Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 05/11/2015 16:09:27)

 

 

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, 2015

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 7, 2015, there were 66,739,898 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, 2015 (unaudited) and December 31, 2014

1

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (unaudited)

2

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2015 (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)

4

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

5-12

 

 

 

Item 2.

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

13-21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

21

 

 

 

 Item 4.

Controls and Procedures.

21

 

 

 

Part II

OTHER INFORMATION

 

     

Item 6.

Exhibits.

22

  

 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

(Unaudited)
March 31, 201
5

   

December 31,

2014

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 32,267,413     $ 38,027,509  

Accounts receivable, net

    1,144,212       1,310,647  

Prepaid expenses and other current assets

    1,384,555       926,699  

Total Current Assets

    34,796,180       40,264,855  
                 

Property and equipment, net

    32,297,557       33,905,286  
                 

Intangible assets, net

    2,101,790       2,199,858  

Goodwill

    1,674,281       1,674,281  

Other assets

    3,896,779       4,277,558  

Total Assets

  $ 74,766,587     $ 82,321,838  
                 

Liabilities and Stockholders’ Equity

               
                 

Current Liabilities

               

Accounts payable

  $ 942,533     $ 871,251  

Accrued expenses

    2,527,664       2,038,696  

Deferred revenues

    1,384,985       1,384,846  

Current maturities of capital lease obligations

    821,121       845,668  

Other

    63,791       57,242  

Total Current Liabilities

    5,740,094       5,197,703  
                 

Long-Term Liabilities

               

Long-term debt, net of debt discount of $2,887,107 and $3,194,147, respectively

    32,761,404       32,101,409  

Capital lease obligations, net of current maturities

    1,136,927       1,285,858  

Other

    1,866,844       1,774,841  

Total Long-Term Liabilities

    35,765,175       35,162,108  

Total Liabilities

    41,505,269       40,359,811  
                 

Commitments (Note 12)

               
                 

Stockholders' Equity

               

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

    -       -  

Common stock, par value $0.001; 95,000,000 shares authorized; 66,662,876 and 66,656,789 shares issued and outstanding, respectively

    66,663       66,657  

Additional paid-in-capital

    157,853,650       157,631,299  

Accumulated deficit

    (124,658,995 )     (115,735,929 )

Total Stockholders' Equity

    33,261,318       41,962,027  

Total Liabilities and Stockholders' Equity

  $ 74,766,587     $ 82,321,838  

 

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,

 
   

2015

   

2014

 
                 

Revenues

  $ 7,960,095     $ 8,379,906  
                 

Operating Expenses

               

Cost of revenues (exclusive of depreciation)

    6,400,367       5,855,944  

Depreciation and amortization

    3,379,383       3,695,415  

Customer support services

    1,241,479       1,175,765  

Sales and marketing

    1,328,430       1,421,599  

General and administrative

    2,869,238       2,677,939  

Total Operating Expenses

    15,218,897       14,826,662  

Operating Loss

    (7,258,802 )     (6,446,756 )

Other Income/(Expense)

               

Interest expense, net

    (1,664,264 )     (63,051 )

Total Other Income/(Expense)

    (1,664,264 )     (63,051 )

Net Loss

  $ (8,923,066 )   $ (6,509,807 )
                 

Net loss per common share – basic and diluted

  $ (0.13 )   $ (0.10 )

Weighted average common shares outstanding – basic and diluted

    67,856,789       66,439,061  

 

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, 2015

 

 

   

Common Stock

                         
   

Shares

   

Amount

   

Additional Paid-In-Capital

   

Accumulated

Deficit

   

Total

 

Balance at January 1, 2015

    66,656,789     $ 66,657     $ 157,631,299     $ (115,735,929 )   $ 41,962,027  

Issuance of common stock under employee stock purchase plan

    6,087       6       13,142       -       13,148  

Stock-based compensation for options

    -       -       209,209       -       209,209  

Net loss

    -       -       -       (8,923,066 )     (8,923,066 )

Balance at March 31, 2015

    66,662,876     $ 66,663     $ 157,853,650     $ (124,658,995 )   $ 33,261,318  

   

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,

 
   

201 5

   

201 4

 

Cash Flows From Operating Activities

               

Net loss

  $ (8,923,066 )   $ (6,509,807 )

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

               

Provision for doubtful accounts

    30,000       10,000  

Depreciation for property, plant and equipment

    3,281,315       3,110,389  

Amortization for customer based intangibles

    98,068       585,026  

Amortization of debt issuance costs

    252,899       -  

Amortization of debt discount

    307,040       -  

Stock-based compensation

    211,157       292,269  

Deferred rent

    90,649       70,761  

Changes in operating assets and liabilities:

               

Accounts receivable

    136,435       (523,559 )

Prepaid expenses and other current assets

    (447,229 )     (500,351 )

Other assets

    131,079       96,407  

Accounts payable

    71,282       (485,532 )

Accrued expenses

    516,458       (353,797 )

Deferred revenues

    139       (13,621 )

Accrued interest

    352,956       -  

Total Adjustments

    5,032,248       2,287,992  

Net Cash Used In Operating Activities

    (3,890,818 )     (4,221,815 )
                 

Cash Flows From Investing Activities

               

Acquisitions of property and equipment

    (1,651,697 )     (2,880,139 )

Lease incentive payment from landlord

    -       380,000  

Payments of security deposits

    (3,200 )     (19,371 )

Deferred acquisition payments

    (2,723 )     (36,941 )

Net Cash Used In Investing Activities

    (1,657,620 )     (2,556,451 )
                 

Cash Flows From Financing Activities

               

Payments on capital leases

    (222,858 )     (208,289 )

Proceeds from the issuance of common stock under employee stock purchase plan

    11,200       10,967  

Net Cash Used In Financing Activities

    (211,658 )     (197,322 )
                 

Net Decrease In Cash and Cash Equivalents

    (5,760,096 )     (6,975,588 )
                 

Cash and Cash Equivalents – Beginning

    38,027,509       28,181,531  

Cash and Cash Equivalents – Ending

  $ 32,267,413     $ 21,205,943  
                 

Supplemental Disclosures of Cash Flow Information

               

Cash paid during the periods for:

               

Interest

  $ 768,520     $ 70,471  

Taxes

  $ 21,900     $ 28,257  

Acquisition of property and equipment:

               

Under capital leases

  $ 49,380     $ -  

Included in accrued expenses

  $ 496,789     $ 524,529  

 

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, Distributed Antenna System (“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. The Cable Operator has a limited right to expand access in other Hetnets’ markets. The term of the Wi-Fi Agreement is for an initial three year period and provides for automatic annual renewals for two additional one year periods.

 

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

 

Note 2.    Summary of Significant Accounting Policies

 

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2015 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2015 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, 2014. 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, 2014, 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.

 

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, 2015, the Company had cash and cash equivalent balances of approximately $31,815,000 in excess of the federally insured limit of $250,000.

 

 
5

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

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,

 
   

2015

   

2014

 

Beginning of period

  $ 59,273     $ 81,009  

Additions

    30,000       10,000  

Deductions

    (17,930 )     (25,290 )

End of period

  $ 71,343     $ 65,719  

 

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 applies the revenue recognition principles set forth under the United States Securities and Exchange Commission Staff Accounting Bulletin 104, (“SAB 104”) which provides for revenue to be recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

 

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

 

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

 

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

 

Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” which requires an entity to recognize revenue representing the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. ASU 2014-09 is intended to establish principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenues and cash flows arising from the entity’s contracts with customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The original standard was effective for the Company on January 1, 2017, however, in April 2015, the FASB proposed a one-year deferral of this standard with a new effective date for the Company of January 1, 2018. Early application is not permitted. The Company is currently evaluating the effect that ASU 2014-09 will have on its condensed consolidated financial statements and related disclosures.

 

In April 2015, the FASB issued ASU No. 2015-03 (”ASU 2015-03”), “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as an asset. ASU 2015-03 is effective for the Company on January 1, 2016. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. The retrospective application represents a change in accounting principle. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the effect that ASU 2015-03 will have on its condensed consolidated financial statements and related disclosures.

 

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

 

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

 

 

 

 
6

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

Note 3.    Property and Equipment

 

Property and equipment is comprised of:

   

March 31, 2015

   

December 31, 2014

 

Network and base station equipment

  $ 36,522,349     $ 35,836,469  

Customer premise equipment

    27,345,815       26,511,691  

Shared wireless infrastructure

    21,076,722       21,044,189  

Information technology

    4,691,363       4,628,555  

Furniture, fixtures and other

    1,710,445       1,669,340  

Leasehold improvements

    1,616,529       1,599,393  
      92,963,223       91,289,637  

Less: accumulated depreciation

    60,665,666       57,384,351  

Property and equipment, net

  $ 32,297,557     $ 33,905,286  

 

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

 

   

March 31, 201 5

   

December 31, 201 4

 

Network and base station equipment

  $ 1,053,255     $ 1,003,875  

Shared wireless infrastructure

    1,230,305       1,230,305  

Customer premise equipment

    246,484       246,484  

Information technology

    1,860,028       1,860,028  
      4,390,072       4,340,692  

Less: accumulated depreciation

    2,355,038       2,135,534  

Property acquired through capital leases, net

  $ 2,035,034     $ 2,205,158  

   

Note 4. Intangible Assets

 

Intangible assets consist of the following:

   

March 31, 2015

   

December 31, 2014

 

Goodwill

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

Customer relationships

  $ 11,856,127     $ 11,856,127  

Less: accumulated amortization of customer relationships

    11,038,892       10,940,824  

Customer relationships, net

    817,235       915,303  

FCC licenses

    1,284,555       1,284,555  

Intangible assets, net

  $ 2,101,790     $ 2,199,858  

 

Amortization expense for the three months ended March 31, 2015 and 2014 was $98,068 and $585,026, respectively. The customer contracts acquired in the Delos acquisition are being amortized over a 50 month period ending April 2017. As of March 31, 2015, the remaining amortization period for the Delos acquisition was 25 months. Balances related to the Company’s other acquisitions have been fully amortized. Future amortization expense is as follows:  

         

Remainder of 2015

 

$

294,204

 

2016

 

 

392,272

 

2017

 

 

130,759

 

 

 

$

817,235

 

 

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

 

 
7

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

Note 5. Accrued Expenses

 

Accrued expenses consist of the following: 

   

March 31, 2015

   

December 31, 2014

 

Payroll and related

  $ 842,499     $ 726,917  

Property and equipment

    496,789       524,280  

Professional services

    486,168       256,534  

Other

    381,701       280,413  

Network

    235,824       187,440  

Marketing

    84,683       63,112  

Total

  $ 2,527,664     $ 2,038,696  

 

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

 

Note 6.    Other Liabilities

 

Other liabilities consist of the following:

   

March 31, 2015

   

December 31, 2014

 

Current

               

Deferred rent

  $ 54,989     $ 46,058  

Deferred acquisition payments

    8,802       11,184  

Total

  $ 63,791     $ 57,242  
                 

Long-Term

               

Deferred rent

  $ 1,465,507     $ 1,373,163  

Deferred acquisition payments

    -       341  

Deferred taxes

    401,337       401,337  

Total

  $ 1,866,844     $ 1,774,841  

 

Deferred acquisition payments related to Delos Internet totaled $8,802 at March 31, 2015 and bear interest at a rate of 7%.

 

Note 7.    Long-Term Debt

 

In October 2014, the Company entered into a loan agreement (the "Loan Agreement") with Melody Business Finance, LLC (the "Lender") which provided the Company with a five-year $35 million term loan (then "Financing" or "Note").  The Note was issued at a 3% discount totaling $1,050,000 which is being amortized over the term of the Note.  The Company recognized interest expense of $91,765 in connection with the amortization of this discount for the three months ended March 31, 2015, and the unamortized balance totaled $862,870 at March 31, 2015.

 

    The Note bears interest payable in cash at a rate equal to the greater of (i) the sum of the one month Libor rate on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that accrues at 4% per annum.   The Company paid $705,911 of interest and accrued $352,956 of PIK interest for the three months ended March 31, 2015.

 

    In October 2019, the Company must repay the principal amount outstanding plus all accrued interest. The Company has the option of prepaying the Note (i) on or before October 16, 2016 (the “Second Anniversary”), but only in full, and (ii) at any time after the Second Anniversary, in the minimum principal amount of $5,000,000 or in full if the balance outstanding is less. All optional prepayments are subject to certain premiums.  Mandatory prepayments are required upon the occurrence of certain events, including but not limited to the (i) sale, lease, conveyance or transfer of certain assets, (ii) issuance or incurrence of indebtedness other than certain permitted debt, (iii) issuance of capital stock redeemable for cash or convertible into debt securities and (iv) any change of control.  As further set forth in a security agreement (the “Security Agreement”), repayment of the Note is secured by a first priority lien and security interest in all of the assets of the Company and its subsidiaries, excluding capital stock of the Company, and certain capital leases, contracts and assets secured by purchase money security interests.  

 

 

 
8

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

    The Loan Agreement also contains representations and warranties by the Company and the Lender, certain indemnification provisions in favor of the Lender and customary covenants (including limitations on other debt, liens, acquisitions, investments and dividends), and events of default (including payment defaults, breaches of covenants, a material impairment in the Lender’s security interest or in the collateral, and events relating to bankruptcy or insolvency). Upon the occurrence of an event of default, an additional 5% interest rate will be applied to the outstanding loan balances, and the Lender may terminate its lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the Loan Agreement.  As of March 31, 2015, the Company was in compliance with all of the debt covenants.

 

    In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, the Company issued warrants (the “Warrants”) to purchase 3,600,000 shares of common stock of which two-thirds have an exercise price of $1.26 and one-third have an exercise price of $0.01, subject to customary adjustments under certain circumstances.  The Warrants have a term of seven and a half years.  The fair value of the warrants granted to the Lender of $2,463,231 was calculated using the Black-Scholes option pricing model and recorded as a debt discount.  The debt discount is being amortized over the term of the Note using the effective interest rate.  The Company recognized interest expense of $215,275 in connection with the amortization of this discount for the three months ended March 31, 2015, and the unamortized balance totaled $2,024,237 at March 31, 2015.

 

   The warrant holders have piggyback registration rights requiring the inclusion of the shares of common stock issuable upon exercise of the Warrants (the “Warrant Shares”) in any registration statement filed by the Company.  In addition, the Company has agreed to file a registration statement to register for resale all of the Warrant Shares and cause the registration statement to become effective by October 16, 2015 (the “Required Registration Statement”).  If the Required Registration Statement is not declared effective by the required date, then (i) the Warrants may be exercised on a cashless basis until the Required Registration Statement becomes effective and the Warrant Shares are listed for trading and (ii) the Company shall pay the holders liquidated damages in the aggregate amount of $5,000 per month, up to $50,000 in total, until both the Required Registration Statement has become effective and the Warrant Shares are listed. 

 

   The Company incurred costs, primarily professional services, of approximately $2,900,000 related to the Loan Agreement.  These costs were recorded as other assets in the Company’s consolidated balance sheet and are being amortized over the term of the Loan Agreement using the effective interest rate.  Amortization expense totaled $252,899 for the three months ended March 31, 2015, and the unamortized balance totaled $2,378,020 at March 31, 2015. 

 

  Note 8 . Stock Options and Warrants

 

Stock Options

 

The Company uses the Black-Scholes option pricing model on the date of grant to value options issued to employees, directors and consultants. Compensation expense, including the effect of forfeitures, is recognized over the period of service, generally the vesting period. There were no stock options granted during the three months ended March 31, 2015 and 2014, respectively. Stock-based compensation was $209,209 and $290,351 for the three months ended March 31, 2015 and 2014, respectively, and is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. The unamortized amount of stock options expense totaled $849,297 as of March 31, 2015 which will be recognized over a weighted-average period of 1.5 years.

 

Option transactions under the stock option plans during the three months ended March 31, 2015 were as follows:

 

   

Number

   

Weighted Average Exercise Price

 

Outstanding as of January 1, 2015

    3,997,695     $ 2.73  

Granted during 2015

    -     $ -  

Exercised

    -     $ -  

Forfeited /expired

    (24,290 )   $ 1.75  

Outstanding as of March 31, 2015

    3,973,405     $ 2.74  

Exercisable as of March 31, 2015

    2,811,295     $ 2.83  

 

Cancellations for the three months ended March 31, 2015 included 24,290 options related to employee terminations.

 

The weighted average remaining contractual life of the outstanding options as of March 31, 2015 was 6.0 years.

 

The aggregate intrinsic value associated with the options outstanding and exercisable as of March 31, 2015 was $1,188,962 and $718,014, respectively. The closing price of the Company’s common stock at March 31, 2015 was $2.16 per share.

 

 

 
9

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

Stock Warrants

 

There were 4,050,000 warrants outstanding and exercisable at March 31, 2015 with a weighted average exercise price of $1.31 per share. The weighted average remaining contractual life of the warrants was 6.4 years.

 

The aggregate intrinsic value associated with the warrants outstanding and exercisable as of March 31, 2015 was $4,740,000. The closing price of the Company’s common stock at March 31, 2015 was $2.16 per share.

 

Cashless Exercises

 

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

 

Note 9. Employee Stock Purchase Plan

 

Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP Plan”), participants can purchase shares of the Company’s stock at a 15% discount. A maximum of 200,000 shares of common stock can be issued under the ESPP Plan of which 117,667 shares have been issued to date and 82,333 shares are available for future issuance. During the three months ended March 31, 2015, a total of 6,087 shares were issued under the ESPP Plan with a fair value of $13,148. The Company recognized $1,948 and $1,918 of stock-based compensation related to the 15% discount for the three months ended March 31, 2015 and 2014, respectively.

 

Note 10. Fair Value Measurement

 

Valuation Hierarchy

 

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

 

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, 2015.

 

                         
   

Total

Carrying

Value

   

Quoted prices

in active

markets
(Level 1)

   

Significant
other
observable
inputs
(Level 2)

   

Significant
unobservable
inputs
(Level 3)

 

March 31, 2015

  $ 32,267,413     $ 32,267,413     $ -     $ -  

December 31, 2014

  $ 38,027,509     $ 38,027,509     $ -     $ -  

 

 Note 11.    Net Loss Per Common Share

 

Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of common shares outstanding during the period and 1,200,000 warrants to purchase shares of common stock at an exercise price of $0.01. 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, 2015 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 $16 million if exercised by the holder for cash.

 

Stock options

    3,973,405  

Warrants

    2,850,000  

Total

    6,823,405  

 

 
10

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

 Note 12.    Commitments

 

Operating Lease Obligations

 

    The Company has entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through August 2023. Certain of these operating leases include extensions, at the Company's option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table below as it is not presently determinable which options, if any, the Company will elect to exercise. As of March 31, 2015, total future operating lease obligations were as follows:

 

         

Remainder of 2015

  $ 16,456,000  

2016

    19,727,967  

2017

    13,906,886  

2018

    6,325,425  

2019

    2,783,906  

Thereafter

    1,033,205  
    $ 60,233,389  

 

Rent expenses were as follows:

 

   

Three Months Ended March 3 1 ,

 
   

201 5

   

201 4

 

Points of Presence

  $ 2,085,698     $ 1,845,246  

Street level rooftops

    3,461,498       3,129,493  

Corporate offices

    92,193       84,109  

Other

    88,336       90,498  
    $ 5,727,725     $ 5,149,346  

 

    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 began at $359,750 for 2014 and escalate by 3% annually reaching $416,970 for 2019.

 

In December 2014, the Company entered into a new lease agreement in Florida, primarily for a second sales center. The lease commenced in February 2015 for 38 months with an option to renew for an additional 60 month period. Total annual rent payments begin at $53,130 and escalate by 3% annually.

 

Capital Lease Obligations

 

The Company has entered into capital leases to acquire property and equipment expiring through March 2018.  As of March 31, 2015, total future capital lease obligations were as follows:

 

Remainder of 2015

  $ 773,879  

2016

    809,816  

2017

    537,199  

2018

    57,168  
    $ 2,178,062  

Less: interest expense

    220,014  

Total capital lease obligations

  $ 1,958,048  

Current

  $ 821,121  

Long-term

  $ 1,136,927  

 

 

 
11

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

  Other

 

During the first quarter of 2015, the Company renewed a one year information technology infrastructure support agreement. The agreement became effective at the end of the first quarter of 2015. Payments of approximately $68,000 are due quarterly through the first quarter of 2016.

 

Note 13. Segment Information

 

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

 

The balance of the Company’s operations is in the Corporate group which includes centralized operations. This group includes operations related to corporate overhead and centralized activities which support our overall operations. Corporate overhead includes administrative personnel, including executive management, and other support functions such as information technology and facilities. Centralized operations 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, 201 5 (Unaudited)

 
   

Fixed

Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Eliminations

   

Total

 
                                         

Revenues

  $ 7,217,731     $ 787,628     $ -     $ (45,264 )   $ 7,960,095  
                                         

Operating Expenses

                                       

Cost of revenues (exclusive of depreciation)

    2,721,896       3,706,383       17,352       (45,264 )     6,400,367  

Depreciation and amortization

    2,126,788       1,031,510       221,085       -       3,379,383  

Customer support services

    326,088       160,135       755,256       -       1,241,479  

Sales and marketing

    1,210,285       43,612       74,533       -       1,328,430  

General and administrative

    120,329       108,344       2,640,565       -       2,869,238  

Total Operating Expenses

    6,505,386       5,049,984       3,708,791       (45,264 )     15,218,897  

Operating Income (Loss)

  $ 712,345     $ (4,262,356 )   $ (3,708,791 )   $ -     $ (7,258,802 )
                                         

Capital expenditures

  $ 1,434,067     $ 118,470     $ 121,049     $ -     $ 1,673,586  
                                         

As of March 31, 2015

                                       

Property and equipment, net

  $ 20,527,511     $ 9,759,333     $ 2,010,713     $ -     $ 32,297,557  

Total assets

  $ 25,257,562     $ 11,978,212     $ 37,530,813     $ -     $ 74,766,587  

 

 

   

Three Months Ended March 31, 201 4 (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

    272,145       176,190       727,430       -       1,175,765  

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

    6,680,273       4,729,357       3,463,001       (45,969 )     14,826,662  

Operating Income (Loss)

  $ 1,005,253     $ (3,989,008 )   $ (3,463,001 )   $ -     $ (6,446,756 )
                                         

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  

 

 

 
12

 

 

 

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, 2015. 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, 2014 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

 

Forward-Looking Statements

 

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

 

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

 

Non-GAAP Measures and Reconciliations to GAAP Measures

 

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

 

Characteristics of Revenues and Expenses

 

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

 

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

 

Sales and marketing expenses primarily consist of the salaries, benefits, travel and other costs of our sales and marketing teams, as well as marketing initiatives and business development expenses.

 

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

 

 

 
13

 

 

 

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, 2015, 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. Intercompany transactions have been eliminated in the tables below.

 

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.

 

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.

   

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

 

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.

  

We exited the Nashville market effective March 31, 2014.

 

Three M onths E nded March 31, 201 5

  

Market

 

Revenues

   

Cost of
Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted
Market
EBITDA

 

Los Angeles

  $ 1,982,509     $ 566,585     $ 1,415,924     $ 486,903     $ 929,021  

New York

    1,961,726       783,017       1,178,709       315,832       862,877  

Boston

    1,246,967       405,443       841,524       166,834       674,690  

Chicago

    693,393       304,005       389,388       149,754       239,634  

Miami

    299,644       118,581       181,063       71,742       109,321  

San Francisco

    268,299       120,464       147,835       40,026       107,809  

Houston

    185,062       73,748       111,314       27,803       83,511  

Las-Vegas-Reno

    217,479       119,284       98,195       44,852       53,343  

Dallas-Fort Worth

    163,370       98,893       64,477       26,658       37,819  

Seattle

    68,320       48,007       20,313       14,715       5,598  

Providence/Newport

    57,807       56,288       1,519       4,198       (2,679 )

Philadelphia

    27,891       27,581       310       6,732       (6,422 )

T otal

  $ 7,172,467     $ 2,721,896     $ 4,450,571     $ 1,356,049     $ 3,094,522  

 

 

 
14

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 3,094,522  

Fixed wireless, non-market specific

       

Other expenses

    (300,653 )

Depreciation and amortization

    (2,126,788 )

Shared wireless infrastructure, net

    (4,217,092 )

Corporate

    (3,708,791 )

Other income (expense)

    (1,664,264 )

Net loss

  $ (8,923,066 )

 

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       98,732       167,855  

Houston

    172,815       57,940       114,875       17,899       96,976  

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     $ 2,498,693     $ 5,140,864     $ 1,409,354     $ 3,731,510  

 

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 3,731,510  

Fixed wireless, non-market specific

       

Other expenses

    (234,353 )

Depreciation and amortization

    (2,537,873 )

Shared wireless infrastructure, net

    (3,943,039 )

Corporate

    (3,463,001 )

Other income (expense)

    (63,051 )

Net loss

  $ (6,509,807 )

 

 

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 service 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. The Cable Operator has a limited right to expand access in other markets. The term of the Wi-Fi Agreement is for an initial three year period and provides for automatic renewals for two additional one year periods.    

 

 

 
15

 

 

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

 

Supplemental Segment Information  

 

Operating information about each segment in accordance with GAAP is disclosed in Note 13 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. 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 GAAP.

 

We focus on Adjusted EBITDA as a principal indictor 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, 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) nonmonetary transactions, and (ii) 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, 201 5

   

Fixed Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 712,345     $ (4,262,356 )   $ (3,708,791 )   $ (7,258,802 )

Depreciation and amortization

    2,126,788       1,031,510       221,085       3,379,383  

Stock-based compensation

    -       -       211,157       211,157  

Loss on nonmonetary transactions

    66,118       -       -       66,118  

Non-recurring expenses, primarily acquisition-related

    -       -       235,692       235,692  

Deferred rent

    44,287       49,793       (3,431 )     90,649  

Adjusted EBITDA

    2,949,538       (3,181,053 )     (3,044,288 )     (3,275,803 )

Less: Capital expenditures

    1,434,067       118,470       121,049       1,673,586  

Net Cash Flow

  $ 1,515,471     $ (3,299,523 )   $ (3,165,337 )   $ (4,949,389 )

 

Reconciliation of Adjusted EBITDA to Net Loss

       
         

Adjusted EBITDA

  $ (3,275,803 )

Depreciation and amortization

    (3,379,383 )

Stock-based compensation

    (211,157 )

Loss on nonmonetary transactions

    (66,118 )

Non-recurring expenses, primarily acquisition-related

    (235,692 )

Deferred rent

    (90,649 )

Operating Income (Loss)

    (7,258,802 )

Interest expense, net

    (1,664,264 )

Net loss

  $ (8,923,066 )

 

 

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

       
         

Net cash flow

  $ (4,949,389 )

Capital expenditures

    1,673,586  

Non-recurring expenses, primarily acquisition related

    (235,692 )

Changes in operating assets and liabilities, net

    761,120  

Other, net

    (1,140,443 )

Net cash used in operating activities

  $ (3,890,818 )

 

 

 

 
16

 

 

 

Three Months Ended March 31, 2014

   

Fixed Wireless

   

Shared Wireless Infrastructure

   

Corporate

   

Total

 

Operating Income (Loss)

  $ 1,005,253     $ (3,989,008 )   $ (3,463,001 )   $ (6,446,756 )

Depreciation and amortization

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

Stock-based compensation

    -       -       292,269       292,269  

Loss on nonmonetary transactions

    67,568       -       -       67,568  

Deferred rent

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

Adjusted EBITDA

    3,617,447       (2,975,255 )     (2,962,935 )     (2,320,743 )

Less: Capital expenditures

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

Net Cash Flow

  $ 2,130,997     $ (3,913,308 )   $ (3,075,789 )   $ (4,858,100 )

 

Reconciliation of Adjusted EBITDA to Net Loss

       
         

Adjusted EBITDA

  $ (2,320,743 )

Depreciation and amortization

    (3,695,415 )

Stock-based compensation

    (292,269 )

Loss on nonmonetary transactions

    (67,568 )

Deferred rent

    (70,761 )

Operating Income (Loss)

    (6,446,756 )

Interest expense, net

    (63,051 )

Net loss

  $ (6,509,807 )

 

 

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

       
         

Net cash flow

  $ (4,858,100 )

Capital expenditures

    2,537,357  

Changes in operating assets and liabilities, net

    (1,780,453 )

Other, net

    (120,619 )

Net cash used in operating activities

  $ (4,221,815 )

 

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

 

Revenues . Revenues totaled $7,960,095 during the three months ended March 31, 2015 compared to $8,379,906 during the three months ended March 31, 2014 representing a decrease of $419,811, or 5%. Revenues for the Fixed Wireless segment totaled $7,217,731 during the three months ended March 31, 2015 compared to $7,685,526 during the three months ended March 31, 2014 representing a decrease of $467,795, or 6%. The decrease principally related to a 7% decrease in the base of customers billed on a monthly recurring basis. New customer additions have been adversely impacted by a 21% decrease in the number of account executives which averaged 27 during the three months ended March 31, 2015 compared to 34 during the three months ended March 31, 2014. In March 2015, we opened a second sales office in Florida and believe that our ability to recruit talent from an additional geographic area will increase the number of account executives and improve sales productivity levels. Revenues for the Shared Wireless segment totaled $787,628 during the three months ended March 31, 2015 compared to $740,349 during the three months ended March 31, 2014 representing an increase of $47,279, or 6%. The increase was exclusively related to higher revenues generated through a large cable company customer contract.

 

Average revenue per user (“ARPU”) for the Fixed Wireless segment totaled $773 as of March 31, 2015 compared to $758 as of March 31, 2014 representing an increase of $15, or 2%. The increase in ARPU primarily related to customers upgrading to higher bandwidth service which generates higher monthly recurring revenue. ARPU for new customers totaled $628 during the three months ended March 31, 2015 compared to $636 during the three months ended March 31, 2014 representing a decrease of $8, or 1%.

 

 

 
17

 

 

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.85% during the three months ended March 31, 2015 compared to 2.33% during the three months ended March 31, 2014. Our goal is to maintain churn levels below industry averages of approximately 2.00%. Churn levels can fluctuate from period to period depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons.

 

Cost of Revenues. Cost of revenues totaled $6,400,367 during the three months ended March 31, 2015 compared to $5,855,944 during the three months ended March 31, 2014 representing an increase of $544,423 or 9%. On a consolidated basis, higher rent expense represented approximately 107% of the increase with rents for PoPs for the Fixed Wireless segment increasing by approximately $260,000 and rents for street level rooftops for the Shared Wireless segment increasing by approximately $326,000. The number of street level rooftops for the Shared Wireless segment were approximately 6% higher at March 31, 2015 compared to March 31, 2014. Other cost of revenues, including bandwidth and customer network costs, totaled $665,353 during the three months ended March 31, 2015 as compared to $707,057 during the three months ended March 31, 2014 representing a decrease of $41,704, or 6%. On a consolidated basis, gross margin was 20% for the three months ended March 31, 2015 as compared to 30% for the three months ended March 31, 2014 representing a decrease of 10 percentage points with the Fixed Wireless and Shared Wireless segments accounting for approximately 7 and 3 of the percentage point decreases, respectively. On a per market basis, approximately $501,000 or 92%, of the increase in cost of revenues occurred in our New York City market which is the second largest market for our Fixed Wireless segment and where approximately 64% of the street level rooftops for our Shared Wireless segment are located.

 

Depreciation and Amortization . Depreciation and amortization totaled $3,379,383 during the three months ended March 31, 2015 compared to $3,695,415 during the three months ended March 31, 2014 representing a decrease of $316,032, or 9%. Depreciation expense totaled $3,281,315 during the three months ended March 31, 2015 compared to $3,110,389 during the three months ended March 31, 2014 representing an increase of $170,926 or 5%. The base of depreciable assets as of March 31, 2015 increased approximately 9% compared to March 31, 2014, however, newly acquired assets will not have a full year of depreciation in the year of acquisition which lessens the impact of a higher base on depreciation expense. The increase in the depreciable base during the twelve months ended March 31, 2015 reflects continued growth in our fixed wireless network (approximately $5,937,000), spending on our shared wireless infrastructure (approximately $978,000) and additions resulting from other expenditures (approximately $392,000).

 

Amortization expense totaled $98,068 during the three months ended March 31, 2015 compared to $585,026 during the three months ended March 31, 2014 representing a decrease of $486,958, or 83%. 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 related to intangible assets associated with the Color Broadband Communications acquisition which had zero and $486,958 of amortization expense in the 2015 and 2014 periods, respectively. These assets became fully amortized in April 2014.

 

Customer Support Services. Customer support services totaled $1,241,479 during the three months ended March 31, 2015 compared to $1,175,765 during the three months ended March 31, 2014 representing an increase of $65,714, or 6%. The increase was primarily related to higher payroll costs as average headcount increased to 68 during the 2015 period as compared to 66 during the 2014 period.

 

Sales and Marketing. Sales and marketing expenses totaled $1,328,430 during the three months ended March 31, 2015 compared to $1,421,599 during the three months ended March 31, 2014 representing a decrease of $93,169, or 7%. Compensation related costs, including sales commissions, totaled $869,571 during the 2015 period as compared to $973,548 during the 2014 period representing a decrease of $103,977, or 11%. Average headcount totaled 38 during the 2015 period as compared to 46 during the 2014 period representing a decrease of 8, or 17%. Channel commissions totaled $127,005 during the 2015 period as compared to $96,543 during the 2014 period representing an increase of $30,462, or 32%. Advertising costs totaled $282,197 during the 2015 period as compared to $296,206 during the 2014 period representing a decrease of $14,009, or 5%. Other costs, including travel, entertainment, dues and subscriptions totaled $49,657 during the 2015 period as compared to $55,302 during the 2014 period representing a decrease of $5,645, or 10%.

 

General and Administrative. General and administrative expenses totaled $2,869,238 during the three months ended March 31, 2015 compared to $2,677,939 during the three months ended March 31, 2014 representing an increase of $191,299, or 7%. Payroll costs totaled $930,407 during 2015 compared to $989,291 during 2014 representing a decrease of $58,884, or 6%. Average headcount totaled 32 during the 2015 period compared to 37 during the 2014 period representing a decrease of 5, or 14%. Stock-based compensation totaled $211,157 during 2015 compared to $292,269 during 2014 representing a decrease of $81,112, or 28%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Facilities expense totaled $124,321 during the 2015 period compared to $98,083 during the 2014 period representing an increase of $26,238, or 27%. Office expense totaled $140,890 during the 2015 period compared to $122,804 during the 2014 period representing an increase of $18,086, or 15%. In March 2015, the Company opened a second sales office in Florida which has increased its facilities costs and office expenses. Acquisition expense totaled $235,692 during the 2015 period compared to zero during the 2014 period representing an increase of $235,692, or 100%. Acquisition expense can fluctuate significantly from period to period depending upon the timing of potential acquisition opportunities. Bad debt expense totaled $30,000 during the 2015 period compared to $10,000 during the 2014 period representing an increase of $20,000, or greater than 100%. Higher bad debt expense related to an 18% increase in receivable balances more than 90 days past due. Other costs, including travel, entertainment, taxes and information technology support totaled $536,675 during the 2015 period as compared to $499,985 during the 2014 period representing an increase of $36,690, or 7%.

 

 
18

 

 

 

Interest Expense, Net. Interest expense, net totaled $1,664,264 during the three months ended March 31, 2015 compared to $63,051 during the three months ended March 31, 2014 representing an increase of $1,601,213, or greater than 100%. The increase related to our $35 million debt financing completed in October 2014. Cash and non-cash interest expense in 2015 totaled $705,911 and $912,894 respectively. Non-cash interest expense included payment-in-kind interest, and the amortization of (i) debt issuance costs, and (ii) discounts associated with (a) original issuance pricing and (b) fair value of warrants issued in connection with the financing.

 

Net Loss. Net loss totaled $8,923,066 during the three months ended March 31, 2015 compared to $6,509,807 during the three months ended March 31, 2014 representing an increase of $2,413,259, or 37%. Operating results accounted for approximately 34% of the higher net loss as revenues decreased by $419,811, or 5%, while operating expenses increased by $392,235, or 3%. Interest expense accounted for approximately 67% of the increased net loss related to our $35 million debt financing completed in October 2014. Interest expense totaled $1,681,414 during the 2015 period as compared to interest expense of $70,471 recognized in 2014 resulting in a net increase of $1,610,943.

 

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 three months ended March 31, 2015 and 2014 are described below.

 

Net Cash Used in Operating Activities.  Net cash used in operating activities for the three months ended March 31, 2015 totaled $3,890,818 compared to $4,221,815 for the three months ended March 31, 2014 representing a decrease of $330,997, or 8%. Cash used in operations for the three months ended March 31, 2015 totaled $4,651,938 as compared to $2,441,362 for the three months ended March 31, 2014 representing an increase of $2,210,576, or 91%. The increase primarily related to higher cost of revenues in the 2015 period related to increased rent expense for both business segments. 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 provided cash of $761,120 during the three months ended March 31, 2015 as compared to cash used of $1,780,453 for the three months ended March 31, 2014 representing a change of $2,541,573 or greater than 100%.

 

Net Cash Used in Investing Activities.  Net cash used in investing activities for the three months ended March 31, 2015 totaled $1,657,620 compared to $2,556,451 for the three months ended March 31, 2014 representing a decrease of $898,831, or 35%. Cash capital expenditures for the Fixed Wireless segment totaled $1,394,579 in the 2015 period compared to $1,570,675 in the 2014 period, representing a decrease of $176,096, or 11%. Cash capital expenditures for the Shared Wireless Infrastructure segment totaled $127,731 in the 2015 period compared to $1,124,876 in the 2014 period, representing a decrease of $997,145, or 89%. Capital expenditures for both business segments can fluctuate from period to period depending upon the number of customer additions and upgrades, network construction activity related to increasing capacity or coverage, and other related reasons. In 2014, we received an incentive payment of $380,000 from our landlord in connection with entering a new lease agreement for our corporate offices. These funds were used to pay for qualified leasehold improvements to the facility.

 

Net Cash Used In Financing Activities . Net cash used in financing activities for the three months ended March 31, 2015 totaled $211,658 compared to $197,322 for the three months ended March 31, 2014, representing an increase of $14,336, or 7%.

 

Debt Financing . In October 2014, we entered into a loan agreement (the “Loan Agreement”) with Melody Business Finance, LLC (the “Lender”). The Lender provided us with a five-year $35 million secured term loan (the “Financing” or “Note”). The Financing was issued at a 3% discount and the Company incurred $2,893,739 in debt issuance costs. Net proceeds were $31,056,260.

 

Pursuant to the terms of the Loan Agreement, the Note bears interest at a rate equal to the greater of (i) the sum of the most recently effective one month Libor as in effect on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that accrues at 4% per annum.

 

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

 

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

 

Capital Resources. As of March 31, 2015, we had cash and cash equivalents of $32,267,413 and working capital of $29,056,086. Based on our current operating activities and plans, we believe our capital resources at the end of March 31, 2015 will enable us to meet our anticipated cash requirements for at least the next twelve months.

 

 

 
19

 

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and other commitments as of March 31, 2015:

 

 

   

Payments due by period

 
   

Total

   

201 5

   

201 6

   

201 7

   

2018

   

2019

   

Thereafter

 
                                                         

Operating leases

  $ 60,233,389     $ 16,456,000     $ 19,727,967     $ 13,906,886     $ 6,325,425     $ 2,783,906     $ 1,033,205  

Long-term debt

    35,648,511       -       -       -       -       35,648,511       -  

Capital leases

    2,178,062       773,879       809,816       537,199       57,168       -       -  

Other

    271,472       203,604       67,868       -       -       -       -  

Deferred payments

    9,062       8,720       342       -       -       -       -  

Total

  $ 98,340,496     $ 17,442,203     $ 20,605,993     $ 14,444,085     $ 6,382,593     $ 38,432,417     $ 1,033,205  

 

Operating Leases. We have entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through August 2023. Certain of these operating leases include extensions, at our option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table above as it is not presently determinable which options, if any, we will elect to exercise.

 

Long-Term Debt . We have entered into a loan agreement with Melody Business Finance, LLC. The $35 million term loan becomes due in October 2019. We had $648,511 of accrued PIK interest as of March 31, 2015.

 

Capital Lease. We have entered into capital leases to acquire property and equipment expiring through March 2018.

 

Other. During the first quarter of 2015, we renewed a one year information technology infrastructure support agreement. The agreement became effective at the end of the first quarter of 2015. Payments of approximately $68,000 are due quarterly through the first quarter of 2016.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, we utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments, giving appropriate consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates which may impact the comparability of our results of operations to other companies in our industry. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and estimation, or are fundamentally important to our business.

 

Revenue Recognition.  We normally enter into contractual agreements with our customers for periods ranging between one to three years. We recognize the total revenue provided under a contract ratably over the contract period including any periods under which we have agreed to provide services at no cost. Deferred revenues are recognized as a liability when billings are issued in advance of the date when revenues are earned. We recognize 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.

 

Long-Lived Assets . Long-lived assets with definite lives consist primarily of property and equipment, and intangible assets such as acquired customer relationships. Long-lived assets are evaluated periodically for impairment or whenever events or circumstances indicate their carrying value may not be recoverable. Conditions that would result in an impairment charge include a significant decline in the fair value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. When such events or circumstances arise, an estimate of the future undiscounted cash flows produced by the asset, or the appropriate grouping of assets, is compared to the asset’s carrying value to determine if impairment exists. If the asset is determined to be impaired, the impairment loss is measured based on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value.

  

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 amorti