Towerstream 10Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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

For the transition period from __________ to __________.

Commission file number 001-33449

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number: (401) 848-5848

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of August 11, 2011, there were 53,247,484 shares of the issuer’s common stock outstanding.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

Table of Contents

		Pages

Part I	FINANCIAL INFORMATION

Item 1.	Financial Statements.	1

	Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010	1

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)	3

	Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2011 (unaudited)	4

	Notes to Unaudited Condensed Consolidated Financial Statements	5-12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	13-20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	20

Item 4.	Controls and Procedures.	20

Part II	OTHER INFORMATION

Item 6.	Exhibits.	22

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited) June 30, 2011			December 31, 2010
Assets
Current Assets
Cash and cash equivalents	$	16,445,426		$	23,173,352
Accounts receivable, net		316,537			482,854
Prepaid expenses and other current assets		536,156			372,895
Total Current Assets		17,298,119			24,029,101

Property and equipment, net		20,863,770			15,266,056

Intangible assets, net		4,473,575			3,366,965
Goodwill		1,724,571			1,724,571
Other assets		411,814			203,132
Total Assets	$	44,771,849		$	44,589,825

Liabilities and Stockholders’ Equity

Current Liabilities
Accounts payable	$	1,194,776		$	909,548
Accrued expenses		1,737,298			1,595,716
Deferred revenues		1,124,849			1,000,018
Current maturities of capital lease obligations		160,293			88,613
Other		334,780			251,085
Total Current Liabilities		4,551,996			3,844,980

Long-Term Liabilities
Capital lease obligations, net of current maturities		138,682			55,735
Other		511,968			668,232
Total Long-Term Liabilities		650,650			723,967
Total Liabilities		5,202,646			4,568,947

Commitments and Contingencies (Note 13)

Stockholders' Equity
Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued		-			-
Common stock, par value $0.001; 70,000,000 shares authorized; 42,897,484 and 42,116,618 shares issued and outstanding, respectively		42,898			42,117
Additional paid-in-capital		77,686,812			75,332,969
Accumulated deficit		(38,160,507	)		(35,354,208	)
Total Stockholders' Equity		39,569,203			40,020,878
Total Liabilities and Stockholders' Equity	$	44,771,849		$	44,589,825

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

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

Revenues	$	6,581,059		$	4,868,539		$	12,534,072		$	9,112,756

Operating Expenses
Cost of revenues (exclusive of depreciation)		1,846,215			1,207,100			3,352,122			2,281,887
Depreciation and amortization		2,213,218			1,454,239			4,187,800			2,555,410
Customer support services		733,162			672,205			1,504,185			1,250,461
Sales and marketing		1,380,857			1,313,704			2,720,659			2,546,502
General and administrative		2,264,866			1,906,726			4,140,262			3,715,533
Total Operating Expenses		8,438,318			6,553,974			15,905,028			12,349,793
Operating Loss		(1,857,259	)		(1,685,435	)		(3,370,956	)		(3,237,037	)
Other Income (Expense)
Interest income		4,440			631			10,032			805
Interest expense		(2,202	)		-			(4,790	)		-
Gain on business acquisition		564,125			355,876			564,125			355,876
Other income (expense), net		(2,819	)		22,396			(4,710	)		42,051
Total Other Income (Expense)		563,544			378,903			564,657			398,732
Net Loss	$	(1,293,715	)	$	(1,306,532	)	$	(2,806,299	)	$	(2,838,305	)
Net loss per common share – basic and diluted	$	(0.03	)	$	(0.04	)	$	(0.07	)	$	(0.08	)
Weighted average common shares outstanding– basic and diluted		42,638,966			34,914,818			42,425,510			34,792,171

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

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
	2011			2010
Cash Flows From Operating Activities
Net loss	$	(2,806,299	)	$	(2,838,305	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for doubtful accounts		112,516			73,491
Depreciation and amortization		4,187,800			2,555,410
Stock-based compensation		246,826			457,541
Gain on business acquisition		(564,125	)		(355,876	)
Loss on sale and disposition of property and equipment		48,275			35,615
Deferred rent		(42,079	)		(36,811	)
Changes in operating assets and liabilities:
Accounts receivable		138,261			(77,156	)
Prepaid expenses and other current assets		(162,465	)		(60,207	)
Other assets		(144,074	)		-
Accounts payable		169,456			(208,317	)
Accrued expenses		134,965			405,322
Other current liabilities		(30,489	)		-
Deferred revenues		(281,869	)		(1,145	)
Total Adjustments		3,812,998			2,787,867
Net Cash Provided By (Used In) Operating Activities		1,006,699			(50,438	)

Cash Flows From Investing Activities
Acquisitions of property and equipment		(6,320,398	)		(3,151,775	)
Acquisition of a business		(1,600,000	)		(1,170,000	)
Proceeds from sale of property and equipment		1,009			-
Change in security deposits		(42,930	)		(3,000	)
Net Cash Used In Investing Activities		(7,962,319	)		(4,324,775	)

Cash Flows From Financing Activities
Repayment of capital leases		(40,372	)		-
Issuance of common stock upon exercise of options		223,140			-
Issuance of common stock upon exercise of warrants		27,000			-
Issuance of common stock under employee stock purchase plan		17,926			-
Net Cash Provided By Financing Activities		227,694			-

Net Decrease In Cash and Cash Equivalents		(6,727,926	)		(4,375,213	)

Cash and Cash Equivalents - Beginning		23,173,352			14,040,839
Cash and Cash Equivalents - Ending	$	16,445,426		$	9,665,626

Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest	$	4,790		$	-
Taxes	$	16,050		$	10,607
Fair value of common stock issued in connection with an acquisition	$	1,839,732		$	430,000
Acquisition of property and equipment under capital lease obligations	$	201,616		$	-

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

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

For the Six Months Ended June 30, 2011

	Common Stock
	Shares		Amount		Additional Paid-In- Capital			Accumulated Deficit			Total
Balance at January 1, 2011		42,116,618	$	42,117	$	75,332,969		$	(35,354,208	)	$	40,020,878
Issuance of common stock for a business acquisition		387,312		387		1,839,345						1,839,732
Cashless exercise of options		130,702		131		(131	)					-
Exercise of options		252,624		253		222,887						223,140
Exercise of warrants		6,000		6		26,994						27,000
Issuance of common stock under an employee stock purchase plan		4,228		4		21,093						21,097
Stock-based compensation for options						184,555						184,555
Stock-based compensation for restricted stock						59,100						59,100
Net loss									(2,806,299	)		(2,806,299	)
Balance at June 30, 2011		42,897,484	$	42,898	$	77,686,812		$	(38,160,507	)	$	39,569,203

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

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Nature of Business

Towerstream Corporation (referred to as ‘‘Towerstream’’ or the ‘‘Company’’) was formed on December 17, 1999, and was incorporated in Delaware. The Company provides broadband services to commercial customers and delivers access over a wireless network transmitting over both regulated and unregulated radio spectrum. The Company’s service supports bandwidth on demand, wireless redundancy, virtual private networks (“VPNs”), disaster recovery, bundled data and video services. The Company provides service 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.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2011 and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the operating results for the full fiscal year or any future period.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2010, and updated, as necessary, in this Quarterly Report on Form 10-Q.

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, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Actual results could differ from those estimates.

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

Concentration of Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of June 30, 2011, the Company had cash and cash equivalent balances of approximately $8,430,000 in excess of the federally insured limit of $250,000. Under the FDIC’s Transaction Account Guarantee (“TAG”) program, noninterest-bearing transaction deposit accounts have full federal deposit insurance coverage through December 31, 2012. The Company has one noninterest-bearing transaction deposit account totaling approximately $113,194 that is covered under the TAG program.

The Company also had approximately $7,765,000 invested in three institutional money market funds. These funds are protected under the Securities Investor Protection Corporation (‘‘SIPC’’), a nonprofit membership corporation which provides limited coverage up to $500,000.

Accounts Receivable. Accounts receivable are stated at cost less an allowance for doubtful accounts. The allowance for doubtful accounts reflects the Company’s estimate of accounts receivable that will be not collected. The allowance is based on the history of past write-offs, the aging of balances, collections experience and current credit conditions. Amounts determined to be uncollectible are written-off against the allowance for doubtful accounts.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Changes in the allowance for doubtful accounts were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Beginning of period	$	105,576		$	94,815		$	118,825		$	88,299
Additions		163,824			28,465			197,492			73,491
Deductions		(40,953	)		(21,155	)		(87,870	)		(59,665	)
End of period	$	228,447		$	102,125		$	228,447		$	102,125

Additions to the allowance for doubtful accounts include provisions for bad debt and deductions to the allowance for doubtful accounts include customer write-offs.

Additions for the three and six months ended June 30, 2011 include $78,824 of reserves recorded in connection with the acquisition of One Velocity, Inc. (“One Velocity”).

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

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

Goodwill. Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired in an acquisition. Goodwill is not amortized but rather is reviewed annually for impairment, or whenever events or circumstances indicate that the carrying value may not be recoverable. A two-step test is performed at the reporting unit level to assess goodwill for impairment. First, the fair value of the reporting unit is compared to its carrying value. If the fair value exceeds the carrying value, the reporting unit is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. If the carrying value of the goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded.

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

Note 3. Business Acquisitions

On May 18, 2011, the Company completed the acquisition of One Velocity. The acquisition is the Company’s first acquisition in a new geographical market and introduced Las Vegas and Reno, Nevada as the Company’s 12th market nationally. The Company obtained full control of One Velocity in the acquisition.

The Company has determined that the acquisition of One Velocity was a business combination to be accounted for under the acquisition method. The following table summarizes the consideration transferred and the amounts of identified assets acquired and liabilities assumed at the acquisition date:

Fair value of consideration transferred:
Cash	$	1,600,000
Common stock (387,312 shares)		1,839,732
		3,439,732
Recognized amounts of identifiable assets acquired and liabilities assumed:
Customer contracts		2,466,512
Property and equipment		1,952,883
Accounts receivable, net		84,460
Security deposits		21,679
Prepaid expenses and other current assets		795
Accounts payable		(115,772	)

Deferred revenue		(406,700	)
Total identifiable net assets		4,003,857
Gain on business acquisition	$	564,125

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company recognized a $564,125 gain on business acquisition which was included in other income (expense) in the Company’s condensed consolidated statements of operations. The challenging economic environment has made it difficult for smaller companies like One Velocity to raise sufficient capital to sustain their growth. As a result, the Company was able to acquire the customer contracts and wireless network of One Velocity at a discounted price.

During the three and six months ended June 30, 2011, the Company incurred approximately $115,000 and $140,000 of third-party costs in connection with the One Velocity acquisition. These expenses are included in the general and administrative expenses in the Company’s consolidated statements of operations.

Pro Forma Information

The following table reflects the unaudited pro forma consolidated results of operations had the One Velocity acquisition taken place at the beginning of the 2011 and 2010 periods and the Sparkplug Chicago, Inc. (“Sparkplug”) and Pipeline Wireless, LLC (“Pipeline”) acquisitions taken place at the beginning of the 2010 period:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenues	$	6,789,968		$	5,790,875		$	13,139,482		$	11,287,650
Amortization expense		840,447			893,410			1,733,858			1,786,821
Total operating expenses		8,717,761			7,712,913			16,728,777			15,077,068
Net loss		(1,364,249	)		(1,543,135	)		(3,024,638	)		(3,390,686	)
Basic net loss per share	$	(0.03	)	$	(0.04	)	$	(0.07	)	$	(0.10	)

The pro forma information presented above does not purport to present what actual results would have been had the acquisitions actually occurred at the beginning of 2010, nor does the information project results for any future period.

Note 4. Property and Equipment, net

The Company’s property and equipment, net is comprised of:

	June 30, 2011		December 31, 2010
Network and base station equipment	$	19,669,291	$	16,278,966
Customer premise equipment		17,368,047		12,496,065
Furniture, fixtures and other		1,541,675		1,541,675
Computer equipment		743,095		683,071
System software		839,691		833,109
Leasehold improvements		775,420		775,420
		40,937,219		32,608,306
Less: accumulated depreciation		20,073,449		17,342,250
	$	20,863,770	$	15,266,056

Depreciation expense for the three months ended June 30, 2011 and 2010 was $1,500,075 and $1,189,418, respectively. Depreciation expense for the six months ended June 30, 2011 and 2010 was $2,827,897 and $2,290,589, respectively. The Company sold or disposed of property and equipment with $93,361 of original cost and $45,842 of accumulated depreciation for the six months ended June 30, 2011. The Company sold or disposed of property and equipment with $144,413 of original cost and $107,428 of accumulated depreciation for the six months ended June 30, 2010. In addition, the Company exchanged property and equipment with a net book value of $20,815 for property and equipment with a fair value of $19,050 during the six months ended June 30, 2011. There were no exchanges of property and equipment for the six months ended June 30, 2010.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

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

	June 30, 2011		December 31, 2010
Network and base station equipment	$	294,452	$	92,836
Customer premise equipment		59,328		59,328
		353,780		152,164
Less: accumulated depreciation		19,844		1,268
	$	333,936	$	150,896

Note 5. Intangible Assets

The Company’s intangible assets are comprised of the following:

	June 30, 2011		December 31, 2010
Goodwill	$	1,724,571	$	1,724,571

Customer contracts	$	5,813,699	$	3,347,187
FCC licenses		975,000		975,000
		6,788,699		4,322,187
Less: accumulated amortization		2,315,125		955,222
	$	4,473,575	$	3,366,965

Amortization expense for the three and six months ended June 30, 2011 was $713,143 and $1,359,903, respectively. Amortization expense for the three and six months ended June 30, 2010 was $264,821. The Company amortized the customer contracts acquired in the Sparkplug acquisition over a 14 month period. The customer contracts acquired in the Pipeline acquisition are being amortized over a 17 month period and the customer contracts acquired in the One Velocity acquisition are being amortized over a 30 month period. As of June 30, 2011, the average remaining amortization period is 19.5 months. Future amortization expense of intangible assets is expected to be approximately $1,151,000 for 2011, $1,480,000 for 2012 and $867,000 for 2013. No amortization expense is expected to be recognized after 2013.

The Company’s FCC licenses are not subject to amortization as they have an indefinite useful life.

Note 6. Accrued Expenses

Accrued expenses consist of the following:

	June 30, 2011		December 31, 2010
Payroll and related	$	635,658	$	595,710
Property and equipment		458,454		338,763
Professional services		245,216		325,485
Network		169,207		111,055
Marketing		80,209		65,898
Offering costs		-		55,000
Other		148,554		103,805
Total	$	1,737,298	$	1,595,716

Network expenses consist of expenses directly related to providing services to our customers.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Note 7. Other Liabilities

Other current liabilities and other long-term liabilities consist of the following:

	June 30, 2011		December 31, 2010
Other Current Liabilities
Deferred rent	$	88,404	$	84,157
Deferred acquisition payments		246,376		136,439
Other		-		30,489
Total	$	334,780	$	251,085

Other Long-Term Liabilities
Deferred rent	$	144,698	$	191,025
Deferred acquisition payments		367,270		477,207
Total	$	511,968	$	668,232

Deferred acquisition payments totaling $768,869 are being paid in 36 monthly installments of $21,357 through May 2014. The payments were discounted at a 12% rate and recorded at $613,646 for acquisition accounting purposes.

Note 8. Share-Based Compensation

The Company uses the Black-Scholes valuation model to value options granted to employees, directors and consultants. Compensation expense, including the effect of forfeitures, is recognized over the period of service, generally the vesting period. Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled $108,403 and $264,120 for the three months ended June 30, 2011 and 2010, respectively. Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled $184,555 and $440,291 for the six months ended June 30, 2011 and 2010, respectively. Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

The unamortized amount of stock options expense was $1,281,939 as of June 30, 2011 which will be recognized over a weighted-average period of 2.0 years.

On June 1, 2011, the Board of Directors amended the 2008 Non-Employee Directors Compensation Plan to change the vesting terms of the annual Board grant. The grants now vest monthly over a one year period instead of immediately upon issuance. On June 1, 2011, the Company issued the annual grant totaling 200,000 options at an exercise price of $5.23.

In June 2011, the Company issued 220,000 options in aggregate to its executives. The options were granted at an exercise price of $4.94. One-third of the options vest on June 24, 2012 with the remaining options vesting in quarterly installments over the following two years.

The fair value of stock option grants were calculated on the dates of grant using the Black-Scholes option pricing model and the following weighted average assumptions:

	Three and Six Months Ended June 30,
	2011			2010
Risk-free interest rate		1.6% - 1.8	%		1.0% - 3.3	%
Expected volatility		56% - 58	%		73	%
Expected life (in years)		5.3 - 6.0			2.5 – 6.1
Expected dividend yield		-			-
Weighted average per share grant date fair value	$	2.65		$	0.99

The risk-free interest rate was based on rates established by the Federal Reserve. The Company’s expected volatility was based upon the historical volatility for its common stock. The expected life of the Company’s options was determined using the simplified

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

method as a result of limited historical data regarding the Company’s activity. The dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the future.

During the first quarter of 2011, the Company issued 90,000 shares of restricted stock to two executives. The fair value of $354,600 was based on the closing market price of the Company’s common stock on the date of grant. The restricted stock vests over a three year period, of which zero shares were vested as of June 30, 2011. Stock-based compensation for restricted stock totaled $29,550 and $59,100 for the three and six months ended June 30, 2011. Unrecognized compensation cost of $295,500 at June 30, 2011 will be recognized over the next 2.5 years.

The Company recorded stock-based compensation of $17,250 related to the issuance of 9,225 shares of common stock to executive officers during the six months ended June 30, 2010. There was no stock-based compensation recorded for the issuance of common stock to executive officers for the six months ended June 30, 2011. There was no stock-based compensation recorded for the issuance of common stock to executive officers for the three months ended June 30, 2011 and 2010, respectively.

Transactions under the stock option plans during the six months ended June 30, 2011 are as follows:

	Number of			Weighted Average
	Options			Exercise Price
Options outstanding as of December 31, 2010		3,706,885		$	1.74
Granted		420,000			5.08
Exercised		(432,145	)		1.03
Cancelled		(8,334	)		0.68
Options outstanding as of June 30, 2011		3,686,406			2.21
Options exercisable as of June 30, 2011		2,941,827		$	1.89

A total of 84,771 and 179,521 options were exercised on a cashless basis during the three and six months ended June 30, 2011, resulting in the net issuance of 68,200 and 130,702 shares. Under a cashless exercise, the holder uses a portion of the shares that would otherwise be issuable upon exercise, rather than cash, as consideration for the exercise. The amount of net shares issuable in connection with a cashless exercise will vary based on the exercise price of the option compared to the current market price of the Company’s common stock on the date of exercise.

During the three and six months ended June 30, 2011, a total of 20,813 and 252,624 options were exercised on a cash basis which resulted in proceeds of $18,179 and $223,140.

The weighted average remaining contractual life of the outstanding options as of June 30, 2011 was 5.7 years.

The intrinsic value for options outstanding and exercisable totaled $10,941,933 and $9,752,214, respectively, as of June 30, 2011. The intrinsic value for an option is calculated as the excess of the closing price of the Company’s common stock at June 30, 2011, which was $4.99 per share, and the exercise price of each option.

Note 9. Stock Warrants

Warrants outstanding and exercisable totaled 4,326,310 and 4,332,310 as of June 30, 2011 and December 31, 2010, respectively, and had a weighted average exercise price of $4.61 (ranging between $4.00 and $6.00). The weighted average remaining contractual life as of June 30, 2011 was 0.6 years.

During the three and six months ended June 30, 2011, a total of 6,000 warrants were exercised on a cash basis which resulted in proceeds of $27,000.

Note 10. Employee Stock Purchase Plan

In November 2010, the Company’s shareholders approved the 2010 Employee Stock Purchase Plan (“ESPP Plan”). Under the ESPP plan, participants purchase the Company’s stock at a 15% discount. A maximum of 200,000 shares of common stock can be issued under the ESPP plan. The first issuance under the ESPP Plan occurred on June 30, 2011. A total of 4,228 shares were issued

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

with a fair value of $21,097. The Company recognized $3,171 of stock-based compensation related to the 15% discount in the ESPP Plan.

Note 11. Fair Value Measurement

Valuation Hierarchy

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

Cash and cash equivalents were carried at fair value measured on a recurring basis as follows:

			Fair Value Measurements
	Total Carrying Value		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)

June 30, 2011	$	16,445,426	$	16,445,426	$	–	$	–
December 31, 2010	$	23,173,352	$	23,173,352	$	–	$	–

Cash and cash equivalents are measured at fair value using quoted market prices and are classified within Level 1 of the valuation hierarchy. The carrying amounts of accounts receivable, accounts payable and accrued liabilities approximate their fair value due to their short maturities. There were no changes in the valuation techniques during the six months ended June 30, 2011.

Note 12. Net Loss Per Common Share

Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of common shares outstanding during the period. All potentially dilutive common shares have been excluded since their inclusion would be anti-dilutive.

The following common stock equivalents were excluded from the computation of diluted net loss per common share because they were anti-dilutive. The exercise or issuance of these common stock equivalents outstanding at June 30, 2011 would dilute earnings per share if the Company becomes profitable in the future. The exercise of the outstanding stock options and warrants could generate proceeds up to approximately $28,100,000.

Stock options			3,686,406
Restricted stock			90,000
Warrants			4,326,310
Total			8,102,716

Note 13. Commitments and Contingencies

Lease Obligations. The Company has entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through December 2020.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

As of June 30, 2011, total future lease commitments were as follows:

Remainder of 2011	$	2,816,766
2012		4,809,558
2013		3,563,633
2014		2,405,847
2015		1,672,946
Thereafter		2,547,429
	$	17,816,179

Rent expense for the three months ended June 30, 2011 and 2010 totaled approximately $1,231,000 and $792,000, respectively. Rent expense for the six months ended June 30, 2011 and 2010 totaled approximately $2,268,000 and $1,531,000, respectively.

Other Commitments and Contingencies. One FCC license includes a contingent payment depending on the status of the license with the FCC and whether the Company has obtained approval to broadcast terrestrially in the 3650 to 3700 MHz band. The contingent payment is due in August 2011 and payable in shares of common stock with a fair value of $275,000. The Company presently expects that it will make the contingent payment in August 2011.

Note 14. Subsequent Events

In July 2011, the Company completed an underwritten offering of 10,350,000 shares of its common stock at a public offering price of $4.00 per share. The total gross proceeds of the offering were $41,400,000. After underwriting discounts, commissions and offering expenses payable by the Company, net proceeds are estimated to be approximately $38,900,000.

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

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the six months ended June 30, 2011. 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, 2010 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 Report.

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 service 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 April 2010, we completed the acquisition of the customer contracts, network infrastructure and related assets of the Chicago, Illinois and Nashville, Tennessee networks of Sparkplug Chicago, Inc. (“Sparkplug”). The aggregate consideration for the acquisition was (i) approximately $1.2 million in cash and (ii) 275,700 shares of our common stock (the “Shares”) with a fair value of approximately $0.4 million. A registration statement covering the Shares on Form S-3 was declared effective by the SEC on May 5, 2010. The acquisition of Sparkplug was a business combination accounted for under the acquisition method.

In December 2010, we completed the acquisition of the customer contracts, network infrastructure and related assets of Pipeline Wireless, LLC (“Pipeline”), which was primarily based in the greater Boston area. The aggregate consideration for the acquisition included (i) approximately $1.6 million in cash, (ii) 411,523 unregistered shares of common stock with a fair value of approximately $1.5 million, (iii) approximately $0.6 million of deferred cash payments over a 36 month period beginning June 2011, and (iv) approximately $0.2 million in assumed liabilities. The acquisition of Pipeline was a business combination accounted for under the acquisition method.

In May 2011, we completed the acquisition of the customer contracts, network infrastructure and related assets of One Velocity Inc. (“One Velocity”), which was based in Las Vegas and Reno, Nevada. The aggregate consideration for the acquisition includes (i) approximately $1.6 million in cash, and (ii) 387,312 unregistered shares of common stock with a fair value of approximately $1.8 million. The acquisition of One Velocity was a business combination accounted for under the acquisition method.

Characteristics of our Revenues and Expenses

We offer our services under agreements having terms of one, two or 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 building PoPs which are 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 tower and roof rental agreements, secure bandwidth and incur other Network Costs. Once we have established a Network Presence in a new market or expanded our Network Presence in an existing market, we are capable of servicing a significant number of customers through that Network Presence. The variable cost to add new customers is relatively modest, especially compared to the upfront cost of establishing or expanding our Network Presence. 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 includes 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 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 June 30, 2011, we operated in twelve markets across the United States including 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 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.

Costs of Revenues: Includes payroll, Core Network costs and Customer Network costs that can be allocated to a specific market. Costs that can not be allocated to a specific market are classified as Centralized Costs.

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

Centralized Costs: Represents costs incurred to support activities across all of our markets that are not allocable to a specific market. This 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.

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 net 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 began providing broadband services in Philadelphia, Pennsylvania in 2010. The Sparkplug acquisition in April 2010 expanded and strengthened our presence in Chicago and also brought us into the Nashville, Tennessee market. The Pipeline acquisition in December 2010 expanded and strengthened our operations in the greater Boston area. We entered the Las Vegas-Reno market in May 2011 through the acquisition of One Velocity.

Cost of revenues for the New York market include approximately $114,000 and $128,000 for the three and six months ended June 30, 2011, respectively, related to the construction of a Wi-Fi offload network.

Three months ended June 30, 2011

Market	Revenues		Cost of Revenues		Gross Margin		Operating Costs		Adjusted Market EBITDA
Boston	$	1,705,713	$	398,959	$	1,306,754	$	274,904	$	1,031,850
New York		1,502,945		464,577		1,038,368		323,549		714,819
Los Angeles		1,048,426		191,730		856,696		275,090		581,606
Chicago		916,531		294,817		621,714		162,206		459,508
San Francisco		386,386		73,068		313,318		96,973		216,345
Miami		342,166		79,750		262,416		92,267		170,149
Las Vegas-Reno		189,093		76,275		112,818		7,879		104,939
Seattle		137,858		53,765		84,093		34,911		49,182
Providence-Newport		112,131		42,640		69,491		23,735		45,756
Dallas-Fort Worth		180,221		78,844		101,377		71,436		29,941
Philadelphia		43,540		17,554		25,986		27,520		(1,534	)
Nashville		16,049		12,124		3,925		11,283		(7,358	)
Total	$	6,581,059	$	1,784,103	$	4,796,956	$	1,401,753	$	3,395,203

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA									$	3,395,203
Centralized costs										(774,378	)
Corporate expenses										(2,123,742	)
Depreciation and amortization										(2,213,218	)
Stock-based compensation										(141,124	)
Other income (expense)										563,544
Net loss									$	(1,293,715	)

Three months ended June 30, 2010

Market	Revenues		Cost of Revenues			Gross Margin			Operating Costs		Adjusted Market EBITDA
New York	$	1,459,129	$	284,684		$	1,174,445		$	352,896	$	821,549
Boston		1,083,557		171,082			912,475			164,142		748,333
Los Angeles		754,489		136,727			617,762			258,665		359,097
Chicago		649,520		203,044			446,476			154,797		291,679
San Francisco		275,606		60,644			214,962			81,088		133,874
Miami		255,347		84,738			170,609			89,096		81,513
Providence-Newport		124,876		38,803			86,073			27,623		58,450
Seattle		130,566		57,475			73,091			31,461		41,630
Nashville		21,371		14,319			7,052			7,192		(140	)
Dallas-Fort Worth		113,181		82,466			30,715			62,010		(31,295	)
Philadelphia		897		12,750	��		(11,853	)		54,082		(65,935	)
Total	$	4,868,539	$	1,146,732		$	3,721,807		$	1,283,052	$	2,438,755

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA											$	2,438,755
Centralized costs												(763,225	)
Corporate expenses												(1,642,606	)
Depreciation and amortization												(1,454,239	)
Stock-based compensation												(264,120	)
Other income (expense)												378,903
Net loss											$	(1,306,532	)

Six months ended June 30, 2011

Market	Revenues		Cost of Revenues		Gross Margin		Operating Costs		Adjusted Market EBITDA
Boston	$	3,358,539	$	793,052	$	2,565,487	$	497,273	$	2,068,214
New York		2,951,136		804,332		2,146,804		656,013		1,490,791
Los Angeles		1,998,694		365,890		1,632,804		536,394		1,096,410
Chicago		1,733,240		521,289		1,211,951		347,880		864,071
San Francisco		735,145		132,511		602,634		190,032		412,602
Miami		643,181		148,735		494,446		195,250		299,196
Las Vegas-Reno		189,093		76,275		112,818		7,879		104,939
Seattle		274,267		107,386		166,881		63,398		103,483
Providence-Newport		231,058		83,501		147,557		50,785		96,772
Dallas-Fort Worth		324,045		160,036		164,009		135,793		28,216
Nashville		31,622		20,146		11,476		22,779		(11,303	)
Philadelphia		64,052		30,809		33,243		55,711		(22,468	)
Total	$	12,534,072	$	3,243,962	$	9,290,110	$	2,759,187	$	6,530,923

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA									$	6,530,923
Centralized costs										(1,573,817	)
Corporate expenses										(3,893,436	)
Depreciation and amortization										(4,187,800	)
Stock-based compensation										(246,826	)
Other income (expense)										564,657
Net loss									$	(2,806,299	)

Six months ended June 30, 2010

Market	Revenues		Cost of Revenues		Gross Margin			Operating Costs		Adjusted Market EBITDA
New York	$	2,852,921	$	557,363	$	2,295,558		$	643,206	$	1,652,352
Boston		2,136,090		345,762		1,790,328			338,060		1,452,268
Los Angeles		1,429,093		270,160		1,158,933			547,036		611,897
Chicago		941,629		314,625		627,004			249,875		377,129
San Francisco		544,460		117,471		426,989			146,196		280,793
Miami		454,740		155,039		299,701			176,204		123,497
Providence-Newport		253,422		82,807		170,615			62,288		108,327
Seattle		253,084		109,072		144,012			62,845		81,167
Nashville		21,371		14,319		7,052			7,192		(140	)
Dallas-Fort Worth		224,491		164,429		60,062			115,575		(55,513	)
Philadelphia		1,455		28,052		(26,597	)		105,102		(131,699	)
Total	$	9,112,756	$	2,159,099	$	6,953,657		$	2,453,579	$	4,500,078

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA										$	4,500,078
Centralized costs											(1,466,172	)
Corporate expenses											(3,257,992	)
Depreciation and amortization											(2,555,410	)
Stock-based compensation											(457,541	)
Other income (expense)											398,732
Net loss										$	(2,838,305	)

Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

Revenues. Revenues totaled $6,581,059 during the three months ended June 30, 2011 compared to $4,868,539 during the three months ended June 30, 2010, representing an increase of $1,712,520, or 35%. This increase was primarily related to 27% growth in our customer base from June 30, 2010 to June 30, 2011.

Average revenue per user (“ARPU”) as of June 30, 2011 totaled $703 compared to $671 as of June 30, 2010, representing an increase of $32, or 5%. The customers acquired from One Velocity in May 2011 had an ARPU of $893 which had the effect of increasing our post-acquisition ARPU by $10. The balance of the increase related to customer upgrades to higher bandwidth levels which also increased ARPU.

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.56% for the three months ended June 30, 2011 compared to 1.15% for the three months ended June 30, 2010, representing a 36% increase. Churn levels can fluctuate from quarter to quarter. Our goal is to maintain churn levels between 1.4% and 1.7% which we believe is below industry standards.

Cost of Revenues. Cost of revenues totaled $1,846,215 for the three months ended June 30, 2011 compared to $1,207,100 for the three months ended June 30, 2010, an increase of $639,115, or 53%. Gross margins decreased to 72% in the 2011 period compared to 75% in the 2010 period. Expenses associated with the Wi-Fi offload network totaled approximately $131,000 which impacted gross margin by 2 percentage points. Core Network costs increased by approximately $359,000 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 $2,213,218 for the three months ended June 30, 2011 compared to $1,454,239 for the three months ended June 30, 2010, representing an increase of $758,979, or 52%. Depreciation expense totaled $1,500,075 for the three months ended June 30, 2011 compared to $1,189,418 for the three months ended June 30, 2010, representing an increase of $310,657, or 26%. The base of depreciable assets increased by $10,994,954, or 37% compared to the second quarter of 2010. The increased depreciable base reflects continued growth in the core business as well as spending on the Wi-Fi offload program and additions resulting from acquisitions. Amortization expense totaled $713,143 for the three months ended June 30, 2011 compared to $264,821 for the three months ended June 30, 2010, representing an increase of $448,322, or greater than 100%. The increase relates to customer based intangible assets recorded in connection with the acquisitions of Pipeline in the fourth quarter of 2010 and One Velocity in the second quarter of 2011.

Customer Support Services. Customer support services expenses totaled $733,162 for the three months ended June 30, 2011 compared to $672,205 for the three months ended June 30, 2010, representing an increase of $60,957, or 9%. This increase was primarily related to additional personnel hired to support our growing customer base. Average headcount increased by 19%, from 47 in the 2010 period to 56 in the 2011 period.

Sales and Marketing. Sales and marketing expenses totaled $1,380,857 for the three months ended June 30, 2011 compared to $1,313,704 for the three months ended June 30, 2010, representing an increase of $67,153, or 5%. This increase was primarily related to an increase in commissions and bonuses of approximately $106,000 in the 2011 period. This increase was offset by approximately $64,000 related to lower base salary costs as sales personnel averaged 54 for the three months ended June 30, 2011 compared with 62 for the same period in 2010, a decrease in average headcount of 13%.

General and Administrative. General and administrative expenses totaled $2,264,866 for the three months ended June 30, 2011 compared to $1,906,726 for the three months ended June 30, 2010, representing an increase of $358,140, or 19%. Costs associated with the Wi-Fi offload program totaled approximately $231,000 for the three months ended June 30, 2011 as compared to zero for the three months ended June 30, 2010. In addition, bad debt reserves increased by approximately $57,000.

Interest Income. Interest income totaled $4,440 for the three months ended June 30, 2011 compared with $631 for the three months ended June 30, 2010, representing an increase of $3,809. The increase primarily relates to higher cash balances in the 2011 period. Average cash balances increased from approximately $9.9 million in the second quarter 2010 to approximately $18.3 million in the second quarter 2011.

Interest Expense. Interest expense totaled $2,202 for the three months ended June 30, 2011. There was no interest expense for the three months ended June 30, 2010. Interest expense related to capital leases acquired in the Pipeline acquisition.

Gain on Business Acquisition. Gain on business acquisition totaled $564,125 for the three months ended June 30, 2011 compared to $355,876 for the three months ended June 30, 2010, representing an increase of $208,249 or 59%. The gain in the 2010 period related to the acquisition of Sparkplug in April 2010 whereas the gain in the 2011 period related to the One Velocity acquisition in May 2011.

Net Loss. Net loss totaled $1,293,715 for the three months ended June 30, 2011 compared with $1,306,532 for the three months ended June 30, 2010, a decrease of $12,817, or 1%. Revenues increased by $1,712,520, or 35%, while operating expenses increased by $1,884,344, or 29%. However, non-operating income totaled $563,544 in the 2011 period compared to $378,903 during the 2010 period resulting in a slight decrease in net loss.

Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

Revenues. Revenues totaled $12,534,072 during the six months ended June 30, 2011 compared to $9,112,756 during the six months ended June 30, 2010, representing an increase of $3,421,316, or 38%. This increase was driven by 27% growth in our customer base from June 30, 2010 to June 30, 2011. ARPU increased 5% during the 2011 period as compared to the 2010 period.

Cost of Revenues. Cost of revenues totaled $3,352,122 for the six months ended June 30, 2011 compared to $2,281,887 for the six months ended June 30, 2010, an increase of $1,070,235, or 47%. Gross margins decreased to 73% during the 2011 periods from 75% in the 2010 period. Expenses associated with the Wi-Fi offload network totaled approximately $147,000 which impacted gross margin by 1 percentage point. Core Network costs increased by approximately $625,000 primarily related to higher tower rent and bandwidth expenses which were partly related to acquisitions. Customer Network costs increased by approximately $169,000 primarily related to the growth in our customer base.

Depreciation and Amortization. Depreciation and amortization totaled $4,187,800 for the six months ended June 30, 2011 compared to $2,555,410 for the six months ended June 30, 2010, representing an increase of $1,632,390, or 64%. Depreciation expense totaled $2,827,897 for the six months ended June 30, 2011 compared to $2,290,589 for the six months ended June 30, 2010, representing an increase of $537,308, or 23%. The base of depreciable assets increased by $10,994,954, or 37% compared to the prior year. The increased depreciable base reflects continued growth in the core business as well as spending on the Wi-Fi offload program and additions resulting from acquisitions. Amortization expense totaled $1,359,903 for the six months ended June 30, 2011 compared to $264,821 for the six months ended June 30, 2010, representing an increase of $1,095,082, or greater than 100%. The increase relates to customer based intangible assets recorded in connection with the acquisitions of Sparkplug in the second quarter of 2010, Pipeline in the fourth quarter of 2010 and One Velocity in the second quarter of 2011.

Customer Support Services. Customer support services expenses totaled $1,504,185 for the six months ended June 30, 2011 compared to $1,250,461 for the six months ended June 30, 2010, representing an increase of $253,724, or 20%. This increase was primarily related to additional personnel hired to support our growing customer base. Average headcount increased by 22%, from 45 in the 2010 period to 55 in the 2011 period.

Sales and Marketing. Sales and marketing expenses totaled $2,720,659 for the six months ended June 30, 2011 compared to $2,546,502 for the six months ended June 30, 2010, representing an increase of $174,157, or 7%. This increase was primarily related to an increase in commissions and bonuses of approximately $278,000 in the 2011 period. This increase was offset by approximately $134,000 related to lower base salary costs as sales personnel averaged 54 for the six months ended June 30, 2011 compared with 62 for the same period in 2010, a decrease in headcount of 13%.

General and Administrative. General and administrative expenses totaled $4,140,262 for the six months ended June 30, 2011 compared to $3,715,533 for the six months ended June 30, 2010, representing an increase of $424,729, or 11%. Costs associated with the Wi-Fi offload program totaled approximately $286,000 for the six months ended June 30, 2011 compared to zero for the six months ended June 30, 2010. Higher payroll costs of approximately $205,000 were offset by a decrease in employee stock-based compensation of approximately $211,000. The balance of the increase occurred across a number of functional components including office, insurance, travel and bad debt reserves.

Interest Income. Interest income totaled $10,032 for the six months ended June 30, 2011 compared with $805 for the six months ended June 30, 2010, representing an increase of $9,227. The increase primarily relates to higher cash balances in the 2011 period. Average cash balances increased from approximately $11.3 million in the 2010 period to approximately $20.3 million in the 2011 period.

Interest Expense. Interest expense totaled $4,790 for the six months ended June 30, 2011. There was no interest expense for the six months ended June 30, 2010. Interest expense related to capital leases acquired in the Pipeline acquisition.

Gain on Business Acquisition. Gain on business acquisition totaled $564,125 for the six months ended June 30, 2011 compared to $355,876 for the six months ended June 30, 2010, representing an increase of $208,249 or 59%. The gain in the 2010 period related to the acquisition of Sparkplug in April 2010 whereas the gain in the 2011 period related to the One Velocity acquisition in May 2011.

Net Loss. Net loss totaled $2,806,299 for the six months ended June 30, 2011 compared with $2,838,305 for the six months ended June 30, 2010, a decrease of $32,006, or 1%. Revenues increased by $3,421,316, or 38%, while operating expenses increased by $3,555,235, or 29%. However, non-operating income totaled $564,657 in the 2011 period compared to $398,732 during the 2010 period resulting in a slight decrease in net loss.

Liquidity and Capital Resources

We have historically met our liquidity and capital requirements primarily through the public sale and private placement of equity securities and debt financing. Changes in capital resources during the six months ended June 30, 2011 and 2010 are described below.

Net Cash Provided by (Used in) Operating Activities. Net cash provided by operating activities totaled $1,006,699 for the six months ended June 30, 2011 as compared to net cash used in operating activities of $50,438 for the six months ended June 30, 2010, representing an increase in cash provided by operating activities of $1,057,137, or greater than 100%. During the six months ended June 30, 2011, cash flow from operations totaled $1,182,914 as compared to cash used in operations of $108,935 during the six months ended June 30, 2010. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results. During the six months ended June 30, 2011, changes in operating assets and liabilities used cash of $176,215. During the six months ended June 30, 2010, changes in operating assets and liabilities generated cash flow of $58,497.

Net Cash Used in Investing Activities. Net cash used in investing activities totaled $7,962,319 for the six months ended June 30, 2011 as compared to $4,324,775 for the six months ended June 30, 2010, representing an increase of $3,637,544, or 84%. The increase in the 2011 period related to higher spending on property and equipment which increased by $3,168,623, or 101%, from $3,151,775 to $6,320,398. The significant components of the increase included approximately $2,010,000 related to the construction of a Wi-Fi offload network and approximately $1,067,000 related to customer premise equipment. In addition, we paid $1,600,000 in cash for the acquisition of One Velocity in the 2011 period compared to $1,170,000 in cash for the acquisition of Sparkplug in the 2010 period.

Net Cash Provided by Financing Activities. Net cash provided by financing activities totaled $227,694 for the six months ended June 30, 2011 as compared to zero for the six months ended June 30, 2010. The increase is primarily related to proceeds from the exercise of stock options which totaled $223,140 for the 2011 period as compared to zero in the 2010 period.

Registered Offering. In July 2011, we completed an underwritten offering of 10,350,000 shares of our common stock at a public offering price of $4.00 per share. The total gross proceeds of the offering were $41,400,000. After underwriting discounts, commissions and offering expenses payable by us, net proceeds are estimated to be approximately $38,900,000.

Working Capital. As of June 30, 2011, we had working capital of $12,746,123. Following our registered offering in July 2011, we had working capital of approximately $51,671,000. Based on our current operating activities and plans, we believe our existing working capital will enable us to meet our anticipated cash requirements for at least the next twelve months.

Acquisition of One Velocity. On May 18, 2011, we completed the acquisition of the customer contracts, network infrastructure and related assets of One Velocity, which was based in Las Vegas and Reno, Nevada. The aggregate consideration for the acquisition includes (i) approximately $1.6 million in cash, and (ii) 387,312 unregistered shares of common stock with a fair value of approximately $1.8 million. The acquisition of One Velocity was a business combination accounted for under the acquisition method.

Critical Accounting Policies

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

Revenue Recognition. We normally enter into contractual agreements with our customers for periods ranging between one to three years. We recognize the total revenue provided under a contract ratably over the contract period, including any periods under which we have agreed to provide services at no cost. Deferred revenues are recognized as a liability when billings are issued in advance of the date when revenues are earned. We apply the revenue recognition principles set forth under Securities and Exchange Commission’s Staff Accounting Bulletin 104, (“SAB 104”) which provides for revenue to be recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.

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

Asset Retirement Obligations. The Financial Accounting Standards Board’s (“FASB”) guidance on asset retirement obligations addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated costs. This guidance requires the recognition of an asset retirement obligation and an associated asset retirement cost when there is a legal obligation associated with the retirement of tangible long-lived assets. Our network equipment is installed on both buildings in which we have a lease agreement (“Company Locations”) and at customer locations. In both instances, the installation and removal of our equipment is not complicated and does not require structural changes to the building where the equipment is installed. Costs associated with the removal of our equipment at company or customer locations are not material, and accordingly, we have determined that we do not presently have asset retirement obligations under the FASB’s accounting guidance.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of June 30, 2011, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our system of internal controls over financial reporting during the three months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 6. Exhibits.

Exhibit No.		Description
31.1		Section 302 Certification of Principal Executive Officer
31.2		Section 302 Certification of Principal Financial Officer
32.1		Section 906 Certification of Principal Executive Officer
32.2		Section 906 Certification of Principal Financial Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TOWERSTREAM CORPORATION

Date: August 15, 2011	By:	/s/ Jeffrey M. Thompson
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: August 15, 2011	By:	/s/ Joseph P. Hernon
		Joseph P. Hernon
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX

Exhibit No.		Description
31.1		Section 302 Certification of Principal Executive Officer
31.2		Section 302 Certification of Principal Financial Officer
32.1		Section 906 Certification of Principal Executive Officer
32.2		Section 906 Certification of Principal Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Towerstream (TWER) Inactive 10-Q2011 Q2 Quarterly report

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