Towerstream Corporation
TOWERSTREAM CORP (Form: 10-K, Received: 03/17/2014 16:08:53)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 (Mark One)

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

For the fiscal year ended December 31, 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.)

 

 

 

88 Silva Lane 

Middletown, Rhode Island

(Address of principal executive offices)

 

02842

(Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

The NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $157,647,372 .

 

As of March 13, 2014 , there were 66,439,561 shares of common stock, par value $0.001 per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive Proxy Statement for our 2014 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the close of the fiscal year ended December 31, 2013 are incorporated by reference into Part III of this Report.

 

 
 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

     

Page

   

PART I

 
       

  Item 1.

 

Business.

2

       

  Item 1A.

 

Risk Factors.

9

       

  Item 1B.

 

Unresolved Staff Comments.

23

       

  Item 2.

 

Properties.

23

       

  Item 3.

 

Legal Proceedings.

23

       

  Item 4.

 

Mine Safety Disclosures.

23

       
   

PART II

 
       

  Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

24

       

Item 6.

 

Selected Financial Data.

26

       

  Item 7.

 

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

27

       

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk.

39

       

Item 8.

 

Financial Statements and Supplementary Data.

4 0

       

  Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

63

       

  Item 9A.

 

Controls and Procedures.

63

       

  Item 9B.

 

Other Information.

65

       

 

 

PART III

 
       

  Item 10.

 

Directors, Executive Officers and Corporate Governance.

66

       

  Item 11.

 

Executive Compensation.

66

       

  Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

66

       

  Item 13.

 

Certain Relationships and Related Transactions, and Director Independence.

66

       

  Item 14.

 

Principal Accountant Fees and Services.

66

       
   

PART IV

 
       

  Item 15.

 

Exhibits and Financial Statement Schedules.

67

 

 
i

 

 

PART I

 

Forward-Looking Statements

 

Forward-looking statements in this report, including without limitation, statements related to Towerstream Corporation’s 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) Towerstream Corporation’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of Towerstream Corporation; (ii) Towerstream Corporation’s plans and results of operations will be affected by Towerstream Corporation’s ability to manage growth and competition; and (iii) other risks and uncertainties indicated from time to time in Towerstream Corporation’s 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 report.  

 

Factors that might affect our forward-looking statements include, among other things:

 

 

overall economic and business conditions;

     
 

the demand for our services;

     
 

competitive factors in the industries in which we compete;

     
 

emergence of new technologies which compete with our service offerings;

     
 

changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);

     
 

the outcome of litigation and governmental proceedings;

     
 

interest rate fluctuations and other changes in borrowing costs;

     
 

other capital market conditions, including availability of funding sources;

     
 

potential impairment of our indefinite-lived intangible assets and/or our long-lived assets; and

     
 

changes in government regulations related to the broadband and Internet protocol industries.

 

Item 1. Business. 

 

Towerstream Corporation (“Towerstream”, “we”, “us”, “our” or the “Company”) is a leading 4G and Small Cell Rooftop Tower company which provides a wide range of wireless communication services through its two business segments.  The Company was incorporated in December 1999.

 

Fixed Wireless Services Segment

 

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, Nashville, Las Vegas-Reno and Providence-Newport. The Company's "Fixed Wireless Services Segment" ("Fixed Wireless" or "FW") has historically grown both organically and through the acquisition of five other fixed wireless broadband providers in various markets.

 

 
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Shared Wireless Infrastructure Segment

 

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 segment.

 

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 renewals for two, one year periods.

 

Our Networks

 

The foundation of our networks consist of Points of Presence (or "PoPs" or "Company Locations") which are generally located on very tall buildings in each urban market. We enter into long term lease agreements with the owners of these buildings which provide us with the right to install communications equipment on the rooftop. We deploy this equipment in order to connect customers to the Internet or to pass small cell signals to carriers and other service providers. Each PoP is "linked" to one or more other PoPs to enhance redundancy and ensure that there is no single point of failure in the network. One or more of our PoPs are located in buildings where national internet service providers such as Cogent or Level 3 are located, and we enter into IP transit or peering arrangements with these organizations in order to connect to the World Wide Web. We refer to the core connectivity of all of our PoPs as a “Wireless Ring in the Sky.” Each PoP has a coverage area averaging approximately six miles although the distance can be affected by numerous factors, most significantly, how clear the line of sight is between the PoP and a customer location. Our Points of Presence are utilized by both our Fixed Wireless and Shared Wireless Infrastructure segments.

 

We install additional equipment at other locations for each of our business segments. We install equipment on the rooftops of the buildings in which our fixed wireless segment customers operate and refer to these as "Customer Locations". This equipment includes receivers and antennas, and a wireless connection is established between the Customer Location to one or more of our PoPs. We also install equipment, including access points, receivers and antennas, on the street level rooftops leased by our shared wireless segment. We expect that customers that want to utilize our street level rooftops to deploy small cell technologies will bring their own equipment and connect it to our network.

 

Our network does not depend on traditional copper wire or fiber connections which are the backbone of many of our competitors' networks. We believe this provides us with an advantage because we may not be significantly affected by events such as natural disasters and power outages. Conversely, our competitors are at greater risk as copper and fiber connections are typically installed at or below ground level and more susceptible to network service issues during disasters and outages.

 

Markets

 

We launched our fixed wireless business in April 2001 in the Boston and Providence markets. In June 2003, we launched service in New York City and followed that with our entry into the Chicago, Los Angeles, San Francisco, Miami and Dallas Fort Worth markets at various times through April 2008. Philadelphia was our last market launch in November 2009. We entered the Seattle, Las Vegas, and Houston markets through acquisitions of service providers based in those markets. We also expanded our market coverage and presence in Boston, Providence, and Los Angeles through acquisitions. Our acquisitions include (i) Sparkplug Chicago, Inc., operating in Chicago, Illinois and Nashville, Tennessee, (ii) Pipeline Wireless, LLC, operating in Boston, Massachusetts and Providence, Rhode Island,(iii) One Velocity, Inc., operating in Las Vegas and Reno, Nevada (iv) Color Broadband Communications, Inc., operating in Los Angeles, California, and (v) Delos Internet, operating in Houston Texas which we completed in February 2013.

 

 
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We determine which geographic markets to enter by assessing criteria in four broad categories. First, we evaluate our ability to deploy our service in a given market after taking into consideration our spectrum position, the availability of towers and zoning constraints. Second, we assess the market by evaluating the number of competitors, existing price points, demographic characteristics and distribution channels. Third, we evaluate the economic potential of the market, focusing on our forecasts of revenue opportunities and capital requirements. Finally, we look at market clustering opportunities and other cost efficiencies that might be realized. Based on this approach, as of December 31, 2013, we offered wireless broadband connectivity in 13 markets, of which 10 are in the top 20 metropolitan areas in the United States based on the number of small to medium businesses in each market. These 10 markets cover an estimated 64% of small and medium businesses (5 to 249 employees) in the United States.

 

We believe there are significant market opportunities beyond the 13 markets in which we are currently offering our services. Our long-term plan is to expand nationally into other top metropolitan markets in the United States. We believe that acquisitions presently represent a more cost effective manner to expand into new markets rather than to build our own infrastructure. Since 2010, we have completed five acquisitions, of which two were in new markets and three expanded our presence in existing markets. We have paid for these acquisitions through a combination of cash and equity, and believe that future acquisitions will be paid in a similar manner. Our decision to expand into new markets will depend upon many factors including the timing and frequency of acquisitions, national and local economic conditions, and the opportunity to leverage existing customer relationships in new markets.

 

Our shared wireless infrastructure segment presently operates in New York City, Chicago, San Francisco, and Miami. In June 2013, we entered our first significant customer agreement with a major cable operator to provide Wi-Fi services in New York City. We expect to expand our shared wireless segment activities into additional markets based on customer demand, and anticipate that they will most likely be in markets where we presently offer fixed wireless services.

 

Sales and Marketing

 

We employ an inside direct sales force model to sell our services to business customers. As of December 31, 2013, we employed 39 direct sales people. We generally compensate these employees on a salary plus commission basis. Approximately 56% of our sales personnel had been with the Company for more than two years as of December 31, 2013, as compared to 67% and 73% as of December 31, 2012 and 2011, respectively . This tenure metric can fluctuate from period to period, especially because the size of the direct sales force is relatively small. The Company believes that a tenure metric between 60% to 75% constitutes an experienced sales force.

 

Our sales force staffing levels peaked in July 2008 when we employed 128 direct sales personnel. In June 2009, we reduced our direct sales force by 34% in response to a growing emphasis on Internet based marketing initiatives. This change reflected an increasing awareness of the need to capture customer demand rather than trying to create customer demand. Most companies secure their bandwidth service under contracts ranging in length from one to three years. As a result, customer buying decisions generally occur when their existing contracts are close to expiring. We believe that many buyers of information technology services search the Internet to learn about industry trends and developments, as well as competitive service offerings. Our reduction in staffing levels has enabled us to cost effectively increase spending on Internet based marketing initiatives, increase sales productivity, and reduce total sales and marketing expenses.

 

Sales through indirect channels comprised 19.6% of our total revenues for the year ended December 31, 2013 compared with 13% for the year ended December 31, 2012 . Color Broadband, which we acquired in December 2011, had an active channel program and we hired one of their former employees to be our Channel Manager. During 2012, we changed our channel program to provide for recurring monthly residual payments, ranging from 8% to 20%. Previously, we had generally paid one time commissions on channel sales.

 

 
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Competition

 

Fixed Wireless Segment

 

The market for broadband services is highly competitive, and includes companies that offer a variety of services using a number of different technology platforms including cable networks, digital subscriber lines (“DSL”), third-generation cellular, satellite, wireless Internet service and other emerging technologies. We compete with these companies on the basis of the portability, ease of use, speed of installation and price. Competitors to our wireless broadband services include:

 

Incumbent Local Exchange Carriers and Common Local Exchange Carriers

 

We face competition from traditional wireline operators in terms of price, performance, discounted rates for bundles of services, breadth of service, reliability, network security, and ease of access and use. In particular, we face competition from Verizon Communications Inc . and AT&T Inc. which are referred to as “incumbent local exchange carriers,” or (“ILECS”), as well as “common local exchange carriers ,” or (“CLECS”), such as TelePacific Communications, MegaPath Networks, and EarthLink, Inc.

 

Cable Modem and DSL Services

 

We compete with companies that provide Internet connectivity through cable modems or DSL. Principal competitors include cable companies, such as Comcast Corporation, Time Warner Cable, Charter, Cox Communications and incumbent telephone companies, such as AT&T Inc. or Verizon Communications Inc. Both the cable and telephone companies deploy their services over wired networks initially designed for voice and one-way data transmission that have subsequently been upgraded to provide for additional services.

 

Cellular and PCS Services

 

Cellular and personal communications service (“PCS”) carriers are seeking to expand their capacity to provide data and voice services that are superior to ours. These providers have substantially broader geographic coverage than we have and, for the foreseeable future, than we expect to have. If one or more of these providers can deploy technologies that compete effectively with our services, the mobility and coverage offered by these carriers will provide even greater competition than we currently face. Moreover, more advanced cellular and PCS technologies, such as third generation mobile technologies, currently offer broadband service with packet data transfer speeds of up to 2,000,000 bits per second for fixed applications, and slower speeds for mobile applications. We expect that third generation technology will be improved to increase connectivity speeds to make it more suitable for a range of advanced applications.

 

Wireless Broadband Service Providers

 

We also face competition from other wireless broadband service providers that use licensed and unlicensed spectrum. In connection with our merger and acquisition activities, we have determined that most of our current and planned markets already have one or more locally based companies providing wireless broadband Internet services. In addition , many local governments, universities and other related entities are providing or subsidizing Wi-Fi networks over unlicensed spectrum, in some cases at no cost to the user. There exist numerous small local urban and rural wireless operations offering local services that could compete with us in our present or planned geographic markets.

 

Satellite  

 

Satellite providers, such as WildBlue Communications, Inc. and Hughes Network Systems, LLC, offer broadband data services that address a niche market, mainly less densely populated areas that are unserved or underserved by competing service providers. Although satellite offers service to a large geographic area, latency caused by the time it takes for the signal to travel to and from the satellite may challenge a satellite provider’s ability to provide some services, such as Voice over Internet Protocol (“VoIP”), which reduces the size of the addressable market.

 

Other  

 

We believe other emerging technologies may also seek to enter the broadband services market. For example, we are aware that several power generation and distribution companies are seeking to develop or have already offered commercial broadband Internet services over existing electric power lines.

 

Shared Wireless Segment

 

The market for shared wireless infrastructure services in major urban markets has grown significantly in the past few years as the emergence of smartphones, tablets, and other portable devices has driven an explosion in mobile data traffic.   In May 2012, five major cable companies (Comcast, TimeWarner Cable, Cox Communications, Cablevision, and Bright House Networks) announced an alliance under which they agreed to allow each other's customers to access their respective Wi-Fi hotspots when roaming outside their cable provider's territory.  The cable companies have referred to this arrangement as "CableWiFi".  In March 2014, CableWiFi.com represented that there were more than 200,000 hotspots available to customers of the participating cable companies, however, not all of these hotspots are in markets in which the Company presently operates.  In addition, the major tower companies have historically operated primarily in suburban areas.  However, they may begin to increase their presence and activities in major urban markets as the carriers, internet companies and others request additional capacity to handle the continued growth in mobile data traffic. 

 

 
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Competitive Strengths

 

Even though we face substantial existing and prospective competition, we believe that we have a number of competitive advantages that will allow us to retain existing customers and attract new customers over time.

 

Reliability  

 

Our network was designed specifically to support wireless broadband services. The networks of cellular, cable and DSL companies rely on infrastructure that was originally designed for non-broadband purposes. We also connect our customers to our Wireless Ring in the Sky which has no single point of failure. This ring is fed by multiple national Internet providers located at opposite ends of our service cities and connected to our national ring which is fed by multiple leading carriers. We believe that we are the only wireless broadband provider that offers true separate egress for true redundancy. With DSL and cable offerings, the wireline connection can be terminated by one backhoe swipe or switch failure. Our Wireless Ring in the Sky is not likely to be affected by backhoe or other below-ground accidents or severe weather. As a result, our network has historically experienced reliability rates of approximately 99% .

 

Flexibility

 

Our wireless infrastructure and service delivery enables us to respond quickly to changes in a customer’s broadband requirements. We offer bandwidth options ranging from 0.5 megabits per second up to 1.5 gigabit per second. We can usually adjust a customer’s bandwidth remotely and without having to visit the customer location to modify or install new equipment. Changes can often be made on a same day basis.

 

Timeliness

 

In many cases, we can install a new customer and begin delivering Internet connectivity within 3 to 5 business days after receiving a customer’s order. Many of the larger telecommunications companies can take 30 to 60 days to complete an installation. The timeliness of service delivery has become more important as businesses conduct more of their business operations through the Internet .

 

Value  

 

We own our entire network which enables us to price our services lower than most of our competitors. Specifically, we are able to offer competitive prices because we do not have to buy a local loop charge from the telephone company.

 

Efficient Economic Model

 

Our economic model is characterized by low fixed capital and operating expenditures relative to other wireless and wireline broadband service providers. We own our entire network which eliminates costs involved with using leased lines owned by telephone or cable companies. Our network is modular. Coverage is directly related to various factors including the height of the facility we are on and the frequencies we utilize. The average area covered by a PoP is a six mile radius.

 

Prime Real Estate Locations

 

We have secured long term lease agreements for what we believe are prime real estate locations for both of our business segments. Our fixed wireless network is constructed on many of the tallest buildings in the thirteen markets in which we operate. This facilitates our ability to deliver internet connectivity to locations where line of sight is not available to our competitors. Our shared wireless infrastructure is located on more than 1,000 street level rooftops in New York City, Chicago, San Francisco, and Miami. The breadth and depth of our networks in these markets enables us to address the densification required in major urban markets.

 

Experienced Management Team  

 

We have an experienced executive management team with more than 35 years of combined experience as company leaders. Our President and Chief Executive Officer, Jeffrey M. Thompson, is a founder of the Company and has more than 20 years of experience in the data communications industry. Our Chief Financial Officer, Joseph P. Hernon, has been the chief financial officer for three publicly traded companies over the past 15 years.

 

 
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Corporate History

 

We were organized in the State of Nevada in June 2005. In January 2007, we merged with and into a wholly-owned Delaware subsidiary for the sole purpose of changing our state of incorporation to Delaware. In January 2007, a wholly-owned subsidiary of ours merged with and into a private company, Towerstream Corporation, with Towerstream Corporation being the surviving company. Upon closing of the merger, we discontinued our former business and succeeded to the business of Towerstream Corporation as our sole line of business. At the same time, we also changed our name to Towerstream Corporation and our subsidiary, Towerstream Corporation, changed its name to Towerstream I, Inc.

 

Regulatory Matters 

 

The Communications Act of 1934, as amended (the “Communications Act”), and the regulations and policies of the Federal Communications Commission (“FCC”) impact significant aspects of our wireless Internet service business, which is also subject to other regulation by federal, state and local authorities under applicable laws and regulations.

 

Spectrum Regulation

 

We provide wireless broadband Internet access services to using both licensed and unlicensed fixed point-to-point systems. The FCC has jurisdiction over the management and licensing of the electromagnetic spectrum for all commercial users. The FCC routinely reviews its spectrum policies and may change its position on spectrum use and allocations from time to time. We believe that the FCC is committed to allocating spectrum to support wireless broadband deployment throughout the United States and will continue to modify its regulations to foster such deployment, which will help us implement our existing and future business plans.

 

Broadband Internet Service Regulation

 

Our wireless broadband network can be used to provide Internet access service and Virtual Private Networks (“VPNs”). In 2002, the FCC ruled that Internet services are interstate information services that are not subject to regulation as a telecommunications service under federal law or to state or local utility regulation. Our broadband Internet services are, therefore, not subject to many of the regulatory requirements imposed on wireless and wireline telecommunications service providers. For example, we are not currently required to contribute a percentage of gross revenues from our Internet access services to the universal service funds used to support local telephone service and advanced telecommunications services for schools, libraries and rural health care facilities. Our wireless broadband Internet services are, however, subject to a number of federal regulatory requirements, including the Communications Assistance for Law Enforcement Act (“CALEA”) requirement that high-speed Internet service providers implement certain network capabilities to assist law enforcement in conducting surveillance of persons suspected of criminal activity.

 

In addition, Internet service providers are subject to a wide range of other federal regulations and statutes including, for example, regulations and policies relating to consumer protection, consumer privacy, and copyright protections. States and local government authorities may also regulate limited aspects of our business by, for example, imposing consumer protection and consumer privacy regulations, zoning requirements, and requiring installation permits.

 

In addition, many new laws and regulation that could impact the provision of Internet services are currently under consideration by the U.S. Congress, federal regulatory agencies, and certain state and local governments. It is uncertain whether any pending proposals will be adopted.

 

Zoning and Permitting Issues

 

States and local governments have the right to regulate the siting and permitting of Towerstream's antennas and equipment used to provide broadband service over Wi-Fi and small cell technologies.  State and local regulation over the siting of wireless facilities can be time-consuming, require burdensome documentation, and involve per site fees, which may have a limiting effect on Towerstream's broadband business that depends on placing and operating wireless antennas and related equipment.  The Federal Communications Commission ("FCC") has initiated a rulemaking, In the Matter of Acceleration of Broadband Deployment by Improving Wireless Facilities Siting Policies, Notice of Proposed Rulemaking, WT Docket No. 13-238, FCC 13-322 (rel. Sept. 26, 2013), that seeks to address delays and burdens that wireless broadband providers may experience due to state and local siting and permitting regulations. The FCC's rulemaking on this matter is still in the comment stage and it is unknown whether or when the FCC will issue rules on facilities siting for wireless broadband deployment.  However, if the FCC issues rules in this rulemaking that streamline the facilities siting process with broad federal standards, such rules could facilitate Towerstream's deployment of Wi-Fi and small cell antennas and equipment, which may be beneficial to its broadband business.

 

 
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Other

 

2012 FCC Inquiry

 

In August 2012, the Company received a letter of inquiry (the “Letter”) from the FCC in which the Company was informed that the Enforcement Bureau was investigating potential violations by the Company of certain provisions of the Communications Act of 1934, as amended, and FCC Rules. The Letter principally related to the Company’s acquisitions and related transactions in 2011 and 2012. The Letter directed the Company to produce certain documents and information. The Company provided the requested documents and information to the FCC. On May 31, 2013, Towerstream entered into a Consent Decree with the Federal Communications Commission in which Towerstream agreed to make a voluntary contribution to the United States Treasury in the amount of $70,000.  As part of the Consent Decree, the FCC terminated investigations into alleged violations of the FCC rules.  This matter is now concluded.

 

FAA Interference Issue

 

On August 6, 2013, the FCC released a Notice of Apparent Liability for Forfeiture ("NAL") alleging that Towerstream caused harmful interference to doppler weather radar systems in New York and Florida.  The FCC proposed a fine of $202,000 for the alleged rule violations. On November 4, 2013, Towerstream filed a response to the NAL denying the FCC's allegations and, in the alternative, requesting that the FCC reduce the proposed forfeiture amount.  This matter remains pending at the FCC.  

 

License KA306 in DeSoto, Texas

 

In May 2007, Towerstream acquired a license to operate an Earth Station in DeSoto, Texas.  The license provided the Earth Station with the right to communicate with the Intelsat satellites in certain frequency bands.  The Earth Station license also provided interference protection from any terrestrial-based 3650 MHz band operator within a 150km protection zone surrounding the Earth Station.  The original license rights, or authorization, was referred to as Call Sign KA306, or KA306.

 

The original license term was for a period of ten years.  The Company never received notice from the FCC prior to the then next expiration date of March 31, 2012 (the Company acquired the license from a prior licensee whose term began in 2002).  The Company subsequently discovered that the license had expired, and in August 2012 filed an application with the FCC requesting that it be allowed to temporarily resume operations of the Earth Station.  In July 2013, the FCC dismissed the Company's application to temporarily resume operations of the Earth Station based on technical considerations.

 

The Company has engaged counsel to work with the Company and the FCC regarding reinstatement of KA306. The Company plans to make a decision on a course of action in the first quarter of 2014. The Company intends to vigorously contest its right to operate the DeSoto earth station.

 

We are subject to extensive regulation that could limit or restrict our activities. If we fail to comply with these regulations, we may be subject to penalties, both monetary and non-monetary, which may adversely affect our financial condition and results of operations, including regulation by the FCC, which risks are more fully described under the heading “Risk Factors.”

 

Rights Plan

 

In November 2010, we adopted a rights plan (the “Rights Plan”) and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock as of the record date on November 14, 2010. Each right, when exercisable, entitles the registered holder to purchase one-hundredth (1/100 th ) of a share of Series A Preferred Stock, par value $0.001 per shares of the Company at a purchase price of $18.00 per one-hundredth (1/100 th ) of a share of the Series A Preferred Stock, subject to certain adjustments. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our Board of Directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.

 

The provisions in our charter, bylaws, Rights Plan and under Delaware law related to the foregoing could discourage takeover attempts that our stockholders would otherwise favor, or otherwise reduce the price that investors might be willing to pay for our common stock in the future.

 

Employees

 

As of December 31, 2013, we had 159 employees, of whom 156 were full-time employees and 3 were part-time employees . As of February 28, 2014 , we had 151 employees, of whom 148 are full-time employees and 3 are part-time employees . We believe our employee relations are good. Two employees are considered members of executive management.

 

 
8

 

 

Our Corporate Information

 

Our principal executive offices are located at 88 Silva Lane, Middletown, Rhode Island, 02842.  Our telephone number is (401) 848-5848. The Company’s website address is http://www.towerstream.com .  Information contained on the Company’s website is not incorporated into this Annual Report on Form 10-K.  Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the Securities and Exchange Commission (“SEC”) website at http://www.sec.gov as soon as reasonably practicable after those reports are electronically filed with or furnished to the SEC.

 

Item 1A. Risk Factors.

 

Investing in our common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below and other information contained in this annual report, including our financial statements and related notes before purchasing shares of our common stock. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operations may be materially adversely affected. In that case, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment.

 

Risks Relating to Fixed Wireless Services

 

We may be unable to successfully execute any of our current or future business strategies.

 

In order to pursue business strategies, we will need to continue to build our infrastructure and strengthen our operational capabilities. Our ability to do any of these successfully could be affected by any one or more of the following factors:

 

 

the ability of our equipment, our equipment suppliers or our service providers to perform as we expect;

 

 

 

 

the ability of our services to achieve market acceptance;

 

 

 

 

our ability to manage third party relationships effectively;

 

 

 

 

our ability to identify suitable locations and then negotiate acceptable agreements with building owners so that we can establish POPs on their rooftop;

 

 

 

 

our ability to work effectively with new customers to secure approval from their landlord to install our equipment;

 

 

 

 

our ability to effectively manage the growth and expansion of our business operations without incurring excessive costs, high employee turnover or damage to customer relationships;

 

 

 

 

our ability to attract and retain qualified personnel, especially individuals experienced in network operations and engineering;

 

 

 

 

equipment failure or interruption of service which could adversely affect our reputation and our relations with our customers;

 

 

 

 

our ability to accurately predict and respond to the rapid technological changes in our industry; and

 

 

 

 

our ability to raise additional capital to fund our growth and to support our operations until we reach profitability.

 

Our failure to adequately address any one or more of the above factors could have a significant adverse impact on our ability to execute our business strategy and the long term viability of our business.

 

We depend on the continued availability of leases and licenses for our communications equipment.

 

We have constructed proprietary networks in each of the markets we serve by installing antennae on rooftops, cellular towers and other structures pursuant to lease or license agreements to send and receive wireless signals necessary for the operation of our network. We typically seek five year initial terms for our leases with three to five year renewal options. Such renewal options are generally exercisable at our discretion before the expiration of the current term. If these leases are terminated or if the owners of these structures are unwilling to continue to enter into leases or licenses with us in the future, we would be forced to seek alternative arrangements with other providers. If we are unable to continue to obtain or renew such leases on satisfactory terms, our business would be harmed.

 

 
9

 

 

Our ability to attract and retain customers may be impaired if we do not maintain and enhance our brand.

 

We believe that our brand is a critical part of our business. Maintaining and enhancing our brand may require us to make substantial investments with no assurance that these investments will be successful. If we fail to promote and maintain the “Towerstream” brand, or if we incur significant expenses in this effort, our business, prospects, operating results and financial condition may be harmed. We anticipate that maintaining and enhancing our brand will become increasingly important, difficult and expensive.

 

We are pursuing acquisitions that we believe complement our existing operations but which involve risks that could adversely affect our business.

 

Acquisitions involve risks that could adversely affect our business including the diversion of management time from operations and difficulties integrating the operations and personnel of acquired companies. In addition, any future acquisition could result in significant costs, the incurrence of additional debt or the issuance of equity securities to fund the acquisition, and the assumption of contingent or undisclosed liabilities, all of which could materially adversely affect our business, financial condition and results of operations.

 

In connection with any future acquisition, we generally will seek to minimize the impact of contingent and undisclosed liabilities by obtaining indemnities and warranties from the seller. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to their limited scope, their amount or duration, the financial limitations of the indemnitor or warrantor, or for other reasons.

 

We continue to consider strategic acquisitions, some of which may be larger than those previously completed and which could be material transactions.  Integrating acquisitions is often costly and may require significant attention from management.  Delays or other operational or financial problems that interfere with our operations may result.  If we fail to implement proper overall business controls for companies or assets we acquire or fail to successfully integrate these acquired companies or assets in our processes, our financial condition and results of operations could be adversely affected.  In addition, it is possible that we may incur significant expenses in the evaluation and pursuit of potential acquisitions that may not be successfully completed.

 

We have a history of operating losses and expect to continue incurring losses for the foreseeable future.

 

Our fixed wireless segment was launched in 2000 and has incurred losses in each year of operation.  Our shared wireless infrastructure business was launched in 2013 and we expect it to continue to incur losses for the foreseeable future.  We cannot anticipate when, if ever, our operations will become profitable. We expect to incur significant net losses as we develop our network, expand our markets, undertake acquisitions, acquire spectrum and pursue our business strategy. We intend to invest significantly in our business before we expect cash flow from operations to be adequate to cover our operating expenses. If we are unable to execute our business strategy and grow our business, either as a result of the risks identified in this section or for any other reason, our business, prospects, financial condition and results of operations will be adversely affected.

 

Cash and cash equivalents represent one of our largest assets and we may be at risk of being uninsured for a large portion of such assets.

 

As of December 31, 2013, we had approximately $28,000,000 in cash and cash equivalents with one large financial banking institution.  At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If the institution at which we have placed our funds were to become insolvent or fail, we could be at risk for losing a substantial portion of our cash deposits, or incur significant time delays in obtaining access to such funds. In light of the limited amount of federal insurance for deposits, even if we were to spread our cash assets among several institutions, we would remain at risk for the amount not covered by insurance.  

 

Our growth may be slowed if we do not have sufficient capital.

 

The continued growth and operation of our business may require additional funding for working capital, debt service, the enhancement and upgrade of our network, the build-out of infrastructure to expand our coverage, possible acquisitions and possible bids to acquire spectrum licenses.  We may be unable to secure such funding when needed in adequate amounts or on acceptable terms, if at all. To execute our business strategy, we may issue additional equity securities in public or private offerings, potentially at a price lower than the market price at the time of such issuance. Similarly, we may seek debt financing and may be forced to incur significant interest expense. If we cannot secure sufficient funding, we may be forced to forego strategic opportunities or delay, scale back or eliminate network deployments, operations, acquisitions, spectrum bids and other investments.

 

 
10

 

 

Many of our competitors are better established and have significantly greater resources which may make it difficult for us to attract and retain customers.

 

The market for broadband and related services is highly competitive, and we compete with several other companies within each of our markets. Many of our competitors are well established with larger and better developed networks and support systems, longer relationships with customers and suppliers, greater name recognition and greater financial, technical and marketing resources than we have. Our competitors may subsidize competing services with revenue from other sources and, thus, may offer their products and services at prices lower than ours. Our competitors may also reduce the prices of their services significantly or may offer broadband connectivity packaged with other products or services. We may not be able to reduce our prices or otherwise combine our services with other products or services which may make it more difficult to attract and retain customers. In addition, businesses which are presently focused on providing services to residential customers may expand their target base and begin offering service to business customers.

 

We expect existing and prospective competitors to adopt technologies or business plans similar to ours, or seek other means to develop competitive services, particularly if our services prove to be attractive in our target markets. This competition may make it difficult to attract new customers and retain existing customers.

  

We may experience difficulties constructing, upgrading and maintaining our network which could increase customer turnover and reduce our revenues.

 

Our success depends on developing and providing products and services that provide customers with high quality Internet connectivity. If the number of customers using our network increases, we will require more infrastructure and network resources to maintain the quality of our services. Consequently, we may be required to make substantial investments to improve our facilities and equipment, and to upgrade our technology and network infrastructure. If we do not complete these improvements successfully, or if we experience inefficiencies, operational failures or unforeseen costs during implementation then the quality of our products and services could decline.

 

We may experience quality deficiencies, cost overruns and delays in implementing network improvements and completing maintenance and upgrade projects. Portions of these projects may not be within our control or the control of our contractors. Our network requires the receipt of permits and approvals from numerous governmental bodies including municipalities and zoning boards. Such bodies often limit the expansion of transmission towers and other construction necessary for our business. Failure to receive approvals in a timely fashion can delay system rollouts and raise the cost of completing projects. In addition, we are typically required to obtain rights from land, building or tower owners to install antennae and other equipment to provide service to our customers. We may not be able to obtain, on terms acceptable to us, or at all, the rights necessary to construct our network and expand our services.

 

We also face challenges in managing and operating our network. These challenges include operating, maintaining and upgrading network and customer premise equipment to accommodate increased traffic or technological advances, and managing the sales, advertising, customer support, billing and collection functions of our business while providing reliable network service at expected speeds and quality. Our failure in any of these areas could adversely affect customer satisfaction, increase customer turnover or churn, increase our costs and decrease our revenues.

 

We may be unable to operate in certain markets if we are unable to obtain and maintain rights to use licensed spectrum.

 

We provide our services in some markets by using spectrum obtained through licenses or long-term leases. Obtaining licensed spectrum can be a long and difficult process that can be costly and require substantial management resources.  Securing licensed spectrum may subject us to increased operational costs, greater regulatory scrutiny and arbitrary government decision making.

 

Licensed spectrum, whether owned or leased, poses additional risks, including:

 

 

inability to satisfy build-out or service deployment requirements upon which spectrum licenses or leases may be conditioned;

 

 

 

 

increases in spectrum acquisition costs or complexity;

 

 

 

 

competitive bids, pre-bid qualifications and post-bid requirements for spectrum acquisitions, in which we may not be successful leading to, among other things, increased competition;

 

 

 

 

adverse changes to regulations governing spectrum rights;

 

 

 

 

the risk that acquired or leased spectrum will not be commercially usable or free of damaging interference from licensed or unlicensed operators in the licensed or adjacent bands;

 

 

 

 

contractual disputes with, or the bankruptcy or other reorganization of, the license holders which could adversely affect control over the spectrum;

 

 

 

 

failure of the FCC or other regulators to renew spectrum licenses as they expire; and

 

 

 

 

invalidation of authorization to use all or a significant portion of our spectrum.

 

 
11

 

 

We utilize unlicensed spectrum in all of our markets which is subject to intense competition, low barriers of entry and slowdowns due to multiple users.

 

We presently utilize unlicensed spectrum in all of our markets to provide our service offerings.  Unlicensed or “free” spectrum is available to multiple users and may suffer bandwidth limitations, interference and slowdowns if the number of users exceeds traffic capacity. The availability of unlicensed spectrum is not unlimited and others do not need to obtain permits or licenses to utilize the same unlicensed spectrum that we currently utilize or may utilize in the future.  The inherent limitations of unlicensed spectrum could potentially threaten our ability to reliably deliver our services. Moreover, the prevalence of unlicensed spectrum creates low barriers of entry in our industry which naturally creates the potential for increased competition.

 

Interruption or failure of our information technology and communications systems could impair our ability to provide services which could damage our reputation.

 

Our services depend on the continuing operation of our information technology and communications systems. We have experienced service interruptions in the past and may experience service interruptions or system failures in the future. Any unscheduled service interruption adversely affects our ability to operate our business and could result in an immediate loss of revenues and adversely impact our operating results. If we experience frequent or persistent system or network failures, our reputation could be permanently harmed. We may need to make significant capital expenditures to increase the reliability of our systems, however, these capital expenditures may not achieve the results we expect.

 

Excessive customer churn may adversely affect our financial performance by slowing customer growth, increasing costs and reducing revenues.

 

The successful implementation of our business plan depends upon controlling customer churn. Customer churn is a measure of customers who cancel their services agreement. Customer churn could increase as a result of:

 

 

 

 

interruptions to the delivery of services to customers over our network;

 

 

 

 

the availability of competing technology such as cable modems, DSL, third-generation cellular, satellite, wireless Internet service and other emerging technologies, some of which may be less expensive or technologically superior to those offered by us;

 

 

 

 

changes in promotions and new marketing or sales initiatives;

 

 

 

 

new competitors entering the markets in which we offer service; and

 

 

 

 

a reduction in the quality of our customer service billing errors.

 

An increase in customer churn can lead to slower customer growth, increased costs and a reduction in revenues.

 

If our business strategy is unsuccessful, we will not be profitable and our stockholders could lose their investment.

 

There is no prior history of other companies that have successfully pursued our strategy of delivering fixed wireless bandwidth services to businesses. Many fixed wireless companies have failed and there is no guarantee that our strategy will be successful or profitable. If our strategy is unsuccessful, the value of our company may decrease and our stockholders could lose their entire investment.

 

We may not be able to effectively control and manage our growth which would negatively impact our operations.

 

If our business and markets continue to grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. In addition, we may face challenges in managing expanding product and service offerings, and in integrating acquired businesses. Such events would increase demands on our existing management, workforce and facilities. Failure to satisfy increased demands could interrupt or adversely affect our operations and cause backlogs and administrative inefficiencies.

 

 
12

 

 

The success of our business depends on the contributions of key personnel and our ability to attract, train and retain highly qualified personnel.

 

We are highly dependent on the continued services of our Chairman, Philip Urso, our President and Chief Executive Officer, Jeffrey M. Thompson, and our Chief Financial Officer, Joseph Hernon. In December 2011, we amended our employment agreement with Mr. Thompson which extended the term for a period of two years, commencing December 2011. The term of this Agreement shall automatically be extended for additional terms of one year, unless either party gives prior written notice of non-renewal to the other party no later than sixty (60) days prior to the expiration of the initial term, or the current renewal term. We cannot guarantee that any of these persons will stay with us for any definite period. Loss of the services of any of these individuals could adversely impact our operations. We do not maintain policies of "key man" insurance on our executives.

   

In addition, we must be able to attract, train, motivate and retain highly skilled and experienced technical employees in order to successfully introduce our services in new markets and grow our business in existing markets. Qualified technical employees often are in great demand and may be unavailable in the time frame required to satisfy our business requirements. We may not be able to attract and retain sufficient numbers of highly skilled technical employees in the future. The loss of technical personnel or our inability to hire or retain sufficient technical personnel at competitive rates of compensation could impair our ability to grow our business and retain our existing customer base.

 

We could encounter difficulties integrating acquisitions which could result in substantial costs, delays or other operational or financial difficulties.

 

Since 2010, we have completed five acquisitions.  We may seek to acquire other fixed wireless businesses, including those operating in our current business markets or those operating in other geographic markets. We cannot accurately predict the timing, size and success of our acquisition efforts and the associated capital commitments that might be required. We expect to encounter competition for acquisitions which may limit the number of potential acquisition opportunities and may lead to higher acquisition prices. We may not be able to identify, acquire or profitably manage additional businesses or successfully integrate acquired businesses, if any, without substantial costs, delays or other operational or financial difficulties.

 

In addition, such acquisitions involve a number of other risks, including:

 

 

failure of the acquired businesses to achieve expected results;

 

 

 

 

integration difficulties could increase customer churn and negatively affect our reputation;

 

 

 

 

diversion of management’s attention and resources to acquisitions;

 

 

 

 

failure to retain key personnel of the acquired businesses;

 

 

 

 

disappointing quality or functionality of acquired equipment and personnel; and

 

 

 

 

risks associated with unanticipated events, liabilities or contingencies.

 

The inability to successfully integrate and manage acquired companies could result in the incurrence of substantial costs to address the problems and issues encountered.

 

Our inability to finance acquisitions could impair the growth and expansion of our business.

 

The extent to which we will be able or willing to use shares of our common stock to consummate acquisitions will depend on (i) the market value of our securities which will vary, (ii) liquidity which can fluctuate, and (iii) the willingness of potential sellers to accept shares of our common stock as full or partial payment. Using shares of our common stock for acquisitions may result in significant dilution to existing stockholders. To the extent that we are unable to use common stock to make future acquisitions, our ability to grow through acquisitions may be limited by the extent to which we are able to raise capital through debt or equity financings. We may not be able to obtain the necessary capital to finance any acquisitions. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of expansion or redirect resources committed to internal purposes. Our inability to use shares of our common stock to make future acquisitions may hinder our ability to actively pursue our acquisition program.

 

 
13

 

 

We rely on a limited number of third party suppliers that manufacture network equipment, and install and maintain our network sites. 

 

We depend on a limited number of third party suppliers to produce and deliver products required for our networks. If these companies fail to perform or experience delays, shortages or increased demand for their products or services, we may face a shortage of components, increased costs, and may be required to suspend our network deployment and our service introduction.  We also depend on a limited number of third parties to install and maintain our network facilities. We do not maintain any long term supply contracts with these manufacturers. If a manufacturer or other provider does not satisfy our requirements, or if we lose a manufacturer or any other significant provider, we may have insufficient network equipment for delivery to customers and for installation or maintenance of our infrastructure. Such developments could force us to suspend the deployment of our network and the installation of new customers thus impairing future growth.

 

Customers may perceive that our network is not secure i f our data security controls are breached which may adversely affect our ability to attract and retain customers and expose us to liability.

 

Network security and the authentication of a customer’s credentials are designed to protect unauthorized access to data on our network. Because techniques used to obtain unauthorized access to or to sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate or implement adequate preventive measures against unauthorized access or sabotage. Consequently, unauthorized parties may overcome our encryption and security systems, and obtain access to data on our network. In addition, because we operate and control our network and our customers’ Internet connectivity, unauthorized access or sabotage of our network could result in damage to our network and to the computers or other devices used by our customers. An actual or perceived breach of network security, regardless of whether the breach is our fault, could harm public perception of the effectiveness of our security controls, adversely affect our ability to attract and retain customers, expose us to significant liability and adversely affect our business prospects.

 

The delivery of our services could infringe on the intellectual property rights of others which may result in costly litigation, substantial damages and prohibit us from selling our services.

 

Third parties may assert infringement or other intellectual property claims against us. We may have to pay substantial damages, including for past infringement if it is ultimately determined that our services infringe a third party’s proprietary rights. Further, we may be prohibited from selling or providing some of our services before we obtain additional licenses, which, if available at all, may require us to pay substantial royalties or licensing fees. Even if claims are determined to be without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from our other business concerns. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our business to be harmed and our stock price to decline.

 

Risks Related to Shared Wireless Infrastructure

 

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation ("Hetnets") to operate the newly formed, shared wireless infrastructure segment. References in this section to "We", "Us", or "Our" refer to the Company, Towerstream Corporation, as a whole. In this section, "its" refers to Hetnets on a business segment operating basis. Risks associated with Hetnets and its focus on shared wireless infrastructure include:

 

We have no experience operating a shared wireless infrastructure company.

 

Our newly formed subsidiary, Hetnets, has not had any experience operating as a shared wireless infrastructure enterprise. We may decide to operate Hetnets as a stand-alone business with its own management and board. For the near term, the management and board of directors are expected to be composed entirely of Towerstream officers and directors which could raise conflicts of interest. There is no assurance that we will be able to execute our business plan for Hetnets. We may not be able to operate Hetnets successfully, including generating revenues and achieving profitability.

 

Hetnets is a new, untested business model that is similar to, yet different than, many traditional tower companies and for this reason is subject to many risks of tower companies and other risks which may not presently be known. If we are unable to execute our business strategy, or are unable to attract customers or capital either as a result of the risks identified herein or for any other reason, our business, results of operations, and financial condition could be materially and adversely affected and we may be forced to terminate operations related to Hetnets, which could have a material adverse effect on the business, results of operations and financial condition of the Company as a whole.

 

 
14

 

 

Hetnets has no operating history as a separate company, and this lack of experience may impede our ability to successfully manage the Hetnets business.

 

Key members of our management team responsible for leadership roles in the Hetnets business have no experience operating a business that is solely engaged in the shared wireless infrastructure business. We do not believe there is any existing business that is dedicated primarily to establishing a dominant position in shared wireless infrastructure to be offered for use by others and as such both management and the business face uncertain risks. Hetnets has no operating history as a separate company. We cannot assure you that our past experience will be sufficient to successfully operate Hetnets as a separate business.

 

For a period of time, we will utilize shared resources of Towerstream for Hetnets’ business and operations. If our management, sales, finance and accounting staff is unable for any reason to respond adequately to the increased demands that will result from separate operations, we may be forced to incur additional administrative and other costs to avoid experiencing deficiencies or material weaknesses in our disclosure controls and procedures or our internal control over financial reporting. We have not yet established processes or procedures for operating Hetnets as a separate business unit.

 

We may be unable to successfully execute any of the business opportunities we have identified for Hetnets to pursue.

 

In order for Hetnets to pursue business opportunities, we will need to build an effective company infrastructure and establish operational capabilities. Our ability to accomplish these objectives could be affected by any one of the following factors:

 

 

the ability of Hetnets equipment, our equipment suppliers or our service providers to perform as we expect;

     
 

the ability of Hetnets to grow and integrate new Small Cell antennae and shared wireless networks into our business;

     
 

the ability of Hetnets to identify suitable locations and negotiate acceptable agreements with building owners so that it can establish new rooftop locations;

     
 

the ability of Hetnets to effectively manage the growth and expansion of its business operations without incurring excessive costs, high employee turnover or damage to business relationships;

     
 

the ability of Hetnets to attract and retain qualified personnel which may be affected by the significant competition in our industry for individuals experienced in network operations and engineering;

     
 

the ability of Hetnets to accurately predict and respond to the rapid technological changes in its industry and the evolving demands of the markets it serves and plans to serve; and

     
 

our ability to raise additional capital to fund Hetnet’s growth and to support its operations until it reaches profitability.

 

The failure of Hetnets to adequately address any one or more of the above factors could have a significant adverse impact on its ability to execute its business plan and may adversely affect its and our business, results of operations and financial condition.

 

Many of the potential customers of Hetnets have substantially greater assets than the Company and may invest in developing their own shared or dedicated wireless infrastructure.  Our competition may include businesses that are also potential customers.  Either of these developments could have a material adverse effect on Hetnets and its business, results of operations and financial condition. Our competition may include businesses that are also potential customers of Hetnets.

 

Hetnets will require additional capital to fund its continued growth.

 

The continued growth and operation of Hetnets will likely require additional funding for working capital, any required upgrade of its networks, the construction of additional infrastructure to expand coverage, and possible acquisitions. Such funding may not be available when needed in adequate amounts or on acceptable terms, if at all. We may issue additional equity securities in public or private offerings in order to execute Hetnets' business strategy.  Additionally, Hetnets may raise capital independently of the Company, and potentially at a price lower than the market price or book value at the time of issuance. Any of such issuances may result in substantial dilution to existing shareholders. Similarly, we may seek debt financing and may be forced to incur interest expense. If we cannot secure sufficient funding for Hetnets, we may be forced to forego strategic opportunities or delay, scale back or eliminate network deployments, operations, acquisitions, and other investments which could have a material adverse effect on our business, results of operations and financial condition.

 

 
15

 

 

Our plans for Hetnets may include financing or joint ventures on a stand-alone basis or a spinoff of all or a portion of the ownership of Hetnets.

 

Our plans for Hetnets may include financing for Hetnets on a stand-alone basis, joint venture arrangements with strategic partners or financial investors, spinning all or a portion of Hetnets off to our stockholders, or a public offering of a portion of the equity of Hetnets, although such actions have not yet been approved by the Company and may change.

 

Any of these actions could have a material adverse effect on our business, results of operations, and financial condition.

 

We depend on the continued availability of leases for our Hetnets shared wireless infrastructure business.

 

We intend to seek to obtain five year initial terms for our leases with renewal options of three to five years each, although there can be no assurance that we will be able to do so. Such renewal options are exercisable generally at our discretion before the expiration of the current term. If these leases are terminated or if the owners of these structures are unwilling to continue to enter into leases with us in the future, we could be forced to seek alternative arrangements with other building owners. If we are unable to continue to renew or replace our shared wireless infrastructure leases on satisfactory terms, Hetnets’ and our business, results of operations and financial condition could be materially and adversely affected.

 

We are a new entrant in an industry which is dominated by very large companies and which is subject to long sales cycles and market volatility .

 

We expect long lead times from our prospective customers prior to establishing predictable, recurring revenue streams for our Hetnets segment due to the long-term nature of purchasing and commitment decisions of large organizations. We also expect to experience delays in converting our customer trials into purchase orders from our prospective customers. The nature and duration of adoption and commitment delays is unpredictable. We depend on the willingness of our prospective customers to transact business with a new entrant in the tower industry offering shared wireless infrastructure, which technologies have not been fully proven or adopted by the industry. In addition, we will continue to be subject to the financial strength and creditworthiness of our customers. Wireless service providers and other prospective customers operate with substantial leverage and have in the past filed for bankruptcy. As a small company, we may be more vulnerable than larger companies to client credit issues, payment delays and bankruptcies. In economic down cycles, necessary capital raising activities by our customers may be thwarted and cause further delays or impact new technology deployment which could adversely affect us. Each of the foregoing factors could have a material adverse effect on our business, results of operations or financial condition.

 

Hetnets will rely on a limited number of suppliers that manufacture carrier-class shared wireless infrastructure equipment.

 

Hetnets depends on a limited number of third party suppliers for carrier-class equipment required for its shared wireless infrastructure. It also depends on a limited number of third parties to install and maintain its infrastructure equipment. Hetnets does not maintain any long term supply contracts with these manufacturers. If a manufacturer or other provider does not satisfy Hetnets’ requirements, it may not have sufficient equipment for the installation of new network locations or the maintenance of existing locations. Such developments could force it to suspend the deployment of its shared wireless infrastructure and may impair its growth. This could have a material adverse effect on our business, results of operations and financial condition.

 

If data security controls employed by Hetnets are breached, customers may perceive that its shared wireless infrastructure is not secure which may adversely affect its ability to attract and retain customers, and expose Hetnets to liability.

 

Wireless infrastructure security and the authentication of customer credentials are designed to protect unauthorized access to data on our shared wireless infrastructure. Because techniques used to prevent unauthorized access to or to sabotage wireless infrastructure change frequently and may not be recognized until launched against a target, Hetnets may be unable to anticipate or implement adequate preventive measures against unauthorized access or sabotage. Consequently, unauthorized parties may overcome Hetnets’ encryption and security systems, and gain access to data on its wireless infrastructure. In addition, because Hetnets operates and controls its shared wireless infrastructure and our customers’ Internet connectivity, unauthorized access or sabotage of the Hetnets shared wireless infrastructure could result in damage to Hetnets’ shared wireless infrastructure and to the computers or other devices used by its customers. An actual or perceived breach of shared wireless infrastructure security, regardless of whether the breach is the fault of Hetnets, could harm public perception of the effectiveness of its security controls, adversely affect its ability to attract and retain customers, expose it to significant liability and adversely affect its business prospects. This could have a material adverse effect on Hetnets’ and, accordingly, our business, results of operations and financial condition.

 

 
16

 

 

The technology used by Hetnets may infringe on the intellectual property rights of others which may result in costly litigation, substantial damages and prohibit it from operating.

 

Third parties may assert infringement or other intellectual property claims against Hetnets related to its trademarks, services or the technology it uses or may use in the future to operate its shared wireless infrastructure. Hetnets may have to pay substantial damages, including damages for past infringement, if it is determined that its shared wireless infrastructure infringe a third party’s proprietary rights. Further, it may be prohibited from maintaining the infringing shared wireless infrastructure or portions thereof or be required to pay substantial royalties or licensing fees to maintain it. Even if claims are determined to be without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from our other business concerns. Any public announcements related to litigation or interference proceedings initiated or threatened against it could materially and adversely affect our business, results of operations and financial condition. We do not maintain insurance coverage for intellectual property claims nor have we established any reserves for potential intellectual property claims.

 

Hetnets may experience difficulties constructing, upgrading and maintaining its shared wireless infrastructure which could impair its ability to provide services to its customers and may reduce its revenues.

 

Hetnets’ success depends on developing and providing services that give customers access to high quality shared wireless infrastructure. If the number of customers using its shared wireless infrastructure increases, it may require more infrastructure and network resources to maintain the quality of its services. Consequently, it may be required to make substantial investments to improve its facilities and equipment, and to upgrade its technology and infrastructure. If Hetnets does not accomplish these objectives successfully, or experiences inefficiencies, operational failures or unforeseen costs, the quality of its shared wireless infrastructure could decline.

 

Hetnets may experience quality deficiencies, cost overruns and delays in implementing its shared wireless infrastructure, improvements and expansion and in maintenance and upgrade projects, including the portions of those projects not within its control or the control of its contractors. The development of shared wireless infrastructure may require securing permits and approvals from numerous governmental bodies including municipalities and zoning boards. Such bodies often limit the installation of rooftop and similar transmission equipment. Failure to receive approvals in a timely fashion can delay system rollouts and raise the cost of completing projects. In addition, Hetnets is required to obtain rights from building owners to install its equipment. We may not be able to obtain, on terms acceptable to us, or at all, the rights necessary to install, expand, upgrade or maintain our shared wireless infrastructure. A failure in any of these areas could materially and adversely affect Hetnets’ and our business, results of operations and financial condition.

 

Hetnets relies on backhaul services from Towerstream's Fixed Wireless Segment and others to support its shared wireless infrastructure.

 

Hetnets relies on the availability of backhaul services from Towerstream's Fixed Wireless Segment and others to support its shared wireless infrastructure. Any delay or failure regarding the availability of backhaul services could have a material adverse effect on the operation of Hetnets’ or the costs incurred to operate its shared wireless infrastructure if it is required to obtain backhaul services from other providers or if such services otherwise are unavailable. This could have a material adverse effect on Hetnets’ and our business, results of operations and financial condition.

 

Hetnets utilizes unlicensed spectrum which is subject to intense competition, low barriers of entry and slowdowns due to multiple users.

 

Hetnets’ shared wireless infrastructure presently utilizes unlicensed spectrum in all of its markets. Unlicensed or “free” spectrum is available to multiple users and may suffer bandwidth limitations, interference and slowdowns if the number of users exceeds traffic capacity. The availability of unlicensed spectrum is not unlimited and others do not need to obtain permits or licenses to utilize the same unlicensed spectrum that we currently utilize or may utilize in the future. The inherent limitations of unlicensed spectrum could potentially threaten our ability to reliably maintain our shared wireless infrastructure. Moreover, the prevalence of unlicensed spectrum creates low barriers of entry in our industry which naturally creates the potential for increased competition for network availability, which could have a material and adverse effect on Hetnets’ and our business, results of operations and financial condition.

 

Regulation of the unlicensed spectrum used by Hetnets could have an adverse effect .

 

If the FCC or another governing agency determines to regulate the unlicensed spectrum that we presently use, then the additional regulations and costs could have a material adverse affect on Hetnets’ and our business, results of operations and financial condition.

 

 
17

 

 

Interruption or failure of its shared wireless infrastructure systems could damage Hetnets’ reputation and adversely affect its operating results.

 

The business of Hetnets depends on the continuing operation of its shared wireless infrastructure systems with minimal interruptions of service. Hetnets may experience service interruptions or system failures in the future. Any service interruption could adversely affect its customers’ ability to operate their businesses and could result in their immediate loss of revenues. If Hetnets experiences frequent or persistent infrastructure failures, its reputation could be permanently harmed and customers may be reluctant to contract for access to its shared wireless infrastructure. Hetnets may need to make significant capital expenditures to increase the reliability of its shared wireless infrastructure and it may not have sufficient funds to cover such expenditures. This could have a material and adverse effect on our business, results of operations, and financial condition.

 

A small number of customers could account for a significant percentage of Hetnets’ revenue.

 

Hetnets currently expects to depend upon a relatively small number of potential customers for a significant percentage of its revenue. As a result, its business, financial condition and results of operations could be adversely affected if (i) it loses one or more of its larger customers, (ii) such customers significantly reduce their business with Hetnets, (iii) these customers fail to make payments or delay making payments, or (iv) Hetnets chooses not to enforce, or to enforce less vigorously, any rights that it may have against these customers because of a desire to maintain its relationship with them.

 

Hetnets faces competition securing long term lease agreements for the rooftop space on which it operates its shared wireless infrastructure services.

 

Hetnets competes with numerous broadband, Wi-Fi, cellular, commercial and other wireless network operators, many of whom desire rooftop locations similar to ours in the same markets, as well as various other public and privately held companies that may provide rooftop utilization as part of a more expansive managed services offering. In addition, Hetnets may face competition from new entrants into the wireless network market. Some of Hetnets’ competitors may have significant advantages, including longer operating histories, lower operating costs, pre-existing relationships with current or potential landlords, greater financial, marketing and other resources, and access to less expensive power. These advantages could allow competitors to respond more quickly to strategic opportunities or changes in its industries or markets. If Hetnets is unable to compete effectively, it may lose existing or potential rooftop locations, incur costs to improve its locations or be forced to reduce the coverage of its shared wireless infrastructure.

 

Hetnets attempts to secure long term agreements with the owners of the buildings on which it constructs its shared wireless infrastructure.  These agreements are normally for an initial five year period with an option to renew for additional five year periods.   Upon expiration, building owners may elect to not renew their leases or renew their leases at higher rates, or for shorter terms. If Hetnets is unable to successfully extend these leases or secure other comparable space when such leases expire, its business, results of operations, and financial condition could be adversely affected.

 

Hetnets is susceptible to catastrophic weather, business or other localized events because its shared wireless infrastructure is presently located in a limited geographic area.

 

Hetnets' shared wireless infrastructure is presently located in just four metropolitan areas. Therefore, it is susceptible to a wide range of localized events which could cause immediate adverse effects on its business, results of operations, and financial condition.  These events could include weather events such as a hurricane, tornado, or blizzard which could render Hetnets unable to provide service for a period of time.  Other localized events which could adversely effect Hetnets includes union strikes that limit access to the rooftops on which its infrastructure is located as well as power outages in the markets in which Hetnets operates.  

 

Any failure of its shared wireless infrastructure could cause Hetnets to incur significant costs.

 

Hetnets’ business depends on providing highly reliable shared wireless infrastructure services to its customers. The physical infrastructure may fail for a number of reasons, including:

 

 

 

human error;

       
 

 

unexpected equipment failure;

       
 

 

power loss or telecommunications failures;

       
 

 

improper building maintenance by landlords in the buildings where it maintains equipment;

       
 

 

fire, tropical storm, hurricane, tornado, flood, earthquake and other natural disasters;

 

 
18

 

 

 

 

water damage;

       
 

 

war, terrorism and any related conflicts or similar events worldwide; and

       
 

 

sabotage and vandalism.

 

If, as a result of any of these events, or other similar events beyond its control there is an infrastructure failure, and it is not corrected immediately, Hetnets ultimately may suffer a loss of revenue which could materially and adversely affect its business, results of operations, and financial condition.

 

Hetnets may have difficulty managing its growth.

 

Hetnets may rapidly and significantly expand if its initial network infrastructure generates customer demand. This would require it to increase significantly the number of its employees and, consequently, the entire size of Hetnets. Its growth may also significantly strain its management, operational and financial resources and systems. An inability to manage growth effectively or the increased strain on its management, resources and systems could materially adversely affect its business, results of operations, and financial condition.

 

Hetnets will depend on external sources of capital to fund its growth strategy, and such capital may not be available on commercially reasonable terms, or at all.

 

It is likely that Hetnets will not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, Hetnets likely will rely on third-party capital markets sources for debt or equity financing to fund its growth strategy. Any turbulence in the U.S. and other financial markets and economies may adversely affect its ability to access the capital markets to meet liquidity and capital expenditure requirements and may result in adverse effects on its business, results of operations, and financial condition. As such, we may not be able to obtain the financing required on favorable terms or at all. Our access to third-party sources of capital also depends, in part, on:

 

 

 

the market’s perception of Hetnets’ growth potential and operating performance;

       
 

 

Hetnets’ then current debt levels; and

       
 

 

the market price per share of our common stock.

 

The loss of any of our key personnel devoted to Hetnets, including executive officers or key sales associates, could adversely affect Hetnets’ and our business, financial condition and results of operations.

 

The success of Hetnets will continue to depend to a significant extent on its executive officers and key sales personnel. Each of its executive officers has a national or regional industry reputation that attracts business and investment opportunities. The loss of key sales personnel could hinder its ability to continue to benefit from existing and potential customers. We cannot provide any assurance that Hetnets will be able to retain its current executive officers or key sales personnel. The loss of any of these individuals could materially and adversely affect its and our business, results of operations, and financial condition.

 

An economic or industry slowdown may materially and adversely affect the Hetnets business.

 

Slowdowns in the economy or in the wireless or broadband industry may impact the demand for access to Hetnets shared wireless infrastructure. Users may reduce the amount of bandwidth that they purchase from wireless network operators during economic downturns which may adversely affect the rents that Hetnets expects to receive from our customers. An economic or industry slowdown may cause other businesses or industries to delay or abandon implementation of new systems and technologies, including shared wireless infrastructure services. Further, political uncertainties, including acts of terrorism and other unforeseen events, may impose additional risks upon, and materially and adversely affect, the wireless or broadband industry generally and, in turn, the Hetnets business.

 

Hetnets operates in a rapidly evolving industry which makes it difficult to forecast its future prospects as its shared wireless infrastructure, or portions thereof, may become obsolete and it may not be able to develop replacement infrastructure on a timely basis or at all.

 

The wireless services industry is characterized by rapid technological change, competitive pricing, frequent new service introductions, and evolving industry standards and regulatory requirements. We believe that the success of Hetnets depends on its ability to anticipate and adapt to these challenges, and to offer competitive shared wireless infrastructure opportunities on a timely basis. We face a number of difficulties and uncertainties such as:

 

 

competition from service providers using more efficient, less expensive technologies including products not yet invented or developed;

 

 
19

 

 

 

responding successfully to advances in competing technologies in a timely and cost-effective manner;

     
 

migration toward standards-based technology which may require substantial capital expenditures; and

     
 

existing, proposed or undeveloped technologies that may render our wireless network assets less profitable or obsolete.

 

Risks Relating to the Wireless Industry

 

An economic or industry slowdown may materially and adversely affect our business.

 

Slowdowns in the economy or in the wireless or broadband industry may impact demand for our services.   Customers may reduce the amount of bandwidth that they purchase from us during economic downturns which will directly affect our revenues and operating results.  An economic or industry slowdown may cause other businesses or industries to delay or abandon implementation of new systems and technologies, including wireless broadband services. Further, political uncertainties, including acts of terrorism and other unforeseen events, may impose additional risks upon and adversely affect the wireless or broadband industry generally, and our business, specifically.

 

We operate in an evolving industry which makes it difficult to forecast our future prospects as our services may become obsolete and we may not be able to develop competitive products or services on a timely basis or at all. 

 

The broadband and wireless services industries are characterized by rapid technological change, competitive pricing, frequent new service introductions, and evolving industry standards and regulatory requirements. We believe that our success depends on our ability to anticipate and adapt to these challenges, and to offer competitive services on a timely basis. We face a number of difficulties and uncertainties such as:

 

 

competition from service providers using more efficient, less expensive technologies including products not yet invented or developed;

 

 

 

 

responding successfully to advances in competing technologies in a timely and cost-effective manner;

 

 

 

 

migration toward standards-based technology which may require substantial capital expenditures; and

 

 

 

 

existing, proposed or undeveloped technologies that may render our wireless broadband services less profitable or obsolete.

 

As the services offered by us and our competitors develop, businesses and consumers may not accept our services as a commercially viable alternative to other means of delivering wireless broadband services. As a result, our services may become obsolete and we may be unable to develop competitive products or services on a timely basis, or at all.

 

We are subject to extensive regulation that could limit or restrict our activities.

 

Our business activities, including the acquisition, lease, maintenance and use of spectrum licenses, are extensively regulated by federal, state and local governmental authorities. A number of federal, state and local privacy, security, and consumer laws also apply to our business. These regulations and their application are subject to continuous change as new legislation, regulations or amendments to existing regulations are periodically implemented by governmental or regulatory authorities, including as a result of judicial interpretations of such laws and regulations. Current regulations directly affect the breadth of services we are able to offer and may impact the rates, terms and conditions of our services. Regulation of companies that offer competing services such as cable and DSL providers, and telecommunications carriers also affects our business. If we fail to comply with these regulations, we may be subject to penalties, both monetary and non-monetary, which may adversely affect our financial condition and results of operations.

 

We are currently not required to register with the Universal Service Administrative Company (“USAC”) as a seller of telecommunications, nor are we required to collect Universal Service Fund (“USF”) fees from our customers or to pay USF fees directly.  In October 2011, the FCC adopted an Order dramatically changing the USF program.  In the next few months, the FCC is also expected to address USF contribution reform.  It is possible that the FCC could adopt new regulations requiring broadband service providers to register and pay USF fees.  If the FCC were to implement such a change, we would likely be obligated to pay USF fees on some or all of our gross revenues.

 

In addition, the FCC or other regulatory authorities could restrict our ability to manage customers’ use of our network, thereby limiting our ability to prevent or address customers’ excessive bandwidth demands. To maintain the quality of our network and user experience, we may manage the bandwidth used by our customers’ applications, in part by restricting the types of applications that may be used over our network. If the FCC or other regulatory authorities were to adopt regulations that constrain our ability to employ bandwidth management practices, excessive use of bandwidth-intensive applications would likely reduce the quality of our services for all customers. Such decline in the quality of our services could harm our business.

 

 
20

 

 

The breach of a license or applicable law, even if accidentally, can result in the revocation, suspension, cancellation or reduction in the term of a license or the imposition of fines. In addition, regulatory authorities may grant new licenses to third parties, resulting in greater competition in territories where we already have rights to licensed spectrum. In order to promote competition, licenses may also require that third parties be granted access to our bandwidth, frequency capacity, facilities or services. We may not be able to obtain or retain any required license, and we may not be able to renew a license on favorable terms, or at all.

 

Wireless broadband services may become subject to greater state or federal regulation in the future. The scope of the regulations that may apply to companies like us and the impact of such regulations on our competitive position are presently unknown and could be detrimental to our business and prospects.

 

Risks Relating to Our Organization

 

Our certificate of incorporation allows for our board of directors to create new series of preferred stock without further approval by our stockholders which could adversely affect the rights of the holders of our common stock.

 

Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to such holders (i) the preferred right to our assets upon liquidation, (ii) the right to receive dividend payments before dividends are distributed to the holders of common stock and (iii) the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing common stockholders.

 

Any of the actions described in the preceding paragraph could significantly adversely affect the investment made by holders of our common stock. Holders of common stock could potentially not receive dividends that they might otherwise have received. In addition, holders of our common stock could receive less proceeds in connection with any future sale of the Company, whether in liquidation or on any other basis.

 

Our officers and directors own a substantial amount of our common stock and, therefore, exercise significant control over our corporate governance and affairs which may result in their taking actions with which other shareholders do not agree.

 

Our executive officers and directors, and entities affiliated with them, control approximately 10% of our outstanding common stock (including shares of common stock underlying exercisable stock options). These shareholders, if they act together, may be able to exercise substantial influence over the outcome of all corporate actions requiring approval of our shareholders, including the election of directors and approval of significant corporate transactions, which may result in corporate action with which other shareholders do not agree. This concentration of ownership may also have the effect of delaying or preventing a change in control which might be in other shareholders’ best interest but which might negatively affect the market price of our common stock.

 

We are subject to extensive financial reporting and related requirements for which our accounting and other management systems and resources may not be adequately prepared.

 

We are subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended, including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires us to conduct an annual management assessment of the effectiveness of our internal controls over financial reporting. These reporting and other obligations place significant demands on our management, administrative, operational and accounting resources. In order to maintain compliance with these requirements, we may need to (i) upgrade our systems, (ii) implement additional financial and management controls, reporting systems and procedures, (iii) implement an internal audit function, and (iv) hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives in a timely and effective manner, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal controls could have a negative impact on our ability to manage our business and on our stock price.

 

We may be at risk to accurately report financial results or detect fraud if we fail to maintain an effective system of internal controls.

 

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report that contains an assessment by management on the Company’s internal control over financial reporting in their annual and quarterly reports on Form 10-K and 10-Q. While we are consistently working on improvements and conducting rigorous reviews of our internal controls over financial reporting, our independent auditors may interpret Section 404 requirements and apply related rules and regulations differently. If our independent auditors are not satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may decline to accept management’s assessment and not provide an attestation report on our internal control over financial reporting. Additionally, if we are not able to meet all the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities such as the SEC.

 

 
21

 

 

We cannot assure you that significant deficiencies or material weaknesses in our disclosure controls and internal control over financial reporting will not be identified in the future. Also, future changes in our accounting, financial reporting, and regulatory environment may create new areas of risk exposure. Failure to modify our existing control environment accordingly may impair our controls over financial reporting and cause our investors to lose confidence in the reliability of our financial reporting which may adversely affect our stock price.

 

Risks Relating to Our Common Stock

   

We may fail to qualify for continued listing on the NASDAQ Capital Market which could make it more difficult for investors to sell their shares.

 

In May 2007, our common stock was approved for listing on the NASDAQ Capital Market and our common stock continues to be listed on the NASDAQ Capital Market. There can be no assurance that trading of our common stock will be sustained or that we can meet NASDAQ’s continued listing standards. In the event that our common stock fails to qualify for continued listing, our common stock could thereafter only be quoted on the OTC Bulletin Board or the “pink sheets.” Under such circumstances, shareholders may find it more difficult to sell, or to obtain accurate quotations, for our common stock, and our common stock would become substantially less attractive to certain purchasers such as financial institutions, hedge funds and other similar investors.

 

Our common stock may be affected by limited trading volume and price fluctuations which could adversely impact the value of our common stock.

 

While there has been relatively active trading in our common stock over the past twelve months, there can be no assurance that an active trading market in our common stock will be maintained. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.

 

We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on an investment in our common stock is expected to be limited to an increase in the value of the common stock.

 

We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition, and other business and economic factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be considered less valuable because a return on a shareholder’s investment will only occur if our stock price appreciates.

 

We adopted a Rights Plan in 2010 which may discourage third parties from attempting to acquire control of our company and have an adverse effect on the price of our common stock.

 

In November 2010, we adopted a rights plan (the “Rights Plan”) and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock as of the record date on November 14, 2010. Each right, when exercisable, entitles the registered holder to purchase one-hundredth (1/100 th ) of a share of Series A Preferred Stock, par value $0.001 per shares of the Company at a purchase price of $18.00 per one-hundredth (1/100 th ) of a share of the Series A Preferred Stock, subject to certain adjustments. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.

 

 
22

 

 

The provisions in our charter, bylaws, Rights Plan and under Delaware law related to the foregoing could discourage takeover attempts that our stockholders would otherwise favor, or otherwise reduce the price that investors might be willing to pay for our common stock in the future.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

 

Item 2. Properties.

 

Our executive offices are located at 88 Silva Lane in Middletown, Rhode Island where we lease approximately 29,000 square feet of space. The majority of our employees work at this location including our finance and administrative, engineering, information technology, customer care and retention, and sales and marketing personnel. Rent payments totaled approximately $590,000 in 2013 when we also occupied space at 55 Hammarlund Way in Middletown, Rhode Island. Our lease for the space at 55 Hammarlund Way expired on December 31, 2013. We do not own any real property.

 

In September 2013, the Company entered into a new lease agreement at 88 Silva Lane which includes 25,000 square feet for its corporate offices and 4,000 square feet of 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.

 

Item 3. Legal Proceedings.

 

There are no significant legal proceedings pending, and we are not aware of any material proceeding contemplated by a governmental authority, to which we are a party or any of our property is subject.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

 
23

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock was quoted on the OTC Bulletin Board from January 12, 2007 through May 30, 2007 under the symbol TWER.OB. Since May 31, 2007, our common stock has been listed on the NASDAQ Capital Market under the symbol TWER. Prior to January 12, 2007, there was no active market for our common stock. The following table sets forth the high and low sales prices as reported on the NASDAQ Capital Market. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

FISCAL YEAR 2013

 

HIGH

   

LOW

 

First Quarter

  $ 3.92     $ 2.12  

Second Quarter

  $ 2.71     $ 2.05  

Third Quarter

  $ 3.22     $ 2.21  

Fourth Quarter

  $ 3.00     $ 2.06  

 

FISCAL YEAR 2012

 

HIGH

   

LOW

 

First Quarter

  $ 5.07     $ 2.09  

Second Quarter

  $ 5.86     $ 3.34  

Third Quarter

  $ 4.70     $ 3.33  

Fourth Quarter

  $ 4.15     $ 2.40  

 

The last reported sales price of our common stock on the NASDAQ Capital Market on December 31, 2013 was $2.96 and on March 13, 2014, the last reported sales price was $2.50. According to the records of our transfer agent, as of March 13, 2014, there were approximately 45 holders of record of our common stock.

 

Performance Graph

 

On May 31, 2007, our shares of common stock began trading on the NASDAQ Capital Market. The chart below compares the annual percentage change in the cumulative total return on our common stock with the NASDAQ Capital Market Composite Index and the NASDAQ Telecom Index. The chart shows the value as of December 31, 2013, of $100 invested on May 31, 2007, the day our common stock was first publicly traded on the NASDAQ Capital Market, in our common stock, the NASDAQ Capital Market Composite Index and the NASDAQ Telecom Index.

 

Comparison of Cumulative Total Returns Among Towerstream,

NASDAQ Capital Market Composite Index and NASDAQ Telecom Index

 

 

 

 
24

 

 

   

5/31/2007

   

12/31/2007

   

12/31/2008

   

12/31/2009

   

12/31/2010

   

12/31/2011

   

12/31/2012

   

12/31/2013

 

Towerstream Corporation

  $ 100.00     $ 41.32     $ 9.29     $ 26.11     $ 54.64     $ 28.53     $ 43.74     $ 39.84  

NASDAQ Capital Market Composite Index

  $ 100.00     $ 83.83     $ 38.91     $ 52.06     $ 61.12     $ 47.08     $ 53.44     $ 73.00  

NASDAQ Telecom Index

  $ 100.00     $ 101.58     $ 57.91     $ 85.85     $ 89.22     $ 77.96     $ 79.52     $ 98.62  

 

Dividend Policy

 

We have never declared or paid cash dividends on our common stock, and we do not intend to pay any cash dividends on our common stock in the foreseeable future. Rather, we expect to retain future earnings (if any) to fund the operation and expansion of our business and for general corporate purposes.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

As of December 31, 2013, securities issued and securities available for future issuance under our 2008 Non-Employee Directors Compensation Plan, our 2007 Equity Compensation Plan and our 2007 Incentive Stock Plan were as follows:

 

Equity Compensation Plan Information

 

   

Number of securities to be issued upon exercise of outstanding options, warrants and rights

   

Weighted average exercise price of outstanding options, warrants and rights

   

Number of securities remaining available for future issuance under equity compensation plans

 

Equity compensation plans approved by security holders

    4,055,016     $ 2.70       3,720,344  

Equity compensation plans not approved by security holders

    -     $ -       -  

Total

    4,055,016     $ 2.70       3,720,344  

 

Recent Sales of Unregistered Securities 

 

 None.

 

Recent Repurchases of Securities.

 

 None.

 

 
25

 

 

Item 6. Selected Financial Data

 

The annual financial information set forth below has been derived from our audited consolidated financial statements. The information should be read in connection with, and is qualified in its entirety by reference to, Management’s Discussion and Analysis, the consolidated financial statements and notes included elsewhere in this report and in our SEC filings.

 

   

Years Ended December 31,

 
   

2009

   

2010

   

2011

   

2012

   

2013

 

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

                                       

Revenues

  $ 14,915,435     $ 19,645,893     $ 26,494,737     $ 32,279,430     $ 33,433,284  

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    3,690,089       4,887,881       8,190,112       16,379,186       22,937,828  

Depreciation and amortization

    4,035,267       5,770,335       9,138,318       13,634,294       15,351,441  

Customer support services

    2,132,968       2,549,615       3,557,124       4,709,413       3,799,554  

Sales and marketing

    5,545,714       5,088,085       5,362,103       6,134,020       5,779,500  

General and administrative

    6,943,086       7,398,420       9,411,608       12,168,183       11,033,057  

Total Operating Expenses

    22,347,124       25,694,336       35,659,265       53,025,096       58,901,380  

Operating (Loss) Income

    (7,431,689 )     (6,048,443 )     (9,164,528 )     (20,745,666 )     (25,468,096 )

Other Income/ (Expense)

                                       

Interest income

    26,605       4,411       57,544       41,531       2,893  

Interest expense

    (740,409 )     (489 )     (22,058 )     (105,245 )     (220,634 )

Gain on business acquisitions

    -       355,876       2,231,534       (40,079 )     1,004,099  

Loss on derivative financial instruments

    (478,544 )     -       -       -       -  

Other income (expense), net

    (1,213 )     85,638       (9,581 )     (13,860 )     (15,020 )

Total Other Income/ (Expense)

    (1,193,561 )     445,436       2,257,439       (117,653 )     771,338  

Loss before income taxes

    (8,625,250 )     (5,603,007 )     (6,907,089 )     (20,863,319 )     (24,696,758 )

Provision for income taxes

    -       -       (118,018 )     (126,256 )     (78,531 )

Net (loss) income

  $ (8,625,250 )   $ (5,603,007 )   $ (7,025,107 )   $ (20,989,575 )   $ (24,775,289 )
                                         

Net (loss) income per common share – basic and diluted

  $ (0.25 )   $ (0.16 )   $ (0.15 )   $ (0.39 )   $ (0.38 )

Weighted average common shares outstanding – basic and diluted

    34,606,798       35,626,783       47,505,861       54,434,173       65,181,310  
                                         

CONSOLIDATED BALANCE SHEETS DATA (at December 31,):

                                       

Cash and cash equivalents

  $ 14,040,839     $ 23,173,352     $ 44,672,587     $ 15,152,226     $ 28,181,531  

Property, plant and equipment, net

    13,634,685       15,266,056       27,531,273       41,982,210       38,484,858  

Total assets

    29,502,707       44,589,825       83,636,896       67,109,714       74,917,467  

Working capital

    11,452,316       20,184,121       40,231,504       10,087,917       23,697,158  

Stockholder’s equity

    25,411,171       40,020,878       77,144,910       57,803,908       66,093,941  
                                         

OTHER FINANCIAL DATA:

                                       

Capital expenditures

  $ 4,707,679     $ 5,304,434     $ 13,620,180     $ 20,722,510     $ 7,143,376  

Net cash provided by (used in) operating activities

    (3,120,323 )     238,534       702,518       (8,078,493 )     (9,484,438 )

Net cash used in investing activities

    (4,803,760 )     (8,057,744 )     (18,218,729 )     (21,343,128 )     (7,562,464 )

Net cash provided by (used in) financing activities

    (2,775,346 )     16,951,723       39,015,446       (98,740 )     30,076,207  

 

 
26

 

 

We focus on Adjusted EBITDA as a principal indicator of the operating efficiency and overall financial performance of our business. We believe this information provides the users of our financial statements with valuable insight into our operating results. EBITDA is calculated as net income (loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization expenses, excluding when applicable, stock-based compensation, other non-operating income or expenses, deferred rent, non-core expenses, as well as gain or loss on (i) disposal of property and equipment, (ii) nonmonetary transactions, and (iii) business acquisitions. It is important to note, however, that non-GAAP financial measures as presented do not represent cash provided by or used in operating activities and may not be comparable to similarly titled measures reported by other companies. Neither should be considered in isolation or as a substitute for measures of performance prepared in accordance with Generally Accepted Accounting Principles (“GAAP”).

 

In January 2013, we formed a wholly owned subsidiary, Hetnets Tower Corporation, to manage the business activities of a new business segment, Shared Wireless Infrastructure. We have provided supplemental segment information on the operating results of our Shared Wireless Infrastructure segment in Item 7 in this Annual Report on Form 10-K. We have also provided supplemental information on our Fixed Wireless segment, including the operating results of each market, in Item 7 in this Annual Report on Form 10-K.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview – Fixed Wireless

 

We provide fixed wireless broadband services to commercial customers and deliver access over a wireless network transmitting over both regulated and unregulated radio spectrum. Our service supports bandwidth on demand, wireless redundancy, virtual private networks (“VPNs”), disaster recovery, bundled data and video services. We currently provide service to business customers in thirteen metropolitan markets.

 

In May 2011, we completed the acquisition of the customer relationships, network infrastructure and related assets of One Velocity Inc. (“One Velocity”) which was based in Las Vegas and Reno, Nevada. The aggregate consideration for the acquisition included (i) approximately $1.6 million in cash, and (ii) 269,886 shares of common stock with a fair value of approximately $1.3 million. The acquisition of One Velocity was a business combination accounted for under the acquisition method. In January 2012, we finalized the purchase price of the One Velocity acquisition. The final purchase price of $2,881,959 was $557,773, or 16%, lower than the initially reported purchase price of $3,439,732. The adjustment resulted in a decrease of 117,426 shares of common stock issued to One Velocity, from 387,312 to 269,886 shares. In addition, we recognized additional gain on business acquisition of approximately $481,000 and a reduction of approximately $77,000 of identifiable net assets in the fourth quarter of 2011.

 

In December 2011, we completed the acquisition of certain customer relationships, network infrastructure and related assets of Color Broadband Communications, Inc. (“Color Broadband”), which is based in the Los Angeles area. The aggregate consideration for the acquisition included (i) approximately $2.8 million in cash, (ii) 827,230 shares of our common stock with a fair value of approximately $2.0 million, and (iii) approximately $0.2 million in assumed liabilities. The acquisition of Color Broadband was a business combination accounted for under the acquisition method. In May 2012, we finalized the purchase price of Color Broadband. The final purchase price of $5,098,996 was $220,885, or 4%, lower than the initially reported purchase price of $5,319,881. The finalization of the purchase price resulted in a reduction of approximately $261,000 of identifiable net assets and a reduction in the gain on business acquisition of approximately $40,000. The purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Color Broadband of 98,506 from 925,736 to 827,230 shares. In addition, 45,600 shares of common stock were returned to the Company principally representing accounts receivable collections retained by Color Broadband during the post-closing transition services period.

 

In February 2013, we completed the acquisition of certain customer relationships, network infrastructure and related assets of Delos Internet (“Delos”), which is based in Houston, Texas. The aggregate consideration for the acquisition included (i) approximately $0.2 million in cash, (ii) 385,124 shares of our common stock with a fair value of approximately $1.0 million, and (iii) approximately $0.2 million in assumed liabilities. The acquisition of Delos Internet was a business combination accounted for under the acquisition method. In June 2013, we finalized the purchase price of Delos Internet. 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 purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Delos Internet of 48,549 from 433,673 to 385,124 shares. We recognized gain on business acquisition of approximately $1.0 million.

 

 
27

 

 

Characteristics of our 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.

 

Customer support services include salaries and related payroll costs associated with our customer support services, customer care, and installation and operations staff.

 

General and administrative expenses include costs attributable to corporate overhead and the overall support of our operations. Salaries and other related payroll costs for executive management, finance, administration and information systems personnel are included in this category. Other costs include office rent, utilities and other facilities costs, accounting, legal and other professional services, and other general operating expenses.

 

Market Information – Fixed Wireless

 

As of December 31, 2013, we operated in thirteen metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport. 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 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 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.

 

 
28

 

 

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. Beginning in 2013, these operating costs are reported under our Shared Wireless Infrastructure segment.

 

Adjusted Market EBITDA : Represents a market’s net income (loss) before interest, taxes, depreciation, amortization, stock-based compensation, and other income (expense). We believe this metric provides useful information regarding the cash flow being generated in a market.

 

We entered the Las Vegas-Reno market in May 2011 through the acquisition of One Velocity. The Color Broadband acquisition in December 2011 expanded and strengthened our operations in the Los Angeles area. We entered the Houston market in February 2013 through the acquisition of Delos.

 

Year ended December 31, 2013

 

Market

 

Revenues

   

Cost of

Revenues

   

Gross Margin

   

Operating Costs

   

Adjusted

Market

EBITDA

 

Los Angeles

  $ 8,197,925     $ 2,254,957     $ 5,942,968     $ 1,566,535     $ 4,376,433  

Boston

    6,508,812       1,573,624       4,935,188       804,360       4,130,828  

New York

    7,715,840       2,624,721       5,091,119       1,282,857       3,808,262  

Chicago

    3,273,174       1,211,552       2,061,622       438,541       1,623,081  

Miami

    1,553,933       444,789       1,109,144       407,015       702,129  

Las Vegas-Reno

    1,148,540       603,631       544,909       116,334       428,575  

San Francisco

    1,248,608       520,589       728,019       336,663       391,356  

Houston

    554,606       220,118       334,488       95,410       239,078  

Providence-Newport

    441,115       202,129       238,986       59,246       179,740  

Seattle

    389,839       210,475       179,364       84,015       95,349  

Dallas-Fort Worth

    681,812       399,464       282,348       257,213       25,135  

Philadelphia

    157,342       82,609       74,733       88,160       (13,427 )

Nashville

    21,038       57,030       (35,992 )     11,443       (47,435 )

Total

  $ 31,892,584     $ 10,405,688     $ 21,486,896     $ 5,547,792     $ 15,939,104  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 15,939,104  

Fixed wireless, non-market specific

       

Other expenses

    (943,412 )

Depreciation and amortization

    (11,062,809 )

Shared wireless infrastructure, net

    (15,519,932 )

Corporate

    (13,881,047 )

Other income (expense)

    771,338  

Provision for income taxes

    (78,531 )

Net loss

  $ (24,775,289 )

 

Year ended December 31, 2012

 

Market

 

Revenues

   

Cost of

Revenues

   

Gross Margin

   

Operating Costs

   

Adjusted

Market

EBITDA

 

Boston

  $ 6,822,836     $ 1,520,727     $ 5,302,109     $ 917,472     $ 4,384,637  

Los Angeles

    7,946,272       2,338,146       5,608,126       1,477,589       4,130,537  

New York

    7,286,768       2,290,154       4,996,614       1,290,214       3,706,400  

Chicago

    3,704,547       1,184,244       2,520,303       668,210       1,852,093  

Miami

    1,662,264       410,674       1,251,590       370,305       881,285  

San Francisco

    1,541,928       436,910       1,105,018       316,549       788,469  

Las Vegas-Reno

    1,545,404       613,723       931,681       148,955       782,726  

Seattle

    485,484       214,090       271,394       102,371       169,023  

Providence-Newport

    488,871       207,086       281,785       115,241       166,544  

Dallas-Fort Worth

    643,174       345,136       298,038       341,295       (43,257 )

Nashville

    39,184       57,745       (18,561 )     36,050       (54,611 )

Philadelphia

    112,698       73,659       39,039       105,237       (66,198 )

Total

  $ 32,279,430     $ 9,692,294     $ 22,587,136     $ 5,889,488     $ 16,697,648  

 

 
29

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 16,697,648  

Fixed wireless, non-market specific

       

Other expenses

    (896,311 )

Depreciation and amortization

    (10,689,868 )

Non-core expenses

    (9,687,500 )

Corporate

    (16,169,635 )

Other income (expense)

    (117,653 )

Provision for income taxes

    (126,256 )

Net loss

  $ (20,989,575 )

 

Year ended December 31, 2011

 

Market

 

Revenues

   

Cost of

Revenues

   

Gross Margin

   

Operating Costs

   

Adjusted

Market

EBITDA

 

Boston

  $ 6,740,600     $ 1,561,551     $ 5,179,049     $ 946,209     $ 4,232,840  

New York

    6,100,471       1,522,891       4,577,580       1,220,426       3,357,154  

Los Angeles

    4,472,136       891,400       3,580,736       1,039,553       2,541,183  

Chicago

    3,461,614       1,034,376       2,427,238       635,910       1,791,328  

San Francisco

    1,491,814       263,663       1,228,151       363,206       864,945  

Miami

    1,389,477       303,917       1,085,560       392,065       693,495  

Las Vegas-Reno

    1,031,535       437,469       594,066       105,266       488,800  

Seattle

    526,228       209,659       316,569       110,341       206,228  

Providence -Newport

    459,255       176,917       282,338       94,106       188,232  

Dallas-Fort Worth

    655,521       333,594       321,927       275,783       46,144  

Nashville

    53,210       52,435       775       41,516       (40,741 )

Philadelphia

    112,876       61,751       51,125       106,150       (55,025 )

Total

  $ 26,494,737     $ 6,849,623     $ 19,645,114     $ 5,330,531     $ 14,314,583  

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 14,314,583  

Fixed wireless, non-market specific

       

Other expenses

    (386,783 )

Depreciation and amortization

    (7,928,923 )

Non-core expenses

    (2,139,218 )

Corporate

    (13,024,187 )

Other income (expense)

    2,257,439  

Provision for income taxes

    (118,018 )

Net loss

  $ (7,025,107 )

 

Overview - Shared Wireless Infrastructure

 

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

 

 
30

 

 

In June 2013, we entered into the Wi-Fi Agreement with 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 our other markets. The term of the Wi-Fi Agreement is for an initial three year period, and provides for automatic renewals for two, one year periods.

 

Supplemental Segment Information

 

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

 

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

 

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

 

Three months ended December 31, 2013

 

   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 767,954     $ (4,242,749 )   $ (3,153,141 )   $ (6,627,936 )

Depreciation and amortization

    2,651,546       875,471       170,869       3,697,886  

Stock-based compensation

    -       -       314,462       314,462  

Loss on property and equipment

    38,820       -       -       38,820  

Loss on non-monetary transactions

    67,794       -       -       67,794  

Deferred rent

    230,160       432,201       (86,820 )     575,541  

Adjusted EBITDA

    3,756,274       (2,935,077 )     (2,754,630 )     (1,933,433 )

Less: Capital expenditures

    1,160,116       1,264,893       908,796       3,333,805  

Net Cash Flow

  $ 2,596,158     $ (4,199,970 )   $ (3,663,426 )   $ (5,267,238 )

 

 

Reconciliation of Adjusted EBITDA to Net Loss

 
         

Adjusted EBITDA

  $ (1,933,433 )

Depreciation and amortization

    (3,697,886 )

Stock-based compensation

    (314,462 )

Loss on property and equipment

    (38,820 )

Loss on non-monetary transactions

    (67,794 )

Deferred rent

    (575,541 )

Operating Income (Loss)

    (6,627,936 )

Interest income

    2,492  

Interest expense

    (66,336 )

Other income (expense), net

    (4,130 )

Provision for income taxes

    (78,531 )

Net loss

  $ (6,774,441 )

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities

 
         

Net cash flow

  $ (5,267,238 )

Capital expenditures

    3,333,805  

Changes in operating assets and liabilities, net

    848,636  

Other, net

    (33,947 )

Net cash used in operating activities

  $ (1,118,744 )

 

 
31

 

 

Year ended December 31, 2013

 

   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 4,115,979     $ (15,703,028 )   $ (13,881,047 )   $ (25,468,096 )

Depreciation and amortization

    11,062,809       3,508,646       779,986       15,351,441  

Stock-based compensation

    -       -       1,253,661       1,253,661  

Loss on property and equipment

    112,442       8,202       -       120,644  

Loss on non-monetary transactions

    272,347       -       -       272,347  

Non-recurring expenses, primarily acquisition-related

    -       -       112,815       112,815  
                                 

Deferred rent

    230,160       432,201       (86,820 )     575,541  

Adjusted EBITDA

    15,793,737       (11,753,979 )     (11,821,405 )     (7,781,647 )

Less: Capital expenditures

    4,518,874       2,314,236       1,258,469       8,091,579  

Net Cash Flow

  $ 11,274,863     $ (14,068,215 )   $ (13,079,874 )   $ (15,873,226 )

 

 

Reconciliation of Adjusted EBITDA to Net Loss

 
         

Adjusted EBITDA

  $ (7,781,647 )

Depreciation and amortization

    (15,351,441 )

Non-recurring expenses, primarily acquisition-related

    (112,815 )

Stock-based compensation

    (1,253,661 )

Loss on property and equipment

    (120,644 )

Loss on non-monetary transactions

    (272,347 )

Deferred rent

    (575,541 )

Operating Income (Loss)

    (25,468,096 )

Interest income

    2,893  

Interest expense

    (220,634 )

Gain on business acquisition

    1,004,099  

Other income (expense), net

    (15,020 )

Provision for income taxes

    (78,531 )

Net loss

  $ (24,775,289 )

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities

 
         

Net cash flow

  $ (15,873,226 )

Capital expenditures

    8,091,579  

Non-recurring expenses, primarily acquisition-related

    (112,815 )

Changes in operating assets and liabilities, net

    (1,169,868 )

Other, net

    (420,108 )

Net cash used in operating activities

  $ (9,484,438 )

 

 
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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

 

Revenues. Revenues totaled $33,433,284 during the year ended December 31, 2013 compared to $32,279,430 during the year ended December 31, 2012 representing an increase of $1,153,854, or 4%. Substantially all of the revenue increase was attributable to our Shared Wireless segment where revenues increased from $192,442 in 2012 to $1,174,509 in 2013.  Fixed wireless revenues increased by $171,786, or 1%, primarily related to an increase in Average Revenue Per User (“ARPU”) from $717 in the 2012 period to $761 in the 2013 period.  The increase in ARPU was offset by higher than normal churn levels.

 

ARPU for the Fixed Wireless segment totaled $761 as of December 31, 2013 compared to $717 as of December 31, 2012 representing an increase of $44, or 6%. ARPU for new customers totaled $663 during the year ended December 31, 2013 compared to $531 during the year ended December 31, 2012 representing an increase of $132, or 25%. The increase in ARPU primarily related to customers upgrading to higher bandwidth service which generates higher monthly recurring revenue.  

 

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.93% during the year ended December 31, 2013 compared to 1.59% during the year ended December 31, 2012. Our goal is to maintain churn levels between 1.40% and 1.70% which we believe is below industry averages of approximately 2.00%. Churn levels can fluctuate from quarter to quarter depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons. Churn has averaged 1.66% over the past 36 months and we do not believe that the slightly higher than targeted churn level is indicative of any long term business developments or trends.

 

Cost of Revenues. Cost of revenues totaled $22,937,828 during the year ended December 31, 2013 compared to $16,379,186 during the year ended December 31, 2012 representing an increase of $6,558,642, or 40%. On a consolidated basis, gross margin during the year ended December 31, 2013 was 31% as compared to 49% during the year ended December 31, 2012 representing a decrease of 18 percentage points. Higher rent expense associated with both Points-of-Presence (“PoPs”) for the fixed wireless network and street level rooftops for the shared wireless infrastructure network increased cost of revenues by $1,322,208 and $6,008,015, respectively, and reduced gross margin by 4 and 18 percentage points, respectively. Increases in rent expense for the fixed wireless network primarily related to an increase in the number of PoPs in 2013 including those acquired in the Delos acquisition as well as base rent increases associated with increasing the number of antenna on our PoPs. Increases in rent expense for the shared wireless network primarily related to a higher number of lease agreements in the 2013 period as compared to the 2012 period. These increases were partially offset by lower Customer Network and other costs which decreased by $771,581 and benefited gross margin by 2 percentage points.

 

Depreciation and Amortization .     Depreciation and amortization totaled $15 ,351,441 during the year ended December 31, 2013 compared to $13,634,294 during the year ended December 31, 2012 representing an increase of $1,717,147 or 13%. Depreciation expense totaled $12 ,257,624 during the year ended December 31, 2013 compared to $10,262,526 during the year ended December 31, 2012 representing an increase of $1,995,098, or 19%. The gross base of depreciable assets as of December 31, 2013 increased by $7,615,000, or 10%, compared to December 31, 2012. The increase in the depreciable base during the year ended December 31, 2013 reflects continued growth in our fixed wireless network (approximately $3,662,000), spending on our shared wireless infrastructure (approximately $1,895,000) and additions resulting from acquisitions (approximately $808,000).

 

Amortization expense totaled $3,093,817 during the year ended December 31, 2013 compared to $3,371,768 during the year ended December 31, 2012 representing a decrease of $277,951, or 8%.  Amortization expense relates to customer related intangible assets recorded in connection with  acquisitions, and can fluctuate significantly from period to period depending upon the timing of acquisitions, the relative amounts of intangible assets recorded, and the amortization periods. The decrease was primarily related to amortization associated with the acquisition of Pipeline Wireless LLC ("Pipeline") which became fully amortized in May 2012. This decrease was partially offset by amortization expense associated with the Delos acquisition which began in February 2013.

 

Customer Support Services.     Customer support services totaled $3,799,554 during the year ended December 31, 2013 compared to $4,709,413 during the year ended December 31, 2012 representing a decrease of $909,859, or 19%.  The decrease was primarily related to lower payroll costs as average headcount totaled 71 during the 2013 period as compared to 81 during the 2012 period representing a decrease of 10, or 12%

 

Sales and Marketing. Sales and marketing expenses totaled $5,779,500 during the year ended December 31, 2013 compared to $6,134,020 during the year ended December 31, 2012 representing a decrease of $354,520, or 6%. Average headcount totaled 48 during the 2013 period as compared to 55 during the 2012 period representing a decrease of 7, or 13%.   In addition, channel commissions totaled $385,049 during 2013 compared to $307,574 during 2012 representing an increase of $77,475, or 25%.

 

General and Administrative.     General and administrative expenses totaled $11,033,057 during the year ended December 31, 2013 compared to $12,168,183 during the year ended December 31, 2012 representing a decrease of $1,135,126, or 9%. Payroll costs totaled $4,049,344 during 2013 compared to $4,410,287 during 2012 representing a decrease of $360,943, or 8%. In November 2012, the Chief Operating Officer resigned and was not replaced. Stock-based compensation totaled $1,253,661 during 2013 compared to $1,658,200 during 2012 representing a decrease of $404,539, or 24%. Acquisition expenses totaled $62,953 during 2013 compared to $330,869 during 2012 representing a decrease of $267,916, or 81%. Finally, bad debt expense totaled $85,000 during 2013 compared to $219,082 during 2012 representing a decrease of $134,082, or 61%. The decrease in bad debt expense was consistent with a more than 50% improvement in receivable balances greater than 90 days outstanding.

 

 
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Interest Income. Interest income totaled $2,893 during the year ended December 31, 2013 compared to $41,531 during the year ended December 31, 2012 representing a decrease of $38,638, or 93%. The decrease in the 2013 period compared to the 2012 period related to a decision to apply earnings credits against bank charges rather than be paid interest income as it yielded a higher net benefit to the Company.

 

Interest Expense.   Interest expense totaled $220,634 during the year ended December 31, 2013 compared to $105,245 during the year ended December 31, 2012 representing an increase of $115,389 or greater than 100%.   In total, we entered into six capital leases between June 2011 and April 2013 for equipment totaling approximately $3.7 million.  We incurred interest expense on these six leases of $161,452 and $55,828 in 2013 and 2012, respectively.

 

Gain on Business Acquisitions.     Gain on business acquisitions totaled $1,004,099 during the year ended December 31, 2013 compared to a loss of $40,079 during the year ended December 31, 2012 representing an increase of $1,044,178, or greater than 100% .  The gain recognized in the 2013 period relates to the acquisition of Delos in February 2013. The loss recognized in the 2012 period represents the final purchase price adjustment related to the acquisition of Color Broadband Communications (“Color Broadband”) in May 2012. The final purchase price for the Color Broadband acquisition resulted in an adjusted gain on business acquisition of $1,146,011. The challenging economic environment during 2012 made it difficult for smaller companies like Delos and Color Broadband to raise sufficient capital to sustain their growth.  As a result, we were able to acquire the customer relationships and wireless network of Delos and Color Broadband at a discounted price.

 

Provision for Income Taxes. Provision for income taxes totaled $78,531 during the year ended December 31, 2013 compared to $126,256 during the year ended December 31, 2012 representing a decrease of $47,725, or 38%. The expense recognized in the periods related to deferred tax liabilities associated with FCC licenses and goodwill which are amortized for tax purposes but not for book purposes.

 

Net Loss . Net loss totaled $24 ,775 ,289 during the year ended December 31, 2013 compared to $20,989,575 during the year ended December 31, 2012 representing an increase of $3,785 ,714 , or 18%. Revenues increased by $1,153,854, or 4%, while operating expenses increased by $5,876 ,284 or 11%. In addition, non-operating income, primarily related to gains on a business acquisition, totaled $771,338 for the year ended December 31, 2013 compared to non-operating expense of $117,653 for the year ended December 31, 2012.

 

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Revenues . Revenues for the year ended December 31, 2012 totaled $32,279,430 compared to $26,494,737 for the year ended December 31, 2011, representing an increase of $5,784,693, or 22%. This increase was primarily related to higher monthly recurring revenue (“MRR”) in the 2012 period, of which approximately $2,791,000 was related to a full year of revenue from the Color Broadband and One Velocity acquisitions and approximately $1,845,000 was related to organic growth in our core business. In addition, revenue generated from temporary connections increased by approximately $455,000, or 70%, in the year ended December 31, 2012 compared to the year ended December 31, 2011.

 

Average revenue per user (“ARPU”) as of December 31, 2012 totaled $717 compared to $710 as of December 31, 2011, representing an increase of $7, or 1%. ARPU for new customers for the year ended December 31, 2012 totaled $531 compared to $599 for the year ended December 31, 2011, representing a decrease of $68, or 11%.

 

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.59% for the year ended December 31, 2012 compared to 1.45% for the year ended December 31, 2011, representing a 10% increase on a percentage basis. Our goal is to maintain churn levels between 1.4% and 1.7% which we believe is below industry averages of approximately 2.0%.

 

Cost of Revenues.   Cost of revenues, exclusive of depreciation, for the year ended December 31, 2012 totaled $16,379,186 compared to $8,190,112 for the year ended December 31, 2011, representing an increase of $8,189,074, or 100%. Gross margins for the year ended December 31, 2012 decreased to 49% compared to 69% during the year ended December 31, 2011. Expenses associated with non-core activities, primarily rent for rooftop tower sites needed to expand our wireless capacity, totaled approximately $6,523,000 and $1,137,000 which impacted gross margin by 20 and 4 percentage points for the year ended December 31, 2012 and December 31, 2011, respectively. Core Network costs increased by approximately $2,626,000 primarily related to higher tower rent and bandwidth expense. Customer Network costs increased by approximately $348,000 primarily related to the growth in our customer base.

 

Depreciation and Amortization.     Depreciation and amortization totaled $13,634,294 for the year ended December 31, 2012 compared to $9,138,318 for the year ended December 31, 2011, representing an increase of $4,495,976, or 49%.

 

 
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Depreciation expense totaled $10,262,526 for the year ended December 31, 2012 compared to $6,507,271 for the year ended December 31, 2011, representing an increase of $3,755,255, or 58%. The gross base of depreciable assets increased by $24,389,376, or 48% compared to the prior year. The increased depreciable base reflects continued growth in our fixed wireless network (approximately $12,873,000) as well as spending on rooftop tower sites (approximately $11,516,000).

 

Amortization expense totaled $3,371,768 for the year ended December 31, 2012 compared to $2,631,047 for the year ended December 31, 2011, representing an increase of $740,721, or 28%. Amortization expense relates to customer related intangible assets recorded in connection with acquisitions and can fluctuate significantly from period to period depending upon the timing of acquisitions, the relative amounts of intangible assets recorded, and the amortization periods. The increase in the 2012 period is principally related to a year of amortization expense related to the Color Broadband acquisition as compared to no expense in the 2011 period.  Amortization expense also increased due to the One Velocity acquisition but decreased significantly related to the Sparkplug and Pipeline acquisitions.

 

Customer Support Services.     Customer support services totaled $4,709,413 for the year ended December 31, 2012 compared to $3,557,124 for the year ended December 31, 2011, representing an increase of $1,152,289, or 32%. The increase was related to additional personnel hired to support our growing customer base. Average department headcount increased by 29% from 63 in 2011 to 81 in 2012.

 

Sales and Marketing. Sales and marketing expenses for the year ended December 31, 2012 totaled $6,134,020 compared to $5,362,103 for the year ended December 31, 2011, representing an increase of $771,917, or 14%. This increase was primarily related to an increase in payroll costs of approximately $290,000, and an increase in commissions and bonuses of approximately $319,000. We improved the base pay and bonus program for account executives in 2012 as part of a concerted effort to attract and retain qualified personnel.

 

General and Administrative.     General and administrative expenses totaled $12,168,183 for the year ended December 31, 2012 compared to $9,411,608 for the year ended December 31, 2011, representing an increase of $2,756,575, or 29%. Expenses associated with non-core activities, including rooftop tower sites, totaled approximately $3,491,000 for the year ended December 31, 2012 as compared to $1,998,000 for the year ended December 31, 2011, representing an increase of approximately $1,493,000 or 75%. The increase in costs associated with non-core activities related to higher payroll, stock-based compensation, and information technology spending of $758,000, $265,000 and $268,000, respectively. In addition, stock-based compensation associated with our core services increased by approximately $312,000, and information technology spending increased by approximately $408,000.

 

Interest Income. Interest income for the year ended December 31, 2012 totaled $41,531 compared to $57,544 for the year ended December 31, 2011 representing a decrease of $16,013, or 28%. The decrease primarily relates to lower average cash balances in the 2012 period compared with the 2011 period. Average cash balances decreased from approximately $35.3 million in the 2011 period to approximately $29.8 million in the 2012 period.

 

Interest Expense.     Interest expense for the year ended December 31, 2012 totaled $105,245 compared to $22,058 for the year ended December 31, 2011, representing an increase of $83,187, or 377%. Interest expense related to capital leases acquired and deferred payment obligations to the Pipeline and Color Broadband acquisitions.

 

Gain on Business Acquisitions.  Loss on business acquisitions totaled $40,079 for the year ended December 31, 2012 compared to a gain of $2,231,534 for the year ended December 31, 2011, representing a decrease of $2,271,613, or 102%.  The gain in the 2011 period related to the acquisition of One Velocity in May 2011 and Color Broadband in December 2011. The loss in the 2012 period related to the final purchase price adjustment for the Color Broadband acquisition in December 2011. We previously recognized a gain on the acquisition of Color Broadband of $1,186,090. The final net gain totaled $1,146,011.

 

Provision for Income Taxes. Provision for income taxes totaled $126,256 for the year ended December 31, 2012 compared with $118,018 for the year ended December 31, 2011, representing an increase of $8,238, or 7%. The expense recognized in the periods related to deferred tax liabilities associated with FCC licenses and goodwill which are amortized for tax purposes but not for book purposes.

 

Net Loss.     Net loss for the year ended December 31, 2012 totaled $20,989,575 compared to $7,025,107 for the year ended December 31, 2011, representing an increase of $13,964,468, or 199%. Revenues increased by $5,784,693, or 22%, while operating expenses increased by $17,365,831, or 49%. Cash operating expenses associated with non-core activities, including rooftop tower sites, totaled $10,875,391 for the year ended December 31, 2012 compared to $3,580,958 for the year ended December 31, 2011, representing an increase of $7,294,433, or 204%. In addition, non-operating expense totaled $117,653 for the year ended December 31, 2012 compared with non-operating income of $2,257,439 for the year ended December 31, 2011.

 

 
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Liquidity and Capital Resources

 

We have historically met our liquidity and capital requirements primarily through the public sale and private placement of equity securities and debt financing. Changes in capital resources during the year ended December 31, 2013 and 2012 are described below. At February 28, 2014, we had cash and cash equivalents totaling approximately $22 ,800,000.

 

Net Cash (Used In) Provided by Operating Activities.   Net cash used in operating activities for the year ended December 31, 2013 totaled $9 ,484 ,438 compared to $8,078,493 for the year ended December 31, 2012 representing an increase of $1 ,405 ,945 , or 17%. Cash used in operations for the year ended December 31, 2013 totaled $8,314,570 as compared to $5,244,641 for the year ended December 31, 2012. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results.  Changes in operating assets and liabilities used cash of $1,169,868 during the year ended December 31, 2013 as compared to $2,833 ,852 for the year ended December 31, 2012.

 

Net cash used in operating activities for the year ended December 31, 2012 totaled $8,078,493 compared to net cash provided by operating activities of $702,518 for the year ended December 31, 2011, representing a decrease of $8,781,011, or greater than 100%. During the year ended December 31, 2012, cash flow provided by operations for our core business totaled $5,630,750 as compared to $4,892,246 during the year ended December 31, 2011. During the year ended December 31, 2012, cash flow used in operations for our non-core activities, including rooftop tower sites, totaled $10,875,391 as compared to $3,580,958 during the year ended December 31, 2011, representing an increase of $7,294,433 or 204%. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operat