Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 08/05/2009 16:06:31)
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

¨
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009

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

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

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes   ¨     No   ¨

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

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

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 August 3, 2009, there were 34,609,319 shares of the issuer’s common stock outstanding.
 


TOWERSTREAM CORPORATION

Table of Contents

       
Page(s)
         
Part I
 
FINANCIAL INFORMATION
   
         
Item 1.
 
Financial Statements.
 
1
         
   
Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008
 
1
         
   
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited)
 
2
         
   
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)
 
3-4
         
   
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2009 (unaudited)
 
5
         
   
Notes to Unaudited Condensed Consolidated Financial Statements
 
6-14
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
15-23
         
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk.
 
23
         
Item 4.
 
Controls and Procedures.
 
23
         
Part II
 
OTHER INFORMATION
   
         
Item 4.
 
Submission of Matters to a Vote of Security Holders.
 
24
         
Item 6.
 
Exhibits.
 
24
 
i

 
PART I
FINANCIAL INFORMATION

Item 1.  Financial Statements.

TOWERSTREAM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
June 30, 2009
   
December 31, 2008
 
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 20,187,961     $ 24,740,268  
Accounts receivable, net of allowance for doubtful accounts of $78,398 and $66,649, respectively
    340,469       279,399  
Prepaid expenses and other
    305,119       319,325  
Total Current Assets
    20,833,549       25,338,992  
                 
Property and equipment, net
    12,952,569       12,890,779  
                 
FCC licenses
    975,000       875,000  
Other assets
    187,064       183,063  
Total Assets
  $ 34,948,182     $ 39,287,834  
                 
Liabilities and Stockholders’ Equity
               
                 
Current Liabilities
               
Current maturities of capital lease obligations
  $ 6,022     $ 25,346  
Accounts payable
    882,164       1,394,476  
Accrued expenses
    819,741       861,390  
Deferred revenues
    979,306       985,403  
Short-term debt, net of discount of $229,151 and $142,605, respectively
    2,613,349       2,607,395  
Derivative liabilities
    11,513       -  
Deferred rent
    63,088       52,554  
Total Current Liabilities
    5,375,183       5,926,564  
                 
Long-Term Liabilities
               
Derivative liabilities
    151,631       -  
Deferred rent
    317,260       354,071  
Total Long-Term Liabilities
    468,891       354,071  
Total Liabilities
    5,844,074       6,280,635  
                 
Commitments (Note 11)
               
                 
Stockholders' Equity
               
Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued
    -       -  
Common stock, par value $0.001;   70,000,000 shares authorized; 34,600,409 and 34,587,854 shares issued and outstanding, respectively
    34,600       34,588  
Additional paid-in-capital
    54,711,138       54,851,755  
Accumulated deficit
    (25,641,630 )     (21,879,144 )
Total Stockholders' Equity
    29,104,108       33,007,199  
Total Liabilities and Stockholders' Equity
  $ 34,948,182     $ 39,287,834  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
1


TOWERSTREAM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Revenues
  $ 3,673,581     $ 2,494,094     $ 7,090,647     $ 4,575,975  
                                 
Operating Expenses
                               
Cost of revenues (exclusive of depreciation)
    914,938       993,513       1,740,852       1,926,715  
Depreciation
    982,323       752,667       1,929,944       1,429,306  
Customer support services
    484,189       485,160       1,034,013       938,212  
Sales and marketing
    1,385,624       2,019,787       2,961,339       3,793,695  
General and administrative
    1,795,813       2,015,267       3,518,155       3,974,639  
Total Operating Expenses
    5,562,887       6,266,394       11,184,303       12,062,567  
Operating Loss
    (1,889,306 )     (3,772,300 )     (4,093,656 )     (7,486,592 )
Other Income (Expense)
                               
Interest income
    9,024       148,163       22,213       436,871  
Interest expense
    (185,570 )     (105,958 )     (368,926 )     (288,976 )
Loss on derivative financial instruments
    (34,088 )     -       (75,237 )     -  
Other, net
    (73 )     4       (73 )     4  
Total Other Income (Expense)
    (210,707 )     42,209       (422,023 )     147,899  
Net Loss
  $ (2,100,013 )   $ (3,730,091 )   $ (4,515,679 )   $ (7,338,693 )
                                 
Net loss per common share – basic and diluted
  $ (0.06 )   $ (0.11 )   $ (0.13 )   $ (0.21 )
Weighted average common shares outstanding – basic and diluted
    34,594,752       34,556,332       34,591,322       34,526,080  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
2

 
TOWERSTREAM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

   
Six Months Ended June 30,
 
   
2009
   
2008
 
             
Cash Flows From Operating Activities
  $ (4,515,679 )   $ (7,338,693 )
Net loss
               
Adjustments to reconcile net loss to net cash used in operating activities:
               
Provision for doubtful accounts
    25,509       85,000  
Depreciation
    1,929,944       1,429,306  
Stock-based compensation
    386,322       509,797  
Non-cash interest on notes payable
    -       73,393  
Accretion of debt discount
    227,627       72,139  
Amortization of financing costs
    29,125       29,125  
Loss on sale and disposition of property and equipment
    33,806       8,828  
Deferred rent
    (26,277 )     71,339  
Loss on derivative financial instruments
    75,237       -  
Changes in operating assets and liabilities:
               
Accounts receivable
    (86,579 )     (72,547 )
Prepaid expenses and other current assets
    (14,920 )     350,783  
Accounts payable
    (512,312 )     (674,080 )
Accrued expenses
    (41,649 )     122,789  
Deferred revenues
    (6,097 )     209,103  
Total Adjustments
    2,019,736       2,214,975  
Net Cash Used In Operating Activities
    (2,495,943 )     (5,123,718 )
                 
Cash Flows From Investing Activities
               
Acquisitions of property and equipment
    (2,026,540 )     (3,887,730 )
Proceeds from sale of property and equipment
    1,000       1,200  
Change in security deposits
    (4,000 )     (14,706 )
Net Cash Used In Investing Activities
    (2,029,540 )     (3,901,236 )
                 
Cash Flows From Financing Activities
               
Repayment of capital leases
    (19,324 )     (25,065 )
Repayment of short-term debt
    (7,500 )     -  
Payment to warrant holders for fractional shares upon cashless exercise
    -       (9 )
Net Cash Used In Financing Activities
    (26,824 )     (25,074 )
                 
Net Decrease In Cash and Cash Equivalents
    (4,552,307 )     (9,050,028 )
                 
Cash and Cash Equivalents - Beginning
    24,740,268       40,756,865  
Cash and Cash Equivalents - Ending
  $ 20,187,961     $ 31,706,837  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
3

 
TOWERSTREAM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)

   
Six Months Ended June 30,
 
   
2009
   
2008
 
Supplemental Disclosures of Cash Flow Information
           
Cash paid during the periods for:
           
Interest
  $ 111,116     $ 114,759  
Non-cash investing and financing activities:
               
Conversion of long-term debt into shares of common stock
  $ -     $ 750,000  
Acquisition of FCC license through short-term debt
  $ 100,000     $ -  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4

 
TOWERSTREAM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
For the Six Months Ended June 30, 2009

   
Common Stock
                   
   
Shares
   
Amount
   
Additional
Paid-In-
Capital
   
Accumulated
Deficit
   
Total
 
Balance at January 1, 2009
    34,587,854     $ 34,588     $ 54,851,755     $ (21,879,144 )   $ 33,007,199  
Cumulative effect of change in accounting principle – January 1, 2009 reclassification of equity-linked financial instruments to derivative liabilities
                    (526,927 )     753,193       226,266  
Issuance of common stock for bonuses
    12,555       12       10,032               10,044  
Stock-based compensation
                    376,278               376,278  
Net loss
                            (4,515,679 )     (4,515,679 )
Balance at June 30, 2009
    34,600,409     $ 34,600     $ 54,711,138     $ (25,641,630 )   $ 29,104,108  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
5

 
TOWERSTREAM CORPORATION
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.
 
In January 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. In addition, 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 was a reverse merger that was accounted for as a recapitalization of Towerstream.
 
The Company provides broadband services to commercial customers and delivers access over a fixed wireless network transmitting over both regulated and unregulated radio spectrum.   The Company’s service 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 fair presentation of the Company’s financial position, as of June 30, 2009, and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2009, 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-K for the year ended December 31, 2008. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2008, 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.
 
Cash and Cash Equivalents.   The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
 
Concentration of Credit Risk .  Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents.
 
6


TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -  CONTINUED
 
At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.  The financial institution at which the Company has its deposit accounts is participating in the FDIC’s Transaction Account Guarantee Program.  Under that program, through December 31, 2009, all non-interest bearing transaction accounts at participating institutions are fully guaranteed by the FDIC for the entire amount in the account.  Coverage under the Transaction Account Guarantee Program is in addition to, and separate from, the overage available under the FDIC’s general deposit insurance rules.
 
The Company had approximately $19,707,000 invested in four Aaa rated institutional money market funds.  These funds are protected under the Securities Investor Protection Corporation (“SPIC”), a nonprofit membership corporation which provides limited coverage up to $500,000.

Accounts Receivable .   Accounts receivable are stated at cost less an allowance for doubtful accounts. The allowance for doubtful accounts reflects the Company’s estimate of accounts receivable that will not be collected.  The allowance is based on the history of past write-offs, the aging of balances, collections experience and current credit conditions.  Amounts determined to be uncollectible are written-off against the allowance for doubtful accounts.  Additions to the allowance for doubtful accounts, e.g. bad debt expense, totaled $26,884 and $85,000 for six months ended June 30, 2009 and 2008, respectively.  Deductions to the allowance for doubtful accounts, e.g. customer write-offs, totaled $15,135 and $40,734 for the six months ended June 30, 2009 and 2008, respectively.

Derivative Financial Instruments . The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.  The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.  For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations.  For stock-based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments at inception and on subsequent valuation dates.  The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.  Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

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

Recent Accounting Pronouncements. In January 2008, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements,” (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The statement indicates, among other matters, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.  FAS 157 defines fair value based upon an exit price model.  Refer to Note 9 for additional discussion on fair value measurements.

Effective in the first quarter of 2009, the Company implemented SFAS 157-2 for its nonfinancial assets and liabilities that are re-measured at fair value on a non-recurring basis.  The adoption did not impact the Company’s financial position or results of operations.  The Company may have disclosure requirements if it completes an acquisition or incurs an impairment of its assets in future periods.
 
7


TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), "Business Combinations," (“FAS 141(R)”) which replaces SFAS No. 141, “Business Combinations.”  FAS 141(R) establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration and certain acquired contingencies. FAS 141(R) also requires that acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination.  FAS 141(R) became effective on January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51," (“FAS 160”). FAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary (previously referred to as minority interests). FAS 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Under FAS 160, noncontrolling interests are reported as a separate component of consolidated stockholders’ equity. In addition, net income allocable to noncontrolling interests and net income attributable to stockholders are reported separately in the consolidated statements of   operations. FAS 160 became effective beginning January 1, 2009.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“FAS 161”).  The new standard amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“FAS 133”) and enhances disclosures about how and why a company uses derivatives; how derivative instruments are accounted for under FAS 133 (and the interpretations of that standard); and how derivatives affect a company’s financial position, financial performance and cash flows.  FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The Company has adopted this standard as of January 1, 2009.  Additional disclosures have been included in the Company’s condensed consolidated financial statements in accordance with FAS 161.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets,” (“FAS 142”).  The objective of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FAS 141(R) and other United States generally accepted accounting principles (“GAAP”).  FSP 142-3 is effective prospectively for intangible assets acquired or received after January 1, 2009.  The Company does not expect FSP 142-3 to have a material impact on its accounting for future acquisitions or renewals of intangible assets.

In May 2008, the FASB issued APB Staff Position 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 for convertible debt instruments that may be settled in cash upon conversion, issuers of such instruments should separately account for the liability and equity components in the statement of financial condition.  FSP APB 14-1 is effective beginning January 1, 2009 and is to be applied retrospectively.   The Company’s debt may not be settled in cash upon conversion.  Accordingly, there was no impact on the Company’s financial position or results of operations upon adoption.

In April 2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” (“FSP FAS 157-4”) which provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity have significantly decreased.  FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly.  This standard is effective for periods ending after June 15, 2009.  The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.
 
8

 
TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP FAS 107-1 and APB 28-1”).  FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim as well as in annual financial statements.  FSP FAS 107-1 and APB 28-1 amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. This standard is effective for periods ending after June 15, 2009.  The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” (“FAS 165”).  FAS 165 establishes general standards of accounting for and disclosure of subsequent events.    In addition, FAS 165 requires entities to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were made available to be issued.  FAS 165 is effective for periods ending after June 15, 2009 and accordingly, the Company adopted this standard in the second quarter of 2009.  The Company has evaluated subsequent events through the time of filing its financial statements with the Securities and Exchange Commission on August 5, 2009 .

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of FASB Statement No. 162,” (“FAS 168”). FAS 168 establishes “The FASB Accounting Standards Codification TM ”  (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP in the United States. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Company does not expect the adoption of this standard to have a material impact on the Company’s financial position or results of operations.
 
Note 3.    Property and Equipment
 
The Company’s property and equipment is comprised of:
 
   
June 30, 2009
   
December 31, 2008
 
Network and base station equipment
  $ 11,809,579     $ 11,075,631  
Customer premise equipment
    8,177,215       7,079,096  
Furniture, fixtures and equipment
    1,525,980       1,525,980  
Computer equipment
    591,397       559,645  
System software
    816,258       789,810  
Leasehold improvements
    775,420       775,420  
      23,695,849       21,805,582  
Less: accumulated depreciation
    10,743,280       8,914,803  
    $ 12,952,569     $ 12,890,779  
 
Depreciation expense for the three months ended June 30, 2009 and 2008 was $982,323 and $752,667, respectively.  Depreciation expense for the six months ended June 30, 2009 and 2008 was $1,929,944 and $1,429,306, respectively.  During the six months ended June 30, 2009, the Company sold or wrote-off property and equipment with $136,273 of original cost and $101,467 of accumulated depreciation.  During the six months ended June 30, 2008, the Company sold or wrote-off property and equipment with $39,098 of original cost and $29,069 of accumulated depreciation.
 
9


TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

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

   
June 30, 2009
   
December 31, 2008
 
Network and base station equipment
  $ 168,441     $ 168,441  
Less: accumulated depreciation
    118,307       106,099  
    $ 50,134     $ 62,342  

Note 4.  Accrued Expenses

Accrued expenses consist of the following:

   
June 30,
   
December 31,
 
   
2009
   
2008
 
Payroll and related
  $ 334,629     $ 510,608  
Penalties
    95,726       149,976  
Interest
    55,000       55,000  
Rent
    25,902       50,149  
Marketing
    86,669       -  
Professional services
    52,589       17,953  
Other
    169,226       77,704  
   Total
  $ 819,741     $ 861,390  

Note 5.    Debt

In January 2007, the Company issued $3,500,000 of 8% senior convertible debentures (the “Debentures”).  These Debentures mature on December 31, 2009 and are convertible into common stock at an initial conversion price of $2.75 per share.  Holders of the Debentures also received warrants to purchase an aggregate of 636,364 shares of common stock at an exercise price of $4.00 per share and warrants to purchase an aggregate of 636,364 shares of common stock at an exercise price of $6.00 per share.   The warrants are exercisable until January 2012 and were valued using the Black Scholes option pricing model.  The proceeds were initially allocated between the warrants ($526,927) and the Debentures ($2,973,073) based on their relative fair values in accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.”   The discounted carrying value of the Debentures is being accreted to the maturity value over the term of the Debentures.  The amount of accretion recorded in each period is recognized as non-cash interest expense.

In January 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 carrying value of the Debenture on the date of conversion was $676,607.  Accordingly, the Company recognized the remaining debt discount of $73,393 as non-cash interest expense in connection with the conversion.

As further described in Note 6, EITF 07-05 became effective on January 1, 2009.  In connection with its implementation, the Company was required to classify the conversion feature of the Debentures and the warrants issued with the Debentures as derivative liabilities.  The cumulative effect of adopting EITF 07-05 resulted in a decrease in the carrying value of the Debentures as of January 1, 2009 from $2,607,395 to $2,293,222. Interest expense totaled $169,586 during the three months ended June 30, 2009 and included $55,000 associated with the 8% coupon and $114,586 associated with the accretion of the discount.  Interest expense totaled $337,627   during the six months ended June 30, 2009 and included $110,000 associated with the 8% coupon and $227,627 associated with the accretion of the discount.  Interest expense totaled $89,501 during the three months ended June 30, 2008 and included $55,000 associated with the 8% coupon and $34,501 associated with accretion of the discount.  Interest expense totaled $256,080 during the six months ended June 30, 2008 and included $110,548 associated with the 8% coupon, $73,393 associated with accretion of the converted Debentures, and $72,139 associated with accretion of the remaining Debentures.
 
10


TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
 
During the second quarter of 2009, the Company agreed to pay $100,000 related to the second installment of one of its FCC licenses.  An agreement was reached in which the Company would pay monthly installments to the licensor over a one year period.  As of June 30, 2009, $92,500 is included in short-term debt in the Company’s condensed consolidated balance sheet for the FCC license.  The Company anticipates payment of this obligation in full by year end 2009.
 
Note 6.    Derivative Liabilities

In June 2008, the FASB finalized Emerging Issues Task Force (“EITF”) 07-05, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock,” (“EITF 07-05”).  Under EITF 07-05, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion feature of the Company’s Debentures, and the warrants issued with the Debentures, do not have fixed settlement provisions because their conversion and exercise prices, respectively, may be lowered if the Company issues securities at lower prices in the future.  The reset provisions protect the Debenture holders from the potential dilution associated with future financings.  In accordance with EITF 07-05, the conversion feature of the Debentures was separated from the host contract, the Debenture, and recognized as an embedded derivative instrument.  Both the conversion feature of the Debenture and the warrants have been re-characterized as derivative liabilities. FAS 133 requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

The derivative liabilities were valued using the Black-Scholes option pricing model and the following assumptions:

   
June 30,
2009
   
March 31,
2009
   
January 1,
2009
   
January 18,
2007
 
                         
Debenture Conversion feature:
                       
   Risk-free interest rate
    0.8 %     0.5 %     0.4 %     4.7 %
   Expected volatility
    79 %     81 %     74 %     60 %
   Expected life (in years)
    0.5       0.8       1       3  
   Expected dividend yield
    -       -       -       -  
                                 
Warrants:
                               
   Risk-free interest rate
    1.4 %     1.2 %     1.0 %     4.7 %
   Expected volatility
    79 %     81 %     74 %     60 %
   Expected life (in years)
    2.5       2.8       3       3  
   Expected dividend yield
    -       -       -       -  
                                 
Fair value:
                               
   Conversion feature
  $ 11,513     $ 13,581     $ 11,838     $ 856,025  
   Warrants
  $ 151,631     $ 115,475     $ 76,079     $ 620,316  

The risk-free interest rate was based on rates established by the Federal Reserve.  Effective in the first quarter of 2008, the Company based expected volatility on the historical volatility for its common stock.  Previously, the Company’s estimated volatility was based on the volatility of publicly-traded peers.  The expected life of the Debentures’ conversion option was based on the maturity of the Debentures and the expected life of the warrants was determined by the expiration date of the warrants.  The expected dividend yield was based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.
 
11

 
TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

EITF 07-05 was implemented in the first quarter of 2009 and is reported as the cumulative effect of a change in accounting principle.  The cumulative effect on the accounting for the conversion feature and the warrants as of January 1, 2009 was as follows:

Derivative
Instrument
 
Additional
Paid-In-Capital
   
Accumulated
Deficit
   
Derivative
Liability
   
Debenture
 
                         
Conversion feature
  $ -     $ (277,531 )   $ (11,838 )   $ 289,369  
Warrants
  $ 526,927     $ (475,662 )   $ (76,069 )   $ 24,804  
Total
  $ 526,927     $ (753,193 )   $ (87,907 )   $ 314,173  

The warrants were originally recorded at their relative fair value as an increase in additional paid-in-capital.  Changes in the accumulated deficit include $635,241 of interest expense associated with the accretion of additional discount recognized on the Debenture and $1,388,434 in gains resulting from decreases in the fair value of the derivative liabilities through December 31, 2008.  The derivative liability amounts reflect the fair value of each derivative instrument as of the January 1, 2009 date of implementation.  The Debenture amounts represent the additional discount recorded upon adoption of EITF 07-05.  This discount will be recognized in 2009 as additional interest expense.

Note 7.    Share-Based Compensation

The Company uses the Black-Scholes option pricing model to value options granted to employees, directors and consultants.  Compensation expense, including the effect of forfeitures, 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 $229,252 and $335,877 during the three months ended June 30, 2009 and 2008, respectively.  Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled $386,322 and $489,697 during the six months ended June 30, 2009 and 2008, respectively.  There was no stock-based compensation for the amortization of stock-based consulting fees for the three months ended June 30, 2008.  Stock-based compensation for the amortization of stock-based consulting fees totaled $20,100 for the six months ended June 30, 2008.  Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

The unamortized amount of stock options expense was $947,970 as of June 30, 2009 which will be   recognized over a weighted average period of 2.31 years.
 
The fair values of stock option grants were calculated on the dates of grant using the Black-Scholes option pricing model and the following weighted average assumptions:
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Risk-free interest rate
    1.3% – 2.7 %     3.3% – 3.4 %     1.3% – 2.7 %     2.5% – 3.4 %
Expected volatility
    86% – 87 %     76% – 98 %     81% – 87 %     76% – 98 %
Expected life (in years)
    2.5 – 6.8       5 – 6.5       2.5 – 6.8       5 – 6.5  
Expected dividend yield
                       
Weighted average per share grant date fair value
  $ 0.51     $ 0.99     $ 0.51     $ 1.18  
 
The risk-free interest rate was based on rates established by the Federal Reserve.  The Company’s expected volatility was based upon the historical volatility for its common stock.  The expected life of the Company’s options was determined using the simplified method under Staff Accounting Bulletin No. 110.  The expected dividend yield was based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.
 
12

 
TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
 
Transactions under the stock option plans during the six months ended June 30, 2009 are as follows:
 
   
Number of
   
Weighted Average
 
   
Options
   
Exercise Price
 
Options outstanding as of January 1, 2009
    3,335,793     $ 1.82  
Granted
    592,022     $ 0.76  
Cancelled
    (135,000 )   $ 1.25  
Options outstanding as of June 30, 2009
    3,792,815     $ 1.68  
Options exercisable as of June 30, 2009
    2,607,770     $ 1.81  

The weighted average remaining contractual life of the outstanding options as of June 30, 2009 was 7.13 years.
 
Note 8.    Stock Warrants
 
Warrants outstanding and exercisable totaled 4,332,310 with a weighted average exercise price of $4.61 (ranging between $4.00 and $6.00) as of June 30, 2009 and January 1, 2009.  The weighted average remaining contractual life of the outstanding warrants as of June 30, 2009 was 2.57 years.

Note 9.    Fair Value Measurement

Valuation Hierarchy
 
FAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.  Level 3 inputs are unobservable inputs, whose value is determined using pricing models, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation to measure assets and liabilities.  A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2009:

         
Fair Value Measurements at June 30, 2009
 
   
Total Carrying
Value at June
30, 2009
   
Quoted prices
in active
markets
(Level 1)
   
Significant
other
observable
inputs (Level 2)
   
Significant
unobservable
inputs (Level 3)
 
                         
Cash equivalents (money market funds)
  $ 20,187,961     $ 20,187,961     $ -     $ -  
Derivative liabilities
  $ 163,144     $ -     $ -     $ 163,144  

Cash equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.  The carrying amounts of cash, accounts receivable, accounts payable, accrued liabilities and debt approximate their fair value due to their short maturities.  The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors, and are classified within Level 3 of the valuation hierarchy. There were no changes in the valuation techniques during the six months ended June 30, 2009.
 
13

 
TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:

   
Three Months
Ended June 30,
   
Six Months
Ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Beginning balance
  $ (41,149 )   $ -     $ -     $ -  
Net unrealized loss on derivative financial instruments
    (34,088 )     -       (75,237 )     -  
Ending balance
  $ (75,237 )   $ -     $ (75,237 )   $ -  
 
Note 10.   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 since their inclusion would be antidilutive.

       The following common stock equivalents 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 June 30, 2009 could potentially dilute earnings per shares in the future.  The exercise of the outstanding stock options and warrants could generate proceeds up to approximately $26,000,000.
 
   
2009
 
Stock options
    3,792,815  
Warrants
    4,332,310  
Convertible debt
    1,000,001  
Total
    9,125,126  
 
Note 11.    Commitments and Contingencies
 
Lease Obligations.     The Company has entered into operating leases related to roof rights, cellular towers, office space and equipment leases under various non-cancelable agreements expiring through March 2019.
 
As of June 30, 2009, total future lease commitments were as follows:

Remainder of 2009
 
$
1,372,816
 
2010
   
2,665,295
 
2011
   
2,308,643
 
2012
   
2,105,367
 
2013
   
1,354,174
 
Thereafter
   
1,722,422
 
   
$
11,528,717
 
 
Rent expense for the three months ended June 30, 2009 and 2008 totaled approximately $628,000 and $492,000, respectively.  Rent expense for the six months ended June 30, 2009 and 2008 totaled approximately $1,209,000 and $942,000, respectively.

Other Commitments and Contingencies .  One of the purchase agreements related to FCC licenses includes a contingent payment of $275,000, depending on the status of the license with the FCC, and whether the Company has obtained approval to broadcast terrestrially in the 3650 to 3700 MHz band.  The contingent payment would consist of the issuance of common stock with a value of $275,000 (due in May 2011).
 
14

 
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 six months ended June 30, 2009. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for our year-ended December 31, 2008 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 broadband services to commercial customers and deliver access over a fixed wireless network transmitting over both regulated and unregulated radio spectrum.   Our service 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.
 
In January 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 was a reverse merger that was accounted for as a recapitalization of Towerstream.
 
Characteristics of our Revenues and Expenses

We offer our services under 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 customers, including core network costs (tower and roof rent expense and utilities, bandwidth costs, Points of Presence (“PoP”) maintenance and other) and customer network costs (customer maintenance, non-installation fees, and other customer specific expenses).  We collectively refer to core network costs and customer network costs as Network Operating Expenses.  When we first enter a new market, or expand in an existing market, we are required to incur up-front costs in order to be able to provide fixed wireless broadband services to commercial customers.  We refer to these activities as establishing a “Network Presence”.  These costs include building PoPs which are Company Locations where we install a substantial amount of equipment in order to connect numerous customers to the internet.  The costs to build PoPs are capitalized and expensed over a 5 year period.  In addition to building PoPs, we also enter tower and roof rental agreements, secure bandwidth, and incur other Network Operating Expenses.  Once we have established a Network Presence in a new market, or expand our Network Presence in an existing market, we are capable of servicing a significant number of customers through that Network Presence.  The variable cost to add new customers is relatively modest, especially compared to the upfront cost of establishing or expanding our Network Presence.  As a result, our gross margins in a market normally increase over time as we add new customers in that market.  However, we may experience variability in gross margins during periods in which we are expanding our Network Presence in a market.
 
15

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

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

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

Market Information

        We operate in one segment which is the business of fixed wireless broadband services.   Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services.  While we operate in only one business segment, we recognize that providing information on the revenues and costs of operating in each market can provide useful information to investors regarding our operating performance.

As of June 30, 2009, we operated in nine markets across the United States including New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth and Providence.  The markets were launched at different times, and as a result, may have different operating metrics based on their stage of maturation.  We incur significant up-front costs in order to establish a Network Presence in a new market.  These costs include building PoPs and Network Operating Expenses.  Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market.  Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers.  The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period.  We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model, the operating performance of our mature markets, and the long-term potential for our newer markets.  Set forth below is a summary of our operating performance on a per-market basis, and a description of how each category is determined.

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

Costs of Revenues : Includes payroll, core network costs and customer network costs that can be specifically allocated to a specific market.

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

Centralized Operating Costs : Represents costs incurred to support activities across all of our markets that are not allocable to a specific market.  This principally consists of payroll costs for customer care representatives, customer support engineers, sales support and installations personnel.  These individuals service customers across all markets rather than being dedicated to any specific market.
 
16

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

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

Three months ended June 30, 2009

Market
 
Revenues
 
Cost of
Revenues
 
Gross
Margin
 
Operating
Costs
   
Market
EBITDA
 
New York
  $ 1,321,731     $ 227,771     $ 1,093,960     $ 278,655     $ 815,305  
Boston
    1,007,857       165,424       842,433       238,636       603,797  
Los Angeles
    442,394       82,049       360,345       238,028       122,317  
San Francisco
    235,374       56,271       179,103       98,699       80,404  
Providence/Newport
    126,062       36,636       89,426       18,880       70,546  
Chicago
    220,491       87,298       133,193       116,263       16,930  
Miami
    150,331       66,698       83,633       109,607       (25,974 )
Seattle
    106,639       58,673       47,966       87,413       (39,447 )
Dallas-Fort Worth
    62,702       60,306       2,396       117,832       (115,436 )
Total
  $ 3,673,581     $ 841,126     $ 2,832,455     $ 1,304,013     $ 1,528,442  
 
Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
       
Market EBITDA
  $ 1,528,442  
Centralized operating costs
    (639,612 )
Corporate expenses
    (1,566,561 )
Depreciation
    (982,323 )
Stock-based compensation
    (229,252 )
Other income (expense)
    (210,707 )
Net loss
  $ (2,100,013 )
 
17


Six months ended June 30, 2009

Market
 
Revenues
 
Cost of
Revenues
 
Gross
Margin
 
Operating
Costs
   
Market
EBITDA
 
New York
  $ 2,559,016     $ 425,667     $ 2,133,349     $ 625,720     $ 1,507,629  
Boston
    1,969,396       335,831       1,633,565       440,808       1,192,757  
Los Angeles
    848,314       148,826       699,488       509,840       189,648  
San Francisco
    458,715       99,692       359,023       227,927       131,096  
Providence/Newport
    267,080       73,972       193,108       71,185       121,923  
Chicago
    422,400       168,488       253,912       243,271       10,641  
Miami
    259,659       125,813       133,846       217,142       (83,296 )
Seattle
    203,631       125,767       77,864       186,474       (108,610 )
Dallas-Fort Worth
    102,436       114,616       (12,180 )     243,336       (255,516 )
Total
  $ 7,090,647     $ 1,618,672     $ 5,471,975     $ 2,765,703     $ 2,706,272  
 
Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
       
Market EBITDA
  $ 2,706,272  
Centralized operating costs
    (1,351,829 )
Corporate expenses
    (3,131,833 )
Depreciation
    (1,929,944 )
Stock-based compensation
    (386,322 )
Other income (expense)
    (422,023 )
Net loss
  $ (4,515,679 )

Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008

Revenues.    Revenues totaled $3,673,581 during the three months ended June 30, 2009 as compared to $2,494,094 during the three months ended June 30, 2008, representing an increase of $1,179,487, or 47%.  This increase was driven by 47% growth in our customer base from June 30, 2008 to June 30, 2009.

ARPU as of June 30, 2009 totaled $769 compared to $819 as of June 30, 2008, representing a decrease of $50, or 6%.  The decrease relates to new customers purchasing lower ARPU products during the economic recession.  Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.90% for the three months ended June 30, 2009 compared to 1.17% for the three months ended June 30, 2008, representing a 62% increase on a percentage basis.  The higher churn in the 2009 period reflects the effect of the ongoing economic recession on our commercial customer base.

Cost of Revenues.    Cost of revenues totaled $914,938 for the three months ended June 30, 2009 as compared to $993,513 for the three months ended June 30, 2008, a decrease of $78,575, or 8%.  Gross margins increased to 75% during the 2009 period as compared to 60% during the 2008 period representing a 25% increase on a percentage basis.  During the first two quarters of 2009, we have focused on increasing market penetration in existing markets rather than expanding into new markets.  We have been able to add new customers at low marginal costs which has positively effected gross margins.  In addition, we have been able to lower the cost of certain network operating expenses including bandwidth, shipping, supplies, and equipment support.

Depreciation.    Depreciation totaled $982,323 for the three months ended June 30, 2009 as compared to $752,667 for the three months ended June 30, 2008, representing an increase of $229,656, or 31%. 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 and existing markets.  Gross fixed assets totaled $23,695,849 at June 30, 2009 as compared to $18,157,844 at June 30, 2008, representing an increase of $5,538,005, or 30%.

18

 

Sales and Marketing.    Sales and marketing totaled $1,385,624 for the three months ended June 30, 2009 as compared to $2,019,787 for the three months ended June 30, 2008, representing a decrease of $634,163, or 31%. Approximately $237,000 of the decrease in expenses related to lower payroll costs as sales and marketing personnel totaled 103 at June 30, 2009 compared with 134 for the same period in 2008.  In addition, commissions and bonuses decreased by approximately $245,000 in the 2009 period.  Advertising costs totaled $122,538 in the 2009 period as compared to $266,873 in the 2008 period, representing a decrease of $144,335, or 54%.  We reduced our internet based marketing costs in the 2009 period as part of our continuing efforts to optimize the efficiency of our sales and marketing programs.

General and Administrative.    General and administrative totaled $1,795,813 for the three months ended June 30, 2009 as compared to $2,015,267 for the three months ended June 30, 2008, representing a decrease of $219,454, or 11%.  This decrease was principally attributable to decreases in (i) professional fees of approximately $104,000 and (ii) stock-based compensation of approximately $107,000.
 
Interest Income.      Interest income totaled $9,024 for the three months ended June 30, 2009 compared with $148,163 for the three months ended June 30, 2008, representing a decrease of $139,139, or 94%.  The decrease relates to lower interest yields in the 2009 period compared with the 2008 period due to current economic factors.  In addition, average cash balances for the second quarter decreased from approximately $32.9 million to approximately $20.4 million.
 
Interest Expense.    Interest expense totaled $185,570 for the three months ended June 30, 2009 compared with $105,958 for the three months ended June 30, 2008, representing an increase of $79,612, or 75%.  Additional non-cash interest expense of $78,540 was recognized in the second quarter of 2009 in connection with the adoption of a new accounting pronouncement, EITF 07-05, as further described in Note 6 to the financial statements.

Net Loss.    We recorded a net loss of $2,100,013 for the three months ended June 30, 2009 as compared to a net loss of $3,730,091 for the three months ended June 30, 2008, a decrease of $1,630,078, or 44%.  This decrease related to a $1,179,487, or 47%, increase in revenues and a $703,507, or 11%, decrease in operating expenses.

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008

Revenues.    Revenues totaled $7,090,647 during the six months ended June 30, 2009 as compared to $4,575,975 during the six months ended June 30, 2008, representing an increase of $2,514,672, or 55%.  This increase was driven by 47% growth in our customer base from June 30, 2008 to June 30, 2009.

       Cost of Revenues.    Cost of revenues totaled $1,740,852 for the six months ended June 30, 2009 as compared to $1,926,715 for the six months ended June 30, 2008, a decrease of $185,863, or 10%.  Gross margins increased to 75% during the 2009 period as compared to 58% during the 2008 period representing a 29% increase on a percentage basis.  During the first two quarters of 2009, we have continued to focus on increasing market penetration in existing markets rather than expanding into new markets.  During the six months ended June 30 2009, we lowered Core Network and Customer Network costs by approximately $114,000 and $93,000, respectively, even though our customer base increased by 47% during the 2009 period.

       Depreciation.    Depreciation totaled $1,929,944 for the six months ended June 30, 2009 as compared to $1,429,306 for the six months ended June 30, 2008, representing an increase of $500,638, or 35%. 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 and existing markets.  Gross fixed assets totaled $23,695,849 at June 30, 2009 as compared to $18,157,844 at June 30, 2008, representing an increase of $5,538,005, or 30%.

Customer Support Services.    Customer support services totaled $1,034,013 for the six months ended June 30, 2009 as compared to $938,212 for the six months ended June 30, 2008, representing an increase of $95,801,   or 10%. This increase was primarily related to additional personnel hired to support our growing customer base.  Average headcount increased by 12%, from 34 in the 2008 period to 38 in the 2009 period.

Sales and Marketing.    Sales and marketing totaled $2,961,339 for the six months ended June 30, 2009 as compared to $3,793,695 for the six months ended June 30, 2008, representing a decrease of $832,356, or 22%.

 
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Approximately $375,000 of the decrease in expenses related to lower payroll costs as our direct sales, sales support, and marketing personnel totaled 103 at June 30, 2009 compared with 134 for the same period in 2008.  Commissions and bonuses decreased by approximately $361,000 and advertising expenses decreased approximately $83,000.

General and Administrative.    General and administrative totaled $3,518,155 for the six months ended June 30, 2009 as compared to $3,974,639 for the six months ended June 30, 2008, representing a decrease of $456,484, or 11%.  This decrease was principally attributable to (i) a decrease in professional fees of approximately $299,000 (ii) and a decrease of approximately $123,000 in stock-based compensation.
 
Interest Income.     Interest income totaled $22,213 for the six months ended June 30, 2009 compared with $436,871 for the six months ended June 30, 2008, representing a decrease of $414,658, or 95% .   In March 2008, we transferred our cash balances into four separate U.S. Treasury based money market funds.  These funds have lower yields but are higher quality instruments than the funds in which we previously invested.  In addition, average cash balances decreased from approximately $33.5 million to approximately $21.5 million, and interest rates have decreased year-over-year.
 
Interest Expense.    Interest expense totaled $368,926 for the six months ended June 30, 2009 compared with $288,976 for the six months ended June 30, 2008, representing an increase of $79,950, or 28%.  Additional non-cash interest expense of approximately $157,000 was recognized in the first six months of 2009 in connection with the adoption of a new accounting pronouncement which was offset by approximately $73,000 of non-cash interest expense that was recognized when a portion of our debt was converted into equity in January 2008.
 
Net Loss.    We recorded a net loss of $4,515,679 for the six months ended June 30, 2009 as compared to a net loss of $7,338,693 for the six months ended June 30, 2008, a decrease of $2,823,014, or 38%.  This decrease related to a $2,514,672, or 55%, increase in revenues and an $878,264, or 7%, decrease in operating expenses.
 
Liquidity and Capital Resources

We have historically met our liquidity and capital requirements primarily through the public sale and private placement of equity securities and debt financing.  Cash and cash equivalents totaled $20,187,961 and $24,740,268 at June 30, 2009 and December 31, 2008, respectively. The decrease in cash and cash equivalents related to our operating, investing and financing activities during the six months ended June 30, 2009, each of which is described below.

Net Cash Used in Operating Activities.    Net cash used in operating activities totaled $2,495,943 for the six months ended June 30, 2009, as compared to $5,123,718 for the six months ended June 30, 2008, representing a decrease of $2,627,775, or 51%.  This decrease was directly related to the lower net loss reported in the 2009 period of $4,515,679, which represented a reduction of $2,823,014, or 38%, as compared to the 2008 period.

Net Cash Used in Investing Activities.    Net cash used in investing activities totaled $2,029,540 for the six months ended June 30, 2009 as compared to $3,901,236 for the six months ended June 30, 2008, representing a decrease of $1,871,696, or 48%.  The decrease in the 2009 period related almost entirely to lower spending on property and equipment.  During the 2008 period, we expanded our corporate office and spent approximately $752,000 on office equipment, system software and leasehold improvements.  Spending on PoPs decreased by approximately $932,000 during the 2009 period as compared to the 2008 period.  Our decision to focus on our existing markets, rather than to expand into new markets during the ongoing economic recession, has resulted in lower PoP spending as the existing markets already have established PoPs.

Working Capital.    As of June 30, 2009, we had working capital of $15,458,366.  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 12 months.

 
20

 
 
Critical Accounting Policies

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which require us 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 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 other companies in our industry. We believe the following significant accounting policies may involve a higher degree of judgment and estimation.

Revenue Recognition.    We normally enter into contractual agreements with our customers for periods ranging between one to three years.  We recognize the total revenue provided under a contract ratably over the contract period, including any periods under which we have agreed to provide services at no cost.  Deferred revenues are recognized as a liability when billings are received in advance of the date when revenues are earned. We apply the revenue recognition principles set forth under SEC Staff Accounting Bulletin 104, (“SAB 104”) which provides for revenue to be recognized 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 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.
 
Asset Retirement Obligations.    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.  FAS 143 requires the recognition of an asset retirement obligation and an associated asset retirement cost when there is a legal obligation in connection with the retirement of tangible long-lived assets.  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 January 2008, we adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) which is defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The statement indicates, among other matters, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal  market, the most advantageous market for the asset or liability.  FAS 157 defines fair value based upon an exit price model.

 
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Effective in the first quarter of 2009, we implemented SFAS 157-2 for our nonfinancial assets and liabilities that are re-measured at fair value on a non-recurring basis.  The adoption did not impact our financial position or results of operations.  We may have disclosure requirements if we complete an acquisition or incur an impairment of our assets in future periods.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), "Business Combinations," (“FAS 141(R)”) which replaces SFAS No. 141, “Business Combinations.”  FAS 141(R) establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration and certain acquired contingencies. FAS 141(R) also requires that acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination.  FAS 141(R) became effective on January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51," (“FAS 160”). FAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary (previously referred to as minority interests).  FAS 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value.
Under FAS 160, noncontrolling interests are reported as a separate component of consolidated stockholders’ equity. In addition, net income allocable to noncontrolling interests and net income attributable to stockholders are reported separately in the consolidated statements of   operations. FAS 160 became effective beginning January 1, 2009.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“FAS 161”).  The new standard amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“FAS 133”) and enhances disclosures about how and why a company uses derivatives; how derivative instruments are accounted for under FAS 133 (and the interpretations of that standard); and how derivatives affect a company’s financial position, financial performance and cash flows.  FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  We have adopted this standard as of January 1, 2009.  Additional disclosures have been included in our condensed
consolidated financial statements in accordance with FAS 161.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets,”(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,  “Goodwill and Other Intangible Assets,” (“FAS 142”).  The objective of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FAS 141(R) and other United States generally accepted accounting principles (“GAAP”).  FSP 142-3 is effective prospectively for intangible assets acquired or received after January 1, 2009.  We do not expect FSP 142-3 to have a material impact on our accounting for future acquisitions or renewals of intangible assets.
 
In May 2008, the FASB issued APB Staff Position 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 for convertible debt instruments that may be settled in cash upon conversion, issuers of such instruments should separately account for the liability and equity components in the statement of financial condition. FSP APB 14-1 is effective beginning January 1, 2009 and is to be applied retrospectively. Our debt may not be settled in cash upon conversion.  Accordingly, there was no impact on our financial position or results of operations upon adoption .

In April 2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” (“FSP FAS 157-4”) which provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity have significantly decreased.  FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly.  This standard is effective for periods ending  after June 15, 2009.  The adoption of this standard did not have a material impact on our financial position or results of operations.

 
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In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP FAS 107-1 and APB 28-1”).  FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim as well as in annual financial statements.  FSP FAS 107-1 and APB 28-1 amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. This standard is effective for periods ending after June 15, 2009.  The adoption of this standard did not have a material impact on our financial position or results of operations.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” (“FAS 165”).  FAS 165 establishes general standards of accounting for and disclosure of subsequent events.    In addition, FAS 165 requires entities to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were made available to be issued.  FAS 165 is effective for periods ending after June 15, 2009 and accordingly, we adopted this standard in the second quarter of 2009.  We have evaluated subsequent events through the time of filing our financial statements with the Securities and Exchange Commission on August 5, 2009 .
 
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – A Replacement of FASB Statement No. 162,” (“FAS 168”). FAS 168 establishes “The FASB Accounting Standards Codification TM ”  (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP in the United States. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. We do not expect the adoption of this standard to have a material impact on our financial position or results of operations.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable

Item 4.  Controls and Procedures.
 
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of the six months ended June 30, 2009, 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.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our system of internal controls over financial reporting during the three months ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
23

 

PART II
OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders.

The Company’s annual meeting of stockholders was held on June 26, 2009.  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 were as follows:
Nominees
 
For
   
Withheld
 
Philip Urso
    27,504,528       488,371  
Jeffrey M. Thompson
    26,866,494       1,126,405  
Howard L. Haronian, M.D.
    27,447,353       545,546  
Paul Koehler
    26,775,169       1,217,730  
William Bush
    26,823,106       1,169,793
 
Item 6. Exhibits.

Exhibit No.
 
Description
 31.1
 
Section 302 Certification of Principal Executive Officer
 31.2
 
Section 302 Certification of Principal Financial Officer
 32.1
 
Section 906 Certification of Principal Executive Officer
 32.2
 
Section 906 Certification of Principal Financial Officer
 
 
24

 
 
SIGNATURES

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

 
TOWERSTREAM CORPORATION
     
Date:  August 5, 2009
By:
/s/ Jeffrey M. Thompson
     
   
Jeffrey M. Thompson
   
President and Chief Executive Officer
   
(Principal Executive Officer)
     
Date:  August 5, 2009
By:
/s/ Joseph P. Hernon
     
   
Joseph P. Hernon
   
Chief Financial Officer
   
(Principal Financial Officer and Principal Accounting Officer)
 
 
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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 June 30, 2009;
 
(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: August 5, 2009

 
/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 June 30, 2009;
 
(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: August 5 , 2009

 
/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 June 30, 2009 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: August 5, 2009

 
/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 June 30, 2009 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: August 5, 2009

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