, 2016, we had NOLs available totaling approximately $~~184~~183.21 million, which begin to expire in 2022. As of ~~June~~September 30, 2016, we have provided a full valuation allowance against the net deferred tax asset, of which the NOLs are the primary component, because we do not believe it is more likely than not that this asset will be realized. If we achieve profitability, the net deferred tax assets may be available to offset future income tax liabilities.

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, our financial position is subject to a variety of risks, such as the collectability of our accounts receivable and the recoverability of the carrying values of our long-term assets. Our debt obligations consist primarily of the Notes with a fixed interest rate. We are not exposed to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold any derivative financial instruments nor do we hold any securities for trading or speculative purposes.

We continually monitor the collectability of our accounts receivable and have not noted any significant changes in our collections as a result of current economic and market conditions. We believe that our allowance for doubtful accounts is adequate as of ~~June~~September 30, 2016. Should the market conditions worsen or should our customers’ ability to pay decrease, we may be required to increase our allowance for doubtful accounts, which would result in a charge to our SG&A expenses.

Our available cash balances are invested on a short-term basis (generally overnight) and, accordingly, are not subject to significant risks associated with changes in interest rates. Substantially all of our cash flows are derived from our operations within the United States and we are not subject to market risk associated with changes in foreign exchange rates.

The fair value of the Notes at ~~June~~September 30, 2016, was approximately $~~124~~147.76 million and was based on publicly quoted market prices. The Notes, like all fixed rate securities, are subject to interest rate risk and will fall in value if market interest rates increase.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~June~~September 30, 2016. For information regarding the Company's annual assessment of the effectiveness of internal control over financial reporting, see our Form 10-K for the year ended December 31, 2015.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended ~~June~~September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION


Item 1.	Legal Proceedings

We are not currently a party to any material legal action. We are, however, party to certain legal actions arising in the ordinary course of business. We are also involved in certain billing and contractual disputes with our vendors. We do not believe that the ultimate outcome of any of the foregoing actions will result in any liability that would have a material adverse effect on our financial condition, results of operations or cash flows.

For more information, see the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our Form 10-K for the year ended December 31, 2015.


Item 1A.	Risk Factors

There have been no material changes in our risk factors from those set forth in our Form 10-K for the year ended December 31, 2015, which should be read in conjunction with this report.

These risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.


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

None.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not Applicable.


Item 5.	Other Information

None.

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Item 6.	Exhibits

The following exhibits are filed herewith:



Exhibit No.		Description
31.1		Certification of the Company’s Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Company’s Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL INSTANCE DOCUMENT

101.SCH		SCHEMA DOCUMENT

101.CAL		CALCULATION LINKBASE DOCUMENT

101.LAB		LABELS LINKBASE DOCUMENT

101.PRE		PRESENTATION LINKBASE DOCUMENT

101.DEF		DEFINITION LINKBASE DOCUMENT

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on ~~August~~October 427, 2016.



BROADVIEW NETWORKS HOLDINGS, INC.

By:	/s/ Michael K. Robinson
	Name:	Michael K. Robinson
	Title:	Chief Executive Officer, President and Director

By:	/s/ Corey Rinker
	Name:	Corey Rinker
	Title:	Chief Financial Officer, Executive Vice President, Treasurer and Assistant Secretary

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EXHIBIT INDEX



Exhibit No.		Description
31.1		Certification of the Company’s Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Company’s Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL INSTANCE DOCUMENT

101.SCH		SCHEMA DOCUMENT

101.CAL		CALCULATION LINKBASE DOCUMENT

101.LAB		LABELS LINKBASE DOCUMENT

101.PRE		PRESENTATION LINKBASE DOCUMENT

101.DEF		DEFINITION LINKBASE DOCUMENT

Large accelerated filer o

Accelerated filer o

Non-accelerated filer þ

Smaller reporting company o

(Do not check if a smaller reporting company)

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