Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 08/08/2013 16:08:15)

lUNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

  For the quarterly period ended June 30, 2013

           OR

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

For the transition period from_______to_______

 

Commission file number 001-33449

 

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

 

20-8259086

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

 

 

 

55 Hammarlund Way

Middletown, Rhode Island

(Address of principal executive offices)

 

02842

(Zip Code)

 

Registrant’s telephone number, including area code (401) 848-5848

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes     No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 Large accelerated filer

 ☐

 

  Accelerated filer

 ☒

 

 

 Non-accelerated filer

 ☐

  (Do not check if a smaller reporting company)

  Smaller reporting company

 ☐

 

 

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

 

As of August 5, 2013, there were 66,401,838 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  June 30, 2013 (unaudited) and December 31, 2012

1

     

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)

2

     
 

Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2013 (unaudited)

3

     
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)

4

     
 

Notes to Unaudited Condensed Consolidated Financial Statements

5-14

     

Item 2 .

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

15 -25

     

Item 3 .

Quantitative and Qualitative Disclosures about Market Risk.

26

     

  Item 4 .

Controls and Procedures.

26

     

Part II  

OTHER INFORMATION  

27
     

Item 6 .

Exhibits.

27

 

 
 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)

June 30, 2013  

   

December 31, 2012

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 36,387,536     $ 15,152,226  

Accounts receivable, net

    688,094       609,302  

Prepaid expenses and other current assets

    1,187,589       943,420  

Total Current Assets

    38,263,219       16,704,948  
                 

Property and equipment, net

    39,127,105       41,982,210  
                 

Intangible assets, net

    4,612,065       4,548,177  

Goodwill

    1,674,281       1,674,281  

Other assets

    1,994,101       2,200,098  

Total Assets

  $ 85,670,771     $ 67,109,714  
                 

Liabilities and Stockholders’ Equity

               
                 

Current Liabilities

               

Accounts payable

  $ 507,130     $ 1,163,442  

Accrued expenses

    2,036,368       2,986,020  

Deferred revenues

    1,344,448       1,457,464  

Current maturities of capital lease obligations

    811,559       775,087  

Other

    170,335       235,018  

Total Current Liabilities

    4,869,840       6,617,031  
                 

Long-Term Liabilities

               

Capital lease obligations, net of current maturities

    2,184,820       2,387,674  

Other

    261,091       301,101  

Total Long-Term Liabilities

    2,445,911       2,688,775  

Total Liabilities

    7,315,751       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; 66,360,173 and 54,670,712 shares issued and outstanding, respectively

    66,360       54,671  

Additional paid-in-capital

    153,515,006       121,118,127  

Accumulated deficit

    (75,226,346 )     (63,368,890 )

Total Stockholders' Equity

    78,355,020       57,803,908  

Total Liabilities and Stockholders' Equity

  $ 85,670,771     $ 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 June 30,

   

Six Months Ended June 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Revenues

  $ 8,212,175     $ 8,103,321     $ 16,511,398     $ 15,922,380  
                                 

Operating Expenses

                               

Cost of revenues (exclusive of depreciation)

    5,360,291       3,723,292       10,590,932       6,796,059  

Depreciation and amortization

    3,935,826       3,348,283       7,806,913       6,629,362  

Customer support services

    987,713       1,238,164       2,135,272       2,400,129  

Sales and marketing

    1,523,804       1,554,339       2,964,660       3,036,328  

General and administrative

    2,636,033       2,953,034       5,773,632       6,144,357  

Total Operating Expenses

    14,443,667       12,817,112       29,271,409       25,006,235  

Operating Loss

    (6,231,492 )     (4,713,791 )     (12,760,011 )     (9,083,855 )

Other Income/(Expense)

                               

Interest income

    123       14,011       277       31,189  

Interest expense

    (58,793 )     (16,670 )     (94,561 )     (38,986 )

Gain on business acquisition

    62,642       (40,079 )     1,004,099       (40,079 )

Other income (expense), net

    (3,630 )     (2,130 )     (7,260 )     (7,060 )

Total Other Income/(Expense)

    342       (44,868 )     902,555       (54,936 )
                                 

Net Loss

  $ (6,231,150 )   $ (4,758,659 )   $ (11,857,456 )   $ (9,138,791 )
                                 
                                 

Net loss per common share – basic and diluted

  $ (0.09 )   $ (0.09 )   $ (0.19 )   $ (0.17 )

Weighted average common shares outstanding – basic and diluted

    66,370,789       54,369,177       63,931,300       54,340,621  

 

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 Six Months Ended June 30, 2013

 

   

Common Stock

     

Additional

   

 

   

 

 
   

Shares

   

Amount

   

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  

Cashless exercise of options

    27,754       28       (28 )             -  

Exercise of options

    243,023       243       252,946               253,189  

Issuance of common stock under employee stock purchase plan

    18,560       18       43,915               43,933  

Issuance of common stock upon vesting of restricted stock awards

    15,000       15       (15 )             -  

Issuance of common stock for business acquisitions

    385,124       385       950,871               951,256  

Net proceeds from issuance of common stock

    11,000,000       11,000       30,488,336               30,499,336  

Stock-based compensation for options

                    631,304               631,304  

Stock-based compensation for restricted stock

                    29,550               29,550  

Net loss

                            (11,857,456 )     (11,857,456 )

Balance at June 3 0, 2013

    66,360,173     $ 66,360     $ 153,515,006     $ (75,226,346 )   $ 78,355,020  

 

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)

 

   

Six Months Ended June 3 0,

 
   

2013

   

2012

 

Cash Flows From Operating Activities

               

Net loss

  $ (11,857,456 )   $ (9,138,791 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Provision for doubtful accounts

    60,000       169,082  

Depreciation and amortization

    7,806,913       6,629,362  

Stock-based compensation

    667,376       915,835  

Gain on business acquisition

    (1,004,099 )     40,079  

Loss on sale and disposition of property and equipment

    59,135       23,605  

Deferred rent

    (57,880 )     (46,327 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (59,552 )     (285,582 )

Prepaid expenses and other current assets

    (244,169 )     (593,114 )

Other assets

    233,634       (397,663 )

Accounts payable

    (685,847 )     (135,512 )

Accrued expenses

    (1,472,991 )     (55,350 )

Deferred revenues

    (172,991 )     (184,629 )

Total Adjustments

    5,129,529       6,079,786  

Net Cash Used In Operating Activities

    (6,727,927 )     (3,059,005 )
                 

Cash Flows From Investing Activities

               

Acquisitions of property and equipment

    (2,119,826 )     (9,744,880 )

Acquisition of a business, net of cash acquired

    (222,942 )     -  

Proceeds from sale of property and equipment

    1,465       9,350  

Payments of security deposits

    (25,644 )     (256,081 )

Deferred acquisition payments

    (83,545 )     (152,914 )

Net Cash Used In Investing Activities

    (2,450,492 )     (10,144,525 )
                 

Cash Flows From Financing Activities

               

Payments on capital leases

    (376,207 )     (274,775 )

Issuance of common stock upon exercise of options

    253,189       161,411  

Issuance of common stock under employee stock purchase plan

    37,411       60,202  

Net proceeds from sale of common stock

    30,499,336       -  

Net Cash Provided By (Used In) Financing Activities

    30,413,729       (53,162 )
                 

Net Increase (Decrease) In Cash and Cash Equivalents

    21,235,310       (13,256,692 )
                 

Cash and Cash Equivalents – Beginning

    15,152,226       44,672,587  

Cash and Cash Equivalents – Ending

  $ 36,387,536     $ 31,415,895  
                 

Supplemental Disclosures of Cash Flow Information

               

Cash paid during the periods for:

               

Interest

  $ 94,525     $ 38,986  

Taxes

  $ 28,336     $ 16,360  

Non-cash investing and financing activities:

               

Fair value of common stock issued (returned) in connection with an acquisition

  $ 951,256     $ (403,365 )

Acquisition of property and equipment:

               

Under capital leases

  $ 80,894     $ 2,042,930  

Included in accrued expenses

  $ 433,408     $ 1,912,822  

 

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 3,500 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 historically 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."

 

In June 2013, Hetnets entered into a Wi-Fi service agreement (the “Agreement”) with a major cable operator (the “Cable Operator”). The Agreement provides leased access to certain access points, primarily within New York City and Bergen County, New Jersey. The Cable Operator has a limited right to expand access in other Hetnets’ markets. The term of the Agreement is for an initial five year period which includes automatic renewals for two one year periods.

 

Note 2.    Summary of Significant Accounting Policies

 

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 3 0, 2013 and the results of operations and cash flows for the periods presented. The results of operations for the six months ended June 3 0, 2013 are not necessarily indicative of the operating results for the full fiscal year or 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.

 

 
5

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 June 3 0, 2013, the Company had cash and cash equivalent balances of approximately $28,370,000 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 June 3 0,

   

Six Months Ended June 3 0,

 
   

2013

   

2012

   

2013

   

2012

 

Beginning of period

  $ 143,437     $ 242,988     $ 190,109     $ 262,525  

Additions

    60,000       136,000       60,000       166,000  

Deductions

    (40,759 )     (103,918 )     (87,431 )     (153,455 )

End of period

  $ 162,678     $ 275,070     $ 162,678     $ 275,070  

 

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 assets acquired 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 amount of identifiable assets acquired and liabilities assumed is recognized as goodwill.  If this consideration is lower than the net amount of the identifiable net assets acquired and liabilities assumed, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed and included in general and administrative expenses in the 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 total consideration transferred over the net amount of identifiable assets acquired and liabilities assumed 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 year’s condensed consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current year’s condensed 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.

 

 
6

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 (385 ,124 shares)

    951,256          

Capital lease obligations assumed

    128,929          

Other liabilities assumed

    36,733          

Total

            1,341,918  
                 

Recognized amounts of identifiable assets acquired and liabilities assumed:

               

Cash

    2,058          

Accounts receivable

    79,238          

Property and equipment

    807,700          

Security deposits

    1,993          

Accounts payable

    (29,536 )        

Deferred revenue

    (59,975 )        

Other liabilities

    (89,930 )        

Total identifiable net tangible assets

            711,548  

Customer relationships

            1,634,469  

Total identifiable net assets

            2,346,017  

Gain on business acquisition

          $ 1,004,099  

 

The Company recognized a gain on business acquisition of $1,004,099 which is included in other income (expense) in the Company’s condensed consolidated statements of operations for the six months ended June 30, 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.

 

In May 2013, the Company finalized the purchase price of Delos. The final purchase price of $1,341,918 was $83,183, or 6%, lower than the initially reported purchase price of $1,425,101. The finalization of the purchase price resulted in a reduction of approximately $21,000 of identifiable net assets and an increase in the gain on business acquisition of approximately $63,000. The purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Delos of 48,549 from 433,673 to 385,124 shares.

 

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

June 3 0, 2012  

 
         

Revenues

  $ 8,272,176  

Amortization expense

    976,863  

Total operating expenses

    13,075,081  

Net loss

    (4,847,773 )

Basic net loss per share

  $ (0.09 )

 

 
7

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

   

Six Months Ended June 3 0,

 
   

2013

   

2012

 

Revenues

  $ 16,623,968     $ 16,260,090  

Amortization expense

    1,635,958       2,128,082  

Total operating expenses

    29,443,388       25,522,172  

Net loss

    (11,916,865 )     (9,317,018 )

Basic net loss per share

  $ (0.19 )   $ (0.17 )

 

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:

 

   

June 3 0, 2013

   

December 31, 2012

 

Network and base station equipment

  $ 31,334,400     $ 28,983,284  

Customer premise equipment

    23,244,257       23,036,057  

Shared wireless infrastructure

    17,332,607       17,232,566  

Information technology

    4,009,611       3,863,212  

Furniture, fixtures and other

    1,607,038       1,598,979  

Leasehold improvements

    789,392       789,392  
      78,317,305       75,503,490  

Less: accumulated depreciation

    39,190,200       33,521,280  

Property and equipment, net

  $ 39,127,105     $ 41,982,210  

 

Depreciation expense for the three months ended June 3 0, 2013 and 2012 was $3,117,847 and $2,469,488, respectively. Depreciation expense for the six months ended June 3 0, 2013 and 2012 was $6,236,334 and $4,697,416, respectively. The Company sold or disposed of property and equipment with $628,015 of original cost and $567,415 of accumulated depreciation during the six months ended June 3 0, 2013 which resulted in $1,465 received in proceeds and $59,135 recognized as loss on disposals. The Company sold or disposed of property and equipment with $112,614 of original cost and $79,659 of accumulated depreciation during the six months ended June 3 0, 2012 which resulted in $9,350 received in proceeds and $23,605 recognized as loss on disposals. Loss on disposals is included in general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

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

 

   

June 3 0, 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

    933,562       541,800  

Property acquired through capital leases, net

  $ 3,067,478     $ 3,249,419  

 

Note 5. Intangible Assets

 

Intangible assets is comprised of:

 

   

June 3 0, 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

    8,528,616       6,958,037  

Customer relationships, net

    3,327,510       3,263,622  

FCC licenses

    1,284,555       1,284,555  

Intangible assets, net

  $ 4,612,065     $ 4,548,177  

 

 

 
8

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Amortization expense for the three months ended June 3 0, 2013 and 2012 was $817,979 and $878,795, respectively . Amortization expense for the six months ended June 3 0, 2013 and 2012 was $1,570,579 and $1,931,946, 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 June 30, 2013, the remaining amortization period for all acquisitions with customer relationship balances ranged from 4.5 to 46 months. Future amortization expense is expected to be as follows:

 

Remainder of 2013

  $ 1,523,239  

2014

    888,969  

2015

    392,272  

2016

    392,272  

2017

    130,758  
    $ 3,327,510  

 

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:

 

   

June 3 0, 2013

   

December 31, 2012

 

Property and equipment

  $ 433,408     $ 1,240,774  

Payroll and related

    821,990       859,130  

Professional services

    344,387       314,270  

Network

    163,206       288,060  

Other

    273,377       283,786  

Total

  $ 2,036,368     $ 2,986,020  

 

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

 

Note 7.    Other Liabilities

 

Other liabilities consist of the following:

   

June 3 0, 2013

   

December 31, 2012

 

Current

               

Deferred rent

  $ 28,941     $ 86,820  

Deferred acquisition payments

    141,394       148,198  

Total

  $ 170,335     $ 235,018  
                 

Long-Term

               

Deferred acquisition payments

  $ 16,817     $ 56,827  

Deferred taxes

    244,274       244,274  

Total

  $ 261,091     $ 301,101  

 

Gross deferred acquisition payments related to Pipeline Wireless LLC (“Pipeline”) totaled $182,935 and are payable in monthly installments of $16,630 through May 2014. The carrying value of these non-interest bearing payments were discounted at 12% and totaled $128,654 at June 30, 2013. Deferred acquisition payments related to Delos totaled $29,557 at June 30, 2013 and bear interest at rates ranging from 7% to 12.5%.

 

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 $2,501,000 related to the underwritten offering.

 

 
9

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 $253,098 and $355,834 for the three months ended June 3 0, 2013 and 2012, respectively. Stock-based compensation totaled $631,304 and $846,159 for the six months ended June 3 0, 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 $1,412,960 as of June 3 0, 2013 which will be recognized over a weighted-average period of 1.5 years.

 

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

 

   

Three Months Ended June 3 0,

   

Six Months Ended June 3 0,

 
   

     2013

   

2012

   

2013

   

2012

 

Risk-free interest rate

    1.0 - 1.5%       0.6%       0.8 - 1.5%       0.6 - 1.0%  

Expected volatility

      65%         74%       65 - 68%       65 - 74%  

Expected life (in years)

    5.3 - 6.5       5.3       5 -  6.5       5 - 5.3  

Expected dividend yield

      -         -         -           -    

Weighted average per share grant date fair value

  $   1.46       $ 2.15     $   1.46       $   2.16    

 

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 June 30, 2013. 30,000 shares were forfeited in the fourth quarter of 2012 in connection with an executive’s cessation of employment. Stock-based compensation for restricted stock totaled $14,775 and $29,550 for the three months ended June 30, 2013 and 2012, respectively. Stock-based compensation for restricted stock totaled $29,550 and $59,100 for the six months ended June 30, 2013 and 2012, respectively. Unrecognized compensation cost of $29,550 at June 30, 2013 will be recognized ratably through December 2013. As of June 30, 2013, 15,000 shares of restricted stock remain unvested.

 

Option transactions under the stock option plans during the six months ended June 3 0, 2013 were as follows:

 

   

Number

   

Weighted Average

Exercise Price

 

Outstanding as of December 31, 2012

    3,916,045     $ 2.85  

Granted during 2013

    325,000       2.57  

Exercised

    (347,986 )     1.23  

Forfeited /expired

    (384,304 )     5.08  

Outstanding as of June 3 0, 2013

    3,508,755     $ 2.74  

Exercisable as of June 3 0, 2013

    2,646,255     $ 2.28  

 

In February 2013, the Company granted 75,000 options to its two executive officers in recognition of the completion of an underwritten offering and the formation of Hetnets. These options were granted at an exercise price of $2.62 and vested immediately. In June 2013, the Company made its annual grant to the Board of Directors consisting of 200,000 options with an exercise price of $2.56 vesting monthly through May 2014. In June 2013, the Company granted 50,000 options to an executive officer with an exercise price of $2.56 which vests annually over a five year period.

   

A total of 104,963 options were exercised on a cashless basis during the three and six months ended June 30, 2013 resulting in the net issuance of 27,754 shares. Under a cashless exercise, the holder uses a portion of the shares that would otherwise be issuable upon exercise, rather than cash, as consideration for the exercise. The amount of net shares issuable in connection with a cashless exercise will vary based on the exercise price of the option compared to the current market price of the Company’s common stock on the date of exercise.

 

 
10

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

A total of 6,667 and 243,023 options were exercised on a cash basis during the three and six months ended June 3 0, 2013, which resulted in proceeds to the Company of $6,200 and $253,189, respectively .

 

Cancellations for the three and six months ended June 3 0, 2013 were 27,178 and 384,304, respectively, and related to employee terminations.

 

The weighted average remaining contractual life of the outstanding options as of June 3 0, 2013 was 5.7 years.

 

The intrinsic value of outstanding and exercisable options totaled $2,179,845 and $2,156,373, respectively, as of June 3 0, 2013. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of June 30, 2013, which was $2.55 per share, and the exercise price of the options.

 

Note 10.    Stock Warrants

 

The 450,000 warrants outstanding at June 3 0, 2013 and December 31, 2012 have an exercise price of $5.00 and expire in July 2016.

 

There was no intrinsic value associated with the outstanding and exercisable warrants as of June 3 0, 2013. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of June 30, 2013, which was $2.55 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 and six months ended June 3 0, 2013, a total of 7,951 and 18,560 shares were issued under the ESPP Plan with a fair value of $20,275 and $43,933, respectively. The Company recognized $3,021 and $6,522 of stock-based compensation related to the 15% discount for the three and six months ended June 3 0, 2013, respectively . The Company recognized $6,186 and $10,576 of stock-based compensation related to the 15% discount for the three and six months ended June 30, 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 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.

 

 
11

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 six months ended June 3 0, 2013.

 

                       
   

Total Carrying Value

   

Quoted prices in active markets

(Level1)

   

Significant other observable inputs

(Level 2)

   

Significant unobservable inputs

(Level 3)

 

June 3 0, 2013

  $ 36,387,536     $ 36,387,536     $ -     $ -  

December 31, 2012

  $ 15,152,226     $ 15,152,226     $ -     $ -  

 

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 June 3 0, 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 $11,866,000 if exercised by the holder for cash.

 

Stock options

    3,508,755  

Restricted stock

    15,000  

Warrants

    450,000  

Total

    3,973,755  

 

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 December 202 0. Certain of these operating leases include extensions, at the Company's option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table below as it is not presently determinable which options, if any, the Company will elect to exercise. As of June 3 0, 2013, total future operating lease obligations were as follows:

 

Remainder of 2013

  $ 9,251,681  

2014

    15,996,763  

2015

    15,069,835  

2016

    13,775,766  

2017

    8,186,874  

Thereafter

    1,604,430  
    $ 63,885,349  

 

Rent expenses were as follows:

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2013

   

2012

   

2013

   

2012

 

Points of Presence

  $ 1,715,204     $ 1,416,058     $ 3,340,906     $ 2,704,775  

Street level rooftops

    2,585,804       991,941       5,049,902       1,600,317  

Corporate

    121,519       117,719       245,276       239,238  

Other

    105,351       96,470       225,229       194,219  
    $ 4,527,878     $ 2,622,188     $ 8,861,313     $ 4,738,549  

 

Rent expenses related to rent for Points of Presence (“POPs”), street level rooftops and other were included in cost of revenues in the Company’s condensed consolidated statements of operations. Rent expense related to our corporate offices was included in general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

 
12

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   

Capital Lease Obligations

 

The Company has entered into capital leases to acquire property and equipment expiring through March 2018. As of June 3 0, 2013, total future capital lease obligations were as follows:

 

Remainder of 2013

  $ 508,116  

2014

    997,824  

2015

    908,344  

2016

    655,754  

2017

    391,305  

Thereafter

    53,923  
    $ 3,515,266  

Less: Interest expense

    (518,887 )

Total capital lease obligations

  $ 2,996,379  

Current

  $ 811,559  

Long-term

  $ 2,184,820  

 

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 June 30, 2013

 
   

Fixed

Wireless

   

Shared Wireless

Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 8,061,156     $ 196,508     $ -     $ (45,489 )   $ 8,212,175  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    2,491,987       2,874,842       38,951       (45,489 )     5,360,291  

Depreciation and amortization

    2,836,979       911,325       187,522       -       3,935,826  

Customer support services

    179,128       56,660       751,925       -       987,713  

Sales and marketing

    1,322,233       111,209       90,362       -       1,523,804  

General and administrative

    170,710       144,750       2,320,573       -       2,636,033  

Total Operating Expenses

    7,001,037       4,098,786       3,389,333       (45,489 )     14,443,667  

Operating Income (Loss)

  $ 1,060,119     $ (3,902,278 )   $ (3,389,333 )   $ -     $ (6,231,492 )
                                         

Capital expenditures

  $ 1,028,311     $ 232,819     $ 46,033     $ -     $ 1,307,163  

 

 
13

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

   

Six Months Ended June 30, 2013

 
   

Fixed

Wireless

   

Shared Wireless

Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 16,247,892     $ 354,984     $ -     $ (91,478 )   $ 16,511,398  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    4,923,318       5,666,971       92,121       (91,478 )     10,590,932  

Depreciation and amortization

    5,656,588       1,775,437       374,888       -       7,806,913  

Customer support services

    357,017       159,938       1,618,317       -       2,135,272  

Sales and marketing

    2,619,174       158,257       187,229       -       2,964,660  

General and administrative

    317,607       334,934       5,121,091       -       5,773,632  

Total Operating Expenses

    13,873,704       8,095,537       7,393,646       (91,478 )     29,271,409  

Operating Income (Loss)

  $ 2,374,188     $ (7,740,553 )   $ (7,393,646 )   $ -     $ (12,760,011 )
                                         

Capital expenditures

  $ 2,115,783     $ 369,019     $ 149,326     $ -     $ 2,634,128  
                                         

As of June 30, 2013

                                       

Property and equipment, net

  $ 24,477,899     $ 12,739,109     $ 1,910,097     $ -     $ 39,127,105  

Total assets

  $ 32,348,914     $ 14,916,880     $ 38,404,977     $ -     $ 85,670,771  

 

 

 
14

 

 

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

 

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the six months ended June 3 0, 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.

 

Non-GAAP Measures and Reconciliations to GAAP Measures

 

We prepare our financial statements in accordance with generally accepted accounting principles (“GAAP”). We use certain Non-GAAP measures to monitor our business performance and that of our segments. These Non-GAAP measures are not recognized under GAAP. Accordingly, investors are cautioned about using or relying on these measures as alternatives to recognized GAAP measures. Our methods of calculating these measures may not be comparable to similar measures presented by other companies.

 

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 street-level rooftop rents and utilities, bandwidth costs, 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 services to commercial customers. We refer to these activities as establishing a "Network Presence." For the Fixed Wireless segment, these costs include constructing Points-of-Presence ("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. For the Shared Wireless Infrastructure segment, these costs include installing numerous access points, backhaul and other equipment on street level rooftops that we refer to as "Hotzones." The costs to build PoPs and construct Hotzones are capitalized and expensed over a five year period. In addition, 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.

 

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.

 

 
15

 

 

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 .

 

Market Information – Fixed Wireless

 

As of June 3 0, 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 .

 

 
16

 

 

Three months ended June 30, 2013

Market

 

Revenues

   

Cost of

Revenues  

   

Gross Margin

   

Operating

Costs

   

Adjusted

Market

EBITDA  

 

Los Angeles

  $ 2,046,981     $ 514,043     $ 1,532,938     $ 349,208     $ 1,183,730  

Boston

    1,628,247       383,026       1,245,221       218,466       1,026,755  

New York

    1,940,048       649,242       1,290,806       356,721       934,085  

Chicago

    820,014       271,901       548,113       107,120       440,993  

Miami

    390,716       105,392       285,324       85,851       199,473  

Houston

    180,254       57,471       122,783       30,022       92,761  

Las Vegas-Reno

    273,887       156,045       117,842       25,937       91,905  

San Francisco

    320,043       119,155       200,888       111,196       89,692  

Providence/Newport

    113,728       49,936       63,792       18,621       45,171  

Seattle

    93,702       53,298       40,404       17,322       23,082  

Philadelphia

    40,052       19,311       20,741       15,283       5,458  

Dallas-Fort Worth

    162,348       100,040       62,308       66,339       (4,031 )

Nashville

    5,647       13,127       (7,480 )     2,859       (10,339 )

Total

  $ 8,015,667     $ 2,491,987     $ 5,523,680     $ 1,404,945     $ 4,118,735  

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 4,118,735  

Fixed wireless, non-market specific

       

Other expenses

    (267,126 )

Depreciation and amortization

    (2,836,979 )

Shared wireless infrastructure, net

    (3,856,789 )

Corporate

    (3,389,333 )

Other income (expense)

    342  

Net loss

  $ (6,231,150 )

 

Three months ended June 3 0, 2012

Market

 

Revenues

   

Cost of

Revenues  

   

Gross Margin

   

Operating

Costs

   

Adjusted

Market

EBITDA  

 

Boston

  $ 1,747,604     $ 365,383     $ 1,382,221     $ 224,282     $ 1,157,939  

New York

    1,842,371       576,164       1,266,207       280,881       985,326  

Los Angeles

    1,925,959       635,189       1,290,770       376,904       913,866  

Chicago

    938,237       278,794       659,443       192,586       466,857  

Miami

    406,234       92,081       314,153       94,837       219,316  

San Francisco

    409,621       121,058       288,563       76,141       212,422  

Las Vegas-Reno

    396,870       152,561       244,309       45,983       198,326  

Providence-Newport

    125,115       44,697       80,418       32,988       47,430  

Seattle

    115,229       53,184       62,045       22,224       39,821