Towerstream Corporation
TOWERSTREAM CORP (Form: 10-Q, Received: 11/14/2017 08:58:48)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

or

 

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

For the transition period from_______to_______

 

Commission file number 001-33449

 

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

20-8259086

(I.R.S. Employer Identification No.)

 

88 Silva  Lane

02842

Middletown, Rhode Island

(Zip Code)

(Address of principal executive offices)

 

 

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No ☐  

 

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

Yes No ☐

 

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

 

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

 

As of November 08, 2017, there were 394,399 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

 

  TOWERSTREAM CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

 

 

 

Pages

Part I

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements.

1

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016 (restated)

1

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)

2

 

 

 

 

 

 

Condensed Consolidated Statement of Stockholders ’ Deficit for the Nine Months Ended September 30, 2017 (unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)

4

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

5-17

 

 

 

 

Item 2.

 

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

18-23

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk.

24

 

 

 

 

  Item 4.

 

Controls and Procedures.

24

 

 

 

 

Part II

 

OTHER INFORMATION

 

   

 

   

   

Item 6.

 

Exhibits.

25

 

i

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

September 30,

2017

(Unaudited)

   

December 31,

2016

(Restated)

 

Assets

               

Current Assets

               

Cash and cash equivalents

  $ 8,282,771     $ 12,272,444  

Accounts receivable, net

    721,600       505,074  

Prepaid expenses and other current assets

    592,566       434,444  

Current assets of discontinued operations

    -       231,978  

Total Current Assets

    9,596,937       13,443,940  
                 

Property and equipment, net

    12,436,040       15,252,357  
                 

Intangible assets, net

    2,562,287       3,652,490  

Goodwill

    1,674,281       1,674,281  

Other assets

    381,660       369,769  

Total Assets

  $ 26,651,205     $ 34,392,837  
                 

Liabilities and Stockholders ’ Deficit

               
                 

Current Liabilities

               

Accounts payable

  $ 219,366     $ 323,625  

Accrued expenses

    1,103,340       911,210  

Accrued interest

    709,233       -  

Deferred revenues

    975,089       1,161,520  

Current maturities of capital lease obligations

    411,309       791,009  

Current liabilities of discontinued operations

    1,030,535       1,240,000  

Deferred rent

    168,985       110,738  

Long-term debt, net of debt discount of $1,803,742

    -       31,487,253  

Total Current Liabilities

    4,617,857       36,025,355  
                 

Long-Term Liabilities

               

Long-term debt, net of debt discount of $ 1,005,292

    33,301,998       -  

Capital lease obligations, net of current maturities

    204,752       158,703  

Other

    920,937       1,062,237  

Total Long-Term Liabilities

    34,427,687       1,220,940  

Total Liabilities

    39,045,544       37,246,295  
                 

Commitments ( Note 15)

               
                 

Stockholders' 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 - 0 and 1,233 shares issued and outstanding, liquidation value of $0 and $1,233,000, respectively

    -       2  

Series E Convertible Preferred - 0 and 500,000 shares issued and outstanding, liquidation value of $0 and $500, respectively

    -       500  

Series F Convertible Preferred - 0 and 1,233 shares issued and outstanding, liquidation value of $0 and $1,233,000, respectively

    -       1  

Series G Convertible Preferred - 538 and 0 shares issued and outstanding, liquidation value of $538,000 and $0, respectively

    1       -  

Series H Convertible Preferred - 501 and 0 shares issued and outstanding, liquidation value of $501,000 and $0, respectively

    1       -  

Common stock, par value $0.001; 200,000,000 shares authorized; 394,399 and 244,369 shares issued and outstanding, respectively

    394       244  

Additional paid-in-capital

    174,676,619       173,801,022  

Accumulated deficit

    (187,071,354

)

    (176,655,227

)

Total Stockholders' Deficit

    (12,394,339

)

    (2,853,458

)

Total Liabilities and Stockholders' Deficit

  $ 26,651,205     $ 34,392,837  

   

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

 

1

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Revenues

  $ 6,555,009     $ 6,664,183     $ 19,645,143     $ 20,270,615  
                                 

Operating Expenses

                               

Infrastructure and access

    2,637,055       2,608,505       7,968,089       7,829,386  

Depreciation and amortization

    1,953,519       2,992,758       6,487,301       8,564,537  

Network operations

    1,043,979       1,231,650       3,330,135       3,748,925  

Customer support

    428,672       417,265       1,187,689       1,479,580  

Sales and marketing

    1,130,855       757,316       2,972,621       3,136,198  

General and administrative

    1,181,481       2,266,838       4,233,350       5,851,175  

Total Operating Expenses

    8,375,561       10,274,332       26,179,185       30,609,801  

Operating Loss

    (1,820,552

)

    (3,610,149

)

    (6,534,042

)

    (10,339,186

)

Other (Expense) / Income

                               

Interest expense, net

    (1,314,761

)

    (1,580,444

)

    (3,887,582

)

    (4,775,855

)

Other (Expense) income, net

    (11

)

    -       5,497       -  

Total Other (Expense)/Income

    (1,314,772

)

    (1,580,444

)

    (3,882,085

)

    (4,775,855

)

Loss from continuing operations

    (3,135,324

)

    (5,190,593

)

    (10,416,127

)

    (15,115,041

)

Loss from discontinued operations

                               

Operating loss

    -       -       -       (2,977,143

)

Gain on sale of assets

    -       -       -       1,177,742  

Total loss from discontinued operations

    -       -       -       (1,799,401

)

                                 

Net Loss

    (3,135,324

)

    (5,190,593

)

    (10,416,127

)

    (16,914,442

)

Deemed dividend to Series D and Series F preferred stockholders

    -       -       (1,905,570

)

    -  

Net loss attributable to common stockholders

  $ (3,135,324

)

    (5,190,593

)

  $ (12,321,697

)

  $ (16,914,442

)

                                 

(Loss) gain per share – basic and diluted

                               

Continuing

  $ (8.30

)

  $ (75.00

)

  $ (39.25

)

  $ (283.91

)

Discontinued

                               

Operating loss

    -       -       -       (55.92

)

Gain on sale of assets

    -       -       -       22.12  

Total discontinued

    -       -       -       (33.80

)

Net loss per common share – basic and diluted

  $ (8.30

)

  $ (75.00

)

  $ (39.25

)

  $ (317.71

)

                                 

Weighted average common shares outstanding – basic and diluted

    377,727       69,206       313,958       53,238  

 

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

 

2

 

   

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS ’ DEFICIT

For the Nine Months Ended September 30, 2017

(UNAUDITED)

 

   

Series D

Convertible

Preferred Stock

   

Series E

Convertible

Preferred Stock

   

Series F

Convertible

Preferred Stock

   

Series G

Convertible

Preferred Stock

   

Series H

Convertible

Preferred Stock

    Common Stock    

Additional

Paid-In-

    Accumulated          
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     Total  
                                                                                                                         

Balance at January 1, 2017

    1,233     $ 2       500,000     $ 500       1,233     $ 1       -       -       -       -       244,369     $ 244     $ 173,801,022     $ (176,655,227

)

  $ (2,853,458

)

Conversion on January 9, 2017 of Series E convertible preferred into common shares

    -       -       (500,000

)

    (500

)

    -       -       -       -       -       -       6,667       7       493       -       -  

Conversion on various dates from January 26, 2017 to April 13, 2017, inclusive, Series F convertible preferred into common shares

    -       -       -       -       (590

)

    -       -       -       -       -       39,334       39       (39

)

    -       -  

Conversion on May 26, 2017 of Series D Convertible Preferred Stock into Series G Preferred stock, and the conversion of Series F Convertible Preferred stock into Series H Convertible Preferred Stock

    (1,233

)

    (2

)

    -       -       (643

)

    (1

)

    938       1       938       1       -       -       1       -       -  

Conversion on various dates from May 30, 2017 to June 29, 2017, inclusive, Series H convertible preferred into common shares

    -       -       -       -       -       -       -       -       (437

)

    -       46,614       47       (47

)

    -       -  

Conversion on various dates from June 30, 2017 to August 22, 2017, inclusive, Series G convertible preferred into common shares

    -       -       -       -       -       -       (400

)

    -       -       -       53,335       53       (53

)

    -       -  

Additional common shares issued due to the rounding provisions of the reverse stock split on September 29, 2017

                                                                                    4,050       4       (4 )     -       -  

Stock-based compensation for options

    -       -       -       -       -       -       -       -       -       -       -       -       874,888       -       874,888  

Issuance of common stock under employee stock purchase plan

    -       -       -       -       -       -       -       -       -       -       30       -       358       -       358  

Net Loss

    -       -       -       -       -       -       -       -       -       -                               (10,416,127

)

    (10,416,127

)

Balance at September 30, 2017

    -     $ -       -     $ -       -     $ -       538     $ 1       501     $ 1       394,399     $ 394     $ 174,676,619     $ (187,071,354

)

  $ (12,394,339

)

   

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

 

3

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2017 and 2016

(UNAUDITED)

 

   

For the Nine Months Ended

September 30,

 
   

2017

   

2016

 

Cash Flows Used In Operating Activities :

               

Net loss

  $ (10,416,127

)

  $ (16,914,442

)

Loss from discontinued operations

    -       (1,799,401

)

Loss from continuing operations

    (10,416,127

)

    (15,115,041

)

Adjustments to reconcile loss from continuing operations to net cash used in continuing operating activities:

               

Provision for doubtful accounts

    87,000       15,000  

Depreciation for property and equipment

    5,397,098       7,524,097  

Amortization of intangible assets

    1,090,203       1,040,440  

Amortization of debt discount and deferred financing costs

    798,450       1,272,648  

Accrued interest

    1,725,528       1,130,192  

Stock-based compensation - Options

    874,888       629,671  

Stock-based compensation - Stock issued for services

    -       488,656  

Stock-based compensation - Employee stock purchase plan

    53       4,017  

Deferred rent

    (83,053

)

    (596,310

)

Changes in operating assets and liabilities:

               

Accounts receivable

    (303,526

)

    (117,449

)

Prepaid expenses and other current assets

    (158,122

)

    (104,436

)

Other assets

    1,034       28,602  

Accounts payable

    (104,259

)

    (674,421

)

Accrued expenses

    23,612       (262,914

)

Deferred revenues

    (186,431

)

    (390,022

)

Total Adjustments

    9,162,475       9,987,771  

Net Cash Used In Continuing Operating Activities

    (1,253,652

)

    (5,127,270

)

Net Cash Provided By (Used In) Discontinued Operating Activities

    22,513       (1,479,792

)

Net Cash Used In Operating Activities

    (1,231,139

)

    (6,607,062

)

                 

Cash Flows Used In Investing Activities:

               

Acquisitions of property and equipment

    (2,089,657

)

    (1,692,895

)

Payments of security deposits

    (12,925

)

    -  

Net Cash Used In Continuing Investing Activities

    (2,102,582

)

    (1,692,895

)

                 

Cash Flows (Used In) Provided By Financing Activities:

               

Payments on capital lease obligations

    (656,257

)

    (741,155

)

Net proceeds from the issuance of common stock and warrants

    -       6,802,823  

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

    305       21,570  

Net Cash (Used In) Provided By Continuing Financing Activities

    (655,952

)

    6,083,238  
                 

Net (Decrease) Increase In Cash and Cash Equivalents

               

Continuing Operations

    (4,012,186

)

    (736,927

)

Discontinued Operations

    22,513       (1,479,792

)

Net Decrease In Cash and Cash Equivalents

    (3,989,673

)

    (2,216,719

)

Cash and Cash Equivalents - Beginning

    12,272,444       15,116,531  

Cash and Cash Equivalents - End of Period

  $ 8,282,771     $ 12,899,812  
                 

Supplemental Disclosures of Cash Flow Information:

               

Cash paid for:

               

Interest

  $ 1,323,353     $ 2,354,401  

Income taxes

  $ 15,547     $ 13,909  

Acquisition of property and equipment :

               

Included in accrued expenses

  $ 286,657     $ 174,732  

Under capital leases

  $ 322,606     $ -  

Exchange of intangible assets - discontinued operations (Note 4)

  $ -     $ 3,837,783  

   

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

 

4

 

    

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Organization and Nature of Business

 

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

 

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”), 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 decided to exit this business and curtailed activities in its smaller markets. The operating results and cash flows for Hetnets have been presented as discontinued operating results for all periods presented in these condensed consolidated financial statements.

 

Note 2. Liquidity, Going Concern, and Management Plans

 

The accompanying condensed consolidated financial statements 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 September 30, 2017, the Company had cash and cash equivalents of approximately $8.3 million and working capital of approximately $5.0 million. The Company incurred significant operating losses since inception and continues to generate losses from operations and as of September 30, 2017, the Company has an accumulated deficit of $187.1 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern within one year from 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 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.

 

During the year ended December 31, 2016, the Company raised a total of $9,130,000 and converted $5,000,000 of long-term debt into preferred stock. In addition, the Company has monitored and reduced certain of its operating costs over the course of 2016 and into the first three quarters of 2017. Historically, the Company has financed its operations 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.

 

Note 3. Basis of Presentation and Summary of Significant Accounting Policies

   

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2017 and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the operating results for the full fiscal year for any future period.

 

5

 

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company ’s Annual Report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2016. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K/A Amendment No. 2 for the year ended December 31, 2016, and updated, as necessary, in this Quarterly Report on Form 10-Q.

 

Retroactive Adjustment for Reverse Stock Splits. On July 7, 2016, the Company effected a one-for-twenty reverse stock split of its common stock.

 

On September 29, 2017, the Company effected a one-for-seventy-five reverse stock split of its common stock. Consequently, all earnings per share and other share related amounts and disclosures have been retroactively adjusted for all periods presented for the splits.

 

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Actual results could differ from those estimates. Key estimates include fair value of certain financial instruments, carrying value of intangible assets, reserves for accounts receivable and accruals for liabilities.

   

Concentration of Credit Risk.  Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of September 30, 2017, the Company had cash and cash equivalent balances of approximately $8.0 million in excess of the federally insured limit of $250,000.

 

Revenue Recognition. The Company generally enters into contractual agreements with its customers for periods ranging between one to three years. The Company recognizes the total revenue provided under a contract ratably over the contract period, including any periods under which the Company has agreed to provide services at no cost. The Company applies the revenue recognition principles set forth under the United States Securities and Exchange Commission Staff Accounting Bulletin 104, (“SAB 104”) which provides for revenue to be recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

 

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

 

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

   

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 in the fourth quarter for impairment, or whenever events or circumstances indicate that the carrying value may not be recoverable. The Company initially performs a qualitative assessment of goodwill which considers macro-economic conditions, industry and market trends, and the current and projected financial performance of the reporting unit. No further analysis is required if it is determined that there is a less than 50 percent likelihood that the carrying value is greater than the fair value. There were no indicators of impairment identified during the three and nine month periods ended September 30, 2017.

 

Recent Accounting Standards. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which was issued by the FASB in August 2015 and extended the original effective date by one year. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is in the process of evaluating the effect of the adoption of this standard on our consolidated financial position and results of operations.  The Company has not yet selected a transition method. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.

 

6

 

 

There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),” was issued in March 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers — Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.

 

In May 2017, the FASB issued ASU 2017-09: Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The standard is effective beginning after December 15, 2017; early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

 

In July 2017, FASB issued ASU No. 2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). ASU 2017-11 consists of two parts. The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity ’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position and results of operations. 

 

7

 

 

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

 

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

   

Note 4.     Discontinued Operations

 

During the fourth quarter of 2015, the Company decided to exit the business conducted by Hetnets 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 into the first quarter of 2016 to sell the NYC network. On March 9, 2016, the Company completed a sale and transfer of certain assets pursuant to an asset purchase agreement (the "Agreement") with a large cable company (the "Buyer"). Under the terms of the Agreement, the Buyer assumed certain rooftop leases and acquired ownership of and the right to operate the Wi-Fi access points and related equipment associated with such leases. The Company retained ownership of all backhaul and related equipment, and the parties entered into an agreement under which the Company provides backhaul services to the Buyer. The Agreement is for a three-year period with two one-year renewals and is cancellable by the Buyer on sixty days ’ notice. In connection with the Agreement, the Company transferred to the Buyer a net book value of network assets aggregating $2,660,041 in exchange for the backhaul agreement valued at $3,837,783. The backhaul agreement has been recorded as an intangible asset in the accompanying condensed consolidated balance sheets. As a result, during the first quarter of 2016, the Company recognized a gain of $1,177,742 in its discontinued operations.

 

The Company had determined that it would not be able to sell the remaining network locations in New York City. As a result, the Company recognized charges totaling $1,585,319 in the first quarter of 2016 which included $453,403 representing the estimated cost to settle lease obligations, $528,364 to write off network assets which could not be redeployed into the fixed wireless network, $110,500 related to security deposits which are not expected to be recovered, and $493,052 related to the accelerated expensing of deferred acquisition costs. These costs were partially offset by a $1,244,284 reduction in the accrual for terminated lease obligations that was recorded in the fourth quarter of 2015. This reduction reflects the outcome of settlements negotiated in the first quarter of 2016 with certain landlords. The operating results and cash flows for Hetnets have been presented as discontinued operations in these condensed consolidated financial statements for all periods presented

 

Discontinued Operations

 

A more detailed presentation of loss from discontinued operations is set forth below. There has been no allocation of consolidated interest expense to discontinued operations.  

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Revenues

  $ -     $ -     $ -     $ 553,302  

Operating Expenses:

                               

Infrastructure and access

    -       -       -       2,523,222  

Depreciation

    -       -       -       638,681  

Network operations

    -       -       -       192,947  

Customer support

    -       -       -       69,804  

Sales and marketing

    -       -       -       246  

General and administrative

    -       -       -       105,545  

Total Operating Expenses

    -       -       -       3,530,445  

Operating Loss

    -       -       -       (2,977,143

)

Gain on sale of assets

    -       -       -       1,177,742  

Net Loss

  $ -     $ -     $ -     $ (1,799,401

)

 

8

 

 

The components of the balance sheet accounts presented as discontinued operations were as follows:

 

   

September 30,

2017

   

December 31,

2016

 

Assets:

               

Prepaid expenses and other current assets

    -       231,978  

Total Current Assets

  $ -     $ 231,978  
                 

Liabilities:

               

Accrued expenses - leases

    1,030,535       1,240,000  

Total Current Liabilities

  $ 1,030,535     $ 1,240,000  

 

Note 5. Property and Equipment

 

Property and equipment is comprised of:

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Network and base station equipment

 

$

43,240,042

 

 

$

42,098,570

 

Customer premise equipment

 

 

35,032,54 8

 

 

 

33,617,085

 

Information technology

 

 

4,879,952

 

 

 

4,859,875

 

Furniture, fixtures and other

 

 

1,713,43 1

 

 

 

1,713,430

 

Leasehold improvements

 

 

1,635,09 0

 

 

 

1,631,322

 

 

 

 

86,501,063

 

 

 

83,920,282

 

Less: accumulated depreciation

 

 

74,065,023

 

 

 

68,667,925

 

Property and equipment, net

 

$

12,436,040

 

 

$

15,252,357

 

 

Depreciation expense for the three months ended September 30, 2017 and 2016 was $1,633,704 and $2,574,875, respectively. Depreciation expense for the nine months ended September 30, 2017 and 2016 was $5,397,098 and $7,524,097, respectively.

 

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

 

   

September 30,

2017

   

December 31,

2016

 

Network and base station equipment

  $ 2,629,526     $ 2,620,898  

Customer premise equipment

    983,770       669,792  

Information technology

    1,860,028       1,860,028  
      5,473,324       5,150,718  

Less: accumulated depreciation

    4,580,960       4,083,274  

Property acquired through capital leases, net

  $ 892,364     $ 1,067,444  

 

Note 6. Intangible Assets

 

Intangible assets consist of the following:

 

   

September 30,

2017

   

December 31,

2016

 
                 

Goodwill

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

Customer relationships

  $ 11,856,126     $ 11,856,126  

Less: accumulated amortization

    11,856,126       11,725,369  

Customer relationships, net

    -       130,757  
                 

Backhaul agreement

    3,837,783       3,837,783  

Less: accumulated amortization

    2,025,496       1,066,050  

Backhaul agreement, net

    1,812,287       2,771,733  
                 

FCC licenses

    750,000       750,000  
                 

Intangible assets, net

  $ 2,562,287     $ 3,652,490  

 

9

 

 

Amortization expense for the three months ended September 30, 2017 and 2016 was $319,815 and $417,883, respectively. Amortization expense for the nine months ended September 30, 2017 and 2016 was $1,090,203 and $1,040,440, respectively. The fair value of the backhaul agreement acquired in the transaction with a large cable company, as described in Note 4, is being amortized on a straight-line basis over the three-year term of the agreement.  The Company’s licenses with the Federal Communications Commission (the “FCC”) are not subject to amortization as they have an indefinite useful life. Future amortization expense is as follows:

 

Remainder of 2017

    319,816  

2018

    1,279,261  

2019

    213,210  

Total

  $ 1,812,287  

    

Note 7. Accrued Expenses

 

Accrued expenses consist of the following:  

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Professional services

 

$

169,510

 

 

$

263,928

 

Payroll and related

 

 

394,598

 

 

 

294,006

 

Property and equipment

 

 

286,657

 

 

 

118,139

 

Network

 

 

175,16 8

 

 

 

92,645

 

Other

 

 

77,407

 

 

 

142,492

 

Total

 

$

1,103,340

 

 

$

911,210

 

 

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

     

Note 8. Other Long-Term Liabilities

 

Other long-term liabilities consist of the following:

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Deferred rent

 

$

500,499

 

 

$

641,799

 

Deferred taxes

 

 

420,438

 

 

 

420,438

 

Total

 

$

920,937

 

 

$

1,062,237

 

 

10

 

 

Note 9.  Long-Term Debt

 

Long-term debt (callable) consists of the following:

 

   

September 30,

2017

   

December 31,

2016

 

Principal

  $ 34,307,290     $ 33,290,995  

Unamortized debt discount

    (1,005,292

)

    (1,803,742

)

Total

  $ 33,301,998     $ 31,487,253  

 

In October 2014, the Company entered into a $35,000,000 note ("Note") with Melody Business Finance, LLC ("Lender") wherein the Company received net proceeds of $33,950,000 after a 3% original issue discount.

 

This Note (the “Note”) matures on October 16, 2019 and accrues interest on the basis of a 360-day year at:

 

a)

A rate equal to the greater of: i) the sum of the one-month Libor rate on any given day plus 7% or ii) 8% per annum. The one-month Libor rate was 1.23% as of September 30, 2017. Interest accrued at this rate is paid in cash at the end of each quarter; plus

 

b)

A rate of 4% per annum. Interest accrued at this rate is added to the principal amount at the end of each quarter.

 

This Note is secured by a first-priority lien and security interest in all of the assets of the Company and its subsidiaries, excluding the capital stock of the Company, and certain capital leases, contracts and assets secured by purchase money security interests.

 

The Note contains representations and warranties by the Company and the Lender, certain indemnification provisions in favor of the Lender and customary covenants (including limitations on other debt, liens, acquisitions, investments and dividends), and events of default (including payment defaults, breaches of covenants, a material impairment in the Lender ’s security interest or in the collateral, and events relating to bankruptcy or insolvency). The Note contains several restrictive covenants and the most significant of which requires the Company to maintain a minimum cash balance of $6,500,000 at all times. The Company was not in compliance with one of the Note covenants as of March 31, 2017 and December 31, 2016, and such violation was waived by the Lender on June 14, 2017 effective March 31, 2017. The Company is in compliance with the Note covenants as of September 30, 2017. Upon the occurrence of an event of default, an additional 5% interest rate will be applied to the outstanding loan balances, and the Lender may terminate its lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the Note to secure its interests. Such amount was not assessed by the Lender.

   

The Company has the option to prepay the Note in the minimum principal amount of $5,000,000, plus integral amounts of $1,000,000, beyond that amount subject to certain prepayment penalties. Mandatory prepayments are required upon the occurrence of certain events, including but not limited to: i) the sale, lease, conveyance or transfer of certain assets, ii) issuance or incurrence of indebtedness other than certain permitted debt, iii) issuance of capital stock redeemable for cash or convertible into debt securities; and iv) any change of control.

 

A discount of $6,406,971 to the face value of the Note was recorded upon its issuance and that discount is being amortized over the term of the Note using the effective interest rate method. That discount consisted of:

 

a)

$2,463,23 2 representing the fair value of warrants simultaneously issued to the Lender for the purchase of up to 1,600 and 800 shares of the Company's common stock at $1,890.00 and $15.00 per share, respectively, through April 2022. The fair value of these warrants was calculated utilizing the Black-Scholes option pricing model;

 

b)

$2,893,739 in costs incurred associated with obtaining this financing arrangement which consisted primarily of professional fees; and

 

c)

$1,050,000 related to a 3% original issue discount.

 

11

 

 

On November 8, 2016 and in connection with a financing transaction, an investor acquired $5,000,000 of the Company's obligations to the Lender consisting of principal and accrued interest of $4,935,834 and $64,166, respectively. The investor then immediately exchanged such obligations for 1,000  shares of the Company's Series D Convertible Preferred Stock (the “Series D Preferred Stock”) and warrants for the purchase of up to 53,334 shares of the Company's common stock. In connection with that exchange, the Company:

 

a)

Wrote-off the portion of the unamortized debt discount and deferred financing costs associated with the exchanged principal and recorded a charge to interest expense of $331,609. The accrued interest and the adjustment to the unamortized debt discount activity described in this paragraph are separate from and unrelated to the amounts appearing in the following paragraphs; and

 

b)

Recorded a non-cash loss on extinguishment of debt charge of $500,000. This amount represents the difference between the fair value of the Series D Preferred Stock of $5,500,000 and the carrying amount of the debt of $5,000,000 as of the date of the exchange.

   

The Company recorded interest expense of $ 1,063,851 and $1,149,871 for the three months ended September 30, 2017 and 2016, respectively. The Company recorded interest expense of $3,048,881 and $3,390,576 for the nine months ended September 30, 2017 and 2016, respectively. Of those amounts, the Company paid to the Lender $1,323,353 and $2,260,384 and added $1,016,295 and $1,130,192 of interest to the principal amount of the Note during the nine months ended September 30, 2017 and 2016, respectively.

 

The Company recorded amortization expense of $ 241,428 and $396,414 for the three months ended September 30, 2017 and 2016, respectively. Amortization expense totaled $798,450 and $1,272,648 for the nine months ended September 30, 2017 and 2016, respectively, and classified those amounts as interest expense.

 

Note 10. Capital Stock

 

On January 9, 2017, the holder of 500,000 shares of Series E Convertible Preferred Stock (the “Series E Preferred Stock”) elected to convert them into shares of common stock. In accordance with the conversion terms applicable to the Series E Preferred Stock, the Company issued 6,667 shares of common stock.

 

On various dates from January 26, 2017 to March 23, 2017, inclusive, the holder of 390 shares of Series F Convertible Preferred Stock (the “Series F Preferred Stock”) elected to convert them into shares of common stock. In accordance with the conversion terms applicable to the Series F Preferred Stock, the Company issued 26,000 shares of common stock.

 

On April 4, 2017 and April 13, 2017, the holder of 200 shares of Series F Convertible Preferred Stock elected to convert them into shares of common stock. In accordance with the conversion terms applicable to the Series F Preferred Stock, the Company issued 1 3,334 shares of common stock.

 

On May 26, 2017, the Company exchanged 1,233 shares of the outstanding Series D Preferred Stock and 643 shares of the outstanding Series F Preferred Stock for 938 shares of newly created Series G Convertible Preferred Stock (the “Series G Preferred Stock”) and 938 shares of the newly created Series H Convertible Preferred Stock (the “Series H Preferred Stock”).

 

The key preferences, rights, and limitations of the Series G Preferred Stock and Series H Preferred Stock, are as follows:

 

 

a)

The stated value of each share of Series G Preferred Stock and Series H Preferred Stock is $1,000,

 

 

b)

Series G Preferred Stock and Series H Preferred Stock may be converted into common shares at any time. The number of common shares issuable upon the conversion of the Series G Preferred Stock is determined by multiplying the number of shares of Series G Preferred Stock being converted by their stated value of $1,000 per share and then dividing by the conversion price of $ 7.50 per common share. The number of common shares issuable upon the conversion of the Series H Preferred Stock is determined by multiplying the number of shares of Series H Preferred Stock being converted by their stated value of $1,000 per share and then dividing by the conversion price of $9.38 per common share,

 

 

c)

In the event of a liquidation event, each share of Series G Preferred Stock and Series H Preferred Stock will be entitled to a per share preferential payment equal to 100% of the stated value of such Series G Preferred Stock or Series H Preferred Stock, plus all accrued and unpaid dividends, if any. All subsequent issuances and junior preferred issuances of our capital stock will be junior in rank to the Series G Preferred Stock and Series H Preferred Stock with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company. The holders of Series G Preferred Stock or Series H Preferred Stock will be entitled to receive dividends if and when declared by the Company. The Series G Preferred Stock and Series H Preferred Stock shall participate on an “as converted” basis, with all dividends declared on our common stock. In addition, if the Company grants, issues or sells any rights to purchase securities pro rata to all of the Company ’s record holders of its common stock, each holder will be entitled to acquire such securities applicable to the granted purchase rights as if the holder had held the number of shares of common stock acquirable upon complete conversion of all Series G Preferred Stock and Series H Preferred Stock then held.

   

12

 

 

 

d)

The Company is prohibited from effecting a conversion of the Series G Preferred Stock and Series H Preferred Stock to the extent that, as a result of such conversion, the holder would beneficially own more than 9.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series G Preferred Stock and Series H Preferred Stock, which beneficial ownership limitation may be decreased by the holder at its option. Each holder is entitled to vote on all matters submitted to stockholders of the Company and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder ’s Series G Preferred Stock and Series H Preferred Stock, but not in excess of the beneficial ownership limitations.  

   

Additionally, upon the issuance of the Series  G Preferred Stock and Series H Preferred Stock in the second quarter of 2017, the Company recorded a beneficial conversion feature and a deemed dividend in the amount of $1,905,570. This amount was calculated using the closing price per share of the Company’s common stock on the day of the transaction and subtracting the conversion price per share. This difference was then multiplied by the number of shares of common stock into which the shares of Series G Preferred Stock and Series H Preferred Stock were convertible into on the date of the transaction.

 

On various dates from May 30, 2017 to June 29, 2017, inclusive, the holder of 437 shares of Series H Preferred Stock elected to convert them into shares of common stock. In accordance with the conversion terms applicable to the Series H Preferr ed Stock, the Company issued 46,614 shares of common stock.

 

On various dates from June 30, 2017 to August 22, 2017, inclusive, the holder of 400 shares of Series G Preferred Stock elected to convert them into shares of common stock. In accordance with the conversion terms applicable to the Series G Preferred Stock, the Company issued 53,335 shares of common stock.

 

Note 11. Stock Options and Warrants

 

Stock Options

 

The Company uses the Black-Scholes option pricing model to value options issued to employees, directors and consultants. Compensation expense, including the estimated effect of forfeitures, is recognized over the period of service, generally the vesting period. Stock compensation expense and the weighted average assumptions used to calculate the fair values of stock options granted during the periods indicated were as follows:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Risk-free interest rate

     -% - -%       0.9% - 1.0%       1.6% - 1.7%       0.9% - 1.4%  

Expected volatility

      -%         78% - 79%       110% - 113%       78% - 83%  

Expected life (in years)

      -           4.2           4.2           4.2    

Expected dividend yield

      -           -           -           -    

Estimated forfeiture rates

      20%         1% - 7%         20%         1% - 7%  
Weighted average per share grant date fair value       $-           $99.75           $9.65           $110.25    
Stock-based compensation       $207,064           $192,812           $874,888           $629,671    

 

The risk-free interest rate was based on rates established by the Federal Reserve. The expected volatility was based upon the historical volatility for the Company ’s common stock. The Company utilized historical data to determine the expected life of stock options. The dividend yield reflected the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future. Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. The unamortized amount of stock options expense totaled $292,737 as of September 30, 2017 which will be recognized over a weighted-average period of 2.4 years.

 

13

 

 

Option transactions under the stock option plans during the nine months ended September 30, 2017 were as follows:

 

   

Number

   

Weighted

Average

Exercise Price

 

Outstanding as of January 1, 2017

    28,232     $ 404.82  

Granted during 2017

    51,090       12.77  

Exercised

    -       -  

Cancelled /expired

    (2,146

)

    1,409.58  

Outstanding as of September 30, 2017

    77,176     $ 117.34  

Exercisable as of September 30, 2017

    35,887     $ 233.48  

 

Grants under the stock option plans during the nine months ended September 30, 2017 were as follows:

 

   

Number

 

Consultant grants

    334  

Executive grants

    50,586  

Annual grants to outside directors

    170  

Total

    51,090  

 

Options granted during the reporting period had a term of ten years. All options were issued at an exercise price equal to the fair value on the date of grant. Consultant grants vest six months from the date of issuance. Executive grants, except as noted below, have vesting periods ranging from immediately upon issuance, quarterly over a two-year period, annually for one year then quarterly over the next two years period, and annually for one year then quarterly over the next three years period from the date of issuance. Director grants vest over a one year period from the date of issuance. The aggregate fair value of the options granted was $493,090 for the nine months ended September 30, 2017.

 

On January 24, 2017, the Company entered into an employment agreement with Ernest Ortega wherein the Company issued options for the purchase of up to 27,162 shares of the Company's common stock at $12.75 per share for a period of ten years. Those options vest as follows: 4,178 will vest on January 24, 2018; 8,358 will vest in eight quarterly installments during the twenty-four months ending January 24, 2020; 7,313 will vest upon the achievement of three consecutive quarters of positive cash flow; and 7,313 will vest upon the sale of the Company's earth station assets in Miami, Florida for gross proceeds equal to or greater than $15,000,000.

 

Certain stock options awarded to Ernest Ortega, Chief Executive Officer, in conjunction with his 2017 employment agreement contained performance based criteria. The fair value of the awards is determined based on the market value of the underlying stock price at the grant date and marked to market over the vesting period based on probabilities and projections of the underlying performance measures. The aggregate fair value of the performance based options granted was $140,708 for the nine months ended September 30, 2017. The Company has not recorded any expense associated with the performance based stock options issued in the nine month period ended September 30, 2017. The Company will continue to evaluate the probability of achieving the criteria associated with performance based stock options and will record any associated compensation expense at such time.

 

On February 3, 2017, the Company awarded options for the purchase of up to 15,868 shares of the Company's common stock at an exercise price of $13.50 per share for a period of ten years. Terms of such option awards conformed to the Company's standard form of option agreement which includes a provision for cashless exercise. The awards consisted of options for 6,676 shares to Mr. Philip Urso for his past service as Interim Chief Executive Officer, options for 5,854 shares to Mr. Arthur Giftakis, the Company's Chief Operating Officer, and options for 3,338 shares to Mr. Frederick Larcombe, the Company's former Chief Financial Officer. Mr. Urso's options vested 100% upon issuance and the options issued to Messrs. Giftakis and Larcombe vest ratably on a quarterly basis over the eight quarters immediately following the date of the awards. The options awarded to Mr. Larcombe were subsequently modified and fully expensed on May 15, 2017 to reflect immediate vesting and, unless exercised prior to May 15, 2018, shall be forfeited.

 

On May 15, 2017, the Company entered into an employment agreement with Laura Thomas, Chief Financial Officer, wherein she was issued options to purchase up to 2% of the Company ’s common stock on a fully diluted basis as of May 15, 2017, or 7,556 options. The options vest 25% after one year of service and the remaining will vest ratably over the following three years.

 

14

 

 

Cancellations for the nine months ended September 30, 2017 consisted of 2,044 related to employee terminations and 102 were associated with the expiration of options.

 

The weighted average remaining contractual life of the outstanding options as of September 30, 2017 was 9.2 years.

 

There was no intrinsic value associated with the options outstanding and exercisable as of September 30, 2017. The closing price of the Company’s common stock at September 30, 2017 was $6.10 per share.

 

Stock Warrants

 

There were 2 ,400 warrants outstanding and exercisable as of September 30, 2017 and December 31, 2016, respectively, with a weighted-average exercise price of $1,265.00 as of September 30, 2017. The weighted average remaining contractual life of the warrants was 4.6 years.

 

There was no intrinsic value associated with the warrants outstanding and exercisable as of September 30, 2017.

 

Note 12. Employee Stock Purchase Plan

 

Under the Company ’s 2010 Employee Stock Purchase Plan (“ESPP Plan”), participants can purchase shares of the Company’s stock at a 15% discount. A maximum number of 334 shares of common stock can be issued under the ESPP Plan of which all of the authorized shares have been issued as of September 30, 2017. During the three and nine months ended September 30, 2017, a total of 0 and 30 shares were issued under the ESPP Plan with a fair value of $0 and $358, respectively. The Company recognized $0 and $53 of stock-based compensation related to the 15% discount for the three and nine months ended September 30, 2017, respectively. The Company recognized $902 and $4,017 of stock-based compensation related to the 15% discount for the three and nine months ended September 30, 2016, respectively.

 

Note 13. Fair Value Measurement

 

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

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. There were no changes in the valuation techniques during the three and nine months ended September 30, 2017.

 

  Note 14. Net Loss Per Common Share

 

Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of common shares outstanding during the period.

 

The following common stock equivalents were excluded from the computation of diluted net loss per common share because they were anti-dilutive. The exercise or issuance of these common stock equivalents would dilute earnings per share if the Company becomes profitable in the future .

   

   

As of September 30,

 
   

2017

   

2016

 

Stock options

    77,176       13,203  

Warrants

    2,400       2,400  

Series G Preferred Stock

    71,734       -  

Series H Preferred Stock

    53,440       -  

Total

    204,750       15,603  

 

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  Note 15. Commitments

 

Operating Lease Obligations

 

The Company has entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through June 2024. Certain of these operating leases include extensions, at the Company's option, for additional terms ranging from one to fifteen years. Amounts associated with the extension periods have not been included in the table below as it is not presently determinable which options, if any, the Company will elect to exercise. As of September 30, 2017, total future operating lease obligations were as follows:

 

Remainder of 2017

  $ 1,789,648  

2018

    6,318,665  

2019

    4,846,377  

2020

    2,627,912  

2021

    667,892  

Thereafter

    231,105  

Total

  $ 16,481,599  

 

Rent expenses were as follows:

   

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2017

   

2016

   

2017

   

2016

 

Points of Presence

  $ 2,161,038     $ 2,160,592     $ 6,472,499     $ 6,402,312  

Corporate offices

    105,359       79,647       281,513       250,567  

Other

    233,779       107,718       695,943       342,273  

Total

  $ 2,500,176     $ 2,347,957     $ 7,449,955     $ 6,995,152  

 

Rent expenses related to Points of Presence were included in infrastructure and access in the Company ’s condensed consolidated statements of operations. Rent expense related to our corporate offices was allocated between general and administrative, sales and marketing, customer support, and network operations expense in the Company’s condensed consolidated statements of operations. Other rent expenses were included in network operations within the Company’s condensed consolidated statements of operations.

 

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

 

In December 2014, the Company entered into a new lease agreement in Florida, primarily for a second sales center. The lease commenced in February 2015 for 38 months with an option to renew for an additional five-year period. Total annual rent payments started at $53,130 and escalated by 3% annually. In April 2016, the Company terminated the Florida lease.  Under the terms of the agreement, the Company forfeited its security deposit of $26,648 and agreed to make a termination payment of $25,000.

 

In April 2017, the Company entered into a new lease agreement for its sales office located in Virginia. The lease commenced on April 15, 2017 and expires on December 31, 2017 with an automatic renewal equal to the original term. Total annual rent payments are fixed at $32,021 for the contract term. In June 2017, the Company leased additional office space in Virginia. The second lease commenced on June 1, 2017 and expires on December 31, 2017 with an automatic renewal equal to the original term. Total annual rent payments are fixed at $20,734 for the duration of the contract term.

 

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Capital Lease Obligations

 

The Company has entered into capital leases to acquire property and equipment expiring through June 2018. As of September 30, 2017, total future capital lease obligations were as follows:

 

Total Capital lease obligation:

       

Remainder of 2017

  $ 189,947  

2018

    283,864  

2019

    122,094  

2020

    72,000  

Subtotal

    667,905  

Less: interest expense

    51,844  

Total

  $ 616,061  
         

Total Capital lease obligation:

       

Current

  $ 411,309  

Long-term

    204,752  

Total

  $ 616,061  

 

 

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

 

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the three and nine months ended September 30, 2017. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K/A Amendment No.2 for the year ended December 31, 2016 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

 

Forward-Looking Statements

 

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

 

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

 

Non-GAAP Measures and Reconciliations to GAAP Measures

 

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

 

Characteristics of Revenues and Expenses

 

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 70% to 80% of customer support costs. Other costs include shipping, troubleshooting, and facilities related expenses.

 

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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 – Fixed Wireless

 

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

   

As of September 30, 2017, we operated in twelve metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation. We incur significant up-front costs in order to establish a network presence in a new market. These costs include building PoPs and network costs. Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a network presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period

 

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 decided 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 into the first quarter of 2016 to sell the NYC network.

 

As further described in Note 4 to our condensed consolidated financial statements, on March 9, 2016, the Company completed a sale and transfer of certain assets to the major cable company (the “Buyer”). The asset purchase agreement ("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 condensed consolidated financial statements.

 

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

 

Continuing Operations – Fixed Wireless

 

Revenues. Revenues totaled $6,555,009 during the three months ended September 30, 2017 compared to $6,664,183 during the three months ended September 30, 2016 representing a decrease of $109,174, or 2%. The revenue decrease is due to a smaller customer base, partially offset by higher non-recurring revenues and lower churn. Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.26% during the three months ended September 30, 2017 compared to 2.02% during the three months ended September 30, 2016.

 

19

 

 

Infrastructure and Access . Infrastructure and access totaled $2,637,055 during the three months ended September 30, 2017 compared to $2,608,505 during the three months ended September 30, 2016 representing an increase of $28,550, or 2%. The increase is due to higher rent expense offset by a reduction in bandwidth costs.

 

Depreciation and Amortization. Depreciation and amortization totaled $1,953,519 during the three months ended September 30, 2017 compared to $2,992,758 during the three months ended September 30, 2016 representing a decrease of $1,039,239, or 35%. Depreciation expense totaled $1,633,704 during the three months ended September 30, 2017 compared to $2,574,875 during the three months ended September 30, 2016 representing a decrease of $941,171, or 37%.

 

Amortization expense totaled $ 319,815 during the three months ended September 30, 2017 compared to $417,883 during the three months ended September 30, 2016 representing a decrease of $98,068, or 23%. 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 $1,043,979 during the three months ended September 30, 2017 compared to $1,231,650 during the three months ended September 30, 2016 representing a decrease of $187,671, or 15%. The decrease is primarily due to a reduction of payroll related costs associated with staffing reductions.

 

Customer Support. Customer support totaled $428,672 during the three months ended September 30, 2017 compared to $417,265 during the three months ended September 30, 2016 representing an increase of $11,407, or 3%. The increase is due to a $66,765 increase in other related costs which was principally attributable to higher maintenance costs which can fluctuate from period to period, offset by a $55,360 payroll expense decrease due to a lower headcount in the 2017 period as the Company consolidated departments and improved efficiencies.

 

Sales and Marketing. Sales and marketing expenses totaled $1,130,855 during the three months ended September 30, 2017 compared to $757,316 during the three months ended September 30, 2016 representing an increase of $373,539, or 49%. The increase is primarily due to payroll costs which increased $276,799 during the 2017 period as a result of increased staffing levels within the new Virginia sales office and the implementation of new sales compensation plans. Indirect channel commissions, previously referred to as outside commissions, increased $46,455, or 24%. The commission increase relates almost exclusively to the Company’s residual program which pays continuing commissions as long as the referred business is a customer. Also contributing to the increase was a $26,560 increase in advertising costs and a $23,725 increase in Other costs primarily related to services provided by a third party for new hire sales training.

 

General and Administrative. General and administrative expenses totaled $1,181,481 during the three months ended September 30, 2017 compared to $2,266,838 during the three months ended September 30, 2016 representing a decrease of $1,085,357, or 48%. Public company related expenses decreased $486,926, or 99%, and primarily relates to the contract termination with our investor relation firms in 2017. Stock based compensation decreased $455,302, or 69%, due to stock issuances to third parties that provided services in Q3-16 associated with the capital raise financing activities. Professional fees decreased $99,742, or 29%, due to lower legal fees and Non-Recurring fees decreased $94,688, or 100%, due to prior year Miami office closure initiatives being resolved.

 

Interest Expense, Net.  Interest expense, net totaled $1,314,761 during the three months ended September 30, 2017 compared to $1,580,444 during the three months ended September 30, 2016 representing a decrease of $265,683, or 17%. Interest expense relates to the $35,000,000 secured term loan which closed in October 2014 and capital lease arrangements. The decrease is primarily attributable to the $5,000,000 reduction of debt which occurred I the fourth quarter of 2016 as more fully described in Note 9, Long-Term Debt.

 

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

 

Continuing Operations – Fixed Wireless

 

Revenues. Revenues totaled $19,645,143 during the nine months ended September 30, 2017 compared to $20,270,615 during the nine months ended September 30, 2016 representing a decrease of $625,472, or 3%. 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 as compared to the customers churning offset by a lower overall churn rate.

   

Infrastructure and Access . Infrastructure and access totaled $7,968,089 during the nine months ended September 30, 2017 compared to $7,829,386 during the nine months ended September 30, 2016 representing an increase of $138,703, or 2%. The increase primarily relates to higher rental costs and maintenance activity offset by a reduction in bandwidth costs.

 

20

 

 

Depreciation and Amortization. Depreciation and amortization totaled $6,487,301 during the nine months ended September 30, 2017 compared to $8,564,537 during the nine months ended September 30, 2016 representing a decrease of $2,077,236, or 24%. Depreciation expense totaled $5,397,098 during the nine months ended September 30, 2017 compared to $7,524,097 during the nine months ended September 30, 2016 representing a decrease of $2,126,999, or 28%.

 

Amortization expense totaled $ 1,090,203 during the nine months ended September 30, 2017 compared to $1,040,440 during the nine months ended September 30, 2016 representing an increase of $49,763, or 5%. 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 $3,330,135 during the nine months ended September 30, 2017 compared to $3,748,925 during the nine months ended September 30, 2016 representing a decrease of $418,790, or 11%. The primary reasons for the decrease are lower payroll costs of $254,994, or 11%, due primarily to staffing reductions, and information technology related cost reductions of $151,319, or 22%, due to decreased third party support and software licenses.

 

Customer Support. Customer support totaled $1,187,689 during the nine months ended September 30, 2017 compared to $1,479,580 during the nine months ended September 30, 2016 representing a decrease of $291,891, or 20%. The decrease is due to a payroll expense decrease of $396,940 or 30%, due to lower average headcount in the 2017 period as the Company consolidated departments and improved efficiencies, offset by higher other customer support costs of $105,048, or 61%, versus the prior period.

 

Sales and Marketing. Sales and marketing expenses totaled $2,972,621 during the nine months ended September 30, 2017 compared to $3,136,198 during the nine months ended September 30, 2016 representing a decrease of $163,577, or 5%. Advertising expenses have decreased $169,583, or 70%, as 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. Payroll costs decreased $59,383, or 3%, due 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. Offsetting these decreases is increased Indirect Channel Commissions of $86,198, or 15%, due 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 $4,233,350 during the nine months ended September 30, 2017 compared to $5,851,175 during the nine months ended September 30, 2016 representing a decrease of $1,617,825, or 28%. Public company costs for the nine months ended September 30, 2017 decreased $534,297, or 82%, primarily due to the contract termination with our investor relation firms in 2017. Payroll costs decreased $434,482, or 27%, due to severance payments made in the 2016 period to former executives and lower headcount associated with staffing reductions. Non-recurring expenses decreased $291,350, or 99%, due to the Miami lawsuit which the Company settled during 2016. Stock based compensation decreased $247,402, or 22%, due to stock issuances to third parties that provided services in the third quarter of 2016 associated with the capital raise financing activities. Professional fees decreased $224,647, or 19%, due to decreased legal fees offset by higher recruiting expenses.

 

Interest Expense, Net.  Interest expense, net totaled $3,887,582 during the nine months ended September 30, 2017 compared to $4,775,855 during the nine months ended September 30, 2016 representing a decrease of $888,273, or 19%. Interest expense relates to the $35,000,000 secured term loan which closed in October 2014 and capital lease arrangements. 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

 

Net loss from discontinued operations for the nine months ended September 30, 2017 was zero compared to $1,799,401 for the nine months ended September 30, 2016. The net loss is attributable to the Company’s decision to exit the Hetnets business and curtailing activities in certain smaller markets. See Note 4 “Discontinued Operations” within the notes to our consolidated financial statements for additional information about our discontinued operations.

 

21

 

 

Liquidity and Capital Resources

 

Changes in capital resources during the nine months ended September 30, 2017 and 2016 are described below.

 

The accompanying condensed consolidated financial statements 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 September 30, 2017, the Company had cash and cash equivalents of approximately $8.3 million and working capital of approximately $5.0 million. The Company has incurred significant operating losses since inception and continues to generate losses from operations and as of September 30, 2017, the Company has an accumulated deficit of $187.1 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. 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

 

Continuing Operations

 

Net Cash ( Used In ) Operating Activities. Net cash used in operating activities for the nine months ended September 30, 2017 totaled $1,253,652 compared to $5,127,270 for the nine months ended September 30, 2016. The $3,873,618 decrease in cash used in operations is due to a $4,698,914 decrease in net loss, a $792,948 decrease in cash outflows associated with operating assets and liabilities, offset by a $1,618,244 decrease in non-cash items.  

 

Net Cash ( Used in ) Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2017 totaled $2,102,581 compared to $1,692,895 for the nine months ended September 30, 2016 representing an increase of $409,686. Cash capital expenditures totaled $2,089,657 in the 2017 period compared to $1,692,895 in the 2016 period representing an increase of $396,762. 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) Provided by Financing Activities . Net cash used in financing activities for the nine months ended September 30, 2017 totaled $655,952 compared to net cash provided by financing activities of $6,083,238 for the nine months ended September 30, 2016, representing a decrease of $6,739,190. During the 2016 period, the Company completed three equity offerings which resulted in net proceeds of $6,802,823.

 

Discontinued Operations

 

Net cash provided from discontinued operations for the nine months ended September 30, 2017 was $22,513 compared to cash used of $1,479,792 for the nine months ended September 30, 2016, representing an increase of $1,502,305. See Note 4 “Discontinued Operations” within the notes to our consolidated financial statements for additional information about our discontinued operations.

 

22

 

 

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. During the fourth quarter of 2016, the Company entered into a financing agreement with an investor whereas the investor acquired $5,000,000 of outstanding principal and accrued interest in exchange for 1,000 shares of convertible preferred stock and warrants as further described in Note 9.

 

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 had 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.

 

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 history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments, giving appropriate consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates which may impact the comparability of our results of operations to other companies in our industry. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and estimation, or are fundamentally important to our business.

 

Revenue Recognition. We generally enter into contractual agreements with our customers for periods ranging between one to three years. We recognize the total revenue provided under a contract ratably over the contract period including any periods under which we have agreed to provide services at no cost. Deferred revenues are recognized as a liability when billings are issued in advance of the date when revenues are earned. We recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

 

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

 

Recent Accounting Standards . See Note 3 of our condensed consolidated financial statements.

 

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

 

23

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Market risk is the potential loss arising from adverse changes in market rates and prices.  Our primary market risk relates to interest rates. At September 30, 2017, all cash and cash equivalents are immediately available cash balances. A portion of our cash and cash equivalents are held in institutional money market funds.   

   

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective, as of September 30, 2017, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

During the second quarter, the Company had determined there was a material weakness in its system of internal control as it relates to monitoring compliance with covenants in its debt agreement. Management has commenced implementation of a remediation plan, which was completed during the third quarter. The remediation plan includes the following steps:

 

 

A detail covenant worksheet will be compiled to include all financial and non-financial covenants. The covenant worksheet will include all covenants associated with current debt arrangements and will be modified to reflect any amendments to current debt and/or new debt arrangements.

   

 

The Company will ensure that the “Certificate of Financial Officer” certifying compliance with the covenants is provided to the lender concurrently with the delivery of the quarterly/annual financial statements.

 

The Company plans to test the aforementioned remediation plan during the fourth quarter.

    

Changes in Internal Control over Financial Reporting

 

There were no other changes in our system of internal control over financial reporting during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

24

 

 

  PART II

OTHER INFORMATION

 

 

Item 6. Exhibits.

 

 

Exhibit No.

 

Description

31.1

 

Section 302 Certification of Principal Executive Officer.     (filed herewith)

31.2

 

Section 302 Certification of Principal Financial Officer.      (filed herewith)

32.1

 

Section 906 Certification of Principal Executive Officer.     (filed herewith)

32.2

 

Section 906 Certification of Principal Financial Officer.      (filed herewith)

101.INS

 

XBRL Instance Document*

101.SCH

 

XBRL Taxonomy Extension Schema Document*

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document*

101.LAB

 

XBRL Taxonomy Labels Linkbase Document*

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document*

101.DEF

 

XBRL Definition Linkbase Document*

 

 


 

* - Attached as Exhibit 101 to this report are the following financial statements from the Company ’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Stockholders’ Deficit, and (v) related notes to these financial statements.  

 

25

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

TOWERSTREAM CORPORATION   

 

 

 

 

Date:  November 14, 2017

By:   

/s/ Ernest Ortega

 

Ernest Ortega

 

Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

By:

/s/ Laura W. Thomas

 

 

Laura W. Thomas

 

Chief Financial Officer

 

(Principal Financial Officer and Principal Accounting Officer)

 

26

 

 

  EXHIBIT INDEX

 

Exhibit No.

 

 

Description

   

 

   

31.1

 

Section 302 Certification of Principal Executive Officer.      (filed herewith)

31.2

 

Section 302 Certification of Principal Financial Officer.       (filed herewith)

32.1

 

Section 906 Certification of Principal Executive Officer.      (filed herewith)

32.2

 

Section 906 Certification of Principal Financial Officer.       (filed herewith)

101.INS

 

XBRL Instance Document*

101.SCH

 

XBRL Taxonomy Extension Schema Document*

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document*

101.LAB

 

XBRL Taxonomy Labels Linkbase Document*

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document*

101.DEF

 

XBRL Definition Linkbase Document*

 

 


 

* - Attached as Exhibit 101 to this report are the following financial statements from the Company ’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Stockholders’ Deficit, and (v) related notes to these financial statements. 

 

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Ernest Ortega, certify that:

 

 

(1)  

I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter ended September 30, 2017;

   

   

   

 

(2)  

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

   

   

   

 

(3)  

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

   

   

   

 

(4)  

The registrant ’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)  

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

   

   

   

 

c)  

Evaluated the effectiveness of the registrant ’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   

   

   

 

d)  

Disclosed in the report any change in the registrant ’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

 

(5)  

The registrant ’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a)  

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant ’s ability to record, process, summarize and report financial information; and

   

   

   

 

b)  

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant ’s internal control over financial reporting.

 

 

Date: November 14, 2017

 

/s/ Ernest Ortega

   

Ernest Ortega

 

Chief Executive Officer

 

(Principal Executive Officer)

 

 

EXHIBIT 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Laura W. Thomas, certify that:

 

 

(1)  

I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter ended September 30, 2017;

   

   

   

 

(2)  

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

   

   

   

 

(3)  

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

   

   

   

 

(4)  

The registrant ’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)  

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

 

c)  

Evaluated the effectiveness of the registrant ’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   

   

   

 

d)  

Disclosed in the report any change in the registrant ’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

 

(5)  

The registrant ’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a)  

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant ’s ability to record, process, summarize and report financial information; and

   

   

   

 

b)  

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant ’s internal control over financial reporting.

 

 

Date: November 14, 2017

 

 

/s/ Laura W. Thomas

   

Laura W. Thomas

 

Chief Financial Officer

 

(Principal Financial Officer and Principal Accounting Officer)

 

  EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S. C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Towerstream Corporation, (the ‘‘Company’’) on Form 10-Q for the period ended September 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Ernest Ortega, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

 

  (1)  

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

 

 

  (2)  

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

   

Date: November 14, 2017

 

 

/s/  Ernest Ortega  

   

Ernest Ortega

 

Chief Executive Officer

 

(Principal Executive Officer)

EXHIBIT 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Towerstream Corporation, (the ‘‘Company’’) on Form 10-Q for the period ended September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Laura W. Thomas, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

 

  (1)  

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

 

 

  (2)  

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

   

Date: November 14, 2017

 

 

/s/ Laura W. Thomas

   

Laura W. Thomas

 

Chief Financial Officer

 

(Principal Financial Officer and Principal Accounting Officer)