Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 05/09/2013 16:04:48)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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 May 6, 2013, there were 66,392,088 shares of common stock, par value $0.001 per share, outstanding.

 

 
 


TOWERSTREAM CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

    Pages
Part I FINANCIAL INFORMATION  
     
Item 1. Financial Statements. 1
     
  Condensed Consolidated Balance Sheets as of  March 31, 2013 (unaudited) and December 31, 2012 1
     

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (unaudited)

2
     
  Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2013 (unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (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.

13-19
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 20
     

 Item 4.

Controls and Procedures. 20
     
Part II OTHER INFORMATION  
     
Item 6. Exhibits. 21

  

 
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    (Unaudited)
March 31, 2013
    December 31, 2012  
Assets            
Current Assets            
    Cash and cash equivalents   $ 40,329,318     $ 15,152,226  
    Accounts receivable, net     627,754       609,302  
    Prepaid expenses and other current assets     1,336,204       943,420  
        Total Current Assets     42,293,276       16,704,948  
                 
Property and equipment, net     40,974,262       41,982,210  
                 
Intangible assets, net     5,430,044       4,548,177  
Goodwill     1,674,281       1,674,281  
Other assets     2,106,330       2,200,098  
          Total Assets   $ 92,478,193     $ 67,109,714  
                 
Liabilities and Stockholders’ Equity                
                 
Current Liabilities                
Accounts payable   $ 494,688     $ 1,163,442  
Accrued expenses     2,553,462       2,986,020  
Deferred revenues     1,368,107       1,457,464  
Current maturities of capital lease obligations     837,261       775,087  
Other     201,728       235,018  
Total Current Liabilities     5,455,246       6,617,031  
                 
Long-Term Liabilities                
     Capital lease obligations, net of current maturities     2,343,014       2,387,674  
     Other     266,696       301,101  
          Total Long-Term Liabilities     2,609,710       2,688,775  
           Total Liabilities     8,064,956       9,305,806  
                 
Commitments (Note 14)                
                 
Stockholders' Equity                
Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued     -       -  
Common stock, par value $0.001; 95,000,000 shares authorized; 66,366,350 and
54,670,712 shares issued and outstanding, respectively
    66,366       54,671  
Additional paid-in-capital     153,342,067       121,118,127  
Accumulated deficit     (68,995,196 )     (63,368,890 )
          Total Stockholders' Equity     84,413,237       57,803,908  
          Total Liabilities and Stockholders' Equity   $ 92,478,193     $ 67,109,714  

 

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

 

1
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Three Months Ended March 31,  
    2013     2012  
             
Revenues   $ 8,299,223     $ 7,819,059  
                 
Operating Expenses                
   Cost of revenues (exclusive of depreciation)     5,230,641       3,072,767  
   Depreciation and amortization     3,871,087       3,281,079  
   Customer support services     1,147,559       1,161,965  
   Sales and marketing     1,440,856       1,481,989  
   General and administrative     3,137,599       3,191,323  
       Total Operating Expenses     14,827,742       12,189,123  
       Operating Loss     (6,528,519 )     (4,370,064 )
Other Income/(Expense)                
   Interest income     154       17,178  
   Interest expense     (35,768 )     (22,316 )
   Gain on business acquisition     941,457       -  
   Other income (expense), net     (3,630 )     (4,930 )
       Total Other Income/(Expense)     902,213       (10,068 )
       Net Loss   $ (5,626,306 )   $ (4,380,132 )
                 
Net loss per common share – basic and diluted   $ (0.09 )   $ (0.08 )
Weighted average common shares outstanding – basic and
diluted
    61,464,706       54,312,066  

 

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

 

2
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

For the Three Months Ended March 31, 2013

 

    Common Stock                    
    Shares     Amount     Additional Paid-In-Capital     Accumulated Deficit     Total  
Balance at December 31, 2012     54,670,712     $ 54,671     $ 121,118,127     $ (63,368,890 )   $ 57,803,908  
Exercise of options     236,356       236       246,753               246,989  
Issuance of common stock under employee
stock purchase plan
    10,609       11       23,647               23,658  
Issuance of common stock upon vesting of restricted
stock awards
    15,000       15       (15 )             -  
Issuance of common stock for business acquisitions     433,673       433       1,070,739               1,071,172  
Net proceeds from issuance of common stock     11,000,000       11,000       30,489,836               30,500,836  
Stock-based compensation for options                     378,205               378,205  
Stock-based compensation for restricted stock                     14,775               14,775  
Net loss                             (5,626,306 )     (5,626,306 )
Balance at March 31, 2013     66,366,350     $ 66,366     $ 153,342,067     $ (68,995,196 )   $ 84,413,237  

   

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

 

3
 

   

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Three Months Ended March 31,  
    2013     2012  
Cash Flows From Operating Activities            
Net loss   $ (5,626,306 )   $ (4,380,132 )
Adjustments to reconcile net loss to net cash used in operating activities:                
   Provision for doubtful accounts     -       30,000  
   Depreciation and amortization     3,871,087       3,281,079  
   Stock-based compensation     396,481       524,265  
   Gain on business acquisition     (941,457 )     -  
   Loss on sale and disposition of property and equipment     41,951       12,111  
   Deferred rent     (28,940 )     (21,040 )
   Changes in operating assets and liabilities:                
      Accounts receivable     62,074       (63,050 )
      Prepaid expenses and other current assets     (392,784 )     (518,533 )
      Other assets     114,105       (132,338 )
      Accounts payable     (695,724 )     (363,902 )
      Accrued expenses     (1,071,747 )     (569,550 )
      Deferred revenues     (151,467 )     (172,858 )
Total Adjustments     1,203,579       2,006,184  
Net Cash Used In Operating Activities     (4,422,727 )     (2,373,948 )
                 
Cash Flows From Investing Activities                
Acquisitions of property and equipment     (696,813 )     (3,434,000 )
Acquisition of a business, net of cash acquired     (222,942 )     -  
Proceeds from sale of property and equipment     1,000       4,300  
Payments of security deposits     (18,344 )     (48,104 )
Deferred acquisition payments     (38,754 )     (82,154 )
Net Cash Used In Investing Activities     (975,853 )     (3,559,958 )
                 
Cash Flows From Financing Activities                
Payments on capital leases     (192,310 )     (131,181 )
Issuance of common stock upon exercise of options     246,989       42,919  
Issuance of common stock under employee stock purchase plan     20,157       24,979  
Net proceeds from sale of common stock     30,500,836       -  
Net Cash Provided By (Used In) Financing Activities     30,575,672       (63,283 )
                 
Net Increase (Decrease) In Cash and Cash Equivalents     25,177,092       (5,997,189 )
                 
Cash and Cash Equivalents – Beginning     15,152,226       44,672,587  
Cash and Cash Equivalents – Ending   $ 40,329,318     $ 38,675,398  
                 
Supplemental Disclosures of Cash Flow Information                
Cash paid during the periods for:                
   Interest   $ 35,732     $ 22,316  
   Taxes   $ 28,262     $ 16,360  
 Non-cash investing and financing activities:                
Fair value of common stock issued in connection with an acquisition   $ 1,071,172     $ -  
     Acquisition of property and equipment:                
        Under capital leases   $ 80,894     $ 1,242,498  
        Included in accrued expenses   $ 549,258     $ 1,184,308  

 

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. During its first decade of operations, the Company's business activities were focused on delivering fixed wireless broadband services to commercial customers over a wireless network transmitting over both regulated and unregulated radio spectrum. The Company's fixed wireless service supports bandwidth on demand, wireless redundancy, virtual private networks (“VPNs”), disaster recovery, bundled data and video services. The Company provides services to approximately 3,600 business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Houston, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport. The Company's “fixed wireless business” has grown both organically and through the acquisition of five other fixed wireless broadband providers in various markets.

 

Since 2010, the Company has been exploring opportunities to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Over the past few years, a significant increase in mobile data generated by smartphones, tablets and other devices has placed tremendous demand on the networks of the carriers. This has caused the carriers to explore a wide range of solutions including (i) acquiring additional spectrum, (ii) employing Wi-Fi to offload data traffic and (iii) utilizing small cell technologies to increase capacity in dense urban areas. During this period, the Company has incurred various costs related to identifying possible new solutions and services. These costs included (a) rent payments under lease agreements which provide the right to install wireless technology equipment on street level rooftops, and (b) construction of a carrier-class network to offload data traffic. The Company has entered into the lease agreements and commenced these capital projects for the purpose of securing capacity that it believes is needed to maintain its competitive position in the wireless industry. The Company believes that the wireless communications industry is experiencing a fundamental shift from its current, macro-cellular architecture to hyper-densified Small Cell architecture where existing cell sites will be supplemented by many smaller base stations operating near street level. The Company also believes that Wi-Fi will be an integral component of Small Cell architecture.

 

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”). The Company plans to transfer certain assets to Hetnets to support the operation of a shared wireless infrastructure business. Hetnets plans to generate rental income from four separate sources including (i) rental of space on street level rooftops for the installation of customer owned Small Cells which includes Wi-Fi antennae, DAS, and Metro and Pico cells, (ii) rental of a channel on Hetnets’ Wi-Fi network for the offloading of mobile data, (iii) rental of cabinets, switch ports, interconnection services, including backhaul or transport, and (iv) rental of power and power backup. The Company refers to the activities of Hetnets as its "shared wireless infrastructure business."

 

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 March 31, 2013 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results for the full fiscal year for 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, 2012. 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, 2012, and updated, as necessary, in this Quarterly Report on Form 10-Q.

 

Use of Estimates.     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Actual results could differ from those estimates.

 

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

 

Concentration of Credit Risk .      Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of March 31, 2013, the Company had cash and cash equivalent balances of approximately $32,313,000 in excess of the federally insured limit of $250,000.

 

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. Changes in the allowance for doubtful accounts were as follows:

 

    Three Months Ended March 31,  
    2013     2012  
Beginning of period   $ 190,109     $ 262,525  
Additions     -       30,000  
Deductions     (46,672 )     (49,537 )
End of period   $ 143,437     $ 242,988  

 

5
 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

Revenue Recognition. The Company normally enters into contractual agreements with its customers for periods ranging between one to three years. The Company recognizes the total revenue provided under a contract ratably over the contract period, including any periods under which the Company has agreed to provide services at no cost. The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

 

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

 

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

 

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

 

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

 

Note 3.    Business Acquisitions

 

Delos Internet

 

In February 2013, the Company completed the acquisition of Delos Internet (“Delos”). The Company obtained full control of Delos in the acquisition. The Company has determined that the acquisition of Delos was a business combination to be accounted for under the acquisition method. The following table summarizes the consideration transferred and the amounts of identified assets acquired and liabilities assumed at the acquisition date:

 

Fair value of consideration transferred:      
  Cash   $ 225,000  
  Common stock (433,673 shares)     1,071,172  
  Capital lease obligations assumed     128,929  
      1,425,101  

Recognized amounts of identifiable assets acquired and liabilities assumed:

       

  Cash     2,058  
  Accounts receivable     80,524  
  Property and equipment     826,524  
  Security deposits     1,993  
  Accounts payable     (26,970 )
  Deferred revenue     (62,110 )
  Other liabilities     (89,930 )
Total identifiable net tangible assets     732,089  
  Customer relationships     1,634,469  
Total identifiable net assets     2,366,558  
  Gain on business acquisition   $ 941,457  

   

6
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The Company recognized a gain on business acquisition of $941,457 which is included in other income (expense) in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2013. The challenging economic environment during 2012 made it difficult for smaller companies like Delos to raise sufficient capital to sustain their growth.  As a result, the Company was able to acquire the customer relationships and wireless network of Delos at a discounted price.

 

The results of operations of Delos have been included in the Company’s condensed consolidated statements of operations since the completion of the acquisition in February 2013. Revenues generated from customers acquired from Delos totaled approximately $56,000 for the three months ended March 31, 2013.

 

During the three months ended March 31, 2013, the Company incurred approximately $58,000 of third-party costs in connection with the Delos acquisition. These expenses are included in the general and administrative expenses in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2013.

 

Pro Forma Information

 

The following table reflects the unaudited pro forma consolidated results of operations had the acquisition taken place at the beginning of the 2013 and 2012 periods:

 

    Three Months Ended March 31,  
    2013     2012  
Revenues   $ 8,411,793     $ 7,987,914  
Amortization expense     817,979       1,151,219  
Total operating expenses     14,999,721       12,447,092  
Net loss     (5,685,715 )     (4,469,246 )
Basic net loss per share   $ (0.09 )   $ (0.08 )

 

The pro forma information presented above does not purport to present what actual results would have been had the acquisitions actually occurred at the beginning of 2013 and 2012 and are not necessarily indicative of the operating results for any future period.

 

Note 4.    Property and Equipment

 

Property and equipment is comprised of:

    March 31, 2013     December 31, 2012  
Network and base station equipment   $ 31,380,577     $ 28,983,284  
Customer premise equipment     22,658,865       23,036,057  
Shared wireless infrastructure     16,946,456       17,232,566  
Information technology     3,964,287       3,863,212  
Furniture, fixtures and other     1,612,579       1,598,979  
Leasehold improvements     789,392       789,392  
      77,352,156       75,503,490  
Less: accumulated depreciation     36,377,894       33,521,280  
Property and equipment, net   $ 40,974,262     $ 41,982,210  

 

Depreciation expense for the three months ended March 31, 2013 and 2012 was $3,118,487 and $2,227,928, respectively. The Company sold or disposed of property and equipment with $304,825 of original cost and $261,873 of accumulated depreciation during the three months ended March 31, 2013. The Company sold or disposed of property and equipment with $67,504 of original cost and $51,093 of accumulated depreciation during the three months ended March 31, 2012.

 

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

    March 31, 2013     December 31, 2012  
Network and base station equipment   $ 828,027     $ 736,612  
Customer premise equipment     96,843       59,330  
Shared wireless infrastructure     1,216,142       1,216,142  
Information technology     1,860,028       1,779,135  
      4,001,040       3,791,219  
Less: accumulated depreciation     733,510       541,800  
Property acquired through capital leases, net   $ 3,267,530     $ 3,249,419  

7
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 5. Intangible Assets

 

Intangible assets is comprised of:

    March 31, 2013     December 31, 2012  
Goodwill   $ 1,674,281     $ 1,674,281  
                 
Customer relationships   $ 11,856,126     $ 10,221,659  
Less: accumulated amortization of customer
relationships
    7,710,637       6,958,037  
Customer relationships, net     4,145,489       3,263,622  
FCC  licenses     1,284,555       1,284,555  
Intangible assets, net   $ 5,430,044     $ 4,548,177  

 

 

Amortization expense for the three months ended March 31, 2013 and 2012 was $752,600 and $1,053,151, respectively. The customer contracts acquired in the Company’s acquisition of Delos are being amortized over a 50 month period ending April 2017. As of March 31, 2013, the average remaining amortization period for all acquisitions with customer relationship balances was approximately 23 months. Future amortization expense is expected to be as follows:

 

Remainder of 2013   $ 2,341,218  
2014     888,969  
2015     392,272  
2016     392,272  
2017     130,758  
    $ 4,145,489  

 

The Company’s licenses with the Federal Communications Commission (the “FCC”) are not subject to amortization as they have an indefinite useful life.

 

Note 6. Accrued Expenses

 

Accrued expenses consist of the following: 

    March 31, 2013     December 31, 2012  
Property and equipment   $ 549,259     $ 1,240,774  
Payroll and related     751,233       859,130  
Professional services     531,786       314,270  
Network     248,090       288,060  
Marketing     179,790       -  
Offering costs     65,000       -  
Information technology support     -       21,713  
Other     228,304       262,073  
   Total   $ 2,553,462     $ 2,986,020  

 

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

 

8
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 7.    Other Liabilities

 

Other liabilities consist of the following:

    March 31, 2013     December 31, 2012  
Current            
   Deferred rent   $ 57,880     $ 86,820  
   Deferred acquisition payments     143,848       148,198  
      Total   $ 201,728     $ 235,018  
                 
Long-Term                
   Deferred acquisition payments   $ 22,422     $ 56,827  
   Deferred taxes     244,274       244,274  
      Total   $ 266,696     $ 301,101  

 

The gross balance of deferred acquisition payments totaled $232,826 at March 31, 2013 and is payable in monthly installments of $16,630 through May 2014. The net present value was calculated at a discount rate of 12%.

 

Note 8. Capital Stock

 

In February 2013, the Company completed an underwritten offering which raised gross proceeds of $30,000,000 in connection with the sale of 10,000,000 shares at $3.00 per share. In March 2013, the Company raised additional gross proceeds of $3,000,000 in connection with the sale of 1,000,000 shares at $3.00 per share related to the exercise of the over-allotment option by the underwriters. The Company incurred costs of approximately $2,499,000 related to the underwritten offering.

 

Note 9. 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 $378,205 and $490,325 for the three months ended March 31, 2013 and 2012, 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 $1,322,797 as of March 31, 2013 which will be recognized over a weighted-average period of 2.0 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 March 31,  
    2013     2012  
Risk-free interest rate     0.8 %     0.7%-1.0 %  
Expected volatility     68 %     65% - 73%  
Expected life (in years)     5       5  
Expected dividend yield     -        
Weighted average per share grant date fair value   $ 1.46     $ 2.18  

 

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

 

During the first quarter of 2011, the Company issued 90,000 shares of restricted stock to two executives. The fair value of $354,600 was based on the closing market price of the Company’s common stock on the date of grant. The restricted stock vests over a three year period, of which 45,000 shares were vested as of March 31, 2013. Stock-based compensation for restricted stock totaled $14,775 and $29,550 for the three months ended March 31, 2013 and 2012, respectively. Unrecognized compensation cost of $44,325 at March 31, 2013 will be recognized ratably through December 2013. As of March 31, 2013, 15,000 shares of restricted stock remain unvested.

 

9
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Option transactions under the stock option plans during the three months ended March 31, 2013 were as follows:

 

    Number     Weighted Average Exercise Price  
Outstanding as of December 31, 2012     3,916,045     $ 2.85  
Granted during 2013     75,000       2.62  
Exercised     (236,356 )     1.04  
Forfeited /expired     (357,126 )     5.18  
Outstanding as of March 31, 2013     3,397,563     $ 2.73  
Exercisable as of March 31, 2013     2,666,238     $ 2.20  

 

A total of 236,356 options were exercised on a cash basis during the three months ended March 31, 2013, which resulted in proceeds to the Company of $246,989.

 

Cancellations for the three months ended March 31, 2013 included 357,126 options related to employee terminations.

 

The weighted average remaining contractual life of the outstanding options as of March 31, 2013 was 5.8 years.

 

The intrinsic value of outstanding and exercisable options totaled $1,660,577 and $1,641,744, respectively, as of March 31, 2013. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of March 31, 2013, which was $2.23 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 exercises on a cashless basis. Under a cashless exercise, the holder uses a portion of the shares that would otherwise be issuable upon exercise, rather than cash, as consideration for the exercise. The amount of net shares issuable in connection with a cashless exercise will vary based on the exercise price of the option compared to the current market price of the Company’s common stock on the date of exercise.

 

Note 10.    Stock Warrants

 

Warrants outstanding and exercisable were 450,000 at both March 31, 2013 and December 31, 2012. The weighted average exercise price for the warrants outstanding and exercisable at both March 31, 2013 and December 31, 2012 was $5.00. The weighted average remaining contractual life of the warrants outstanding as of March 31, 2013 was 3.29 years.

 

There was no intrinsic value associated with the outstanding and exercisable warrants as of March 31, 2013. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of March 31, 2013, which was $2.23 per share, and the exercise price of the warrants.

 

The number of shares issuable upon the exercise of a warrant will be lower if a holder exercises on a cashless basis. Under a cashless exercise, the holder uses a portion of the shares that would otherwise be issuable upon exercise, rather than cash, as consideration for the exercise. The amount of net shares issuable in connection with a cashless exercise will vary based on the exercise price of the warrant compared to the current market price of the Company’s common stock on the date of exercise.

 

Note 11. 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. During the three months ended March 31, 2013, a total of 10,609 shares were issued under the ESPP Plan with a fair value of $23,658. The Company recognized $3,501 and $4,390 of stock-based compensation related to the 15% discount for the three months ended March 31, 2013 and 2012, respectively.

 

Note 12. Fair Value Measurement

 

Valuation Hierarchy

 

The accounting standard of the Financial Accounting Standards Board (“FASB”) for fair value measurements establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

Cash and cash equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. There were no changes in the valuation techniques during the three months ended March 31, 2013.

 

    Total Carrying Value     Quoted prices in active markets
(Level 1)
    Significant
other
observable
inputs
(Level 2)
    Significant
unobservable
inputs
(Level 3)
 
March 31, 2013   $ 40,329,318     $ 40,329,318     $ -     $ -  
December 31, 2012   $ 15,152,226     $ 15,152,226     $ -     $ -  

 

10
 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 13.    Net Loss Per Common Share

 

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

 

The following common stock equivalents were excluded from the computation of diluted net loss per common share because they were anti-dilutive. The exercise or issuance of these common stock equivalents outstanding at March 31, 2013 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 $13,246,000 if exercised by the holder for cash.

 

Stock options     3,397,563  
Restricted stock     15,000  
Warrants     450,000  
Total     3,862,563  

 

Note 14.    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 January 2023.

 

As of March 31, 2013, total future operating lease obligations were as follows:

 

Remainder of 2013   $ 13,180,069  
2014     14,916,713  
2015     14,088,243  
2016     12,921,170  
2017     7,360,748  
Thereafter     1,276,393  
    $ 63,743,336  

 

Rent expense for the three months ended March 31, 2013 and 2012 totaled approximately $4,333,000 and $2,116,000, respectively. Approximately $4,210,000 and $1,995,000 for the three months ended March 31, 2013 and 2012, respectively, related to rent for Points of Presence (“POPs”) and street level rooftops and was included in cost of revenues in the Company’s condensed consolidated statements of operations.  The remaining balance of approximately $123,000 and $121,000 for the three months ended March 31, 2013 and 2012, respectively, related to our corporate offices and is included in general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

Capital Lease Obligations

 

The Company has entered into capital leases to acquire property and equipment expiring through December 2017. In December 2011, the Company 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 the first lease for approximately $1,400,000 commenced in the second quarter of 2012. The second lease obligation of approximately $700,000 commenced at the beginning of April 2013. These leases will be paid in various installments over a 60 month period from their respective commencement dates.

 

As of March 31, 2013, total future capital lease obligations were as follows:

 

Remainder of 2013   $ 732,553  
2014     1,000,358  
2015     908,344  
2016     655,754  
2017     391,305  
Thereafter     53,922  
    $ 3,742,236  
Less: Interest expense     561,961  
Total capital lease obligations   $ 3,180,275  
Current   $ 837,261  
Long-term   $ 2,343,014  

 

11
 

   

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Other

 

During the first quarter of 2013, the Company renewed a one year information technology infrastructure support agreement. The agreement became effective at the end of the first quarter of 2013. The monthly payments are approximately $43,000 and will be paid on a quarterly basis through the fourth quarter of 2013.

 

Note 15. Segment Information

 

The Company has two reportable segments: Fixed Wireless and Shared Wireless Infrastructure. Management evaluates performance and allocates resources based on the operating performance of each segment as well as the long-term growth potential for each segment. Costs reported for each segment include costs directly associated with a segment’s operations. Intersegment revenues and expenses are eliminated in consolidation.

 

The balance of the Company’s operations is in the Corporate group which includes centralized operations. This group includes operations related to corporate overhead and centralized activities which support our overall operations. Corporate overhead includes administrative personnel, including executive management, and other support functions such as information technology and facilities. Centralized operations includes network operations, customer care, and the management of network assets. The Corporate group is treated as a separate segment consistent with how management monitors and analyzes financial results. Corporate costs are not allocated to the segments because such costs are managed and controlled on a functional basis that encompasses all markets, with centralized, functional management held accountable for corporate results. Management also believes that not allocating these centralized costs provides a better reflection of the direct operating performance of each segment. The table below presents information about our operating segments:

 

    Three Months Ended March 31, 2013  
    Fixed Wireless     Shared Wireless Infrastructure     Corporate     Eliminations     Total  
                               
Revenues   $ 8,186,736     $ 158,476     $ -     $ (45,989 )   $ 8,299,223  
                                         
Operating Expenses                                        
Cost of revenues (exclusive of depreciation)     2,431,331       2,792,129       53,170       (45,989 )     5,230,641  
Depreciation and amortization     2,819,609       864,112       187,366       -       3,871,087  
Customer support services     177,889       103,278       866,392       -       1,147,559  
Sales and marketing     1,296,941       47,048       96,867       -       1,440,856  
General and administrative     146,897       190,184       2,800,518       -       3,137,599  
Total Operating Expenses     6,872,667       3,996,751       4,004,313       (45,989 )     14,827,742  
Operating Income (Loss)   $ 1,314,069     $ (3,838,275 )   $ (4,004,313 )   $ -     $ (6,528,519 )
                                         
Capital expenditures   $ 1,087,472     $ 136,200     $ 103,293     $ -     $ 1,326,965  
                                         
As of March 31, 2013                                        
Property and equipment, net   $ 25,641,570     $ 13,275,065     $ 2,057,627     $ -     $ 40,974,262  
Total assets   $ 34,427,109     $ 15,556,795     $ 42,494,289     $ -     $ 92,478,193  

 

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 three months ended March 31, 2013. 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, 2012 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 - Fixed Wireless

 

We provide fixed wireless broadband services to commercial customers and deliver access over a wireless network transmitting over both regulated and unregulated radio spectrum. Our service supports bandwidth on demand, wireless redundancy, virtual private networks (“VPNs”), disaster recovery, bundled data and video services. We provide service to business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Houston, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport.

 

In August 2012, we entered into a binding merger agreement with Delos Internet (“Delos”) pursuant to which a wholly owned subsidiary of ours would be merged with and into Delos, with Delos becoming a wholly owned subsidiary of ours. Delos operates in Houston, Texas. We closed the acquisition of Delos in February 2013.

 

Characteristics of Revenues and Expenses

 

We offer our fixed wireless 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

  

As of March 31, 2013, we operated in thirteen metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, 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.

 

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 : Includes corporate overhead and centralized activities which support our overall operations. Corporate overhead includes administrative personnel, including executive management, and other support functions such as information technology and facilities. Centralized operations include network operations, customer care, and the management of network assets.

   

Shared Wireless Infrastructure, net: Represents the net operating results for that business segment.

 

Non-Core Expenses: These costs related to our efforts in 2012 to develop other wireless technology solutions and services, and primarily consisted of rent payments for street level rooftops, costs associated with constructing an offload network and payroll costs for employees working on these projects.

 

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 operating cash flow being generated in a market.

  

We entered the Houston market in February 2013 through the acquisition of Delos.

 

14
 

  

Three months ended March 31, 2013

 

Market   Revenues     Cost of
Revenues
    Gross Margin     Operating Costs     Adjusted
Market
EBITDA
 
Los Angeles   $ 2,069,824     $ 559,210     $ 1,510,614     $ 382,020     $ 1,128,594  
Boston     1,669,439       358,145       1,311,294       186,754       1,124,540  
New York     1,885,865       602,225       1,283,640       333,311       950,329  
Chicago     913,199       310,170       603,029       109,238       493,791  
Las Vegas-Reno     388,174       150,842       237,332       37,638       199,694  
Miami     377,347       99,261       278,086       84,025       194,061  
San Francisco     302,629       106,950       195,679       79,816       115,863  
Providence/Newport     127,368       49,275       78,093       18,211       59,882  
Seattle     137,037       51,044       85,993       33,818       52,175  
Houston     52,985       22,727       30,258       11,009       19,249  
Dallas-Fort Worth     171,352       88,780       82,572       75,460       7,112  
Philadelphia     39,940       18,037       21,903       22,528       (625 )
Nashville     5,588       14,665       (9,077 )     4,248       (13,325 )
Total   $ 8,140,747     $ 2,431,331     $ 5,709,416     $ 1,378,076     $ 4,331,340  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure      
Adjusted market EBITDA   $ 4,331,340  
Fixed wireless, non-market specific        
   Other expenses     (243,651 )
   Depreciation and amortization     (2,819,609 )
Shared wireless infrastructure, net     (3,792,286 )
Corporate     (4,004,313 )
Other income (expense)     902,213  
Net loss   $ (5,626,306 )

   

Three months ended March 31, 2012  

  

Market   Revenues     Cost of
Revenues
    Gross Margin     Operating Costs     Adjusted
Market
EBITDA
 
Los Angeles   $ 1,967,109     $ 568,854     $ 1,398,255     $ 340,182     $ 1,058,073  
Boston     1,688,525       393,942       1,294,583       265,786       1,028,797  
New York     1,647,786       501,096       1,146,690       306,393       840,297  
Chicago     860,989       257,424       603,565       143,763       459,802  
Las Vegas-Reno     431,846       153,243       278,603       40,036       238,567  
Miami     418,905       88,328       330,577       101,624       228,953  
San Francisco     377,380       95,563       281,817       84,080       197,737  
Providence-Newport     108,140       40,332       67,808       30,546       37,262  
Seattle     115,898       59,491       56,407       23,582       32,825  
Dallas-Fort Worth     169,260       82,508       86,752       77,658       9,094  
Nashville     9,333       13,203       (3,870 )     8,734       (12,604 )
Philadelphia     23,888       16,101       7,787       22,185       (14,398 )
Total   $ 7,819,059     $ 2,270,085     $ 5,548,974     $ 1,444,569     $ 4,104,405  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure      
Adjusted market EBITDA   $ 4,104,405  
Fixed wireless, non-market specific        
   Other expenses     (144,711 )
   Depreciation and amortization     (2,786,825 )
Non-core expenses     (1,299,854 )
Corporate     (4,243,079 )
Other income (expense)     (10,068 )
Net loss   $ (4,380,132 )

  

Overview - Shared Wireless Infrastructure

 

This business segment offers a range of rental options on street level rooftops related to (i) the installation of customer owned Small Cells, (ii) the offloading of mobile data, and (iii) backhaul, power and other related telecommunications. To date, our operating activities have been primarily focused in New York City, and to a lesser degree, San Francisco, Chicago, and Southern Florida. Costs incurred to establish and operate this business segment include (a) rent payments under lease agreements which provide us with the right to install wireless technology equipment and (b) construction of a carrier-class network to offload data traffic.

 

15
 

   

Supplemental Segment Information

 

Operating information about each segment in accordance with generally accepted principles is disclosed in Note 15 of the financial statements. In addition, we use other non-GAAP measurements to assess the operating performance of each segment. These non-GAAP financial measures are commonly used by investors, financial analysts, and rating agencies. Management believes that these non-GAAP financial measures should be available so that investors have the same data that management employs in assessing our overall operations.

 

EBITDA, a non-GAAP financial measure, is calculated as net income (loss) before interest, income taxes, depreciation and amortization. We define adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization expenses, excluding when applicable, stock-based compensation, other non-operating income or expenses as well as gain or loss on (i) disposal of property and equipment, (ii) nonmonetary transactions, and (iii) business acquisitions.

 

Net Cash Flow is another commonly used non- GAAP financial measure. Net Cash Flow is defined as Adjusted EBITDA less capital expenditures.

 

    Three Months Ended March 31, 2013  
    Fixed Wireless     Shared Wireless Infrastructure     Corporate     Total  
Operating Income (Loss)   $ 1,314,069     $ (3,838,275 )   $ (4,004,313 )   $ (6,528,519 )
Depreciation and amortization     2,819,609       864,112       187,366       3,871,087  
Stock-based compensation     -       -       396,481       396,481  
Loss on property and equipment     39,227       2,724       -       41,951  
Loss on non-monetary transactions     77,184       -       -       77,184  
Non-recurring expenses, primarily acquisition-related     -       -       65,400       65,400  
Adjusted EBITDA     4,250,089       (2,971,439 )     (3,355,066 )     (2,076,416 )
Less: Capital expenditures     1,087,472       136,200       103,293       1,326,965  
Net Cash Flow   $ 3,162,617     $ (3,107,639 )   $ (3,458,359 )   $ (3,403,381 )

 

Reconciliation of Adjusted EBITDA, Segment Basis to Net Loss for the Three Months Ended March 31, 2013      
       
Adjusted EBITDA   $ (2,076,416 )
Depreciation and amortization     (3,871,087 )
Non-recurring expenses, primarily acquisition-related     (65,400 )
Stock-based compensation     (396,481 )
Loss on property and equipment     (41,951 )
Loss on non-monetary transactions     (77,184 )
Operating Income (Loss)     (6,528,519 )
Interest income     154  
Interest expense     (35,768 )
Gain on business acquisition     941,457  
Other income (expense), net     (3,630 )
Net loss   $ (5,626,306 )

 

Reconciliation of Net Cash Flow, Segment Basis to Net Cash Used in Operating Activities for the Three Months Ended March 31, 2013      
       
Net cash flow, segment basis   $ (3,403,381 )
Capital expenditures     1,326,965  
Non-recurring expenses, primarily acquisition related     (65,400 )
Changes in operating assets and liabilities, net     (2,135,543 )
Other, net     (145,368 )
Net cash used in operating activities   $ (4,422,727 )

 

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

 

Revenues . Revenues totaled $8,299,223 during the three months ended March 31, 2013 compared to $7,819,059 during the three months ended March 31, 2012 representing an increase of $480,164, or 6%. This increase was primarily related to higher monthly recurring revenue (“MRR”) of approximately $200,000, or 3%, in the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012, of which approximately $146,000 related to organic growth and approximately $54,000 related to a month of revenue from the Delos acquisition. In addition, revenue generated from temporary connections increased by approximately $168,000, or 128%, in the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012.

 

Average revenue per user (“ARPU”) as of March 31, 2013 totaled $727 compared to $706 as of March 31, 2012 representing an increase of $21, or 3%. ARPU for new customers for the quarter ended March 31, 2013 totaled $630 compared to $545 for the quarter ended March 31, 2012, representing an increase of $85, or 16%. The increase in ARPU primarily related to a higher percentage of customers purchasing, or upgrading to, higher bandwidth service which generates greater MRR. In addition, the customers acquired from Delos in February 2013 had an ARPU of $864 compared to $721 for our existing customer base which had the effect of increasing our post-acquisition ARPU by $3.

 

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.64% for the three months ended March 31, 2013 compared to 1.58% for the three months ended March 31, 2012. 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 $5,230,641 for the three months ended March 31, 2013 compared to $3,072,767 for the three months ended March 31, 2012 representing an increase of $2,157,874, or 70%. On a consolidated basis, gross margin for the three months ended March 31, 2013 was 37% as compared to 61% for the three months ended March 31, 2012 representing a decrease of 24 percentage points.  Higher rent expense associated with both PoPs for the fixed wireless network and street level rooftops for the shared wireless infrastructure network increased cost of revenues by 106% in dollars and reduced gross margin by 28 percentage points.  These increases were partially offset by lower Customer Network and other costs which decreased by 6% in dollars and which benefited gross margin by 2 percentage points.

 

Depreciation and Amortization.     Depreciation and amortization totaled $3,871,087 for the three months ended March 31, 2013 compared to $3,281,079 for the three months ended March 31, 2012, representing an increase of $590,008, or 18%. Depreciation expense totaled $3,118,487 for the three months ended March 31, 2013 compared to $2,227,928 for the three months ended March 31, 2012 representing an increase of $890,559, or 40%. The gross base of depreciable assets as of March 31, 2013 increased by $20,444,741, or 36%, compared to March 31, 2012. The increase in the depreciable base during the twelve months ended March 31, 2013 reflects continued growth in our fixed wireless network (approximately $10,455,000), spending on our shared wireless infrastructure (approximately $8,495,000) and additions resulting from acquisitions (approximately $827,000).

 

Amortization expense totaled $752,600 for the three months ended March 31, 2013 compared to $1,053,151 for the three months ended March 31, 2012 representing a decrease of $300,551, or 29%. Amortization expense relates to customer related 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 decrease was primarily related to the acquisition of Pipeline Wireless LLP (“Pipeline”), which was fully depreciated in May 2012, partially offset by one month’s amortization recorded in connection with the Delos acquisition.

 

Customer Support Services.     Customer support services totaled $1,147,559 for the three months ended March 31, 2013 compared to $1,161,965 for the three months ended March 31, 2012 representing a decrease of $14,406, or 1%. Average headcount increased from 76 during the 2012 period to 77 during the 2013 period.

 

Sales and Marketing. Sales and marketing expenses for the three months ended March 31, 2013 totaled $1,440,856 compared to $1,481,989 for the three months ended March 31, 2012 representing a decrease of $41,133, or 3%. This decrease was primarily related to a decrease in commissions and bonuses of approximately $40,000.

 

General and Administrative.     General and administrative expenses totaled $3,137,599 for the three months ended March 31, 2013 compared to $3,191,323 for the three months ended March 31, 2012 representing a decrease of $53,724, or 2%. On a functional basis, increases in professional services (approximately $159,000), information technology (approximately $58,000), and payroll (approximately $50,000) were offset by decreases in acquisition costs (approximately $288,000) and stock-based compensation (approximately $128,000).

 

16
 

 

Interest Income. Interest income for the three months ended March 31, 2013 totaled $154 compared to $17,178 for the three months ended March 31, 2012 representing a decrease of $17,024, or 99%. The decrease relates to less interest earned on our cash accounts during the 2013 period.

 

Interest Expense.     Interest expense for the three months ended March 31, 2013 totaled $35,768 compared to $22,316 for the three months ended March 31, 2012 representing an increase of $13,452, or 60%. The increase in interest expense was primarily related to additional capital leases acquired.

 

Gain on Business Acquisition.  Gain on business acquisition totaled $941,457 for the three months ended March 31, 2013 compared to zero for the three months ended March 31, 2012.  The gain in the 2013 period related to the acquisition of Delos in February 2013. The challenging economic environment during 2012 made it difficult for smaller companies like Delos to raise sufficient capital to sustain their growth. As a result, we were able to acquire the customer relationships and wireless network of Delos at a discounted price.

 

Net Loss.     Net loss for the three months ended March 31, 2013 totaled $5,626,306 compared to $4,380,132 for the three months ended March 31, 2012 representing an increase of $1,246,174, or 28%. Revenues increased by $480,164, or 6%, while operating expenses increased by $2,638,619, or 22%. In addition, non-operating income totaled $902,213 for the three months ended March 31, 2013 compared with non-operating expense of $10,068 for the three months ended March 31, 2012.

 

Liquidity and Capital Resources

 

We have historically met our liquidity and capital requirements primarily through the public sale and private placement of equity securities and debt financing. Changes in capital resources during the three months ended March 31, 2013 and 2012 are described below.

 

Net Cash Used in Operating Activities.     Net cash used in operating activities for the three months ended March 31, 2013 totaled $4,422,727 compared to $2,373,948 for the three months ended March 31, 2012 representing an increase of $2,048,779, or 86%. Cash used in operations for the three months ended March 31, 2013 totaled $2,287,184 as compared to $553,717 for the three months ended March, 31, 2012. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results.  During the three months ended March 31, 2013, changes in operating assets and liabilities used cash of $2,135,543 compared to $1,820,231 for the three months ended March 31, 2012.

 

Net Cash Used in Investing Activities.     Net cash used in investing activities for the three months ended March 31, 2013 totaled $975,853 compared to $3,559,958 for the three months ended March 31, 2012 representing a decrease of $2,584,105, or 73%. The decrease in the 2013 period related to lower spending on property and equipment which decreased by $2,737,187, or 80%, from $3,434,000 to $696,813. During the 2012 period, we spent significantly on the construction of a carrier class network to offload data traffic. In addition, capital spending on the fixed wireless network was significantly lower in 2013.

 

Net Cash Provided by (Used In) Financing Activities .  Net cash provided by financing activities for the three months ended March 31, 2013 totaled $30,575,672 compared to net cash used in financing activities of $63,283 for the three months ended March 31, 2012, representing a decrease of $30,638,955, or greater than 100%. The increase was primarily related to net proceeds of $30,500,836 received in the first quarter of 2013 from the sale of 11,000,000 shares of our common stock at a public offering of $3.00 per share.

 

Acquisition of Delos. In February 2013, we completed the acquisition of Delos which was based in the Houston, Texas area. The aggregate consideration for the acquisition included (i) approximately $225,000 in cash, (ii) 433,673 shares of common stock with a fair value of approximately $1.1 million based on the market price of our common stock on the closing date, and (iii) approximately $0.1 million in assumed liabilities. The acquisition of Delos was a business combination accounted for under the acquisition method.

 

Underwritten Offerings. In the first quarter of 2013, we completed an underwritten offering of 11,000,000 shares of our common stock at a public offering price of $3.00 per share. The total gross proceeds of the offering were $33,000,000. Net proceeds were approximately $30,501,000, after underwriting discounts, commissions and offering expenses.

 

Working Capital.     As of March 31, 2013, we had working capital of $36,838,030. Based on our current operating activities and plans, we believe our existing working capital will enable us to meet our anticipated cash requirements for at least the next twelve months.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and other commitments as of March 31, 2013:

 

 

    Payments due by period  
    Total     2013     2014     2015     2016     2017     Thereafter  
Capital lease obligations   $ 3,742,236     $ 732,553     $ 1,000,358     $ 908,344     $ 655,754     $ 391,305     $ 53,922  
Operating leases     63,743,336       13,180,069       14,916,713       14,088,243       12,921,170       7,360,748       1,276,393  
Deferred payments     232,826       149,674       83,152       -       -       -       -  
Other     384,438       384,438       -       -       -       -       -  
Total contractual cash   obligations   $ 68,102,836     $ 14,446,734     $ 16,000,223     $ 14,996,587     $ 13,576,924     $ 7,752,053     $ 1,330,315  

 

17
 

 

Capital Lease Obligations. We have entered into capital leases to acquire property and equipment expiring through December 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 the first lease for approximately $1,400,000 commenced in the second quarter of 2012. The second lease obligation of approximately $700,000 commenced at the beginning of April 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 January 2023.

 

Deferred Payments . We are making deferred payments to Pipeline as part of the consideration paid for the acquisition. There were 14 monthly payments of approximately $16,630 remaining as of March 31, 2013.

 

Other. During the first quarter of 2013, we renewed a one year information technology infrastructure support agreement. The agreement became effective at the end of the first quarter of 2013. The monthly payments are approximately $43,000 and will be paid on a quarterly basis through the fourth 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.

 

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

 

18
 

   

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.’’

 

19
 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Market risk is the potential loss arising from adverse changes in market rates and prices.  Our primary market risk relates to interest rates.  At March 31, 2013, all cash and cash equivalents are immediately available cash balances.  A portion of our cash and cash equivalents are held in three institutional money market funds.   Our interest rate risk exposure is to a decline in interest rates which would result in a decline in interest income. Due to our current market yields, a further decline in interest rates would not have a material impact on earnings.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of March 31, 2013, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our system of internal control over financial reporting during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

20
 

 

P ART II

OTHER INFORMATION

 

Item 6. Exhibits.

 

Exhibit No.

DESCRIPTION: T:/V341721/IMAGE_002.GIF

DESCRIPTION: T:/V341721/IMAGE_002.GIF

Description

DESCRIPTION: T:/V341721/IMAGE_002.GIF 31.1 Section 302 Certification of Principal Executive Officer.
DESCRIPTION: T:/V341721/IMAGE_002.GIF 31.2 Section 302 Certification of Principal Financial Officer.
DESCRIPTION: T:/V341721/IMAGE_002.GIF 32.1 Section 906 Certification of Principal Executive Officer.
DESCRIPTION: T:/V341721/IMAGE_002.GIF 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 March 31, 2013 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 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.

 

21
 

  

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

TOWERSTREAM CORPORATION  

   
   
Date: May 9, 2013 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)

 

22
 

 

EXHIBIT INDEX

Exhibit No.

DESCRIPTION: T:/V341721/IMAGE_002.GIF

DESCRIPTION: T:/V341721/IMAGE_002.GIF

Description

DESCRIPTION: T:/V341721/IMAGE_002.GIF 31.1 Section 302 Certification of Principal Executive Officer.
DESCRIPTION: T:/V341721/IMAGE_002.GIF 31.2 Section 302 Certification of Principal Financial Officer.
DESCRIPTION: T:/V341721/IMAGE_002.GIF 32.1 Section 906 Certification of Principal Executive Officer.
DESCRIPTION: T:/V341721/IMAGE_002.GIF 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 March 31, 2013 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 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

 

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Jeffrey M. Thompson, certify that:

 

  (1)   I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter ended March 31, 2013;
     
  (2)   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  (3)   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     
  (4)   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d)   Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
     
  (5)   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         

Date: May 9, 2013

 

  /s/ Jeffrey M. Thompson

Jeffrey M. Thompson
President and Chief Executive Officer

(Principal Executive Officer)

 

 

EXHIBIT 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Joseph P. Hernon, certify that:

 

  (1)   I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter ended March 31, 2013;
     
  (2)   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  (3)   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     
  (4)   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
     
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
  d)   Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
     
  (5)   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         

Date: May 9, 2013

  /s/ Joseph P. Hernon

Joseph P. Hernon
Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

EXHIBIT 32.1

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

 

In connection with the Quarterly Report of Towerstream Corporation, (the ‘‘Company’’) on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Jeffrey M. Thompson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

 

 (1)  

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

 (2)  

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

  

Date: May 9, 2013

 

  /s/ Jeffrey M. Thompson

Jeffrey M. Thompson
President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

EXHIBIT 32.2

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

 

In connection with the Quarterly Report of Towerstream Corporation, (the ‘‘Company’’) on Form 10-Q for the period ended March 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Joseph P. Hernon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

 

 (1)  

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

 (2)  

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

  

Date: May 9, 2013

 

  /s/ Joseph P. Hernon

Joseph P. Hernon
Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)