Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 11/10/2014 16:03:49)

 

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, 2014

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   20-8259086

(State or other jurisdiction of incorporation or organization)

 

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

     
88 Silva Lane    
Middletown, Rhode Island   02842

(Address of principal executive offices)

 

(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 6, 2014, there were 66,650,752 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, 2014 (unaudited) and December 31, 2013

1

     

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)

2

     
 

Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2014 (unaudited)

3

     
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)

4

     
 

Notes to Unaudited Condensed Consolidated Financial Statements

5-15

     

Item 2.

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

16-28

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

29

     

Item 4.

Controls and Procedures.

29

     

Part II

OTHER INFORMATION

 
     

Item 1A.

Risk Factors.

 30

     

Item 6.

Exhibits.

31

 

 

 

   

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)

September 30, 2014

   

December 31, 2013

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 11,890,770     $ 28,181,531  

Accounts receivable, net

    1,046,736       611,548  

Prepaid expenses and other current assets

    1,431,720       925,587  

Total Current Assets

    14,369,226       29,718,666  
                 

Property and equipment, net

    35,382,147       38,484,858  
                 

Intangible assets, net

    2,297,926       3,088,827  

Goodwill

    1,674,281       1,674,281  

Other assets

    1,751,100       1,950,835  

Total Assets

  $ 55,474,680     $ 74,917,467  
                 

Liabilities and Stockholders’ Equity

               
                 

Current Liabilities

               

Accounts payable

  $ 603,937     $ 1,241,743  

Accrued expenses

    2,229,030       2,532,679  

Deferred revenues

    1,263,456       1,396,780  

Current maturities of capital lease obligations

    775,817       783,051  

Other

    54,340       67,255  

Total Current Liabilities

    4,926,580       6,021,508  
                 

Long-Term Liabilities

               

Capital lease obligations, net of current maturities

    1,249,126       1,805,336  

Other

    1,596,477       996,682  

Total Long-Term Liabilities

    2,845,603       2,802,018  

Total Liabilities

    7,772,183       8,823,526  
                 

Commitments (Note 12)

               
                 

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; 66,650,752 and 66,424,561 shares issued and outstanding, respectively

    66,651       66,425  

Additional paid-in-capital

    154,938,511       154,171,695  

Accumulated deficit

    (107,302,665 )     (88,144,179 )

Total Stockholders' Equity

    47,702,497       66,093,941  

Total Liabilities and Stockholders' Equity

  $ 55,474,680     $ 74,917,467  

 

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,

 
   

2014

   

2013

   

2014

   

2013

 
                                 

Revenues

  $ 8,301,604     $ 8,400,664     $ 24,946,358     $ 24,912,061  
                                 

Operating Expenses

                               

Cost of revenues (exclusive of depreciation)

    6,210,920       5,444,298       18,168,776       15,591,890  

Depreciation and amortization

    3,318,395       3,846,644       10,294,872       11,653,557  

Customer support services

    1,244,161       1,221,076       3,563,571       3,799,687  

Sales and marketing

    1,353,015       1,368,628       4,173,703       4,333,288  

General and administrative

    2,381,586       2,600,168       7,726,523       8,373,800  

Total Operating Expenses

    14,508,077       14,480,814       43,927,445       43,752,222  

Operating Loss

    (6,206,473 )     (6,080,150 )     (18,981,087 )     (18,840,161 )

Other Income/(Expense)

                               

Interest expense, net

    (43,970 )     (59,613 )     (166,509 )     (153,897 )

Gain on business acquisition

    -       -       -       1,004,099  

Other income (expense), net

    (3,630 )     (3,630 )     (10,890 )     (10,890 )

Total Other Income/(Expense)

    (47,600 )     (63,243 )     (177,399 )     839,312  
                                 

Net Loss

  $ (6,254,073 )   $ (6,143,393 )   $ (19,158,486 )   $ (18,000,849 )
                                 

Net loss per common share – basic and diluted

  $ (0.09 )   $ (0.09 )   $ (0.29 )   $ (0.28 )

Weighted average common shares outstanding – basic and diluted

    66,643,804       66,402,499       66,521,267       64,764,085  

 

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, 2014

 

   

Common Stock

                         
   

Shares

   

Amount

   

Additional

Paid-In-Capital

   

Accumulated Deficit

   

Total

 

Balance at December 31, 2013

    66,424,561     $ 66,425     $ 154,171,695     $ (88,144,179 )   $ 66,093,941  

Cashless exercise of options

    192,270       192       (192 )     -       -  

Issuance of common stock under employee stock purchase plan

    18,921       19       35,740       -       35,759  

Issuance of common stock upon vesting of restricted stock awards

    15,000       15       (15 )     -       -  

Stock-based compensation for options

    -       -       735,076       -       735,076  

Fair value of options repurchased

    -       -       (3,793 )     -       (3,793 )

Net loss

    -       -       -       (19,158,486 )     (19,158,486 )

Balance at September 30, 2014

    66,650,752     $ 66,651     $ 154,938,511     $ (107,302,665 )   $ 47,702,497  

 

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

 

 
3

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

Nine Months Ended

September 30,

 
   

2014

   

2013

 

Cash Flows From Operating Activities

               

Net loss

  $ (19,158,486 )   $ (18,000,849 )

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

               

Provision for doubtful accounts

    192,000       70,000  

Depreciation for property, plant and equipment

    9,503,971       9,264,999  

Amortization for customer based intangibles

    790,901       2,388,558  

Stock-based compensation

    740,405       939,200  

Gain on business acquisition

    -       (1,004,099 )

Loss on sale and disposition of property and equipment

    -       81,824  

Deferred rent

    271,455       (86,820 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (627,188 )     (250,270 )

Prepaid expenses and other current assets

    (506,133 )     (100,310 )

Other assets

    213,407       353,130  

Accounts payable

    (637,806 )     (471,399 )

Accrued expenses

    (690,097 )     (1,411,797 )

Deferred revenues

    (133,324 )     (137,859 )

Total Adjustments

    9,117,591       9,635,157  

Net Cash Used In Operating Activities

    (10,040,895 )     (8,365,692 )
                 

Cash Flows From Investing Activities

               

Acquisitions of property and equipment

    (5,981,608 )     (3,896,628 )

Lease incentive payment from landlord

    380,000       -  

Acquisition of a business, net of cash acquired

    -       (222,942 )

Proceeds from sale of property and equipment

    -       14,779  

Payments of security deposits

    (13,672 )     (39,154 )

Deferred acquisition payments

    (64,574 )     (124,460 )

Net Cash Used In Investing Activities

    (5,679,854 )     (4,268,405 )
                 

Cash Flows From Financing Activities

               

Payments on capital leases

    (596,649 )     (571,500 )

Proceeds upon exercise of options

    -       292,389  

Issuance of common stock under employee stock purchase plan

    30,430       55,623  

Net proceeds from sale of common stock

    -       30,499,336  

Fair value of options repurchased

    (3,793 )     -  

Net Cash (Used In) Provided By Financing Activities

    (570,012 )     30,275,848  
                 

Net (Decrease) Increase In Cash and Cash Equivalents

    (16,290,761 )     17,641,751  
                 

Cash and Cash Equivalents – Beginning

    28,181,531       15,152,226  

Cash and Cash Equivalents – Ending

  $ 11,890,770     $ 32,793,977  
                 

Supplemental Disclosures of Cash Flow Information

               

Cash paid during the periods for:

               

Interest

  $ 187,653     $ 154,298  

Taxes

  $ 45,685     $ 34,072  

Non-cash investing and financing activities:

               

Fair value of common stock issued in connection with an acquisition

  $ -     $ 951,256  

Acquisition of property and equipment:

               

Under capital leases

  $ 33,204     $ 80,894  

Included in accrued expenses

  $ 386,448     $ 780,254  

 

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 business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Houston, Philadelphia, 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.

 

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”).  Hetnets was formed to operate a new shared wireless infrastructure platform that emerged from the Company's efforts to identify opportunities to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services.  Hetnets operates a carrier-class network which has been constructed on "street level rooftops" which are closer to the ground (where Wi-Fi and small cell can operate with less interference from the macro cell) than the Company's traditional fixed wireless network.  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.  Hetnets is structured to operate like a tower company and expects 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 “Wi-Fi Agreement”) with a major cable operator (the “Cable Operator”). The Wi-Fi 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 Wi-Fi Agreement is for an initial three year period and provides for automatic annual renewals for two additional one year periods.

 

In August 2014, the Company executed a master licensing agreement ("MLA") with a carrier for small cell deployments. The MLA establishes the detailed terms and conditions under which individual orders are governed, and are generally designed to expedite the deployment process. The term of this agreement is for 25 years.

 

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, 2014 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2014 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, 2013. 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, 2013, 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.

 

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.

 

 
5

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

   

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, the Company’s cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of September 30, 2014, the Company had cash and cash equivalent balances of approximately $1,614,000 in excess of the federally insured limit of $250,000.

 

The Company also had approximately $10,023,000 invested in 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,

 
   

2014

   

2013

   

2014

   

2013

 

Beginning of period

  $ 161,863     $ 162,678     $ 81,009     $ 190,109  

Additions

    75,000       10,000       192,000       70,000  

Deductions

    (30,995 )     (39,552 )     (67,141 )     (126,983 )

End of period

  $ 205,868     $ 133,126     $ 205,868     $ 133,126  

 

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

 

The highest level of judgment and estimation involved in accounting for business acquisitions relates to determining the fair value of the customer relationships and network assets acquired. In each of the five acquisitions completed over the past four years, the highest asset value has been allocated to the customer relationships acquired. Determining the fair value of customer relationships involves judgments and estimates regarding how long the customers will continue to contract services with the Company. During the course of completing five acquisitions, the Company has developed a database of historical experience from prior acquisitions to assist in preparing future estimates of cash flows. Similarly, the Company has used its historical experience in building networks to prepare estimates regarding the fair value of the network assets that it acquires.

 

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

 

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

 

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

 

Intrinsic Value of Stock Options and Warrants . The Company calculates the intrinsic value of stock options and warrants as the difference between the closing price of the Company’s common stock at the end of the reporting period and the exercise price of the stock options and warrants.

 

 
6

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

   

Recent Accounting Pronouncements. In May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” which requires an entity to recognize revenue representing the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services . ASU 2014-09 is intended to establish principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenues and cash flows arising from the entity’s contracts with customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The Company is currently evaluating the effect that ASU 2014-09 will have on its condensed consolidated financial statements and related disclosures.

 

In June 2014, FASB issued ASU No. 2014-12 (“ASU 2014-12”), “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which requires a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. ASU 2014-12 states that the performance target should not be reflected in estimating the grant date fair value of the award. ASU 2014-12 clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the periods for which the requisite service has already been rendered. The new standard is effective for the Company on January 1, 2016. The Company does not expect adoption of ASU 2014-12 to have a significant impact on its condensed consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014–15 (“ASU 2014-15”), “Presentation of Financial Statements – Going Concern.”  ASU 2014-15 provides GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.  ASU 2014-15 is the final version of Proposed ASU No. 2013–300 “Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption,” which has been deleted. The Company does not expect the adoption of ASU 2014–15 to have a significant impact on its condensed consolidated financial statements.

 

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 .

 

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 and determined that the acquisition 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. The number of shares issued was based on the closing price of the Company's common stock on the February 28, 2013 closing date which was $2.47.

 

 

 

Original

   

Adjustments

   

Final

 
Fair value of consideration transferred:                        

Cash

  $ 225,000     $ -     $ 225,000  

Common stock

    1,071,172       (119,916 )     951,256  

Other liabilities assumed

    -       36,733       36,733  

Capital lease obligations assumed

    128,929       -       128,929  

Total consideration transferred

    1,425,101       (83,183 )     1,341,918  
                         

Fair value of identifiable assets acquired and liabilities assumed:

                       

Cash

    2,058       -       2,058  

Accounts receivable

    80,524       1,286       79,238  

Property and equipment

    826,524       18,824       807,700  

Security deposits

    1,993       -       1,993  

Accounts payable

    (26,970 )     2,566       (29,536 )

Deferred revenue

    (62,110 )     (2,135 )     (59,975 )

Other liabilities

    (89,930 )     -       (89,930 )

Total identifiable net tangible assets

    732,089       20,541       711,548  

Customer relationships

    1,634,469       -       1,634,469  

Total identifiable net assets

    2,366,558       20,541       2,346,017  

Gain on business acquisition

  $ 941,457     $ 62,642     $ 1,004,099  

 

 
7

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

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 which 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.

 

The Company incurred approximately $99,000 of third-party costs in connection with the Delos acquisition for the nine month ended September 30, 2013.  There were no third-party costs incurred by the Company in connection with the Delos acquisition for the three months ended September 30, 2013. These expenses are included in the general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

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 period:

 

   

Nine Months Ended

September 30,

2013

 
         

Revenues

  $ 25,024,631  

Amortization expense

    2,453,937  

Total operating expenses

    43,924,201  

Net loss

    (18,060,258 )

Basic net loss per share

  $ (0.28 )

 

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 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,

2014

   

December 31,

2013

 

Network and base station equipment

  $ 35,373,208     $ 32,233,262  

Customer premise equipment

    25,278,981       24,244,017  

Shared wireless infrastructure

    21,014,018       19,128,064  

Information technology

    4,586,445       4,417,869  

Furniture, fixtures and other

    1,667,978       1,661,567  

Leasehold improvements

    1,599,393       1,433,984  
      89,520,023       83,118,763  

Less: accumulated depreciation

    54,137,876       44,633,905  

Property and equipment, net

  $ 35,382,147     $ 38,484,858  

 

 
8

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

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

 

   

September 30,

2014

   

December 31,

2013

 

Network and base station equipment

  $ 861,231     $ 828,027  

Shared wireless infrastructure

    1,216,142       1,216,142  

Customer premise equipment

    96,843       96,843  

Information technology

    1,860,028       1,860,028  
      4,034,244       4,001,040  

Less: accumulated depreciation

    1,933,822       1,333,666  

Property acquired through capital leases, net

  $ 2,100,422     $ 2,667,374  

 

Note 5. Intangible Assets

 

Intangible assets consist of the following:

 

   

September 30,

2014

   

December 31,

2013

 

Goodwill

  $ 1,674,281     $ 1,674,281  
                 

Customer relationships

  $ 11,856,127     $ 11,856,127  

Less: accumulated amortization of customer relationships

    10,842,756       10,051,855  

Customer relationships, net

    1,013,371       1,804,272  

FCC licenses

    1,284,555       1,284,555  

Intangible assets, net

  $ 2,297,926     $ 3,088,827  

 

Amortization expense for the three months ended September 30, 2014 and 2013 was $98,068 and $817,979, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 was $790,901 and $2,388,558, 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, 2014, the remaining amortization period for the Delos acquisition was 31 months. Balances related to the Company’s other acquisitions have been fully amortized. Future amortization expense is as follows:

 

Remainder of 2014

  $ 98,068  

2015

    392,272  

2016

    392,272  

2017

    130,759  
    $ 1,013,371  

 

The Company’s licenses with the Federal Communications Commission (“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,

2014

   

December 31,

2013

 

Payroll and related

  $ 1,125,257     $ 937,624  

Property and equipment

    386,448       867,311  

Professional services

    302,095       186,917  

Other

    187,811       293,402  

Network

    149,164       138,684  

Marketing

    78,255       108,741  

Total

  $ 2,229,030     $ 2,532,679  

 

 
9

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Network represents costs incurred to provide services to the Company’s customers including tower rentals, bandwidth, troubleshooting and gear removal.

 

Note 7.    Other Liabilities

 

Other liabilities consist of the following:

 

   

September 30,

2014

   

December 31,

2013

 

Current

               

Deferred rent

  $ 43,351     $ -  

Deferred acquisition payments

    10,989       67,255  

Total

  $ 54,340     $ 67,255  

Long-Term

               

Deferred rent

  $ 1,270,464     $ 662,361  

Deferred acquisition payments

    3,208       11,516  

Deferred taxes

    322,805       322,805  

Total

  $ 1,596,477     $ 996,682  

 

Deferred acquisition payments related to Delos totaled $14,197 at September 30, 2014 and bear interest at a rate of 7%. In May 2014, the Company made its last deferred acquisition payment of $16,630 related to the acquisition of Pipeline Wireless LLC.

 

Note 8. Stock Options and Warrants

 

Stock Options

 

The Company uses the Black-Scholes option pricing model on the date of grant to value options issued to employees, directors and consultants. Compensation expense, including the effect of forfeitures, is recognized over the period of service, generally the vesting period. Stock compensation expense and the weighted average assumptions used to calculate the fair values of stock options granted during the periods indicated were as follows:

 

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2014

   

2013

   

2014

   

2013

 

Risk-free interest rate

    1.7%-1.8 %     1.9 %     1.6%-1.8 %     0.8%-1.9 %

Expected volatility

    59 %     68 %     47%-59 %     65%-68 %

Expected life (in years)

    5.3       6       5.3       5-6.5  

Expected dividend yield

    -       -       -       -  

Weighted average per share grant date fair value

  $ 0.75     $ 1.42     $ 0.80     $ 1.44  

Stock-based compensation

  $ 183,844     $ 253,813     $ 735,076     $ 885,116  

 

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. 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 $1,113,205 as of September 30, 2014 which will be recognized over a weighted-average period of 1.7 years.

 

Option transactions under the stock option plans during the nine months ended September 30, 2014 were as follows:

 

   

Number

   

Weighted Average

Exercise Price

 

Outstanding as of December 31, 2013

    4,055,016     $ 2.70  

Granted during 2014

    372,073     $ 1.70  

Exercised

    (340,906 )   $ 0.74  

Forfeited /expired

    (184,869 )   $ 2.51  

Outstanding as of September 30, 2014

    3,901,314     $ 2.78  

Exercisable as of September 30, 2014

    2,882,066     $ 2.69  

 

 
10

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

In June 2014, the Company made its annual grant to the Board of Directors consisting of 200,000 options with an exercise price of $1.93 vesting monthly through June 2015.

 

In July 2014, the Company granted to its two executive officers 47,073 options with an exercise price of $1.67 vesting monthly over a two year period.

 

In September 2014, the Company granted to its two executive officers 125,000 options with an exercise price of $1.34 vesting quarterly over a two year period.

 

A total of 340,906 options were exercised on a cashless basis during the nine months ended September 30, 2014 resulting in the net issuance of 192,270 shares. There were no other options exercised during the nine months ended September 30, 2014.

 

Cancellations for the three and nine months ended September 30, 2014 were 74,064 and 184,869, respectively. Cancellations related to employee terminations except for 14,250 options which were repurchased during the nine months ended September 30, 2014.

 

The weighted average remaining contractual life of the outstanding options as of September 30, 2014 was 5.8 years.

 

The intrinsic value of outstanding and exercisable options totaled $196,892 and $179,392 respectively, as of September 30, 2014.

 

Stock Warrants  

 

There were 450,000 warrants outstanding and exercisable at September 30, 2014 and December 31, 2013 with an exercise price of $5.00 and an expiration date in July 2016.

 

       The warrants had no intrinsic value at September 30, 2014.

 

Cashless Exercises

 

The number of shares issuable upon the exercise of an option or 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 option or warrant compared to the current market price of the Company’s common stock on the date of exercise.

 

Note 9. 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 105,543 shares have been issued to date and 94,457 shares are available for future issuance. During the three and nine months ended September 30, 2014, a total of 6,948 and 18,921 shares were issued under the ESPP Plan with a fair value of $10,283 and $35,759, respectively. The Company recognized $1,529 and $5,329 of stock-based compensation related to the 15% discount for the three and nine months ended September 30, 2014, 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 .

 

Note 10. Fair Value Measurement

 

Valuation Hierarchy

 

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

 

 
11

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

   

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, 2014.

   

   

Total Carrying

Value

   

Quoted prices in active markets
(Level 1)

   

Significant
other
observable
inputs
(Level 2)

   

Significant
unobservable
inputs
(Level 3)

 

September 30, 2014

  $ 11,890,770     $ 11,890,770     $ -     $ -  

December 31, 2013

  $ 28,181,531     $ 28,181,531     $ -     $ -  

   

Note 11.    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. 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, 2014 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 million if exercised by the holder for cash.

   

Stock options

    3,901,314  

Warrants

    450,000  

Total

    4,351,314  

 

Note 12.    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 August 2023. 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, 2014, total future operating lease obligations were as follows:

 

Remainder of 2014

  $ 5,182,797  

2015

    19,758,856  

2016

    18,300,039  

2017

    12,639,857  

2018

    5,160,998  

Thereafter

    2,779,175  
    $ 63,821,722  

 

Rent expenses were as follows:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2014

   

2013

   

2014

   

2013

 

Points of Presence

  $ 1,939,574     $ 1,767,441     $ 5,732,922     $ 5,108,347  

Street level rooftops

    3,359,804       2,707,304       9,752,720       7,757,206  

Corporate offices

    84,109       121,518       252,328       366,794  

Other

    88,211       102,039       273,928       327,268  
    $ 5,471,698     $ 4,698,302     $ 16,011,898     $ 13,559,615  

 

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 corporate offices was included in general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

In September 2013, the Company entered into a new lease agreement for its corporate offices and new warehouse space. The lease commenced on January 1, 2014 and expires on December 31, 2019 with an option to renew for an additional five year term through December 31, 2024. The Company spent approximately $600,000 in leasehold improvements in connection with consolidating its corporate based employees from two buildings into one building. The landlord agreed to contribute $380,000 in funding towards qualified leasehold improvements and made such payment to the Company in February 2014. Total annual rent payments begin at $359,750 for 2014 and escalate by 3% annually reaching $416,970 for 2019.

 

 
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, 2014, total future capital lease obligations were as follows:

   

Remainder of 2014

  $ 238,464  

2015

    921,437  

2016

    668,847  

2017

    401,125  

2018

    53,922  
    $ 2,283,795  

Less: Interest expense

    258,852  

Total capital lease obligations

  $ 2,024,943  

Current

  $ 775,817  

Long-term

  $ 1,249,126  

 

Other

 

During the fourth quarter of 2013, the Company renewed a one year information technology infrastructure support agreement which became effective at the end of the first quarter of 2014. Payments of approximately $121,000 are due quarterly through the first quarter of 2015.

 

Note 13.    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. Inter-segment 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 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. 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 the Company’s operating segments:

   

   

Three Months Ended September 30, 2014 (Unaudited)

 
   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 7,553,609     $ 793,964     $ -     $ (45,969 )   $ 8,301,604  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    2,631,572       3,609,807       15,510       (45,969 )     6,210,920  

Depreciation and amortization

    1,980,519       1,013,693       324,183       -       3,318,395  

Customer support services

    342,288       147,379       754,494       -       1,244,161  

Sales and marketing

    1,239,446       38,261       75,308       -       1,353,015  

General and administrative

    63,686       163,125       2,154,775       -       2,381,586  

Total Operating Expenses

    6,257,511       4,972,265       3,324,270       (45,969 )     14,508,077  

Operating Income (Loss)

  $ 1,296,098     $ (4,178,301 )   $ (3,324,270 )   $ -     $ (6,206,473 )
                                         

Capital expenditures

  $ 1,154,281     $ 589,883     $ 21,603     $ -     $ 1,765,767  

 

 
13

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

   

   

Three Months Ended September 30, 2013 (Unaudited)

 
   

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)

    2,510,278       2,956,914       22,755       (45,649 )     5,444,298  

Depreciation and amortization

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

Customer support services

    339,206       208,491       673,379       -       1,221,076  

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  

   

 

   

Nine Months Ended September 30, 2014 (Unaudited)

 
   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 22,811,582     $ 2,272,683     $ -     $ (137,907 )   $ 24,946,358  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    7,750,725       10,512,098       43,860       (137,907 )     18,168,776  

Depreciation and amortization

    6,598,893       2,932,592       763,387       -       10,294,872  

Customer support services

    878,764       502,342       2,182,465       -       3,563,571  

Sales and marketing

    3,754,707       177,874       241,122       -       4,173,703  

General and administrative

    374,164       467,290       6,885,069       -       7,726,523  

Total Operating Expenses

    19,357,253       14,592,196       10,115,903       (137,907 )     43,927,445  

Operating Income (Loss)

  $ 3,454,329     $ (12,319,513 )   $ (10,115,903 )   $ -     $ (18,981,087 )
                                         

Capital expenditures

  $ 4,044,135     $ 2,018,334     $ 338,791     $ -     $ 6,401,260  
                                         

As of September 30, 2014

                                       

Property and equipment, net

  $ 21,340,927     $ 11,753,330     $ 2,287,890     $ -     $ 35,382,147  

Total assets

  $ 26,293,518     $ 14,232,594     $ 14,948,568     $ -     $ 55,474,680  

 

 
14

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

   

   

Nine Months Ended September 30, 2013 (Unaudited)

 
   

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)

    7,229,469       8,404,925       94,623       (137,127 )     15,591,890  

Depreciation and amortization

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

Customer support services

    900,349       587,389       2,311,949       -       3,799,687  

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  

   

Note 14. Subsequent Events

 

   In October 2014, the Company entered into a loan agreement (the “Loan Agreement”) with Melody Business Finance, LLC (the “Lender”). The Lender will provide the Company with a five-year $35 million secured term loan (the “Financing”). Pursuant to the terms of the Loan Agreement, the loan bears interest at a rate equal to the greater of (i) the sum of the most recently effective one month Libor as in effect on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that shall accrue at 4% per annum.

 

The aggregate principal amount outstanding plus all accrued and unpaid interest is due in October 2019. The Company has the option of making principal payments (i) on or before October 16, 2016 (the “Second Anniversary”) but only for the full amount outstanding and (ii) after the Second Anniversary in minimum amount(s) of $5 million.

 

   In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, the Company issued warrants (the “Warrants”) to purchase 3.6 million shares of common stock of which two-thirds have an exercise price of $1.26 and one-third have an exercise price of $0.01, subject to standard antidilution provisions. The Warrants have a term of seven and a half years. The Company has agreed to include the shares of common stock underlying the Warrants in a registration statement that must be filed no later than the one year anniversary of the Loan Agreement. If, following the one year anniversary, the registration statement is not declared effective, the Company will pay the warrant holders liquidated damages in the aggregate amount of $5,000 per month, with maximum liquidated damages of $50,000, until the registration statement has become effective.

 

 

 
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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, 2014. 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, 2013 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 rent 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 upfront cost of establishing or expanding our Network Presence.  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.

 

 
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Customer support services include salaries and related payroll costs associated with our customer support services, customer care, 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 twelve metropolitan markets.

 

Market Information – Fixed Wireless

 

As of September 30, 2014, we operated in twelve metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation. We incur significant up-front costs in order to establish a Network Presence in a new market. These costs include building PoPs and Network Costs. Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period. We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model and the operating performance of our mature 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 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.

 

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 Internet (“Delos”). We exited the Nashville market effective March 31, 2014.

 

 
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Three months ended September 30, 2014

Market

 

Revenues

   

Cost of
Revenues

   

Gross Margin

   

Operating Costs

   

Adjusted
Market
EBITDA

 

Los Angeles

  $ 2,016,888     $ 543,967     $ 1,472,921     $ 513,935     $ 958,986  

New York

    1,949,316       724,148       1,225,168       348,283       876,885  

Boston

    1,363,282       397,754       965,528       201,988       763,540  

Chicago

    722,474       298,883       423,591       111,998       311,593  

Las-Vegas-Reno

    338,417       126,312       212,105       1,114       210,991  

Miami

    357,315       116,987       240,328       50,620       189,708  

Houston

    178,249       71,171       107,078       10,050       97,028  

Dallas-Fort Worth

    155,612       96,015       59,597       19,545       40,052  

San Francisco

    270,055       125,070       144,985       105,417       39,568  

Seattle

    74,418       44,696       29,722       (3,434 )     33,156  

Providence-Newport

    56,279       53,874       2,405       1,746       659  

Philadelphia

    25,335       32,695       (7,360 )     4,246       (11,606 )

Total

  $ 7,507,640     $ 2,631,572     $ 4,876,068     $ 1,365,508     $ 3,510,560  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 3,510,560  

Fixed wireless, non-market specific

       

Other expenses

    (279,912 )

Depreciation and amortization

    (1,980,519 )

Shared wireless infrastructure, net

    (4,132,332 )

Corporate

    (3,324,270 )

Other income (expense)

    (47,600 )