twer20171231_10k.htm
 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 (Mark One)

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

For the fiscal year ended December 31, 2017

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.)

 

76 Hammarlund Way

Middletown, Rhode Island

(Address of principal executive offices)

 

02842

(Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

     
     

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No ☒  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No ☒

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth 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 ☒ 

     
      Emerging growth company

     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $2,574,930.  

 

As of March 23, 2018, there were 394,399 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

 

 

Page

PART I

 

 

 

Item 1

Business.

2

 

 

 

Item 1A

Risk Factors.

10

 

 

 

Item 1B

Unresolved Staff Comments.

29

 

 

 

Item 2

Properties.

30

 

 

 

Item 3

Legal Proceedings.

30

 

 

 

Item 4

Mine Safety Disclosures.

30

 

 

 

PART II

 

 

 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

31

 

 

 

Item 6

Selected Financial Data.

32

 

 

 

Item 7

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

32

 

 

 

Item 7A

Quantitative and Qualitative Disclosures About Market Risk.

44

 

 

 

Item 8

Financial Statements and Supplementary Data.

45

 

 

 

Item 9

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

86

 

 

 

Item 9A

Controls and Procedures.

86

 

 

 

Item 9B

Other Information.

87

 

 

 

PART III

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance.

88

 

 

 

Item 11

Executive Compensation.

92

 

 

 

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

98

 

 

 

Item 13

Certain Relationships and Related Transactions, and Director Independence.

100

 

 

 

Item 14

Principal Accountant Fees and Services.

101

 

 

 

PART IV

 

 

 

Item 15

Exhibits and Financial Statement Schedules.

102

 

i

 

  

 

PART I

 

Forward-Looking Statements

 

Forward-looking statements in this report, including without limitation, statements related to Towerstream Corporation’s 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) Towerstream Corporation’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of Towerstream Corporation; (ii) Towerstream Corporation’s plans and results of operations will be affected by Towerstream Corporation’s ability to manage growth and competition; and (iii) other risks and uncertainties indicated from time to time in Towerstream Corporation’s 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 report.  

 

Factors that might affect our forward-looking statements include, among other things:

 

overall economic and business conditions;

 

 

the demand for our services;

 

 

competitive factors in the industries in which we compete;

 

 

emergence of new technologies which compete with our service offerings;

 

 

changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);

 

 

the outcome of litigation and governmental proceedings;

 

 

interest rate fluctuations and other changes in borrowing costs;

 

 

other capital market conditions, including availability of funding sources;

 

 

potential impairment of our indefinite-lived intangible assets and/or our long-lived assets; and

 

 

changes in government regulations related to the broadband and Internet protocol industries.

 

1

 

  

Item 1 - Business. 

 

Towerstream Corporation (“Towerstream”, “we”, “us”, “our” or the “Company”) is primarily a provider of fixed wireless services to businesses in twelve major urban markets across the U.S. 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. Our fixed wireless service supports bandwidth on demand, wireless redundancy, virtual private networks, disaster recovery, bundled data and video services. We provide 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. Our "Fixed Wireless Services Business" ("Fixed Wireless" or "FW") has historically grown both organically and through the acquisition of five other fixed wireless broadband providers in various markets.

 

We offer fixed wireless business internet service in three product categories: Business Class Internet, Temporary Internet Solutions, and Wholesale Internet Service. This unique portfolio of bandwidth services is able to scale our existing target markets, from small businesses to fortune 500 companies. Such service is as fast as fiber and equally as stable.

 

Under the Business Class Internet category, we offer two types of service: Single Tenant Service and On-Net Service. Under the Single Tenant Service offering, we deliver fixed wireless broadband to a single client through a radio receiver/transmitter on the client’s building dedicated solely to that client. We estimate an addressable market opportunity of approximately 392,000 buildings within four miles of the 175 Points-of-Presence (“PoP” or “Company Locations”) located within the twelve major markets in which we provide service. Currently, we are offering bandwidth speeds ranging from 5Mbps (Megabits per second) to 10Gbps (Gigabits per second) in the Single Tenant Internet Service category with an increased focus on bandwidth speeds of 100Mbps or greater.

 

Under the On-Net Internet Service offering, we are able to connect, or “light”, an entire building at once and at a cost similar to what was traditionally required for one high bandwidth customer requiring point-to-point equipment. This can be accomplished, in part, because the capabilities of the equipment installed by us have improved even as the costs of the equipment have decreased. As a result, we are able to leverage the initial installation cost to serve an entire building’s tenant base. In place of a wireless install for every single customer in the building, we now only have to install the wireless portion of the install once. Subsequent customers are connected by simply running a wire to the common space in the building where the wireless service terminates. Additionally, instead of having multiple antennas on both the customer building and the PoP, there generally needs to be only one antenna on each location. We are offering 20Mbps to 1.5Gbps in this product category with an increased focus on bandwidth speeds of 100Mbps or greater.

 

Under the Temporary Internet Service offering, we are able to provide solutions for a client’s short-term connection requirements in locations where fiber, copper, and cable infrastructure does not exist or is cost prohibitive. With connections available for days, weeks, or months, this solution is ideal for special events, conferences, television and movie productions, constructions projects and more.

 

Under the Wholesale Internet Service offering, we are able to deliver both Dedicated Internet Access (DIA) and Point-to-Point Transport solutions with bandwidth options from 5Mbps to 10mbps. By using our fixed wireless network, our wholesale partners bypass the extensive installation times of our fiber competitors. Our competitive advantages enable our partners to provide solutions their customers need quickly, reliably, and more cost-effective.

 

In March 2018 the Company announced that its board of directors commenced an evaluation of strategic repositioning of the Company as it moves to leverage its existing key assets in major U.S. markets. In conjunction with such announcement, the Company is launching a concerted focus on indirect and wholesale channels and has retained Bank Street Group LLC as its independent financial advisor to explore strategic alternatives with such broadband carriers.  The Company has not set a definitive timetable for the completion of its review of strategic alternatives and there can be no assurances that the process will result in a transaction. Any potential strategic alternative will be evaluated by the board. The Company does not intend to discuss developments with respect to the evaluation process unless a transaction is approved, or disclosure becomes appropriate.

 

2

 

 

Our Network

 

The foundation of our network consists of PoPs which are generally located on very tall buildings in each urban market. We enter into long-term lease agreements with the owners of these buildings which provide us with the right to install communications equipment on the rooftop. We deploy this equipment in order to connect customers to the Internet. Each PoP is "linked" to one or more other PoPs to enhance redundancy and ensure that there is no single point of failure in the network. One or more of our PoPs are located in buildings where national Internet service providers such as Cogent or Level 3 are located, and we enter into IP transit or peering arrangements with these organizations in order to connect to the Internet. We refer to the core connectivity of all of our PoPs as a “Wireless Ring in the Sky.” Each PoP has a coverage area averaging approximately six miles although the distance can be affected by numerous factors, most significantly, how clear the line of sight is between the PoP and a customer location.

  

Our network does not depend on traditional copper wire or fiber connections which are the backbone of many of our competitors' networks. We believe this provides us with an advantage because we may not be significantly affected by events such as natural disasters and power outages. Conversely, our competitors are at greater risk as copper and fiber connections are typically installed at or below ground level and more susceptible to network service issues during disasters and outages.

 

Markets

 

We launched our fixed wireless business in April 2001 in the Boston and Providence markets. In June 2003, we launched service in New York City and followed that with our entry into the Chicago, Los Angeles, San Francisco, Miami and Dallas-Fort Worth markets at various times through April 2008. Philadelphia was our last market launch in November 2009. We entered the Seattle, Las Vegas-Reno, and Houston markets through acquisitions of service providers based in those markets. We also expanded our market coverage and presence in Boston, Providence, and Los Angeles through acquisitions.

 

3

 

 

We determine which geographic markets to enter by assessing criteria in four broad categories. First, we evaluate our ability to deploy our service in a given market after taking into consideration our spectrum position, the availability of towers and other mounting structures. Second, we assess the market by evaluating the number of competitors, existing price points, demographic characteristics and distribution channels. Third, we evaluate the economic potential of the market, focusing on our forecasts of revenue opportunities and capital requirements. Finally, we look at market clustering opportunities and other cost efficiencies that might be realized. Based on this approach, as of December 31, 2017, we offer wireless broadband connectivity in 12 markets, of which 10 are in the top 20 metropolitan areas in the United States based on the number of small to medium businesses in each market. These 10 markets cover approximately 30% of small and medium businesses (5 to 249 employees) in the United States based on information obtained from AtoZDatabases.com.

 

We believe there are market opportunities beyond the 12 markets in which we are currently offering our services. Our long-term plan is to expand nationally into other top metropolitan markets in the United States. We believe that acquisitions represent a more cost effective manner to expand into new markets rather than to build our own infrastructure. Since 2010, we have completed five acquisitions, of which two were in new markets and three expanded our presence in existing markets. We have paid for these acquisitions through a combination of cash and equity, and believe that future acquisitions will be paid in a similar manner. Our decision to expand into new markets will depend upon many factors including the timing and frequency of acquisitions, national and local economic conditions, and the opportunity to leverage existing customer relationships in new markets.

 

Sales and Marketing

 

We employ an inside direct sales force model to sell our services to business customers. As of December 31, 2017, we employed 8 direct sales people. We generally compensate these employees on a salary plus commission basis.

  

Sales through indirect channels comprised 35% of our total revenues during the year ended December 31, 2017 compared with 34% during the year ended December 31, 2016. Our channel program provides for recurring monthly residual payments ranging from 8% to 25%.

 

4

 

 

Effective January 24, 2017, the Company hired a new Chief Executive Officer who is a telecommunications industry veteran and has extensive experience developing markets and increasing revenue. Immediately thereafter, the Company began to implement new sales and marketing strategies to leverage the Company’s state-of-the-art fixed wireless network to serve both enterprise and service providers. The three main pillars of this strategy are price, speed to market, and reliability. Our sales organization has been recently restructured for 2017 and beyond to create a more disciplined approach to identify and target prospective customers. Included in this strategy is a new methodology, which includes professional sales and development training, which will assist our sales professionals with achieving both volume and velocity. Enterprise demands are routinely moving towards and exceeding 100Mbps speeds.

 

As the demand for high bandwidth speeds over 100Mbps is projected to increase by double digits by 2020, building scale and digitizing networks are key for enterprises to keep pace. To ensure we are prepared for increasing demands of our clients and prospects, our service offerings have been condensed and priced accordingly. We currently offer three speeds in the Single Tenants and On-Net categories with customized quotes for larger bandwidth needs between 100Mbps and 1Gbps.

 

Under the Temporary Internet Service offering, the Company is able to provide solutions for a client’s short-term connection requirements in locations where fiber, copper, and cable infrastructure does not exist or is cost prohibitive. With connections available for days, weeks, or months, this solution is ideal for special events, conferences, television and movie productions, constructions projects and more.

 

In August 2017, the Company created a new wholesale division that provides last-mile services to telecommunications carriers in North America. Sales and marketing efforts have been restructured to create a more disciplined approach to identify and target prospective customers. By leveraging existing software tools, our sales and marketing organization can identify 392,000 buildings within four miles of our PoPs that house customers with the highest propensity to buy our services. This focused approach allows our sales force to target the subset of buildings that have confirmed line-of-sight and also lack fiber. This segmentation of our prospect database enables us to focus on prospects that align with prospective customers that are most likely to need and buy our services, along with enhanced sales development training, and continues to assist our sales professionals to shorten the sales cycle and achieve volume and velocity.

 

Competition

 

The market for broadband services is highly competitive, and includes companies that offer a variety of services using a number of different technology platforms including cable networks, digital subscriber lines (“DSL”), fiber Internet service providers, third, fourth, and fifth-generation cellular, satellite, wireless Internet service and other emerging technologies. We compete with these companies on the basis of the portability, ease of use, speed of installation and price. Competitors to our wireless broadband services include:

 

Incumbent Local Exchange Carriers and Competitive Local Exchange Carriers

 

We face competition from traditional wireline operators in terms of price, performance, discounted rates for bundles of services, breadth of service, reliability, network security, and ease of access and use. In particular, we face competition from Verizon Communications Inc. and AT&T Inc. which are referred to as “incumbent local exchange carriers”, as well as competitive local exchange carriers.

 

Cable Modem, DSL, and Fiber Services

 

We compete with companies that provide Internet connectivity through cable modems, DSL, and fiber services. Principal competitors include cable companies, such as Comcast Corporation (including their Xfinity product), Spectrum Communications (previously known as Charter Communications), Cox Communications and incumbent telecommunications companies, such as AT&T Inc. or Verizon Communications Inc. Both the cable and telecommunications companies deploy their services over wired networks initially designed for voice and one-way data transmission that have subsequently been upgraded to provide for additional two-way voice, video and broadband services.

 

Cellular and CMRS Services

 

Cellular and other Commercial Mobile Radio Service (“CMRS”) carriers are seeking to expand their capacity to provide data and voice services that are superior to ours. These providers have substantially broader geographic coverage than we have and, for the foreseeable future, than we expect to have. If one or more of these providers can deploy technologies that compete effectively with our services, the mobility and coverage offered by these carriers will provide even greater competition than we currently face. Moreover, more advanced cellular and CMRS technologies, such as fourth generation Long Term Evolution (“LTE”) mobile technologies, and fifth generation millimeter wave technology currently offer broadband service with packet data transfer speeds of up to 2,000,000 bits per second for fixed applications, and slower speeds for mobile applications. We expect that LTE technology will be improved to increase connectivity speeds to make it more suitable for a range of advanced applications.

 

5

 

 

Wireless Broadband Service Providers

 

We also face competition from other wireless broadband service providers that use licensed and unlicensed spectrum. In connection with our merger and acquisition activities, we have determined that most of our current and planned markets already have one or more locally based companies providing wireless broadband Internet services. In addition, many local governments, universities and other related entities are providing or subsidizing Wi-Fi networks over unlicensed spectrum, in some cases at no cost to the user. There exist numerous small urban and rural wireless operations offering local services that could compete with us in our present or planned geographic markets.

 

Satellite  

 

Satellite providers, such as Hughes Network Systems, LLC, offer broadband data services that address a niche market, mainly less densely populated areas that are unserved or underserved by competing service providers. Although satellite offers service to a large geographic area, latency caused by the time it takes for the signal to travel to and from the satellite may challenge a satellite provider’s ability to provide some services, such as Voice over Internet Protocol (“VoIP”), which reduces the size of the addressable market. Satellite providers are currently seeking additional frequencies from the FCC that would enable them to provide more robust fixed wireless services.

 

Other  

 

We believe other emerging technologies may also seek to enter the broadband services market. For example, we are aware that several power generation and distribution companies are seeking to develop or have already offered commercial broadband Internet services over existing electric power lines. 

 

Competitive Strengths

 

Even though we face substantial existing and prospective competition, we believe that we have a number of competitive advantages that will allow us to retain existing customers and attract new customers over time.

 

Reliability  

 

Our network was designed specifically to support wireless broadband services. The networks of cellular, cable and DSL companies rely on infrastructure that was originally designed for non-broadband purposes. We also connect our customers to our Wireless Ring in the Sky which has no single point of failure. This ring is fed by multiple national Internet providers located at opposite ends of our service cities and connected to our national ring which is fed by multiple leading carriers. We believe that we are the only wireless broadband provider that offers true separate egress for true redundancy. With DSL and cable offerings, the wireline connection can be terminated by one backhoe swipe or switch failure. Our Wireless Ring in the Sky is not likely to be affected by backhoe or other below-ground accidents or severe weather. As a result, our network has historically experienced reliability rates of approximately 99%.

 

6

 

 

Flexibility

 

Our wireless infrastructure and service delivery enables us to respond quickly to changes in a customer’s broadband requirements. We offer bandwidth options ranging from 5 megabits per second up to 10 gigabits per second. We can usually adjust a customer’s bandwidth remotely and without having to visit the customer location to modify or install new equipment. Changes can often be made on a same day basis.

 

Timeliness

 

We have demonstrated the capability to install approximately 20% of our services within 7 days and approximately 75% of our services within thirty days from the customer contract date. Many of the larger telecommunications companies can take 30 to 60 days to complete an installation. The timeliness of service delivery has become more important as businesses conduct more of their business operations through the Internet.

 

Value  

 

We own our entire network which enables us to price our services lower than most of our competitors. Specifically, we are able to offer competitive prices because we do not have to buy a local loop charge from the telephone company.

 

Efficient Economic Model

 

We believe our economic model is characterized by low fixed capital and operating expenditures relative to other wireless and wireline broadband service providers. We own our entire network which eliminates costs involved with using leased lines owned by telephone or cable companies. Our network is modular. Coverage is directly related to various factors including the height of the facility we are on and the frequencies we utilize. The average area covered by a PoP is a six-mile radius.

 

Prime Real Estate Locations

 

We have secured long term lease agreements for prime real estate locations in the twelve markets in which we have built our fixed wireless network. These locations are some of the tallest buildings in each city which facilitates our ability to deliver Internet connectivity to customer locations where line of sight is not available to our competitors.

 

7

 

  

Corporate History

 

We were organized in the State of Nevada in June 2005. In January 2007, we merged with and into a wholly-owned Delaware subsidiary for the sole purpose of changing our state of incorporation to Delaware. In January 2007, a wholly-owned subsidiary of ours merged with and into a private company formed in 1999, Towerstream Corporation, with Towerstream Corporation being the surviving company. Upon closing of the merger, we discontinued our former business and succeeded to the business of Towerstream Corporation as our sole line of business. At the same time, we also changed our name to Towerstream Corporation and our subsidiary, Towerstream Corporation, changed its name to Towerstream I, Inc.

 

Regulatory Matters 

 

The Communications Act of 1934, as amended (the “Communications Act”), and the regulations and policies of the Federal Communications Commission (“FCC”) impact significant aspects of our wireless Internet service business which is also subject to other regulation by federal, state and local authorities under applicable laws and regulations.

 

Spectrum Regulation

 

We provide wireless broadband Internet access services using both licensed and unlicensed fixed point-to-point systems. The FCC has jurisdiction over the management and licensing of the electromagnetic spectrum for all commercial users. The FCC routinely reviews its spectrum policies and may change its position on spectrum use and allocations from time to time. We believe that the FCC is committed to allocating spectrum to support wireless broadband deployment throughout the United States and will continue to modify its regulations to foster such deployment, which will help us implement our existing and future business plans.

 

Broadband Internet Service Regulation

  

Our wireless broadband network can be used to provide Internet access service and Virtual Private Networks (“VPNs”). On May 23, 2017, the FCC issued a notice of proposed rulemaking, the intention of which is to repeal the net neutrality protections adopted in 2015 Open Internet Order and reclassify fixed and mobile broadband services as information services governed by Title I of the Communications Act. On December 14, 2017, the FCC released its Restoring Internet Freedom Report and Order in which is re-classified Internet access service as an information and not a telecommunications service and removed all Title II obligations from Internet traffic arrangements. The impact of this Report and Order on the industry and competition is still unknown at this time.

 

In addition, Internet service providers are subject to a wide range of other federal regulations and statutes some of which are regulated by the Federal Trade Commission, including, for example, regulations and policies relating to low-income subsidies, consumer protection, consumer privacy, and copyright protections. State and local government authorities may also regulate limited aspects of our business by, for example, imposing consumer protection and consumer privacy regulations, zoning requirements, and requiring installation permits.

 

8

 

 

Regulatory Issues

 

Our antennas and equipment used to provide wireless broadband service are regulated by the FCC. As such, any changes in FCC regulations involving the use or deployment of wireless broadband service could have a positive or negative impact on our business.

 

Other - FAA Interference Issue

 

In August 2013, the FCC released a Notice of Apparent Liability for Forfeiture ("NAL") alleging that Towerstream caused harmful interference to doppler weather radar systems in New York and Florida, and proposing a fine for the alleged rule violations. In November 2013, after consultation with regulatory counsel, Towerstream filed a response denying the FCC's allegations. In July 2016, Towerstream settled the matter with the FCC under a consent decree that required Towerstream to admit that it violated the laws and regulations that prohibit Unlicensed National Information Infrastructure transmission systems operators from causing interference to doppler weather radar systems, to comply with such rules in the future, and to pay a civil penalty. The Company paid such penalty during the year ended December 31, 2016 and that amount was not material to the operating results for that period.

 

Rights Plan

 

In November 2010, we adopted a rights plan (the “Rights Plan”) and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock as of the record date on November 14, 2010. Each right, when exercisable, entitles the registered holder to purchase one-hundredth (1/100th) of a share of Series A Preferred Stock, par value $0.001 per shares of the Company at a purchase price of $18.00 per one-hundredth (1/100th) of a share of the Series A Preferred Stock, subject to certain adjustments. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our Board of Directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.

 

The provisions in our charter, bylaws, Rights Plan and under Delaware law, related to the foregoing, could discourage takeover attempts that our stockholders would otherwise favor, or otherwise reduce the price that investors might be willing to pay for our common stock in the future.

 

9

 

 

Employees

 

As of December 31, 2017, we had 83 employees, of whom 80 were full-time employees and 3 were part-time employees. As of March 23, 2018, we had 53 employees, of whom 50 were full-time employees and 3 were part-time employees. We believe our employee relations are good. Three employees are considered members of executive management.

 

Reverse Split

 

On September 29, 2017, the Company effected a one-for-seventy-five reverse stock split of its common stock. Consequently, all earnings per share and other share related amounts and disclosures have been retroactively adjusted for all periods presented for the splits.

 

 

Our Corporate Information

 

Our principal executive offices are located at 76 Hammarlund Way, Middletown, Rhode Island, 02842.  Our telephone number is (401) 848-5848. The Company’s website address is http://www.towerstream.com. Information contained on the Company’s website is not incorporated into this Annual Report on Form 10-K.  Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the Securities and Exchange Commission (“SEC”) website at http://www.sec.gov as soon as reasonably practicable after those reports are electronically filed with or furnished to the SEC. These reports are also available on the Company’s website.

 

 Item 1A - Risk Factors.

 

Investing in our common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below and other information contained in this annual report, including our financial statements and related notes before purchasing shares of our common stock. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occurs, our business, financial condition or results of operations may be materially adversely affected. In that case, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment.

 

Risks Relating to Our Financial Condition

 

If we choose to raise additional capital, we may not be able to obtain additional financing to fund our operations on terms acceptable to us or at all.

 

If we choose to raise additional funds in the future, there can be no assurance that sufficient debt or equity financing will be available at all or, if available, that such financing will be at terms and conditions acceptable to us. Should we fail to obtain additional debt financing or raise additional capital, we may not be able to achieve our longer term business objectives and may face other serious adverse consequences. If we raise additional funds by issuing equity securities or convertible debt, investors may experience significant dilution of their ownership interest, and the newly-issued securities may have rights senior to those of the holders of our common stock. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility and may require us to provide collateral to secure the loan. In addition, in a liquidation, debtholders will be entitled to repayment before any proceeds can be paid to our stockholders.

 

10

 

 

We have a history of operating losses and expect to continue incurring losses for the foreseeable future.

 

Our net losses for the years ending December 31, 2017 and 2016 were $12,469,682 and $20,436,496, respectively. We cannot anticipate when, if ever, our operations will become profitable. We expect to incur significant net losses as we develop our network, expand our markets, undertake acquisitions, acquire spectrum licenses and pursue our business strategy. We intend to invest significantly in our business before we expect cash flow from operations to be adequate to cover our operating expenses. If we are unable to execute our business strategy and grow our business, either as a result of the risks identified in this section or for any other reason, our business, prospects, financial condition and results of operations will be adversely affected.

 

Cash and cash equivalents represent one of our largest assets and we may be at risk of being uninsured for a large portion of such assets.

 

As of December 31, 2017, we had approximately $7.6 million in cash and cash equivalents with one large financial banking institution. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If the institution at which we have placed our funds were to become insolvent or fail, we could be at risk for losing a substantial portion of our cash deposits, or incur significant time delays in obtaining access to such funds. In light of the limited amount of federal insurance for deposits, even if we were to spread our cash assets among several institutions, we would remain at risk for the amount not covered by insurance.  

 

Our growth may be slowed if we do not have sufficient capital.

 

The continued growth and operation of our business may require additional funding for working capital, debt service, the enhancement and upgrade of our network, the build-out of infrastructure to expand our coverage, possible acquisitions and possible bids to acquire spectrum licenses. We may be unable to secure such funding when needed in adequate amounts or on acceptable terms, if at all. To execute our business strategy, we may issue additional equity securities in public or private offerings, potentially at a price lower than the market price at the time of such issuance. Similarly, we may seek debt financing and may be forced to incur significant interest expense. If we cannot secure sufficient funding, we may be forced to forego strategic opportunities or delay, scale back or eliminate network deployments, operations, acquisitions, spectrum bids and other investments.

 

11

 

 

There is substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

 

The Company’s consolidated financial statements for the year ended December 31, 2017 have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Effective March 30, 2018 through April 15, 2018, the Company entered into an amended and restated Forbearance agreement with its lender and has classified long term debt with a net carrying value of $33,868,700 as current liabilities as of December 31, 2017. As of December 31, 2017, the Company had cash and cash equivalents of approximately $7.6 million and working capital deficiency of approximately $31.1 million. The Company has incurred significant operating losses since inception and continues to generate losses from operations and as of December 31, 2017, the Company had an accumulated deficit of $189.1 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued. Management has also evaluated the significance of these conditions in relation to the Company's ability to meet its obligations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  Our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2017, describing the existence of substantial doubt about our ability to continue as a going concern.

 

Historically, the Company has financed its operation through private and public placement of equity securities, as well as debt financing and capital leases. The Company’s ability to fund its longer term cash requirements is subject to multiple risks, many of which are beyond its control. The Company intends to raise additional capital, either through debt or equity financings or through the potential sale of the Company’s assets in order to achieve its business plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.  

 

 

Recently enacted tax reform legislation in the U.S. could adversely affect our business and financial condition.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law, making significant changes to the Internal Revenue Code. Changes under the Tax Act include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits (including reducing the business tax credit for certain clinical testing expenses incurred in the testing of orphan drugs). The overall impact of the new federal tax law is uncertain, and our business and financial condition could be adversely affected. For example, because of the tax rate decrease, our deferred tax assets and our corresponding valuation allowance against these deferred tax assets have been reduced and may continue to be adversely impacted. In addition, it is uncertain if and to what extent various states will conform to Tax Act and what effect that legal challenges will have on the Tax Act, including litigation in the U.S. and international challenges brought at organizations such as the World Trade Organization. The impact of the Tax Act on holders of our common stock is also uncertain and could be adverse. Investors should consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.

 

12

 

 

Risks Relating to Fixed Wireless Services

 

We may be unable to successfully execute any of our current or future business strategies.

 

In order to pursue business strategies, we will need to continue to build our infrastructure and strengthen our operational capabilities. Our ability to do these successfully could be affected by any one or more of the following factors:

 

the ability of our equipment, our equipment suppliers or our service providers to perform as we expect;

 

 

the ability of our services to achieve market acceptance;

 

 

our ability to manage third party relationships effectively;

 

 

our ability to identify suitable locations and then negotiate acceptable agreements with building owners so that we can establish PoPs on their rooftops;

 

 

our ability to work effectively with new customers to secure approval from their landlord to install our equipment;

 

 

our ability to effectively manage the growth and expansion of our business operations without incurring excessive costs, high employee turnover or damage to customer relationships;

 

 

our ability to attract and retain qualified personnel, especially individuals experienced in network operations and engineering;

 

 

equipment failure or interruption of service which could adversely affect our reputation and our relations with our customers;

 

 

our ability to accurately predict and respond to the rapid technological changes in our industry; and

 

 

our ability to raise additional capital to fund our growth and to support our operations until we reach profitability.

 

Our failure to adequately address any one or more of the above factors could have a significant adverse impact on our ability to execute our business strategy and the long-term viability of our business.

 

13

 

  

We depend on the continued availability of leases and licenses for our communications equipment.

 

We have constructed proprietary networks in each of the markets we serve by installing antennae on rooftops, communication towers and other structures pursuant to lease or license agreements to send and receive wireless signals necessary for the operation of our network. We typically seek initial five-year terms for our leases with three to five-year renewal options. Such renewal options are generally exercisable at our discretion before the expiration of the current term. If these leases are terminated or if the owners of these structures are unwilling to continue to enter into leases or licenses with us in the future, we would be forced to seek alternative arrangements with other providers. If we are unable to continue to obtain or renew such leases on satisfactory terms, our business would be harmed.

 

We may not be able to attract and retain customers if we do not maintain and enhance our brand. 

 

We believe that our brand is critical part to our success. Maintaining and enhancing our brand may require us to make substantial investments with no assurance that these investments will be successful. If we fail to promote and maintain the “Towerstream” brand, or if we incur significant expenses in this effort, our business, prospects, operating results and financial condition may be harmed. We anticipate that maintaining and enhancing our brand will become increasingly important, difficult and expensive and we may not be able to do so.

 

Many of our competitors are better established and have significantly greater resources which may make it difficult for us to attract and retain customers.

 

The market for broadband and related services is highly competitive, and we compete with several other companies within each of our markets. Many of our competitors are well established with larger and better developed networks and support systems, longer relationships with customers and suppliers, greater name recognition and greater financial, technical and marketing resources than we have. Our competitors may subsidize competing services with revenue from other sources and, thus, may offer their products and services at prices lower than ours. Our competitors may also reduce the prices of their services significantly or may offer broadband connectivity packaged with other products or services. We may not be able to reduce our prices or otherwise combine our services with other products or services which may make it more difficult to attract and retain customers. In addition, businesses which are presently focused on providing services to residential customers may expand their target base and begin offering service to business customers.

 

We expect existing and prospective competitors to adopt technologies or business plans similar to ours, or seek other means to develop competitive services, particularly if our services prove to be attractive in our target markets. This competition may make it difficult to attract new customers and retain existing customers.

  

14

 

  

We may experience difficulties constructing, upgrading and maintaining our network which could increase customer turnover and reduce our revenues.

 

Our success depends on developing and providing products and services that provide customers with high quality Internet connectivity. If the number of customers using our network increases, we will require more infrastructure and network resources to maintain the quality of our services. Consequently, we may be required to make substantial investments to improve our facilities and equipment, and to upgrade our technology and network infrastructure. If we do not complete these improvements successfully, or if we experience inefficiencies, operational failures or unforeseen costs during implementation, the quality of our products and services could decline.

 

We may experience quality deficiencies, cost overruns and delays in implementing network improvements and completing maintenance and upgrade projects. Portions of these projects may not be within our control or the control of our contractors. Our network requires the receipt of permits and approvals from numerous governmental bodies. Such bodies often limit the expansion of transmission towers and other construction necessary for our business. Failure to receive approvals in a timely fashion can delay system rollouts and raise the cost of completing projects. In addition, we are typically required to obtain rights from land, building or tower owners to install antennae and other equipment to provide service to our customers. We may not be able to obtain, on terms acceptable to us, or at all, the rights necessary to construct our network and expand our services.

 

We also face challenges in managing and operating our network. These challenges include operating, maintaining and upgrading network and customer premise equipment to accommodate increased traffic or technological advances, and managing the sales, advertising, customer support, billing and collection functions of our business while providing reliable network service at expected speeds and quality. Our failure in any of these areas could adversely affect customer satisfaction, increase customer turnover or churn, increase our costs and decrease our revenues.

 

We may be unable to operate in certain markets if we are unable to obtain and maintain rights to use licensed spectrum or if the FCC re-allocates “unlicensed” spectrum.

 

We provide our services in some markets by using spectrum obtained through licenses or long-term leases. Obtaining licensed spectrum can be a long and difficult process that can be costly and require substantial management resources. Securing licensed spectrum may subject us to increased operational costs, greater regulatory scrutiny and arbitrary government decision making and we may be unable to secure such licensed spectrum.

 

Licensed spectrum, whether owned or leased, poses additional risks, including:

 

inability to satisfy build-out or service deployment requirements upon which spectrum licenses or leases may be conditioned;

 

 

increases in spectrum acquisition costs or complexity;

 

15

 

 

competitive bids, pre-bid qualifications and post-bid requirements for spectrum acquisitions, in which we may not be successful leading to, among other things, increased competition;

  

  

adverse changes to regulations governing spectrum rights;

  

  

the risk that acquired or leased spectrum will not be commercially usable or free of damaging interference from licensed or unlicensed operators in the licensed or adjacent bands;

 

 

contractual disputes with, or the bankruptcy or other reorganization of, the license holders which could adversely affect control over the spectrum;

 

 

failure of the FCC or other regulators to renew spectrum licenses as they expire; and

 

 

invalidation of authorization to use all or a significant portion of our spectrum.

 

We utilize unlicensed spectrum in all of our markets which is subject to intense competition, low barriers of entry and slowdowns due to multiple users.

 

We presently utilize unlicensed spectrum in all of our markets to provide our service offerings.  Unlicensed or “free” spectrum is available to multiple users and may suffer bandwidth limitations, interference and slowdowns if the number of users exceeds traffic capacity. The availability of unlicensed spectrum is not unlimited and others do not need to obtain permits or licenses to utilize the same unlicensed spectrum that we currently utilize or may utilize in the future.  The inherent limitations of unlicensed spectrum could potentially threaten our ability to reliably deliver our services. Moreover, the prevalence of unlicensed spectrum creates low barriers of entry in our industry which naturally creates the potential for increased competition.

 

Interruption or failure of our information technology and communications systems could impair our ability to provide services which could damage our reputation.

 

Our services depend on the continuing operation of our information technology and communications systems. We have experienced service interruptions in the past and may experience service interruptions or system failures in the future. Any unscheduled service interruption adversely affects our ability to operate our business and could result in an immediate loss of revenues and adversely impact our operating results. If we experience frequent or persistent system or network failures, our reputation could be permanently harmed. We may need to make significant capital expenditures to increase the reliability of our systems, however, these capital expenditures may not achieve the results we expect.

 

16

 

   

Excessive customer churn may adversely affect our financial performance by slowing customer growth, increasing costs and reducing revenues.

 

The successful implementation of our business plan depends upon controlling customer churn. Customer churn is a measure of customers who cancel their services agreement. Customer churn could increase as a result of:

 

interruptions to the delivery of services to customers over our network;

 

 

the availability of competing technology such as cable modems, DSL, third-generation cellular, satellite, wireless Internet service and other emerging technologies, some of which may be less expensive or technologically superior to those offered by us;

 

 

changes in promotions and new marketing or sales initiatives;

 

 

new competitors entering the markets in which we offer service;

 

 

a reduction in the quality of our customer service billing errors;

  

  

a change in our fee structure; and

  

  

existing competitors whose services may be less expensive.

 

An increase in customer churn can lead to slower customer growth, increased costs and a reduction in our revenues.

 

If our business strategy is unsuccessful, we will not be profitable and our stockholders could lose their investment.

 

Many fixed wireless companies have failed and there is no guarantee that our strategy will be successful or profitable. If our strategy is unsuccessful, the value of our company may decrease and our stockholders could lose their entire investment.

 

We may not be able to effectively control and manage our growth which would negatively impact our operations.

 

If our business and markets continue to grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. In addition, we may face challenges in managing expanding product and service offerings, and in integrating acquired increased demands which could interrupt or adversely affect our operations and cause backlogs and administrative inefficiencies in the businesses discussed below. Such events would increase demands on our existing management, workforce and facilities.

 

17

 

   

The success of our business depends on the contributions of key personnel and our ability to attract, train and retain highly qualified personnel.

  

We are highly dependent on the continued services of our key personnel across all facets of operations. We do not have an employment agreement with any of these individuals except for our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer. We cannot guarantee that any of these persons will stay with us for any definite period. Loss of the services of any of these individuals could adversely impact our operations. We do not maintain policies of "key man" insurance on our executives.

   

In addition, we must be able to attract, train, motivate and retain highly skilled and experienced technical employees in order to successfully introduce our services in new markets and grow our business in existing markets. Qualified technical employees often are in great demand and may be unavailable in the time frame required to satisfy our business requirements. We may not be able to attract and retain sufficient numbers of highly skilled technical employees in the future. The loss of technical personnel or our inability to hire or retain sufficient technical personnel at competitive rates of compensation could impair our ability to grow our business and retain our existing customer base.

 

We may pursue acquisitions that we believe complement our existing operations but which involve risks that could adversely affect our business.

 

Acquisitions involve risks that could adversely affect our business including the diversion of management time and focus from operations and difficulties integrating the operations and personnel of acquired companies. In addition, any future acquisition could result in significant costs, the incurrence of additional debt to fund the acquisition, and the assumption of contingent or undisclosed liabilities, all of which could materially adversely affect our business, financial condition and results of operations.

 

In connection with any future acquisition, we generally will seek to minimize the impact of contingent and undisclosed liabilities by obtaining indemnities and warranties from the seller. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to their limited scope, amount or duration, as well as the financial limitations of the indemnitor or warrantor.

 

We may continue to consider strategic acquisitions, some of which may be larger than those previously completed and which could be material transactions. Integrating acquisitions is often costly and may require significant attention from management. Delays or other operational or financial problems that interfere with our operations may result. If we fail to implement proper overall business controls for companies or assets we acquire or fail to successfully integrate these acquired companies or assets in our processes, our financial condition and results of operations could be adversely affected. In addition, it is possible that we may incur significant expenses in the evaluation and pursuit of potential acquisitions that may not be successfully completed.

 

18

 

   

We could encounter difficulties integrating acquisitions which could result in substantial costs, delays or other operational or financial difficulties.

 

Since 2010, we have completed five acquisitions.  We may seek to acquire other fixed wireless businesses, including those operating in our current business markets or those operating in other geographic markets. We cannot accurately predict the timing, size and success of our acquisition efforts and the associated capital commitments that might be required. We expect to encounter competition for acquisitions which may limit the number of potential acquisition opportunities and may lead to higher acquisition prices. We may not be able to identify, acquire or profitably manage additional businesses or successfully integrate acquired businesses, if any, without substantial costs, delays or other operational or financial difficulties.

 

In addition, such acquisitions involve a number of other risks, including:

 

failure to obtain regulatory approval for such acquisitions;

  

  

failure of the acquired businesses to achieve expected results;

 

 

integration difficulties could increase customer churn and negatively affect our reputation;

 

 

diversion of management’s attention and resources to acquisitions;

 

 

failure to retain key personnel of the acquired businesses;

 

 

disappointing quality or functionality of acquired equipment and personnel; and

 

 

risks associated with unanticipated events, liabilities or contingencies.

 

The inability to successfully integrate and manage acquired companies could result in the incurrence of substantial costs to address the problems and issues encountered.

 

Our inability to finance acquisitions could impair the growth and expansion of our business.

 

The extent to which we will be able or willing to use shares of our common stock to consummate acquisitions will depend on (i) the market value of our securities which will vary, (ii) liquidity which can fluctuate, and (iii) the willingness of potential sellers to accept shares of our common stock as full or partial payment. Using shares of our common stock for acquisitions may result in significant dilution to existing stockholders. To the extent that we are unable to use common stock to make future acquisitions, our ability to grow through acquisitions may be limited by the extent to which we are able to raise capital through debt or equity financings. We may not be able to obtain the necessary capital to finance any acquisitions. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of expansion or redirect resources committed to internal purposes. Our inability to use shares of our common stock to make future acquisitions may hinder our ability to actively pursue our acquisition program.

 

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We rely on a limited number of third party suppliers that manufacture network equipment, and install and maintain our network sites. 

 

We depend on a limited number of third party suppliers to produce and deliver products required for our networks. If these companies fail to perform or experience delays, shortages or increased demand for their products or services, we may face a shortage of components, increased costs, and may be required to suspend our network deployment and our service introduction.  We also depend on a limited number of third parties to install and maintain our network facilities. We do not maintain any long-term supply contracts with these manufacturers. If a manufacturer or other provider does not satisfy our requirements, or if we lose a manufacturer or any other significant provider, we may have insufficient network equipment for delivery to customers and for installation or maintenance of our infrastructure. Such developments could force us to suspend the deployment of our network and the installation of new customers, thus impairing future growth.

 

Customers may perceive that our network is not secure if our data security controls are breached which may adversely affect our ability to attract and retain customers and expose us to liability.

 

Network security and the authentication of a customer’s credentials are designed to protect unauthorized access to data on our network. Because techniques used to obtain unauthorized access to or to sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate or implement adequate preventive measures against unauthorized access or sabotage. Consequently, unauthorized parties may overcome our encryption and security systems, and obtain access to data on our network. In addition, because we operate and control our network and our customers’ Internet connectivity, unauthorized access or sabotage of our network could result in damage to our network and to the computers or other devices used by our customers. An actual or perceived breach of network security, regardless of whether the breach is our fault, could harm public perception of the effectiveness of our security controls, adversely affect our ability to attract and retain customers, expose us to significant liability and adversely affect our business prospects.

 

The delivery of our services could infringe on the intellectual property rights of others which may result in costly litigation, substantial damages and prohibit us from selling our services.

 

Third parties may assert infringement or other intellectual property claims against us. We may have to pay substantial damages, including for past infringement if it is ultimately determined that our services infringe a third party’s proprietary rights. Further, we may be prohibited from selling or providing some of our services before we obtain additional licenses, which, if available at all, may require us to pay substantial royalties or licensing fees. Even if claims are determined to be without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from our other business concerns. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our business to be harmed and our stock price to decline.

 

20

 

   

Risks Relating to Discontinued Operations

 

We may incur additional charges in connection with our decision to exit the shared wireless infrastructure business, and any additional costs would adversely impact our cash flows.

 

During the fourth quarter of 2015, we determined to exit the shared wireless infrastructure business and curtailed activity in our smaller markets. In connection with this decision, we recognized charges in the fourth quarter of 2015 aggregating $5,359,000, consisting of $3,284,000 of estimated cost to settle our lease obligations, $1,618,000 to write-off network assets which could not be redeployed into the fixed wireless network and writing off $456,000 of deferred acquisition costs and security deposits which are not expected to be recovered.

 

During the first quarter of 2016, we sold the majority of network locations in New York City, our largest market, to a major cable company. We also determined that we would not be able to sell the remaining network locations in New York City.  As a result, we recognized charges totaling $1,585,319 in the first quarter of 2016 which included $453,403 representing the estimated cost to settle lease obligations, $528,364 to write off network assets which could not be redeployed into the fixed wireless network, $110,500 related to security deposits which are not expected to be recovered, and $493,052 related to the accelerated expensing of deferred acquisition costs. These costs were partially offset by a $1,244,284 reduction in the accrual for terminated lease obligations that was recorded in the fourth quarter of 2015. This reduction reflects the outcome of settlements negotiated in the first quarter of 2016 with certain landlords.  As of December 31, 2016, and based upon negotiations, settlements, and experiences through that date, the Company had reduced that remaining estimated liability by $1,557,626 to $1,240,000 and reduced operating expenses for the year ended December 31, 2016 by the same amount. As of December 31, 2017, and based upon negotiations, settlements, and experiences through that date, the Company had reduced that remaining estimated liability by $210,978 to $1,029,022. We believe that we have recognized principally all of the costs required to exit this business but can provide no assurance that additional costs will not be incurred. Any additional costs would adversely impact our operating results and cash flows, and our stock price could decline.

 

Risks Relating to the Wireless Industry

 

An economic or industry slowdown may materially and adversely affect our business.

 

Slowdowns in the economy or in the wireless or broadband industry may impact demand for our services.   Customers may reduce the amount of bandwidth that they purchase from us during economic downturns which will directly affect our revenues and operating results.  An economic or industry slowdown may cause other businesses or industries to delay or abandon implementation of new systems and technologies, including wireless broadband services. Further, political uncertainties, including acts of terrorism and other unforeseen events, may impose additional risks upon and adversely affect the wireless or broadband industry generally, and our business, specifically. 

 

21

 

   

We operate in an evolving industry which makes it difficult to forecast our future prospects as our services may become obsolete and we may not be able to develop competitive products or services on a timely basis or at all. 

 

The broadband and wireless services industries are characterized by rapid technological change, competitive pricing, frequent new service introductions, and evolving industry standards and regulatory requirements. We believe that our success depends on our ability to anticipate and adapt to these challenges, and to offer competitive services on a timely basis. We face a number of difficulties and uncertainties such as:

 

competition from service providers using more efficient, less expensive technologies including products not yet invented or developed;

 

 

responding successfully to advances in competing technologies in a timely and cost-effective manner;

 

 

migration toward standards-based technology which may require substantial capital expenditures; and

 

 

existing, proposed or undeveloped technologies that may render our wireless broadband services less profitable or obsolete.

 

As the services offered by us and our competitors develop, businesses and consumers may not accept our services as a commercially viable alternative to other means of delivering wireless broadband services. As a result, our services may become obsolete and we may be unable to develop competitive products or services on a timely basis, or at all.

 

We are subject to extensive regulation that could limit or restrict our activities. 

 

Our business activities, including the acquisition, lease, maintenance and use of spectrum licenses, and use of unlicensed spectrum, are extensively regulated by federal, state and local governmental authorities. A number of federal, state and local privacy, security, and consumer laws also apply to our business. These regulations and their application are subject to continuous change as new legislation, regulations or amendments to existing regulations are periodically implemented by governmental or regulatory authorities, including as a result of judicial interpretations of such laws and regulations. Current regulations directly affect the breadth of services we are able to offer and may impact the rates, terms and conditions of our services. Regulation of companies that offer competing services such as cable and fiber providers, and telecommunications carriers also affects our business. If we fail to comply with these regulations, we may be subject to penalties, both monetary and nonmonetary, which may adversely affect our financial condition and results of operations.

 

On February 26, 2015, the FCC adopted an Open Internet order in which fixed and mobile broadband services are reclassified as telecommunications services governed by Title II of the Communications Act. This reclassification includes forbearance from applying many sections of the Communications Act and the FCC’s rules to broadband service providers. As part of the Title II reclassification, the FCC could adopt new regulations requiring broadband service providers to register and pay Universal Service Fund (“USF”) fees as well as submit to a significant amount of other common carrier regulations.

 

22

 

 

The Open Internet order also adopted rules prohibiting broadband service providers from: (1) blocking access to legal content, applications, services or non-harmful devices; (2) impairing or degrading lawful Internet traffic on its basis, content, applications or services; or (3) favoring certain Internet traffic over other traffic in exchange for consideration. Depending on how the Open Internet rules are implemented, the Open Internet order could limit our ability to manage customers’ use of our networks, thereby limiting our ability to prevent or address customers’ excessive bandwidth demands. To maintain the quality of our network and user experience, we may manage the bandwidth used by our customers’ applications, in part by restricting the types of applications that may be used over our network. The FCC Open Internet regulations may constrain our ability to employ bandwidth management practices. Excessive use of bandwidth-intensive applications would likely reduce the quality of our services for all customers. Such decline in the quality of our services could harm our business.

 

On May 23, 2017, the FCC issued a notice of proposed rulemaking, the intention of which is to repeal the net neutrality protections adopted in 2015 and reclassify fixed and mobile broadband services as information services governed by Title I of the Communications Act. At the time of this filing, it is unknown if and when the proposed rules will be adopted, and it is possible that wireless broadband services may become subject to less federal regulation in the future.

 

The breach of a license or applicable law, even if accidentally, can result in the revocation, suspension, cancellation or reduction in the term of a license or the imposition of fines. In addition, regulatory authorities may grant new licenses to third parties, resulting in greater competition in territories where we already have rights to licensed spectrum. In order to promote competition, licenses may also require that third parties be granted access to our bandwidth, frequency capacity, facilities or services. We may not be able to obtain or retain any required license, and we may not be able to renew a license on favorable terms, or at all.

 

Wireless broadband services may become subject to greater state or federal regulation in the future. The scope of the regulations that may apply to companies like us and the impact of such regulations on our competitive position are presently unknown and could be detrimental to our business and prospects.

 

Risks Relating to Our Secured Indebtedness

 

Our cash flows and capital resources may be insufficient to meet minimum balance requirements or to make required payments on our secured indebtedness, which is secured by substantially all of our assets.

 

In October 2014, we entered into a loan agreement which provided us with a five-year $35,000,000 term loan. As of December 31, 2017, we had $34,657,986 of principal and interest outstanding under the terms of this loan. We have agreed to maintain a minimum balance of cash or cash equivalents equal to or greater than $6,500,000 at all times throughout the term of the loan. As of December 31, 2017, we had $7,568,982 in cash and cash equivalents with one large financing banking institution. The loan bears interest payable in cash at a rate equal to the greater of (i) the sum of the one month LIBOR rate on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that accrues at 4% per annum.

 

In November 2016, $5,000,000 of principal and accrued interest obligations in connection with this loan was converted into our Series D Convertible Preferred Stock (“Series D Preferred Stock”). This had the effect of reducing principal by $4,935,834 and given interest rates we experienced during the year ended December 31, 2016, reduced annual interest expense by approximately $592,000 and annual cash interest payments by approximately $395,000.

 

23

 

 

We recorded interest expense of $4,142,046 and $4,497,945 for the years ended December 31, 2017 and 2016, respectively. Of those amounts, we paid to the lender $2,775,054 and $2,998,630 and, in accordance with the provisions of the loan agreement, added $1,366,992 and $1,499,315 to the principal amount of the loan during the years ended December 31, 2017 and 2016, respectively.

 

Our indebtedness could have important consequences. For example, it could:

 

make it difficult for us to satisfy our debt obligations;

  

  

make us more vulnerable to general adverse economic and industry conditions;

 

 

limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements;

 

 

expose us to interest rate fluctuations because the interest rate on our long-term debt is variable;

 

 

require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes;

 

 

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

 

 

place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources.

 

In addition, our ability to meet minimum balance requirements, make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond our control. These factors include, among others:

 

economic and demand factors affecting our industry;

  

  

pricing pressures;

  

  

increased operating costs;

  

  

competitive conditions; and

  

  

other operating difficulties.

 

If our cash flows and capital resources are insufficient to fund our minimum balance requirements or debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. Our obligations pursuant to our long-term debt agreement are secured by a security interest in all of our assets, exclusive of capital stock of the Company, certain capital leases, certain contracts and certain assets secured by purchase money security interests. The foregoing encumbrances may limit our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable economic terms, if at all.

 

24

 

 

Our long-term debt agreement contains various covenants limiting the discretion of our management in operating our business.

 

Our long-term debt agreement contains, subject to certain carve-outs, various restrictive covenants that limit our management's discretion in operating our business. In particular, these instruments limit our ability to, among other things:

 

incur additional debt;

  

  

grant liens on assets;

  

  

issue capital stock with certain features;

  

  

sell or acquire assets outside the ordinary course of business; and

  

  

make fundamental business changes.

 

On June 14, 2017, the lender delivered to us a “Waiver to Loan Agreement” (the “Waiver”) waiving our obligations to provide a report of our auditors covering our December 31, 2016 audited financial statements “without a `going concern' or like qualification or exception and without any qualification or exception as to the scope of such audit” as provided in the debt agreement. The effective date of the Waiver is March 31, 2017 and the Waiver only applies to our failure to deliver such report of our auditors for the December 31, 2016 audited financial statements and not with respect to any future financial years. The Waiver is effective retroactive to the date on which our auditors’ report concerning the December 31, 2016 financial statements which included a “going concern” explanatory paragraph was issued. The lender has not provided us any notice of Default or any Event of Default, as such terms are defined in our agreements with the lender, and has waived for all purposes the December 31, 2016 going concern covenant requirement. Notwithstanding such waiver, as a result of non-compliance with the non-financial covenant as of December 31, 2016, we reclassified long term debt with a net carrying value of $31,487,253 as current liabilities as of December 31, 2016.

 

Effective January 26, 2018, the Company entered into a Forbearance to Loan Agreement (the “Agreement”) with the lender, as administrative agent to the lenders under the loan agreement entered into on October 16, 2014 by and among the Company, certain of its subsidiaries, the lender and the lender’s party thereto (the “Loan Agreement”). Pursuant to the Agreement, the lender, through March 30, 2018 (the “Forbearance Period”), waived the Company’s requirement to maintain at least $6,500,000 minimum in deposit accounts or securities accounts (the “$6,500,000 Minimum”) and agreed to forbear from exercising any of its rights with respect to an event of default related to the $6,500,000 Minimum. The Forbearance Period shall terminate upon the Company’s failure to maintain at least $4,000,000 minimum in deposit accounts or securities accounts or upon the occurrence of certain events of default. The Forbearance agreement was amended and restated effective February 28, 2018 to also include a forbearance of Section 6.1(a)(i) of the agreement “Qualified Auditor’s Report” in the event that the Company’s audited consolidated financial statements for the year ended December 31, 2017 contained a going concern qualification. The agreement was further amended and restated effective March 30, 2018 to extend the forbearance period until April 15, 2018. We expect to extend the Forbearance Period beyond April 15, 2018 but there is no guarantee that we will be able to do so on terms acceptable to us or at all. As a result of the Forbearance Period expiring April 15, 2018, the Company has classified long term debt with a net carrying value of $33,868,700 as current liabilities as of December 31, 2017.

 

Although we are currently in compliance with the covenants contained in the debt agreement, if we fail to comply with the restrictions in our long-term debt agreement, a default may allow the lender under the relevant instruments to accelerate the related debt and to exercise their remedies under these agreements, which will typically include the right to declare the principal amount of that debt, together with accrued and unpaid interest and other related amounts, immediately due and payable, to exercise any remedies the lender may have to foreclose on assets that are subject to liens securing that debt and to terminate any commitments they had made to supply further funds. The long-term debt agreement governing our indebtedness also contains various covenants that may limit our ability to pay dividends.

 

25

 

  

Risks Relating to Our Organization

 

Our certificate of incorporation allows for our Board of Directors to create new series of preferred stock without further approval by our stockholders which could adversely affect the rights of the holders of our common stock.

 

Our Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors also has the authority to issue preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance of a series of preferred stock that would grant to such holders (i) the preferred right to our assets upon liquidation, (ii) the right to receive dividend payments before dividends are distributed to the holders of common stock and (iii) the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our Board of Directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing common stockholders.

 

Any of the actions described in the preceding paragraph could significantly adversely affect the investment made by holders of our common stock. Holders of common stock could potentially not receive dividends that they might otherwise have received. In addition, holders of our common stock could receive less proceeds in connection with any future sale of the Company, whether in liquidation or on any other basis.

 

We are subject to extensive financial reporting and related requirements for which our accounting and other management systems and resources may not be adequately prepared.

 

We are subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended, including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires us to conduct an annual management assessment of the effectiveness of our internal controls over financial reporting. These reporting and other obligations place significant demands on our management, administrative, operational and accounting resources. In order to maintain compliance with these requirements, we may need to (i) upgrade our systems, (ii) implement additional financial and management controls, reporting systems and procedures, (iii) implement an internal audit function, and (iv) hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives in a timely and effective manner, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal controls could have a negative impact on our ability to manage our business and on our stock price.

 

We may be at risk to accurately report financial results or detect fraud if we fail to maintain an effective system of internal controls.

 

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report that contains an assessment by management on the Company’s internal control over financial reporting in their annual and quarterly reports on Form 10-K and 10-Q. We cannot assure you that significant deficiencies or material weaknesses in our disclosure controls and internal control over financial reporting will not be identified in the future. Also, future changes in our accounting, financial reporting, and regulatory environment may create new areas of risk exposure. Failure to modify our existing control environment accordingly may impair our controls over financial reporting and cause our investors to lose confidence in the reliability of our financial reporting which may adversely affect our stock price.

 

26

 

 

Risks Relating to Our Common Stock

   

Our common stock is quoted on the OTCQB which may have an unfavorable impact on our stock price and liquidity.

  

Our common stock is quoted on the OTCQB. The OTCQB is an automated quotation service operated by OTC Markets, LLC. The quotation of our shares on the OTCQB may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, in part because of the inability or unwillingness of certain investors to acquire shares of common stock not traded on a national securities exchange, and could depress the trading price of our common stock and have a long-term adverse impact on our ability to raise capital in the future.

 

Our common stock is subject to the “penny stock” rules of the SEC and the trading market in the securities is limited, which makes transactions in our Common Stock cumbersome and may reduce the value of an investment in our Common Stock. 

  

Rule 15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.  For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

  

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

  

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction.  Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules.  This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.

  

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions.  Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

  

27

 

 

A limited public trading market may cause volatility in the price of our common stock.

 

The quotation of our common stock on the OTCQB marketplace does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Our common stock is subject to this volatility. Sales of substantial amounts of common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short time and our stockholders could suffer losses or be unable to liquidate their holdings. Because our common stock does not trade on a national securities exchange, our common stock is subject to the securities laws of the various states and jurisdictions of the United States in addition to federal securities law. While we may register our common stock or qualify for exemptions for our common stock in one of more states, if we fail to do so the investors in those states where we have not taken such steps may not be allowed to purchase our stock or those who presently hold our stock may not be able to resell their shares without substantial effort and expense. These restrictions and potential costs could be significant burdens on our stockholders. 

 

We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on an investment in our common stock is expected to be limited to an increase in the value of the common stock.

 

We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition, and other business and economic factors as our Board of Directors may consider relevant. If we do not pay dividends, our common stock may be considered less valuable because a return on a shareholder’s investment will only occur if our stock price appreciates.

  

We adopted a Rights Plan in 2010 which may discourage third parties from attempting to acquire control of our Company and have an adverse effect on the price of our common stock.

 

In November 2010, we adopted the Rights Plan and declared a dividend distribution of twenty preferred share purchase rights for each outstanding share of common stock as of the record date on November 24, 2010. Each right, when exercisable, entitles the registered holder to purchase one-hundredth (1/100th) of a share of Series A Preferred Stock, par value $0.001 per share, at a purchase price of $18.00 per one-hundredth (1/100th) of a share of Series A Preferred Stock, subject to certain adjustments. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our Board of Directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.

 

The provisions in our charter, bylaws, Rights Plan and under Delaware law related to the foregoing could discourage takeover attempts that our stockholders would otherwise favor, or otherwise reduce the price that investors might be willing to pay for our common stock in the future.

  

28

 

 

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.  

 

If our stockholders sell substantial amounts of our common stock in the public market, including upon the expiration of any statutory holding period under Rule 144 or registration for resale, or issued upon the conversion of preferred stock, if any, or exercise of warrants, it could create a circumstance commonly referred to as an "overhang" and in anticipation of which the market price of our common stock could fall.  As of December 31, 2017, we had 394,399 shares of common stock issued and outstanding. As of December 31, 2017, we had 2,400 shares underlying warrants that have been registered for resale pursuant to an effective registration statement on Form S-3 (File No. 333-212437), 71,734 shares of common stock underlying our Series G Convertible Preferred Stock (“Series G Preferred Stock”) available for resale under Rule 144 and 53,440 shares of common stock underlying our Series H Convertible Preferred Stock (“Series H Preferred Stock”) for resale under Rule 144. The existence of an overhang, whether or not sales have occurred or are occurring, also could make our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate more difficult.  

 

The rights of our common stockholders are limited by and subordinate to the rights of the holders of Series G  Preferred Stock and Series H Preferred Stock; these rights may have a negative effect on the value of shares of our Common Stock.

 

The holders of our outstanding shares of Series G Preferred Stock and Series H Preferred Stock have rights and preferences generally superior to those of our holders of common stock. The existence of these superior rights and preferences may have a negative effect on the value of shares of our common stock. These rights are more fully set forth in the certificates of designations governing these instruments, and include, but are not limited to:

 

the right to receive a liquidation preference, prior to any distribution of our assets to the holders of our common stock; and

 

 

the right to convert into shares of our common stock at the conversion price set forth in the certificates of designations governing the respective Preferred Stock, which may be adjusted.

  

 

Item 1B - Unresolved Staff Comments.

 

None.

 

29

 

  

Item 2 - Properties.

 

We do not own any real property.

 

Our executive offices are located in Middletown, Rhode Island, where we lease 16,569 square feet of space. Annual rent expense is $183,000 and escalates by approximately 3% annually reaching $213,000 for 2024. Our lease expires December 31, 2024 with an option to renew for an additional five year term.

 

Item 3 - Legal Proceedings.

 

There are no significant legal proceedings pending, and we are not aware of any material proceeding contemplated by a governmental authority, to which we are a party or any of our property is subject.

 

Item 4 - Mine Safety Disclosures.

 

Not applicable

 

30

 

 

PART II

 

Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock was listed on the NASDAQ Capital Market under the symbol TWER from May 31, 2007 until November 30, 2016. Effective December 1, 2016, the Company moved to trade on the OTCQB under the symbol TWER. The following table sets forth the high and low sales prices as reported on the NASDAQ Capital Market for the period from January 1, 2016 through November 30, 2016 and OTCQB for subsequent periods. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. All stock prices included in the following table are adjusted for the 1 for 20 reverse split of our common stock effected on July 7, 2016 and the 1 for 75 Listing Reverse Split implemented on September 29, 2017.

 

Fiscal Year 2017

 

HIGH

   

LOW

 
                 

First Quarter

  $ 15.75     $ 10.50  

Second Quarter

  $ 14.25     $ 6.75  

Third Quarter

  $ 9.00     $ 4.50  

Fourth Quarter

  $ 6.00     $ 3.00  

 

Fiscal Year 2016

 

High

   

Low

 
                 

First Quarter

  $ 600.00     $ 150.00  

Second Quarter

  $ 855.00     $ 180.00  

Third Quarter

  $ 312.75     $ 88.50  

Fourth Quarter

  $ 117.00     $ 13.50  

 

The last reported sales price of our common stock on the OTCQB on December 29, 2017 was $3.15 and on March 23, 2018, the last reported sales price was $3.60. According to the records of our transfer agent, as of March 23, 2018, there were 38 holders of record of our common stock.

 

Dividend Policy

 

We have never declared or paid cash dividends on our common stock, and we do not intend to pay any cash dividends on our common stock in the foreseeable future. Rather, we expect to retain future earnings (if any) to fund the operation and expansion of our business and for general corporate purposes.

 

31

 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

As of December 31, 2017, securities issued and securities available for future issuance under our 2008 Non-Employee Directors Compensation Plan, our 2007 Equity Compensation Plan, our 2007 Incentive Stock Plan, our 2016 Equity Incentive Plan and our 2016 Non-Executive Incentive Plan were as follows:

 

Equity Compensation Plan Information

 

   

Number of

securities to be

issued upon

exercise of

outstanding

options,

warrants and

rights

   

Weighted

average

exercise price

of outstanding

options,

warrants and

rights

   

Number of

securities

remaining

available for

future issuance

under equity

compensation

plans

 

Equity compensation plans approved by security holders

    76,601     $ 117.42       -  

Equity compensation plans not approved by security holders

    -     $ -       -  

Total

    76,601     $ 117.42       -  

 

Recent Sales of Unregistered Securities.

 

There were no unregistered securities sold by us during the year ended December 31, 2017 that were not otherwise disclosed by us during the year in a Quarterly Report on Form 10-Q, a current Report on Form 8-K, or within this Annual Report on Form 10-K.

 

Recent Repurchases of Securities.

 

None.

 

Item 6 - Selected Financial Data.

 

Not applicable

 

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Segment Information

 

Upon its formation in 2013, the Company determined that the Shared Wireless Infrastructure business represented a separate business segment which was reported as the "Shared Wireless Infrastructure" or "Shared Wireless" segment. The Company's existing business which provides fixed wireless services to businesses was reported as the "Fixed Wireless" business segment. The Company also established a Corporate Group so that centralized operating activities which supported both business segments could be reported separately. During the fourth quarter of 2015, the Company determined to exit the Shared Wireless infrastructure business. As a result, the operating results of the Shared Wireless business are reported as discontinued operations in these financial statements. The Fixed Wireless operating results are reported as a single segment referred to as continuing operations. Costs associated with the Corporate Group are included in continuing operations.

  

32

 

 

Overview - Fixed Wireless

 

We provide fixed wireless broadband services to commercial customers and deliver access over a wireless network transmitting over both licensed and unlicensed 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.

 

Characteristics of our Revenues and Expenses

 

We offer 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.

 

Infrastructure and access expenses relate directly to maintaining our network and providing connectivity to our customers. Infrastructure primarily relates to our Points-of-Presence ("PoPs") where we install a substantial amount of equipment, mostly on the roof, which we utilize to connect numerous customers to the internet. We enter into long term lease agreements to maintain our equipment on these PoPs and these rent payments comprise the majority of our infrastructure and access costs. Access expenses primarily consist of bandwidth connectivity agreements that we enter into with national service providers.

 

Network operations costs relate to the daily operations of our network and ensuring that our customers have connectivity within the terms of our service level agreement. We have employees based in our largest markets who are dedicated to ensuring that our network operates effectively on a daily basis. Other employees monitor network operations from our network operating center which is located at our corporate headquarters. Payroll comprises approximately 55% to 60% of network operations costs. Information technology systems and support comprises approximately 15% to 20% of network operations costs.

 

Customer support costs relate to our continuing communications with customers regarding their service level agreement. Payroll comprises approximately 78% to 88% of customer support costs. Other costs include travel expenses to service customer locations, shipping, troubleshooting, and facilities related expenses.

 

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.

  

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 and finance personnel are included in this category. Other costs include accounting, legal and other professional services, and other general operating expenses.

 

33

 

 

Overview - Shared Wireless Infrastructure

 

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”), to operate a new business designed to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets built a carrier-class network which offered a shared wireless infrastructure platform, primarily for (i) co-location of customer owned antenna and related equipment and (ii) Wi-Fi access and offloading. The Company referred to this as its “Shared Wireless Infrastructure” or “Shared Wireless” business. During the fourth quarter of 2015, the Company determined to exit this business and curtailed activities in its smaller markets. The remaining network, located in New York City, was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the NYC network.

 

As further described in Note 4 to our consolidated financial statements, on March 9, 2016, the Company completed a sale and transfer of certain assets to the major cable company (the “Buyer”). The asset purchase agreement provided that the Buyer would assume certain rooftop leases in NYC and acquire ownership of the Wi-Fi access points and related equipment associated with operating the network. The Company retained ownership of all backhaul and related equipment and the parties entered into a backhaul services agreement under which the Company will provide bandwidth to the Buyer at the locations governed by the leases. The agreement is for a three-year period with two, one year renewals and is cancellable by the Buyer on sixty days’ notice. The operating results and cash flows for Hetnets have been presented as discontinued operating results in these consolidated financial statements.

 

Reverse Stock Splits

 

On July 7, 2016, the Company effected a one-for-twenty reverse stock split of its common stock. Consequently, all earnings per share and other share related amounts and disclosures have been retroactively adjusted for all periods presented.

 

On September 29, 2017, the Company effected a one-for-seventy-five reverse stock split. Consequently, all earnings per share and other share related amounts and disclosures have been retroactively adjusted for all periods presented.

 

Results of Operations

 

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

 

Continuing Operations – Fixed Wireless

 

Revenues. Revenues totaled $26,212,550 during the year ended December 31, 2017 compared to $26,895,613 during the year ended December 31, 2016 representing a decrease of $683,063, or 3%. The decrease is due to fewer customers but is offset by new customers having a higher average rate per unit and a lower overall customer churn rate.

 

Customer Churn. Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.31% during the year ended December 31, 2017 compared to 1.70% during the year ended December 31, 2016. Churn levels can fluctuate from period to period depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons.

 

34

 

 

Infrastructure and Access. Infrastructure and access totaled $10,670,673 for the year ended December 31, 2017 compared to $10,366,246 for the year ended December 31, 2016 representing an increase of $304,427, or 3%. The increase primarily relates to higher tower rental costs and maintenance activity offset by a reduction in bandwidth costs.

 

Depreciation and Amortization. Depreciation and amortization totaled $6,734,987 during the year ended December 31, 2017 compared to $10,875,935 during the year ended December 31, 2016 representing a decrease of $4,140,948, or 38%. Depreciation expense totaled $5,324,969 during the year ended December 31, 2017 compared to $9,417,612 during the year ended December 31, 2016 representing a decrease of $4,092,643, or 43%. The depreciation decrease is due to capital investment activity being lower than historical levels and a higher percentage of assets becoming fully depreciated.

 

Amortization expense totaled $1,410,019 during the year ended December 31, 2017 compared to $1,458,323 during the year ended December 31, 2016 representing a decrease of $48,304, or 3%. 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.

 

Network Operations. Network operations totaled $4,342,392 for the year ended December 31, 2017 compared to $5,113,382 for the year ended December 31, 2016 representing a decrease of $770,990, or 15%. The primary reasons for the decrease are lower payroll costs of $334,003, or 11%, due primarily to staffing reductions, and information technology related cost reductions of $221,977, or 24%, due to decreased third party support and software licenses.

 

Customer Support. Customer support totaled $1,608,526 for the year ended December 31, 2017 compared to $1,858,314 for the year ended December 31, 2016 representing a decrease of $249,788, or 13%. The decrease is due to lower payroll related expenses of $367,440, or 23%, due to lower average headcount in the 2017 period as the Company consolidated departments and improved efficiencies, offset by higher other customer support costs of $117,652, or 51%, primarily due to increased maintenance costs.

 

35

 

 

Sales and Marketing. Sales and marketing expenses totaled $3,883,438 during the year ended December 31, 2017 compared to $3,936,915 during the year ended December 31, 2016 representing a decrease of $53,477, or l.4%. Advertising expenses have decreased $161,107, or 66%, as the Company has significantly reduced its Internet marketing initiatives in connection with its current marketing focus on specific businesses in certain connected buildings rather than marketing broadly to all businesses within a market, offset by increased indirect channel commissions of $135,213, or 17%, associated with the Company’s residual program which pays continuing commissions as long as the referred business is a customer.

 

General and Administrative. General and administrative expenses totaled $6,324,084 during the year ended December 31, 2017 compared to $7,777,657 during the year ended December 31, 2016 representing a decrease of $1,453,573, or 19%. Public company costs decreased $872,353, or 77%, primarily due to the contract termination with certain investor relation firms in 2017, and Stock based compensation decreased $586,015, or 39%.

   

Loss on Extinguishment of Debt. Loss on extinguishment of debt totaled zero for the year ended December 31, 2017 compared to $500,000 for the year ended December 31, 2016 representing a decrease of $500,000, or 100%. This charge relates to the exchange of $5,000,000 in long-term debt for Series D Preferred Stock during the year ended December 21, 2016 as more fully described in Note 9, Long-Term Debt and Note 10(j), Capital Stock, in the financial statements.

 

36

 

  

Interest Expense, Net. Interest expense, net totaled $5,201,972 during the year ended December 31, 2017 compared to $6,605,222 during the year ended December 31, 2016 representing a decrease of $1,403,250, or approximately 21%. Interest expense relates to the $35,000,000 secured term loan which closed in October 2014 and capital lease arrangements. The decrease is primarily attributable to the $5,000,000 reduction of debt in the fourth quarter of 2016 as more fully described in Note 9, Long-Term Debt to the consolidated financial statements.

  

Discontinued Operations – Shared Wireless

 

Net loss from discontinued operations for the year ended December 31, 2016 was attributable to the Company’s decision to exit the Hetnets business and curtail activities in certain smaller markets. See Note 4 “Discontinued Operations” within the notes to our consolidated financial statements for additional information about our discontinued operations. 

 

37

 

 

Liquidity and Capital Resources

 

Changes in capital resources during the years ended December 31, 2017 and 2016 are described below.

 

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2017, we had cash and cash equivalents of approximately $7.6 million and working capital deficiency of approximately $31.1 million. We have incurred significant operating losses since inception and continue to generate losses from operations and as of December 31, 2017, we have an accumulated deficit of $189.1 million. These matters raise substantial doubt about our ability to continue as a going concern within one year after the date these financial statements are issued. Management has also evaluated the significance of these conditions in relation to the Company's ability to meet its obligations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

Historically, we have financed our operation through private and public placement of equity securities, as well as debt financing and capital leases. Our ability to fund our longer term cash requirements is subject to multiple risks, many of which are beyond our control. We intend to raise additional capital, either through debt or equity financings or through the potential sale of our assets in order to achieve our business plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that we will be able to do so. There is no assurance that any funds raised will be sufficient to enable us to attain profitable operations or continue as a going concern. To the extent that we are unsuccessful, we may need to curtail or cease our operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.

 

38

 

  

On June 20, 2016, the Company raised $2,280,000 in a private placement offering of common stock and warrants and received net proceeds of $2,236,250.

 

On July 7, 2016, the Company raised $1,250,000 in a private placement offering of convertible preferred stock and warrants and received net proceeds of $1,194,737.

 

On September 12, 2016, the Company raised $4,000,000 in a registered public offering of common stock and received net proceeds of $3,378,280.

 

On November 1, 2016, the underwriter of the September 12, 2016 registered public offering exercised an over-allotment option and the Company raised $600,000 from the sale of common stock and received net proceeds of $528,150.

 

On November 8, 2016, the Company entered into a series of agreements wherein $5,000,000 of the Company’s senior secured debt due to Lender was canceled and the Company simultaneously issued 1,000 shares of Series D Preferred Stock and warrants to purchase 4,000,000 shares of common stock at an exercise price of $1.15 per share.  The cancellation of that debt serves to reduce the balloon payment due in October 2019 by that amount and reduce interest payments by $400,000 on an annual basis.

   

On November 22, 2016, the Company raised $1,000,000 in a private placement offering of preferred stock and received net proceeds of $827,635.

 

Continuing Operations

 

Net Cash Used In Operating Activities. Net cash used in operating activities for the year ended December 31, 2017 totaled $1,423,961 compared to $6,188,647 for the year ended December 31, 2016. The $4,764,686 decrease in cash used in operations is due to a $7,725,039 decrease in net loss, a $2,344,841 decrease in cash outflows associated with operating assets and liabilities, offset by a $5,305,194 decrease in non-cash items.  

 

Net Cash Used in Investing Activities. Net cash used in investing activities for the year ended December 31, 2017 totaled $2,431,752 compared to $2,322,429 for the year ended December 31, 2016 representing an increase of $109,323. Cash capital expenditures totaled $2,407,877 in the 2017 period compared to $2,361,601 in the 2016 period representing an increase of $46,276. Capital expenditures can fluctuate from period to period depending upon the number of customer additions and upgrades, network construction activity related to increasing capacity or coverage, and other related reasons.

 

Net Cash (Used in) Provided by Financing Activities. Net cash used in financing activities for the year ended December 31, 2017 totaled $868,749 compared to net provided by financing activities of $7,213,677 for the year ended December 31, 2016 representing a decrease of $8,082,426. During the 2016 period, we completed three common stock offerings which resulted in net proceeds of $6,142,680 and two preferred stock offerings which resulted in net proceeds of $2,022,372.

 

39

 

  

Discontinued Operations

 

Net cash provided by discontinued operations for the year ended December 31, 2017 was $21,000 compared to net cash used in discontinued operations of $1,546,688 for the year ended December 31, 2016, representing an increase of $1,567,688. See Note 4 “Discontinued Operations” within the notes to our consolidated financial statements for additional information about our discontinued operations.

 

40

 

 

Other Considerations

 

Debt Financing. In October 2014, we entered into the Loan Agreement with Lender. The Lender provided us with a five-year $35,000,000 secured term loan (the “Financing”). The Financing was issued at a 3% discount and the Company incurred $2,893,739 in debt issuance costs. Net proceeds were $31,056,260.

 

On November 8, 2016 and in connection with a financing transaction as more fully discussed in Note 10, Capital Stock, an investor acquired $5,000,000 of the Company's obligations to the Lender consisting of principal and accrued interest of $4,935,834 and $64,166, respectively. The investor then immediately exchanged such obligations for 1,000 shares of the Company's Series D Preferred Stock and warrants for the purchase of up to 53,334 shares of the Company's common stock.

 

The loan bears interest at a rate equal to the greater of (i) the sum of the most recently effective one month LIBOR as in effect on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that accrues at 4% per annum.

 

The aggregate principal amount outstanding plus all accrued and unpaid interest is due in October 2019. The Company has the option of making principal payments (i) on or before October 16, 2016 (the “Second Anniversary”) but only for the full amount outstanding and (ii) after the Second Anniversary in minimum amount(s) of $5,000,000 plus multiples of $1,000,000.

 

In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, we issued warrants (the “Warrants”) to purchase 2,400 shares of common stock of which two-thirds have an exercise price of $1,890 and one-third have an exercise price of $15, subject to standard anti-dilution provisions. The Warrants have a term of seven and a half years.

 

41

 

  

Impact of Inflation, Changing Prices and Economic Conditions 

  

Pricing for many technology products and services have historically decreased over time due to the effect of product and process improvements and enhancements. In addition, economic conditions can affect the buying patterns of customers. While our customer base experienced a decline during 2017, our overall pricing increased during that same period. Customers continued to place a premium on value and performance. Pricing of services continued to be a focus for prospective buyers with multi-point and midrange product pricing remaining steady while competition for high capacity links intensified. In part, pressure on high capacity links was due to decreased costs for equipment and some competitors willing to sacrifice margins. We believe that our customers will continue to upgrade their bandwidth service. The continued migration of many business activities and functions to the Internet, and growing use of cloud computing should also result in increased bandwidth requirements over the long term. Inflation has remained relatively modest and has not had a material impact on our business in recent years.

  

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 normally 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.

 

42

 

 

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.

 

Asset Retirement Obligations

 

The Financial Accounting Standards Board (“FASB”) guidance on asset retirement obligations addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated costs. This guidance requires the recognition of an asset retirement obligation and an associated asset retirement cost when there is a legal obligation associated with the retirement of tangible long-lived assets. Our network equipment is installed on both buildings in which we have a lease agreement (“Company Locations”) and at customer locations. In both instances, the installation and removal of our equipment is not complicated and does not require structural changes to the building where the equipment is installed. Costs associated with the removal of our equipment at Company or customer locations are not material, and accordingly, we have determined that we do not presently have asset retirement obligations under the FASB’s accounting guidance.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements, financings, or other relationships with unconsolidated entities known as “Special Purposes Entities.”

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements applicable to our financial statements are described in Note 3 to our financial statements titled Basis of Presentation and Summary of Significant Accounting Policies which is included elsewhere in this document.

 

43

 

 

Item 7A - Quantitative and Qualitative Disclosures About Market Risk.

 

Market Rate 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 December 31, 2017, 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.

 

Interest Rate Risk

 

Our interest rate risk exposure is to a decline in interest rates which would result in a decline in interest income. Due to our current market yields, a further decline in interest rates would not have a material impact on earnings.

 

Foreign Currency Exchange Rate Risk

 

We do not have any material foreign currency exchange rate risk.

 

44

 

  

Item 8 - Financial Statements and Supplementary Data.

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

Index to Consolidated Financial Statements

  

 

Page

  

  

Report of Independent Registered Public Accounting Firm

46

 

 

Consolidated Balance Sheets

47

 

 

Consolidated Statements of Operations

48

 

 

Consolidated Statements of Stockholders’ Deficit

49

 

 

Consolidated Statements of Cash Flows

50

 

 

Notes to Consolidated Financial Statements

51

 

                                                                         

 

45

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Stockholders and Board of Directors

of Towerstream Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Towerstream Corporation and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ Marcum llp

 

Marcum llp

 

We have served as the Company’s auditor since 2007.

 

 

New York, NY
April 2, 2018

 

46

 

   

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   

As of December 31,

 
   

2017

   

2016

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 7,568,982     $ 12,272,444  

Accounts receivable, net of reserves for uncollectable accounts of $95,884 and $64,824, respectively

    912,333       505,074  

Prepaid expenses and other current assets

    242,320       434,444  

Current assets of discontinued operations

    -       231,978  

Total Current Assets

    8,723,635       13,443,940  
                 

Property and equipment, net

    13,430,980       15,252,357  
                 

Intangible assets, net

    2,242,471       3,652,490  

Goodwill

    1,674,281       1,674,281  

Other assets

    386,047       369,769  

Total Assets

  $ 26,457,414     $ 34,392,837  
                 

Liabilities and Stockholders’ (Deficit) Equity

               

Current Liabilities

               

Accounts payable

  $ 1,150,861     $ 323,625  

Accrued expenses

    1,622,036       911,210  

Accrued interest

    722,629       -  

Deferred revenues

    934,450       1,161,520  

Current maturities of capital lease obligations

    382,918       791,009  

Current liabilities of discontinued operations

    1,029,022       1,240,000  

Deferred rent

    78,048       110,738  

Long-term debt (callable), net of debt discounts and deferred financing costs of $789,287 and $1,803,742, respectively

    33,868,700       31,487,253  

Total Current Liabilities

    39,788,664       36,025,355  
                 

Long-Term Liabilities

               
                 

Capital lease obligations, net of current maturities

    305,947       158,703  

Other

    754,203       1,062,237  

Total Long-Term Liabilities

    1,060,150       1,220,940  

Total Liabilities

    40,848,814       37,246,295  
                 

Commitments (Note 15)

               
                 

Stockholders' Deficit

               

Preferred stock, par value $0.001; 5,000,000 shares authorized;

               

Series D Convertible Preferred - 0 and 1,233 shares issued and outstanding, respectively; Liquidation value of $0 and $1,233,000 as of December 31, 2017 and 2016

    -       2  

Series E Convertible Preferred - 0 and 500,000 shares issued and outstanding, respectively; Liquidation value of $0 and $500 as of December 31, 2017 and 2016

    -       500  

Series F Convertible Preferred – 0 and 1,233 shares issued and outstanding, respectively; Liquidation value of $0 and $1,233,000 as of December 31, 2017 and 2016

    -       1  

Series G Convertible Preferred - 538 and 0 shares issued and outstanding, respectively; Liquidation value of $538,000 and $0 as of December 31, 2017 and 2016

    1       -  

Series H Convertible Preferred - 501 and 0 shares issued and outstanding, respectively; Liquidation value of $501,000 and $0 as of December 31, 2017 and 2016

    1       -  

Common stock, par value $0.001; 200,000,000 shares authorized; 394,399 and 244,369 shares issued and outstanding as of December 31, 2017 and 2016, respectively

    394       244  

Additional paid-in-capital

    174,733,113       173,801,022  

Accumulated deficit

    (189,124,909

)

    (176,655,227

)

Total Stockholders' Deficit

    (14,391,400

)

    (2,853,458

)

Total Liabilities and Stockholders' Deficit

  $ 26,457,414     $ 34,392,837  

 

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

 

47

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   

For the Years Ended

December 31,

 
   

2017

   

2016

 
                 

Revenues

  $ 26,212,550     $ 26,895,613  
                 

Operating Expenses

               

Infrastructure and access

    10,670,673       10,366,246  

Depreciation and amortization

    6,734,987       10,875,935  

Network operations

    4,342,392       5,113,382  

Customer support

    1,608,526       1,858,314  

Sales and marketing

    3,883,438       3,936,915  

General and administrative

    6,324,084       7,777,657  

Total Operating Expenses

    33,564,100       39,928,449  

Operating Loss

    (7,351,550

)

    (13,032,836

)

Other Income/(Expense)

               

Interest expense, net

    (5,201,972

)

    (6,605,222

)

Loss on extinguishment of debt

    -       (500,000

)

Loss before income taxes

    (12,553,522

)

    (20,138,058

)

                 

(Provision) benefit for income taxes

    83,840       (56,663

)

Loss from continuing operations

    (12,469,682

)

    (20,194,721

)

Loss from discontinued operations

               

Loss from discontinued operations

    -       (1,419,517

)

Gain on sale of assets

    -       1,177,742  

Total loss from discontinued operations

    -       (241,775

)

                 

Net Loss

    (12,469,682

)

    (20,436,496

)

Deemed dividend to Series D and F preferred stockholders

    (1,905,570

)

    (1,721,745

)

Net loss attributable to common stockholders

  $ (14,375,252

)

  $ (22,158,241

)

                 

(Loss) income per share – basic and diluted

               

Continuing

  $ (43.01

)

  $ (274.06

)

Discontinued

               

Operating loss

    -       (17.75

)

Gain on sale of assets

    -       14.73  

Total discontinued

    -       (3.02

)

Net loss per common share – Basic and diluted

  $ (43.01

)

  $ (277.08

)

                 

Weighted average common shares outstanding – Basic and diluted

    334,234       79,969  

  

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

 

48

 

 

 

  TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

For the Years Ended December 31, 2017 and 2016

  

   

Series B Convertible

   

Series C Convertible

   

Series D Convertible

   

Series E Convertible

   

Series F Convertible

   

Series G Convertible

   

Series H Convertible

                   

Additional

                 
   

Preferred Stock

   

Preferred Stock

   

Preferred Stock

   

Preferred Stock

   

Preferred Stock

   

Preferred Stock

   

Preferred Stock

   

Common Stock

   

Paid-In-

   

Accumulated

         
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Deficit

   

Total

 

Balance at January 1, 2016

    -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       -     $ -       44,567     $ 45     $ 158,764,373     $ (156,218,731 )   $ 2,545,687  

Issuance on June 20, 2016 of 10,000 units consisting of shares of common stock and warrants at $228.00 per unit for gross cash proceeds of $2,280,000, net of transaction costs of $43,750

    -       -       -       -       -       -       -       -       -       -       -       -       -       -       10,000       10       2,236,240       -       2,236,250  

Issuance on July 7, 2016 of 892,857 units consisting of shares of Series B Convertible Preferred Stock and warrants at $1.40 per unit for gross cash proceeds of $1,250,000, net of transaction costs of $56,156

    892,857       893       -       -       -       -       -       -       -       -       -       -       -       -       -       -       1,193,844       -       1,194,737  

Issuance on July 21 and July 26, 2016 of 5,953 shares of common stock in connection with the conversion of 892,857 shares of Series B Convertible Preferred Stock

    (892,857 )     (893 )     -       -       -       -       -       -       -       -       -       -       -       -       5,953       6       887       -       -  

Issuance on September 12, 2016 of 680,000 shares of Series C Convertible Preferred Stock in exchange for certain outstanding warrants

    -       -       680,000       680       -       -       -       -       -       -       -       -       -       -       -       -       (680 )     -       -  

Issuance on September 12, 2016 of 39,507 shares of common stock at $101.25 per share for gross cash proceeds of $4,000,000, net of transaction costs of $621,720

    -       -       -       -       -       -       -       -       -       -       -       -       -       -       39,507       40       3,378,240       -       3,378,280  

Issuance on various dates between October 10 and October 18, 2016, inclusive, of 9,067 shares of common stock in connection with the conversion of 680,000 shares of Series C Convertible Preferred Stock

    -       -       (680,000 )     (680 )     -       -       -       -       -       -       -       -       -       -       9,067       9       671       -       -  

Issuance on November 1, 2016 of 5,926 shares of common stock at $101.25 per share for gross cash proceeds of $600,000, net of transaction costs of $71,850

    -       -       -       -       -       -       -       -       -       -       -       -       -       -       5,926       6       528,144       -       528,150  

Issuance on November 8, 2016 of 1,000 shares of Series D Convertible Preferred Stock with a value of $5,500,000 in exchange for the reduction of $5,000,000 in long-debt, net of transaction costs of $170,264

    -       -       -       -       1,000       1       -       -       -       -       -       -       -       -       -       -       5,329,735       -       5,329,736  

Recognition on November 8, 2016 of beneficial conversion feature of $1,375,000 related to the modification of the conversion terms of Series D Convertible Preferred Stock and recorded as a deemed dividend

    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  

Issuance on various dates between November 10 and November 16, 2016, inclusive, of 43,044 shares of common stock in connection with the conversion of 378 shares of Series D Convertible Preferred Stock

    -       -       -       -       (378 )     -       -       -       -       -       -       -       -       -       43,044       43       (43 )     -       -  

Issuance on November 22, 2016 of 2,799 shares of Series D Convertible Preferred Stock in connection with a 5.5 for 1 forward split of that series of stock

    -       -       -       -       2,799       3       -       -       -       -       -       -       -       -       -       -       (3 )     -       -  

Issuance on November 22, 2016 of 1,000 shares of common stock at $1,000 per share for gross cash proceeds of $1,000,000, net of transaction costs of $172,366

    -       -       -       -       1,000       1       -       -       -       -       -       -       -       -       -       -       827,634       -       827,635  

Recognition on November 22, 2016 of beneficial conversion feature of $346,745 related to the modification of the conversion terms of Series D Convertible Preferred Stock and recorded as a deemed dividend

    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -  

Issuance on November 22, 2016 of 2,000,000 shares of Series E Convertible Preferred Stock in exchange for certain outstanding warrants

    -       -       -       -       -       -       2,000,000       2,000       -       -       -       -       -       -       -       -       (2,000 )     -       -  

Issuance on various dates between November 22 and November 29, 2016, inclusive, of 63,334 shares of common stock in connection with the conversion of 1,955 shares of Series D Convertible Preferred Stock

    -       -       -       -       (1,955 )     (2 )     -       -       -       -       -       -       -       -       63,334       63       (61 )     -       -  

Issuance on December 19, 2016 of 20,000 shares of common stock in connection with the conversion of 1,500,000 shares of Series E Convertible Preferred Stock

    -       -       -       -       -       -       (1,500,000 )     (1,500 )     -       -       -       -       -       -       20,000       20       1,480       -       -  

Issuance on December 30, 2016 of 1,233 shares of Series F Convertible Preferred Stock in exchange for 1,233 shares of Series D Convertible Preferred Stock

    -       -       -       -       (1,233 )     (1 )     -       -       1,233       1       -       -       -       -       -       -       -       -       -  

Issuance on various dates between February 1, and September 21, 2016, inclusive, of 2,573 shares of common stock at an average of $189.75 per share for services valued at $488,656

    -       -       -       -       -       -       -       -       -       -       -       -       -       -       2,573       2       488,654       -       488,656  

Issuance at the end of each quarter in connection with the employee stock purchase plan an aggregate total of 398 shares of common stock at an average price of $72.75 per share for proceeds of $28,952

    -       -       -       -       -       -       -       -       -       -       -       -       -       -       398       -       28,952       -       28,952  

Share-based compensation expense for options issued to directors, management, and employees during the current and previous years

    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       1,024,955       -       1,024,955  

Net loss

    -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       -       (20,436,496 )     (20,436,496 )

Balance at January 1, 2017

    -       -       -       -       1,233       2       500,000       500       1,233       1       -       -       -       -       244,369       244       173,801,022       (176,655,227 )     (2,853,458 )

Conversion on January 9, 2017 of Series E convertible preferred into common shares

                                    -       -       (500,000 )     (500 )     -       -       -       -       -       -       6,667       7       493       -       -  

Conversion on various dates from January 26, 2017 to April 13,2017, inclusive, Series F convertible preferred into common shares

                                    -       -       -       -       (590 )     -       -       -       -       -       39,334       39       (39 )     -       -  

Conversion on May 26, 2017 of Series D Convertible Preferred Stock into Series G Preferred stock, and the conversion of Series F Convertible Preferred stock into Series H Convertible Preferred Stock

                                    (1,233 )     (2 )     -       -       (643 )     (1 )     938       1       938       1       -       -       1       -       -  

Conversion on various dates from May 30, 2017 to June 29,2017, inclusive, Series H convertible preferred into common shares

                                    -       -       -       -       -       -       -       -       (437 )     -       46,614       47       (47 )     -       -  

Conversion on various dates from June 30, 2017 to August 22,2017, inclusive, Series G convertible preferred into common shares

                                                                                    (400 )     -                       53,335       53       (53 )     -       -  

Additional shares issued as a result of the rounding provisions of the reverse stock split of September 29, 2017

                                    -       -       -       -       -       -       -       -       -       -       4,050       4       (4 )     -       -  

Stock-based compensation for options

                                    -       -       -       -       -       -       -       -       -       -       -       -       931,382       -       931,382  

Issuance of common stock under employee stock purchase plan

                                    -       -       -       -       -       -       -       -       -       -       30       -       358       -       358  

Net Loss

                                    -       -       -       -       -       -       -       -       -       -       -       -       -       (12,469,682 )     (12,469,682 )
                                                                                                                                                         

Balance at December 31, 2017

    -       -       -       -       -       -       -       -       -       -       538       1       501       1       394,399       394       174,733,113       (189,124,909 )     (14,391,400 )

 

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

 

49

 

   

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS 

 

   

For the Years Ended

December 31,

 
   

2017

   

2016

 

Cash Flows Used In Operating Activities:

               

Net loss

  $ (12,469,682

)

  $ (20,436,496

)

Loss from discontinued operations

    -       241,775  

Net loss from continuing operations

    (12,469,682

)

    (20,194,721

)

Adjustments to reconcile loss from continuing operations to net cash used in operating activities:

               

Provision (benefit) for income taxes

    (83,840

)

    56,663  

Provision for doubtful accounts

    122,000       25,000  

Depreciation for property, plant and equipment

    5,324,969       9,417,612  

Amortization for intangible assets

    1,410,019       1,458,323  
Interest added to note principal     1,366,992       1,499,315  

Amortization of debt discount and deferred financing costs

    1,014,456       1,609,588  

Loss on extinguishment of debt

    -       500,000  

Write-off of debt discount and deferred financing costs in connection with extinguishment of debt

    -       331,609  

Accrued interest

    722,629       (21,389 )

Stock-based compensation - Options

    931,382       1,024,955  

Stock-based compensation – Stock issued for services

    -       488,656  

Stock-based compensation – Employee stock purchase plan

    52       4,523  

Deferred rent

    (256,886

)

    (537,888

)

Changes in operating assets and liabilities:

               

Accounts receivable

    (529,259

)

    (221,523

)

Prepaid expenses and other current assets

    192,124       39,585  

Other assets

    7,598       (24,584

)

Account payable

    827,236       (553,509

)

Accrued expenses

    223,319       (765,628

)

Deferred revenues

    (227,070

)

    (325,234

)

Total Adjustments

    11,045,721       14,006,074  

Net Cash Used In Continuing Operating Activities

    (1,423,961

)

    (6,188,647

)

Net Cash Provided By (Used In) Discontinued Operating Activities

    21,000       (1,546,688

)

Net Cash Used In Operating Activities

    (1,402,961

)

    (7,735,335

)

                 

Cash Flows Used In Investing Activities:

               

Acquisitions of property and equipment

    (2,407,877

)

    (2,361,601

)