Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 11/06/2008 06:02:51)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.

Commission file number 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.)
   
55 Hammarlund Way
Middletown, Rhode Island
(Address of principal executive offices)
02842
(Zip Code)

Registrant’s telephone number: (401) 848-5848

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No ¨

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

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

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

As of November 3, 2008, there were 34,556,755 shares of the issuer’s common stock outstanding.



TOWERSTREAM CORPORATION AND SUBISIDIARIES

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Table of Contents
 
PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

TOWERSTREAM CORPORATION AND SUBISIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
September 30, 
2008
 
December 31, 2007
 
Assets
             
Current Assets
             
Cash and cash equivalents
 
$
28,084,915
 
$
40,756,865
 
Accounts receivable, net of allowance for doubtful accounts of $101,930 and     $77,615, respectively
   
258,725
   
184,621
 
Prepaid expenses and other current assets
   
362,634
   
736,156
 
Total Current Assets
   
28,706,274
   
41,677,642
 
               
Property and equipment, net
   
12,137,660
   
8,518,750
 
               
Security deposits and other assets
   
260,318
   
283,790
 
FCC licenses
   
875,000
   
475,000
 
Total Assets
 
$
41,979,252
 
$
50,955,182
 
               
Liabilities and Stockholders’ Equity
             
               
Current Liabilities
             
Current maturities of capital lease obligations
 
$
34,293
 
$
47,486
 
Accounts payable
   
1,299,197
   
1,413,970
 
Accrued expenses
   
1,032,560
   
685,576
 
Deferred revenues
   
990,010
   
631,506
 
Total Current Liabilities
   
3,356,060
   
2,778,538
 
               
Other Liabilities
             
Long-term debt, net of deferred debt discount of $177,106   and   $357,139, respectively
   
2,572,894
   
3,142,861
 
Capital lease obligations, net of current maturities
   
2,451
   
25,341
 
Deferred rent
   
419,765
   
273,154
 
Total Other Liabilities
   
2,995,110
   
3,441,356
 
Total Liabilities
   
6,351,170
   
6,219,894
 
               
Commitments (Note 9)
             
               
Stockholders' Equity
             
Preferred stock, par value $0.001;   5,000,000 authorized, none outstanding
   
   
 
Common stock, par value $0.001;   70,000,000 shares authorized; 34,556,755 and   34,080,053 issued and outstanding, respectively
   
34,557
   
34,080
 
Additional paid-in-capital
   
54,649,976
   
53,223,033
 
Deferred consulting costs
   
-
   
(20,100
)
Accumulated deficit
   
(19,056,451
)
 
(8,501,725
)
Total Stockholders' Equity
   
35,628,082
   
44,735,288
 
Total Liabilities and Stockholders' Equity
 
$
41,979,252
 
$
50,955,182
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

1

 
Table of Contents
 
TOWERSTREAM CORPORATION AND SUBISIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
   
2008
 
2007
 
2008
 
2007
 
                   
Revenues
 
$
2,869,949
 
$
1,764,689
 
$
7,445,924
 
$
4,977,449
 
                           
Operating Expenses
                         
Cost of revenues (exclusive of depreciation)
   
1,030,524
   
659,147
   
3,044,763
   
1,670,480
 
Depreciation
   
857,368
   
501,889
   
2,286,674
   
1,278,778
 
Customer support services
   
453,410
   
257,842
   
1,321,780
   
608,890
 
Sales and marketing
   
2,058,901
   
1,049,907
   
5,926,676
   
2,145,813
 
General and administrative
   
1,691,498
   
1,489,290
   
5,565,547
   
4,968,722
 
Total Operating Expenses
   
6,091,701
   
3,958,075
   
18,145,440
   
10,672,683
 
Operating Loss
   
(3,221,752
)
 
(2,193,386
)
 
(10,699,516
)
 
(5,695,234
)
Other Income (Expense)
                         
Interest income
   
123,563
   
596,593
   
560,434
   
933,420
 
Interest expense
   
(105,589
)
 
(132,961
)
 
(394,565
)
 
(841,924
)
Other expense, net
   
(12,255
)
 
(15,987
)
 
(21,079
)
 
(171,108
)
Total Other Income (Expense)
   
5,719
   
447,645
   
144,790
   
(79,612
)
Net Loss
 
$
(3,216,033
)
$
(1,745,741
)
$
(10,554,726
)
$
(5,774,846
)
                           
Net loss per common share – basic and diluted
 
$
(0.09
)
$
(0.05
)
$
(0.31
)
$
(0.21
)
                           
Weighted average common shares outstanding – basic and diluted
   
34,556,580
   
34,076,803
   
34,536,321
   
27,614,003
 

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

2

 
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TOWERSTREAM CORPORATION AND SUBISIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Nine Months Ended September 30,
 
   
2008
 
2007
 
           
Cash Flows From Operating Activities
             
Net loss
 
$
(10,554,726
)
$
(5,774,846
)
Adjustments to reconcile net loss to net cash used in operating activities:
             
Provision for doubtful accounts receivable
   
65,000
   
60,000
 
Depreciation
   
2,286,674
   
1,278,778
 
Stock-based compensation
   
697,529
   
738,411
 
Non-cash interest on notes payable
   
73,393
   
74,882
 
Amortization of beneficial conversion feature
   
-
   
378,055
 
Amortization of deferred debt discount
   
106,640
   
125,877
 
Amortization of financing costs
   
43,688
   
41,746
 
Loss on sale and disposition of property and equipment
   
21,394
   
21,137
 
Deferred rent
   
146,610
   
-
 
Changes in operating assets and liabilities:
             
Accounts receivable
   
(139,104
)
 
(51,210
)
Prepaid expenses and other current assets
   
373,522
   
(371,603
)
Accounts payable
   
(114,773
)
 
27,058
 
Accrued expenses
   
346,984
   
569,175
 
Deferred compensation
   
-
   
(10,000
)
Deferred revenues
   
358,504
   
288,031
 
Total Adjustments
   
4,266,061
   
3,170,337
 
Net Cash Used In Operating Activities
   
(6,288,665
)
 
(2,604,509
)
               
Cash Flows From Investing Activities
             
Acquisitions of property and equipment
   
(5,928,678
)
 
(4,294,055
)
Proceeds from sale of property and equipment
   
1,700
   
42,500
 
Acquisitions of FCC licenses
   
(400,000
)
 
(125,000
)
Change in security deposits
   
(20,215
)
 
(8,202
)
Net Cash Used In Investing Activities
   
(6,347,193
)
 
(4,384,757
)
               
Cash Flows From Financing Activities
             
Net proceeds from sale of debentures
   
-
   
3,360,000
 
Repayment of stockholder notes
   
-
   
(200,000
)
Repayment of equipment note
   
-
   
(7,593
)
Repayment of capital leases
   
(36,083
)
 
(45,408
)
Proceeds from exercise of warrants
   
-
   
119,973
 
Payment to warrant holders for fractional shares upon cashless exercise
   
(9
)
 
-
 
Net proceeds from sale of common stock
   
-
   
48,257,918
 
Net Cash (Used In)/Provided By Financing Activities
   
(36,092
)
 
51,484,890
 
               
Net (Decrease)/Increase In Cash and Cash Equivalents
   
(12,671,950
)
 
44,495,624
 
               
Cash and Cash Equivalents - Beginning
   
40,756,865
   
160,363
 
Cash and Cash Equivalents - Ending
 
$
28,084,915
 
$
44,655,987
 

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

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TOWERSTREAM CORPORATION AND SUBISIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
 
   
Nine Months Ended September 30,
 
   
2008
 
2007
 
           
Supplemental Disclosures of Cash Flow Information
             
Cash paid during the periods for:
             
Interest
 
$
171,284
 
$
48,262
 
Non-cash investing and financing activities:
             
Conversion of principal and interest on notes payable into shares of common stock
 
$
-
 
$
2,191,636
 
Conversion of long-term debt into shares of common stock
 
$
750,000
 
$
-
 
Assumption of accounts payable in reverse merger transaction
 
$
-
 
$
16,752
 

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

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TOWERSTREAM CORPORATION AND SUBISIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
For the Nine Months Ended September 30, 2008

   
Common Stock
 
Additional
Paid-In-
Capital
 
Deferred 
Consulting 
Costs
 
Accumulated 
Deficit
 
Total
 
   
Shares
 
 Amount
 
Balance at January 1, 2008
   
34,080,053
 
$
34,080
 
$
53,223,033
 
$
(20,100
)
$
(8,501,725
)
$
44,735,288
 
Issuance of common stock upon conversion   of debentures
   
272,727
   
273
   
749,727
               
750,000
 
Non-cash exercise of options
   
19,037
   
19
   
(19
)
             
 
Non-cash exercise of warrants
   
184,938
   
185
   
(185
)
             
 
Payment to warrant holders for fractional   shares upon cashless exercise
               
(9
)
             
(9
)
Stock-based compensation
               
677,429
               
677,429
 
Amortization of deferred consulting costs
                     
20,100
         
20,100
 
Net loss
                           
(10,554,726
)
 
(10,554,726
)
Balance at September 30, 2008
   
34,556,755
 
$
34,557
 
$
54,649,976
 
$
 
$
(19,056,451
)
$
35,628,082
 

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

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TOWERSTREAM CORPORATION AND SUBISIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1.    Organization and Nature of Business
 
Towerstream Corporation (herein after referred to as ‘‘Towerstream’’ or the ‘‘Company’’) was formed on December 17, 1999, and was incorporated in Delaware. In January 2007, the Company terminated its Sub S tax status and elected to operate as a C corporation with its corporate headquarters located in Rhode Island.
 
On January 12, 2007, Towerstream merged with a newly formed subsidiary of University Girls Calendar Ltd. (‘‘UGC’’), a publicly traded shell company. In connection with the merger, all outstanding shares of UGC were cancelled, except for 1,900,000 shares of common stock. Also, in connection with the merger, UGC issued 15,000,000 shares of its common stock for all the outstanding common stock of Towerstream. As a result of the transaction, the former owners of Towerstream became the controlling stockholders of UGC which also changed its name to Towerstream Corporation. The previously private company Towerstream Corporation changed its name to Towerstream I, Inc., and became a wholly-owned subsidiary of the publicly traded company. The merger of Towerstream and UGC is a reverse merger that has been accounted for as a recapitalization of Towerstream.
 
The Company provides fixed wireless broadband services to commercial users based on a monthly subscription model. Through transmissions over both regulated and unregulated radio spectrum, the Company provides customers high speed Internet access over a fixed wireless network which supports bandwidth on demand, wireless redundancy, virtual private networks (“VPNs”), disaster recovery, bundled data and video services. The Company provides service to business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Providence and Newport, Rhode Island.
 
Note 2.    Summary of Significant Accounting Policies
 
Basis of Presentation.     The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2008, are not necessarily indicative of the operating results for the full fiscal year or any future period.
 
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-KSB for the year ended December 31, 2007, and updated, as necessary, in this Quarterly Report on Form 10-Q.
 
Use of Estimates.     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 at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Reclassifications.      Certain accounts in the prior period condensed consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current period condensed consolidated financial statements. These reclassifications have no effect on the previously reported net loss.

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Concentration of Credit Risk.     Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents.
 
The Company maintains its cash and cash equivalents accounts at financial institutions with balances, at times, in excess of federally insured limits. As of September 30, 2008, the Company had cash and cash equivalent balances of approximately $1,237,000 in excess of the federally insured limit of $100,000. In October 2008, the Federal Deposit Insurance Corporation increased the federally insured limit to $250,000 through December 31, 2009. The Company also has substantial cash equivalent balances which are invested in various Aaa rated institutional money market funds. As of September 30, 2008, the Company had cash equivalent balances of approximately $26,339,000 invested in excess of the Securities Investor Protection Corporation (‘‘SIPC’’) limit of $500,000.
 
Recent Accounting Pronouncements.      In May 2008, the Financial Accounting Standards Board (“FASB”) issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is not permitted. The Company currently is assessing the impact of FSP APB 14-1 on its condensed consolidated financial position, results of operations or cash flows.

In May 2008, FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles,”   (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company does not expect SFAS 162 to have a material impact on its condensed consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued Statement No. 141(R), "Business Combinations," (“SFAS 141(R)”), which will change the accounting for and reporting of business combination transactions. The most significant changes in the accounting for business combinations under SFAS 141(R) include: (1) valuation of any acquirer shares issued as purchase consideration will be measured at fair value as of the acquisition date; (2) contingent purchase consideration, if any, will generally be measured and recorded at the acquisition date, at fair value, with any subsequent change in fair value reflected in earnings rather than through an adjustment to the purchase price allocation; (3) acquired in-process research and development costs, which have historically been expensed immediately upon acquisition, will now be capitalized at their acquisition date fair values, measured for impairment over the remaining development period and, upon completion of a successful development project, amortized to expense over the asset's estimated useful life; (4) acquisition related costs will be expensed as incurred rather than capitalized as part of the purchase price allocation; and (5) acquisition related restructuring cost accruals will be reflected within the acquisition accounting only if certain specific criteria are met as of the acquisition date; the prior accounting convention, which permitted an acquirer to record restructuring accruals within the purchase price allocation as long as certain, broad criteria had been met, generally around formulating, finalizing and communicating certain exit activities, will no longer be permitted. SFAS 141(R) is effective for reporting periods beginning on or after December 15, 2008. Earlier adoption is not permitted. The Company anticipates that adoption of this pronouncement will significantly impact how the Company accounts for business combination transactions consummated after the effective date.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51," (“SFAS 160”), effective for fiscal years beginning after December 15, 2008. SFAS 160 clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including the requirement that the noncontrolling interest be classified as a component of equity. SFAS 160 is required to be adopted simultaneously with SFAS 141(R). The Company does not expect that this pronouncement will have a significant impact on the Company’s condensed consolidated financial position, results of operations or cash flows.

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On February 15, 2007, the FASB issued SFAS No. 159, entitled ‘‘The Fair Value Option for Financial Assets and Financial Liabilities,’’ (“SFAS 159”). The guidance in SFAS 159 ‘‘allows’’ reporting entities to ‘‘choose’’ to measure many financial instruments and certain other items at fair value. The objective underlying the development of this literature is to improve financial reporting by providing reporting entities with the opportunity to reduce volatility in reported earnings that results from measuring related assets and liabilities differently without having to apply complex hedge accounting provisions, using the guidance in SFAS No. 133, as amended, entitled ‘‘Accounting for Derivative Instruments and Hedging Activities.’’ The provisions of SFAS No. 159 are applicable to all reporting entities and are effective as of the beginning of the first fiscal year that begins subsequent to November 15, 2007. The Company adopted SFAS 159 effective January 1, 2008.  Upon adoption, the Company did not elect the fair value option for any items within the scope of SFAS 159 and, therefore, the adoption of SFAS 159 did not have an impact on the Company’s condensed consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). This statement provides a single definition of fair value, a framework for measuring fair value, and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123 (revised 2004), “Share-Based Payment,” and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 157 on January 1, 2008, as required for its financial assets and financial liabilities.  However, the FASB deferred the effective date of SFAS 157 for one year as it relates to fair value measurement requirements for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of SFAS 157 for the Company’s financial assets and financial liabilities did not have a material impact on its condensed consolidated financial statements. The Company is evaluating the effect the implementation of SFAS 157 for its nonfinancial assets and nonfinancial liabilities will have on the Company’s condensed consolidated financial statements.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That is Not Active” (“FSP 157-3”), which clarifies the application of SFAS 157 when the market for a financial asset is inactive.  Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value.  The guidance in FSP 157-3 is effective immediately and did not have a material impact on the Company’s condensed consolidated financial statements.
 
Note 3.    Property and Equipment
 
The Company’s property and equipment is comprised of:

   
September 30, 2008
 
December 31, 2007
 
Network and base station equipment
 
$
10,239,817
 
$
7,448,258
 
Customer premise equipment
   
6,301,337
   
4,120,647
 
Furniture, fixtures and equipment
   
1,518,010
   
1,294,472
 
Computer equipment
   
548,321
   
476,206
 
Leasehold improvements
   
775,420
   
496,368
 
System software
   
789,809
    
473,261
 
 
   
20,172,714
       
14,309,212
 
Less: accumulated depreciation
   
8,035,054
   
5,790,462
 
 
 
$
12,137,660
 
$
8,518,750
 

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Depreciation expense for the three months ended September 30, 2008 and 2007 was $857,368 and $501,889, respectively. Depreciation expense for the nine months ended September 30, 2008 and 2007 was $2,286,674   and $1,278,778, respectively. During the nine months ended September 30, 2008, the Company sold or wrote-off property and equipment with $65,177 of original cost and $42,082 of accumulated depreciation.
 
Property held under capital leases included within the Company’s property and equipment consists of the following:  

   
September 30, 2008
 
December 31, 2007
 
Network and base station equipment
 
$
194,702
 
$
194,702
 
Less: accumulated depreciation
   
122,625
   
93,419
 
 
 
$
72,077
 
$
101,283
 
 
Note 4.    Long-Term Debt
 
On January 18, 2007, the Company issued $3,500,000 of 8% senior convertible debentures (the ‘‘Debentures’’). These Debentures mature on December 31, 2009, and are convertible, in whole or in part, at each holder’s option, into shares of the Company’s common stock at an initial conversion price of $2.75 per share.
 
On January 4, 2008, a Debenture holder converted $750,000 of Debentures into common stock at a conversion price of $2.75 per share resulting in the issuance of 272,727 shares of common stock. The Company recognized $73,393 of unamortized debt discount as non-cash interest expense in connection with the conversion.

Note 5.    Stockholders’ Equity
 
On January 19, 2008, two former employees exercised their warrants to purchase a total of 251,717 shares. The warrants were exercised on a cashless exercise basis resulting in the issuance of 184,938 shares.
 
During the nine months ended September 30, 2008, former employees exercised options to purchase a total of 185,705 shares. The options were exercised on a cashless exercise basis resulting in the issuance of 19,037 shares.
 
Note 6.    Share-Based Compensation
 
The Company uses the Black-Scholes valuation model to value options granted to employees, directors and consultants. Compensation expense is recognized over the period of service, generally the vesting period. Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled $187,732 and $175,654 during the three months ended September 30, 2008 and 2007, respectively. Stock-based compensation also included $100,500 for the amortization of stock-based deferred consulting costs for the three months ended September 30, 2007. Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled $677,429 and $457,011 during the nine months ended September 30, 2008 and 2007, respectively. Also included in stock-based compensation for the nine months ended September 30, 2008 and 2007, respectively, was $20,100 and $281,400 for the amortization of stock-based deferred consulting costs. Stock-based compensation is included in general and administrative expenses on the Company’s condensed consolidated statements of operations.
 
The unamortized amount of stock options expense was $1,251,762 as of September 30, 2008 which will be recognized over a weighted average period of 2.42 years.

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The fair values of stock option grants were calculated on the dates of grant using the Black-Scholes option valuation model and the following weighted average assumptions:

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2008
 
2007
 
2008
 
2007
 
                           
Risk-free interest rate
   
3.4
%
 
-
   
2.5 – 3.4%
 
 
4.7 – 5.0%
 
Expected volatility
   
78
%
 
-
   
76 – 98 %
 
 
57– 60%
 
Expected life (in years)
   
6.5
   
-
   
5 – 6.5
   
7
 
Expected dividend yield
   
-
   
-
   
-
   
-
 
Weighted average per share grant date fair value
 
$
0.94
   
-
 
$
1.11
 
$
3.01
 
 
The risk-free interest rate is based on rates established by the Federal Reserve. In 2008, the Company’s expected volatility is based upon the historical volatility for its common stock. In 2007, the Company’s expected volatility was based on other factors, including the stock prices of its publicly-traded peers. In 2008, the expected life of the Company’s options was determined using the simplified method under Staff Accounting Bulletin No. 110 whereas in 2007, the Company’s estimate was based on the period of time that options granted were expected to be outstanding. The dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.
 
Transactions under the stock option plans during the nine months ended September 30, 2008 are as follows:

   
Number of
 
Weighted Average
 
   
Options
 
Exercise Price
 
Options outstanding as of January 1, 2008
   
2,328,067
 
$
2.08
 
Granted
   
896,032
 
$  
1.50
 
Forfeited/expired
   
(33,505
)
$
1.94
 
Exercised
   
(185,705
)
$
1.43
 
Options outstanding as of September 30, 2008
   
3,004,889
 
$
1.96
 
Options exercisable as of September 30, 2008
   
2,051,061
 
$
1.73
 
 
The weighted average remaining contractual life of the outstanding options as of September 30, 2008 was 6.72 years.
 
On August 27, 2008, the Company’s stockholders approved the adoption of the 2008 Non-Employee Directors Compensation Plan. Under this plan, the Company has reserved an aggregate of 1,000,000 shares for issuance to our non-employee directors. As of September 30, 2008, no shares have been issued under this plan.

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Note 7.    Stock Warrants
 
A summary of the status of the warrants for the nine months ended September 30, 2008 is as follows:

   
Number of
 
Weighted Average
 
   
Warrants
 
Exercise Price
 
Warrants outstanding as of January 1, 2008
   
4,672,325
 
$
4.34
 
Exercised
   
(251,717
)
$
0.75
 
Expired
   
(88,298
)
$
1.27
 
Warrants outstanding as of September 30, 2008
   
4,332,310
 
$
4.61
 
Warrants exercisable as of September 30, 2008
   
4,332,310
 
$
4.61
 
 
The weighted average remaining contractual life of the outstanding warrants as of September 30, 2008 was 3.31 years.
 
Note 8. Net Loss Per Common Share
 
Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded from the calculation of weighted average common shares outstanding since their inclusion would be antidilutive.
 
The following common stock equivalents, on an as exercised or converted basis, were excluded from the computation of diluted net loss per common share because they were antidilutive. The exercise of these common stock equivalents outstanding at September 30, 2008 could potentially dilute earnings per shares in the future.

   
2008
 
Stock options
   
3,004,889
 
Warrants
   
4,332,310
 
Convertible debt
   
1,000,001
 
Total
   
8,337,200
 
 
Note 9.    Commitments and Contingencies
 
Lease Obligations.     The Company has entered into operating leases related to roof top rights, cellular towers, office space and equipment leases under various non-cancelable agreements expiring through March 2019. Total future lease commitments as of September 30, 2008 are as follows:

 
$
573,171
 
2009
   
2,165,864
 
2010
   
2,078,605
 
2011
   
1,761,930
 
2012
   
1,610,779
 
Thereafter
   
1,850,637
 
 
 
$
10,040,986
 
 
Rent expense for the three months ended September 30, 2008 and 2007 totaled approximately $499,000 and $310,000, respectively. Rent expense for the nine months ended September 30, 2008 and 2007 totaled approximately $1,441,000 and $815,000, respectively.

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

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the three and nine months ended September 30, 2008. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-KSB for our year-ended December 31, 2007 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Forward-Looking Statements
 
Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.
 
In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or ‘‘continue’’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place undue 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.
 
Overview
 
We provide fixed wireless broadband services to commercial users based on a monthly subscription model. Through transmissions over both regulated and unregulated radio spectrum, we provide customers high speed Internet access over a fixed wireless network, which supports bandwidth on demand, wireless redundancy, virtual private networks (“VPNs”), disaster recovery, bundled data and video services. We provide service to business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Providence and Newport, Rhode Island.
 
Prior to January 12, 2007, we were a public shell company, as defined by the Securities and Exchange Commission, without material assets or activities. On January 12, 2007, we completed a reverse merger (the “Merger”), pursuant to which a wholly-owned subsidiary of ours merged with and into a private company, Towerstream Corporation, with such private company being the surviving company. In connection with the Merger, we discontinued our former business and commenced operating the business of Towerstream as our sole line of business. The former private company, our subsidiary, changed its name to Towerstream I, Inc. For financial reporting purposes, Towerstream, and not the public shell company, is considered the acquiror. All costs associated with the Merger (other than financing related costs in connection with the simultaneous sale of $3,500,000 of 8% senior convertible debentures due in 2009 and warrants, and approximately $11,500,000 of units consisting of common stock and warrants) were expensed as incurred.

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Characteristics of our Revenues and Expenses

We offer our services under service agreements having terms of one, two or 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.
 
Costs of revenues consists of expenses that are directly related to providing services to our subscribers, including the costs to establish points of presence in new markets, and to strengthen or expand our presence in existing markets. These costs include bandwidth purchases, tower and rooftop rent and utilities, site work visits, equipment support and network supplies (collectively “Network Operating Expenses”). Our gross margins can fluctuate from period to period due to the timing of when we add network capacity to existing markets or expand into new markets. This variability in gross margin occurs, in part, because we are required to incur these costs prior to generating new subscriber revenues.
 
Sales and marketing expenses primarily consist of the salaries, benefits, travel and other costs of our sales and marketing teams, as well as marketing initiatives and business development expenses. Customer support services includes salaries and related payroll costs associated with our customer support services, customer care, and installation and operations staff. General and administrative expenses primarily consist of the costs attributable to the support of our operations, such as costs related to information systems, salaries, expenses and office space costs for executive management, technical support, accounting, purchasing, administrative and human resources personnel, insurance, recruiting fees, legal, accounting and other professional services.
 
Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007
 
Revenues.     Revenues totaled $2,869,949 during the three months ended September 30, 2008 as compared to $1,764,689 during the three months ended September 30, 2007, representing an increase of $1,105,260, or 63%. This increase was driven by the growth of our customer base which increased by 38% from the end of the 2008 period as compared to the end of the 2007 period. In addition, our monthly average revenue per user (“ARPU”) increased from $694 to $827, primarily related to higher relative sales of our midrange service offering which is priced at $999 per month.
 
Customer churn, represented as a percent of revenue lost on a monthly basis from subscribers terminating our service, averaged 1.22% for the three months ended September 30, 2008 compared with 1.26%   for the three months ended September 30, 2007.
 
Quarterly Operating Metrics (1)
 
September 30,
2008
 
September 30,
2007
 
Revenues
 
$
2,869,949
 
$
1,764,689
 
Sequential growth
   
15.1
%
 
8.1
%
ARPU (2)
 
$
827
 
$
694
 
ARPU of new subscriber additions (3)
 
$
733
 
$
748
 
Customer churn (4)
   
1.22
%
 
1.26
%
 

(1) Information is calculated for each quarter on a stand-alone basis.
 
(2) ARPU is the average revenue per user per month which is calculated by dividing the average number of subscribers into the total average revenue for the period.
 
(3) ARPU of new subscriber additions is calculated by dividing the total number of new subscribers added in the period into monthly recurring revenue generated from those subscribers.
 
(4) The churn percentage represents the monthly recurring revenue lost during the period as a percentage of gross revenues.

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Cost of Revenues.     Cost of revenues totaled $1,030,524 for the three months ended September 30, 2008 as compared to $659,147 for the three months ended September 30, 2007, an increase of $371,377, or 56%. Gross margins, excluding depreciation, increased to 64% during the 2008 period as compared to 63% during the 2007 period. We launched service in Miami at the end of the first quarter of 2007 and in Dallas-Fort Worth in the second quarter of 2008. Over the past twelve months, we have also expanded our presence in existing markets including Chicago, New York and San Francisco. These activities increased Network Operating Expenses by approximately $295,000 in the 2008 period as compared to the 2007 period. In addition, network personnel costs increased by approximately $76,000 as additional employees were hired to support our continued growth and expansion.

Depreciation Expense.     Depreciation expense totaled $857,368 for the three months ended September 30, 2008 as compared to $501,889 for the three months ended September 30, 2007, representing an increase of $355,479, or 71%. This increase was primarily related to the continued investment in our network, base station and customer premise equipment (collectively, our “Network”) which was required to support the growth in our customer base and our expansion into new markets. Gross fixed assets totaled $20,172,714 at September 30, 2008 as compared to $11,914,195 at September 30, 2007.
 
Customer Support Services.     Customer support services totaled $453,410 for the three months ended September 30, 2008 as compared to $257,842 for the three months ended September 30, 2007, representing an increase of $195,568, or 76%. This increase was primarily related to costs of additional personnel hired to support our growing customer base.
 
Sales and Marketing Expenses. Sales and marketing expenses totaled $2,058,901 for the three months ended September 30, 2008 as compared to $1,049,907 for the three months ended September 30, 2007, representing an increase of $1,008,994, or 96%.   Approximately $866,000, or 86%, of the increase in expenses related to higher payroll costs associated with the expansion of our sales force and sales support team from 72   employees as of September 30, 2007 to 132 employees as of September 30, 2008. Approximately $136,000, or 14%, related to advertising expense, primarily related to internet based advertising programs.
 
General and Administrative Expenses.     General and administrative expenses totaled $1,691,498 for the three months ended September 30, 2008 as compared to $1,489,290 for the three months ended September 30, 2007, representing an increase of $202,208, or 14%. This increase was primarily due to higher employee headcount for our finance and administrative personnel. Payroll costs in the 2008 period increased by approximately $111,000. Rent and utilities increased by approximately $76,000 as additional space was leased due to the increase in headcount which also caused an increase of approximately $36,000 in software user fees. These increases were offset by a decrease in stock-based compensation of approximately $88,000 in the 2008 period.
 
Interest Income. Interest income t otaled $123,563 for the three months ended September 30, 2008 compared with $596,593 for the three months ended September 30, 2007, representing a decrease of $473,030, and 79% . In March 2008, we transferred our cash balances into four separate U.S. Treasury based money market funds, each of which has a Moody’s rating of Aaa. These funds have lower yields but are higher quality instruments than the previous investment funds. In addition, cash balances decreased as funds were used to support operations.
 
Net Loss.     We recorded a net loss of $3,216,033 for the three months ended September 30, 2008 as compared to a net loss of $1,745,741 for the three months ended September 30, 2007, an increase of $1,470,292, or 84%. Approximately $1,009,000, or 69%, of the increase related to higher sales and marketing expenses related to an increase in sales related personnel from 72 as of September 30, 2007 compared to 132 as of September 30, 2008.
 
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
 
Revenues.     During the nine months ended September 30, 2008, we had revenues of $7,445,924 as compared to revenues of $4,977,449 during the nine months ended September 30, 2007, representing an increase of $2,468,475, or 50% . This increase was primarily attributable to the growth of our network subscriber base and an increase in our ARPU.

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Cost of Revenues.     Cost of revenues totaled $3,044,763 for the nine months ended September 30, 2008 as compared to $1,670,480 for the nine months ended September 30, 2007, an increase of $1,374,283, or 82%. Gross margins, excluding depreciation, decreased to 59% during the 2008 period as compared to 66% during the 2007 period. We launched service in Miami at the end of the first quarter of 2007 and in Dallas-Fort Worth in the second quarter of 2008. Over the past twelve months, we have also expanded our presence in existing markets including Chicago, New York and San Francisco. These activities increased Network Operating Expenses by approximately $1,117,000 in the 2008 period as compared to the 2007 period. In addition, network personnel costs increased by approximately $257,000 as additional employees were hired to support our continued growth and expansion.

Depreciation Expense.     Depreciation expense totaled $2,286,674 for the nine months ended September 30, 2008 as compared to $1,278,778 for the nine months ended September 30, 2007, representing an increase of $1,007,896, or 79%. This increase was primarily related to the continued investment in our Network which was required to support the growth in our customer base and our expansion into new markets. Gross fixed assets totaled $20,172,714 at September 30, 2008 as compared to $11,914,195 at September 30, 2007.
 
Customer Support Services.     Customer support services totaled $1,321,780 for the nine months ended September 30, 2008 as compared to $608,890 for the nine months ended September 30, 2007, representing an increase of $712,890, or 117%. This increase was primarily the result of costs of additional personnel hired to support our growing customer base.
 
Sales and Marketing Expenses. Sales and marketing expenses totaled $5,926,676 for the nine months ended September 30, 2008 as compared to $2,145,813 for the nine months ended September 30, 2007, representing an increase of $3,780,863, or 176%.   Approximately $3,326,000, or 88%, of this increase in expenses related to higher payroll costs associated with the expansion of our sales force and sales support team from 72 employees as of September 30, 2007 to 132 employees as of September 30, 2008. Approximately $432,000, or 11%, related to advertising expense, primarily related to internet based advertising programs.
 
General and Administrative Expenses.     General and administrative expenses totaled $5,565,547 for the nine months ended September 30, 2008 as compared to $4,968,722 for the nine months ended September 30, 2007, representing an increase of $596,825 or 12%. This increase was primarily due to higher employee headcount for our finance and administrative personnel. Payroll costs increased by approximately $769,000 in the 2008 period. Rent and utilities increased by approximately $332,000 as additional space was leased due to the increase in headcount which also caused an increase of approximately $151,000 in software user fees. Non-income taxes increased by approximately $131,000. These increases were accompanied by a decrease of approximately $885,000 in professional services fees as compared to the 2007 period which included the extensive use of third party advisers related to the Merger and financing transactions completed during that period.
 
Interest Income. Interest income t otaled $560,434 for the nine months ended September 30, 2008 compared with $933,420   for the nine months ended September 30, 2007, representing a decrease of $372,986, or 40%. In March 2008, we transferred our cash balances into four separate U.S. Treasury based money market funds, each of which has a Moody’s rating of Aaa. These funds have lower yields but are higher quality instruments than the previous investment funds. In addition, cash balances decreased as funds were used to support operations.
 
Interest Expense.     Interest expense totaled $394,565 for the nine months ended September 30, 2008 as compared to $841,924 for the nine months ended September 30, 2007, representing a decrease of $447,359, or 53%. The decrease was attributable to certain non-recurring transactions related to our Merger in January 2007. During the 2007 period, we agreed to convert certain notes payable into common stock at a discounted rate. We recognized approximately $314,000 of non-cash interest expense, representing the discounted amount, in connection with this transaction. In addition, we recognized non-cash interest expense of approximately $75,000 in connection with an agreement to increase the outstanding balance of certain promissory notes by such amount. These promissory notes were subsequently converted into common stock as a result of the Merger.

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Other Expense, net.      Other expense, net totaled $21,079 for the nine months ended September 30, 2008 compared with $171,108 for the nine months ended September 30, 2007, representing a decrease of $150,029, or 88%. In June 2007, the Company recorded a charge of approximately $150,000 related to a penalty provision in a registration rights agreement which required that a registration statement be declared effective by a certain date.
 
  Net Loss.     We recorded a net loss of $10,554,726 for the nine months ended September 30, 2008 as compared to a net loss of $5,774,846 for the nine months ended September 30, 2007, an increase of $4,779,880, or 83%. Approximately $3,781,000, or 79%, of the increase related to higher sales and marketing expenses related to an increase in sales related personnel from 72   as of September 30, 2007 compared to 132 as of September 30, 2008.
 
Liquidity and Capital Resources
 
Since completing the Merger in January 2007, we have financed our operations primarily through the public sale and private placement of our equity securities and debt financing. Cash and cash equivalents totaled $28,084,915 and $40,756,865 at September 30, 2008 and December 31, 2007 , respectively. The decrease in cash and cash equivalents related to our operating, investing and financing activities during the nine months ended September 30, 2008, each of which is described below. Cash and cash equivalents are invested in various Aaa rated institutional money market funds. We have historically met our liquidity requirements from a variety of sources, including internally generated cash, short and long-term borrowings and the sale of equity securities.
 
Net Cash Used in Operating Activities.     Net cash used in operating activities totaled $6,288,665 for the nine months ended September 30, 2008, as compared to $2,604,509 for the nine months ended September 30, 2007, representing an increase of $3,684,156, or 141%. This increase was primarily due to higher operating expenses in the 2008 period associated with increased headcount across all areas of operations, as well as capital and operating expenditures to support our market and capacity expansion initiatives.
 
Net Cash Used in Investing Activities.     Net cash used in investing activities totaled $6,347,193 for the nine months ended September 30, 2008 as compared to $4,384,757 for the nine months ended September 30, 2007, representing an increase of $1,962,436, or 45%. Acquisitions of property and equipment represented $1,634,623, or 83%, of the increase in cash used in investing activities.  This increase relates to both our expansion into new markets as well as the strengthening of our network in existing markets.  We entered the Miami market in March 2007 and the Dallas market in April 2008, and incurred higher capital expenditures in the 2008 period for both of these new markets.  Our network includes equipment located on buildings at the customer location (commonly known as customer premise equipment, (“CPE”)) as well as on buildings in which we maintain points of presence (“PoPs”), which are used to transmit data to multiple customers.  We increased our customer count by 471 customers in the 2008 period as compared to 193 customers in the 2007 period.  As a result, spending on CPE increased by approximately $2,232,000 and spending on PoPs increased by approximately $2,805,000 during the nine months ended September 30, 2008. In addition, we purchased a FCC license for $400,000 during the third quarter of 2008.
 
Net Cash Used In/Provided By Financing Activities.    Net cash used in financing activities totaled $36,092 for the nine months ended September 30, 2008 as compared to net cash provided by financing activities of $51,484,890 for the nine months ended September 30, 2007. The decrease is directly related to financing transactions completed in the 2007 period including two equity transactions which raised net proceeds of $48,257,918 and a debt financing transaction which raised $3,360,000. Other financing activities in the first nine months of 2007 included the repayment of $200,000 of stockholder notes and proceeds of $119,973 from warrants exercised.
 
Working Capital.     As of September 30, 2008, we had working capital of $25,350,214. Based on our current operating activities and plans, we believe our existing working capital will enable us to meet our anticipated cash requirements for at least the next twelve months.
 
Senior Convertible Debentures
 
On January 4, 2008, a debenture holder converted $750,000 of debentures into common stock at a conversion price of $2.75 per share resulting in the issuance of 272,727 shares of common stock. The Company recognized $73,393 of unamortized debt discount as non-cash interest expense in connection with the conversion. The principal amount of debentures outstanding as of September 30, 2008 totaled $2,750,000.

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Critical Accounting Policies
 
Our financial statements are prepared in conformity with generally accepted accounting principles in the United States of America which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting periods. 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 utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments, giving due 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 those of companies in similar businesses. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and estimation.
 
Revenue Recognition.     Revenues are recognized at the time access to our services is made available to customers. Contractual arrangements range from one to three years. Revenues include fees associated with terminated contracts upon collection. Deferred revenues are recognized as a liability when billings are issued in advance of the date when revenues are earned. When customers terminate service prior to completing their contract, we attempt to collect the balance due under the contract. Any such revenue is recognized when collected. Our revenue arrangements with multiple deliverables under Emerging Issues Task Force Issue (“EITF”) 00-21 are deemed to be immaterial.

Long-Lived Assets. Long-lived assets consist primarily of property and equipment, and FCC licenses. Long-lived assets are reviewed annually 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 market 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 pursuant to the requirements of Statement of Financial Accounting Standards (“SFAS”) No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” 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.

SFAS No. 143, “Accounting for Asset Retirement Obligations,” (“FAS 143”) addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  Our network equipment is installed on both buildings in which the Company has 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 FAS 143.
 
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
 
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FSP APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is not permitted. We currently are assessing the impact of FSP APB 14-1 on our condensed consolidated financial position, results of operations or cash flows.

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In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,”   (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect SFAS 162 to have a material impact on our condensed consolidated financial position, results of operations or cash flows.
 
In December 2007, the FASB issued Statement No. 141(R), "Business Combinations," (“SFAS 141(R)”), which will change the accounting for and reporting of business combination transactions. The most significant changes in the accounting for business combinations under SFAS 141(R) include: (1) valuation of any acquirer shares issued as purchase consideration will be measured at fair value as of the acquisition date; (2) contingent purchase consideration, if any, will generally be measured and recorded at the acquisition date, at fair value, with any subsequent change in fair value reflected in earnings rather than through an adjustment to the purchase price allocation; (3) acquired in-process research and development costs, which have historically been expensed immediately upon acquisition, will now be capitalized at their acquisition date fair values, measured for impairment over the remaining development period and, upon completion of a successful development project, amortized to expense over the asset's estimated useful life; (4) acquisition related costs will be expensed as incurred rather than capitalized as part of the purchase price allocation; and (5) acquisition related restructuring cost accruals will be reflected within the acquisition accounting only if certain specific criteria are met as of the acquisition date; the prior accounting convention, which permitted an acquirer to record restructuring accruals within the purchase price allocation as long as certain, broad criteria had been met, generally around formulating, finalizing and communicating certain exit activities, will no longer be permitted. SFAS 141(R) is effective for reporting periods beginning on or after December 15, 2008. Earlier adoption is not permitted. We anticipate that adoption of this pronouncement will significantly impact how we account for business combination transactions consummated after the effective date.
 
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51," (“SFAS 160”), effective for fiscal years beginning after December 15, 2008. SFAS 160 clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including the requirement that the noncontrolling interest be classified as a component of equity. SFAS 160 is required to be adopted simultaneously with SFAS 141(R). We do not expect that this pronouncement will have a significant impact on our condensed consolidated financial position, results of operations or cash flows.
 
On February 15, 2007, the FASB issued SFAS No. 159, entitled ‘‘The Fair Value Option for Financial Assets and Financial Liabilities,’’ (“SFAS 159”). The guidance in SFAS 159 ‘‘allows’’ reporting entities to ‘‘choose’’ to measure many financial instruments and certain other items at fair value. The objective underlying the development of this literature is to improve financial reporting by providing reporting entities with the opportunity to reduce volatility in reported earnings that results from measuring related assets and liabilities differently without having to apply complex hedge accounting provisions, using the guidance in SFAS No. 133, as amended, entitled ‘‘Accounting for Derivative Instruments and Hedging Activities.’’ The provisions of SFAS 159 are applicable to all reporting entities and are effective as of the beginning of the first fiscal year that begins subsequent to November 15, 2007. We adopted SFAS 159 effective January 1, 2008.  Upon adoption, we did not elect the fair value option for any items within the scope of SFAS 159 and, therefore, the adoption of SFAS 159 did not have an impact on our condensed consolidated financial statements.

18

 
Table of Contents

In September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value Measurements,’’ (“SFAS 157”). This statement provides a single definition of fair value, a framework for measuring fair value and expanded disclosures concerning fair value. Previously, different definitions of fair value were contained in various accounting pronouncements creating inconsistencies in measurement and disclosures. SFAS 157 applies under those previously issued pronouncements that prescribe fair value as the relevant measure of value, except SFAS No. 123 (revised 2004), “Share-Based Payment,” and related interpretations and pronouncements that require or permit measurement similar to fair value but are not intended to measure fair value. This pronouncement is effective for fiscal years beginning after November 15, 2007. We adopted SFAS 157 on January 1, 2008, as required for our financial assets and financial liabilities.  However, the FASB deferred the effective date of SFAS 157 for one year as it relates to fair value measurement requirements for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring basis. The adoption of SFAS 157 for our financial assets and financial liabilities did not have a material impact on our condensed consolidated financial statements. We are evaluating the effect the implementation of SFAS 157 for our nonfinancial assets and nonfinancial liabilities will have on our condensed consolidated financial statements.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That is Not Active” (“FSP 157-3”), which clarifies the application of SFAS 157 when the market for a financial asset is inactive.  Specifically, FSP 157-3 clarifies how (1) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value.  The guidance in FSP 157-3 is effective immediately and did not have a material impact on our condensed consolidated financial statements.


Market Risk Related to Interest Rates

We are exposed to market risks related to changes in interest rates; however, we believe those risks are not material in relation to our operations. We do not have any foreign currency exchange rate risk or derivative financial instruments.

Interest Rate Risk

As of September 30, 2008, our cash and cash equivalents included approximately $28,000,000 of money market securities.  Due to the short term duration of our investment portfolio, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio.
 
 
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of the nine months ended September 30, 2008, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

19

 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting during the nine months ended September 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

20



OTHER INFORMATION

Item 1A. Risk Factors .

We have a large cash and cash equivalent position and in light of the recent market turmoil among financial institutions and related liquidity issues, we may be at risk of being uninsured for a large portion of such assets or having timing problems accessing such assets.
 
The recent market turmoil, including the failure or insolvency of several large financial institutions and the credit crunch affecting the short term debt markets, has caused liquidity problems for companies and institutions across the country.  As of September 30, 2008, we had approximately $28,000,000 in cash or cash equivalents with one large financial banking institution. Although the present regulatory response in the United States for when a large institution becomes insolvent generally has been to have the failing institution merge or transfer assets to more solvent entities, thereby avoiding failures, it is possible that any financial institution could become insolvent or fail.  Federal insurance for cash deposits has recently been increased to $250,000 for a limited time.  We have deposits far in excess of such amount.  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 in excess of insurance.  

Although the NASDAQ Stock Market has temporarily suspended its continued listing requirement of a minimum bid of $1.00 per share, our current stock price is below the $1.00 minimum bid and we could be in risk of a delisting of our shares in the future.
 
Under the rules of the NASDAQ Stock Market, we must maintain a minimum bid price of $1.00 for our common stock.  If a company's stock trades for 30 consecutive business days below the $1.00 minimum closing bid price requirement, NASDAQ will send a deficiency notice to the company, advising that it has been afforded a "compliance period" of 180 calendar days to regain compliance with the applicable requirements.  Given the current extraordinary market conditions, NASDAQ has determined to suspend the bid price and market value of publicly held shares requirements through Friday, January 16, 2009 for all of its listed companies. 
 
Our stock price, as of November 4, 2008, had a closing price of $0.95 per share.  On October 21, 2008, our shares price had a minimum closing price of $1.00.  Although we are in currently in compliance with the NASDAQ rules because our stock has not traded at less than $1.00 for 30 consecutive days (and the rule has been, as stated above, temporarily suspended), it is possible that when the rule is reinstated and our stock continues to trade at less than $1.00, we could receive notice of possible delisting. In the event that we did not take steps to increase our share price, or in the event that any steps we undertake are not successful in raising our stock price, our shares could be delisted from trading on the NASDAQ Stock Market.
 

The Company’s annual meeting of stockholders was held on August 27, 2008 and the following actions were voted upon:

 
(a)
The Company’s stockholders elected Philip Urso, Jeffrey M. Thompson, Howard L. Haronian, M.D., Paul Koehler and William Bush to serve as directors until the next annual meeting of stockholders. The votes cast with respect to each nominee are set forth below.

Nominees
 
  For
 
Withheld
 
Philip Urso
   
22,798,252
   
433,480  
 
Jeffrey M. Thompson
   
22,855,973
   
375,759  
 
Howard L. Haronian, M.D.
   
22,785,857
   
445,875  
 
Paul Koehler
   
22,863,852
   
367,880  
 
William Bush
   
22,815,552
   
416,180  
 
 
             
 
(b)
The Company’s stockholders approved the adoption of the 2008 Non-Employee Directors Compensation Plan, with 12,043,008 votes for, 815,820 votes against, 46,285 abstentions and 10,326,619 votes not voted.
 
 
(c)
The Company’s stockholders approved the ratification of the appointment of Marcum & Kliegman LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008, with 22,877,807 votes for, 247,112 votes against and 106,813 abstentions.


Exhibit No.
 
Description
31.1
 
Section 302 Certification of Principal Executive Officer
31.2
 
Section 302 Certification of Principal Financial Officer
32.1
 
Section 906 Certification of Principal Executive Officer
32.2
 
Section 906 Certification of Principal Financial Officer

21


SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TOWERSTREAM CORPORATION

Date: November 5, 2008
By:
/s/ Jeffrey M. Thompson
 
       
   
Jeffrey M. Thompson
 
   
President and Chief Executive Officer
 
   
(Principal Executive Officer)
 
       
Date: November 5, 2008
By:
/s/ Joseph P. Hernon
 
       
   
Joseph P. Hernon
 
   
Chief Financial Officer
 
   
(Principal Financial Officer and Principal Accounting Officer)
 

22


EXHIBIT INDEX

Exhibit No.
 
Description
31.1
 
Section 302 Certification of Principal Executive Officer
31.2
 
Section 302 Certification of Principal Financial Officer
32.1
 
Section 906 Certification of Principal Executive Officer
32.2
 
Section 906 Certification of Principal Financial Officer


 
EXHIBIT 31.1
 
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Jeffrey M. Thompson, certify that:

(1)
I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter ended September 30, 2008;

(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 5, 2008

/s/ Jeffrey M. Thompson
Jeffrey M. Thompson
President and Chief Executive Officer
(Principal Executive Officer)
 

EXHIBIT 31.2
 
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Joseph P. Hernon, certify that:

(1)
I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter ended September 30, 2008;

(2)
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3)
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
(4)
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5)
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 5, 2008

/s/ Joseph P. Hernon
Joseph P. Hernon
Chief Financial Officer
(Principal Financial Officer)
 
 
 

 
EXHIBIT 32.1
 
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Towerstream Corporation, (the ‘‘Company’’) on Form 10-Q for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Jeffrey M. Thompson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)
The Report fully complies with the requirements of Section 13(a) of 15(d) of the Securities Exchange Act of 1934; and
 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: November 5, 2008

/s/ Jeffrey M. Thompson
Jeffrey M. Thompson
President and Chief Executive Officer
(Principal Executive Officer)

 
 

 
EXHIBIT 32.2
 
CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Towerstream Corporation, (the ‘‘Company’’) on Form 10-Q for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Joseph P. Hernon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1)
The Report fully complies with the requirements of Section 13(a) of 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: November 5, 2008

/s/ Joseph P. Hernon
Joseph P. Hernon
Chief Financial Officer
(Principal Financial Officer)