Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 05/10/2012 16:04:26)

 

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 March 31, 2012

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, including area code (401) 848-5848

 

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

 

Indicate by check mark whether the registrant 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.

 

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

 

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

 

As of May 7, 2012, there were 54,387,090 shares of common stock, par value $0.001 per share, outstanding.

 

 
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

    Pages
     
Part I FINANCIAL INFORMATION  
     
Item 1. Financial Statements. 1
     
  Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011 1
     
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (unaudited) 2
     
  Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2012 (unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited) 4
     
  Notes to Unaudited Condensed Consolidated Financial Statements 5-11
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 12-18
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 19
     
Item 4. Controls and Procedures. 19
     
Part II OTHER INFORMATION  
     
Item 6. Exhibits. 20

 

 
 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    (Unaudited)
March 31, 2012
    December 31, 2011  
Assets                
Current Assets                
Cash and cash equivalents   $ 38,675,398     $ 44,672,587  
Accounts receivable, net     625,589       592,539  
Prepaid expenses and other current assets     1,141,038       622,505  
Total Current Assets     40,442,025       45,887,631  
                 
Property and equipment, net     31,147,740       27,531,273  
                 
Intangible assets, net     6,906,610       7,959,761  
Goodwill     1,674,281       1,674,281  
Other assets     764,392       583,950  
Total Assets   $ 80,935,048     $ 83,636,896  
                 
Liabilities and Stockholders’ Equity                
                 
Current Liabilities                
Accounts payable   $ 1,080,017     $ 1,443,919  
Accrued expenses     3,977,349       2,120,093  
Deferred revenues     1,418,428       1,591,286  
Current maturities of capital lease obligations     223,034       293,126  
Other     357,048       392,546  
Total Current Liabilities     7,055,876       5,840,970  
                 
Long-Term Liabilities                
Capital lease obligations, net of current maturities     180,065       241,154  
Other     342,166       409,862  
Total Long-Term Liabilities     522,231       651,016  
Total Liabilities     7,578,107       6,491,986  
                 
Commitments (Note 13)                
                 
Stockholders' Equity                
Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued     -       -  
Common stock, par value $0.001; 70,000,000 shares authorized; 54,385,423 and 54,256,083 shares issued and outstanding, respectively     54,385       54,256  
Additional paid-in-capital     120,062,003       119,469,969  
Accumulated deficit     (46,759,447 )     (42,379,315 )
Total Stockholders' Equity     73,356,941       77,144,910  
Total Liabilities and Stockholders' Equity   $ 80,935,048     $ 83,636,896  

 

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 March 31,  
    2012     2011  
             
Revenues   $ 7,819,059     $ 5,953,013  
                 
Operating Expenses                
Cost of revenues (exclusive of depreciation)     3,068,011       1,505,907  
Depreciation and amortization     3,281,079       1,974,582  
Customer support services     1,067,815       771,023  
Sales and marketing     1,429,827       1,339,802  
General and administrative     3,342,391       1,875,396  
Total Operating Expenses     12,189,123       7,466,710  
Operating Loss     (4,370,064 )     (1,513,697 )
Other Income/(Expense)                
Interest income     17,178       5,592  
Interest expense     (22,316 )     (2,588 )
Other income (expense), net     (4,930 )     (1,891 )
Total Other Income/(Expense)     (10,068 )     1,113  
Net Loss   $ (4,380,132 )   $ (1,512,584 )
                 
Net loss per common share – basic and diluted   $ (0.08 )   $ (0.04 )
Weighted average common shares outstanding – basic and diluted     54,312,066       42,209,682  

 

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 Three Months Ended March 31, 2012

 

    Common Stock     Additional
Paid-In-
    Accumulated        
    Shares     Amount     Capital     Deficit     Total  
Balance at January 1, 2012     54,256,083     $ 54,256     $ 119,469,969     $ (42,379,315 )   $ 77,144,910  
Cashless exercise of options     54,822       55       (55 )             -  
Exercise of options     38,335       38       42,881               42,919  
Issuance of common stock under an employee stock purchase plan     6,183       6       29,363               29,369  
Issuance of common stock upon vesting of restricted stock awards     30,000       30       (30 )             -  
Stock-based compensation for options                     490,325               490,325  
Stock-based compensation for restricted stock                     29,550               29,550  
Net loss                             (4,380,132 )     (4,380,132 )
Balance at March 31, 2012     54,385,423     $ 54,385     $ 120,062,003     $ (46,759,447 )   $ 73,356,941  

 

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)

 

    Three Months Ended March 31,  
    2012     2011  
Cash Flows From Operating Activities                
Net loss   $ (4,380,132 )   $ (1,512,584 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
Provision for doubtful accounts     30,000       27,516  
Depreciation and amortization     3,281,079       1,974,582  
Stock-based compensation     524,265       105,702  
Loss on sale and disposition of property and equipment     12,111       18,560  
Deferred rent     (21,040 )     (21,039 )
Changes in operating assets and liabilities:                
Accounts receivable     (63,050 )     64,431  
Prepaid expenses and other current assets     (518,533 )     (193,709 )
Other assets     (132,338 )     -  
Accounts payable     (363,902 )     603,714  
Accrued expenses     614,758       172,118  
Other current liabilities     -       (6,292 )
Deferred revenues     (172,858 )     44,445  
Total Adjustments     3,190,492       2,790,028  
Net Cash (Used In) Provided By Operating Activities     (1,189,640 )     1,277,444  
                 
Cash Flows From Investing Activities                
Acquisitions of property and equipment     (4,618,308 )     (2,620,055 )
Proceeds from sale of property and equipment     4,300       201  
Payments of security deposits     (48,104 )     (9,500 )
Deferred acquisition payments     (82,154 )     -  
Net Cash Used In Investing Activities     (4,744,266 )     (2,629,354 )
                 
Cash Flows From Financing Activities                
Payments on capital leases     (131,181 )     (20,254 )
Issuance of common stock upon exercise of options     42,919       204,960  
Issuance of common stock under employee stock purchase plan     24,979       -  
Net Cash (Used In) Provided By Financing Activities     (63,283 )     184,706  
                 
Net Decrease In Cash and Cash Equivalents     (5,997,189 )     (1,167,204 )
                 
Cash and Cash Equivalents – Beginning     44,672,587       23,173,352  
Cash and Cash Equivalents – Ending   $ 38,675,398     $ 22,006,148  
                 
Supplemental Disclosures of Cash Flow Information                
Cash paid during the periods for:                
Interest   $ 22,316     $ 2,588  
Taxes   $ 16,360     $ 16,050  
Non-cash investing activities:                
Acquisition of property and equipment   $ 1,242,498     $ -  

 

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 incorporated in Delaware in December 1999. 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 twelve major metropolitan markets consisting of New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport.

 

In the fourth quarter of 2011, the Company launched its Wi-Fi network which is marketed towards mobile operators, Internet based marketing companies and Wi-Fi operators.

 

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 Stated 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 March 31, 2012 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2012 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, 2011. 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, 2011, 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 March 31, 2012, the Company had cash and cash equivalent balances of approximately $30,660,000 in excess of the federally insured limit of $250,000. Under the FDIC’s Transaction Account Guarantee (“TAG”) program, non-interest-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 balance of approximately $655,000 as of March 31, 2012 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 which reflects the Company’s estimate of balances 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. Additions to the allowance for doubtful accounts include provisions for bad debt and deductions to the allowance for doubtful accounts include customer write-offs.

 

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 March 31,  
    2012     2011  
Beginning of period   $ 262,525     $ 118,825  
Additions     30,000       33,668  
Deductions     (49,537 )     (46,917 )
End of period   $ 242,988     $ 105,576  

 

Business Acquisitions . Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the consideration transferred on the acquisition date.  When the Company acquires a business, it assesses the acquired assets and liabilities assumed for the appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. The excess of the total consideration transferred over the net identifiable assets acquired and liabilities assumed is recognized as goodwill.  If this consideration is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed and included in general and administrative expenses in our condensed consolidated statements of operations.

 

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 recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

 

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. The Company initially performs a qualitative assessment of goodwill which considers macro-economic conditions, industry and market trends, and the current and projected financial performance of the reporting unit.  No further analysis is required if it is determined that there is a less than 50 percent likelihood that the carrying value is greater than the fair value. 

 

Reclassifications. Certain accounts in the prior years’ 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.

 

Subsequent Events . Subsequent events have been evaluated through the date of this filing.

 

Note 3.    Business Acquisitions

 

Pro Forma Information

 

The following table reflects the unaudited pro forma consolidated results of operations had the acquisitions of One Velocity, Inc. (“One Velocity”) and Color Broadband Communications, Inc. (“Color Broadband”) taken place at the beginning of the 2011 period:

 

    Three Months Ended March 31, 2011  
Revenues   $ 7,074,620  
Amortization expense     1,384,635  
Total operating expenses     8,892,618  
Net loss     (1,816,887 )
Basic net loss per share   $ (0.04 )

 

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 2011 nor does the information project results for any future period.

 

6
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 4.    Property and Equipment

 

Property and equipment is comprised of:

 

    March 31, 2012     December 31, 2011  
Network and base station equipment   $ 23,905,574     $ 22,231,025  
Customer premise equipment     18,775,492       18,015,886  
Wi-Fi network     8,581,193       6,535,212  
Information technology     3,283,769       1,977,302  
Furniture, fixtures and other     1,585,968       1,579,269  
Leasehold improvements     775,420       775,420  
      56,907,416       51,114,114  
Less: accumulated depreciation     25,759,676       23,582,841  
Property and equipment, net   $ 31,147,740     $ 27,531,273  

 

Depreciation expense for the three months ended March 31, 2012 and 2011 was $2,227,928 and $1,327,822, respectively. The Company sold or disposed of property and equipment with $67,504 of original cost and $51,093 of accumulated depreciation during the three months ended March 31, 2012. The Company sold or disposed of property and equipment with $47,855 of original cost and $25,224 of accumulated depreciation during the three months ended March 31, 2011. In addition, the Company exchanged property and equipment with a net book value of $9,180 for property and equipment with a fair value of $13,050 during the three months ended March 31, 2011. There were no exchanges of property and equipment for the three months ended March 31, 2012.

 

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

 

    March 31, 2012     December 31, 2011  
Network and base station equipment   $ 529,621     $ 576,033  
Wi-Fi network     81,305       81,305  
Customer premise equipment     59,328       59,328  
      670,254       716,666  
Less: accumulated depreciation     (111,428 )     (77,915 )
Property acquired through capital leases, net   $ 558,826     $ 638,751  

 

During the first quarter of 2012, the Company made final lease payments of $46,412 on property held under capital leases on leases acquired with the Color Broadband acquisition. The Company obtained clear title to the equipment, and accordingly, is no longer reporting these assets as property held under capital leases.

 

Note 5. Intangible Assets

 

Intangible assets consist of the following:

 

    March 31, 2012     December 31, 2011  
Goodwill   $ 1,674,281     $ 1,674,281  
                 
Customer contracts   $ 10,261,475     $ 10,261,475  
FCC licenses     1,284,555       1,284,555  
      11,546,030       11,546,030  
Less: accumulated amortization     4,639,420       3,586,269  
Intangible assets, net   $ 6,906,610     $ 7,959,761  

 

Amortization expense for the three months ended March 31, 2012 and 2011 was $1,053,151 and $646,760, respectively. The customer contracts acquired in the Sparkplug Chicago, Inc. acquisition totaled $1,483,000 and were amortized over a 14 month period which ended in June 2011. The customer contracts acquired in the Pipeline Wireless, LLC acquisition are being amortized over a 17 month period ending May 2012. The customer contracts acquired in the One Velocity acquisition are being amortized over a 30 month period ending November 2013. The customer contracts acquired in the Color Broadband acquisition are being amortized over a 28 month period ending April 2014. As of March 31, 2012, the average remaining amortization period was approximately 15 months. Future amortization expense is expected to be as follows:

 

7
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)  

 

Remainder of 2012   $ 2,337,019  
2013     2,783,989  
2014     501,047  
    $ 5,622,055  

 

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:

 

    March 31, 2012     December 31, 2011  
Property and equipment   $ 2,426,806     $ 863,525  
Payroll and related     822,178       608,101  
Professional services     335,095       277,213  
Network     164,118       149,755  
Marketing     83,254       2,582  
Acquisition costs     -       95,911  
Other     145,898       123,006  
Total   $ 3,977,349     $ 2,120,093  

 

Network expenses relate to providing services to our customers.

 

Note 7.    Other Liabilities

 

Other liabilities consist of the following:

 

    March 31, 2012     December 31, 2011  
Current                
Deferred rent   $ 112,106     $ 104,206  
Deferred acquisition payments     244,942       288,340  
Total   $ 357,048     $ 392,546  
                 
Long-Term                
Deferred rent   $ 57,880     $ 86,820  
Deferred acquisition payments     166,268       205,024  
Deferred taxes     118,018       118,018  
Total   $ 342,166     $ 409,862  

 

The gross balance of deferred acquisition payments totaled $411,210 as of March 31, 2012 and included $328,204 related to the acquisition of Pipeline Wireless, LLC payable in monthly installments of $16,630 through May 2014, and $83,006 related to the acquisition of Color Broadband payable in monthly installments of $10,000 through December 2012. These payments are recorded at a 12% discount rate for acquisition accounting purposes.

 

Note 8. Stock-Based Compensation

 

The Company uses the Black-Scholes option pricing model to value options granted to employees, directors and consultants. Compensation expense, including the effect of forfeitures, is recognized over the period of service, generally the vesting period. Stock-based compensation totaled $490,325 and $76,152 for the three months ended March 31, 2012 and 2011, respectively. Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

The unamortized amount of stock options expense totaled $2,859,475 as of March 31, 2012 which will be recognized over a weighted-average period of 2.9 years.

 

8
 

  

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

    Three Months Ended March 31,  
    2012     2011  
Risk-free interest rate     0.7%-1.0 %        
Expected volatility     65% - 73%        
Expected life (in years)     5        
Expected dividend yield            
Weighted average per share grant date fair value   $ 2.18        

 

The risk-free interest rate was based on rates established by the Federal Reserve. The Company’s expected volatility was based upon the historical volatility for its common stock. The expected life of the Company’s options was determined using the simplified method 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 30,000 shares were vested as of March 31, 2012. Stock-based compensation for restricted stock totaled $29,550 for the three months ended March 31, 2012 and 2011, respectively. Unrecognized compensation cost of $206,850 at March 31, 2012 will be recognized ratably through December 2013.

 

Option transactions under the stock option plans during the three months ended March 31, 2012 were as follows:

 

    Number of
Options
    Weighted Average
Exercise Price
 
Outstanding as of December 31, 2011     4,635,624     $ 2.85  
Granted during 2012     50,000       3.81  
Exercised     (131,892 )     1.56  
Forfeited /expired     (78,122 )     9.42  
Outstanding as of March 31, 2012     4,475,610     $ 2.79  
Exercisable as of March 31, 2012     3,056,101     $ 1.92  

 

A total of 93,557 options were exercised on a cashless basis during the three months ended March 31, 2012 resulting in the net issuance of 54,822 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 months ended March 31, 2012, a total of 38,335 options were exercised on a cash basis which resulted in proceeds of $42,919.

 

The weighted average remaining contractual life of the outstanding options as of March 31, 2012 was 6.1 years.

 

The intrinsic value of outstanding and exercisable options totaled $9,599,303 and $9,029,450, respectively, as of March 31, 2012. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock at March 31, 2012, which was $4.75 per share, and the exercise price of the options.

 

The number of shares issuable upon the exercise of options outstanding will be lower if a holder elects to exercise on a cashless basis.

 

9
 

   

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 9.    Stock Warrants

 

Warrant transactions during the three months ended March 31, 2012 were as follows:

 

    Number of
Warrants
    Weighted Average
Exercise Price
 
Outstanding as of December 31, 2011     4,776,310     $ 4.65  
Forfeited /expired     (4,026,310 )     4.66  
Outstanding as of March 31, 2012     750,000     $ 4.60  
Exercisable as of March 31, 2012     300,000     $ 4.00  

 

A total of 4,026,310 warrants exercisable at exercise prices ranging from $4.00 to $6.00 expired in January 2012 and an additional 300,000 warrants with an exercise price of $4.00 will expire in June 2012.

 

The intrinsic value for outstanding and exercisable warrants totaled $225,000, respectively, as of March 31, 2012. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock at March 31, 2012, which was $4.75 per share, and the exercise price of the warrants.

 

The weighted average remaining contractual life as of March 31, 2012 was 2.7 years.

 

The number of shares issuable upon the exercise of warrants outstanding will be lower if a holder elects to exercise on a cashless basis.

 

Note 10. Employee Stock Purchase Plan

 

Under the Company’s 2010 Employee Stock Purchase Plan (“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 months ended March 31, 2012, a total of 6,183 shares were issued with a fair value of $29,369. The Company recognized $4,390 of stock-based compensation related to the 15% discount for the three months ended March 31, 2012.

 

Note 11. Fair Value Measurement

 

Valuation Hierarchy

 

The FASB’s accounting standard for fair value measurements establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. 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.

 

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 three months ended March 31, 2012.

   

    Total Carrying Value     Quoted prices in
active markets
(Level 1)
    Significant other
observable inputs
(Level 2)
    Significant
unobservable inputs
(Level 3)
 
March 31, 2012   $ 38,675,398     $ 38,675,398     $ -     $ -  
December 31, 2011   $ 44,672,587     $ 44,672,587     $ -     $ -  

 

10
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 12.    Net Loss Per Common Share

 

Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded since their inclusion would be anti-dilutive.

 

The following common stock equivalents were excluded from the computation of diluted net loss per common share because they were anti-dilutive. The exercise or issuance of these common stock equivalents outstanding at March 31, 2012 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 $15,929,000.

 

Stock options     4,475,610  
Restricted stock     60,000  
Warrants     750,000  
Total     5,285,610  

 

Note 13.    Commitments

 

Operating 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 March 31, 2012, total future operating lease obligations were as follows:

 

Remainder of 2012   $ 6,753,280  
2013     7,722,940  
2014     5,928,709  
2015     5,036,361  
2016     3,812,674  
Thereafter     2,421,775  
    $ 31,675,739  

 

Rent expense for the three months ended March 31, 2012and 2011 totaled approximately $2,116,000 and $1,036,000, respectively.

 

Capital Lease Obligations

 

We have entered into capital leases to acquire network and customer premise equipment expiring through March 2017. In December 2011, we entered into an agreement with Cisco Capital to acquire equipment related to our information technology infrastructure. We expect the lease to commence in the second quarter of 2012. The total lease obligation is approximately $2,100,000 and will be paid in various installments over a 60 month period.

 

As of March 31, 2012, total future capital lease obligations were as follows:

 

Remainder of 2012   $ 374,033  
2013     458,823  
2014     449,549  
2015     620,560  
2016     620,560  
Thereafter     155,140  
    $ 2,678,665  

 

Other

 

In December 2011, we entered into a one year information technology infrastructure support agreement. The agreement became effective at the end of the first quarter of 2012. The monthly payments are approximately $43,000 and will be paid through the first quarter of 2013.

 

11
 

 

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

 

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the three months ended March 31, 2012. 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, 2011 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The follow 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 the fourth quarter of 2011, we launched our Wi-Fi network which is marketed towards mobile operators, Internet based marketing companies, and Wi-Fi operators. 

 

In April 2012, we entered into a Wi-Fi agreement with our second national wireless carrier utilizing our current and future rooftop assets.

 

Characteristics of our Revenues and Expenses

 

We offer broadband 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.

 

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.

 

12
 

 

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

 

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

 

General and administrative expenses include costs attributable to corporate overhead and the overall support of our operations. Salaries and other related payroll costs for executive management, finance, administration and information systems personnel are included in this category. Other costs include rent, utilities and other 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 March 31, 2012, we operated in twelve major metropolitan markets consisting of 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 cannot 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 expense, 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.

 

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 entered the Las Vegas-Reno market in May 2011 through the acquisition of One Velocity, Inc. (“One Velocity”). The acquisition of Color Broadband Communications Inc. (“Color Broadband”) in December 2011 expanded our market presence in the Los Angeles area.

 

The New York market included cost of revenues of approximately $655,000 and operating costs of approximately $45,000 for the three months ended March 31, 2012, related to the construction of a Wi-Fi network.

 

13
 

 

Three months ended March 31, 2012

 

Market   Revenues     Cost of
Revenues
    Gross Margin     Operating
Costs
    Adjusted
Market
EBITDA
 
Los Angeles   $ 1,967,109     $ 580,006     $ 1,387,103     $ 351,444     $ 1,035,659  
Boston     1,688,525       393,942       1,294,583       265,786       1,028,797  
New York     1,647,786       1,101,706       546,080       353,286       192,794  
Chicago     860,989       273,770       587,219       157,643       429,576  
Las Vegas-Reno     431,846       153,242       278,604       40,036       238,568  
Miami     418,905       88,328       330,577       101,624       228,953  
San Francisco     377,380       176,275       201,105       84,079       117,026  
Providence-Newport     108,140       40,332       67,808       30,546       37,262  
Seattle     115,898       62,593       53,305       26,684       26,621  
Dallas-Fort Worth     169,260       83,128       86,132       77,658       8,474  
Nashville     9,333       13,203       (3,870 )     8,734       (12,604 )
Philadelphia     23,888       16,101       7,787       22,184       (14,397 )
Total   $ 7,819,059     $ 2,982,626     $ 4,836,433     $ 1,519,704     $ 3,316,729  
                                         
Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure                  
Adjusted market EBITDA                                   $ 3,316,729  
Centralized costs                                     (1,063,323 )
Corporate expenses                                     (2,818,126 )
Depreciation and amortization                                     (3,281,079 )
Stock-based compensation                                     (524,265 )
Other income (expense)                                     (10,068 )
Net loss                                   $ (4,380,132 )

 

Three months ended March 31, 2011

 

Market   Revenues     Cost of
Revenues
    Gross Margin     Operating Costs     Adjusted
Market
EBITDA
 
Boston   $ 1,652,826     $ 394,093     $ 1,258,733     $ 222,369     $ 1,036,364  
New York     1,448,191       339,755       1,108,436       332,464       775,972  
Los Angeles     950,268       174,160       776,108       261,304       514,804  
Chicago     816,709       226,472       590,237       185,674       404,563  
San Francisco     348,759       59,443       289,316       93,059       196,257  
Miami     301,015       68,985       232,030       102,983       129,047  
Seattle     136,409       53,621       82,788       28,487       54,301  
Providence-Newport     118,927       40,861       78,066       27,050       51,016  
Dallas-Fort Worth     143,824       81,192       62,632       64,357       (1,725 )
Nashville     15,573       8,022       7,551       11,496       (3,945 )
Philadelphia     20,512       13,255       7,257       28,191       (20,934 )
Total   $ 5,953,013     $ 1,459,859     $ 4,493,154     $ 1,357,434     $ 3,135,720  
                                         
Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure          
Adjusted market EBITDA                                   $ 3,135,720  
Centralized costs                                     (799,439 )
Corporate expenses                                     (1,769,694 )
Depreciation and amortization                                     (1,974,582 )
Stock-based compensation                                     (105,702 )
Other income (expense)                                     1,113  
Net loss                                   $ (1,512,584 )

 

14
 

 

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

 

Revenues . Revenues totaled $7,819,059 during the three months ended March 31, 2012 compared to $5,953,013 during the three months ended March 31, 2011, representing an increase of $1,866,046, or 31%. This increase was primarily related to a 24% increase in our customer base from approximately 2,900 at March 31, 2011 to approximately 3,600 at March 31, 2012.

 

Average revenue per user (“ARPU”) as of March 31, 2012 totaled $706 compared to $688 as of March 31, 2011, representing an increase of $18, or 3%. The increase in ARPU primarily related to a higher percentage of customers purchasing, or upgrading to, higher bandwidth service which generates greater monthly recurring revenue (“MRR”).  Customers purchasing more than 10 megabytes of bandwidth service, commonly referred to as point-to-point customers, increased from 29% of our customer base as of March 31, 2011 to 38% as of March 31, 2012. The customers acquired from One Velocity in May 2011 had an ARPU of $734 compared to $690 for our customer base which had the effect of increasing our post acquisition ARPU by $2. The customers acquired from Color Broadband in December 2011 had an ARPU of $645 compared to $717 for our customer base which had the effect of decreasing our post acquisition ARPU by $7.

 

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.58% for the three months ended March 31, 2012 compared to 1.56% for the three months ended March 31, 2011. 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 $3,068,011 for the three months ended March 31, 2012 compared to $1,505,907 for the three months ended March 31, 2011, representing an increase of $1,562,104, or slightly greater than 100%. Gross margins for the three months ended March 31, 2012 decreased to 61% compared to 75% during the three months ended March 31, 2011. Expenses associated with the Wi-Fi network totaled approximately $849,000 which impacted gross margin by 11 percentage points for the three months ended March 31, 2012. There were approximately $16,000 of expenses associated with the Wi-Fi network for the three months ended March 31, 2011. Core Network costs increased by approximately $696,000 primarily related to higher tower rent and bandwidth expenses which were partly related to acquisitions. Customer Network costs increased by approximately $56,000 primarily related to the growth in our customer base.

 

Depreciation and Amortization.     Depreciation and amortization totaled $3,281,079 for the three months ended March 31, 2012 compared to $1,974,582 for the three months ended March 31, 2011, representing an increase of $1,306,497, or 66%. Depreciation expense totaled $2,227,928 for the three months ended March 31, 2012 compared to $1,327,822 for the three months ended March 31, 2011, representing an increase of $900,106, or 68%. The gross base of depreciable assets increased by $21,759,838, or 62% compared to March 31, 2011. The increased depreciable base reflects continued growth in the core business (approximately $11,220,000) as well as spending on the Wi-Fi network (approximately $6,610,000) and additions resulting from acquisitions (approximately $3,930,000).

 

Amortization expense totaled $1,053,151 for the three months ended March 31, 2012 compared to $646,760 for the three months ended March 31, 2011, representing an increase of $406,391, or 63%. The increase primarily relates to the amortization of customer based intangible assets recorded in connection with the acquisitions of Color Broadband in the fourth quarter of 2011 and One Velocity in the second quarter of 2011.

 

Customer Support Services.     Customer support services totaled $1,067,815 for the three months ended March 31, 2012 compared to $771,023 for the three months ended March 31, 2011, representing an increase of $296,792, or 38%. This increase was primarily related to additional personnel hired to support our growing customer base. Average department headcount increased by 41% from 54 in 2011 period to 76 in 2012 period.

 

Sales and Marketing. Sales and marketing expenses for the three months ended March 31, 2012 totaled $1,429,827 compared to $1,339,802 for the three months ended March 31, 2011, representing an increase of $90,025, or 7%. This increase was primarily related to an increase in payroll costs of approximately $30,000, an increase in commissions and bonuses of approximately $26,000 and an increase in advertising of approximately $20,000.

 

General and Administrative.     General and administrative expenses totaled $3,342,391 for the three months ended March 31, 2012 compared to $1,875,396 for the three months ended March 31, 2011, representing an increase of $1,466,995, or 78%. Costs associated with the Wi-Fi network totaled approximately $568,000 for the three months ended March 31, 2012 as compared to $55,000 for the three months ended March 31, 2011. In addition, stock-based compensation increased by approximately $419,000, acquisition costs increased by approximately $290,000, and information technology spending increased by approximately $110,000.

 

Interest Income. Interest income for the three months ended March 31, 2012 totaled $17,178 compared to $5,592 for the three months ended March 31, 2011 representing an increase of $11,586, or greater than 100%. The increase primarily relates to higher average cash balances in the 2012 period compared with the 2011 period. Average cash balances increased from approximately $22.2 million in the first quarter 2011 to approximately $41.1 million in the first quarter 2012.

 

15
 

 

Interest Expense.     Interest expense for the three months ended March 31, 2012 totaled $22,316 compared to $2,588 for the three months ended March 31, 2011, representing an increase of $19,728, or greater than 100%. Interest expense related to capital leases acquired and deferred payment obligations related to the Pipeline and Color Broadband acquisitions.

 

Net Loss.     Net loss for the three months ended March 31, 2012 totaled $4,380,132 compared to $1,512,584 for the three months ended March 31, 2011, representing an increase of $2,867,548, or greater than 100%. Revenues increased by $1,866,046, or 31%, while operating expenses increased by $4,722,413, or 63%. Operating expenses associated with our Wi-Fi network totaled $1,631,597 for the three months ended March 31, 2012 compared to $121,313 for the three months ended March 31, 2011, representing an increase of $1,510,284, or greater than 100%.

  

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 three months ended March 31, 2012 and 2011 are described below.

 

Net Cash (Used in) Provided by Operating Activities.     Net cash used in operating activities for the three months ended March 31, 2012 totaled $1,189,640 compared to cash provided by operating activities totaled $1,277,444 for the three months ended March 31, 2011, representing a decrease of $2,467,084, or greater than 100%. During the three months ended March 31, 2012, cash provided by operations for our core business totaled $1,063,458 as compared to $714,050 during the three months ended March 31, 2011. During the three months ended March 31, 2012, cash flow used in operations for our Wi-Fi business totaled $1,617,175 as compared to $121,313 during the three months ended March 31, 2011. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results.  During the three months ended March 31, 2012, changes in operating assets and liabilities used cash of $635,923 compared to cash provided by of $684,707 for the three months ended March 31, 2011.

 

  Net Cash Used in Investing Activities.     Net cash used in investing activities for the three months ended March 31, 2012 totaled $4,744,266 compared to $2,629,354 for the three months ended March 31, 2011, representing an increase of $2,114,912, or 80%. The increase in the 2012 period related to higher spending on property and equipment which increased by $1,998,253, or 76%, from $2,620,055 to $4,618,308. The significant components of the increase included approximately $1,340,000 related to network equipment and $960,000 related to the construction of our Wi-Fi network.

 

Net Cash (Used in) Provided by Financing Activities .  Net cash used in financing activities for the three months ended March 31, 2012 totaled $63,283 compared to cash provided by financing activities of $184,706 for the three months ended March 31, 2011, representing a decrease of $247,989, or greater than 100%. The decrease is primarily related to the payments on our capital leases assumed through the Color Broadband acquisition.

 

Working Capital.     As of March 31, 2012, we had working capital of $33,386,149. 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.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and other commitments as of March 31, 2012:

 

    Payments due by period  
    Total     2012     2013     2014     2015     2016     Thereafter  
Capital lease obligations   $ 2,678,665     $ 374,033     $ 458,823     $ 449,549     $ 620,560     $ 620,560     $ 155,140  
Operating leases     31,675,739       6,753,280       7,722,940       5,928,709       5,036,361       3,812,674       2,421,775  
Deferred payments     522,391       239,674       199,565       83,152       -       -       -  
Other     497,288       390,826       106,462       -       -       -       -  
Total contractual cash obligations   $ 35 ,374,083     $ 7,757,813     $ 8,487,790     $ 6,461,410     $ 5,656,921     $ 4,433,234     $ 2,576,915  

 

Capital Lease Obligations. We have entered into capital leases to acquire network and customer premise equipment expiring through March 2017. In December 2011, we entered into an agreement with Cisco Capital to acquire equipment related to our information technology infrastructure. We expect the lease to commence in the second quarter of 2012. The principal value of the lease obligation is approximately $2,100,000 and will be paid in varying installments over a 60 month period.

 

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Operating Leases. We have entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through December 2020.

 

Deferred Payments . We are making deferred payments to Pipeline as part of the consideration paid for the acquisition. There were 26 monthly payments of $16,630 remaining as of March 31, 2012.

 

We acquired an agreement with the acquisition of Color Broadband related to the purchase of network equipment and licenses. There were 9 monthly payments of approximately $10,000 remaining as of March 31, 2012.

 

Other. In December 2011, we entered into a one year information technology infrastructure support agreement. The agreement became effective at the end of the first quarter of 2012. The monthly payments are approximately $43,000 and will be paid through the first quarter of 2013.

 

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 recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

 

Long-Lived Assets . Long-lived assets with definite lives consist primarily of property and equipment, and intangible assets such as acquired customer 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.

 

Business Acquisitions . Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the consideration transferred on the acquisition date.  When we acquire a business, we assess the acquired assets and liabilities assumed for the appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. The excess of the total consideration transferred over the net identifiable assets acquired and liabilities assumed is recognized as goodwill.  If the total consideration is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed and included in general and administrative expenses in our consolidated statements of operations.

 

Goodwill. Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired in an acquisition. Goodwill is not amortized but rather is reviewed annually for impairment, or whenever events or circumstances indicate that the carrying value may not be recoverable. We initially perform a qualitative assessment of goodwill which considers macro-economic conditions, industry and market trends, and the current and projected financial performance of the reporting unit.  No further analysis is required if it is determined that there is a less than 50 percent likelihood that the carrying value is greater than the fair value. 

 

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Asset Retirement Obligations. The 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.’’

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Market risk is the potential loss arising from adverse changes in market rates and prices.  Our primary market risk relates to interest rates.  At March 31, 2012, all cash and cash equivalents are immediately available cash balances.  A portion of our cash and cash equivalents are held in three institutional money market funds.   Our interest rate risk exposure is to a decline in interest rates which would result in a decline in interest income. Due to our current market yields, a further decline in interest rates would not have a material impact on earnings.

 

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 March 31, 2012, 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 control over financial reporting during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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P ART 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.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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: May 10, 2012 By:   /s/ Jeffrey M. Thompson
   

Jeffrey M. Thompson

President and Chief Executive Officer

(Principal Executive Officer)

     
  By: /s/ Joseph P. Hernon
   

Joseph P. Hernon

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

21
 

  

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 CHIEF 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 March 31, 2012;

 

(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.

 

(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: May 10, 2012

 

  /s/ Jeffrey M. Thompson

Jeffrey M. Thompson
President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

EXHIBIT 31.2

 

CERTIFICATION OF THE CHIEF 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 March 31, 2012;

 

(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.

 

(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: May 10, 2012

 

  /s/ Joseph P. Hernon

Joseph P. Hernon
Chief Financial Officer

(Principal Financial Officer and Principal Accounting
Officer)

 

 

 

  

EXHIBIT 32.1

 

CERTIFICATION OF THE CHIEF 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 March 31, 2012 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) or 15(d) of the Securities Exchange Act of 1934; and

 

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

 

Date: May 10, 2012

 

  /s/ Jeffrey M. Thompson

Jeffrey M. Thompson
President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

EXHIBIT 32.2

 

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Towerstream Corporation, (the ‘‘Company’’) on Form 10-Q for the period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Joseph P. Hernon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

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

 

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

 

Date: May 10, 2012

 

  /s/ Joseph P. Hernon

Joseph P. Hernon
Chief Financial Officer

(Principal Financial Officer and Principal Accounting

Officer)