Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 11/14/2011 16:00:53)

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

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011

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   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (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 November 9, 2011, there were 53,395,639 shares of the issuer’s common stock outstanding.

 
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

Table of Contents

   
Pages
     
Part I
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements.
1
     
 
Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010
1
     
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010 (unaudited)
2
     
 
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2011 (unaudited)
3
     
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (unaudited)
4
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
5-13
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
14-21
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
21
     
Item 4.
Controls and Procedures.
22
     
Part II
OTHER INFORMATION
 
     
Item 6.
Exhibits.
23

 
i

 

PART I
FINANCIAL INFORMATION

Item 1.  Financial Statements.

TOWERSTREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

   
(Unaudited)
September 30, 2011
   
December 31, 2010
 
Assets
           
Current Assets
           
Cash and cash equivalents
  $ 51,587,331     $ 23,173,352  
Accounts receivable, net
    449,223       482,854  
Prepaid expenses and other current assets
    397,909       372,895  
Total Current Assets
    52,434,463       24,029,101  
                 
Property and equipment, net
    23,413,776       15,266,056  
                 
Intangible assets, net
    4,207,505       3,366,965  
Goodwill
    1,674,281       1,724,571  
Other assets
    544,429       203,132  
Total Assets
  $ 82,274,454     $ 44,589,825  
                 
Liabilities and Stockholders’ Equity
               
                 
Current Liabilities
               
Accounts payable
  $ 1,434,253     $ 909,548  
Accrued expenses
    1,904,859       1,595,716  
Deferred revenues
    1,250,069       1,000,018  
Current maturities of capital lease obligations
    255,952       88,613  
Other
    274,985       251,085  
Total Current Liabilities
    5,120,118       3,844,980  
                 
Long-Term Liabilities
               
Capital lease obligations, net of current maturities
    244,472       55,735  
Other
    360,683       668,232  
Total Long-Term Liabilities
    605,155       723,967  
Total Liabilities
    5,725,273       4,568,947  
                 
Commitments (Note 14)
               
                 
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; 53,395,639 and 42,116,618 shares issued and outstanding, respectively
    53,395       42,117  
Additional paid-in-capital
    117,276,704       75,332,969  
Accumulated deficit
    (40,780,918 )     (35,354,208 )
Total Stockholders' Equity
    76,549,181       40,020,878  
Total Liabilities and Stockholders' Equity
  $ 82,274,454     $ 44,589,825  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
1

 
 
TOWERSTREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 6,775,892     $ 5,080,650     $ 19,309,964     $ 14,193,406  
                                 
Operating Expenses
                               
Cost of revenues (exclusive of depreciation)
    2,231,428       1,251,686       5,583,550       3,533,573  
Depreciation and amortization
    2,298,788       1,556,619       6,486,588       4,112,029  
Customer support services
    869,900       636,588       2,374,085       1,887,049  
Sales and marketing
    1,348,408       1,286,402       4,069,067       3,832,904  
General and administrative
    2,656,438       1,758,093       6,796,700       5,473,626  
Total Operating Expenses
    9,404,962       6,489,388       25,309,990       18,839,181  
Operating Loss
    (2,629,070 )     (1,408,738 )     (6,000,026 )     (4,645,775 )
Other Income (Expense)
                               
Interest income
    21,627       689       31,659       1,494  
Interest expense
    (8,728 )     -       (13,518 )     -  
Gain on business acquisition
    -       -       564,125       355,876  
Other income (expense), net
    (4,240 )     20,895       (8,950 )     62,946  
Total Other Income (Expense)
    8,659       21,584       573,316       420,316  
Net Loss
  $ (2,620,411 )   $ (1,387,154 )   $ (5,426,710 )   $ (4,225,459 )
                                 
Net loss per common share – basic and diluted
  $ (0.05 )   $ (0.04 )   $ (0.12 )   $ (0.12 )
Weighted average common shares outstanding– basic and diluted
    51,599,165       35,004,822       45,516,998       34,863,834  

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

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
For the Nine Months Ended September 30, 2011

   
Common Stock
                   
   
Shares
   
Amount
   
Additional Paid-In-
Capital
   
Accumulated Deficit
   
Total
 
Balance at January 1, 2011
    42,116,618     $ 42,117     $ 75,332,969     $ (35,354,208 )   $ 40,020,878  
Issuance of common stock for a business acquisition
    387,312       387       1,839,345               1,839,732  
Net proceeds from issuance of common stock
    10,350,000       10,350       38,824,359               38,834,709  
Cashless exercise of options
    155,316       155       (155 )             -  
Exercise of options
    275,311       275       240,560               240,835  
Exercise of warrants
    6,000       6       26,994               27,000  
Issuance of common stock under an employee stock purchase plan
    15,095       15       48,902               48,917  
Stock-based compensation for options
                    565,615               565,615  
Stock-based compensation for restricted stock
                    88,650               88,650  
Issuance of common stock for FCC license
    89,987       90       309,465               309,555  
Net loss
                            (5,426,710 )     (5,426,710 )
Balance at September 30, 2011
    53,395,639     $ 53,395     $ 117,276,704     $ (40,780,918 )   $ 76,549,181  

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

 
3

 

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

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Cash Flows From Operating Activities
           
Net loss
  $ (5,426,710 )   $ (4,225,459 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
               
Provision for doubtful accounts
    215,802       102,323  
Depreciation and amortization
    6,486,588       4,112,029  
Stock-based compensation
    661,565       677,796  
Gain on business acquisition
    (564,125 )     (355,876 )
Loss on sale and disposition of property and equipment
    49,796       49,514  
Deferred rent
    (63,117 )     (57,850 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (97,711 )     (33,519 )
Prepaid expenses and other current assets
    (89,285 )     63,213  
Other assets
    (252,410 )     -  
Accounts payable
    411,867       (334,103 )
Accrued expenses
    309,142       363,668  
Other current liabilities
    (23,051 )     -  
Deferred revenues
    (156,649 )     (622,104 )
Deferred payments
    (85,059 )     -  
Total Adjustments
    6,803,353       3,965,091  
Net Cash Provided By (Used In) Operating Activities
    1,376,643       (260,368 )
                 
Cash Flows From Investing Activities
               
Acquisitions of property and equipment
    (10,358,737 )     (4,203,142 )
Acquisition of a business
    (1,600,000 )     (1,170,000 )
Proceeds from sale of property and equipment
    16,009       -  
Change in security deposits
    (67,207 )     (3,000 )
Net Cash Used In Investing Activities
    (12,009,935 )     (5,376,142 )
                 
Cash Flows From Financing Activities
               
Payments on capital leases
    (96,890 )     -  
Issuance of common stock upon exercise of options
    240,835       920  
Issuance of common stock upon exercise of warrants
    27,000       -  
Issuance of common stock under employee stock purchase plan
    41,617       -  
Net proceeds from sale of common stock
    38,834,709       -  
Net Cash Provided By Financing Activities
    39,047,271       920  
                 
Net Increase (Decrease) In Cash and Cash Equivalents
    28,413,979       (5,635,590 )
                 
Cash and Cash Equivalents - Beginning
    23,173,352       14,040,839  
Cash and Cash Equivalents - Ending
  $ 51,587,331     $ 8,405,249  
                 
Supplemental Disclosures of Cash Flow Information
               
Cash paid during the periods for:
               
Interest
  $ 13,518     $ -  
Taxes
  $ 16,801     $ 10,923  
Fair value of common stock issued in connection with an acquisition
  $ 1,839,732     $ 430,000  
Fair value of common stock issued for FCC license
  $ 309,555     $ -  
Fair value of common stock issued for services
  $ -     $ 105,060  
Acquisition of property and equipment under capital lease obligations
  $ 452,965     $ -  

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

 
4

 

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

Towerstream Corporation (referred to as ‘‘Towerstream’’ or the ‘‘Company’’) was 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, Las Vegas-Reno and Providence-Newport.
 
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 September 30, 2011 and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2011 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, 2010. 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, 2010, 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. As of September 30, 2011, the Company had cash and cash equivalent balances of approximately $43,570,000 in excess of the federally insured limit of $250,000. Under the FDIC’s Transaction Account Guarantee (“TAG”) program, noninterest-bearing transaction deposit accounts have full federal deposit insurance coverage through December 31, 2012.  The Company has one noninterest-bearing transaction deposit account with a zero balance as of September 30, 2011 that is covered under the TAG program.

The Company also had approximately $7,765,000 invested in three institutional money market funds.  These funds are protected under the Securities Investor Protection Corporation (‘‘SIPC’’), 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 be not 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.

 
5

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Changes in the allowance for doubtful accounts were as follows:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Beginning of period
  $ 228,447     $ 102,124     $ 118,825     $ 88,299  
Additions
    105,000       28,832       302,491       102,322  
Deductions
    (50,784 )     (23,212 )     (138,653 )     (82,877 )
End of period
  $ 282,663     $ 107,744     $ 282,663     $ 107,744  

Additions to the allowance for doubtful accounts include provisions for bad debt and deductions to the allowance for doubtful accounts include customer write-offs.

Additions for the nine months ended September 30, 2011 include $78,824 of reserves recorded in connection with the acquisition of One Velocity, Inc. (“One Velocity”).

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 the 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.

Goodwill.      Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired in an acquisition.  Goodwill is not amortized but rather is reviewed annually for impairment, or whenever events or circumstances indicate that the carrying value may not be recoverable.  A two-step test is performed at the reporting unit level to assess goodwill for impairment.  First, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, the reporting unit is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. If the carrying value of the goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded.

Reclassifications.     Certain accounts in the prior year consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current year consolidated financial statements.  These reclassifications have no effect on the previously reported net loss.
 
Recent Accounting Pronouncements .     In September 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to simplify how entities test goodwill for impairment. ASU 2011-08 allows entities to assess qualitative factors in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a greater than 50 percent likelihood exists that the fair value is less than the carrying amount, a two-step goodwill impairment test must be performed. This standard’s update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The adoption of this standard is not expected to have a material impact on the Company’s condensed consolidated financial position and results of operations.
 
Subsequent Events .  Subsequent events have been evaluated through the date of this filing.

Note 3.    Business Acquisitions

One Velocity, Inc.

On May 18, 2011, the Company completed the acquisition of One Velocity.   The acquisition is the Company’s first acquisition in a new geographical market and introduced Las Vegas and Reno, Nevada as the Company’s 12 th market nationally.  The Company obtained full control of One Velocity in the acquisition.

The Company has determined that the acquisition of One Velocity 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:

 
6

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Fair value of consideration transferred:
     
Cash
  $ 1,600,000  
Common stock (387,312 shares)
    1,839,732  
      3,439,732  
Recognized amounts of identifiable assets acquired and liabilities assumed:
       
Customer contracts
    2,466,512  
Property and equipment
    1,952,883  
Accounts receivable, net
    84,460  
Security deposits
    21,679  
Prepaid expenses and other current assets
    795  
Accounts payable
    (115,772 )
Deferred revenue
    (406,700 )
Total identifiable net assets
    4,003,857  
Gain on business acquisition
  $ 564,125  

The Company recognized a $564,125 gain on business acquisition which was included in other income (expense) in the Company’s condensed consolidated statements of operations.  The challenging economic environment has made it difficult for smaller companies like One Velocity to raise sufficient capital to sustain their growth.  As a result, the Company was able to acquire the customer contracts and wireless network of One Velocity at a discounted price.

During the three and nine months ended September 30, 2011, the Company incurred approximately $89,000 and $ 228,000 of third-party costs in connection with the One Velocity acquisition.  These expenses are included in the general and administrative expenses in the Company’s consolidated statements of operations.

Pipeline Wireless, LLC
 
In September 2011, the Company finalized the purchase price of the Pipeline Wireless, LLC (“Pipeline”) acquisition.  The final purchase price of $3,719,047 is $112,421, or 3%, lower than the previously reported purchase price of $3,831,468.  The adjustment resulted in a decrease in deferred payments of $145,065, or $112,421 on a net present value basis.  In addition, identifiable net assets and goodwill were reduced by $62,131 and $50,290, respectively.
 
Pro Forma Information

The following table reflects the unaudited pro forma consolidated results of operations had the One Velocity acquisition taken place at the beginning of the 2011 and 2010 periods and the Sparkplug Chicago, Inc. (“Sparkplug”) and Pipeline Wireless, LLC (“Pipeline”) acquisitions taken place at the beginning of the 2010 period:

   
Three Months Ended
September 30,
   
Nine Months Ended 
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues
  $ 6,775,892     $ 5,933,467     $ 19,915,374     $ 17,221,117  
Amortization expense
    575,625       893,410       2,309,483       2,680,231  
Total operating expenses
    9,404,962       7,565,000       26,133,739       22,642,068  
Net loss
    (2,620,411 )     (1,609,949 )     (5,645,049 )     (5,000,635 )
Basic net loss per share
  $ (0.05 )   $ (0.05 )   $ (0.12 )   $ (0.14 )

The pro forma information presented above does not purport to present what actual results would have been had the acquisitions actually occurred at the beginning of 2010, nor does the information project results for any future period.

 
7

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 
Note 4.    Property and Equipment, net
 
The Company’s property and equipment, net is comprised of:
 
   
September 30, 2011
   
December 31, 2010
 
Network and base station equipment
  $ 19,914,184     $ 15,943,741  
Customer premise equipment
    15,727,195       11,958,249  
Wi-Fi offload network
    5,464,580       873,041  
Furniture, fixtures and other
    1,542,833       1,541,675  
Computer equipment
    861,740       683,071  
System software
    843,828       833,109  
Leasehold improvements
    775,420       775,420  
      45,129,780       32,608,306  
Less: accumulated depreciation
    21,716,004       17,342,250  
    $ 23,413,776     $ 15,266,056  

Depreciation expense for the three months ended September 30, 2011 and 2010 was $1,723,163 and $1,238,833, respectively.  Depreciation expense for the nine months ended September 30, 2011 and 2010 was $4,551,060 and $3,529,422, respectively.  The Company sold or disposed of property and equipment with $190,488 of original cost and $126,448 of accumulated depreciation for the nine months ended September 30, 2011.  The Company sold or disposed of property and equipment with $174,612 of original cost and $123,728 of accumulated depreciation for the nine months ended September 30, 2010.  In addition, the Company exchanged property and equipment with a net book value of $20,815 for property and equipment with a fair value of $19,050 during the nine months ended September 30, 2011.  There were no exchanges of property and equipment for the nine months ended September 30, 2010.

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

   
September 30, 2011
   
December 31, 2010
 
Network and base station equipment
  $ 545,801     $ 92,836  
Customer premise equipment
    59,328       59,328  
      605,129       152,164  
Less: accumulated depreciation
    45,911       1,268  
    $ 559,218     $ 150,896  

Note 5.  Intangible Assets

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

   
September 30, 2011
   
December 31, 2010
 
Goodwill
  $ 1,674,281     $ 1,724,571  
                 
Customer contracts
  $ 5,813,699     $ 3,347,187  
FCC licenses
    1,284,555       975,000  
      7,098,254       4,322,187  
Less: accumulated amortization
    2,890,749       955,222  
    $ 4,207,505     $ 3,366,965  

Amortization expense for the three and nine months ended September 30, 2011 was $575,625 and $1,935,528, respectively.  Amortization expense for the three and nine months ended September 30, 2010 was $317,786 and $582,607, respectively.  The Company amortized the customer contracts acquired in the Sparkplug acquisition over a 14 month period.  The customer contracts acquired in the Pipeline acquisition are being amortized over a 17 month period and the customer contracts acquired in the One Velocity acquisition are being amortized over a 30 month period.   As of September 30, 2011, the average remaining amortization period is 16.5 months.  Future amortization expense of intangible assets is expected to be approximately $576,000 for 2011, $1,480,000 for 2012 and $867,000 for 2013.  No amortization expense is expected to be recognized after 2013.

 
8

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The Company’s FCC licenses are not subject to amortization as they have an indefinite useful life.

Note 6.  Accrued Expenses

Accrued expenses consist of the following:

   
September 30, 2011
   
December 31, 2010
 
Payroll and related
  $ 661,346     $ 595,710  
Property and equipment
    554,570       355,268  
Professional services
    229,909       325,485  
Network
    145,714       111,055  
Marketing
    79,305       65,898  
Offering costs
    55,000       55,000  
Other
    179,015       87,300  
Total
  $ 1,904,859     $ 1,595,716  
 
Network expenses consist of expenses directly related to providing services to our customers. 
 
Note 7.    Other Liabilities

Other current liabilities and other long-term liabilities consist of the following:

   
September 30, 2011
   
December 31, 2010
 
Other Current Liabilities
           
Deferred rent
  $ 96,305     $ 84,157  
Deferred acquisition payments
    171,242       136,439  
Other
    7,438       30,489  
Total
  $  274,985     $ 251,085  
                 
Other Long-Term Liabilities
               
Deferred rent
  $ 115,760     $ 191,025  
Deferred acquisition payments
    244,923       477,207  
Total
  $ 360,683     $ 668,232  
 
In September 2011, the Company reduced the deferred acquisition payments balance by approximately $145,000 based on the final determination of the purchase price of the Pipeline acquisition.  The adjusted total of $623,804 was discounted at a 12% rate and recorded at $501,225 for acquisition accounting purposes. As of September 30, 2011, the gross balance totaled approximately $532,000 which will be paid in monthly installments of $16,630 through May 2014.
 
Note 8.    Capital Stock

In July 2011, the Company issued 10,350,000 shares of common stock in connection with an underwritten offering at $4.00 per share, resulting in gross proceeds of $41,400,000.  The Company incurred costs of approximately $2,565,000 related to this underwritten offering.
 
In August 2011, the Company issued 89,987 shares of common stock in connection with the acquisition of a FCC license. The fair value of the common stock issued was $309,555.
 
Note 9.    Share-Based Compensation
 
The Company uses the Black-Scholes valuation 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 $381,060 and $115,195 for the three months ended September 30, 2011 and 2010, respectively.   Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled $565,615 and $555,486 for the nine months ended September 30, 2011 and 2010, respectively.  Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

 
9

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The unamortized amount of stock options expense was approximately $3,645,000 as of September 30, 2011 which will be recognized over a weighted-average period of 3.1 years.
 
In July 2011, the Company issued options to purchase an aggregate of 745,000 shares of common stock to its executives which vest based on the satisfaction of performance conditions.  The options were granted at an exercise price of $5.25 per share.  The commencement of vesting for these options is based on the completion of multiple acquisitions and/or carrier backhaul agreements.
 
In August 2011, the Company issued options to purchase an aggregate of 320,000 shares of common stock to its employees.  The options were granted at an exercise price of $4.09 per share.  The options vest in quarterly installments over the next four years.

The fair value 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
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Risk-free interest rate
    1.6% - 2.1 %     -       1.6% - 2.1 %     1.0% - 3.3 %
Expected volatility
    50% - 56 %     -       50% - 58 %     73 %
Expected life (in years)
    5.7 - 6.4       -       5.3 - 6.4       2.5 – 6.1  
Expected dividend yield
    -       -       -       -  
Weighted average per share grant date fair value
  $ 2.59     $ -     $ 2.61     $ 0.99  

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

During the first quarter of 2011, the Company issued 90,000 shares of restricted stock to two executives.  The fair value of $354,600 was based on the closing market price of the Company’s common stock on the date of grant.  The restricted stock vests over a three year period, of which zero shares were vested as of September 30, 2011.  Stock-based compensation for restricted stock totaled $29,550 and $88,650 for the three and nine months ended September 30, 2011.  Unrecognized compensation cost of $265,950 at September 30, 2011 will be recognized over the next 2.3 years.

The Company recorded stock-based compensation of $17,250 related to the issuance of 9,225 shares of common stock to executive officers during the nine months ended September 30, 2010.  There was no stock-based compensation recorded for the issuance of common stock to executive officers for the nine months ended September 30, 2011.  There was no stock-based compensation recorded for the issuance of common stock to executive officers for the three months ended September 30, 2011 and 2010, respectively.
 
Transactions under the stock option plans during the nine months ended September 30, 2011 are as follows:
 
   
Number of
   
Weighted Average
 
   
Options
   
Exercise Price
 
Options outstanding as of December 31, 2010
    3,706,885     $ 1.74  
Granted
    1,485,000       4.95  
Exercised
    (498,205 )     1.05  
Cancelled
    (8,334 )     0.68  
Options outstanding as of September 30, 2011
    4,685,346       2.83  
Options exercisable as of September 30, 2011
    2,976,714     $  1.95  

 
10

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

A total of 43,373 and 222,894 options were exercised on a cashless basis during the three and nine months ended September 30, 2011, resulting in the net issuance of 24,614 and 155,316 shares.  Under a cashless exercise, the holder uses a portion of the shares that would otherwise be issuable upon exercise, rather than cash, as consideration for the exercise.  The amount of net shares issuable in connection with a cashless exercise will vary based on the exercise price of the option compared to the current market price of the Company’s common stock on the date of exercise.

During the three and nine months ended September 30, 2011, a total of 22,687 and 275,311 options were exercised on a cash basis which resulted in proceeds of $27,820 and $240,835.

The weighted average remaining contractual life of the outstanding options as of September 30, 2011 was 6.5 years.

The intrinsic value for options outstanding and exercisable totaled $3,567,456 and $3,237,871, respectively, as of September 30, 2011.  The intrinsic value for an option is calculated as the excess of the closing price of the Company’s common stock at September 30, 2011, which was $2.56 per share, and the exercise price of each option.

Note 10.    Stock Warrants

A summary of warrant activity for the nine months ended September 30, 2011 is as follows:

   
Number of
   
Weighted Average
 
   
Warrants
   
Exercise Price
 
Warrants outstanding as of December 31, 2010
    4,332,310     $ 4.61  
Granted
    450,000       5.00  
Exercised
    (6,000 )      4.50  
Warrants outstanding as of September 30, 2011
    4,776,310       4.65  
Warrants exercisable as of September 30, 2011
    4,326,310     $  4.61  

The weighted average remaining contractual life as of September 30, 2011 was 0.74 years.  A total of 4,026,310 warrants expire in January 2012 and an additional 300,000 warrants expire in June 2012.
 
In July 2011, the Company issued 450,000 warrants to purchase shares of its common stock at an exercise price of $5.00 per share under its July 2011 underwritten offering.  These warrants are exercisable in July 2012 and expire in July 2016.

During the nine months ended September 30, 2011, 6,000 warrants were exercised on a cash basis which resulted in proceeds of $27,000. No warrants were exercised during the three months ended September 30, 2011.

Note 11.    Employee Stock Purchase Plan

In November 2010, the Company’s shareholders approved the 2010 Employee Stock Purchase Plan (“ESPP Plan”).  Under the ESPP plan, participants can purchase shares of the Company’s stock at a 15% discount.  A maximum of 200,000 shares of common stock can be issued under the ESPP plan.  The first issuance under the ESPP Plan occurred on June 30, 2011.  During the three and nine months ended September 30, 2011, a total of 10,867 and 15,095 shares were issued with a fair value of $27,820 and $48,917, respectively.  The Company recognized $4,129 and $7,300 of stock-based compensation related to the 15% discount for the three and nine months ended September 30, 2011.

Note 12.    Fair Value Measurement

Valuation Hierarchy

The Financial Accounting Standards Board’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.

 
11

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Cash and cash equivalents were carried at fair value measured on a recurring basis as follows:

         
Fair Value Measurements
 
   
Total Carrying Value
   
Quoted prices
in active
markets
(Level 1)
   
Significant
other
observable
inputs (Level 2)
   
Significant
unobservable
inputs (Level 3)
 
                         
September 30, 2011
  $ 51,587,331     $ 51,587,331     $ -     $ -  
December 31, 2010
  $ 23,173,352     $ 23,173,352     $ -     $ -  

Cash and cash equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy.  The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities.  There were no changes in the valuation techniques during the nine months ended September 30, 2011.

Note 13.   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 or issuance of these common stock equivalents outstanding at September 30, 2011 would dilute earnings per share if the Company becomes profitable in the future.  The exercise of the outstanding stock options and warrants could generate proceeds up to approximately $35,482,000.

Stock options
    4,685,346  
Restricted stock
    90,000  
Warrants
    4,776,310  
Total
    9,551,656  
 
Note 14.    Commitments
 
Lease Obligations.     The Company has entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through December 2020.
 
As of September 30, 2011, total future lease commitments were as follows:

Remainder of 2011
  $ 1,721,350  
2012
    5,910,531  
2013
    4,630,091  
2014
    3,362,564  
2015
    2,528,182  
Thereafter
    3,119,982  
    $ 21,272,700  

Rent expense for the three months ended September 30, 2011 and 2010 totaled approximately $1,526,000 and $852,000, respectively.  Rent expense for the nine months ended September 30, 2011 and 2010 totaled approximately $3,793,000 and $2,383,000, respectively.
 
 
12

 
 
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Note 15.      Subsequent Events

On October 30, 2011, the Company and Color Broadband Communications, Inc. (“Color Broadband”) entered a definitive agreement to acquire certain business assets from Color Broadband.  Under the terms of the agreement, the Company will acquire Color Broadband business assets operating in Los Angeles area including substantially all customer contracts, network infrastructure, and related assets.  The transaction is subject to customary conditions and is expected to close by the end of 2011.

 
13

 

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 nine months ended September 30, 2011. 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, 2010 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 too much reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this Report.
 
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, Las Vegas-Reno and Providence-Newport.
 
In April 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 included (i) approximately $1.2 million in cash and (ii) 275,700 shares of our common stock (the “Shares”) with a fair value of approximately $0.4 million. The acquisition of Sparkplug was a business combination accounted for under the acquisition method.
 
In December 2010, we completed the acquisition of the customer contracts, network infrastructure and related assets of Pipeline Wireless, LLC (“Pipeline”), which was primarily based in the greater Boston area.  The aggregate consideration for the acquisition included (i) approximately $1.6 million in cash, (ii) 411,523 unregistered shares of common stock with a fair value of approximately $1.5 million, (iii) approximately $0.5 million of deferred cash payments over a 36 month period beginning June 2011, and (iv) approximately $0.2 million in assumed liabilities.  The acquisition of Pipeline was a business combination accounted for under the acquisition method.
 
In May 2011, we completed the acquisition of the customer contracts, network infrastructure and related assets of One Velocity Inc. (“One Velocity”), which was based in Las Vegas and Reno, Nevada.  The aggregate consideration for the acquisition included (i) approximately $1.6 million in cash, and (ii) 387,312 unregistered shares of common stock with a fair value of approximately $1.8 million.  The acquisition of One Velocity was a business combination accounted for under the acquisition method.
 
In July 2011, we completed an underwritten offering of 10,350,000 shares of our common stock at a public offering price of $4.00 per share.  The total gross proc eeds of the offering were $41,400,000.  Net proceeds were approximately $38,835 ,000 , after underwriting discounts , commissions and offering expenses .   
 
In September 2011, we signed an agreement with Boingo Wireless, Inc. (“Boingo”) under which Boingo will manage Internet services across our state-of-the-art Wi-Fi network in New York City’s Manhattan borough.
 
In October 2011, we entered a definitive agreement with Color Broadband Communications, Inc. (“Color Broadband”) to acquire certain business assets from Color Broadband.  Under the terms of the agreement, we will acquire Color Broadband business assets operating in Los Angeles area including substantially all customer contracts, network infrastructure, and related assets.  The transaction is subject to customary conditions and is expected to close by the end of 2011.
 
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.

 
14

 
Costs of revenues consists of expenses that are directly related to providing services to our customers, including Core Network expenses (tower and roof rent 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 includes 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 facilities 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 September 30, 2011, we operated in twelve markets across the United States including New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport.  The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation.  We incur significant up-front costs in order to establish a Network Presence in a new market.  These costs include building PoPs and Network Costs.  Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market.  Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers.  The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period.  We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model, 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 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 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, marketing and certain installations personnel.  These individuals service customers across all markets rather than being dedicated to any specific market.

 
15

 
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.

Adjusted Market EBITDA :   Represents a market’s net income (loss) 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.

We began providing broadband services in Philadelphia, Pennsylvania in 2010.  The Sparkplug acquisition in April 2010 expanded and strengthened our presence in Chicago and also brought us into the Nashville, Tennessee market.  The Pipeline acquisition in December 2010 expanded and strengthened our operations in the greater Boston area. We entered the Las Vegas-Reno market in May 2011 through the acquisition of One Velocity.

Cost of revenues for the New York market include approximately $ 359,000 and $ 487,000 for the three and nine months ended September 30, 2011, respectively, related to the construction of a Wi-Fi network.

Three months ended September 30, 2011
 
Market
 
Revenues
   
Cost of
Revenues
   
Gross
Margin
   
Operating
Costs
   
Adjusted
Market
EBITDA
 
Boston
  $ 1,695,256     $ 390,387     $ 1,304,869     $ 224,535     $ 1,080,334  
New York
    1,532,711       707,731       824,980       340,824       484,156  
Los Angeles
    1,086,767       223,427       863,340       262,728       600,612  
Chicago
    870,300       266,329       603,971       150,881       453,090  
San Francisco
    370,265       66,401       303,864       92,547       211,317  
Las Vegas-Reno
    408,545       179,858       228,687       44,250       184,437  
Miami
    365,266       80,503       284,763       100,347       184,416  
Providence-Newport
    120,011       50,871       69,140       23,848       45,292  
Seattle
    125,393       55,372       70,021       26,952       43,069  
Dallas-Fort Worth
    165,551       84,441       81,110       79,747       1,363  
Nashville
    12,650       969       11,681       11,050       631  
Philadelphia
    23,177       15,240       7,937       28,105       (20,168 )
Total
  $ 6,775,892     $ 2,121,529     $ 4,654,363     $ 1,385,814     $ 3,268,549  

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
       
Adjusted market EBITDA
                                  $ 3,268,549  
Centralized costs
                                    (942,393 )
Corporate expenses
                                    (2,241,699 )
Depreciation and amortization
                                    (2,298,788 )
Stock-based compensation
                                    (414,739 )
Other income (expense)
                                    8,659  
Net loss
                                  $ (2,620,411 )

Three months ended September 30, 2010
 
Market
 
Revenues
   
Cost of
Revenues
   
Gross
Margin
   
Operating
Costs
   
Adjusted
Market
EBITDA
 
New York
  $ 1,435,828     $ 280,934     $ 1,154,894     $ 270,096     $ 884,798  
Boston
    1,130,341       174,285       956,056       167,313       788,743  
Los Angeles
    839,957       158,128       681,829       294,239       387,590  
Chicago
    749,207       227,530       521,677       180,671       341,006  
San Francisco
    285,765       60,701       225,064       92,544       132,520  
Miami
    242,681       83,342       159,339       80,696       78,643  
Providence-Newport
    120,961       38,637       82,324       23,635       58,689  
Seattle
    124,667       54,318       70,349       31,580       38,769  
Nashville
    18,479       7,735       10,744       5,121       5,623  
Dallas-Fort Worth
    127,674       87,101       40,573       59,015       (18,442 )
Philadelphia
    5,090       13,115       (8,025 )     39,939       (47,964 )
Total
  $ 5,080,650     $ 1,185,826     $ 3,894,824     $ 1,244,849     $ 2,649,975  

 
16

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
       
Adjusted market EBITDA
                                  $ 2,649,975  
Centralized costs
                                    (744,001 )
Corporate expenses
                                    (1,537,838 )
Depreciation and amortization
                                    (1,556,619 )
Stock-based compensation
                                    (220,255 )
Other income (expense)
                                    21,584  
Net loss
                                  $ (1,387,154 )

Nine months ended September 30, 2011

Market
 
Revenues
   
Cost of
Revenues
   
Gross
Margin
   
Operating
Costs
   
Adjusted
Market
EBITDA
 
Boston
  $ 5,053,796     $ 1,183,440     $ 3,870,356     $ 721,808     $ 3,148,548  
New York
    4,483,848       1,512,064       2,971,784       996,837       1,974,947  
Los Angeles
    3,085,461       589,316       2,496,145       799,122       1,697,023  
Chicago
    2,603,539       787,618       1,815,921       498,761       1,317,160  
San Francisco
    1,105,410       198,911       906,499       282,579       623,920  
Miami
    1,008,446       229,238       779,208       295,597       483,611  
Las Vegas-Reno
    597,638       256,133       341,505       52,129       289,376  
Seattle
    399,660       162,758       236,902       90,350       146,552  
Providence-Newport
    351,069       134,372       216,697       74,633       142,064  
Dallas-Fort Worth
    489,596       244,477       245,119       215,540       29,579  
Nashville
    44,272       21,115       23,157       33,829       (10,672 )
Philadelphia
    87,229       46,049       41,180       83,816       (42,636 )
Total
  $ 19,309,964     $ 5,365,491     $ 13,944,473     $ 4,145,001     $ 9,799,472  

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
       
Adjusted market EBITDA
                                  $ 9,799,472  
Centralized costs
                                    (2,516,210 )
Corporate expenses
                                    (6,135,135 )
Depreciation and amortization
                                    (6,486,588 )
Stock-based compensation
                                    (661,565 )
Other income (expense)
                                    573,316  
Net loss
                                  $ (5,426,710 )

Nine months ended September 30, 2010

Market
 
Revenues
   
Cost of
Revenues
   
Gross
Margin
   
Operating
Costs
   
Adjusted
Market
EBITDA
 
New York
  $ 4,288,749     $ 838,297     $ 3,450,452     $ 913,302     $ 2,537,150  
Boston
    3,266,431       520,047       2,746,384       505,373       2,241,011  
Los Angeles
    2,269,050       428,288       1,840,762       841,275       999,487  
Chicago
    1,690,836       542,155       1,148,681       430,546       718,135  
San Francisco
    830,225       178,172       652,053       238,740       413,313  
Miami
    697,421       238,381       459,040       256,900       202,140  
Providence-Newport
    374,383       121,444       252,939       85,923       167,016  
Seattle
    377,751       163,390       214,361       94,425       119,936  
Nashville
    39,850       22,054       17,796       12,313       5,483  
Dallas-Fort Worth
    352,165       251,530       100,635       174,590       (73,955 )
Philadelphia
    6,545       41,167       (34,622 )     145,041       (179,663 )
Total
  $ 14,193,406     $ 3,344,925     $ 10,848,481     $ 3,698,428     $ 7,150,053  

 
17

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
       
Adjusted market EBITDA
                                  $ 7,150,053  
Centralized costs
                                    (2,210,173 )
Corporate expenses
                                    (4,795,830 )
Depreciation and amortization
                                    (4,112,029 )
Stock-based compensation
                                    (677,796 )
Other income (expense)
                                    420,316  
Net loss
                                  $ (4,225,459 )
 
Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010

Revenues.    Revenues totaled $6,775,892 during the three months ended September 30, 2011 compared to $5,080,650 during the three months ended September 30, 2010, representing an increase of $1,695,242  or 33%.  This increase was primarily related to 24% growth in our customer base from September 30, 2010 to September 30, 2011.

Average revenue per user (“ARPU”) as of September 30, 2011 totaled $709 compared to $669 as of September 30, 2010, representing an increase of $40, or 6%. The increase primarily related to new and existing customers purchasing higher bandwidth levels. ARPU for new customers for the three months ended September 30, 2011 totaled $625 compared to $543 for the three months ended September 30, 2010, representing an increase of $82, or 15%.

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.27% for the three months ended September 30, 2011 compared to 1.60% for the three months ended September 30, 2010, representing a 21% improvement.   Churn levels can fluctuate from quarter to quarter.  Our goal is to maintain churn levels between 1.4% and 1.7% which we believe is below industry  averages of approximately 2.0%.
 
Cost of Revenues.    Cost of revenues totaled $2,231,428 for the three months ended September 30, 2011 compared to $1,251,686 for the three months ended September 30, 2010, an increase of $979,742, or 78%.  Gross margins decreased to 67% in the 2011 period compared to 75% in the 2010 period.   Expenses associated with the Wi-Fi network totaled approximately $422,000 which impacted gross margin by 6 percentage points.  Core Network costs increased by approximately $454,000 primarily related to higher tower rent and bandwidth expenses which were partly related to acquisitions.  Customer Network costs increased by approximately $90,000 primarily related to the growth in our customer base.

       Depreciation and Amortization.    Depreciation and amortization totaled $2,298,788   for the three months ended September 30, 2011 compared to $1,556,619   for the three months ended September 30, 2010, representing an increase of $742,169, or 48%. Depreciation expense totaled $1,723,163 for the three months ended September 30, 2011 compared to $1,238,833 for the three months ended September 30, 2010, representing an increase of $484,330, or 39%. The base of depreciable assets increased by $14,166,347, or 46% compared to the third quarter of 2010.   The increased depreciable base reflects continued growth in the core business as well as spending on the Wi-Fi network and additions resulting from acquisitions.  Amortization expense totaled $575,625 for the three months ended September 30, 2011 compared to $317,786 for the three months ended September 30, 2010, representing an increase of $257,839, or 81%.  The increase relates to customer based intangible assets recorded in connection with the acquisitions of Pipeline in the fourth quarter of 2010 and One Velocity in the second quarter of 2011.

Customer Support Services.    Customer support services expenses totaled $869,900 for the three months ended September 30, 2011 compared to $636,588 for the three months ended September 30, 2010, representing an increase of $233,312,   or 37%. This increase was primarily related to additional personnel hired to support our growing customer base.  Average headcount increased by 40%, from 48 in the 2010 period to 67 in the 2011 period.

Sales and Marketing.    Sales and marketing expenses totaled $1,348,408 for the three months ended September 30, 2011 compared to $1,286,402 for the three months ended September 30, 2010, representing an increase of $62,006, or 5%.  This increase was attributed to an increase in commissions and bonuses of approximately $76,000 and an increase in advertising of approximately $31,000 in the 2011 period.  This increase was offset by approximately $57,000 related to lower base salary costs as sales personnel averaged 54 for the three months ended September 30, 2011 compared with 60 for the same period in 2010, a decrease in average headcount of 10%.

General and Administrative.    General and administrative expenses totaled $2,656,438 for the three months ended September 30, 2011 compared to $1,758,093 for the three months ended September 30, 2010, representing an increase of $898,345, or 51%.  Costs associated with the Wi-Fi  network totaled approximately $ 309,000 for the three months ended September 30, 2011 as compared to zero for the three months ended September 30, 2010.  Professional fees increased by approximately $194,000 and employee stock-compensation increased by approximately $194,000.  The balance of the increase occurred across a number of functional components including travel and bad debt.
 

 
18

 

Interest Income.     Interest income totaled $21,627 for the three months ended September 30, 2011 compared with $689 for the three months ended September 30, 2010, representing an increase of $20,938.  The increase primarily relates to higher cash balances in the 2011 period.  Average cash balances increased from approximately $8.5 million in the third quarter 2010 to approximately $52.9 million in the third quarter 2011.

Interest Expense.     Interest expense totaled $8,728 for the three months ended September 30, 2011.  There was no interest expense for the three months ended September 30, 2010.  Interest expense related to capital leases acquired and deferred payments made related to the Pipeline acquisition.

       Net Loss.    Net loss totaled $2,620,411 for the three months ended September 30, 2011 compared with $1,387,154 for the three months ended September 30, 2010, an increase of $1,233,257, or 89%.  Revenues increased by $1,695,242, or 33%, while operating expenses increased by $2,915,574, or 45%.

Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010

Revenues.    Revenues totaled $19,309,964 during the nine months ended September 30, 2011 compared to $14,193,406 during the nine months ended September 30, 2010, representing an increase of $5,116,558, or 36%.  This increase was driven by 24% growth in our customer base from September 30, 2010 to September 30, 2011.  In addition, ARPU increased 6% during the 2011 period as compared to the 2010 period. ARPU for new customers for the nine months ended September 30, 2011 totaled $595 compared to $533 for the nine months ended September 30, 2010, representing an increase of $62, or 12%.

Cost of Revenues.    Cost of revenues totaled $5,583,550 for the nine months ended September 30, 2011 compared to $3,533,573 for the nine months ended September 30, 2010, an increase of $2,049,977, or 58%.  Gross margins decreased to 71% during the 2011 periods from 75% in the 2010 period. Expenses associated with the Wi-Fi network totaled approximately $569,000 which impacted gross margin by 3 percentage point.   Core Network costs increased by approximately $1,079,000 primarily related to higher tower rent and bandwidth expenses which were partly related to acquisitions.  Customer Network costs increased by approximately $259,000 primarily related to the growth in our customer base.

       Depreciation and Amortization.    Depreciation and amortization totaled $6,486,588   for the nine months ended September 30, 2011 compared to $4,112,029   for the nine months ended September 30, 2010, representing an increase of $2,374,559, or 58%.  Depreciation expense totaled $4,551,060 for the nine months ended September 30, 2011 compared to $3,529,422 for the nine months ended September 30, 2010, representing an increase of $1,021,638, or 29%. The base of depreciable assets increased by $14,166,347, or 46% compared to the prior year.  The increased depreciable base reflects continued growth in the core business as well as spending on the Wi-Fi network and additions resulting from acquisitions.  Amortization expense totaled $1,935,528 for the nine months ended September 30, 2011 compared to $582,607 for the nine months ended September 30, 2010, representing an increase of $1,352,921, or greater than 100%.  The increase relates to customer based intangible assets recorded in connection with the acquisitions of Sparkplug in the second quarter of 2010, Pipeline in the fourth quarter of 2010 and One Velocity in the second quarter of 2011.

Customer Support Services.    Customer support services expenses totaled $2,374,085 for the nine months ended September 30, 2011 compared to $1,887,049 for the nine months ended September 30, 2010, representing an increase of $487,036,   or 26%. This increase was primarily related to additional personnel hired to support our growing customer base.  Average headcount increased by 28%, from 46 in the 2010 period to 59 in the 2011 period.

Sales and Marketing.    Sales and marketing expenses totaled $4,069,067 for the nine months ended September 30, 2011 compared to $3,832,904 for the nine months ended September 30, 2010, representing an increase of $236,163, or 6%.  This increase was primarily related to an increase in commissions and bonuses of approximately $404,000 in the 2011 period.  This increase was offset by approximately $191,000 related to lower base salary costs as sales personnel averaged 54 for the nine months ended September 30, 2011 compared with 61 for the same period in 2010, a decrease in headcount of 12%.
 
General and Administrative.     General and administrative expenses totaled $6,796,700 for the nine months ended September 3 0,  2011 compared to $5,473,626 for the nine months ended September 3 0,  2010, representing an increase of $1,323,074, or 24%.  Costs associated with the Wi-Fi network totaled approximately $595,000 for the nine months ended September 30, 2011 compared to zero for the nine months ended September 30, 2010.    Payroll costs increased by approximately $159,000 and bad debt increased by approximately $113,000.  The balance of the increase occurred across a number of functional components including office and travel.
 
Interest Income.     Interest income totaled $31,659 for the nine months ended September 30, 2011 compared with $1,494 for the nine months ended September 30, 2010, representing an increase of $30,165.  The increase primarily relates to higher cash balances in the 2011 period.  Average cash balances increased from approximately $10.4 million in the 2010 period to approximately $31.1 million in the 2011 period.

 
19

 

Interest Expense.     Interest expense totaled $13,518 for the nine months ended September 30, 2011.  There was no interest expense for the nine months ended September 30, 2010.  Interest expense related to capital leases acquired and deferred payments made related to the Pipeline acquisition.

Gain on Business Acquisition.     Gain on business acquisition totaled $564,125 for the nine months ended September 30, 2011 compared to $355,876 for the nine months ended September 30, 2010, representing an increase of $208,249 or 59%.  The gain in the 2010 period related to the acquisition of Sparkplug in April 2010 whereas the gain in the 2011 period related to the One Velocity acquisition in May 2011.

Net Loss.    Net loss totaled $5,426,710 for the nine months ended September 30, 2011 compared with $4,225,459 for the nine months ended September 30, 2010, an increase of $1,201,251, or 28%.  Revenues increased by $5,116,558, or 36%, while operating expenses increased by $6,470,809, or 34%.  
 
Liquidity and Capital Resources

We have historically met our liquidity and capital requirements primarily through the public sale and private placement of equity securities and debt financing.  Changes in capital resources during the nine months ended September 30, 2011 and 2010 are described below.

Net Cash Provided by (Used in) Operating Activities.    Net cash provided by operating activities totaled $1,376,643 for the nine months ended September 30, 2011 as compared to net cash used in operating activities of $260,368 for the nine months ended September 30, 2010, representing an increase in cash provided by operating activities of $1,637,011, or greater than 100%.  During the nine months ended September 30, 2011, cash flow from operations totaled $1,359,799 as compared to $302,477 during the nine months ended September 30, 2010.  Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results.  During the nine months ended September 30, 2011, changes in operating assets and liabilities provided cash of $16,844.  During the nine months ended September 30, 2010, changes in operating assets and liabilities used cash of $562,845.

Net Cash Used in Investing Activities.    Net cash used in investing activities totaled $12,009,935 for the nine months ended September 30, 2011 as compared to $5,376,142 for the nine months ended September 30, 2010, representing an increase of $6,633,793, or greater than 100%.  The increase in the 2011 period related to higher spending on property and equipment which increased by $6,155,595, or greater than 100%, from $4,203,142 to $10,358,737.  The significant components of the increase included approximately $3,681,000 related to the construction of a Wi-Fi network, approximately $1,441,000 related to customer premise equipment and approximately $907,000 related to network equipment. In addition, we paid $1,600,000 in cash for the acquisition of One Velocity in the 2011 period compared to $1,170,000 in cash for the acquisition of Sparkplug in the 2010 period.

Net Cash Provided by Financing Activities.    Net cash provided by financing activities totaled $39,047,271 for the nine months ended September 30, 2011 as compared to $920 for the nine months ended September 30, 2010, representing an increase of $39,046,351, or greater than 100%.  The increase is primarily related to net proceeds of $38,834,709 resulting from the sale of 10,350,000 shares of our common stock at a public offering price of $4.00 per share in July 2011.
 
Working Capital.    As of September 30, 2011, we had working capital of $47,314,345. 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 One Velocity.   On May 18, 2011, we completed the acquisition of the customer contracts, network infrastructure and related assets of One Velocity, which was based in Las Vegas and Reno, Nevada.  The aggregate consideration for the acquisition includes (i) approximately $1.6 million in cash, and (ii) 387,312 unregistered shares of common stock with a fair value of approximately $1.8 million.  The acquisition of One Velocity was a business combination accounted for under the acquisition method.

 
20

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

Goodwill.      Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired in an acquisition.  Goodwill is not amortized but rather is reviewed annually for impairment, or whenever events or circumstances indicate that the carrying value may not be recoverable.  A two-step test is performed at the reporting unit level to assess goodwill for impairment.  First, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, the reporting unit is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. If the carrying value of the goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded.

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.’’

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable

 
21

 

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 September 30, 2011, 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 September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
22

 

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
 
 
23

 

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:  November 14, 2011
     
By:
/s/ Jeffrey M. Thompson
 
       
Jeffrey M. Thompson
President and Chief Executive Officer
(Principal Executive Officer)
 
             
Date:  November 14, 2011
     
By:
/s/ Joseph P. Hernon
 
       
Joseph P. Hernon
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
 
 
 
24

 

EXHIBIT INDEX

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

 
 

 

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

 
(1)
I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter ended September 30, 2011;

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

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

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

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

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

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

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

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

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

 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 14 , 2011

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

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

 
(1)
I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter ended September 30, 2011;

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

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

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

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

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

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

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

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

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

 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: November 14 , 2011

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

 
 

 
 
 
EXHIBIT 32.1
 
CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Towerstream Corporation, (the ‘‘Company’’) on Form 10-Q for the period ended September 30, 2011 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.