TOWERSTREAM CORPORATION
FINANCIAL STATEMENTS
For the Years Ended December 31, 2005 and 2004
TOWERSTREAM CORPORATION
CONTENTS
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Page
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1
FINANCIAL STATEMENTS
Balance Sheet 2-3
Statements of Operations 4
Statements of Stockholders' Equity 5
Statements of Cash Flows 6-7
NOTES TO FINANCIAL STATEMENTS 8-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
TowerStream Corporation
Middletown, Rhode Island
We have audited the accompanying balance sheet of TowerStream Corporation (the
"Company") as of December 31, 2005, and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2005 and
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TowerStream Corporation as of
December 31, 2005, and the results of its operations and its cash flows for the
years ended December 31, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Marcum & Kliegman LLP
New York, New York
December 7, 2006, except for Note 17 (o),(p),(q), (r), (s) and (t) as to which
the date is January 18, 2007
1
TOWERSTREAM CORPORATION
BALANCE SHEET
December 31, 2005
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ASSETS
CURRENT ASSETS
Cash $203,050
Accounts receivable, less allowance for doubtful
accounts of $45,000 173,650
Advances to officers 35,533
Prepaid expenses 8,821
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Total Current Assets $ 421,054
PROPERTY AND EQUIPMENT, Net 3,720,514
OTHER ASSETS
Security deposits and other assets 64,185
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TOTAL ASSETS $4,205,753
==========
The accompanying notes are an integral part of these financial statements.
2
TOWERSTREAM CORPORATION
BALANCE SHEET
December 31, 2005
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving note, stockholder $ 250,000
Current maturities of long-term debt, net of
deferred debt discount of $19,831 551,982
Current maturities of capital lease obligations 18,861
Current maturities of notes payable, stockholders 866,643
Accounts payable and accrued expenses 479,476
Deferred compensation 125,000
Deferred revenues 452,322
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Total Current Liabilities $2,744,284
OTHER LIABILITIES
Long-term debt, net of current maturities 9,322
Capital lease obligations, net of current maturities 29,079
Notes payable, stockholders, net of current maturities 347,011
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Total Other Liabilities 385,412
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TOTAL LIABILITIES 3,129,696
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value; 30,000,000 shares
authorized; 21,070,310 shares issued 21,070
Additional paid in capital 8,491,456
Accumulated deficit (7,401,469)
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1,111,057
Less treasury stock, at cost, 32,000 shares (35,000)
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TOTAL STOCKHOLDERS' EQUITY 1,076,057
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,205,753
==========
The accompanying notes are an integral part of these financial statements.
3
TOWERSTREAM CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005 and 2004
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2005 2004
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REVENUES $ 5,397,510 $ 4,602,109
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OPERATING EXPENSES
Cost of revenues (exclusive of depreciation of $933,557
and $742,636, respectively, shown separately below) 1,509,505 1,026,068
Depreciation 933,557 742,636
Customer support services 419,356 378,767
Selling, general and administrative expenses 3,265,352 2,980,400
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TOTAL OPERATING EXPENSES 6,127,770 5,127,871
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OPERATING LOSS (730,260) (525,762)
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OTHER EXPENSE (INCOME)
Interest expense, net 216,945 214,740
Other income -- (40,838)
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TOTAL OTHER EXPENSE 216,945 173,902
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NET LOSS $ (947,205) $ (699,664)
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Net loss per common share - basic and diluted $ (0.05) $ (0.04)
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Weighted average common shares outstanding 20,776,874 19,548,257
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The accompanying notes are an integral part of these financial statements.
4
TOWERSTREAM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2005 and 2004
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Common stock Treasury Stock Additional
-------------------- ------------------ Paid in Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ------- ------- -------- ---------- ----------- ----------
Balance at January 1, 2004 17,880,969 $17,881 (32,000) $(35,000) $6,085,299 $(5,754,600) $ 313,580
Sale of common stock 1,667,500 1,667 -- -- 938,333 -- 940,000
Issuance of common stock upon conversion
of deferred compensation 386,000 386 -- -- 385,614 -- 386,000
Issuance of common stock upon conversion
of stockholder notes 92,229 92 -- -- 92,137 -- 92,229
Fair value of warrants issued in connection
with convertible notes -- 7 -- -- 6,804 -- 6,811
Net loss -- -- -- -- -- (699,664) (699,664)
---------- ------- ------- -------- ---------- ----------- ----------
Balance at December 31, 2004 20,026,698 7,528 (32,000) (35,000) 7,520,692 (6,454,264) 1,038,956
Sale of common stock 925,000 925 -- -- 924,075 -- 925,000
Issuance of common stock upon conversion
of stockholder notes 118,612 119 -- -- 59,187 -- 59,306
Net loss -- -- -- -- -- (947,205) (947,205)
---------- ------- ------- -------- ---------- ----------- ----------
Balance at December 31, 2005 21,070,310 $21,070 (32,000) $(35,000) $8,491,456 $(7,401,469) $1,076,057
========== ======= ======= ======== ========== =========== ==========
The accompanying notes are an integral part of these financial statements.
5
TOWERSTREAM CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 and 2004
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2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (947,205) $ (699,664)
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Adjustments to reconcile net loss to net cash provided by
operating activities
Provision for doubtful accounts 114,293 15,000
Depreciation 933,557 742,636
Amortization of deferred debt discount 12,292 10,589
Employee stock-based compensation -- 465,000
Changes in operating assets and liabilities:
Accounts receivable (77,204) (123,830)
Advances to officers (5,775) (1,449)
Prepaid expenses 4,331 (11,263)
Accounts payable and accrued expenses 128,229 (329,318)
Deferred compensation 202,312 118,000
Deferred revenues 114,455 98,685
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TOTAL ADJUSTMENTS 1,426,490 984,050
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NET CASH PROVIDED BY OPERATING ACTIVITIES 479,285 284,386
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,369,527) (995,262)
Additional security deposits (8,500) (28,136)
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NET CASH USED IN INVESTING ACTIVITIES (1,378,027) (1,023,398)
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CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft (29,407) 29,407
Proceeds from revolving note, stockholder -- 250,000
Proceeds from notes payable, stockholders 500,000 350,000
Principal repayment of notes payable, stockholders (106,237) (294,955)
Principal repayment of capital lease obligations (13,344) (11,337)
Principal repayment of long-term debt (174,220) (205,842)
Proceeds from sale of common stock 925,000 475,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES $ 1,101,792 $ 592,273
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The accompanying notes are an integral part of these financial statements.
6
TOWERSTREAM CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005 and 2004
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2005 2004
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NET INCREASE (DECREASE) IN CASH $203,050 $(146,739)
CASH - Beginning -- 146,739
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CASH - Ending $203,050 $ --
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $176,900 $ 197,292
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Non-cash investing and financing activities:
Conversion of notes payable, stockholders into common
stock $ 59,306 $ 92,229
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Conversion of deferred compensation into common stock $ -- $ 386,000
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Conversion of deferred compensation into notes payable $195,312 $ --
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Fair value of warrants granted in connection with debt $ -- $ 6,811
======== =========
The accompanying notes are an integral part of these financial statements.
7
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 1 - Organization and Nature of Business
TowerStream Corporation (herein after referred to as the "Company") was
formed on December 17, 1999 and was incorporated in Delaware. The Company
operates as a Sub Chapter S corporation with its corporate headquarters
located in Rhode Island.
The Company is a fixed wireless broadband provider. The Company serves
several major U.S. markets including: Los Angeles, San Francisco, New York
City, Chicago, Boston, Providence and Newport, Rhode Island.
NOTE 2 - Summary of Significant Accounting Policies
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. The allowance for bad debts reflects management's best
estimate of probable losses inherent in the accounts receivable balance.
Periodically, management evaluates its accounts receivable and establishes
an allowance for doubtful accounts, based on the history of past
write-offs, collections, and current credit conditions. The allowance for
uncollectible accounts at December 31, 2005 was $45,000 and bad debt
expense for 2005 and 2004 was approximately $114,000 and $15,000,
respectively.
Property and Equipment
Property and equipment are stated at cost. The costs associated with the
construction of the network and subscriber installations are capitalized.
Costs include equipment, installation costs and materials. Depreciation is
computed by the straight-line method over the following estimated useful
lives:
Years
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Furniture, fixtures and equipment 5-7
Computer equipment 5
Systems software 3
Network and base station equipment 5-7
Customer premise equipment 5-7
Expenditures for maintenance and repairs, which do not generally extend the
useful life of the assets, are charged to operations as incurred. Gains or
losses on disposal of property and equipment are reflected in the statement
of operations in the period of the disposal.
8
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Deferred Revenues
Deferred revenues consisted of two categories. One category is regular
monthly billing, billed one month in advance. The second category includes
revenues billed in advance for either the 12th or 24th month of the initial
contract. As of April 2005 the Company no longer bills under the term of
second category.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising
costs for the years ended December 31, 2005 and 2004 were approximately
$240,000 and $180,000, respectively.
Income Tax Status
The Company, with the consent of its stockholders, has elected to be taxed
under sections of the federal and the state of Rhode Island income tax law,
which provide that, in lieu of corporation income taxes, the stockholders
separately account for their pro rata shares of the Company's items of
income, deductions, losses and credits. As a result of this election, no
provision or liability for income taxes has been recognized in the
accompanying financial statements.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs for the years ended December 31, 2005 and 2004 were
approximately $129,500 and $122,700, respectively. These costs have been
recorded in the statement of operations as part of selling, general and
administrative expenses.
9
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Long-Lived Assets
Long-lived assets consist primarily of property and equipment. Long-lived
assets are reviewed annually for impairment or whenever events or
circumstances indicate their carrying value may not be recoverable. When
such events or circumstances arise, an estimate of the future undiscounted
cash flows produced by the asset, or the appropriate grouping of assets, is
compared to the asset's carrying value to determine if impairment exists
pursuant to the requirements of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". 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.
Management has determined there was no impairment of its property and
equipment during the years ended December 31, 2005 and 2004.
Revenue Recognition
Revenues are recognized at the time access to the Company's internet
services is made available to its customers. Contractual arrangements range
from one to three years. Deferred revenues are recognized as a liability
when billings are received in advance of the date when revenues are earned.
Company revenue arrangements with multiple deliverables under Emerging
Issues Task Force Issue ("EITF") No. 00-21 are deemed to be immaterial.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values of financial
instruments. The carrying amounts reported in the statement of financial
position for current assets and current liabilities qualifying as financial
instruments are reasonable estimates of fair value. The fair value of
long-term debt is estimated to approximate fair market value based on the
current rates offered to the Company for debt of the same remaining
maturities. The fair value of the Company's notes payable to stockholders
are not reasonably determinable based on the related party nature of the
transactions.
Stock-Based Compensation
The Company accounts for stock-based compensation under the intrinsic value
method in accordance with the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. Under APB
Opinion No. 25, compensation expense is based upon the difference, if any,
generally on the date of grant, between the fair value of our stock and the
exercise price of the option. In December 2002, the Financial Accounting
Standard Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148, which amends SFAS
No. 123, requires the measurement of the fair value of stock options or
warrants to be included in the statement of operations or disclosed in the
notes to financial statements. The Company records its stock-based
compensation under the Accounting Principles Board (APB) No. 25 and has
elected the disclosure-only alternative under SFAS No. 123.
10
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Stock-Based Compensation, continued
The Company has computed the pro forma disclosures under SFAS No. 148 for
options and warrants granted (the "grants") using the Black-Scholes option
pricing model. The assumptions used during the years ended December 31,
2005 and 2004 are as follows:
December 31,
---------------------------
2005 2004
------------ ------------
Risk free interest rate 3.6% - 4.4% 2.2% - 3.1%
Expected dividend yield -- --
Expected lives 6 - 10 years 6 - 10 years
Expected volatility 55.8% 66.8%
If the Company had elected to recognize compensation costs for the
Company's options and warrants plans using the fair value method at the
grant dates, the effect on the Company's net loss and loss per share for
the periods shown below would have been as follows:
For the Years Ended
December 31,
-------------------------
2005 2004
----------- -----------
Net loss as reported $ (947,205) $ (699,664)
Add: stock based employee compensation expense,
included in reported loss. -- 465,000
Less: stock-based employee compensation as
determined under fair value based method for
all awards (457,153) (886,819)
----------- -----------
Pro Forma Net Loss $(1,404,358) $(1,121,483)
=========== ===========
Net Loss Per Share:
Basic and diluted loss - as reported $ (0.05) $ (0.04)
Basic and diluted loss - pro forma $ (0.07) $ (0.06)
11
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Basic and Diluted Loss Per Share
Net loss per share is computed in accordance with Statement of Financial
Standards No. 128, "Earning Per Share" ("SFAS No. 128"). SFAS No. 128
requires the presentation of both basic and diluted earnings per share.
Basic net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted loss per
share reflects the potential dilution that could occur through the
potential effect of common shares issuable upon the exercise of stock
options, warrants and convertible securities. The calculation assumes (i)
the exercise of stock options and warrants based on the treasury stock
method; and (ii) the conversion of convertible preferred stock only if an
entity records earnings from continuing operations, as such adjustments
would otherwise be anti-dilutive to earnings per share from continuing
operations. As a result of the Company recording a loss during each of the
years ended December 31, 2005 and 2004, the average number of common shares
used in the calculation of basic and diluted loss per share is identical
and has not been adjusted for the effects of the following items: (i)
3,827,000 and 3,024,000 potential common shares from unexercised stock
options and warrants for each of the years ended December 31, 2005 and
2004, respectively, and (ii) 1,339,139 and 650,657 shares convertible under
stockholders' notes at December 31, 2005 and 2004, respectively. Such
potential common shares may dilute earnings per share in the future.
Convertible Notes Payable
The Company accounts for conversion options embedded in convertible notes
in accordance with Statement of Financial Accounting Standard ("SFAS) No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") and EITF 00-19 "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF
00-19"). SFAS 133 generally requires Companies to bifurcate conversion
options embedded in convertible notes and preferred shares from their host
instruments and to account for them as free standing derivative financial
instruments in accordance with EITF 00-19. SFAS 133 provides for an
exception to this rule when convertible notes are deemed to be conventional
as that term is described in the implementation guidance provided in
paragraph 61 (k) of Appendix A to SFAS 133 and further clarified in EITF
05-2 "The Meaning of "Conventional Convertible Debt Instrument" in Issue
No. 00-19. SFAS 133 provides for an additional exception to this rule when
the economic characteristics and risks of the embedded derivative
instrument are clearly and closely related to the economic characteristics
and risks of the host instrument.
12
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 2 - Summary of Significant Accounting Policies, continued
Convertible Notes Payable, continued
The Company accounts for convertible notes (deemed conventional) and
non-conventional convertible debt instruments classified as equity under
EITF 00-19 "Accounting for Derivative Financial Investments indexed to, and
potentially settled in, a Company's own stock " ("EITF 00-19") and in
accordance with the provisions of Emerging Issues Task Force Issue ("EITF")
98-5 "Accounting for Convertible Securities with Beneficial Conversion
Features," ("EITF 98-5"), EITF 00-27 "Application of EITF 98-5 to Certain
Convertible Instruments." Accordingly, the Company records, as a discount
to convertible notes, the intrinsic value of such conversion options based
upon the differences between the fair value of the underlying common stock
at the commitment date of the note transaction and the effective conversion
price embedded in the note. Debt discounts under these arrangements are
amortized over the term of the related debt to their earliest date of
redemption.
NOTE 3 - Cash
The Company maintains its cash in bank deposit accounts, which at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash. The amount on deposit at December 31, 2005
exceeded the insurance limits by approximately $363,000.
NOTE 4 - Advances to Officers
Advances to officers as of December 31, 2005 in the amount of approximately
$35,500 are non-interest bearing and have no definitive repayment terms.
NOTE 5 - Property and Equipment, net
As of December 31, 2005, the Company's property and equipment, net is
comprised of:
Network and base station equipment $3,513,147
Customer premise equipment 2,520,638
Furniture, fixtures and equipment 170,506
Computer equipment 166,949
System Software 135,209
----------
6,506,449
Less: accumulated depreciation 2,785,935
----------
$3,720,514
==========
13
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 5 - Property and Equipment, net, continued
Depreciation expense for the years ended December 31, 2005 and 2004 was
$933,557 and $742,636.
NOTE 6 - Revolving Note, Stockholder
The Company has a $250,000 secured revolving note with a trust, which is
also a stockholder in the Company. The note provides for revolving credit
through April 2006. The note is due on demand and bears interest at 10% per
annum. Management is presently negotiating with the stockholder to extend
the repayment terms of the note. The note is principally secured by all the
assets of the Company.
NOTE 7 - Notes Payable, Stockholders
As of January 1, 2004, the Company owed an officer who is also a
stockholder ("Stockholder One") principal and interest of approximately
$220,000. On November 30, 2004, the Company converted $100,000 of deferred
compensation liability due to such stockholder into a note payable. The
notes payable to Stockholder One are unsecured, payable in monthly
installments at an interest rate of 10% per annum. In 2004, the Company
repaid approximately $95,000 of principal under the note payable of
approximately $220,000. As of December 31, 2004, the Company owed
Stockholder One an aggregate of approximately $225,000 under both notes
payable.
On August 1, 2005, the Company borrowed approximately $195,000 from
Stockholder One. As part of the borrowing arrangement, the Company and
Stockholder One agreed to combine the new and prior borrowings into one
note agreement. The note is unsecured bearing interest at the rate of 5%
per annum with monthly installments of principal and interest of $10,806.
The note contains an option for Stockholder One to convert up to 50% of the
outstanding principal balance into shares of common stock at the rate of
$1.00 per share, the market price as of August 1, 2005. At December 31,
2005 the Company owed Stockholder One approximately $314,000. The note
matures in August 2008.
On December 7, 2005, the Company borrowed an additional $250,000 under a
demand note from Stockholder One. The note is unsecured, payable in monthly
installments of interest only at a rate of 10% per annum. The note matures
on the earlier of the occurrence of certain events as defined or December
6, 2006. As of December 31, 2005, no such events have occurred. Stockholder
One has the right to convert the principal and interest into shares of
common stock at the rate of $1.00 per share, the market price as of
December 7, 2005.
14
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 7 - Notes Payable, Stockholders, continued
On September 7, 2004, the Company borrowed $150,000 under a note payable to
another officer and stockholder ("Stockholder Two"). The note is unsecured,
and is payable in monthly installments of interest only at an interest rate
of 10% per annum. The note matures September 2007. The note contains an
option for Stockholder Two to convert to shares of common stock at $0.80
per common share, the market price as of September 7, 2004. The note shall
immediately become due and payable if certain events, as defined under the
note agreement, occur. As of December 31, 2005, no such events have
occurred.
On June 9, 2003, the Company borrowed $50,000 under a note payable from a
stockholder ("Stockholder Three"). During the year ended 2005, Stockholder
Three elected, as defined in the note agreement, to convert the principal
and interest of $59,306 into 118,612 shares of common stock.
On November 10, 2005, the Company borrowed $250,000 under another note
payable due to Stockholder Three. The note is unsecured, payable in monthly
installments of interest only at a rate of 10% per annum. The note matures
if certain events occur as defined or on November 9, 2006. As of December
31, 2005, no such events have occurred. Stockholder Three has the right to
convert the principal and interest into shares of common stock at the rate
of $1.00 per share, the market price as of November 10, 2005.
On August 2, 2002, the Company borrowed $250,000 under a demand note
payable due to a fourth stockholder ("Stockholder Four"). The note is
payable within sixty days upon notice from Stockholder Four. The note is
unsecured bearing an interest rate of 10% per annum.
A summary of the outstanding debt as of December 31, 2005 due each
stockholder is:
Stockholder One $ 563,654
Stockholder Two 150,000
Stockholder Three 250,000
Stockholder Four 250,000
----------
$1,213,654
==========
As of December 31, 2005, aggregate maturities of notes payable,
stockholders due in future years are as follows:
Year Ending December 31,
2006 $ 866,643
2007 272,611
2008 74,400
----------
$1,213,654
==========
15
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
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NOTE 8 - Long-Term Debt
As of December 31, 2005, long-term debt consists of:
7% equipment financing note, due in monthly installments of
principal and interest of $879 through November 2007. Certain
equipment is collateralized under the note agreement. $ 18,858
16% equipment financing note, due in monthly installments of
principal and interest of $12,159 through September 2006. The
holder of the note received 75,000 warrants as part of the debt
agreement and has the right to convert the total principal and
interest outstanding into common stock. As of December 31, 2005,
the debt balance is net of unamortized debt discount of $3,392.
On January 15, 2006, the note was settled prematurely in cash at
a discount (see Note 17). 99,090
16% equipment financing note, due in monthly installments of
principal and interest of $9,729 through March 2008. The holder
of the note received 72,000 warrants as part of the debt
agreement and has the right to convert the total principal and
interest outstanding into common stock. As of December 31, 2005,
the debt balance is net of unamortized debt discount of $7,693.
On January 15, 2006, the note was settled prematurely in cash at
a discount (see Note 17). 261,365
10% equipment financing note, principal and interest due in May
2006. The note holder received 36,000 warrants as part of the
debt agreement. As of December 31, 2005, the debt balance is net
of unamortized debt discount of $4,124. On March 30, 2006, the
principal of the note and related accrued interest were
converted into 126,859 shares of common stock (see Note 17). 86,613
10% equipment financing note, principal and interest due in May
2006. The note holder received 18,000 warrants as part of the
debt agreement. As of December 31, 2005, the debt balance is net
of unamortized debt discount of $4,622. On March 30, 2006, the
principal of the note and related accrued interest were
converted into 139,808 shares of common stock (see Note 17). 95,378
--------
$561,304
========
16
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - Long-Term Debt, continued
As of December 31, 2005 aggregate maturities of long-term debt due in
future years are as follows:
Year Ending December 31,
2006 $551,982
2007 9,322
--------
$561,304
========
The fair value of the warrants granted under the above debt agreements was
calculated using the Black-Scholes model and such amount was recorded as a
debt discount and a corresponding increase to paid-in-capital. The discount
is being amortized over the life of the respective loans. The Company
recorded $12,292 and $10,589 as additional interest expense related to the
debt discount for the years ended December 31, 2005 and 2004, respectively.
As of December 31, 2005, the total amount of unamortized debt discount is
$19,831.
NOTE 9 - Capital Leases
The Company is the lessee of network base station equipment under various
capital leases expiring in 2008. The assets and liabilities under capital
leases are recorded at the fair market value of the assets. The assets are
depreciated over the lease term, which approximates their useful lives,
using the straight-line method. Depreciation of assets under capital leases
charged to expense in 2005 and 2004 was approximately $14,500.
Property held under capital leases as of December 31, 2005 consists of the
following:
Network base station equipment $ 72,621
Less: accumulated depreciation (29,048)
--------
$ 43,573
========
As of December 31, 2005, the minimum future lease payments under these
capital leases are:
17
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - Capital Leases, continued
Year Ending December 31,
-----------------------------------------------------
2006 $ 31,331
2007 31,331
2008 3,942
--------
Total minimum lease payments 66,604
Less: amount representing imputed interest (18,664)
--------
Present Value of Minimum Capital Lease Payments $ 47,940
========
Note 10 - Employee Benefit Plan
The Company had a 401(k) retirement plan covering all eligible employees
who had attained the age of twenty-one and had completed one year of
service with the Company. The Company could elect to match up to a certain
amount of employees' contributions to the 401(k) plan. For the year ended
December 31, 2004, the Company elected to contribute approximately $11,700
toward the 401(k) plan. As of December 31, 2004, the 401(k) plan was
terminated.
Effective January 1, 2005, the Company established a new 401(k) retirement
plan. The plan covers all eligible employees who have attained the age of
twenty-one and have completed a half year of service with the Company. The
Company could elect to match up to a certain amount of employees'
contributions to the 401(k) plan. Total employee and employer contributions
are limited for 2005 to 100% of compensation per participant or $42,000,
whichever is less. For the year ended December 31, 2005, no employer
contributions were made toward the 401(k) plan.
NOTE 11 - Capital Stock
On February 10, 2005, the Board of Directors approved an increase in common
shares authorized from 20.0 million to 30.0 million.
In 2005, pursuant to the terms of a private placement under the exempt
rules of the Securities Act of 1933, as amended (the "Private Placement"),
the Company sold 925,000 shares of common stock for net proceeds of
$925,000.
18
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - Capital Stock, continued
In 2004, pursuant to the terms of the Private Placement, the Company sold
337,500 shares of common stock for net proceeds of $275,000. In addition,
during the year ended December 31, 2004, the Company sold 1,330,000 shares
of common stock for net proceed of $200,000 to a member of the management
of the Company. As part of this related party stock transaction, the
Company recorded a stock-based compensation charge of $465,000 which has
been recorded in the statement of operations as part of selling, general
and administrative expenses in year 2004 for book purpose.
NOTE 12 - Stock Option Plan
The Company adopted a stock option plan during the year ended December 31,
2000 (the "2000 Plan"). Under the 2000 Plan, the Company can issue up to
1.5 million stock options. On February 10, 2005, the Board of Directors
approved the increase in the number of stock options that can be granted
under the 2000 Plan from 1.5 million to 3.0 million. The 2000 Plan is
intended to provide incentives: (i) to officers and other employees of the
Company by providing them with opportunities to purchase common stock in
the Company pursuant to options granted, which qualify as incentive stock
options; (ii) to directors, officers and employees of, and consultants and
advisors of the Company, by providing them with opportunities to purchase
common stock in the Company pursuant to options granted which do not
qualify as incentive stock options ("nonqualified options"); and (iii) to
directors, officers and employees of, and consultants and advisors to the
Company, by providing them with awards of common stock in the Company
("stock awards").
The purchase price per share of common stock deliverable upon the exercise
of an option shall be determined by the Board of Directors; however,
pursuant to the 2000 Plan it shall not be below fair market value on the
date of issuance. Each option and all rights shall expire on such date as
shall be set forth in the applicable Stock Rights Agreement, except that,
in the case of an incentive stock option, such date shall not be later than
ten (10) years after the date on which the option is granted and, in all
cases, options shall be subject to earlier termination as provided in the
2000 Plan.
Options granted under the 2000 Plan shall be exercisable either in full or
in installments, and shares issued pursuant to stock awards granted under
the 2000 Plan shall vest either in full or in installments, at such time or
times during such period as shall be set forth in the Stock Rights
Agreement evidencing such stock rights, subject to the provisions of the
2000 Plan, provided that no option granted shall be exercisable during the
first twelve (12) months after the date of grant. In addition, the 2000
Plan limits the right of the holder of outstanding options to exercise such
vested options within a limited timetable as defined under the 2000 Plan
upon a Participant's death, becoming disabled or terminating employment.
19
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 - Stock Option Plan, continued
A summary of the status of the 2000 Plan and changes are as follows:
2005 2004
----------- -----------
Options outstanding - Beginning of year 1,318,000 1,586,000
Granted 870,000 485,000
Expired (72,000) (753,000)
----------- -----------
Options outstanding - End of year 2,116,000 1,318,000
=========== ===========
Options exercisable - End of year 1,541,667 496,000
=========== ===========
Weighted average fair value of the options
granted during the years. $ 0.27 $ 0.46
=========== ===========
Weighted average remaining contractual life
of the outstanding options - End of year 8.03 years 8.11 years
=========== ===========
The options were granted to employees at exercisable prices ranging from
$0.55 to $1.50 per common share expiring at various periods through
December 2015.
NOTE 13 - Stock Warrants
The Company has issued warrants to purchase shares of common stock
following the exercise of the warrant. The warrants were granted to
employees and certain non-employees at exercisable prices ranging from
$0.50 to $1.50 per common share expiring at various periods through March
2010. Warrants granted to non-employees were in connection with certain
loan borrowings. The fair value of the warrants granted to non-employees
was calculated using the Black-Scholes model and estimated to have a fair
value of approximately $90,000, which has been amortized over the term of
the debt agreements.
A summary of the status of the warrants for the years ended December 31, is
as follows:
2005 2004
----------- -----------
Warrants outstanding - Beginning of year 1,706,000 1,173,000
Granted 5,000 543,000
Expired -- (10,000)
----------- -----------
Warrants outstanding - End of year 1,711,000 1,706,000
=========== ===========
Warrants exercisable - End of year -- --
=========== ===========
Weighted average fair value of the warrants
granted during the years $ 0.49 $ 0.41
=========== ===========
Weighted average remaining contractual life
of the outstanding options - End of year 3.06 years 4.07 years
=========== ===========
20
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14 - Deferred Compensation
On January 1, 2004, the Company entered into a deferred compensation
agreement with one of its officers, who is also a principal stockholder. On
November 30, 2004, the Company agreed to convert $100,000 of deferred
compensation liability into a note payable.
On January 1, 2005, the Company entered into a deferred compensation
agreement with another officer, who is also a stockholder. The officer
agreed to defer $125,000 of his salary for 2005. The agreement allows for
the accrual of interest at 10% compounded monthly. The amount deferred is
due and payable upon either 1) the change of control of the Company's
voting stock or sale of substantially all the assets of the Company; 2)
December 31, 2006; or 3) an earlier date if so elected by the Board of
Directors. The officer has the right to convert the deferred compensation
costs into shares of common stock at $1.00 per share. Interest accrued but
not paid as of December 31, 2005 was $6,665.
NOTE 15 - Recent Accounting Pronouncements
The following pronouncements have been issued by the Financial Accounting
Standards Board ("FASB"):
In September 2006, the FASB issued SFAS No. 157, "Accounting for Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, and establishes a
framework for measuring fair value in generally accepted accounting
principles and expands disclosure about fair value measurements. SFAS 157
is effective for the Company for Fiscal Periods beginning subsequent to
November 15, 2007. The Company does not expect the new standard to have a
material impact on the Company's financial position, results of operations
or cash flows.
In September 2006, the staff of the SEC issued Staff Accounting Bulletin
No. 108 ("SAB 108") which provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. SAB 108 is effective
for year 2006. Adoption of SAB 108 is not expected to have a material
impact on the Company's consolidated financial position, results of
operations or cash flows.
In February 2006, the FASB issued SFAS No. 155 "Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and
140" ("SFAS 155"). SFAS 155 clarifies certain issues relating to embedded
derivatives and beneficial interests in securitized financial assets. The
provisions of SFAS 155 are effective for all financial instruments acquired
or issued after fiscal years beginning after September 15, 2006. The
Company does not expect this pronouncement to have a material impact on the
Company's financial position, results of operations or cash flows.
In September 2005, the FASB ratified the following consensus reached in
EITF Issue 05-8: a) The issuance of convertible debt with a beneficial
conversion feature results in a basis difference in applying FASB Statement
of Financial Accounting Standards SFAS No. 109. Recognition of such a
feature effectively creates a debt instrument and a separate equity
instrument for book purposes, whereas the convertible debt is treated
entirely as a debt instrument for income tax purposes. b) The resulting
basis difference should be deemed a temporary difference because it will
result in a taxable amount when the recorded amount of the liability is
recovered or settled. c) Recognition of deferred taxes for the temporary
difference should be reported as an adjustment to additional paid-in
capital. This consensus is effective in the first interim or annual
reporting period commencing after December 15, 2005, with early application
permitted. The effect of applying the consensus should be accounted for
retroactively to all debt instruments containing a beneficial conversion
feature that are subject to EITF Issue 00-27 (and thus is applicable to
debt instruments converted or extinguished in prior periods but which are
still presented in the financial statements). The adoption of this
pronouncement is not expected to have a material impact on the Company's
financial statements.
21
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - Recent Accounting Pronouncements, continued
In June 2005, the EITF reached consensus on Issue No. 05-6 ("EITF 05-6").
EITF 05-6 provides guidance on determining the amortization period for
leasehold improvements acquired in a business combination or acquired
subsequent to lease inception. The guidance in EITF 05-6 will be applied
prospectively and is effective for periods beginning after June 29, 2005.
The adoption of EITF 05-6 did not have a material impact on the Company's
financial position, results of operations or cash flows.
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF No. 00-19, `Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company's Own Stock" ("EITF No. 05-2"), which addresses when a
convertible debt instrument should be considered `conventional' for the
purpose of applying the guidance in EITF No. 00-19. EITF No. 05-2 also
retained the exemption under EITF No. 00-19 for conventional convertible
debt instruments and indicated that convertible preferred stock having a
mandatory redemption date may qualify for the exemption provided under EITF
No. 00-19 for conventional convertible debt if the instrument's economic
characteristics are more similar to debt than equity. EITF No. 05-2 is
effective for new instruments entered into and instruments modified in
periods beginning after June 29, 2005. The adoption of this pronouncement
did not have a material impact on the Company's financial position, results
of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction." This Statement replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for
and reporting of a change in accounting principle. The statements apply to
all voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. When a
pronouncement includes specific transition provisions, those provisions
should be followed. This statement is effective for accounting changes and
corrections of errors made in the fiscal years beginning after December 15,
2005. Management does not believe this pronouncement will have a material
impact on the Company's financial position or results of operations.
22
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - Recent Accounting Pronouncements, continued
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." The amendments made by Statement 153 are based on the
principle that exchanges of nonmonetary assets should be measured based on
the fair value of the assets exchanged. Further, the amendments eliminate
the narrow exception for nonmonetary exchanges of similar productive assets
and replace it with a broader exception for exchanges of nonmonetary assets
that do not have commercial substance. Previously, Opinion 29 required that
the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar
productive asset should be based on the recorded amount of the asset
relinquished. Opinion 29 provided an exception to its basic measurement
principle (fair value) for exchanges of similar productive assets.
The Statement is effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 153, and does not believe the impact will be significant
on the Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,".
This statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." Statement 123R supersedes Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and its
related implementation guidance. Generally, the approach in Statement 123R
is similar to the approach described in Statement 123. However, Statement
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized as compensation cost in the
historical financial statements. This Statement is effective for public
entities that file as small business issuers - as of the beginning of the
first annual reporting period beginning after December 15, 2005. The
Company will adopt Statement 123R beginning January 1, 2006 using the
modified prospective method. The impact of this Statement will require the
Company to record a charge for the fair value of its stock options over the
vesting period in the financial statements. The Company expects this
pronouncement will have a material impact on the Company's financial
position and results of operations. As of December 31, 2005, the Company
had unvested employee stock options valued using the Black-Scholes model at
approximately $217,000.
23
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 - Recent Accounting Pronouncements, continued
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional financial support from other parties. FIN 46
is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired
prior to February 1, 2003, the provisions of FIN 46 must be applied for the
first interim or annual period beginning after December 15, 2003. In
December 2003, the FASB issued Interpretation No. 46(R) ("FIN 46R") which
revised certain provisions of FIN 46. Publicly reporting entities that are
small business issuers must apply FIN 46R to all entities subject to FIN
46R no later than the end of the first reporting period that ends after
December 15, 2004 (as of December 31, 2004, for a calendar year enterprise)
The effective date includes those entities to which FIN 46 had previously
been applied. However, prior to the application of FIN 46R, a public entity
that is a small business issuer shall apply FIN 46 or FIN 46R to those
entities that are considered special-purpose entities no later than as of
the end of the first reporting period that ends after December 15, 2003.
The adoption of FIN 46 or FIN 46R did not have material effect on the
Company's consolidated financial position or results of operations.
NOTE 16 - Commitments
Lease Obligations
The Company leases roof top rights, cellular towers and office space under
various non-cancelable agreements expiring through December 2019. As of
December 31, 2005, the total future lease payments are as follows:
Year Ending December 31,
------------------------
2006 $ 823,100
2007 698,700
2008 529,700
2009 441,600
2010 385,300
Thereafter 892,100
----------
$3,770,500
==========
Rent expense for the years ended December 31, 2005 and 2004 totaled
approximately $863,000 and $683,000, respectively.
24
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - Commitments, continued
On August 26, 2006 the Company entered into a License Purchase Agreement
for certain spectrum in southern Florida. The purchase price is comprised
of five annual cash payments of $50,000 plus 100,000 shares of Towerstream
stock. The first payment of $50,000 and the 100,000 shares are to be issued
upon FCC approval of the transfer of the license (see Note 17).
NOTE 17 - Subsequent Events
a) On January 12, 2006, Stockholder One loaned the Company $250,000. The
note is unsecured, payable in monthly installments of interest only
computed at 10% per annum. The note matures sixty days after payee demand.
Proceeds of the note were used to pay-off approximately $244,000 of certain
equipment financing notes, prior to their maturity dates. The early
extinguishment of debt resulted in approximately $115,000 of gain on
extinguishment of debt.
b) During the first six months of 2006, the Company entered into two
separate capital lease arrangements for equipment. The assets and
liabilities under these capital leases shall be recorded at the fair market
value of the assets which aggregate approximately $86,000. The lease terms
require monthly rental payments of approximately $3,100 over the lease term
of three years, which approximates their estimated useful lives.
c) On March 15, 2006 the Board of Directors issued 80,000 incentive stock
options to certain employees under the 2000 Plan at an exercise price of
$1.00. Also, the Board of Directors approved the repricing of 201,000
incentive stock options previously granted in prior years. These stock
options originally had exercise prices ranging from $1.25 to $1.50 per
common share and were repriced to $1.00 per common share, the estimated
market price on March 15, 2006. The Company will assign a fair value to
each of these stock option transactions in accordance with FAS 123R and
record a stock-based compensation charge in 2006.
d) On March 30, 2006, two equipment finance notes in the principal amounts
of $90,737 and $100,000 and related accrued interest were converted into
266,667 shares of common stock of the Company at the option of the debtor.
e) On June 22, 2006, the Board of Directors issued 15,000 incentive stock
options to an employee under the 2000 Plan at an exercise price of $1.00,
the estimated market price of the common stock on the date of the issuance.
25
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17 - Subsequent Events, continued
f) On July 12, 2006, Stockholder One loaned the Company $50,000. The note
is unsecured, payable in monthly installments of interest only computed at
10% per annum. The note matures sixty days after demand for repayment.
g) On September 30, 2006, the Company borrowed an additional $150,000 under
a demand note from an officer who is also a stockholder. The note is
secured by the assets of the Company, payable in monthly installments of
interest only computed at 10% per annum. The note matures sixty days after
payee demand. Proceeds of the note were used for general working capital
purposes.
h) On September 30, 2006, the Company borrowed an additional $125,000 under
a demand note from an officer who is also a stockholder. The note is
secured by the assets of the Company, payable in monthly installments of
interest only computed at 10% per annum. The note matures sixty days after
payee demand. Proceeds of the note were used for general working capital
purposes.
i) On October 1, 2006 the Company repaid in full and terminated its
$250,000 revolving credit facility with a trust, who is also a stockholder.
j) On October 1, 2006 the Board of Directors issued 45,000 incentive stock
options to employees under the 2000 Plan at an exercise price of $1.00, the
estimated market price of the common stock on the date of issuance.
k) On October 24, 2006 the Board of Directors issued 50,000 incentive stock
options to a director under the 2000 Plan at an exercise price of $1.00,
the estimated market price of the common stock on the date of issuance.
l) On November 2, 2006, an individual loaned the Company $250,000. The note
is unsecured, bears interest at 6% per annum, and all principal and accrued
interest is due on April 23, 2007. Subsequent to November 2, 2006, the
individual provided Towerstream with consulting services. As consideration
therefore, on January 4, 2007, Towerstream amended and restated the note in
order to make such note convertible into shares of common stock of the
Company immediately following the Merger at a conversion price of $1.60 per
share.
m) On November 21, 2006 the Company received FCC approval on that certain
southern Florida spectrum license transfer. Accordingly, the Company issued
100,000 shares of Towerstream stock and made its first installment payment
of $50,000 on said date.
26
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17 - Subsequent Events, continued
n) On November 30, 2006 the Company entered into an Asset Purchase
Agreement to purchase a fixed wireless network in Seattle, WA. The purchase
included fixed wireless equipment and related assets at five points of
presence, as well as, the assumption of certain operating leases at those
locations. No customer contracts were purchased or assumed in the
transaction. In total, assets with a Net Book Value of $236,000 were
acquired for a purchase price of $200,000 in cash.
o) On December 28, 2006, the Company entered into a capital lease
arrangement for equipment. The assets and liabilities under these capital
leases shall be recorded at the fair market value of the assets which
aggregate approximately $37,000. The lease terms require monthly rental
payments of approximately $1,247 over the lease term of three years, which
approximates their estimated useful lives.
p) On January 4, 2007, certain stockholders collectively transferred an
aggregate of $1,616,753 in outstanding promissory notes and other payables
due from Towerstream to a group of third party investors. In connection
with these note transfers, Towerstream issued a new promissory note of
approximately $1.6 million and cancelled the aforementioned obligations. As
part of the arrangement, Towerstream granted to the investors the right to
automatically convert the note into shares of common stock of a publicly
traded shell company (University Girls Calendar, Ltd. "UGC") into which
Towerstream was merged (see "q" below) at a conversion price of $1.50 per
share. The note has a maturity date of January 4, 2008 with interest at the
rate of 10% per annum. The note is having a maturity date of January 4,
2008, and accruing interest at the rate of 10% per annum. In conjunction
with the above transaction, the Company will record a charge of
approximately $460,000 for the beneficial conversion feature granted to the
holders of approximately $924,000 of the stockholders' notes at $1.50 per
share which did not originally have conversion rights and were converted
into share of common stock in connection with the Merger. In addition, a
stockholder with a $250,000 convertible note exercised his right to convert
the note into shares of common stock at $1.43 per share in conjunction with
the merger.
q) On January 12, 2007, Towerstream merged into a newly formed subsidiary
of UGC. In connection with the merger 1,900,000 of UGC common shares will
remain outstanding and all other shares of UGC outstanding were cancelled.
Also, in connection with the merger, UGC issued 15,000,000 shares of its
common stock for all the outstanding common stock of Towerstream. As a
result of the transaction, the former owners of Towerstream became the
controlling stockholders of UGC and UGC changed its name to Towerstream
Corporation. Accordingly, the merger of Towerstream and UGC (the "Merger")
is a reverse merger that has been accounted for as a recapitalization of
Towerstream.
27
TOWERSTREAM CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17 - Subsequent Events, continued
r) Concurrent with the Merger, UGC sold 5,110,056 shares of common stock
for gross proceeds of $11,497,625 (at $2.25 per share). In addition, these
investors received warrants to purchase 2,555,028 shares of common stock
for a period of five years at an exercise price of $4.50 per share,
collectively (the "Private Placement"). In connection with the Private
Placement, UGC incurred placement agent fees totaling approximately
$446,400, and issued 140,917 warrants with an estimated fair value of
approximately $77,000 to the placement agent at an exercise price of $4.50
per share for a period of five years. In addition, UGC incurred other
professional fees and expenses totaling approximately $522,300 in
connection with the Merger.
s) On January 18, 2007, UGC sold $3,500,000 of senior convertible
debentures (the "Debentures"). The Debentures require quarterly interest
only payments of 8% per annum and mature on December 31, 2009. The
Debentures are convertible into shares of common stock of UGC at $2.75 per
share subject to limitations as defined and registration rights. In
addition, holders of the Debentures received warrants to purchase 636,364
shares of common stock at an exercise price of $4.00 per share and warrants
to purchase 63,636 shares of common stock at an exercise price of $6.00
per share, for a period of five years. In conjunction with these warrants,
the Company will record an additional debt discount of approximately
$527,000.
In connection with the Debentures, UGC incurred placement agent fees
totaling approximately $140,000, and issued 63,634 warrants with an
estimated fair value of $34,750 to the placement agent at an exercise price
of $4.50 per share for a period of five years.
t) In conjunction with the merger on January 12, 2007 UGC adopted the 2007
Equity Compensation Plan (the "2007 Plan"). The Plan provides a means to
award specific equity-based benefits to officers, other employees,
consultants and directors. Under the Merger agreement all options and
warrants and their respective rights and obligations, that were outstanding
prior to the merger were transferred into the 2007 Plan and totaled
2,645,062. The total number of shares of Common Stock that can be delivered
under the 2007 Plan is 3,200,000. As of January 12, 2007, the date of the
Merger, 554,938 shares remained available for issuance pursuant to the
Plan.
28
