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 June 30, 2015

OR

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

For the transition period from_______to_______

 

Commission file number 001-33449

 

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware (State or other jurisdiction of incorporation or organization)		20-8259086 (I.R.S. Employer Identification No.)
88 Silva Lane Middletown, Rhode Island (Address of principal executive offices)		02842 (Zip Code)

 

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

 

 

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 August 6, 2015, there were 66,766,261 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 June 30, 2015 (unaudited) and December 31, 2014			1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)			2
	Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2015 (unaudited)			3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited)			4
	Notes to Unaudited Condensed Consolidated Financial Statements			5-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.			14-25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.			25
Item 4.	Controls and Procedures.			25
Part II	OTHER INFORMATION
Item 6.	Exhibits.			26

 

  

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		June 30, 2015 (Unaudited)				December 31, 2014
Assets
Current Assets
Cash and cash equivalents		$	26,117,134			$	38,027,509
Accounts receivable, net			1,011,670				1,310,647
Prepaid expenses and other current assets			1,317,789				926,699
Total Current Assets			28,446,593				40,264,855
Property and equipment, net			31,522,059				33,905,286
Intangible assets, net			2,003,722				2,199,858
Goodwill			1,674,281				1,674,281
Other assets			3,538,774				4,277,558
Total Assets		$	67,185,429			$	82,321,838
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	984,047			$	871,251
Accrued expenses			2,474,277				2,038,696
Deferred revenues			1,268,442				1,384,846
Current maturities of capital lease obligations			1,014,911				845,668
Other			65,723				57,242
Total Current Liabilities			5,807,400				5,197,703
Long-Term Liabilities
Long-term debt, net of debt discount of $2,594,452 and $3,194,147, respectively			33,414,506				32,101,409
Capital lease obligations, net of current maturities			1,432,416				1,285,858
Other			1,899,356				1,774,841
Total Long-Term Liabilities			36,746,278				35,162,108
Total Liabilities			42,553,678				40,359,811
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; 66,766,261 and 66,656,789 shares issued and outstanding, respectively			66,766				66,657
Additional paid-in-capital			158,074,791				157,631,299
Accumulated deficit			(133,509,806	)			(115,735,929	)
Total Stockholders' Equity			24,631,751				41,962,027
Total Liabilities and Stockholders' Equity		$	67,185,429			$	82,321,838

  

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 June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
Revenues		$	7,857,133			$	8,264,848			$	15,817,228			$	16,644,754
Operating Expenses
Cost of revenues (exclusive of depreciation)			6,319,537				6,101,913				12,719,904				11,957,856
Depreciation and amortization			3,409,113				3,281,062				6,788,496				6,976,477
Customer support services			1,332,233				1,150,905				2,573,712				2,326,670
Sales and marketing			1,548,480				1,399,089				2,876,910				2,820,688
General and administrative			2,428,153				2,666,997				5,297,391				5,344,937
Total Operating Expenses			15,037,516				14,599,966				30,256,413				29,426,628
Operating Loss			(7,180,383	)			(6,335,118	)			(14,439,185	)			(12,781,874	)
Other Income/(Expense)
Interest expense, net			(1,670,428	)			(59,488	)			(3,334,692	)			(122,539	)
Total Other Income/(Expense)			(1,670,428	)			(59,488	)			(3,334,692	)			(122,539	)
Net Loss		$	(8,850,811	)		$	(6,394,606	)		$	(17,773,877	)		$	(12,904,413	)
Net loss per common share – basic and diluted		$	(0.13	)		$	(0.10	)		$	(0.26	)		$	(0.19	)
Weighted average common shares outstanding –  basic and diluted			67,924,379				66,478,686				67,890,771				66,458,983

 

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 Six Months Ended June 30, 2015

 

 

		Common Stock
		Shares				Amount				Additional Paid-In-Capital				Accumulated Deficit				Total
Balance at January 1, 2015			66,656,789			$	66,657			$	157,631,299			$	(115,735,929	)		$	41,962,027
Cashless exercise of options			96,594				97				(97	)			-				-
Issuance of common stock under employee stock purchase plan			12,878				12				25,291				-				25,303
Stock-based compensation for options			-				-				418,298				-				418,298
Net loss			-				-				-				(17,773,877	)			(17,773,877	)
Balance at June 30, 2015			66,766,261			$	66,766			$	158,074,791			$	(133,509,806	)		$	24,631,751

   

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

 

 

 TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(UNAUDITED)

 

		Six Months Ended June 30,
		2015				2014
Cash Flows From Operating Activities
Net loss		$	(17,773,877	)		$	(12,904,413	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts			100,000				117,000
Depreciation for property, plant and equipment			6,592,360				6,283,644
Amortization for customer based intangibles			196,136				692,833
Amortization of debt issuance costs			493,950				-
Amortization of debt discount			599,695				-
Stock-based compensation			422,079				555,034
Deferred rent			127,861				161,890
Changes in operating assets and liabilities:
Accounts receivable			198,977				(301,937	)
Prepaid expenses and other current assets			(380,462	)			(444,799	)
Other assets			249,024				161,650
Accounts payable			112,796				215,882
Accrued expenses			642,467				(294,303	)
Deferred revenues			(116,404	)			(113,036	)
Accrued interest			713,402				-
Total Adjustments			9,951,881				7,033,858
Net Cash Used In Operating Activities			(7,821,996	)			(5,870,555	)
Cash Flows From Investing Activities
Acquisitions of property and equipment			(3,605,994	)			(4,930,801	)
Lease incentive payment from landlord			-				380,000
Payments of security deposits			(2,189	)			(18,721	)
Deferred acquisition payments			(5,492	)			(61,946	)
Net Cash Used In Investing Activities			(3,613,675	)			(4,631,468	)
Cash Flows From Financing Activities
Payments on capital leases			(496,226	)			(408,683	)
Proceeds from the issuance of common stock under employee stock purchase plan			21,522				21,675
Fair value of options repurchased			-				(3,793	)
Net Cash Used In Financing Activities			(474,704	)			(390,801	)
Net Decrease In Cash and Cash Equivalents			(11,910,375	)			(10,892,824	)
Cash and Cash Equivalents – Beginning			38,027,509				28,181,531
Cash and Cash Equivalents – Ending		$	26,117,134			$	17,288,707
Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest		$	1,559,200			$	137,527
Taxes		$	21,900			$	41,269
Acquisition of property and equipment:
Under capital leases		$	810,026			$	-
Included in accrued expenses		$	317,393			$	572,004

 

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, Distributed Antenna System (“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 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 June 30, 2015 and the results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 2015 are not necessarily indicative of the operating results for the full fiscal year 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, 2014. 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, 2014, 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.

  

Concentration of Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of June 30, 2015, the Company had cash and cash equivalent balances of approximately $25,596,000 in excess of the federally insured limit of $250,000.

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Accounts Receivable. Accounts receivable are stated at cost less an allowance for doubtful accounts which reflects the Company’s estimate of balances that will not be collected. The allowance is based on the history of past write-offs, the aging of balances, collections experience and current credit conditions. 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 June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
Beginning of period		$	71,343			$	65,719			$	59,273			$	81,009
Additions			70,000				107,000				100,000				117,000
Deductions			(23,595	)			(10,856	)			(41,525	)			(36,146	)
End of period		$	117,748			$	161,863			$	117,748			$	161,863

  

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

 

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

 

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

 

Recent Accounting Pronouncements. In April 2015, the FASB issued ASU No. 2015-03 (“ASU 2015-03”), “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as an asset. ASU 2015-03 is effective for the Company on January 1, 2016. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. The retrospective application represents a change in accounting principle. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the effect that ASU 2015-03 will have on its condensed consolidated financial statements and related disclosures.

 

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.    Property and Equipment

 

Property and equipment is comprised of:

 

		June 30, 2015				December 31, 2014
Network and base station equipment		$	37,820,584			$	35,836,469
Customer premise equipment			28,574,798				26,511,691
Shared wireless infrastructure			21,027,870				21,044,189
Information technology			4,739,136				4,628,555
Furniture, fixtures and other			1,713,580				1,669,340
Leasehold improvements			1,622,802				1,599,393
			95,498,770				91,289,637
Less: accumulated depreciation			63,976,711				57,384,351
Property and equipment, net		$	31,522,059			$	33,905,286

  

 

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:

 

		June 30, 2015				December 31, 2014
Network and base station equipment		$	1,390,593			$	1,003,875
Shared wireless infrastructure			1,230,305				1,230,305
Customer premise equipment			669,792				246,484
Information technology			1,860,028				1,860,028
			5,150,718				4,340,692
Less: accumulated depreciation			2,599,896				2,135,534
Property acquired through capital leases, net		$	2,550,822			$	2,205,158

  

Depreciation expense for the three months ended June 30, 2015 and 2014 was $3,311,045 and $3,173,255, respectively. Depreciation expense for the six months ended June 30, 2015 and 2014 was $6,592,360 and $6,283,644, respectively.

 

Note 4. Intangible Assets

 

Intangible assets consist of the following:

 

		June 30, 2015				December 31, 2014
Goodwill		$	1,674,281			$	1,674,281
Customer relationships		$	11,856,127			$	11,856,127
Less: accumulated amortization of customer relationships			11,136,960				10,940,824
Customer relationships, net			719,167				915,303
FCC licenses			1,284,555				1,284,555
Intangible assets, net		$	2,003,722			$	2,199,858

 

Amortization expense for the three months ended June 30, 2015 and 2014 was $98,068 and $107,807, respectively. Amortization expense for the six months ended June 30, 2015 and 2014 was $196,136 and $692,833, respectively. The customer contracts acquired in the Delos acquisition are being amortized over a 50 month period ending April 2017. As of June 30, 2015, the remaining amortization period for the Delos acquisition was 22 months. Balances related to the Company’s other acquisitions have been fully amortized. Future amortization expense is as follows:

 

Remainder of 2015		$	196,136
2016			392,272
2017			130,759
		$	719,167

 

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

 

Note 5. Accrued Expenses

 

Accrued expenses consist of the following: 

 

		June 30, 2015				December 31, 2014
Payroll and related		$	1,195,878			$	726,917
Professional services			352,839				256,534
Property and equipment			317,393				524,280
Other			302,340				280,413
Network			224,828				187,440
Marketing			80,999				63,112
Total		$	2,474,277			$	2,038,696

 

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

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Note 6.    Other Liabilities

 

Other liabilities consist of the following:

 

		June 30, 2015				December 31, 2014
Current
Deferred rent		$	59,690			$	46,058
Deferred acquisition payments			6,033				11,184
Total		$	65,723			$	57,242
Long-Term
Deferred rent		$	1,498,019			$	1,373,163
Deferred acquisition payments			-				341
Deferred taxes			401,337				401,337
Total		$	1,899,356			$	1,774,841

 

Deferred acquisition payments related to Delos Internet totaled $6,033 at June 30, 2015 and bear interest at a rate of 7%.

 

Note 7.    Long-Term Debt

 

   In October 2014, the Company entered into a loan agreement (the "Loan Agreement") with Melody Business Finance, LLC (the "Lender") which provided the Company with a five-year $35 million term loan (the "Financing" or "Note").  The Note was issued at a 3% discount totaling $1,050,000 which is being amortized over the term of the Note.  The Company recognized interest expense of $87,466 and $179,231 in connection with the amortization of this discount for the three and six months ended June 30, 2015, respectively, and the unamortized balance totaled $775,404 at June 30, 2015.

 

     The Note bears interest payable in cash at a rate equal to the greater of (i) the sum of the one month Libor rate on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that accrues at 4% per annum.  The Company paid $720,892 of interest and accrued $360,446 of PIK interest for the three months ended June 30, 2015. The Company paid $1,426,803 of interest and accrued $713,402 of PIK interest for the six months ended June 30, 2015. PIK interest is included in Interest expense in the accompanying condensed consolidated statements of operations.

 

    As of June 30, 2015, the Company was in compliance with all of the debt covenants.

 

    In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, the Company issued warrants (the “Warrants”) to purchase 3,600,000 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 customary adjustments under certain circumstances.  The Warrants have a term of seven and a half years.  The fair value of the warrants granted to the Lender of $2,463,231 was calculated using the Black-Scholes option pricing model and recorded as a debt discount.  The debt discount is being amortized over the term of the Note using the effective interest rate.  The Company recognized interest expense of $205,190 and $420,464 in connection with the amortization of this discount for the three and six months ended June 30, 2015, respectively, and the unamortized balance totaled $1,819,048 at June 30, 2015.

 

   The Company incurred costs, primarily professional services, of approximately $2,900,000 related to the Loan Agreement.  These costs were recorded as other assets in the Company’s consolidated balance sheet and are being amortized over the term of the Loan Agreement using the effective interest rate.  Amortization expense totaled $241,051 and $493,950 for the three and six months ended June 30, 2015, respectively, and the unamortized balance totaled $2,136,969 at June 30, 2015. 

 

  

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

Note 8. Stock Options and Warrants

 

Stock Options

 

 The Company uses the Black-Scholes option pricing model to value options issued to employees, directors and consultants. Compensation expense, including on the date of grant 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 June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
Risk-free interest rate			1.6	%			1.6	%			1.6	%			1.6	%
Expected volatility			59	%			47	%			59	%			47	%
Expected life (in years)			4.1				5.3				4.1				5.3
Expected dividend yield			-				-				-				-
Weighted average per share grant date fair value		$	0.95			$	0.84			$	0.95			$	0.84
Stock-based compensation		$	209,089			$	260,882			$	418,298			$	551,233

 

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. Beginning in the fourth quarter of 2014, the Company began utilizing its historical data regarding the Company’s activity as it relates to the expected life of stock options. 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 $823,508 as of June 30, 2015 which will be recognized over a weighted-average period of 1.2 years.

 

Option transactions under the stock option plans during the six months ended June 30, 2015 were as follows:

 

		Number				Weighted Average Exercise Price
Outstanding as of January 1, 2015			3,997,695			$	2.73
Granted during 2015			200,000			$	2.07
Exercised			(426,530	)		$	1.58
Cancelled /expired			(59,124	)		$	1.82
Outstanding as of June 30, 2015			3,712,041			$	2.74
Exercisable as of June 30, 2015			2,460,068			$	3.05

 

 In June 2015, the Company made its annual grant to the Board of Directors consisting of 200,000 options with an exercise price of $2.07 vesting monthly through May 2016.

 

 A total of 426,530 options were exercised on a cashless basis during the six months ended June 30, 2015 resulting in the net issuance of 96,594 shares.

 

 Cancellations for the six months ended June 30, 2015 were 31,624. Cancellations related to employee terminations except for 27,500 options which expired during the six months ended June 30, 2015.

 

 The weighted average remaining contractual life of the outstanding options as of June 30, 2015 was 6.7 years.

 

 The aggregate intrinsic value associated with the options outstanding and exercisable as of June 30, 2015 was $501,101 and $228,886, respectively. The closing price of the Company’s common stock at June 30, 2015 was $1.79 per share.

 

Stock Warrants

 

There were 4,050,000 warrants outstanding and exercisable at June 30, 2015 with a weighted average exercise price of $1.31 per share. The weighted average remaining contractual life of the warrants was 6.2 years.

 

The aggregate intrinsic value associated with the warrants outstanding and exercisable as of June 30, 2015 was $3,408,000. The closing price of the Company’s common stock at June 30, 2015 was $1.79 per share.

 

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 market price of the Company’s common stock on the date of exercise.

  

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

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 124,458 shares have been issued to date and 75,542 shares are available for future issuance. During the three and six months ended June 30, 2015, a total of 6,791 and 12,878 shares were issued under the ESPP Plan with a fair value of $12,156 and $25,303, respectively. The Company recognized $1,833 and $3,781 of stock-based compensation related to the 15% discount for the three and six months ended June 30, 2015, respectively. The Company recognized $1,882 and $3,801 of stock-based compensation related to the 15% discount for the three and six months ended June 30, 2014, 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.

 

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 three months ended June 30, 2015.

 

		Total Carrying Value				Quoted prices in active markets (Level 1)				Significant other observable inputs (Level 2)				Significant unobservable inputs (Level 3)
June 30, 2015		$	26,117,134			$	26,117,134			$	-			$	-
December 31, 2014		$	38,027,509			$	38,027,509			$	-			$	-

 

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 and the inclusion of 1,200,000 warrants to purchase shares of common stock at an exercise price of $0.01. 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 June 30, 2015 would dilute earnings per share if the Company becomes profitable in the future. The exercise of these stock options and warrants could potentially generate proceeds up to approximately $16 million if exercised by the holder for cash.

 

Stock options			3,712,041
Warrants			2,850,000
Total			6,562,041

  

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

 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 April 2025. 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 June 30, 2015, total future operating lease obligations were as follows:

 

Remainder of 2015		$	10,779,421
2016			19,342,274
2017			13,801,840
2018			6,395,904
2019			2,842,743
Thereafter			1,047,538
		$	54,209,720

 

Rent expenses were as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2015				2014				2015				2014
Points of Presence		$	2,009,366			$	1,948,102			$	4,095,064			$	3,793,348
Street level rooftops			3,397,290				3,263,423				6,858,788				6,392,916
Corporate offices			96,669				84,109				188,861				168,219
Other			100,605				95,219				188,940				185,717
		$	5,603,930			$	5,390,853			$	11,331,653			$	10,540,200

  

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 our 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 began at $359,750 for 2014 and escalate by 3% annually reaching $416,970 for 2019.

 

In December 2014, the Company entered into a new lease agreement in Florida, primarily for a second sales center. The lease commenced in February 2015 for 38 months with an option to renew for an additional 60 month period. Total annual rent payments begin at $53,130 and escalate by 3% annually.

 

Capital Lease Obligations

 

The Company has entered into capital leases to acquire property and equipment expiring through June 2018.  As of June 30, 2015, total future capital lease obligations were as follows:

 

Remainder of 2015		$	631,822
2016			1,110,428
2017			837,811
2018			143,796
		$	2,723,857
Less: interest expense			276,530
Total capital lease obligations		$	2,447,327
Current		$	1,014,911
Long-term		$	1,432,416

 

 Other

 

Under the terms of a one year information technology support agreement, the Company is making quarterly payments of approximately $68,000 through the first quarter of 2016.

 

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. Intersegment revenues and expenses are eliminated in consolidation.

 

 

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

 

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 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. 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 our operating segments:

 

		Three Months Ended June 30, 2015 (Unaudited)
		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Eliminations				Total
Revenues		$	7,080,474			$	826,226			$	-			$	(49,567	)		$	7,857,133
Operating Expenses
Cost of revenues (exclusive of depreciation)			2,683,920				3,672,380				12,804				(49,567	)			6,319,537
Depreciation and amortization			2,175,665				1,015,859				217,589				-				3,409,113
Customer support services			360,919				196,226				775,088				-				1,332,233
Sales and marketing			1,427,790				43,299				77,391				-				1,548,480
General and administrative			180,565				95,189				2,152,399				-				2,428,153
Total Operating Expenses			6,828,859				5,022,953				3,235,271				(49,567	)			15,037,516
Operating Income (Loss)		$	251,615			$	(4,196,727	)		$	(3,235,271	)		$	-			$	(7,180,383	)
Capital expenditures		$	2,422,143			$	56,223			$	57,181			$	-			$	2,535,547

 

		Three Months Ended June 30, 2014 (Unaudited)
		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Eliminations				Total
Revenues		$	7,572,447			$	738,370			$	-			$	(45,969	)		$	8,264,848
Operating Expenses
Cost of revenues (exclusive of depreciation)			2,620,460				3,513,341				14,081				(45,969	)			6,101,913
Depreciation and amortization			2,080,501				977,960				222,601				-				3,281,062
Customer support services			271,591				178,774				700,540				-				1,150,905
Sales and marketing			1,252,124				62,862				84,103				-				1,399,089
General and administrative			202,053				157,636				2,307,308				-				2,666,997
Total Operating Expenses			6,426,729				4,890,573				3,328,633				(45,969	)			14,599,966
Operating Income (Loss)		$	1,145,718			$	(4,152,203	)		$	(3,328,633	)		$	-			$	(6,335,118	)
Capital expenditures		$	1,403,404			$	490,399			$	204,334			$	-			$	2,098,137

 

 

		Six Months Ended June 30, 2015 (Unaudited)
		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Eliminations				Total
Revenues		$	14,298,205			$	1,613,854			$	-			$	(94,831	)		$	15,817,228
Operating Expenses
Cost of revenues (exclusive of depreciation)			5,405,816				7,378,763				30,156				(94,831	)			12,719,904
Depreciation and amortization			4,302,453				2,047,369				438,674				-				6,788,496
Customer support services			687,007				356,361				1,530,344				-				2,573,712
Sales and marketing			2,638,075				86,911				151,924				-				2,876,910
General and administrative			300,894				203,533				4,792,964				-				5,297,391
Total Operating Expenses			13,334,245				10,072,937				6,944,062				(94,831	)			30,256,413
Operating Income (Loss)		$	963,960			$	(8,459,083	)		$	(6,944,062	)		$	-			$	(14,439,185	)
Capital expenditures		$	3,856,210			$	174,693			$	178,230			$	-			$	4,209,133
As of June 30, 2015
Property and equipment, net		$	20,977,133			$	8,694,622			$	1,850,304			$	-			$	31,522,059
Total assets		$	25,486,114			$	10,789,654			$	30,909,661			$	-			$	67,185,429

 

 

		Six Months Ended June 30, 2014 (Unaudited)
		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Eliminations				Total
Revenues		$	15,257,973			$	1,478,719			$	-			$	(91,938	)		$	16,644,754
Operating Expenses
Cost of revenues (exclusive of depreciation)			5,119,152				6,902,292				28,350				(91,938	)			11,957,856
Depreciation and amortization			4,618,374				1,918,898				439,205				-				6,976,477
Customer support services			543,736				354,964				1,427,970				-				2,326,670
Sales and marketing			2,515,261				139,612				165,815				-				2,820,688
General and administrative			310,479				304,164				4,730,294				-				5,344,937
Total Operating Expenses			13,107,002				9,619,930				6,791,634				(91,938	)			29,426,628
Operating Income (Loss)		$	2,150,971			$	(8,141,211	)		$	(6,791,634	)		$	-			$	(12,781,874	)
Capital expenditures		$	2,889,854			$	1,428,452			$	317,188			$	-			$	4,635,494
As of June 30, 2014
Property and equipment, net		$	21,966,834			$	12,377,471			$	2,492,402			$	-			$	36,836,707
Total assets		$	27,442,263			$	14,839,751			$	19,888,452			$	-			$	62,170,466

 

Note 14. Subsequent Events

 

In the third quarter of 2015, the Company's wholly owned subsidiary, Hetnets Tower Corporation ("Hetnets"), signed contracts with a leading carrier for the colocation of small cell equipment on Hetnets' wireless infrastructure.

 

 

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 six months ended June 30, 2015. 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, 2014 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, and installation and operations staff.

 

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

 

 

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 June 30, 2015, we operated in twelve metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation. We incur significant up-front costs in order to establish a Network Presence in a new market. These costs include building PoPs and Network Costs. Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period. We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model and the operating performance of our mature markets. Set forth below is a summary of our operating performance on a per-market basis, and a description of how each category is determined.

 

Revenues: Revenues are allocated based on which market each customer is located in. Intercompany transactions have been eliminated in the tables below.

 

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

 

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

 

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

   

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

 

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

  

We exited the Nashville market effective March 31, 2014.

 

Three Months Ended June 30, 2015

  

Market		Revenues				Cost of Revenues				Gross Margin				Operating Costs				Adjusted Market EBITDA
Los Angeles		$	2,041,795			$	573,951			$	1,467,844			$	570,922			$	896,922
New York			1,936,468				722,282				1,214,186				335,388				878,798
Boston			1,217,581				394,409				823,172				212,259				610,913
Chicago			582,012				307,011				275,001				125,651				149,350
San Francisco			253,831				123,542				130,289				50,732				79,557
Houston			187,459				73,856				113,603				37,816				75,787
Miami			321,133				133,304				187,829				141,123				46,706
Las-Vegas-Reno			179,367				121,935				57,432				44,330				13,102
Seattle			67,750				46,537				21,213				14,305				6,908
Providence/Newport			52,413				50,845				1,568				3,343				(1,775	)
Philadelphia			26,730				27,666				(936	)			14,572				(15,508	)
Dallas-Fort Worth			164,368				108,582				55,786				91,232				(35,446	)
Total		$	7,030,907			$	2,683,920			$	4,346,987			$	1,641,673			$	2,705,314

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA		$	2,705,314
Fixed wireless, non-market specific
Other expenses			(327,601	)
Depreciation and amortization			(2,175,665	)
Shared wireless infrastructure, net			(4,147,160	)
Corporate			(3,235,271	)
Other income (expense)			(1,670,428	)
Net loss		$	(8,850,811	)

 

Three Months Ended June 30, 2014

 

Market		Revenues				Cost of Revenues				Gross Margin				Operating Costs				Adjusted Market EBITDA
Los Angeles		$	1,996,000			$	573,010			$	1,422,990			$	468,799			$	954,191
New York			1,949,999				702,033				1,247,966				335,819				912,147
Boston			1,449,309				403,931				1,045,378				189,968				855,410
Chicago			734,524				293,140				441,384				128,269				313,115
Miami			380,888				118,518				262,370				82,173				180,197
San Francisco			284,923				123,775				161,148				58,260				102,888
Houston			173,532				66,073				107,459				37,713				69,746
Las Vegas-Reno			224,856				121,870				102,986				56,089				46,897
Seattle			74,892				47,899				26,993				11,793				15,200
Dallas-Fort Worth			160,467				100,229				60,238				46,309				13,929
Providence-Newport			64,573				50,888				13,685				1,449				12,236
Philadelphia			32,515				19,094				13,421				5,953				7,468
Total		$	7,526,478			$	2,620,460			$	4,906,018			$	1,422,594			$	3,483,424

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA		$	3,483,424
Fixed wireless, non-market specific
Other expenses			(303,174	)
Depreciation and amortization			(2,080,501	)
Shared wireless infrastructure, net			(4,106,234	)
Corporate			(3,328,633	)
Other income (expense)			(59,488	)
Net loss		$	(6,394,606	)

 

Six Months Ended June 30, 2015

 

Market		Revenues				Cost of Revenues				Gross Margin				Operating Costs				Adjusted Market EBITDA
Los Angeles		$	4,024,304			$	1,140,536			$	2,883,768			$	1,057,825			$	1,825,943
New York			3,898,194				1,505,299				2,392,895				651,220				1,741,675
Boston			2,464,548				799,852				1,664,696				379,093				1,285,603
Chicago			1,275,405				611,016				664,389				275,405				388,984
San Francisco			522,130				244,006				278,124				90,758				187,366
Houston			372,521				147,604				224,917				65,619				159,298
Miami			620,777				251,885				368,892				212,865				156,027
Las-Vegas-Reno			396,846				241,219				155,627				89,182				66,445
Seattle			136,070				94,544				41,526				29,020				12,506
Dallas-Fort Worth			327,738				207,475				120,263				117,890				2,373
Providence/Newport			110,220				107,133				3,087				7,541				(4,454)
Philadelphia			54,621				55,247				(626)				21,304				(21,930)
Total		$	14,203,374			$	5,405,816			$	8,797,558			$	2,997,722			$	5,799,836

 

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA		$	5,799,836
Fixed wireless, non-market specific
Other expenses			(628,254)
Depreciation and amortization			(4,302,453)
Shared wireless infrastructure, net			(8,364,252)
Corporate			(6,944,062)
Other income (expense)			(3,334,692)
Net loss		$	(17,773,877)

 

Six Months Ended June 30, 2014

 

Market		Revenues				Cost of Revenues				Gross Margin				Operating Costs				Adjusted Market EBITDA
Los Angeles		$	4,035,759			$	1,134,319			$	2,901,440			$	937,098			$	1,964,342
New York			3,866,028				1,320,544				2,545,484				616,059				1,929,425
Boston			2,983,564				797,546				2,186,018				386,678				1,799,340
Chicago			1,459,587				586,799				872,788				269,367				603,421
Miami			749,950				220,991				528,959				180,905				348,054
Houston			346,348				124,012				222,336				55,612				166,724
San Francisco			560,963				251,455				309,508				148,820				160,688
Las Vegas-Reno			480,752				243,355				237,397				98,410				138,987
Providence-Newport			144,858				98,443				46,415				3,024				43,391
Dallas-Fort Worth			327,124				193,711				133,413				95,440				37,973
Seattle			139,825				95,730				44,095				17,378				26,717
Philadelphia			69,373				39,605				29,768				20,824				8,944
Nashville			1,904				12,642				(10,738	)			2,331				(13,069	)
Total		$	15,166,035			$	5,119,152			$	10,046,883			$	2,831,946			$	7,214,937

 

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA		$	7,214,937
Fixed wireless, non-market specific
Other expenses			(537,530	)
Depreciation and amortization			(4,618,374	)
Shared wireless infrastructure, net			(8,049,273	)
Corporate			(6,791,634	)
Other income (expense)			(122,539	)
Net loss		$	(12,904,413	)

 

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 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 utilizes in assessing our overall operations. It is important to note, however, that non-GAAP financial measures as presented do not represent cash provided by or used in operating activities and may not be comparable to similarly titled measures reported by other companies. Neither should be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

 

We focus on Adjusted EBITDA as a principal indictor of the operating efficiency and overall financial performance of our business. We believe this information provides the users of our financial statements with valuable insight into our operating results. 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) nonmonetary transactions, and (ii) 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 June 30, 2015

 

		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Total
Operating Income (Loss)		$	251,615			$	(4,196,727	)		$	(3,235,271	)		$	(7,180,383	)
Depreciation and amortization			2,175,665				1,015,859				217,589				3,409,113
Stock-based compensation			-				-				210,922				210,922
Loss on nonmonetary transactions			66,490				-				-				66,490
Non-recurring expenses, primarily acquisition-related			-				-				162,910				162,910
Deferred rent			40,036				9,848				(12,672	)			37,212
Adjusted EBITDA			2,533,806				(3,171,020	)			(2,656,522	)			(3,293,736	)
Less: Capital expenditures			2,422,143				56,223				57,181				2,535,547
Net Cash Flow		$	111,663			$	(3,227,243	)		$	(2,713,703	)		$	(5,829,283	)

 

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA		$	(3,293,736	)
Depreciation and amortization			(3,409,113	)
Stock-based compensation			(210,922	)
Loss on nonmonetary transactions			(66,490	)
Non-recurring expenses, primarily acquisition-related			(162,910	)
Deferred rent			(37,212	)
Operating Income (Loss)			(7,180,383	)
Interest expense, net			(1,670,428	)
Net loss		$	(8,850,811	)

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow		$	(5,829,283	)
Capital expenditures			2,535,547
Non-recurring expenses, primarily acquisition related			(162,910	)
Changes in operating assets and liabilities, net			658,679
Other, net			(1,133,211	)
Net cash used in operating activities		$	(3,931,178	)

 

Three Months Ended June 30, 2014

 

		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Total
Operating Income (Loss)		$	1,145,718			$	(4,152,203	)		$	(3,328,633	)		$	(6,335,118	)
Depreciation and amortization			2,080,501				977,960				222,601				3,281,062
Stock-based compensation			-				-				262,764				262,764
Loss on non-monetary transactions			67,833				-				-				67,833
Non-recurring expenses, primarily acquisition-related			-				-				91,359				91,359
Deferred rent			38,742				61,192				(8,807	)			91,127
Adjusted EBITDA			3,332,794				(3,113,051	)			(2,760,716	)			(2,540,973	)
Less: Capital expenditures			1,403,404				490,399				204,334				2,098,137
Net Cash Flow		$	1,929,390			$	(3,603,450	)		$	(2,965,050	)		$	(4,639,110	)

 

  

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA		$	(2,540,973	)
Depreciation and amortization			(3,281,062	)
Stock-based compensation			(262,764	)
Loss on non-monetary transactions			(67,833	)
Non-recurring expenses, primarily acquisition-related			(91,359	)
Deferred rent			(91,127	)
Operating Income (Loss)			(6,335,118	)
Interest expense, net			(59,488	)
Net loss		$	(6,394,606	)

 

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow		$	(4,639,110	)
Capital expenditures			2,098,137
Non-recurring expenses, primarily acquisition-related			(91,359	)
Changes in operating assets and liabilities, net			1,003,909
Other, net			(20,318	)
Net cash used in operating activities		$	(1,648,741	)

 

Six Months Ended June 30, 2015

 

		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Total
Operating Income (Loss)		$	963,960			$	(8,459,083	)		$	(6,944,062	)		$	(14,439,185	)
Depreciation and amortization			4,302,453				2,047,369				438,674				6,788,496
Stock-based compensation			-				-				422,079				422,079
Loss on nonmonetary transactions			132,608				-				-				132,608
Non-recurring expenses, primarily acquisition-related			-				-				398,602				398,602
Deferred rent			84,323				59,641				(16,103	)			127,861
Adjusted EBITDA			5,483,344				(6,352,073	)			(5,700,810	)			(6,569,539	)
Less: Capital expenditures			3,856,210				174,693				178,230				4,209,133
Net Cash Flow		$	1,627,134			$	(6,526,766	)		$	(5,879,040	)		$	(10,778,672	)

 

 

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA		$	(6,569,539	)
Depreciation and amortization			(6,788,496	)
Stock-based compensation			(422,079	)
Loss on nonmonetary transactions			(132,608	)
Non-recurring expenses, primarily acquisition-related			(398,602	)
Deferred rent			(127,861	)
Operating Income (Loss)			(14,439,185	)
Interest expense, net			(3,334,692	)
Net loss		$	(17,773,877	)

 

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow		$	(10,778,672	)
Capital expenditures			4,209,133
Non-recurring expenses, primarily acquisition-related			(398,602	)
Changes in operating assets and liabilities, net			1,419,800
Other, net			(2,273,655	)
Net cash used in operating activities		$	(7,821,996	)

 

Six Months Ended June 30, 2014

 

		Fixed Wireless				Shared Wireless Infrastructure				Corporate				Total
Operating Income (Loss)		$	2,150,971			$	(8,141,211	)		$	(6,791,634	)		$	(12,781,874	)
Depreciation and amortization			4,618,374				1,918,898				439,205				6,976,477
Stock-based compensation			-				-				555,034				555,034
Loss on non-monetary transactions			135,401				-				-				135,401
Non-recurring expenses, primarily acquisition-related			-				-				91,359				91,359
Deferred rent			45,496				134,007				(17,613	)			161,890
Adjusted EBITDA			6,950,242				(6,088,306	)			(5,723,649	)			(4,861,713	)
Less: Capital expenditures			2,889,854				1,428,452				317,188				4,635,494
Net Cash Flow		$	4,060,388			$	(7,516,758	)		$	(6,040,837	)		$	(9,497,207	)

 

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA		$	(4,861,713	)
Depreciation and amortization			(6,976,477	)
Stock-based compensation			(555,034	)
Loss on non-monetary transactions			(135,401	)
Non-recurring expenses, primarily acquisition-related			(91,359	)
Deferred rent			(161,890	)
Operating Income (Loss)			(12,781,874	)
Interest expense, net			(122,539	)
Net loss		$	(12,904,413	)

 

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow		$	(9,497,207	)
Capital expenditures			4,635,494
Non-recurring expenses, primarily acquisition-related			(91,359	)
Changes in operating assets and liabilities, net			(776,543	)
Other, net			(140,940	)
Net cash used in operating activities		$	(5,870,555	)

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

 

Revenues. Revenues totaled $7,857,133 during the three months ended June 30, 2015 compared to $8,264,848 during the three months ended June 30, 2014 representing a decrease of $407,715, or 5%. Revenues for the Fixed Wireless segment totaled $7,080,474 during the three months ended June 30, 2015 compared to $7,572,447 during the three months ended June 30, 2014 representing a decrease of $491,973, or 6%. The decrease principally related to a 6% decrease in the base of customers billed on a monthly recurring basis. In March 2015, we opened a second sales office in Florida and believe that our ability to recruit talent from an additional geographic area will increase the number of account executives and improve sales productivity levels. Revenues for the Shared Wireless segment totaled $826,226 during the three months ended June 30, 2015 compared to $738,370 during the three months ended June 30, 2014 representing an increase of $87,856, or 12%. 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 $772 as of June 30, 2015 compared to $760 as of June 30, 2014 representing an increase of $12, or 2%. The increase in ARPU primarily related to customers upgrading to higher bandwidth service which generates higher monthly recurring revenue. ARPU for new customers totaled $620 during the three months ended June 30, 2015 compared to $626 during the three months ended June 30, 2014 representing a decrease of $6, or 1%.

 

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.84% during the three months ended June 30, 2015 compared to 1.71% during the three months ended June 30, 2014. Our goal is to maintain churn levels below industry averages of approximately 2.00%. Churn levels can fluctuate from period to period depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons.

 

Cost of Revenues. Cost of revenues totaled $6,319,537 during the three months ended June 30, 2015 compared to $6,101,913 during the three months ended June 30, 2014 representing an increase of $217,624, or 4%. On a consolidated basis, higher rent expense represented approximately 94% of the increase with rents for PoPs for the Fixed Wireless segment increasing by approximately $96,000 and rents for street level rooftops for the Shared Wireless segment increasing by approximately $109,000. The number of street level rooftops for the Shared Wireless segment were approximately 4% higher at June 30, 2015 compared to June 30, 2014. Other cost of revenues, including bandwidth and customer network costs, totaled $716,548 during the three months ended June 30, 2015 as compared to $704,168 during the three months ended June 30, 2014 representing an increase of $12,380, or 2%. On a consolidated basis, gross margin was 20% for the three months ended June 30, 2015 as compared to 26% for the three months ended June 30, 2014 representing a decrease of 6 percentage points with the Fixed Wireless and Shared Wireless segments accounting for approximately 5 and 1 of the percentage point decreases, respectively. On a per market basis, approximately $279,000 or 78%, 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 65% of the street level rooftops for our Shared Wireless segment are located.

 

Depreciation and Amortization. Depreciation and amortization totaled $3,409,113 during the three months ended June 30, 2015 compared to $3,281,062 during the three months ended June 30, 2014 representing an increase of $128,051, or 4%. Depreciation expense totaled $3,311,045 during the three months ended June 30, 2015 compared to $3,173,255 during the three months ended June 30, 2014 representing an increase of $137,790 or 4%. The base of depreciable assets as of June 30, 2015 increased approximately 9% compared to June 30, 2014, however, newly acquired assets will not have a full year of depreciation in the year of acquisition which lessens the impact of a higher base on depreciation expense. The increase in the depreciable base during the twelve months ended June 30, 2015 reflects continued growth in our fixed wireless network (approximately $7,098,000), spending on our shared wireless infrastructure (approximately $403,000) and corporate expenditures (approximately $243,000).

 

Amortization expense totaled $98,068 during the three months ended June 30, 2015 compared to $107,807 during the three months ended June 30, 2014 representing a decrease of $9,739, or 9%. 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 intangible assets associated with the Color Broadband Communications acquisition which had zero and $9,739 of amortization expense in the 2015 and 2014 periods, respectively. These assets became fully amortized in April 2014.

 

Customer Support Services. Customer support services totaled $1,332,233 during the three months ended June 30, 2015 compared to $1,150,905 during the three months ended June 30, 2014 representing an increase of $181,328, or 16%. The increase was primarily related to higher payroll costs as average headcount increased to 71 during the 2015 period as compared to 69 during the 2014 period.

 

Sales and Marketing. Sales and marketing expenses totaled $1,548,480 during the three months ended June 30, 2015 compared to $1,399,089 during the three months ended June 30, 2014 representing an increase of $149,391, or 11%. Compensation related costs, including sales commissions, totaled $1,097,083 during the 2015 period as compared to $966,373 during the 2014 period representing an increase of $130,710, or 14%. Average headcount totaled 54 during the 2015 period as compared to 44 during the 2014 period representing an increase of 10, or 23%. During the first quarter of 2015, the Company opened a new sales office in South Florida. Channel commissions totaled $145,995 during the 2015 period as compared to $103,315 during the 2014 period representing an increase of $42,680, or 41%. Advertising costs totaled $253,841 during the 2015 period as compared to $289,236 during the 2014 period representing a decrease of $35,395, or 12%. Other costs, including travel, entertainment, dues and subscriptions totaled $51,561 during the 2015 period as compared to $40,165 during the 2014 period representing an increase of $11,396, or 28%.

 

General and Administrative. General and administrative expenses totaled $2,428,153 during the three months ended June 30, 2015 compared to $2,666,997 during the three months ended June 30, 2014 representing a decrease of $238,844, or 9%. Payroll costs totaled $796,010 during 2015 compared to $1,019,296 during 2014 representing a decrease of $223,286, or 22%. Average headcount totaled 32 during the 2015 period compared to 35 during the 2014 period representing a decrease of 3, or 9%. Stock-based compensation totaled $210,922 during 2015 compared to $262,764 during 2014 representing a decrease of $51,842, or 20%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Acquisition related expense totaled $162,910 during the 2015 period compared to $91,359 during the 2014 period representing an increase of $71,551, or 78%. Acquisition related expense can fluctuate significantly from period to period depending upon the timing of potential acquisition opportunities. Information technology support expense totaled $273,806 during the 2015 period compared to $347,783 during the 2014 period representing a decrease of $73,977, or 21%. The Company absorbed certain information technology support services internally which reduced costs associated with third party support services.

 

 

Interest Expense, Net. Interest expense, net totaled $1,670,428 during the three months ended June 30, 2015 compared to $59,488 during the three months ended June 30, 2014 representing an increase of $1,610,940, or greater than 100%. The increase related to our $35 million debt financing completed in October 2014. Cash and non-cash interest expense in 2015 totaled $720,892 and $894,153 respectively. Non-cash interest expense included payment-in-kind interest, and the amortization of (i) debt issuance costs, and (ii) discounts associated with (a) original issuance pricing and (b) the fair value of warrants issued in connection with the financing.

 

Net Loss. Net loss totaled $8,850,811 during the three months ended June 30, 2015 compared to $6,394,606 during the three months ended June 30, 2014 representing an increase of $2,456,205, or 38%. Operating results accounted for approximately 34% of the higher net loss as revenues decreased by $407,715, or 5%, while operating expenses increased by $437,550, or 3%. Interest expense accounted for approximately 66% of the increased net loss related to our $35 million debt financing completed in October 2014. Interest expense totaled $1,684,833 during the 2015 period as compared to interest expense of $67,056 recognized in 2014 resulting in a net increase of $1,617,777.

 

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

 

Revenues. Revenues totaled $15,817,228 during the six months ended June 30, 2015 compared to $16,644,754 during the six months ended June 30, 2014 representing a decrease of $827,526, or 5%. Revenues for the Fixed Wireless segment totaled $14,298,205 during the six months ended June 30, 2015 compared to $15,257,973 during the six months ended June 30, 2014 representing a decrease of $959,768, or 6%. The decrease principally related to a 6% decrease in the base of customers billed on a monthly recurring basis. In March 2015, we opened a second sales office in Florida and believe that our ability to recruit talent from an additional geographic area will increase the number of account executives and improve sales productivity levels. Revenues for the Shared Wireless segment totaled $1,613,854 during the six months ended June 30, 2015 compared to $1,478,719 during the six months ended June 30, 2014 representing an increase of $135,135, or 9%. The increase was exclusively related to higher revenues generated through a large cable company customer contract.

 

Cost of Revenues. Cost of revenues totaled $12,719,904 during the six months ended June 30, 2015 compared to $11,957,856 during the six months ended June 30, 2014 representing an increase of $762,048, or 6%. On a consolidated basis, higher rent expense represented approximately 104% of the increase with rents for PoPs for the Fixed Wireless segment increasing by approximately $356,000 and rents for street level rooftops for the Shared Wireless segment increasing by approximately $436,000. The number of street level rooftops for the Shared Wireless segment were approximately 4% higher at June 30, 2015 compared to June 30, 2014. Other cost of revenues, including bandwidth and customer network costs, totaled $1,381,900 during the six months ended June 30, 2015 as compared to $1,411,225 during the six months ended June 30, 2014 representing a decrease of $29,325, or 2%. On a consolidated basis, gross margin was 20% for the six months ended June 30, 2015 as compared to 28% for the six months ended June 30, 2014 representing a decrease of 8 percentage points with the Fixed Wireless and Shared Wireless segments accounting for approximately 7 and 1 of the percentage point decreases, respectively. On a per market basis, approximately $780,000 or 98%, 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 65% of the street level rooftops for our Shared Wireless segment are located.

 

Depreciation and Amortization. Depreciation and amortization totaled $6,788,496 during the six months ended June 30, 2015 compared to $6,976,477 during the six months ended June 30, 2014 representing a decrease of $187,981, or 3%. Depreciation expense totaled $6,592,360 during the six months ended June 30, 2015 compared to $6,283,644 during the six months ended June 30, 2014 representing an increase of $308,716 or 5%. The base of depreciable assets as of June 30, 2015 increased approximately 9% compared to June 30, 2014, however, newly acquired assets will not have a full year of depreciation in the year of acquisition which lessens the impact of a higher base on depreciation expense. The increase in the depreciable base during the twelve months ended June 30, 2015 reflects continued growth in our fixed wireless network (approximately $7,098,000), spending on our shared wireless infrastructure (approximately $403,000) and corporate expenditures (approximately $243,000).

 

Amortization expense totaled $196,136 during the six months ended June 30, 2015 compared to $692,833 during the six months ended June 30, 2014 representing a decrease of $496,697, or 72%. 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 intangible assets associated with the Color Broadband Communications acquisition which had zero and $496,697 of amortization expense in the 2015 and 2014 periods, respectively. These assets became fully amortized in April 2014.

 

Customer Support Services. Customer support services totaled $2,573,712 during the six months ended June 30, 2015 compared to $2,326,670 during the six months ended June 30, 2014 representing an increase of $247,042, or 11%. The increase was primarily related to higher payroll costs as average headcount increased to 70 during the 2015 period as compared to 67 during the 2014 period.

 

Sales and Marketing. Sales and marketing expenses totaled $2,876,910 during the six months ended June 30, 2015 compared to $2,820,688 during the six months ended June 30, 2014 representing an increase of $56,222, or 2%. Compensation related costs, including sales commissions, totaled $1,966,654 during the 2015 period as compared to $1,939,921 during the 2014 period representing an increase of $26,733, or 1%. Average headcount totaled 46 during the 2015 period as compared to 45 during the 2014 period representing an increase of 1, or 2%. Channel commissions totaled $273,000 during the 2015 period as compared to $199,858 during the 2014 period representing an increase of $73,142, or 37%. Advertising costs totaled $536,038 during the 2015 period as compared to $585,442 during the 2014 period representing a decrease of $49,404, or 8%. Other costs, including travel, entertainment, dues and subscriptions totaled $101,218 during the 2015 period as compared to $95,467 during the 2014 period representing an increase of $5,751, or 6%.

 

  

General and Administrative. General and administrative expenses totaled $5,297,391 during the six months ended June 30, 2015 compared to $5,344,937 during the six months ended June 30, 2014 representing a decrease of $47,546, or 1%. Payroll costs totaled $1,726,417 during 2015 compared to $2,008,587 during 2014 representing a decrease of $282,170, or 14%. Average headcount totaled 32 during the 2015 period compared to 36 during the 2014 period representing a decrease of 4, or 11%. Stock-based compensation totaled $422,079 during 2015 compared to $555,034 during 2014 representing a decrease of $132,955, or 24%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Facilities expense totaled $254,060 during the 2015 period compared to $203,162 during the 2014 period representing an increase of $50,898, or 25%. In March 2015, the Company opened a second sales office in Florida which has increased its facilities expenses. Acquisition related expense totaled $398,602 during the 2015 period compared to $91,359 during the 2014 period representing an increase of $307,243, or greater than 100%. Acquisition related expense can fluctuate significantly from period to period depending upon the timing of potential acquisition opportunities.

 

Interest Expense, Net. Interest expense, net totaled $3,334,692 during the six months ended June 30, 2015 compared to $122,539 during the six months ended June 30, 2014 representing an increase of $3,212,153, or greater than 100%. The increase related to our $35 million debt financing completed in October 2014. Cash and non-cash interest expense in 2015 totaled $1,426,803 and $1,807,047 respectively. Non-cash interest expense included payment-in-kind interest, and the amortization of (i) debt issuance costs, and (ii) discounts associated with (a) original issuance pricing and (b) the fair value of warrants issued in connection with the financing.

 

Net Loss. Net loss totaled $17,773,877 during the six months ended June 30, 2015 compared to $12,904,413 during the six months ended June 30, 2014 representing an increase of $4,869,464, or 38%. Operating results accounted for approximately 34% of the higher net loss as revenues decreased by $827,526, or 5%, while operating expenses increased by $829,785, or 3%. Interest expense accounted for approximately 66% of the increased net loss related to our $35 million debt financing completed in October 2014. Interest expense totaled $3,366,247 during the 2015 period as compared to interest expense of $137,527 recognized in 2014 resulting in a net increase of $3,228,720.

 

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 six months ended June 30, 2015 and 2014 are described below.

 

Net Cash Used in Operating Activities. Net cash used in operating activities for the six months ended June 30, 2015 totaled $7,821,996 compared to $5,870,555 for the six months ended June 30, 2014 representing an increase of $1,951,441, or 33%. Cash used in operations for the six months ended June 30, 2015 totaled $9,241,796 as compared to $5,094,012 for the six months ended June 30, 2014 representing an increase of $4,147,784, or 81%. The increase related to a combination of lower revenues, higher expenses, and cash interest expense on debt. 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 provided cash of $1,419,800 during the six months ended June 30, 2015 as compared to cash used of $776,543 for the six months ended June 30, 2014 representing a change of $2,196,343 or greater than 100%.

 

Net Cash Used in Investing Activities. Net cash used in investing activities for the six months ended June 30, 2015 totaled $3,613,675 compared to $4,631,468 for the six months ended June 30, 2014 representing a decrease of $1,017,793, or 22%. Cash capital expenditures for the Fixed Wireless segment totaled $3,230,379 in the 2015 period compared to $2,879,251 in the 2014 period, representing an increase of $351,128, or 12%. Cash capital expenditures for the Shared Wireless Infrastructure segment totaled $186,289 in the 2015 period compared to $1,749,766 in the 2014 period, representing a decrease of $1,563,477, or 89%. 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 2014, we received an incentive payment of $380,000 from our landlord in connection with entering a new lease agreement for our corporate offices. These funds were used to pay for qualified leasehold improvements to the facility.

 

Net Cash Used In Financing Activities. Net cash used in financing activities for the six months ended June 30, 2015 totaled $474,704 compared to $390,801 for the six months ended June 30, 2014, representing an increase of $83,903, or 21%.

 

Debt Financing. In October 2014, we entered into a loan agreement (the “Loan Agreement”) with Melody Business Finance, LLC (the “Lender”). The Lender provided us with a five-year $35 million secured term loan (the “Financing” or “Note”). The Note was issued at a 3% discount and the Company incurred $2,893,739 in debt issuance costs. Net proceeds were $31,056,260.

 

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

 

The aggregate principal amount outstanding plus all accrued and unpaid interest is due in October 2019. We have 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 the minimum principal amount of $5 million or in full if the balance outstanding is less.

 

 

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 June 30, 2015, we had cash and cash equivalents of $26,117,134 and working capital of $22,639,193. Based on our current operating activities and plans, we believe our capital resources at the end of June 30, 2015 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 June 30, 2015:

 

 

		Payments due by period
		Total				2015				2016				2017				2018				2019				Thereafter
Operating leases		$	54,209,720			$	10,779,421			$	19,342,274			$	13,801,840			$	6,395,904			$	2,842,743			$	1,047,538
Long-term debt			36,008,957				-				-				-				-				36,008,957				-
Capital leases			2,723,857				631,822				1,110,428				837,811				143,796				-				-
Other			203,604				135,736				67,868				-				-				-				-
Deferred payments			6,156				5,814				342				-				-				-				-
Total		$	93,152,294			$	11,552,793			$	20,520,912			$	14,639,651			$	6,539,700			$	38,851,700			$	1,047,538

 

Operating Leases. We have entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through April 2025. Certain of these operating leases include extensions, at our option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table above as it is not presently determinable which options, if any, we will elect to exercise.

 

Long-Term Debt. We have entered into a loan agreement with Melody Business Finance, LLC. The $35 million term loan becomes due in October 2019. Accrued PIK interest totaled $1,008,957 as of June 30, 2015.

 

Capital Lease. We have entered into capital leases to acquire property and equipment expiring through June 2018.

 

Other. Under the terms of a one year information technology support agreement, the Company is making quarterly payments of approximately $68,000 through the first quarter of 2016.

 

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.

 

Recent Accounting Pronouncements. In April 2015, the FASB issued ASU No. 2015-03 (“ASU 2015-03”), “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as an asset. ASU 2015-03 is effective for us on January 1, 2016. Once adopted, entities are required to apply the new guidance retrospectively to all prior periods presented. The retrospective application represents a change in accounting principle. Early adoption is permitted for financial statements that have not been previously issued. We are currently evaluating the effect that ASU 2015-03 will have on our condensed consolidated financial statements and related disclosures.

 

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 June 30, 2015, all cash and cash equivalents are immediately available cash balances.  A portion of our cash and cash equivalents are held in institutional money market funds.   

 

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of June 30, 2015, 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 six months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 PART II

OTHER INFORMATION

 

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*

 

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*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 June 30, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Stockholders’ 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: August 10, 2015	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*

  

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*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 June 30, 2015 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Stockholders’ Equity, and (v) related notes to these financial statements.  

 

 

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