Towerstream Corporation
TOWERSTREAM CORP (Form: 10-K, Received: 03/18/2016 17:08:04)

  UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

 (Mark One)

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

For the fiscal year ended December 31, 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

 

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

Title of each class

Name of each exchange on which registered

Common Stock, par value $0.001 per share

The NASDAQ Capital Market

 

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

 

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

 

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

 

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

 

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

Yes     No  

 

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

 

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

 

Large accelerated filer

Accelerated filer

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

Smaller reporting company

     

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $108,303,532.  

 

As of March 14, 2016, there were 66,810,149 shares of common stock, par value $0.001 per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 
 

 

 

Portions of the definitive Proxy Statement for our 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the close of the fiscal year ended December 31, 2015 are incorporated by reference into Part III of this Report.

 

 
 

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

 

 

 

Page

 

 

PART I

 

 

 

 

 

  Item 1.

 

Business.

2

 

 

 

 

  Item 1A.

 

Risk Factors.

8

 

 

 

 

  Item 1B.

 

Unresolved Staff Comments.

18

 

 

 

 

  Item 2.

 

Properties.

18

 

 

 

 

  Item 3.

 

Legal Proceedings.

18

 

 

 

 

  Item 4.

 

Mine Safety Disclosures.

18

 

 

 

 

 

 

PART II

 

 

 

 

 

  Item 5.

 

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

19

 

 

 

 

Item 6.

 

Selected Financial Data.

22

 

 

 

 

  Item 7.

 

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

23

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk.

34

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data.

35

 

 

 

 

  Item 9.

 

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

59

 

 

 

 

  Item 9A.

 

Controls and Procedures.

59

 

 

 

 

  Item 9B.

 

Other Information.

61

 

 

 

 

 

 

PART III

 

 

 

 

 

  Item 10.

 

Directors, Executive Officers and Corporate Governance.

62

 

 

 

 

  Item 11.

 

Executive Compensation.

62

 

 

 

 

  Item 12.

 

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

62

 

 

 

 

  Item 13.

 

Certain Relationships and Related Transactions, and Director Independence.

62

 

 

 

 

  Item 14.

 

Principal Accountant Fees and Services.

62

 

 

 

 

 

 

PART IV

 

 

 

 

 

  Item 15.

 

Exhibits and Financial Statement Schedules.

63

 

 
i

 

 

PART I

 

Forward-Looking Statements

 

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

 

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

 

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

 

 

overall economic and business conditions;

 

 

the demand for our services;

 

 

competitive factors in the industries in which we compete;

 

 

emergence of new technologies which compete with our service offerings;

 

 

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

 

 

the outcome of litigation and governmental proceedings;

 

 

interest rate fluctuations and other changes in borrowing costs;

 

 

other capital market conditions, including availability of funding sources;

 

 

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

 

 

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

 

Item 1. Business. 

 

Towerstream Corporation (“Towerstream”, “we”, “us”, “our” or the “Company”) is primarily a provider of fixed wireless services to businesses in twelve major urban markets across the U.S. The Company was incorporated in December 1999.

 

Fixed Wireless Services

 

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 Services Business" ("Fixed Wireless" or "FW") has historically grown both organically and through the acquisition of five other fixed wireless broadband providers in various markets.

 

 
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Beginning in the first half of 2014, the Company has shifted its sales and marketing strategy to focus on its On-Net platform. Traditionally, the Company has connected, or “lit”, individual customers in a building with bandwidth for internet connectivity. Under its On-Net platform, the Company is able to connect, or “light”, the entire building at once and at a cost similar to what was traditionally required for one high bandwidth customer requiring point-to-point equipment. This can be accomplished, in part, because the capabilities of the equipment have improved even as the cost has decreased. As a result, Towerstream is able to leverage the initial installation cost to serve the entire building tenant base. In place of a wireless install for every single customer, Towerstream now only has to install the wireless portion of the install once. Subsequent customers are connected by simply running a wire to the common space in the building where the wireless service terminates. Towerstream also benefits by not having to incur additional antenna rental costs at its Points-of-Presence (“PoP”). Instead of having multiple antennas on both the customer building and the PoP, there generally needs to be only one antenna on each location.

 

Currently Towerstream is offering 20M, 50M, 100M up to 1000M bandwidth denominations.  This unique portfolio of bandwidth services is able to go up and down existing markets from small business to fortune 500 companies.

   

Shared Wireless Infrastructure Services    

 

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”), to operate a new business designed to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets built a carrier-class network which offered a shared wireless infrastructure platform, primarily for (i) co-location of customer owned antenna and related equipment and (ii) Wi-Fi access and offloading. The Company referred to this as its “Shared Wireless Infrastructure” or “Shared Wireless” business. During the fourth quarter of 2015, the Company determined to exit this business and curtailed activities in its smaller markets. The remaining network, located in New York City (or “NYC”), was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the New York City network. As further described in Note 18 to the Company’s consolidated financial statements, on March 9, 2016, the Company completed a sale and transfer of certain assets to the major cable company (the “Buyer”). The Asset Purchase Agreement provided that the Buyer would assume certain rooftop leases in NYC and acquire ownership of the Wi-Fi access points and related equipment associated with operating the network. The Company retained ownership of all backhaul and related equipment and the parties entered into a backhaul services agreement under which the Company will provide bandwidth to the Buyer at the locations governed by the leases. The agreement is for a three year period with two, one year renewals and is cancellable by the Buyer on sixty days’ notice. The operating results and cash flows for Hetnets have been presented as discontinued operating results in these consolidated financial statements. Assets associated with the New York City network have been presented as Assets Held for Sale.

 

Our Networks

 

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

 

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

 

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

 

Markets

 

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

 

We determine which geographic markets to enter by assessing criteria in four broad categories. First, we evaluate our ability to deploy our service in a given market after taking into consideration our spectrum position, the availability of towers and zoning constraints. Second, we assess the market by evaluating the number of competitors, existing price points, demographic characteristics and distribution channels. Third, we evaluate the economic potential of the market, focusing on our forecasts of revenue opportunities and capital requirements. Finally, we look at market clustering opportunities and other cost efficiencies that might be realized. Based on this approach, as of December 31, 2015, we offered wireless broadband connectivity in 12 markets, of which 10 are in the top 20 metropolitan areas in the United States based on the number of small to medium businesses in each market. These 10 markets cover approximately 60% of small and medium businesses (5 to 249 employees) in the United States.

 

 
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We believe there are market opportunities beyond the 12 markets in which we are currently offering our services. Our long-term plan is to expand nationally into other top metropolitan markets in the United States. We believe that acquisitions represent a more cost effective manner to expand into new markets rather than to build our own infrastructure. Since 2010, we have completed five acquisitions, of which two were in new markets and three expanded our presence in existing markets. We have paid for these acquisitions through a combination of cash and equity, and believe that future acquisitions will be paid in a similar manner. Our decision to expand into new markets will depend upon many factors including the timing and frequency of acquisitions, national and local economic conditions, and the opportunity to leverage existing customer relationships in new markets.

 

Sales and Marketing

 

We employ an inside direct sales force model to sell our services to business customers. As of December 31, 2015, we employed 43 direct sales people. We generally compensate these employees on a salary plus commission basis. Approximately 44% of our sales personnel had been with the Company for more than two years as of December 31, 2015, as compared to 66% and 56% as of December 31, 2014 and 2013, respectively. This tenure metric can fluctuate from period to period, especially because the size of the direct sales force is relatively small. The Company believes that a tenure metric between 60% to 75% constitutes an experienced sales force.  

 

In March 2015, we opened a second sales center in Boca Raton, Florida where a number of telecommunications and call center companies are based. As of December 31, 2015 we employed a total of 20 direct sales people in our Boca Raton facility which accounts for approximately 47% of our total sales personnel. All of these employees have been with the Company for less than a year as of December 31, 2015. We believe that being able to recruit talented professionals from a second geographic area will enable us to maintain a sales force of 40 to 50 experienced and productive account executives. A larger sales force should have a positive effect on new customer additions. We generally expect that new account executives will need approximately nine months of training and on-the-job experience before their sales pipelines become robust and they begin generating new sales levels comparable to existing account executives.

 

We continued to spend significantly on Internet based marketing initiatives designed to capture customer demand rather than trying to create customer demand. Most companies secure their bandwidth service under contracts ranging in length from one to three years. As a result, customer buying decisions generally occur when their existing contracts are close to expiring. We believe that many buyers of information technology services search the Internet to learn about industry trends and developments, as well as competitive service offerings. Spending on Internet based marketing initiatives totaled $758,750, $953,459, and $1,030,916 during the years ended December 31, 2015, 2014, and 2013, respectively.

 

  Sales through indirect channels comprised 34.1% of our total revenues for the year ended December 31, 2015 compared with 22.7% for the year ended December 31, 2014 and 19.6% for the year ended December 31, 2013. Our channel program provides for recurring monthly residual payments ranging from 8% to 20%.

 

Competition

 

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

 

Incumbent Local Exchange Carriers and Competitive Local Exchange Carriers

 

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

 

Cable Modem and DSL Services

 

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

 

 
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Cellular and CMRS Services

 

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

 

Wireless Broadband Service Providers

 

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

 

Satellite  

 

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

 

Other  

 

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

 

Competitive Strengths

 

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

 

     Reliability  

 

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

 

Flexibility

 

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

 

Timeliness

 

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

 

 
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Value  

 

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

 

Efficient Economic Model

 

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

 

Prime Real Estate Locations

 

We have secured long term lease agreements for prime real estate locations in the twelve markets in which we have built our fixed wireless network. These locations are some of the tallest buildings in each city which facilitates our ability to deliver Internet connectivity to customer locations where line of sight is not available to our competitors.

 

Corporate History

 

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

 

Regulatory Matters  

 

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

 

Spectrum Regulation

 

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

 

Broadband Internet Service Regulation   

 

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

 

On February 26, 2015, the FCC adopted an Open Internet order in which fixed and mobile broadband services is reclassified as a telecommunications services governed by Title II of the Communications Act. This reclassification includes forbearance from applying many sections of the Communications Act and the FCC’s rules to broadband service providers. The Open Internet order also adopted rules prohibiting broadband service providers from: (1) blocking access to legal content, applications, services or non-harmful devices; (2) impairing or degrading lawful Internet traffic on the basis, content, applications or services; or (3) favoring certain Internet traffic over other traffic in exchange for consideration. 

 

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

   

Zoning and Permitting Issues

 

States and local governments have the right to regulate the siting and permitting of Towerstream's antennas and equipment used to provide broadband service over Wi-Fi and small cell technologies.  State and local regulation over the siting of wireless facilities can be time-consuming, require burdensome documentation, and involve per site fees, which may have a limiting effect on Towerstream's broadband business that depends on placing and operating wireless antennas and related equipment.  In October 2014, the FCC adopted an order addressing the delays and burdens that wireless broadband providers may experience due to state and local siting and permitting regulations, and, among other decisions, clarified that if a state or local government fails to act on eligible modification requests within a prescribed time frame, the request will ultimately be “deemed granted” by the Commission. This decision and the other rules adopted in the October order may ultimately facilitate Towerstream's deployment and modification of Wi-Fi and small cell antennas and equipment, which may be beneficial to its broadband business.

 

Other

 

FAA Interference Issue

 

In August 2013, the FCC released a Notice of Apparent Liability for Forfeiture ("NAL") alleging that Towerstream caused harmful interference to doppler weather radar systems in New York and Florida, and proposing a fine for the alleged rule violations. In November 2013, after consultation with regulatory counsel, Towerstream filed a response denying the FCC's allegations. This matter remains outstanding with the FCC.

 

License KA306 in DeSoto, Texas

 

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

 

The FCC is currently considering major changes in the 3.5 GHz band including a reduction to the protection zone. These regulatory changes would make future operation of both the earth station and 3650 MHz band licenses in the DeSoto area uncertain and potentially costly. As a result, the Company has determined to relinquish any rights to KA306. An impairment charge of $534,555 was recognized in the fourth quarter of 2015 to write off the carrying value of the license.

 

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

 

Rights Plan

 

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

 

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

 

  Employees  

 

As of December 31, 2015, we had 154 employees, of whom 153 were full-time employees and one was a part-time employee. As of March 4, 2016, we had 131 employees, of whom 129 were full-time employees and 2 were part-time employees. We believe our employee relations are good. Three employees are considered members of executive management.

 

Our Corporate Information

 

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

 

  Item 1A. Risk Factors.

 

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

 

Risks Relating to Fixed Wireless Services

 

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

 

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

 

 

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

 

 

the ability of our services to achieve market acceptance;

 

 

our ability to manage third party relationships effectively;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

We may not be able to attract and retain customers if we do not maintain and enhance our brand.  

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of December 31, 2015, we had approximately $15,100,000 in cash and cash equivalents with two large financial banking institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If the institution at which we have placed our funds were to become insolvent or fail, we could be at risk for losing a substantial portion of our cash deposits, or incur significant time delays in obtaining access to such funds. In light of the limited amount of federal insurance for deposits, even if we were to spread our cash assets among several institutions, we would remain at risk for the amount not covered by insurance.  

 

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

 

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

 

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

 

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

 

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

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

   

 

increases in spectrum acquisition costs or complexity;  

 

 

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

 

 
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adverse changes to regulations governing spectrum rights;

 

 

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

   

 

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

   

 

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

   

 

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

    

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

 

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

 

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

 

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

 

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

 

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

 

 

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

     

 

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

     

 

changes in promotions and new marketing or sales initiatives;

     

 

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

     

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We are highly dependent on the continued services of our key personnel across all facets of operations. We do not have an employment agreement with any of these individuals. We cannot guarantee that any of these persons will stay with us for any definite period. Loss of the services of any of these individuals could adversely impact our operations. We do not maintain policies of "key man" insurance on our executives.

   

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

 

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

 

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

 

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

 

 

failure of the acquired businesses to achieve expected results;

 

 

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

 

 

diversion of management’s attention and resources to acquisitions;

 

 

failure to retain key personnel of the acquired businesses;

 

 

disappointing quality or functionality of acquired equipment and personnel; and

 

 

risks associated with unanticipated events, liabilities or contingencies.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Risks Related to Discontinued Operations

 

We may incur additional charges in connection with our decision to exit the Shared Wireless infrastructure business , and any additional costs would adversely impact our cash flows.

 

During the fourth quarter of 2015, we determined to exit the Shared Wireless infrastructure business and curtailed activity in our smaller markets. In connection with the foregoing, we recognized charges in the fourth quarter of 2015 aggregating approximately $5,359,000, consisting of approximately $3,284,000 of estimated cost to settle our lease obligations, $1,618,000 to write-off network assets which could not be redeployed into the fixed wireless network and writing off $456,000 of deferred acquisition costs and security deposits which are not expected to be recovered. We believe that we have recognized principally all of the costs required to exit this business but can provide no assurance that additional costs will not be incurred.

 

We may encounter difficulties or may not be able to sell Assets Held for Sale at December 31, 2015 which could adversely impact future profitability .

 

The Shared Wireless Infrastructure business’ largest network was in New York City where it had a lease access agreement with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the New York City network. In March 2016, the Company completed a sale and transfer of certain assets to a major cable company customer. The Company is presently continuing efforts to sell the remainder of the network in New York City. We cannot guarantee that any agreements for the sale of these assets will be on terms favorable to us or that we will be able to sell such assets. If we are not able to sell these assets on favorable terms, if at all, our profitability could be adversely impacted and our stock price could decline.

 

Risks Relating to the Wireless Industry

 

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

 

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

 

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

 

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

 

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

 

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

On February 26, 2015, the FCC adopted an Open Internet order in which fixed and mobile broadband services is reclassified as telecommunications services governed by Title II of the Communications Act. This reclassification includes forbearance from applying many sections of the Communications Act and the FCC’s rules to broadband service providers. As part of the Title II reclassification, the FCC could adopt new regulations requiring broadband service providers to register and pay Universal Service Fund (“USF”) fees as well as submit to a significant amount of other common carrier regulations.

 

The Open Internet order also adopted rules prohibiting broadband service providers from: (1) blocking access to legal content, applications, services or non-harmful devices; (2) impairing or degrading lawful Internet traffic on the basis, content, applications or services; or (3) favoring certain Internet traffic over other traffic in exchange for consideration. Depending on how the Open Internet rules are implemented, the Open Internet order could limit our ability to manage customers’ use of our networks, thereby limiting our ability to prevent or address customers’ excessive bandwidth demands. To maintain the quality of our network and user experience, we may manage the bandwidth used by our customers’ applications, in part by restricting the types of applications that may be used over our network. The FCC Open Internet regulations may constrain our ability to employ bandwidth management practices. Excessive use of bandwidth-intensive applications would likely reduce the quality of our services for all customers. Such decline in the quality of our services could harm our business.

 

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

 

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

 

 Risks Related to Our Indebtedness

 

Our cash flows and capital resources may be insufficient to make required payments on our indebtedness and future indebtedness.

 

In October 2014, we entered into a loan agreement which provided us with a five-year $35 million term loan. The loan 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. We paid $2,906,695 of interest and accrued $1,453,347 of PIK interest for the year ended December 31, 2015.

 

 
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Our indebtedness could have important consequences to you. For example, it could:

 

 

make it difficult for us to satisfy our debt obligations;

 

 

make us more vulnerable to general adverse economic and industry conditions;

 

 

limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements;

 

 

expose us to interest rate fluctuations because the interest rate on our long-term debt is variable;

 

 

require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes;

 

 

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

 

 

place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources.

 

In addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond our control. These factors include, among others:

 

 

economic and demand factors affecting our industry;

 

 

pricing pressures;

 

 

increased operating costs;

 

 

competitive conditions; and

 

 

other operating difficulties.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. Our obligations pursuant to our long-term debt agreement are secured by a security interest in all of our assets, exclusive of capital stock of the Company, certain capital leases, certain contracts and certain assets secured by purchase money security interests. The foregoing encumbrances may limit our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable economic terms, if at all.

 

Our long-term debt agreement contains various covenants limiting the discretion of our management in operating our business.

 

Our long-term debt agreement contains, subject to certain carve-outs, various restrictive covenants that limit our management's discretion in operating our business. In particular, these instruments limit our ability to, among other things:

 

 

incur additional debt;

 

 

grant liens on assets;

 

 

issue capital stock with certain features;

 

 

sell or acquire assets outside the ordinary course of business; and

 

 

make fundamental business changes.

 

 
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If we fail to comply with the restrictions in our long-term debt agreement, a default may allow the lender under the relevant instruments to accelerate the related debt and to exercise their remedies under these agreements, which will typically include the right to declare the principal amount of that debt, together with accrued and unpaid interest and other related amounts, immediately due and payable, to exercise any remedies the lender may have to foreclose on assets that are subject to liens securing that debt and to terminate any commitments they had made to supply further funds. The long-term debt agreement governing our indebtedness also contains various covenants that may limit our ability to pay dividends.

 

Risks Relating to Our Organization

 

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

 

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

 

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

   

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

 

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

 

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

 

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

 

 
16

 

 

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

 

Risks Relating to Our Common Stock    

 

We may fail to regain compliance for continued listing on the NASDAQ Capital Market and a delisting of our stock could make it more difficult for investors to sell their shares

 

Our common stock was approved for listing on the NASDAQ Capital Market in May of 2007 where it continues to be listed. The listing Rules (the “Rules”) of NASDAQ require the company to meet certain requirements. These continued listing standards include specifically enumerated criteria, such as:

  

• 

a $1.00 minimum closing bid price;

• 

stockholders’ equity of $2.5 million;

• 

500,000 shares of publicly-held common stock with a market value of at least $1 million;

• 

300 round-lot stockholders; and

• 

compliance with NASDAQ’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of NASDAQ’s discretionary authority.

 

On November 24, 2015, NASDAQ informed the Company that it had failed to maintain a minimum bid price of $1 per share for more than 30 consecutive business days. The Company can regain compliance if, at any time during the 180 day period ending May 23, 2016, the closing bid price of the common stock is at least $1 for a minimum of ten consecutive business days. It is unknown at this time if we will be able to regain compliance with the minimum bid price requirement within the time allowed in order to continue our common stock listing on the Nasdaq Capital Market. Continued listing during this period is also contingent on our continued compliance with all listing requirements other than for the minimum bid price. While we hope to regain compliance in the ordinary course of business, we may consider a reverse stock split, if necessary to continue our listing, and have committed to NASDAQ to do so if necessary. However, even if we do effect such a reverse stock split, our stockholders may bring actions against us in connection with that reverse stock split that could divert management resources, cause us to incur significant expenses or cause our common stock to be further diluted.

 

The Company reported stockholders’ equity at December 31, 2015 of $2,545,687, above the $2.5 million listing standard required by NASDAQ but it is likely that our stockholders’ equity will be below $2.5 million at March 31, 2016.

 

If we fail to comply with NASDAQ’s continued listing standards, we may be delisted and our common stock will trade, if at all, only on the over-the-counter market, such as the OTC Bulletin Board or OTCQX market, and then only if one or more registered broker-dealer market makers comply with quotation requirements.  In addition, delisting of our common stock could depress our stock price, substantially limit liquidity of our common stock and materially adversely affect our ability to raise capital on terms acceptable to us, or at all.

  

Finally, delisting of our common stock would likely result in our common stock becoming a “penny stock” under the Securities Exchange Act.  The principal result or effect of being designated a “penny stock” is that securities broker-dealers cannot recommend the shares but must trade it on an unsolicited basis. Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document prepared by the SEC, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. A broker-dealer must also provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and sales person in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for shares that become subject to those penny stock rules. Under such circumstances, shareholders may find it more difficult to sell, or to obtain accurate quotations, for our common stock, and our common stock would become substantially less attractive to certain purchasers such as financial institutions, hedge funds and other similar investors.

     

We could fail in future financing efforts or be delisted from The NASDAQ Capital Market if we fail to receive stockholder approval when needed.

 

We are required under the NASDAQ rules to obtain stockholder approval for any issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock outstanding before the issuance of such securities sold at a discount to the greater of book or market value in an offering that is not deemed to be a “public offering” by NASDAQ. Funding of our operations and potential acquisitions of assets may require issuance of additional equity securities that would comprise more than 20% of the total shares of our common stock outstanding, but we might not be successful in obtaining the required stockholder approval for such an issuance. If we are unable to obtain financing due to stockholder approval difficulties, such failure may have a material adverse effect on our ability to continue operations.

 

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

 

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

 

 
17 

 

 

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

 

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

 

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

 

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

 

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

 

Item 1B. Unresolved Staff Comments.

 

Not applicable.

 

  Item 2. Properties.

 

We do not own any real property.

 

Our executive offices are located at 88 Silva Lane in Middletown, Rhode Island, where we lease approximately 29,000 square feet of space. The majority of our employees work at this location including our finance and administrative, engineering, information technology, customer care and retention, and sales and marketing personnel. Rent payments totaled approximately $371,036 in 2015 and escalate by 3% annually reaching $416,970 for 2019. Our lease expires on December 31, 2019 with an option to renew for an additional five year term through December 31, 2024.

 

In December 2014, the Company entered into a new lease agreement in Florida which includes 3,542 square feet for office space 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. Rent payments totaled approximately $40,731 in 2015 and escalate by 3% annually.

 

Item 3. Legal Proceedings.

 

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

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

 
18

 

 

PART II

 

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

 

Market Information

 

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

 

FISCAL YEAR 2015

 

HIGH

   

LOW

 

First Quarter

  $ 2.55     $ 1.62  

Second Quarter

  $ 2.29     $ 1.72  

Third Quarter

  $ 2.15     $ 1.02  

Fourth Quarter

  $ 1.10     $ .28  

 

FISCAL YEAR 2014

 

HIGH

   

LOW

 

First Quarter

  $ 3.36     $ 2.30  

Second Quarter

  $ 2.49     $ 1.45  

Third Quarter

  $ 2.06     $ 1.28  

Fourth Quarter

  $ 1.95     $ 1.06  

 

The last reported sales price of our common stock on the NASDAQ Capital Market on December 31, 2015 was $0.38 and on March 14, 2016, the last reported sales price was $0.20. According to the records of our transfer agent, as of March 14, 2016, there were approximately 40 holders of record of our common stock.

 

 
19

 

   

Performance Graph

 

On May 31, 2007, our shares of common stock began trading on the NASDAQ Capital Market. The chart below compares the annual percentage change in the cumulative total return on our common stock with the NASDAQ Capital Market Composite Index and the NASDAQ Telecom Index. The chart shows the value as of December 31, 2015, of $100 invested on May 31, 2007, the day our common stock was first publicly traded on the NASDAQ Capital Market, in our common stock, the NASDAQ Capital Market Composite Index and the NASDAQ Telecom Index. The stock price performance below is not necessarily indicative of future performance.

 

 

 

     

12/10

   

12/11

   

12/12

   

12/13

   

12/14

   

12/15

 
                                                   

Towerstream Corp.

      100.00       52.22       80.05       72.91       45.57       9.36  

NASDAQ Composite

      100.00       100.52       116.55       165.43       187.63       198.29  

NASDAQ Telecommunications

      100.00       89.84       91.94       128.06       133.36       128.46  
NASDAQ Capital Market Composite       100.00       77.02       87.44       119.44       112.75       93.62  

 

Dividend Policy

 

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

 

 
20 

 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

As of December 31, 2015, securities issued and securities available for future issuance under our 2008 Non-Employee Directors Compensation Plan, our 2007 Equity Compensation Plan and our 2007 Incentive Stock Plan were as follows:

 

Equity Compensation Plan Information  

   

Number of securities

to be issued upon

exercise of

outstanding options, warrants and rights

   

Weighted average

exercise price of

outstanding

options, warrants

and rights

   

Number of

securities

remaining

available for future

issuance under

equity

compensation

plans

 

Equity compensation plans approved by security holders

    4,340,042     $ 2.61       2,945,150  

Equity compensation plans not approved by security holders

    -     $ -       -  

Total

    4,340,042     $ 2.61       2,945,150  

 

Recent Sales of Unregistered Securities.

 

 There were no unregistered securities sold by us during the year ended December 31, 2015 that were not otherwise disclosed by us during the year in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

 

Recent Repurchases of Securities.

 

 None.

 

 
21

 

 

Item 6. Selected Financial Data

 

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

 

   

Years Ended December 31,

 
   

2011

   

201 2

   

201 3

   

201 4

   

2015

 

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

                                       

Revenues

  $ 26,494,737     $ 32,279,430     $ 31,892,584     $ 29,936,181     $ 27,905,023  

Operating Expenses

                                       

Cost of revenues

    7,472,849       15,376,136       9,874,066       10,299,906       10,603,845  

Depreciation and amortization

    9,138,318       13,634,294       11,842,794       9,681,631       9,643,583  

Customer support services

    4,274,387       5,712,463       4,113,459       4,127,294       4,425,764  

Sales and marketing

    5,362,103       6,134,020       5,477,922       5,341,178       5,864,267  

General and administrative

    9,411,608       12,168,183       10,364,431       9,767,404       9,957,538  

Total Operating Expenses

    35,659,265       53,025,096       41,672,672       39,217,413       40,494,997  

Operating Loss

    (9,164,528 )     (20,745,666 )     (9,780,088 )     (9,281,232 )     (12,589,974 )

Other Income/(Expense)

                                       

Interest Income (expense), net

    35,486       (63,714 )     (217,741 )     (1,672,846 )     (6,652,786 )

Gain (loss) on business acquisitions

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

Other expenses, net

    (9,581 )     (13,860 )     -       -       -  

Total Other Income/ (Expense)

    2,257,439       (117,653 )     786,358       (1,672,846 )     (6,652,786 )

Loss before income taxes

    (6,907,089 )     (20,863,319 )     (8,993,730 )     (10,954,078 )     (19,242,760 )

(Provision) benefit for income taxes

    (118,018 )     (126,256 )     (78,531 )     (78,532 )     37,562  

Loss from continuing operations

    (7,025,107 )     (20,989,575 )     (9,072,261 )     (11,032,610 )     (19,205,198 )

Loss from discontinued operations

    -       -       (15,703,028 )     (16,559,140 )     (21,277,604 )

Net Loss

  $ (7,025,107 )   $ (20,989,575 )   $ (24,775,289 )   $ (27,591,750 )   $ (40,482,802 )
                                         

Loss per share – basic and diluted

                                       

Continuing

  $ (0.15 )   $ (0.39 )   $ (0.14 )   $ (0.16 )   $ (0.28 )

Discontinued

    -       -       (0.24 )     (0.25 )     (0.32 )

Net loss per share – basic and diluted

  $ (0.15 )   $ (0.39 )   $ (0.38 )   $ (0.41 )   $ (0.60 )

Weighted average common shares outstanding – basic and diluted

    47,505,861       54,434,173       65,181,310       66,803,767       67,931,666  
                                         

CONSOLIDATED BALANCE SHEETS DATA (at December 31,):

                                       

Cash and cash equivalents

  $ 44,672,587     $ 15,152,226     $ 28,181,531     $ 38,027,509     $ 15,116,531  

Property, plant and equipment, net

    27,531,273       41,982,210       25,682,211       23,146,977       21,235,384  

Assets held for sale

    -       -       7,784,980       7,875,241       5,315,107  

Current assets of discontinued operations

    -       -       747,594        1,336,139       1,248,569  

Total assets

    83,636,896       67,109,714       74,917,467       82,321,838       48,721,260  

Working capital

    40,231,504       10,087,917       23,697,158       42,942,393       13,506,611  

Stockholder’s equity

    77,144,910       57,803,908       66,093,941       41,962,027       2,545,687  
                                         

OTHER FINANCIAL DATA:

                                       

Capital expenditures

                                       

Cash

  $ 13,620,180     $ 20,722,510     $ 7,143,376     $ 7,306,942     $ 6,727,288  

Accrued expenses

    658,144       1,240,774       867,311       524,280       178,134  

Capital leases

    769,882       2,915,580       80,894       339,652       810,026  

Other

    -       18,679       -       -       -  
                                         

Net cash provided by (used in) operating activities

    702,518       (8,078,493 )     (9,484,438 )     (13,413,128 )     (15,253,754 )

Net cash used in investing activities

    (18,218,729 )     (21,343,128 )     (7,562,464 )     (7,036,756 )     (6,683,405 )

Net cash provided by (used in) financing activities

  $ 39,015,446     $ (98,740 )   $ 30,076,207     $ 30,295,862     $ (973,819 )

 

 
22

 

 

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

 

Segment Information

 

Upon its formation in 2013, the Company determined that the Shared Wireless Infrastructure business represented a separate business segment which was reported as the "Shared Wireless Infrastructure" or "Shared Wireless" segment. The Company's existing business which provides fixed wireless services to businesses was reported as the "Fixed Wireless" business segment. The Company also established a Corporate Group so that centralized operating activities which supported both business segments could be reported separately.

 

During the fourth quarter of 2015, the Company determined to exit the Shared Wireless infrastructure business. As a result, the operating results of the Shared Wireless business are reported as discontinued operations in these financial statements. The operating results of the Fixed Wireless segment are also referred to as Continuing Operations. Costs associated with the Corporate Group are included in continuing operations.

 

Overview – Fixed Wireless

 

We provide fixed wireless broadband services to commercial customers and deliver access over a wireless network transmitting over both licensed and unlicensed 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.

  

In February 2013, we completed the acquisition of certain customer relationships, network infrastructure and related assets of Delos Internet (“Delos”), which is based in Houston, Texas. The aggregate consideration for the acquisition included (i) approximately $0.2 million in cash, (ii) 385,124 shares of our common stock with a fair value of approximately $1.0 million, and (iii) approximately $0.2 million in assumed liabilities. The acquisition of Delos was a business combination accounted for under the acquisition method. In June 2013, we finalized the purchase price of Delos. The final purchase price of $1,341,918 was $83,183, or 6%, lower than the initially reported purchase price of $1,425,101. The 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. We recognized a gain on business acquisition of approximately $1.0 million.

 

Characteristics of our Revenues and Expenses

 

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

 

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

 

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

 

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

 

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

 

 
23

 

 

Market Information

 

As of December 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.

    

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.

 

Year Ended December 31, 2015

Market

 

Revenues

   

Cost of

Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted

Market

EBITDA

 

Los Angeles

  $ 7,994,736     $ 2,218,654     $ 5,776,082     $ 2,019,305     $ 3,756,777  

New York

    7,814,182       2,836,635       4,977,547       1,377,608       3,599,939  

Boston

    4,748,326       1,594,884       3,153,442       791,873       2,361,569  

Chicago

    2,442,022       1,233,989       1,208,033       601,164       606,869  

San Francisco

    1,032,721       467,406       565,315       209,984       355,331  

Houston

    748,941       305,657       443,284       193,752       249,532  

Miami

    1,190,563       503,794       686,769       565,788       120,981  

Las Vegas-Reno

    707,964       485,852       222,112       203,544       18,568  

Seattle

    242,588       177,287       65,301       60,891       4,410  

Providence-Newport

    210,145       200,102       10,043       10,134       (91 )

Philadelphia

    108,157       111,722       (3,565 )     45,749       (49,314 )

Dallas-Fort Worth

    664,678       412,635       252,043       378,375       (126,332 )

Total

  $ 27,905,023     $ 10,548,617     $ 17,356,406     $ 6,458,167     $ 10,898,239  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 10,898,239  

Non-market specific

       

Other expenses

    (1,074,373 )

Depreciation and amortization

    (8,773,218 )

Loss from discontinued operations

    (21,277,604 )

Corporate

    (13,640,622 )

Other income (expense)

    (6,652,786 )

Provision for income taxes

    37,562  

Net loss

  $ (40,482,802 )

   

 
24

 

 

Year Ended December 31, 2014

Market

 

Revenues

   

Cost of

Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted

Market

EBITDA

 

Los Angeles

  $ 8,019,832     $ 2,259,611     $ 5,760,221     $ 1,932,611     $ 3,827,610  

New York

    7,810,019       2,616,041       5,193,978       1,328,111       3,865,867  

Boston

    5,663,256       1,598,896       4,064,360       823,425       3,240,935  

Chicago

    2,902,942       1,184,641       1,718,301       528,099       1,190,202  

Miami

    1,428,933       451,577       977,356       288,380       688,976  

Las Vegas-Reno

    988,565       491,875       496,690       136,356       360,334  

Houston

    697,467       265,819       431,648       104,549       327,099  

San Francisco

    1,103,604       480,409       623,195       304,406       318,789  

Dallas-Fort Worth

    637,831       390,615       247,216       151,347       95,869  

Seattle

    301,679       191,019       110,660       38,077       72,583  

Providence-Newport

    258,992       208,882       50,110       14,007       36,103  

Nashville

    1,903       12,642       (10,739 )     2,331       (13,070 )

Philadelphia

    121,158       99,602       21,556       55,696       (34,140 )

Total

  $ 29,936,181     $ 10,251,629     $ 19,684,552     $ 5,707,395     $ 13,977,157  

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 13,977,157  

Non-market specific

       

Other expenses

    (1,141,850 )

Depreciation and amortization

    (8,697,630 )

Loss from discontinued operations

    (16,559,140 )

Corporate

    (13,418,909 )

Other income (expense)

    (1,672,846 )

Provision for income taxes

    (78,532 )

Net loss

  $ (27,591,750 )

 

Year Ended December 31, 2013

M arket

 

Revenues

   

Cost of

Revenues

   

Gross Margin

   

Operating

Costs

   

Adjusted

Market

EBITDA

 

Los Angeles

  $ 8,197,925     $ 2,146,194     $ 6,051,731     $ 1,675,298     $ 4,376,433  

Boston

    6,508,812       1,460,425       5,048,387       917,559       4,130,828  

New York

    7,715,840       2,392,852       5,322,988       1,345,250       3,977,738  

Chicago

    3,273,174       1,161,474       2,111,700       488,619       1,623,081  

Miami

    1,553,933       433,818       1,120,115       417,986       702,129  

Las Vegas-Reno

    1,148,540       529,974       618,566       189,991       428,575  

San Francisco

    1,248,608       477,437       771,171       366,195       404,976  

Houston

    554,606       215,085       339,521       100,443       239,078  

Providence-Newport

    441,115       201,570       239,545       59,805       179,740  

Seattle

    389,839       192,561       197,278       101,929       95,349  

Dallas-Fort Worth

    681,812       399,465       282,347       257,212       25,135  

Philadelphia

    157,342       82,607       74,735       88,162       (13,427 )

Nashville

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

Total

  $ 31,892,584     $ 9,750,492     $ 22,142,092     $ 6,019,892     $ 16,122,200  

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

       

Adjusted market EBITDA

  $ 16,122,200  

Non-market specific

       

Other expenses

    (958,432 )

Depreciation and amortization

    (11,062,809 )

Loss on discontinued operations

    (15,703,028 )

Corporate

    (13,881,047 )

Other income (expense)

    786,358  

Provision for income taxes

    (78,531 )

Net loss

  $ (24,775,289 )

   

 
25

 

 

  Overview - Shared Wireless Infrastructure

 

 In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”), to operate a new business designed to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets built a carrier-class network which offered a shared wireless infrastructure platform, primarily for (i) co-location of customer owned antenna and related equipment and (ii) Wi-Fi access and offloading. The Company referred to this as its “Shared Wireless Infrastructure” or “Shared Wireless” business. During the fourth quarter of 2015, the Company determined to exit this business and curtailed activities in its smaller markets. The remaining network, located in New York City (or “NYC”), was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the New York City network. As further described in Note 18, on March 9, 2016, the Company completed a sale and transfer of certain assets to the major cable company (the “Buyer”). The Asset Purchase Agreement provided that the Buyer would assume certain rooftop leases in NYC and acquire ownership of the Wi-Fi access points and related equipment associated with operating the network. The Company retained ownership of all backhaul and related equipment and the parties entered into a backhaul services agreement under which the Company will provide bandwidth to the Buyer at the locations governed by the leases. The agreement is for a three year period with two, one year renewals and is cancellable by the Buyer on sixty days’ notice. The operating results and cash flows for Hetnets have been presented as discontinued operating results in these consolidated financial statements. Assets associated with the New York City network have been presented as Assets Held for Sale.

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

Continuing Operations – Fixed Wireless

 

      Revenues. Revenues totaled $27,905,023 during the year ended December 31, 2015 compared to $29,936,181 during the year ended December 31, 2014 representing a decrease of $2,031,158, or 7%. The decrease principally related to a 7% decrease in the base of customers billed on a monthly recurring basis. 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.

 

    Average revenue per user (“ARPU”) totaled $764 as of December 31, 2015 compared to $772 as of December 31, 2014 representing a decrease of $8, or 1%. ARPU for new customers totaled $640 during the year ended December 31, 2015 compared to $639 during the year ended December 31, 2014 representing an increase of $1, or less than 1%. ARPU for new customers can fluctuate from period to period.

 

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.88% during the year ended December 31, 2015 compared to 1.85% during the year ended December 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 $10,603,845 during the year ended December 31, 2015 compared to $10,299,906 during the year ended December 31, 2014 representing an increase of $303,939 or 3%. The increase primarily related to tower rents which increased by $428,863, or 5%. This increase was partially offset by lower customer network costs which decreased by $131,251 or 18%. Gross margin for continuing operations totaled 62% for the 2015 period compared to 66% for the 2014 period.

 

Depreciation and Amortization. Depreciation and amortization totaled $9,643,583 during the year ended December 31, 2015 compared to $9,681,631 during the year ended December 31, 2014 representing a decrease of $38,048 or less than 1%. Depreciation expense totaled $9,251,312 during the year ended December 31, 2015 compared to $8,792,662 during the year ended December 31, 2014 representing an increase of $458,650, or 5%. The base of depreciable assets as of December 31, 2015 increased approximately 10% compared to December 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 year ended December 31, 2015 primarily reflects continued investment in our network which totaled approximately $7.0 million.

 

 
26

 

 

Amortization expense totaled $392,272 during the year ended December 31, 2015 compared to $888,969 during the year ended December 31, 2014 representing a decrease of $496,697, or 56%. 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 related entirely to amortization associated with the Color Broadband acquisition which became fully amortized in April 2014.

 

Customer Support Services. Customer support services totaled $4,425,764 during the year ended December 31, 2015 compared to $4,127,294 during the year ended December 31, 2014 representing an increase of $298,470 or 7%. The increase was primarily related to higher payroll costs as average headcount totaled 71 during the 2015 period as compared to 69 during the 2014 period representing an increase of 2, or 3%.

 

Sales and Marketing. Sales and marketing expenses totaled $5,864,267 during the year ended December 31, 2015 compared to $5,341,178 during the year ended December 31, 2014 representing an increase of $523,089, or 10%. Compensation related costs, including sales commissions, totaled $4,034,985 during the 2015 period as compared to $3,619,262 during the 2014 period representing an increase of $415,723, or 11%. Average headcount totaled 57 during the 2015 period compared to 37 during the 2014 period representing an increase of 20, or 53%. The increase in headcount related to hires in our new sales office in South Florida which opened during the first quarter of 2015 resulting in higher compensation costs. Channel commissions totaled $603,529 during the 2015 period as compared to $440,281 during the 2014 period representing an increase of $163,248, or 37%. Sales through the channel comprised 34.1% of our total revenues in 2015 compared to 22.7% in 2014 which resulted in higher channel commissions. Advertising costs totaled $1,052,623 during the 2015 period as compared to $1,122,246 during the 2014 period representing a decrease of $69,623, or 6%.

 

General and Administrative. General and administrative expenses totaled $9,957,538 during the year ended December 31, 2015 compared to $9,767,404 during the year ended December 31, 2014 representing an increase of $190,134, or 2%. Payroll costs totaled $2,923,290 during the 2015 period as compared to $3,350,728 during the 2014 period representing a decrease of $427,438, or 13%. Information technology support costs decreased to $1,044,683 during the 2015 period compared to $1,363,271 during the 2014 period representing a decrease of $318,588, or 23%, as the Company internally absorbed certain functions that were previously provided by third parties. The Company recorded a charge of $534,555 in 2015 in connection with the carrying value of an FCC license that was not renewed due to an increased focus on the largest urban markets. Acquisition costs can vary from period to period based on activity levels and totaled $166,561 in 2015 compared to $22,919 in 2014 representing an increase of $143,642. Facilities costs, including office expense, totaled $1,070,492 in the 2015 period compared to $904,327 in the 2014 period representing an increase of $166,165, or 18%. The Company opened a new sales office in South Florida in the first quarter of 2015. Insurance expense totaled $545,705 in the 2015 period compared to $468,583 in the 2014 period, representing an increase of $77,122, or 16%, primarily related to higher workers’ compensation premiums.

 

Interest Expense, Net.  Interest expense, net totaled $6,652,786 during the year ended December 31, 2015 compared to $1,672,846 during the year ended December 31, 2014 representing an increase of $4,979,940, or greater than 100%. The increase related to a full year of interest expense on the $35 million secured term loan which closed in October 2014. Cash and non-cash interest expense in 2015 totaled $2,906,695 and $3,533,471, 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.

 

Loss from Continuing Operations . Loss from continuing operations totaled $19,205,198 during the year ended December 31, 2015 compared to $11,032,610 during the year ended December 31, 2014 representing an increase of $8,172,588, or 74%. Interest expense on our long term debt represented $4,979,940, or 61%, of the increased loss. Revenues decreased by $2,031,158 in 2015 which represented 25% of the increased loss. Higher operating expenses in 2015, which occurred across all functional categories, represented $1,277,584, or 16%, of the increased loss.

 

Discontinued Operations – Shared Wireless

 

Revenues . Revenues for the Shared Wireless segment totaled $3,370,181 during the year ended December 31, 2015 compared to $3,099,972 during the year ended December 31, 2014 representing an increase of $270,209 or 9%. The increase was primarily related to higher revenues generated through a large cable company customer contract.

 

Cost of Revenues. Cost of revenues totaled $17,751,033 during the year ended December 31, 2015 compared to $14,220,122 during the year ended December 31, 2014 representing an increase of $3,530,911 or 25%. The increase related solely to higher rooftop rental expense in the 2015 period.

 

Depreciation . . Depreciation totaled $4,032,219 during the year ended December 31, 2015 compared to $3,957,784 during the year ended December 31, 2014 representing an increase of $74,435 or 2%.

 

 
27

 

 

Customer Support Services. Customer support services totaled $710,368 during the year ended December 31, 2015 compared to $683,208 during the year ended December 31, 2014 representing an increase of $27,160 or 4%.

 

Sales and Marketing. Sales and marketing expenses totaled $145,954 during the year ended December 31, 2015 compared to $229,013 during the year ended December 31, 2014 representing a decrease of $83,059, or 36%. The decrease related to certain sales management personnel who were employed for all of 2014 but only part of 2015.

 

General and Administrative. General and administrative expenses totaled $2,008,211 during the year ended December 31, 2015 compared to $568,985 during the year ended December 31, 2014 representing an increase of $1,439,226, or greater than 100%. The Company recognized a loss of $1,618,540 on the disposal of property and equipment in connection with the termination of business activities in certain markets. These costs were partially offset by a decrease in network development payroll costs of $99,210 and the absence of bad debt charges as compared to $80,000 in the 2014 period.

 

Loss from Discontinued Operations. Loss from discontinued operations for the year ended December 31, 2015 totaled $21,277,604 compared to $16,559,140 for the year ended December 31, 2014 representing an increase of $4,718,464, or 28%. Cost of revenues represented $3,530,911, or 75%, of the increase related to higher rooftop rental expenses. A loss of on the disposal of property and equipment in 2015, in connection with the termination of business activities in certain markets, represented $1,618,540, or 34%, of the increase. Higher revenues in the 2015 period offset these increases by 6%.

 

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Continuing Operations – Fixed Wireless

 

      Revenues. Revenues totaled $29,936,181 during the year ended December 31, 2014 compared to $31,892,584 during the year ended December 31, 2013 representing a decrease of $1,956,403, or 6%. The decrease principally related to an 8% decrease in the base of customers billed on a monthly recurring basis. New customer additions were adversely impacted by a 14% decrease in the number of account executives which averaged 31 during the year ended December 31, 2014 compared to 36 during the year ended December 31, 2013. 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.

 

    Average revenue per user (“ARPU”) for the Fixed Wireless segment totaled $772 as of December 31, 2014 compared to $761 as of December 31, 2013 representing an increase of $11, or 1%. The increase in ARPU primarily related to customers upgrading to higher bandwidth service which generates higher monthly recurring revenue. ARPU for new customers totaled $639 during the year ended December 31, 2014 compared to $663 during the year ended December 31, 2013 representing a decrease of $24, or 4%.

 

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 year ended December 31, 2014 compared to 1.86% during the year ended December 31, 2013. Our goal is to maintain churn levels between 1.40% and 1.70% which we believe is below industry averages of approximately 2.00%. Churn levels can fluctuate from 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 $10,299,906 during the year ended December 31, 2014 compared to $9,874,066 during the year ended December 31, 2013 representing an increase of $425,840 or 4%. The increase related to higher tower rents which increased by $602,034, or 9% partially offset by customer maintenance costs which decreased by $103,490 and lower network lease expenses which decreased by $55,937.

 

Depreciation and Amortization. Depreciation and amortization totaled $9,681,631 during the year ended December 31, 2014 compared to $11,842,794 during the year ended December 31, 2013 representing a decrease of $2,161,163 or 18%. Depreciation expense totaled $8,792,662 during the year ended December 31, 2014 compared to $8,748,977 during the year ended December 31, 2013 representing an increase of $43,685, or less than 1%. The base of depreciable assets increased approximately 10% during 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 year ended December 31, 2014 reflects continued growth in our network (approximately $5,871,000), and additions resulting from other expenditures (approximately $384,000).

 

Amortization expense totaled $888,969 during the year ended December 31, 2014 compared to $3,093,817 during the year ended December 31, 2013 representing a decrease of $2,204,848, or 71%. 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 two acquisitions which had modest or no amortization in the 2014 period but full amortization in the 2013 period. We recognized zero and $819,093 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with One Velocity which became fully amortized in November 2013. In addition, we recognized $496,697 and $1,947,830 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with Color Broadband which became fully amortized in April 2014. These decreases were partially offset by higher amortization expense associated with the Delos acquisition which was completed in February 2013, and for which $392,272 was recorded in the 2014 period compared to $326,894 in the 2013 period.

 

 
28

 

 

Customer Support Services. Customer support services totaled $4,127,294 during the year ended December 31, 2014 compared to $4,113,459 during the year ended December 31, 2013 representing an increase of $13,745 or less than 1%. The decrease was primarily related to lower payroll costs as average headcount decreased 3% to 69 during 2014 as compared to 71 during 2013.

 

Sales and Marketing. Sales and marketing expenses totaled $5,341,178 during the year ended December 31, 2014 compared to $5,477,922 during the year ended December 31, 2013 representing a decrease of $136,744, or 2%. Compensation related costs, including sales commissions, totaled $3,815,222 during the 2014 period as compared to $4,170,511 during the 2013 period representing a decrease of $355,289, or 9%. Average headcount totaled 41 during the 2014 period compared to 48 during the 2013 period representing a decrease of 7, or 15%. Channel commissions totaled $440,281 during the 2014 period as compared to $385,049 during the 2013 period representing an increase of $55,232, or 14%. Advertising costs totaled $1,132,845 during the 2014 period as compared to $1,100,353 during the 2013 period representing an increase of $32,492, or 3%. Other costs, including travel, entertainment, dues, and subscriptions totaled $181,843 during the 2014 period as compared to $123,588 during the 2013 period representing an increase of $58,255, or 47%.

 

General and Administrative. General and administrative expenses totaled $9,767,404 during the year ended December 31, 2014 compared to $10,364,431 during the year ended December 31, 2013 representing a decrease of $597,027, or 6%. Payroll costs totaled $3,350,728 during 2014 compared to $3,599,967 during 2013 representing a decrease of $249,239, or 7%. Average headcount totaled 34 during the 2014 period compared to 37 during the 2013 period representing a decrease of 3, or 8%. Stock-based compensation totaled $960,490 during 2014 compared to $1,253,661 during 2013 representing a decrease of $293,171 or 23%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Facilities expense totaled $408,490 during the 2014 period compared to $654,613 during the 2013 period representing a decrease of $246,123, or 38%. Office expense totaled $495,837 during the 2014 period compared to $582,355 during the 2013 period representing a decrease of $86,518, or 15%. The Company consolidated its corporate offices from two buildings to one building which has lowered its facilities costs and office expenses. Insurance expense totaled $468,583 during the 2014 period compared to $278,899 during the 2013 period representing an increase of $189,684, or 68%. The increase primarily related to higher workers' compensation premiums. Bad debt expense totaled $322,000 during the 2014 period compared to $85,000 during the 2013 period representing an increase of $237,000, or greater than 100%. Approximately two thirds of the increase related to a temporary link customer and one third related to a shared wireless customer which had paid for fifteen months of service prior to ceasing operations.

 

Interest Expense, Net.  Interest expense, net totaled $1,672,846 during the year ended December 31, 2014 compared to $217,741 during the year ended December 31, 2013 representing an increase of $1,455,105, or greater than 100%. The increase related to the $35 million secured term loan which closed in October 2014. Cash and non-cash interest expense in 2014 totaled $591,111 and $877,460, 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.

 

Gain on Business Acquisition.  There was no gain on business acquisition during the year ended December 31, 2014 compared to $1,004,099 during the year ended December 31, 2013. The gain recognized in the 2013 period related to the acquisition of Delos in February 2013. We were able to acquire the customer relationships and wireless network of Delos at a discounted price as the challenging economic environment during this period made it difficult for smaller companies to raise capital to sustain their growth.  

 

Loss from Continuing Operations . Loss from continuing operations totaled $11,032,610 for the year ended December 31, 2014 compared to $9,072,261 for the year ended December 31, 2013 representing an increase of $1,960,349, or 22%. Revenues decreased by $1,956,403 in 2014 which represented 100% of the increased loss. Operating expenses decreased by $2,455, 259 in 2014 but this benefit was offset by interest expense which increased by $1,455,105 in 2014 and the absence of gains on business acquisition which totaled $1,004,099 in 2013.

 

Discontinued Operations – Shared Wireless

 

Revenues. Revenues for the Shared Wireless segment totaled $3,099,972 during the year ended December 31, 2014 compared to $1,540,700 during the year ended December 31, 2013 representing an increase of $1,559,272 or greater than 100%. The increase was primarily related to a full year of revenues recognized in 2014 under a large cable company customer contract which commenced in July 2013.  

 

Cost of Revenues. Cost of revenues totaled $14,220,122 during the year ended December 31, 2014 compared to $11,980,097 during the year ended December 31, 2013 representing an increase of $2,240,025 or 19%. Rents for street level rooftops for the Shared Wireless segment increased by approximately $2,282,000. The number of street level rooftops for the Shared Wireless segment were approximately 12% higher at December 31, 2014 compared to December 31, 2013.

 

 
29

 

 

Depreciation. Depreciation totaled $3,957,784 during the year ended December 31, 2014 compared to $3,508,647 during the year ended December 31, 2013 representing an increase of $449,137 or 13%. The base of depreciable assets increased approximately 10% during 2014.

 

Customer Support Services. Customer support services totaled $683,208 during the year ended December 31, 2014 compared to $784,780 during the year ended December 31, 2013 representing a decrease of $101,572 or 13%.

 

Sales and Marketing. Sales and marketing expenses totaled $229,013 during the year ended December 31, 2014 compared to $301,578 during the year ended December 31, 2013 representing a decrease of $72,565, or 24%.

 

General and Administrative. General and administrative expenses totaled $568,985 during the year ended December 31, 2014 compared to $668,626 during the year ended December 31, 2013 representing a decrease of $99,641, or 15%.

 

Loss from Discontinued Operations. Loss from discontinued operations totaled $16,559,140 for the year ended December 31, 2014 compared to $15,703,028 for the year ended December 31, 2013 representing an increase of $856,112, or 5%. Revenues increased by $1,559, 272 in 2015 but were offset by cost of revenues which increased by $2,240,025 in 2015. The net effect of these two items totaled $680,753 which represented 80% of the increased loss in 2015.

  

Liquidity and Capital Resources

 

We have historically met our liquidity and capital requirements primarily through the public sale and private placement of equity securities and debt financing. Changes in capital resources during the year ended December 31, 2015 and 2014 are described below. At February 28, 2016, we had cash and cash equivalents totaling approximately $11,411,000.

 

Net Cash Used In Operating Activities. Net cash used in operating activities for the year ended December 31, 2015 totaled $15,253,754 compared to $13,413,128 for the year ended December 31, 2014 representing an increase of $1,840,626, or 14%. Revenues generated from continuing operations decreased to $27,905,023 in 2015 from $29,936,181 in 2014, representing a decrease of $2,031,158 which adversely impacted cash flows available to support operating activities.

 

 Net cash used in operating activities for the year ended December 31, 2014 totaled $13,413,128 compared to $9,484,438 for the year ended December 31, 2013 representing an increase of $3,928,690, or 41%. Revenues from continuing operations decreased to $29,936,181 in 2014 from $31,892,584 in 2013, representing a decrease of $1,956,403. Cost of revenues from discontinuing operations increased to $14,220,122 in 2014 from $11,980,097 in 2013, representing an increase of $2,240,025.

 

Net Cash Used in Investing Activities. Net cash used in investing activities for the year ended December 31, 2015 totaled $6,683,405 compared to $7,036,756 for the year ended December 31, 2014 representing a decrease of $353,351 or 5%. Cash capital expenditures from continuing operations increased to $6,487,040 in the 2015 period from $5,086,298 in the 2014 period representing an increase of $1,400,742, or 28%. Cash capital expenditures from discontinued operations decreased to $240,248 in 2015 from $2,220,644 in the 2014 period. Capital expenditures 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 addition, we received an incentive payment of $380,000 in the 2014 period 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 investing activities for the year ended December 31, 2014 totaled $7,036,756 compared to $7,562,464 for the year ended December 31, 2013 representing a decrease of $525,708 or 7%. Cash capital expenditures for continuing operations decreased from $5,878,483 in the 2013 period to $5,086,298 in the 2014 period representing a decrease of $792,185, or 13%. Cash capital expenditures for discontinued operations increased from $1,264,893 in the 2013 period to $2,220,644 in the 2014 period, representing an increase of $955,751, or 76%. Capital expenditures 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 addition, we received an incentive payment of $380,000 in the 2014 period 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. Finally, we paid cash of $225,000 for the acquisition of Delos in the 2013 period. There were no acquisitions in the 2014 period. 

 

Net Cash (Used In) Provided by Financing Activities . Net cash used in financing activities for the year ended December 31, 2015 totaled $973,819 compared to net cash provided by financing activities of $30,295,862 for the year ended December 31, 2014, representing a decrease of $31,269,681, or greater than 100%. We received net proceeds of $31,056,260 in the fourth quarter of 2014 in connection with a debt financing.

 

 
30

 

 

Net cash provided by financing activities for the year ended December 31, 2014 totaled $30,295,862 compared to $30,076,207 for the year ended December 31, 2013, representing an increase of $219,655, or 1%. We received net proceeds of $31,056,260 in the fourth quarter of 2014 in connection with a debt financing. We received net proceeds of $30,499,336 in the first quarter of 2013 in connection with the sale of 11,000,000 shares of our common stock at a public offering price of $3.00 per share.

   

Acquisition of Delos. In February 2013, we completed the acquisition of Delos which was based in Houston, Texas. The aggregate consideration for the acquisition included (i) approximately $225,000 in cash, (ii) 385,124 shares of common stock with a fair value of approximately $951,000 based on the market price of our common stock on the closing date, and (iii) approximately $166,000 in assumed liabilities. The acquisition of Delos was a business combination accounted for under the acquisition method.

 

Discontinued Operations . In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”), to operate a new business designed to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets built a carrier-class network which offered a shared wireless infrastructure platform, primarily for (i) co-location of customer owned antenna and related equipment and (ii) Wi-Fi access and offloading. The Company referred to this as its “Shared Wireless Infrastructure” or “Shared Wireless” business. During the fourth quarter of 2015, the Company determined to exit this business and curtailed activities in its smaller markets. The remaining network, located in New York City (or “NYC”), was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the New York City network. On March 9, 2016, the Company completed a sale and transfer of certain assets to a major cable company (the “Buyer”). The Asset Purchase Agreement provided that the Buyer would assume certain rooftop leases in NYC and acquire ownership of the Wi-Fi access points and related equipment associated with operating the network. The Company retained ownership of all backhaul and related equipment and the parties entered into a backhaul services agreement under which the Company will provide internet bandwidth to the Buyer at the locations governed by the leases. The agreement is for a three year period with two, one year renewals and is cancellable by the Buyer on sixty days’ notice. The operating results and cash flows for Hetnets have been presented as discontinued operating results in the accompanying consolidated financial statements. The net effect of the Buyer (i) assuming certain rooftop leases, (ii) entering into a backhaul services agreement, and (iii) terminating the access agreement is projected to result in a net reduction in cash requirements of approximately $6 million annually.

 

Underwritten Offering. In the first quarter of 2013, we completed an underwritten offering of 11,000,000 shares of our common stock at a public offering price of $3.00 per share. The total gross proceeds were $33,000,000 and net proceeds were approximately $30,499,336, after underwriting discounts, commissions and offering expenses.

 

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”). 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.

 

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

 

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

 

In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, 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 anti-dilution 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 December 31, 2016.

 

Capital Resources. At December 31, 2015, the Company had cash and cash equivalents of approximately $15.1 million and working capital of approximately $13.5 million. Based on (i) current projections for revenues for its continuing operations, (ii) operating costs to support its continuing operations including the effect of cost reduction measures that are being implemented, and (iii) capital expenditures to support the network infrastructure, the Company believes that its current cash balances are sufficient to maintain operations and fulfill working capital requirements for the next twelve months from the date of filing this annual report. The Company has historically financed operations through private and public placement of equity securities, as well as debt financings and capital leases. The Company's ability to fund its longer term cash requirements is subject to multiple risks, many of which are beyond its control. Should additional funding be required, the Company may need to raise additional capital through the sale of equity or debt securities. There can be no assurances that the Company would be successful in raising additional capital.

 

Contractual Obligations and Commitments

 

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

 

   

Payments due by period

 
   

Total

   

2016

   

2017

   

2018

   

2019

   

20 20

   

Thereafter

 

Operating leases

  $ 47,735,336     $ 19,885,917     $ 15,252,943     $ 8,286,819     $ 3,199,264     $ 741,907     $ 368,486  

Long-term debt

    36,748,903       -       -       -       36,748,903       -       -  

Capital leases

    2,092,035       1,110,428       837,811       143,796       -       -       -  

Total

  $ 86,576,274     $ 20,996,345     $ 16,090,754     $ 8,430,615     $ 39,948,167     $ 741,907     $ 368,486  

 

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 April 2025. 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.

 

 
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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 $1,453,347 of accrued PIK interest as of December 31, 2015.

 

Capital Leases. We have entered into capital leases to acquire network, rooftop tower site and customer premise equipment expiring through June 2018.

 

Impact of Inflation, Changing Prices and Economic Conditions 

 

Pricing for many technology products and services have historically decreased over time due to the effect of product and process improvements and enhancements. In addition, economic conditions can affect the buying patterns of customers. In 2015, our customer base continued to upgrade to higher bandwidth products as business conditions and the general economy continued to improve. Customers continued to place a premium on value and performance. Pricing of services continued to be a focus for prospective buyers with multi-point and midrange product pricing remaining steady while competition for high capacity links intensified. In part, pressure on high capacity links was due to decreased costs for equipment and some competitors willing to sacrifice margins. We believe that our customers will continue to upgrade their bandwidth service. The continued migration of many business activities and functions to the Internet, and growing use of cloud computing should also result in increased bandwidth requirements over the long term. Inflation has remained relatively modest and has not had a material impact on our business in recent years.

  

  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 normally 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.

 

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 we acquire a business, we assess 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 total 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 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 network assets that we acquire.

 

 
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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. We initially perform 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.

 

Asset Retirement Obligations. The Financial Accounting Standards Board (“FASB”) guidance on asset retirement obligations addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated costs. This guidance requires the recognition of an asset retirement obligation and an associated asset retirement cost when there is a legal obligation associated with the retirement of tangible long-lived assets. Our network equipment is installed on both buildings in which we have a lease agreement (“Company Locations”) and at customer locations. In both instances, the installation and removal of our equipment is not complicated and does not require structural changes to the building where the equipment is installed. Costs associated with the removal of our equipment at Company or customer locations are not material, and accordingly, we have determined that we do not presently have asset retirement obligations under the FASB’s accounting guidance.

 

Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements, financings, or other relationships with unconsolidated entities known as “Special Purposes Entities.”

 

Recent Accounting Pronouncements  

 

In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08 (“ASU 2014-08”), “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. The new standard was effective for us on January 1, 2015. During the fourth quarter of 2015, we determined to exit the shared wireless infrastructure business.  We concluded that this represented a strategic shift in operations, and accordingly, have presented the operating results and cash flows for this business as a discontinued operation in our consolidated financial statements.  

 

In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” which requires an entity to recognize revenue representing the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. ASU 2014-09 is intended to establish principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenues and cash flows arising from the entity’s contracts with customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for us on January 1, 2018. Early application is only permitted as of January 1, 2017. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

 

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

 

In August 2014, the FASB issued ASU No. 2014–15 (“ASU 2014-15”), “Presentation of Financial Statements – Going Concern.” ASU 2014-15 provides GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The new standard is effective for us on January 1, 2017. We do not expect the adoption of ASU 2014–15 to have a significant impact on our consolidated financial statements.

 

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 us 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. We are currently evaluating the effect that ASU 2015-03 will have on our consolidated financial statements and related disclosures.  

 

In May 2015, the FASB issued ASU No. 2015-07 (“2015-07”), “Fair Value Measurement.” ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. ASU 2015-07 is effective for us on January 1, 2016. Early adoption is permitted. We do not expect the adoption of ASU 2015–07 to have a significant impact on our consolidated financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16 (“ASU 2015-16”), “Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments”. The update requires that the acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined (not retrospectively as with prior guidance). Additionally, the acquirer must record in the same period’s financial statements the effect on earnings of changes in depreciation, amortization or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the time of acquisition. The acquiring entity is required to disclose, on the face of the financial statements or in the footnotes to the financial statements, the portion of the amount recorded in current period earnings, by financial statement line item, that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for us on January 1, 2016. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

 

 
33

 

   

In November 2015, the FASB has issued an update to ASU No. 2015-17 (“ASU 2015-17”) “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” The update requires a company to classify all deferred tax assets and liabilities as noncurrent. The update of ASU 2015-17 is effective for us on January 1, 2018. We do not expect the adoption of the update of ASU 2015–17 to have a significant impact on our consolidated financial statements.

 

In January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), “Financial Instruments – Overall (Subtopic 825-10)”. ASU 2016-01 updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The new guidance is effective for us on January 1, 2018. We do not expect the adoption of ASU 2016–01 to have a significant impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02), “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2016-02 is effective for us on January 1, 2019. Early adoption is permitted. We are currently evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

 Market Rate Risk

 

 Market risk is the potential loss arising from adverse changes in market rates and prices. Our primary market risk relates to interest rates. At December 31, 2015, all cash and cash equivalents are immediately available cash balances. A portion of our cash and cash equivalents are held in institutional money market funds.

 

  Interest Rate Risk

 

 Our interest rate risk exposure is to a decline in interest rates which would result in a decline in interest income. Due to our current market yields, a further decline in interest rates would not have a material impact on earnings.

 

 Foreign Currency Exchange Rate Risk

 

 We do not have any material foreign currency exchange rate risk.

 

 
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Item 8. Financial Statements and Supplementary Data.

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

Index to Consolidated Financial Statements

 

 

 

Page

Report of Independent Registered Public Accounting Firm

36

 

 

Consolidated Balance Sheets

37

 

 

Consolidated Statements of Operations

38

 

 

Consolidated Statements of Stockholders’ Equity

39

 

 

Consolidated Statements of Cash Flows

40

 

 

Notes to Consolidated Financial Statements

41

   

 
35

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Audit Committee of the

Board of Directors and Shareholders of

Towerstream Corporation and Subsidiaries

   

 

We have audited the accompanying consolidated balance sheets of Towerstream Corporation and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2015, 2014 and 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Towerstream Corporation and Subsidiaries as of December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for the years ended December 31, 2015, 2014 and 2013 in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Towerstream Corporation and Subsidiaries’ internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 and our report dated, March 18, 2016, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

/s/ Marcum LLP

Marcum LLP

New York, NY

March 18, 2016

 

 
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TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

   

As of December 31,

 
   

2015

   

2014

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 15,116,531     $ 38,027,509  

Accounts receivable, net

    308,551       587,078  

Prepaid expenses and other current assets

    474,029       314,129  

Current assets of discontinued operations

    1,248,569       1,336,139  

Current assets held for sale

    5,315,107       7,875,241  

Total Current Assets

    22,462,787       48,140,096  
                 

Property and equipment, net

    21,235,384       23,146,977  
                 

Intangible assets, net

    1,273,030       2,199,858  

Goodwill

    1,674,281       1,674,281  

Other assets

    2,075,778       2,989,208  

Long-term assets of discontinued operations

    -       4,171,418  

Total Assets

  $ 48,721,260     $ 82,321,838  
                 

Liabilities and Stockholders’ Equity

               
                 

Current Liabilities

               

Accounts payable

  $ 877,134     $ 757,208  

Accrued expenses

    1,629,218       1,955,878  

Deferred revenues

    1,486,754       1,384,846  

Current maturities of capital lease obligations

    992,690       845,668  

Current liabilities of discontinued operations

    3,907,368       196,861  

Other

    63,012       57,242  

Total Current Liabilities

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