Towerstream Corporation
TOWERSTREAM CORP (Form: S-1/A, Received: 09/26/2017 06:06:55)

As filed with the Securities and Exchange Commission on September 25 , 201 7

 

Registration No. 333-219024

  UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

  

FORM S-1/A

Amendment No. 1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

  

4899

  

20-8259086

(State or other jurisdiction

  

(Primary Standard Industrial

  

(I.R.S. Employer

of incorporation or organization)

  

Classification Code Number)

  

Identification Number)

   

88 Silva Lane

Middletown, Rhode Island 02842

(401) 848-5848

  (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Ernest Ortega

Chief Executive Officer

  Towerstream Corporation

88 Silva Lane

Middletown, Rhode Island 02842

(401) 848-5848

 (Name, address, including zip code, and telephone number, including area code, of agent for service)

   

With copies to:

 

Harvey Kesner, Esq.

Avital Perlman, Esq.

Sichenzia Ross Ference Kesner LLP

1185 Avenue of the Americas,

37th Floor

New York, NY 10036

(212) 930-9700

Mitchell Nussbaum, Esq.

Norwood Beveridge, Esq.

Lili Taheri, Esq.
Loeb & Loeb LLP

345 Park Avenue

New York, NY 10154

(212) 407-4000

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement is declared effective.

  

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ☒

  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

 

 
 

 

   

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.☐  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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     ☒

   
  Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered

   

Proposed
Maximum

Aggregate

Offering

Price
(1)

     

Amount of
Registration

Fee

 

Class A Units (2)

 

$

20,000,000

(3)

 

$

2,318.00

 

Common Stock, par value $0.001, included in the Class A Units (4)

 

 

 

(6)

 

 

 

(6)

Warrants to Purchase Common Stock, included in the Class A and Class B Units (5)

 

 

(6)

 

 

(6)

Shares of Common Stock issuable upon exercise of the Warrants included in the Class A Units and Class B Units (4)(5)

 

 

25,000,000

(3)

 

 

2,897.50

 

Class B Units (7 )

 

 

 

 

 

 

Series I Convertible Preferred Stock, included in the Class B Units (8)

 

 

 

 

 

 

Common Stock issuable upon conversion of Series I Convertible Preferred Stock

 

 

 

 

 

 

Total

 

$

45,000,000

 

 

$

5,215.50

(9)

 


(1)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”).

(2)

Each unit consists of one share of common stock, $0.001 par value per share, and one warrant to purchase one share of common stock, $0.001 par value per share.

(3)

Includes shares of common stock and/or shares issuable upon exercise of warrants the underwriters have the option to purchase to cover over-allotments, if any.

(4)

Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.

(5)

The warrants are exercisable at a per share price equal to 125% of the public offering price.

(6)

Included in the price of the units. No fee required pursuant to Rule 457(g) under the Securities Act.

(7)

Each unit consists of one share of Series I Convertible Preferred Stock, $0.001 par value per share, and one warrant to purchase one share of common stock, $0.001 par value per share.

(8)

No separate fee required pursuant to Rule 457 under the Securities Act of 1933.

(9)

$2,318 of such amount previously paid. $2,897.50 paid herewith.

   

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.  

 

 

 

     

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

     

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION

DATED SEPTEMBER 25, 2017

 

 

 

$17,391,300

Class A units consisting of com mon stock and warrants and Class B units consisting of shares of Series I Preferred Stock and warrants

 

 

Towerstream Corporation
  
 

We are offering up to      units, each unit consisting of one share of our common stock, $0.001 par value per share, and one warrant to purchase one share of our common stock (the “Class A units”). The warrants included within a Class A unit are exercisable immediately and have an exercise price of $ per share (125% of the public offering price) and expire five years from the date of issuance. The Class A units will not be issued or certificated. Purchasers will receive only shares of common stock and warrants. The shares of common stock and warrants may be transferred separately, immediately upon issuance. The offering also includes the shares of common stock issuable from time to time upon exercise of the warrants.

 

We are also offering to those purchasers, whose purchase of Class A units in this offering would result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock following the consummation of this offering, the opportunity to purchase, in lieu of the number of Class A units that would result in ownership in excess of 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock, a unit (“Class B unit”) consisting of (i) one share of Series I convertible preferred stock, par value $.001 per share (the “Series I Preferred Stock”), convertible at any time at the holder’s option into shares of common stock equal to $1,000 divided by $_____, the public offering price per Class A unit (the “Conversion Price”) and (ii) warrants to purchase a number of shares of common stock equal to the number of shares of common stock issuable upon conversion of one share of Series I Preferred Stock. The warrants included in the Class B units will have the same terms as the warrants included in the Class A units. The Class B units will not be issued or certificated. Purchasers will receive only shares of Series I Preferred Stock and warrants. The shares of Series I Preferred Stock and warrants may be transferred separately, immediately upon issuance.

 

Our common stock is presently quoted on the OTCQB tier of the OTC Markets Group, Inc. (“OTCQB”) under the symbol “TWER”. We have applied to have our common stock and will apply to have our warrants listed on The NASDAQ Capital Market under the symbol “TWER” and “TWERW,” respectively, and the closing of this offering is contingent upon the successful listing of our common stock and warrants on The NASDAQ Capital Market. No assurance can be given that our application will be approved. On September 22, 2017, the last reported sale price for our common stock on the OTCQB was $6.75 per share.

 

There is no established public trading market for the Series I Preferred Stock, and we do not expect a market to develop. In addition, we do not intend to apply for listing of the Series I Preferred Stock on any national securities exchange or other trading market.  Without an active trading market, the liquidity of the Series I Preferred Stock will be limited.

 

In connection with the listing of our shares of common stock and warrants on The NASDAQ Capital Market, we will implement a 1 for 75 reverse split of our issued and outstanding common stock prior to the date that we price this offering.  All share and per share data in this prospectus have been retroactively restated to reflect the reverse stock split.

 

Our business and an investment in our securities involve a high degree of risk. See “Risk Factors” beginning on page  7 of this prospectus for a discussion of information that you should consider before investing in our securities.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

   

Per Class A Unit

 

Per Class B Unit

   

Total

 

Public offering price

  $     $       $    

Underwriting discounts and commissions (2)

  $     $       $    

Proceeds, before expenses, to us

  $     $       $    

 

(1) The public offering price and underwriting discount corresponds to (i) in respect of the Class A units (a) a public offering price per share of common stock of $___ and (b) a public offering price per warrant of $__, and (ii) in respect of the Class B units, (a) a public offering price per share of Series I Preferred Stock of $__ and (ii) a public offering price per warrant of $____.

(2)

Please refer to “Underwriting” beginning on page 72 of this prospectus for additional information regarding underwriting compensation.

   

We have granted a 45-day option to the representative of the underwriters to purchase up to ______ additional shares of common stock and/or additional warrants to purchase up to _____ shares of common stock (15% of the shares (including the number of shares of common stock issuable upon conversion of the Series I Preferred Stock) issued in this offering) and 15% of the warrants issued in the offering), in any combination thereof, from us at the offering price for each security, less underwriting discounts and commissions, to cover over-allotments, if any. The over-allotment option may be used to purchase shares of common stock, warrants, or any combination thereof, as determined by the representative of the underwriters.  on the same terms and conditions set forth above, solely to cover over-allotments, if any. 

 

The underwriters expect to deliver the shares against payment therefor on or about         , 2017.

 

Joseph Gunnar & Co.

 

The date of this prospectus is ______, 2017  

 

 

 

   

TABLE OF CONTENTS

 

 

Page

 

 

Prospectus Summary

  1

Risk Factors

  7

Cautionary Note Regarding Forward-Looking Statements and Industry Data

  22

Use of Proceeds

  23

Price Range of Common Stock and Related Matters

  24

Dividend Policy

  24

Dilution

  25

Capitalization

  26

Selected Consolidated Financial Data

  28

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

  30

Business

  42

Management

  49

Security Ownership of Certain Beneficial Owners and Management

  60

Certain Relationships and Related Party Transactions

  62

Description of Securities

  63

Underwriting

  72

Legal Matters

  80

Experts

  80

Where You Can Find More Information

  80

Index to Financial Statements

  F-1

 

You should rely only on the information contained in or incorporated by reference in this prospectus, or in any related prospectus supplement, or amendment to this prospectus that we file with the Securities and Exchange Commission. We have not, and the underwriters have not, authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate as of the date on the front of this prospectus only. Our business, financial conditions, results of operations and prospects may have changed since that date.

 

 
ii

 

 

 

 

 
iii

 

 

PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our Securities , you should carefully read this entire prospectus, including our financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each case included elsewhere in this prospectus.

 

Unless stated otherwise or the context otherwise requires, (i) references to “Towerstream,” “we,” “our,” “us,” or the “Company” in this prospectus mean Towerstream Corporation on a consolidated basis with its wholly-owned subsidiaries and (ii) all share and per share data in this prospectus reflects a 1-for-75 reverse stock split of our common stock issued and outstanding (including adjustments for fractional shares), which will be effected prior to the date we price this offering .

 

Business Overview

   

We are primarily a provider of fixed wireless services to businesses in twelve major urban markets across the U.S. During its first decade of operations, our 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. Our fixed wireless service supports bandwidth on demand, wireless redundancy, virtual private networks, disaster recovery, bundled data and video services. We provide 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. Our "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.

 

We offer fixed wireless business internet service in three product categories: Single Tenant Internet Service, On-Net Internet Service, and Temporary Internet Service. This unique portfolio of bandwidth services is able to scale our existing target markets, from small businesses to fortune 500 companies. Such service is as fast as fiber and equally as stable.

 

Under the Single Tenant Internet Service offering, we deliver fixed wireless broadband to a single client through a radio receiver/transmitter on the client’s building dedicated solely to that client. We estimate an addressable market opportunity of approximately 392,000 buildings within four miles of the 175 Points-of-Presence (“PoP” or “Company Locations”) located within the twelve major markets in which we provide service. Currently, we are offering bandwidth speeds ranging from 5Mbps (Megabits per second) to 1.5Gbps (Gigabits per second) in the Single Tenant Internet Service category with an increased focus on bandwidth speeds of 100Mbps or greater.

 

Under the On-Net Internet Service offering, we are able to connect, or “light”, an 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 installed by us have improved even as the costs of the equipment has decreased. As a result, we are able to leverage the initial installation cost to serve an entire building’s tenant base. In place of a wireless install for every single customer in the building, we now only have 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. Additionally, instead of having multiple antennas on both the customer building and the PoP, there generally needs to be only one antenna on each location. We are offering 20Mbps to 1.5Gbps in this product category with an increased focus on bandwidth speeds of 100Mbps or greater.

 

Under the Temporary Internet Service offering, we are able to provide solutions for a client’s short-term connection requirements in locations where fiber, copper, and cable infrastructure does not exist or is cost prohibitive. With connections available for days, weeks, or months, this solution is ideal for special events, conferences, television and movie productions, constructions projects and more.

 

Our Network

 

The foundation of our network consists of PoPs 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. 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.

 

 
1

 

    

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 subsequent acquisitions.

  

Sales and Marketing  

 

We employ an inside direct sales force model to sell our services to business customers. As of August 31, 2017, we employed 22 direct sales people. We generally compensate these employees on a salary plus commission basis.

  

Sales through indirect channels comprised 34% of our total revenues during the years ended December 31, 2016 and 2015. Our channel program currently provides for recurring monthly residual payments ranging from 8% to 25%.

 

Effective January 24, 2017, the Company hired a new Chief Executive Officer who is a telecommunications industry veteran and has extensive experience developing markets and increasing revenue. Immediately thereafter, the Company began to implement new sales and marketing strategies to leverage the Company’s state-of-the-art fixed wireless network to serve both enterprise and service providers. The three main pillars of this strategy are price, speed to market, and reliability.

 

In August 2017, the Company created a new wholesale division that will provide last-mile services to telecommunications carriers in North America.

   

Listing Reverse Split  

 

On May 4, 2017, our stockholders approved a reverse stock split of our issued and outstanding shares of common stock at a ratio of between 1-for-2 and 1-for-100, with the specific ratio and effective time of the reverse stock split to be determined by our Board of Directors, or our Board. In September 2017, the Board approved a 1-for-75 reverse stock split, or the Listing Reverse Split, which we will implement prior to the date we price this offering. The Listing Reverse Split is intended to allow us to meet the minimum share price requirement of The NASDAQ Capital Market. We have applied for listing of our common stock on The NASDAQ Capital Market, which listing we expect to occur upon the consummation of this offering. However, there are no assurances that such listing application will be approved. If the application is not approved, the shares of our common stock will continue to be traded on the OTCQB and we will be unable to complete this offering. 

 

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 formed in 1999, 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.

 

 
2

 

   

THE OFFERING  

 

The following summary contains basic information about our common stock , Series I Preferred Stock and the offering and is not intended to be complete. It does not contain all the information that may be important to you. For a more complete understanding of our common stock and Series I Preferred Stock , you should read the section entitled “Description of Capital Stock” in this prospectus.

 

Class A units offered by us:

 

We are offering      Class A units, each consisting of one share of common stock and one warrant to purchase one share of common stock. The warrants included within the Class A units are exercisable immediately, have an exercise price of $  per share (125% of the public offering price of one Class A unit) and expire five years from the date of issuance.

 

 

 

Class B units offered by us

 

We are also offering to those purchasers, whose purchase of Class A units in this offering would result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock following the consummation of this offering, the opportunity to purchase, in lieu of the number of Class A units that would result in ownership in excess of 4.99% (or, at the election of the purchaser, 9.99%) of our outstanding common stock, Class B units. Each Class B unit will consist of one share of Series I Preferred Stock, convertible into a number of shares of common stock equal to $1,000 divided by $____, the public offering price per Class A unit (the “Conversion Price”), and warrants to purchase a number of shares of common stock equal to the number of shares of common stock issuable upon conversion of one share of Series I Preferred Stock.

 

 

 

Description of Series I Preferred Stock:

 

 

Each share of Series I Preferred is convertible at any time at the holder’s option into a number of shares of common stock equal to $1,000 divided by the Conversion Price. Notwithstanding the foregoing, we shall not effect any conversion of Series I Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of shares of Series I Preferred Stock (together with such holder’s affiliates, and any persons acting as a group together with such holder or any of such holder’s affiliates) would beneficially own a number of shares of our common stock in excess of 4.99% (or, at the election of the purchaser, 9.99%) of the shares of our common stock then outstanding after giving effect to such exercise. For additional information, see “Description of Capital Stock — Series I Preferred Stock Issued in this Offering” in this prospectus.

 

 

 

Overallotment option:

 

We have granted the underwriters a 45 day option to purchase up to _____ additional shares of our common stock at a public offering price of $___ per share and/or warrants to purchase up to ___ additional shares of our common stock at a public offering price of $0.01 per warrant, solely to cover over-allotments, if any.

     
Common stock to be outstanding after this offering   shares of common stock, after giving effect to the Listing Reverse Split (including shares of common stock to be issued upon conversion of the Series I Preferred Stock). 
     
Use of proceeds   We intend to use the net proceeds from this offering primarily for general corporate purposes and working capital. See “Use of Proceeds”.
     

Risk factors

 

See “Risk Factors” beginning on page 7 of this prospectus and the other information included in this prospectus for a discussion of factors you should carefully consider before investing in our securities.

 

 

 

OTCQB trading symbol

 

TWER

     

Proposed Symbol and Listing

  We have applied to list our common stock on the NASDAQ Capital Market under the symbol “TWER” and will apply to list our warrants on the NASDAQ Capital Market under the symbol “TWERW”. There can be no assurance that our application will be approved. The closing of this offering is contingent upon the successful listing of our common stock on The NASDAQ Capital Market. We do not intend to apply for listing of the Series I Preferred Stock on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Series I Preferred Stock will be limited.

 

We will implement the Listing Reverse Split prior to the date that we price this offering. No fractional shares of the Company’s common stock will be issued as a result of the Listing Reverse Split. Any fractional shares resulting from the Listing Reverse Split will be rounded up to the nearest whole share.

 

Unless we indicate otherwise, all information in this prospectus assumes no exercise by the underwriters of the overallotment option or of the underwriter warrants, is based on 390,340 shares of common stock issued and outstanding as of September 21, 2017, and:  

 

  excludes 2,400 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $1,265.25 per share as of September 21, 2017;
     

 

excludes 77,076 shares of our common stock issuable upon exercise of outstanding options at a weighted average exercise price of $115.75 per share as of  September 21, 2017;   
     
 

excludes 71,733 shares of our common stock issuable upon conversion of outstanding shares of Series G Convertible Preferred Stock (the “Series G Preferred Stock”) as of September 21, 2017; and
     
 

excludes 53,440 shares of our common stock issuable upon conversion of outstanding shares of Series H Convertible Preferred Stock (the “Series H Preferred Stock”) as of September 21, 2017.

     

 
3

 

 

SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following table includes (i) summary consolidated statement of operations data for the years ended December 31, 2016 and 2015 and the three and six months ended June 30, 2017 (unaudited) and 2016 (unaudited) and (ii) summary consolidated balance sheet data as of June 30, 2017 (unaudited), derived from our audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus. Our financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States. The results indicated below are not necessarily indicative of our future performance.

  

Certain operating expenses in these financial statements have been reclassified to conform to the presentation in the current condensed consolidated financial statements. These reclassifications had no impact upon the previously reported net losses.

 

You should read this information together with the sections entitled “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Selected Consolidated Financial Data”, and our consolidated financial statements and related notes included elsewhere in this prospectus. 

 

 
4

 

 

   

Years ended December 31,

   

Six Months Ended June 30,

   

Three Months Ended June 30,

 
   

2016

   

2015

   

2017

   

2016

   

2017

   

2016

 
                   

(unaudited)

   

(unaudited)

   

(unaudited)

   

(unaudited)

 

Revenues

  $ 26,895,613     $ 27,905,023     $ 13,090,134     $ 13,606,432     $ 6,517,817     $ 6,872,342  
                                                 

Operating Expenses:

                                               

Infrastructure and access

    10,294,523       10,073,835       5,331,034       5,220,881       2,622,723       2,650,134  

Depreciation and amortization

    10,875,935       9,643,583       4,533,782       5,571,778       2,100,281       3,044,132  

Network operations

    5,185,105       5,192,117       2,286,156       2,551,738       1,085,249       1,279,570  

Customer support

    1,858,314       2,500,553       759,017       1,027,855       391,335       484,664  

Sales and marketing

    3,936,915       6,034,383       1,841,766       2,378,881       976,790       883,961  

General and administrative

    7,777,657       7,050,526       3,051,869       3,584,335       1,514,141       1,604,542  

Loss on extinguishment of debt

    500,000       -       -       -       -       -  

Total Operating Expenses

    40,428,449       40,494,997       17,803,624       20,335,468       8,690,519       9,947,003  
                                                 

Operating Loss

    (13,532,836 )     (12,589,974 )     (4,713,490 )     (6,729,036 )     (2,172,702 )     (3,074,661 )
                                                 

Other (Expense)/Income:

                                               

Interest, net

    (6,605,222 )     (6,652,786 )     (2,572,821 )     (3,195,411 )     (1,298,920 )     (1,588,291 )

Gain on business acquisitions

    -       -       -       -       -       -  

Other

    -       -       5,508       -       3,879       -  

Total Other (Expense)/Income

    (6,605,222 )     (6,652,786 )     (2,567,313 )     (3,195,411 )     (1,295,041 )     (1,588,291 )
                                                 

Loss before income taxes

    (20,138,058 )     (19,242,760 )     (7,280,803 )     (9,924,447 )     (3,467,743 )     (4,662,952 )
                                                 

(Provision for) benefit from income taxes

    (56,663 )     37,562       -       -       -       -  
                                                 

Loss from continuing operations

    (20,194,721 )     (19,205,198 )     (7,280,803 )     (9,924,447 )     (3,467,743 )     (4,662,952 )
                                                 

Loss from discontinued operations:

                                               

Operating loss

    (1,419,517 )     (21,277,604 )     -       (2,977,143 )     -       (67,576 )

Gain on sale of assets

    1,177,742       -       -       1,177,742       -       -  

Total loss from discontinued operations

    (241,775 )     (21,277,604 )     -       (1,799,401 )     -       (67,576 )
                                                 

Net Loss

    (20,436,496 )     (40,482,802 )     (7,280,803 )     (11,723,848 )     (3,467,743 )     (4,730,528 )

Deemed dividend to preferred stockholders

    (1,721,745 )     -       (1,905,570 )     0       (1,905,570 )     -  

Net loss attributable to common stockholders

  $ (22,158,241 )   $ (40,482,802 )   $ (9,186,373 )   $ (11,723,848 )   $ (5,373,313 )   $ (4,730,528 )
                                                 

Net loss per share - basic and diluted

                                               

Continuing operations

  $ (274.06 )   $ (424.07 )   $ (32.63 )   $ (219.73 )   $ (17.91 )   $ (101.89 )

Discontinued operations

    (3.02 )     (469.83 )     -       (39.84 )     -       (1.48 )

Total net loss per share - basic and diluted

  $ (277.08 )   $ (893.90 )   $ (32.63 )   $ (259.57 )   $ (17.91 )   $ (103.37 )
                                                 

Weighted average common shares outstanding

    79,969       45,288       281,538       45,166       299,974       45,765  

 

 
5

 

 

  PROFORMA BALANCE SHEET
AS OF JUNE 30, 2017
(UNAUDITED)  

 

   

As of June 30, 2017

 
   

Reported

   

Pro Forma

   

Pro Forma

 
           

Adjustments

   

As Adjusted

 
                         

ASSETS

                       
                         

Current assets:

                       

Cash and cash equivalents

  $ 8,968,852     $ -     $ -  

Other current assets - Countinuing operations

    1,230,907       -       -  

Other current assets - Discountinued operations

    -       -       -  

Total current assets

    10,199,759       -       -  
                         

Non-current assets:

                       

Property and equipment, net

    13,032,875       -       -  

Intangible assets, net

    2,882,102       -       -  

Goodwill

    1,674,281       -       -  

Other non-current assets

    386,021       -       -  

Total non-current assets

    17,975,279       -       -  
                         

Total assets

  $ 28,175,038     $ -     $ -  
                         

LIABILITIES AND STOCKHOLDERS DEFICIT

                       
                         

Liabilities:

                       

Current liabilities:

                       

Continuing operations

  $ 2,878,230     $ -     $ -  

Discontinued operations

    1,088,904       -       -  

Total current liabilities

    3,967,134       -       -  

Non-current liabilities:

                       

Long-term debt, net of debt discount and deferred financing costs of $1,513,042

    32,705,952       -       -  

Other non-current liabilities

    968,034       -       -  

Total non-current liabilities

    33,673,986       -       -  
                         

Total liabilities

    37,641,120       -       -  
                         

Stockholders Deficit:

                       

Preferred stock

    2               -  

Common stock

    364       13 (1)      -  
              13 (2)         

Additional paid-in capital

    174,469,582       (13 )(1)     -  
              (13 )(2)        

Accumulated deficit

    (183,936,030 )     -       -  
                         

Total stockholders deficit

    (9,466,082 )     -       -  
                         

Total liabilities and stockholders deficit

  $ 28,175,038     $ -     $ -  

 

Pro Forma Adjustments:

   

1)

Reflects the conversion of 100 shares of Series G Preferred Stock into 13,334 shares of common stock on August 4, 2017.
   

2)

Reflects the conversion of 100 shares of Series G Preferred Stock into 13,334 shares of common stock on August 22, 2017.

  

 
6

 

 

RISK FACTORS  

 

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

 

Risks Relating to Our Financial Condition

 

If we choose to raise additional capital, we may not be able to obtain additional financing to fund our operations on terms acceptable to us or at all.

 

If we choose to raise additional funds in the future, there can be no assurance that sufficient debt or equity financing will be available at all or, if available, that such financing will be at terms and conditions acceptable to us. Should we fail to obtain additional debt financing or raise additional capital, we may not be able to achieve our longer term business objectives and may face other serious adverse consequences. If we raise additional funds by issuing equity securities or convertible debt, investors may experience significant dilution of their ownership interest, and the newly-issued securities may have rights senior to those of the holders of our common stock. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility and may require us to provide collateral to secure the loan. In addition, in a liquidation, debtholders will be entitled to repayment before any proceeds can be paid to our stockholders.

  

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

 

Our net losses for the years ending December 31, 2016 and 2015 were $20,436,496 and $40,482,802, respectively, and our net losses for the six months ending June 30, 2017 and 2016 were $7,280,803 and $11,723,848, respectively. 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 licenses 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, 2016 and June 30, 2017, we had $12.3 million and $9.0 million, respectively, in cash and cash equivalents with one large financial banking institution. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If the institution at which we have placed our funds were to become insolvent or fail, we could be at risk for losing a substantial portion of our cash deposits, or incur significant time delays in obtaining access to such funds. In light of the limited amount of federal insurance for deposits, even if we were to spread our cash assets among several institutions, we would remain at risk for the amount not covered by insurance.  

 

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

 

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

 

 
7

 

   

There is substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.  

 

The Company’s consolidated financial statements for the year ended December 31, 2016 and the six months ended June 30, 2017 have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2016 and June 30, 2017, the Company had cash and cash equivalents of $12.3 million and $9.0 million, respectively, and working capital deficiency of $22.6 million and working capital of $6.2 million, respectively. The Company has incurred significant operating losses since inception and continues to generate losses from operations and as of December 31, 2016 and June 30, 2017, the Company had an accumulated deficit of $176.7 million and $183.9 million, respectively. These matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued. Management has also evaluated the significance of these conditions in relation to the Company’s ability to meet its obligations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  Our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements included in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2016, describing the existence of substantial doubt about our ability to continue as a going concern.

 

Historically, the Company has financed its operation through private and public placement of equity securities, as well as debt financing 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. The Company intends to raise additional capital, either through debt or equity financings or through the potential sale of the Company’s assets in order to achieve its business plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.  

 

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 rooftops;

 

 

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;

   

 
8

 

 

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

 

 

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

 

 

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

 

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

 

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

 

We have constructed proprietary networks in each of the markets we serve by installing antennae on rooftops, communications 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 and we may not be able to do so.

 

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, the quality of our products and services could decline.

 

 
9

 

   

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. 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 or if the FCC re-allocates “unlicensed” 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 and we may be unable to secure such licensed spectrum.

 

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

 

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

 

 

increases in spectrum acquisition costs or complexity;

 

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

 

 

adverse changes to regulations governing spectrum rights;

 

 

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

 

 

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

 

 

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

 

 

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

 

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.

 

 
10

 

   

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;

 

 

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

 

 

a change in our fee structure: and

 

 

existing competitors whose services may be less expensive.

 

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

 

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

 

Many fixed wireless companies have failed and there is no guarantee that our strategy will be successful or profitable. If our strategy is unsuccessful, the value of our company may decrease and our stockholders could lose their entire investment.

 

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

 

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

 

 
11

 

   

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 except for our Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer. 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 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 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 to obtain regulatory approval for such acquisitions;

 

 

failure of the acquired businesses to achieve expected results;

 

 

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

   

 
12

 

 

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.

 

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.

 

 
13

 

   

Risks Relating 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 this decision, we recognized charges in the fourth quarter of 2015 aggregating $5,359,000, consisting of $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.  

 

As of December 31, 2016, and based upon negotiations, settlements, and experiences through that date, the Company had reduced that remaining estimated liability by $1,557,626 to $1,240,000 and reduced operating expenses for the year ended December 31, 2016 by the same amount. As of June 30, 2017, and based upon negotiations, settlements, and experiences through that date, the Company had reduced that remaining estimated liability by $151,096 to $1,088,904.  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. Any additional costs would adversely impact our operating results and cash flows, 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:

 

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.

   

 
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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, and use of unlicensed spectrum, 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 fiber providers, and other 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 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.

 

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 its 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.  

 

On May 23, 2017, the FCC issued a notice of proposed rulemaking, the intention of which is to repeal the net neutrality protections adopted in 2015 and reclassify fixed and mobile broadband services as information services governed by Title I of the Communications Act. At the time of this filing, it is unknown if and when the proposed rules will be adopted, and it is possible that wireless broadband services may become subject to less federal regulation in the future.

 

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.

 

Risks Relating to Our Secured Indebtedness

 

Our cash flows and capital resources may be insufficient to meet minimum balance requirements or to make required payments on our secured indebtedness, which is secured by substantially all of our assets.  

 

In October 2014, we entered into a loan agreement which provided us with a five-year $35,000,000 term loan. As of December 31, 2016, we had $33,290,995 of principal and interest outstanding under the terms of this loan. As of June 30, 2017, we had $33,952,672 of principal and interest outstanding under the terms of this loan. We have agreed to maintain a minimum balance of cash or cash equivalents equal to or greater than $6,500,000 at all times throughout the term of the loan. As of December 31, 2016, we had $12,272,444 in cash and cash equivalents with one large financing banking institution. As of June 30, 2017, we had $8,968,852 in cash and cash equivalents with one large financing banking institution. 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.

 

 
15

 

   

In November 2016, $5,000,000 of principal and accrued interest obligations in connection with this loan was converted into our Series D Preferred Stock. This had the effect of reducing principal by $4,935,834 and given interest rates we experienced during the year ended December 31, 2016, reduced annual interest expense by $592,000 and annual cash interest payments by $395,000.  

 

We recorded interest expense of $4,497,945 and $4,360,042 for the years ended December 31, 2016 and 2015, respectively. Of those amounts, we paid to the lender $2,955,853 and $2,906,695 and, in accordance with the provisions of the loan agreement, added $1,499,315 and $1,453,347 to the principal amount of the loan during the years ended December 31, 2016 and 2015, respectively. We recorded interest expense of $1,019,591 and $1,125,988 for the three months ended June 30, 2017 and 2016, respectively. Of those amounts, we paid to the lender $679,727 and $750,659 and, in accordance with the provisions of the loan agreement, added $339,864 and $375,329 to the principal amount of the loan during the three months ended June 30, 2017 and 2016, respectively. We recorded interest expense of $1,985,030 and $2,240,703 for the six months ended June 30, 2017 and 2016, respectively. Of those amounts, we paid to the lender $1,323,353 and $1,493,803 and, in accordance with the provisions of the loan agreement, added $661,677 and $746,900 to the principal amount of the loan during the six months ended June 30, 2017 and 2016, respectively.

 

Our indebtedness could have important consequences. 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 meet minimum balance requirements, 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.

   

 
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If our cash flows and capital resources are insufficient to fund our minimum balance requirements or 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.

 

On June 14, 2017, the lender delivered to us a “Waiver to Loan Agreement” (the “Waiver”) waiving our obligations to provide a report of our auditors covering our December 31, 2016 audited financial statements “without a `going concern' or like qualification or exception and without any qualification or exception as to the scope of such audit” as provided in the debt agreement. The effective date of the Waiver is March 31, 2017 and the Waiver only applies to our failure to deliver such report of our auditors for the December 31, 2016 audited financial statements and not with respect to any future financial years. The Waiver is effective retroactive to the date on which our auditors’ report concerning the December 31, 2016 financial statements which included a “going concern” explanatory paragraph was issued. The lender has not provided us any notice of Default or any Event of Default, as such terms are defined in our agreements with the lender, and has waived for all purposes the December 31, 2016 going concern covenant requirement. Notwithstanding such waiver, as a result of non-compliance with the non-financial covenant, we restated our previously reported balance sheets by reclassifying long term debt with a net carrying value of $31,487,253 as current liabilities as of December 31, 2016.

 

Although we are currently in compliance with the covenants contained in the debt agreement, 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.

 

 
17

 

   

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.

 

We have identified certain matters involving our internal controls over our financial reporting that are material weaknesses under standards established by the PCAOB.     

 

Material weaknesses were identified in some aspects of our internal control over financial reporting for the fiscal year ended December 31, 2016 and for the quarters ended March 31, 2017 and June 30, 2017. Given these material weaknesses, management concluded that we did not maintain effective internal control over financial reporting. Once identified, we commenced the evaluation of the material weaknesses noted in our internal control over financial reporting specifically surrounding the monitoring of compliance with non-financial covenants in our secured debt agreement. Such non-compliance with a non-financial covenant resulted in the restatements disclosed in the December 31, 2016 and March 31, 2017 financial statements. In order to address our internal control over financial reporting material weaknesses we have improved the training of our finance team with respect to monitoring compliance with such covenants. The cost of implementing the improved internal control process was negligible.

 

Any failure to maintain such internal controls could adversely impact our ability to report our financial results on a timely and accurate basis, which could result in our inability to satisfy our reporting obligations or result in material misstatements in our financial statements. If our financial statements are not accurate, investors may not have a complete understanding of our operations or may lose confidence in our reported financial information, which could result in a material adverse effect on our business or have a negative effect on the trading price of our common stock.

 

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. We cannot assure you that additional 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     

 

A limited public trading market may cause volatility in the price of our common stock.

 

While we have applied for the listing of our common stock on The NASDAQ Capital Market and the closing of this offering is contingent on such listing, our common stock is currently quoted on the OTCQB marketplace.   If we fail to maintain the listing of our common stock on The NASDAQ Capital Market, our common stock will be quoted on the OTCQB marketplace.  The quotation of our common stock on the OTCQB marketplace does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Our common stock is subject to this volatility. Sales of substantial amounts of common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock and our stock price may decline substantially in a short time and our stockholders could suffer losses or be unable to liquidate their holdings. Because our common stock does not trade on a national securities exchange, our common stock is subject to the securities laws of the various states and jurisdictions of the United States in addition to federal securities law. While we may register our common stock or qualify for exemptions for our common stock in one of more states, if we fail to do so the investors in those states where we have not taken such steps may not be allowed to purchase our stock or those who presently hold our stock may not be able to resell their shares without substantial effort and expense. These restrictions and potential costs could be significant burdens on our stockholders.

 

 
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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 twenty preferred share purchase rights for each outstanding share of common stock as of the record date on November 24, 2010. Each right, when exercisable, entitles the registered holder to purchase one-hundredth (1/100th) of a share of Series A Preferred Stock, par value $0.001 per shares of the Company at a purchase price of $18 per one-hundredth (1/100th) 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.

  

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.     

 

If our stockholders sell substantial amounts of our common stock in the public market, including upon the expiration of any statutory holding period under Rule 144 or registration for resale, or issued upon the conversion of preferred stock, if any, or exercise of warrants, it could create a circumstance commonly referred to as an "overhang" and in anticipation of which the market price of our common stock could fall.  As of September 21, 2017, we had 390,340 shares of common stock issued and outstanding. As of September 21, 2017, we had 2,400 shares underlying warrants that have been registered for resale pursuant to an effective registration statement on Form S-3 (File No. 212437), 71,733 shares of common stock underlying Series G Preferred Stock available for resale under Rule 144 and 53,440 shares of common stock underlying Series H Preferred Stock available for resale under Rule 144. The existence of an overhang, whether or not sales have occurred or are occurring, also could make our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate more difficult.  

 

 
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The rights of our common stockholders are limited by and subordinate to the rights of the holders of Series G  Preferred Stock , Series H Preferred Stock and, upon completion of this offering, Series I Preferred Stock; these rights may have a negative effect on the value of shares of our common stock.

 

The holders of our outstanding shares of Series G Preferred Stock, Series H Preferred Stock and, upon completion of this offering, Series I Preferred Stock, have rights and preferences generally superior to those of our holders of common stock. The existence of these superior rights and preferences may have a negative effect on the value of shares of our common stock. These rights are more fully set forth in the certificates of designations governing these instruments, and include, but are not limited to:

 

the right to receive a liquidation preference, prior to any distribution of our assets to the holders of our common stock; and

 

 

the right to convert into shares of our common stock at the conversion price set forth in the certificates of designations governing the respective Preferred Stock, which may be adjusted.

  

Risks Related to this Offering

 

Investors in this offering will suffer immediate and substantial dilution.  

 

Because the price per share of our common stock and Series I Preferred Stock being offered is substantially higher than the net tangible book value per share of our common stock, you will suffer substantial dilution in the net tangible book value of the securities you purchase in this offering. If you purchase shares in this offering, you will suffer immediate and substantial dilution of $           per share in the net tangible book value. See the section entitled “Dilution” below for a more detailed discussion of the dilution you will incur if you purchase securities in this offering.

 

We will have considerable discretion over the use of the proceeds of this offering and may not realize an adequate return.

 

We will have considerable discretion in the application of the net proceeds of this offering. We have not determined the amount of net proceeds that we will apply to various corporate purposes. We may use the proceeds for purposes that do not yield a significant return, if any, for our stockholders.

 

Future sales or issuances of our common stock may cause the market price of our common stock to decline.

 

The sale of substantial amounts of our common stock, whether directly by us or in the secondary market by existing security holders (including holders of our outstanding warrants and convertible debt), the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock could materially and adversely affect the market price of our common stock and our ability to raise capital through future offerings of equity or equity related securities. Any such sales may result in significant dilution to our existing shareholders, including you. We cannot assure you that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater than the price per share paid by investors in this offering, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders, which will result in additional dilution to you.

 

If we are not able to comply with the applicable continued listing requirements or standards of NASDAQ, NASDAQ could delist our common stock.  

 

Our common stock will be listed on The NASDAQ Capital Market upon completion of this offering. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards.

 

In the event that our common stock is delisted from the NASDAQ Capital Market and is not eligible to be listed on another national securities exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by securities analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.

 

 
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If our common stock is not listed on a national securities exchange, compliance with applicable state securities laws may be required for subsequent offers, transfers and sales of the shares of common stock offered hereby.    

 

The securities offered hereby are being offered pursuant to one or more exemptions from registration and qualification under applicable state securities laws. Because our common stock will be listed on The NASDAQ Capital Market upon the consummation of this offering, we are not required to register or qualify in any state the subsequent offer, transfer or sale of the common stock or the Series I Preferred Stock. If our common stock is delisted from The NASDAQ Capital Market and is not eligible to be listed on another national securities exchange, subsequent transfers of the shares of our common stock and the Series I Preferred Stock offered hereby by U.S. holders may not be exempt from state securities laws. In such event, it will be the responsibility of the holder of shares or warrants to register or qualify the shares or the warrants for any subsequent offer, transfer or sale in the United States or to determine that any such offer, transfer or sale is exempt under applicable state securities laws.  

 

There is no established market for the Series I Preferred Stock and warrants being offered in this offering.  

 

There is no established trading market for the Series I Preferred Stock and warrants and we do not expect a market to develop. In addition, we do not intend to apply for the listing of the Series I Preferred Stock on any national securities exchange or other trading market. Without an active trading market, the liquidity of the Series I Preferred Stock and warrants will be limited.

 

 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.

 

In some cases, you can identify forward-looking statements by terminology, such as “expects”, “anticipates”, “intends”, “estimates”, “plans”, “potential”, “possible”, “probable”, “believes”, “seeks”, “may”, “should”, “could” or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus.

 

You should read this prospectus and the documents that we reference herein and therein and have filed as exhibits to the registration statement, of which this prospectus is part, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. These risks and uncertainties, along with others, are described above under the heading “Risk Factors” beginning on page 7 of this prospectus. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this prospectus, and particularly our forward-looking statements, by these cautionary statements.

 

 
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USE OF PROCEEDS

   

We estimate that the net proceeds of this offering will be approximately $             , or approximately $               if the underwriters exercise the over-allotment option in full , after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

We intend to use the net proceeds received from this offering for general corporate purposes, including sales and marketing (65%) and working capital (35%).

 

We have not yet determined the amount of net proceeds to be used specifically for any of the foregoing purposes. Accordingly, we will retain broad discretion over the use of these proceeds. Pending any use as described above, we intend to invest the net proceeds in high-quality, short-term, interest-bearing securities.  

 

 
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  PRICE RANGE OF COMMON STOCK AND RELATED MATTERS  

 

Our common stock had been listed on the NASDAQ Capital Market under the symbol TWER from May 31, 2007 until November 30, 2016. Effective December 1, 2016, the Company moved to trade on OTCQB under the symbol TWER. The following table sets forth the high and low sales prices as reported on the NASDAQ Capital Market for the period from January 1, 2015 through November 30, 2016 and OTCQB from December 1, 2016 through June 30, 2017. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. All stock prices included in the following table are adjusted for the 1 for 20 reverse split of our common stock effected on July 7, 2016 and the 1 for 75 Listing Reverse Split that we will implement prior to the date that we price this offering.

 

Fiscal Year 2017

 

HIGH

   

LOW

 
                 

First Quarter

  $ 15.75     $ 10.50  
Second Quarter   $ 14.25     $ 6.75  

 

Fiscal Year 2016

 

HIGH

   

LOW

 
                 

First Quarter

  $ 600.00     $ 150.00  

Second Quarter

  $ 855.00     $ 180.00  

Third Quarter

  $ 312.75     $ 88.50  

Fourth Quarter

  $ 117.00     $ 13.50  

 

Fiscal Year 2015

 

HIGH

   

LOW

 
                 

First Quarter

  $ 3,825.00     $ 2,430.00  

Second Quarter

  $ 3,435.00     $ 2,580.00  

Third Quarter

  $ 3,225.00     $ 1,530.00  

Fourth Quarter

  $ 1,650.00     $ 420.00  

 

The last reported sales price of our common stock on the OTCQB on December 31, 2016 was $13.50 and on September 22, 2017, the last reported sales price was $6.75. According to the records of our transfer agent, as of September 21, 2017, there were 38 holders of record of our common stock.

   

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.    

 

 
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DILUTION  

 

If you invest in our securities in this offering, your ownership interest will be diluted to the extent of the difference between the public offering price per share and the pro forma net tangible book value per share after this offering. We calculate net tangible book value per share by dividing the net tangible book value, which is tangible assets less total liabilities, by the number of outstanding shares of our common stock.

 

Our net tangible book value per share as of June 30, 2017 was approximately ($14,022,465), or ($35.92) per share after giving effect to the conversion of 200 preferred shares into 26,667 shares of common stock from July 1, 2017 through and immediately prior to the date of this prospectus. After giving effect to the sale by us of               shares offered by this prospectus at a public offering price of  $             per share and after deducting underwriting discounts and estimated offering expenses payable by us and assuming that we issue only Class A units (and no Class B units), our pro forma net tangible book value as of June 30, 2017 would have been approximately $            , or $              per share. This represents an immediate increase in pro forma net tangible book value of  $     per share to existing stockholders and an immediate dilution of $              per share to new investors purchasing our common stock in this offering. The following table illustrates the per share dilution:

 

Assumed public offering price per share

  $    
         

Pro forma net tangible book value per share as of June 30, 2017

       

Increase in pro forma net tangible book per share attributable to this offering

       

Adjusted pro forma net tangible book value per share after this offering

       
         

Dilution in pro forma net tangible book value per common share to new investors

  $    

 

The information above gives effect to the Listing Reverse Split and assumes that the underwriters do not exercise their over-allotment option. If the underwriters exercise their over-allotment option in full, our net tangible book value per share after giving effect to this offering would be $              per share, and the dilution in net tangible book value per share to investors in this offering would be $                per share.

 

This table does not take into account further dilution to new investors that could occur upon the exercise of outstanding options and warrants having a per share exercise price less than the public offering price per share in this offering. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.         

 

 
25

 

 

CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2017:

 

 

On an actual basis;

     
  On a pro forma basis to give effect to the conversion of shares of our preferred stock into common stock; and
     

 

On a pro forma as adjusted basis to give effect to the receipt of $                in net proceeds as previously discussed through the issuance of  Class A units in this offering (and assuming no Class B units are sold) at an assumed public offering price of $  per Class A unit and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

     

You should consider this table in conjunction with “Use of Proceeds”, “Description of Securities” and our financial statements and the notes to those financial statements included elsewhere in this prospectus.

 

 
26

 

 

   

As of June 30, 2017

 
   

Reported

   

Pro Forma

   

Pro Forma

 
                   

As Adjusted

 
                   

For This

 
                   

Offering

 
                         

Long-term debt, net of debt discount and deferred financing costs of $ 1,246,720

  $ 32,705,952     $ -     $ -  
                         

Stockholders equity (deficit):

                       
                         

Preferred stock, par value $0.001; 5,000,000 shares authorized

                       
                         

Series A Preferred - No shares issued or outstanding

    -       -       -  
                         

Series B Convertible Preferred - No shares issued or outstanding

    -       -       -  
                         

Series C Convertible Preferred - No shares issued or outstanding

    -       -       -  
                         

Series D Convertible Preferred - No shares issued or outstanding

    -       -       -  
                         

Series E Convertible Preferred - No shares issued or outstanding

    -       -       -  
                         

Series F Convertible Preferred - No shares issued or outstanding

    -       -       -  
                         

Series G Convertible Preferred - 738 shares issued and outstanding with a liquidation value of $738,000, 538 shares issued and outstanding with liquidation value of $538,000 as of June 30, 2017 and as of "Pro-Forma", respectively

    1       -       -  
                         

Series H Convertible Preferred - 501 shares issued and outstanding with a liquidation value of $501,000 as of June 30, 2017 and as of "Pro-Forma"

    1       -       -  
                         

Common stock, par value $0.001; 200,000,000 shares authorized; 363,681 shares issued and outstanding as of June 30, 2017; 390,349 shares issued and outstanding as of "Pro-Forma"; 00,000,000 shares issued and outstanding as of "Pro Forma as Adjusted For This Offering"

    364       13   (1)     -  
              13   (2)        
                         

Additional paid-in capital

    174,469,582       (13 ) (1)     -  
              (13 ) (2)        
                         

Accumulated deficit

    (183,936,030 )     -       -  
                         

Total stockholders equity (deficit)

    (9,466,082 )             -  
                         

Total capitalization

  $ 23,239,870             $ -  

 

Pro Forma Adjustments:

  

  

1)

Reflects the conversion of 100 shares of Series G Preferred Stock into 13,334 shares of common stock on August 4, 2017.

   

2)

Reflects the conversion of 100 shares of Series G Preferred Stock into 13,334 shares of common stock on August 22, 2017.

  

  

 

 
27

 

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table includes (i) consolidated statement of operations data for the years ended December 31, 2016 and 2015 and the six and three months ended June 30, 2017 (unaudited) and 2016 (unaudited) and summary consolidated balance sheet data as of December 31, 2016 and 2015 and June 30, 2017 (unaudited), derived from our audited and unaudited consolidated financial statements and related notes which are included elsewhere in this prospectus.  The share and per share amounts for all periods reflect the completion of the Listing Reverse Split, which we will implement prior to the date we price this offering. Our financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States. The results indicated below are not necessarily indicative of our future performance.

 

Certain operating expenses in these financial statements have been reclassified to conform to the presentation in the current condensed consolidated financial statements. These reclassifications had no impact upon the previously reported net losses.

 

You should read this information together with the sections entitled “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

 
28

 

 

Selected Consolidated Financial Data  

Years Ended December 31,

   

Six Months Ended

   

Three Months Ended

 
           

June 30,

   

June 30,

 
   

2016

   

2015

   

2017

   

2016

   

2017

   

2016

 
                   

(unaudited)

   

(unaudited)

   

(unaudited)

   

(unaudited)

 

Revenues

  $ 26,895,613     $ 27,905,023     $ 13,090,134     $ 13,606,432     $ 6,517,817     $ 6,872,342  
                                                 

Operating expenses

    40,428,449       40,494,997       17,803,624       20,335,468       8,690,519       9,947,003  
                                                 

Operating Loss

    (13,532,836 )     (12,589,974 )     (4,713,490 )     (6,729,036 )     (2,172,702 )     (3,074,661 )
                                                 

Other income (expense):

                                               

Interest, net

    (6,605,222 )     (6,652,786 )     (2,572,821 )     (3,195,411 )     (1,298,920 )     (1,588,291 )

Gain on business acquisitions

    -       -       -       -       -       -  

Other

    -       -       5,508       -       3,879       -  

Total other income

    (6,605,222 )     (6,652,786 )     (2,567,313 )     (3,195,411 )     (1,295,041 )     (1,588,291 )
                                                 

Loss before income taxes

    (20,138,058 )     (19,242,760 )     (7,280,803 )     (9,924,447 )     (3,467,743 )     (4,662,952 )
                                                 

(Provision for) benefit from income taxes

    (56,663 )     37,562       -       -       -       -  
                                                 

Loss from continuing operations

    (20,194,721 )     (19,205,198 )     (7,280,803 )     (9,924,447 )     (3,467,743 )     (4,662,952 )
                                                 

Loss from discontinued operations

    (241,775 )     (21,277,604 )     -       (1,799,401 )     -       (67,576 )
                                                 

Net Loss

    (20,436,496 )     (40,482,802 )     (7,280,803 )     (11,723,848 )     (3,467,743 )     (4,730,528 )

Deemed dividend to Series D preferred stockholders

    (1,721,745 )     -       (1,905,570 )     -       (1,905,570 )     -  

Net loss attributable to common stockholders

  $ (22,158,241 )   $ (40,482,802 )   $ (9,186,373 )   $ (11,723,848 )   $ (5,373,313 )   $ (4,730,528 )
                                                 

Net loss per share - Basic and diluted

                                               

Continuing operations

  $ (274.06 )   $ (424.07 )   $ (32.63 )   $ (219.73 )   $ (17.91 )   $ (101.89 )

Discontinued operations

    (3.02 )     (469.83 )     -       (39.84 )     -       (1.48 )

Total net loss per share

  $ (277.08 )   $ (893.90 )   $ (32.63 )   $ (259.57 )   $ (17.91 )   $ (103.37 )
                                                 

Weighted average common shares outstanding

    79,969       45,288       281,538       45,166       299,974       45,765  

 

 

Selected Consolidated Financial Data

 

As of December 31,

   

As of June 30,

 
   

2016

   

2015

   

2017

   

2016

 
                   

(unaudited)

   

(unaudited)

 

Cash and cash equivalents

  $ 12,272,444     $ 15,116,531     $ 8,968,852     $ 9,977,495  

Working capital (deficiency) 1

  $ (22,581,415 )   $ 13,506,611     $ 6,232,625     $ 4,530,584  

Total assets

  $ 34,392,837     $ 47,029,839     $ 28,175,038     $ 36,479,402  
                                 

Non-current debt and other liabilities

  $ 1,220,940     $ 35,527,976     $ 33,673,986     $ 36,099,368  

Stockholders’ equity (deficit)

  $ (2,853,458 )   $ 2,545,687     $ (9,466,082 )   $ (6,471,727 )

 

1 Debt amount reclassified from current as of December 31, 2016 to Long-term as of June 30, 2017.

   

 
29

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations should be read together with our financial statements and accompanying notes appearing elsewhere in this Prospectus. This Management’s Discussion and Analysis contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” set forth in the beginning of this Prospectus, and see “Risk Factors” beginning on page  7 for a discussion of certain risk factors applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative of results that may occur in future periods. The share and per share amounts for all periods reflect the completion of the Listing Reverse Split, which we will implement prior to the date we price this offering.

 

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.

 

Characteristics of our Revenues and Expenses

 

We offer 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.

 

Infrastructure and access expenses relate directly to maintaining our network and providing connectivity to our customers. Infrastructure primarily relates to our Points-of-Presence ("PoPs") where we install a substantial amount of equipment, mostly on the roof, which we utilize to connect numerous customers to the internet. We enter into long term lease agreements to maintain our equipment on these PoPs and these rent payments comprise the majority of our infrastructure and access costs. Access expenses primarily consist of bandwidth connectivity agreements that we enter into with national service providers.

 

Network operations costs relate to the daily operations of our network and ensuring that our customers have connectivity within the terms of our service level agreement. We have employees based in our largest markets who are dedicated to ensuring that our network operates effectively on a daily basis. Other employees monitor network operations from our network operating center which is located at our corporate headquarters. Payroll comprises approximately 55% to 60% of network operations costs. Information technology systems and support comprises approximately 15% to 20% of network operations costs.

 

Customer support costs relate to our continuing communications with customers regarding their service level agreement. Payroll comprises approximately 83% to 88% of customer support costs. Other costs include travel expenses to service customer locations, shipping, troubleshooting, and facilities related expenses.

 

 
30

 

   

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.

  

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 and finance personnel are included in this category. Other costs include accounting, legal and other professional services, and other general operating expenses.

 

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 NYC network.

 

As further described in Note 4 to our consolidated financial statements for the fiscal year ended December 31, 2016, 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 ("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 NYC network were presented as Assets Held for Sale as of December 31, 2015.

 

Reverse Stock Splits

 

On July 7, 2016, the Company effected a one-for-twenty reverse stock split of our common stock. Consequently, all earnings per share and other share related amounts and disclosures have been retroactively adjusted for all periods presented.

 

In September 2017, the board approved the 1 for 75 Listing Reverse Split, which we will implement prior to the date we price this offering. Consequently, all earnings per share and other share related amounts and disclosures have been retroactively adjusted for all periods presented.

 

Results of Operations

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

Continuing Operations – Fixed Wireless

 

Revenues.  Revenues totaled $26,895,613 during the year ended December 31, 2016 compared to $27,905,023 during the year ended December 31, 2015 representing a decrease of $1,009,410, or 4%. The decrease principally related to a 7% decrease in the base of customers billed on a monthly recurring basis offset by a 3% increase in rates charged to customers.

 

Customer Churn.  Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.70% during the year ended December 31, 2016 compared to 1.87% during the year ended December 31, 2015. Effective January 1, 2016, we have modified our methodology to conform to common practice in the telecommunications industry. Revenue adjustments associated with customers who are modifying the (i) amount of their bandwidth or (ii) the pricing terms of their contract will no longer be included in the calculation of customer churn. Customer churn calculated under the previous methodology would have totaled 2.00% and 2.07% for the years ended December 31, 2016 and 2015, respectively. 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.

 

 
31

 

   

Infrastructure and Access . Infrastructure and access totaled $10,294,523 for the year ended December 31, 2016 compared to $10,073,835 for the year ended December 31, 2015 representing an increase of $220,688, or 2%. The increase primarily relates to our tower rental expense.

 

Depreciation and Amortization.   Depreciation and amortization totaled $10,875,935 during the year ended December 31, 2016 compared to $9,643,583 during the year ended December 31, 2015 representing an increase of $1,232,352 or 13%. Depreciation expense totaled $9,417,612 during the year ended December 31, 2016 compared to $9,251,311 during the year ended December 31, 2015 representing an increase of $166,301, or 2%. The increase primarily related to the transfer of certain assets during the first quarter of 2016 from discontinued operations to continuing operations.

 

Amortization expense totaled $1,458,323 during the year ended December 31, 2016 compared to $392,272 during the year ended December 31, 2015 representing an increase of $1,066,051, or more than 100%. Amortization expense relates to customer related intangible assets recorded in connection with acquisitions and can fluctuate significantly from period to period depending upon the timing of acquisitions, the relative amounts of intangible assets recorded, and the amortization periods. The increase related entirely to amortization associated with the shared wireless infrastructure transaction described in the section above which closed in March 2016.

 

Network Operations . Network operations totaled $5,185,105 for the year ended December 31, 2016 compared to $5,192,117 for the year ended December 31, 2015 representing a decrease of $7,012, or less than 1%. Payroll costs totaled $2,923,145 in the 2016 period compared to $2,860,803 in the 2015 period representing an increase of $62,342 or 2%. Information technology support expenses totaled $922,684 in the 2016 period compared to $1,044,683 in the 2015 period representing a decrease of $121,999 or 12%, as the Company internally absorbed certain functions that were previously provided by third parties. Network support costs totaled $638,266 for the year ended December 31, 2016 compared to $745,849 for the year ended December 31, 2015 representing a decrease of $107,583, or 14%. These costs can fluctuate from period to period and the dollar change is not meaningful.

 

Customer Support . Customer support totaled $1,858,314 for the year ended December 31, 2016 compared to $2,500,553 for the year ended December 31, 2015 representing a decrease of $642,239, or 26%. Payroll expense totaled $1,629,230 during the 2016 period compared to $2,087,457 during the 2015 period representing a decrease of $458,227, or 22%. Average headcount was lower in the 2016 period as the Company consolidated departments and improved efficiencies. Other customer support costs totaled $229,084 for the year ended December 31, 2016 compared to $413,096 for the year ended December 31, 2015 representing a decrease of $184,012, or 45%. This decrease was principally attributable to lower customer troubleshooting costs which can fluctuate from period to period.

 

Sales and Marketing.   Sales and marketing expenses totaled $3,936,915 during the year ended December 31, 2016 compared to $6,034,383 during the year ended December 31, 2015 representing a decrease of $2,097,468, or 35%. Payroll costs totaled $2,591,201 during the 2016 period compared to $4,032,684 during the 2015 period representing a decrease of $1,441,483, or 36%. The decrease related to lower headcount in connection with the closing of our sales office in Florida as well as additional sales reductions made at our corporate headquarters in the first quarter of 2016. Advertising expenses totaled $245,230 during the 2016 period as compared to $1,052,623 during the 2015 period representing a decrease of $807,393, or 77%. The Company has significantly reduced its Internet marketing initiatives in connection with its current marketing focus on specific businesses in certain connected buildings rather than marketing broadly to all businesses in a market. Outside commissions totaled $792,365 in the 2016 period compared to $603,529 in the 2015 period representing an increase of $188,836, or 31%. The increase relates almost exclusively to the Company’s residual program which pays continuing commissions as long as the referred business is a customer.

 

General and Administrative.  General and administrative expenses totaled $7,777,657 during the year ended December 31, 2016 compared to $7,050,526 during the year ended December 31, 2015 representing an increase of $727,131 or 10%. Stock based compensation totaled $1,518,134 during the 2016 period compared to $1,024,246 during the 2015 period representing an increase of $493,888, or 48%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Payroll costs increased to $1,995,023 in the 2016 period compared to $1,968,550 in the 2015 period representing an increase of $26,473, or 1%. The increase related to severance payments to our former Chief Executive Officer. Public company fees totaled $1,129,646 during the 2016 period compared to $444,937 during the 2015 period representing an increase of $684,709, or more than 100%. This increase related primarily to additional services provided by investor relation firms during 2016. Professional services fees totaled $1,482,556 for the year ended December 31,2016 compared to $1,187,948 for the year ended December 31, 2015 representing an increase of $294,608, or 25%. This increase related primarily to the restructuring of the business during 2016. Corporate travel expenses totaled $95,615 in the 2016 period compared to $405,423 in the 2015 period representing a decrease of $309,808, or 76%. The decrease related to the cancellation of the Company's President’s Club trip for top performers and lower travel expenses at the executive level. Customer related expenses decreased by approximately $101,622 in the 2016 period due to lower bad debt expense compared to the 2015 period.

 

 
32

 

   

Loss on Extinguishment of Debt. Loss on   extinguishment of debt totaled $500,000 for the year ended December 31, 2016 compared with zero for the year ended December 31, 2015 representing an increase of $500,000, or 100%. This charge relates to the exchange of $5,000,000 in long-term debt for Series D Preferred Stock as more fully described in Note 9,  Long-Term Debt  and Note 10(j),  Capital Stock , in the financial statements.

 

Interest Expense, Net.  Interest expense, net totaled $6,605,222 during the year ended December 31, 2016 compared to $6,652,786 during the year ended December 31, 2015 representing a decrease of $47,564 or approximately 1%. Cash and non-cash interest expense in 2016 totaled $2,998,629 and $3,494,262, respectively. Cash and non-cash interest expense in 2015 totaled $2,906,695 and $3,539,722, respectively. Such decreases are attributable to the $5,000,000 reduction of debt as more fully described in Note 9,  Long-Term Debt . 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 $20,194,721 during the year ended December 31, 2016 compared to $19,205,198 during the year ended December 31, 2015 representing an increase of $989,523, or 5%.

 

Deemed Dividend.  This deemed dividend of $1,721,745 during the year ended December 31, 2016 is related to modifications of the conversion terms of the Series D Preferred Stock. There were no similar transactions during the prior year.

 

Discontinued Operations – Shared Wireless

 

The captions discussed below can be found in Note 4,  Discontinued Operations,   in the financial statements.

 

Revenues . Revenues for the Shared Wireless business totaled $553,302 during the year ended December 31, 2016 compared to $3,370,181 during the year ended December 31, 2015 representing a decrease of $2,816,879 or 84%. The decrease primarily related to our contract with a major cable company which was terminated in March 2016 resulting in only two months of revenue in the 2016 period compared to twelve months of revenue in the 2015 period.

 

Infrastructure and Access . Infrastructure and access totaled $965,596 during the year ended December 31, 2016 compared to $19,292,571 during the year ended December 31, 2015 representing a decrease of $18,326,975, or 95%. During the quarter ended December 31, 2016, we determined that our liability for leases agreements related to discontinued operations should be reduced by $1,557,626 to $1,240,000 to reflect the revised estimate of the remaining obligations in connection with those leases. Loss on fixed assets totaled $528,364 during the year ended December 31, 2016 compared to zero during the year ended December 31, 2015. During the first quarter of 2016, the Company sold certain network infrastructure assets to a major cable company. The Company determined to shut down the remaining network locations and recognized a loss of $528,364 which represented the net book value of capitalized installation costs as well as equipment which could not be redeployed into the fixed wireless network.

 

 
33

 

   

Depreciation.  Depreciation totaled $638,681 during the year ended December 31, 2016 compared to $4,032,219 during the year ended December 31, 2015 representing a decrease of $3,393,538 or 84%. All business activities associated with the shared wireless business were terminated during the first quarter of 2016.

  

Network Operations . Network operations totaled $192,947 during the year ended December 31, 2016 compared to $793,886 during the year ended December 31, 2015 representing a decrease of $600,939, or 76%. Certain costs were incurred in the 2016 period related to the termination of the business. The 2015 period primarily related to payroll expenses.

 

Customer Support . Customer support services totaled $69,804 during the year ended December 31, 2016 compared to $383,155 during the year ended December 31, 2015 representing a decrease of $313,351 or 82%. The business was terminated in early March 2016.

 

Sales and Marketing.  Sales and marketing expenses totaled $246 during the year ended December 31, 2016 compared to $145,954 during the year ended December 31, 2015 representing a decrease of $145,708, or 100%. The decrease reflects a lack of sales and marketing efforts prior to terminating the business in March 2016.

 

General and Administrative.  General and administrative expenses totaled $105,545 during the year ended December 31, 2016 compared to zero during the year ended December 31, 2015. The increase reflects professional services fees incurred in the 2016 period for terminating the business.

 

Loss from Discontinued Operations . Loss from discontinued operations for the year ended December 31, 2016 totaled $241,775 compared to $21,277,604 for the year ended December 31, 2015 representing an increase of $21,035,829. Infrastructure and access costs decreased by $18,326,975 and depreciation decreased by $3,393,538. Gain on sale of assets increased by $1,177,742.

 

Three Months Ended June 30 , 2017 Compared to Three Months Ended June 30 , 2016

 

Continuing Operations – Fixed Wireless

 

Revenues. Revenues totaled $6,517,817 during the three months ended June 30, 2017 compared to $6,872,342 during the three months ended June 30, 2016 representing a decrease of $354,525, or 5%. Although the number of customers remained relatively consistent for the two periods, the revenue decrease is due to new acquisitions (“new customers”) having a lower average rate per unit as compared to the customers churning. Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.48% during the three months ended June 30, 2017 compared to 1.59% during the three months ended June 30, 2016.

 

Infrastructure and Access . Infrastructure and access totaled $2,622,723 during the three months ended June 30, 2017 compared to $2,650,134 during the three months ended June 30, 2016 representing a decrease of $27,411, or 1%. The decrease primarily relates to a reduction in bandwidth costs offset by increased rent and other expenses.

 

Depreciation and Amortization. Depreciation and amortization totaled $2,100,281 during the three months ended June 30, 2017 compared to $3,044,132 during the three months ended June 30, 2016 representing a decrease of $943,851 or 31%. Depreciation expense totaled $1,747,777 during the three months ended June 30, 2017 compared to $2,626,249 during the three months ended June 30, 2016 representing a decrease of $878,472, or 33%.

 

Amortization expense totaled $352,504 during the three months ended June 30, 2017 compared to $417,883 during the three months ended June 30, 2016 representing a decrease of $65,379, or 16%. 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.  

 

 
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Network Operations . Network operations totaled $1,085,249 during the three months ended June 30, 2017 compared to $1,279,570 during the three months ended June 30, 2016 representing a decrease of $194,321 or 15%. Payroll costs totaled $656,161 in the 2017 period compared to $785,513 in the 2016 period representing a decrease of $129,352, or 16% due primarily to staffing reductions. Information technology support expenses totaled $147,490 in the 2017 period compared to $231,031 in the 2016 period representing a decrease of $83,541 or 36%, due primarily to a decrease in third party support costs.

 

Customer Support. Customer support totaled $391,335 during the three months ended June 30, 2017 compared to $484,664 during the three months ended June 30, 2016 representing a decrease of $93,329, or 19%. Payroll expense totaled $291,202 during the 2017 period compared to $429,073 during the 2016 period representing a decrease of $137,871 or 32%. Average headcount was lower in the 2017 period as the Company consolidated departments and improved efficiencies. Other customer support costs totaled $100,133 during the three months ended June 30, 2017 compared to $55,591 during the 2016 period representing an increase of $44,542 or 80%. This increase was principally attributable to higher customer troubleshooting costs which can fluctuate from period to period.

 

Sales and Marketing. Sales and marketing expenses totaled $976,790 during the three months ended June 30, 2017 compared to $883,961 during the three months ended June 30, 2016 representing an increase of $92,829, or 11%. Payroll costs totaled $652,248 during the 2017 period compared to $574,571 during the 2016 period representing an increase of $77,677, or 14%. The payroll increase is primarily related to increased staffing levels associated with the new sales office located in Virginia which was opened in the second quarter of 2017. Advertising expenses totaled $28,220 during the 2017 period as compared to $59,562 during the 2016 period representing a decrease of $31,342, or 53%. The Company has significantly reduced its Internet marketing initiatives in connection with its current marketing focus on specific businesses in certain connected buildings rather than marketing broadly to all businesses within a market. Indirect channel commissions, previously referred to as outside commissions, totaled $221,583 in the 2017 period compared to $190,165 in the 2016 period representing an increase of $31,418, or 17%. The increase relates almost exclusively to the Company’s residual program which pays continuing commissions as long as the referred business is a customer.

 

General and Administrative. General and administrative expenses totaled $1,514,141 during the three months ended June 30, 2017 compared to $1,604,542 during the three months ended June 30, 2016 representing a decrease of $90,401, or 6%. Payroll costs decreased to $404,017 in the 2017 period compared to $500,046 in the 2016 period representing a decrease of $96,029, or 19%. The decrease relates to severance paid to a former executive in the 2016 period. Stock based compensation totaled $315,540 during the 2017 period compared to $141,805 during the 2016 period representing an increase of $173,735, or more than 100%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Corporate travel expenses totaled $42,827 in the 2017 period compared to $14,854 in the 2016 period representing an increase of $27,973, or more than 100%. The increase is related to executive travel in 2017. Non-recurring expenses decreased $167,486, or 100%, for the three months ended June 30, 2017. The decrease primarily relates to the Miami lawsuit which the Company settled during the 2016 period. Public company expenses decreased to $55,562 in the 2017 period compared to $90,023 in the 2016 period representing a decrease of $34,461, or 38%. The decrease relates to the reduction of public company filing fees and the contract termination with our investor relation firms in 2017.

 

Interest Expense, Net.  Interest expense, net totaled $1,298,920 during the three months ended June 30, 2017 compared to $1,588,291 during the three months ended June 30, 2016 representing a decrease of $289,371, or 18%. Interest expense relates to the $35,000,000 secured term loan which closed in October 2014. The decrease is primarily attributable to the $5,000,000 reduction of debt in the fourth quarter of 2016 as more fully described in Note 9, Long-Term Debt.

 

Discontinued Operations – Shared Wireless

 

Revenues . Revenue was zero for the three months ended June 30, 2017 and 2016.

 

Infrastructure and Access. Infrastructure and Access totaled zero during the three months ended June 30, 2017 and 2016. 

 

Depreciation. Depreciation totaled zero during the three months ended June 30, 2017 and 2016.

 

Network Operations. Network operations totaled zero during the three months ended June 30, 2017 compared to $9,364 during the three months ended June 30, 2016 representing a decrease of $9,364, or 100%. Certain costs were incurred in the 2016 period related to the termination of the business.

 

Customer Support Services. Customer support services totaled zero during the three months ended June 30, 2017 and 2016.

 

Sales and Marketing. Sales and marketing expenses totaled zero during the three months ended June 30, 2017 and 2016.

 

General and Administrative. General and administrative expenses totaled zero during the three months ended June 30, 2017 compared to $58,212 during the three months ended June 30, 2016 representing a decrease of $58,212, or 100%. The decrease reflects professional service fees incurred in the 2016 period related to the termination of the business.

 

 
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Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

 

Continuing Operations – Fixed Wireless

 

Revenues. Revenues totaled $13,090,134 during the six months ended June 30, 2017 compared to $13,606,432 during the six months ended June 30, 2016, representing a decrease of $516,298, or 4%. Although the number of customers remained relatively consistent for the two periods, the revenue decrease is due to new customers having a lower average rate per unit.

  

Infrastructure and Access . Infrastructure and access totaled $5,331,034 during the six months ended June 30, 2017 compared to $5,220,881 during the six months ended June 30, 2016 representing an increase of $110,153, or 2%. The increase primarily relates to higher tower rental expense, offset by reduced bandwidth costs.

 

Depreciation and Amortization. Depreciation and amortization totaled $4,533,782 during the six months ended June 30, 2017 compared to $5,571,778 during the six months ended June 30, 2016, representing an decrease of $1,037,996 or 19%. Depreciation expense totaled $3,763,394 during the six months ended June 30, 2017 compared to $4,949,222 during the six months ended June 30, 2016, representing a decrease of $1,185,828, or 24%.

 

Amortization expense totaled $770,388 during the six months ended June 30, 2017 compared to $622,556 during the six months ended June 30, 2016, representing an increase of $147,832, or 24%. The increase is related to our backhaul agreement with a major cable company. 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.

 

Network Operations . Network operations totaled $2,286,156 during the six months ended June 30, 2017 compared to $2,551,738 during the six months ended June 30, 2016 representing a decrease of $265,582, or 10%. Payroll costs totaled $1,375,526 in the 2017 period compared to $1,557,352 in the 2016 period representing a decrease of $181,826, or 12% due primarily to staffing reductions. Network costs totaled $371,639 in the six months ended June 30, 2017 compared to $485,115 during the six months ended June 30, 2016, representing a decrease of $113,476, or 23%. The decrease was primarily due to a reduction in third party support costs. Field activities costs totaled $297,986 in the six months ended June 30, 2017 compared to $244,121 during the six months ended June 30, 2016 representing an increase of $53,865, or 22% due to higher installation volume during 2017.

 

Customer Support. Customer support totaled $759,017 during the six months ended June 30, 2017 compared to $1,027,855 during the six months ended June 30, 2016, representing a decrease of $268,838, or 26%. Payroll expense totaled $600,143 during the 2017 period compared to $845,171 during the 2016 period, representing a decrease of $245,028 or 29%. Average headcount was lower in the 2017 period as the Company consolidated departments and improved efficiencies. Other customer support costs totaled $158,877 during the six months ended June 30, 2017 compared to $182,684 during the 2016 period, representing a decrease of $23,807 or 13%. This decrease was principally attributable to lower customer troubleshooting costs which can fluctuate from period to period.

 

Sales and Marketing. Sales and marketing expenses totaled $1,841,766 during the six months ended June 30, 2017 compared to $2,378,881 during the six months ended June 30, 2016 representing a decrease of $537,115, or 23%. Payroll costs totaled $1,205,246 during the 2017 period compared to $1,541,426 during the 2016 period, representing a decrease of $336,180, or 22%. The payroll decrease relates to lower headcount associated with cost savings initiatives and the closure of our Florida sales office in the first quarter of 2016 offset by additional hires in the new Virginia sales office. Advertising expenses totaled $46,496 during the six months ended June 30, 2017 compared to $242,639 during the six months ended June 30, 2016 representing a decrease of $196,143 or 81%. The Company has significantly reduced its Internet marketing initiatives in connection with its current marketing focus on specific businesses in certain connected buildings rather than marketing broadly to all businesses in a market. Indirect channel commissions totaled $435,835 in the 2017 period compared to $396,094 in the 2016 period representing an increase of $39,741, or 10%. The increase relates to the Company’s residual program which pays continuing commissions as long as the referred business is a customer.

 

General and Administrative. General and administrative expenses totaled $3,051,869 during the six months ended June 30, 2017 compared to $3,584,334 during the six months ended June 30, 2016 representing a decrease of $532,465, or 15%. Payroll costs decreased to $827,742 in the 2017 period compared to $1,264,753 in the 2016 period representing a decrease of $437,011, or 35%. The decrease is related to severance payments made in 2016 period to former executives and lower headcount associated with staffing reductions. Stock based compensation totaled $667,874 during the 2017 period compared to $459,795 during the 2016 period representing an increase of $208,079, or 45%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Professional fees totaled $714,419 in the 2017 period compared to $839,324 in the 2016 period representing a decrease of $124,905, or 15%. The decrease is related to decreased legal fees offset by higher recruiting expenses. Non-recurring expenses decreased to $2,751 for the six months ended June 30, 2017 compared to $199,411 for the six month period ended June 30, 2016 representing a decrease of $196,660, or 99%. The decrease primarily relates to a lawsuit which the Company settled during the 2016. Public company costs for the six months ended June 30, 2017 were $117,157 compared to $164,527 during the six months ended June 30,2016 representing a decrease of $47,370, or 29%. The decrease relates to the reduction of public company filing fees, the contract termination with our investor relation firms in 2017, offset by an increase in annual meeting expenses. Other expenses increased to $414,435 for the six months ended June 30, 2017 compared to $330,310 for the six month period ended June 30, 2016, representing an increase of $84,125, or 25%. The increase primarily relates to increased business taxes.

 

Interest Expense, Net.  Interest expense, net totaled $2,572,821 during the six months ended June 30, 2017 compared to $3,195,411 during the six months ended June 30, 2016, representing a decrease of $622,590, or 20%. Interest expense relates to the $35,000,000 secured term loan which closed in October 2014. The decrease is primarily attributable to the $5,000,000 reduction of debt in the fourth quarter of 2016 as more fully described in Note 9 to the condensed consolidated financial statement appearing elsewhere in this prospectus.

 

 
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Discontinued Operations – Shared Wireless

 

Revenues . Revenues for the Shared Wireless business totaled zero during the six months ended June 30, 2017 compared to $553,302 during the six months ended June 30, 2016 representing a decrease of $553,302 or 100%. The decrease primarily related to our contract with a major cable company which was terminated in March 2016 resulting in no revenue in the six months ended June 30, 2017 versus two months of revenue in the 2016 period.

 

Infrastructure and Access. Infrastructure and access totaled zero during the six months ended June 30, 2017 compared to $2,523,222 during the six months ended June 30, 2016 representing a decrease of $2,523,222, or 100%. Rent expense for rooftop locations totaled zero in the 2017 period compared to $1,994,858 in the 2016 period representing a decrease of $1,994,858 or 100%. All business activities associated with the shared wireless business were terminated in the first quarter of 2016. Loss on fixed assets totaled zero during the six months ended June 30, 2017 compared to $528,364 during the six months ended June 30, 2016. During the first quarter of 2016, the Company sold certain network infrastructure assets to a major cable company. The Company determined to shut down the remaining network locations and recognized a loss of $528,364 which represented the net book value of capitalized installation costs as well as equipment which could not be redeployed into the fixed wireless network

 

Depreciation. Depreciation totaled zero during the six months ended June 30, 2017 compared to $638,681 during the six months ended June 30, 2016. All business activities associated with the shared wireless business were terminated during the first quarter of 2016.

 

Network Operations. Network operations totaled zero during the six months ended June 30, 2017 compared to $192,947 during the six months ended June 30, 2016 representing a decrease of $192,947, or 100%. Certain costs were incurred in the 2016 period related to the termination of the business.

 

Customer Support Services. Customer support services totaled zero during the six months ended June 30, 2017 compared to $69,804 during the six months ended June 30, 2016 representing a decrease of $69,804 or 100%. The business was terminated in early March 2016.

 

Sales and Marketing. Sales and marketing expenses totaled zero during the six months ended June 30, 2017 compared to $246 during the six months ended June 30, 2016 representing a decrease of $246, or 100%. The decrease reflects the termination of the business in March 2016.

 

General and Administrative. General and administrative expenses totaled zero during the six months ended June 30, 2017 compared to $105,545 during the six months ended June 30, 2016. The decrease reflects the termination of the business in March 2016.

 

Loss from Discontinued Operations. Loss from discontinued operations for the six months ended June 30, 2017 totaled zero compared to $1,799,401 for the six months ended June 30, 2016 representing a decrease of $1,799,401, or 100% and reflects the termination of the business in March 2016.

 

Liquidity and Capital Resources   

 

The condensed consolidated financial statements appearing elsewhere in this prospectus have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2017, the Company had cash and cash equivalents of approximately $9.0 million and working capital of approximately $6.2 million. The Company has incurred significant operating losses since inception and continues to generate losses from operations and as of June 30, 2017, the Company has an accumulated deficit of $183.9 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued in connection with the filing of our Quarterly Report for the period ended June 30, 2017. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Historically, the Company has financed its operation through private and public placement of equity securities, as well as debt financing 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. The Company intends to raise additional capital, either through debt or equity financings or through the potential sale of the Company’s assets in order to achieve its business plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful

 

 
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Continuing Operations

 

Net Cash Used In Operating Activities. Net cash used in operating activities for the six months ended June 30, 2017 totaled $1,431,794 compared to $4,389,683 for the six months ended June 30, 2016 representing a decrease of $2,957,889. Revenues generated from continuing operations were $516,298 lower in the 2017 period which adversely impacted cash flows available to support operating activities. Changes in operating assets and liabilities used cash of $522,976 during the 2017 period compared to $2,119,814 used in the 2016 period, which represented a total difference of $1,596,838. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results.

 

Net cash used in operating activities for the year ended December 31, 2016 totaled $6,188,647 compared to $4,357,230 for the year ended December 31, 2015 representing an increase of $1,831,417, or 42%. Revenues generated from continuing operations were $1,009,410 lower in the 2016 period which adversely impacted cash flows available to support operating activities. Cash operating expenses incurred from continuing operations were $176,580 lower in the 2016 period which positively impacted cash flows available to support operating activities.  

 

Net Cash Used in Investing Activities. Net cash used in investing activities for the six months ended June 30, 2017 totaled $1,473,754 compared to $1,160,400 for the six months ended June 30, 2016 representing an increase of $313,354. Cash capital expenditures totaled $1,460,829 in the 2017 period compared to $1,160,400 in the 2016 period representing an increase of $300,429. 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.

 

Net cash used in investing activities for the year ended December 31, 2016 totaled $2,322,429 compared to $6,495,881 for the year ended December 31, 2015 representing a decrease of $4,173,452, or 64%. Cash capital expenditures totaled $2,361,601 in the 2016 period compared to $6,487,040 in the 2015 period representing a decrease of $4,125,439, or 64%. The Company was able to redeploy certain equipment from its discontinued operations to support its continuing operations, thereby lowering capital expenditures in the 2016 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.

 

Net Cash Provided by (Used in) Financing Activities .   Net cash used in financing activities for the six months ended June 30, 2017 totaled $478,926 compared to net cash provided by financing activities of $1,754,706 for the six months ended June 30, 2016, representing a decrease of $2,233,632. During the 2016 period, the Company completed an equity offering which resulted in net proceeds of $2,230,000.

 

Discontinued Operations

 

Net Cash Provided by ( Used In ) Operating Activities. Net cash provided by operating activities for the six months ended June 30, 2017 totaled $80,882 compared to $1,343,659 used for the six months ended June 30, 2016 representing an increase of $1,424,541. Operating activities for the discontinued business were terminated in March 2016 which resulted in lower cash requirements for the 2017 period. The Company also received cash proceeds in 2017 due to a refund of a security deposit associated with discontinued operations.

 

Net Cash Used in Investing Activities. There were no investing activities during either period.

 

Net Cash Provided by (Used in) Financing Activities . There were no financing activities during either period.

    

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 (“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 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. During the first quarter of 2016, the Company determined that it would not be able to sell the remainder of the New York City network, and accordingly, all remaining assets are being redeployed into the fixed wireless network or written off. The operating results and cash flows for Hetnets have been reclassified and presented as discontinued operating results for all periods presented in these condensed consolidated financial statements.  

 

 
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Other Considerations

 

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 $35,000,000 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 $5,000,000 plus multiples of $1,000,000.

 

In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, we issued warrants (the “Warrants”) to purchase 180,000 shares of common stock of which two-thirds have an exercise price of $1,890.00 and one-third have an exercise price of $15.00, subject to standard anti-dilution provisions. The Warrants have a term of seven and a half years.

 

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. While our customer base experienced a decline during 2016, our overall pricing increased by 3% during that same period. 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.  

 

 
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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.

 

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.

 

 
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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

 

Recent accounting pronouncements applicable to our financial statements are described in Note 3 to our condensed consolidated financial statements appearing elsewhere in this prospectus.

 

 
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BUSINESS

 

Towerstream Corporation is primarily a provider of fixed wireless services to businesses in twelve major urban markets across the U.S. 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.

 

The Company offers fixed wireless business internet service in three product categories: Single Tenant Internet Service, On-Net Internet Service, and Temporary Internet Service. This unique portfolio of bandwidth services is able to go up and down existing markets, from small businesses to fortune 500 companies. Such service is as fast as fiber and equally as stable.

 

Under the Single Tenant Internet Service offering, the Company delivers fixed wireless broadband to a single client through a radio receiver/transmitter on the client’s building dedicated solely to that client. The Company estimates an addressable market opportunity of approximately 392,000 buildings within 4 miles of the 175 Points-of-Presence (“PoP” or “Company Locations”) located within the twelve major markets in which the Company provides service. Currently the company is offering bandwidth speeds ranging from 5Mbps (Megabits per second) to 1.5Gbps (Gigabits per second) in the Single Tenant Internet Service category with an increased focus on 100Mbps or more.

 

Under the On-Net Internet Service offering, the Company is able to connect, or “light”, an 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 installed by the Company 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. Additionally, instead of having multiple antennas on both the customer building and the PoP, there generally needs to be only one antenna on each location. The Company is offering bandwidth speeds ranging from 20Mbps to 1.5Gbps in this product category with an increased focus on 100Mbps or more.

 

Under the Temporary Internet Service offering, the Company is able to provide solutions for a client’s short-term connection requirements in places where fiber, copper, and cable infrastructure does not exist or is cost prohibitive. With connections available for days, weeks, or months, this solution is ideal for special events, conferences, TV & Movie Productions, constructions projects and more.

 

Our Network

 

The foundation of our network consists of PoPs 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. 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 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.

 

 
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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.

 

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 other mounting structures. 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, 2016, 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 30% of small and medium businesses (5 to 249 employees) in the United States based on information obtained from AtoZDatabases.com.

 

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 August 31, 2017, we employed 22 direct sales people. We generally compensate these employees on a salary plus commission basis.

 

Sales through indirect channels comprised 34% of our total revenues during the years ended December 31, 2016, and 2015 and the six months ended June 30, 2017. Our channel program currently provides for recurring monthly residual payments ranging from 8% to 25%.

 

Effective January 24, 2017, the Company hired a new Chief Executive Officer who is a telecommunications industry veteran and has extensive experience developing markets and increasing revenue. Immediately thereafter, the Company began to implement new sales and marketing strategies to leverage the Company’s state-of-the-art fixed wireless network to serve both enterprise and service providers. The three main pillars of this strategy are price, speed to market, and reliability.

 

In August 2017 the Company created a new wholesale division that will provide last-mile services to telecommunications carriers in North America. Sales and marketing efforts have been restructured to create a more disciplined approach to identify and target prospective customers. By leveraging existing software tools, our sales and marketing organization can identify the 392,000 buildings within four miles of our PoPs that house customers with the highest propensity to buy our services. This focused approach allows our sales force to target the subset of buildings that have confirmed line-of-sight and also lack fiber. This segmentation of our prospect database to focus on prospects that align with prospective customers that are most likely to need and buy our services, along with enhanced sales development training, continues to assist our sales professionals to shorten the sales cycle and achieve volume and velocity.

 

 
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As the demand for high bandwidth speeds over 100Mbps is projected to increase by double digits by 2020, building scale and digitizing networks are key for enterprises to keep pace. To ensure we are prepared for increasing demands of our clients and prospects, our service offerings have been condensed and priced accordingly. We currently offer three speeds in the Single Tenants and On-Net categories with customized quotes for larger bandwidth needs between 100Mbps and 1Gbps.

 

Under the Temporary Internet Service offering, the Company is able to provide solutions for a client’s short-term connection requirements in locations where fiber, copper, and cable infrastructure does not exist or is cost prohibitive. With connections available for days, weeks, or months, this solution is ideal for special events, conferences, television and movie productions, constructions projects and more.

 

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”), fiber Internet service providers, third, fourth, and fifth-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 (“CLECS”).

 

Cable Modem, DSL, and Fiber Services

 

We compete with companies that provide Internet connectivity through cable modems, DSL, and fiber services. Principal competitors include cable companies, such as Comcast Corporation, Spectrum Communications (previously known as Charter Communications), Cox Communications and incumbent telecommunications companies, such as AT&T Inc. or Verizon Communications Inc. Both the cable and telecommunications 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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