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TWER > SEC Filings for TWER > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for TOWERSTREAM CORP


8-Nov-2012

Quarterly Report


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

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the nine months ended September 30, 2012. 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, 2011 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Forward-Looking Statements

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

In some cases, you can identify forward-looking statements by terminology such as ''may,'' ''will,'' ''should,'' ''could,'' ''expects,'' ''plans,'' ''intends,'' ''anticipates,'' ''believes,'' ''estimates,'' ''predicts,'' ''potential,'' or ''continue'' or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place 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.

Overview

We provide broadband services to commercial customers and deliver access over a wireless network transmitting over both regulated and unregulated radio spectrum. Our service supports bandwidth on demand, wireless redundancy, virtual private networks ("VPNs"), disaster recovery, bundled data and video services. We provide broadband services to business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport.

In the fourth quarter of 2011, we launched our Wi-Fi/Small Cell rooftop tower sites ("rooftop tower sites") which is marketed towards mobile operators, Internet based marketing companies, and Wi-Fi operators.

In the first half of 2012, we entered into two agreements with national wireless carriers utilizing our current and future rooftop tower sites.

In August 2012, we entered into a binding merger agreement with Delos Internet ("Delos") pursuant to which a wholly owned subsidiary of ours will be merged with and into Delos, with Delos becoming a wholly owned subsidiary of ours. Delos operates in Houston, Texas. The closing of the merger agreement is subject to customary closing conditions as well as regulatory approval. We anticipate, but cannot assure, that the merger agreement will close during the first quarter of 2013.

Characteristics of our Revenues and Expenses

We offer broadband services under agreements for periods 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.

Costs of revenues consists of expenses that are directly related to providing services to our customers, including Core Network expenses (tower and roof rent and utilities, bandwidth costs, Points of Presence ("PoP") maintenance and other) and Customer Network expenses (customer maintenance, non-installation fees and other customer specific expenses). We collectively refer to Core Network and Customer Network as our "Network," and Core Network costs and Customer Network costs as "Network Costs." When we first enter a new market, or expand in an existing market, we are required to incur up-front costs in order to be able to provide wireless broadband services to commercial customers. We refer to these activities as establishing a "Network Presence." These costs include constructing 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. The costs to build PoPs are capitalized and expensed over a five year period. In addition to building PoPs, 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 up-front cost of establishing or expanding our Network Presence. As a result, our gross margins in a market normally increase over time as we add new customers in that market. However, we may experience variability in gross margins during periods in which we are expanding our Network Presence in a market.

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

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

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

Market Information

We operate in one segment which is the business of wireless broadband services. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. While we operate in only one business segment, we recognize that providing information on the revenues and costs of operating in each market can provide useful information to investors regarding our operating performance.

As of September 30, 2012, we operated in twelve metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport. 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 incurring Network Costs. Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period. We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model, the operating performance of our mature markets, and the long-term potential for our newer markets. Set forth below is a summary of our operating performance on a per-market basis, and a description of how each category is determined.

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

Centralized Costs: Represents costs incurred to support activities across all of our markets that are not allocable to a specific market. These principally consists of payroll costs for customer care representatives, customer support engineers, sales support, marketing and certain installations personnel. These individuals service customers across all markets rather than being dedicated to any specific market.

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

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

We entered the Las Vegas-Reno market in May 2011 through the acquisition of One Velocity, Inc. ("One Velocity"). The acquisition of Color Broadband Communications Inc. ("Color Broadband") in December 2011 expanded our market presence in the Los Angeles area.

Three months ended September 30, 2012

                                                                                      Adjusted
                                       Cost of          Gross         Operating        Market
Market                Revenues        Revenues         Margin           Costs          EBITDA
Los Angeles          $ 1,994,972     $   598,997     $ 1,395,975     $   396,698     $   999,277
New York               1,857,988         435,194       1,422,794         319,524       1,103,270
Boston                 1,698,654         388,141       1,310,513         220,220       1,090,293
Chicago                  943,775         303,818         639,957         170,327         469,630
Miami                    413,321         117,119         296,202          94,438         201,764
Las Vegas-Reno           369,748         157,851         211,897          28,518         183,379
San Francisco            373,210          87,322         285,888          79,976         205,912
Dallas-Fort Worth        157,625          82,537          75,088          90,172         (15,084 )
Seattle                  144,369          54,007          90,362          36,092          54,270
Providence/Newport       131,992          64,693          67,299          29,954          37,345
Philadelphia              30,043          22,355           7,688          32,125         (24,437 )
Nashville                 11,810          14,106          (2,296 )         8,547         (10,843 )
Total                $ 8,127,507     $ 2,326,140     $ 5,801,367     $ 1,506,591     $ 4,294,776

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

Adjusted market EBITDA                                                   $  4,294,776
Centralized costs                                                            (939,677 )
Corporate expenses                                                         (2,011,720 )
Rooftop tower sites expenses                                               (2,886,353 )
Depreciation and amortization                                              (3,399,442 )
Stock-based compensation                                                     (437,567 )
Other income (expense)                                                        (28,251 )
Net loss                                                                 $ (5,408,234 )

Three months ended September 30, 2011

                                                                                      Adjusted
                                       Cost of          Gross         Operating        Market
Market                Revenues        Revenues         Margin           Costs          EBITDA
Boston               $ 1,695,256     $   390,387     $ 1,304,869     $   224,535     $ 1,080,334
New York               1,532,711         349,209       1,183,502         308,937         874,565
Los Angeles            1,086,767         223,427         863,340         262,728         600,612
Chicago                  870,300         266,329         603,971         150,881         453,090
Las Vegas- Reno          408,545         179,858         228,687          44,250         184,437
San Francisco            370,265          66,401         303,864          92,547         211,317
Miami                    365,266          80,503         284,763         100,347         184,416
Dallas-Fort Worth        165,551          84,441          81,110          79,747           1,363
Seattle                  125,393          55,372          70,021          26,952          43,069
Providence-Newport       120,011          50,871          69,140          23,848          45,292
Philadelphia              23,177          15,240           7,937          28,105         (20,168 )
Nashville                 12,650             969          11,681          11,050             631
Total                $ 6,775,892     $ 1,763,007     $ 5,012,885     $ 1,353,927     $ 3,658,958

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

Adjusted market EBITDA                                                   $  3,658,958
Centralized costs                                                            (761,196 )
Corporate expenses                                                         (1,933,124 )
Rooftop tower sites expenses                                                 (880,181 )
Depreciation and amortization                                              (2,298,788 )
Stock-based compensation                                                     (414,739 )
Other income (expense)                                                          8,659
Net Loss                                                                 $ (2,620,411 )

Nine months ended September 30, 2012

                                                                                          Adjusted
                                        Cost of                          Operating         Market
Market                 Revenues        Revenues       Gross Margin         Costs           EBITDA
Los Angeles          $  5,888,039     $ 1,798,033     $   4,090,006     $ 1,108,888     $  2,981,118
New York                5,348,145       1,340,228         4,007,917         910,825        3,097,092
Boston                  5,134,784       1,147,466         3,987,318         710,288        3,277,030
Chicago                 2,743,001         835,807         1,907,194         506,675        1,400,519
Miami                   1,238,460         299,199           939,261         290,899          648,362
Las Vegas-Reno          1,198,464         463,654           734,810         114,537          620,273
San Francisco           1,160,212         277,022           883,190         244,250          638,940
Dallas-Fort Worth         488,163         257,967           230,196         257,546          (27,350 )
Seattle                   375,496         172,788           202,708          88,004          114,704
Providence/Newport        365,247         149,721           215,526          93,490          122,036
Philadelphia               78,458          55,061            23,397          77,206          (53,809 )
Nashville                  31,418          42,145           (10,727 )        26,052          (36,779 )
Total                $ 24,049,887     $ 6,839,091     $  17,210,796     $ 4,428,660     $ 12,782,136

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

Adjusted market EBITDA                                                   $  12,782,136
Centralized costs                                                           (2,829,033 )
Corporate expenses                                                          (6,300,188 )
Rooftop tower sites expenses                                                (6,734,545 )
Depreciation and amortization                                              (10,028,804 )
Stock-based compensation                                                    (1,353,404 )
Other income (expense)                                                         (83,187 )
Net loss                                                                 $ (14,547,025 )

Nine months ended September 30, 2011

                                                                                          Adjusted
                                        Cost of                          Operating         Market
Market                 Revenues        Revenues       Gross Margin         Costs           EBITDA
Boston               $  5,053,796     $ 1,183,440     $   3,870,356     $   721,808     $  3,148,548
New York                4,483,848       1,024,971         3,458,877         946,407        2,512,470
Los Angeles             3,085,461         589,316         2,496,145         799,122        1,697,023
Chicago                 2,603,539         787,618         1,815,921         498,761        1,317,160
San Francisco           1,105,410         198,911           906,499         282,579          623,920
Miami                   1,008,446         229,238           779,208         295,597          483,611
Las Vegas- Reno           597,638         256,133           341,505          52,129          289,376
Dallas-Fort Worth         489,596         244,477           245,119         215,540           29,579
Seattle                   399,660         162,758           236,902          90,350          146,552
Providence-Newport        351,069         134,372           216,697          74,633          142,064
Philadelphia               87,229          46,049            41,180          83,816          (42,636 )
Nashville                  44,272          21,115            23,157          33,829          (10,672 )
Total                $ 19,309,964     $ 4,878,398     $  14,431,566     $ 4,094,571     $ 10,336,995

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure

Adjusted market EBITDA                                                   $ 10,336,995
Centralized costs                                                          (2,242,822 )
Corporate expenses                                                         (5,540,457 )
Rooftop tower sites expenses                                               (1,405,589 )
Depreciation and amortization                                              (6,486,588 )
Stock-based compensation                                                     (661,565 )
Other income (expense)                                                      1,054,635
Net loss                                                                 $ (4,945,391 )

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenues. Revenues totaled $8,127,507 during the three months ended September 30, 2012 compared to $6,775,892 during the three months ended September 30, 2011 representing an increase of $1,351,615, or 20%. This increase was primarily related to a 14% increase in our customer base from approximately 3,200 at September 30, 2011 to approximately 3,600 at September 30, 2012.

Average revenue per user ("ARPU") as of September 30, 2012 totaled $714 compared to $709 as of September 30, 2011 representing an increase of $5, or 1%. The increase in ARPU primarily related to a higher percentage of customers purchasing, or upgrading to, higher bandwidth service which generates greater monthly recurring revenue ("MRR"). Customers purchasing more than 10 megabytes of bandwidth service, commonly referred to as point-to-point customers, increased from 34% of our customer base as of September 30, 2011 to 40% as of September 30, 2012. The customers acquired from One Velocity in May 2011 had an ARPU of $734 compared to $690 for our customer base which had the effect of increasing our post-acquisition ARPU by $2. The customers acquired from Color Broadband in December 2011 had an ARPU of $645 compared to $717 for our customer base which had the effect of decreasing our post-acquisition ARPU by $7.

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.54% for the three months ended September 30, 2012 compared to 1.27% for the three months ended September 30, 2011. Our goal is to maintain churn levels between 1.4% and 1.7% which we believe is below industry averages of approximately 2.0%.

Cost of Revenues. Cost of revenues totaled $4,439,475 for the three months ended September 30, 2012 compared to $2,231,428 for the three months ended September 30, 2011 representing an increase of $2,208,047, or 99%. Gross margin for the three months ended September 30, 2012 decreased to 45% compared to 67% during the three months ended September 30, 2011. Expenses associated with rooftop tower sites for the three months ended September 30, 2012 totaled approximately $2,067,000 which impacted gross margin by 26 percentage points. Expenses associated with rooftop tower sites for the three months ended September 30, 2011 totaled approximately $422,000 which impacted gross margins by 6 percentage points. Core Network costs increased by approximately $479,000 primarily related to higher tower rent and bandwidth expenses which were partly related to acquisitions. Customer Network costs increased by approximately $90,000 primarily related to the growth in our customer base.

Depreciation and Amortization. Depreciation and amortization totaled $3,399,442 for the three months ended September 30, 2012 compared to $2,298,788 for the three months ended September 30, 2011 representing an increase of $1,100,654, or 48%. Depreciation expense totaled $2,679,531 for the three months ended September 30, 2012 compared to $1,723,163 for the three months ended September 30, 2011 representing an increase of $956,368, or 56%. The gross base of depreciable assets as of September 30, 2012 increased by $25,548,274, or 57%, compared to September 30, 2011. The increase in the depreciable base during the twelve months ended September 30, 2012 reflects continued growth in the core business (approximately $11,798,000) as well as spending on rooftop tower sites (approximately $11,773,000) and additions resulting from acquisitions (approximately $1,977,000).

Amortization expense totaled $719,911 for the three months ended September 30, 2012 compared to $575,625 for the three months ended September 30, 2011 representing an increase of $144,286, or 25%. The increase was primarily related to the amortization of customer based intangible assets recorded in connection with the acquisition of Color Broadband in the fourth quarter of 2011.

Customer Support Services. Customer support services totaled $1,128,131 for the three months ended September 30, 2012 compared to $869,900 for the three months ended September 30, 2011 representing an increase of $258,231, or 30%. Expenses associated with rooftop tower sites increased by $94,000 to $244,000 compared to $150,000 for the three months ended September 30, 2011. The remaining increase was related to additional personnel hired to support our growing customer base. Average department headcount increased by 23% from 67 in the 2011 period to 82 in the 2012 period.

Sales and Marketing. Sales and marketing expenses for the three months ended September 30, 2012 totaled $1,518,229 compared to $1,348,408 for the three months ended September 30, 2011 representing an increase of $169,821, or 13%. This increase was primarily related to an increase in payroll costs of approximately $69,000 and an increase in commissions and bonuses of approximately $89,000.

General and Administrative. General and administrative expenses totaled $3,022,213 for the three months ended September 30, 2012 compared to $2,656,438 for the three months ended September 30, 2011 representing an increase of $365,775, or 14%. Expenses associated with rooftop tower sites totaled approximately $573,000 for the three months ended September 30, 2012 as compared to $309,000 for the three months ended September 30, 2011. In addition, information technology spending increased by approximately $129,000.

Interest Income. Interest income for the three months ended September 30, 2012 totaled $10,206 compared to $21,627 for the three months ended September 30, 2011 representing a decrease of $11,421, or 53%. The decrease primarily relates to lower average cash balances in the 2012 period compared with the 2011 period. Average cash balances decreased from approximately $52.9 million in the third quarter 2011 to approximately $25.7 million in the third quarter 2012.

Interest Expense. Interest expense for the three months ended September 30, 2012 totaled $37,247 compared to $8,728 for the three months ended September 30, 2011 representing an increase of $28,519, or greater than 100%. Interest expense was primarily related to capital leases acquired and deferred payment obligations related to the Pipeline Wireless LLC ("Pipeline") and Color Broadband acquisitions.

Net Loss. Net loss for the three months ended September 30, 2012 totaled $5,408,234 compared to $2,620,411 for the three months ended September 30, 2011 representing an increase of $2,787,823 or slightly greater than 100%. Revenues increased by $1,351,615 or 20%, while operating expenses increased by $4,102,528, or 44%. Operating expenses associated with rooftop tower sites totaled $2,886,353 for the three months ended September 30, 2012 compared to $880,181 for the three months ended September 30, 2011 representing an increase of $2,006,172 or greater than 100%. Increased expenses associated with rooftop tower sites represented 72% of the increase in net loss for the three months ended September 30, 2012 as compared to the same period in 2011.

Nine Months Ended September 30, 2012 Comparedto Nine Months Ended September 30, 2011

Revenues. Revenues totaled $24,049,887 during the nine months ended September 30, 2012 compared to $19,309,964 during the nine months ended September 30, 2011 representing an increase of $4,739,923, or 25%. This increase was primarily related to a 14% increase in our customer base from approximately 3,200 at September 30, 2011 to approximately 3,600 at September 30, 2012.

Cost of Revenues. Cost of revenues totaled $11,226,112 for the nine months ended September 30, 2012 compared to $5,583,550 for the nine months ended September 30, 2011 representing an increase of $5,642,562, or slightly greater than 100%. Gross margin for the nine months ended September 30, 2012 decreased to 53% compared to 71% during the nine months ended September 30, 2011. Expenses . . .

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