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, 2014

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.)
88 Silva Lane
Middletown, Rhode Island		02842
(Address of principal executive offices)		(Zip Code)

 

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

  

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

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

 

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐

                                      

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

 

As of November 6, 2014, there were 66,650,752 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, 2014 (unaudited) and December 31, 2013	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)	2
	Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2014 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5-15
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16-28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	29
Item 4.	Controls and Procedures.	29
Part II	OTHER INFORMATION
Item 1A.	Risk Factors.	30
Item 6.	Exhibits.	31

 

  

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		(Unaudited) September 30, 2014				December 31, 2013
Assets
Current Assets
Cash and cash equivalents		$	11,890,770			$	28,181,531
Accounts receivable, net			1,046,736				611,548
Prepaid expenses and other current assets			1,431,720				925,587
Total Current Assets			14,369,226				29,718,666
Property and equipment, net			35,382,147				38,484,858
Intangible assets, net			2,297,926				3,088,827
Goodwill			1,674,281				1,674,281
Other assets			1,751,100				1,950,835
Total Assets		$	55,474,680			$	74,917,467
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	603,937			$	1,241,743
Accrued expenses			2,229,030				2,532,679
Deferred revenues			1,263,456				1,396,780
Current maturities of capital lease obligations			775,817				783,051
Other			54,340				67,255
Total Current Liabilities			4,926,580				6,021,508
Long-Term Liabilities
Capital lease obligations, net of current maturities			1,249,126				1,805,336
Other			1,596,477				996,682
Total Long-Term Liabilities			2,845,603				2,802,018
Total Liabilities			7,772,183				8,823,526
Commitments (Note 12)
Stockholders' Equity
Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued			-				-
Common stock, par value $0.001; 95,000,000 shares authorized; 66,650,752 and 66,424,561 shares issued and outstanding, respectively			66,651				66,425
Additional paid-in-capital			154,938,511				154,171,695
Accumulated deficit			(107,302,665	)			(88,144,179	)
Total Stockholders' Equity			47,702,497				66,093,941
Total Liabilities and Stockholders' Equity		$	55,474,680			$	74,917,467

 

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

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Revenues		$	8,301,604			$	8,400,664			$	24,946,358			$	24,912,061
Operating Expenses
Cost of revenues (exclusive of depreciation)			6,210,920				5,444,298				18,168,776				15,591,890
Depreciation and amortization			3,318,395				3,846,644				10,294,872				11,653,557
Customer support services			1,244,161				1,221,076				3,563,571				3,799,687
Sales and marketing			1,353,015				1,368,628				4,173,703				4,333,288
General and administrative			2,381,586				2,600,168				7,726,523				8,373,800
Total Operating Expenses			14,508,077				14,480,814				43,927,445				43,752,222
Operating Loss			(6,206,473	)			(6,080,150	)			(18,981,087	)			(18,840,161	)
Other Income/(Expense)
Interest expense, net			(43,970	)			(59,613	)			(166,509	)			(153,897	)
Gain on business acquisition			-				-				-				1,004,099
Other income (expense), net			(3,630	)			(3,630	)			(10,890	)			(10,890	)
Total Other Income/(Expense)			(47,600	)			(63,243	)			(177,399	)			839,312
Net Loss		$	(6,254,073	)		$	(6,143,393	)		$	(19,158,486	)		$	(18,000,849	)
Net loss per common share – basic and diluted		$	(0.09	)		$	(0.09	)		$	(0.29	)		$	(0.28	)
Weighted average common shares outstanding – basic and diluted			66,643,804				66,402,499				66,521,267				64,764,085

 

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

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

For the Nine Months Ended September 30, 2014

 

		Common Stock
		Shares				Amount				Additional Paid-In-Capital				Accumulated Deficit				Total
Balance at December 31, 2013			66,424,561			$	66,425			$	154,171,695			$	(88,144,179	)		$	66,093,941
Cashless exercise of options			192,270				192				(192	)			-				-
Issuance of common stock under employee stock purchase plan			18,921				19				35,740				-				35,759
Issuance of common stock upon vesting of restricted stock awards			15,000				15				(15	)			-				-
Stock-based compensation for options			-				-				735,076				-				735,076
Fair value of options repurchased			-				-				(3,793	)			-				(3,793	)
Net loss			-				-				-				(19,158,486	)			(19,158,486	)
Balance at September 30, 2014			66,650,752			$	66,651			$	154,938,511			$	(107,302,665	)		$	47,702,497

 

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

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Nine Months Ended September 30,
		2014				2013
Cash Flows From Operating Activities
Net loss		$	(19,158,486	)		$	(18,000,849	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts			192,000				70,000
Depreciation for property, plant and equipment			9,503,971				9,264,999
Amortization for customer based intangibles			790,901				2,388,558
Stock-based compensation			740,405				939,200
Gain on business acquisition			-				(1,004,099	)
Loss on sale and disposition of property and equipment			-				81,824
Deferred rent			271,455				(86,820	)
Changes in operating assets and liabilities:
Accounts receivable			(627,188	)			(250,270	)
Prepaid expenses and other current assets			(506,133	)			(100,310	)
Other assets			213,407				353,130
Accounts payable			(637,806	)			(471,399	)
Accrued expenses			(690,097	)			(1,411,797	)
Deferred revenues			(133,324	)			(137,859	)
Total Adjustments			9,117,591				9,635,157
Net Cash Used In Operating Activities			(10,040,895	)			(8,365,692	)
Cash Flows From Investing Activities
Acquisitions of property and equipment			(5,981,608	)			(3,896,628	)
Lease incentive payment from landlord			380,000				-
Acquisition of a business, net of cash acquired			-				(222,942	)
Proceeds from sale of property and equipment			-				14,779
Payments of security deposits			(13,672	)			(39,154	)
Deferred acquisition payments			(64,574	)			(124,460	)
Net Cash Used In Investing Activities			(5,679,854	)			(4,268,405	)
Cash Flows From Financing Activities
Payments on capital leases			(596,649	)			(571,500	)
Proceeds upon exercise of options			-				292,389
Issuance of common stock under employee stock purchase plan			30,430				55,623
Net proceeds from sale of common stock			-				30,499,336
Fair value of options repurchased			(3,793	)			-
Net Cash (Used In) Provided By Financing Activities			(570,012	)			30,275,848
Net (Decrease) Increase In Cash and Cash Equivalents			(16,290,761	)			17,641,751
Cash and Cash Equivalents – Beginning			28,181,531				15,152,226
Cash and Cash Equivalents – Ending		$	11,890,770			$	32,793,977
Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest		$	187,653			$	154,298
Taxes		$	45,685			$	34,072
Non-cash investing and financing activities:
Fair value of common stock issued in connection with an acquisition		$	-			$	951,256
Acquisition of property and equipment:
Under capital leases		$	33,204			$	80,894
Included in accrued expenses		$	386,448			$	780,254

 

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

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

Note 1.    Organization and Nature of Business

 

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

 

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”).  Hetnets was formed to operate a new shared wireless infrastructure platform that emerged from the Company's efforts to identify opportunities to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services.  Hetnets operates a carrier-class network which has been constructed on "street level rooftops" which are closer to the ground (where Wi-Fi and small cell can operate with less interference from the macro cell) than the Company's traditional fixed wireless network.  The Company believes that the wireless communications industry is experiencing a fundamental shift from its traditional macro-cellular architecture to densified small cell architecture where existing cell sites will be supplemented by many smaller base stations operating near street level.  Hetnets is structured to operate like a tower company and expects to generate rental income from four separate sources including (i) rental of space on street level rooftops for the installation of customer owned small cells which includes Wi-Fi antennae, DAS, and Metro and Pico cells, (ii) rental of a channel on Hetnets’ Wi-Fi network for internet access and the offloading of mobile data, (iii) rental of a port for backhaul or transport, and (iv) power and other related services. The Company refers to the activities of Hetnets as its “shared wireless infrastructure” (or “shared wireless”) business.

 

       In June 2013, Hetnets entered into a Wi-Fi service agreement (the “Wi-Fi Agreement”) with a major cable operator (the “Cable Operator”). The Wi-Fi Agreement provides leased access to certain access points, primarily within New York City and Bergen County, New Jersey. The Cable Operator has a limited right to expand access in other Hetnets’ markets. The term of the Wi-Fi Agreement is for an initial three year period and provides for automatic annual renewals for two additional one year periods.

 

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

 

Note 2.    Summary of Significant Accounting Policies

 

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2014 and the results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of the operating results for the full fiscal year or for any future period.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. 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, 2013, and updated, as necessary, in this Quarterly Report on Form 10-Q.

 

Use of Estimates.    The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Actual results could differ from those estimates.

 

Cash and Cash Equivalents.    The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

  

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, the Company’s 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, 2014, the Company had cash and cash equivalent balances of approximately $1,614,000 in excess of the federally insured limit of $250,000.

 

The Company also had approximately $10,023,000 invested in institutional money market funds. These funds are protected under the Securities Investor Protection Corporation, 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 which reflects the Company’s estimate of balances that will be not collected. The allowance is based on the history of past write-offs, the aging of balances, collections experience and current credit conditions. Additions include provisions for doubtful accounts and deductions include customer write-offs. Changes in the allowance for doubtful accounts were as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Beginning of period		$	161,863			$	162,678			$	81,009			$	190,109
Additions			75,000				10,000				192,000				70,000
Deductions			(30,995	)			(39,552	)			(67,141	)			(126,983	)
End of period		$	205,868			$	133,126			$	205,868			$	133,126

 

Business Acquisitions. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the consideration transferred on the acquisition date.  When the Company acquires a business, it assesses the acquired assets and liabilities assumed for the appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. The excess of the total consideration transferred over the net identifiable assets acquired and liabilities assumed is recognized as goodwill.  If this consideration is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed and included in general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

The highest level of judgment and estimation involved in accounting for business acquisitions relates to determining the fair value of the customer relationships and network assets acquired. In each of the five acquisitions completed over the past four years, the highest asset value has been allocated to the customer relationships acquired. Determining the fair value of customer relationships involves judgments and estimates regarding how long the customers will continue to contract services with the Company. During the course of completing five acquisitions, the Company has developed a database of historical experience from prior acquisitions to assist in preparing future estimates of cash flows. Similarly, the Company has used its historical experience in building networks to prepare estimates regarding the fair value of the network assets that it acquires.

 

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 recognizes 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.

 

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

 

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

 

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

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

  

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

 

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

 

In August 2014, the FASB issued ASU No. 2014–15 (“ASU 2014-15”), “Presentation of Financial Statements – Going Concern.”  ASU 2014-15 provides GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.  ASU 2014-15 is the final version of Proposed ASU No. 2013–300 “Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption,” which has been deleted. The Company does not expect the adoption of ASU 2014–15 to have a significant impact on its condensed consolidated financial statements.

 

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 3.    Business Acquisitions

 

Delos Internet

 

In February 2013, the Company completed the acquisition of Delos Internet (“Delos”). The Company obtained full control of Delos and determined that the acquisition 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. The number of shares issued was based on the closing price of the Company's common stock on the February 28, 2013 closing date which was $2.47.

 

		Original				Adjustments				Final
Fair value of consideration transferred:
Cash		$	225,000			$	-			$	225,000
Common stock			1,071,172				(119,916	)			951,256
Other liabilities assumed			-				36,733				36,733
Capital lease obligations assumed			128,929				-				128,929
Total consideration transferred			1,425,101				(83,183	)			1,341,918
Fair value of identifiable assets acquired and liabilities assumed:
Cash			2,058				-				2,058
Accounts receivable			80,524				1,286				79,238
Property and equipment			826,524				18,824				807,700
Security deposits			1,993				-				1,993
Accounts payable			(26,970	)			2,566				(29,536	)
Deferred revenue			(62,110	)			(2,135	)			(59,975	)
Other liabilities			(89,930	)			-				(89,930	)
Total identifiable net tangible assets			732,089				20,541				711,548
Customer relationships			1,634,469				-				1,634,469
Total identifiable net assets			2,366,558				20,541				2,346,017
Gain on business acquisition		$	941,457			$	62,642			$	1,004,099

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

The Company recognized a gain on business acquisition of $1,004,099 which is included in other income (expense) in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2013. The challenging economic environment during 2012 made it difficult for smaller companies like Delos to raise sufficient capital to sustain their growth.  As a result, the Company was able to acquire the customer relationships and wireless network of Delos at a discounted price.

 

In May 2013, the Company finalized the purchase price of Delos which resulted in a reduction of approximately $21,000 of identifiable net assets and an increase in the gain on business acquisition of approximately $63,000. The purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Delos of 48,549 from 433,673 to 385,124 shares.

 

The Company incurred approximately $99,000 of third-party costs in connection with the Delos acquisition for the nine month ended September 30, 2013.  There were no third-party costs incurred by the Company in connection with the Delos acquisition for the three months ended September 30, 2013. These expenses are included in the general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

Pro Forma Information

 

The following table reflects the unaudited pro forma consolidated results of operations had the acquisition taken place at the beginning of the 2013 period:

 

		Nine Months Ended September 30, 2013
Revenues		$	25,024,631
Amortization expense			2,453,937
Total operating expenses			43,924,201
Net loss			(18,060,258	)
Basic net loss per share		$	(0.28	)

 

The pro forma information presented above does not purport to present what actual results would have been had the acquisition actually occurred at the beginning of 2013 and are not necessarily indicative of the operating results for any future period.

 

Note 4.    Property and Equipment

 

Property and equipment is comprised of:

 

		September 30, 2014				December 31, 2013
Network and base station equipment		$	35,373,208			$	32,233,262
Customer premise equipment			25,278,981				24,244,017
Shared wireless infrastructure			21,014,018				19,128,064
Information technology			4,586,445				4,417,869
Furniture, fixtures and other			1,667,978				1,661,567
Leasehold improvements			1,599,393				1,433,984
			89,520,023				83,118,763
Less: accumulated depreciation			54,137,876				44,633,905
Property and equipment, net		$	35,382,147			$	38,484,858

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

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

 

		September 30, 2014				December 31, 2013
Network and base station equipment		$	861,231			$	828,027
Shared wireless infrastructure			1,216,142				1,216,142
Customer premise equipment			96,843				96,843
Information technology			1,860,028				1,860,028
			4,034,244				4,001,040
Less: accumulated depreciation			1,933,822				1,333,666
Property acquired through capital leases, net		$	2,100,422			$	2,667,374

 

Note 5. Intangible Assets

 

Intangible assets consist of the following:

 

		September 30, 2014				December 31, 2013
Goodwill		$	1,674,281			$	1,674,281
Customer relationships		$	11,856,127			$	11,856,127
Less: accumulated amortization of customer relationships			10,842,756				10,051,855
Customer relationships, net			1,013,371				1,804,272
FCC licenses			1,284,555				1,284,555
Intangible assets, net		$	2,297,926			$	3,088,827

 

Amortization expense for the three months ended September 30, 2014 and 2013 was $98,068 and $817,979, respectively. Amortization expense for the nine months ended September 30, 2014 and 2013 was $790,901 and $2,388,558, respectively. The customer contracts acquired in the Company’s acquisition of Delos are being amortized over a 50 month period ending April 2017. As of September 30, 2014, the remaining amortization period for the Delos acquisition was 31 months. Balances related to the Company’s other acquisitions have been fully amortized. Future amortization expense is as follows:

 

Remainder of 2014		$	98,068
2015			392,272
2016			392,272
2017			130,759
		$	1,013,371

 

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

 

Note 6. Accrued Expenses

 

Accrued expenses consist of the following:

 

		September 30, 2014				December 31, 2013
Payroll and related		$	1,125,257			$	937,624
Property and equipment			386,448				867,311
Professional services			302,095				186,917
Other			187,811				293,402
Network			149,164				138,684
Marketing			78,255				108,741
Total		$	2,229,030			$	2,532,679

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

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

 

Note 7.    Other Liabilities

 

Other liabilities consist of the following:

 

		September 30, 2014				December 31, 2013
Current
Deferred rent		$	43,351			$	-
Deferred acquisition payments			10,989				67,255
Total		$	54,340			$	67,255
Long-Term
Deferred rent		$	1,270,464			$	662,361
Deferred acquisition payments			3,208				11,516
Deferred taxes			322,805				322,805
Total		$	1,596,477			$	996,682

 

Deferred acquisition payments related to Delos totaled $14,197 at September 30, 2014 and bear interest at a rate of 7%. In May 2014, the Company made its last deferred acquisition payment of $16,630 related to the acquisition of Pipeline Wireless LLC.

 

Note 8. Stock Options and Warrants

 

Stock Options

 

The Company uses the Black-Scholes option pricing model on the date of grant to value options issued to employees, directors and consultants. Compensation expense, including the effect of forfeitures, is recognized over the period of service, generally the vesting period. 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,
		2014				2013				2014				2013
Risk-free interest rate			1.7%-1.8	%			1.9	%			1.6%-1.8	%			0.8%-1.9	%
Expected volatility			59	%			68	%			47%-59	%			65%-68	%
Expected life (in years)			5.3				6				5.3				5-6.5
Expected dividend yield			-				-				-				-
Weighted average per share grant date fair value		$	0.75			$	1.42			$	0.80			$	1.44
Stock-based compensation		$	183,844			$	253,813			$	735,076			$	885,116

 

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 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 $1,113,205 as of September 30, 2014 which will be recognized over a weighted-average period of 1.7 years.

 

Option transactions under the stock option plans during the nine months ended September 30, 2014 were as follows:

 

		Number				Weighted Average Exercise Price
Outstanding as of December 31, 2013			4,055,016			$	2.70
Granted during 2014			372,073			$	1.70
Exercised			(340,906	)		$	0.74
Forfeited /expired			(184,869	)		$	2.51
Outstanding as of September 30, 2014			3,901,314			$	2.78
Exercisable as of September 30, 2014			2,882,066			$	2.69

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

In June 2014, the Company made its annual grant to the Board of Directors consisting of 200,000 options with an exercise price of $1.93 vesting monthly through June 2015.

 

In July 2014, the Company granted to its two executive officers 47,073 options with an exercise price of $1.67 vesting monthly over a two year period.

 

In September 2014, the Company granted to its two executive officers 125,000 options with an exercise price of $1.34 vesting quarterly over a two year period.

 

A total of 340,906 options were exercised on a cashless basis during the nine months ended September 30, 2014 resulting in the net issuance of 192,270 shares. There were no other options exercised during the nine months ended September 30, 2014.

 

Cancellations for the three and nine months ended September 30, 2014 were 74,064 and 184,869, respectively. Cancellations related to employee terminations except for 14,250 options which were repurchased during the nine months ended September 30, 2014.

 

The weighted average remaining contractual life of the outstanding options as of September 30, 2014 was 5.8 years.

 

The intrinsic value of outstanding and exercisable options totaled $196,892 and $179,392 respectively, as of September 30, 2014.

 

Stock Warrants 

 

There were 450,000 warrants outstanding and exercisable at September 30, 2014 and December 31, 2013 with an exercise price of $5.00 and an expiration date in July 2016.

 

       The warrants had no intrinsic value at September 30, 2014.

 

Cashless Exercises

 

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

 

Note 9. Employee Stock Purchase Plan

 

Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP Plan”), participants can purchase shares of the Company’s stock at a 15% discount. A maximum of 200,000 shares of common stock can be issued under the ESPP Plan of which 105,543 shares have been issued to date and 94,457 shares are available for future issuance. During the three and nine months ended September 30, 2014, a total of 6,948 and 18,921 shares were issued under the ESPP Plan with a fair value of $10,283 and $35,759, respectively. The Company recognized $1,529 and $5,329 of stock-based compensation related to the 15% discount for the three and nine months ended September 30, 2014, respectively. The Company recognized $3,236 and $9,759 of stock-based compensation related to the 15% discount for the three and nine months ended September 30, 2013, respectively.

 

Note 10. Fair Value Measurement

 

Valuation Hierarchy

 

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

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

  

Cash and cash equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. There were no changes in the valuation techniques during the nine months ended September 30, 2014.

  

		Total Carrying Value				Quoted prices in active markets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)
September 30, 2014		$	11,890,770			$	11,890,770			$	-			$	-
December 31, 2013		$	28,181,531			$	28,181,531			$	-			$	-

  

Note 11.    Net Loss Per Common Share

 

        Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of common shares outstanding during the period. The following common stock equivalents were excluded from the computation of diluted net loss per common share because they were anti-dilutive. The exercise or issuance of these common stock equivalents outstanding at September 30, 2014 would dilute earnings per share if the Company becomes profitable in the future. The exercise of the outstanding stock options and warrants could potentially generate proceeds up to approximately $13 million if exercised by the holder for cash.

  

Stock options			3,901,314
Warrants			450,000
Total			4,351,314

 

Note 12.    Commitments

 

Operating Lease Obligations

 

The Company has entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through August 2023. Certain of these operating leases include extensions, at the Company's option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table below as it is not presently determinable which options, if any, the Company will elect to exercise. As of September 30, 2014, total future operating lease obligations were as follows:

 

Remainder of 2014		$	5,182,797
2015			19,758,856
2016			18,300,039
2017			12,639,857
2018			5,160,998
Thereafter			2,779,175
		$	63,821,722

 

Rent expenses were as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Points of Presence		$	1,939,574			$	1,767,441			$	5,732,922			$	5,108,347
Street level rooftops			3,359,804				2,707,304				9,752,720				7,757,206
Corporate offices			84,109				121,518				252,328				366,794
Other			88,211				102,039				273,928				327,268
		$	5,471,698			$	4,698,302			$	16,011,898			$	13,559,615

 

Rent expenses related to Points of Presence, street level rooftops and other were included in cost of revenues in the Company’s condensed consolidated statements of operations. Rent expense related to corporate offices was included in general and administrative expenses in the Company’s condensed consolidated statements of operations.

 

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

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

  

Capital Lease Obligations

 

The Company has entered into capital leases to acquire property and equipment expiring through March 2018. As of September 30, 2014, total future capital lease obligations were as follows:

  

Remainder of 2014		$	238,464
2015			921,437
2016			668,847
2017			401,125
2018			53,922
		$	2,283,795
Less: Interest expense			258,852
Total capital lease obligations		$	2,024,943
Current		$	775,817
Long-term		$	1,249,126

 

Other

 

During the fourth quarter of 2013, the Company renewed a one year information technology infrastructure support agreement which became effective at the end of the first quarter of 2014. Payments of approximately $121,000 are due quarterly through the first quarter of 2015.

 

Note 13.    Segment Information

 

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

 

     The balance of the Company’s operations is in the Corporate group which includes centralized operations. This group includes operations related to corporate overhead and centralized activities which support overall operations. Corporate overhead includes administrative personnel, including executive management, and other support functions such as information technology and facilities. Centralized operations include network operations, customer care, and the management of network assets. The Corporate group is treated as a separate segment consistent with how management monitors and analyzes financial results. Corporate costs are not allocated to the segments because such costs are managed and controlled on a functional basis that encompasses all markets with centralized, functional management held accountable for corporate results. Management also believes that not allocating these centralized costs provides a better reflection of the direct operating performance of each segment. The table below presents information about the Company’s operating segments:

  

		Three Months Ended September 30, 2014 (Unaudited)
		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Eliminations				Total
Revenues		$	7,553,609			$	793,964			$	-			$	(45,969	)		$	8,301,604
Operating Expenses
Cost of revenues (exclusive of depreciation)			2,631,572				3,609,807				15,510				(45,969	)			6,210,920
Depreciation and amortization			1,980,519				1,013,693				324,183				-				3,318,395
Customer support services			342,288				147,379				754,494				-				1,244,161
Sales and marketing			1,239,446				38,261				75,308				-				1,353,015
General and administrative			63,686				163,125				2,154,775				-				2,381,586
Total Operating Expenses			6,257,511				4,972,265				3,324,270				(45,969	)			14,508,077
Operating Income (Loss)		$	1,296,098			$	(4,178,301	)		$	(3,324,270	)		$	-			$	(6,206,473	)
Capital expenditures		$	1,154,281			$	589,883			$	21,603			$	-			$	1,765,767

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

  

		Three Months Ended September 30, 2013 (Unaudited)
		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Eliminations				Total
Revenues		$	7,910,377			$	535,936			$	-			$	(45,649	)		$	8,400,664
Operating Expenses
Cost of revenues (exclusive of depreciation)			2,510,278				2,956,914				22,755				(45,649	)			5,444,298
Depreciation and amortization			2,754,675				857,739				234,230				-				3,846,644
Customer support services			339,206				208,491				673,379				-				1,221,076
Sales and marketing			1,206,125				80,956				81,547				-				1,368,628
General and administrative			126,256				151,561				2,322,351				-				2,600,168
Total Operating Expenses			6,936,540				4,255,661				3,334,262				(45,649	)			14,480,814
Operating Income (Loss)		$	973,837			$	(3,719,725	)		$	(3,334,262	)		$	-			$	(6,080,150	)
Capital expenditures		$	1,242,975			$	680,324			$	200,347			$	-			$	2,123,646

  

 

		Nine Months Ended September 30, 2014 (Unaudited)
		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Eliminations				Total
Revenues		$	22,811,582			$	2,272,683			$	-			$	(137,907	)		$	24,946,358
Operating Expenses
Cost of revenues (exclusive of depreciation)			7,750,725				10,512,098				43,860				(137,907	)			18,168,776
Depreciation and amortization			6,598,893				2,932,592				763,387				-				10,294,872
Customer support services			878,764				502,342				2,182,465				-				3,563,571
Sales and marketing			3,754,707				177,874				241,122				-				4,173,703
General and administrative			374,164				467,290				6,885,069				-				7,726,523
Total Operating Expenses			19,357,253				14,592,196				10,115,903				(137,907	)			43,927,445
Operating Income (Loss)		$	3,454,329			$	(12,319,513	)		$	(10,115,903	)		$	-			$	(18,981,087	)
Capital expenditures		$	4,044,135			$	2,018,334			$	338,791			$	-			$	6,401,260
As of September 30, 2014
Property and equipment, net		$	21,340,927			$	11,753,330			$	2,287,890			$	-			$	35,382,147
Total assets		$	26,293,518			$	14,232,594			$	14,948,568			$	-			$	55,474,680

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

  

		Nine Months Ended September 30, 2013 (Unaudited)
		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Eliminations				Total
Revenues		$	24,158,268			$	890,920			$	-			$	(137,127	)		$	24,912,061
Operating Expenses
Cost of revenues (exclusive of depreciation)			7,229,469				8,404,925				94,623				(137,127	)			15,591,890
Depreciation and amortization			8,411,263				2,633,176				609,118				-				11,653,557
Customer support services			900,349				587,389				2,311,949				-				3,799,687
Sales and marketing			3,825,299				239,213				268,776				-				4,333,288
General and administrative			443,863				486,495				7,443,442				-				8,373,800
Total Operating Expenses			20,810,243				12,351,198				10,727,908				(137,127	)			43,752,222
Operating Income (Loss)		$	3,348,025			$	(11,460,278	)		$	(10,727,908	)		$	-			$	(18,840,161	)
Capital expenditures		$	3,358,758			$	1,049,344			$	349,674			$	-			$	4,757,776
As of September 30, 2013
Property and equipment, net		$	23,870,843			$	12,439,779			$	1,875,461			$	-			$	38,186,083
Total assets		$	30,590,803			$	14,881,500			$	34,776,782			$	-			$	80,249,085

  

Note 14. Subsequent Events

 

   In October 2014, the Company entered into a loan agreement (the “Loan Agreement”) with Melody Business Finance, LLC (the “Lender”). The Lender will provide the Company with a five-year $35 million secured term loan (the “Financing”). Pursuant to the terms of the Loan Agreement, 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 shall accrue at 4% per annum.

 

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

 

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

 

 

 

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 nine months ended September 30, 2014. 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, 2013 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

 

Forward-Looking Statements

 

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

 

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

 

Non-GAAP Measures and Reconciliations to GAAP Measures

 

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

 

Characteristics of Revenues and Expenses

 

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

 

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

 

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

 

 

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

 

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

 

Overview – Fixed Wireless

 

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

 

Market Information – Fixed Wireless

 

As of September 30, 2014, we operated in twelve metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation. We incur significant up-front costs in order to establish a Network Presence in a new market. These costs include building PoPs and Network Costs. Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period. We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model and the operating performance of our mature markets. Set forth below is a summary of our operating performance on a per-market basis, and a description of how each category is determined.

 

Revenues: Revenues are allocated based on which market each customer is located in.

 

Costs of Revenues: Includes Core Network costs and Customer Network costs that can be allocated to a specific market.

 

Operating Costs: Represents costs that can be specifically allocated to a market which include direct sales personnel, certain direct marketing expenses, certain customer support and installation payroll expenses and third party commissions.

 

Corporate: Includes corporate overhead and centralized activities which support our overall operations. Corporate overhead includes administrative personnel, including executive management, and other support functions such as information technology and facilities. Centralized operations include network operations, customer care, and the management of network assets.

 

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

 

Adjusted Market EBITDA: Represents a market’s income (loss) before interest, taxes, depreciation, amortization, stock-based compensation, and other income (expense). We believe this metric provides useful information regarding the operating cash flow being generated in a market.

 

We entered the Houston market in February 2013 through the acquisition of Delos Internet (“Delos”). We exited the Nashville market effective March 31, 2014.

 

 

Three months ended September 30, 2014

Market		Revenues				Cost of Revenues				Gross Margin				Operating Costs				Adjusted Market EBITDA
Los Angeles		$	2,016,888			$	543,967			$	1,472,921			$	513,935			$	958,986
New York			1,949,316				724,148				1,225,168				348,283				876,885
Boston			1,363,282				397,754				965,528				201,988				763,540
Chicago			722,474				298,883				423,591				111,998				311,593
Las-Vegas-Reno			338,417				126,312				212,105				1,114				210,991
Miami			357,315				116,987				240,328				50,620				189,708
Houston			178,249				71,171				107,078				10,050				97,028
Dallas-Fort Worth			155,612				96,015				59,597				19,545				40,052
San Francisco			270,055				125,070				144,985				105,417				39,568
Seattle			74,418				44,696				29,722				(3,434	)			33,156
Providence-Newport			56,279				53,874				2,405				1,746				659
Philadelphia			25,335				32,695				(7,360	)			4,246				(11,606	)
Total		$	7,507,640			$	2,631,572			$	4,876,068			$	1,365,508			$	3,510,560

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA		$	3,510,560
Fixed wireless, non-market specific
Other expenses			(279,912	)
Depreciation and amortization			(1,980,519	)
Shared wireless infrastructure, net			(4,132,332	)
Corporate			(3,324,270	)
Other income (expense)			(47,600	)
Net loss		$	(6,254,073	)

  

Three months ended September 30, 2013

Market		Revenues				Cost of Revenues				Gross Margin				Operating Costs				Adjusted Market EBITDA
Boston		$	1,632,918			$	361,630			$	1,271,288			$	196,340			$	1,074,948
Los Angeles			2,020,905				549,122				1,471,783				418,928				1,052,855
New York			1,914,892				635,865				1,279,027				293,841				985,186
Chicago			779,457				284,498				494,959				135,484				359,475
Miami			383,462				119,758				263,704				132,562				131,142
San Francisco			311,765				127,717				184,048				80,345				103,703
Las Vegas-Reno			251,167				127,045				124,122				51,798				72,324
Houston			153,727				65,566				88,161				22,746				65,415
Providence-Newport			115,246				49,954				65,292				11,472				53,820
Dallas-Fort Worth			174,095				101,718				72,377				64,619				7,758
Seattle			83,019				48,334				34,685				27,405				7,280
Nashville			4,902				15,359				(10,457	)			1,804				(12,261	)
Philadelphia			39,173				23,712				15,461				31,159				(15,698	)
Total		$	7,864,728			$	2,510,278			$	5,354,450			$	1,468,503			$	3,885,947

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA	$	3,885,947
Fixed wireless, non-market specific
Other expenses		(203,084)
Depreciation and amortization		(2,754,675)
Shared wireless infrastructure, net		(3,674,076)
Corporate		(3,334,262)
Other income (expense)		(63,243)
Net loss	$	(6,143,393)

  

Nine months ended September 30, 2014

Market		Revenues				Cost of Revenues				Gross Margin				Operating Costs				Adjusted Market EBITDA
Los Angeles		$	6,052,647			$	1,678,286			$	4,374,361			$	1,451,033			$	2,923,328
New York			5,815,345				2,044,692				3,770,653				964,342				2,806,311
Boston			4,346,847				1,195,300				3,151,547				588,665				2,562,882
Chicago			2,182,059				885,682				1,296,377				381,365				915,012
Miami			1,107,265				337,978				769,287				224,265				545,022
Las-Vegas-Reno			819,169				369,667				449,502				99,524				349,978
Houston			524,596				195,183				329,413				65,662				263,751
San Francisco			831,018				376,525				454,493				254,237				200,256
Dallas-Fort Worth			482,736				289,727				193,009				114,985				78,024
Seattle			214,245				140,426				73,819				13,944				59,875
Providence-Newport			201,137				152,317				48,820				4,770				44,050
Philadelphia			94,708				72,300				22,408				25,070				(2,662	)
Nashville			1,903				12,642				(10,739	)			2,331				(13,070	)
Total		$	22,673,675			$	7,750,725			$	14,922,950			$	4,190,193			$	10,732,757

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA		$	10,732,757
Fixed wireless, non-market specific
Other expenses			(817,442	)
Depreciation and amortization			(6,598,893	)
Shared wireless infrastructure, net			(12,181,606	)
Corporate			(10,115,903	)
Other income (expense)			(177,399	)
Net loss		$	(19,158,486	)

  

Nine months ended September 30, 2013

Market		Revenues				Cost of Revenues				Gross Margin				Operating Costs				Adjusted Market EBITDA
Los Angeles		$	6,137,710			$	1,562,383			$	4,575,327			$	1,210,148			$	3,365,179
Boston			4,930,604				1,047,995				3,882,609				656,367				3,226,242
New York			5,740,805				1,869,032				3,871,773				1,002,173				2,869,600
Chicago			2,512,670				856,002				1,656,668				362,409				1,294,259
Miami			1,151,525				324,411				827,114				302,437				524,677
Las Vegas-Reno			913,230				399,685				513,545				149,622				363,923
San Francisco			934,437				341,833				592,604				283,345				309,259
Houston			386,965				143,864				243,101				65,675				177,426
Providence-Newport			356,342				148,797				207,545				48,672				158,873
Seattle			313,758				140,719				173,039				90,503				82,536
Dallas-Fort Worth			507,795				290,537				217,258				206,418				10,840
Philadelphia			119,165				61,061				58,104				68,971				(10,867	)
Nashville			16,135				43,150				(27,015	)			8,910				(35,925	)
Total		$	24,021,141			$	7,229,469			$	16,791,672			$	4,455,650			$	12,336,022

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA		$	12,336,022
Fixed wireless, non-market specific
Other expenses			(713,861	)
Depreciation and amortization			(8,411,263	)
Shared wireless infrastructure, net			(11,323,151	)
Corporate			(10,727,908	)
Other income (expense)			839,312
Net loss		$	(18,000,849	)

 

Overview - Shared Wireless Infrastructure

 

Our Shared Wireless Infrastructure segment offers a range of rental options on street level rooftops related to (i) the installation of customer owned Small Cells, (ii) Wi-Fi access and the offloading of mobile data, and (iii) backhaul, power and other related telecommunications. To date, our operating activities have been primarily focused in New York City, and to a lesser degree, San Francisco, Chicago, and Southern Florida. Costs incurred to establish and operate this business segment include (a) rent payments under lease agreements which provide us with the right to install wireless technology equipment and (b) construction of a carrier-class network to deliver the services being offered by our shared wireless segment.

 

In June 2013, we entered into the Wi-Fi service agreement with a major cable operator (the “Cable Operator”). The Wi-Fi Agreement provides leased access to certain access points, primarily within New York City and Bergen County, New Jersey. The Cable Operator has a limited right to expand access in other markets. The term of the Wi-Fi Agreement is for an initial three year period and provides for automatic renewals for two additional one year periods.

 

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

 

Supplemental Segment Information

 

Operating information about each segment in accordance with GAAP is disclosed in Note 13 of the financial statements. In addition, we use other non-GAAP measurements to assess the operating performance of each segment. These non-GAAP financial measures are commonly used by investors, financial analysts, and rating agencies. Management believes that these non-GAAP financial measures should be available so that investors have the same data that management employs in assessing our overall operations.

 

EBITDA, a non-GAAP financial measure, is calculated as net income (loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization expenses, excluding when applicable, stock-based compensation, deferred rent expense, other non-operating income or expenses as well as gain or loss on (i) disposal of property and equipment, (ii) nonmonetary transactions, and (iii) business acquisitions.

 

Net Cash Flow is another commonly used non-GAAP financial measure. Net Cash Flow is defined as Adjusted EBITDA less capital expenditures.

 

Three months ended September 30, 2014

 

		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Total
Operating Income (Loss)		$	1,296,098			$	(4,178,301	)		$	(3,324,270	)		$	(6,206,473	)
Depreciation and amortization			1,980,519				1,013,693				324,183				3,318,395
Stock-based compensation			-				-				185,373				185,373
Loss on non-monetary transactions			67,833				-				-				67,833
Deferred rent			47,932				70,439				(8,807	)			109,564
Adjusted EBITDA			3,392,382				(3,094,169	)			(2,823,521	)			(2,525,308	)
Less: Capital expenditures			1,154,281				589,883				21,603				1,765,767
Net Cash Flow		$	2,238,101			$	(3,684,052	)		$	(2,845,124	)		$	(4,291,075	)

 

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA		$	(2,525,308	)
Depreciation and amortization			(3,318,395	)
Stock-based compensation			(185,373	)
Loss on non-monetary transactions			(67,833	)
Deferred rent			(109,564	)
Operating Income (Loss)			(6,206,473	)
Interest expense, net			(43,970	)
Other income (expense), net			(3,630	)
Net loss		$	(6,254,073	)

 

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow		$	(4,291,075	)
Capital expenditures			1,765,767
Changes in operating assets and liabilities, net			(737,288	)
Other, net			(40,434	)
Net cash used in operating activities		$	(3,303,030	)

 

Three months ended September 30, 2013

 

		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Total
Operating Income (Loss)		$	973,837			$	(3,719,725	)		$	(3,334,262	)		$	(6,080,150	)
Depreciation and amortization			2,754,675				857,739				234,230				3,846,644
Stock-based compensation			-				-				271,824				271,824
Loss on property and equipment			19,521				3,168				-				22,689
Loss on non-monetary transactions			62,394				-				-				62,394
Adjusted EBITDA			3,810,427				(2,858,818	)			(2,828,208	)			(1,876,599	)
Less: Capital expenditures			1,242,975				680,324				200,347				2,123,646
Net Cash Flow		$	2,567,452			$	(3,539,142	)		$	(3,028,555	)		$	(4,000,245	)

  

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA		$	(1,876,599	)
Depreciation and amortization			(3,846,644	)
Stock-based compensation			(271,824	)
Loss on property and equipment			(22,689	)
Loss on non-monetary transactions			(62,394	)
Operating Income (Loss)			(6,080,150	)
Interest expense, net			(59,613	)
Other income (expense), net			(3,630	)
Net loss		$	(6,143,393	)

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow		$	(4,000,245	)
Capital expenditures			2,123,646
Changes in operating assets and liabilities, net			383,410
Other, net			(144,575	)
Net cash used in operating activities		$	(1,637,764	)

 

 

     Nine Months Ended September 30, 2014

 

		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Total
Operating Income (Loss)		$	3,454,329			$	(12,319,513	)		$	(10,115,903	)		$	(18,981,087	)
Depreciation and amortization			6,598,893				2,932,592				763,387				10,294,872
Stock-based compensation			-				-				740,405				740,405
Loss on non-monetary transactions			203,231				-				-				203,231
Deferred rent			93,428				204,447				(26,420	)			271,455
Non-recurring expenses, primarily acquisition-related			-				-				91,359				91,359
Adjusted EBITDA			10,349,881				(9,182,474	)			(8,547,172	)			(7,379,765	)
Less: Capital expenditures			4,044,135				2,018,334				338,791				6,401,260
Net Cash Flow		$	6,305,746			$	(11,200,808	)		$	(8,885,963	)		$	(13,781,025	)

 

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA		$	(7,379,765	)
Depreciation and amortization			(10,294,872	)
Stock-based compensation			(740,405	)
Loss on non-monetary transactions			(203,231	)
Deferred rent			(271,455	)
Non-recurring expenses, primarily acquisition-related			(91,359	)
Operating Income (Loss)			(18,981,087	)
Interest expense, net			(166,509	)
Other income (expense), net			(10,890	)
Net loss		$	(19,158,486	)

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow		$	(13,781,025	)
Capital expenditures			6,401,260
Non-recurring expenses, primarily acquisition-related			(91,359	)
Changes in operating assets and liabilities, net			(2,381,141	)
Other, net			(188,630	)
Net cash used in operating activities		$	(10,040,895	)

 

Nine Months Ended September 30, 2013

 

		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Total
Operating Income (Loss)		$	3,348,025			$	(11,460,278	)		$	(10,727,908	)		$	(18,840,161	)
Depreciation and amortization			8,411,263				2,633,176				609,118				11,653,557
Stock-based compensation			-				-				939,200				939,200
Loss on property and equipment			73,622				8,202				-				81,824
Loss on non-monetary transactions			204,552				-				-				204,552
Non-recurring expenses, primarily acquisition-related			-				-				112,815				112,815
Adjusted EBITDA			12,037,462				(8,818,900	)			(9,066,775	)			(5,848,213	)
Less: Capital expenditures			3,358,758				1,049,344				349,674				4,757,776
Net Cash Flow		$	8,678,704			$	(9,868,244	)		$	(9,416,449	)		$	(10,605,989	)

 

 

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA		$	(5,848,213	)
Depreciation and amortization			(11,653,557	)
Stock-based compensation			(939,200	)
Loss on property and equipment			(81,824	)
Loss on non-monetary transactions			(204,552	)
Non-recurring expenses, primarily acquisition-related			(112,815	)
Operating Income (Loss)			(18,840,161	)
Interest expense, net			(153,897	)
Gain on business acquisition			1,004,099
Other income (expense), net			(10,890	)
Net loss		$	(18,000,849	)

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow		$	(10,605,989	)
Capital expenditures			4,757,776
Non-recurring expenses, primarily acquisition-related			(112,815	)
Changes in operating assets and liabilities, net			(2,018,505	)
Other, net			(386,159	)
Net cash used in operating activities		$	(8,365,692	)

 

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

 

Revenues. Revenues totaled $8,301,604 during the three months ended September 30, 2014 compared to $8,400,664 during the three months ended September 30, 2013 representing a decrease of $99,060, or 1%. Revenues for the fixed wireless segment totaled $7,553,609 during the three months ended September 30, 2014 compared to $7,910,377 during the three months ended September 30, 2013 representing a decrease of $356,768, or 5%. The decrease principally related to a 7% decrease in the base of customers billed on a monthly recurring basis. New customer additions have been adversely impacted by a 15% decrease in the number of account executives during the three months ended September 30, 2014 compared to the three months ended September 30, 2013, which we plan to address by opening a second sales center so that personnel can be recruited from an additional geographic area. Revenues for the shared wireless segment totaled $793,964 during the three months ended September 30, 2014 compared to $535,936 during the three months ended September 30, 2013 representing an increase of $258,028, or 48%. The increase was exclusively related to higher revenues generated through a large cable company customer contract.

 

Average revenue per user (“ARPU”) for the Fixed Wireless segment totaled $769 as of September 30, 2014 compared to $747 as of September 30, 2013 representing an increase of $22, or 3%. The increase in ARPU primarily related to customers upgrading to higher bandwidth service which generates higher monthly recurring revenue. ARPU for new customers totaled $651 during the three months ended September 30, 2014 compared to $648 during the three months ended September 30, 2013 representing an increase of $3, or less than 1%.

 

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.69% during the three months ended September 30, 2014 compared to 1.71% during the three months ended September 30, 2013. Our goal is to maintain churn levels between 1.40% and 1.70% which we believe is below industry averages of approximately 2.00%. Churn levels can fluctuate from quarter to quarter depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons.

 

Cost of Revenues.    Cost of revenues totaled $6,210,920 during the three months ended September 30, 2014 compared to $5,444,298 for the three months ended September 30, 2013 representing an increase of $766,622, or 14%. On a consolidated basis, higher rent expense represented approximately 113% of the increase with rents for PoPs for the fixed wireless segment increasing by approximately $194,000 and rents for street level rooftops for the shared wireless segment increasing by approximately $680,000. The number of street level rooftops for the shared wireless segment were approximately 20% higher at September 30, 2014 compared to September 30, 2013. On a consolidated basis, gross margin was 25% for the three months ended September 30, 2014 as compared to 35% for the three months ended September 30, 2013 representing a decrease of 10 percentage points with the shared wireless and fixed wireless segments accounting for 8 and 2 of the percentage point decreases, respectively. On a per market basis, approximately $697,000, or 91%, of the increase in cost of revenues occurred in our New York City market which is the second largest market for our fixed wireless segment and where approximately 63% of the street level rooftops for our shared wireless segment are located. Other cost of revenues, including bandwidth and customer network costs, totaled $713,767 during the three months ended September 30, 2014 as compared to $821,208 during the three months ended September 30, 2013 representing a decrease of $107,441, or 13%.

 

 

Depreciation and Amortization.    Depreciation and amortization totaled $3,318,395 during the three months ended September 30, 2014 compared to $3,846,644 during the three months ended September 30, 2013 representing a decrease of $528,249, or 14%. Depreciation expense totaled $3,220,327 during the three months ended September 30, 2014 compared to $3,028,665 during the three months ended September 30, 2013 representing an increase of $191,662, or 6%.

 

Amortization expense totaled $98,068 during the three months ended September 30, 2014 compared to $817,979 during the three months ended September 30, 2013 representing a decrease of $719,911, or 88%. Amortization expense relates to customer related intangible assets recorded in connection with acquisitions and can fluctuate significantly from period to period depending upon the timing of acquisitions, the relative amounts of intangible assets recorded, and the amortization periods. The decrease was related to two acquisitions which had no amortization in the 2014 period but full amortization in the 2013 period. We recognized zero and $232,953 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with One Velocity Inc. (“One Velocity”) which became fully amortized in November 2013. In addition, we recognized zero and $486,958 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with Color Broadband Communications (“Color Broadband”) which became fully amortized in April 2014.

 

Customer Support Services.    Customer support services totaled $1,244,161 during the three months ended September 30, 2014 compared to $1,221,076 during the three months ended September 30, 2013 representing an increase of $23,085, or 2%. The increase was primarily related to higher payroll costs as average headcount totaled 71 during the 2014 period as compared to 67 during the 2013 period.

 

Sales and Marketing. Sales and marketing expenses totaled $1,353,015 during the three months ended September 30, 2014 compared to $1,368,628 during the three months ended September 30, 2013 representing a decrease of $15,613, or 1%. Compensation related costs, including sales commissions, totaled $917,486 during the 2014 period as compared to $975,548 during the 2013 period representing a decrease of $58,062, or 6%. Average headcount totaled 38 during the 2014 period compared to 46 during the 2013 period representing a decrease of 8, or 17%. Advertising costs totaled $284,320 during the 2014 period as compared to $266,566 during the 2013 period representing an increase of $17,754, or 7%.

 

General and Administrative. General and administrative expenses totaled $2,381,586 during the three months ended September 30, 2014 compared to $2,600,168 during the three months ended September 30, 2013 representing a decrease of $218,582, or 8%. Stock-based compensation totaled $185,373 during the 2014 period compared to $271,824 during the 2013 period representing a decrease of $86,451, or 32%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Professional services costs totaled $260,245 during the 2014 period compared to $361,013 during the 2013 period representing a decrease of $100,768, or 28%. The decrease primarily related to higher legal fees for FCC matters during the 2013 period. Facilities expense totaled $103,008 during the 2014 period compared to $166,811 during the 2013 period representing a decrease of $63,803, or 38%. The Company consolidated its corporate offices from two buildings to one building which has lowered its facilities costs. Insurance expense totaled $112,184 during the 2014 period compared to $69,552 during the 2013 period representing an increase of $42,632, or 61%. The increase primarily related to higher workers' compensation premiums.

 

Interest Expense, Net.  Interest expense, net totaled $43,970 during the three months ended September 30, 2014 compared to $59,613 during the three months ended September 30, 2013 representing a decrease of $15,643, or 26%.

 

Net Loss.  Net loss totaled $6,254,073 during the three months ended September 30, 2014 compared to $6,143,393 during the three months ended September 30, 2013 representing an increase of $110,680, or 2%. Revenues decreased by $99,060, or 1%, while operating expenses increased by $27,263, or less than 1%. In addition, non-operating expense totaled $47,600 during the three months ended September 30, 2014 compared with non-operating expense of $63,243 during the three months ended September 30, 2013.

  

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

 

Revenues. Revenues totaled $24,946,358 during the nine months ended September 30, 2014 compared to $24,912,061 during the nine months ended September 30, 2013 representing an increase of $34,297, or less than 1%. Revenues for the fixed wireless segment totaled $22,811,582 during the nine months ended September 30, 2014 compared to $24,158,268 during the nine months ended September 30, 2013 representing a decrease of $1,346,686, or 6%.   The decrease principally related to a 6% decrease in the base of customers billed on a monthly recurring basis. New customer additions have been adversely impacted by a 10% decrease in the number of account executives during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, which we plan to address by opening a second sales center so that personnel can be recruited from an additional geographic area. Revenues for the shared wireless segment totaled $2,272,683 during the nine months ended September 30, 2014 compared to $890,920 during the nine months ended September 30, 2013 representing an increase of $1,381,763, or greater than 100%. The increase was primarily related to higher revenues generated through a large cable company customer contract.

 

 

Cost of Revenues.    Cost of revenues totaled $18,168,776 during the nine months ended September 30, 2014 compared to $15,591,890 during the nine months ended September 30, 2013 representing an increase of $2,576,886, or 17%. On a consolidated basis, higher rent expense represented approximately 107% of the increase with rents for PoPs for the fixed wireless segment increasing by approximately $605,000 and rents for street level rooftops for the shared wireless segment increasing by approximately $2,139,000. The number of street level rooftops for the shared wireless segment were approximately 20% higher at September 30, 2014 compared to September 30, 2013. On a consolidated basis, gross margin was 27% for the nine months ended September 30, 2014 as compared to 37% for the nine months ended September 30, 2013 representing a decrease of 10 percentage points with the shared wireless and fixed wireless segments accounting for 8 and 2 of the percentage point decreases, respectively. On a per market basis, approximately $1,962,000, or 76%, of the increase in cost of revenues occurred in our New York City market which is the second largest market for our fixed wireless segment and where approximately 63% of the street level rooftops for our shared wireless segment are located. Other cost of revenues, including bandwidth and customer network costs, totaled $2,124,992 during the nine months ended September 30, 2014 as compared to $2,292,612 during the nine months ended September 30, 2013 representing a decrease of $167,620, or 7%.

 

Depreciation and Amortization.    Depreciation and amortization totaled $10,294,872 during the nine months ended September 30, 2014 compared to $11,653,557 during the nine months ended September 30, 2013 representing a decrease of $1,358,685 or 12%. Depreciation expense totaled $9,503,971 during the nine months ended September 30, 2014 compared to $9,264,999 during the nine months ended September 30, 2013 representing an increase of $238,972, or 3%.

 

Amortization expense totaled $790,901 during the nine months ended September 30, 2014 compared to $2,388,558 during the nine months ended September 30, 2013 representing a decrease of $1,597,657 or 67%. Amortization expense relates to customer related intangible assets recorded in connection with acquisitions and can fluctuate significantly from period to period depending upon the timing of acquisitions, the relative amounts of intangible assets recorded, and the amortization periods. The decrease was related to two acquisitions which had modest or no amortization in the 2014 period but full amortization in the 2013 period. We recognized zero and $698,860 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with One Velocity which became fully amortized in November 2013. In addition, we recognized $496,697 and $1,460,873 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with Color Broadband which became fully amortized in April 2014. These decreases were partially offset by higher amortization expense associated with the Delos acquisition which was completed in February 2013, and for which $294,204 was recorded in the 2014 period compared to $228,825 in the 2013 period.

 

Customer Support Services.    Customer support services totaled $3,563,571 during the nine months ended September 30, 2014 compared to $3,799,687 during the nine months ended September 30, 2013 representing a decrease of $236,116, or 6%. The decrease was primarily related to lower payroll costs as average headcount decreased 4% to 69 during the 2014 period as compared to 72 during the 2013 period.

 

Sales and Marketing. Sales and marketing expenses totaled $4,173,703 during the nine months ended September 30, 2014 compared to $4,333,288 during the nine months ended September 30, 2013 representing a decrease of $159,585, or 4%. Compensation related costs, including sales commissions, totaled $2,857,407 during the 2014 period as compared to $3,148,792 during the 2013 period representing a decrease of $291,385, or 9%. Average headcount totaled 43 during the 2014 period compared to 48 during the 2013 period representing a decrease of 5, or 10%. Channel commissions totaled $310,957 during the 2014 period as compared to $280,343 during the 2013 period representing an increase of $30,614, or 11%. Advertising costs totaled $869,762 during the 2014 period as compared to $808,854 during the 2013 period representing an increase of $60,908, or 8%.

 

General and Administrative.  General and administrative expenses totaled $7,726,523 during the nine months ended September 30, 2014 compared to $8,373,800 during the nine months ended September 30, 2013 representing a decrease of $647,277 or 8%. Stock-based compensation totaled $740,405 during the 2014 period compared to $939,200 during the 2013 period representing a decrease of $198,795, or 21%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Professional services costs totaled $887,181 during the 2014 period compared to $1,110,175 during the 2013 period representing a decrease of $222,994, or 20%. The decrease partially related to higher legal fees for the shared wireless segment during the 2013 period, primarily related to our San Francisco network. Facilities expense totaled $306,170 during the 2014 period compared to $475,569 during the 2013 period representing a decrease of $169,399, or 36%. The Company consolidated its corporate offices from two buildings to one building which has lowered its facilities costs. Insurance expense totaled $346,454 during the 2014 period compared to $208,107 during the 2013 period representing an increase of $138,347, or 66%. The increase primarily related to higher workers' compensation premiums.

 

Interest Expense, Net.    Interest expense, net totaled $166,509 during the nine months ended September 30, 2014 compared to $153,897 during the nine months ended September 30, 2013 representing an increase of $12,612, or 8%.

 

Gain on Business Acquisition.    There was no gain on business acquisition during the nine months ended September 30, 2014 compared to $1,004,099 during the nine months ended September 30, 2013.  The gain recognized in the 2013 period related to the acquisition of Delos in February 2013. The challenging economic environment during 2012 made it difficult for smaller companies like Delos to raise sufficient capital to sustain their growth. As a result, we were able to acquire the customer relationships and wireless network of Delos at a discounted price.

 

 

Net Loss.    Net loss totaled $19,158,486 during the nine months ended September 30, 2014 compared to $18,000,849 during the nine months ended September 30, 2013 representing an increase of $1,157,637, or 6%. Revenues increased by $34,297, or less than 1%, while operating expenses increased by $175,223, or less than 1%. In addition, non-operating expense totaled $177,399 during the nine months ended September 30, 2014 compared with non-operating income, primarily related to a gain on a business acquisition, of $839,312 during the nine months ended September 30, 2013.

 

Liquidity and Capital Resources

 

We have historically met our liquidity and capital requirements primarily through the public sale and private placement of equity securities and debt financing. Changes in capital resources during the nine months ended September 30, 2014 and 2013 are described below.

 

Net Cash Used in Operating Activities.    Net cash used in operating activities for the nine months ended September 30, 2014 totaled $10,040,895 compared to $8,365,692 for the nine months ended September 30, 2013 representing an increase of $1,675,203, or 20%. Cash used in operations for the nine months ended September 30, 2014 totaled $7,659,754 as compared to $6,347,187 for the nine months ended September 30, 2013 representing an increase of $1,312,567, or 21%. The increase primarily related to higher cost of revenues in the 2014 period related to increased rent expense for both business segments. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results. Changes in operating assets and liabilities used cash of $2,381,141 during the nine months ended September 30, 2014 as compared to using cash of $2,018,505 during the nine months ended September 30, 2013 representing an increase of $362,636, or 18%.

 

Net Cash Used in Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2014 totaled $5,679,854 compared to $4,268,405 for the nine months ended September 30, 2013 representing an increase of $1,411,449, or 33%. Cash capital expenditures for the fixed wireless segment increased from $3,027,247 in the 2013 period to $3,724,092 in the 2014 period representing an increase of $696,845, or 23%. Cash capital expenditures for the shared wireless infrastructure segment increased from $777,359 in the 2013 period to $1,971,791 in the 2014 period representing an increase of $1,194,432, or greater than 100%. Capital expenditures for both business segments can fluctuate from period to period depending upon the number of customer additions and upgrades, network construction activity related to increasing capacity or coverage, and other related reasons.  In addition, we received an incentive payment of $380,000 in the 2014 period from our landlord in connection with entering a new lease agreement for our corporate offices. These funds were used to pay for qualified leasehold improvements to the facility. Finally, we paid cash of $225,000 for the acquisition of Delos in the 2013 period. There were no acquisitions in the 2014 period.

 

Net Cash (Used In) Provided by Financing Activities.  Net cash used in financing activities for the nine months ended September 30, 2014 totaled $570,012 compared to net cash provided by financing activities of $30,275,848 for the nine months ended September 30, 2013 representing a decrease of $30,845,860, or greater than 100%. The decrease was primarily related to net proceeds of $30,499,336 received in the first quarter of 2013 from the sale of 11,000,000 shares of our common stock at a public offering price of $3.00 per share.

 

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

 

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

 

Debt Financing. In October 2014, we entered into a loan agreement (the “Loan Agreement”) with Melody Business Finance, LLC (the “Lender”). The Lender will provide us with a five-year $35 million secured term loan (the “Financing”). Pursuant to the terms of the Loan Agreement, 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 shall accrue at 4% per annum.

 

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

 

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

 

 

Capital Resources.    As of September 30, 2014, we had cash and cash equivalents of $11,890,770 and working capital of $9,442,646. In October 2014, we raised gross proceeds of $35,000,000 in the Financing. Based on our current operating activities and plans, we believe our capital resources at the end of September 30, 2014, combined with proceeds from the Financing, will enable us to meet our anticipated cash requirements for at least the next twelve months.

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations and other commitments as of September 30, 2014:

 

		Payments due by period
		Total				2014				2015				2016				2017				2018				Thereafter
Capital leases		$	2,283,795			$	238,464			$	921,437			$	668,847			$	401,125			$	53,922			$	-
Operating leases			63,821,722				5,182,797				19,758,856				18,300,039				12,639,857				5,160,998				2,779,175
Deferred payments			14,876				2,907				11,627				342				-				-				-
Other			242,830				121,415				121,415				-				-				-				-
Total		$	66,363,223			$	5,545,583			$	20,813,335			$	18,969,228			$	13,040,982			$	5,214,920			$	2,779,175

 

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

 

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

 

Other. During the fourth quarter of 2013, we renewed a one year information technology infrastructure support agreement which became effective at the end of the first quarter of 2014. Payments of approximately $121,000 are due quarterly through the first quarter of 2015.

 

Critical Accounting Policies

 

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

 

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

 

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

 

 

Business Acquisitions. Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the consideration transferred on the acquisition date.  When we acquire a business, we assess the acquired assets and liabilities assumed for the appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. The excess of the total consideration transferred over the net identifiable assets acquired and liabilities assumed is recognized as goodwill.  If the total consideration is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed and included in general and administrative expenses in our condensed consolidated statements of operations.

 

     The highest level of judgment and estimation involved in accounting for business acquisitions relates to determining the fair value of the customer relationships and network assets acquired. In each of the five acquisitions completed over the past four years, the highest asset value has been allocated to the customer relationships acquired. Determining the fair value of customer relationships involves judgments and estimates regarding how long the customers will continue to contract services with us. During the course of completing five acquisitions, we have developed a database of historical experience from prior acquisitions to assist us in preparing future estimates of cash flows. Similarly, we have used our historical experience in building networks to prepare estimates regarding the fair value of the network assets that we acquire. 

 

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

 

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

 

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

 

In August 2014, the FASB issued ASU No. 2014–15 (“ASU 2014-15”), “Presentation of Financial Statements – Going Concern.”  ASU 2014-15 provides GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.  ASU 2014-15 is the final version of Proposed ASU No. 2013–300 “Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entity’s Going Concern Presumption,” which has been deleted. We do not expect the adoption of ASU 2014–15 to have a significant impact on 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.’’

 

 

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, 2014, 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 are effective, as of September 30, 2014, 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 control over financial reporting during the nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

  

PART II

OTHER INFORMATION

 

Item 1A. Risk Factors.

 

The Company’s Annual Report on Form 10-K filed with the Commission on March 17, 2014, as amended (the “2013 Form 10-K) includes detailed disclosure about the risks faced by the Company’s business. Such risks have not materially changed since December 31, 2013, except as described below. The new risk factors are as a result of the loan agreement we entered with Melody Business Finance, LLC (the “Loan Agreement”). Events or circumstances arising from one or more of these risks, together with the risks we identify in our 2013 Form 10-K, could adversely affect our business, financial condition, operating results and prospects and the value and price of our common stock could decline. The risks identified below and in our 2013 Form 10-K are not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not material may also impair our business operations and results.

  

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

 

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

 

●

make it difficult for us to satisfy our debt obligations;

●

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

●

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

●

expose us to interest rate fluctuations because the interest rate on the debt under the Loan Agreement is variable;

●

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

●

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

●

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

 

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

 

●

economic and demand factors affecting our industry;

●

pricing pressures;

●

increased operating costs;

●

competitive conditions; and

●

other operating difficulties.

 

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

 

 

The Loan Agreement contains various covenants limiting the discretion of our management in operating our business.

 

The Loan Agreement contains, subject to certain carve-outs, various restrictive covenants that limit our management's discretion in operating our business. In particular, these instruments limit our ability to, among other things:

 

●

incur additional debt;

●

grant liens on assets;

●

issue capital stock with certain features;

●

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

●

make fundamental business changes.

 

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

 

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.
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, 2014 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 Statements of Stockholders’ Equity, and (v) related notes to these financial statements.  

 

 

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 10, 2014	By:	/s/ Jeffrey M. Thompson
		Jeffrey M. Thompson
		President and Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Joseph P. Hernon
		Joseph P. Hernon
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

 

 

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
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, 2014 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 Statements of Stockholders’ Equity, and (v) related notes to these financial statements.  

 

 

 

33