Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 05/12/2014 16:04:17)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended March 31, 2014

OR

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

For the transition period from_______to_______

 

Commission file number 001-33449

 

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(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

 

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

 

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

Yes No

 

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

   

Large accelerated filer

Accelerated filer   

Non-accelerated filer    (Do not check if a smaller reporting company)

Smaller reporting company   

 

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

 

As of May 8, 2014, there were 66,445,044 shares of common stock, par value $0.001 per share, outstanding.

 

 

 
 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

 

 

Pages

Part I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements.

1

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013

1

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013 (unaudited)

2

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2014 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (unaudited)

4

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

5-13

 

 

 

Item 2.

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

14-22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

22

 

 

 

 Item 4.

Controls and Procedures.

22

 

 

 

Part II

OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits.

23

 

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)
March 31, 2014

   

December 31, 2013

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 21,205,943     $ 28,181,531  

Accounts receivable, net

    1,125,107       611,548  

Prepaid expenses and other current assets

    1,425,938       925,587  

Total Current Assets

    23,756,988       29,718,666  
                 

Property and equipment, net

    37,911,826       38,484,858  
                 

Intangible assets, net

    2,503,801       3,088,827  

Goodwill

    1,674,281       1,674,281  

Other assets

    1,873,799       1,950,835  

Total Assets

  $ 67,720,695     $ 74,917,467  
                 

Liabilities and Stockholders’ Equity

               
                 

Current Liabilities

               

Accounts payable

  $ 756,211     $ 1,241,743  

Accrued expenses

    1,836,100       2,532,679  

Deferred revenues

    1,383,159       1,396,780  

Current maturities of capital lease obligations

    773,415       783,051  

Other

    70,970       67,255  

Total Current Liabilities

    4,819,855       6,021,508  
                 

Long-Term Liabilities

               

Capital lease obligations, net of current maturities

    1,606,683       1,805,336  

Other

    1,406,787       996,682  

Total Long-Term Liabilities

    3,013,470       2,802,018  

Total Liabilities

    7,833,325       8,823,526  
                 

Commitments (Note 13)

               
                 

Stockholders' Equity

               

Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued

    -       -  

Common stock, par value $0.001; 95,000,000 shares authorized; 66,445,044 and 66,424,561 shares issued and outstanding, respectively

    66,445       66,425  

Additional paid-in-capital

    154,474,911       154,171,695  

Accumulated deficit

    (94,653,986 )     (88,144,179

)

Total Stockholders' Equity

    59,887,370       66,093,941  

Total Liabilities and Stockholders' Equity

  $ 67,720,695     $ 74,917,467  

 

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

 

 
1

 

   

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   

Three Months Ended March 31,

 
   

2014

   

2013

 
                 

Revenues

  $ 8,379,906     $ 8,299,223  
                 

Operating Expenses

               

Cost of revenues (exclusive of depreciation)

    5,855,944       4,981,306  

Depreciation and amortization

    3,695,415       3,871,087  

Customer support services

    1,172,135       1,396,894  

Sales and marketing

    1,421,599       1,440,856  

General and administrative

    2,677,939       3,137,599  

Total Operating Expenses

    14,823,032       14,827,742  

Operating Loss

    (6,443,126 )     (6,528,519

)

Other Income/(Expense)

               

Interest income

    7,420       154  

Interest expense

    (70,471 )     (35,768

)

Gain on business acquisition

    -       941,457  

Other income (expense), net

    (3,630 )     (3,630

)

Total Other Income/(Expense)

    (66,681 )     902,213  

Net Loss

  $ (6,509,807 )   $ (5,626,306

)

                 

Net loss per common share – basic and diluted

  $ (0.10 )   $ (0.09

)

Weighted average common shares outstanding – basic and diluted

    66,439,061       61,464,706  

 

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

 

 
2

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

For the Three Months Ended March 31, 2014

 

   

Common Stock

                         
   

Shares

   

Amount

   

Additional

Paid-In-Capital

   

Accumulated Deficit

   

Total

 

Balance at December 31, 2013

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

)

  $ 66,093,941  

Issuance of common stock under employee stock purchase plan

    5,483       5       12,880       -       12,885  

Issuance of common stock upon vesting of restricted stock awards

    15,000       15       (15 )     -       -  

Stock-based compensation for options

    -       -       290,351       -       290,351  

Net loss

    -       -       -       (6,509,807 )     (6,509,807 )

Balance at March 31, 2014

    66,445,044     $ 66,445     $ 154,474,911     $ (94,653,986 )   $ 59,887,370  

   

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

 

 
3

 

   

  TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

Three Months Ended March 31,

 
   

2014

   

2013

 

Cash Flows From Operating Activities

               

Net loss

  $ (6,509,807 )   $ (5,626,306

)

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

               

Provision for doubtful accounts

    10,000       -  

Depreciation for property, plant and equipment

    3,110,389       3,118,487  

Amortization for customer based intangibles

    585,026       752,600  

Stock-based compensation

    292,269       396,481  

Gain on business acquisition

    -       (941,457 )

Loss on sale and disposition of property and equipment

    -       41,951  

Deferred rent

    70,761       (28,940

)

Changes in operating assets and liabilities:

               

Accounts receivable

    (523,559 )     62,074  

Prepaid expenses and other current assets

    (500,351 )     (392,784

)

Other assets

    96,407       114,105  

Accounts payable

    (485,532 )     (695,724

)

Accrued expenses

    (1,221,108 )     (1,071,747

)

Deferred revenues

    (13,621 )     (151,467

)

Total Adjustments

    1,420,681       1,203,579  

Net Cash Used In Operating Activities

    (5,089,126 )     (4,422,727

)

                 

Cash Flows From Investing Activities

               

Acquisitions of property and equipment

    (2,012,828 )     (696,813

)

Lease incentive payment from landlord

    380,000       -  

Acquisition of a business, net of cash acquired

    -       (222,942 )

Proceeds from sale of property and equipment

    -       1,000  

Payments of security deposits

    (19,371 )     (18,344

)

Deferred acquisition payments

    (36,941 )     (38,754

)

Net Cash Used In Investing Activities

    (1,689,140 )     (975,853

)

                 

Cash Flows From Financing Activities

               

Payments on capital leases

    (208,289 )     (192,310

)

Issuance of common stock upon exercise of options

    -       246,989  

Issuance of common stock under employee stock purchase plan

    10,967       20,157  

Net proceeds from sale of common stock

    -       30,500,836  

Net Cash (Used In) Provided By Financing Activities

    (197,322 )     30,575,672  
                 

Net (Decrease) Increase In Cash and Cash Equivalents

    (6,975,588 )     25,177,092  
                 

Cash and Cash Equivalents – Beginning

    28,181,531       15,152,226  

Cash and Cash Equivalents – Ending

  $ 21,205,943     $ 40,329,318  
                 

Supplemental Disclosures of Cash Flow Information

               

Cash paid during the periods for:

               

Interest

  $ 70,471     $ 35,732  

Taxes

  $ 28,257     $ 28,262  

Non-cash investing and financing activities:

               

Fair value of common stock issued in connection with an acquisition

  $ -     $ 1,071,172  

Acquisition of property and equipment:

               

Under capital leases

  $ -     $ 80,894  

Included in accrued expenses

  $ 524,529     $ 549,258  

 

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

 

 
4

 

 

  TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1.    Organization and Nature of Business

 

Towerstream Corporation (referred to as “Towerstream” or the “Company”) was incorporated in Delaware in December 1999. During its first decade of operations, the Company's business activities were focused on delivering fixed wireless broadband services to commercial customers over a wireless network transmitting over both regulated and unregulated radio spectrum. The Company's fixed wireless service supports bandwidth on demand, wireless redundancy, virtual private networks, disaster recovery, bundled data and video services. The Company provides services to business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. The Company's “fixed wireless business” has historically grown both organically and through the acquisition of five other fixed wireless broadband providers in various markets.

 

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”).  Hetnets was formed to operate a new shared wireless infrastructure platform that emerged from the Company's efforts to identify opportunities to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services.  Hetnets operates a carrier-class network which has been constructed on "street level rooftops" which are closer to the ground (where Wi-Fi and small cell can operate with less interference from the macro cell) than the Company's traditional fixed wireless network.  The Company believes that the wireless communications industry is experiencing a fundamental shift from its traditional macro-cellular architecture to densified small cell architecture where existing cell sites will be supplemented by many smaller base stations operating near street level.  Hetnets is structured to operate like a tower company and expects  to generate rental income from four separate sources including (i) rental of space on street level rooftops for the installation of customer owned small cells which includes Wi-Fi antennae, DAS, and Metro and Pico cells, (ii) rental of a channel on Hetnets’ Wi-Fi network for internet access and the offloading of mobile data, (iii) rental of a port for backhaul or transport, and (iv) power and other related services. The Company refers to the activities of Hetnets as its “shared wireless infrastructure” (or “shared wireless”) business.

 

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

 

Note 2.    Summary of Significant Accounting Policies

 

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2014 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the operating results for the full fiscal year for any future period.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2013, and updated, as necessary, in this Quarterly Report on Form 10-Q.

 

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

 

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

   

 
5

 

   

  TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Concentration of Credit Risk.      Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of March 31, 2014, the Company had cash and cash equivalent balances of approximately $5,946,000 in excess of the federally insured limit of $250,000.

 

The Company also had approximately $15,010,000 invested in institutional money market funds. These funds are protected under the Securities Investor Protection Corporation, a nonprofit membership corporation which provides limited coverage up to $500,000.

 

Accounts Receivable . Accounts receivable are stated at cost less an allowance for doubtful accounts which reflects the Company’s estimate of balances that will be not collected. The allowance is based on the history of past write-offs, the aging of balances, collections experience and current credit conditions. Additions include provisions for doubtful accounts and deductions include customer write-offs. Changes in the allowance for doubtful accounts were as follows:

 

   

Three Months Ended March 31,

 
   

2014

   

2013

 

Beginning of period

  $ 81,009     $ 190,109  

Additions

    10,000       -  

Deductions

    (25,290 )     (46,672

)

End of period

  $ 65,719     $ 143,437  

 

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

 

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

 

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

 

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

 

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

 

Recent Accounting Pronouncements. No accounting pronouncements adopted during the three months ended March 31, 2014 had a material impact on the Company's condensed consolidated financial statements. No new accounting pronouncements issued during the three months ended March 31, 2014 but not yet adopted are expected to have a material impact on the Company's condensed consolidated financial statements.

 

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

 

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

 

 
6

 

   

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 3.    Business Acquisitions

 

Delos Internet

 

In February 2013, the Company completed the acquisition of Delos Internet (“Delos”). The Company obtained full control of Delos and determined that the acquisition was a business combination to be accounted for under the acquisition method. The following table summarizes the consideration transferred and the amounts of identified assets acquired and liabilities assumed at the acquisition date. The number of shares issued was based on the closing price of the Company's common stock on the February 28, 2013 closing date which was $2.47.

 

Fair value of consideration transferred:

 

Original

   

Adjustments

   

Final

 

Cash

  $ 225,000     $ -     $ 225,000  

Common stock

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

Other liabilities assumed

    -       36,733       36,733  

Capital lease obligations assumed

    128,929       -       128,929  

Total consideration transferred

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

Fair value of identifiable assets acquired and liabilities assumed:

                       

Cash

    2,058       -       2,058  

Accounts receivable

    80,524       1,286       79,238  

Property and equipment

    826,524       18,824       807,700  

Security deposits

    1,993       -       1,993  

Accounts payable

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

Deferred revenue

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

Other liabilities

    (89,930 )     -       (89,930 )

Total identifiable net tangible assets

    732,089       20,541       711,548  

Customer relationships

    1,634,469       -       1,634,469  

Total identifiable net assets

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

Gain on business acquisition

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

 

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

 

In May 2013, the Company finalized the purchase price of Delos which resulted in a reduction of approximately $21,000 of identifiable net assets and an increase in the gain on business acquisition of approximately $63,000. The purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Delos of 48,549 from 433,673 to 385,124 shares.

 

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

 

Pro Forma Information

 

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

 

   

Three Months Ended

March 31, 2013

 

Revenues

  $ 8,411,793  

Amortization expense

    817,979  

Total operating expenses

    14,999,721  

Net loss

    (5,685,715 )

Basic net loss per share

  $ (0.09 )

 

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

 

 
7

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 4.    Property and Equipment

 

Property and equipment is comprised of:

 

   

March 31, 2014

   

December 31, 2013

 

Network and base station equipment

  $ 33,092,603     $ 32,233,262  

Customer premise equipment

    24,838,433       24,244,017  

Shared wireless infrastructure

    20,098,809       19,128,064  

Information technology

    4,517,495       4,417,869  

Furniture, fixtures and other

    1,667,779       1,661,567  

Leasehold improvements

    1,441,001       1,433,984  
      85,656,120       83,118,763  

Less: accumulated depreciation

    47,744,294       44,633,905  

Property and equipment, net

  $ 37,911,826     $ 38,484,858  

 

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

 

   

March 31, 2014

   

December 31, 2013

 

Network and base station equipment

  $ 828,027     $ 828,027  

Shared wireless infrastructure

    1,216,142       1,216,142  

Customer premise equipment

    96,843       96,843  

Information technology

    1,860,028       1,860,028  
      4,001,040       4,001,040  

Less: accumulated depreciation

    1,533,718       1,333,666  

Property acquired through capital leases, net

  $ 2,467,322     $ 2,667,374  

 

Note 5. Intangible Assets

 

Intangible assets consist of the following:

 

   

March 31, 2014

   

December 31, 2013

 

Goodwill

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

Customer relationships

  $ 11,856,127     $ 11,856,127  

Less: accumulated amortization of customer relationships

    10,636,881       10,051,855  

Customer relationships, net

    1,219,246       1,804,272  

FCC licenses

    1,284,555       1,284,555  

Intangible assets, net

  $ 2,503,801     $ 3,088,827  

 

Amortization expense for the three months ended March 31, 2014 and 2013 was $585,026 and $752,600, respectively. The customer contracts acquired in the Company’s acquisition of Delos are being amortized over a 50 month period ending April 2017. As of March 31, 2014, the remaining amortization period for all acquisitions with customer relationship balances ranged from 1 to 37 months. Future amortization expense is expected to be as follows:

 

Remainder of 2014

  $ 303,943  

2015

    392,272  

2016

    392,272  

2017

    130,759  
    $ 1,219,246  

 

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

 

 

 
8

 

   

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 6. Accrued Expenses

 

Accrued expenses consist of the following: 

 

   

March 31, 2014

   

December 31, 2013

 

Property and equipment

  $ 524,529     $ 867,311  

Payroll and related

    673,108       937,624  

Professional services

    241,345       186,917  

Network

    126,744       138,684  

Marketing

    94,842       108,741  

Other

    175,532       293,402  

Total

  $ 1,836,100     $ 2,532,679  

 

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

 

Note 7.    Other Liabilities

 

Other liabilities consist of the following:

 

   

March 31, 2014

   

December 31, 2013

 

Current

               

Deferred rent

  $ 37,935     $ -  

Deferred acquisition payments

    33,035       67,255  

Total

  $ 70,970     $ 67,255  
                 

Long-Term

               

Deferred rent

  $ 1,075,187     $ 662,361  

Deferred acquisition payments

    8,795       11,516  

Deferred taxes

    322,805       322,805  

Total

  $ 1,406,787     $ 996,682  

 

Gross deferred acquisition payments related to the acquisition of Pipeline Wireless LLC (“Pipeline”) in December 2010 totaled $33,261 and are payable in monthly installments of $16,630 through May 2014. The carrying value of these non-interest bearing payments were discounted rate at 12% and totaled $22,422 at March 31, 2014. Deferred acquisition payments related to Delos totaled $19,408 at March 31, 2014 and bear interest at rates ranging from 7% to 12.5%.

 

 Note 8. Stock-Based Compensation

 

The Company uses the Black-Scholes option pricing model to value options granted to employees, directors and consultants. Compensation expense, including the effect of forfeitures, is recognized over the period of service, generally the vesting period. Stock-based compensation totaled $290,351 and $378,205 for the three months ended March 31, 2014 and 2013, respectively. Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

 

The unamortized amount of stock options expense totaled $1,398,465 as of March 31, 2014 which will be recognized over a weighted-average period of 2.1 years.

 

During the three months ended March 31, 2014, there were no stock options granted by the Company. The fair values of stock option grants during the three months ended March 31, 2013 were calculated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:

 

   

Three Months Ended

March 31, 2013

 

Risk-free interest rate

    0.8 %

Expected volatility

    68 %

Expected life (in years)

    5  

Expected dividend yield

    -  

Weighted average per share grant date fair value

  $ 1.46  

 

 
9

 

 

  TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

Option transactions under the stock option plans during the three months ended March 31, 2014 were as follows:

 

   

Number

   

Weighted Average

Exercise Price

 

Outstanding as of December 31, 2013

    4,055,016     $ 2.70  

Granted during 2014

    -     $ -  

Exercised

    -     $ -  

Forfeited /expired

    (35,000 )   $ 2.31  

Outstanding as of March 31, 2014

    4,020,016     $ 2.70  

Exercisable as of March 31, 2014

    2,897,049     $ 2.45  

   

Cancellations for the three months ended March 31, 2014 included 35,000 options related to employee terminations.

 

The weighted average remaining contractual life of the outstanding options as of March 31, 2014 was 5.8 years.

 

The intrinsic value of outstanding and exercisable options totaled $1,754,542 and $1,726,406, respectively, as of March 31, 2014. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of March 31, 2014, which was $2.35 per share, and the exercise price of the options.

 

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

 

Note 9.    Stock Warrants

 

The 450,000 warrants outstanding and exercisable at March 31, 2014 and December 31, 2013 had an exercise price of $5.00 and expire in July 2016.

 

There was no intrinsic value associated with the outstanding and exercisable warrants as of March 31, 2014. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of March 31, 2014, which was $2.35 per share, and the exercise price of the warrants.

 

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

 

Note 10. Employee Stock Purchase Plan

 

Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP Plan”), participants can purchase shares of the Company’s stock at a 15% discount. A maximum of 200,000 shares of common stock can be issued under the ESPP Plan of which 92,105 shares have been issued to date and 107,895 shares are available for future issuance. During the three months ended March 31, 2014, a total of 5,483 shares were issued under the ESPP Plan with a fair value of $12,885. The Company recognized $1,918 and $3,501 of stock-based compensation related to the 15% discount for the three months ended March 31, 2014 and 2013, respectively.

 

 
10

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Note 11. Fair Value Measurement

 

Valuation Hierarchy

 

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

 

Cash and cash equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. There were no changes in the valuation techniques during the three months ended March 31, 2014.

 

   

Total

Carrying

Value

   

Quoted prices in active markets
(Level 1)

   

Significant
other
observable
inputs
(Level 2)

   

Significant
unobservable
inputs
(Level 3)

 

March 31, 2014

  $ 21,205,943     $ 21,205,943     $ -     $ -  

December 31, 2013

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

 

Note 12.    Net Loss Per Common Share

 

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

 

The following common stock equivalents were excluded from the computation of diluted net loss per common share because they were anti-dilutive. The exercise or issuance of these common stock equivalents outstanding at March 31, 2014 would dilute earnings per share if the Company becomes profitable in the future. The exercise of the outstanding stock options and warrants could potentially generate proceeds up to approximately $13,116,000 if exercised by the holder for cash.

 

Stock options

    4,020,016  

Warrants

    450,000  

Total

    4,470,016  

 

Note 13.    Commitments

 

Operating Lease Obligations

 

    The Company has entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through December 2020. Certain of these operating leases include extensions, at the Company's option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table below as it is not presently determinable which options, if any, the Company will elect to exercise. As of March 31, 2014, total future operating lease obligations were as follows:

 

Remainder of 2014

  $ 18,945,459  

2015

    17,296,665  

2016

    15,980,241  

2017

    10,476,902  

2018

    3,182,292  

Thereafter

    1,127,327  
    $ 67,008,886  

 

 

 
11

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Rent expenses were as follows:

 

   

Three Months Ended March 31 ,

 
   

2014

   

2013

 

Points of Presence

  $ 1,845,246     $ 1,625,702  

Street level rooftops

    3,129,493       2,464,098  

Corporate offices

    84,109       123,758  

Other

    90,498       119,877  
    $ 5,149,346     $ 4,333,435  

 

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

 

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

 

Capital Lease Obligations

 

The Company has entered into capital leases to acquire property and equipment expiring through March 2018.  As of March 31, 2014, total future capital lease obligations were as follows:

 

Remainder of 2014

  $ 734,919  

2015

    908,344  

2016

    655,754  

2017

    391,305  

2018

    53,923  
    $ 2,744,245  

Less: Interest expense

    364,147  

Total capital lease obligations

  $ 2,380,098  

Current

  $ 773,415  

Long-term

  $ 1,606,683  

 

Other

 

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

 

Note 14. Segment Information

 

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

   

 

 
12

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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

 

   

Three Months Ended March 31, 2014 (Unaudited)

 
   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 7,685,526     $ 740,349     $ -     $ (45,969 )   $ 8,379,906  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    2,498,693       3,388,951       14,269       (45,969 )     5,855,944  

Depreciation and amortization

    2,537,873       940,938       216,604       -       3,695,415  

Customer support services

    268,515       176,190       727,430       -       1,172,135  

Sales and marketing

    1,263,137       76,750       81,712       -       1,421,599  

General and administrative

    108,425       146,528       2,422,986       -       2,677,939  

Total Operating Expenses

    6,676,643       4,729,357       3,463,001       (45,969 )     14,823,032  

Operating Income (Loss)

  $ 1,008,883     $ (3,989,008 )   $ (3,463,001 )   $ -     $ (6,443,126 )
                                         

Capital expenditures

  $ 1,486,450     $ 938,053     $ 112,854     $ -     $ 2,537,357  
                                         

As of March 31, 2014

                                       

Property and equipment, net

  $ 22,570,307     $ 12,832,453     $ 2,509,066     $ -     $ 37,911,826  

Total assets

  $ 28,562,095     $ 15,336,248     $ 23,822,352     $ -     $ 67,720,695  

   

   

Three Months Ended March 31, 2013 (Unaudited)

 
   

Fixed Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 8,186,736     $ 158,476     $ -     $ (45,989

)

  $ 8,299,223  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    2,334,145       2,650,885       42,265       (45,989

)

    4,981,306  

Depreciation and amortization

    2,819,609       864,112       187,366       -       3,871,087  

Customer support services

    275,075       244,522       877,297       -       1,396,894  

Sales and marketing

    1,296,941       47,048       96,867       -       1,440,856  

General and administrative

    146,897       190,184       2,800,518       -       3,137,599  

Total Operating Expenses

    6,872,667       3,996,751       4,004,313       (45,989

)

    14,827,742  

Operating Income (Loss)

  $ 1,314,069     $ (3,838,275

)

  $ (4,004,313

)

  $ -     $ (6,528,519

)

                                         

Capital expenditures

  $ 1,087,472     $ 136,200     $ 103,293     $ -     $ 1,326,965  
                                         

As of March 31, 2013

                                       

Property and equipment, net

  $ 25,641,570     $ 13,275,065     $ 2,057,627     $ -     $ 40,974,262  

Total assets

  $ 34,427,109     $ 15,556,795     $ 42,494,289     $ -     $ 92,478,193  

 

Note 15. Subsequent Events

 

In April 2014, Hetnets entered into a Wi-Fi Agreement with an international provider of Wi-Fi access services in major urban markets. This agreement provides leased access to access points within New York City, Chicago, San Francisco, and Miami. The term of the agreement is for an initial three year period, includes annual escalations of 2%, and provides for automatic annual renewals for two additional years.  

 

 

 
13

 

 

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

 

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the three months ended March 31, 2014. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

 

Forward-Looking Statements

 

Forward-looking statements in this Quarterly Report on Form 10-Q, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth and competition; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

 

In some cases, you can identify forward-looking statements by terminology such as “may,’’ “will,’’ “should,’’ “could,’’ “expects,’’ “plans,’’ “intends,’’ “anticipates,’’ “believes,’’ “estimates,’’ “predicts,’’ “potential,’’ or “continue’’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place too much reliance on these forward-looking statements which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q.

 

Non-GAAP Measures and Reconciliations to GAAP Measures

 

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

 

Characteristics of Revenues and Expenses

 

Our Fixed Wireless segment offers broadband services under agreements for periods normally ranging between one to three years. Pursuant to these agreements, we bill customers on a monthly basis, in advance, for each month of service. Payments received in advance of services performed are recorded as deferred revenues and recognized as revenue ratably over the service period. Our Shared Wireless Infrastructure segment offers to rent space, channels, and ports on our street level rooftops at a fixed monthly rent.

 

Costs of revenues consists of expenses that are directly related to providing services to our customers, including Core Network expenses (tower and street level rooftop rent and utilities, bandwidth costs, maintenance and other) and Customer Network expenses (customer maintenance, non-installation fees and other customer specific expenses).  We collectively refer to Core Network and Customer Network as our “Network,” and Core Network costs and Customer Network costs as “Network Costs.”  When we first enter a new market, or expand in an existing market, we are required to incur up-front costs in order to be able to provide services to commercial customers.  We refer to these activities as establishing a “Network Presence.” For the Fixed Wireless segment, these costs include constructing Points-of-Presence (“PoPs”) in buildings in which we have a lease agreement (“Company Locations”) where we install a substantial amount of equipment in order to connect numerous customers to the Internet. For the Shared Wireless Infrastructure segment, these costs include installing numerous access points, backhaul, and other equipment on street level rooftops that we refer to as “Hotzones.” The costs to build PoPs and construct Hotzones are capitalized and expensed over a five year period.  In addition, we also enter into tower and roof rental agreements, secure bandwidth and incur other Network Costs.  Once we have established a Network Presence in a new market or expanded our Network Presence in an existing market, we are capable of servicing a significant number of customers through that Network Presence.  The variable cost to add new customers is relatively modest, especially compared to the upfront cost of establishing or expanding our Network Presence.  However, we may experience variability in gross margins during periods in which we are expanding our Network Presence in a market.

 

 
14

 

 

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.

 

Overview – Fixed Wireless

 

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

 

Market Information – Fixed Wireless

  

As of March 31, 2014, we operated in twelve metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation. We incur significant up-front costs in order to establish a Network Presence in a new market. These costs include building PoPs and Network Costs. Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period. We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model and the operating performance of our mature markets. Set forth below is a summary of our operating performance on a per-market basis, and a description of how each category is determined.

 

Revenues : Revenues are allocated based on which market each customer is located in.

 

Costs of Revenues : Includes Core Network costs and Customer Network costs that can be allocated to a specific market.

 

Operating Costs : Represents costs that can be specifically allocated to a market which include direct sales personnel, certain direct marketing expenses, certain customer support and installation payroll expenses and third party commissions.

 

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

   

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

 

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

  

We entered the Houston market in February 2013 through the acquisition of Delos Internet (“Delos”). We exited the Nashville market effective March 31, 2014.

 

 

 
15

 

 

Three months ended March 31, 2014

 

Market

 

Revenues

   

Cost of
Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted
Market
EBITDA

 

New York

  $ 1,916,030     $ 618,511     $ 1,297,519     $ 280,240     $ 1,017,279  

Los Angeles

    2,039,758       561,310       1,478,448       468,298       1,010,150  

Boston

    1,534,256       393,615       1,140,641       196,710       943,931  

Chicago

    725,062       293,659       431,403       141,098       290,305  

Miami

    369,061       102,474       266,587       95,102       171,485  

Houston

    172,815       57,939       114,876       17,899       96,977  

Las-Vegas-Reno

    255,897       121,485       134,412       42,321       92,091  

San Francisco

    276,040       127,678       148,362       90,561       57,801  

Providence-Newport

    80,285       47,555       32,730       1,575       31,155  

Dallas-Fort Worth

    166,657       93,483       73,174       49,131       24,043  

Seattle

    64,934       47,831       17,103       5,586       11,517  

Philadelphia

    36,858       20,510       16,348       14,872       1,476  

Nashville

    1,904       12,642       (10,738 )     2,331       (13,069 )

Total

  $ 7,639,557     $ 2,498,692     $ 5,140,865     $ 1,405,724     $ 3,735,141  

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 3,735,141  

Fixed wireless, non-market specific

       

Other expenses

    (234,354 )

Depreciation and amortization

    (2,537,873 )

Shared wireless infrastructure, net

    (3,943,039 )

Corporate

    (3,463,001 )

Other income (expense)

    (66,681 )

Net loss

  $ (6,509,807 )

     

Three months ended March 31, 2013  

  

Market

 

Revenues

   

Cost of
Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted
Market
EBITDA

 

Los Angeles

  $ 2,069,824     $ 529,767     $ 1,540,057     $ 411,463     $ 1,128,594  

Boston

    1,669,439       330,279       1,339,160       214,620       1,124,540  

New York

    1,885,865       599,099       1,286,766       336,437       950,329  

Chicago

    913,199       305,649       607,550       113,759       493,791  

Las Vegas-Reno

    388,174       131,925       256,249       56,555       199,694  

Miami

    377,347       99,261       278,086       84,025       194,061  

San Francisco

    302,629       100,840       201,789       85,926       115,863  

Providence-Newport

    127,368       49,141       78,227       18,345       59,882  

Seattle

    137,037       45,685       91,352       39,177       52,175  

Houston

    52,985       21,016       31,969       12,720       19,249  

Dallas-Fort Worth

    171,352       88,781       82,571       75,459       7,112  

Philadelphia

    39,940       18,037       21,903       22,528       (625 )

Nashville

    5,588       14,665       (9,077 )     4,248       (13,325 )

Total

  $ 8,140,747     $ 2,334,145     $ 5,806,602     $ 1,475,262     $ 4,331,340  

   

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 4,331,340  

Fixed wireless, non-market specific

       

Other expenses

    (243,651 )

Depreciation and amortization

    (2,819,609 )

Shared wireless infrastructure, net

    (3,792,286 )

Corporate

    (4,004,313 )

Other income (expense)

    902,213  

Net loss

  $ (5,626,306 )

 

 
16

 

    

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.

 

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

 

In April 2014, we entered into a Wi-Fi Agreement with an international provider of Wi-Fi access services in major urban markets. This agreement provides leased access to access points within New York City, Chicago, San Francisco, and Miami. The term of the agreement is for an initial three year period, includes annual escalations of 2%, and provides for automatic annual renewals for two additional years.

 

Supplemental Segment Information  

 

Operating information about each segment in accordance with GAAP is disclosed in Note 14 of the financial statements. In addition, we use other non-GAAP measurements to assess the operating performance of each segment. These non-GAAP financial measures are commonly used by investors, financial analysts, and rating agencies. Management believes that these non-GAAP financial measures should be available so that investors have the same data that management employs in assessing our overall operations.

 

EBITDA, a non-GAAP financial measure, is calculated as net income (loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization expenses, excluding when applicable, stock-based compensation, 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. Net Cash Flow is defined as Adjusted EBITDA less capital expenditures.

 

Three Months Ended March 31, 2014

 

   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 1,008,883     $ (3,989,008 )   $ (3,463,001 )   $ (6,443,126 )

Depreciation and amortization

    2,537,873       940,938       216,604       3,695,415  

Stock-based compensation

    -       -       292,269       292,269  

Loss on non-monetary transactions

    67,568       -       -       67,568  

Deferred rent

    6,753       72,815       (8,807 )     70,761  

Adjusted EBITDA

    3,621,077       (2,975,255 )     (2,962,935 )     (2,317,113 )

Less: Capital expenditures

    1,486,450       938,053       112,854       2,537,357  

Net Cash Flow

  $ 2,134,627     $ (3,913,308 )   $ (3,075,789 )   $ (4,854,470 )

 

Reconciliation of Adjusted EBITDA to Net Loss

       
         

Adjusted EBITDA

  $ (2,317,113 )

Depreciation and amortization

    (3,695,415 )

Stock-based compensation

    (292,269 )

Loss on non-monetary transactions

    (67,568 )

Deferred rent

    (70,761 )

Operating Income (Loss)

    (6,443,126 )

Interest income

    7,420  

Interest expense

    (70,471 )

Other income (expense), net

    (3,630 )

Net loss

  $ (6,509,807 )

 

 

 
17

 

   

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

       
         

Net cash flow

  $ (4,854,470 )

Capital expenditures

    2,537,357  

Changes in operating assets and liabilities, net

    (2,647,764 )

Other, net

    (124,249 )

Net cash used in operating activities

  $ (5,089,126 )

 

Three Months Ended March 31, 2013

 

   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 1,314,069     $ (3,838,275

)

  $ (4,004,313

)

  $ (6,528,519

)

Depreciation and amortization

    2,819,609       864,112       187,366       3,871,087  

Stock-based compensation

    -       -       396,481       396,481  

Loss on property and equipment

    39,227       2,724       -       41,951  

Loss on non-monetary transactions

    77,184       -       -       77,184  

Non-recurring expenses, primarily acquisition-related

    -       -       65,400       65,400  

Adjusted EBITDA

    4,250,089       (2,971,439

)

    (3,355,066

)

    (2,076,416

)

Less: Capital expenditures

    1,087,472       136,200       103,293       1,326,965  

Net Cash Flow

  $ 3,162,617     $ (3,107,639

)

  $ (3,458,359

)

  $ (3,403,381

)

   

Reconciliation of Adjusted EBITDA to Net Loss