Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 08/04/2010 16:02:08)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010

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
20-8259086
 (State or other jurisdiction of incorporation or organization)
 (I.R.S. Employer Identification No.)
   
55 Hammarlund Way
02842
Middletown, Rhode Island
(Zip Code)
 (Address of principal executive offices)
 

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):

Large accelerated filer ¨
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 2, 2010, there were 34,976,085 shares of the issuer’s common stock outstanding.

 
 

 

TOWERSTREAM CORPORATION

Table of Contents

   
Pages
     
Part I
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements.
1
     
 
Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009
1
     
 
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
2
     
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (unaudited)
3
     
 
Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2010 (unaudited)
4
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
5-12
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
13-20
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
20
     
Item 4.
Controls and Procedures.
20
     
Part II
OTHER INFORMATION
 
     
Item 6.
Exhibits.
21
 
i

 
PART I
FINANCIAL INFORMATION

Item 1.  Financial Statements.

TOWERSTREAM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
June 30, 2010
   
December 31, 2009
 
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 9,665,626     $ 14,040,839  
Accounts receivable, net
    492,125       403,073  
Prepaid expenses and other
    315,978       258,307  
Total Current Assets
    10,473,729       14,702,219  
                 
Property and equipment, net
    15,055,226       13,634,685  
                 
Intangible assets, net
    2,193,179       975,000  
Other assets
    197,203       190,803  
Total Assets
  $ 27,919,337     $ 29,502,707  
                 
Liabilities and Stockholders’ Equity
               
                 
Current Liabilities
               
Accounts payable
  $ 871,390     $ 1,055,804  
Accrued expenses
    1,491,580       1,086,258  
Deferred revenues
    1,212,249       1,028,952  
Deferred rent
    84,157       78,889  
Total Current Liabilities
    3,659,376       3,249,903  
                 
Long-Term Liabilities
               
Derivative liabilities
    -       566,451  
Deferred rent
    233,103       275,182  
Total Long-Term Liabilities
    233,103       841,633  
Total Liabilities
    3,892,479       4,091,536  
                 
Commitments (Note 13)
               
                 
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; 34,976,085 and 34,662,229 shares issued and outstanding, respectively
    34,976       34,662  
Additional paid-in-capital
    56,581,388       55,127,710  
Accumulated deficit
    (32,589,506 )     (29,751,201 )
Total Stockholders' Equity
    24,026,858       25,411,171  
Total Liabilities and Stockholders' Equity
  $ 27,919,337     $ 29,502,707  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
1

 
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenues
  $ 4,868,539     $ 3,673,581     $ 9,112,756     $ 7,090,647  
                                 
Operating Expenses
                               
Cost of revenues (exclusive of depreciation)
    1,207,100       914,938       2,281,887       1,740,852  
Depreciation and amortization
    1,454,239       982,323       2,555,410       1,929,944  
Customer support services
    672,205       484,189       1,250,461       1,034,013  
Sales and marketing
    1,313,704       1,385,624       2,546,502       2,961,339  
General and administrative
    1,906,726       1,795,813       3,715,533       3,518,155  
Total Operating Expenses
    6,553,974       5,562,887       12,349,793       11,184,303  
Operating Loss
    (1,685,435 )     (1,889,306 )     (3,237,037 )     (4,093,656 )
Other Income (Expense)
                               
Interest income
    631       9,024       805       22,213  
Interest expense
    -       (185,570 )     -       (368,926 )
Gain on business acquisition
    355,876       -       355,876       -  
Loss on derivative financial instruments
    -       (34,088 )     -       (75,237 )
Other, net
    22,396       (73 )     42,051       (73 )
Total Other Income (Expense)
    378,903       (210,707 )     398,732       (422,023 )
Net Loss
  $ (1,306,532 )   $ (2,100,013 )   $ (2,838,305 )   $ (4,515,679 )
Net loss per common share – basic and diluted
  $ (0.04 )   $ (0.06 )   $ (0.08 )   $ (0.13 )
Weighted average common shares outstanding – basic and diluted
    34,914,818       34,594,752       34,792,171       34,591,322  

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,
 
   
2010
   
2009
 
             
Cash Flows From Operating Activities
           
Net loss
  $ (2,838,305 )   $ (4,515,679 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Provision for doubtful accounts
    73,491       25,509  
Depreciation and amortization
    2,555,410       1,929,944  
Stock-based compensation
    457,541       386,322  
Gain on business acquisition
    (355,876 )     -  
Accretion of debt discount
    -       227,627  
Amortization of financing costs
    -       29,125  
Loss on sale and disposition of property and equipment
    35,615       33,806  
Deferred rent
    (36,811 )     (26,277 )
Loss on derivative financial instruments
    -       75,237  
Changes in operating assets and liabilities:
               
Accounts receivable
    (77,156 )     (86,579 )
Prepaid expenses and other current assets
    (60,207 )     (14,920 )
Accounts payable
    (208,317 )     (512,312 )
Accrued expenses
    405,322       (41,649 )
Deferred revenues
    (1,145 )     (6,097 )
Total Adjustments
    2,787,867       2,019,736  
Net Cash Used In Operating Activities
    (50,438 )     (2,495,943 )
                 
Cash Flows From Investing Activities
               
Acquisitions of property and equipment
    (3,151,775 )     (2,026,540 )
Acquisition of a business
    (1,170,000 )     -  
Proceeds from sale of property and equipment
    -       1,000  
Change in security deposits
    (3,000 )     (4,000 )
Net Cash Used In Investing Activities
    (4,324,775 )     (2,029,540 )
                 
Cash Flows From Financing Activities
               
Repayment of capital leases
    -       (19,324 )
Repayment of short-term debt
    -       (7,500 )
Net Cash Used In Financing Activities
    -       (26,824 )
                 
Net Decrease In Cash and Cash Equivalents
    (4,375,213 )     (4,552,307 )
                 
Cash and Cash Equivalents - Beginning
    14,040,839       24,740,268  
Cash and Cash Equivalents - Ending
  $ 9,665,626     $ 20,187,961  
                 
Supplemental Disclosures of Cash Flow Information
               
Cash paid during the periods for:
               
Interest
  $ -     $ 111,116  
Taxes
  $ 10,607     $ 9,860  
Acquisition of FCC license through short term debt
  $ -     $ 100,000  
Fair value of common stock issued in connection with an acquisition
  $ 430,000     $ -  

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

 
3

 

TOWERSTREAM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
For the Six Months Ended June 30, 2010

   
Common Stock
                   
   
Shares
   
Amount
   
Additional Paid-In-
Capital
   
Accumulated Deficit
   
Total
 
Balance at January 1, 2010
    34,662,229     $ 34,662     $ 55,127,710     $ (29,751,201 )   $ 25,411,171  
Issuance of common stock for bonuses
    9,225       9       17,241               17,250  
Issuance of common stock for a business acquisition
    275,700       276       429,724               430,000  
Cashless exercise of options
    28,931       29       (29 )             -  
Stock-based compensation
                    440,291               440,291  
Reclassification of derivative liabilities to equity linked financial instruments
                    566,451               566,451  
Net loss
                            (2,838,305 )     (2,838,305 )
Balance at June 30, 2010
    34,976,085     $ 34,976     $ 56,581,388     $ (32,589,506 )   $ 24,026,858  

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

 
4

 

TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1.    Organization and Nature of Business

Towerstream Corporation (referred to as ‘‘Towerstream’’ or the ‘‘Company’’) was formed on December 17, 1999, and was incorporated in Delaware.  The Company provides broadband services to commercial customers and delivers access over a 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, Philadelphia, Nashville, 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 United States Securities and Exchange Commission (“SEC”). 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 intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2010 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, 2010 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, 2009. 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, 2009, 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, and the amounts of revenues and expenses. Actual results could differ from those estimates.

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

Concentration of Credit Risk .    Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

The Company also had approximately $9,314,000 invested in three 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.  The allowance for doubtful accounts was $102,125 at June 30, 2010 and $88,299 at December 31, 2009. Additions to the allowance for doubtful accounts, e.g. provision for bad debt, totaled $28,465 and $73,491 for the three and six months ended June 30, 2010, respectively.  Additions to the allowance for doubtful accounts totaled $25,509 for both the three month and six months ended June 30, 2009.  Deductions to the allowance for doubtful accounts, e.g. customer write-offs, totaled $21,155 and $6,896 for the three months ended June 30, 2010 and 2009, respectively, and $59,665 and $13,760 for the six months ended June 30, 2010 and 2009, respectively.

 
5

 

TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Revenue Recognition.     The Company normally enters into contractual agreements with its customers for periods ranging between one to three years.  The Company recognizes the total revenue provided under a contract ratably over the contract period, including any periods under which the Company has agreed to provide services at no cost.  The Company applies 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.

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

Recent Accounting Pronouncements.    In February 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standard that amended certain recognition and disclosure requirements related to subsequent events. The accounting standard requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance. The adoption of this standard had no effect on the Company’s condensed consolidated financial position or results of operations.  Disclosures have been modified to reflect the new requirements.
 
Note 3.    Acquisition of Sparkplug Chicago, Inc.
 
On April 15, 2010, the Company completed the acquisition of the customer contracts, network infrastructure and related assets of the Chicago, Illinois and Nashville, Tennessee networks of Sparkplug Chicago, Inc. (“Sparkplug”).   The acquisition expanded the Company’s presence in the Chicago market and introduced Nashville, Tennessee as the Company's 11 th market nationally.  The Company obtained full control of Sparkplug in the acquisition.

The Company has determined that the acquisition of Sparkplug was a business combination to be accounted for under the acquisition method.  The following table summarizes the consideration transferred and the amounts of identified assets acquired and liabilities assumed at the acquisition date:

Fair value of consideration transferred:
     
Cash
  $ 1,170,000  
Stock issuance
    430,000  
      1,600,000  
Recognized amounts of identifiable assets acquired and liabilities assumed:
       
Customer contracts
    1,483,000  
Property and equipment
    591,590  
Accounts receivable
    85,388  
Security deposits
    3,400  
Prepaid expenses
    844  
Accounts payable
    (23,903 )
Deferred revenue
    (184,442 )
Total identifiable net assets
    1,955,877  
Gain on business acquisition
  $ 355,877  

The Company recognized a $355,877 gain on the business acquisition as a result of Sparkplug Chicago, Inc. being sold at a discounted price due to the realignment of its geographic markets by its parent company, Sparkplug Inc.  The gain on business acquisition is included in other income (expense) in the Company’s condensed consolidated statements of operations.

 
6

 

TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The total common shares issued as part of the consideration paid to Sparkplug was 275,700 shares.

During the three and six months ended June 30, 2010, the Company incurred approximately $215,000 and $271,000, respectively, of third-party acquisition-related costs.  These expenses are included in the general and administrative expenses in the Company’s condensed consolidated statements of operations.

The results of operations of Sparkplug have been included in the Company’s condensed consolidated statements of operations since the completion of the Sparkplug acquisition on April 15, 2010.  Revenues totaled approximately $353,000 and net loss totaled $56,800 for the three months ended June 30, 2010.  The net loss excludes any third-party acquisition-related costs. The following table reflects the unaudited pro forma consolidated results of operations had the Sparkplug acquisition taken place at the beginning of 2010 and 2009 periods:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
  $ 4,938,058     $ 4,073,322     $ 9,582,016     $ 7,890,129  
Amortization expense
    317,786       317,786       635,571       635,571  
Total operating expenses
    6,637,301       6,055,612       12,925,845       12,169,753  
Net loss
    (1,320,340 )     (2,192,997 )     (2,945,097 )     (4,701,647 )
Basic net loss per share
  $ (0.04 )   $ (0.06 )   $ (0.08 )   $ (0.14 )
 
Note 4.    Property and Equipment
 
The Company’s property and equipment is comprised of:

 
 
June 30, 2010
   
December 31, 2009
 
Network and base station equipment
  $ 14,947,822     $ 13,282,567  
Customer premise equipment
    11,215,837       9,324,444  
Furniture, fixtures and equipment
    1,525,980       1,525,980  
Computer equipment
    647,328       610,847  
System software
    829,878       819,305  
Leasehold improvements
    775,420       775,420  
      29,942,265       26,338,563  
Less: accumulated depreciation
    14,887,039       12,703,878  
    $ 15,055,226     $ 13,634,685  

Depreciation expense for the three months ended June 30, 2010 and 2009 was $1,189,418 and $982,323, respectively.  Depreciation expense for the six months ended June 30, 2010 and 2009 was $2,290,589 and $1,929,944, respectively.  During the six months ended June 30, 2010, the Company sold or wrote-off property and equipment with $144,413 of original cost and $107,428 of accumulated depreciation.  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.

Note 5.  Intangible Assets

The Company’s intangible assets are comprised of the following:

   
June 30, 2010
   
December 31, 2009
 
Customer contracts
  $ 1,483,000     $ -  
FCC licenses
    975,000       975,000  
      2,458,000       975,000  
Less: accumulated amortization
    264,821       -  
    $ 2,193,179     $ 975,000  
 
 
7

 

TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Amortization expense for the three and six months ended June 30, 2010 was $264,821.  There was no amortization expense for the three and six months ended June 30, 2009.  The Company is amortizing the customer contracts over a 14 month period which represented the remaining average contractual term of the contracts acquired.  As of June 30, 2010, the remaining amortization life of the customer contracts was 11.5 months.

Note 6.  Accrued Expenses

Accrued expenses consist of the following:

   
June 30, 2010
   
December 31, 2009
 
Payroll and related
  $ 435,172     $ 430,360  
Professional services
    369,241       157,151  
Property and equipment
    361,383       140,566  
Core and customer network expenses
    115,570       57,688  
Marketing
    76,163       79,026  
Penalties
    47,796       95,726  
Other
    86,255       125,741  
   Total
  $ 1,491,580     $ 1,086,258  
 
Core and customer network expenses consist of tower and roof rent expense and utilities, bandwidth costs, Points of Presence maintenance, customer maintenance, non-installation fees and other core and customer specific expenses. 
 
Note 7.    Debt

In January 2007, the Company issued $3,500,000 of 8% senior convertible debentures (the “Debentures”).  These Debentures matured on December 31, 2009 and were convertible, in whole or in part, into shares of common stock at an initial conversion price of $2.75 per share.  In addition, holders of the Debentures 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. These warrants are exercisable until January 2012 and were calculated using the Black-Scholes option pricing model. The proceeds were allocated between the warrants ($526,927) and the Debentures ($2,973,073) based on their relative fair values.   The initial, discounted carrying value of the Debentures of $2,973,073 was accreted to the maturity value over the term of the Debentures.  The amount of accretion recorded in each period was 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.  On December 31, 2009, the maturity date, the Company paid $2,750,000 to the holder of all outstanding Debentures.

As further described in Note 8, a new accounting standard became effective on January 1, 2009 related to the accounting for derivative financial instruments indexed to a company’s own stock.  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 this standard 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 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.

Note 8.    Derivative Liabilities

In June 2008, the FASB issued an accounting standard related to the accounting for derivative financial instruments indexed to a company’s own stock.  Under this standard, instruments which do not have fixed settlement provisions are deemed to be derivative instruments.  The fair value of these liabilities is re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 
8

 

TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Certain of the Company’s warrants did not initially have fixed settlement provisions because their exercise price could have been lowered if the Company had issued securities at lower prices (“reset provisions”).  Accordingly, these warrants were initially reported as derivative liabilities.  As of January 1, 2010, the reset provisions were no longer applicable and the warrants were determined to have fixed settlement provisions.  As a result, the fair value of the warrants was reclassified to equity as of January 1, 2010.

Note 9.    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 $264,120 and $219,208 during the three months ended June 30, 2010 and 2009, respectively.  Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled $440,291 and $376,278 during the six months ended June 30, 2010 and 2009, respectively.  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 $576,656 as of June 30, 2010 which will be   recognized over a weighted average period of 1.98 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,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Risk-free interest rate
    1.0% -3.3 %     1.3% - 2.7 %     1.0%-3.3 %     1.3% - 2.7 %
Expected volatility
    73 %     86% -87 %     73 %     81% - 87 %
Expected life (in years)
    2.5 – 6.1       2.5 – 6.8       2.5 – 6.1       2.5 – 6.8  
Expected dividend yield
    -       -       -        
Weighted average per share grant date fair value
  $ 0.99     $ 0.51     $ 0.99     $ 0.51  

The risk-free interest rate was based on rates established by the Federal Reserve.  The Company’s expected volatility was based upon the historical volatility for its common stock.  The expected life of the Company’s options was determined using the simplified method as a result of limited historical data regarding the Company’s activity.  The dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.

The Company recorded stock-based compensation related to the issuance of common stock to executive officers as a part of their bonus programs, which totaled $10,044 for the three months ended June 30, 2009.  Total shares issued to executive officers were 12,555 for the three months ended June 30, 2009.  There was no stock-based compensation recorded for the issuance of common stock to executive officers for the three months ended June 30, 2010.  The Company recorded stock-based compensation related to the issuance of common stock to executive officers as a part of their bonus programs, which totaled $17,250 and $10,044 for the six months ended June 30, 2010 and 2009, respectively.  Total shares issued to executive officers were 9,225 and 12,555 for the six months ended June 30, 2010 and 2009 respectively.

 
9

 

TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
Transactions under the stock option plans during the six months ended June 30, 2010 are as follows:
 
   
Number of
   
Weighted Average
 
   
Options
   
Exercise Price
 
Options outstanding as of January 1, 2010
    3,738,638     $ 1.69  
Granted
    375,000       1.80  
Exercised
    (132,824 )     1.41  
Cancelled
    (43,470 )     0.95  
Options outstanding as of June 30, 2010
    3,937,344       1.72  
Options exercisable as of June 30, 2010
    3,148,668     $  1.83  

The weighted average remaining contractual life of the outstanding options as of June 30, 2010 was 6.21 years.

The intrinsic value for options outstanding and exercisable totaled $1,449,759 and $1,121,112, respectively, as of June 30, 2010.  The intrinsic value for an option is calculated as the excess of the closing price of the Company’s common stock at June 30, 2010, which was $1.61 per share, and the exercise price of each option.
 
Note 10.    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, 2010 and January 1, 2010.  The weighted average remaining contractual life as of June 30, 2010 was 1.57 years.
 
Note 11.    Fair Value Measurement

Valuation Hierarchy

The FASB’s accounting standard for fair value measurements establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value.  This hierarchy prioritizes the inputs into three broad levels 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 based on the Company’s own assumptions used to measure assets and liabilities at fair value.  A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2010 and December 31, 2009, respectively:

         
Fair Value Measurements at June 30, 2010
 
   
Total Carrying
Value at June
30, 2010
   
Quoted prices
in active
markets
(Level 1)
   
Significant
other
observable
inputs (Level 2)
   
Significant
unobservable
inputs (Level 3)
 
                         
Cash equivalents
  $ 9,313,787     $ 9,313,787     $     $  
 
 
10

 

TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

         
Fair Value Measurements at December 31, 2009
 
   
Total Carrying
Value at
December 31,
2009
   
Quoted prices
in active
markets
(Level 1)
   
Significant
other
observable
inputs (Level 2)
   
Significant
unobservable
inputs (Level 3)
 
                         
Cash equivalents
  $ 13,513,047     $ 13,513,047     $     $  
Derivative liabilities
  $ 566,451     $     $     $ 566,451  

Cash equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.  The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities.  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, 2010.

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,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Fair value, beginning of period
  $ -     $ 129,056     $ 566,451     $ 87,907  
Reclassification of derivative liability to equity
    -       -       (566,451 )     -  
Net unrealized loss on derivative financial instruments
    -       34,088       -       75,237  
                                 
Fair value, end of period
  $ -     $ 163,144     $ -     $ 163,144  
 
Note 12.   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 anti-dilutive.

The following common stock equivalents were excluded from the computation of diluted net loss per common share because they were anti-dilutive.  The exercise of these common stock equivalents outstanding at June 30, 2010 would dilute earnings per shares of the Company becomes profitable in the future.  The exercise of the outstanding stock options and warrants could generate proceeds up to approximately $26,744,000.
 
Stock options
    3,937,344  
Warrants
    4,332,310  
Total
    8,269,654  
 
Note 13.    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.

 
11

 

TOWERSTREAM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
As of June 30, 2010, total future lease commitments were as follows:

 
$
1,618,060
 
2011
   
2,826,188
 
2012
   
2,638,084
 
2013
   
1,765,984
 
2014
   
832,851
 
Thereafter
   
1,204,687
 
   
$
10,885,854
 

Rent expense for the three months ended June 30, 2010 and 2009 totaled approximately $792,000 and 628,000, respectively.  Rent expense for the six months ended June 30, 2010 and 2009 totaled approximately $1,531,000 and $1,209,000, 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).

 
12

 

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

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the six months ended June 30, 2010. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year-ended December 31, 2009 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Forward-Looking Statements
 
Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth and competition; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission (“SEC”).
 
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 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, Philadelphia, Nashville, Providence and Newport, Rhode Island.
 
On April 15, 2010, we completed the acquisition of the customer contracts, network infrastructure and related assets of the Chicago, Illinois and Nashville, Tennessee networks of Sparkplug Chicago, Inc. (“Sparkplug”). The aggregate consideration for the acquisition was (i) $1,170,000 in cash and (ii) 275,700 shares of our common stock (the “Shares”) with a fair value of $430,000. A registration statement covering the Shares on Form S-3 was declared effective by the SEC on May 5, 2010. We have determined that the acquisition of Sparkplug is a business combination to be accounted for under the acquisition method.
 
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 and recognized as revenue ratably over the service period.
 
 
13

 

Costs of revenues consists of expenses that are directly related to providing services to our customers, including Core Network expenses (tower and roof rent expense and utilities, bandwidth costs, Points of Presence (“PoP”) maintenance and other) and Customer Network expenses (customer maintenance, non-installation fees and other customer specific expenses).  We collectively refer to Core Network and Customer Network as our “Network,” and Core Network costs and Customer Network costs as “Network Costs.”  When we first enter a new market, or expand in an existing market, we are required to incur up-front costs in order to be able to provide 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 five year period.  In addition to building PoPs, we also enter tower and roof rental agreements, secure bandwidth and incur other Network Costs.  Once we have established a Network Presence in a new market or expanded our Network Presence in an existing market, we are capable of servicing a significant number of customers through that Network Presence.  The variable cost to add new customers is relatively modest, especially compared to the upfront cost of establishing or expanding our Network Presence.  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.

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 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, 2010, we operated in eleven markets across the United States including New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Philadelphia, Nashville 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 Costs.  Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market.  Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers.  The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period.  We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model, 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 allocated 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. Costs that can not be allocated to a specific market are classified as Centralized Costs.

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

Centralized 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 certain installations personnel.  These individuals service customers across all markets rather than being dedicated to any specific market.

 
14

 

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, 2010

Market
 
Revenues
 
Cost of
Revenues
 
Gross
Margin
 
Operating
Costs
   
Market
EBITDA
 
New York
  $ 1,459,129     $ 284,684     $ 1,174,445     $ 352,896     $ 821,549  
Boston
    1,083,557       171,082       912,475       164,142       748,333  
Los Angeles
    754,489       136,727       617,762       258,665       359,097  
Chicago
    649,520       203,044       446,476       154,797       291,679  
San Francisco
    275,606       60,644       214,962       81,088       133,874  
Miami
    255,347       84,738       170,609       89,096       81,513  
Providence/Newport
    124,876       38,803       86,073       27,623       58,450  
Seattle
    130,566       57,475       73,091       31,461       41,630  
Nashville
    21,371       14,319       7,052       7,192       (140 )
Dallas-Fort Worth
    113,181       82,466       30,715       62,010       (31,295 )
Philadelphia
    897       12,750       (11,853 )     54,082       (65,935 )
Total
  $ 4,868,539     $ 1,146,732     $ 3,721,807     $ 1,283,052     $ 2,438,755  

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
     
Market EBITDA
  $ 2,438,755  
Centralized costs
    (763,225 )
Corporate expenses
    (1,642,606 )
Depreciation and amortization
    (1,454,239 )
Stock-based compensation
    (264,120 )
Other income (expense)
    378,903  
Net loss
  $ (1,306,532 )

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       195,771       646,662  
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       61,745       27,681  
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 )

 
15

 
 
Six months ended June 30, 2010

Market
 
Revenues
 
Cost of
Revenues
 
Gross
Margin
 
Operating
Costs
   
Market
EBITDA
 
New York
  $ 2,852,921     $ 557,363     $ 2,295,558     $ 643,206     $ 1,652,352  
Boston
    2,136,090       345,762       1,790,328       338,060       1,452,268  
Los Angeles
    1,429,093       270,160       1,158,933       547,036       611,897  
Chicago
    941,629       314,625       627,004       249,875       377,129  
San Francisco
    544,460       117,471       426,989       146,196       280,793  
Miami
    454,740       155,039       299,701       176,204       123,497  
Providence/Newport
    253,422       82,807       170,615       62,288       108,327  
Seattle
    253,084       109,072       144,012       62,845       81,167  
Nashville
    21,371       14,319       7,052       7,192       (140 )
Dallas-Fort Worth
    224,491       164,429       60,062       115,575       (55,513 )
Philadelphia
    1,455       28,052       (26,597 )     105,102       (131,699 )
Total
  $ 9,112,756     $ 2,159,099     $ 6,953,657     $ 2,453,579     $ 4,500,078  

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
     
Market EBITDA
  $ 4,500,078  
Centralized costs
    (1,466,172 )
Corporate expenses
    (3,257,992 )
Depreciation and amortization
    (2,555,410 )
Stock-based compensation
    (457,541 )
Other income (expense)
    398,732  
Net loss
  $ (2,838,305 )

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       397,943       1,235,622  
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       114,050       79,058  
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 )

We began providing broadband services in Nashville, Tennessee in April 2010.

Certain accounts in the prior year Market EBITDA reconciliation had been reclassified for comparative purposes to conform to the presentation in the current year.  These reclassifications have no effect on the previously reported total Market EBITDA.

 
16

 

Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009

Revenues.    Revenues totaled $4,868,539 during the three months ended June 30, 2010 as compared to $3,673,581 during the three months ended June 30, 2009, representing an increase of $1,194,958, or 33%.  This increase was driven by 56% growth in our customer base from June 30, 2009 to June 30, 2010.  The effect of the increase in our customer base was mitigated by a decrease of 13% in average revenue per user (“ARPU”) during the
2010 period as compared to the 2009 period.

ARPU as of June 30, 2010 totaled $671 compared to $769 as of June 30, 2009, representing a decrease of $98, or 13%.  The decrease relates to new customers purchasing lower ARPU products during the economic recession.  In addition, the acquisition of Sparkplug had the effect of lowering our post-acquisition ARPU by $23.  The customers acquired from Sparkplug had an ARPU of $463 compared to $703 for our customer base prior to the acquisition.  Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.15% for the three months ended June 30, 2010 compared to 1.90% for the three months ended June 30, 2009, representing a 39% decrease on a percentage basis.  The lower churn in the 2010 period reflects the results of our efforts to improve customer service.  During the second quarter of 2009, we effected staffing and process changes to improve customer retention and reduce churn.

       Cost of Revenues.    Cost of revenues totaled $1,207,100 for the three months ended June 30, 2010 as compared to $914,938 for the three months ended June 30, 2009, an increase of $292,162, or 32%.  Gross margins remained stable at 75% during both the 2010 and 2009 periods.  Core Network costs increased by approximately $228,000 primarily related to higher tower rent expenses and bandwidth, which were partly related to the acquisition of Sparkplug.

       Depreciation and Amortization.    Depreciation and amortization totaled $1,454,239 for the three months ended June 30, 2010 as compared to $982,323 for the three months ended June 30, 2009, representing an increase of $471,916, or 48%. This increase related to the continued investment in our Network required to support the growth in our customer base and expansion in existing markets.  Gross fixed assets totaled $29,942,264 at June 30, 2010 as compared to $23,695,849 at June 30, 2009, representing an increase of $6,246,415, or 26%.  In addition, we recognized approximately $265,000 of amortization expense associated with customer contracts acquired through the Sparkplug acquisition.

Customer Support Services.    Customer support services expenses totaled $672,205 for the three months ended June 30, 2010 as compared to $484,189 for the three months ended June 30, 2009, representing an increase of $188,016,   or 39%. This increase was primarily related to additional personnel hired to support our growing customer base.  Average headcount increased by 24%, from 38 in the 2009 period to 47 in the 2010 period.

Sales and Marketing.    Sales and marketing expenses totaled $1,313,704 for the three months ended June 30, 2010 as compared to $1,385,624 for the three months ended June 30, 2009, representing a decrease of $71,920, or 5%. Approximately $327,000 of the decrease related to lower payroll costs as sales and marketing personnel averaged 62 for the three months ended June 30, 2010 compared with 100 for the same period in 2009, a decrease in headcount of 38%.  This decrease was offset by an increase in marketing and advertising expenses of approximately $129,000, primarily related to Internet based advertising programs.  In addition, there was an increase in commissions and bonuses of approximately $132,000 in the 2010 period.

General and Administrative.    General and administrative expenses totaled $1,906,726 for the three months ended June 30, 2010 as compared to $1,795,813 for the three months ended June 30, 2009, representing an increase of $110,913, or 6%.  This increase was attributable to professional services of approximately $179,000, primarily related to the Sparkplug acquisition offset by a decrease of approximately $96,000 in payroll costs.
 
Interest Income.      Interest income totaled $631 for the three months ended June 30, 2010 compared with $9,024 for the three months ended June 30, 2009, representing a decrease of $8,393, or 93%.  The decrease primarily relates to lower cash balances and interest yields in the 2010 period compared with the 2009 period.  Average cash balances decreased from approximately $20.4 million in the second quarter 2009 to approximately $9.9 million in the second quarter 2010.  Monthly interest yields averaged 0.16% in the 2009 period compared with 0.02% in the 2010 period.

 
17

 

Interest Expense.    Interest expense totaled zero for the three months ended June 30, 2010 compared with $185,570 for the three months ended June 30, 2009, representing a decrease of 100%.  Interest expense for the 2009 period included $114,586 associated with the accretion of debt discount and $55,000 associated with the 8% coupon on outstanding debt.  Outstanding debt of $2,750,000 was repaid on December 31, 2009.
 
Net Loss.    Net loss totaled $1,306,532 for the three months ended June 30, 2010 as compared to a net loss of $2,100,013 for the three months ended June 30, 2009, a decrease of $793,481, or 38%.  This decrease primarily related to an increase in revenues of $1,194,958, or 33%, and a gain on business acquisition of $355,876 offset by an increase in operating expenses of $991,087, or 18%.

Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009

Revenues.    Revenues totaled $9,112,756 during the six months ended June 30, 2010 as compared to $7,090,647 during the six months ended June 30, 2009, representing an increase of $2,022,109, or 29%.  This increase was driven by 56% growth in our customer base from June 30, 2009 to June 30, 2010.  The effect of the increase in our customer base was mitigated by a decrease of 13% in ARPU during the 2010 period as compared to the 2009 period.

       Cost of Revenues.    Cost of revenues totaled $2,281,887 for the six months ended June 30, 2010 as compared to $1,740,852 for the six months ended June 30, 2009, an increase of $541,035, or 31%.  Gross margins remained stable at 75% during both the 2010 period and 2009 periods.  Core Network costs increased by approximately $437,000 primarily related to higher tower and roof rent expenses, in addition to higher bandwidth.

       Depreciation and Amortization.    Depreciation and amortization totaled $2,555,410 for the six months ended June 30, 2010 as compared to $1,929,944 for the six months ended June 30, 2009, representing an increase of $625,466, or 32%. This increase is related to the continued investment in our Network required to support the growth in our customer base and expansion in existing markets.  Gross fixed assets totaled $29,942,264 at June 30, 2010 as compared to $23,695,849 at June 30, 2009, representing an increase of $6,246,415, or 26%.  In addition, we recognized approximately $265,000 of amortization expense associated with customer contracts acquired through the Sparkplug acquisition.

Customer Support Services.    Customer support services expenses totaled $1,250,461 for the six months ended June 30, 2010 as compared to $1,034,013 for the six months ended June 30, 2009, representing an increase of $216,448,   or 21%. This increase was primarily related to additional personnel hired to support our growing customer base.  Average headcount increased by 22%, from 37 in the 2009 period to 45 in the 2010 period.

Sales and Marketing.    Sales and marketing expenses totaled $2,546,502 for the six months ended June 30, 2010 as compared to $2,961,339 for the six months ended June 30, 2009, representing a decrease of $414,837, or 14%. Approximately $697,000 of the decrease related to lower payroll costs as sales and marketing personnel averaged 62 for the six months ended June 30, 2010 compared with 101 for the same period in 2009, a decrease in headcount of 39%.  This decrease was offset by an increase in marketing and advertising expenses of approximately $200,000, primarily related to Internet based advertising programs.  In addition, commissions and bonuses increased by approximately $109,000 in the 2010 period.

General and Administrative.    General and administrative expenses totaled $3,715,533 for the six months ended June 30, 2010 as compared to $3,518,155 for the six months ended June 30, 2009, representing an increase of $197,378, or 6%.  This increase was attributable to professional services of approximately $235,000, primarily related to the Sparkplug acquisition, and an increase of approximately $71,000 in stock-based compensation, offset by a decrease of approximately $200,000 in payroll costs.

Interest Income.      Interest income totaled $805 for the six months ended June 30, 2010 compared with $22,213 for the six months ended June 30, 2009, representing a decrease of $21,408, or 96%.  The decrease primarily relates to lower cash balances and interest yields in the 2010 period compared with the 2009 period.  Average cash balances decreased from approximately $21.5 million in the second quarter 2009 to approximately $11.3 million in the second quarter 2010.  Monthly interest yields averaged 0.19% in the 2009 period compared with 0.01% in the 2010 period.

 
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Interest Expense.    Interest expense totaled zero for the six months ended June 30, 2010 compared with $368,926 for the six months ended June 30, 2009, representing a decrease of 100%. Interest expense for the 2009 period included $227,627 associated with the accretion of debt discount and $110,000 associated with the 8% coupon on outstanding debt.  Outstanding debt of $2,750,000 was repaid on December 31, 2009.
 
Net Loss.    Net loss totaled $2,838,305 for the six months ended June 30, 2010 as compared to a net loss of $4,515,679 for the six months ended June 30, 2009, a decrease of $1,677,374, or 37%.  This decrease primarily related to an increase in revenues of $2,022,109, or 29%, and a gain on business acquisition of $355,876 offset by an increase in operating expenses of $1,165,490, or 10%.

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 $9,665,626 and $14,040,839 at June 30, 2010 and December 31, 2009, respectively. The decrease in cash and cash equivalents related to our operating and investing activities during the six months ended June 30, 2010, each of which is described below.

Net Cash Used in Operating Activities.    Net cash used in operating activities totaled $50,438 for the six months ended June 30, 2010 as compared to $2,495,943 for the six months ended June 30, 2009, representing an increase in cash used in operating activities of $2,445,505, or 98%.  This improvement was directly related to the lower net loss reported in the 2010 period which decreased by $1,677,374, or 37%, as compared to the 2009 period.

Net Cash Used in Investing Activities.    Net cash used in investing activities totaled $4,324,775 for the six months ended June 30, 2010 as compared to $2,029,540 for the six months ended June 30, 2009, representing an increase of $2,295,235, or 113%.  The increase in the 2010 period related to higher spending on property and equipment which increased by $1,125,235, or 56%, from $3,151,775 to $2,026,540.  The significant components increases of property and equipment included approximately $662,000 related to customer premise equipment and approximately $474,000 related to network and base station equipment.  In addition, we paid $1,170,000 in cash for the acquisition of Sparkplug in the 2010 period.
 
Working Capital.    As of June 30, 2010, we had working capital of $6,814,353.  Based on our current operating activities and plans, we believe our existing working capital will enable us to meet our anticipated cash requirements for at least the next twelve months.
 
Acquisition of Sparkplug Chicago, Inc.   On April 15, 2010, we completed the acquisition of the customer contracts, network infrastructure and related assets of the Chicago, Illinois and Nashville, Tennessee networks of Sparkplug Chicago, Inc. (“Sparkplug”). The aggregate consideration for the acquisition was (i) $1,170,000 in cash,  and (ii) 275,700 shares of our common stock (the “Shares”) with a fair value of $430,000. A registration statement covering the Shares on Form S-3 was declared effective by the SEC on May 5, 2010. We have determined that the acquisition of Sparkplug is a business combination to be accounted for under the acquisition method.
 
Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, we utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments, giving appropriate consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to other companies in our industry. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and estimation, or are fundamentally important to our business.
 
 
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Revenue Recognition.     We normally enter into contractual agreements with our customers for periods ranging between one to three years.  We recognize the total revenue provided under a contract ratably over the contract period, including any periods under which we have agreed to provide services at no cost.  Deferred revenues are recognized as a liability when billings are issued in advance of the date when revenues are earned.  We apply the revenue recognition principles set forth under SEC’s 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 intangible assets. 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.  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.    The Financial Accounting Standards Board’s (“FASB”) guidance on asset retirement obligations addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated costs.  This guidance requires the recognition of an asset retirement obligation and an associated asset retirement cost when there is a legal obligation associated with the retirement of tangible long-lived assets.  Our network equipment is installed on both buildings in which we have a lease   agreement (“Company Locations”) and at customer locations.  In both instances, the installation and removal of our equipment is not complicated and does not require structural changes to the building where the equipment is installed.  Costs associated with the removal of our equipment at company or customer locations are not material, and accordingly, we have determined that we do not presently have asset retirement obligations under the FASB’s accounting guidance.

Off-Balance Sheet Arrangements.    We have no off-balance sheet arrangements, financings, or other relationships with unconsolidated entities known as ‘‘Special Purposes Entities.’’
 
Recent Accounting Pronouncements
 
In February 2010, the FASB issued an accounting standard that amended certain recognition and disclosure requirements related to subsequent events. The accounting standard requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement that an SEC filer disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance. The adoption of this standard had no effect on our condensed consolidated financial position or results of operations.  Disclosures have been modified to reflect the new requirements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable

Item 4.  Controls and Procedures.
 
Disclosure Controls and Procedures
 
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its   principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of June 30, 2010, 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, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
20

 

PART II
OTHER INFORMATION
 
Item 6. Exhibits.

Exhibit No.
 
Description
 31.1
 
Section 302 Certification of Principal Executive Officer
 31.2
 
Section 302 Certification of Principal Financial Officer
 32.1
 
Section 906 Certification of Principal Executive Officer
 32.2
 
Section 906 Certification of Principal Financial Officer
 
 
21

 

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 4, 2010
By:
/s/ Jeffrey M. Thompson
   
 
Jeffrey M. Thompson
 
President and Chief Executive Officer
 
(Principal Executive Officer)
   
Date:  August 4, 2010
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, 2010;

 
(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 4, 2010

 
/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, 2010;

 
(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 4, 2010

 
/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, 2010 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 4, 2010

 
/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, 2010 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 4, 2010

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