Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 11/08/2012 16:04:25)

 

 

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, 2012

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_______to_______

 

Commission file number 001-33449

 

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

20-8259086

(I.R.S. Employer Identification No.)

     

55 Hammarlund Way

Middletown, Rhode Island

(Address of principal executive offices)

 

02842

(Zip Code)

 

Registrant’s telephone number, 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 o  

 

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

 

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

 

As of November 5, 2012, there were 54,643,263 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 September 30, 2012 (unaudited) and December 31, 2011 1
     
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited) 2
     
  Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2012 (unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited) 4
     
  Notes to Unaudited Condensed Consolidated Financial Statements 5-12
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 13-21
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 22
     
Item 4. Controls and Procedures. 22
     
Part II OTHER INFORMATION  
     
Item 6. Exhibits. 23

 

 
 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    (Unaudited)
September 30, 2012
    December 31, 2011  
Assets                
Current Assets                
   Cash and cash equivalents   $ 23,132,521     $ 44,672,587  
   Accounts receivable, net     603,233       592,539  
   Prepaid expenses and other current assets     795,320       622,505  
       Total Current Assets     24,531,074       45,887,631  
                 
Property and equipment, net     39,990,259       27,531,273  
                 
Intangible assets, net     5,268,088       7,959,761  
Goodwill     1,674,281       1,674,281  
Other assets     1,769,362       583,950  
Total Assets   $ 73,233,064     $ 83,636,896  
                 
Liabilities and Stockholders’ Equity                
                 
Current Liabilities                
 Accounts payable   $ 1,139,374     $ 1,443,919  
 Accrued expenses     3,468,857       2,120,093  
 Deferred revenues     1,493,015       1,591,286  
 Current maturities of capital lease obligations     571,669       293,126  
 Other     295,308       392,546  
         Total Current Liabilities     6,968,223       5,840,970  
                 
Long-Term Liabilities                
    Capital lease obligations, net of current maturities     2,144,599       241,154  
    Other     210,200       409,862  
         Total Long-Term Liabilities     2,354,799       651,016  
Total Liabilities     9,323,022       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; 54,641,929 and
54,256,083 shares issued and outstanding, respectively
    54,642       54,256  
 Additional paid-in-capital     120,781,740       119,469,969  
 Accumulated deficit     (56,926,340 )     (42,379,315 )
         Total Stockholders' Equity     63,910,042       77,144,910  
         Total Liabilities and Stockholders' Equity   $ 73,233,064     $ 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 September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
                         
Revenues   $ 8,127,507     $ 6,775,892     $ 24,049,887     $ 19,309,964  
                                 
Operating Expenses                                
Cost of revenues (exclusive of depreciation)     4,439,475       2,231,428       11,226,112       5,583,550  
  Depreciation and amortization     3,399,442       2,298,788       10,028,804       6,486,588  
  Customer support services     1,128,131       869,900       3,368,661       2,374,085  
  Sales and marketing     1,518,229       1,348,408       4,458,333       4,069,067  
  General and administrative     3,022,213       2,656,438       9,431,815       6,796,700  
      Total Operating Expenses     13,507,490       9,404,962       38,513,725       25,309,990  
      Operating Loss     (5,379,983 )     (2,629,070 )     (14,463,838 )     (6,000,026 )
Other Income/(Expense)                                
  Interest income     10,206       21,627       41,395       31,659  
  Interest expense     (37,247 )     (8,728 )     (76,233 )     (13,518 )
  Gain (loss) on business acquisition     -       -       (40,079 )     1,045,444  
  Other income (expense), net     (1,210 )     (4,240 )     (8,270 )     (8,950 )
      Total Other Income/(Expense)     (28,251 )     8,659       (83,187 )     1,054,635  
      Net Loss   $ (5,408,234 )   $ (2,620,411 )   $ (14,547,025 )   $ (4,945,391 )
                                 
Net loss per common share – basic
and diluted
  $ (0.10 )   $ (0.05 )   $ (0.27 )   $ (0.11 )
Weighted average common shares
outstanding – basic and diluted
    54,403,237       51,599,165       54,361,646       45,516,998  

 

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, 2012

 

    Common Stock     Additional     Accumulated        
    Shares     Amount     Paid-In-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     161,027       161       (161 )             -  
Exercise of options     315,793       316       312,537               312,853  
Issuance of common stock under employee stock purchase plan     23,132       23       99,057               99,080  
Issuance of common stock upon vesting of restricted stock awards     30,000       30       (30 )             -  
Stock-based compensation for options                     1,249,925               1,249,925  
Stock-based compensation for restricted stock                     88,650               88,650  
Adjustment to common stock issued for business acquisitions     (144,106 )     (144 )     (403,221 )             (403,365 )
Fair value of options repurchased                     (34,986 )             (34,986 )
Net loss                             (14,547,025 )     (14,547,025 )
Balance at September 30, 2012     54,641,929     $ 54,642     $ 120,781,740     $ (56,926,340 )   $ 63,910,042  

 

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,  
    2012     2011  
Cash Flows From Operating Activities                
Net loss   $ (14,547,025 )   $ (4,945,391 )
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                
  Provision for doubtful accounts     219,082       215,802  
  Depreciation and amortization     10,028,804       6,486,588  
  Stock-based compensation     1,353,404       661,565  
  (Gain) loss on business acquisition     40,079       (1,045,444 )
  Loss on sale and disposition of property and equipment     72,072       49,796  
  Deferred rent     (75,267 )     (63,117 )
  Changes in operating assets and liabilities:                
     Accounts receivable     (230,195 )     (97,711 )
     Prepaid expenses and other current assets     (332,872 )     (89,285 )
     Other assets     (893,202 )     (252,410 )
     Accounts payable     (304,545 )     411,867  
     Accrued expenses     1,354,743       309,142  
     Other current liabilities     -       (23,051 )
     Deferred revenues     (318,999 )     (156,649 )
Total Adjustments     10,913,104       6,407,093  
Net Cash (Used In) Provided By Operating Activities     (3,633,921 )     1,461,702  
                 
Cash Flows From Investing Activities                
Acquisitions of property and equipment     (17,382,469 )     (10,358,737 )
Acquisition of a business     -       (1,600,000 )
Proceeds from sale of property and equipment     12,850       16,009  
Payments of security deposits     (292,209 )     (67,207 )
Deferred acquisition payments     (221,633 )     (85,059 )
Net Cash Used In Investing Activities     (17,883,461 )     (12,094,994 )
                 
Cash Flows From Financing Activities                
Payments on capital leases     (384,802 )     (96,890 )
Issuance of common stock upon exercise of options     312,853       240,835  
Issuance of common stock upon exercise of warrants     -       27,000  
Issuance of common stock under employee stock purchase plan     84,251       41,617  
Repurchase of options     (34,986 )     -  
Net proceeds from sale of common stock     -       38,834,709  
Net Cash (Used In) Provided By Financing Activities     (22,684 )     39,047,271  
                 
Net (Decrease) Increase In Cash and Cash Equivalents     (21,540,066 )     28,413,979  
                 
Cash and Cash Equivalents – Beginning     44,672,587       23,173,352  
Cash and Cash Equivalents – Ending   $ 23,132,521     $ 51,587,331  
                 
Supplemental Disclosures of Cash Flow Information                
Cash paid during the periods for:                
  Interest   $ 76,234     $ 13,518  
  Taxes   $ 18,158     $ 16,801  
Fair value of common stock issued for FCC license   $ -     $ 309,555  
 Non-cash investing and financing activities:                
  Acquisition of property and equipment under capital lease obligations   $ 2,333,006     $ 452,965  
  Fair value of common stock issued (returned) related to an acquisition   $ (403,365 )   $ 1,839,732  

 

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 broadband services to business customers in twelve 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/Small Cell rooftop tower sites (“rooftop tower sites”) 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 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, 2012 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 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 September 30, 2012, the Company had cash and cash equivalent balances of approximately $15,116,000 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 $523,000 as of September 30, 2012 that is covered under the TAG program.

 

The Company also had approximately $7,766,000 invested in three institutional money market funds. These funds are protected under the Securities Investor Protection Corporation, 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 include provisions for doubtful accounts and deductions 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 September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
Beginning of period   $ 275,070     $ 228,447     $ 262,525     $ 118,825  
Additions     50,000       105,000       219,082       302,491  
Deductions     (113,656 )     (50,784 )     (270,193 )     (138,653 )
End of period   $ 211,414     $ 282,663     $ 211,414     $ 282,663  

 

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.

 

Recent Accounting Pronouncements. In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-02, Intangibles -Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), to simplify how entities test indefinite-lived intangibles assets for impairment. ASU 2012-02 allows entities to assess qualitative factors in determining whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. This pronouncement becomes effective for annual and interim tests performed for the fiscal years beginning after September 15, 2012. 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

 

Delos Internet

 

In August 2012, the Company and Delos Internet (“Delos”) entered into a binding merger agreement pursuant to which a wholly owned subsidiary of the Company will be merged with and into Delos, with Delos becoming a wholly owned subsidiary of the Company. Delos operates in Houston, Texas. The closing of the merger agreement is subject to customary closing conditions as well as regulatory approval.  The Company anticipates, but cannot assure, that the merger agreement will close during the first quarter of 2013.

 

6
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Color Broadband Communications Inc.

 

In May 2012, the Company finalized the purchase price of Color Broadband Communications Inc. (“Color Broadband”). The final purchase price of $5,098,996 is $220,885, or 4%, lower than the previously reported purchase price of $5,319,881. The finalization of the purchase price resulted in a reduction of approximately $261,000 of identifiable net assets and a reduction in the gain on business acquisition of approximately $40,000. The purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Color Broadband of 98,506 from 925,736 to 827,230 shares. In addition, 45,600 shares of common stock were returned to the Company principally representing accounts receivable collections retained by Color Broadband during the post-closing transition services period.

 

One Velocity Inc.

 

In January 2012, the Company finalized the purchase price of the One Velocity Inc. (“One Velocity”) acquisition. The final purchase price of $2,881,959 is $557,773, or 16%, lower than the previously reported purchase price of $3,439,732. The adjustment resulted in a decrease of 117,426 shares of common stock issued to One Velocity, from 387,312 to 269,886 shares. In addition, the Company recognized additional gain on business acquisition of approximately $481,000 and a reduction of approximately $77,000 of identifiable net assets in the fourth quarter of 2011. The additional gain on business acquisition of approximately $481,000 has been retroactively adjusted and included in the statement of operations for the nine months ended September 30, 2011.

 

Pro Forma Information

 

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

 

    Three Months Ended
September 30, 2011
  Nine Months Ended
September 30, 2011
Revenues   $ 7,500,998     $ 22,090,692  
Amortization expense   $ 1,062,583     $ 3,749,588  
Total operating expenses   $ 10,282,298     $ 28,744,980  
Net loss   $ (2,772,641 )   $ (5,599,653 )
Basic net loss per share   $ (0.05 )   $ (0.12 )

  

The pro forma information presented above does not purport to present what actual results of the Company would have been had the acquisitions actually occurred at the beginning of 2011 nor does the information project results for any future period.

 

Note 4.    Property and Equipment

 

Property and equipment is comprised of:

    September 30, 2012     December 31, 2011  
Network and base station equipment   $ 26,504,739     $ 22,231,025  
Customer premise equipment     20,808,540       18,015,886  
Rooftop tower sites     17,237,764       6,535,212  
Information technology     3,743,460       1,977,302  
Furniture, fixtures and other     1,594,158       1,579,269  
Leasehold improvements     789,393       775,420  
      70,678,054       51,114,114  
Less: accumulated depreciation     30,687,795       23,582,841  
Property and equipment, net   $ 39,990,259     $ 27,531,273  

 

Depreciation expense for the three months ended September 30, 2012 and 2011 was $2,679,531 and $1,723,163, respectively. Depreciation expense for the nine months ended September 30, 2012 and 2011 was $7,376,947 and $4,551,060, respectively. The Company sold or disposed of property and equipment with $356,915 of original cost and $271,993 of accumulated depreciation during the nine months ended September 30, 2012. The Company sold or disposed of property and equipment with $190,488 of original cost and $126,448 of accumulated depreciation during the nine months ended September 30, 2011. 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, 2012.

 

7
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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

    September 30, 2012     December 31, 2011  
Network and base station equipment   $ 712,925     $ 576,033  
Rooftop tower sites     684,149       81,305  
Customer premise equipment     59,328       59,328  
Information technology     1,752,240       -  
      3,208,642       716,666  
Less: accumulated depreciation     381,368       77,915  
Property acquired through capital leases, net   $ 2,827,274     $ 638,751  

 

During the first quarter of 2012, the Company made final payments of $46,412 on capital 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:

    September 30, 2012     December 31, 2011  
Goodwill   $ 1,674,281     $ 1,674,281  
                 
Customer contracts   $ 10,221,658     $ 10,261,475  
Less: accumulated amortization of customer contracts     6,238,125       3,586,269  
Customer contracts, net     3,983,533       6,675,206  
FCC licenses     1,284,555       1,284,555  
Intangible assets, net   $ 5,268,088     $ 7,959,761  

 

Amortization expense for the three months ended September 30, 2012 and 2011 was $719,911 and $575,625, respectively. Amortization expense for the nine months ended September 30, 2012 and 2011 was $2,651,857 and $1,935,528, 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 totaled $1,864,187 and were amortized over a 17 month period which ended 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 September 30, 2012, the average remaining amortization period was approximately 16 months. Future amortization expense is expected to be as follows:

 

Remainder of 2012   $ 719,911  
2013     2,766,925  
2014     496,697  
    $ 3,983,533  

 

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, 2012     December 31, 2011  
Property and equipment   $ 1,590,798     $ 863,525  
Payroll and related     831,931       608,101  
Lease acquisition     109,450       -  
Professional services     258,223       277,213  
Network     294,831       149,755  
Information technology support     151,987       -  
Marketing     84,433       2,582  
Acquisition     -       95,911  
Other   147,204       123,006  
  Total   $ 3,468,857     $ 2,120,093  

 

8
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Network expenses consist of costs incurred to provide services to our customers, and include tower rentals, bandwidth, troubleshooting and gear removal.

 

Note 7.    Other Liabilities

 

Other liabilities consist of the following:

    September 30, 2012     December 31, 2011  
Current                
  Deferred rent   $ 115,759     $ 104,206  
  Deferred acquisition payments     179,549       288,340  
     Total   $ 295,308     $ 392,546  
                 
Long-Term                
  Deferred rent   $ -     $ 86,820  
  Deferred acquisition payments     92,182       205,024  
  Deferred taxes     118,018       118,018  
     Total   $ 210,200     $ 409,862  

 

The gross balance of deferred acquisition payments totaled $362,608 as of September 30, 2012 and included $332,608 related to the acquisition of Pipeline Wireless, LLC payable in monthly installments of $16,630 through May 2014, and $30,000 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 $403,765 and $381,060 for the three months ended September 30, 2012 and 2011, respectively. Stock-based compensation totaled $1,249,925 and $565,615 for the nine months ended September 30, 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 $2,500,724 as of September 30, 2012 which will be recognized over a weighted-average period of 2.3 years.

 

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

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2012     2011     2012     2011  
Risk-free interest rate     -       1.6%-2.1%         0.6% - 1.0%       1.6%-2.1%  
Expected volatility     -       50%-56%       65% - 74%       50%-58%  
Expected life (in years)     -       5.7 - 6.4       5 - 5.3       5.3 - 6.4  
Expected dividend yield     -       -       -       -  
Weighted average per share grant date fair value     -     $ 2.59     $ 2.16     $ 2.61  

 

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 the shares was $354,600 and 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 September 30, 2012. Stock-based compensation for restricted stock totaled $29,550 for the three months ended September 30, 2012 and 2011, respectively. Stock-based compensation for restricted stock totaled $88,650 for the nine months ended September 30, 2012 and 2011, respectively. Unrecognized compensation cost of $147,750 at September 30, 2012 will be recognized ratably through December 2013.

 

9
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Option transactions under the stock option plans during the nine months ended September 30, 2012 were as follows:

 

    Number     Weighted Average Exercise Price  
Outstanding as of December 31, 2011     4,635,624     $ 2.85  
Granted during 2012     250,000       3.62  
Cancelled     (568,164 )     1.20  
Forfeited /expired     (108,120 )     8.14  
Outstanding as of September 30, 2012     4,209,340     $ 2.99  
Exercisable as of September 30, 2012     2,931,888     $ 2.31  

 

A total of 142,806 and 252,371 options were exercised on a cashless basis during the three and nine months ended September 30, 2012, respectively, resulting in the net issuance of 96,419 and 161,027 shares. Under a cashless exercise, the holder uses a portion of the shares that would otherwise be issuable upon exercise 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.

 

A total of 173,643 and 315,793 options were exercised on a cash basis during the three and nine months ended September 30, 2012, respectively, which resulted in proceeds of $151,441 and $312,853, respectively.

 

Cancellations for the nine months ended September 30, 2012 included 14,370 options related to employee terminations, 18,750 options that were repurchased and 75,000 options that expired. The 18,750 options had a fair value of $34,986.

 

The weighted average remaining contractual life of the outstanding options as of September 30, 2012 was 6.1 years.

 

The intrinsic value of outstanding and exercisable options totaled $6,239,706 and $5,937,671, respectively, as of September 30, 2012. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock at September 28, 2012, which was $4.06 per share, and the exercise price of the options.

 

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

 

Note 9.    Stock Warrants

 

Warrant transactions during the nine months ended September 30, 2012 were as follows:

 

    Number     Weighted Average Exercise Price  
Outstanding as of December 31, 2011     4,776,310     $ 4.65  
Forfeited /expired     (4,326,310 )     4.61  
Outstanding as of September 30, 2012     450,000     $ 5.00  
Exercisable as of September 30, 2012     450,000     $ 5.00  

 

A total of 4,026,310 warrants exercisable at 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 expired in June 2012.

 

There was no intrinsic value associated with the outstanding and exercisable warrants as of September 30, 2012. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock at September 28, 2012, which was $4.06 per share, and the exercise price of the warrants.

 

The weighted average remaining contractual life as of September 30, 2012 was 3.8 years.

 

The number of shares issuable upon the exercise of a warrant 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 and nine months ended September 30, 2012, a total of 6,971 and 23,132 shares were issued under the ESPP Plan with a fair value of $28,302 and $99,080, respectively. The Company recognized $4,252 and $14,829 of stock-based compensation related to the 15% discount for the three and nine months ended September 30, 2012, respectively. The Company recognized $4,129 and $7,300 of stock-based compensation related to the 15% discount for three and nine months ended September 30, 2011, respectively.

 

10
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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 nine months ended September 30, 2012.

 

      Total Carrying Value     Quoted prices in active markets (Level 1)     Significant other observable inputs (Level 2)     Significant unobservable inputs
(Level 3)
 
  September 30, 2012     $ 23,132,521     $ 23,132,521     $ -     $ -  
  December 31, 2011     $ 44,672,587     $ 44,672,587     $ -     $ -  

 

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 September 30, 2012 would dilute earnings per share if the Company becomes profitable in the future. The exercise of the outstanding stock options and warrants could potentially generate proceeds up to approximately $14,822,000 if exercised by the holder for cash.

 

Stock options     4,209,340  
Restricted stock     60,000  
Warrants     450,000  
Total     4,719,340  

 

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 September 30, 2012, total future operating lease obligations were as follows:

 

Remainder of 2012   $ 3,746,855  
2013     13,089,174  
2014     11,686,178  
2015     10,656,928  
2016     9,455,925  
Thereafter     5,483,716  
    $ 54,118,776  

 

11
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Rent expense for the three months ended September 30, 2012 and 2011 totaled approximately $3,245,000 and $1,526,000, respectively. Rent expense for the nine months ended September 30, 2012 and 2011 totaled approximately $7,984,000 and $3,793,000, respectively.

 

Capital Lease Obligations

 

We have entered into capital leases to acquire property and equipment expiring through May 2017. In December 2011, we entered into an agreement with Cisco Capital to acquire equipment related to our information technology infrastructure. The total lease obligation is approximately $2,100,000, of which approximately $1,400,000 commenced in the second quarter of 2012. The remaining $700,000 is expected to commence in the first quarter of 2013. These leases will be paid in various installments over a 60 month period from their respective commencement dates.

 

As of September 30, 2012, total future capital lease obligations were as follows:

 

Remainder of 2012   $ 161,384  
2013     705,283  
2014     750,263  
2015     665,692  
2016     633,377  
Thereafter     387,517  
    3,303,516  
Less: Obligations not commenced as of September 30, 2012     189,226  
Less: Interest expense     398,022  
Total capital lease obligations   $ 2,716,268  
Current   $ 571,669  
Long-term   $ 2,144,599  

 

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.

 

Note 14.    Subsequent Events

 

The Company’s annual meeting of stockholders was held on November 2, 2012.  Stockholders approved an increase in the number of shares of common stock authorized for issuance from 70 million to 95 million.  Stockholders also approved an increase in the number of shares reserved for issuance under the 2007 Incentive Stock Plan from 2.5 million to 5 million.

 

12
 

 

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

 

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the nine months ended September 30, 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 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 Quarterly Report on Form 10-Q.

 

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 broadband services 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/Small Cell rooftop tower sites (“rooftop tower sites”) which is marketed towards mobile operators, Internet based marketing companies, and Wi-Fi operators. 

 

In the first half of 2012, we entered into two agreements with national wireless carriers utilizing our current and future rooftop tower sites.

 

In August 2012, we entered into a binding merger agreement with Delos Internet (“Delos”) pursuant to which a wholly owned subsidiary of ours will be merged with and into Delos, with Delos becoming a wholly owned subsidiary of ours. Delos operates in Houston, Texas. The closing of the merger agreement is subject to customary closing conditions as well as regulatory approval.  We anticipate, but cannot assure, that the merger agreement will close during the first quarter of 2013.

 

Characteristics of our Revenues and Expenses

 

We offer broadband services under agreements for periods ranging between one to 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 constructing PoPs in buildings in which we have a lease agreement (“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 into 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 up-front 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.

 

13
 

 

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 office 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, 2012, we operated in twelve 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 incurring 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.

 

Centralized Costs : Represents costs incurred to support activities across all of our markets that are not allocable to a specific market. These 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.

 

Costs of Revenues : Includes payroll, Core Network costs and Customer Network costs that can be allocated to a specific market.

 

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

 

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 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.

 

14
 

 

Three months ended September 30, 2012

 

Market   Revenues     Cost of
Revenues
    Gross
Margin
    Operating
Costs
    Adjusted
Market
EBITDA
 
Los Angeles   $ 1,994,972     $ 598,997     $ 1,395,975     $ 396,698     $ 999,277  
New York     1,857,988       435,194       1,422,794       319,524       1,103,270  
Boston     1,698,654       388,141       1,310,513       220,220       1,090,293  
Chicago     943,775       303,818       639,957       170,327       469,630  
Miami     413,321       117,119       296,202       94,438       201,764  
Las Vegas-Reno     369,748       157,851       211,897       28,518       183,379  
San Francisco     373,210       87,322       285,888       79,976       205,912  
Dallas-Fort Worth     157,625       82,537       75,088       90,172       (15,084 )
Seattle     144,369       54,007       90,362       36,092       54,270  
Providence/Newport     131,992       64,693       67,299       29,954       37,345  
Philadelphia     30,043       22,355       7,688       32,125       (24,437 )
Nashville     11,810       14,106       (2,296 )     8,547       (10,843 )
Total   $ 8,127,507     $ 2,326,140     $ 5,801,367     $ 1,506,591     $ 4,294,776  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure      
Adjusted market EBITDA   $ 4,294,776  
Centralized costs     (939,677 )
Corporate expenses     (2,011,720 )
Rooftop tower sites expenses     (2,886,353 )
Depreciation and amortization     (3,399,442 )
Stock-based compensation     (437,567 )
Other income (expense)     (28,251 )
Net loss   $ (5,408,234 )

 

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       349,209       1,183,502       308,937       874,565  
Los Angeles     1,086,767       223,427       863,340       262,728       600,612  
Chicago     870,300       266,329       603,971       150,881       453,090  
Las Vegas- Reno     408,545       179,858       228,687       44,250       184,437  
San Francisco     370,265       66,401       303,864       92,547       211,317  
Miami     365,266       80,503       284,763       100,347       184,416  
Dallas-Fort Worth     165,551       84,441       81,110       79,747       1,363  
Seattle     125,393       55,372       70,021       26,952       43,069  
Providence-Newport     120,011       50,871       69,140       23,848       45,292  
Philadelphia     23,177       15,240       7,937       28,105       (20,168 )
Nashville     12,650       969       11,681       11,050       631  
Total   $ 6,775,892     $ 1,763,007     $ 5,012,885     $ 1,353,927     $ 3,658,958  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure      
Adjusted market EBITDA   $ 3,658,958  
Centralized costs     (761,196 )
Corporate expenses     (1,933,124 )
Rooftop tower sites expenses     (880,181 )
Depreciation and amortization     (2,298,788 )
Stock-based compensation     (414,739 )
Other income (expense)     8,659  
Net Loss   $ (2,620,411 )

 

15
 

 

Nine months ended September 30, 2012

 

Market   Revenues     Cost of
Revenues
    Gross Margin     Operating
Costs
    Adjusted
Market
EBITDA
 
Los Angeles   $ 5,888,039     $ 1,798,033     $ 4,090,006     $ 1,108,888     $ 2,981,118  
New York     5,348,145       1,340,228       4,007,917       910,825       3,097,092  
Boston     5,134,784       1,147,466       3,987,318       710,288       3,277,030  
Chicago     2,743,001       835,807       1,907,194       506,675       1,400,519  
Miami     1,238,460       299,199       939,261       290,899       648,362  
Las Vegas-Reno     1,198,464       463,654       734,810       114,537       620,273  
San Francisco     1,160,212       277,022       883,190       244,250       638,940  
Dallas-Fort Worth     488,163       257,967       230,196       257,546       (27,350 )
Seattle     375,496       172,788       202,708       88,004       114,704  
Providence/Newport     365,247       149,721       215,526       93,490       122,036  
Philadelphia     78,458       55,061       23,397       77,206       (53,809 )
Nashville     31,418       42,145       (10,727 )     26,052       (36,779 )
Total   $ 24,049,887     $ 6,839,091     $ 17,210,796     $ 4,428,660     $ 12,782,136  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure      
Adjusted market EBITDA   $ 12,782,136  
Centralized costs     (2,829,033 )
Corporate expenses     (6,300,188 )
Rooftop tower sites expenses     (6,734,545 )
Depreciation and amortization     (10,028,804 )
Stock-based compensation     (1,353,404 )
Other income (expense)     (83,187 )
Net loss   $ (14,547,025 )

 

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       1,024,971       3,458,877       946,407       2,512,470  
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  
Dallas-Fort Worth     489,596       244,477       245,119       215,540       29,579  
Seattle     399,660       162,758       236,902       90,350       146,552  
Providence-Newport     351,069       134,372       216,697       74,633       142,064  
Philadelphia     87,229       46,049       41,180       83,816       (42,636 )
Nashville     44,272       21,115       23,157       33,829       (10,672 )
Total   $ 19,309,964     $ 4,878,398     $ 14,431,566     $ 4,094,571     $ 10,336,995  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure      
Adjusted market EBITDA   $ 10,336,995  
Centralized costs     (2,242,822 )
Corporate expenses     (5,540,457 )
Rooftop tower sites expenses     (1,405,589 )
Depreciation and amortization     (6,486,588 )
Stock-based compensation     (661,565 )
Other income (expense)     1,054,635  
Net loss   $ (4,945,391 )

 

16
 

 

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

 

Revenues . Revenues totaled $8,127,507 during the three months ended September 30, 2012 compared to $6,775,892 during the three months ended September 30, 2011 representing an increase of $1,351,615, or 20%. This increase was primarily related to a 14% increase in our customer base from approximately 3,200 at September 30, 2011 to approximately 3,600 at September 30, 2012.

 

Average revenue per user (“ARPU”) as of September 30, 2012 totaled $714 compared to $709 as of September 30, 2011 representing an increase of $5, or 1%. 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 34% of our customer base as of September 30, 2011 to 40% as of September 30, 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 1.54% for the three months ended September 30, 2012 compared to 1.27% for the three months ended September 30, 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 $4,439,475 for the three months ended September 30, 2012 compared to $2,231,428 for the three months ended September 30, 2011 representing an increase of $2,208,047, or 99%. Gross margin for the three months ended September 30, 2012 decreased to 45% compared to 67% during the three months ended September 30, 2011. Expenses associated with rooftop tower sites for the three months ended September 30, 2012 totaled approximately $2,067,000 which impacted gross margin by 26 percentage points. Expenses associated with rooftop tower sites for the three months ended September 30, 2011 totaled approximately $422,000 which impacted gross margins by 6 percentage points. Core Network costs increased by approximately $479,000 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 $3,399,442 for the three months ended September 30, 2012 compared to $2,298,788 for the three months ended September 30, 2011 representing an increase of $1,100,654, or 48%. Depreciation expense totaled $2,679,531 for the three months ended September 30, 2012 compared to $1,723,163 for the three months ended September 30, 2011 representing an increase of $956,368, or 56%. The gross base of depreciable assets as of September 30, 2012 increased by $25,548,274, or 57%, compared to September 30, 2011. The increase in the depreciable base during the twelve months ended September 30, 2012 reflects continued growth in the core business (approximately $11,798,000) as well as spending on rooftop tower sites (approximately $11,773,000) and additions resulting from acquisitions (approximately $1,977,000).

 

Amortization expense totaled $719,911 for the three months ended September 30, 2012 compared to $575,625 for the three months ended September 30, 2011 representing an increase of $144,286, or 25%. The increase was primarily related to the amortization of customer based intangible assets recorded in connection with the acquisition of Color Broadband in the fourth quarter of 2011.

 

Customer Support Services.     Customer support services totaled $1,128,131 for the three months ended September 30, 2012 compared to $869,900 for the three months ended September 30, 2011 representing an increase of $258,231, or 30%. Expenses associated with rooftop tower sites increased by $94,000 to $244,000 compared to $150,000 for the three months ended September 30, 2011. The remaining increase was related to additional personnel hired to support our growing customer base. Average department headcount increased by 23% from 67 in the 2011 period to 82 in the 2012 period.

 

Sales and Marketing. Sales and marketing expenses for the three months ended September 30, 2012 totaled $1,518,229 compared to $1,348,408 for the three months ended September 30, 2011 representing an increase of $169,821, or 13%. This increase was primarily related to an increase in payroll costs of approximately $69,000 and an increase in commissions and bonuses of approximately $89,000.

 

General and Administrative.     General and administrative expenses totaled $3,022,213 for the three months ended September 30, 2012 compared to $2,656,438 for the three months ended September 30, 2011 representing an increase of $365,775, or 14%. Expenses associated with rooftop tower sites totaled approximately $573,000 for the three months ended September 30, 2012 as compared to $309,000 for the three months ended September 30, 2011. In addition, information technology spending increased by approximately $129,000.

 

17
 

 

Interest Income. Interest income for the three months ended September 30, 2012 totaled $10,206 compared to $21,627 for the three months ended September 30, 2011 representing a decrease of $11,421, or 53%. The decrease primarily relates to lower average cash balances in the 2012 period compared with the 2011 period. Average cash balances decreased from approximately $52.9 million in the third quarter 2011 to approximately $25.7 million in the third quarter 2012.

 

Interest Expense.     Interest expense for the three months ended September 30, 2012 totaled $37,247 compared to $8,728 for the three months ended September 30, 2011 representing an increase of $28,519, or greater than 100%. Interest expense was primarily related to capital leases acquired and deferred payment obligations related to the Pipeline Wireless LLC (“Pipeline”) and Color Broadband acquisitions.

 

Net Loss.     Net loss for the three months ended September 30, 2012 totaled $5,408,234 compared to $2,620,411 for the three months ended September 30, 2011 representing an increase of $2,787,823 or slightly greater than 100%. Revenues increased by $1,351,615 or 20%, while operating expenses increased by $4,102,528, or 44%. Operating expenses associated with rooftop tower sites totaled $2,886,353 for the three months ended September 30, 2012 compared to $880,181 for the three months ended September 30, 2011 representing an increase of $2,006,172 or greater than 100%. Increased expenses associated with rooftop tower sites represented 72% of the increase in net loss for the three months ended September 30, 2012 as compared to the same period in 2011.

 

 

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

 

Revenues . Revenues totaled $24,049,887 during the nine months ended September 30, 2012 compared to $19,309,964 during the nine months ended September 30, 2011 representing an increase of $4,739,923, or 25%. This increase was primarily related to a 14% increase in our customer base from approximately 3,200 at September 30, 2011 to approximately 3,600 at September 30, 2012.

 

Cost of Revenues.     Cost of revenues totaled $11,226,112 for the nine months ended September 30, 2012 compared to $5,583,550 for the nine months ended September 30, 2011 representing an increase of $5,642,562, or slightly greater than 100%. Gross margin for the nine months ended September 30, 2012 decreased to 53% compared to 71% during the nine months ended September 30, 2011. Expenses associated with rooftop tower sites totaled approximately $4,234,000 which impacted gross margin by 18 percentage points for the nine months ended September 30, 2012. There were approximately $569,000 of expenses associated with rooftop tower sites for the nine months ended September 30, 2011 which impacted gross margin by 3 percentage points. Core Network costs increased by approximately $1,814,000 primarily related to higher tower rent and bandwidth expenses which were partly related to acquisitions. Customer Network costs increased by approximately $241,000 primarily related to the growth in our customer base.

 

Depreciation and Amortization.     Depreciation and amortization totaled $10,028,804 for the nine months ended September 30 2012 compared to $6,486,588 for the nine months ended September 30, 2011 representing an increase of $3,542,216, or 55%. Depreciation expense totaled $7,376,947 for the nine months ended September 30, 2012 compared to $4,551,060 for the nine months ended September 30, 2011 representing an increase of $2,825,887, or 62%. The gross base of depreciable assets as of September 30, 2012 increased by $25,548,274 or 57%, compared to September 30, 2011. The increase in the depreciable base during the twelve months ended September 30, 2012 reflects continued growth in the core business (approximately $11,798,000) as well as spending on rooftop tower sites (approximately $11,773,000) and additions resulting from acquisitions (approximately $1,977,000).

 

Amortization expense totaled $2,651,857 for the nine months ended September 30, 2012 compared to $1,935,528 for the nine months ended September 30, 2011 representing an increase of $716,329, or 37%. Amortization expense relates to customer based intangible assets recorded in connection with acquisitions and can fluctuate significantly from period to period depending upon the timing of acquisitions, the relative amounts of intangible assets recorded, and the amortization periods. The increase in the 2012 period is principally related to a full nine months of amortization expense related to the Color Broadband acquisition as compared to no expense in the 2011 period.  Amortization expense also increased related to the One Velocity acquisition but decreased significantly related to the Sparkplug Chicago, Inc. and Pipeline acquisitions.

 

Customer Support Services.     Customer support services totaled $3,368,661 for the nine months ended September 30, 2012 compared to $2,374,085 for the nine months ended September 30, 2011 representing an increase of $994,576, or 42%. Expenses associated with rooftop tower sites increased by $468,000 to approximately $710,000 compared to approximately $242,000 for the nine months ended September 30, 2011. The remaining increase was related to additional personnel hired to support our growing customer base. Average department headcount increased by 37% from 59 in the 2011 period to 81 in the 2012 period.

 

Sales and Marketing. Sales and marketing expenses for the nine months ended September 30, 2012 totaled $4,458,333 compared to $4,069,067 for the nine months ended September 30, 2011 representing an increase of $389,266, or 10%. This increase was primarily related to an increase in payroll costs of approximately $147,000, an increase in commissions and bonuses of approximately $172,000 and an increase in advertising of approximately $48,000.

 

 

18
 

 

General and Administrative.     General and administrative expenses totaled $9,431,815 for the nine months ended September 30, 2012 compared to $6,796,700 for the nine months ended September 30, 2011 representing an increase of $2,635,115, or 39%. Expenses associated with rooftop tower sites totaled approximately $1,778,000 for the nine months ended September 30, 2012 as compared to approximately $595,000 for the nine months ended September 30, 2011. In addition, stock-based compensation increased by approximately $692,000, information technology spending increased by approximately $405,000, acquisition costs increased by approximately $226,000, and loss on non-monetary transactions increased by approximately $155,000.

 

Interest Income. Interest income for the nine months ended September 30, 2012 totaled $41,395 compared to $31,659 for the nine months ended September 30, 2011 representing an increase of $9,736, or greater than 31%. The increase was primarily related to higher average cash balances in the 2012 period compared with the 2011 period. Average cash balances increased from approximately $31.1 million in the 2011 period to approximately $33.8 million in the 2012 period.

 

Interest Expense.     Interest expense for the nine months ended September 30, 2012 totaled $76,233 compared to $13,518 for the nine months ended September 30, 2011 representing an increase of $62,715, or greater than 100%. Interest expense primarily related to capital leases acquired and deferred payment obligations related to the Pipeline and Color Broadband acquisitions.

 

Gain (Loss) on Business Acquisition.     Loss on business acquisition totaled $40,079 for the nine months ended September 30, 2012 compared to a gain of $1,045,444 for the nine months ended September 30, 2011, representing a decrease of $1,085,523 or greater than 100%. The gain in the 2011 period related to the acquisition of One Velocity in May 2011. The loss in the 2012 period related to the final purchase price adjustment for the Color Broadband acquisition in December 2011. We previously recognized a gain on the acquisition of Color Broadband of $1,186,090. The final net gain totaled $1,146,011.

 

Net Loss.     Net loss for the nine months ended September 30, 2012 totaled $14,547,025 compared to $4,945,391 for the nine months ended September 30, 2011 representing an increase of $9,601,634 or greater than 100%. Revenues increased by $4,739,923, or 25%, while operating expenses increased by $13,203,735, or 52%. Operating expenses associated with rooftop tower sites totaled $6,734,545 for the nine months ended September 30, 2012 compared to $1,405,589 for the nine months ended September 30, 2011, representing an increase of $5,328,956, or greater than 100%. In addition, non-operating expense totaled $83,187 for the nine months ended September 30, 2012 compared with non-operating income of $1,054,635 for the nine months ended September 30, 2011.

 

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, 2012 and 2011 are described below.

 

Net Cash (Used in) Provided by Operating Activities.     Net cash used in operating activities for the nine months ended September 30, 2012 totaled $3,633,921 compared to cash provided by operating activities of $1,461,702 for the nine months ended September 30, 2011 representing a decrease of $5,095,623, or greater than 100%. During the nine months ended September 30, 2012, cash provided by operations for our core business totaled $3,825,694 as compared to $2,765,388 during the nine months ended September 30, 2011. During the nine months ended September 30, 2012, cash flow used in operations for our rooftop tower sites totaled $6,734,545 as compared to $1,405,589 during the nine months ended September 30, 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 nine months ended September 30, 2012, changes in operating assets and liabilities used cash of $725,070 compared to cash provided of $101,903 for the nine months ended September 30, 2011.

 

Net Cash Used in Investing Activities.     Net cash used in investing activities for the nine months ended September 30, 2012 totaled $17,883,461 compared to $12,094,994 for the nine months ended September 30, 2011 representing an increase of $5,788,467, or 48%. The increase in the 2012 period related to higher spending on property and equipment which increased by $7,023,732, or 68%, from $10,358,737 to $17,382,469. Expenditures related to network equipment increased by approximately $2,212,000 in the 2012 period compared to the 2011 period. Expenditures related to the construction of the rooftop tower sites increased by approximately $5,293,000 in the 2012 period compared to the 2011 period.

 

Net Cash (Used In) Provided by Financing Activities .  Net cash used in financing activities for the nine months ended September 30, 2012 totaled $22,684 compared to net cash provided by financing activities of $39,047,271 for the nine months ended September 30, 2011, representing a decrease of $39,069,955, or greater than 100%. The decrease was primarily related to net proceeds of $38,834,709 received in July 2011 from the sale of 10,350,000 shares of our common stock at a public offering of $4.00 per share. The decrease also related to payments on capital leases which totaled approximately $384,802 for the nine months ended September 30, 2012 compared to $96,890 for the nine months ended September 30, 2011.

 

19
 

 

Working Capital.     As of September 30, 2012, we had working capital of $17,562,851. 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 September 30, 2012:

 

    Payments due by period  
    Total     2012     2013     2014     2015     2016     Thereafter  
Capital lease obligations   $ 3,303,516     $ 161,384     $ 705,283     $ 750,263     $ 665,692     $ 633,377     $ 387,517  
Operating leases     54,118,776       3,746,855       13,089,174       11,686,178       10,656,928       9,455,925       5,483,716  
Deferred payments     362,608       79,891       199,565       83,152       -       -       -  
Other     236,737       130,275       106,462       -       -       -       -  
Total contractual cash obligations   $ 58,021,637     $ 4,118,405     $ 14,100,484     $ 12,519,593     $ 11,322,620     $ 10,089,302     $ 5,871,233  

 

 

Capital Lease Obligations. We have entered into capital leases to acquire property and equipment expiring through May 2017. In December 2011, we entered into an agreement with Cisco Capital to acquire equipment related to our information technology infrastructure. The total lease obligation is approximately $2,100,000, of which approximately $1,400,000 commenced in the second quarter of 2012. The remaining $700,000 is expected to commence in the first quarter of 2013. These leases will be paid in various installments over a 60 month period from their respective commencement dates.

 

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 20 monthly payments of approximately $16,630 remaining as of September 30, 2012.

 

We acquired an agreement with the acquisition of Color Broadband related to the purchase of network equipment and licenses. There were 3 monthly payments of $10,000 remaining as of September 30, 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 utilize 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.

 

20
 

 

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 condensed 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. 

 

Asset Retirement Obligations. The Financial Accounting Standards Board (“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.’’

 

21
 

 

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 September 30, 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 September 30, 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 September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

22
 

 

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.
101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Calculation Linkbase Document*
101.LAB   XBRL Taxonomy Labels Linkbase Document*
101.PRE   XBRL Taxonomy Presentation Linkbase Document*
101.DEF   XBRL Definition Linkbase Document*

 

* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, and (v) related notes to these financial statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q/A shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

 

23
 

 

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: November 8, 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)

 
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.
101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Calculation Linkbase Document*
101.LAB   XBRL Taxonomy Labels Linkbase Document*
101.PRE   XBRL Taxonomy Presentation Linkbase Document*
101.DEF   XBRL Definition Linkbase Document*

 

* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, and (v) related notes to these financial statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q/A shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

 

 

 

 

 

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 September 30, 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: November 8, 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 September 30, 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: November 8, 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 September 30, 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: November 8, 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 September 30, 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: November 8, 2012

 

  /s/ Joseph P. Hernon

Joseph P. Hernon
Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)