Attached files
file | filename |
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EX-32.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER - TOWERSTREAM CORP | v192396_ex32-1.htm |
EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER PURSUANT - TOWERSTREAM CORP | v192396_ex31-2.htm |
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER PURSUANT - TOWERSTREAM CORP | v192396_ex31-1.htm |
EX-32.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER - TOWERSTREAM CORP | v192396_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended June 30, 2010
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
|
20-8259086
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
55
Hammarlund Way
|
02842
|
Middletown,
Rhode Island
|
(Zip
Code)
|
(Address
of principal executive offices)
|
Registrant’s
telephone number: (401)
848-5848
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
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 x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do
not check if a smaller reporting company)
|
Smaller reporting
company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
As of
August 2, 2010, there were 34,976,085 shares of the issuer’s common stock
outstanding.
TOWERSTREAM
CORPORATION
Pages
|
||
Part
I
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
Financial
Statements.
|
1
|
Condensed
Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December
31, 2009
|
1
|
|
Condensed
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2010 and 2009 (unaudited)
|
2
|
|
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2010 and 2009 (unaudited)
|
3
|
|
Condensed
Consolidated Statement of Stockholders’ Equity for the Six Months Ended
June 30, 2010 (unaudited)
|
4
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
5-12
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
13-20
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
20
|
Item
4.
|
Controls
and Procedures.
|
20
|
Part
II
|
OTHER
INFORMATION
|
|
Item
6.
|
Exhibits.
|
21
|
i
PART
I
TOWERSTREAM
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2010
|
December 31, 2009
|
|||||||
Assets
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 9,665,626 | $ | 14,040,839 | ||||
Accounts
receivable, net
|
492,125 | 403,073 | ||||||
Prepaid
expenses and other
|
315,978 | 258,307 | ||||||
Total
Current Assets
|
10,473,729 | 14,702,219 | ||||||
Property
and equipment, net
|
15,055,226 | 13,634,685 | ||||||
Intangible
assets, net
|
2,193,179 | 975,000 | ||||||
Other
assets
|
197,203 | 190,803 | ||||||
Total
Assets
|
$ | 27,919,337 | $ | 29,502,707 | ||||
Liabilities and Stockholders’
Equity
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 871,390 | $ | 1,055,804 | ||||
Accrued
expenses
|
1,491,580 | 1,086,258 | ||||||
Deferred
revenues
|
1,212,249 | 1,028,952 | ||||||
Deferred
rent
|
84,157 | 78,889 | ||||||
Total
Current Liabilities
|
3,659,376 | 3,249,903 | ||||||
Long-Term
Liabilities
|
||||||||
Derivative
liabilities
|
- | 566,451 | ||||||
Deferred
rent
|
233,103 | 275,182 | ||||||
Total
Long-Term Liabilities
|
233,103 | 841,633 | ||||||
Total
Liabilities
|
3,892,479 | 4,091,536 | ||||||
Commitments
(Note 13)
|
||||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, par value $0.001; 5,000,000 shares authorized; none
issued
|
- | - | ||||||
Common
stock, par value $0.001; 70,000,000 shares
authorized; 34,976,085 and 34,662,229 shares issued and outstanding,
respectively
|
34,976 | 34,662 | ||||||
Additional
paid-in-capital
|
56,581,388 | 55,127,710 | ||||||
Accumulated
deficit
|
(32,589,506 | ) | (29,751,201 | ) | ||||
Total
Stockholders' Equity
|
24,026,858 | 25,411,171 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 27,919,337 | $ | 29,502,707 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
1
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$ | 4,868,539 | $ | 3,673,581 | $ | 9,112,756 | $ | 7,090,647 | ||||||||
Operating
Expenses
|
||||||||||||||||
Cost
of revenues (exclusive of depreciation)
|
1,207,100 | 914,938 | 2,281,887 | 1,740,852 | ||||||||||||
Depreciation
and amortization
|
1,454,239 | 982,323 | 2,555,410 | 1,929,944 | ||||||||||||
Customer
support services
|
672,205 | 484,189 | 1,250,461 | 1,034,013 | ||||||||||||
Sales
and marketing
|
1,313,704 | 1,385,624 | 2,546,502 | 2,961,339 | ||||||||||||
General
and administrative
|
1,906,726 | 1,795,813 | 3,715,533 | 3,518,155 | ||||||||||||
Total
Operating Expenses
|
6,553,974 | 5,562,887 | 12,349,793 | 11,184,303 | ||||||||||||
Operating
Loss
|
(1,685,435 | ) | (1,889,306 | ) | (3,237,037 | ) | (4,093,656 | ) | ||||||||
Other
Income (Expense)
|
||||||||||||||||
Interest
income
|
631 | 9,024 | 805 | 22,213 | ||||||||||||
Interest
expense
|
- | (185,570 | ) | - | (368,926 | ) | ||||||||||
Gain
on business acquisition
|
355,876 | - | 355,876 | - | ||||||||||||
Loss
on derivative financial instruments
|
- | (34,088 | ) | - | (75,237 | ) | ||||||||||
Other,
net
|
22,396 | (73 | ) | 42,051 | (73 | ) | ||||||||||
Total
Other Income (Expense)
|
378,903 | (210,707 | ) | 398,732 | (422,023 | ) | ||||||||||
Net
Loss
|
$ | (1,306,532 | ) | $ | (2,100,013 | ) | $ | (2,838,305 | ) | $ | (4,515,679 | ) | ||||
Net
loss per common share – basic and diluted
|
$ | (0.04 | ) | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.13 | ) | ||||
Weighted
average common shares outstanding – basic and diluted
|
34,914,818 | 34,594,752 | 34,792,171 | 34,591,322 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash Flows From Operating
Activities
|
||||||||
Net
loss
|
$ | (2,838,305 | ) | $ | (4,515,679 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Provision
for doubtful accounts
|
73,491 | 25,509 | ||||||
Depreciation
and amortization
|
2,555,410 | 1,929,944 | ||||||
Stock-based
compensation
|
457,541 | 386,322 | ||||||
Gain
on business acquisition
|
(355,876 | ) | - | |||||
Accretion
of debt discount
|
- | 227,627 | ||||||
Amortization
of financing costs
|
- | 29,125 | ||||||
Loss
on sale and disposition of property and equipment
|
35,615 | 33,806 | ||||||
Deferred
rent
|
(36,811 | ) | (26,277 | ) | ||||
Loss
on derivative financial instruments
|
- | 75,237 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(77,156 | ) | (86,579 | ) | ||||
Prepaid
expenses and other current assets
|
(60,207 | ) | (14,920 | ) | ||||
Accounts
payable
|
(208,317 | ) | (512,312 | ) | ||||
Accrued
expenses
|
405,322 | (41,649 | ) | |||||
Deferred
revenues
|
(1,145 | ) | (6,097 | ) | ||||
Total
Adjustments
|
2,787,867 | 2,019,736 | ||||||
Net
Cash Used In Operating Activities
|
(50,438 | ) | (2,495,943 | ) | ||||
Cash Flows From Investing
Activities
|
||||||||
Acquisitions
of property and equipment
|
(3,151,775 | ) | (2,026,540 | ) | ||||
Acquisition
of a business
|
(1,170,000 | ) | - | |||||
Proceeds
from sale of property and equipment
|
- | 1,000 | ||||||
Change
in security deposits
|
(3,000 | ) | (4,000 | ) | ||||
Net
Cash Used In Investing Activities
|
(4,324,775 | ) | (2,029,540 | ) | ||||
Cash Flows From Financing
Activities
|
||||||||
Repayment
of capital leases
|
- | (19,324 | ) | |||||
Repayment
of short-term debt
|
- | (7,500 | ) | |||||
Net
Cash Used In Financing Activities
|
- | (26,824 | ) | |||||
Net
Decrease In Cash and Cash Equivalents
|
(4,375,213 | ) | (4,552,307 | ) | ||||
Cash
and Cash Equivalents - Beginning
|
14,040,839 | 24,740,268 | ||||||
Cash
and Cash Equivalents - Ending
|
$ | 9,665,626 | $ | 20,187,961 | ||||
Supplemental Disclosures of Cash Flow
Information
|
||||||||
Cash
paid during the periods for:
|
||||||||
Interest
|
$ | - | $ | 111,116 | ||||
Taxes
|
$ | 10,607 | $ | 9,860 | ||||
Acquisition
of FCC license through short term debt
|
$ | - | $ | 100,000 | ||||
Fair
value of common stock issued in connection with an
acquisition
|
$ | 430,000 | $ | - |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
For
the Six Months Ended June 30, 2010
Common Stock
|
||||||||||||||||||||
Shares
|
Amount
|
Additional Paid-In-
Capital
|
Accumulated Deficit
|
Total
|
||||||||||||||||
Balance
at January 1, 2010
|
34,662,229 | $ | 34,662 | $ | 55,127,710 | $ | (29,751,201 | ) | $ | 25,411,171 | ||||||||||
Issuance
of common stock for bonuses
|
9,225 | 9 | 17,241 | 17,250 | ||||||||||||||||
Issuance
of common stock for a business acquisition
|
275,700 | 276 | 429,724 | 430,000 | ||||||||||||||||
Cashless
exercise of options
|
28,931 | 29 | (29 | ) | - | |||||||||||||||
Stock-based
compensation
|
440,291 | 440,291 | ||||||||||||||||||
Reclassification
of derivative liabilities to equity linked financial
instruments
|
566,451 | 566,451 | ||||||||||||||||||
Net
loss
|
(2,838,305 | ) | (2,838,305 | ) | ||||||||||||||||
Balance
at June 30, 2010
|
34,976,085 | $ | 34,976 | $ | 56,581,388 | $ | (32,589,506 | ) | $ | 24,026,858 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1. Organization and Nature of Business
Towerstream
Corporation (referred to as ‘‘Towerstream’’ or the ‘‘Company’’) was formed on
December 17, 1999, and was incorporated in Delaware. The Company
provides broadband services to commercial customers and delivers access over a
wireless network transmitting over both regulated and unregulated radio
spectrum. The Company’s service supports bandwidth on demand,
wireless redundancy, virtual private networks (“VPNs”), disaster recovery,
bundled data and video services. The Company provides service to business
customers in New York City, Boston, Chicago, Los Angeles, San Francisco,
Seattle, Miami, Dallas-Fort Worth, Philadelphia, Nashville, Providence and
Newport, Rhode Island.
Note
2. Summary of Significant Accounting
Policies
Basis of Presentation.
The condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and with Form 10-Q and
Article 10 of Regulation S-X of the United States Securities and Exchange
Commission (“SEC”). Accordingly, they do not contain all information and
footnotes required by accounting principles generally accepted in the United
States of America 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 June 30, 2010 and the
results of operations and cash flows for the periods presented. The results of
operations for the three and six months ended June 30, 2010 are not necessarily
indicative of the operating results for the full fiscal year or any future
period.
These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
The Company’s accounting policies are described in the Notes to Consolidated
Financial Statements in its Annual Report on Form 10-K for the year ended
December 31, 2009, and updated, as necessary, in this Quarterly Report on Form
10-Q.
Use of Estimates.
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. Actual results could
differ from those estimates.
Cash and Cash
Equivalents. The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
Concentration of Credit
Risk. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist of cash
and cash equivalents. At times, our cash and cash equivalents may be
uninsured or in deposit accounts that exceed the Federal Deposit Insurance
Corporation (“FDIC”) insurance limits.
The
Company also had approximately $9,314,000 invested in three institutional money
market funds. These funds are protected under the Securities Investor
Protection Corporation (“SPIC”), a nonprofit membership corporation which
provides limited coverage up to $500,000.
Accounts
Receivable. Accounts receivable are stated
at cost less an allowance for doubtful accounts. The allowance for doubtful
accounts reflects the Company’s estimate of accounts receivable that will not be
collected. The allowance is based on the history of past write-offs,
the aging of balances, collections experience and current credit
conditions. Amounts determined to be uncollectible are written-off
against the allowance for doubtful accounts. The allowance for
doubtful accounts was $102,125 at June 30, 2010 and $88,299 at December 31,
2009. Additions to the allowance for doubtful accounts, e.g. provision for bad
debt, totaled $28,465 and $73,491 for the three and six months ended June 30,
2010, respectively. Additions to the allowance for doubtful accounts
totaled $25,509 for both the three month and six months ended June 30,
2009. Deductions to the allowance for doubtful accounts, e.g.
customer write-offs, totaled $21,155 and $6,896 for the three months ended June
30, 2010 and 2009, respectively, and $59,665 and $13,760 for the six months
ended June 30, 2010 and 2009, respectively.
5
TOWERSTREAM
CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
CONTINUED
Revenue
Recognition. The Company normally enters into
contractual agreements with its customers for periods ranging between one to
three years. The Company recognizes the total revenue provided under
a contract ratably over the contract period, including any periods under which
the Company has agreed to provide services at no cost. The Company
applies the revenue recognition principles set forth under SEC 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.
Recent Accounting
Pronouncements. In February 2010, the Financial
Accounting Standards Board (“FASB”) issued an accounting standard that amended
certain recognition and disclosure requirements related to subsequent events.
The accounting standard requires an entity that is an SEC filer to evaluate
subsequent events through the date that the financial statements are issued and
removes the requirement that an SEC filer disclose the date through which
subsequent events have been evaluated. This guidance was effective upon
issuance. The adoption of this standard had no effect on the Company’s condensed
consolidated financial position or results of operations. Disclosures
have been modified to reflect the new requirements.
Note
3. Acquisition of Sparkplug Chicago, Inc.
On April
15, 2010, the Company completed the acquisition of the customer contracts,
network infrastructure and related assets of the Chicago, Illinois and
Nashville, Tennessee networks of Sparkplug Chicago, Inc.
(“Sparkplug”). The acquisition expanded the Company’s presence
in the Chicago market and introduced Nashville, Tennessee as the Company's
11th
market nationally. The Company obtained full control of Sparkplug in
the acquisition.
The
Company has determined that the acquisition of Sparkplug was a business
combination to be accounted for under the acquisition method. The
following table summarizes the consideration transferred and the amounts of
identified assets acquired and liabilities assumed at the acquisition
date:
Fair
value of consideration transferred:
|
||||
Cash
|
$ | 1,170,000 | ||
Stock
issuance
|
430,000 | |||
1,600,000 | ||||
Recognized
amounts of identifiable assets acquired and liabilities
assumed:
|
||||
Customer
contracts
|
1,483,000 | |||
Property
and equipment
|
591,590 | |||
Accounts
receivable
|
85,388 | |||
Security
deposits
|
3,400 | |||
Prepaid
expenses
|
844 | |||
Accounts
payable
|
(23,903 | ) | ||
Deferred
revenue
|
(184,442 | ) | ||
Total
identifiable net assets
|
1,955,877 | |||
Gain
on business acquisition
|
$ | 355,877 |
The
Company recognized a $355,877 gain on the business acquisition as a result of
Sparkplug Chicago, Inc. being sold at a discounted price due to the realignment
of its geographic markets by its parent company, Sparkplug Inc. The
gain on business acquisition is included in other income (expense) in the
Company’s condensed consolidated statements of operations.
6
TOWERSTREAM
CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
CONTINUED
The total
common shares issued as part of the consideration paid to Sparkplug was 275,700
shares.
During
the three and six months ended June 30, 2010, the Company incurred approximately
$215,000 and $271,000, respectively, of third-party acquisition-related
costs. These expenses are included in the general and administrative
expenses in the Company’s condensed consolidated statements of
operations.
The
results of operations of Sparkplug have been included in the Company’s condensed
consolidated statements of operations since the completion of the Sparkplug
acquisition on April 15, 2010. Revenues totaled approximately
$353,000 and net loss totaled $56,800 for the three months ended June 30,
2010. The net loss excludes any third-party acquisition-related
costs. The following table reflects the unaudited pro forma consolidated results
of operations had the Sparkplug acquisition taken place at the beginning of 2010
and 2009 periods:
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$ | 4,938,058 | $ | 4,073,322 | $ | 9,582,016 | $ | 7,890,129 | ||||||||
Amortization
expense
|
317,786 | 317,786 | 635,571 | 635,571 | ||||||||||||
Total
operating expenses
|
6,637,301 | 6,055,612 | 12,925,845 | 12,169,753 | ||||||||||||
Net
loss
|
(1,320,340 | ) | (2,192,997 | ) | (2,945,097 | ) | (4,701,647 | ) | ||||||||
Basic
net loss per share
|
$ | (0.04 | ) | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.14 | ) |
Note
4. Property and Equipment
The
Company’s property and equipment is comprised of:
|
June 30, 2010
|
December 31, 2009
|
||||||
Network
and base station equipment
|
$ | 14,947,822 | $ | 13,282,567 | ||||
Customer
premise equipment
|
11,215,837 | 9,324,444 | ||||||
Furniture,
fixtures and equipment
|
1,525,980 | 1,525,980 | ||||||
Computer
equipment
|
647,328 | 610,847 | ||||||
System
software
|
829,878 | 819,305 | ||||||
Leasehold
improvements
|
775,420 | 775,420 | ||||||
29,942,265 | 26,338,563 | |||||||
Less:
accumulated depreciation
|
14,887,039 | 12,703,878 | ||||||
$ | 15,055,226 | $ | 13,634,685 |
Depreciation
expense for the three months ended June 30, 2010 and 2009 was $1,189,418 and
$982,323, respectively. Depreciation expense for the six months ended
June 30, 2010 and 2009 was $2,290,589 and $1,929,944,
respectively. During the six months ended June 30, 2010, the Company
sold or wrote-off property and equipment with $144,413 of original cost and
$107,428 of accumulated depreciation. During the six months ended
June 30, 2009, the Company sold or wrote-off property and equipment with
$136,273 of original cost and $101,467 of accumulated
depreciation.
Note
5. Intangible Assets
The
Company’s intangible assets are comprised of the following:
June 30, 2010
|
December 31, 2009
|
|||||||
Customer
contracts
|
$ | 1,483,000 | $ | - | ||||
FCC
licenses
|
975,000 | 975,000 | ||||||
2,458,000 | 975,000 | |||||||
Less:
accumulated amortization
|
264,821 | - | ||||||
$ | 2,193,179 | $ | 975,000 |
7
TOWERSTREAM
CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
CONTINUED
Amortization
expense for the three and six months ended June 30, 2010 was
$264,821. There was no amortization expense for the three and six
months ended June 30, 2009. The Company is amortizing the customer
contracts over a 14 month period which represented the remaining average
contractual term of the contracts acquired. As of June 30, 2010, the
remaining amortization life of the customer contracts was 11.5
months.
Note
6. Accrued Expenses
Accrued
expenses consist of the following:
June 30, 2010
|
December 31, 2009
|
|||||||
Payroll
and related
|
$ | 435,172 | $ | 430,360 | ||||
Professional
services
|
369,241 | 157,151 | ||||||
Property
and equipment
|
361,383 | 140,566 | ||||||
Core
and customer network expenses
|
115,570 | 57,688 | ||||||
Marketing
|
76,163 | 79,026 | ||||||
Penalties
|
47,796 | 95,726 | ||||||
Other
|
86,255 | 125,741 | ||||||
Total
|
$ | 1,491,580 | $ | 1,086,258 |
Core and
customer network expenses consist of tower and roof rent expense and utilities,
bandwidth costs, Points of Presence maintenance, customer maintenance,
non-installation fees and other core and customer specific
expenses.
Note
7. Debt
In
January 2007, the Company issued $3,500,000 of 8% senior convertible debentures
(the “Debentures”). These Debentures matured on December 31, 2009 and
were convertible, in whole or in part, into shares of common stock at an initial
conversion price of $2.75 per share. In addition, holders of the
Debentures received warrants to purchase an aggregate of 636,364 shares of
common stock at an exercise price of $4.00 per share and warrants to purchase an
aggregate of 636,364 shares of common stock at an exercise price of $6.00 per
share. These warrants are exercisable until January 2012 and were calculated
using the Black-Scholes option pricing model. The proceeds were allocated
between the warrants ($526,927) and the Debentures ($2,973,073) based on their
relative fair values. The initial, discounted
carrying value of the Debentures of $2,973,073 was accreted to the maturity
value over the term of the Debentures. The amount of accretion
recorded in each period was recognized as non-cash interest
expense.
In
January 2008, a Debenture holder converted $750,000 of Debentures into common
stock at a conversion price of $2.75 per share resulting in the issuance of
272,727 shares of common stock. On December 31, 2009, the maturity
date, the Company paid $2,750,000 to the holder of all outstanding
Debentures.
As
further described in Note 8, a new accounting standard became effective on
January 1, 2009 related to the accounting for derivative financial instruments
indexed to a company’s own stock. In connection with its implementation,
the Company was required to classify the conversion feature of the Debentures
and the warrants issued with the Debentures as derivative
liabilities. The cumulative effect of adopting this standard resulted
in a decrease in the carrying value of the Debentures as of January 1, 2009 from
$2,607,395 to $2,293,222. Interest expense totaled $169,586 during
the three months ended June 30, 2009 and included $55,000 associated with the 8%
coupon and $114,586 associated with accretion of the
discount. Interest expense totaled $337,627 during the six months
ended June 30, 2009 and included $110,000 associated with the 8% coupon and
$227,627 associated with the accretion of the discount.
Note
8. Derivative Liabilities
In June
2008, the FASB issued an accounting standard related to the accounting for
derivative financial instruments indexed to a company’s own
stock. Under this standard, instruments which do not have fixed
settlement provisions are deemed to be derivative instruments. The
fair value of these liabilities is re-measured at the end of every reporting
period with the change in value reported in the statement of
operations.
8
TOWERSTREAM
CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
CONTINUED
Certain
of the Company’s warrants did not initially have fixed settlement provisions
because their exercise price could have been lowered if the Company had issued
securities at lower prices (“reset provisions”). Accordingly,
these
warrants were initially reported as derivative liabilities. As of
January 1, 2010, the reset provisions were no longer
applicable and the warrants were determined to have fixed settlement
provisions. As a result, the fair value of the warrants was
reclassified to equity as of January 1, 2010.
Note
9. Share-Based Compensation
The
Company uses the Black-Scholes option pricing model to value options granted to
employees, directors and consultants. Compensation expense, including
the effect of forfeitures, is recognized over the period of service, generally
the vesting period. Stock-based compensation for the amortization of
stock options granted under the Company’s stock option plans totaled $264,120
and $219,208 during the three months ended June 30, 2010 and 2009,
respectively. Stock-based compensation for the amortization of stock
options granted under the Company’s
stock option plans totaled $440,291 and $376,278 during the six months ended
June 30, 2010 and 2009, respectively. Stock-based compensation is
included in general and administrative expenses in the accompanying condensed
consolidated statements of operations.
The
unamortized amount of stock options expense was $576,656 as of June
30, 2010 which will be recognized over a
weighted average period of 1.98 years.
The fair
values of stock option grants were calculated on the dates of grant using the
Black-Scholes option pricing model and the following weighted average
assumptions:
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Risk-free
interest rate
|
1.0% -3.3 | % | 1.3% - 2.7 | % | 1.0%-3.3 | % | 1.3% - 2.7 | % | ||||||||
Expected
volatility
|
73 | % | 86% -87 | % | 73 | % | 81% - 87 | % | ||||||||
Expected
life (in years)
|
2.5 – 6.1 | 2.5 – 6.8 | 2.5 – 6.1 | 2.5 – 6.8 | ||||||||||||
Expected
dividend yield
|
- | - | - | – | ||||||||||||
Weighted
average per share grant date fair value
|
$ | 0.99 | $ | 0.51 | $ | 0.99 | $ | 0.51 |
The
risk-free interest rate was based on rates established by the Federal
Reserve. The Company’s expected volatility was based upon the
historical volatility for its common stock. The expected life of the
Company’s options was
determined using the simplified method as a result of limited historical data
regarding the Company’s activity. The dividend yield is based upon
the fact that the Company has not historically paid dividends, and does not
expect to pay dividends in the future.
The
Company recorded stock-based compensation related to the issuance of common
stock to executive officers as a part of their bonus programs, which totaled
$10,044 for the three months ended June 30, 2009. Total shares issued
to executive officers were 12,555 for the three months ended June 30,
2009. There was no stock-based compensation recorded for the issuance
of common stock to executive officers for the three months ended June 30,
2010. The Company recorded stock-based compensation related to the
issuance of common stock to executive officers as a part of their bonus
programs, which totaled $17,250 and $10,044 for the six months ended June 30,
2010 and 2009, respectively. Total shares issued to executive
officers were 9,225 and 12,555 for the six months ended June 30, 2010 and 2009
respectively.
9
TOWERSTREAM
CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
CONTINUED
Transactions
under the stock option plans during the six months ended June 30, 2010 are as
follows:
Number
of
|
Weighted
Average
|
|||||||
Options
|
Exercise Price
|
|||||||
Options
outstanding as of January 1, 2010
|
3,738,638 | $ | 1.69 | |||||
Granted
|
375,000 | 1.80 | ||||||
Exercised
|
(132,824 | ) | 1.41 | |||||
Cancelled
|
(43,470 | ) | 0.95 | |||||
Options
outstanding as of June 30, 2010
|
3,937,344 | 1.72 | ||||||
Options
exercisable as of June 30, 2010
|
3,148,668 | $ | 1.83 |
The
weighted average remaining contractual life of the outstanding options as of
June 30, 2010 was 6.21 years.
The
intrinsic value for options outstanding and exercisable totaled $1,449,759 and
$1,121,112, respectively, as of June 30, 2010. The intrinsic value
for an option is calculated as the excess of the closing price of the Company’s
common stock at June 30, 2010, which was $1.61 per share, and the exercise price
of each option.
Note
10. Stock Warrants
Warrants
outstanding and exercisable totaled 4,332,310 with a weighted average exercise
price of $4.61 (ranging
between $4.00 and $6.00) as of June 30, 2010 and January 1, 2010. The
weighted average remaining contractual life as of June 30, 2010 was 1.57
years.
Note
11. Fair Value Measurement
Valuation
Hierarchy
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
as follows: 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
following tables provide the assets and liabilities carried at fair value
measured on a recurring basis as of June 30, 2010 and December 31, 2009,
respectively:
Fair Value Measurements at June 30, 2010
|
||||||||||||||||
Total Carrying
Value at June
30, 2010
|
Quoted prices
in active
markets
(Level 1)
|
Significant
other
observable
inputs (Level 2)
|
Significant
unobservable
inputs (Level 3)
|
|||||||||||||
Cash
equivalents
|
$ | 9,313,787 | $ | 9,313,787 | $ | – | $ | – |
10
TOWERSTREAM
CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
CONTINUED
Fair Value Measurements at December 31, 2009
|
||||||||||||||||
Total Carrying
Value at
December 31,
2009
|
Quoted prices
in active
markets
(Level 1)
|
Significant
other
observable
inputs (Level 2)
|
Significant
unobservable
inputs (Level 3)
|
|||||||||||||
Cash
equivalents
|
$ | 13,513,047 | $ | 13,513,047 | $ | – | $ | – | ||||||||
Derivative
liabilities
|
$ | 566,451 | $ | – | $ | – | $ | 566,451 |
Cash
equivalents are measured at fair value using quoted market prices and are
classified within Level 1 of the valuation hierarchy. The carrying
amounts of accounts receivable, accounts payable and accrued liabilities
approximate their fair value due to their short maturities. The
derivative liabilities are measured at fair value using quoted market prices and
estimated volatility factors, and are classified within Level 3 of the valuation
hierarchy. There were no changes in the valuation techniques during
the six months ended June 30, 2010.
The
following table sets forth a summary of the changes in the fair value of our
Level 3 financial liabilities that are measured at fair value on a recurring
basis:
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Fair
value, beginning of period
|
$ | - | $ | 129,056 | $ | 566,451 | $ | 87,907 | ||||||||
Reclassification
of derivative liability to equity
|
- | - | (566,451 | ) | - | |||||||||||
Net
unrealized loss on derivative financial instruments
|
- | 34,088 | - | 75,237 | ||||||||||||
Fair
value, end of period
|
$ | - | $ | 163,144 | $ | - | $ | 163,144 |
Note
12. Net Loss Per Common Share
Basic and
diluted net loss per share has been calculated by dividing net loss by the
weighted average number of common shares outstanding during the
period. All potentially dilutive common shares have been excluded
since their inclusion would be anti-dilutive.
The
following common stock equivalents were excluded from the computation of diluted
net loss per common share because they were anti-dilutive. The
exercise of these common stock equivalents outstanding at June 30, 2010
would dilute earnings per shares of the Company becomes profitable in the
future. The exercise of the outstanding stock options and warrants
could generate proceeds up to approximately $26,744,000.
Stock
options
|
3,937,344 | |||
Warrants
|
4,332,310 | |||
Total
|
8,269,654 |
Note
13. Commitments and Contingencies
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
March 2019.
11
TOWERSTREAM
CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
CONTINUED
As of
June 30, 2010, total future lease commitments were as
follows:
$
|
1,618,060
|
|||
2011
|
2,826,188
|
|||
2012
|
2,638,084
|
|||
2013
|
1,765,984
|
|||
2014
|
832,851
|
|||
Thereafter
|
1,204,687
|
|||
$
|
10,885,854
|
Rent
expense for the three months ended June 30, 2010 and 2009 totaled approximately
$792,000 and 628,000, respectively. Rent expense for the six months
ended June 30, 2010 and 2009 totaled approximately $1,531,000 and $1,209,000,
respectively.
Other Commitments and
Contingencies. One of the purchase agreements related to FCC
licenses includes a contingent payment of $275,000, depending on the status of
the license with the FCC, and whether the Company has obtained approval to
broadcast terrestrially in the 3650 to 3700 MHz band. The contingent
payment would consist of the
issuance of common stock with a value of $275,000 (due in May
2011).
12
The
following discussion and analysis summarizes the significant factors affecting
our condensed consolidated results of operations, financial condition and
liquidity position for the six months ended June 30, 2010. This discussion
and analysis should be read in conjunction with our audited financial statements
and notes thereto included in our Annual Report on Form 10-K for the year-ended
December 31, 2009 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 (“SEC”).
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 undue reliance on these
forward-looking statements, which speak only as of the date hereof. We are under
no duty to update any of the forward-looking statements after the date of this
Report.
Overview
We
provide 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 (“VPNs”), disaster recovery, bundled data
and video services. We provide service to business customers in New York City,
Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth,
Philadelphia, Nashville, Providence and Newport, Rhode
Island.
On April
15, 2010, we completed the acquisition of the customer contracts, network
infrastructure and related assets of the Chicago, Illinois and Nashville,
Tennessee networks of Sparkplug Chicago, Inc. (“Sparkplug”). The aggregate
consideration for the acquisition was (i) $1,170,000 in cash and (ii) 275,700
shares of our common stock (the “Shares”) with a fair value of $430,000. A
registration statement covering the Shares on Form S-3 was declared effective by
the SEC on May 5, 2010. We have determined that the acquisition of Sparkplug is
a business combination to be accounted for under the acquisition
method.
Characteristics
of our Revenues and Expenses
We offer
our services under agreements having terms of one, two or three years. Pursuant
to these agreements, we bill customers on a monthly basis, in advance, for each
month of service. Payments received in advance of services performed are
recorded as deferred revenues and recognized as revenue ratably over the service
period.
13
Costs of
revenues consists of expenses that are directly related to providing services to
our customers, including Core Network expenses (tower and roof rent expense and
utilities, bandwidth costs, Points of Presence (“PoP”) maintenance and other)
and Customer Network expenses (customer maintenance, non-installation fees and
other customer specific expenses). We collectively refer to Core Network
and Customer Network as our “Network,” and Core Network costs and Customer
Network costs as “Network Costs.” When we first enter a new market, or
expand in an existing market, we are required to incur up-front costs in order
to be able to provide wireless broadband services to commercial customers.
We refer to these activities as establishing a “Network
Presence.” These costs include building PoPs which are Company
Locations where we install a substantial amount of equipment in order to connect
numerous customers to the Internet. The costs to build PoPs are
capitalized and expensed over a five year period. In addition to building
PoPs, we also enter tower and roof rental agreements, secure bandwidth and incur
other Network Costs. Once we have established a Network Presence in a new
market or expanded our Network Presence in an existing market, we are capable of
servicing a significant number of customers through that Network Presence.
The variable cost to add new customers is relatively modest, especially compared
to the upfront cost of establishing or expanding our Network Presence. As
a result, our gross margins in a market normally increase over time as
we add new customers in that market. However, we may experience
variability in gross margins during periods in which we are expanding our
Network Presence in a market.
Sales and
marketing expenses primarily consist of the salaries, benefits, travel and other
costs of our sales and marketing teams, as well as marketing initiatives and
business development expenses.
Customer
support services include salaries and related payroll costs associated with our
customer support services, customer care, and installation and operations
staff.
General
and administrative expenses include costs attributable to corporate overhead and
the overall support of our operations. Salaries and other related
payroll costs for executive management, finance, administration and information
systems personnel are included in this category. Other costs
include rent, utilities and other facility costs, accounting, legal, and other
professional services, and other general operating expenses.
Market
Information
We
operate in one segment which is the business of wireless broadband
services. 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. While we operate in only one business segment, we recognize
that providing information on the revenues and costs of operating in each market
can provide useful information to investors regarding our operating
performance.
As of
June 30, 2010, we operated in eleven markets across the United States including
New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle,
Dallas-Fort Worth, Philadelphia, Nashville and Providence. The
markets were launched at different times, and as a result, may have different
operating metrics based on their stage of maturation. We incur
significant up-front costs in order to establish a Network Presence in a new
market. These costs include building PoPs and Network Costs. Other
material costs include hiring and training sales and marketing personnel who
will be dedicated to securing customers in that market. Once we have
established a Network Presence in a new market, we are capable of servicing a
significant number of customers. The rate of customer additions
varies from market to market, and we are unable to predict how many customers
will be added in a market during any specific period. We believe that
providing operating information regarding each of our markets provides useful
information to shareholders in understanding the leveraging potential of our
business model, the operating performance of our mature markets, and the
long-term potential for our newer markets. Set forth below is a
summary of our operating performance on a per-market basis, and a description of
how each category is determined.
Revenues: Revenues are
allocated based on which market each customer is located in.
Costs of Revenues: Includes
payroll, Core Network costs and Customer Network costs that can be specifically
allocated to a specific market. Costs that can not be allocated to a specific
market are classified as Centralized Costs.
Operating Costs: Costs which
can be specifically allocated to a market include direct sales and marketing
personnel, certain
direct marketing expenses, certain customer support and installation payroll
expenses and third party commissions.
Centralized Costs: Represents
costs incurred to support activities across all of our markets that are not
allocable to a specific market. This principally consists of payroll
costs for customer care representatives, customer support engineers, sales
support and certain installations personnel. These individuals
service customers across all markets rather
than being dedicated to any specific market.
14
Corporate expenses: Includes
costs attributable to corporate overhead and the overall support of our
operations. Salaries
and related payroll costs for executive management, finance, administration and
information systems personnel
are included in this category. Other costs include office rent,
utilities and other facilities costs, professional services and other general
operating expenses.
Market EBITDA: Represents a
market’s earnings before interest, taxes, depreciation, amortization,
stock-based compensation, and other income (expense). We believe this
metric provides useful information regarding the cash flow being generated in a
market.
Three
months ended June 30, 2010
Market
|
Revenues
|
Cost of
Revenues
|
Gross
Margin
|
Operating
Costs
|
Market
EBITDA
|
|||||||||||||||
New
York
|
$ | 1,459,129 | $ | 284,684 | $ | 1,174,445 | $ | 352,896 | $ | 821,549 | ||||||||||
Boston
|
1,083,557 | 171,082 | 912,475 | 164,142 | 748,333 | |||||||||||||||
Los
Angeles
|
754,489 | 136,727 | 617,762 | 258,665 | 359,097 | |||||||||||||||
Chicago
|
649,520 | 203,044 | 446,476 | 154,797 | 291,679 | |||||||||||||||
San
Francisco
|
275,606 | 60,644 | 214,962 | 81,088 | 133,874 | |||||||||||||||
Miami
|
255,347 | 84,738 | 170,609 | 89,096 | 81,513 | |||||||||||||||
Providence/Newport
|
124,876 | 38,803 | 86,073 | 27,623 | 58,450 | |||||||||||||||
Seattle
|
130,566 | 57,475 | 73,091 | 31,461 | 41,630 | |||||||||||||||
Nashville
|
21,371 | 14,319 | 7,052 | 7,192 | (140 | ) | ||||||||||||||
Dallas-Fort
Worth
|
113,181 | 82,466 | 30,715 | 62,010 | (31,295 | ) | ||||||||||||||
Philadelphia
|
897 | 12,750 | (11,853 | ) | 54,082 | (65,935 | ) | |||||||||||||
Total
|
$ | 4,868,539 | $ | 1,146,732 | $ | 3,721,807 | $ | 1,283,052 | $ | 2,438,755 |
Reconciliation of Non-GAAP Financial Measure to
GAAP Financial Measure
|
||||
Market
EBITDA
|
$ | 2,438,755 | ||
Centralized
costs
|
(763,225 | ) | ||
Corporate
expenses
|
(1,642,606 | ) | ||
Depreciation
and amortization
|
(1,454,239 | ) | ||
Stock-based
compensation
|
(264,120 | ) | ||
Other
income (expense)
|
378,903 | |||
Net
loss
|
$ | (1,306,532 | ) |
Three
months ended June 30, 2009
Market
|
Revenues
|
Cost of
Revenues
|
Gross
Margin
|
Operating
Costs
|
Market
EBITDA
|
|||||||||||||||
New
York
|
$ | 1,321,731 | $ | 227,771 | $ | 1,093,960 | $ | 278,655 | $ | 815,305 | ||||||||||
Boston
|
1,007,857 | 165,424 | 842,433 | 195,771 | 646,662 | |||||||||||||||
Los
Angeles
|
442,394 | 82,049 | 360,345 | 238,028 | 122,317 | |||||||||||||||
San
Francisco
|
235,374 | 56,271 | 179,103 | 98,699 | 80,404 | |||||||||||||||
Providence/Newport
|
126,062 | 36,636 | 89,426 | 61,745 | 27,681 | |||||||||||||||
Chicago
|
220,491 | 87,298 | 133,193 | 116,263 | 16,930 | |||||||||||||||
Miami
|
150,331 | 66,698 | 83,633 | 109,607 | (25,974 | ) | ||||||||||||||
Seattle
|
106,639 | 58,673 | 47,966 | 87,413 | (39,447 | ) | ||||||||||||||
Dallas-Fort
Worth
|
62,702 | 60,306 | 2,396 | 117,832 | (115,436 | ) | ||||||||||||||
Total
|
$ | 3,673,581 | $ | 841,126 | $ | 2,832,455 | $ | 1,304,013 | $ | 1,528,442 |
Reconciliation of Non-GAAP Financial Measure to
GAAP Financial Measure
|
||||
Market
EBITDA
|
$ | 1,528,442 | ||
Centralized
operating costs
|
(639,612 | ) | ||
Corporate
expenses
|
(1,566,561 | ) | ||
Depreciation
|
(982,323 | ) | ||
Stock-based
compensation
|
(229,252 | ) | ||
Other
income (expense)
|
(210,707 | ) | ||
Net
loss
|
$ | (2,100,013 | ) |
15
Six
months ended June 30, 2010
Market
|
Revenues
|
Cost of
Revenues
|
Gross
Margin
|
Operating
Costs
|
Market
EBITDA
|
|||||||||||||||
New
York
|
$ | 2,852,921 | $ | 557,363 | $ | 2,295,558 | $ | 643,206 | $ | 1,652,352 | ||||||||||
Boston
|
2,136,090 | 345,762 | 1,790,328 | 338,060 | 1,452,268 | |||||||||||||||
Los
Angeles
|
1,429,093 | 270,160 | 1,158,933 | 547,036 | 611,897 | |||||||||||||||
Chicago
|
941,629 | 314,625 | 627,004 | 249,875 | 377,129 | |||||||||||||||
San
Francisco
|
544,460 | 117,471 | 426,989 | 146,196 | 280,793 | |||||||||||||||
Miami
|
454,740 | 155,039 | 299,701 | 176,204 | 123,497 | |||||||||||||||
Providence/Newport
|
253,422 | 82,807 | 170,615 | 62,288 | 108,327 | |||||||||||||||
Seattle
|
253,084 | 109,072 | 144,012 | 62,845 | 81,167 | |||||||||||||||
Nashville
|
21,371 | 14,319 | 7,052 | 7,192 | (140 | ) | ||||||||||||||
Dallas-Fort
Worth
|
224,491 | 164,429 | 60,062 | 115,575 | (55,513 | ) | ||||||||||||||
Philadelphia
|
1,455 | 28,052 | (26,597 | ) | 105,102 | (131,699 | ) | |||||||||||||
Total
|
$ | 9,112,756 | $ | 2,159,099 | $ | 6,953,657 | $ | 2,453,579 | $ | 4,500,078 |
Reconciliation of Non-GAAP Financial Measure to
GAAP Financial Measure
|
||||
Market
EBITDA
|
$ | 4,500,078 | ||
Centralized
costs
|
(1,466,172 | ) | ||
Corporate
expenses
|
(3,257,992 | ) | ||
Depreciation
and amortization
|
(2,555,410 | ) | ||
Stock-based
compensation
|
(457,541 | ) | ||
Other
income (expense)
|
398,732 | |||
Net
loss
|
$ | (2,838,305 | ) |
Six
months ended June 30, 2009
Market
|
Revenues
|
Cost of
Revenues
|
Gross
Margin
|
Operating
Costs
|
Market
EBITDA
|
|||||||||||||||
New
York
|
$ | 2,559,016 | $ | 425,667 | $ | 2,133,349 | $ | 625,720 | $ | 1,507,629 | ||||||||||
Boston
|
1,969,396 | 335,831 | 1,633,565 | 397,943 | 1,235,622 | |||||||||||||||
Los
Angeles
|
848,314 | 148,826 | 699,488 | 509,840 | 189,648 | |||||||||||||||
San
Francisco
|
458,715 | 99,692 | 359,023 | 227,927 | 131,096 | |||||||||||||||
Providence/Newport
|
267,080 | 73,972 | 193,108 | 114,050 | 79,058 | |||||||||||||||
Chicago
|
422,400 | 168,488 | 253,912 | 243,271 | 10,641 | |||||||||||||||
Miami
|
259,659 | 125,813 | 133,846 | 217,142 | (83,296 | ) | ||||||||||||||
Seattle
|
203,631 | 125,767 | 77,864 | 186,474 | (108,610 | ) | ||||||||||||||
Dallas-Fort
Worth
|
102,436 | 114,616 | (12,180 | ) | 243,336 | (255,516 | ) | |||||||||||||
Total
|
$ | 7,090,647 | $ | 1,618,672 | $ | 5,471,975 | $ | 2,765,703 | $ | 2,706,272 |
Reconciliation of Non-GAAP Financial Measure to
GAAP Financial Measure
|
||||
Market
EBITDA
|
$ | 2,706,272 | ||
Centralized
operating costs
|
(1,351,829 | ) | ||
Corporate
expenses
|
(3,131,833 | ) | ||
Depreciation
|
(1,929,944 | ) | ||
Stock-based
compensation
|
(386,322 | ) | ||
Other
income (expense)
|
(422,023 | ) | ||
Net
loss
|
$ | (4,515,679 | ) |
We began
providing broadband services in Nashville, Tennessee in April
2010.
Certain
accounts in the prior year Market EBITDA reconciliation had been reclassified
for comparative purposes to conform to the presentation in the current
year. These reclassifications have no effect on the previously
reported total Market EBITDA.
16
Three
Months Ended June 30, 2010 Compared to the Three Months Ended June
30, 2009
Revenues. Revenues
totaled $4,868,539 during the three months ended June 30, 2010 as compared to
$3,673,581 during the three months ended June 30, 2009, representing an increase
of $1,194,958, or 33%. This increase was driven by 56% growth in
our customer base from June 30, 2009 to June 30, 2010. The effect of
the increase in our customer base was mitigated by a decrease of 13% in average
revenue per user (“ARPU”) during the
2010
period as compared to the 2009 period.
ARPU as
of June 30, 2010 totaled $671 compared to $769 as of June 30, 2009, representing
a decrease of $98, or 13%. The decrease relates to new customers
purchasing lower ARPU products during the economic recession. In
addition, the acquisition of Sparkplug had the effect of lowering our
post-acquisition ARPU by $23. The customers acquired from Sparkplug
had an ARPU of $463 compared to $703 for our customer base prior to the
acquisition. Customer churn, calculated as a percent of revenue lost
on a monthly basis from customers terminating service or reducing their service
level, totaled 1.15% for the three months ended June 30, 2010 compared to 1.90%
for the three months ended June 30, 2009, representing a 39% decrease on a
percentage basis. The lower churn in the 2010 period reflects the
results of our efforts to improve customer service. During the second
quarter of 2009, we effected staffing and process changes to improve customer
retention and reduce churn.
Cost
of Revenues. Cost of revenues totaled $1,207,100 for the
three months ended June 30, 2010 as compared to $914,938 for the three months
ended June 30, 2009, an increase of $292,162, or 32%. Gross margins
remained stable at 75% during both the 2010 and 2009 periods. Core
Network costs increased by approximately $228,000 primarily related to higher
tower rent expenses and bandwidth, which were partly related to the acquisition
of Sparkplug.
Depreciation
and Amortization. Depreciation and amortization totaled
$1,454,239 for the three months ended June 30, 2010 as compared to
$982,323 for the three months ended June 30, 2009, representing an
increase of $471,916, or 48%. This increase related to the continued investment
in our Network required to support the growth in our customer base and expansion
in existing markets. Gross fixed assets totaled $29,942,264 at June
30, 2010 as compared to $23,695,849 at June 30, 2009, representing an increase
of $6,246,415, or 26%. In addition, we recognized approximately
$265,000 of amortization expense associated with customer contracts acquired
through the Sparkplug acquisition.
Customer Support
Services. Customer support services expenses totaled
$672,205 for the three months ended June 30, 2010 as compared to
$484,189 for the three months ended June 30, 2009, representing an
increase of $188,016, or 39%. This increase
was primarily related to additional personnel hired to support our growing
customer base. Average headcount increased by 24%, from 38 in the
2009 period to 47 in the 2010 period.
Sales and
Marketing. Sales and marketing expenses totaled
$1,313,704 for the three months ended June 30, 2010 as compared to $1,385,624
for the three months ended June 30, 2009, representing a decrease of $71,920, or
5%. Approximately $327,000 of the decrease related to lower payroll costs as
sales and marketing personnel averaged 62 for the three months ended June 30,
2010 compared with 100 for the same period in 2009, a decrease in headcount of
38%. This decrease was offset by an increase in marketing and
advertising expenses of approximately $129,000, primarily related to Internet
based advertising programs. In addition, there was an increase in
commissions and bonuses of approximately $132,000 in the 2010
period.
General and
Administrative. General and administrative expenses
totaled $1,906,726 for the three months ended June 30, 2010 as compared to
$1,795,813 for the three months ended June 30, 2009, representing an
increase of $110,913, or 6%. This increase was attributable to
professional services of approximately $179,000, primarily related to the
Sparkplug acquisition offset by a decrease of approximately $96,000 in payroll
costs.
Interest
Income. Interest income totaled
$631 for the three months ended June 30, 2010 compared with $9,024 for the
three months ended June 30, 2009, representing a decrease of $8,393, or
93%. The decrease primarily relates to lower cash balances and
interest yields in the 2010 period compared with the 2009
period. Average cash balances decreased from approximately $20.4
million in the second quarter 2009 to approximately $9.9 million in the second
quarter 2010. Monthly interest yields averaged 0.16% in the 2009
period compared with 0.02% in the 2010 period.
17
Interest
Expense. Interest expense totaled zero for the three
months ended June 30, 2010 compared with $185,570 for the three months ended
June 30, 2009, representing a decrease of 100%. Interest expense for
the 2009 period included $114,586 associated with the accretion of debt discount
and $55,000 associated with the 8% coupon on outstanding
debt. Outstanding debt of $2,750,000 was repaid on December 31,
2009.
Net
Loss. Net loss totaled $1,306,532 for the three
months ended June 30, 2010 as compared to a net loss of $2,100,013 for
the three months ended June 30, 2009, a decrease of $793,481, or
38%. This decrease primarily related
to an increase in revenues of $1,194,958, or 33%, and a gain on business
acquisition of $355,876 offset by an increase in operating expenses of $991,087,
or 18%.
Six
Months Ended June 30, 2010 Compared to the Six Months Ended June
30, 2009
Revenues. Revenues
totaled $9,112,756 during the six months ended June 30, 2010 as compared to
$7,090,647 during the six months ended June 30, 2009, representing an increase
of $2,022,109, or 29%. This increase was driven by 56% growth in
our customer base from June 30, 2009 to June 30, 2010. The effect of
the increase in our customer base was mitigated by a decrease of 13% in ARPU
during the 2010 period as compared to the 2009 period.
Cost
of Revenues. Cost of revenues totaled $2,281,887 for the
six months ended June 30, 2010 as compared to $1,740,852 for the six months
ended June 30, 2009, an increase of $541,035, or 31%. Gross margins
remained stable at 75% during both the 2010 period and 2009
periods. Core Network costs increased by approximately $437,000
primarily related to higher tower and roof rent expenses, in addition to higher
bandwidth.
Depreciation
and Amortization. Depreciation and amortization totaled
$2,555,410 for the six months ended June 30, 2010 as compared to
$1,929,944 for the six months ended June 30, 2009, representing an
increase of $625,466, or 32%. This increase is related to the continued
investment in our Network required to support the growth in our customer base
and expansion in existing markets. Gross fixed assets totaled
$29,942,264 at June 30, 2010 as compared to $23,695,849 at June 30, 2009,
representing an increase of $6,246,415, or 26%. In addition, we
recognized approximately $265,000 of amortization expense associated with
customer contracts acquired through the Sparkplug acquisition.
Customer Support
Services. Customer support services expenses totaled
$1,250,461 for the six months ended June
30, 2010 as compared to $1,034,013 for the six months ended June
30, 2009, representing an increase of $216,448, or 21%. This increase
was primarily related to additional personnel hired to support our growing
customer base. Average headcount increased by 22%, from 37 in the
2009 period to 45 in the 2010 period.
Sales and
Marketing. Sales and marketing expenses totaled
$2,546,502 for the six months ended June 30, 2010 as compared to $2,961,339 for
the six months ended June 30, 2009, representing a decrease of $414,837, or 14%.
Approximately $697,000 of the decrease related to lower payroll costs as sales
and marketing personnel averaged 62 for the six months ended June 30, 2010
compared with 101 for the same period in 2009, a decrease in headcount of
39%. This decrease was offset by an increase in marketing and
advertising expenses of approximately $200,000, primarily related to Internet
based advertising programs. In addition, commissions and bonuses
increased by approximately $109,000 in the 2010 period.
General and
Administrative. General and administrative expenses
totaled $3,715,533 for the six months ended June 30, 2010 as compared to
$3,518,155 for the six months ended June 30, 2009, representing an increase
of $197,378, or 6%. This increase was attributable to professional
services of approximately $235,000, primarily related to the Sparkplug
acquisition, and an increase of approximately $71,000 in stock-based
compensation, offset by a decrease of approximately $200,000 in payroll
costs.
Interest
Income. Interest income totaled
$805 for the six months ended June 30, 2010 compared with $22,213 for
the six months ended June 30, 2009, representing a decrease of $21,408, or
96%. The decrease primarily relates to lower cash balances and
interest yields in the 2010 period compared with the 2009
period. Average cash balances decreased from approximately $21.5
million in the second quarter 2009 to approximately $11.3 million in the second
quarter 2010. Monthly interest yields averaged 0.19% in the 2009
period compared with 0.01% in the 2010 period.
18
Interest
Expense. Interest expense totaled zero for the six
months ended June 30, 2010 compared with $368,926 for the six months ended June
30, 2009, representing a decrease of 100%.Interest
expense for the 2009 period included $227,627 associated with the accretion of
debt discount and $110,000 associated with the 8% coupon on outstanding
debt. Outstanding debt of $2,750,000 was repaid on December 31,
2009.
Net
Loss. Net loss totaled $2,838,305 for the six
months ended June 30, 2010 as compared to a net loss of $4,515,679 for
the six months ended June 30, 2009, a decrease of $1,677,374, or
37%. This decrease primarily related to an increase in revenues of
$2,022,109, or 29%, and a gain on business acquisition of $355,876 offset by
an increase in operating expenses of $1,165,490, or 10%.
Liquidity
and Capital Resources
We have
historically met our liquidity and capital requirements primarily through the
public sale and private placement of equity securities and debt
financing. Cash and cash equivalents totaled $9,665,626 and
$14,040,839 at June 30, 2010 and December 31, 2009, respectively. The decrease
in cash and cash equivalents related to our operating and investing activities
during the six months ended June 30, 2010, each of which is described
below.
Net Cash Used in Operating
Activities. Net cash used in operating activities
totaled $50,438 for the six months ended June 30, 2010 as compared to
$2,495,943 for the six months ended June 30, 2009, representing an
increase in cash used in operating activities of $2,445,505, or
98%. This improvement was directly related to the lower net loss
reported in the 2010 period which decreased by $1,677,374, or 37%, as compared
to the 2009 period.
Net Cash Used in Investing
Activities. Net cash used in investing activities
totaled $4,324,775 for the six months ended June 30, 2010 as compared to
$2,029,540 for the six months ended June 30, 2009, representing an increase
of $2,295,235, or 113%. The increase in the 2010 period related to
higher spending on property and equipment which increased by $1,125,235, or 56%,
from $3,151,775 to $2,026,540. The significant components increases
of property and equipment included approximately $662,000 related to customer
premise equipment and approximately $474,000 related to network and base station
equipment. In addition, we paid $1,170,000 in cash for the
acquisition of Sparkplug in the 2010 period.
Working
Capital. As of June 30, 2010, we had working
capital of $6,814,353. Based on our current operating activities and
plans, we believe our existing working capital will enable us to meet our
anticipated cash requirements for at least the next twelve
months.
Acquisition of Sparkplug Chicago,
Inc. On April 15, 2010, we completed the acquisition of the
customer contracts, network infrastructure and related assets of the Chicago,
Illinois and Nashville, Tennessee networks of Sparkplug Chicago, Inc.
(“Sparkplug”). The aggregate consideration for the acquisition was (i)
$1,170,000 in cash, and (ii) 275,700 shares of our common stock (the
“Shares”) with a fair value of $430,000. A registration statement covering the
Shares on Form S-3 was declared effective by the SEC on May 5, 2010. We have
determined that the acquisition of Sparkplug is a business combination to be
accounted for under the acquisition method.
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 utilized available information,
including our past history, industry standards and the current economic
environment, among other factors, in forming our estimates and judgments, giving
appropriate consideration to materiality. Actual results may differ from these
estimates. In addition, other companies may utilize different estimates, which
may impact the comparability of our results of operations to other companies in
our industry. We believe that of our significant accounting policies, the
following may involve a higher degree of judgment and estimation, or are
fundamentally important to our business.
19
Revenue
Recognition. We normally enter into contractual
agreements with our customers for periods ranging between one to three
years. We recognize the total revenue provided under a contract
ratably over the contract period, including any periods under which we have
agreed to provide services at no cost. Deferred revenues are
recognized as a liability when billings are issued in advance of the date when
revenues are earned. We apply the revenue recognition principles set
forth under SEC’s 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.
Long-Lived
Assets. Long-lived assets consist primarily of property and
equipment, and intangible assets. Long-lived assets are reviewed annually 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 market 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.
Asset Retirement
Obligations. The Financial Accounting Standards Board’s
(“FASB”) guidance on asset retirement obligations addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated costs. This guidance requires
the recognition of an asset retirement obligation and an associated asset
retirement cost when there is a legal obligation associated with the retirement
of tangible long-lived assets. Our network equipment is installed on both
buildings in which we have a lease agreement (“Company
Locations”) and at customer locations. In both instances, the installation
and removal of our equipment is not complicated and does not require structural
changes to the building where the equipment is installed. Costs associated
with the removal of our equipment at company or customer locations are not
material, and accordingly, we have determined that we do not presently have
asset retirement obligations under the FASB’s accounting guidance.
Off-Balance Sheet
Arrangements. We have no off-balance sheet arrangements,
financings, or other relationships with unconsolidated entities known as
‘‘Special Purposes Entities.’’
Recent
Accounting Pronouncements
In
February 2010, the FASB issued an accounting standard that amended certain
recognition and disclosure requirements related to subsequent events. The
accounting standard requires an entity that is an SEC filer to evaluate
subsequent events through the date that the financial statements are issued and
removes the requirement that an SEC filer disclose the date through which
subsequent events have been evaluated. This guidance was effective upon
issuance. The adoption of this standard had no effect on our condensed
consolidated financial position or results of operations. Disclosures
have been modified to reflect the new requirements.
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 are effective, as of June 30, 2010, 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.
Changes in Internal Control
over Financial Reporting
There
were no changes in our system of internal controls over financial reporting
during the three months ended June 30, 2010 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
20
Item
6. Exhibits.
Exhibit No.
|
Description
|
|
31.1
|
Section
302 Certification of Principal Executive Officer
|
|
31.2
|
Section
302 Certification of Principal Financial Officer
|
|
32.1
|
Section
906 Certification of Principal Executive Officer
|
|
32.2
|
Section
906 Certification of Principal Financial
Officer
|
21
SIGNATURES
Pursuant
to the requirements 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: August
4, 2010
|
By:
|
/s/ Jeffrey M. Thompson
|
Jeffrey
M. Thompson
|
||
President
and Chief Executive Officer
|
||
(Principal
Executive Officer)
|
||
Date: August
4, 2010
|
By:
|
/s/ Joseph P. Hernon
|
Joseph
P. Hernon
|
||
Chief
Financial Officer
|
||
(Principal
Financial Officer and Principal Accounting
Officer)
|
22
EXHIBIT
INDEX
Exhibit No.
|
Description
|
|
31.1
|
Section
302 Certification of Principal Executive Officer
|
|
31.2
|
Section
302 Certification of Principal Financial Officer
|
|
32.1
|
Section
906 Certification of Principal Executive Officer
|
|
32.2
|
Section
906 Certification of Principal Financial
Officer
|