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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

  For the quarterly period ended June 30, 2014

OR

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

For the transition period from_______to_______

 

Commission file number 001-33449

 

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

20-8259086

(I.R.S. Employer Identification No.)

 

 

 

88 Silva Lane

Middletown, Rhode Island

(Address of principal executive offices)

 

02842

(Zip Code)

 

Registrant’s telephone number, including area code (401) 848-5848

 

 

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  ☒   No   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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      No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

                                        Large accelerated filer                                                                                                                                    Accelerated filer

                                        Non-accelerated filer (Do not check if a smaller reporting company)                                                    Smaller reporting company      

 

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

 

As of August 7, 2014, there were 66,643,804 shares of common stock, par value $0.001 per share, outstanding.

 

 

 
 

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

   

Pages

Part I

FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements.

1

     
 

Condensed Consolidated Balance Sheets as of  June 30, 2014 (unaudited) and December 31, 2013

1

     

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)

2

     
 

Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2014 (unaudited)

3

     
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)

4

     
 

Notes to Unaudited Condensed Consolidated Financial Statements

5-15

     

 Item 2.

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

16-28

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

28

     

 Item 4.

Controls and Procedures.

28

     

Part II

OTHER INFORMATION

 
     

Item 6.

Exhibits.

30

 

 

 
ii

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)

June 30, 2014

   

December 31, 2013

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 17,288,707     $ 28,181,531  

Accounts receivable, net

    796,485       611,548  

Prepaid expenses and other current assets

    1,370,386       925,587  

Total Current Assets

    19,455,578       29,718,666  
                 

Property and equipment, net

    36,836,707       38,484,858  
                 

Intangible assets, net

    2,395,994       3,088,827  

Goodwill

    1,674,281       1,674,281  

Other assets

    1,807,906       1,950,835  

Total Assets

  $ 62,170,466     $ 74,917,467  
                 

Liabilities and Stockholders’ Equity

               
                 

Current Liabilities

               

Accounts payable

  $ 1,457,625     $ 1,241,743  

Accrued expenses

    1,943,068       2,532,679  

Deferred revenues

    1,283,744       1,396,780  

Current maturities of capital lease obligations

    781,651       783,051  

Other

    51,443       67,255  

Total Current Liabilities

    5,517,531       6,021,508  
                 

Long-Term Liabilities

               

Capital lease obligations, net of current maturities

    1,398,053       1,805,336  

Other

    1,492,438       996,682  

Total Long-Term Liabilities

    2,890,491       2,802,018  

Total Liabilities

    8,408,022       8,823,526  
                 

Commitments (Note 12)

               
                 

Stockholders' Equity

               

Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued

    -       -  

Common stock, par value $0.001; 95,000,000 shares authorized; 66,643,804 and 66,424,561 shares issued and outstanding, respectively

    66,644       66,425  

Additional paid-in-capital

    154,744,392       154,171,695  

Accumulated deficit

    (101,048,592 )     (88,144,179 )

Total Stockholders' Equity

    53,762,444       66,093,941  

Total Liabilities and Stockholders' Equity

  $ 62,170,466     $ 74,917,467  

 

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

 

 

 
1

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 
                                 
                                 

Revenues

  $ 8,264,848     $ 8,212,175     $ 16,644,754     $ 16,511,398  
                                 

Operating Expenses

                               

Cost of revenues (exclusive of depreciation)

    6,101,913       5,166,287       11,957,856       10,147,593  

Depreciation and amortization

    3,281,062       3,935,826       6,976,477       7,806,913  

Customer support services

    1,147,275       1,181,717       2,319,410       2,578,611  

Sales and marketing

    1,399,089       1,523,804       2,820,688       2,964,660  

General and administrative

    2,666,997       2,636,033       5,344,937       5,773,632  

Total Operating Expenses

    14,596,336       14,443,667       29,419,368       29,271,409  
                                 

Operating Loss

    (6,331,488 )     (6,231,492 )     (12,774,614 )     (12,760,011 )

Other Income/(Expense)

                               

Interest expense, net

    (59,488 )     (58,670 )     (122,539 )     (94,284 )

Gain on business acquisition

    -       62,642       -       1,004,099  

Other income (expense), net

    (3,630 )     (3,630 )     (7,260 )     (7,260 )

Total Other Income/(Expense)

    (63,118 )     342       (129,799 )     902,555  
                                 

Net Loss

  $ (6,394,606 )   $ (6,231,150 )   $ (12,904,413 )   $ (11,857,456 )
                                 

Net loss per common share – basic and diluted

  $ (0.10 )   $ (0.09 )   $ (0.19 )   $ (0.19 )

Weighted average common shares outstanding – basic and diluted

    66,478,686       66,370,789       66,458,983       63,931,300  

 

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

 

 

 
2

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

For the Six Months Ended June 30, 2014

 

   

Common Stock

                         
   

Shares

   

Amount

   

Additional

Paid-In-Capital

   

Accumulated

Deficit

   

Total

 

Balance at December 31, 2013

    66,424,561     $ 66,425     $ 154,171,695     $ (88,144,179 )   $ 66,093,941  

Cashless exercise of options

    192,270       192       (192 )     -       -  

Issuance of common stock under employee stock purchase plan

    11,973       12       25,464       -       25,476  

Issuance of common stock upon vesting of restricted stock awards

    15,000       15       (15 )     -       -  

Stock-based compensation for options

    -       -       551,233       -       551,233  

Fair value of options repurchased

    -       -       (3,793 )     -       (3,793 )

Net loss

    -       -       -       (12,904,413 )     (12,904,413 )

Balance at June 30, 2014

    66,643,804     $ 66,644     $ 154,744,392     $ (101,048,592 )   $ 53,762,444  

 

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

 

 

 
3

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

Six Months Ended June 30,

 
   

2014

   

2013

 

Cash Flows From Operating Activities

               

Net loss

  $ (12,904,413 )   $ (11,857,456 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Provision for doubtful accounts

    117,000       60,000  

Depreciation for property, plant and equipment

    6,283,644       6,236,334  

Amortization for customer based intangibles

    692,833       1,570,579  

Stock-based compensation

    555,034       667,376  

Gain on business acquisition

    -       (1,004,099 )

Loss on sale and disposition of property and equipment

    -       59,135  

Deferred rent

    161,890       (57,880 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (301,937 )     (59,552 )

Prepaid expenses and other current assets

    (444,799 )     (244,169 )

Other assets

    161,650       233,634  

Accounts payable

    215,882       (685,847 )

Accrued expenses

    (1,161,615 )     (1,472,991 )

Deferred revenues

    (113,036 )     (172,991 )

Total Adjustments

    6,166,546       5,129,529  

Net Cash Used In Operating Activities

    (6,737,867 )     (6,727,927 )
                 

Cash Flows From Investing Activities

               

Acquisitions of property and equipment

    (4,063,489 )     (2,119,826 )

Lease incentive payment from landlord

    380,000       -  

Acquisition of a business, net of cash acquired

    -       (222,942 )

Proceeds from sale of property and equipment

    -       1,465  

Payments of security deposits

    (18,721 )     (25,644 )

Deferred acquisition payments

    (61,946 )     (83,545 )

Net Cash Used In Investing Activities

    (3,764,156 )     (2,450,492 )
                 

Cash Flows From Financing Activities

               

Payments on capital leases

    (408,683 )     (376,207 )

Issuance of common stock upon exercise of options

    -       253,189  

Issuance of common stock under employee stock purchase plan

    21,675       37,411  

Net proceeds from sale of common stock

    -       30,499,336  

Fair value of options repurchased

    (3,793 )     -  

Net Cash (Used In) Provided By Financing Activities

    (390,801 )     30,413,729  
                 

Net (Decrease) Increase In Cash and Cash Equivalents

    (10,892,824 )     21,235,310  
                 

Cash and Cash Equivalents – Beginning

    28,181,531       15,152,226  

Cash and Cash Equivalents – Ending

  $ 17,288,707     $ 36,387,536  
                 

Supplemental Disclosures of Cash Flow Information

               

Cash paid during the periods for:

               

Interest

  $ 137,527     $ 94,525  

Taxes

  $ 41,269     $ 28,336  

Non-cash investing and financing activities:

               

Fair value of common stock issued in connection with an acquisition

  $ -     $ 951,256  

Acquisition of property and equipment:

               

Under capital leases

  $ -     $ 80,894  

Included in accrued expenses

  $ 572,004     $ 433,408  

 

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

 

 

 
4

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.    Organization and Nature of Business

 

Towerstream Corporation (referred to as “Towerstream” or the “Company”) was incorporated in Delaware in December 1999. During its first decade of operations, the Company's business activities were focused on delivering fixed wireless broadband services to commercial customers over a wireless network transmitting over both regulated and unregulated radio spectrum. The Company's fixed wireless service supports bandwidth on demand, wireless redundancy, virtual private networks, disaster recovery, bundled data and video services. The Company provides services to business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. The Company's “fixed wireless business” has historically grown both organically and through the acquisition of five other fixed wireless broadband providers in various markets.

 

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”).  Hetnets was formed to operate a new shared wireless infrastructure platform that emerged from the Company's efforts to identify opportunities to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services.  Hetnets operates a carrier-class network which has been constructed on "street level rooftops" which are closer to the ground (where Wi-Fi and small cell can operate with less interference from the macro cell) than the Company's traditional fixed wireless network.  The Company believes that the wireless communications industry is experiencing a fundamental shift from its traditional macro-cellular architecture to densified small cell architecture where existing cell sites will be supplemented by many smaller base stations operating near street level.  Hetnets is structured to operate like a tower company and expects to generate rental income from four separate sources including (i) rental of space on street level rooftops for the installation of customer owned small cells which includes Wi-Fi antennae, DAS, and Metro and Pico cells, (ii) rental of a channel on Hetnets’ Wi-Fi network for internet access and the offloading of mobile data, (iii) rental of a port for backhaul or transport, and (iv) power and other related services. The Company refers to the activities of Hetnets as its “shared wireless infrastructure” (or “shared wireless”) business.

 

       In June 2013, Hetnets entered into a Wi-Fi service agreement (the “Wi-Fi Agreement”) with a major cable operator (the “Cable Operator”). The Wi-Fi Agreement provides leased access to certain access points, primarily within New York City and Bergen County, New Jersey. The Cable Operator has a limited right to expand access in other Hetnets’ markets. The term of the Wi-Fi Agreement is for an initial three year period, and provides for automatic annual renewals for two additional one year periods.

 

Note 2.    Summary of Significant Accounting Policies

 

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2014 and the results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 2014 are not necessarily indicative of the operating results for the full fiscal year or for any future period.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2013, and updated, as necessary, in this Quarterly Report on Form 10-Q.

 

Use of Estimates.    The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Actual results could differ from those estimates.

 

Cash and Cash Equivalents.    The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

 

 
5

 

 

  

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Concentration of Credit Risk.    Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of June 30, 2014, the Company had cash and cash equivalent balances of approximately $2,014,000 in excess of the federally insured limit of $250,000.

 

The Company also had approximately $15,017,000 invested in institutional money market funds. These funds are protected under the Securities Investor Protection Corporation, a nonprofit membership corporation which provides limited coverage up to $500,000.

 

Accounts Receivable. Accounts receivable are stated at cost less an allowance for doubtful accounts which reflects the Company’s estimate of balances that will be not collected. The allowance is based on the history of past write-offs, the aging of balances, collections experience and current credit conditions. Additions include provisions for doubtful accounts and deductions include customer write-offs. Changes in the allowance for doubtful accounts were as follows:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Beginning of period

  $ 65,719     $ 143,437     $ 81,009     $ 190,109  

Additions

    107,000       60,000       117,000       60,000  

Deductions

    (10,856 )     (40,759 )     (36,146 )     (87,431 )

End of period

  $ 161,863     $ 162,678     $ 161,863     $ 162,678  

 

Business Acquisitions. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the consideration transferred on the acquisition date.  When the Company acquires a business, it assesses the acquired assets and liabilities assumed for the appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. The excess of the total consideration transferred over the net identifiable assets acquired and liabilities assumed is recognized as goodwill.  If this consideration is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed and included in general and administrative expenses in our condensed consolidated statements of operations.

 

The highest level of judgment and estimation involved in accounting for business acquisitions relates to determining the fair value of the customer relationships and network assets acquired. In each of the five acquisitions completed over the past four years, the highest asset value has been allocated to the customer relationships acquired. Determining the fair value of customer relationships involves judgments and estimates regarding how long the customers will continue to contract services with the Company. During the course of completing five acquisitions, the Company has developed a database of historical experience from prior acquisitions to assist in preparing future estimates of cash flows. Similarly, the Company has used its historical experience in building networks to prepare estimates regarding the fair value of the network assets that it acquires.

 

Revenue Recognition. The Company normally enters into contractual agreements with its customers for periods ranging between one to three years. The Company recognizes the total revenue provided under a contract ratably over the contract period, including any periods under which the Company has agreed to provide services at no cost. The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

 

Deferred Revenues. Customers are billed monthly in advance. Deferred revenues are recognized for that portion of monthly charges not yet earned as of the end of the reporting period. Deferred revenues are also recognized for certain customers who pay for their services in advance.

 

Goodwill. Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired in an acquisition. Goodwill is not amortized but rather is reviewed annually for impairment, or whenever events or circumstances indicate that the carrying value may not be recoverable. The Company initially performs a qualitative assessment of goodwill which considers macro-economic conditions, industry and market trends, and the current and projected financial performance of the reporting unit.  No further analysis is required if it is determined that there is a less than 50 percent likelihood that the carrying value is greater than the fair value. 

 

 

 
6

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Recent Accounting Pronouncements. In May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” which requires an entity to recognize revenue representing the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive in exchange for those goods or services. ASU 2014-09 is intended to establish principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenues and cash flows arising from the entity’s contracts with customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The Company is currently evaluating the effect that ASU 2014-09 will have on its condensed consolidated financial statements and related disclosures.

 

In June 2014, FASB issued ASU No. 2014-12 (“ASU 2014-12”), “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which requires a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. ASU 2014-12 states that the performance target should not be reflected in estimating the grant date fair value of the award. ASU 2014-12 clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the periods for which the requisite service has already been rendered. The new standard is effective for the Company on January 1, 2016. The Company does not expect adoption of ASU 2014-12 to have a significant impact on its condensed consolidated financial statements.

 

Reclassifications.    Certain accounts in the prior year’s condensed consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current year’s condensed consolidated financial statements. These reclassifications have no effect on the previously reported net loss.

 

Subsequent Events. Subsequent events have been evaluated through the date of this filing.

 

Note 3.    Business Acquisitions

 

Delos Internet

 

In February 2013, the Company completed the acquisition of Delos Internet (“Delos”). The Company obtained full control of Delos and determined that the acquisition was a business combination to be accounted for under the acquisition method. The following table summarizes the consideration transferred and the amounts of identified assets acquired and liabilities assumed at the acquisition date. The number of shares issued was based on the closing price of the Company's common stock on the February 28, 2013 closing date which was $2.47.

 

Fair value of consideration transferred:

 

Original

   

Adjustments

   

Final

 

Cash

  $ 225,000     $ -     $ 225,000  

Common stock

    1,071,172       (119,916 )     951,256  

Other liabilities assumed

    -       36,733       36,733  

Capital lease obligations assumed

    128,929       -       128,929  

Total consideration transferred

    1,425,101       (83,183 )     1,341,918  
                         

Fair value of identifiable assets acquired and liabilities assumed:

                       

Cash

    2,058       -       2,058  

Accounts receivable

    80,524       1,286       79,238  

Property and equipment

    826,524       18,824       807,700  

Security deposits

    1,993       -       1,993  

Accounts payable

    (26,970 )     2,566       (29,536 )

Deferred revenue

    (62,110 )     (2,135 )     (59,975 )

Other liabilities

    (89,930 )     -       (89,930 )

Total identifiable net tangible assets

    732,089       20,541       711,548  

Customer relationships

    1,634,469       -       1,634,469  

Total identifiable net assets

    2,366,558       20,541       2,346,017  

Gain on business acquisition

  $ 941,457     $ 62,642     $ 1,004,099  

 

 

 
7

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

The Company recognized a gain on business acquisition of $1,004,099 which is included in other income (expense) in the Company’s condensed consolidated statements of operations for the six months ended June 30, 2013. The challenging economic environment during 2012 made it difficult for smaller companies like Delos to raise sufficient capital to sustain their growth.  As a result, the Company was able to acquire the customer relationships and wireless network of Delos at a discounted price.

 

In May 2013, the Company finalized the purchase price of Delos which resulted in a reduction of approximately $21,000 of identifiable net assets and an increase in the gain on business acquisition of approximately $63,000. The purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Delos of 48,549 from 433,673 to 385,124 shares.

 

The Company incurred approximately $41,000 and $99,000, respectively, of third-party costs in connection with the Delos acquisition for the three and six month ended June 30, 2013. These expenses are included in the general and administrative expenses in the Company’s condensed consolidated statements of operations for the respective periods.

 

Pro Forma Information

 

The following table reflects the unaudited pro forma consolidated results of operations had the acquisition taken place at the beginning of the 2013 period:

 

   

Six Months Ended

June 30, 2013

 
         

Revenues

  $ 16,623,968  

Amortization expense

    1,635,958  

Total operating expenses

    29,443,388  

Net loss

    (11,916,865 )

Basic net loss per share

  $ (0.19 )

 

The pro forma information presented above does not purport to present what actual results would have been had the acquisition actually occurred at the beginning of 2013 and are not necessarily indicative of the operating results for any future period.

 

Note 4.    Property and Equipment

 

Property and equipment is comprised of:

 

   

June 30, 2014

   

December 31, 2013

 

Network and base station equipment

  $ 34,173,206     $ 32,233,262  

Customer premise equipment

    25,124,372       24,244,017  

Shared wireless infrastructure

    20,624,465       19,128,064  

Information technology

    4,565,143       4,417,869  

Furniture, fixtures and other

    1,667,977       1,661,567  

Leasehold improvements

    1,599,093       1,433,984  
      87,754,256       83,118,763  

Less: accumulated depreciation

    50,917,549       44,633,905  

Property and equipment, net

  $ 36,836,707     $ 38,484,858  

 

Property acquired through capital leases included within the Company’s property and equipment consists of the following:

 

   

June 30, 2014

   

December 31, 2013

 

Network and base station equipment

  $ 828,027     $ 828,027  

Shared wireless infrastructure

    1,216,142       1,216,142  

Customer premise equipment

    96,843       96,843  

Information technology

    1,860,028       1,860,028  
      4,001,040       4,001,040  

Less: accumulated depreciation

    1,733,770       1,333,666  

Property acquired through capital leases, net

  $ 2,267,270     $ 2,667,374  

 

 

 
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TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Note 5. Intangible Assets

 

Intangible assets consist of the following:

   

June 30, 2014

   

December 31, 2013

 

Goodwill

  $ 1,674,281     $ 1,674,281  
                 

Customer relationships

  $ 11,856,127     $ 11,856,127  

Less: accumulated amortization of customer relationships

    10,744,688       10,051,855  

Customer relationships, net

    1,111,439       1,804,272  

FCC licenses

    1,284,555       1,284,555  

Intangible assets, net

  $ 2,395,994     $ 3,088,827  

 

Amortization expense for the three months ended June 30, 2014 and 2013 was $107,807 and $817,979, respectively. Amortization expense for the six months ended June 30, 2014 and 2013 was $692,833 and $1,570,579, respectively. The customer contracts acquired in the Company’s acquisition of Delos are being amortized over a 50 month period ending April 2017. As of June 30, 2014, the remaining amortization period for the Delos acquisition was 34 months. Balances related to the Company’s other acquisitions have been fully amortized. Future amortization expense is as follows:

 

Remainder of 2014

  $ 196,136  

2015

    392,272  

2016

    392,272  

2017

    130,759  
    $ 1,111,439  

 

The Company’s licenses with the Federal Communications Commission (“FCC”) are not subject to amortization as they have an indefinite useful life.

 

Note 6. Accrued Expenses

 

Accrued expenses consist of the following:

   

June 30, 2014

   

December 31, 2013

 

Property and equipment

  $ 572,004     $ 867,311  

Payroll and related

    813,005       937,624  

Professional services

    160,712       186,917  

Network

    127,719       138,684  

Marketing

    84,830       108,741  

Other

    184,798       293,402  

Total

  $ 1,943,068     $ 2,532,679  

 

Network expenses consist of costs incurred to provide services to our customers and include tower rentals, bandwidth, troubleshooting and gear removal.

 

Note 7.    Other Liabilities

 

Other liabilities consist of the following:

   

June 30, 2014

   

December 31, 2013

 

Current

               

Deferred rent

  $ 40,644     $ -  

Deferred acquisition payments

    10,799       67,255  

Total

  $ 51,443     $ 67,255  

Long-Term

               

Deferred rent

  $ 1,163,607     $ 662,361  

Deferred acquisition payments

    6,026       11,516  

Deferred taxes

    322,805       322,805  

Total

  $ 1,492,438     $ 996,682  

 

 

 
9

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Deferred acquisition payments related to Delos totaled $16,825 at June 30, 2014 and bear interest at rates ranging from 7% to 12.5%. In May 2014, the Company made its last deferred acquisition payment of $16,630 related to the acquisition of Pipeline Wireless LLC.

 

Note 8. Stock Options and Warrants

 

Stock Options

 

The Company uses the Black-Scholes option pricing model to value options issued to employees, directors and consultants. Compensation expense, including on the date of grant the effect of forfeitures, is recognized over the period of service, generally the vesting period. Stock compensation expense and the weighted average assumptions used to calculate the fair values of stock options granted during the periods indicated were as follows:

 

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Risk-free interest rate

    1.6 %     1.0 - 1.5 %     1.6 %     0.8 - 1.5 %

Expected volatility

    47 %     65 %     47 %     65 - 68 %

Expected life (in years)

    5.3    

5.3 – 6.5

      5.3       5 - 6.5  

Expected dividend yield

    -       -       -       -  

Weighted average per share grant date fair value

  $ 0.84     $ 1.46     $ 0.84     $ 1.46  

Stock-based compensation

  $ 260,882     $ 253,098     $ 551,233     $ 631,304  

 

The risk-free interest rate was based on rates established by the Federal Reserve. The Company’s expected volatility was based upon the historical volatility for its common stock. The expected life of the Company’s options was determined using the simplified method as a result of limited historical data regarding the Company’s activity. The dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future. Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. The unamortized amount of stock options expense totaled $1,231,353 as of June 30, 2014 which will be recognized over a weighted-average period of 1.8 years.

 

Option transactions under the stock option plans during the six months ended June 30, 2014 were as follows:

 

   

Number

   

Weighted Average Exercise Price

 

Outstanding as of December 31, 2013

    4,055,016     $ 2.70  

Granted during 2014

    200,000     $ 1.93  

Exercised

    (340,906 )   $ 0.74  

Forfeited /expired

    (110,805 )   $ 2.68  

Outstanding as of June 30, 2014

    3,803,305     $ 2.83  

Exercisable as of June 30, 2014

    2,659,485     $ 2.70  

 

In June 2014, the Company made its annual grant to the Board of Directors consisting of 200,000 options with an exercise price of $1.93 vesting monthly through May 2015.

 

A total of 340,906 options were exercised on a cashless basis during the three ended June 30, 2014 resulting in the net issuance of 192,270 shares.

 

Cancellations for the three and six months ended June 30, 2014 were 75,805 and 110,805, respectively. Cancellations related to employee terminations except for 14,250 options which were repurchased during the three months ended June 30, 2014.

 

The weighted average remaining contractual life of the outstanding options as of June 30, 2014 was 5.9 years.

 

 
10

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

The intrinsic value of outstanding and exercisable options totaled $645,363 and $643,363 respectively, as of June 30, 2014. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of June 30, 2014, which was $1.94 per share, and the exercise price of the options.

 

Stock Warrants 

 

There were 450,000 warrants outstanding and exercisable at June 30, 2014 and December 31, 2013 with an exercise price of $5.00 and an expiration date in July 2016.

 

       The warrants had no intrinsic value at June 30, 2014. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of June 30, 2014, which was $1.94 per share, and the exercise price of the warrants.

 

Cashless Exercises

 

The number of shares issuable upon the exercise of an option or a warrant will be lower if a holder exercises on a cashless basis. Under a cashless exercise, the holder uses a portion of the shares that would otherwise be issuable upon exercise, rather than cash, as consideration for the exercise. The amount of net shares issuable in connection with a cashless exercise will vary based on the exercise price of the option or warrant compared to the current market price of the Company’s common stock on the date of exercise.

 

Note 9. Employee Stock Purchase Plan

 

Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP Plan”), participants can purchase shares of the Company’s stock at a 15% discount. A maximum of 200,000 shares of common stock can be issued under the ESPP Plan. During the three and six months ended June 30, 2014, a total of 6,490 and 11,973 shares were issued under the ESPP Plan with a fair value of $12,591 and $25,476, respectively. The Company recognized $1,882 and $3,801 of stock-based compensation related to the 15% discount for the three and six months ended June 30, 2014, respectively. The Company recognized $3,021 and $6,522 of stock-based compensation related to the 15% discount for the three and six months ended June 30, 2013, respectively.

 

Note 10. Fair Value Measurement

 

Valuation Hierarchy

 

The accounting standard of the FASB for fair value measurements establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

Cash and cash equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. There were no changes in the valuation techniques during the six months ended June 30, 2014.

 

 

             
   

Total Carrying

Value

   

Quoted prices 

in active

markets
(Level 1)

   

Significant
other
observable
inputs
(Level 2)

   

Significant
unobservable
inputs
(Level 3)

 

June 30, 2014

  $ 17,288,707     $ 17,288,707     $ -     $ -  

December 31, 2013

  $ 28,181,531     $ 28,181,531     $ -     $ -  

 

 

 
11

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Note 11.    Net Loss Per Common Share

 

Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of common shares outstanding during the period. The following common stock equivalents were excluded from the computation of diluted net loss per common share because they were anti-dilutive. The exercise or issuance of these common stock equivalents outstanding at June 30, 2014 would dilute earnings per share if the Company becomes profitable in the future. The exercise of the outstanding stock options and warrants could potentially generate proceeds up to approximately $13 million if exercised by the holder for cash.

 

 

Stock options

    3,803,305  

Warrants

    450,000  

Total

    4,253,305  

 

Note 12.    Commitments

 

Operating Lease Obligations

 

The Company has entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through December 2020. Certain of these operating leases include extensions, at the Company's option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table below as it is not presently determinable which options, if any, the Company will elect to exercise. As of June 30, 2014, total future operating lease obligations were as follows:

 

Remainder of 2014

  $ 10,429,485  

2015

    19,226,692  

2016

    17,782,036  

2017

    12,039,856  

2018

    4,513,665  

Thereafter

    2,063,693  
    $ 66,055,427  

 

Rent expenses were as follows:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Points of Presence

  $ 1,948,102     $ 1,715,204     $ 3,793,348     $ 3,340,906  

Street level rooftops

    3,263,423       2,585,804       6,392,916       5,049,902  

Corporate offices

    84,109       121,519       168,219       245,276  

Other

    95,219       105,351       185,717       225,229  
    $ 5,390,853     $ 4,527,878     $ 10,540,200     $ 8,861,313  

 

Rent expenses related to Points of Presence, street level rooftops and other were included in cost of revenues in the Company’s condensed consolidated statements of operations. Rent expense related to our corporate offices was included in general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

In September 2013, the Company entered into a new lease agreement for its corporate offices and new warehouse space. The lease commenced on January 1, 2014 and expires on December 31, 2019 with an option to renew for an additional five year term through December 31, 2024. The Company spent approximately $600,000 in leasehold improvements in connection with consolidating its corporate based employees from two buildings into one building. The Landlord agreed to contribute $380,000 in funding towards qualified leasehold improvements and made such payment to the Company in February 2014. Total annual rent payments begin at $359,750 for 2014 and escalate by 3% annually reaching $416,970 for 2019.

 

 

 
12

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Capital Lease Obligations

 

The Company has entered into capital leases to acquire property and equipment expiring through March 2018. As of June 30, 2014, total future capital lease obligations were as follows:

 

Remainder of 2014

  $ 478,632  

2015

    908,344  

2016

    655,754  

2017

    391,305  

2018

    53,922  
    $ 2,487,957  

Less: Interest expense

    308,253  

Total capital lease obligations

  $ 2,179,704  

Current

  $ 781,651  

Long-term

  $ 1,398,053  

 

Other

 

During the fourth quarter of 2013, the Company renewed a one year information technology infrastructure support agreement which became effective at the end of the first quarter of 2014. Payments of approximately $121,000 are due quarterly through the first quarter of 2015.

 

Note 13.    Segment Information

 

The Company has two reportable segments: Fixed Wireless and Shared Wireless Infrastructure. Management evaluates performance and allocates resources based on the operating performance of each segment as well as the long-term growth potential for each segment. Costs reported for each segment include costs directly associated with a segment’s operations. Inter-segment revenues and expenses are eliminated in consolidation.

 

     The balance of the Company’s operations is in the Corporate group which includes centralized operations. This group includes operations related to corporate overhead and centralized activities which support overall operations. Corporate overhead includes administrative personnel, including executive management, and other support functions such as information technology and facilities. Centralized operations include network operations, customer care, and the management of network assets. The Corporate group is treated as a separate segment consistent with how management monitors and analyzes financial results. Corporate costs are not allocated to the segments because such costs are managed and controlled on a functional basis that encompasses all markets with centralized, functional management held accountable for corporate results. Management also believes that not allocating these centralized costs provides a better reflection of the direct operating performance of each segment. The table below presents information about the Company's operating segments:

 

   

Three Months Ended June 30, 2014 (Unaudited)

 
   

Fixed 

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 7,572,447     $ 738,370     $ -     $ (45,969 )   $ 8,264,848  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    2,620,460       3,513,341       14,081       (45,969 )     6,101,913  

Depreciation and amortization

    2,080,501       977,960       222,601       -       3,281,062  

Customer support services

    267,961       178,774       700,540       -       1,147,275  

Sales and marketing

    1,252,124       62,862       84,103       -       1,399,089  

General and administrative

    202,053       157,636       2,307,308       -       2,666,997  

Total Operating Expenses

    6,423,099       4,890,573       3,328,633       (45,969 )     14,596,336  

Operating Income (Loss)

  $ 1,149,348     $ (4,152,203 )   $ (3,328,633 )   $ -     $ (6,331,488 )

Capital expenditures

  $ 1,403,404     $ 490,399     $ 204,334     $ -     $ 2,098,137  

 

 

 
13

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

   

Three Months Ended June 30, 2013 (Unaudited)

 
   

Fixed 

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 8,061,156     $ 196,508     $ -     $ (45,489 )   $ 8,212,175  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    2,385,047       2,797,126       29,603       (45,489 )     5,166,287  

Depreciation and amortization

    2,836,979       911,325       187,522       -       3,935,826  

Customer support services

    286,068       134,376       761,273       -       1,181,717  

Sales and marketing

    1,322,233       111,209       90,362       -       1,523,804  

General and administrative

    170,710       144,750       2,320,573       -       2,636,033  

Total Operating Expenses

    7,001,037       4,098,786       3,389,333       (45,489 )     14,443,667  

Operating Income (Loss)

  $ 1,060,119     $ (3,902,278 )   $ (3,389,333 )   $ -     $ (6,231,492 )
                                         

Capital expenditures

  $ 1,028,311     $ 232,819     $ 46,033     $ -     $ 1,307,163  

 

 

 

   

Six Months Ended June 30, 2014 (Unaudited)

 
   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 15,257,973     $ 1,478,719     $ -     $ (91,938 )   $ 16,644,754  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    5,119,152       6,902,292       28,350       (91,938 )     11,957,856  

Depreciation and amortization

    4,618,374       1,918,898       439,205       -       6,976,477  

Customer support services

    536,476       354,964       1,427,970       -       2,319,410  

Sales and marketing

    2,515,261       139,612       165,815       -       2,820,688  

General and administrative

    310,479       304,164       4,730,294       -       5,344,937  

Total Operating Expenses

    13,099,742       9,619,930       6,791,634       (91,938 )     29,419,368  
                                         

Operating Income (Loss)

  $ 2,158,231     $ (8,141,211 )   $ (6,791,634 )   $ -     $ (12,774,614 )
                                         

Capital expenditures

  $ 2,889,854     $ 1,428,452     $ 317,188     $ -     $ 4,635,494  
                                         

As of June 30, 2014

                                       

Property and equipment, net

  $ 21,966,834     $ 12,377,471     $ 2,492,402     $ -     $ 36,836,707  

Total assets

  $ 27,442,263     $ 14,839,751     $ 19,888,452     $ -     $ 62,170,466  

 

 

 
14

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

 

   

Six Months Ended June 30, 2013 (Unaudited)

 
   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 16,247,892     $ 354,984     $ -     $ (91,478 )   $ 16,511,398  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    4,719,192       5,448,011       71,868       (91,478 )     10,147,593  

Depreciation and amortization

    5,656,588       1,775,437       374,888       -       7,806,913  

Customer support services

    561,143       378,898       1,638,570       -       2,578,611  

Sales and marketing

    2,619,174       158,257       187,229       -       2,964,660  

General and administrative

    317,607       334,934       5,121,091       -       5,773,632  

Total Operating Expenses

    13,873,704       8,095,537       7,393,646       (91,478 )     29,271,409  

Operating Income (Loss)

  $ 2,374,188     $ (7,740,553 )   $ (7,393,646 )   $ -     $ (12,760,011 )
                                         

Capital expenditures

  $ 2,115,783     $ 369,019     $ 149,326     $ -     $ 2,634,128  
                                         

As of June 30, 2013

                                       

Property and equipment, net

  $ 24,477,899     $ 12,739,109     $ 1,910,097     $ -     $ 39,127,105  

Total assets

  $ 32,348,914     $ 14,916,880     $ 38,404,977     $ -     $ 85,670,771  

 

 

Note 14. Subsequent Events

 

 

In August 2014, the Company executed a master licensing agreement ("MLA") with a carrier for small cell deployments.  An MLA establishes the detailed terms and conditions under which individual orders are governed, and are generally designed to expedite the deployment process.  The term of this agreement is for 25 years.

 

 

 

 
15

 

 

 

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

 

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the six months ended June 30, 2014. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

 

Forward-Looking Statements

 

Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth and competition; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

 

In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or ‘‘continue’’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place too much reliance on these forward-looking statements which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q.

 

Non-GAAP Measures and Reconciliations to GAAP Measures

 

We prepare our financial statements in accordance with generally accepted accounting principles (“GAAP”). We use certain Non-GAAP measures to monitor our business performance and that of our segments. These Non-GAAP measures are not recognized under GAAP. Accordingly, investors are cautioned about using or relying on these measures as alternatives to recognized GAAP measures. Our methods of calculating these measures may not be comparable to similar measures presented by other companies.

 

Characteristics of Revenues and Expenses

 

Our Fixed Wireless segment offers broadband services under agreements for periods normally ranging between one to three years. Pursuant to these agreements, we bill customers on a monthly basis, in advance, for each month of service. Payments received in advance of services performed are recorded as deferred revenues and recognized as revenue ratably over the service period. Our Shared Wireless Infrastructure segment offers to rent space, channels, and ports on our street level rooftops at a fixed monthly rent.

 

Costs of revenues consists of expenses that are directly related to providing services to our customers, including Core Network expenses (tower and street level rooftop rent and utilities, bandwidth costs, maintenance and other) and Customer Network expenses (customer maintenance, non-installation fees and other customer specific expenses).  We collectively refer to Core Network and Customer Network as our “Network,” and Core Network costs and Customer Network costs as “Network Costs.”  When we first enter a new market, or expand in an existing market, we are required to incur up-front costs in order to be able to provide services to commercial customers.  We refer to these activities as establishing a “Network Presence.” For the Fixed Wireless segment, these costs include constructing Points-of-Presence (“PoPs”) in buildings in which we have a lease agreement (“Company Locations”) where we install a substantial amount of equipment in order to connect numerous customers to the Internet. For the Shared Wireless Infrastructure segment, these costs include installing numerous access points, backhaul, and other equipment on street level rooftops that we refer to as “Hotzones.” The costs to build PoPs and construct Hotzones are capitalized and expensed over a five year period.  In addition, we also enter into tower and roof rental agreements, secure bandwidth and incur other Network Costs.  Once we have established a Network Presence in a new market or expanded our Network Presence in an existing market, we are capable of servicing a significant number of customers through that Network Presence.  The variable cost to add new customers is relatively modest, especially compared to the upfront cost of establishing or expanding our Network Presence.  However, we may experience variability in gross margins during periods in which we are expanding our Network Presence in a market.

 

 

 
16

 

 

 

Sales and marketing expenses primarily consist of the salaries, benefits, travel and other costs of our sales and marketing teams, as well as marketing initiatives and business development expenses.

 

Customer support services include salaries and related payroll costs associated with our customer support services, customer care, installation and operations staff.

 

General and administrative expenses include costs attributable to corporate overhead and the overall support of our operations. Salaries and other related payroll costs for executive management, finance, administration and information systems personnel are included in this category. Other costs include office rent, utilities and other facilities costs, accounting, legal and other professional services, and other general operating expenses.

 

Overview – Fixed Wireless

 

We provide fixed wireless broadband services to commercial customers and deliver access over a wireless network transmitting over both regulated and unregulated radio spectrum. Our service supports bandwidth on demand, wireless redundancy, virtual private networks, disaster recovery, bundled data and video services. We currently provide service to business customers in twelve metropolitan markets.

 

Market Information – Fixed Wireless

 

As of June 30, 2014, we operated in twelve metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation. We incur significant up-front costs in order to establish a Network Presence in a new market. These costs include building PoPs and Network Costs. Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period. We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model and the operating performance of our mature markets. Set forth below is a summary of our operating performance on a per-market basis, and a description of how each category is determined.

 

Revenues: Revenues are allocated based on which market each customer is located in.

 

Costs of Revenues: Includes Core Network costs and Customer Network costs that can be allocated to a specific market.

 

Operating Costs: Represents costs that can be specifically allocated to a market which include direct sales personnel, certain direct marketing expenses, certain customer support and installation payroll expenses and third party commissions.

 

Corporate: Includes corporate overhead and centralized activities which support our overall operations. Corporate overhead includes administrative personnel, including executive management, and other support functions such as information technology and facilities. Centralized operations include network operations, customer care, and the management of network assets.

 

Shared Wireless Infrastructure, net: Represents the net operating results for that business segment.

 

Adjusted Market EBITDA: Represents a market’s income (loss) before interest, taxes, depreciation, amortization, stock-based compensation, and other income (expense). We believe this metric provides useful information regarding the operating cash flow being generated in a market.

 

We entered the Houston market in February 2013 through the acquisition of Delos Internet (“Delos”). We exited the Nashville market effective March 31, 2014.

 

 

 
17

 

 

 

Three months ended June 30, 2014

Market

 

Revenues

   

Cost of
Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted
Market
EBITDA

 

Los Angeles

  $ 1,996,000     $ 573,010     $ 1,422,990     $ 468,799     $ 954,191  

New York

    1,949,999       702,033       1,247,966       335,819       912,147  

Boston

    1,449,309       403,931       1,045,378       189,968       855,410  

Chicago

    734,524       293,140       441,384       128,269       313,115  

Miami

    380,888       118,518       262,370       78,543       183,827  

San Francisco

    284,923       123,775       161,148       58,260       102,888  

Houston

    173,532       66,073       107,459       37,713       69,746  

Las Vegas-Reno

    224,856       121,870       102,986       56,089       46,897  

Seattle

    74,892       47,899       26,993       11,793       15,200  

Dallas-Fort Worth

    160,467       100,229       60,238       46,309       13,929  

Providence-Newport

    64,573       50,888       13,685       1,449       12,236  

Philadelphia

    32,515       19,094       13,421       5,953       7,468  

Total

  $ 7,526,478     $ 2,620,460     $ 4,906,018     $ 1,418,964     $ 3,487,054  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 3,487,054  

Fixed wireless, non-market specific

       

Other expenses

    (303,174 )

Depreciation and amortization

    (2,080,501 )

Shared wireless infrastructure, net

    (4,106,234 )

Corporate

    (3,328,633 )

Other income (expense)

    (63,118 )

Net loss

  $ (6,394,606 )

 

 

Three months ended June 30, 2013

Market

 

Revenues

   

Cost of
Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted
Market
EBITDA

 

Los Angeles

  $ 2,046,981     $ 483,494     $ 1,563,487     $ 379,757     $ 1,183,730  

Boston

    1,628,247       356,085       1,272,162       245,407       1,026,755  

New York

    1,940,048       634,068       1,305,980       371,895       934,085  

Chicago

    820,014       265,855       554,159       113,166       440,993  

Miami

    390,716       105,392       285,324       85,851       199,473  

Houston

    180,254       57,284       122,970       30,209       92,761  

Las Vegas-Reno

    273,887       140,713       133,174       41,269       91,905  

San Francisco

    320,043       113,277       206,766       117,074       89,692  

Providence-Newport

    113,728       49,702       64,026       18,855       45,171  

Seattle

    93,702       46,699       47,003       23,921       23,082  

Philadelphia

    40,052       19,311       20,741       15,283       5,458  

Dallas-Fort Worth

    162,348       100,040       62,308       66,339       (4,031 )

Nashville

    5,647       13,127       (7,480 )     2,859       (10,339 )

Total

  $ 8,015,667     $ 2,385,047     $ 5,630,620     $ 1,511,885     $ 4,118,735  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 4,118,735  

Fixed wireless, non-market specific

       

Other expenses

    (267,126 )

Depreciation and amortization

    (2,836,979 )

Shared wireless infrastructure, net

    (3,856,789 )

Corporate

    (3,389,333 )

Other income (expense)

    342  

Net loss

  $ (6,231,150 )

 

 

 
18

 

 

 

Six months ended June 30, 2014

Market

 

Revenues

   

Cost of
Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted
Market
EBITDA

 

Los Angeles

  $ 4,035,759     $ 1,134,319     $ 2,901,440     $ 937,098     $ 1,964,342  

New York

    3,866,028       1,320,544       2,545,484       616,059       1,929,425  

Boston

    2,983,564       797,546       2,186,018       386,678       1,799,340  

Chicago

    1,459,587       586,799       872,788       269,367       603,421  

Miami

    749,950       220,991       528,959       173,645       355,314  

Houston

    346,348       124,012       222,336       55,612       166,724  

San Francisco

    560,963       251,455       309,508       148,820       160,688  

Las Vegas-Reno

    480,752       243,355       237,397       98,410       138,987  

Providence-Newport

    144,858       98,443       46,415       3,024       43,391  

Dallas-Fort Worth

    327,124       193,711       133,413       95,440       37,973  

Seattle

    139,825       95,730       44,095       17,378       26,717  

Philadelphia

    69,373       39,605       29,768       20,824       8,944  

Nashville

    1,904       12,642       (10,738 )     2,331       (13,069 )

Total

  $ 15,166,035     $ 5,119,152     $ 10,046,883     $ 2,824,686     $ 7,222,197  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 7,222,197  

Fixed wireless, non-market specific

       

Other expenses

    (537,530 )

Depreciation and amortization

    (4,618,374 )

Shared wireless infrastructure, net

    (8,049,273 )

Corporate

    (6,791,634 )

Other income (expense)

    (129,799 )

Net loss

  $ (12,904,413 )

 

 

Six months ended June 30, 2013

Market

 

Revenues

   

Cost of
Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted
Market
EBITDA

 

Los Angeles

  $ 4,116,805     $ 1,013,262     $ 3,103,543     $ 791,220     $ 2,312,323  

Boston

    3,297,685       686,364       2,611,321       460,028       2,151,293  

New York

    3,825,913       1,233,167       2,592,746       708,332       1,884,414  

Chicago

    1,733,214       571,504       1,161,710       226,925       934,785  

Miami

    768,063       204,653       563,410       169,876       393,534  

Las Vegas-Reno

    662,062       272,638       389,424       97,825       291,599  

San Francisco

    622,673       214,117       408,556       203,000       205,556  

Houston

    233,239       78,300       154,939       42,928       112,011  

Providence-Newport

    241,096       98,843       142,253       37,200       105,053  

Seattle

    230,739       92,384       138,355       63,099       75,256  

Philadelphia

    79,992       37,348       42,644       37,810       4,834  

Dallas-Fort Worth

    333,700       188,821       144,879       141,797       3,082  

Nashville

    11,233       27,791       (16,558 )     7,107       (23,665 )

Total

  $ 16,156,414     $ 4,719,192     $ 11,437,222     $ 2,987,147     $ 8,450,075  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 8,450,075  

Fixed wireless, non-market specific

       

Other expenses

    (510,777 )

Depreciation and amortization

    (5,656,588 )

Shared wireless infrastructure, net

    (7,649,075 )

Corporate

    (7,393,646 )

Other income (expense)

    902,555  

Net loss

  $ (11,857,456 )

 

 

 
19

 

 

 

Overview - Shared Wireless Infrastructure

 

Our Shared Wireless Infrastructure segment offers a range of rental options on street level rooftops related to (i) the installation of customer owned Small Cells, (ii) Wi-Fi access and the offloading of mobile data, and (iii) backhaul, power and other related telecommunications. To date, our operating activities have been primarily focused in New York City, and to a lesser degree, San Francisco, Chicago, and Southern Florida. Costs incurred to establish and operate this business segment include (a) rent payments under lease agreements which provide us with the right to install wireless technology equipment and (b) construction of a carrier-class network to deliver the services being offered by our shared wireless segment.

 

In June 2013, we entered into the Wi-Fi service agreement with a major cable operator (the “Cable Operator”). The Wi-Fi Agreement provides leased access to certain access points, primarily within New York City and Bergen County, New Jersey. The Cable Operator has a limited right to expand access in other markets. The term of the Wi-Fi Agreement is for an initial three year period, and provides for automatic renewals for two additional one year periods.

 

Supplemental Segment Information

 

Operating information about each segment in accordance with GAAP is disclosed in Note 13 of the financial statements. In addition, we use other non-GAAP measurements to assess the operating performance of each segment. These non-GAAP financial measures are commonly used by investors, financial analysts, and rating agencies. Management believes that these non-GAAP financial measures should be available so that investors have the same data that management employs in assessing our overall operations.

 

EBITDA, a non-GAAP financial measure, is calculated as net income (loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization expenses, excluding when applicable, stock-based compensation, deferred rent expense, other non-operating income or expenses as well as gain or loss on (i) disposal of property and equipment, (ii) nonmonetary transactions, and (iii) business acquisitions.

 

Net Cash Flow is another commonly used non-GAAP financial measure. Net Cash Flow is defined as Adjusted EBITDA less capital expenditures.

 

Three months ended June 30, 2014

 

   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 1,149,348     $ (4,152,203 )   $ (3,328,633 )   $ (6,331,488 )

Depreciation and amortization

    2,080,501       977,960       222,601       3,281,062  

Stock-based compensation

    -       -       262,764       262,764  

Loss on non-monetary transactions

    67,833       -       -       67,833  

Deferred rent

    38,742       61,192       (8,807 )     91,127  

Non-recurring expenses, primarily acquisition- related

    -       -       91,359       91,359  

Adjusted EBITDA

    3,336,424       (3,113,051 )     (2,760,716 )     (2,537,343 )

Less: Capital expenditures

    1,403,404       490,399       204,334       2,098,137  

Net Cash Flow

  $ 1,933,020     $ (3,603,450 )   $ (2,965,050 )   $ (4,635,480 )

 

Reconciliation of Adjusted EBITDA to Net Loss

       
         

Adjusted EBITDA

  $ (2,537,343 )

Depreciation and amortization

    (3,281,062 )

Stock-based compensation

    (262,764 )

Loss on non-monetary transactions

    (67,833 )

Deferred rent

    (91,127 )

Non-recurring expenses, primarily acquisition-related

    (91,359 )

Operating Income (Loss)

    (6,331,488 )

Interest expense, net

    (59,488 )

Other income (expense), net

    (3,630 )

Net loss

  $ (6,394,606 )

 

 

 
20

 

 

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities

       
         

Net cash flow

  $ (4,635,480 )

Capital expenditures

    2,098,137  

Non-recurring expenses, primarily acquisition-related

    (91,359 )

Changes in operating assets and liabilities, net

    1,003,909  

Other, net

    (23,948 )

Net cash used in operating activities

  $ (1,648,741 )

 

Three months ended June 30, 2013

 

   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 1,060,119     $ (3,902,278 )   $ (3,389,333 )   $ (6,231,492 )

Depreciation and amortization

    2,836,979       911,325       187,522       3,935,826  

Stock-based compensation

    -       -       270,895       270,895  

Loss on property and equipment

    14,874       2,310       -       17,184  

Loss on non-monetary transactions

    64,974       -       -       64,974  

Non-recurring expenses, primarily acquisition-related

    -       -       47,415       47,415  

Adjusted EBITDA

    3,976,946       (2,988,643 )     (2,883,501 )     (1,895,198 )

Less: Capital expenditures

    1,028,311       232,819       46,033       1,307,163  

Net Cash Flow

  $ 2,948,635     $ (3,221,462 )   $ (2,929,534 )   $ (3,202,361 )

 

 

Reconciliation of Adjusted EBITDA to Net Loss

       
         

Adjusted EBITDA

  $ (1,895,198 )

Depreciation and amortization

    (3,935,826 )

Stock-based compensation

    (270,895 )

Loss on property and equipment

    (17,184 )

Loss on non-monetary transactions

    (64,974 )

Non-recurring expenses, primarily acquisition-related

    (47,415 )

Operating Income (Loss)

    (6,231,492 )

Interest expense, net

    (58,670 )

Gain on business acquisition

    62,642  

Other income (expense), net

    (3,630 )

Net loss

  $ (6,231,150 )

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities

       
         

Net cash flow

  $ (3,202,361 )

Capital expenditures

    1,307,163  

Non-recurring expenses, primarily acquisition-related

    (47,415 )

Changes in operating assets and liabilities, net

    (266,373 )

Other, net

    (96,216 )

Net cash used in operating activities

  $ (2,305,202 )

 

 

 
21

 

 

 

     Six Months Ended June 30, 2014

 

   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 2,158,231     $ (8,141,211 )   $ (6,791,634 )   $ (12,774,614 )

Depreciation and amortization

    4,618,374       1,918,898       439,205       6,976,477  

Stock-based compensation

    -       -       555,034       555,034  

Loss on non-monetary transactions

    135,401       -       -       135,401  

Deferred rent

    45,496       134,007       (17,613 )     161,890  

Non-recurring expenses, primarily acquisition-related

    -       -       91,359       91,359  

Adjusted EBITDA

    6,957,502       (6,088,306 )     (5,723,649 )     (4,854,453 )

Less: Capital expenditures

    2,889,854       1,428,452       317,188       4,635,494  

Net Cash Flow

  $ 4,067,648     $ (7,516,758 )   $ (6,040,837 )   $ (9,489,947 )

 

Reconciliation of Adjusted EBITDA to Net Loss

       
         

Adjusted EBITDA

  $ (4,854,453 )

Depreciation and amortization

    (6,976,477 )

Stock-based compensation

    (555,034 )

Loss on non-monetary transactions

    (135,401 )

Deferred rent

    (161,890 )

Non-recurring expenses, primarily acquisition-related

    (91,359 )

Operating Income (Loss)

    (12,774,614 )

Interest expense, net

    (122,539 )

Other income (expense), net

    (7,260 )

Net loss

  $ (12,904,413 )

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities

       
         

Net cash flow

  $ (9,489,947 )

Capital expenditures

    4,635,494  

Non-recurring expenses, primarily acquisition-related

    (91,359 )

Changes in operating assets and liabilities, net

    (1,643,855 )

Other, net

    (148,200 )

Net cash used in operating activities

  $ (6,737,867 )

 

Six Months Ended June 30, 2013

 

   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 2,374,188     $ (7,740,553 )   $ (7,393,646 )   $ (12,760,011 )

Depreciation and amortization

    5,656,588       1,775,437       374,888       7,806,913  

Stock-based compensation

    -       -       667,376       667,376  

Loss on property and equipment

    54,101       5,034       -       59,135  

Loss on non-monetary transactions

    142,158       -       -       142,158  

Non-recurring expenses, primarily acquisition-related

    -       -       112,815       112,815  

Adjusted EBITDA

    8,227,035       (5,960,082 )     (6,238,567 )     (3,971,614 )

Less: Capital expenditures

    2,115,783       369,019       149,326       2,634,128  

Net Cash Flow

  $ 6,111,252     $ (6,329,101 )   $ (6,387,893 )   $ (6,605,742 )

 

 

 
22

 

 

 

Reconciliation of Adjusted EBITDA to Net Loss

       
         

Adjusted EBITDA

  $ (3,971,614 )

Depreciation and amortization

    (7,806,913 )

Stock-based compensation

    (667,376 )

Loss on property and equipment

    (59,135 )

Loss on non-monetary transactions

    (142,158 )
Non-recurring expenses, primarily acquisition-related     (112,815

)

Operating Income (Loss)

    (12,760,011 )

Interest expense, net

    (94,284 )

Gain on business acquisition

    1,004,099  

Other income (expense), net

    (7,260 )

Net loss

  $ (11,857,456 )

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities

       
         

Net cash flow

  $ (6,605,742 )

Capital expenditures

    2,634,128  

Non-recurring expenses, primarily acquisition-related

    (112,815 )

Changes in operating assets and liabilities, net

    (2,401,916 )

Other, net

    (241,582 )

Net cash used in operating activities

  $ (6,727,927 )

 

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

 

Revenues. Revenues totaled $8,264,848 during the three months ended June 30, 2014 compared to $8,212,175 during the three months ended June 30, 2013 representing an increase of $52,673, or 1%. Revenues for the Fixed Wireless segment totaled $7,572,447 during the three months ended June 30, 2014 compared to $8,061,156 during the three months ended June 30, 2013 representing a decrease of $488,709, or 6%. The decrease principally resulted from an 8% decrease in monthly recurring billings which can be attributed, in part, to a lower number of sales personnel. Revenues for the Shared Wireless segment totaled $738,370 during the three months ended June 30, 2014 compared to $196,508 during the three months ended June 30, 2013 representing an increase of $541,862, or greater than 100%. The increase was exclusively related to higher revenues generated through a large cable company customer contract.

 

Average revenue per user (“ARPU”) for the Fixed Wireless segment totaled $760 as of June 30, 2014 compared to $740 as of June 30, 2013 representing an increase of $20, or 3%. The increase in ARPU primarily related to customers upgrading to higher bandwidth service which generates higher monthly recurring revenue. ARPU for new customers totaled $626 during the three months ended June 30, 2014 compared to $640 during the three months ended June 30, 2013 representing a decrease of $14, or 2%.

 

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.71% during the three months ended June 30, 2014 compared to 2.34% during the three months ended June 30, 2013. Our goal is to maintain churn levels between 1.40% and 1.70% which we believe is below industry averages of approximately 2.00%. Churn levels can fluctuate from quarter to quarter depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons. We believe that the improved results for the 2014 period reflects the efforts of our recently formed customer retention department which has adopted an active communications program with our customers to identify, address and mitigate any potential service issues with our customers. Churn elevated to 2.04% during the twelve months ended March 31, 2014 but averaged 1.71% during the thirty six months ended June 30, 2014.

 

Cost of Revenues.    Cost of revenues totaled $6,101,913 during the three months ended June 30, 2014 compared to $5,166,287 during the three months ended June 30, 2013 representing an increase of $935,626, or 18%. On a consolidated basis, higher rent expense represented approximately 100% of the increase with rents for PoPs for the fixed wireless segment increasing by approximately $202,000 and rents for street level rooftops for the shared wireless segment increasing by approximately $744,000. On a consolidated basis, gross margin was 26% for the three months ended June 30, 2014 as compared to 37% for the three months ended June 30, 2013 representing a decrease of 11 percentage points with the shared wireless and fixed wireless segments accounting for 9 and 2 of the percentage point decreases, respectively. On a per market basis, approximately $675,000, or 72%, of the increase in cost of revenues occurred in our New York City market which is the second largest market for our fixed wireless segment and where approximately 60% of the street level rooftops for our shared wireless segment are located. Lease agreements for our PoPs and street level rooftops generally include escalators averaging two to three percent annually. Other cost of revenues, including bandwidth and customer network costs totaled $704,168 during the three months ended June 30, 2014 as compared to $715,317 during the three months ended June 30, 2013 representing a decrease of $11,149, or 2%.

 

 

 
23

 

 

 

Depreciation and Amortization.    Depreciation and amortization totaled $3,281,062 during the three months ended June 30, 2014 compared to $3,935,826 during the three months ended June 30, 2013 representing a decrease of $654,764, or 17%. Depreciation expense totaled $3,173,255 during the three months ended June 30, 2014 compared to $3,117,847 during the three months ended June 30, 2013 representing an increase of $55,408, or 2%.

 

Amortization expense totaled $107,807 during the three months ended June 30, 2014 compared to $817,979 during the three months ended June 30, 2013 representing a decrease of $710,172, or 87%. Amortization expense relates to customer related intangible assets recorded in connection with acquisitions and can fluctuate significantly from period to period depending upon the timing of acquisitions, the relative amounts of intangible assets recorded, and the amortization periods. The decrease was related to two acquisitions which had almost no amortization in the 2014 period but full amortization in the 2013 period. We recognized zero and $232,953 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with One Velocity Inc. (“One Velocity”) which became fully amortized in November 2013. In addition, we recognized $9,739 and $486,958 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with Color Broadband Communications (“Color Broadband”) which became fully amortized in April 2014.

 

Customer Support Services.    Customer support services totaled $1,147,275 during the three months ended June 30, 2014 compared to $1,181,717 during the three months ended June 30, 2013 representing a decrease of $34,442, or 3%. The decrease was primarily related to lower payroll costs as average headcount totaled 69 during the 2014 period as compared to 70 during the 2013 period.

 

Sales and Marketing. Sales and marketing expenses totaled $1,399,089 during the three months ended June 30, 2014 compared to $1,523,804 during the three months ended June 30, 2013 representing a decrease of $124,715, or 8%. Compensation related costs, including sales commissions, totaled $966,373 during the 2014 period as compared to $1,142,723 during the 2013 period representing a decrease of $176,350, or 15%. Average headcount totaled 44 during the 2014 period compared to 49 during the 2013 period representing a decrease of 5, or 10%. Advertising costs totaled $289,236 during the 2014 period as compared to $244,844 during the 2013 period representing an increase of $44,392, or 18%.

 

General and Administrative. General and administrative expenses totaled $2,666,997 during the three months ended June 30, 2014 compared to $2,636,033 during the three months ended June 30, 2013 representing an increase of $30,964, or 1%. Payroll costs totaled $1,019,296 during the 2014 period compared to $936,535 during the 2013 period representing an increase of $82,761, or 9%. Professional services costs totaled $252,327 during the 2014 period compared to $301,236 during the 2013 period representing a decrease of $48,909, or 16%. The decrease primarily related to higher legal fees for FCC matters during the 2013 period. Facilities expense totaled $105,079 during the 2014 period compared to $144,850 during the 2013 period representing a decrease of $39,771, or 27%. The Company consolidated its corporate offices from two buildings to one building which has lowered its facilities costs. Insurance expense totaled $113,721 during the 2014 period compared to $69,374 during the 2013 period representing an increase of $44,347, or 64%. The increase primarily related to higher workers' compensation premiums.

 

     Interest Expense, Net.    Interest expense, net totaled $59,488 during the three months ended June 30, 2014 compared to $58,670 during the three months ended June 30, 2013 representing an increase of $818, or 1%.

 

Gain on Business Acquisition.    There was no gain on business acquisition during the three months ended June 30, 2014 compared to $62,642 during the three months ended June 30, 2013.  The gain recognized in the 2013 period represented the final purchase price adjustment related to the acquisition of Delos in February 2013. The final, adjusted gain totaled $1,004,099. The challenging economic environment during 2012 made it difficult for smaller companies like Delos to raise sufficient capital to sustain their growth. As a result, we were able to acquire the customer relationships and wireless network of Delos at a discounted price.

 

Net Loss.    Net loss totaled $6,394,606 during the three months ended June 30, 2014 compared to $6,231,150 during the three months ended June 30, 2013 representing an increase of $163,456, or 3%. Revenues increased by $52,673, or 1%, while operating expenses increased by $152,669, or 1%. In addition, non-operating expense totaled $63,118 during the three months ended June 30, 2014 compared with non-operating income of $342 during the three months ended June 30, 2013.

 

 

 
24

 

 

 

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

 

Revenues. Revenues totaled $16,644,754 during the six months ended June 30, 2014 compared to $16,511,398 during the six months ended June 30, 2013 representing an increase of $133,356, or 1%. Revenues for the Fixed Wireless segment totaled $15,257,973 during the six months ended June 30, 2014 compared to $16,247,892 during the six months ended June 30, 2013 representing a decrease of $989,919, or 6%.   The decrease principally resulted from a 6% decrease in monthly recurring billings which can be attributed, in part, to a lower number of sales personnel. Revenues for the Shared Wireless segment totaled $1,478,719 during the six months ended June 30, 2014 compared to $354,984 during the six months ended June 30, 2013 representing an increase of $1,123,735, or greater than 100%. The increase was primarily related to higher revenues generated through a large cable company customer contract.

 

Cost of Revenues.    Cost of revenues totaled $11,957,856 during the six months ended June 30, 2014 compared to $10,147,593 during the six months ended June 30, 2013 representing an increase of $1,810,263, or 18%. On a consolidated basis, higher rent expense represented approximately 100% of the increase with rents for PoPs for the fixed wireless segment increasing by approximately $412,000 and rents for street level rooftops for the shared wireless segment increasing by approximately $1,459,000. On a consolidated basis, gross margin was 28% for the six months ended June 30, 2014 as compared to 39% for the six months ended June 30, 2013 representing a decrease of 11 percentage points with the shared wireless and fixed wireless segments accounting for 9 and 2 of the percentage point decreases, respectively. On a per market basis, approximately $1,265,000, or 70%, of the increase in cost of revenues occurred in our New York City market which is the second largest market for our fixed wireless segment and where approximately 60% of the street level rooftops for our shared wireless segment are located. Lease agreements for our PoPs and street level rooftops generally include escalators averaging two to three percent annually. Other cost of revenues, including bandwidth and customer network costs totaled $1,411,225 during the six months ended June 30, 2014 as compared to $1,471,406 during the six months ended June 30, 2013 representing a decrease of $60,181, or 4%.

 

Depreciation and Amortization.    Depreciation and amortization totaled $6,976,477 during the six months ended June 30, 2014 compared to $7,806,913 during the six months ended June 30, 2013 representing a decrease of $830,436, or 11%. Depreciation expense totaled $6,283,644 during the six months ended June 30, 2014 compared to $6,236,334 during the six months ended June 30, 2013 representing an increase of $47,310, or 1%.

 

Amortization expense totaled $692,833 during the six months ended June 30, 2014 compared to $1,570,579 during the six months ended June 30, 2013 representing a decrease of $877,746 or 56%. Amortization expense relates to customer related intangible assets recorded in connection with acquisitions and can fluctuate significantly from period to period depending upon the timing of acquisitions, the relative amounts of intangible assets recorded, and the amortization periods. The decrease was related to two acquisitions which had partial or no amortization in the 2014 period but full amortization in the 2013 period. We recognized zero and $465,907 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with One Velocity which became fully amortized in November 2013. In addition, we recognized $496,697 and $973,915 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with Color Broadband which became fully amortized in April 2014. These decreases were partially offset by higher amortization expense associated with the Delos acquisition which was completed in February 2013, and for which $196,136 was recorded in the 2014 period compared to $130,757 in the 2013 period.

 

Customer Support Services.    Customer support services totaled $2,319,410 during the six months ended June 30, 2014 compared to $2,578,611 during the six months ended June 30, 2013 representing a decrease of $259,201, or 10%. The decrease was primarily related to lower payroll costs as average headcount decreased 9% to 67 during the 2014 period as compared to 74 during the 2013 period.

 

Sales and Marketing. Sales and marketing expenses totaled $2,820,688 during the six months ended June 30, 2014 compared to $2,964,660 during the six months ended June 30, 2013 representing a decrease of $143,972, or 5%. Compensation related costs, including sales commissions, totaled $1,939,921 during the 2014 period as compared to $2,173,244 during the 2013 period representing a decrease of $233,323, or 11%. Average headcount totaled 45 during the 2014 period compared to 49 during the 2013 period representing a decrease of 4, or 8%. Channel commissions totaled $199,858 during the 2014 period as compared to $179,004 during the 2013 period representing an increase of $20,854, or 12%. Advertising costs totaled $585,442 during the 2014 period as compared to $542,289 during the 2013 period representing an increase of $43,153, or 8%.

 

General and Administrative.  General and administrative expenses totaled $5,344,937 during the six months ended June 30, 2014 compared to $5,773,632 during the six months ended June 30, 2013 representing a decrease of $428,695 or 7%. Stock-based compensation totaled $555,034 during the 2014 period compared to $667,376 during the 2013 period representing a decrease of $112,342, or 17%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Professional services costs totaled $626,936 during the 2014 period compared to $749,162 during the 2013 period representing a decrease of $122,226, or 16%. The decrease partially related to higher legal fees for the shared wireless segment during the 2013 period, primarily related to our San Francisco network. Facilities expense totaled $203,162 during the 2014 period compared to $308,759 during the 2013 period representing a decrease of $105,597, or 34%. The Company consolidated its corporate offices from two buildings to one building which has lowered its facilities costs. Insurance expense totaled $234,269 during the 2014 period compared to $138,555 during the 2013 period representing an increase of $95,714, or 69%. The increase primarily related to higher workers' compensation premiums.

 

 

 
25

 

 

 

Interest Expense, Net.    Interest expense, net totaled $122,539 during the six months ended June 30, 2014 compared to $94,284 during the six months ended June 30, 2013 representing an increase of $28,255, or 30%.

 

Gain on Business Acquisition.    There was no gain on business acquisition during the six months ended June 30, 2014 compared to $1,004,099 during the six months ended June 30, 2013.  The gain recognized in the 2013 period related to the acquisition of Delos in February 2013. The challenging economic environment during 2012 made it difficult for smaller companies like Delos to raise sufficient capital to sustain their growth. As a result, we were able to acquire the customer relationships and wireless network of Delos at a discounted price.

 

Net Loss.    Net loss totaled $12,904,413 during the six months ended June 30, 2014 compared to $11,857,456 during the six months ended June 30, 2013 representing an increase of $1,046,957, or 9%. Revenues increased by $133,356, or 1%, while operating expenses increased by $147,959, or 1%. In addition, non-operating expense totaled $129,799 during the six months ended June 30, 2014 compared with non-operating income, primarily related to gain on business acquisition, of $902,555 during the six months ended June 30, 2013.

 

Liquidity and Capital Resources

 

We have historically met our liquidity and capital requirements primarily through the public sale and private placement of equity securities and debt financing. Changes in capital resources during the six months ended June 30, 2014 and 2013 are described below.

 

Net Cash Used in Operating Activities.    Net cash used in operating activities for the six months ended June 30, 2014 totaled $6,737,867 compared to $6,727,927 for the six months ended June 30, 2013 representing an increase of $9,940, or less than 1%. Cash used in operations for the six months ended June 30, 2014 totaled $5,094,012 as compared to $4,326,011 for the six months ended June, 30, 2013. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results.  Changes in operating assets and liabilities used cash of $1,643,855 during the six months ended June 30, 2014 as compared to $2,401,916 for the six months ended June 30, 2013.

 

Net Cash Used in Investing Activities. Net cash used in investing activities for the six months ended June 30, 2014 totaled $3,764,156 compared to $2,450,492 for the six months ended June 30, 2013 representing an increase of $1,313,664, or 54%. Cash capital expenditures for the fixed wireless segment increased from $1,904,985 in the 2013 period to $2,615,952 in the 2014 period representing an increase of $710,967, or 37%. Cash capital expenditures for the shared wireless infrastructure segment increased from $180,007 in the 2013 period to $1,326,391 in the 2014 period representing an increase of $1,146,384 or greater than 100%. In addition, we received an incentive payment of $380,000 from our landlord in connection with entering a new lease agreement for our corporate offices. These funds were used to pay for qualified leasehold improvements to the facility. Finally, we paid cash of $225,000 for the acquisition of Delos in the 2013 period. There were no acquisitions in the 2014 period.

 

Net Cash (Used In) Provided by Financing Activities.  Net cash used in financing activities for the six months ended June 30, 2014 totaled $390,801 compared to net cash provided by financing activities of $30,413,729 for the six months ended June 30, 2013, representing a decrease of $30,804,530, or greater than 100%. The decrease was primarily related to net proceeds of $30,499,336 received in the first quarter of 2013 from the sale of 11,000,000 shares of our common stock at a public offering price of $3.00 per share.

 

Acquisition of Delos. In February 2013, we completed the acquisition of Delos which was based in the Houston, Texas area. The aggregate consideration for the acquisition included (i) approximately $225,000 in cash, (ii) 385,124 shares of common stock with a fair value of approximately $951,000 based on the market price of our common stock on the closing date, and (iii) approximately $166,000 in assumed liabilities. The acquisition of Delos was a business combination accounted for under the acquisition method.

 

Underwritten Offering. In the first quarter of 2013, we completed an underwritten offering of 11,000,000 shares of our common stock at a public offering price of $3.00 per share. The total gross proceeds of the offering were $33,000,000. Net proceeds were $30,499,336, after underwriting discounts, commissions and offering expenses.

 

Capital Resources.    As of June 30, 2014, we had cash and cash equivalents of $17,288,707 and working capital of $13,938,047. Based on our current operating activities and plans, we believe our capital resources at the end of June 30, 2014 will enable us to meet our anticipated cash requirements for at least the next twelve months.

 

 

 
26

 

 

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and other commitments as of June 30, 2014:

 

   

Payments due by period

 
   

Total

   

2014

   

2015

   

2016

   

2017

   

2018

   

Thereafter

 

Capital leases

  $ 2,487,957     $ 478,632     $ 908,344     $ 655,754     $ 391,305     $ 53,922     $ -  

Operating leases

    66,055,427       10,429,485       19,226,692       17,782,036       12,039,856       4,513,665       2,063,693  

Deferred payments

    17,782       5,813       11,627       342       -       -       -  

Other

    364,246       242,831       121,415       -       -       -       -  

Total

  $ 68,925,412     $ 11,156,761     $ 20,268,078     $ 18,438,132     $ 12,431,161     $ 4,567,587     $ 2,063,693  

 

Capital Lease Obligations. We have entered into capital leases to acquire network, rooftop tower site and customer premise equipment expiring through March 2018.

 

Operating Leases. We have entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through December 2020. Certain of these operating leases include extensions, at our option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table above as it is not presently determinable which options, if any, we will elect to exercise.

 

Other. During the fourth quarter of 2013, we renewed a one year information technology infrastructure support agreement which became effective at the end of the first quarter of 2014. Payments of approximately $121,000 are due quarterly through the first quarter of 2015.

 

Critical Accounting Policies

 

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, we utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments, giving appropriate consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates which may impact the comparability of our results of operations to other companies in our industry. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and estimation, or are fundamentally important to our business. 

 

Revenue Recognition.    We normally enter into contractual agreements with our customers for periods ranging between one to three years. We recognize the total revenue provided under a contract ratably over the contract period including any periods under which we have agreed to provide services at no cost. Deferred revenues are recognized as a liability when billings are issued in advance of the date when revenues are earned. We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

 

Long-Lived Assets. Long-lived assets with definite lives consist primarily of property and equipment, and intangible assets such as acquired customer relationships. Long-lived assets are evaluated periodically for impairment or whenever events or circumstances indicate their carrying value may not be recoverable. Conditions that would result in an impairment charge include a significant decline in the fair value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset’s carrying value to determine if impairment exists. If the asset is determined to be impaired, the impairment loss is measured based on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value.

 

Business Acquisitions. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the consideration transferred on the acquisition date.  When we acquire a business, we assess the acquired assets and liabilities assumed for the appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. The excess of the total consideration transferred over the net identifiable assets acquired and liabilities assumed is recognized as goodwill.  If the total consideration is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed and included in general and administrative expenses in our condensed consolidated statements of operations.

 

 

 
27

 

 

 

     The highest level of judgment and estimation involved in accounting for business acquisitions relates to determining the fair value of the customer relationships and network assets acquired. In each of the five acquisitions completed over the past four years, the highest asset value has been allocated to the customer relationships acquired. Determining the fair value of customer relationships involves judgments and estimates regarding how long the customers will continue to contract services with us. During the course of completing five acquisitions, we have developed a database of historical experience from prior acquisitions to assist us in preparing future estimates of cash flows. Similarly, we have used our historical experience in building networks to prepare estimates regarding the fair value of the network assets that we acquire. 

 

Goodwill. Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired in an acquisition. Goodwill is not amortized but rather is reviewed annually for impairment, or whenever events or circumstances indicate that the carrying value may not be recoverable. We initially perform a qualitative assessment of goodwill which considers macro-economic conditions, industry and market trends, and the current and projected financial performance of the reporting unit.  No further analysis is required if it is determined that there is a less than 50 percent likelihood that the carrying value is greater than the fair value. 

 

Recent Accounting Pronouncements. In May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” which requires an entity to recognize revenue representing the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive in exchange for those goods or services. ASU 2014-09 is intended to establish principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenues and cash flows arising from the entity’s contracts with customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. We are currently evaluating the effect that ASU 2014-09 will have on our condensed consolidated financial statements and related disclosures.

 

In June 2014, FASB issued ASU No. 2014-12 (“ASU 2014-12”), “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which requires a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. ASU 2014-12 states that the performance target should not be reflected in estimating the grant date fair value of the award. ASU 2014-12 clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the periods for which the requisite service has already been rendered. The new standard is effective for us on January 1, 2016. We do not expect adoption of ASU 2014-12 to have a significant impact on our condensed consolidated financial statements.

 

Off-Balance Sheet Arrangements.    We have no off-balance sheet arrangements, financings, or other relationships with unconsolidated entities known as ‘‘Special Purposes Entities.’’

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

     Market risk is the potential loss arising from adverse changes in market rates and prices.  Our primary market risk relates to interest rates.  At June 30, 2014, all cash and cash equivalents are immediately available cash balances.  A portion of our cash and cash equivalents are held in institutional money market funds.   

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of June 30, 2014, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

 

 
28

 

 

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our system of internal control over financial reporting during the six months ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 
29

 

 

 

PART II

OTHER INFORMATION

 

Item 6. Exhibits.

 

Exhibit No.    

Description

31.1

Section 302 Certification of Principal Executive Officer.

31.2

Section 302 Certification of Principal Financial Officer.

32.1

Section 906 Certification of Principal Executive Officer.

32.2

Section 906 Certification of Principal Financial Officer.

101.INS XBRL Instance Document*
101.SCH XBRL Taxonomy Extension Schema Document*
101.CAL XBRL Taxonomy Calculation Linkbase Document*
101.LAB XBRL Taxonomy Labels Linkbase Document*
101.PRE XBRL Taxonomy Presentation Linkbase Document*
101.DEF XBRL Definition Linkbase Document*
   

*Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, and (v) related notes to these financial statements.  

 

 

 
30

 

 

 

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.

 

 

TOWERSTREAM CORPORATION

   
   

 

 

 

 

Date: August 112014

By:  

/s/ Jeffrey M. Thompson

 
     

 

Jeffrey M. Thompson

 
 

President and Chief Executive Officer

 
  (Principal Executive Officer)  

 

   

                                                                                                                                                                                     By:

/s/ Joseph P. Hernon

 
     
 

Joseph P. Hernon

 
 

Chief Financial Officer

 
  (Principal Financial Officer and Principal Accounting Officer)
     

 

 

 
31

 

 

 

EXHIBIT INDEX

Exhibit No.

   

Description

31.1

Section 302 Certification of Principal Executive Officer.

31.2

Section 302 Certification of Principal Financial Officer.

32.1

Section 906 Certification of Principal Executive Officer.

32.2

Section 906 Certification of Principal Financial Officer

101.INS

XBRL Instance Document*

101.SCH

XBRL Taxonomy Extension Schema Document*

101.CAL

XBRL Taxonomy Calculation Linkbase Document*

101.LAB

XBRL Taxonomy Labels Linkbase Document*

101.PRE

XBRL Taxonomy Presentation Linkbase Document*

101.DEF

XBRL Definition Linkbase Document*

   

  

*Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, and (v) related notes to these financial statements.  

 

 

 

 

 

 

 

 

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