Towerstream (TWER) 10-Q 2013 Q2 Quarterly report

lUNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2013

          OR

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

For the transition period from_______to_______

Commission file number 001-33449

TOWERSTREAM CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

Yes☒    No

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

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

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

As of August 5, 2013, there were 66,401,838 shares of common stock, par value $0.001 per share, outstanding.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

Table of Contents

		Pages
Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements.	1
	Condensed Consolidated Balance Sheets as of  June 30, 2013 (unaudited) and December 31, 2012	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)	2
	Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2013 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited)	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5-14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	15-25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	26
Item 4.	Controls and Procedures.	26
Part II	OTHER INFORMATION	27
Item 6.	Exhibits.	27

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited) June 30, 2013			December 31, 2012
Assets
Current Assets
Cash and cash equivalents	$	36,387,536		$	15,152,226
Accounts receivable, net		688,094			609,302
Prepaid expenses and other current assets		1,187,589			943,420
Total Current Assets		38,263,219			16,704,948
Property and equipment, net		39,127,105			41,982,210
Intangible assets, net		4,612,065			4,548,177
Goodwill		1,674,281			1,674,281
Other assets		1,994,101			2,200,098
Total Assets	$	85,670,771		$	67,109,714
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	507,130		$	1,163,442
Accrued expenses		2,036,368			2,986,020
Deferred revenues		1,344,448			1,457,464
Current maturities of capital lease obligations		811,559			775,087
Other		170,335			235,018
Total Current Liabilities		4,869,840			6,617,031
Long-Term Liabilities
Capital lease obligations, net of current maturities		2,184,820			2,387,674
Other		261,091			301,101
Total Long-Term Liabilities		2,445,911			2,688,775
Total Liabilities		7,315,751			9,305,806
Commitments (Note 14)
Stockholders' Equity
Preferred stock, par value $0.001; 5,000,000 shares authorized; none issued		-			-
Common stock, par value $0.001; 95,000,000 shares authorized; 66,360,173 and54,670,712 shares issued and outstanding, respectively		66,360			54,671
Additional paid-in-capital		153,515,006			121,118,127
Accumulated deficit		(75,226,346	)		(63,368,890	)
Total Stockholders' Equity		78,355,020			57,803,908
Total Liabilities and Stockholders' Equity	$	85,670,771		$	67,109,714

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

1

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenues	$	8,212,175		$	8,103,321		$	16,511,398		$	15,922,380
Operating Expenses
Cost of revenues (exclusive of depreciation)		5,360,291			3,723,292			10,590,932			6,796,059
Depreciation and amortization		3,935,826			3,348,283			7,806,913			6,629,362
Customer support services		987,713			1,238,164			2,135,272			2,400,129
Sales and marketing		1,523,804			1,554,339			2,964,660			3,036,328
General and administrative		2,636,033			2,953,034			5,773,632			6,144,357
Total Operating Expenses		14,443,667			12,817,112			29,271,409			25,006,235
Operating Loss		(6,231,492	)		(4,713,791	)		(12,760,011	)		(9,083,855	)
Other Income/(Expense)
Interest income		123			14,011			277			31,189
Interest expense		(58,793	)		(16,670	)		(94,561	)		(38,986	)
Gain on business acquisition		62,642			(40,079	)		1,004,099			(40,079	)
Other income (expense), net		(3,630	)		(2,130	)		(7,260	)		(7,060	)
Total Other Income/(Expense)		342			(44,868	)		902,555			(54,936	)
Net Loss	$	(6,231,150	)	$	(4,758,659	)	$	(11,857,456	)	$	(9,138,791	)
Net loss per common share – basic and diluted	$	(0.09	)	$	(0.09	)	$	(0.19	)	$	(0.17	)
Weighted average common shares outstanding –basic and diluted		66,370,789			54,369,177			63,931,300			54,340,621

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

 

2

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

For the Six Months Ended June 30, 2013

	Common Stock				Additional
	Shares		Amount		Paid-In- Capital			Accumulated Deficit			Total
Balance at December 31, 2012		54,670,712	$	54,671	$	121,118,127		$	(63,368,890	)	$	57,803,908
Cashless exercise of options		27,754		28		(28	)					-
Exercise of options		243,023		243		252,946						253,189
Issuance of common stockunder employee stockpurchase plan		18,560		18		43,915						43,933
Issuance of common stockupon vesting of restrictedstock awards		15,000		15		(15	)					-
Issuance of common stockfor business acquisitions		385,124		385		950,871						951,256
Net proceeds from issuance ofcommon stock		11,000,000		11,000		30,488,336						30,499,336
Stock-based compensation foroptions						631,304						631,304
Stock-based compensation forrestricted stock						29,550						29,550
Net loss									(11,857,456	)		(11,857,456	)
Balance at June 30, 2013		66,360,173	$	66,360	$	153,515,006		$	(75,226,346	)	$	78,355,020

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

3

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
	2013			2012
Cash Flows From Operating Activities
Net loss	$	(11,857,456	)	$	(9,138,791	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts		60,000			169,082
Depreciation and amortization		7,806,913			6,629,362
Stock-based compensation		667,376			915,835
Gain on business acquisition		(1,004,099	)		40,079
Loss on sale and disposition of property and equipment		59,135			23,605
Deferred rent		(57,880	)		(46,327	)
Changes in operating assets and liabilities:
Accounts receivable		(59,552	)		(285,582	)
Prepaid expenses and other current assets		(244,169	)		(593,114	)
Other assets		233,634			(397,663	)
Accounts payable		(685,847	)		(135,512	)
Accrued expenses		(1,472,991	)		(55,350	)
Deferred revenues		(172,991	)		(184,629	)
Total Adjustments		5,129,529			6,079,786
Net Cash Used In Operating Activities		(6,727,927	)		(3,059,005	)
Cash Flows From Investing Activities
Acquisitions of property and equipment		(2,119,826	)		(9,744,880	)
Acquisition of a business, net of cash acquired		(222,942	)		-
Proceeds from sale of property and equipment		1,465			9,350
Payments of security deposits		(25,644	)		(256,081	)
Deferred acquisition payments		(83,545	)		(152,914	)
Net Cash Used In Investing Activities		(2,450,492	)		(10,144,525	)
Cash Flows From Financing Activities
Payments on capital leases		(376,207	)		(274,775	)
Issuance of common stock upon exercise of options		253,189			161,411
Issuance of common stock under employee stock purchase plan		37,411			60,202
Net proceeds from sale of common stock		30,499,336			-
Net Cash Provided By (Used In) Financing Activities		30,413,729			(53,162	)
Net Increase (Decrease) In Cash and Cash Equivalents		21,235,310			(13,256,692	)
Cash and Cash Equivalents – Beginning		15,152,226			44,672,587
Cash and Cash Equivalents – Ending	$	36,387,536		$	31,415,895
Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest	$	94,525		$	38,986
Taxes	$	28,336		$	16,360
Non-cash investing and financing activities:
Fair value of common stock issued (returned) in connection with an acquisition	$	951,256		$	(403,365	)
Acquisition of property and equipment:
Under capital leases	$	80,894		$	2,042,930
Included in accrued expenses	$	433,408		$	1,912,822

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

4

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Organization and Nature of Business

Towerstream Corporation (referred to as “Towerstream’’ or the “Company’’) was incorporated in Delaware in December 1999.During its first decade of operations, the Company's business activities were focused on delivering fixed wireless broadband services to commercial customers over a wireless network transmitting over both regulated and unregulated radio spectrum. The Company's fixed wireless service supports bandwidth on demand, wireless redundancy, virtual private networks (“VPNs”), disaster recovery, bundled data and video services. The Company provides services to approximately 3,500 business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Houston, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport. The Company's “fixed wireless business” has historically grown both organically and through the acquisition of five other fixed wireless broadband providers in various markets.

Since 2010, the Company has been exploring opportunities to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Over the past few years, a significant increase in mobile data generated by smartphones, tablets and other devices has placed tremendous demand on the networks of the carriers. This has caused the carriers to explore a wide range of solutions including (i) acquiring additional spectrum, (ii) employing Wi-Fi to offload data traffic and (iii) utilizing small cell technologies to increase capacity in dense urban areas. During this period, the Company has incurred various costs related to identifying possible new solutions and services. These costs included (a) rent payments under lease agreements which provide the right to install wireless technology equipment on street level rooftops and (b) construction of a carrier-class network to offload data traffic. The Company has entered into the lease agreements and commenced these capital projects for the purpose of securing capacity that it believes is needed to maintain its competitive position in the wireless industry. The Company believes that the wireless communications industry is experiencing a fundamental shift from its current, macro-cellular architecture to hyper-densified small cell architecture where existing cell sites will be supplemented by many smaller base stations operating near street level. The Company also believes that Wi-Fi will be an integral component of small cell architecture.

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”). The Company plans to transfer certain assets to Hetnets to support the operation of a shared wireless infrastructure business. Hetnets plans to generate rental income from four separate sources including (i) rental of space on street level rooftops for the installation of customer owned small cells which includes Wi-Fi antennae, DAS, and Metro and Pico cells, (ii) rental of a channel on Hetnets’ Wi-Fi network for the offloading of mobile data, (iii) rental of cabinets, switch ports, interconnection services, including backhaul or transport, and (iv) rental of power and power backup. The Company refers to the activities of Hetnets as its "shared wireless infrastructure business."

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

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, 2013 and the results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 2013 are not necessarily indicative of the operating results for the full fiscal year or for any future period.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. 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, 2012, 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.

5

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2013, the Company had cash and cash equivalent balances of approximately $28,370,000 in excess of the federally insured limit of $250,000.

The Company also had approximately $7,766,000 invested in three institutional money market funds. These funds are protected under the Securities Investor Protection Corporation, a nonprofit membership corporation which provides limited coverage up to $500,000.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Beginning of period	$	143,437		$	242,988		$	190,109		$	262,525
Additions		60,000			136,000			60,000			166,000
Deductions		(40,759	)		(103,918	)		(87,431	)		(153,455	)
End of period	$	162,678		$	275,070		$	162,678		$	275,070

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

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

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

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

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

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

6

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 3.    Business Acquisitions

Delos Internet

In February 2013, the Company completed the acquisition of Delos Internet (“Delos”). The Company obtained full control of Delos in the acquisition. The Company has determined that the acquisition of Delos 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	$	225,000
Common stock (385,124 shares)		951,256
Capital lease obligations assumed		128,929
Other liabilities assumed		36,733
Total					1,341,918
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash		2,058
Accounts receivable		79,238
Property and equipment		807,700
Security deposits		1,993
Accounts payable		(29,536	)
Deferred revenue		(59,975	)
Other liabilities		(89,930	)
Total identifiable net tangible assets					711,548
Customer relationships					1,634,469
Total identifiable net assets					2,346,017
Gain on business acquisition				$	1,004,099

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

In May 2013, the Company finalized the purchase price of Delos. The final purchase price of $1,341,918 was $83,183, or 6%, lower than the initially reported purchase price of $1,425,101. The finalization of the purchase price resulted in a reduction of approximately $21,000 of identifiable net assets and an increase in the gain on business acquisition of approximately $63,000. The purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Delos of 48,549 from 433,673 to 385,124 shares.

Pro Forma Information

The following table reflects the unaudited pro forma consolidated results of operations had the acquisition taken place at the beginning of the 2013 and 2012 periods:

	Three Months Ended June 30, 2012
Revenues	$	8,272,176
Amortization expense		976,863
Total operating expenses		13,075,081
Net loss		(4,847,773	)
Basic net loss per share	$	(0.09	)

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TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Six Months Ended June 30,
	2013			2012
Revenues	$	16,623,968		$	16,260,090
Amortization expense		1,635,958			2,128,082
Total operating expenses		29,443,388			25,522,172
Net loss		(11,916,865	)		(9,317,018	)
Basic net loss per share	$	(0.19	)	$	(0.17	)

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 2013 and 2012 and are not necessarily indicative of the operating results for any future period.

Note 4.    Property and Equipment

Property and equipment is comprised of:

	June 30, 2013		December 31, 2012
Network and base station equipment	$	31,334,400	$	28,983,284
Customer premise equipment		23,244,257		23,036,057
Shared wireless infrastructure		17,332,607		17,232,566
Information technology		4,009,611		3,863,212
Furniture, fixtures and other		1,607,038		1,598,979
Leasehold improvements		789,392		789,392
		78,317,305		75,503,490
Less: accumulated depreciation		39,190,200		33,521,280
Property and equipment, net	$	39,127,105	$	41,982,210

Depreciation expense for the three months ended June 30, 2013 and 2012 was $3,117,847 and $2,469,488, respectively. Depreciation expense for the six months ended June 30, 2013 and 2012 was $6,236,334 and $4,697,416, respectively. The Company sold or disposed of property and equipment with $628,015 of original cost and $567,415 of accumulated depreciation during the six months ended June 30, 2013 which resulted in $1,465 received in proceeds and $59,135 recognized as loss on disposals. The Company sold or disposed of property and equipment with $112,614 of original cost and $79,659 of accumulated depreciation during the six months ended June 30, 2012 which resulted in $9,350 received in proceeds and $23,605 recognized as loss on disposals. Loss on disposals is included in general and administrative expenses in the Company’s condensed consolidated statements of operations.

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

	June 30, 2013		December 31, 2012
Network and base station equipment	$	828,027	$	736,612
Customer premise equipment		96,843		59,330
Shared wireless infrastructure		1,216,142		1,216,142
Information technology		1,860,028		1,779,135
		4,001,040		3,791,219
Less: accumulated depreciation		933,562		541,800
Property acquired through capital leases, net	$	3,067,478	$	3,249,419

Note 5. Intangible Assets

Intangible assets is comprised of:

	June 30, 2013		December 31, 2012
Goodwill	$	1,674,281	$	1,674,281
Customer relationships	$	11,856,126	$	10,221,659
Less: accumulated amortization of customer relationships		8,528,616		6,958,037
Customer relationships, net		3,327,510		3,263,622
FCC licenses		1,284,555		1,284,555
Intangible assets, net	$	4,612,065	$	4,548,177

8

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amortization expense for the three months ended June 30, 2013 and 2012 was $817,979 and $878,795, respectively. Amortization expense for the six months ended June 30, 2013 and 2012 was $1,570,579 and $1,931,946, respectively. The customer contracts acquired in the Company’s acquisition of Delos are being amortized over a 50 month period ending April 2017. As of June 30, 2013, the remaining amortization period for all acquisitions with customer relationship balances ranged from 4.5 to 46 months. Future amortization expense is expected to be as follows:

Remainder of 2013	$	1,523,239
2014		888,969
2015		392,272
2016		392,272
2017		130,758
	$	3,327,510

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

Note 6. Accrued Expenses

Accrued expenses consist of the following:

	June 30, 2013		December 31, 2012
Property and equipment	$	433,408	$	1,240,774
Payroll and related		821,990		859,130
Professional services		344,387		314,270
Network		163,206		288,060
Other		273,377		283,786
Total	$	2,036,368	$	2,986,020

Network expenses consist of costs incurred to provide services to our customers and includes tower rentals, bandwidth, troubleshooting and gear removal.

Note 7.    Other Liabilities

Other liabilities consist of the following:

	June 30, 2013		December 31, 2012
Current
Deferred rent	$	28,941	$	86,820
Deferred acquisition payments		141,394		148,198
Total	$	170,335	$	235,018
Long-Term
Deferred acquisition payments	$	16,817	$	56,827
Deferred taxes		244,274		244,274
Total	$	261,091	$	301,101

Gross deferred acquisition payments related to Pipeline Wireless LLC (“Pipeline”) totaled $182,935 and are payable in monthly installments of $16,630 through May 2014. The carrying value of these non-interest bearing payments were discounted at 12% and totaled $128,654 at June 30, 2013. Deferred acquisition payments related to Delos totaled $29,557 at June 30, 2013 and bear interest at rates ranging from 7% to 12.5%.

Note 8. Capital Stock

In February 2013, the Company completed an underwritten offering which raised gross proceeds of $30,000,000 in connection with the sale of 10,000,000 shares at $3.00 per share. In March 2013, the Company raised additional gross proceeds of $3,000,000 in connection with the sale of 1,000,000 shares at $3.00 per share related to the exercise of the over-allotment option by the underwriters. The Company incurred costs of approximately $2,501,000 related to the underwritten offering.

9

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Stock-Based Compensation

The Company uses the Black-Scholes option pricing 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 totaled $253,098 and $355,834 for the three months ended June 30, 2013 and 2012, respectively. Stock-based compensation totaled $631,304 and $846,159 for the six months ended June 30, 2013 and 2012, 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 totaled $1,412,960 as of June 30, 2013 which will be recognized over a weighted-average period of 1.5 years.

The fair values 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 Months Ended June 30,						Six Months Ended June 30,
	2013				2012		2013				2012
Risk-free interest rate		1.0	-	1.5%		0.6%		0.8	-	1.5%		0.6	-	1.0%
Expected volatility			65%			74%		65	-	68%		65	-	74%
Expected life (in years)		5.3	-	6.5		5.3		5	-	6.5		5	-	5.3
Expected dividend yield			-			-			-				-
Weighted average per share grant date fair value	$		1.46		$	2.15	$		1.46		$		2.16

The risk-free interest rate was based on rates established by the Federal Reserve. The Company’s expected volatility was based upon the historical volatility for its common stock. The expected life of the Company’s options was determined using the simplified method as a result of limited historical data regarding the Company’s activity. The dividend yield is based upon the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future.

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 45,000 shares were vested as of June 30, 2013. 30,000 shares were forfeited in the fourth quarter of 2012 in connection with an executive’s cessation of employment. Stock-based compensation for restricted stock totaled $14,775 and $29,550 for the three months ended June 30, 2013 and 2012, respectively. Stock-based compensation for restricted stock totaled $29,550 and $59,100 for the six months ended June 30, 2013 and 2012, respectively. Unrecognized compensation cost of $29,550 at June 30, 2013 will be recognized ratably through December 2013. As of June 30, 2013, 15,000 shares of restricted stock remain unvested.

Option transactions under the stock option plans during the six months ended June 30, 2013 were as follows:

	Number			Weighted Average Exercise Price
Outstanding as of December 31, 2012		3,916,045		$	2.85
Granted during 2013		325,000			2.57
Exercised		(347,986	)		1.23
Forfeited /expired		(384,304	)		5.08
Outstanding as of June 30, 2013		3,508,755		$	2.74
Exercisable as of June 30, 2013		2,646,255		$	2.28

In February 2013, the Company granted 75,000 options to its two executive officers in recognition of the completion of an underwritten offering and the formation of Hetnets. These options were granted at an exercise price of $2.62 and vested immediately. In June 2013, the Companymade its annual grant to the Board of Directors consisting of 200,000 options with an exercise price of $2.56 vesting monthly through May 2014. In June 2013, the Company granted 50,000 options to an executive officer with an exercise price of $2.56 which vests annually over a five year period.

A total of 104,963 options were exercised on a cashless basis during the three and six months ended June 30, 2013 resulting in the net issuance of 27,754 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.

10

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A total of 6,667 and 243,023 options were exercised on a cash basis during the three and six months ended June 30, 2013, which resulted in proceeds to the Company of $6,200 and $253,189, respectively.

Cancellations for the three and six months ended June 30, 2013 were 27,178 and 384,304, respectively, and related to employee terminations.

The weighted average remaining contractual life of the outstanding options as of June 30, 2013 was 5.7 years.

The intrinsic value of outstanding and exercisable options totaled $2,179,845 and $2,156,373, respectively, as of June 30, 2013. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of June 30, 2013, which was $2.55 per share, and the exercise price of the options.

Note 10.    Stock Warrants

The 450,000 warrants outstanding at June 30, 2013 and December 31, 2012 have an exercise price of $5.00 and expire in July 2016.

There was no intrinsic value associated with the outstanding and exercisable warrants as of June 30, 2013. The intrinsic value is calculated as the difference between the closing price of the Company’s common stock as of June 30, 2013, which was $2.55 per share, and the exercise price of the warrants.

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

Note 11. Employee Stock Purchase Plan

Under the Company’s 2010 Employee Stock Purchase Plan (“ESPP Plan”), participants can purchase shares of the Company’s stock at a 15% discount. A maximum of 200,000 shares of common stock can be issued under the ESPP Plan. During the three and six months ended June 30, 2013, a total of 7,951 and 18,560 shares were issued under the ESPP Plan with a fair value of $20,275 and $43,933, respectively. The Company recognized $3,021 and $6,522 of stock-based compensation related to the 15% discount for the three and six months ended June 30, 2013, respectively. The Company recognized $6,186 and $10,576 of stock-based compensation related to the 15% discount for the three and six months ended June 30, 2012, respectively.

Note 12. Fair Value Measurement

Valuation Hierarchy

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

11

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2013.

	Total Carrying Value		Quoted prices in active markets (Level1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
June 30, 2013	$	36,387,536	$	36,387,536	$	-	$	-
December 31, 2012	$	15,152,226	$	15,152,226	$	-	$	-

Note 13.    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, 2013 would dilute earnings per share if the Company becomes profitable in the future. The exercise of the outstanding stock options and warrants could potentially generate proceeds up to approximately $11,866,000 if exercised by the holder for cash.

Stock options	3,508,755
Restricted stock	15,000
Warrants	450,000
Total	3,973,755

Note 14.    Commitments

Operating Lease Obligations

The Company has entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through December 2020. Certain of these operating leases include extensions, at the Company's option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table below as it is not presently determinable which options, if any, the Company will elect to exercise. As of June 30, 2013, total future operating lease obligations were as follows:

Remainder of 2013	$	9,251,681
2014		15,996,763
2015		15,069,835
2016		13,775,766
2017		8,186,874
Thereafter		1,604,430
	$	63,885,349

Rent expenses were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Points of Presence	$	1,715,204	$	1,416,058	$	3,340,906	$	2,704,775
Street level rooftops		2,585,804		991,941		5,049,902		1,600,317
Corporate		121,519		117,719		245,276		239,238
Other		105,351		96,470		225,229		194,219
	$	4,527,878	$	2,622,188	$	8,861,313	$	4,738,549

Rent expenses related to rent for Points of Presence (“POPs”), street level rooftops and other were included in cost of revenues in the Company’s condensed consolidated statements of operations. Rent expense related to our corporate offices was included in general and administrative expenses in the Company’s condensed consolidated statements of operations.

12

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Capital Lease Obligations

The Company has entered into capital leases to acquire property and equipment expiring through March 2018. As of June 30, 2013, total future capital lease obligations were as follows:

Remainder of 2013	$	508,116
2014		997,824
2015		908,344
2016		655,754
2017		391,305
Thereafter		53,923
	$	3,515,266
Less: Interest expense		(518,887	)
Total capital lease obligations	$	2,996,379
Current	$	811,559
Long-term	$	2,184,820

Other

During the first quarter of 2013, the Company renewed a one year information technology infrastructure support agreement. The agreement became effective at the end of the first quarter of 2013. The monthly payments are approximately $43,000 and will be paid on a quarterly basis through the fourth quarter of 2013.

Note 15.    Segment Information

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

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

	Three Months Ended June 30, 2013
	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Eliminations			Total
Revenues	$	8,061,156	$	196,508		$	-		$	(45,489	)	$	8,212,175
Operating Expenses
Cost of revenues (exclusive of depreciation)		2,491,987		2,874,842			38,951			(45,489	)		5,360,291
Depreciation and amortization		2,836,979		911,325			187,522			-			3,935,826
Customer support services		179,128		56,660			751,925			-			987,713
Sales and marketing		1,322,233		111,209			90,362			-			1,523,804
General and administrative		170,710		144,750			2,320,573			-			2,636,033
Total Operating Expenses		7,001,037		4,098,786			3,389,333			(45,489	)		14,443,667
Operating Income (Loss)	$	1,060,119	$	(3,902,278	)	$	(3,389,333	)	$	-		$	(6,231,492	)
Capital expenditures	$	1,028,311	$	232,819		$	46,033		$	-		$	1,307,163

13

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Six Months Ended June 30, 2013
	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Eliminations			Total
Revenues	$	16,247,892	$	354,984		$	-		$	(91,478	)	$	16,511,398
Operating Expenses
Cost of revenues (exclusive of depreciation)		4,923,318		5,666,971			92,121			(91,478	)		10,590,932
Depreciation and amortization		5,656,588		1,775,437			374,888			-			7,806,913
Customer support services		357,017		159,938			1,618,317			-			2,135,272
Sales and marketing		2,619,174		158,257			187,229			-			2,964,660
General and administrative		317,607		334,934			5,121,091			-			5,773,632
Total Operating Expenses		13,873,704		8,095,537			7,393,646			(91,478	)		29,271,409
Operating Income (Loss)	$	2,374,188	$	(7,740,553	)	$	(7,393,646	)	$	-		$	(12,760,011	)
Capital expenditures	$	2,115,783	$	369,019		$	149,326		$	-		$	2,634,128
As of June 30, 2013
Property and equipment, net	$	24,477,899	$	12,739,109		$	1,910,097		$	-		$	39,127,105
Total assets	$	32,348,914	$	14,916,880		$	38,404,977		$	-		$	85,670,771

14

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, 2013. 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, 2012 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Forward-Looking Statements

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

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

Non-GAAP Measures and Reconciliations to GAAP Measures

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

Characteristics of Revenues and Expenses

We offer our fixed wireless broadband services under agreements for periods ranging between one to three years. Pursuant to these agreements, we bill customers on a monthly basis, in advance, for each month of service. Payments received in advance of services performed are recorded as deferred revenues and recognized as revenue ratably over the service period.

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

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

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

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

15

Overview – Fixed Wireless

We provide fixed wireless broadband services to commercial customers and deliver access over a wireless network transmitting over both regulated and unregulated radio spectrum. Our service supports bandwidth on demand, wireless redundancy, virtual private networks (“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, Houston, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport.

In August 2012, we entered into a binding merger agreement with Delos Internet (“Delos”) pursuant to which a wholly owned subsidiary of ours would be merged with and into Delos, with Delos becoming a wholly owned subsidiary of ours. Delos operates in Houston, Texas. We closed the acquisition of Delos in February 2013.

Market Information – Fixed Wireless

As of June 30, 2013, we operated in thirteen metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Nashville, Las Vegas-Reno and Providence-Newport. The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation. We incur significant up-front costs in order to establish a Network Presence in a new market.  These costs include building PoPs and incurring Network Costs.  Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period. We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model, the operating performance of our mature markets, and the long-term potential for our newer markets. Set forth below is a summary of our operating performance on a per-market basis, and a description of how each category is determined.

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

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

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

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

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

Non-Core Expenses:These costs related to our efforts in 2012 to develop other wireless technology solutions and services, and primarily consisted of rent payments for street level rooftops, costs associated with constructing an offload network and payroll costs for employees working on these projects.

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

We entered the Houston market in February 2013 through the acquisition of Delos.

16

Three months ended June 30, 2013

Market	Revenues		Cost of Revenues		Gross Margin			Operating Costs		Adjusted Market EBITDA
Los Angeles	$	2,046,981	$	514,043	$	1,532,938		$	349,208	$	1,183,730
Boston		1,628,247		383,026		1,245,221			218,466		1,026,755
New York		1,940,048		649,242		1,290,806			356,721		934,085
Chicago		820,014		271,901		548,113			107,120		440,993
Miami		390,716		105,392		285,324			85,851		199,473
Houston		180,254		57,471		122,783			30,022		92,761
Las Vegas-Reno		273,887		156,045		117,842			25,937		91,905
San Francisco		320,043		119,155		200,888			111,196		89,692
Providence/Newport		113,728		49,936		63,792			18,621		45,171
Seattle		93,702		53,298		40,404			17,322		23,082
Philadelphia		40,052		19,311		20,741			15,283		5,458
Dallas-Fort Worth		162,348		100,040		62,308			66,339		(4,031	)
Nashville		5,647		13,127		(7,480	)		2,859		(10,339	)
Total	$	8,015,667	$	2,491,987	$	5,523,680		$	1,404,945	$	4,118,735

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA	$	4,118,735
Fixed wireless, non-market specific
Other expenses		(267,126	)
Depreciation and amortization		(2,836,979	)
Shared wireless infrastructure, net		(3,856,789	)
Corporate		(3,389,333	)
Other income (expense)		342
Net loss	$	(6,231,150	)

Three months ended June 30, 2012

Market	Revenues		Cost of Revenues		Gross Margin			Operating Costs		Adjusted Market EBITDA
Boston	$	1,747,604	$	365,383	$	1,382,221		$	224,282	$	1,157,939
New York		1,842,371		576,164		1,266,207			280,881		985,326
Los Angeles		1,925,959		635,189		1,290,770			376,904		913,866
Chicago		938,237		278,794		659,443			192,586		466,857
Miami		406,234		92,081		314,153			94,837		219,316
San Francisco		409,621		121,058		288,563			76,141		212,422
Las Vegas-Reno		396,870		152,561		244,309			45,983		198,326
Providence-Newport		125,115		44,697		80,418			32,988		47,430
Seattle		115,229		53,184		62,045			22,224		39,821
Nashville		10,274		14,836		(4,562	)		8,771		(13,333	)
Philadelphia		24,528		16,605		7,923			22,897		(14,974	)
Dallas-Fort Worth		161,279		91,864		69,415			89,716		(20,301	)
Total	$	8,103,321	$	2,442,416	$	5,660,905		$	1,468,210	$	4,192,695

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA	$	4,192,695
Fixed wireless, non-market specific
Other expenses		(242,004	)
Depreciation and amortization		(2,722,160	)
Non-core expenses		(1,923,364	)
Corporate		(4,018,958	)
Other income (expense)		(44,868	)
Net loss	$	(4,758,659	)

17

Six months ended June 30, 2013

Market	Revenues		Cost of Revenues		Gross Margin			Operating Costs		Adjusted Market EBITDA
Los Angeles	$	4,116,805	$	1,073,253	$	3,043,552		$	731,229	$	2,312,323
Boston		3,297,685		741,172		2,556,513			405,220		2,151,293
New York		3,825,913		1,251,467		2,574,446			690,032		1,884,414
Chicago		1,733,214		582,071		1,151,143			216,358		934,785
Miami		768,063		204,653		563,410			169,876		393,534
Las Vegas-Reno		662,062		306,887		355,175			63,576		291,599
San Francisco		622,673		226,105		396,568			191,012		205,556
Houston		233,239		80,198		153,041			41,030		112,011
Providence/Newport		241,096		99,211		141,885			36,832		105,053
Seattle		230,739		104,343		126,396			51,140		75,256
Philadelphia		79,992		37,348		42,644			37,810		4,834
Dallas-Fort Worth		333,700		188,819		144,881			141,799		3,082
Nashville		11,233		27,791		(16,558	)		7,107		(23,665	)
Total	$	16,156,414	$	4,923,318	$	11,233,096		$	2,783,021	$	8,450,075

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA	$	8,450,075
Fixed wireless, non-market specific
Other expenses		(510,777	)
Depreciation and amortization		(5,656,588	)
Shared wireless infrastructure, net		(7,649,075	)
Corporate		(7,393,646	)
Other income (expense)		902,555
Net loss	$	(11,857,456	)

Six months ended June 30, 2012

Market	Revenues		Cost of Revenues		Gross Margin			Operating Costs		Adjusted Market EBITDA
Boston	$	3,436,129	$	759,325	$	2,676,804		$	490,068	$	2,186,736
Los Angeles		3,893,067		1,204,043		2,689,024			717,086		1,971,938
New York		3,490,157		1,077,260		2,412,897			587,274		1,825,623
Chicago		1,799,226		536,218		1,263,008			336,349		926,659
Miami		825,140		180,409		644,731			196,461		448,270
Las Vegas-Reno		828,716		305,804		522,912			86,019		436,893
San Francisco		787,002		216,621		570,381			160,221		410,160
Providence-Newport		233,255		85,029		148,226			63,535		84,691
Seattle		231,127		112,675		118,452			45,806		72,646
Dallas-Fort Worth		330,539		174,372		156,167			167,374		(11,207	)
Nashville		19,607		28,039		(8,432	)		17,505		(25,937	)
Philadelphia		48,415		32,706		15,709			45,081		(29,372	)
Total	$	15,922,380	$	4,712,501	$	11,209,879		$	2,912,779	$	8,297,100

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA	$	8,297,100
Fixed wireless, non-market specific
Other expenses		(386,715	)
Depreciation and amortization		(5,508,985	)
Non-core expenses		(3,223,218	)
Corporate		(8,262,037	)
Other income (expense)		(54,936	)
Net loss	$	(9,138,791	)

Overview - Shared Wireless Infrastructure

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

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

Supplemental Segment Information

Operating information about each segment in accordance with GAAP is disclosed in Note 15 of the financial statements. In addition, we use other non-GAAP measurements to assess the operating performance of each segment. These non-GAAP financial measures are commonly used by investors, financial analysts, and rating agencies. Management believes that these non-GAAP financial measures should be available so that investors have the same data that management employs in assessing our overall operations.

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

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

Three months ended June 30, 2013

	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Total
Operating Income (Loss)	$	1,060,119	$	(3,902,278	)	$	(3,389,333	)	$	(6,231,492	)
Depreciation and amortization		2,836,979		911,325			187,522			3,935,826
Stock-based compensation		-		-			270,895			270,895
Loss on property and equipment		14,874		2,310			-			17,184
Loss on non-monetary transactions		64,974		-			-			64,974
Non-recurring expenses, primarilyacquisition-related		-		-			47,415			47,415
Adjusted EBITDA		3,976,946		(2,988,643	)		(2,883,501	)		(1,895,198	)
Less: Capital expenditures		1,028,311		232,819			46,033			1,307,163
Net Cash Flow	$	2,948,635	$	(3,221,462	)	$	(2,929,534	)	$	(3,202,361	)

Reconciliation of Adjusted EBITDA, Segment Basis to Net Loss
Adjusted EBITDA	$	(1,895,198	)
Depreciation and amortization		(3,935,826	)
Non-recurring expenses, primarily acquisition-related		(47,415	)
Stock-based compensation		(270,895	)
Loss on property and equipment		(17,184	)
Loss on non-monetary transactions		(64,974	)
Operating Income (Loss)		(6,231,492	)
Interest income		123
Interest expense		(58,793	)
Gain on business acquisition		62,642
Other income (expense), net		(3,630	)
Net loss	$	(6,231,150	)

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Reconciliation of Net Cash Flow, Segment Basis to Net Cash Used in Operating Activities
Net cash flow, segment basis	$	(3,202,361	)
Capital expenditures		1,307,163
Non-recurring expenses, primarily acquisition-related		(47,415	)
Changes in operating assets and liabilities, net		(266,373	)
Other, net		(96,216	)
Net cash used in operating activities	$	(2,305,202	)

     Six Months Ended June 30, 2013

	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Total
Operating Income (Loss)	$	2,374,188	$	(7,740,553	)	$	(7,393,646	)	$	(12,760,011	)
Depreciation and amortization		5,656,588		1,775,437			374,888			7,806,913
Stock-based compensation		-		-			667,376			667,376
Loss on property and equipment		54,101		5,034			-			59,135
Loss on non-monetary transactions		142,158		-			-			142,158
Non-recurring expenses, primarily acquisition-related		-		-			112,815			112,815
Adjusted EBITDA		8,227,035		(5,960,082	)		(6,238,567	)		(3,971,614	)
Less: Capital expenditures		2,115,783		369,019			149,326			2,634,128
Net Cash Flow	$	6,111,252	$	(6,329,101	)	$	(6,387,893	)	$	(6,605,742	)

Reconciliation of Adjusted EBITDA, Segment Basis to Net Loss
Adjusted EBITDA	$	(3,971,614	)
Depreciation and amortization		(7,806,913	)
Non-recurring expenses, primarily acquisition-related		(112,815	)
Stock-based compensation		(667,376	)
Loss on property and equipment		(59,135	)
Loss on non-monetary transactions		(142,158	)
Operating Income (Loss)		(12,760,011	)
Interest income		277
Interest expense		(94,561	)
Gain on business acquisition		1,004,099
Other income (expense), net		(7,260	)
Net loss	$	(11,857,456	)

Reconciliation of Net Cash Flow, Segment Basis to Net Cash Used in Operating Activities
Net cash flow, segment basis	$	(6,605,742	)
Capital expenditures		2,634,128
Non-recurring expenses, primarily acquisition-related		(112,815	)
Changes in operating assets and liabilities, net		(2,401,916	)
Other, net		(241,582	)
Net cash used in operating activities	$	(6,727,927	)

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Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Revenues. Revenues totaled $8,212,175 during the three months ended June 30, 2013 compared to $8,103,321 during the three months ended June 30, 2012 representing an increase of $108,854, or 1%. This increase was primarily related to an increase in shared wireless revenues of approximately $69,000 and an increase in fixed wireless revenues of approximately $40,000.

Average revenue per user (“ARPU”) for the Fixed Wireless segment as of June 30, 2013 totaled $740 compared to $708 as of June 30, 2012 representing an increase of $32, or 5%. ARPU for new customers for the quarter ended June 30, 2013 totaled $640 compared to $477 for the quarter ended June 30, 2012 representing an increase of $163, or 34%. The increase in ARPU primarily related to customers upgrading to higher bandwidth service which generates higher monthly recurring revenue (“MRR”). In addition,the customers acquired from Delos in February 2013 had an ARPU of $864 compared to $721 for our existing customer base which had the effect of increasing our post-acquisition ARPU by $3.

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 2.37% for the three months ended June 30, 2013 compared to 1.65% for the three months ended June 30, 2012.During the 2013 period, we experienced a higher than normal level of customers who terminated service because they were acquired by a company which had existing bandwidth relationships. In addition, the consistent increase in customer ARPU over the past five quarters has adversely affected our churn rate as the relative impact of each cancellation is more significant. Our goal is to maintain churn levels between 1.40% and 1.70% which we believe is below industry averages of 2.00%. Prior to the quarter ended June 30, 2013, we had reported churn levels within our target range for 14 consecutive quarters.We believe that churn will return to its historical levels in the second half of 2013.

Cost of Revenues.    Cost of revenues totaled $5,360,291 for the three months ended June 30, 2013 compared to $3,723,292 for the three months ended June 30, 2012 representing an increase of $1,636,999, or 44%.On a consolidated basis, gross margin for the three months ended June 30, 2013 was 35% as compared to 54% for the three months ended June 30, 2012 representing a decrease of 19 percentage points.  Higher rent expense associated with both PoPs for the fixed wireless network and street level rooftops for the shared wireless infrastructure network increased cost of revenues by $1,979,233 and reduced gross margin by 24 percentage points.  These increases were partially offset by lower Customer Network and other costs which decreased by $342,235 and benefited gross margin by 4 percentage points.

Depreciation and Amortization.    Depreciation and amortization totaled $3,935,826 for the three months ended June 30, 2013 compared to $3,348,283 for the three months ended June 30, 2012 representing an increase of $587,543, or 18%. Depreciation expense totaled $3,117,847 for the three months ended June 30, 2013 compared to $2,469,488 for the three months ended June 30, 2012 representing an increase of $648,359, or 26%. The gross base of depreciable assets as of June 30, 2013 increased by $13,629,458, or 21%, compared to June 30, 2012. The increase in the depreciable base during the twelve months ended June 30, 2013 reflects continued growth in our fixed wireless network (approximately $6,579,000), spending on our shared wireless infrastructure (approximately $5,636,000) and additions resulting from acquisitions (approximately $808,000).

Amortization expense totaled $817,979 for the three months ended June 30, 2013 compared to $878,795 for the three months ended June 30, 2012 representing a decrease of $60,816, or 7%. Amortization expense relates to customer related intangible assets recorded in connection with acquisitions and can fluctuate significantly from period to period depending upon the timing of acquisitions, the relative amounts of intangible assets recorded, and the amortization periods. The decrease was primarily related to intangible assets associated with the acquisition of Pipeline Wireless LLP (“Pipeline”) which became fully amortized in May 2012. The decrease was partially offset by amortization expense associated with the Delos acquisition which began in February 2013.

Customer Support Services.    Customer support services totaled $987,713 for the three months ended June 30, 2013 compared to $1,238,164 for the three months ended June 30, 2012 representing a decrease of $250,451, or 20%. Average headcount totaled 70 during the 2013 period as compared to 83 during the 2012 period representing a decrease of 13, or 16%.

Sales and Marketing.Sales and marketing expenses for the three months ended June 30, 2013 totaled $1,523,804 compared to $1,554,339 for the three months ended June 30, 2012 representing a decrease of $30,535, or 2%. This decrease was primarily related to a decrease in commissions paid to sales personnel of approximately $30,000.

General and Administrative.    General and administrative expenses totaled $2,636,033 for the three months ended June 30, 2013 compared to $2,953,034 for the three months ended June 30, 2012 representing a decrease of $317,001, or 11%. The decrease primarily related to lower payroll and stock-based compensation costs of approximately $238,000 and $121,000, respectively.

Interest Income.Interest income for the three months ended June 30, 2013 totaled $123 compared to $14,011 for the three months ended June 30, 2012 representing a decrease of $13,888, or 99%.The decrease in the 2013 period compared to the 2012 period related to a decision to apply earnings credits against bank charges rather than be paid interest income as it yielded a higher net benefit to the Company. 

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Interest Expense.    Interest expense for the three months ended June 30, 2013 totaled $58,793 compared to $16,670 for the three months ended June 30, 2012 representing an increase of $42,123, or greater than 100%. The increase in interest expense was primarily related to additional capital leases entered into related to network equipment and information technology infrastructure.

Gain on Business Acquisition.    Gain on business acquisition totaled $62,642 for the three months ended June 30, 2013 compared to a loss of $40,079 for the three months ended June 30, 2012.  The gain recognized in the 2013 period relates to the acquisition of Delos in February 2013. The loss recognized in the 2012 period represents the final purchase price adjustment of Color Broadband Communications (“Color Broadband”) in May 2012. The challenging economic environment during 2012 made it difficult for smaller companies like Delos to raise sufficient capital to sustain their growth.  As a result, we were able to acquire the customer relationships and wireless network of Delos at a discounted price.

Net Loss.    Net loss for the three months ended June 30, 2013 totaled $6,231,150 compared to $4,758,659 for the three months ended June 30, 2012 representing an increase of $1,472,491, or 31%. Revenues increased by $108,854, or 1%, while operating expenses increased by $1,626,555, or 13%.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Revenues. Revenues totaled $16,511,398 during the six months ended June 30, 2013 compared to $15,922,380 during the six months ended June 30, 2012 representing an increase of $589,018, or 4%. Fixed wireless revenues increased by approximately $343,000, or 2%, primarily related to an increase in ARPU from $708 in the 2012 period to $740 in the 2013 period.  In addition, revenues from temporary connections increased by approximately $125,000, or 27%, in the 2013 period as compared to the 2012 period.Shared wireless revenue increased by approximately $121,000, or greater than 100%, in the six months ended June 30, 2013 compared to the six months ended June 20, 2012.

Cost of Revenues.    Cost of revenues totaled $10,590,932 for the six months ended June 30, 2013 compared to $6,796,059 for the six months ended June 30, 2012 representing an increase of $3,794,873, or 56%. On a consolidated basis, gross margin for the six months ended June 30, 2013 was 36% as compared to 57% for the six months ended June 30, 2012 representing a decrease of 21 percentage points.  Higher rent expense associated with both PoPs for the fixed wireless network and street level rooftops for the shared wireless infrastructure network increased cost of revenues by $4,262,054 and reduced gross margin by 26 percentage points.  These increases were partially offset by lower Customer Network and other costs which decreased by $467,180 and benefited gross margin by 3 percentage points.

Depreciation and Amortization.    Depreciation and amortization totaled $7,806,913 for the six months ended June 30, 2013 compared to $6,629,362 for the six months ended June 30, 2012 representing an increase of $1,177,551, or 18%. Depreciation expense totaled $6,236,334 for the six months ended June 30, 2013 compared to $4,697,416 for the six months ended June 30, 2012 representing an increase of $1,538,918, or 33%. The gross base of depreciable assets as of June 30, 2013 increased by $13,629,458, or 21%, compared to June 30, 2012. The increase in the depreciable base during the twelve months ended June 30, 2013 reflects continued growth in our fixed wireless network (approximately $6,579,000), spending on our shared wireless infrastructure (approximately $5,636,000) and additions resulting from acquisitions (approximately $808,000).

Amortization expense totaled $1,570,579 for the six months ended June 30, 2013 compared to $1,931,946 for the six months ended June 30, 2012 representing a decrease of $361,367 or 19%. The decrease was primarily related to intangible assets associated with the acquisition of Pipeline which became fully amortized in May 2012. This decrease was partially offset by amortization expense associated with the Delos acquisition which began in February 2013.

Customer Support Services.    Customer support services totaled $2,135,272 for the six months ended June 30, 2013 compared to $2,400,129 for the six months ended June 30, 2012 representing a decrease of $264,857, or 11%.   Average headcount totaled 74 during the 2013 period as compared to 81 during the 2012 period representing a decrease of 7, or 9%.

Sales and Marketing.Sales and marketing expenses for the six months ended June 30, 2013 totaled $2,964,660 compared to $3,036,328 for the six months ended June 30, 2012 representing a decrease of $71,668, or 2%. This decrease was primarily related to a decrease in commissions paid to sales personnel of approximately $79,000.

General and Administrative.    General and administrative expenses totaled $5,773,632 for the six months ended June 30, 2013 compared to $6,144,357 for the six months ended June 30, 2012 representing a decrease of $370,725, or 6%. On a functional basis, decreases in acquisition costs (approximately $263,000), stock-based compensation (approximately $248,000) and bad debt (approximately $109,000) were offset by an increase in professional services (approximately $228,000).

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Interest Income.Interest income for the six months ended June 30, 2013 totaled $277 compared to $31,189 for the six months ended June 30, 2012 representing a decrease of $30,912, or 99%. The decrease in the 2013 period compared to the 2012 period related to a decision to apply earnings credits against bank charges rather than be paid interest income as it yielded a higher net benefit to the Company. 

Interest Expense.    Interest expense for the six months ended June 30, 2013 totaled $94,561 compared to $38,986 for the six months ended June 30, 2012 representing an increase of $55,575, or greater than 100%. The increase in interest expense was primarily related to additional capital leases entered into related to network equipment and information technology infrastructure.

Gain on Business Acquisition.    Gain on business acquisition totaled $1,004,099 for the six months ended June 30, 2013 compared to a loss of $40,079 for the six months ended June 30, 2012.  The gain recognized in the 2013 period relates to the acquisition of Delos in February 2013. The loss recognized in the 2012 period represents the final purchase price adjustment related to the acquisition of Color Broadband in May 2012. The challenging economic environment during 2012 made it difficult for smaller companies like Delos to raise sufficient capital to sustain their growth.  As a result, we were able to acquire the customer relationships and wireless network of Delos at a discounted price.

Net Loss.    Net loss for the six months ended June 30, 2013 totaled $11,857,456 compared to $9,138,791 for the six months ended June 30, 2012 representing an increase of $2,718,665, or 30%. Revenues increased by $589,018, or 4%, while operating expenses increased by $4,265,174, or 17%. In addition, non-operating income, primarily related to gains on a business acquisition, totaled $902,555 for the six months ended June 30, 2013 compared to non-operating expense of $54,936 for the six months ended June 30, 2012.

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, 2013 and 2012 are described below.

Net Cash Used in Operating Activities.    Net cash used in operating activities for the six months ended June 30, 2013 totaled $6,727,927 compared to $3,059,005 for the six months ended June 30, 2012 representing an increase of $3,668,922, or greater than 100%. Cash used in operations for the six months ended June 30, 2013 totaled $4,326,011 as compared to $1,407,155 for the six months ended June, 30, 2012. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results.  Changes in operating assets and liabilities used cash of $2,401,916 during the six months ended June 30, 2013 as compared to $1,651,850 for the six months ended June 30, 2012.

Net Cash Used in Investing Activities.Net cash used in investing activities for thesix months ended June 30, 2013 totaled $2,450,492 compared to $10,144,525 for the six months ended June 30, 2012 representing a decrease of $7,694,033, or 76%. Capital expenditures for the fixed wireless segment decreased from $5,500,445 in the 2012 period to $1,896,393 in the 2013 period representing a reduction of $3,604,052, or 66%.During the 2012 period, we upgraded the fixed wireless network acquired in connection with the acquisition of Color Broadband and also added additional capacity in order to be able to provide backhaul services to the shared wireless infrastructure network. Capital expenditures for the shared wireless infrastructure segment decreased from $4,065,297 in the 2012 period to $187,840 in the 2013 period representing a reduction of $3,877,457, or 95%. During the 2012 period, our wholly owned subsidiary, Hetnets Tower Corporation, substantially completed the construction of a carrier class network to offload data traffic and offer access for small cells.

Net Cash Provided by (Used In) Financing Activities.  Net cash provided by financing activities for the six months ended June 30, 2013 totaled $30,413,729 compared to net cash used in financing activities of $53,162 for the six months ended June 30, 2012, representing an increase of $30,466,891, or greater than 100%. The increase was primarily related to net proceeds of $30,499,336 received in the first quarter of 2013 from the sale of 11,000,000 shares of our common stock at a public offering price of $3.00 per share.

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

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

Working Capital.    As of June 30, 2013, we had working capital of $33,393,379. 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.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations and other commitments as of June 30, 2013:

	Payments due by period
	Total		2013		2014		2015		2016		2017		Thereafter
Capital leases	$	3,515,266	$	508,116	$	997,824	$	908,344	$	655,754	$	391,305	$	53,923
Operating leases		63,885,349		9,251,681		15,996,763		15,069,835		13,775,766		8,186,874		1,604,430
Deferred payments		182,935		99,783		83,152		-		-		-		-
Other		160,297		136,701		11,627		11,627		342		-		-
Total	$	67,743,847	$	9,996,281	$	17,089,366	$	15,989,806	$	14,431,862	$	8,578,179	$	1,658,353

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

Operating Leases.We have entered into operating leases related to roof rights, cellular towers, office space, and equipment leases under various non-cancelable agreements expiring through December 2020. Certain of these operating leases include extensions, at our option, for additional terms ranging from 1 to 25 years. Amounts associated with the extension periods have not been included in the table above as it is not presently determinable which options, if any, we will elect to exercise.

Deferred Payments.We are making deferred payments to Pipeline as part of the consideration paid for the acquisition. There were 11 monthly payments of approximately $16,630 remaining as of June 30, 2013.

Other.During the first quarter of 2013, we renewed a one year information technology infrastructure support agreement. The agreement became effective at the end of the first quarter of 2013. The monthly payments are approximately $43,000 and will be paid on a quarterly basis through the fourth quarter of 2013.

Critical Accounting Policies

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

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

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

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

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

Asset Retirement Obligations.   The Financial Accounting Standards Board (“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 leaseagreement (“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.’’

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the potential loss arising from adverse changes in market rates and prices.  Our primary market risk relates to interest rates.  At June 30, 2013, all cash and cash equivalents are immediately available cash balances.  A portion of our cash and cash equivalents are held in three institutional money market funds.   Our interest rate risk exposure is to a decline in interest rates which would result in a decline in interest income. Due to our current market yields, a further decline in interest rates would not have a material impact on earnings.

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, 2013, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our system of internal control over financial reporting during the six months ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 6. Exhibits.

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

*Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, and (v) related notes to these financial statements. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

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SIGNATURES

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

TOWERSTREAM CORPORATION 

Date: August 8,2013	By:	/s/ Jeffrey M. Thompson
		Jeffrey M. Thompson
		President and Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Joseph P. Hernon
		Joseph P. Hernon
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

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

*Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, and (v) related notes to these financial statements. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

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