Form 10-Q TOWERSTREAM CORP For: Sep 30

FREE Breaking News Alerts from StreetInsider.com!

StreetInsider.com Top Tickers, 8/14/2026

1. GLOB
2. AMAT
3. RDDT
4. ELUT
5. SMSI

6. SNDK
7. ADYEN:NA
8. JCAP
9. XYL
10. ADYYF

Top News Most Read Special Reports

November 10, 2014 4:03 PM EST

E-mail

�

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

�

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

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

For the transition period from_______to_______

�

Commission file number 001-33449

�

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

�

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

�

Registrants telephone number, including area code (401) 848-5848

��

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

�

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

�

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

�

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

��

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

�

As of November 6, 2014, there were 66,650,752 shares of common stock, par value $0.001 per share, outstanding.

�

��

TOWERSTREAM CORPORATION AND SUBSIDIARIES

�

Table of Contents

�

�	�	Pages
�	�	�
Part I	FINANCIAL INFORMATION	�
�	�	�
Item 1.	Financial Statements.	1
�	�	�
�	Condensed Consolidated Balance Sheets as of �September 30, 2014 (unaudited) and December 31, 2013	1
�	�	�
�	Condensed Consolidated Statements of Operations for the Three and Nine�Months Ended September 30, 2014 and 2013 (unaudited)	2
�	�	�
�	Condensed Consolidated Statement of Stockholders Equity for the Nine Months Ended September 30, 2014 (unaudited)	3
�	�	�
�	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)	4
�	�	�
�	Notes to Unaudited Condensed Consolidated Financial Statements	5-15
�	�	�
Item 2.	Managements Discussion and Analysis of Financial Condition and Results of Operations.	16-28
�	�	�
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	29
�	�	�
Item 4.	Controls and Procedures.	29
�	�	�
Part II	OTHER INFORMATION	�
�	�	�
Item 1A.	Risk Factors.	�30
�	�	�
Item 6.	Exhibits.	31

�

i�

�

��

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

�

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

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

�

Three Months Ended

September 30,

�

Nine Months Ended

September 30,

�

2014

�

2013

�

2014

�

2013

�

Revenues

�

8,301,604

�

8,400,664

�

24,946,358

�

24,912,061

�

Operating Expenses

�

Cost of revenues (exclusive of depreciation)

�

6,210,920

�

5,444,298

�

18,168,776

�

15,591,890

�

Depreciation and amortization

�

3,318,395

�

3,846,644

�

10,294,872

�

11,653,557

�

Customer support services

�

1,244,161

�

1,221,076

�

3,563,571

�

3,799,687

�

Sales and marketing

�

1,353,015

�

1,368,628

�

4,173,703

�

4,333,288

�

General and administrative

�

2,381,586

�

2,600,168

�

7,726,523

�

8,373,800

�

Total Operating Expenses

�

14,508,077

�

14,480,814

�

43,927,445

�

43,752,222

�

Operating Loss

�

(6,206,473

)

�

(6,080,150

)

�

(18,981,087

)

�

(18,840,161

)

Other Income/(Expense)

�

Interest expense, net

�

(43,970

)

�

(59,613

)

�

(166,509

)

�

(153,897

)

Gain on business acquisition

�

1,004,099

�

Other income (expense), net

�

(3,630

)

�

(3,630

)

�

(10,890

)

�

(10,890

)

Total Other Income/(Expense)

�

(47,600

)

�

(63,243

)

�

(177,399

)

�

839,312

�

Net Loss

�

(6,254,073

)

�

(6,143,393

)

�

(19,158,486

)

�

(18,000,849

)

�

Net loss per common share basic and diluted

�

(0.09

)

�

(0.09

)

�

(0.29

)

�

(0.28

)

Weighted average common shares outstanding basic and diluted

�

66,643,804

�

66,402,499

�

66,521,267

�

64,764,085

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(UNAUDITED)

For the Nine Months Ended September 30, 2014

�

Common Stock

�

Shares

�

Amount

�

Additional

Paid-In-Capital

�

Accumulated Deficit

�

Total

�

Balance at December 31, 2013

�

66,424,561

�

66,425

�

154,171,695

�

(88,144,179

)

�

66,093,941

�

Cashless exercise of options

�

192,270

�

192

�

(192

)

�

Issuance of common stock under employee stock purchase plan

�

18,921

�

35,740

�

35,759

�

Issuance of common stock upon vesting of restricted stock awards

�

15,000

�

(15

)

�

Stock-based compensation for options

�

735,076

�

735,076

�

Fair value of options repurchased

�

(3,793

)

�

(3,793

)

Net loss

�

(19,158,486

)

�

(19,158,486

)

Balance at September 30, 2014

�

66,650,752

�

66,651

�

154,938,511

�

(107,302,665

)

�

47,702,497

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

�

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

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

��

Note 1.��Organization and Nature of Business

�

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

�

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

�

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

�

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

�

Note 2.��Summary of Significant Accounting Policies

�

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

�

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2013. The Companys accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2013, and updated, as necessary, in this Quarterly Report on Form 10-Q.

�

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

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

��

Concentration of Credit Risk.��Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, the Companys cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. As of September 30, 2014, the Company had cash and cash equivalent balances of approximately $1,614,000 in excess of the federally insured limit of $250,000.

�

The Company also had approximately $10,023,000 invested in institutional money market funds. These funds are protected under the Securities Investor Protection Corporation, a nonprofit membership corporation which provides limited coverage up to $500,000.

�

Accounts Receivable. Accounts receivable are stated at cost less an allowance for doubtful accounts which reflects the Companys estimate of balances that will be not collected. The allowance is based on the history of past write-offs, the aging of balances, collections experience and current credit conditions. Additions include provisions for doubtful accounts and deductions include customer write-offs. Changes in the allowance for doubtful accounts were as follows:

�

Three Months Ended

September 30,

�

Nine Months Ended

September 30,

�

2014

�

2013

�

2014

�

2013

�

Beginning of period

�

161,863

�

162,678

�

81,009

�

190,109

�

Additions

�

75,000

�

10,000

�

192,000

�

70,000

�

Deductions

�

(30,995

)

�

(39,552

)

�

(67,141

)

�

(126,983

)

End of period

�

205,868

�

133,126

�

205,868

�

133,126

�

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

�

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

�

Revenue Recognition. The Company normally enters into contractual agreements with its customers for periods ranging between one to three years. The Company recognizes the total revenue provided under a contract ratably over the contract period, including any periods under which the Company has agreed to provide services at no cost. The Company recognizes revenue when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

�

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

�

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

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

��

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

�

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

�

In August 2014, the FASB issued ASU No. 201415 (ASU 2014-15), Presentation of Financial Statements Going Concern.� ASU 2014-15 provides GAAP guidance on managements responsibility in evaluating whether there is substantial doubt about a companys ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a companys ability to continue as a going concern within one year from the date the financial statements are issued.� ASU 2014-15 is the final version of Proposed ASU No. 2013300 Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entitys Going Concern Presumption, which has been deleted. The Company does not expect the adoption of ASU 201415 to have a significant impact on its condensed consolidated financial statements.

�

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

�

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

�

Note 3.��Business Acquisitions

�

Delos Internet

�

In February 2013, the Company completed the acquisition of Delos Internet (Delos). The Company obtained full control of Delos and determined that the acquisition was a business combination to be accounted for under the acquisition method. The following table summarizes the consideration transferred and the amounts of identified assets acquired and liabilities assumed at the acquisition date. The number of shares issued was based on the closing price of the Company's common stock on the February 28, 2013 closing date which was $2.47.

�

Original

�

Adjustments

�

Final

�

Fair value of consideration transferred:

�

Cash

�

225,000

�

225,000

�

Common stock

�

1,071,172

�

(119,916

)

�

951,256

�

Other liabilities assumed

�

36,733

�

36,733

�

Capital lease obligations assumed

�

128,929

�

128,929

�

Total consideration transferred

�

1,425,101

�

(83,183

)

�

1,341,918

�

Fair value of identifiable assets acquired and liabilities assumed:

�

Cash

�

2,058

�

2,058

�

Accounts receivable

�

80,524

�

1,286

�

79,238

�

Property and equipment

�

826,524

�

18,824

�

807,700

�

Security deposits

�

1,993

�

1,993

�

Accounts payable

�

(26,970

)

�

2,566

�

(29,536

)

Deferred revenue

�

(62,110

)

�

(2,135

)

�

(59,975

)

Other liabilities

�

(89,930

)

�

(89,930

)

Total identifiable net tangible assets

�

732,089

�

20,541

�

711,548

�

Customer relationships

�

1,634,469

�

1,634,469

�

Total identifiable net assets

�

2,366,558

�

20,541

�

2,346,017

�

Gain on business acquisition

�

941,457

�

62,642

�

1,004,099

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

�

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

�

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

�

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

�

Pro Forma Information

�

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

�

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

�

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

�

Note 4.��Property and Equipment

�

Property and equipment is comprised of:

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

�

Property acquired through capital leases included within the Companys property and equipment consists of the following:

�

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

�

Note 5. Intangible Assets

�

Intangible assets consist of the following:

�

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

�

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

�

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

�

The Companys licenses with the Federal Communications Commission (FCC) are not subject to amortization as they have an indefinite useful life.

�

Note 6. Accrued Expenses

�

Accrued expenses consist of the following:

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

�

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

�

Note 7.��Other Liabilities

�

Other liabilities consist of the following:

�

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

�

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

�

Note 8. Stock Options and Warrants

�

Stock Options

�

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

�

Three Months Ended

September 30,

�

Nine Months Ended

September 30,

�

2014

�

2013

�

2014

�

2013

�

Risk-free interest rate

�

1.7%-1.8

�

1.9

�

1.6%-1.8

�

0.8%-1.9

Expected volatility

�

47%-59

�

65%-68

Expected life (in years)

�

5.3

�

5.3

�

5-6.5

�

Expected dividend yield

�

Weighted average per share grant date fair value

�

0.75

�

1.42

�

0.80

�

1.44

�

Stock-based compensation

�

183,844

�

253,813

�

735,076

�

885,116

�

The risk-free interest rate was based on rates established by the Federal Reserve. The Companys expected volatility was based upon the historical volatility for its common stock. The expected life of the Companys options was determined using the simplified method as a result of limited historical data regarding the Companys activity. The dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future. Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. The unamortized amount of stock options expense totaled $1,113,205 as of September 30, 2014 which will be recognized over a weighted-average period of 1.7 years.

�

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

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

Stock Warrants�

�

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

�

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

�

Cashless Exercises

�

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

�

Note 9. Employee Stock Purchase Plan

�

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

�

Note 10. Fair Value Measurement

�

Valuation Hierarchy

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

��

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

��

�

Total Carrying

Value

�

Quoted prices in active markets
(Level 1)

�

Significant
other
observable
inputs
(Level 2)

�

Significant
unobservable
inputs
(Level 3)

�

September 30, 2014

�

11,890,770

�

11,890,770

�

December 31, 2013

�

28,181,531

�

28,181,531

�

��

Note 11.��Net Loss Per Common Share

�

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

��

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

�

Note 12.��Commitments

�

Operating Lease Obligations

�

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

�

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

�

Rent expenses were as follows:

�

Three Months Ended

September 30,

�

Nine Months Ended

September 30,

�

2014

�

2013

�

2014

�

2013

�

Points of Presence

�

1,939,574

�

1,767,441

�

5,732,922

�

5,108,347

�

Street level rooftops

�

3,359,804

�

2,707,304

�

9,752,720

�

7,757,206

�

Corporate offices

�

84,109

�

121,518

�

252,328

�

366,794

�

Other

�

88,211

�

102,039

�

273,928

�

327,268

�

5,471,698

�

4,698,302

�

16,011,898

�

13,559,615

�

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

�

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

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

��

Capital Lease Obligations

�

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

��

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

�

Other

�

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

�

Note 13. ��Segment Information

�

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

�

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

��

�

Three Months Ended September 30, 2014 (Unaudited)

�

Fixed

Wireless

�

Shared Wireless Infrastructure

�

Corporate

�

Eliminations

�

Total

�

Revenues

�

7,553,609

�

793,964

�

(45,969

)

�

8,301,604

�

Operating Expenses

�

Cost of revenues (exclusive of depreciation)

�

2,631,572

�

3,609,807

�

15,510

�

(45,969

)

�

6,210,920

�

Depreciation and amortization

�

1,980,519

�

1,013,693

�

324,183

�

3,318,395

�

Customer support services

�

342,288

�

147,379

�

754,494

�

1,244,161

�

Sales and marketing

�

1,239,446

�

38,261

�

75,308

�

1,353,015

�

General and administrative

�

63,686

�

163,125

�

2,154,775

�

2,381,586

�

Total Operating Expenses

�

6,257,511

�

4,972,265

�

3,324,270

�

(45,969

)

�

14,508,077

�

Operating Income (Loss)

�

1,296,098

�

(4,178,301

)

�

(3,324,270

)

�

(6,206,473

)

�

Capital expenditures

�

1,154,281

�

589,883

�

21,603

�

1,765,767

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

��

�

Three Months Ended September 30, 2013 (Unaudited)

�

Fixed

Wireless

�

Shared Wireless Infrastructure

�

Corporate

�

Eliminations

�

Total

�

Revenues

�

7,910,377

�

535,936

�

(45,649

)

�

8,400,664

�

Operating Expenses

�

Cost of revenues (exclusive of depreciation)

�

2,510,278

�

2,956,914

�

22,755

�

(45,649

)

�

5,444,298

�

Depreciation and amortization

�

2,754,675

�

857,739

�

234,230

�

3,846,644

�

Customer support services

�

339,206

�

208,491

�

673,379

�

1,221,076

�

Sales and marketing

�

1,206,125

�

80,956

�

81,547

�

1,368,628

�

General and administrative

�

126,256

�

151,561

�

2,322,351

�

2,600,168

�

Total Operating Expenses

�

6,936,540

�

4,255,661

�

3,334,262

�

(45,649

)

�

14,480,814

�

Operating Income (Loss)

�

973,837

�

(3,719,725

)

�

(3,334,262

)

�

(6,080,150

)

�

Capital expenditures

�

1,242,975

�

680,324

�

200,347

�

2,123,646

�

��

�

Nine Months Ended September 30, 2014 (Unaudited)

�

Fixed

Wireless

�

Shared Wireless Infrastructure

�

Corporate

�

Eliminations

�

Total

�

Revenues

�

22,811,582

�

2,272,683

�

(137,907

)

�

24,946,358

�

Operating Expenses

�

Cost of revenues (exclusive of depreciation)

�

7,750,725

�

10,512,098

�

43,860

�

(137,907

)

�

18,168,776

�

Depreciation and amortization

�

6,598,893

�

2,932,592

�

763,387

�

10,294,872

�

Customer support services

�

878,764

�

502,342

�

2,182,465

�

3,563,571

�

Sales and marketing

�

3,754,707

�

177,874

�

241,122

�

4,173,703

�

General and administrative

�

374,164

�

467,290

�

6,885,069

�

7,726,523

�

Total Operating Expenses

�

19,357,253

�

14,592,196

�

10,115,903

�

(137,907

)

�

43,927,445

�

Operating Income (Loss)

�

3,454,329

�

(12,319,513

)

�

(10,115,903

)

�

(18,981,087

)

�

Capital expenditures

�

4,044,135

�

2,018,334

�

338,791

�

6,401,260

�

As of September 30, 2014

�

Property and equipment, net

�

21,340,927

�

11,753,330

�

2,287,890

�

35,382,147

�

Total assets

�

26,293,518

�

14,232,594

�

14,948,568

�

55,474,680

�

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  CONTINUED

��

�

Nine Months Ended September 30, 2013 (Unaudited)

�

Fixed

Wireless

�

Shared Wireless Infrastructure

�

Corporate

�

Eliminations

�

Total

�

Revenues

�

24,158,268

�

890,920

�

(137,127

)

�

24,912,061

�

Operating Expenses

�

Cost of revenues (exclusive of depreciation)

�

7,229,469

�

8,404,925

�

94,623

�

(137,127

)

�

15,591,890

�

Depreciation and amortization

�

8,411,263

�

2,633,176

�

609,118

�

11,653,557

�

Customer support services

�

900,349

�

587,389

�

2,311,949

�

3,799,687

�

Sales and marketing

�

3,825,299

�

239,213

�

268,776

�

4,333,288

�

General and administrative

�

443,863

�

486,495

�

7,443,442

�

8,373,800

�

Total Operating Expenses

�

20,810,243

�

12,351,198

�

10,727,908

�

(137,127

)

�

43,752,222

�

Operating Income (Loss)

�

3,348,025

�

(11,460,278

)

�

(10,727,908

)

�

(18,840,161

)

�

Capital expenditures

�

3,358,758

�

1,049,344

�

349,674

�

4,757,776

�

As of September 30, 2013

�

Property and equipment, net

�

23,870,843

�

12,439,779

�

1,875,461

�

38,186,083

�

Total assets

�

30,590,803

�

14,881,500

�

34,776,782

�

80,249,085

�

��

Note 14. Subsequent Events

�

��In October 2014, the Company entered into a loan agreement (the Loan Agreement) with Melody Business Finance, LLC (the Lender). The Lender will provide the Company with a five-year $35 million secured term loan (the Financing). Pursuant to the terms of the Loan Agreement, the loan bears interest at a rate equal to the greater of (i) the sum of the most recently effective one month Libor as in effect on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (PIK), or deferred, interest that shall accrue at 4% per annum.

�

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

�

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

�

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

�

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the nine months ended September 30, 2014. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

�

Forward-Looking Statements

�

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

�

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

�

Non-GAAP Measures and Reconciliations to GAAP Measures

�

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

�

Characteristics of Revenues and Expenses

�

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

�

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

�

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

�

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

�

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

�

Overview Fixed Wireless

�

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

�

Market Information Fixed Wireless

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

Three months ended September 30, 2014

Market

�

Revenues

�

Cost of
Revenues

�

Gross Margin

�

Operating Costs

�

Adjusted
Market
EBITDA

�

Los Angeles

�

2,016,888

�

543,967

�

1,472,921

�

513,935

�

958,986

�

New York

�

1,949,316

�

724,148

�

1,225,168

�

348,283

�

876,885

�

Boston

�

1,363,282

�

397,754

�

965,528

�

201,988

�

763,540

�

Chicago

�

722,474

�

298,883

�

423,591

�

111,998

�

311,593

�

Las-Vegas-Reno

�

338,417

�

126,312

�

212,105

�

1,114

�

210,991

�

Miami

�

357,315

�

116,987

�

240,328

�

50,620

�

189,708

�

Houston

�

178,249

�

71,171

�

107,078

�

10,050

�

97,028

�

Dallas-Fort Worth

�

155,612

�

96,015

�

59,597

�

19,545

�

40,052

�

San Francisco

�

270,055

�

125,070

�

144,985

�

105,417

�

39,568

�

Seattle

�

74,418

�

44,696

�

29,722

�

(3,434

)

�

33,156

�

Providence-Newport

�

56,279

�

53,874

�

2,405

�

1,746

�

659

�

Philadelphia

�

25,335

�

32,695

�

(7,360

)

�

4,246

�

(11,606

)

Total

�

7,507,640

�

2,631,572

�

4,876,068

�

1,365,508

�

3,510,560

�

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

��

Three months ended September 30, 2013

Market

�

Revenues

�

Cost of
Revenues

�

Gross Margin

�

Operating Costs

�

Adjusted
Market
EBITDA

�

Boston

�

1,632,918

�

361,630

�

1,271,288

�

196,340

�

1,074,948

�

Los Angeles

�

2,020,905

�

549,122

�

1,471,783

�

418,928

�

1,052,855

�

New York

�

1,914,892

�

635,865

�

1,279,027

�

293,841

�

985,186

�

Chicago

�

779,457

�

284,498

�

494,959

�

135,484

�

359,475

�

Miami

�

383,462

�

119,758

�

263,704

�

132,562

�

131,142

�

San Francisco

�

311,765

�

127,717

�

184,048

�

80,345

�

103,703

�

Las Vegas-Reno

�

251,167

�

127,045

�

124,122

�

51,798

�

72,324

�

Houston

�

153,727

�

65,566

�

88,161

�

22,746

�

65,415

�

Providence-Newport

�

115,246

�

49,954

�

65,292

�

11,472

�

53,820

�

Dallas-Fort Worth

�

174,095

�

101,718

�

72,377

�

64,619

�

7,758

�

Seattle

�

83,019

�

48,334

�

34,685

�

27,405

�

7,280

�

Nashville

�

4,902

�

15,359

�

(10,457

)

�

1,804

�

(12,261

)

Philadelphia

�

39,173

�

23,712

�

15,461

�

31,159

�

(15,698

)

Total

�

7,864,728

�

2,510,278

�

5,354,450

�

1,468,503

�

3,885,947

�

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

��

Nine months ended September 30, 2014

Market

�

Revenues

�

Cost of
Revenues

�

Gross Margin

�

Operating Costs

�

Adjusted
Market
EBITDA

�

Los Angeles

�

6,052,647

�

1,678,286

�

4,374,361

�

1,451,033

�

2,923,328

�

New York

�

5,815,345

�

2,044,692

�

3,770,653

�

964,342

�

2,806,311

�

Boston

�

4,346,847

�

1,195,300

�

3,151,547

�

588,665

�

2,562,882

�

Chicago

�

2,182,059

�

885,682

�

1,296,377

�

381,365

�

915,012

�

Miami

�

1,107,265

�

337,978

�

769,287

�

224,265

�

545,022

�

Las-Vegas-Reno

�

819,169

�

369,667

�

449,502

�

99,524

�

349,978

�

Houston

�

524,596

�

195,183

�

329,413

�

65,662

�

263,751

�

San Francisco

�

831,018

�

376,525

�

454,493

�

254,237

�

200,256

�

Dallas-Fort Worth

�

482,736

�

289,727

�

193,009

�

114,985

�

78,024

�

Seattle

�

214,245

�

140,426

�

73,819

�

13,944

�

59,875

�

Providence-Newport

�

201,137

�

152,317

�

48,820

�

4,770

�

44,050

�

Philadelphia

�

94,708

�

72,300

�

22,408

�

25,070

�

(2,662

)

Nashville

�

1,903

�

12,642

�

(10,739

)

�

2,331

�

(13,070

)

Total

�

22,673,675

�

7,750,725

�

14,922,950

�

4,190,193

�

10,732,757

�

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

��

Nine months ended September 30, 2013

Market

�

Revenues

�

Cost of
Revenues

�

Gross Margin

�

Operating Costs

�

Adjusted
Market
EBITDA

�

Los Angeles

�

6,137,710

�

1,562,383

�

4,575,327

�

1,210,148

�

3,365,179

�

Boston

�

4,930,604

�

1,047,995

�

3,882,609

�

656,367

�

3,226,242

�

New York

�

5,740,805

�

1,869,032

�

3,871,773

�

1,002,173

�

2,869,600

�

Chicago

�

2,512,670

�

856,002

�

1,656,668

�

362,409

�

1,294,259

�

Miami

�

1,151,525

�

324,411

�

827,114

�

302,437

�

524,677

�

Las Vegas-Reno

�

913,230

�

399,685

�

513,545

�

149,622

�

363,923

�

San Francisco

�

934,437

�

341,833

�

592,604

�

283,345

�

309,259

�

Houston

�

386,965

�

143,864

�

243,101

�

65,675

�

177,426

�

Providence-Newport

�

356,342

�

148,797

�

207,545

�

48,672

�

158,873

�

Seattle

�

313,758

�

140,719

�

173,039

�

90,503

�

82,536

�

Dallas-Fort Worth

�

507,795

�

290,537

�

217,258

�

206,418

�

10,840

�

Philadelphia

�

119,165

�

61,061

�

58,104

�

68,971

�

(10,867

)

Nashville

�

16,135

�

43,150

�

(27,015

)

�

8,910

�

(35,925

)

Total

�

24,021,141

�

7,229,469

�

16,791,672

�

4,455,650

�

12,336,022

�

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

�

Overview - Shared Wireless Infrastructure

�

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

�

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

�

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

�

Supplemental Segment Information

�

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

�

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

�

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

�

Three months ended September 30, 2014

�

Fixed

Wireless

�

Shared Wireless Infrastructure

�

Corporate

�

Total

�

Operating Income (Loss)

�

1,296,098

�

(4,178,301

)

�

(3,324,270

)

�

(6,206,473

)

Depreciation and amortization

�

1,980,519

�

1,013,693

�

324,183

�

3,318,395

�

Stock-based compensation

�

185,373

�

185,373

�

Loss on non-monetary transactions

�

67,833

�

67,833

�

Deferred rent

�

47,932

�

70,439

�

(8,807

)

�

109,564

�

Adjusted EBITDA

�

3,392,382

�

(3,094,169

)

�

(2,823,521

)

�

(2,525,308

)

Less: Capital expenditures

�

1,154,281

�

589,883

�

21,603

�

1,765,767

�

Net Cash Flow

�

2,238,101

�

(3,684,052

)

�

(2,845,124

)

�

(4,291,075

)

�

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

�

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

�

Three months ended September 30, 2013

�

Fixed

Wireless

�

Shared Wireless Infrastructure

�

Corporate

�

Total

�

Operating Income (Loss)

�

973,837

�

(3,719,725

)

�

(3,334,262

)

�

(6,080,150

)

Depreciation and amortization

�

2,754,675

�

857,739

�

234,230

�

3,846,644

�

Stock-based compensation

�

271,824

�

271,824

�

Loss on property and equipment

�

19,521

�

3,168

�

22,689

�

Loss on non-monetary transactions

�

62,394

�

62,394

�

Adjusted EBITDA

�

3,810,427

�

(2,858,818

)

�

(2,828,208

)

�

(1,876,599

)

Less: Capital expenditures

�

1,242,975

�

680,324

�

200,347

�

2,123,646

�

Net Cash Flow

�

2,567,452

�

(3,539,142

)

�

(3,028,555

)

�

(4,000,245

)

��

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

�

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

�

��Nine Months Ended September 30, 2014

�

Fixed

Wireless

�

Shared Wireless Infrastructure

�

Corporate

�

Total

�

Operating Income (Loss)

�

3,454,329

�

(12,319,513

)

�

(10,115,903

)

�

(18,981,087

)

Depreciation and amortization

�

6,598,893

�

2,932,592

�

763,387

�

10,294,872

�

Stock-based compensation

�

740,405

�

740,405

�

Loss on non-monetary transactions

�

203,231

�

203,231

�

Deferred rent

�

93,428

�

204,447

�

(26,420

)

�

271,455

�

Non-recurring expenses, primarily acquisition-related

�

91,359

�

91,359

�

Adjusted EBITDA

�

10,349,881

�

(9,182,474

)

�

(8,547,172

)

�

(7,379,765

)

Less: Capital expenditures

�

4,044,135

�

2,018,334

�

338,791

�

6,401,260

�

Net Cash Flow

�

6,305,746

�

(11,200,808

)

�

(8,885,963

)

�

(13,781,025

)

�

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

�

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

�

Nine Months Ended September 30, 2013

�

Fixed

Wireless

�

Shared Wireless Infrastructure

�

Corporate

�

Total

�

Operating Income (Loss)

�

3,348,025

�

(11,460,278

)

�

(10,727,908

)

�

(18,840,161

)

Depreciation and amortization

�

8,411,263

�

2,633,176

�

609,118

�

11,653,557

�

Stock-based compensation

�

939,200

�

939,200

�

Loss on property and equipment

�

73,622

�

8,202

�

81,824

�

Loss on non-monetary transactions

�

204,552

�

204,552

�

Non-recurring expenses, primarily acquisition-related

�

112,815

�

112,815

�

Adjusted EBITDA

�

12,037,462

�

(8,818,900

)

�

(9,066,775

)

�

(5,848,213

)

Less: Capital expenditures

�

3,358,758

�

1,049,344

�

349,674

�

4,757,776

�

Net Cash Flow

�

8,678,704

�

(9,868,244

)

�

(9,416,449

)

�

(10,605,989

)

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

��

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

Liquidity and Capital Resources

�

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

�

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

�

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

�

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

�

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

�

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

�

Debt Financing. In October 2014, we entered into a loan agreement (the Loan Agreement) with Melody Business Finance, LLC (the Lender). The Lender will provide us with a five-year $35 million secured term loan (the Financing). Pursuant to the terms of the Loan Agreement, the loan bears interest at a rate equal to the greater of (i) the sum of the most recently effective one month Libor as in effect on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (PIK), or deferred, interest that shall accrue at 4% per annum.

�

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

�

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

�

Contractual Obligations and Commitments

�

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

�

Payments due by period

�

Total

�

2014

�

2015

�

2016

�

2017

�

2018

�

Thereafter

�

Capital leases

�

2,283,795

�

238,464

�

921,437

�

668,847

�

401,125

�

53,922

�

Operating leases

�

63,821,722

�

5,182,797

�

19,758,856

�

18,300,039

�

12,639,857

�

5,160,998

�

2,779,175

�

Deferred payments

�

14,876

�

2,907

�

11,627

�

342

�

Other

�

242,830

�

121,415

�

121,415

�

Total

�

66,363,223

�

5,545,583

�

20,813,335

�

18,969,228

�

13,040,982

�

5,214,920

�

2,779,175

�

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

�

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

�

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

�

Critical Accounting Policies

�

��The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of managements 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 assets carrying value to determine if impairment exists. If the asset is determined to be impaired, the impairment loss is measured based on the excess of its carrying value over its fair value. Assets to be disposed of are reported at the lower of their carrying value or net realizable value.

�

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

�

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

�

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

�

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

�

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

�

In August 2014, the FASB issued ASU No. 201415 (ASU 2014-15), Presentation of Financial Statements Going Concern.� ASU 2014-15 provides GAAP guidance on managements responsibility in evaluating whether there is substantial doubt about a companys ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a companys ability to continue as a going concern within one year from the date the financial statements are issued.� ASU 2014-15 is the final version of Proposed ASU No. 2013300 Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties about an Entitys Going Concern Presumption, which has been deleted. We do not expect the adoption of ASU 201415 to have a significant impact on our condensed consolidated financial statements.

��

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

�

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

�

Market risk is the potential loss arising from adverse changes in market rates and prices.� Our primary market risk relates to interest rates.� At September 30, 2014, all cash and cash equivalents are immediately available cash balances.� A portion of our cash and cash equivalents are held in institutional money market funds.� �

��

Item 4. Controls and Procedures.

�

Disclosure Controls and Procedures

�

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of September 30, 2014, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

�

Changes in Internal Control over Financial Reporting

�

There were no changes in our system of internal control over financial reporting during the nine months ended September 30,�2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

��

�

��

PART II

OTHER INFORMATION

�

Item 1A. Risk Factors.

�

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

��

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

�

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

�

make it difficult for us to satisfy our debt obligations;

�

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

�

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

�

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

�

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

�

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

�

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

�

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

�

economic and demand factors affecting our industry;

�

pricing pressures;

�

increased operating costs;

�

competitive conditions; and

�

other operating difficulties.

�

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

�

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

�

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

�

incur additional debt;

�

grant liens on assets;

�

issue capital stock with certain features;

�

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

�

make fundamental business changes.

�

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

�

Item 6. Exhibits.

�

Exhibit No.	�	Description
31.1	�	Section 302 Certification of Principal Executive Officer.
31.2	�	Section 302 Certification of Principal Financial Officer.
32.1	�	Section 906 Certification of Principal Executive Officer.
32.2	�	Section 906 Certification of Principal Financial Officer.
101.INS	�	XBRL Instance Document*
101.SCH	�	XBRL Taxonomy Extension Schema Document*
101.CAL	�	XBRL Taxonomy Calculation Linkbase Document*
101.LAB	�	XBRL Taxonomy Labels Linkbase Document*
101.PRE	�	XBRL Taxonomy Presentation Linkbase Document*
101.DEF	�	XBRL Definition Linkbase Document*
�	�	�

*Attached as Exhibit 101 to this report are the following financial statements from the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Stockholders Equity, and (v) related notes to these financial statements.��

�

SIGNATURES

�

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

�

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

�

EXHIBIT INDEX

�

Exhibit No.	�	Description
31.1	�	Section 302 Certification of Principal Executive Officer.
31.2	�	Section 302 Certification of Principal Financial Officer.
32.1	�	Section 906 Certification of Principal Executive Officer.
32.2	�	Section 906 Certification of Principal Financial Officer
101.INS	�	XBRL Instance Document*
101.SCH	�	XBRL Taxonomy Extension Schema Document*
101.CAL	�	XBRL Taxonomy Calculation Linkbase Document*
101.LAB	�	XBRL Taxonomy Labels Linkbase Document*
101.PRE	�	XBRL Taxonomy Presentation Linkbase Document*
101.DEF	�	XBRL Definition Linkbase Document*
�	�	�

��

�

EXHIBIT 31.1

�

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

�

I, Jeffrey M.�Thompson, certify that:

�

�	(1)		I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter�ended September 30, 2014;
�	�		�
�	(2) �		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
�	�		�
�	(3) �		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
�	�		�
�	(4) �		The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
�		�		�
�		a) �		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
�		�		�
�		b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
�		�		�
�		c) �		Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
�		�		�
�		d) �		Disclosed in the report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting.
�	�		�
�	(5) �		The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
�		�		�
�		a) �		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
�		�		�
�		b) �		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.

�

Date: November 10, 2014�

�

/s/ Jeffrey M. Thompson

�

Jeffrey M. Thompson
President and Chief Executive Officer

(Principal Executive Officer)

�

EXHIBIT 31.2

�

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

�

I, Joseph P. Hernon, certify that:

�

�	(1)�		I have reviewed this quarterly report on Form 10-Q of Towerstream Corporation for the quarter ended September 30, 2014;
�	�		�
�	(2) �		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
�	�		�
�	(3) �		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
�	�		�
�	(4) �		The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
�		�		�
�		a) �		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
�		�		�
�		b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
�		�		�
�		c) �		Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
�		�		�
�		d) �		Disclosed in the report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of the annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting.
�	�		�
�	(5) �		The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
�		�		�
�		a) �		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
�		�		�
�		b) �		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.

�

Date: November 10, 2014

�

/s/ Joseph P. Hernon

�

Joseph P. Hernon
Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

�

EXHIBIT 32.1

�

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S. C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

�

In connection with the Quarterly Report of Towerstream Corporation, (the Company) on Form�10-Q for the period ended September 30,�2014 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Jeffrey M.�Thompson,�President and Chief�Executive�Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

�

�	(1) �	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
�	�	�
�	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

�

Date: November 10, 2014

�

/s/ Jeffrey M. Thompson

Jeffrey M. Thompson
President and Chief Executive Officer

(Principal Executive Officer)

�

EXHIBIT 32.2

�

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

�

In connection with the Quarterly Report of Towerstream Corporation, (the Company) on Form�10-Q for the period ended September 30,�2014, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Joseph P. Hernon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

�

�	(1) �	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
�	�	�
�	(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

�

Date: November 10, 2014

�

/s/ Joseph P. Hernon

�

Joseph P. Hernon
Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

�

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

Create E-mail Alert Related Categories

SEC Filings

Sign up for StreetInsider Free!

Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!

Form 10-Q TOWERSTREAM CORP For: Sep 30

You May Also Be Interested In

Create E-mail Alert Related Categories

Sign up for StreetInsider Free!

Free News Feed