NOTES TO CONSOLIDATED F
INANCIAL 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 licensed and unlicensed radio spectrum. The Company’s fixed wireless service supports bandwidth on demand, wireless redundancy, virtual private networks, disaster recovery, bundled data and video services. The Company provides services to business customers in New York City, Boston, Chicago, Los Angeles, San Francisco, Seattle, Miami, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. The Company’s “Fixed Wireless" business has historically grown both organically and through the acquisition of five other fixed wireless broadband providers in various markets.
In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”), to operate a new business designed to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets built a carrier-class network which offered a shared wireless infrastructure platform, primarily for (i) co-location of customer owned antenna and related equipment and (ii) Wi-Fi access and offloading. The Company referred to this as its “Shared Wireless Infrastructure” or “Shared Wireless” business. During the fourth quarter of 2015, the Company determined to exit this business and curtailed activities in its smaller markets. The remaining network, located in New York City (or “NYC”), was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the NYC network.
On March 9, 2016, the Company completed a sale and transfer of certain assets pursuant to an asset purchase agreement (the “Agreement”) with a large cable company (the “Buyer”). Under the terms of the Agreement, the Buyer assumed certain rooftop leases and acquired ownership of and the right to operate the Wi-Fi access points and related equipment associated with such leases. The Company retained ownership of all backhaul and related equipment, and the parties entered into an agreement under which the Company provides backhaul services to the Buyer. The Agreement is for a three-year period with two one-year renewals and is cancellable by the Buyer on sixty days’ notice. During the first quarter of 2016, the Company determined that it would not be able to sell the remainder of the NYC network, and accordingly, all remaining assets were reployed into the fixed wireless network or written off. The operating results and cash flows for Hetnets have been presented as discontinued operating results in these consolidated financial statements. Assets associated with the New York City network were presented as Assets Held for Sale as of December 31, 2015.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Note 2
-
Liquidity, Going Concern, and Management Plans
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of December 31, 2016, the Company had cash and cash equivalents of approximately $12.3 million and working capital of approximately $8.9 million. The Company incurred significant operating losses since inception and continues to generate losses from operations and as of December 31, 2016, the Company has an accumulated deficit of $176.7 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date these financial statements are issued. Management has also evaluated the significance of these conditions in relation to the Company's ability to meet its obligations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
During the year ended December 31, 2016, the Company has raised a total of $9,130,000 as indicated in Note 10,
Capital Stock
, and converted $5,000,000 of long-term debt into preferred stock as indicated on Note 9,
Long-Term Debt
. In addition, the Company has monitored and reduced certain of its operating costs over the course of the year. Historically, the Company has financed its operation through private and public placement of equity securities, as well as debt financing and capital leases. The Company’s ability to fund its longer term cash requirements is subject to multiple risks, many of which are beyond its control. The Company intends to raise additional capital, either through debt or equity financings or through the potential sale of the Company’s assets in order to achieve its business plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.
Note 3
-
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Retroactive Adjustment
For Reverse Stock Split
On July 7, 2016, the Company effected a one-for-twenty reverse split of its common stock. Consequently, all earnings per share and other share related amounts and disclosures have been retroactively adjusted for all periods presented.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
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. Key estimates include fair value of certain financial instruments, carrying value of intangible assets, reserves for accounts receivable and accruals for liabilities.
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, the Company’s cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of December 31, 2016, the Company had cash and cash equivalent balances of approximately $12 million in excess of the federally insured limit of $250,000.
Accounts Receivable
Accounts receivable are stated at cost less an allowance for doubtful accounts which reflects the Company’s estimate of balances that will not be 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.
Property and Equipment
Property and equipment are stated at cost and include equipment, installation costs and materials. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the useful lives or the term of the respective lease. Network, base station, shared wireless infrastructure and customer premise equipment are depreciated over estimated useful lives of five years; furniture, fixtures and other from three to five years and information technology from three to five years.
Expenditures for maintenance and repairs which do not extend the useful life of the assets are charged to expense as incurred. Gains or losses on disposals of property and equipment are reflected in general and administrative expenses in the Company’s consolidated statements of operations.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
FCC Licenses
Federal Communications Commission (“FCC”) licenses are initially recorded at cost and are considered to be intangible assets with an indefinite life because the Company is able to maintain the license indefinitely as long as it complies with certain FCC requirements. The Company intends to and has demonstrated an ability to maintain compliance with such requirements. The Financial Accounting Standards Board’s (“FASB”) guidance on goodwill and other intangible assets states that an asset with an indefinite useful life is not amortized. However, as further described in the next paragraph, these assets are reviewed annually for impairment.
Long-Lived Assets
Long-lived assets with definitive lives consist primarily of property and equipment, and certain intangible assets. 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.
The FASB’s 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. The Company’s network equipment is installed on both buildings in which the Company has a lease agreement and at customer locations. In both instances, the installation and removal of the Company’s equipment is not complicated and does not require structural changes to the building where the equipment is installed. Costs associated with the removal of the Company’s equipment at company or customer locations are not material, and accordingly, the Company has determined that it does not presently have asset retirement obligations under the FASB’s accounting guidance.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of identifiable net assets acquired in an acquisition. Goodwill is not amortized but rather is reviewed annually for impairment, or whenever events or circumstances indicate that the carrying value may not be recoverable. The Company initially performs a qualitative assessment of goodwill which considers macro-economic conditions, industry and market trends, and the current and projected financial performance of the reporting unit. No further analysis is required if it is determined that there is a less than 50 percent likelihood that the carrying value is greater than the fair value. The Company completed a qualitative and quantitative assessment and determined that there was no impairment of goodwill as of December 31, 2016 and 2015, respectively.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Fair Value of Financial Instruments
The Company has categorized its financial assets and liabilities measured at fair value into a three-level hierarchy in accordance with the FASB’s guidance. Fair value is defined as an exit price, the amount that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not to be sustained upon examination.
Revenue Recognition
The Company normally enters into contractual agreements with its customers for periods ranging between one to three years. The Company recognizes the total revenue provided under a contract ratably over the contract period, including any periods under which the Company has agreed to provide services at no cost. The Company applies the revenue recognition principles set forth under the United States Securities and Exchange Commission Staff Accounting Bulletin 104, (“SAB 104”) which provides for revenue to be recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery or installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
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.
Advertising Costs
The Company charges advertising costs to expense as incurred. Advertising costs for the years ended December 31, 2016, and 2015 were approximately $245,230, and $1,058,000, respectively, and are included in sales and marketing expenses in the Company’s consolidated statements of operations.
Stock-Based Compensation
The Company accounts for stock-based awards issued to employees in accordance with FASB guidance. Such awards primarily consist of options to purchase shares of common stock. The fair value of stock-based awards is determined on the grant date using a valuation model. The fair value is recognized as compensation expense, net of estimated forfeitures, on a straight line basis over the service period which is normally the vesting period.
Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of common shares outstanding during the period.
The following common stock equivalents were excluded from the computation of diluted net loss per common share because they were anti-dilutive. The exercise of these common stock equivalents would dilute earnings per shares if the Company becomes profitable in the future.
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Stock options
|
|
|
2,106,889
|
|
|
|
217,002
|
|
Warrants
|
|
|
180,000
|
|
|
|
202,500
|
|
Series D Convertible Preferred Stock
|
|
|
3,082,500
|
|
|
|
-
|
|
Series E Convertible Preferred Stock
|
|
|
500,000
|
|
|
|
-
|
|
Series F Convertible Preferred Stock
|
|
|
6,165,000
|
|
|
|
-
|
|
Total
|
|
|
12,034,389
|
|
|
|
419,502
|
|
Convertible Instruments
The Company accounts for hybrid contracts that feature conversion options in accordance with applicable GAAP which requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Conversion options that contain variable settlement features such as provisions to adjust the conversion price to those more favorable than that featured in the hybrid contract generally result in their bifurcation from the host instrument.
Reclassifications
Certain accounts in the prior year’s consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the current year’s consolidated financial statements. These reclassifications have no effect on the previously reported net loss.
Segments
The Company determined that the Shared Wireless Infrastructure and Fixed Wireless businesses represented separate business segments. In addition, the Company established a Corporate Group so that centralized operating and administrative activities which supported both businesses could be reported separately. During the fourth quarter of 2015, the Company determined to exit the Shared Wireless Infrastructure business. As a result, its operating results for all periods presented are being reported as discontinued operations in these financial statements. The operating results of the Fixed Wireless business are being reported as continuing operations.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers”. ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, "Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which was issued by the FASB in August 2015 and extended the original effective date by one year. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14 upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross Versus Net)," was issued in March,2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, "Identifying Performance Obligations and Licensing," issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, "Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients" provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.
In June 2014, the FASB issued ASU No. 2014-12 (“ASU 2014-12”), “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period,” which requires a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. ASU 2014-12 states that the performance target should not be reflected in estimating the grant date fair value of the award. ASU 2014-12 clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the periods for which the requisite service has already been rendered. The new standard was effective for and adopted by the Company on January 1, 2016 and did not have a significant impact on its consolidated financial statements.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
In August 2014, the FASB issued ASU No. 2014–15 (“ASU 2014-15”), “Presentation of Financial Statements – Going Concern.” ASU 2014-15 provides GAAP guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The new standard was effective for and adopted by the Company on January 1, 2017 and did not have a significant impact on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03 (“ASU 2015-03”), “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of being presented as an asset. ASU 2015-03 was effective for and retrospectively adopted by the Company on January 1, 2016. Long-term debt, net of debt discount, as of December 31, 2015 was previously reported on the consolidated balance sheet as $34,695,383 with the associated $1,691,421 of unamortized debt issuance costs included in other assets on its consolidated balance sheet.
In February 2016, the FASB issued ASU 2016-02 (“ASU 2016-02), “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2016-02 is effective for the Company on January 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2016-02 will have on its consolidated financial statements
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new standard will be effective for the Company on January 1, 2017. The Company is currently evaluating the impact of its pending adoption of this standard on its consolidated financial statements and related disclosures
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 is intended to address how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the effect that ASU 2016-15 will have on its consolidated financial position and results of operations.
In January 2017, the FASB issued ASU No. 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business”, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on its consolidated financial position, results of operations or related disclosures.
In January 2017, the FASB issued ASU No. 2017-04 (“ASU 2017-04”), “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which removes Step 2 from the goodwill impairment test. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment test performed with a measurement date after January 1, 2017. The Company does not expect ASU 2017-04 to have a material impact on its financial positions or results of operations.
Note 4
-
Discontinued Operations
During the fourth quarter of 2015, the Company determined to exit the business conducted by Hetnets and curtailed activities in its smaller markets. The remaining network, located in New York City (or “NYC”), was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the NYC network. On March 9, 2016, the Company completed a sale and transfer of certain assets pursuant to an asset purchase agreement (the "Agreement") with a large cable company (the "Buyer"). Under the terms of the Agreement, the Buyer assumed certain rooftop leases and acquired ownership of and the right to operate the Wi-Fi access point and related equipment associated with such leases. The Company retained ownership of all backhaul and related equipment, and the parties entered into an agreement under which the Company provides backhaul services to the Buyer. The Agreement is for a three-year period with two one-year renewals and is cancellable by the Buyer on sixty-day's notice. In connection with the Agreement, the Company transferred to the Buyer a net book value of network assets aggregating $2,660,041 in exchange for the backhaul agreement valued at $3,837,783. The backhaul agreement has been recorded as an intangible asset in the accompanying consolidated balance sheet. As a result, during the first quarter of 2016, the Company recognized a gain of $1,177,742 in its discontinued operations.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
The Company has determined that it will not be able to sell the remaining network locations in New York City. As a result, the Company recognized charges totaling $1,585,319 in the first quarter of 2016 which included $453,403 representing the estimated cost to settle lease obligations, $528,364 to write off network assets which could not be redeployed into the fixed wireless network, $110,500 related to security deposits which are not expected to be recovered, and $493,052 related to the accelerated expensing of deferred acquisition costs. These costs were partially offset by a $1,244,284 reduction in the accrual for terminated lease obligations that was recorded in the fourth quarter of 2015. This reduction reflects the outcome of settlements negotiated in the first quarter of 2016 with certain landlords. The operating results and cash flows for Hetnets have been reclassified and presented as discontinued operations in these consolidated financial statements for all periods presented.
Operating Results
The operating results and cash flows for Hetnets have been presented as discontinued operating results in these consolidated financial statements of which a more detailed presentation is set forth below. There has been no allocation of consolidated interest expense to discontinued operations.
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
553,302
|
|
|
$
|
3,370,181
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Infrastructure and access
|
|
|
965,596
|
|
|
|
19,292,571
|
|
Depreciation
|
|
|
638,681
|
|
|
|
4,032,219
|
|
Network operations
|
|
|
192,947
|
|
|
|
793,886
|
|
Customer support
|
|
|
69,804
|
|
|
|
383,155
|
|
Sales and marketing
|
|
|
246
|
|
|
|
145,954
|
|
General and administrative
|
|
|
105,545
|
|
|
|
-
|
|
Total operating expenses
|
|
|
1,972,819
|
|
|
|
24,647,785
|
|
Net operating loss
|
|
|
(1,419,517
|
)
|
|
|
(21,277,604
|
)
|
Gain on sale of assets
|
|
|
1,177,742
|
|
|
|
-
|
|
Net Loss
|
|
$
|
(241,775
|
)
|
|
$
|
(21,277,604
|
)
|
Included in Infrastructure and Access expense during the year ended December 31, 2016 and 2015, respectively, were $453,403 and $3
,284,467 representing the estimated cost of terminating the leases associated with the Hetnets business. Accordingly, disbursements associated with such activity during the years ended December 31, 2016 and 2015 were recorded as reductions to that estimated liability. As of December 31, 2016 and based upon negotiations, settlements, and experiences through that date, the Company had reduced that remaining estimated liability by $1,557,626 to $1,240,000 and reduced expense for Infrastructure and Access for the year ended December 31, 2016 by the same amount.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
The components of the balance sheet accounts presented as discontinued operations were as follows:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
-
|
|
|
$
|
715,993
|
|
Prepaid expenses and other current assets
|
|
|
231,978
|
|
|
|
278,891
|
|
Deferred acquisitions costs
|
|
|
-
|
|
|
|
253,685
|
|
Total Current Assets
|
|
$
|
231,978
|
|
|
$
|
1,248,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
556,800
|
|
Accrued expenses
|
|
|
-
|
|
|
|
66,101
|
|
Accrued expenses - network
|
|
|
1,240,000
|
|
|
|
3,284,467
|
|
Total Current Liabilities
|
|
$
|
1,240,000
|
|
|
$
|
3,907,368
|
|
Assets Held for Sale
Assets associated with the New York City network were presented as Assets Held for Sale as of December 31, 2015. The components of the balance sheet accounts presented as Assets Held for Sale were as follows:
Security deposits
|
|
|
|
|
|
$
|
356,108
|
|
Wi-Fi and back-end equipment, net
|
|
|
-
|
|
|
|
4,958,999
|
|
Current assets held for sale
|
|
|
|
|
|
$
|
5,315,107
|
|
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Note 5
-
Property and Equipment
Property and equipment is comprised of:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Network and base station equipment
|
|
$
|
42,098,570
|
|
|
$
|
38,351,119
|
|
Customer premise equipment
|
|
|
33,617,085
|
|
|
|
30,910,874
|
|
Information technology
|
|
|
4,859,875
|
|
|
|
4,810,865
|
|
Furniture, fixtures and other
|
|
|
1,713,430
|
|
|
|
1,713,722
|
|
Leasehold improvements
|
|
|
1,631,322
|
|
|
|
1,623,559
|
|
|
|
|
83,920,282
|
|
|
|
77,410,139
|
|
Less: accumulated depreciation
|
|
|
68,667,925
|
|
|
|
56,174,755
|
|
Property and equipment, net
|
|
$
|
15,252,357
|
|
|
$
|
21,235,384
|
|
Depreciation expense for the years ended December 31, 2016 and 2015 was $9,417,612 and $9,251,311, respectively.
Property acquired through capital leases included within the Company’s property and equipment consists of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Network and base station equipment
|
|
$
|
2,620,898
|
|
|
$
|
2,620,898
|
|
Customer premise equipment
|
|
|
669,792
|
|
|
|
669,792
|
|
Information technology
|
|
|
1,860,028
|
|
|
|
1,860,028
|
|
|
|
|
5,150,718
|
|
|
|
5,150,718
|
|
Less: accumulated depreciation
|
|
|
4,083,274
|
|
|
|
3,114,968
|
|
Property acquired through capital leases, net
|
|
$
|
1,067,444
|
|
|
$
|
2,035,750
|
|
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Note 6
-
Goodwill and Intangible Assets
Intangible assets consist of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,674,281
|
|
|
$
|
1,674,281
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
11,856,126
|
|
|
$
|
11,856,126
|
|
Less: accumulated amortization
|
|
|
11,725,369
|
|
|
|
11,333,096
|
|
Customer relationships, net
|
|
|
130,757
|
|
|
|
523,030
|
|
|
|
|
|
|
|
|
|
|
Backhaul agreement
|
|
|
3,837,783
|
|
|
|
-
|
|
Less: accumulated amortization
|
|
|
1,066,050
|
|
|
|
-
|
|
Backhaul agreement, net
|
|
|
2,771,733
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
FCC licenses
|
|
|
750,000
|
|
|
|
1,284,555
|
|
Impairment charge
|
|
|
-
|
|
|
|
(534,555
|
)
|
FCC licenses, net
|
|
|
750,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
3,652,490
|
|
|
$
|
1,273,030
|
|
Amortization expense for the year ended December 31, 2016 and 2015 was $1,458,323 and $392,272, respectively. The fair value of the backhaul agreement acquired in the transaction with a large cable company, as described in Note 4, is being amortized on a straight-line basis over the three-year term of the agreement. The customer contracts acquired in the Delos Internet acquisition are being amortized over a 50-month period. The Company’s licenses with the Federal Communications Commission (the “FCC”) are not subject to amortization as they have an indefinite useful life.
Years Ending December 31,
|
|
|
|
|
2017
|
|
|
1,410,019
|
|
2018
|
|
|
1,279,261
|
|
2019
|
|
|
213,210
|
|
Total
|
|
$
|
2,902,490
|
|
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Note 7
-
Accrued Expenses
Accrued expenses consist of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Payroll and related
|
|
$
|
294,006
|
|
|
$
|
551,448
|
|
Professional services
|
|
|
263,928
|
|
|
|
427,932
|
|
Other
|
|
|
142,492
|
|
|
|
339,680
|
|
Property and equipment
|
|
|
118,139
|
|
|
|
176,614
|
|
Network
|
|
|
92,645
|
|
|
|
133,544
|
|
Total
|
|
$
|
911,210
|
|
|
$
|
1,629,218
|
|
Network represents costs incurred to provide services to the Company’s customers including tower rentals, bandwidth, troubleshooting and gear removal.
Note 8
-
Other Long-Term Liabilities
Other long-term liabilities consist of the following:
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred rent
|
|
$
|
641,799
|
|
|
$
|
1,227,414
|
|
Deferred taxes
|
|
|
420,438
|
|
|
|
363,774
|
|
Total
|
|
$
|
1,062,237
|
|
|
$
|
1,591,188
|
|
Note 9
-
Long-Term Debt
Long-term debt consists of the following as of December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Principal
|
|
$
|
33,290,995
|
|
|
$
|
36,748,903
|
|
Unamortized debt discount
|
|
|
(1,803,742
|
)
|
|
|
(3,744,941
|
)
|
Total
|
|
$
|
31,487,253
|
|
|
$
|
33,003,962
|
|
In October 2014, the Company entered into a $35,000,000 note ("Note") with Melody Business Finance, LLC ("Lender") wherein the Company received net proceeds of $33,950,000 after a 3% original issue discount.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
This Note matures on October 16, 2019 and accrues interest on the basis of a 360-day year at:
a)
|
A rate equal to the greater of: i) the sum of the one-month Libor rate on any given day plus 7% or ii) 8% per annum. The one-month Libor rate was 0.77% as of December 31, 2016. Interest accrued at this rate is paid in cash at the end of each quarter; plus
|
b)
|
A rate of 4% per annum. Interest accrued at this rate is added to the principal amount at the end of each quarter.
|
This Note is secured by a first-priority lien and security interest in all of the assets of the Company and its subsidiaries, excluding the capital stock of the Company, and certain capital leases, contracts and assets secured by purchase money security interests.
The Note contains representations and warranties by the Company and the Lender, certain indemnification provisions in favor of the Lender and customary covenants (including limitations on other debt, liens, acquisitions, investments and dividends), and events of default (including payment defaults, breaches of covenants, a material impairment in the Lender’s security interest or in the collateral, and events relating to bankruptcy or insolvency). The Note contains several restrictive covenants and the most significant of which requires the Company to maintain a minimum cash balance of $6,500,000 at all times. The Company was in compliance with all of the Note covenants as of December 31, 2016. Upon the occurrence of an event of default, an additional 5% interest rate will be applied to the outstanding loan balances, and the Lender may terminate its lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the Note to secure its interests.
The Company has the option to prepay the Note in the minimum principal amount of $5,000,000 plus integral amounts of $1,000,000 beyond that amount subject to certain prepayment penalties. Mandatory prepayments are required upon the occurrence of certain events, including but not limited to: i) the sale, lease, conveyance or transfer of certain assets, ii) issuance or incurrence of indebtedness other than certain permitted debt, iii) issuance of capital stock redeemable for cash or convertible into debt securities; and iv) any change of control.
A discount of $6,406,971 to the face value of the Note was recorded upon its issuance and that discount is being amortized over the term of the Note using the effective interest rate method. That discount consisted of:
a)
|
$2,463,231 representing the fair value of warrants simultaneously issued to the Lender for the purchase of up to 120,000 and 60,000 shares of the Company's common stock at $25.20 and $0.20 per share, respectively, through April 2022. The fair value of these warrants was calculated utilizing the Black-Scholes option pricing model;
|
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
b)
|
$2,893,739 in costs incurred associated with obtaining this financing arrangement which consisted primarily of professional fees; and
|
c)
|
$1,050,000 related to a 3% original issue discount.
|
On November 8, 2016 and in connection with a financing transaction as more fully discussed in Note 10,
Capital Stock
, an investor acquired $5,000,000 of the Company's obligations to the Lender consisting of principal and accrued interest of $4,935,834 and $64,166, respectively. The investor then immediately exchanged such obligations for 1,000 shares of the Company's Series D Convertible Preferred Stock and warrants for the purchase of up to 4,000,000 shares of the Company's common stock. In connection with that exchange, the Company:
a)
|
Wrote-off the portion of the unamortized debt discount and deferred financing costs associated with the exchanged principal and recorded a charge to interest expense of $331,609. The accrued interest and the adjustment to the unamortized debt discount activity described in this paragraph are separate from and unrelated to the amounts appearing in the following paragraphs; and
|
b)
|
Recorded a non-cash loss on extinguishment of debt charge of $500,000. This amount represents the difference between the fair value of the Series D Convertible Preferred Stock of $5,500,000 as described in Note 10,
Capital Stock
, and the carrying amount of the debt of $5,000,000 as of the date of the exchange.
|
The Company recorded interest expense of $4,497,945 and $4,360,042 for the years ended December 31, 2016 and 2015, respectively. Of those amounts, the Company paid to the Lender $2,955,853 and $2,906,695 and added $1,477,926 and $1,453,347 to the principal amount of the Note during the years ended December 31, 2016 and 2015, respectively.
The Company recorded amortization expense of $1,609,588 and $2,080,125 for the years ended December 31, 2016 and 2015, respectively, and classified those amounts as interest expense.
Note 10
-
Capital Stock
The Company is authorized to issue up to 200,000,000 shares of common stock at a par value of $0.001 and had 18,327,264 and 3,342,391 shares issued and outstanding as of December 31, 2016 and 2015, respectively. The holders of common stock are entitled to one vote per share and are entitled to receive dividends, if any, as may be declared by the Company's Board of Directors. Upon liquidation, dissolution, or winding-up of the Company, the holders of the Company's common stock are entitled to share ratably in all assets that are available for distribution. They have no preemptive, subscription, redemption, or conversion rights. Any rights, preferences, and privileges of holders of the Company’s common stock are subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock, which may be designated solely by action of the Company's Board of Directors and issued in the future. At the Company’s annual meeting on August 21, 2015, the shareholders approved an increase in the number of authorized shares of common stock from 95,000,000 to 200,000,000.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
The Company is authorized to issue up to 5,000,000 shares of "blank check" preferred stock at a par value of $0.001 which may be issued from time to time in one or more classes and in one or more series within a class upon authorization by our Board. The Board, without further approval of the shareholders, is authorized to fix the preferences, limitations and relative rights of the shares of each class or series within a class. The issuance of preferred stock could adversely affect the voting power, conversion or other rights of holders of common stock. Preferred stock could be issued quickly with terms calculated to delay or prevent a change in control of the Company or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of our common stock.
The Company had created Series A Preferred Stock during the year ended December 31, 2010 and Series B through Series F Convertible Preferred Stock during the year ended December 31, 2016, and designated the number of shares as indicated below. The Company had shares of the following series of preferred stock issued and outstanding as of December 31, 2016 and 2015:
|
|
Designated
|
|
|
Issued and Outstanding
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Series A Preferred Stock
|
|
|
350,000
|
|
|
|
-
|
|
|
|
-
|
|
Series B Convertible Preferred Stock
|
|
|
892,857
|
|
|
|
-
|
|
|
|
-
|
|
Series C Convertible Preferred Stock
|
|
|
680,000
|
|
|
|
-
|
|
|
|
-
|
|
Series D Convertible Preferred Stock
|
|
|
4,421
|
|
|
|
1,233
|
|
|
|
-
|
|
Series E Convertible Preferred Stock
|
|
|
2,000,000
|
|
|
|
500,000
|
|
|
|
-
|
|
Series F Convertible Preferred Stock
|
|
|
1,233
|
|
|
|
1,233
|
|
|
|
-
|
|
|
|
|
3,928,511
|
|
|
|
502,466
|
|
|
|
-
|
|
The preferences, rights, and limitations of each series of preferred stock are discussed to the extent appropriate in the following paragraphs.
a)
|
On November 8, 2010, the Company adopted a shareholder rights plan under which the Company issued one "preferred share purchase right" ("right") for each share of the Company's common stock held by shareholders of record as of the close of business on November 24, 2010. Each holder of a right will be allowed to purchase one one-hundredth of a share of 350,000 shares of Series A Preferred Stock at an exercise price of $18.00. In general, the rights will become exercisable if a person or group acquires 15% or more of the Company’s outstanding common stock or announces a tender offer or exchange offer for 15% or more of the Company’s outstanding common stock. The rights will expire on November 8, 2020. The Company may redeem the rights for $0.001 each at any time until the tenth business day following public announcement that a person or group has acquired 15% or more of its outstanding common stock.
|
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
b)
|
On June 20, 2016, the Company raised $2,280,000 through the issuance of 750,000 Units at $3.04 per Unit. The Units collectively consisted of: i) 750,000 shares of common stock, and ii) warrants for the purchase of 750,000 shares of the Company's common stock at $5.00 per share for a period of five years. The common shares and the warrants were immediately separable and were issued independently. Expenses associated with this transaction totaled $43,750 resulting in net proceeds to the Company of $2,236,250. Such net proceeds were allocated to the shares and the warrants issued in the amounts of $1,677,188 and $559,062, respectively, in proportion to their relative fair value on the date of issuance. The fair value of the common shares was determined by utilizing the closing price on the day of the transaction and the fair value of the warrants was determined by using the Black-Scholes model as more fully described in Note 11,
Stock Option Plans and Warrants
.
|
c)
|
On July 7, 2016 and as previously indicated, the Company effected a 1-for-20 reverse stock split. Consequently, all share quantities, per share amounts, and any other appropriate amounts or disclosures in these financial statements affected by that reverse stock split have been adjusted for that reverse stock split.
|
d)
|
On July 7, 2016, the Company raised $1,250,000 through the issuance of 892,857 Units at $1.40 per Unit. The Units collectively consisted of: i) 892,857 shares of newly created Series B Convertible Preferred Stock ("Series B") which were convertible into 446,429 shares of the Company's common stock, and ii) warrants for the purchase 223,214 shares of the Company's common stock at $3.00 per share for a period of five years. The common shares and the warrants were immediately separable and were issued independently. Expenses associated with this transaction totaled $56,156 resulting in net proceeds to the Company of $1,193,844. Such net proceeds were allocated to the shares and the warrants issued in the amounts of $963,949 and $229,895, respectively, in proportion to their relative fair value on the date of issuance. The fair value of the Series B shares was determined by reference to the number of common shares which they were convertible into and the closing price for those shares on the day of the transaction. The fair value of the warrants was determined by using the Black-Scholes model as more fully described in Note 11,
Stock Option Plans and Warrants
.
|
e)
|
On July 21 and July 26, 2016, the holders of the 892,857 shares of Series B, previously issued on July 7, 2016, converted all such shares into 446,429 shares of common stock.
|
f)
|
On September 12, 2016, the Company effected an exchange with the holders of the warrants previously issued on June 20 and July 7, 2016 for the purchase of up to 750,000 and 223,214 shares of the Company's common stock described above, respectively. In that exchange, the holders surrendered those warrants and the Company issued 680,000 shares of newly created Series C Convertible Preferred Stock ("Series C") which was convertible into the Company's common shares on a one-for-one basis. The Company accounted for this exchange by reducing Additional Paid-In Capital by $1,031,999 for the book value of the warrants with a corresponding increasing Series C par value by $680 and Series C Additional Paid-In Capital by $1,031,319.
|
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
g)
|
On September 12, 2016, the Company raised $4,000,000 through the issuance of 2,962,963 common shares at $1.35 per share. Expenses associated with this transaction, including the 7% underwriters' commission of $280,000, totaled $621,720 resulting in net proceeds to the Company of $3,378,280. In connection with this transaction, the Company granted the underwriter an option through October 31, 2016 to purchase up to an additional 444,444 shares of the Company's common stock at $1.35 per share, subject to the same commission structure, to cover overallotments.
|
h)
|
On various dates from October 10 through October 18, 2016, the holders of the 680,000 shares of Series C, previously issued on September 12, 2016, exercised their conversion privileges and converted such shares into a like number of common shares.
|
i)
|
On November 1, 2016, the underwriter, which assisted the Company with the offering on September 12, 2016 described above, exercised its option and the Company raised $600,000 through the issuance of 444,444 common shares at $1.35 per. Expenses associated with this transaction, including the 7% underwriters' commission of $42,000, totaled $71,850 resulting in net proceeds to the Company of $528,150.
|
j)
|
On November 8, 2016, an investor acquired
,
$5,000,000 of principal and accrued interest payable by Towerstream to Melody Business Finance, LLC ("Melody") in exchange for a payment of $5,500,000 from the investor to Melody as more fully described in Note 9
Long-Term Debt
.
|
The Company then exchanged such debt for 1,000 shares of newly created Series D Convertible Preferred Stock ("Series D") and warrants for the purchase of up to 4,000,000 shares of the Company's common stock at an exercise price of $1.34 for a period of five years.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
The key preferences, rights, and limitations of the Series D shares, including subsequent documented agreements with the holder of the Series D shares, are as follows:
i) The Stated Value of each Series D share is $5,500;
ii)
Series D shares may be converted into common shares at any time. The number of common shares issuable upon such conversion is determined by multiplying the number of Series D shares being converted by their stated value of $5,500 per share and then dividing by the conversion price pf $0.644 per common share;
iii) Series D shares may be converted into common shares at any time in any amount provided that the holder or its affiliates would not beneficially own more than 9.99% of the Company's common stock;
iv) Series D shares may vote as common shares on an "as converted" basis subject to the conversion limitation described above;
v) The Company may only sell up to $15,000,000 of equity or equity linked securities and only at a price equal to or greater than $0.50 per common share through November 8, 2017. That restriction remains in effect so long as there are Series D shares outstanding with a Stated Value of at least $2,000,000; and
vi) The holder of Series D has a right to participate up to 100% in the Company's equity financings through November 8, 2017.
The Series D shares and the warrants were immediately separable and were issued independently. Expenses associated with this transaction totaled $170,264 resulting in net effective proceeds to the Company of $5,329,736. Such net proceeds were allocated to the shares and the warrants issued in the amounts of $3,740,942 and $1,588,794, respectively, in proportion to their relative fair value on the date of issuance. The fair value of the Series D shares was determined by reference to the number of common shares which they were convertible into and the closing price for those shares on the day of the transaction. The fair value of the warrants was determined by using the Black-Scholes model as more fully described in Note 11,
Stock Option Plans and Warrants
.
Additionally, upon the issuance of the Series D shares, the Company recorded a beneficial conversion feature and a deemed dividend in the amount of $1,375,000. This amount was calculated using the closing price per share of the Company’s common stock on the day of the transaction and subtracting the conversion price per share. This difference was then multiplied by the number of shares of common stock into which the Series D shares were convertible into on the date of the transaction.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
k)
|
On various dates from November 10 through November 16, 2016, inclusive, the holder of 378 shares of Series D, previously issued on November 8, 2016, elected to convert them into shares of common stock. In accordance with the terms applicable to that series of preferred shares, the Company issued 3,228,264 shares of common stock.
|
l)
|
On November 22, 2016, the Company effected a 5.5 for 1 forward split of Series D shares resulting in an increase of such shares outstanding from 622 to 3,421, a net increase of 2,799 shares. The purpose of this forward split was to increase the number of Series D shares to 3,421 and effectively adjust the stated value of each Series D share from $5,500 to $1,000 per share to facilitate record keeping purposes. Additionally on that date, the Company amended the key preferences, rights, and limitations of the Series D shares to indicate that number of common shares issuable upon their conversion is determined by: multiplying the number of Series D shares being converted by their stated value of $1,000 per share and then dividing by the conversion price per common share. Such conversion price is 75% of the prior day's closing bid but at no time shall be lower than $0.40 per share.
|
On November 22, 2016, the Company then raised $1,000,000 through the issuance of 1,000 Series D shares at $1,000 per share. Expenses associated with this transaction totaled $172,366 resulting in net proceeds to the Company of $827,635.
Additionally on November 22, 2016 and as a result of the adjustment of the conversion price described above, the Company recorded a beneficial conversion feature and a deemed dividend in the amount of $346,745. This amount was calculated using the closing price per share of the Company’s common stock on the day of the transaction and subtracting the conversion price per share. This difference was then multiplied by the number of shares of common stock into which the Series D shares were convertible into on the date of the transaction.
Finally, on November 22, 2016, the Company effected an exchange with the holders of warrants, previously issued on November 8, 2016, for the purchase of up to 4,000,000 shares of the Company's common stock. In that exchange, the holders surrendered those warrants and the Company issued 2,000,000 shares of newly created Series E Convertible Preferred Stock ("Series E").
The key preferences, rights, and limitations of the Series E shares are as follows:
i) The Stated Value of each Series E share is $0.001;
ii) Series E shares are convertible into the Company's common shares on a one-for-one basis;
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
iii) Series E shares may be converted into common shares at any time in any amount provided that the holder or its affiliates would not beneficially own more than 9.99% of the Company's common stock; and
iv) Series E shares may vote as common shares on an "as converted" basis subject to the conversion limitation described above.
m)
|
On various dates from November 22 through November 29, 2016, inclusive, the holder of 1,955 shares of Series D, previously issued on November 8 and 22, 2016, elected to convert them into shares of common stock. In accordance with the terms applicable to that series of preferred shares, the Company issued 4,750,000 shares of common stock.
|
n)
|
On December 19, 2016, the holder of 1,500,000 shares of Series E, previously issued on November 22, 2016, elected to convert them into shares of common stock. In accordance with the terms applicable to that series of preferred shares, the Company issued 1,500,000 shares of common stock.
|
o)
|
On December 30, 2016, the Company effected an exchange with the holder of 1,233 shares of Series D previously issued on November 8 and 22, 2016. In that exchange, the holder surrendered those shares and the Company issued 1,233 shares of newly created Series F Convertible Preferred Stock ("Series F") which was convertible into the Company's common shares as described below.
|
The key preferences, rights, and limitations of the Series F shares are substantially the same as Series D with the exception of the conversion price and are as follows:
i) The Stated Value of each Series F share is $1,000;
ii) Series F shares may be converted into common shares at the rate of 90% of the Company's volume-weighted average price ("VWAP") during the five trading days prior to the date of conversion. However, such VWAP may not be lower than $0.20 thus providing, in effect, a conversion floor of that amount;
iii) Series F shares may be converted into common shares at any time in any amount provided that the holder or its affiliates would not beneficially own more than 9.99% of the Company's common stock; and
iv) Series F shares may vote as common shares on an "as converted" basis subject to the conversion limitation described above.
There was no beneficial conversion feature triggered by this exchange.
p)
|
On various dates during the year ended December 31, 2016, the Company issued 192,966 shares of common stock to third parties for professional services at an average price per share of $2.53 for a total value of $488,656. Pursuant to the terms of those service agreements, the value of those shares of common stock was immediately expensed and classified in general and administrative expenses in the Company’s statements of operations.
|
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Note 11
-
Stock Option Plans and Warrants
Stock Options Plans
The 2007 Equity Compensation Plan (the “2007 Plan”) became effective in January 2007 and provides for the issuance of options, restricted stock and other stock-based instruments to officers and employees, consultants and directors of the Company. The total number of shares of common stock issuable under the 2007 Plan is 120,196. A total of 88,715 stock options or common stock have been issued under the 2007 Plan as of December 31, 2016.
The 2007 Incentive Stock Plan became effective in May 2007 and provides for the issuance of up to 125,000 shares of common stock in the form of options or restricted stock (the “2007 Incentive Stock Plan”). Shareholders approved an increase in the number of authorized shares of common stock issuable under the 2007 Incentive Stock Plan from 125,000 to 250,000 in November 2012. A total of 242,487 stock options, common stock or restricted stock have been issued under the 2007 Incentive Stock Plan as of December 31, 2016.
Options granted under both the 2007 Plan and the 2007 Incentive Plan have terms up to ten years and are exercisable at a price per share not less than the fair value of the underlying common stock on the date of grant. The total number of shares of common stock that remain available for issuance as of December 31, 2016 under the 2007 Plan and the 2007 Incentive Stock Plan combined is 38,995 shares.
The 2008 Non-Employee Directors Compensation Plan (the “2008 Directors Plan”) became effective in August 2008 and provides for the issuance of up to 50,000 shares of common stock in the form of options or restricted stock. In November 2013, shareholders approved an increase in the number of shares of common stock issuable under the 2008 Directors Plan to 100,000. A total of 76,125 stock options or common stock have been issued under the 2008 Directors Plan as of December 31, 2016. Options granted under the 2008 Directors Plan have terms of up to ten years and are exercisable at a price per share equal to the fair value of the underlying common stock on the date of grant. The total number of shares of common stock that remain available for issuance as of December 31, 2016 under the 2008 Directors Plan is 23,875 shares.
The 2016 Equity Incentive Plan became effective in September 2016 and provides for the issuance of up to 682,000 shares of common stock in the form of equity or equity-linked awards to officers, directors, consultants and other personnel (the “2016 Equity Incentive Plan”). Shareholders approved an increase in the number of authorized shares of common stock issuable under the 2016 Equity Incentive Plan from 682,000 to 1,435,000 in December 2016. A total of 1,805,499 stock options, have been issued under the 2016 Equity Incentive Plan as of December 31, 2016. In February 2017, the Company’s shareholders approved an increase in the number of authorized shares of common stock issuable under the 2016 Equity Incentive Plan from 1,435,000 to 2,521,347.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
The 2016 Non-Executive Equity Incentive Plan became effective in December 2016 and provides for the issuance of up to 250,000 equity and equity-linked awards to non-executive employees and consultants of the Company (the “2016 Non-Employee Incentive Plan”). There have been no equity awards issued under the 2016 Non-Employee Incentive Plan as of December 31, 2016.
Options granted under both the 2016 Equity Incentive Plan and the 2016 Non-Employee Incentive Plan have terms up to ten years and are exercisable at a price per share not less than the fair value of the underlying common stock on the date of grant.
The Company uses the Black-Scholes model to value options granted to employees, directors and consultants. Compensation expense, including the estimated effect of forfeitures, is recognized over the period of service, generally the vesting period. Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled $1,024,955 and $1,016,705 for the years ended December 31, 2016 and 2015, respectively. Stock-based compensation is included in general and administrative expenses in the accompanying consolidated statements of operation. The Company calculates the intrinsic value of stock options and warrants as the difference between the closing price of the Company’s common stock at the end of the reporting period and the exercise price of the stock options and warrants.
The unamortized amount of stock options expense was $843,779 as of December 31, 2016 which will be recognized over a weighted-average period of 2.9 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:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
0.9%
|
to
|
1.8%
|
|
|
1.5%
|
to
|
1.7%
|
|
Expected volatility
|
|
78%
|
to
|
110%
|
|
|
58%
|
to
|
77%
|
|
Expected life (in years)
|
|
|
4.2
|
|
|
|
4.1
|
to
|
4.2
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
|
0%
|
|
|
Estimated forfeiture rates
|
|
1%
|
to
|
20%
|
|
|
1%
|
to
|
10%
|
|
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
The risk-free interest rate was based on rates established by the Federal Reserve. The expected volatility was based upon the historical volatility for the Company’s common stock. The Company utilized historical data to determine the expected life of stock options.
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. The Company reviews its forfeiture rate annually to update its assumption for recent experience.
Option transactions under the stock option plans during the years ended December 31, 2016 and 2015 were as follows:
|
|
Number of Options
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding as of January 1, 2015
|
|
|
199,885
|
|
|
$
|
54.60
|
|
Granted during 2015
|
|
|
43,938
|
|
|
|
29.20
|
|
Exercised
|
|
|
(21,327
|
)
|
|
|
31.60
|
|
Forfeited /expired
|
|
|
(5,494
|
)
|
|
|
38.80
|
|
Outstanding as of December 31, 2015
|
|
|
217,002
|
|
|
|
52.20
|
|
Granted during 2016
|
|
|
1,938,249
|
|
|
|
1.22
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited /expired
|
|
|
(48,362
|
)
|
|
|
52.38
|
|
Outstanding as of December 31, 2016
|
|
|
2,106,889
|
|
|
$
|
5.30
|
|
Exercisable as of December 31, 2016
|
|
|
927,520
|
|
|
$
|
10.24
|
|
Grants under the stock option plans were as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Annual grants to outside directors
|
|
|
294,999
|
|
|
|
10,000
|
|
Executive grants
|
|
|
452,500
|
|
|
|
11,563
|
|
Employee grants
|
|
|
1,108,250
|
|
|
|
22,375
|
|
Non-employee grants
|
|
|
82,500
|
|
|
|
-
|
|
Total
|
|
|
1,938,249
|
|
|
|
43,938
|
|
Options granted during the reporting period had terms ranging from five to ten years and were issued at an exercise price equal to the fair value on the date of grant. Director grants vesting periods range from vesting immediately upon issuance, vesting quarterly over a one year period from the date of issuance and vesting over a one year period from the date of issuance. Executive grants vesting periods range from vesting immediately upon issuance to vesting monthly or quarterly over a one or two-year period from the date of issuance. Employee grants range from vesting immediately upon issuance to vesting over a one to three year period from the date of issuance. Non-employee grants vesting periods range from vesting immediately upon issuance, vesting over six months from the date of issuance and vesting monthly over one year from the date of issuance.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Forfeited or expired options under the stock option plans were as follows:
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Employee terminations
|
|
|
46,260
|
|
|
|
4,119
|
|
Expired
|
|
|
2,102
|
|
|
|
1,375
|
|
Total
|
|
|
48,362
|
|
|
|
5,494
|
|
The weighted-average fair values of the options granted during 2016 and 2015 were $0.74 and $0.68, respectively. Outstanding options of 2,106,889 as of December 31, 2016 had exercise prices that ranged from $0.24 to $105.00 and had a weighted-average remaining contractual life of 9.4 years. Exercisable options of 927,520 as of December 31, 2016 had exercise prices that ranged from $0.24 to $105.00 and had a weighted-average remaining contractual life of 9.0 years.
As of December 31, 2016, there was no aggregate intrinsic value associated with the outstanding and exercisable options. The closing price of the Company’s common stock at December 31, 2016, was $0.18 per share. The Company calculates the intrinsic value of stock options and warrants as the difference between the closing price of the Company’s common stock at the end of the reporting period and the exercise price of the stock options and warrants.
Stock Warrants
Warrant transactions during the years ended December 31, 2016 and 2015 were as follows:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding as of January 1, 2015 and December 31, 2015
|
|
|
202,500
|
|
|
$
|
26.20
|
|
Granted during 2016
|
|
|
4,973,214
|
|
|
|
1.63
|
|
Exchanged during 2016
|
|
|
(4,973,214
|
)
|
|
|
1.63
|
|
Expired during 2016
|
|
|
(22,500
|
)
|
|
|
100.00
|
|
Outstanding and exercisable as of December 31, 2016
|
|
|
180,000
|
|
|
$
|
16.87
|
|
As of December 31, 2016, all warrants were exercisable and had a weighted average remaining contractual life of 5.3 years.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
As of December 31, 2016, there was no aggregate intrinsic value associated with the outstanding and exercisable warrants. The closing price of the Company’s common stock at December 31, 2016 was $0.18 per share.
In connection with the June 17, 2016 offering, the Company issued warrants to purchase 750,000 shares of common stock. Each warrant expires five years from the date of issuance, had an exercise price of $5.00 per share, and are exercisable six months from the date of issuance. The Company utilized the Black-Scholes model to value these warrants and attributed a value to them of $791,290 which was accounted for as an addition to additional paid-in capital. Assumptions included an interest rate of 1.17%, a contractual term of 5 years, expected volatility of 81%, and a dividend yield of zero. The risk-free interest rate was based on rates established by the Federal Reserve. The expected volatility was based upon the historical volatility for the Company’s common stock. The dividend yield reflected the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future.
In connection with the July 7, 2016 offering, the Company issued warrants to purchase 223,214 shares of common stock. Each warrant expires five years from the date of issuance, had an exercise price of $3.00 per share. The Company utilized the Black-Scholes model to value these warrants and attributed a value to them of $240,709 which was accounted for as an addition to additional paid-in capital. Assumptions included an interest rate of 0.97%, a contractual term of 5 years, expected volatility of 78%, and a dividend yield of zero. The risk-free interest rate was based on rates established by the Federal Reserve. The expected volatility was based upon the historical volatility for the Company’s common stock. The dividend yield reflected the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future.
On September 12, 2016, warrants for the purchase of up to 973,214 shares of common stock were exchanged for 680,000 shares of common stock. See Note 10,
Capital Stock
, for further information regarding this transaction.
Note 12
-
Employee Benefit Programs
The Company has established a 401(k) retirement plan (“401(k) plan”) which covers all eligible employees who have attained the age of twenty-one and have completed 30 days of employment with the Company. The Company can elect to match up to a certain amount of employees’ contributions to the 401(k) plan. No employer contributions were made during the years ended December 31, 2016 and 2015.
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 25,000 shares of common stock can be issued under the ESPP Plan of which all of the authorized shares have been issued as of December 31, 2016. During the years ended December 31, 2016 and 2015, a total of 29,807 and 2,838 shares were issued under the ESPP Plan with a fair value of $28,952 and $49,757, respectively. The Company recognized $4,523 and $7,541 of stock-based compensation related to the 15% discount for the years ended December 31, 2016 and 2015, respectively.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Note 13
-
Income Taxes
Provision
The provision for income taxes consists of the following:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Total current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
45,587,097
|
|
|
|
(6,521,134
|
)
|
State
|
|
|
8,228,412
|
|
|
|
(1,150,789
|
)
|
Change in valuation allowance
|
|
|
(53,758,846
|
)
|
|
|
7,634,360
|
|
Total deferred
|
|
|
56,663
|
|
|
|
(37,562
|
)
|
Provision for income taxes
|
|
$
|
56,663
|
|
|
$
|
(37,562
|
)
|
The provision for income taxes using the U.S. Federal statutory tax rate as compared to the Company’s effective tax rate is summarized as follows:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
U.S. Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State taxes
|
|
|
(4.9
|
)%
|
|
|
(6.0
|
)%
|
Permanent differences
|
|
|
0.9
|
%
|
|
|
0.1
|
%
|
Rate Change
|
|
|
7.6
|
%
|
|
|
0.0
|
%
|
Prior year Net Operating Loss write-off (Section 382 restriction)
|
|
|
263.2
|
%
|
|
|
0.0
|
%
|
Current year Net Operating Loss write-off
|
|
|
34.5
|
%
|
|
|
0.0
|
%
|
Valuation allowance
|
|
|
(267.0
|
)%
|
|
|
39.8
|
%
|
Effective tax rate
|
|
|
0.3
|
%
|
|
|
(0.1
|
)%
|
The Company files income tax returns for Towerstream Corporation and its subsidiaries in the U.S. federal and various state principle jurisdictions. As of December 31, 2016, the tax returns for Towerstream Corporation for the years 2013 through 2016 remain open to examination by the Internal Revenue Service and various state authorities.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
The Company’s deferred tax assets (liabilities) consisted of the effects of temporary differences attributable to the following:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,948,281
|
|
|
$
|
56,202,470
|
|
Stock-based compensation
|
|
|
2,931,251
|
|
|
|
2,426,886
|
|
Intangible assets
|
|
|
1,261,696
|
|
|
|
2,481,960
|
|
Debt discount
|
|
|
984,422
|
|
|
|
695,259
|
|
Allowance for doubtful accounts
|
|
|
25,281
|
|
|
|
37,145
|
|
Other
|
|
|
532,040
|
|
|
|
1,388,166
|
|
Total deferred tax assets
|
|
|
8,682,971
|
|
|
|
63,231,886
|
|
Valuation allowance
|
|
|
(7,676,293
|
)
|
|
|
(61,340,847
|
)
|
Deferred tax assets, net of valuation allowance
|
|
|
1,006,678
|
|
|
|
1,891,039
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,006,678
|
)
|
|
|
(1,891,039
|
)
|
Intangible assets
|
|
|
(420,437
|
)
|
|
|
(363,774
|
)
|
Total deferred tax liabilities
|
|
|
(1,427,115
|
)
|
|
|
(2,254,813
|
)
|
Net deferred tax liabilities
|
|
$
|
(420,437
|
)
|
|
$
|
(363,774
|
)
|
Accounting for Uncertainty in Income Taxes
ASC Topic 740 clarifies the accounting and reporting for uncertainties in income tax law. ASC Topic 740 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The guidance also provides direction on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
As of December 31, 2016 and 2015, the Company has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s financial statements. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense, and penalties as general and administrative expenses. No interest and penalties were recorded during the years ended December 31, 2016 and 2015. The Company does not expect its unrecognized tax benefit position to change during the next twelve months.
NOL Limitations
The Company’s utilization of net operating loss (“NOL”) carryforwards is subject to an annual limitation due to ownership changes that have occurred previously or that could occur in the future as provided in Section 382 of the Internal Revenue Code, as well as similar state provisions. Section 382 limits the utilization of NOLs when there is a greater than 50% change of ownership as determined under the regulations. Since its formation, the Company has raised capital through the issuance of capital stock and various convertible instruments which, combined with the purchasing shareholders’ subsequent disposition of these shares, has resulted in an ownership change as defined by Section 382, and also could result in an ownership change in the future upon subsequent disposition.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
As of December 31, 2015, the Company had approximately $140,517,000 of federal and state NOL carryovers. As of November 9, 2016, the company had a greater than 50% change in ownership under Section 382 of the Internal Revenue Code. Based on the calculations under Section 382, the NOL carryforward as of that date is limited to approximately $4,612,000. After the ownership change and through December 31, 2016, the Company had a taxable loss of approximately $2,948,000. The total federal and state NOLs of approximately $7,560,000 as of December 31, 2016 begin to expire starting in the year ending December 31, 2017.
Valuation Allowance
In assessing the realizability of deferred tax assets, the Company has considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial reporting standards, the Company has considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. Since both goodwill and the FCC licenses are considered to be assets with indefinite lives for financial reporting purposes, the related deferred tax liabilities cannot be used as a source of future taxable income for purposes of determining the need for a valuation allowance. Based upon this evaluation, a full valuation allowance has been recorded as of December 31, 2016 and 2015. The change in valuation allowance was ($53,644,554) and $16,145,402, respectively, for the years ended December 31, 2016 and 2015 of which $94,292 and $8,511,042, respectively, pertains to discontinued operations.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Note 14
-
Fair Value Measurement
The FASB’s accounting standard for fair value measurements establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Cash and cash equivalents 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. The carrying value of the Company’s long-term debt is carried at cost as the related interest rate is at terms that approximate rates currently available to the Company. There were no changes in the valuation techniques during the year ended December 31, 2016.
|
|
Total Carrying Value
|
|
|
Quoted prices in active markets
(Level 1)
|
|
|
Significant other observable inputs (Level 2)
|
|
|
Significant unobservable inputs (Level 3)
|
|
December 31, 2016
|
|
$
|
12,272,444
|
|
|
$
|
12,272,444
|
|
|
$
|
-
|
|
|
$
|
-
|
|
December 31, 2015
|
|
$
|
15,116,531
|
|
|
$
|
15,116,531
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 15
-
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 on various dates through June 2024. Certain of these operating leases include extensions, at the Company's option, for additional terms ranging from one to fifteen 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.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
As of December 31, 2016, total future operating lease obligations were as follows:
Years Ending December 31,
|
|
|
|
|
2017
|
|
$
|
7,943,370
|
|
2018
|
|
|
6,318,665
|
|
2019
|
|
|
4,846,377
|
|
2020
|
|
|
2,627,912
|
|
2021
|
|
|
667,892
|
|
Thereafter
|
|
|
231,105
|
|
Total
|
|
$
|
22,635,322
|
|
Rent expenses were as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Points of Presence
|
|
$
|
8,491,235
|
|
|
$
|
8,180,389
|
|
Corporate offices
|
|
|
335,713
|
|
|
|
382,234
|
|
Other
|
|
|
552,177
|
|
|
|
414,618
|
|
Total
|
|
$
|
9,379,125
|
|
|
$
|
8,977,241
|
|
Rent expenses related to Points of Presence and other were included in infrastructure and access and Network operations in the Company’s consolidated statements of operations. Rent expense related to the Company’s corporate offices was included in general and administrative expenses in the Company’s consolidated statements of operations.
In September 2013, the Company entered into a new lease agreement for its corporate offices and new warehouse space. The lease commenced on January 1, 2014 and expires on December 31, 2019 with an option to renew for an additional five-year term through December 31, 2024. Total annual rent payments begin at $359,750 for 2014 and escalate by 3% annually reaching $416,970 for 2019.
In December 2014, the Company entered into a new lease agreement in Florida, primarily for a second sales center. The lease commenced in February 2015 for 38 months with an option to renew for an additional five-year period. Total annual rent payments started at $53,130 and escalated by 3% annually. In April 2016, the Company terminated the Florida lease. Under the terms of the agreement, the Company forfeited its security deposit of $26,648 and agreed to make a termination payment of $25,000.
TOWERSTREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED F
INANCIAL STATEMENTS – CONTINUED
Capital Lease Obligations
The Company has entered into capital leases to acquire property and equipment expiring through June 2018. As of December 31, 2016, total future capital lease obligations were as follows:
Years Ending December 31,
|
|
|
|
|
2017
|
|
$
|
837,811
|
|
2018
|
|
|
143,796
|
|
Sub-Total
|
|
|
981,607
|
|
Less: Interest expense
|
|
|
31,895
|
|
Total capital lease obligations
|
|
$
|
949,712
|
|
Current
|
|
$
|
791,009
|
|
Long-Term
|
|
$
|
158,703
|
|
Note 16
-
Subsequent Events
1)
|
On January 24, 2017, the Company entered into an employment agreement with Ernest Ortega pursuant to which he will serve as the Company’s Chief Executive Officer. The agreement has a term of eighteen months and automatically renews for additional one-year terms unless earlier terminated by either party with three months prior to the renewal date. In that connection, the Company issued options for the purchase of up to 2,037,085 shares of the Company common stock at $0.17 per share for a period of ten years. Those options vest as follows: 940,193 will vest on January 24, 2018; 626,795 will vest in eight quarterly installments during the twenty-four months ending January 24, 2020; 548,446 will vest upon the achievement of three consecutive quarters of positive cash flow; and 548,446 will vest upon the sale of the Company's earth station assets in Miami, Florida for gross proceeds equal to or greater than $15,000,000.
|
2)
|
The Company issued shares of common stock in connection with the following activity:
|
|
a)
|
On January 9, 2017, the holder of 500,000 shares of Series E Convertible Preferred Stock elected to convert them into shares of common stock. In accordance with the conversion terms applicable to those preferred shares, the Company issued 500,000 shares of common stock.
|
|
|
|
|
b)
|
On various dates from January 26, 2017 to March 23, 2017, inclusive, the holder of 390 shares of Series F Convertible Preferred Stock elected to convert them into shares of common stock. In accordance with the conversion terms applicable to those preferred shares, the Company issued 1,950,000 shares of common stock.
|
3)
|
Effective February 1, 2017, the Company entered into an employment agreement with Philip Urso, who served as the Company's Interim Chief Executive Officer from February 2016 through January 2017 and currently serves as the Chairman of the Board of Directors, pursuant to which he will provide support and transition services to the Company’s new Chief Executive Officer for a period of three months. Under the terms of the agreement, Mr. Urso's compensation will consist of a salary of $12,500 per month, a car allowance of $1,000 per month, and health insurance coverage for himself and his dependents.
|
4)
|
On February 4, 2017, the Company awarded options for the purchase of up to 1,189,987 shares of the Company's common stock at an exercise price of $0.17 per share for a period of ten years. Terms of such option awards conformed to the Company's standard form of option agreement which includes a provision for cashless exercise. The awards consisted of options for 500,653 shares to Mr. Urso for his past service as Interim Chief Executive Officer, options for 439,008 shares to Mr. Giftakis, the Company' Chief Operating Officer, and options for 250,326 shares to Mr. Larcombe, the Company' Chief Financial Officer. Mr. Urso's options vested 100% upon issuance and the options issued to Messrs. Giftakis and Larcombe vest ratably on a quarterly basis over the eight quarters immediately following the date of the awards.
|