Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 11/12/2013 16:07:17)

 

UNITED 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 September 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 November 7, 2013, there were 66,419,380 shares of common stock, par value $0.001 per share, outstanding.

 

 
 

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

   

Pages

Part I

FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements.

1

     
 

Condensed Consolidated Balance Sheets as of  September 30, 2013 (unaudited) and December 31, 2012

1

     

 

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

2

     
 

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

3

     
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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

 
     

Item 6 .

Exhibits.

27

 

 

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

   

(Unaudited)

September 30, 2013

   

December 31, 2012

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 32,793,977     $ 15,152,226  

Accounts receivable, net

    868,811       609,302  

Prepaid expenses and other current assets

    1,043,730       943,420  

Total Current Assets

    34,706,518       16,704,948  
                 

Property and equipment, net

    38,186,083       41,982,210  
                 

Intangible assets, net

    3,794,087       4,548,177  

Goodwill

    1,674,281       1,674,281  

Other assets

    1,888,116       2,200,098  

Total Assets

  $ 80,249,085     $ 67,109,714  
                 

Liabilities and Stockholders’ Equity  

               
                 

Current Liabilities

               

Accounts payable

  $ 721,578     $ 1,163,442  

Accrued expenses

    2,444,408       2,986,020  

Deferred revenues

    1,379,580       1,457,464  

Current maturities of capital lease obligations

    809,934       775,087  

Other

    103,107       235,018  

Total Current Liabilities

    5,458,607       6,617,031  
                 

Long-Term Liabilities

               

Capital lease obligations, net of current maturities

    1,991,152       2,387,674  

Other

    258,463       301,101  

Total Long-Term Liabilities

    2,249,615       2,688,775  

Total Liabilities

    7,708,222       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; 66,419,380 and 54,670,712 shares issued and outstanding, respectively

    66,420       54,671  

Additional paid-in-capital

    153,844,182       121,118,127  

Accumulated deficit

    (81,369,739 )     (63,368,890 )

Total Stockholders' Equity

    72,540,863       57,803,908  

Total Liabilities and Stockholders' Equity

  $ 80,249,085     $ 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 September 30,

   

Nine Months Ended September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Revenues

  $ 8,400,664     $ 8,127,507     $ 24,912,061     $ 24,049,887  
                                 

Operating Expenses

                               

Cost of revenues (exclusive of depreciation)

    5,772,664       4,443,991       16,363,595       11,240,050  

Depreciation and amortization

    3,846,644       3,399,442       11,653,557       10,028,804  

Customer support services

    892,710       1,173,432       3,027,982       3,573,561  

Sales and marketing

    1,368,628       1,561,972       4,333,288       4,598,300  

General and administrative

    2,600,168       2,928,653       8,373,800       9,073,010  

Total Operating Expenses

    14,480,814       13,507,490       43,752,222       38,513,725  

Operating Loss

    (6,080,150 )     (5,379,983 )     (18,840,161 )     (14,463,838 )

Other Income/(Expense)

                               

Interest income

    125       10,206       401       41,395  

Interest expense

    (59,738 )     (37,247 )     (154,298 )     (76,233 )

Gain on business acquisition

    -       -       1,004,099       (40,079 )

Other income (expense), net

    (3,630 )     (1,210 )     (10,890 )     (8,270 )

Total Other Income/(Expense)

    (63,243 )     (28,251 )     839,312       (83,187 )
                                 

Net Loss

  $ (6,143,393 )   $ (5,408,234 )   $ (18,000,849 )   $ (14,547,025 )
                                 

Net loss per common share – basic and diluted

  $ (0.09 )   $ (0.10 )   $ (0.28 )   $ (0.27 )

Weighted average common shares outstanding – basic and diluted

    66,402,499       54,403,237       64,764,085       54,361,646  

 

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

 

 

 

 
2

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

For the Nine Months Ended September 30, 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

    37,770       38       (38 )     -       -  

Exercise of options

    284,688       285       292,104       -       292,389  

Issuance of common stock under employee stock purchase plan

    26,086       26       65,356       -       65,382  

Issuance of common stock upon vesting of restricted stock awards

    15,000       15       (15 )     -       -  

Net proceeds from issuance of common stock

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

Issuance of common stock for business acquisitions

    385,124       385       950,871       -       951,256  

Stock-based compensation for options

    -       -       885,116       -       885,116  

Stock-based compensation for restricted stock

    -       -       44,325       -       44,325  

Net loss

    -       -       -       (18,000,849 )     (18,000,849 )

Balance at September 3 0, 2013

    66,419,380     $ 66,420     $ 153,844,182     $ (81,369,739 )   $ 72,540,863  

 

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

 

 

 

 
3

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

   

Nine Months Ended September 3 0,

 
   

2013

   

2012

 

Cash Flows From Operating Activities

               

Net loss

  $ (18,000,849 )   $ (14,547,025 )

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

               

Provision for doubtful accounts

    70,000       219,082  

Depreciation and amortization

    11,653,557       10,028,804  

Stock-based compensation

    939,200       1,353,404  

Gain on business acquisition

    (1,004,099 )     40,079  

Loss on sale and disposition of property and equipment

    81,824       72,072  

Deferred rent

    (86,820 )     (75,267 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (250,270 )     (230,195 )

Prepaid expenses and other current assets

    (100,310 )     (332,872 )

Other assets

    353,130       (893,202 )

Accounts payable

    (471,399 )     (304,545 )

Accrued expenses

    (1,411,797 )     (30,674 )

Deferred revenues

    (137,859 )     (318,999 )

Total Adjustments

    9,635,157       9,527,687  

Net Cash Used In Operating Activities

    (8,365,692 )     (5,019,338 )
                 

Cash Flows From Investing Activities

               

Acquisitions of property and equipment

    (3,896,628 )     (15,997,052 )

Acquisition of a business, net of cash acquired

    (222,942 )     -  

Proceeds from sale of property and equipment

    14,779       12,850  

Payments of security deposits

    (39,154 )     (292,209 )

Deferred acquisition payments

    (124,460 )     (221,633 )

Net Cash Used In Investing Activities

    (4,268,405 )     (16,498,044 )
                 

Cash Flows From Financing Activities

               

Payments on capital leases

    (571,500 )     (384,802 )

Issuance of common stock upon exercise of options

    292,389       312,853  

Issuance of common stock under employee stock purchase plan

    55,623       84,251  

Repurchase of options

    -       (34,986 )

Net proceeds from sale of common stock

    30,499,336       -  

Net Cash Provided By (Used In) Financing Activities

    30,275,848       (22,684 )
                 

Net Increase (Decrease) In Cash and Cash Equivalents

    17,641,751       (21,540,066 )
                 

Cash and Cash Equivalents – Beginning

    15,152,226       44,672,587  

Cash and Cash Equivalents – Ending

  $ 32,793,977     $ 23,132,521  
                 

Supplemental Disclosures of Cash Flow Information

               

Cash paid during the periods for:

               

Interest

  $ 154,298     $ 76,233  

Taxes

  $ 34,072     $ 18,158  

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     $ 2,333,006  

Included in accrued expenses

  $ 780,254     $ 1,590,798  

 

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, 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 and coverage in dense urban areas. During this period, the Company incurred various costs related to identifying possible new solutions and services. These costs included rent payments under lease agreements which provide the Company with the right to install wireless technology equipment on the rooftops of buildings. The Company refers to these locations as "street level rooftops" because Wi-Fi and small cell technologies are required to be close to the ground, and therefore, the buildings are often one to two stories high. The Company also incurred costs to construct 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 traditional, macro-cellular architecture to 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”).  Hetnets plans to utilize the carrier-class network constructed on the street level rooftops 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 internet access and the offloading of mobile data, (iii) rental of a port for backhaul or transport, and (iv) power and other related services. The Company refers to the activities of Hetnets as its “shared wireless infrastructure” (or “shared wireless”) 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 three year period, and provides for 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 (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2013 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 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 GAAP 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 (Continued)

 

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 insurance limits. As of September 30, 2013, the Company had cash and cash equivalent balances of approximately $24,777,000 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 September 30,

   

Nine Months Ended September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Beginning of period

  $ 162,678     $ 275,070     $ 190,109     $ 262,525  

Additions

    10,000       50,000       70,000       219,082  

Deductions

    (39,552 )     (113,656 )     (126,983 )     (270,193 )

End of period

  $ 133,126     $ 211,414     $ 133,126     $ 211,414  

 

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 (Continued)  

 

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 consideration transferred

            1,341,918  
                 

Fair value 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 nine months ended September 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 of Delos taken place at the beginning of the 2013 and 2012 periods:

 

   

Three Months Ended

September 30, 2012

 
         

Revenues

  $ 8,296,362  

Amortization expense

    817,979  

Total operating expenses

    13,765,459  

Net loss

    (5,497,348 )

Basic net loss per share

  $ (0.10 )

 

 

 
7

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

   

Nine Months Ended September 30,

 
   

2013

   

2012

 

Revenues

  $ 25,024,631     $ 24,556,452  

Amortization expense

    2,453,937       2,946,061  

Total operating expenses

    43,924,201       39,287,631  

Net loss

    (18,060,258 )     (14,814,366 )

Basic net loss per share

  $ (0.28 )   $ (0.27 )

 

The pro forma information presented above does not purport to present what actual results would have been had the acquisition 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:

 

   

September 30, 2013

   

December 31, 2012

 

Network and base station equipment

  $ 31,994,152     $ 28,983,284  

Customer premise equipment

    23,427,912       23,036,057  

Shared wireless infrastructure

    17,889,725       17,232,566  

Information technology

    4,208,769       3,863,212  

Furniture, fixtures and other

    1,607,038       1,598,979  

Leasehold improvements

    789,392       789,392  
      79,916,988       75,503,490  

Less: accumulated depreciation

    41,730,905       33,521,280  

Property and equipment, net

  $ 38,186,083     $ 41,982,210  

 

Depreciation expense for the three months ended September 30, 2013 and 2012 was $3,028,665 and $2,679,531, respectively. Depreciation expense for the nine months ended September 30, 2013 and 2012 was $9,264,999 and $7,376,947, respectively. The Company sold or disposed of property and equipment with $1,151,978 of original cost and $1,055,375 of accumulated depreciation during the nine months ended September 30, 2013 which resulted in $14,779 received in proceeds and $81,824 recognized as loss on disposals. The Company sold or disposed of property and equipment with $356,915 of original cost and $271,993 of accumulated depreciation during the nine months ended September 30, 2012 which resulted in $12,850 received in proceeds and $72,072 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:

 

   

September 30, 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

    1,133,614       541,800  

Property acquired through capital leases, net

  $ 2,867,426     $ 3,249,419  

 

Note 5. Intangible Assets

 

Intangible assets consist of the following:

 

   

September 30, 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

    9,346,594       6,958,037  

Customer relationships, net

    2,509,532       3,263,622  

FCC licenses

    1,284,555       1,284,555  

Intangible assets, net

  $ 3,794,087     $ 4,548,177  

 

 

 
8

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Amortization expense for the three months ended September 30, 2013 and 2012 was $817,979 and $719,911, respectively . Amortization expense for the nine months ended September 30, 2013 and 2012 was $2,388,558 and $2,651,857, 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 September 30, 2013, the remaining amortization period for all acquisitions with customer relationship balances ranged from 2 to 43 months. Future amortization expense is expected to be as follows:

 


Remainder of 2013

  $ 705,260  

2014

    888,969  

2015

    392,272  

2016

    392,272  

2017

    130,759  
    $ 2,509,532  

 

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:

 

   

September 30, 2013

   

December 31, 2012

 

Property and equipment

  $ 780,254     $ 1,240,774  

Payroll and related

    804,164       859,130  

Professional services

    397,814       314,270  

Network

    185,720       288,060  

Other

    276,456       283,786  

Total

  $ 2,444,408     $ 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:

 

   

September 30, 2013

   

December 31, 2012

 

Current

               

Deferred rent

  $ -     $ 86,820  

Deferred acquisition payments

    103,107       148,198  

Total

  $ 103,107     $ 235,018  
                 

Long-Term

               

Deferred acquisition payments

  $ 14,189     $ 56,827  

Deferred taxes

    244,274       244,274  

Total

  $ 258,463     $ 301,101  

 

Gross deferred acquisition payments related to the acquisition of Pipeline Wireless LLC (“Pipeline”) in December 2010 totaled $133,043 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 $92,181 at September 30, 2013. Deferred acquisition payments related to Delos totaled $25,115 at September 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 (Continued)

 

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 ,813 and $403 ,765 for the three months ended September 30, 2013 and 2012, respectively. Stock-based compensation totaled $885 ,116 and $1,249,925 for the nine months ended September 30, 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 $2,044,445 as of September 30, 2013 which will be recognized over a weighted-average period of 2.4 years.

 

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

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

   

2013

   

2012

   

2013

 

2012

Risk-free interest rate

    1.9 %     -        0.8% - 1.9%      0.6%  - 1.0%

Expected volatility

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

Expected life (in years)

    6       -        5 -  6.5      5 -  5.3

Expected dividend yield

    -       -         -         -  

Weighted average per share grant date fair value

  $ 1.42       -     $      1.44   $      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 September 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 September 30, 2013 and 2012, respectively. Stock-based compensation for restricted stock totaled $44,325 and $88,650 for the nine months ended September 30, 2013 and 2012, respectively. Unrecognized compensation cost of $14,775 at September 30, 2013 will be recognized ratably through December 2013. As of September 30, 2013, 15,000 shares of restricted stock remain unvested.

 

Option transactions under the stock option plans during the nine months ended September 30, 2013 were as follows:

 

   

Number

   

Weighted Average

Exercise Price

 

Outstanding as of December 31, 2012

    3,916,045     $ 2.85  

Granted during 2013

    950,000     $ 2.40  

Exercised

    (420,159 )   $ 1.23  

Forfeited /expired

    (390,870 )   $ 5.07  

Outstanding as of September 30, 2013

    4,055,016     $ 2.70  

Exercisable as of September 30, 2013

    2,676,434     $ 2.36  

 

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. In August 2013, the Company granted 625,000 options to certain employees with an exercise price of $2.31 vesting annually over a three year period.

 

 

 
10

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

A total of 30,508 and 135,471 options were exercised on a cashless basis during the three and nine months ended September 30, 2013 resulting in the net issuance of 10,016 and 37,770 shares, respectively. 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.

 

A total of 41,665 and 284,688 options were exercised on a cash basis during the three and nine months ended September 30, 2013, which resulted in proceeds to the Company of $39,199 and $292,389, respectively.

 

Cancellations of options for the three and nine months ended September 30, 2013 were 6,566 and 390,870, respectively, and related to employee terminations.

 

The weighted average remaining contractual life of the outstanding options as of September 30, 2013 was 6.3 years.

 

The intrinsic value of outstanding and exercisable options totaled $3,047,325 and $2,595,864, respectively, as of September 30, 2013. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of September 30, 2013, which was $2.85 per share, and the exercise price of the options.

 

Note 10.    Stock Warrants

   

The 450,000 warrants outstanding at September 30, 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 September 30, 2013. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of September 30, 2013, which was $2.85 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, of which 81,441 shares have been issued to date and 118,559 shares are available for future issuance. During the three and nine months ended September 30, 2013, a total of 7,526 and 26,086 shares were issued under the ESPP Plan with a fair value of $21,449 and $65,382, respectively. The Company recognized $3,236 and $9,759 of stock-based compensation related to the 15% discount for the three and nine months ended September 30, 2013, respectively . The Company recognized $4,252 and $14,829 of stock-based compensation related to the 15% discount for the three and nine months ended September 30, 2012, respectively .

 

Note 12. Fair Value Measurement

 

Valuation Hierarchy

 

The accounting standard of the Financial Accounting Standards Board 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.

 

Cash and cash equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. There were no changes in the valuation techniques during the nine months ended September 30, 2013.

 

 

 
11

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

   

Total

Carrying Value

   

Quoted prices in

active markets

(Level 1)

   

Significant other

observable inputs

(Level 2)

   

Significant

unobservable inputs

(Level 3)

 

September 30, 2013

  $ 32,793,977     $ 32,793,977    

$

-      -  

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 September 30, 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 $13,197,000 if exercised by the holder for cash.

 

Stock options

    4,055,016  

Restricted stock

    15,000  

Warrants

    450,000  

Total

    4,520,016  

 

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 2020. 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 September 30, 2013, total future operating lease obligations were as follows:

 

Remainder of 2013

  $ 4,763,777  

2014

    16,280,282  

2015

    15,376,341  

2016

    13,949,461  

2017

    8,406,490  

Thereafter

    1,758,256  
    $ 60,534,607  

 

Rent expenses were as follows:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Points of Presence

  $ 1,767,441     $ 1,418,061     $ 5,108,347     $ 4,122,836  

Street level rooftops

    2,707,304       1,609,252       7,757,206       3,209,569  

Corporate offices

    121,518       126,619       366,794       365,856  

Other

    102,039       91,582       327,268       285,801  
    $ 4,698,302     $ 3,245,514     $ 13,559,615     $ 7,984,062  

 

Rent expenses related to Points of Presence, 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 (Continued)

 

Capital Lease Obligations

 

The Company has entered into capital leases to acquire property and equipment expiring through March 2018. As of September 30, 2013, total future capital lease obligations were as follows:

 

Remainder of 2013

  $ 262,903  

2014

    997,824  

2015

    908,344  

2016

    655,754  

2017

    391,305  

Thereafter

    53,923  
    $ 3,270,053  

Less: Interest expense

    (468,967 )

Total capital lease obligations

  $ 2,801,086  

Current

  $ 809,934  

Long-term

  $ 1,991,152  

 

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. Payments of approximately $128,000 are due quarterly 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 September 30, 2013

 
   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 7,910,377     $ 535,936     $ -     $ (45,649 )   $ 8,400,664  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    2,640,529       3,110,640       67,144       (45,649 )     5,772,664  

Depreciation and amortization

    2,754,675       857,739       234,230       -       3,846,644  

Customer support services

    208,955       54,765       628,990       -       892,710  

Sales and marketing

    1,206,125       80,956       81,547       -       1,368,628  

General and administrative

    126,256       151,561       2,322,351       -       2,600,168  

Total Operating Expenses

    6,936,540       4,255,661       3,334,262       (45,649 )     14,480,814  

Operating Income (Loss)

  $ 973,837     $ (3,719,725 )   $ (3,334,262 )   $ -     $ (6,080,150 )
                                         

Capital expenditures

  $ 1,242,975     $ 680,324     $ 200,347     $ -     $ 2,123,646  

 

 

 

 
13

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

   

Nine Months Ended September 30, 2013

 
   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 24,158,268     $ 890,920     $ -     $ (137,127 )   $ 24,912,061  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    7,563,846       8,777,611       159,265       (137,127 )     16,363,595  

Depreciation and amortization

    8,411,263       2,633,176       609,118       -       11,653,557  

Customer support services

    565,972       214,703       2,247,307       -       3,027,982  

Sales and marketing

    3,825,299       239,213       268,776       -       4,333,288  

General and administrative

    443,863       486,495       7,443,442       -       8,373,800  

Total Operating Expenses

    20,810,243       12,351,198       10,727,908       (137,127 )     43,752,222  

Operating Income (Loss)

  $ 3,348,025     $ (11,460,278 )   $ (10,727,908 )   $ -     $ (18,840,161 )
                                         

Capital expenditures

  $ 3,358,758     $ 1,049,344     $ 349,674     $ -     $ 4,757,776  
                                         

As of September 30, 2013

                                       

Property and equipment, net

  $ 23,870,843     $ 12,439,779     $ 1,875,461     $ -     $ 38,186,083  

Total assets

  $ 30,590,803     $ 14,881,500     $ 34,776,782     $ -     $ 80,249,085  

 

   

 
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 nine months ended September 30, 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.

 

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

 

Our Fixed Wireless segment offers broadband services under agreements for periods normally 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. Our Shared Wireless Infrastructure segment offers to rent space, channels, and ports on our street level rooftops at a fixed monthly rent.

 

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.

 

 

 
15

 

 

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.

 

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, disaster recovery, bundled data and video services. We currently provide service to business customers in thirteen metropolitan markets. 

 

In February 2013 , we closed a 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 our wholly owned subsidiary. Delos operates in Houston, Texas.

 

Market Information – Fixed Wireless

 

As of September 30, 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 and the operating performance of our 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 September 30, 2013

Market

 

Revenues

   

Cost of

Revenues

   

Gross Margin

   

Operating Costs

    Adjusted

Market

EBITDA

 

Boston

  $ 1,632,918     $ 391,788     $ 1,241,130     $ 166,182     $ 1,074,948  

Los Angeles

    2,020,905       568,621       1,452,284       399,429       1,052,855  

New York

    1,914,892       659,803       1,255,089       269,903       985,186  

Chicago

    779,457       308,090       471,367       111,892       359,475  

Miami

    383,462       124,259       259,203       128,061       131,142  

San Francisco

    311,765       131,498       180,267       76,564       103,703  

Las Vegas-Reno

    251,167       145,683       105,484       33,160       72,324  

Houston

    153,727       65,566       88,161       22,746       65,415  

Providence -Newport

    115,246       50,145       65,101       11,281       53,820  

Dallas-Fort Worth

    174,095       101,718       72,377       64,619       7,758  

Seattle

    83,019       54,289       28,730       21,450       7,280  

Nashville

    4,902       15,359       (10,457 )     1,804       (12,261 )

Philadelphia

    39,173       23,713       15,460       31,158       (15,698 )

Total

  $ 7,864,728     $ 2,640,532     $ 5,224,196     $ 1,338,249     $ 3,885,947  

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 3,885,947  

Fixed wireless, non-market specific

       

Other expenses

    (203,084 )

Depreciation and amortization

    (2,754,675 )

Shared wireless infrastructure, net

    (3,674,076 )

Corporate

    (3,334,262 )

Other income (expense)

    (63,243 )

Net loss

  $ (6,143,393 )

 

Three months ended September 30, 2012

Market

 

Revenues

   

Cost of

Revenues

   

Gross Margin

   

Operating Costs

   

Adjusted

Market

EBITDA

 

Boston

  $ 1,698,654     $ 385,411     $ 1,313,243     $ 220,220     $ 1,093,023  

Los Angeles

    1,994,972       598,913       1,396,059       399,146       996,913  

New York

    1,857,988       557,909       1,300,079       319,498       980,581  

Chicago

    943,775       308,102       635,673       170,327       465,346  

Miami

    413,321       119,406       293,915       93,954       199,961  

San Francisco

    373,210       102,810       270,400       75,971       194,429  

Las Vegas-Reno

    369,748       157,851       211,897       28,518       183,379  

Seattle

    144,369       50,687       93,682       33,054       60,628  

Providence-Newport

    131,992       64,491       67,501       29,955       37,546  

Nashville

    11,810       14,106       (2,296 )     8,547