UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2014

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.)
88 Silva Lane  Middletown, Rhode Island (Address of principal executive offices)	02842 (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.001 per share	The NASDAQ Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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 ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was $116,231,063.

As of March 9, 2015, there were 66,656,789 shares of common stock, par value $0.001 per share, outstanding.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

Table of Contents

		Page
	PART I
Item 1.	Business.	2
Item 1A.	Risk Factors.	9
Item 1B.	Unresolved Staff Comments.	23
Item 2.	Properties.	23
Item 3.	Legal Proceedings.	24
Item 4.	Mine Safety Disclosures.	24
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	25
Item 6.	Selected Financial Data.	27
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	28
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	41
Item 8.	Financial Statements and Supplementary Data.	42
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	65
Item 9A.	Controls and Procedures.	65
Item 9B.	Other Information.	67
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance.	68
Item 11.	Executive Compensation.	72
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	80
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	82
Item 14.	Principal Accountant Fees and Services.	82
	PART IV
Item 15.	Exhibits and Financial Statement Schedules.	83

i

PART I

Forward-Looking Statements

Forward-looking statements in this report, including without limitation, statements related to Towerstream Corporation’s 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) Towerstream Corporation’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of Towerstream Corporation; (ii) Towerstream Corporation’s plans and results of operations will be affected by Towerstream Corporation’s ability to manage growth and competition; and (iii) other risks and uncertainties indicated from time to time in Towerstream Corporation’s filings with the Securities and Exchange Commission.

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

Factors that might affect our forward-looking statements include, among other things:

● overall economic and business conditions;

● the demand for our services;

● competitive factors in the industries in which we compete;

● emergence of new technologies which compete with our service offerings;

● changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);

● the outcome of litigation and governmental proceedings;

● interest rate fluctuations and other changes in borrowing costs;

● other capital market conditions, including availability of funding sources;

● potential impairment of our indefinite-lived intangible assets and/or our long-lived assets; and

● changes in government regulations related to the broadband and Internet protocol industries.

Item 1. Business. 

Towerstream Corporation (“Towerstream”, “we”, “us”, “our” or the “Company”) is a leading 4G and Small Cell Rooftop Tower company which provides a wide range of wireless communication services through its two business segments.  The Company was incorporated in December 1999.

Fixed Wireless Services Segment

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, 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 Services Segment" ("Fixed Wireless" or "FW") has historically grown both organically and through the acquisition of five other fixed wireless broadband providers in various markets.

2

Shared Wireless Infrastructure Segment

In 2010, the Company began 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 and coverage in dense urban areas. During this period, the Company incurred various costs related to identifying possible new solutions and services. These costs included rent payments under lease agreements which provide the Company with the right to install wireless technology equipment on the rooftops of buildings. The Company refers to these locations as "street level rooftops" because Wi-Fi and small cell technologies are required to be close to the ground, and therefore, the buildings are often one to two stories high. The Company also incurred costs to construct 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 traditional, macro-cellular architecture to 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”). Hetnets was formed to operate a new shared wireless infrastructure platform that emerged from the Company's efforts to identify opportunities to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets operates a carrier-class network which has been constructed on "street level rooftops" which are closer to the ground (where Wi-Fi and small cell can operate with less interference from the macro cell) than the Company's traditional fixed wireless network. Hetnets is structured to operate like a tower company and expects 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, Distributed Antenna System (“DAS”), and Metro and Pico cells, (ii) rental of a channel on Hetnets’ Wi-Fi network for Internet access and the offloading of mobile data, (iii) rental of a port for backhaul or transport, and (iv) power and other related services. The Company refers to the activities of Hetnets as its “Shared Wireless Infrastructure” (or “Shared Wireless”) business. 

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

In August 2014, the Company executed a master licensing agreement ("MLA") with a carrier for small cell deployments. The MLA establishes the detailed terms and conditions under which individual orders are governed, and are generally designed to expedite the deployment process. The term of this agreement is for 25 years.

Our Networks

The foundation of our networks consist of Points of Presence (or "PoPs" or "Company Locations") which are generally located on very tall buildings in each urban market. We enter into long term lease agreements with the owners of these buildings which provide us with the right to install communications equipment on the rooftop. We deploy this equipment in order to connect customers to the Internet or to pass small cell signals to carriers and other service providers. Each PoP is "linked" to one or more other PoPs to enhance redundancy and ensure that there is no single point of failure in the network. One or more of our PoPs are located in buildings where national Internet service providers such as Cogent or Level 3 are located, and we enter into IP transit or peering arrangements with these organizations in order to connect to the Internet. We refer to the core connectivity of all of our PoPs as a “Wireless Ring in the Sky.” Each PoP has a coverage area averaging approximately six miles although the distance can be affected by numerous factors, most significantly, how clear the line of sight is between the PoP and a customer location. Our Points of Presence are utilized by both our Fixed Wireless and Shared Wireless Infrastructure segments.

We install additional equipment at other locations for each of our business segments. We install equipment on the rooftops of the buildings in which our fixed wireless segment customers operate and refer to these as "Customer Locations". This equipment includes receivers and antennas, and a wireless connection is established between the Customer Location to one or more of our PoPs. We also install equipment, including access points, receivers and antennas, on the street level rooftops leased by our Shared Wireless segment. This equipment enables us to operate our Wi-Fi network which we own and control, as well as equipment to backhaul data traffic off of the rooftop to our core network. We expect that customers that want to utilize our street level rooftops to deploy small cell technologies will bring their own equipment and connect it to our network.

Our network does not depend on traditional copper wire or fiber connections which are the backbone of many of our competitors' networks. We believe this provides us with an advantage because we may not be significantly affected by events such as natural disasters and power outages. Conversely, our competitors are at greater risk as copper and fiber connections are typically installed at or below ground level and more susceptible to network service issues during disasters and outages.

3

Markets

We launched our fixed wireless business in April 2001 in the Boston and Providence markets. In June 2003, we launched service in New York City and followed that with our entry into the Chicago, Los Angeles, San Francisco, Miami and Dallas-Fort Worth markets at various times through April 2008. Philadelphia was our last market launch in November 2009. We entered the Seattle, Las Vegas-Reno, and Houston markets through acquisitions of service providers based in those markets. We also expanded our market coverage and presence in Boston, Providence, and Los Angeles through acquisitions. Our acquisitions include (i) Sparkplug Chicago, Inc., operating in Chicago, Illinois, (ii) Pipeline Wireless, LLC, operating in Boston, Massachusetts and Providence, Rhode Island, (iii) One Velocity, Inc., operating in Las Vegas and Reno, Nevada (iv) Color Broadband Communications, Inc., operating in Los Angeles, California, and (v) Delos Internet, operating in Houston, Texas which we completed in February 2013.

We determine which geographic markets to enter by assessing criteria in four broad categories. First, we evaluate our ability to deploy our service in a given market after taking into consideration our spectrum position, the availability of towers and zoning constraints. Second, we assess the market by evaluating the number of competitors, existing price points, demographic characteristics and distribution channels. Third, we evaluate the economic potential of the market, focusing on our forecasts of revenue opportunities and capital requirements. Finally, we look at market clustering opportunities and other cost efficiencies that might be realized. Based on this approach, as of December 31, 2014, we offered wireless broadband connectivity in 12 markets, of which 10 are in the top 20 metropolitan areas in the United States based on the number of small to medium businesses in each market. These 10 markets cover an estimated 62% of small and medium businesses (5 to 249 employees) in the United States.

We believe there are significant market opportunities beyond the 12 markets in which we are currently offering our services. Our long-term plan is to expand nationally into other top metropolitan markets in the United States. We believe that acquisitions presently represent a more cost effective manner to expand into new markets rather than to build our own infrastructure. Since 2010, we have completed five acquisitions, of which two were in new markets and three expanded our presence in existing markets. We have paid for these acquisitions through a combination of cash and equity, and believe that future acquisitions will be paid in a similar manner. Our decision to expand into new markets will depend upon many factors including the timing and frequency of acquisitions, national and local economic conditions, and the opportunity to leverage existing customer relationships in new markets.

Our Shared Wireless Infrastructure segment presently operates in New York City, Chicago, San Francisco, and Miami. In June 2013, we entered our first significant customer agreement with a major cable operator to provide Wi-Fi services in New York City. We expect to expand our Shared Wireless segment activities into additional markets based on customer demand, and anticipate that they will most likely be in markets where we presently offer fixed wireless services.

Sales and Marketing

We employ an inside direct sales force model to sell our services to business customers. As of December 31, 2014, we employed 29 direct sales people. We generally compensate these employees on a salary plus commission basis. Approximately 66% of our sales personnel had been with the Company for more than two years as of December 31, 2014, as compared to 56% and 67% as of December 31, 2013 and 2012, respectively. This tenure metric can fluctuate from period to period, especially because the size of the direct sales force is relatively small. The Company believes that a tenure metric between 60% to 75% constitutes an experienced sales force.

In March 2015, we opened a second sales center in Boca Raton, Florida where a number of telecommunications and call center companies are based. We believe that being able to recruit talented professionals from a second geographic area will enable us to increase our sales force to between 50 to 60 account executives. A larger sales force should have a positive effect on new customer additions. We generally expect that new account executives will need approximately nine months of training and on-the-job experience before their sales pipelines become robust and they begin generating new sales levels comparable to existing account executives.

We continue to spend significantly on Internet based marketing initiatives designed to capture customer demand rather than trying to create customer demand. Most companies secure their bandwidth service under contracts ranging in length from one to three years. As a result, customer buying decisions generally occur when their existing contracts are close to expiring. We believe that many buyers of information technology services search the Internet to learn about industry trends and developments, as well as competitive service offerings. Spending on internet based marketing initiatives totaled $953,459, $1,030,916, and $1,034,273 during the years ended December 31, 2014, 2013, and 2012, respectively.

Sales through indirect channels comprised 22.7% of our total revenues for the year ended December 31, 2014 compared with 19.6% for the year ended December 31, 2013. Color Broadband, which we acquired in December 2011, had an active channel program and we hired one of their former employees to be our Channel Manager. During 2012, we changed our channel program to provide for recurring monthly residual payments, ranging from 8% to 20%. Previously, we had generally paid one time commissions on channel sales.

4

Competition

Fixed Wireless Segment

The market for broadband services is highly competitive, and includes companies that offer a variety of services using a number of different technology platforms including cable networks, digital subscriber lines (“DSL”), third-generation cellular, satellite, wireless Internet service and other emerging technologies. We compete with these companies on the basis of the portability, ease of use, speed of installation and price. Competitors to our wireless broadband services include:

Incumbent Local Exchange Carriers and Common Local Exchange Carriers

We face competition from traditional wireline operators in terms of price, performance, discounted rates for bundles of services, breadth of service, reliability, network security, and ease of access and use. In particular, we face competition from Verizon Communications Inc. and AT&T Inc. which are referred to as “incumbent local exchange carriers,” or (“ILECS”), as well as “common local exchange carriers,” or (“CLECS”), such as TelePacific Communications, MegaPath Networks, and EarthLink, Inc.

Cable Modem and DSL Services

We compete with companies that provide Internet connectivity through cable modems or DSL. Principal competitors include cable companies, such as Comcast Corporation, Time Warner Cable, Charter, Cox Communications and incumbent telephone companies, such as AT&T Inc. or Verizon Communications Inc. Both the cable and telephone companies deploy their services over wired networks initially designed for voice and one-way data transmission that have subsequently been upgraded to provide for additional services.

Cellular and PCS Services

Cellular and personal communications service (“PCS”) carriers are seeking to expand their capacity to provide data and voice services that are superior to ours. These providers have substantially broader geographic coverage than we have and, for the foreseeable future, than we expect to have. If one or more of these providers can deploy technologies that compete effectively with our services, the mobility and coverage offered by these carriers will provide even greater competition than we currently face. Moreover, more advanced cellular and PCS technologies, such as third generation mobile technologies, currently offer broadband service with packet data transfer speeds of up to 2,000,000 bits per second for fixed applications, and slower speeds for mobile applications. We expect that third generation technology will be improved to increase connectivity speeds to make it more suitable for a range of advanced applications.

Wireless Broadband Service Providers

We also face competition from other wireless broadband service providers that use licensed and unlicensed spectrum. In connection with our merger and acquisition activities, we have determined that most of our current and planned markets already have one or more locally based companies providing wireless broadband Internet services. In addition, many local governments, universities and other related entities are providing or subsidizing Wi-Fi networks over unlicensed spectrum, in some cases at no cost to the user. There exist numerous small urban and rural wireless operations offering local services that could compete with us in our present or planned geographic markets.

Satellite  

Satellite providers, such as WildBlue Communications, Inc. and Hughes Network Systems, LLC, offer broadband data services that address a niche market, mainly less densely populated areas that are unserved or underserved by competing service providers. Although satellite offers service to a large geographic area, latency caused by the time it takes for the signal to travel to and from the satellite may challenge a satellite provider’s ability to provide some services, such as Voice over Internet Protocol (“VoIP”), which reduces the size of the addressable market.

Other  

We believe other emerging technologies may also seek to enter the broadband services market. For example, we are aware that several power generation and distribution companies are seeking to develop or have already offered commercial broadband Internet services over existing electric power lines.

Shared Wireless Segment

The market for shared wireless infrastructure services in major urban markets has grown significantly in the past few years as the emergence of smartphones, tablets, and other portable devices has driven an explosion in mobile data traffic. In May 2012, five major cable companies (Comcast, TimeWarner Cable, Cox Communications, Cablevision, and Bright House Networks) announced an alliance under which they agreed to allow each other's customers to access their respective Wi-Fi hotspots when roaming outside their cable provider's territory.  The cable companies have referred to this arrangement as "CableWiFi".  In March 2015, CableWiFi.com represented that there were more than 300,000 hotspots available to customers of the participating cable companies, however, not all of these hotspots are in markets in which the Company presently operates.  In addition, the major cable companies have historically operated primarily in suburban areas.  However, they may begin to increase their presence and activities in major urban markets as the carriers, Internet companies and others request additional capacity to handle the continued growth in mobile data traffic. 

5

Competitive Strengths

Even though we face substantial existing and prospective competition, we believe that we have a number of competitive advantages that will allow us to retain existing customers and attract new customers over time.

Reliability  

Our network was designed specifically to support wireless broadband services. The networks of cellular, cable and DSL companies rely on infrastructure that was originally designed for non-broadband purposes. We also connect our customers to our Wireless Ring in the Sky which has no single point of failure. This ring is fed by multiple national Internet providers located at opposite ends of our service cities and connected to our national ring which is fed by multiple leading carriers. We believe that we are the only wireless broadband provider that offers true separate egress for true redundancy. With DSL and cable offerings, the wireline connection can be terminated by one backhoe swipe or switch failure. Our Wireless Ring in the Sky is not likely to be affected by backhoe or other below-ground accidents or severe weather. As a result, our network has historically experienced reliability rates of approximately 99%.

Flexibility

Our wireless infrastructure and service delivery enables us to respond quickly to changes in a customer’s broadband requirements. We offer bandwidth options ranging from 0.5 megabits per second up to 1.5 gigabit per second. We can usually adjust a customer’s bandwidth remotely and without having to visit the customer location to modify or install new equipment. Changes can often be made on a same day basis.

Timeliness

In many cases, we can install a new customer and begin delivering Internet connectivity within 3 to 5 business days after receiving a customer’s order. Many of the larger telecommunications companies can take 30 to 60 days to complete an installation. The timeliness of service delivery has become more important as businesses conduct more of their business operations through the Internet.

Value  

We own our entire network which enables us to price our services lower than most of our competitors. Specifically, we are able to offer competitive prices because we do not have to buy a local loop charge from the telephone company.

Efficient Economic Model

Our economic model is characterized by low fixed capital and operating expenditures relative to other wireless and wireline broadband service providers. We own our entire network which eliminates costs involved with using leased lines owned by telephone or cable companies. Our network is modular. Coverage is directly related to various factors including the height of the facility we are on and the frequencies we utilize. The average area covered by a PoP is a six mile radius.

Prime Real Estate Locations

We have secured long term lease agreements for what we believe are prime real estate locations for both of our business segments. Our fixed wireless network is constructed on many of the tallest buildings in the 12 markets in which we operate. This facilitates our ability to deliver Internet connectivity to locations where line of sight is not available to our competitors. Our shared wireless infrastructure is located on more than 1,000 street level rooftops in New York City, Chicago, San Francisco, and Miami. The breadth and depth of our networks in these markets enables us to address the densification required in major urban markets.

Experienced Management Team  

We have an experienced executive management team with more than 35 years of combined experience as company leaders. Our President and Chief Executive Officer, Jeffrey M. Thompson, is a founder of the Company and has more than 20 years of experience in the data communications industry. Our Chief Financial Officer, Joseph P. Hernon, has been the chief financial officer for three publicly traded companies over the past 15 years.

6

Corporate History

We were organized in the State of Nevada in June 2005. In January 2007, we merged with and into a wholly-owned Delaware subsidiary for the sole purpose of changing our state of incorporation to Delaware. In January 2007, a wholly-owned subsidiary of ours merged with and into a private company, Towerstream Corporation, with Towerstream Corporation being the surviving company. Upon closing of the merger, we discontinued our former business and succeeded to the business of Towerstream Corporation as our sole line of business. At the same time, we also changed our name to Towerstream Corporation and our subsidiary, Towerstream Corporation, changed its name to Towerstream I, Inc.

Regulatory Matters 

The Communications Act of 1934, as amended (the “Communications Act”), and the regulations and policies of the Federal Communications Commission (“FCC”) impact significant aspects of our wireless Internet service business which is also subject to other regulation by federal, state and local authorities under applicable laws and regulations.

Spectrum Regulation

We provide wireless broadband Internet access services using both licensed and unlicensed fixed point-to-point systems. The FCC has jurisdiction over the management and licensing of the electromagnetic spectrum for all commercial users. The FCC routinely reviews its spectrum policies and may change its position on spectrum use and allocations from time to time. We believe that the FCC is committed to allocating spectrum to support wireless broadband deployment throughout the United States and will continue to modify its regulations to foster such deployment, which will help us implement our existing and future business plans.

Broadband Internet Service Regulation

Our wireless broadband network can be used to provide Internet access service and Virtual Private Networks (“VPNs”). In 2002, the FCC ruled that Internet services are interstate information services that are not subject to regulation as a telecommunications service under federal law or to state or local utility regulation. Our broadband Internet services, therefore, have traditionally not been subject to many of the regulatory requirements imposed on wireless and wireline telecommunications service providers. For example, we have not been required to contribute a percentage of gross revenues from our Internet access services to the universal service funds used to support local telephone service and advanced telecommunications services for schools, libraries and rural health care facilities. Our wireless broadband Internet services are, however, have been subject to a number of federal regulatory requirements, including the Communications Assistance for Law Enforcement Act (“CALEA”) requirement that high-speed Internet service providers implement certain network capabilities to assist law enforcement in conducting surveillance of persons suspected of criminal activity.

On February 26, 2015, the FCC adopted an Open Internet order in which fixed and mobile broadband services is reclassified as a telecommunications services governed by Title II of the Communications Act. This reclassification includes forbearance from applying many sections of the Communications Act and the FCC’s rules to broadband service providers. The Open Internet order also adopted rules prohibiting broadband service providers from: (1) blocking access to legal content, applications, services or non-harmful devices; (2) impairing or degrading lawful Internet traffic on the basis, content, applications or services; or (3) favoring certain Internet traffic over other traffic in exchange for consideration. At this time, the FCC’s Open Internet rules are not yet in effect and it is unclear precisely which Title II obligations will be imposed on Towerstream’s broadband services and what impact the reclassification of broadband services or the Open Internet rules may have on Towerstream’s broadband business.

In addition, Internet service providers are subject to a wide range of other federal regulations and statutes including, for example, regulations and policies relating to consumer protection, consumer privacy, and copyright protections. States and local government authorities may also regulate limited aspects of our business by, for example, imposing consumer protection and consumer privacy regulations, zoning requirements, and requiring installation permits.

Zoning and Permitting Issues

States and local governments have the right to regulate the siting and permitting of Towerstream's antennas and equipment used to provide broadband service over Wi-Fi and small cell technologies.  State and local regulation over the siting of wireless facilities can be time-consuming, require burdensome documentation, and involve per site fees, which may have a limiting effect on Towerstream's broadband business that depends on placing and operating wireless antennas and related equipment.  In October 2014, the FCC adopted an order addressing the delays and burdens that wireless broadband providers may experience due to state and local siting and permitting regulations, and, among other decisions, clarified that if a state or local government fails to act on eligible modification requests within a prescribed time frame, the request will ultimately be “deemed granted” by the Commission. This decision and the other rules adopted in the October order may ultimately facilitate Towerstream's deployment and modification of Wi-Fi and small cell antennas and equipment, which may be beneficial to its broadband business.

7

Other

FAA Interference Issue

In August 2013, the FCC released a Notice of Apparent Liability for Forfeiture ("NAL") alleging that Towerstream caused harmful interference to doppler weather radar systems in New York and Florida, and proposing a fine for the alleged rule violations. In November 2013, after consultation with regulatory counsel, Towerstream filed a response denying the FCC's allegations. This matter remains outstanding with the FCC.

License KA306 in DeSoto, Texas

In May 2007, Towerstream acquired a license to operate an Earth Station in DeSoto, Texas.  The license provided the Earth Station with the right to communicate with the Intelsat satellites in certain frequency bands.  The Earth Station license also provided interference protection from any terrestrial-based 3650 MHz band operator within a 150km protection zone surrounding the Earth Station.  The original license rights, or authorization, was referred to as Call Sign KA306, or KA306.

The original license term was for a period of ten years.  The Company never received notice from the FCC prior to the then next expiration date of March 31, 2012 (the Company acquired the license from a prior licensee whose term began in 2002).  The Company subsequently discovered that the license had expired, and in August 2012 filed an application with the FCC requesting that it be allowed to temporarily resume operations of the Earth Station.  In July 2013, the FCC dismissed the Company's application to temporarily resume operations of the Earth Station based on technical considerations.

The Company has engaged counsel to work with the Company and the FCC regarding reinstatement of KA306. The Company plans to vigorously contest its right to operate the DeSoto earth station and expects to finalize its course of action in the third quarter of 2015.

We are subject to extensive regulation that could limit or restrict our activities. If we fail to comply with these regulations, we may be subject to penalties, both monetary and non-monetary, which may adversely affect our financial condition and results of operations, including regulation by the FCC, which risks are more fully described under the heading “Risk Factors.”

Rights Plan

In November 2010, we adopted a rights plan (the “Rights Plan”) and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock as of the record date on November 14, 2010. Each right, when exercisable, entitles the registered holder to purchase one-hundredth (1/100th) of a share of Series A Preferred Stock, par value $0.001 per shares of the Company at a purchase price of $18.00 per one-hundredth (1/100th) of a share of the Series A Preferred Stock, subject to certain adjustments. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our Board of Directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.

The provisions in our charter, bylaws, Rights Plan and under Delaware law related to the foregoing could discourage takeover attempts that our stockholders would otherwise favor, or otherwise reduce the price that investors might be willing to pay for our common stock in the future.

 Employees

As of December 31, 2014, we had 140 employees, of whom 138 were full-time employees and 2 were part-time employees. As of February 28, 2015, we had 141 employees, of whom 139 were full-time employees and 2 were part-time employees. We believe our employee relations are good. Two employees are considered members of executive management.

Our Corporate Information

Our principal executive offices are located at 88 Silva Lane, Middletown, Rhode Island, 02842.  Our telephone number is (401) 848-5848. The Company’s website address is http://www.towerstream.com.  Information contained on the Company’s website is not incorporated into this Annual Report on Form 10-K.  Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through the Securities and Exchange Commission (“SEC”) website at http://www.sec.gov as soon as reasonably practicable after those reports are electronically filed with or furnished to the SEC.

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 Item 1A. Risk Factors.

Investing in our common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below and other information contained in this annual report, including our financial statements and related notes before purchasing shares of our common stock. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operations may be materially adversely affected. In that case, the trading price of our common stock could decline and investors in our common stock could lose all or part of their investment.

Risks Relating to Fixed Wireless Services

We may be unable to successfully execute any of our current or future business strategies.

In order to pursue business strategies, we will need to continue to build our infrastructure and strengthen our operational capabilities. Our ability to do these successfully could be affected by any one or more of the following factors:

● the ability of our equipment, our equipment suppliers or our service providers to perform as we expect;

● the ability of our services to achieve market acceptance;

● our ability to manage third party relationships effectively;

● our ability to identify suitable locations and then negotiate acceptable agreements with building owners so that we can establish POPs on their rooftop;

● our ability to work effectively with new customers to secure approval from their landlord to install our equipment;

● our ability to effectively manage the growth and expansion of our business operations without incurring excessive costs, high employee turnover or damage to customer relationships;

● our ability to attract and retain qualified personnel, especially individuals experienced in network operations and engineering;

● equipment failure or interruption of service which could adversely affect our reputation and our relations with our customers;

● our ability to accurately predict and respond to the rapid technological changes in our industry; and

● our ability to raise additional capital to fund our growth and to support our operations until we reach profitability.

Our failure to adequately address any one or more of the above factors could have a significant adverse impact on our ability to execute our business strategy and the long term viability of our business.

We depend on the continued availability of leases and licenses for our communications equipment.

We have constructed proprietary networks in each of the markets we serve by installing antennae on rooftops, cellular towers and other structures pursuant to lease or license agreements to send and receive wireless signals necessary for the operation of our network. We typically seek initial five year terms for our leases with three to five year renewal options. Such renewal options are generally exercisable at our discretion before the expiration of the current term. If these leases are terminated or if the owners of these structures are unwilling to continue to enter into leases or licenses with us in the future, we would be forced to seek alternative arrangements with other providers. If we are unable to continue to obtain or renew such leases on satisfactory terms, our business would be harmed.

We may not be able to attract and retain customers if we do not maintain and enhance our brand. 

We believe that our brand is critical part to our success. Maintaining and enhancing our brand may require us to make substantial investments with no assurance that these investments will be successful. If we fail to promote and maintain the “Towerstream” brand, or if we incur significant expenses in this effort, our business, prospects, operating results and financial condition may be harmed. We anticipate that maintaining and enhancing our brand will become increasingly important, difficult and expensive.

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We are pursuing acquisitions that we believe complement our existing operations but which involve risks that could adversely affect our business.

Acquisitions involve risks that could adversely affect our business including the diversion of management time and focus from operations and difficulties integrating the operations and personnel of acquired companies. In addition, any future acquisition could result in significant costs, the incurrence of additional debt to fund the acquisition, and the assumption of contingent or undisclosed liabilities, all of which could materially adversely affect our business, financial condition and results of operations.

In connection with any future acquisition, we generally will seek to minimize the impact of contingent and undisclosed liabilities by obtaining indemnities and warranties from the seller. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to their limited scope, amount or duration, as well as the financial limitations of the indemnitor or warrantor.

We continue to consider strategic acquisitions, some of which may be larger than those previously completed and which could be material transactions.  Integrating acquisitions is often costly and may require significant attention from management.  Delays or other operational or financial problems that interfere with our operations may result.  If we fail to implement proper overall business controls for companies or assets we acquire or fail to successfully integrate these acquired companies or assets in our processes, our financial condition and results of operations could be adversely affected.  In addition, it is possible that we may incur significant expenses in the evaluation and pursuit of potential acquisitions that may not be successfully completed.

We have a history of operating losses and expect to continue incurring losses for the foreseeable future.

Our fixed wireless segment was launched in 2000 and has incurred losses in each year of operation.    We cannot anticipate when, if ever, our operations will become profitable. We expect to incur significant net losses as we develop our network, expand our markets, undertake acquisitions, acquire spectrum and pursue our business strategy. We intend to invest significantly in our business before we expect cash flow from operations to be adequate to cover our operating expenses. If we are unable to execute our business strategy and grow our business, either as a result of the risks identified in this section or for any other reason, our business, prospects, financial condition and results of operations will be adversely affected.

Cash and cash equivalents represent one of our largest assets and we may be at risk of being uninsured for a large portion of such assets.

As of December 31, 2014, we had approximately $38,000,000 in cash and cash equivalents with two large financial banking institutions.  At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If the institution at which we have placed our funds were to become insolvent or fail, we could be at risk for losing a substantial portion of our cash deposits, or incur significant time delays in obtaining access to such funds. In light of the limited amount of federal insurance for deposits, even if we were to spread our cash assets among several institutions, we would remain at risk for the amount not covered by insurance.  

Our growth may be slowed if we do not have sufficient capital.

The continued growth and operation of our business may require additional funding for working capital, debt service, the enhancement and upgrade of our network, the build-out of infrastructure to expand our coverage, possible acquisitions and possible bids to acquire spectrum licenses.  We may be unable to secure such funding when needed in adequate amounts or on acceptable terms, if at all. To execute our business strategy, we may issue additional equity securities in public or private offerings, potentially at a price lower than the market price at the time of such issuance. Similarly, we may seek debt financing and may be forced to incur significant interest expense. If we cannot secure sufficient funding, we may be forced to forego strategic opportunities or delay, scale back or eliminate network deployments, operations, acquisitions, spectrum bids and other investments.

Many of our competitors are better established and have significantly greater resources which may make it difficult for us to attract and retain customers.

The market for broadband and related services is highly competitive, and we compete with several other companies within each of our markets. Many of our competitors are well established with larger and better developed networks and support systems, longer relationships with customers and suppliers, greater name recognition and greater financial, technical and marketing resources than we have. Our competitors may subsidize competing services with revenue from other sources and, thus, may offer their products and services at prices lower than ours.Our competitors may also reduce the prices of their services significantly or may offer broadband connectivity packaged with other products or services. We may not be able to reduce our prices or otherwise combine our services with other products or services which may make it more difficult to attract and retain customers. In addition, businesses which are presently focused on providing services to residential customers may expand their target base and begin offering service to business customers.

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We expect existing and prospective competitors to adopt technologies or business plans similar to ours, or seek other means to develop competitive services, particularly if our services prove to be attractive in our target markets. This competition may make it difficult to attract new customers and retain existing customers.

We may experience difficulties constructing, upgrading and maintaining our network which could increase customer turnover and reduce our revenues.

Our success depends on developing and providing products and services that provide customers with high quality Internet connectivity. If the number of customers using our network increases, we will require more infrastructure and network resources to maintain the quality of our services. Consequently, we may be required to make substantial investments to improve our facilities and equipment, and to upgrade our technology and network infrastructure. If we do not complete these improvements successfully, or if we experience inefficiencies, operational failures or unforeseen costs during implementation then the quality of our products and services could decline.

We may experience quality deficiencies, cost overruns and delays in implementing network improvements and completing maintenance and upgrade projects. Portions of these projects may not be within our control or the control of our contractors. Our network requires the receipt of permits and approvals from numerous governmental bodies including municipalities and zoning boards. Such bodies often limit the expansion of transmission towers and other construction necessary for our business. Failure to receive approvals in a timely fashion can delay system rollouts and raise the cost of completing projects. In addition, we are typically required to obtain rights from land, building or tower owners to install antennae and other equipment to provide service to our customers. We may not be able to obtain, on terms acceptable to us, or at all, the rights necessary to construct our network and expand our services.

We also face challenges in managing and operating our network. These challenges include operating, maintaining and upgrading network and customer premise equipment to accommodate increased traffic or technological advances, and managing the sales, advertising, customer support, billing and collection functions of our business while providing reliable network service at expected speeds and quality. Our failure in any of these areas could adversely affect customer satisfaction, increase customer turnover or churn, increase our costs and decrease our revenues.

We may be unable to operate in certain markets if we are unable to obtain and maintain rights to use licensed spectrum.

We provide our services in some markets by using spectrum obtained through licenses or long-term leases. Obtaining licensed spectrum can be a long and difficult process that can be costly and require substantial management resources.  Securing licensed spectrum may subject us to increased operational costs, greater regulatory scrutiny and arbitrary government decision making.

Licensed spectrum, whether owned or leased, poses additional risks, including:

● inability to satisfy build-out or service deployment requirements upon which spectrum licenses or leases may be conditioned;

● increases in spectrum acquisition costs or complexity;

● competitive bids, pre-bid qualifications and post-bid requirements for spectrum acquisitions, in which we may not be successful leading to, among other things, increased competition;

● adverse changes to regulations governing spectrum rights;

● the risk that acquired or leased spectrum will not be commercially usable or free of damaging interference from licensed or unlicensed operators in the licensed or adjacent bands;

● contractual disputes with, or the bankruptcy or other reorganization of, the license holders which could adversely affect control over the spectrum;

● failure of the FCC or other regulators to renew spectrum licenses as they expire; and

● invalidation of authorization to use all or a significant portion of our spectrum.

We utilize unlicensed spectrum in all of our markets which is subject to intense competition, low barriers of entry and slowdowns due to multiple users.

We presently utilize unlicensed spectrum in all of our markets to provide our service offerings.  Unlicensed or “free” spectrum is available to multiple users and may suffer bandwidth limitations, interference and slowdowns if the number of users exceeds traffic capacity. The availability of unlicensed spectrum is not unlimited and others do not need to obtain permits or licenses to utilize the same unlicensed spectrum that we currently utilize or may utilize in the future.  The inherent limitations of unlicensed spectrum could potentially threaten our ability to reliably deliver our services. Moreover, the prevalence of unlicensed spectrum creates low barriers of entry in our industry which naturally creates the potential for increased competition.

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Interruption or failure of our information technology and communications systems could impair our ability to provide services which could damage our reputation.

Our services depend on the continuing operation of our information technology and communications systems. We have experienced service interruptions in the past and may experience service interruptions or system failures in the future. Any unscheduled service interruption adversely affects our ability to operate our business and could result in an immediate loss of revenues and adversely impact our operating results. If we experience frequent or persistent system or network failures, our reputation could be permanently harmed. We may need to make significant capital expenditures to increase the reliability of our systems, however, these capital expenditures may not achieve the results we expect.

Excessive customer churn may adversely affect our financial performance by slowing customer growth, increasing costs and reducing revenues.

The successful implementation of our business plan depends upon controlling customer churn. Customer churn is a measure of customers who cancel their services agreement. Customer churn could increase as a result of:

● interruptions to the delivery of services to customers over our network;

● the availability of competing technology such as cable modems, DSL, third-generation cellular, satellite, wireless Internet service and other emerging technologies, some of which may be less expensive or technologically superior to those offered by us;

● changes in promotions and new marketing or sales initiatives;

● new competitors entering the markets in which we offer service; and

● a reduction in the quality of our customer service billing errors.

An increase in customer churn can lead to slower customer growth, increased costs and a reduction in revenues.

If our business strategy is unsuccessful, we will not be profitable and our stockholders could lose their investment.

There is no prior history of other companies that have successfully pursued our strategy of delivering fixed wireless bandwidth services to businesses. Many fixed wireless companies have failed and there is no guarantee that our strategy will be successful or profitable. If our strategy is unsuccessful, the value of our company may decrease and our stockholders could lose their entire investment.

We may not be able to effectively control and manage our growth which would negatively impact our operations.

If our business and markets continue to grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. In addition, we may face challenges in managing expanding product and service offerings, and in integrating acquired businesses. Such events would increase demands on our existing management, workforce and facilities. Failure to satisfy increased demands could interrupt or adversely affect our operations and cause backlogs and administrative inefficiencies.

The success of our business depends on the contributions of key personnel and our ability to attract, train and retain highly qualified personnel.

We are highly dependent on the continued services of (i) Philip Urso, Chairman, (ii) Jeffrey M. Thompson, President and Chief Executive Officer, and (iii) Joseph Hernon, Chief Financial Officer. Our calendar year, employment agreement with Mr. Thompson is automatically extended for an additional year, unless either party gives prior written notice of non-renewal to the other party no later than November 2 of each agreement term. We do not have an employment agreement with Mr. Hernon. We cannot guarantee that any of these persons will stay with us for any definite period. Loss of the services of any of these individuals could adversely impact our operations. We do not maintain policies of "key man" insurance on our executives.

In addition, we must be able to attract, train, motivate and retain highly skilled and experienced technical employees in order to successfully introduce our services in new markets and grow our business in existing markets. Qualified technical employees often are in great demand and may be unavailable in the time frame required to satisfy our business requirements. We may not be able to attract and retain sufficient numbers of highly skilled technical employees in the future. The loss of technical personnel or our inability to hire or retain sufficient technical personnel at competitive rates of compensation could impair our ability to grow our business and retain our existing customer base.

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We could encounter difficulties integrating acquisitions which could result in substantial costs, delays or other operational or financial difficulties.

Since 2010, we have completed five acquisitions.  We may seek to acquire other fixed wireless businesses, including those operating in our current business markets or those operating in other geographic markets. We cannot accurately predict the timing, size and success of our acquisition efforts and the associated capital commitments that might be required. We expect to encounter competition for acquisitions which may limit the number of potential acquisition opportunities and may lead to higher acquisition prices. We may not be able to identify, acquire or profitably manage additional businesses or successfully integrate acquired businesses, if any, without substantial costs, delays or other operational or financial difficulties.

In addition, such acquisitions involve a number of other risks, including:

● failure of the acquired businesses to achieve expected results;

● integration difficulties could increase customer churn and negatively affect our reputation;

● diversion of management’s attention and resources to acquisitions;

● failure to retain key personnel of the acquired businesses;

● disappointing quality or functionality of acquired equipment and personnel; and

● risks associated with unanticipated events, liabilities or contingencies.

The inability to successfully integrate and manage acquired companies could result in the incurrence of substantial costs to address the problems and issues encountered.

Our inability to finance acquisitions could impair the growth and expansion of our business.

The extent to which we will be able or willing to use shares of our common stock to consummate acquisitions will depend on (i) the market value of our securities which will vary, (ii) liquidity which can fluctuate, and (iii) the willingness of potential sellers to accept shares of our common stock as full or partial payment. Using shares of our common stock for acquisitions may result in significant dilution to existing stockholders. To the extent that we are unable to use common stock to make future acquisitions, our ability to grow through acquisitions may be limited by the extent to which we are able to raise capital through debt or equity financings. We may not be able to obtain the necessary capital to finance any acquisitions. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of expansion or redirect resources committed to internal purposes. Our inability to use shares of our common stock to make future acquisitions may hinder our ability to actively pursue our acquisition program.

We rely on a limited number of third party suppliers that manufacture network equipment, and install and maintain our network sites. 

We depend on a limited number of third party suppliers to produce and deliver products required for our networks. If these companies fail to perform or experience delays, shortages or increased demand for their products or services, we may face a shortage of components, increased costs, and may be required to suspend our network deployment and our service introduction.  We also depend on a limited number of third parties to install and maintain our network facilities. We do not maintain any long term supply contracts with these manufacturers. If a manufacturer or other provider does not satisfy our requirements, or if we lose a manufacturer or any other significant provider, we may have insufficient network equipment for delivery to customers and for installation or maintenance of our infrastructure. Such developments could force us to suspend the deployment of our network and the installation of new customers thus impairing future growth.

Customers may perceive that our network is not secure if our data security controls are breached which may adversely affect our ability to attract and retain customers and expose us to liability.

Network security and the authentication of a customer’s credentials are designed to protect unauthorized access to data on our network. Because techniques used to obtain unauthorized access to or to sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate or implement adequate preventive measures against unauthorized access or sabotage. Consequently, unauthorized parties may overcome our encryption and security systems, and obtain access to data on our network. In addition, because we operate and control our network and our customers’ Internet connectivity, unauthorized access or sabotage of our network could result in damage to our network and to the computers or other devices used by our customers. An actual or perceived breach of network security, regardless of whether the breach is our fault, could harm public perception of the effectiveness of our security controls, adversely affect our ability to attract and retain customers, expose us to significant liability and adversely affect our business prospects.

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The delivery of our services could infringe on the intellectual property rights of others which may result in costly litigation, substantial damages and prohibit us from selling our services.

Third parties may assert infringement or other intellectual property claims against us. We may have to pay substantial damages, including for past infringement if it is ultimately determined that our services infringe a third party’s proprietary rights. Further, we may be prohibited from selling or providing some of our services before we obtain additional licenses, which, if available at all, may require us to pay substantial royalties or licensing fees. Even if claims are determined to be without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from our other business concerns. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our business to be harmed and our stock price to decline.

Risks Related to Shared Wireless Infrastructure

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation ("Hetnets") to operate the newly formed, Shared Wireless Infrastructure segment. References in this section to "We", "Us", or "Our" refer to the Company, Towerstream Corporation, as a whole. In this section, "its" refers to Hetnets on a business segment operating basis. Risks associated with Hetnets and its focus on shared wireless infrastructure include:

We have limited experience operating a shared wireless infrastructure company.

Our recently formed subsidiary, Hetnets, has operated as a shared wireless infrastructure enterprise for a limited time period, since January 2013. We may decide to operate Hetnets as a stand-alone business with its own management and board. For the near term, the management and board of directors are expected to be composed entirely of Towerstream officers and directors which could raise conflicts of interest. There is no assurance that we will be able to execute our business plan for Hetnets. We may not be able to operate Hetnets successfully, including generating revenues and achieving profitability.

Hetnets is a new, untested business model that is similar to, yet different than, many traditional tower companies and for this reason is subject to many risks of tower companies and other risks which may not presently be known. If we are unable to execute our business strategy, or are unable to attract customers or capital either as a result of the risks identified herein or for any other reason, our business, results of operations, and financial condition could be materially and adversely affected and we may be forced to terminate operations related to Hetnets, which could have a material adverse effect on the business, results of operations and financial condition of the Company as a whole.

Hetnets has limited operating history and this lack of experience may impede our ability to successfully manage the Hetnets business.

Key members of our management team responsible for leadership roles in the Hetnets business have limited experience operating a business that is solely engaged in the Shared Wireless Infrastructure business. We do not believe there is any existing business that is dedicated primarily to establishing a dominant position in shared wireless infrastructure to be offered for use by others and as such both management and the business face uncertain risks. Hetnets has no operating history as a separate company. We cannot assure you that our past experience will be sufficient to successfully operate Hetnets as a separate business.

For a period of time, we will utilize shared resources of Towerstream for Hetnets’ business and operations. If our management, sales, finance and accounting staff is unable for any reason to respond adequately to the increased demands that will result from separate operations, we may be forced to incur additional administrative and other costs to avoid experiencing deficiencies or material weaknesses in our disclosure controls and procedures or our internal control over financial reporting. We have not yet established processes or procedures for operating Hetnets as a separate business unit.

Hetnets has a history of operating losses and we expect to continue incurring losses for the foreseeable future.

Our Shared Wireless Infrastructure business was launched in 2013, has incurred losses in each year of operation and we expect it to continue to incur losses for the foreseeable future.  We cannot anticipate when, if ever, Hetnets’ operations will become profitable. We expect that Hetnets will incur significant net losses as we pursue our business strategy. We intend to invest significantly in Hetnets before we expect cash flow from operations to be adequate to cover its operating expenses.

We may be unable to successfully execute any of the business opportunities we have identified for Hetnets to pursue.

In order for Hetnets to pursue business opportunities, we will need to build an effective company infrastructure and establish operational capabilities. Our ability to accomplish these objectives could be affected by any one of the following factors:

● the ability of Hetnets equipment, our equipment suppliers or our service providers to perform as we expect;

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● the ability of Hetnets to grow and integrate new Small Cell antennae and shared wireless networks into our business;

● the ability of Hetnets to identify suitable locations and negotiate acceptable agreements with building owners so that it can establish new rooftop locations;

● the ability of Hetnets to effectively manage the growth and expansion of its business operations without incurring excessive costs, high employee turnover or damage to business relationships;

● the ability of Hetnets to attract and retain qualified personnel which may be affected by the significant competition in our industry for individuals experienced in network operations and engineering;

● the ability of Hetnets to accurately predict and respond to the rapid technological changes in its industry and the evolving demands of the markets it serves and plans to serve; and

● our ability to raise additional capital to fund Hetnets’ growth and to support its operations until it reaches profitability.

The failure of Hetnets to adequately address any one or more of the above factors could have a significant adverse impact on its ability to execute its business plan and may adversely affect its and our business, results of operations and financial condition.

Many of the potential customers of Hetnets have substantially greater assets than the Company and may invest in developing their own shared or dedicated wireless infrastructure.  Our competition may include businesses that are also potential customers.  Either of these developments could have a material adverse effect on Hetnets and its business, results of operations and financial condition. Our competition may include businesses that are also potential customers of Hetnets.

Our plans for Hetnets may include financing or joint ventures on a stand-alone basis or a spinoff of all or a portion of the ownership of Hetnets.

Our plans for Hetnets may include financing for Hetnets on a stand-alone basis, joint venture arrangements with strategic partners or financial investors, spinning all or a portion of Hetnets off to our stockholders, or a public offering of a portion of the equity of Hetnets, although such actions have not yet been approved by the Company and may change.Any of these actions could have a material adverse effect on our business, results of operations, and financial condition.

We depend on the continued availability of leases for our Hetnets shared wireless infrastructure business.

We intend to seek to obtain five year initial terms for our leases with renewal options of three to five years each, although there can be no assurance that we will be able to do so. Such renewal options are exercisable generally at our discretion before the expiration of the current term. If these leases are terminated or if the owners of these structures are unwilling to continue to enter into leases with us in the future, we could be forced to seek alternative arrangements with other building owners. If we are unable to continue to renew or replace our shared wireless infrastructure leases on satisfactory terms, Hetnets’ and our business, results of operations and financial condition could be materially and adversely affected.

We are a new entrant in an industry which is dominated by very large companies and which is subject to long sales cycles and market volatility.

We expect long lead times from our prospective customers prior to establishing predictable, recurring revenue streams for our Hetnets segment due to the long-term nature of purchasing and commitment decisions of large organizations. We also expect to experience delays in converting our customer trials into purchase orders from our prospective customers. The nature and duration of adoption and commitment delays is unpredictable. We depend on the willingness of our prospective customers to transact business with a new entrant in the tower industry offering shared wireless infrastructure, which technologies have not been fully proven or adopted by the industry. In addition, we will continue to be subject to the financial strength and creditworthiness of our customers. Wireless service providers and other prospective customers operate with substantial leverage and have in the past filed for bankruptcy. As a small company, we may be more vulnerable than larger companies to client credit issues, payment delays and bankruptcies. In economic down cycles, necessary capital raising activities by our customers may be thwarted and cause further delays or impact new technology deployment which could adversely affect us. Each of the foregoing factors could have a material adverse effect on our business, results of operations or financial condition.

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Hetnets will rely on a limited number of suppliers that manufacture carrier-class shared wireless infrastructure equipment.

Hetnets depends on a limited number of third party suppliers for carrier-class equipment required for its shared wireless infrastructure. It also depends on a limited number of third parties to install and maintain its infrastructure equipment. Hetnets does not maintain any long term supply contracts with these manufacturers. If a manufacturer or other provider does not satisfy Hetnets’ requirements, it may not have sufficient equipment for the installation of new network locations or the maintenance of existing locations. Such developments could force it to suspend the deployment of its shared wireless infrastructure and may impair its growth. This could have a material adverse effect on our business, results of operations and financial condition.

If data security controls employed by Hetnets are breached, customers may perceive that its shared wireless infrastructure is not secure which may adversely affect its ability to attract and retain customers, and expose Hetnets to liability.

Wireless infrastructure security and the authentication of customer credentials are designed to protect unauthorized access to data on our shared wireless infrastructure. Because techniques used to prevent unauthorized access to or to sabotage wireless infrastructure change frequently and may not be recognized until launched against a target, Hetnets may be unable to anticipate or implement adequate preventive measures against unauthorized access or sabotage. Consequently, unauthorized parties may overcome Hetnets’ encryption and security systems, and gain access to data on its wireless infrastructure. In addition, because Hetnets operates and controls its shared wireless infrastructure and our customers’ Internet connectivity, unauthorized access or sabotage of the Hetnets shared wireless infrastructure could result in damage to Hetnets’ shared wireless infrastructure and to the computers or other devices used by its customers. An actual or perceived breach of shared wireless infrastructure security, regardless of whether the breach is the fault of Hetnets, could harm public perception of the effectiveness of its security controls, adversely affect its ability to attract and retain customers, expose it to significant liability and adversely affect its business prospects. This could have a material adverse effect on Hetnets’ and, accordingly, our business, results of operations and financial condition.

    The technology used by Hetnets may infringe on the intellectual property rights of others which may result in costly litigation, substantial damages and prohibit it from operating.

Third parties may assert infringement or other intellectual property claims against Hetnets related to its trademarks, services or the technology it uses or may use in the future to operate its shared wireless infrastructure. Hetnets may have to pay substantial damages, including damages for past infringement, if it is determined that its shared wireless infrastructure infringe a third party’s proprietary rights. Further, it may be prohibited from maintaining the infringing shared wireless infrastructure or portions thereof or be required to pay substantial royalties or licensing fees to maintain it. Even if claims are determined to be without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from our other business concerns. Any public announcements related to litigation or interference proceedings initiated or threatened against it could materially and adversely affect our business, results of operations and financial condition. We do not maintain insurance coverage for intellectual property claims nor have we established any reserves for potential intellectual property claims.

Hetnets may experience difficulties constructing, upgrading and maintaining its shared wireless infrastructure which could impair its ability to provide services to its customers and may reduce its revenues.

Hetnets’ success depends on developing and providing services that give customers access to high quality shared wireless infrastructure. If the number of customers using its shared wireless infrastructure increases, it may require more infrastructure and network resources to maintain the quality of its services. Consequently, it may be required to make substantial investments to improve its facilities and equipment, and to upgrade its technology and infrastructure. If Hetnets does not accomplish these objectives successfully, or experiences inefficiencies, operational failures or unforeseen costs, the quality of its shared wireless infrastructure could decline.

Hetnets may experience quality deficiencies, cost overruns and delays in implementing its shared wireless infrastructure, improvements and expansion and in maintenance and upgrade projects, including the portions of those projects not within its control or the control of its contractors. The development of shared wireless infrastructure may require securing permits and approvals from numerous governmental bodies including municipalities and zoning boards. Such bodies often limit the installation of rooftop and similar transmission equipment. Failure to receive approvals in a timely fashion can delay system rollouts and raise the cost of completing projects. In addition, Hetnets is required to obtain rights from building owners to install its equipment. We may not be able to obtain, on terms acceptable to us, or at all, the rights necessary to install, expand, upgrade or maintain our shared wireless infrastructure. A failure in any of these areas could materially and adversely affect Hetnets’ and our business, results of operations and financial condition.

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Hetnets relies on backhaul services from Towerstream's Fixed Wireless segment and others to support its shared wireless infrastructure.

Hetnets relies on the availability of backhaul services from Towerstream's Fixed Wireless segment and others to support its shared wireless infrastructure. Any delay or failure regarding the availability of backhaul services could have a material adverse effect on the operation of Hetnets’ or the costs incurred to operate its shared wireless infrastructure if it is required to obtain backhaul services from other providers or if such services otherwise are unavailable. This could have a material adverse effect on Hetnets’ and our business, results of operations and financial condition.

Hetnets utilizes unlicensed spectrum which is subject to intense competition, low barriers of entry and slowdowns due to multiple users.

Hetnets’ shared wireless infrastructure presently utilizes unlicensed spectrum in all of its markets. Unlicensed or “free” spectrum is available to multiple users and may suffer bandwidth limitations, interference and slowdowns if the number of users exceeds traffic capacity. The availability of unlicensed spectrum is not unlimited and others do not need to obtain permits or licenses to utilize the same unlicensed spectrum that we currently utilize or may utilize in the future. The inherent limitations of unlicensed spectrum could potentially threaten our ability to reliably maintain our shared wireless infrastructure. Moreover, the prevalence of unlicensed spectrum creates low barriers of entry in our industry which naturally creates the potential for increased competition for network availability, which could have a material and adverse effect on Hetnets’ and our business, results of operations and financial condition.

Regulation of the unlicensed spectrum used by Hetnets could have an adverse effect.

If the FCC or another governing agency determines to regulate the unlicensed spectrum that we presently use, then the additional regulations and costs could have a material adverse effect on Hetnets’ and our business, results of operations and financial condition.

     Interruption or failure of its shared wireless infrastructure systems could damage Hetnets’ reputation and adversely affect its operating results.

The business of Hetnets depends on the continuing operation of its shared wireless infrastructure systems with minimal interruptions of service. Hetnets may experience service interruptions or system failures in the future. Any service interruption could adversely affect its customers’ ability to operate their businesses and could result in their immediate loss of revenues. If Hetnets experiences frequent or persistent infrastructure failures, its reputation could be permanently harmed and customers may be reluctant to contract for access to its shared wireless infrastructure. Hetnets may need to make significant capital expenditures to increase the reliability of its shared wireless infrastructure and it may not have sufficient funds to cover such expenditures. This could have a material and adverse effect on our business, results of operations, and financial condition.

A small number of customers could account for a significant percentage of Hetnets’ revenue.

Hetnets currently expects to depend upon a relatively small number of potential customers for a significant percentage of its revenue. As a result, its business, financial condition and results of operations could be adversely affected if (i) it loses one or more of its larger customers, (ii) such customers significantly reduce their business with Hetnets, (iii) these customers fail to make payments or delay making payments, or (iv) Hetnets chooses not to enforce, or to enforce less vigorously, any rights that it may have against these customers because of a desire to maintain its relationship with them.

Hetnets faces competition securing long term lease agreements for the rooftop space on which it operates its shared wireless infrastructure services.

Hetnets competes with numerous broadband, Wi-Fi, cellular, commercial and other wireless network operators, many of whom desire rooftop locations similar to ours in the same markets, as well as various other public and privately held companies that may provide rooftop utilization as part of a more expansive managed services offering. In addition, Hetnets may face competition from new entrants into the wireless network market. Some of Hetnets’ competitors may have significant advantages, including longer operating histories, lower operating costs, pre-existing relationships with current or potential landlords, greater financial, marketing and other resources, and access to less expensive power. These advantages could allow competitors to respond more quickly to strategic opportunities or changes in its industries or markets. If Hetnets is unable to compete effectively, it may lose existing or potential rooftop locations, incur costs to improve its locations or be forced to reduce the coverage of its shared wireless infrastructure.

Hetnets attempts to secure long term agreements with the owners of the buildings on which it constructs its shared wireless infrastructure.  These agreements are normally for an initial five year period with an option to renew for additional five year periods.   Upon expiration, building owners may elect to not renew their leases or renew their leases at higher rates, or for shorter terms. If Hetnets is unable to successfully extend these leases or secure other comparable space when such leases expire, its business, results of operations, and financial condition could be adversely affected.

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Hetnets is susceptible to catastrophic weather, business or other localized events because its shared wireless infrastructure is presently located in a limited geographic area.

Hetnets' shared wireless infrastructure is presently located in just four metropolitan areas. Therefore, it is susceptible to a wide range of localized events which could cause immediate adverse effects on its business, results of operations, and financial condition.  These events could include weather events such as a hurricane, tornado, or blizzard which could render Hetnets unable to provide service for a period of time.  Other localized events which could adversely effect Hetnets includes union strikes that limit access to the rooftops on which its infrastructure is located as well as power outages in the markets in which Hetnets operates.  

Any failure of its shared wireless infrastructure could cause Hetnets to incur significant costs.

Hetnets’ business depends on providing highly reliable shared wireless infrastructure services to its customers. The physical infrastructure may fail for a number of reasons, including:

● human error;

● unexpected equipment failure;

● power loss or telecommunications failures;

● improper building maintenance by landlords in the buildings where it maintains equipment;

● fire, tropical storm, hurricane, tornado, flood, earthquake and other natural disasters;

● water damage;

● war, terrorism and any related conflicts or similar events worldwide; and

● sabotage and vandalism.

If, as a result of any of these events, or other similar events beyond its control there is an infrastructure failure, and it is not corrected immediately, Hetnets ultimately may suffer a loss of revenue which could materially and adversely affect its business, results of operations, and financial condition.

Hetnets may have difficulty managing its growth.

Hetnets may rapidly and significantly expand if its initial network infrastructure generates customer demand. This would require it to increase significantly the number of its employees and, consequently, the entire size of Hetnets. Its growth may also significantly strain its management, operational and financial resources and systems. An inability to manage growth effectively or the increased strain on its management, resources and systems could materially adversely affect its business, results of operations, and financial condition.

Hetnets will require additional capital to fund its continued growth and such capital may not be available on commercially reasonable terms, or at all.

 The continued growth and operation of Hetnets will likely require additional funding for working capital, any required upgrade of its networks, the construction of additional infrastructure to expand coverage, and possible acquisitions. Such funding may not be available when needed in adequate amounts or on acceptable terms, if at all. We may issue additional equity securities in public or private offerings in order to execute Hetnets' business strategy.  

Any turbulence in the U.S. and other financial markets and economies may adversely affect Hetnets’ ability to access the capital markets to meet liquidity and capital expenditure requirements and may result in adverse effects on its business, results of operations, and financial condition. Our access to third-party sources of capital also depends, in part, on:

● the market’s perception of Hetnets’ growth potential and operating performance;

● Hetnets’ then current debt levels; and

● the market price per share of our common stock.

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Additionally, Hetnets may raise capital independently of the Company, and potentially at a price lower than the market price or book value at the time of issuance. Any such issuances may result in substantial dilution to existing shareholders. Similarly, we may seek debt financing and may be forced to incur interest expense. If we cannot secure sufficient funding for Hetnets, we may be forced to forego strategic opportunities or delay, scale back or eliminate network deployments, operations, acquisitions, and other investments which could have a material adverse effect on our business, results of operations and financial condition.

The loss of any of our key personnel devoted to Hetnets, including executive officers or key sales associates, could adversely affect Hetnets’ and our business, financial condition and results of operations.

The success of Hetnets will continue to depend to a significant extent on its executive officers and key sales personnel. Each of its executive officers has a national or regional industry reputation that attracts business and investment opportunities. The loss of key sales personnel could hinder its ability to continue to benefit from existing and potential customers. We cannot provide any assurance that Hetnets will be able to retain its current executive officers or key sales personnel. The loss of any of these individuals could materially and adversely affect its and our business, results of operations, and financial condition.

    Hetnets operates in a rapidly evolving industry which makes it difficult to forecast its future prospects as its shared wireless infrastructure, or portions thereof, may become obsolete and it may not be able to develop replacement infrastructure on a timely basis or at all.

The wireless services industry is characterized by rapid technological change, competitive pricing, frequent new service introductions, and evolving industry standards and regulatory requirements. We believe that the success of Hetnets depends on its ability to anticipate and adapt to these challenges, and to offer competitive shared wireless infrastructure opportunities on a timely basis. We face a number of difficulties and uncertainties such as:

● competition from service providers using more efficient, less expensive technologies including products not yet invented or developed;

● responding successfully to advances in competing technologies in a timely and cost-effective manner;

● migration toward standards-based technology which may require substantial capital expenditures; and

● existing, proposed or undeveloped technologies that may render our wireless network assets less profitable or obsolete.

Risks Relating to the Wireless Industry

An economic or industry slowdown may materially and adversely affect our business.

Slowdowns in the economy or in the wireless or broadband industry may impact demand for our services.   Customers may reduce the amount of bandwidth that they purchase from us during economic downturns which will directly affect our revenues and operating results.  An economic or industry slowdown may cause other businesses or industries to delay or abandon implementation of new systems and technologies, including wireless broadband services. Further, political uncertainties, including acts of terrorism and other unforeseen events, may impose additional risks upon and adversely affect the wireless or broadband industry generally, and our business, specifically.

We operate in an evolving industry which makes it difficult to forecast our future prospects as our services may become obsolete and we may not be able to develop competitive products or services on a timely basis or at all. 

The broadband and wireless services industries are characterized by rapid technological change, competitive pricing, frequent new service introductions, and evolving industry standards and regulatory requirements. We believe that our success depends on our ability to anticipate and adapt to these challenges, and to offer competitive services on a timely basis. We face a number of difficulties and uncertainties such as:

● competition from service providers using more efficient, less expensive technologies including products not yet invented or developed;

● responding successfully to advances in competing technologies in a timely and cost-effective manner;

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● migration toward standards-based technology which may require substantial capital expenditures; and

● existing, proposed or undeveloped technologies that may render our wireless broadband services less profitable or obsolete.

As the services offered by us and our competitors develop, businesses and consumers may not accept our services as a commercially viable alternative to other means of delivering wireless broadband services. As a result, our services may become obsolete and we may be unable to develop competitive products or services on a timely basis, or at all.

We are subject to extensive regulation that could limit or restrict our activities.

Our business activities, including the acquisition, lease, maintenance and use of spectrum licenses, are extensively regulated by federal, state and local governmental authorities. A number of federal, state and local privacy, security, and consumer laws also apply to our business. These regulations and their application are subject to continuous change as new legislation, regulations or amendments to existing regulations are periodically implemented by governmental or regulatory authorities, including as a result of judicial interpretations of such laws and regulations. Current regulations directly affect the breadth of services we are able to offer and may impact the rates, terms and conditions of our services. Regulation of companies that offer competing services such as cable and DSL providers, and telecommunications carriers also affects our business. If we fail to comply with these regulations, we may be subject to penalties, both monetary and nonmonetary, which may adversely affect our financial condition and results of operations.

We are currently not required to register with the Universal Service Administrative Company (“USAC”) as a seller of telecommunications, nor are we required to collect Universal Service Fund (“USF”) fees from our customers or to pay USF fees directly.  In October 2011, the FCC adopted an Order dramatically changing the USF program.  In the next few months, the FCC is also expected to address USF contribution reform.  On February 26, 2015, the FCC adopted an Open Internet order in which fixed and mobile broadband services is reclassified as telecommunications services governed by Title II of the Communications Act. This reclassification includes forbearance from applying many sections of the Communications Act and the FCC’s rules to broadband service providers. As part of the Title II reclassification, the FCC could adopt new regulations requiring broadband service providers to register and pay USF fees as well as submit to a significant amount of other common carrier regulations.

The Open Internet order also adopted rules prohibiting broadband service providers from: (1) blocking access to legal content, applications, services or non-harmful devices; (2) impairing or degrading lawful Internet traffic on the basis, content, applications or services; or (3) favoring certain Internet traffic over other traffic in exchange for consideration. Depending on how the Open Internet rules are implemented, the Open Internet order could limit our ability to manage customers’ use of our networks, thereby limiting our ability to prevent or address customers’ excessive bandwidth demands. To maintain the quality of our network and user experience, we may manage the bandwidth used by our customers’ applications, in part by restricting the types of applications that may be used over our network. The FCC Open Internet regulations may constrain our ability to employ bandwidth management practices. Excessive use of bandwidth-intensive applications would likely reduce the quality of our services for all customers. Such decline in the quality of our services could harm our business.

The breach of a license or applicable law, even if accidentally, can result in the revocation, suspension, cancellation or reduction in the term of a license or the imposition of fines. In addition, regulatory authorities may grant new licenses to third parties, resulting in greater competition in territories where we already have rights to licensed spectrum. In order to promote competition, licenses may also require that third parties be granted access to our bandwidth, frequency capacity, facilities or services. We may not be able to obtain or retain any required license, and we may not be able to renew a license on favorable terms, or at all.

Wireless broadband services may become subject to greater state or federal regulation in the future. The scope of the regulations that may apply to companies like us and the impact of such regulations on our competitive position are presently unknown and could be detrimental to our business and prospects.

 Risks Related to Our Indebtedness

Our cash flows and capital resources may be insufficient to make required payments on our indebtedness and future indebtedness.

In October 2014, we entered into a loan agreement which provided us with a five-year $35 million term loan. The loan bears interest payable in cash at a rate equal to the greater of (i) the sum of the one month Libor rate on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that accrues at 4% per annum. We paid $591,111 of interest and accrued $295,556 of PIK interest for the year ended December 31, 2014.

Our indebtedness could have important consequences to you. For example, it could:

● make it difficult for us to satisfy our debt obligations;

 

● make us more vulnerable to general adverse economic and industry conditions;

 

● limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements;

 

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● expose us to interest rate fluctuations because the interest rate on our long-term debt is variable;

 

● require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes;

 

● limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

 

● place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources.

In addition, our ability to make scheduled payments or refinance our obligations depends on our successful financial and operating performance, cash flows and capital resources, which in turn depend upon prevailing economic conditions and certain financial, business and other factors, many of which are beyond our control. These factors include, among others:

● economic and demand factors affecting our industry;

 

● pricing pressures;

 

● increased operating costs;

 

● competitive conditions; and

 

● other operating difficulties.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. In the event that we are required to dispose of material assets or operations to meet our debt service and other obligations, the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. Our obligations pursuant to our long-term debt agreement are secured by a security interest in all of our assets, exclusive of capital stock of the Company, certain capital leases, certain contracts and certain assets secured by purchase money security interests. The foregoing encumbrances may limit our ability to dispose of material assets or operations. We also may not be able to restructure our indebtedness on favorable economic terms, if at all.

Our long-term debt agreement contains various covenants limiting the discretion of our management in operating our business.

Our long-term debt agreement contains, subject to certain carve-outs, various restrictive covenants that limit our management's discretion in operating our business. In particular, these instruments limit our ability to, among other things:

● incur additional debt;

 

● grant liens on assets;

 

● issue capital stock with certain features;

 

● sell or acquire assets outside the ordinary course of business; and

 

● make fundamental business changes.

If we fail to comply with the restrictions in our long-term debt agreement, a default may allow the lender under the relevant instruments to accelerate the related debt and to exercise their remedies under these agreements, which will typically include the right to declare the principal amount of that debt, together with accrued and unpaid interest and other related amounts, immediately due and payable, to exercise any remedies the lender may have to foreclose on assets that are subject to liens securing that debt and to terminate any commitments they had made to supply further funds. The long-term debt agreement governing our indebtedness also contains various covenants that may limit our ability to pay dividends.

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Risks Relating to Our Organization

Our certificate of incorporation allows for our board of directors to create new series of preferred stock without further approval by our stockholders which could adversely affect the rights of the holders of our common stock.

Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to such holders (i) the preferred right to our assets upon liquidation, (ii) the right to receive dividend payments before dividends are distributed to the holders of common stock and (iii) the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing common stockholders.

Any of the actions described in the preceding paragraph could significantly adversely affect the investment made by holders of our common stock. Holders of common stock could potentially not receive dividends that they might otherwise have received. In addition, holders of our common stock could receive less proceeds in connection with any future sale of the Company, whether in liquidation or on any other basis.

Our officers and directors own a substantial amount of our common stock and, therefore, exercise significant control over our corporate governance and affairs which may result in their taking actions with which other shareholders do not agree.

Our executive officers and directors, and entities affiliated with them, control approximately 10% of our outstanding common stock (including shares of common stock underlying exercisable stock options). These shareholders, if they act together, may be able to exercise substantial influence over the outcome of all corporate actions requiring approval of our shareholders, including the election of directors and approval of significant corporate transactions, which may result in corporate action with which other shareholders do not agree. This concentration of ownership may also have the effect of delaying or preventing a change in control which might be in other shareholders’ best interest but which might negatively affect the market price of our common stock.

 We are subject to extensive financial reporting and related requirements for which our accounting and other management systems and resources may not be adequately prepared.

We are subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended, including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires us to conduct an annual management assessment of the effectiveness of our internal controls over financial reporting. These reporting and other obligations place significant demands on our management, administrative, operational and accounting resources. In order to maintain compliance with these requirements, we may need to (i) upgrade our systems, (ii) implement additional financial and management controls, reporting systems and procedures, (iii) implement an internal audit function, and (iv) hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives in a timely and effective manner, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal controls could have a negative impact on our ability to manage our business and on our stock price.

We may be at risk to accurately report financial results or detect fraud if we fail to maintain an effective system of internal controls.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report that contains an assessment by management on the Company’s internal control over financial reporting in their annual and quarterly reports on Form 10-K and 10-Q. While we are consistently working on improvements and conducting rigorous reviews of our internal controls over financial reporting, our independent auditors may interpret Section 404 requirements and apply related rules and regulations differently. If our independent auditors are not satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may decline to accept management’s assessment and not provide an attestation report on our internal control over financial reporting. Additionally, if we are not able to meet all the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities such as the SEC.

We cannot assure you that significant deficiencies or material weaknesses in our disclosure controls and internal control over financial reporting will not be identified in the future. Also, future changes in our accounting, financial reporting, and regulatory environment may create new areas of risk exposure. Failure to modify our existing control environment accordingly may impair our controls over financial reporting and cause our investors to lose confidence in the reliability of our financial reporting which may adversely affect our stock price.

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Risks Relating to Our Common Stock

We may fail to qualify for continued listing on the NASDAQ Capital Market which could make it more difficult for investors to sell their shares.

In May 2007, our common stock was approved for listing on the NASDAQ Capital Market and our common stock continues to be listed on the NASDAQ Capital Market. There can be no assurance that trading of our common stock will be sustained or that we can meet NASDAQ’s continued listing standards. In the event that our common stock fails to qualify for continued listing, our common stock could thereafter only be quoted on the OTC Bulletin Board or the “pink sheets.” Under such circumstances, shareholders may find it more difficult to sell, or to obtain accurate quotations, for our common stock, and our common stock would become substantially less attractive to certain purchasers such as financial institutions, hedge funds and other similar investors.

Our common stock may be affected by limited trading volume and price fluctuations which could adversely impact the value of our common stock.

While there has been relatively active trading in our common stock over the past twelve months, there can be no assurance that an active trading market in our common stock will be maintained. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to periodically enter the market in the belief that we will have poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our common stock will be stable or appreciate over time.

We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on an investment in our common stock is expected to be limited to an increase in the value of the common stock.

We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on our earnings, financial condition, and other business and economic factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be considered less valuable because a return on a shareholder’s investment will only occur if our stock price appreciates.

We adopted a Rights Plan in 2010 which may discourage third parties from attempting to acquire control of our company and have an adverse effect on the price of our common stock.

In November 2010, we adopted a rights plan (the “Rights Plan”) and declared a dividend distribution of one preferred share purchase right for each outstanding share of common stock as of the record date on November 14, 2010. Each right, when exercisable, entitles the registered holder to purchase one-hundredth (1/100th) of a share of Series A Preferred Stock, par value $0.001 per shares of the Company at a purchase price of $18.00 per one-hundredth (1/100th) of a share of the Series A Preferred Stock, subject to certain adjustments. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.

The provisions in our charter, bylaws, Rights Plan and under Delaware law related to the foregoing could discourage takeover attempts that our stockholders would otherwise favor, or otherwise reduce the price that investors might be willing to pay for our common stock in the future.

Item 1B. Unresolved Staff Comments.

Not applicable.

 Item 2. Properties.

We do not own any real property.

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Our executive offices are located at 88 Silva Lane in Middletown, Rhode Island, where we lease approximately 29,000 square feet of space. The majority of our employees work at this location including our finance and administrative, engineering, information technology, customer care and retention, and sales and marketing personnel. Rent payments totaled approximately $359,750 in 2014 and escalate by 3% annually reaching $416,970 for 2019. Our lease expires on December 31, 2019 with an option to renew for an additional five year term through December 31, 2024.

In December 2014, the Company entered into a new lease agreement in Florida which includes 3,542 square feet for office space for a second sales center. The lease commenced in February 2015 for 38 months with an option to renew for an additional 60 month period. Total annual rent payments begin at $53,130 and escalate by 3% annually.

Item 3. Legal Proceedings.

There are no significant legal proceedings pending, and we are not aware of any material proceeding contemplated by a governmental authority, to which we are a party or any of our property is subject.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock was quoted on the OTC Bulletin Board from January 12, 2007 through May 30, 2007 under the symbol TWER.OB. Since May 31, 2007, our common stock has been listed on the NASDAQ Capital Market under the symbol TWER. Prior to January 12, 2007, there was no active market for our common stock. The following table sets forth the high and low sales prices as reported on the NASDAQ Capital Market. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

FISCAL YEAR 2014	HIGH		LOW
First Quarter	$	3.36	$	2.30
Second Quarter	$	2.49	$	1.45
Third Quarter	$	2.06	$	1.28
Fourth Quarter	$	1.95	$	1.06

FISCAL YEAR 2013	HIGH		LOW
First Quarter	$	3.92	$	2.12
Second Quarter	$	2.71	$	2.05
Third Quarter	$	3.22	$	2.21
Fourth Quarter	$	3.00	$	2.06

The last reported sales price of our common stock on the NASDAQ Capital Market on December 31, 2014 was $1.85 and on March 9, 2015, the last reported sales price was $2.20. According to the records of our transfer agent, as of March 9, 2015, there were approximately 35 holders of record of our common stock.

Performance Graph

On May 31, 2007, our shares of common stock began trading on the NASDAQ Capital Market. The chart below compares the annual percentage change in the cumulative total return on our common stock with the NASDAQ Capital Market Composite Index and the NASDAQ Telecom Index. The chart shows the value as of December 31, 2014, of $100 invested on May 31, 2007, the day our common stock was first publicly traded on the NASDAQ Capital Market, in our common stock, the NASDAQ Capital Market Composite Index and the NASDAQ Telecom Index. The stock price performance below is not necessarily indicative of future performance.

Comparison of Cumulative Total Returns Among Towerstream,

NASDAQ Capital Market Composite Index and NASDAQ Telecom Index

 

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	5/31/2007		12/31/2007		12/31/2008		12/31/2009		12/31/2010		12/31/2011		12/31/2012		12/31/2013		12/31/2014
Towerstream Corporation	$	100.00	$	41.32	$	9.29	$	26.11	$	54.64	$	28.53	$	43.74	$	39.84	$	24.90
NASDAQ Capital Market Composite Index	$	100.00	$	83.83	$	38.91	$	52.06	$	61.12	$	47.08	$	53.44	$	73.00	$	68.91
NASDAQ Telecom Index	$	100.00	$	101.58	$	57.91	$	85.85	$	89.22	$	77.96	$	79.52	$	98.62	$	107.41

Dividend Policy

We have never declared or paid cash dividends on our common stock, and we do not intend to pay any cash dividends on our common stock in the foreseeable future. Rather, we expect to retain future earnings (if any) to fund the operation and expansion of our business and for general corporate purposes.

Securities Authorized for Issuance Under Equity Compensation Plans

As of December 31, 2014, securities issued and securities available for future issuance under our 2008 Non-Employee Directors Compensation Plan, our 2007 Equity Compensation Plan and our 2007 Incentive Stock Plan were as follows:

Equity Compensation Plan Information

	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders		3,997,695	$	2.73		3,537,019
Equity compensation plans not approved by security holders		-	$	-		-
Total		3,997,695	$	2.73		3,537,019

Recent Sales of Unregistered Securities.

 There were no unregistered securities sold by us during the year ended December 31, 2014 that were not otherwise disclosed by us during the year in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

Recent Repurchases of Securities.

 None.

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Item 6. Selected Financial Data

The annual financial information set forth below has been derived from our audited consolidated financial statements. The information should be read in connection with, and is qualified in its entirety by reference to, Management’s Discussion and Analysis, the consolidated financial statements and notes included elsewhere in this report and in our SEC filings.

	Years Ended December 31,
	2010			2011			2012			2013			2014
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues	$	19,645,893		$	26,494,737		$	32,279,430		$	33,433,284		$	33,036,153
Operating Expenses
Cost of revenues (exclusive of depreciation)		4,340,262			7,472,849			15,376,136			21,854,163			24,520,028
Depreciation and amortization		5,770,335			9,138,318			13,634,294			15,351,441			13,639,415
Customer support services		3,097,234			4,274,387			5,712,463			4,883,219			4,796,038
Sales and marketing		5,088,085			5,362,103			6,134,020			5,779,500			5,570,191
General and administrative		7,398,420			9,411,608			12,168,183			11,033,057			10,336,504
Total Operating Expenses		25,694,336			35,659,265			53,025,096			58,901,380			58,862,176
Operating Loss		(6,048,443	)		(9,164,528	)		(20,745,666	)		(25,468,096	)		(25,826,023	)
Other Income/(Expense)
Interest expense, net		3,922			35,486			(63,714	)		(217,741	)		(1,672,846	)
Gain on business acquisitions		355,876			2,231,534			(40,079	)		1,004,099			-
Other income (expense), net		85,638			(9,581	)		(13,860	)		(15,020	)		(14,349	)
Total Other Income/ (Expense)		445,436			2,257,439			(117,653	)		771,338			(1,687,195	)
Loss before income taxes		(5,603,007	)		(6,907,089	)		(20,863,319	)		(24,696,758	)		(27,513,218	)
Provision for income taxes		-			(118,018	)		(126,256	)		(78,531	)		(78,532	)
Net Loss	$	(5,603,007	)	$	(7,025,107	)	$	(20,989,575	)	$	(24,775,289	)	$	(27,591,750	)
Net loss per common share – basic and diluted	$	(0.16	)	$	(0.15	)	$	(0.39	)	$	(0.38	)	$	(0.41	)
Weighted average common shares outstanding – basic and diluted		35,626,783			47,505,861			54,434,173			65,181,310			66,553,904
CONSOLIDATED BALANCE SHEETS DATA (at December 31,):
Cash and cash equivalents	$	23,173,352		$	44,672,587		$	15,152,226		$	28,181,531		$	38,027,509
Property, plant and equipment, net		15,266,056			27,531,273			41,982,210			38,484,858			33,905,286
Total assets		44,589,825			83,636,896			67,109,714			74,917,467			82,321,838
Working capital		20,184,121			40,231,504			10,087,917			23,697,158			35,067,152
Stockholder’s equity		40,020,878			77,144,910			57,803,908			66,093,941			41,962,027
OTHER FINANCIAL DATA:
Capital expenditures
Cash	$	5,304,434		$	13,620,180		$	20,722,510		$	7,143,376		$	7,306,942
Accrued expenses		355,268			658,144			1,240,774			867,311			524,280
Capital leases		152,164			769,882			2,915,580			80,894			339,652
Other		-			-			18,679			-			-
Net cash provided by (used in) operating activities		238,534			702,518			(8,078,493	)		(9,484,438	)		(13,413,128	)
Net cash used in investing activities		(8,057,744	)		(18,218,729	)		(21,343,128	)		(7,562,464	)		(7,036,756	)
Net cash provided by (used in) financing activities		16,951,723			39,015,446			(98,740	)		30,076,207			30,295,862

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In January 2013, we formed a wholly owned subsidiary, Hetnets Tower Corporation, to manage the business activities of a new business segment, Shared Wireless Infrastructure. We have provided supplemental segment information on the operating results of our Shared Wireless Infrastructure segment in Item 7 in this Annual Report on Form 10-K. We have also provided supplemental information on our Fixed Wireless segment, including the operating results of each market, in Item 7 in this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 currently provide service to business customers in twelve metropolitan markets.

In December 2011, we completed the acquisition of certain customer relationships, network infrastructure and related assets of Color Broadband Communications, Inc. (“Color Broadband”), which is based in the Los Angeles area. The aggregate consideration for the acquisition included (i) approximately $2.8 million in cash, (ii) 827,230 shares of our common stock with a fair value of approximately $2.0 million, and (iii) approximately $0.3 million in assumed liabilities. The acquisition of Color Broadband was a business combination accounted for under the acquisition method. In May 2012, we finalized the purchase price of Color Broadband. The final purchase price of $5,098,996 was $220,885, or 4%, lower than the initially reported purchase price of $5,319,881. The finalization of the purchase price resulted in a reduction of approximately $261,000 of identifiable net assets and a reduction in the gain on business acquisition of approximately $40,000. The purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Color Broadband of 98,506 from 925,736 to 827,230 shares. In addition, 45,600 shares of common stock were returned to the Company principally representing accounts receivable collections retained by Color Broadband during the post-closing transition services period.

In February 2013, we completed the acquisition of certain customer relationships, network infrastructure and related assets of Delos Internet (“Delos”), which is based in Houston, Texas. The aggregate consideration for the acquisition included (i) approximately $0.2 million in cash, (ii) 385,124 shares of our common stock with a fair value of approximately $1.0 million, and (iii) approximately $0.2 million in assumed liabilities. The acquisition of Delos was a business combination accounted for under the acquisition method. In June 2013, we 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 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. We recognized a gain on business acquisition of approximately $1.0 million.

Characteristics of our Revenues and Expenses

Our Fixed Wireless segment offers broadband services under agreements for periods normally 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. Our Shared WirelessInfrastructure segment offers to rent space, channels, and ports on our street level rooftops at a fixed monthly rent.

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 rent 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 upfront cost of establishing or expanding our Network Presence.  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.

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

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

Market Information – Fixed Wireless

As of December 31, 2014, we operated in twelve metropolitan markets consisting of New York, Boston, Los Angeles, Chicago, San Francisco, Miami, Seattle, Dallas-Fort Worth, Houston, Philadelphia, Las Vegas-Reno and Providence-Newport. Although we provide services in multiple markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics among all markets, including the nature of the services provided and the type of customers purchasing such services. The markets were launched at different times, and as a result, may have different operating metrics based on their size and stage of maturation. We incur significant up-front costs in order to establish a Network Presence in a new market.  These costs include building PoPs and Network Costs.  Other material costs include hiring and training sales and marketing personnel who will be dedicated to securing customers in that market. Once we have established a Network Presence in a new market, we are capable of servicing a significant number of customers. The rate of customer additions varies from market to market, and we are unable to predict how many customers will be added in a market during any specific period. We believe that providing operating information regarding each of our markets provides useful information to shareholders in understanding the leveraging potential of our business model and the operating performance of our mature 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. Intercompany transactions have been eliminated in the tables below.

Costs of Revenues: Includes 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 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. Beginning in 2013, these operating costs are reported under our Shared Wireless Infrastructure segment.

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

We entered the Houston market in February 2013 through the acquisition of Delos. We exited the Nashville market effective March 31, 2014.

Year Ended December 31, 2014

Market	Revenues		Cost of Revenues		Gross Margin			Operating Costs		Adjusted Market EBITDA
Los Angeles	$	8,019,832	$	2,259,611	$	5,760,221		$	1,932,611	$	3,827,610
New York		7,810,019		2,785,827		5,024,192			1,328,111		3,696,081
Boston		5,663,256		1,598,896		4,064,360			823,425		3,240,935
Chicago		2,902,942		1,184,641		1,718,301			528,099		1,190,202
Miami		1,428,933		451,577		977,356			288,380		688,976
Las-Vegas-Reno		988,565		491,875		496,690			136,356		360,334
Houston		697,467		265,819		431,648			104,549		327,099
San Francisco		1,103,604		494,029		609,575			304,406		305,169
Dallas-Fort Worth		637,831		390,615		247,216			151,347		95,869
Seattle		301,679		191,019		110,660			38,077		72,583
Providence-Newport		258,992		208,882		50,110			14,007		36,103
Nashville		1,903		12,642		(10,739	)		2,331		(13,070	)
Philadelphia		121,158		99,602		21,556			55,696		(34,140	)
Total	$	29,936,181	$	10,435,035	$	19,501,146		$	5,707,395	$	13,793,751

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Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA	$	13,793,751
Fixed wireless, non-market specific
Other expenses		(1,127,386	)
Depreciation and amortization		(8,697,630	)
Shared wireless infrastructure, net		(16,375,734	)
Corporate		(13,419,024	)
Other income (expense)		(1,687,195	)
Provision for income taxes		(78,532	)
Net loss	$	(27,591,750	)

Year Ended December 31, 2013

Market	Revenues		Cost of Revenues		Gross Margin			Operating Costs		Adjusted Market EBITDA
Los Angeles	$	8,197,925	$	2,146,194	$	6,051,731		$	1,675,298	$	4,376,433
Boston		6,508,812		1,460,425		5,048,387			917,559		4,130,828
New York		7,715,840		2,562,328		5,153,512			1,345,250		3,808,262
Chicago		3,273,174		1,161,474		2,111,700			488,619		1,623,081
Miami		1,553,933		433,818		1,120,115			417,986		702,129
Las Vegas-Reno		1,148,540		529,974		618,566			189,991		428,575
San Francisco		1,248,608		491,057		757,551			366,195		391,356
Houston		554,606		215,085		339,521			100,443		239,078
Providence-Newport		441,115		201,570		239,545			59,805		179,740
Seattle		389,839		192,561		197,278			101,929		95,349
Dallas-Fort Worth		681,812		399,465		282,347			257,212		25,135
Philadelphia		157,342		82,607		74,735			88,162		(13,427	)
Nashville		21,038		57,030		(35,992	)		11,443		(47,435	)
Total	$	31,892,584	$	9,933,588	$	21,958,996		$	6,019,892	$	15,939,104

Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA	$	15,939,104
Fixed wireless, non-market specific
Other expenses		(943,412	)
Depreciation and amortization		(11,062,809	)
Shared wireless infrastructure, net		(15,519,932	)
Corporate		(13,881,047	)
Other income (expense)		771,338
Provision for income taxes		(78,531	)
Net loss	$	(24,775,289	)

Year Ended December 31, 2012

Market	Revenues		Cost of Revenues		Gross Margin			Operating Costs		Adjusted Market EBITDA
Boston	$	6,822,836	$	1,384,383	$	5,438,453		$	1,053,816	$	4,384,637
Los Angeles		7,946,272		2,244,487		5,701,785			1,571,248		4,130,537
New York		7,286,768		2,308,760		4,978,008			1,271,608		3,706,400
Chicago		3,704,547		1,123,586		2,580,961			728,868		1,852,093
Miami		1,662,264		412,382		1,249,882			368,597		881,285
San Francisco		1,541,928		396,226		1,145,702			357,233		788,469
Las Vegas-Reno		1,545,404		545,793		999,611			216,885		782,726
Seattle		485,484		188,285		297,199			128,176		169,023
Providence-Newport		488,871		205,752		283,119			116,575		166,544
Dallas-Fort Worth		643,174		345,136		298,038			341,295		(43,257	)
Nashville		39,184		57,745		(18,561	)		36,050		(54,611	)
Philadelphia		112,698		71,924		40,774			106,972		(66,198	)
Total	$	32,279,430	$	9,284,459	$	22,994,971		$	6,297,323	$	16,697,648

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Reconciliation of Non-GAAP Financial Measure to GAAP Financial Measure
Adjusted market EBITDA	$	16,697,648
Fixed wireless, non-market specific
Other expenses		(896,311	)
Depreciation and amortization		(10,689,868	)
Non-core expenses		(9,687,500	)
Corporate		(16,169,635	)
Other income (expense)		(117,653	)
Provision for income taxes		(126,256	)
Net loss	$	(20,989,575	)

 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) Wi-Fi access and 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 deliver the services being offered by our Shared Wireless segment.

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

In August 2014, we executed a master licensing agreement ("MLA") with a carrier for small cell deployments. The MLA establishes the detailed terms and conditions under which individual orders are governed, and are generally designed to expedite the deployment process. The term of this agreement is for 25 years.

Supplemental Segment Information

Operating information about each segment in accordance with Generally Accepted Accounting Principles (“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 utilizes in assessing our overall operations. It is important to note, however, that non-GAAP financial measures as presented do not represent cash provided by or used in operating activities and may not be comparable to similarly titled measures reported by other companies. Neither should be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

We focus on Adjusted EBITDA as a principal indictor of the operating efficiency and overall financial performance of our business. We believe this information provides the users of our financial statements with valuable insight into our operating results. 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, deferred rent expense, 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 that we utilize. Net Cash Flow is defined as Adjusted EBITDA less capital expenditures.

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Three Months Ended December 31, 2014

	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Total
Operating Income (Loss)	$	697,812	$	(4,239,627	)	$	(3,303,121	)	$	(6,844,936	)
Depreciation and amortization		2,098,737		1,025,192			220,614			3,344,543
Stock-based compensation		-		-			220,085			220,085
Loss on nonmonetary transactions		67,953		-			-			67,953
Non-recurring expenses, primarily acquisition-related		-		-			28,346			28,346
Deferred rent		60,206		54,006			(8,807	)		105,405
Adjusted EBITDA		2,924,708		(3,160,429	)		(2,842,883	)		(3,078,604	)
Less: Capital expenditures		1,523,831		202,310			43,473			1,769,614
Net Cash Flow	$	1,400,877	$	(3,362,739	)	$	(2,886,356	)	$	(4,848,218	)

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA	$	(3,078,604	)
Depreciation and amortization		(3,344,543	)
Non-recurring expenses, primarily acquisition-related		(28,346	)
Stock-based compensation		(220,085	)
Loss on nonmonetary transactions		(67,953	)
Deferred rent		(105,405	)
Operating Income (Loss)		(6,844,936	)
Interest expense, net		(1,506,337	)
Other income (expense), net		(3,459	)
Provision for income taxes		(78,532	)
Net loss	$	(8,433,264	)

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow	$	(4,848,218	)
Capital expenditures		1,769,614
Non-recurring expenses, primarily acquisition-related		(28,346	)
Changes in operating assets and liabilities, net		600,562
Other, net		(865,845	)
Net cash used in operating activities	$	(3,372,233	)

 Three Months Ended December 31, 2013

	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Total
Operating Income (Loss)	$	767,954	$	(4,242,749	)	$	(3,153,141	)	$	(6,627,936	)
Depreciation and amortization		2,651,546		875,471			170,869			3,697,886
Stock-based compensation		-		-			314,462			314,462
Loss on property and equipment		38,820		-			-			38,820
Loss on nonmonetary transactions		67,794		-			-			67,794
Deferred rent		230,160		432,201			(86,820	)		575,541
Adjusted EBITDA		3,756,274		(2,935,077	)		(2,754,630	)		(1,933,433	)
Less: Capital expenditures		1,160,116		1,264,893			908,796			3,333,805
Net Cash Flow	$	2,596,158	$	(4,199,970	)	$	(3,663,426	)	$	(5,267,238	)

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Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA	$	(1,933,433	)
Depreciation and amortization		(3,697,886	)
Stock-based compensation		(314,462	)
Loss on property and equipment		(38,820	)
Loss on nonmonetary transactions		(67,794	)
Deferred rent		(575,541	)
Operating Income (Loss)		(6,627,936	)
Interest expense, net		(63,844	)
Other income (expense), net		(4,130	)
Provision for income taxes		(78,531	)
Net loss	$	(6,774,441	)

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow	$	(5,267,238	)
Capital expenditures		3,333,805
Changes in operating assets and liabilities, net		848,636
Other, net		(33,947	)
Net cash used in operating activities	$	(1,118,744	)

 Year Ended December 31, 2014

	Fixed Wireless		Shared Wireless Infrastructure		Corporate		Total
Operating Income (Loss)	$	4,152,141	$	(16,559,140)	$	(13,419,024)	$	(25,826,023)
Depreciation and amortization		8,697,630		3,957,784		984,001		13,639,415
Stock-based compensation		-		-		960,490		960,490
Loss on nonmonetary transactions		271,184		-		-		271,184
Non-recurring expenses, primarily acquisition-related		-		-		119,705		119,705
Deferred rent		153,634		258,453		(35,227)		376,860
Adjusted EBITDA		13,274,589		(12,342,903)		(11,390,055)		(10,458,369)
Less: Capital expenditures		5,567,966		2,220,644		382,264		8,170,874
Net Cash Flow	$	7,706,623	$	(14,563,547)	$	(11,772,319)	$	(18,629,243)

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA	$	(10,458,369	)
Depreciation and amortization		(13,639,415	)
Non-recurring expenses, primarily acquisition-related		(119,705	)
Stock-based compensation		(960,490	)
Loss on nonmonetary transactions		(271,184	)
Deferred rent		(376,860	)
Operating Income (Loss)		(25,826,023	)
Interest expense, net		(1,672,846	)
Other income (expense), net		(14,349	)
Provision for income taxes		(78,532	)
Net loss	$	(27,591,750	)

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow	$	(18,629,243	)
Capital expenditures		8,170,874
Non-recurring expenses, primarily acquisition-related		(119,705	)
Changes in operating assets and liabilities, net		(1,780,579	)
Other, net		(1,054,475	)
Net cash used in operating activities	$	(13,413,128	)

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Year Ended December 31, 2013

	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Total
Operating Income (Loss)	$	4,115,979	$	(15,703,028	)	$	(13,881,047	)	$	(25,468,096	)
Depreciation and amortization		11,062,809		3,508,646			779,986			15,351,441
Stock-based compensation		-		-			1,253,661			1,253,661
Loss on property and equipment		112,442		8,202			-			120,644
Loss on nonmonetary transactions		272,347		-			-			272,347
Non-recurring expenses, primarily acquisition-related		-		-			112,815			112,815
Deferred rent		230,160		432,201			(86,820	)		575,541
Adjusted EBITDA		15,793,737		(11,753,979	)		(11,821,405	)		(7,781,647	)
Less: Capital expenditures		4,518,874		2,314,236			1,258,469			8,091,579
Net Cash Flow	$	11,274,863	$	(14,068,215	)	$	(13,079,874	)	$	(15,873,226	)

Reconciliation of Adjusted EBITDA to Net Loss
Adjusted EBITDA	$	(7,781,647	)
Depreciation and amortization		(15,351,441	)
Non-recurring expenses, primarily acquisition-related		(112,815	)
Stock-based compensation		(1,253,661	)
Loss on property and equipment		(120,644	)
Loss on nonmonetary transactions		(272,347	)
Deferred rent		(575,541	)
Operating Income (Loss)		(25,468,096	)
Interest expense, net		(217,741	)
Gain on business acquisition		1,004,099
Other income (expense), net		(15,020	)
Provision for income taxes		(78,531	)
Net loss	$	(24,775,289	)

Reconciliation of Net Cash Flow to Net Cash Used in Operating Activities
Net cash flow	$	(15,873,226	)
Capital expenditures		8,091,579
Non-recurring expenses, primarily acquisition-related		(112,815	)
Changes in operating assets and liabilities, net		(1,169,868	)
Other, net		(420,108	)
Net cash used in operating activities	$	(9,484,438	)

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

      Revenues. Revenues totaled $33,036,153 during the year ended December 31, 2014 compared to $33,433,284 during the year ended December 31, 2013 representing a decrease of $397,131, or 1%. Revenues for the Fixed Wireless segment totaled $30,119,587 during the year ended December 31, 2014 compared to $32,075,680 during the year ended December 31, 2013 representing a decrease of $1,956,093, or 6%. The decrease principally related to an 8% decrease in the base of customers billed on a monthly recurring basis. New customer additions have been adversely impacted by a 14% decrease in the number of account executives which averaged 31 during the year ended December 31, 2014 compared to 36 during the year ended December 31, 2013. In March 2015, we opened a second sales office in Florida and believe that our ability to recruit talent from an additional geographic area will increase the number of account executives and improve sales productivity levels. Revenues for the Shared Wireless segment totaled $3,099,972 during the year ended December 31, 2014 compared to $1,540,700 during the year ended December 31, 2013 representing an increase of $1,559,272 or greater than 100%. The increase was primarily related to a full year of revenues recognized in 2014 under a large cable company customer contract which commenced in July 2013. 

    Average revenue per user (“ARPU”) for the Fixed Wireless segment totaled $772 as of December 31, 2014 compared to $761 as of December 31, 2013 representing an increase of $11, or 1%. The increase in ARPU primarily related to customers upgrading to higher bandwidth service which generates higher monthly recurring revenue.  ARPU for new customers totaled $639 during the year ended December 31, 2014 compared to $663 during the year ended December 31, 2013 representing a decrease of $24, or 4%.

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Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.85% during the year ended December 31, 2014 compared to 1.86% during the year ended December 31, 2013. Our goal is to maintain churn levels between 1.40% and 1.70% which we believe is below industry averages of approximately 2.00%. Churn levels can fluctuate from period to period depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons.

Cost of Revenues. Cost of revenues totaled $24,520,028 during the year ended December 31, 2014 compared to $21,854,163 during the year ended December 31, 2013 representing an increase of $2,665,865 or 12%. On a consolidated basis, higher rent expense represented approximately 107% of the increase with rents for PoPs for the Fixed Wireless segment increasing by approximately $593,000 and rents for street level rooftops for the Shared Wireless segment increasing by approximately $2,282,000. The number of street level rooftops for the Shared Wireless segment were approximately 12% higher at December 31, 2014 compared to December 31, 2013. Other cost of revenues, including bandwidth and customer network costs, totaled $2,839,792 during the year ended December 31, 2014 as compared to $3,048,857 during the year ended December 31, 2013 representing a decrease of $209,065, or 7%. On a consolidated basis, gross margin was 26% for the year ended December 31, 2014 as compared to 35% for the year ended December 31, 2013 representing a decrease of 9 percentage points with the Shared Wireless and Fixed Wireless segments accounting for 7 and 2 of the percentage point decreases, respectively. On a per market basis, approximately $2,274,000, or 85%, of the increase in cost of revenues occurred in our New York City market which is the second largest market for our Fixed Wireless segment and where approximately 64% of the street level rooftops for our Shared Wireless segment are located.

Depreciation and Amortization. Depreciation and amortization totaled $13,639,415 during the year ended December 31, 2014 compared to $15,351,441 during the year ended December 31, 2013 representing a decrease of $1,712,026 or 11%. Depreciation expense totaled $12,750,446 during the year ended December 31, 2014 compared to $12,257,624 during the year ended December 31, 2013 representing an increase of $492,822, or 4%. The base of depreciable assets increased approximately 10% during 2014, however, newly acquired assets will not have a full year of depreciation in the year of acquisition which lessens the impact of a higher base on depreciation expense. The increase in the depreciable base during the year ended December 31, 2014 reflects continued growth in our fixed wireless network (approximately $5,871,000), spending on our shared wireless infrastructure (approximately $1,916,000) and additions resulting from other expenditures (approximately $384,000).

Amortization expense totaled $888,969 during the year ended December 31, 2014 compared to $3,093,817 during the year ended December 31, 2013 representing a decrease of $2,204,848, or 71%. 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 related to two acquisitions which had modest or no amortization in the 2014 period but full amortization in the 2013 period. We recognized zero and $819,093 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with One Velocity which became fully amortized in November 2013. In addition, we recognized $496,697 and $1,947,830 of amortization expense in the 2014 and 2013 periods, respectively, related to intangible assets associated with Color Broadband which became fully amortized in April 2014. These decreases were partially offset by higher amortization expense associated with the Delos acquisition which was completed in February 2013, and for which $392,272 was recorded in the 2014 period compared to $326,894 in the 2013 period.

Customer Support Services. Customer support services totaled $4,796,038 during the year ended December 31, 2014 compared to $4,883,219 during the year ended December 31, 2013 representing a decrease of $87,181 or 2%.  The decrease was primarily related to lower payroll costs as average headcount decreased 3% to 69 during 2014 as compared to 71 during 2013.

Sales and Marketing. Sales and marketing expenses totaled $5,570,191 during the year ended December 31, 2014 compared to $5,779,500 during the year ended December 31, 2013 representing a decrease of $209,309, or 4%. Compensation related costs, including sales commissions, totaled $3,815,222 during the 2014 period as compared to $4,170,511 during the 2013 period representing a decrease of $355,289, or 9%. Average headcount totaled 41 during the 2014 period compared to 48 during the 2013 period representing a decrease of 7, or 15%. Channel commissions totaled $440,281 during the 2014 period as compared to $385,049 during the 2013 period representing an increase of $55,232, or 14%. Advertising costs totaled $1,132,845 during the 2014 period as compared to $1,100,353 during the 2013 period representing an increase of $32,492, or 3%. Other costs, including travel, entertainment, dues, and subscriptions totaled $181,843 during the 2014 period as compared to $123,588 during the 2013 period representing an increase of $58,255, or 47%.

General and Administrative. General and administrative expenses totaled $10,336,504 during the year ended December 31, 2014 compared to $11,033,057 during the year ended December 31, 2013 representing a decrease of $696,553, or 6%. Payroll costs totaled $3,702,328 during 2014 compared to $4,049,344 during 2013 representing a decrease of $347,016, or 9%. Average headcount totaled 34 during the 2014 period compared to 37 during the 2013 period representing a decrease of 3, or 8%. Stock-based compensation totaled $960,490 during 2014 compared to $1,253,661 during 2013 representing a decrease of $293,171 or 23%. Stock-based compensation can fluctuate significantly from period to period depending on the timing, quantity and valuation of stock option grants. Facilities expense totaled $408,490 during the 2014 period compared to $654,613 during the 2013 period representing a decrease of $246,123, or 38%. Office expense totaled $495,837 during the 2014 period compared to $582,355 during the 2013 period representing a decrease of $86,518, or 15%. The Company consolidated its corporate offices from two buildings to one building which has lowered its facilities costs and office expenses. Insurance expense totaled $468,583 during the 2014 period compared to $278,899 during the 2013 period representing an increase of $189,684, or 68%. The increase primarily related to higher workers' compensation premiums. Bad debt expense totaled $322,000 during the 2014 period compared to $85,000 during the 2013 period representing an increase of $237,000, or greater than 100%. Approximately two thirds of the increase related to a temporary link customer and one third related to a shared wireless customer which had paid for fifteen months of service prior to ceasing operations.

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Interest Expense, Net.     Interest expense, net totaled $1,672,846 during the year ended December 31, 2014 compared to $217,741 during the year ended December 31, 2013 representing an increase of $1,455,105, or greater than 100%. The increase related to the $35 million secured term loan which closed in October 2014. Cash and non-cash interest expense in 2014 totaled $591,111 and $877,461, respectively. Non-cash interest expense included payment-in-kind interest, and the amortization of (i) debt issuance costs, and (ii) discounts associated with (a) original issuance pricing and (b) fair value of warrants issued in connection with the financing.

Gain on Business Acquisition.     There was no gain on business acquisition during the year ended December 31, 2014 compared to $1,004,099 during the year ended December 31, 2013. The gain recognized in the 2013 period related to the acquisition of Delos in February 2013. We were able to acquire the customer relationships and wireless network of Delos at a discounted price as the challenging economic environment during this period made it difficult for smaller companies to raise capital to sustain their growth.

Net Loss. Net loss totaled $27,591,750 during the year ended December 31, 2014 compared to $24,775,289 during the year ended December 31, 2013 representing an increase of $2,816,461, or 11%. The increase was not related to operating results as revenues decreased by $397,131, or 1%, while operating expenses decreased by $39,204 or less than 1%. Instead, the increase related to items included in other income (expense). Interest expense totaled $1,710,825 in 2014 related to the Company's $35 million debt financing completed in October 2014 as compared to interest expense of $220,634 recognized in 2013 resulting in a net increase of $1,490,191. In addition, the Company recognized a gain on acquisition of $1,004,099 in 2013 as compared to zero in 2014.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Revenues. Revenues totaled $33,433,284 during the year ended December 31, 2013 compared to $32,279,430 during the year ended December 31, 2012 representing an increase of $1,153,854, or 4%. Substantially all of the revenue increase was attributable to our Shared Wireless segment. Fixed wireless revenues increased by $171,786, or 1%, primarily related to an increase in Average Revenue Per User (“ARPU”) from $717 in the 2012 period to $761 in the 2013 period. The increase in ARPU was offset by higher than normal churn levels. 

ARPU for the Fixed Wireless segment totaled $761 as of December 31, 2013 compared to $717 as of December 31, 2012 representing an increase of $44, or 6%. The increase in ARPU primarily related to customers upgrading to higher bandwidth service which generates higher monthly recurring revenue. ARPU for new customers totaled $663 during the year ended December 31, 2013 compared to $531 during the year ended December 31, 2012 representing an increase of $132, or 25%.

Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.86% during the year ended December 31, 2013 compared to 1.58% during the year ended December 31, 2012. Our goal is to maintain churn levels between 1.40% and 1.70% which we believe is below industry averages of approximately 2.00%. Churn levels can fluctuate from period to period depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons. Churn has averaged 1.63% over the past 36 months and we do not believe that the slightly higher than targeted churn level is indicative of any long term business developments or trends. 

Cost of Revenues.   Cost of revenues totaled $21,854,163 during the year ended December 31, 2013 compared to $15,376,136 during the year ended December 31, 2012 representing an increase of $6,478,027, or 42%. On a consolidated basis, gross margin during the year ended December 31, 2013 was 35% as compared to 52% during the year ended December 31, 2012 representing a decrease of 17 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 $1,322,208 and $6,008,015, respectively, and reduced gross margin by 4 and 18 percentage points, respectively. Increases in rent expense for the Fixed Wireless network primarily related to an increase in the number of PoPs in 2013 including those acquired in the Delos acquisition as well as base rent increases associated with increasing the number of antenna on our PoPs. Increases in rent expense for the Shared Wireless network primarily related to a higher number of lease agreements in the 2013 period as compared to the 2012 period. These increases were partially offset by lower Customer Network and other costs which decreased by $852,196 and benefited gross margin by 3 percentage points.

Depreciation and Amortization.  Depreciation and amortization totaled $15,351,441 during the year ended December 31, 2013 compared to $13,634,294 during the year ended December 31, 2012 representing an increase of $1,717,147 or 13%. Depreciation expense totaled $12,257,624 during the year ended December 31, 2013 compared to $10,262,526 during the year ended December 31, 2012 representing an increase of $1,995,098, or 19%. The gross base of depreciable assets as of December 31, 2013 increased by $7,615,000, or 10%, compared to December 31, 2012. The increase in the depreciable base during the year ended December 31, 2013 reflects continued growth in our fixed wireless network (approximately $3,662,000), spending on our shared wireless infrastructure (approximately $1,895,000) and additions resulting from acquisitions (approximately $808,000).

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Amortization expense totaled $3,093,817 during the year ended December 31, 2013 compared to $3,371,768 during the year ended December 31, 2012 representing a decrease of $277,951, or 8%. 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 amortization associated with the acquisition of Pipeline Wireless LLC ("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 $4,883,219 during the year ended December 31, 2013 compared to $5,712,463 during the year ended December 31, 2012 representing a decrease of $829,244, or 15%. The decrease was primarily related to lower payroll costs as average headcount totaled 71 during the 2013 period as compared to 81 during the 2012 period representing a decrease of 10, or 12%

Sales and Marketing. Sales and marketing expenses totaled $5,779,500 during the year ended December 31, 2013 compared to $6,134,020 during the year ended December 31, 2012 representing a decrease of $354,520, or 6%. Average headcount totaled 48 during the 2013 period as compared to 55 during the 2012 period representing a decrease of 7, or 13%. In addition, channel commissions totaled $385,049 during 2013 compared to $307,574 during 2012 representing an increase of $77,475, or 25%.

General and Administrative. General and administrative expenses totaled $11,033,057 during the year ended December 31, 2013 compared to $12,168,183 during the year ended December 31, 2012 representing a decrease of $1,135,126, or 9%. Payroll costs totaled $4,049,344 during 2013 compared to $4,410,287 during 2012 representing a decrease of $360,943, or 8%. In November 2012, the Chief Operating Officer resigned and was not replaced. Stock-based compensation totaled $1,253,661 during 2013 compared to $1,658,200 during 2012 representing a decrease of $404,539, or 24%. Acquisition expenses totaled $62,953 during 2013 compared to $330,869 during 2012 representing a decrease of $267,916, or 81%. Finally, bad debt expense totaled $85,000 during 2013 compared to $219,082 during 2012 representing a decrease of $134,082, or 61%. The decrease in bad debt expense was consistent with a more than 50% improvement in receivable balances greater than 90 days outstanding.

Interest Expense, net.     Interest expense, net totaled $217,741 during the year ended December 31, 2013 compared to $63,714 during the year ended December 31, 2012 representing an increase of $154,027 or greater than 100%. In total, we entered into six capital leases between June 2011 and April 2013 for equipment totaling approximately $3.7 million. We incurred interest expense on these six leases of $161,452 and $55,828 in 2013 and 2012, respectively. In addition, interest income decreased by $38,368 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.

Gain on Business Acquisitions.  Gain on business acquisitions totaled $1,004,099 during the year ended December 31, 2013 compared to a loss of $40,079 during the year ended December 31, 2012 representing an increase of $1,044,178, or greater than 100%. 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 Communications (“Color Broadband”) in May 2012. The final purchase price for the Color Broadband acquisition resulted in an adjusted gain on business acquisition of $1,146,011. The challenging economic environment during 2012 made it difficult for smaller companies like Delos and Color Broadband to raise sufficient capital to sustain their growth. As a result, we were able to acquire the customer relationships and wireless network of Delos and Color Broadband at a discounted price.

Provision for Income Taxes. Provision for income taxes totaled $78,531 during the year ended December 31, 2013 compared to $126,256 during the year ended December 31, 2012 representing a decrease of $47,725, or 38%. The expense recognized in the periods related to deferred tax liabilities associated with FCC licenses and goodwill which are amortized for tax purposes but not for book purposes.

Net Loss.  Net loss totaled $24,775,289 during the year ended December 31, 2013 compared to $20,989,575 during the year ended December 31, 2012 representing an increase of $3,785,714, or 18%. Revenues increased by $1,153,854, or 4%, while operating expenses increased by $5,876,284 or 11%. In addition, non-operating income, primarily related to gain on a business acquisition, totaled $771,338 for the year ended December 31, 2013 compared to non-operating expense of $117,653 for the year ended December 31, 2012.

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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 year ended December 31, 2014 and 2013 are described below. At February 28, 2015, we had cash and cash equivalents totaling approximately $34,074,000.

Net Cash Used In Operating Activities.   Net cash used in operating activities for the year ended December 31, 2014 totaled $13,413,128 compared to $9,484,438 for the year ended December 31, 2013 representing an increase of $3,928,690, or 41%. Cash used in operations for the year ended December 31, 2014 totaled $11,632,549 as compared to $8,314,570 for the year ended December 31, 2013 representing an increase of $3,317,979, or 40%. The increase primarily related to higher cost of revenues in the 2014 period related to increased rent expense for both business segments. 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 $1,780,579 during the year ended December 31, 2014 as compared to $1,169,868 for the year ended December 31, 2013 representing an increase of $610,711, or 52%.

Net cash used in operating activities for the year ended December 31, 2013 totaled $9,484,438 compared to $8,078,493 for the year ended December 31, 2012 representing an increase of $1,405,945, or 17%. Cash used in operations for the year ended December 31, 2013 totaled $8,314,570 as compared to $5,244,641 for the year ended December 31, 2012 representing an increase of $3,069,929, or 59%. 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 $1,169,868 during the year ended December 31, 2013 as compared to using cash of $2,833,852 during the year ended December 31, 2012 representing a decrease of $1,663,984, or 59%.

Net Cash Used in Investing Activities. Net cash used in investing activities for the year ended December 31, 2014 totaled $7,036,756 compared to $7,562,464 for the year ended December 31, 2013 representing a decrease of $525,708 or 7%. Cash capital expenditures for the Fixed Wireless segment increased from $4,256,335 in the 2013 period to $4,803,272 in the 2014 period representing an increase of $546,937, or 13%. Cash capital expenditures for the Shared Wireless Infrastructure segment increased from $1,890,861 in the 2013 period to $2,188,220 in the 2014 period representing an increase of $297,359, or 16%. Capital expenditures for both business segments can fluctuate from period to period depending upon the number of customer additions and upgrades, network construction activity related to increasing capacity or coverage, and other related reasons. In addition, we received an incentive payment of $380,000 in the 2014 period from our landlord in connection with entering a new lease agreement for our corporate offices. These funds were used to pay for qualified leasehold improvements to the facility. Finally, we paid cash of $225,000 for the acquisition of Delos in the 2013 period. There were no acquisitions in the 2014 period.

Net cash used in investing activities for the year ended December 31, 2013 totaled $7,562,464 compared to $21,343,128 for the year ended December 31, 2012 representing a decrease of $13,780,664 or 65%. Capital expenditures for the Fixed Wireless segment decreased from $10,982,881 in the 2012 period to $4,256,335 in the 2013 period representing a reduction of $6,726,546, or 61%. 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 $9,900,974 in the 2012 period to $1,890,861in the 2013 period representing a reduction of $8,010,113, or 81%. During the 2012 period, the construction of a carrier class network to offload data traffic and offer access for small cells was substantially completed. Finally, we paid cash of $225,000 for the acquisition of Delos Internet. There were no acquisitions in the 2012 period.

Net Cash Provided by Financing Activities.  Net cash provided by financing activities for the year ended December 31, 2014 totaled $30,295,862 compared to $30,076,207 for the year ended December 31, 2013, representing an increase of $219,655, or 1%. We received net proceeds of $31,056,260 in the fourth quarter of 2014 in connection with a debt financing. We received net proceeds of $30,499,336 in the first quarter of 2013 in connection with the sale of 11,000,000 shares of our common stock at a public offering price of $3.00 per share.

Net cash provided by financing activities for the year ended December 31, 2013 totaled $30,076,207 compared to net cash used in financing activities of $98,740 for the year ended December 31, 2012, representing an increase of $30,174,947, or greater than 100%. The increase is 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 Color Broadband. In December 2011, we completed the acquisition of certain customer relationships, network infrastructure and related assets of Color Broadband which was based in the Los Angeles area. The aggregate consideration for the acquisition included (i) approximately $2.8 million in cash, (ii) 827,230 shares of common stock with a fair value of approximately $2.0 million, and (iii) approximately $0.3 million in assumed liabilities. The acquisition of Color Broadband was a business combination accounted for under the acquisition method.

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Acquisition of Delos. In February 2013, we completed the acquisition of Delos which was based in Houston, Texas. 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 approximately $30,499,336, after underwriting discounts, commissions and offering expenses.

Debt Financing. In October 2014, we entered into a loan agreement (the “Loan Agreement”) with Melody Business Finance, LLC (the “Lender”). The Lender provided us with a five-year $35 million secured term loan (the “Financing”). The Financing was issued at a 3% discount and the Company incurred $2,893,739 in debt issuance costs. Net proceeds were $31,056,260.

Pursuant to the terms of the Loan Agreement, the loan bears interest at a rate equal to the greater of (i) the sum of the most recently effective one month Libor as in effect on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that accrues at 4% per annum.

The aggregate principal amount outstanding plus all accrued and unpaid interest is due in October 2019. The Company has the option of making principal payments (i) on or before October 16, 2016 (the “Second Anniversary”) but only for the full amount outstanding and (ii) after the Second Anniversary in minimum amount(s) of $5 million.

In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, we issued warrants (the “Warrants”) to purchase 3.6 million shares of common stock of which two-thirds have an exercise price of $1.26 and one-third have an exercise price of $0.01, subject to standard antidilution provisions. The Warrants have a term of seven and a half years. We have agreed to include the shares of common stock underlying the Warrants in a registration statement that must be filed no later than the one year anniversary of the Loan Agreement. If, following the one year anniversary, the registration statement is not declared effective, we will pay the warrant holders liquidated damages in the aggregate amount of $5,000 per month, with maximum liquidated damages of $50,000, until the registration statement has become effective.

Capital Resources. As of December 31, 2014, we had cash and cash equivalents of $38,027,509 and working capital of $35,067,152. Based on our current operating activities and plans, we believe our capital resources at the end of December 31, 2014 will enable us to meet our anticipated cash requirements for at least the next twelve months.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and other commitments as of December 31, 2014:

	Payments due by period
	Total		2015		2016		2017		2018		2019		Thereafter
Operating leases	$	64,296,796	$	20,885,399	$	19,548,552	$	13,793,190	$	6,281,442	$	2,758,765	$	1,029,448
Long-term debt		35,295,556		-		-		-		-		35,295,556		-
Capital leases		2,404,928		1,042,934		790,345		517,727		53,922		-		-
Deferred payments		11,969		11,627		342		-		-				-
Other		121,415		121,415		-		-		-				-
Total	$	102,130,664	$	22,061,375	$	20,339,239	$	14,310,917	$	6,335,364	$	38,054,321	$	1,029,448

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 August 2023. 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.

Long-Term Debt. We have entered into a loan agreement with Melody Business Finance, LLC. The $35 million term loan becomes due in October 2019. We had $295,556 of accrued PIK interest as of December 31, 2014.

Capital Leases. We have entered into capital leases to acquire network, rooftop tower site and customer premise equipment expiring through March 2018.

Other. During the fourth quarter of 2013, we renewed a one year information technology infrastructure support agreement which became effective at the end of the first quarter of 2014. Payments of approximately $121,000 are due quarterly through the first quarter of 2015.

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Impact of Inflation, Changing Prices and Economic Conditions

Pricing for many technology products and services have historically decreased over time due to the effect of product and process improvements and enhancements. In addition, economic conditions can affect the buying patterns of customers. In 2014, our customer base continued to upgrade to higher bandwidth products as business conditions and the general economy continued to improve. Customers continued to place a premium on value and performance. Pricing of services continued to be a focus for prospective buyers with multi-point and midrange product pricing remaining steady while competition for high capacity links intensified. In part, pressure on high capacity links was due to decreased costs for equipment and some competitors willing to sacrifice margins. We believe that our customers will continue to upgrade their bandwidth service. The continued migration of many business activities and functions to the Internet, and growing use of cloud computing should also result in increased bandwidth requirements over the long term. Inflation has remained relatively modest and has not had a material impact on our business in recent years.

 Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, we 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 normally 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.

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 identifiable assets acquired and liabilities assumed is recognized as goodwill. If the total consideration is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed and included in general and administrative expenses in our consolidated statements of operations.

The highest level of judgment and estimation involved in accounting for business acquisitions relates to determining the fair value of the customer relationships and network assets acquired. In each of the five acquisitions completed over the past four years, the highest asset value has been allocated to the customer relationships acquired. Determining the fair value of customer relationships involves judgments and estimates regarding how long the customers will continue to contract services with us. During the course of completing five acquisitions, we have developed a database of historical experience from prior acquisitions to assist us in preparing future estimates of cash flows. Similarly, we have used our historical experience in building networks to prepare estimates regarding the fair value of the network assets that we acquire.

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. 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.

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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 lease agreement (“Company Locations”) and at customer locations.  In both instances, the installation and removal of our equipment is not complicated and does not require structural changes to the building where the equipment is installed.  Costs associated with the removal of our equipment at Company or customer locations are not material, and accordingly, we have determined that we do not presently have asset retirement obligations under the FASB’s accounting guidance.

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

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” which requires an entity to recognize revenue representing the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. ASU 2014-09 is intended to establish principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenues and cash flows arising from the entity’s contracts with customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. We are currently evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

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 is effective for us on January 1, 2016. We do not expect adoption of ASU 2014-12 to have a significant impact on our consolidated financial statements.

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 is effective for us on January 1, 2017. We do not expect the adoption of ASU 2014–15 to have a significant impact on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 Market Rate 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 December 31 2014, all cash and cash equivalents are immediately available cash balances.  A portion of our cash and cash equivalents are held in institutional money market funds.

  Interest Rate Risk

 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.

 Foreign Currency Exchange Rate Risk

 We do not have any material foreign currency exchange rate risk.

41

Item 8. Financial Statements and Supplementary Data.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

Index to Consolidated Financial Statements

	Page
Report of Independent Registered Public Accounting Firm	43
Consolidated Balance Sheets	44
Consolidated Statements of Operations	45
Consolidated Statements of Stockholders’ Equity	46
Consolidated Statements of Cash Flows	47
Notes to Consolidated Financial Statements	48

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the

Board of Directors and Shareholders of

Towerstream Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheets of Towerstream Corporation and Subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2014, 2013 and 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Towerstream Corporation and Subsidiaries as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for the years ended December 31, 2014, 2013 and 2012 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Towerstream Corporation and Subsidiaries’ internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 and our report dated, March 12, 2015, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Marcum LLP

Marcum LLP

New York, NY

March 12, 2015

43

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2014			2013
Assets
Current Assets
Cash and cash equivalents	$	38,027,509		$	28,181,531
Accounts receivable, net		1,310,647			611,548
Prepaid expenses and other current assets		926,699			925,587
Total Current Assets		40,264,855			29,718,666
Property and equipment, net		33,905,286			38,484,858
Intangible assets, net		2,199,858			3,088,827
Goodwill		1,674,281			1,674,281
Other assets		4,277,558			1,950,835
Total Assets	$	82,321,838		$	74,917,467
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	871,251		$	1,241,743
Accrued expenses		2,038,696			2,532,679
Deferred revenues		1,384,846			1,396,780
Current maturities of capital lease obligations		845,668			783,051
Other		57,242			67,255
Total Current Liabilities		5,197,703			6,021,508
Long-Term Liabilities
Long-term debt, net of debt discount of $3,194,147		32,101,409			-
Capital lease obligations, net of current maturities		1,285,858			1,805,336
Other		1,774,841			996,682
Total Long-Term Liabilities		35,162,108			2,802,018
Total Liabilities		40,359,811			8,823,526
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; 66,656,789 and 66,424,561 shares issued and outstanding, respectively		66,657			66,425
Additional paid-in-capital		157,631,299			154,171,695
Accumulated deficit		(115,735,929	)		(88,144,179	)
Total Stockholders' Equity		41,962,027			66,093,941
Total Liabilities and Stockholders' Equity	$	82,321,838		$	74,917,467

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

44

 TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Years Ended December 31,
	2014			2013			2012
Revenues	$	33,036,153		$	33,433,284		$	32,279,430
Operating Expenses
Cost of revenues (exclusive of depreciation)		24,520,028			21,854,163			15,376,136
Depreciation and amortization		13,639,415			15,351,441			13,634,294
Customer support services		4,796,038			4,883,219			5,712,463
Sales and marketing		5,570,191			5,779,500			6,134,020
General and administrative		10,336,504			11,033,057			12,168,183
Total Operating Expenses		58,862,176			58,901,380			53,025,096
Operating Loss		(25,826,023	)		(25,468,096	)		(20,745,666	)
Other Income/(Expense)
Interest expense, net		(1,672,846	)		(217,741	)		(63,714	)
Gain on business acquisitions		-			1,004,099			(40,079	)
Other income (expense), net		(14,349	)		(15,020	)		(13,860	)
Total Other Income/(Expense)		(1,687,195	)		771,338			(117,653	)
Loss before income taxes		(27,513,218	)		(24,696,758	)		(20,863,319	)
Provision for income taxes		(78,532	)		(78,531	)		(126,256	)
Net Loss	$	(27,591,750	)	$	(24,775,289	)	$	(20,989,575	)
Net loss per common share – basic and diluted	$	(0.41	)	$	(0.38	)	$	(0.39	)
Weighted average common shares outstanding – basic and diluted		66,803,767			65,181,310			54,434,173

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

45

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2014, 2013 and 2012

	Common Stock						Additional
	Shares			Amount			Paid-In- Capital			Accumulated Deficit			Total
Balance at December 31, 2011		54,256,083		$	54,256		$	119,469,969		$	(42,379,315	)	$	77,144,910
Cashless exercise of options		162,884			163			(163	)		-			-
Exercise of options		337,128			337			328,704			-			329,041
Issuance of common stock under employee stock purchase plan		28,723			29			117,222			-			117,251
Issuance of common stock upon vesting of restricted stock awards		30,000			30			(30	)		-			-
Stock-based compensation for options		-			-			1,532,282			-			1,532,282
Stock-based compensation for restricted stock		-			-			108,350			-			108,350
Adjustment to common stock issued for business acquisitions		(144,106	)		(144	)		(403,222	)		-			(403,366	)
Fair value of options repurchased		-			-			(34,985	)		-			(34,985	)
Net loss		-			-			-			(20,989,575	)		(20,989,575	)
Balance at December 31, 2012		54,670,712			54,671			121,118,127			(63,368,890	)		57,803,908
Cashless exercise of options		37,770			38			(38	)		-			-
Exercise of options		284,688			285			292,104			-			292,389
Issuance of common stock under employee stock purchase plan		31,267			31			80,687			-			80,718
Issuance of common stock upon vesting of restricted stock awards		15,000			15			(15	)		-			-
Net proceeds from issuance of common stock		11,000,000			11,000			30,488,336			-			30,499,336
Issuance of common stock for business acquisitions		385,124			385			950,871			-			951,256
Stock-based compensation for options		-			-			1,182,523			-			1,182,523
Stock-based compensation for restricted stock		-			-			59,100			-			59,100
Net loss		-			-			-			(24,775,289	)		(24,775,289	)
Balance at December 31, 2013		66,424,561			66,425			154,171,695			(88,144,179	)		66,093,941
Cashless exercise of options		192,270			192			(192	)					-
Issuance of common stock under employee stock purchase plan		24,958			25			46,903			-			46,928
Issuance of common stock upon vesting of restricted stock awards		15,000			15			(15	)		-			-
Stock-based compensation for options		-			-			953,470			-			953,470
Fair value of options repurchased		-			-			(3,793	)		-			(3,793	)
Debt discount associated with warrants issued in connection with issuance of debt		-			-			2,463,231			-			2,463,231
Net loss		-			-			-			(27,591,750	)		(27,591,750	)
Balance at December 31, 2014		66,656,789		$	66,657		$	157,631,299		$	(115,735,929	)	$	41,962,027

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

46

TOWERSTREAM CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS 

	For the Years Ended December 31,
	2014			2013			2012
Cash Flows from Operating Activities
Net Loss	$	(27,591,750	)	$	(24,775,289	)	$	(20,989,575	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		78,532			78,531			126,256
Provision for doubtful accounts		322,000			85,000			219,082
Depreciation for property, plant and equipment		12,750,446			12,257,624			10,262,526
Amortization for customer based intangibles		888,969			3,093,817			3,371,768
Amortization of debt issuance costs		262,820			-			-
Amortization of debt discount		319,084			-			-
Stock-based compensation		960,490			1,253,661			1,658,200
Gain on business acquisitions		-			(1,004,099	)		40,079
Loss on sale and disposition of property and equipment		-			120,644			171,230
Deferred rent		376,860			575,541			(104,207	)
Changes in operating assets and liabilities:
Accounts receivable		(1,021,099	)		(8,007	)		(202,051	)
Prepaid expenses and other current assets		(1,112	)		17,834			(537,609	)
Other assets		346,765			302,780			(1,289,698	)
Account payable		(370,492	)		48,766			(280,477	)
Accrued expenses		(1,018,263	)		(1,410,582	)		(169,467	)
Deferred revenues		(11,934	)		(120,659	)		(354,550	)
Accrued interest		295,556			-			-
Total Adjustments		14,178,622			15,290,851			12,911,082
Net Cash Used In Operating Activities		(13,413,128	)		(9,484,438	)		(8,078,493	)
Cash Flows From Investing Activities
Acquisitions of property and equipment		(7,306,942	)		(7,143,376	)		(20,722,510	)
Lease incentive payment from landlord		380,000			-			-
Acquisition of a business, net of cash acquired		-			(222,942	)		-
Proceeds from sale of property and equipment		-			18,365			12,850
Payments of security deposits		(42,568	)		(51,524	)		(345,129	)
Deferred acquisition payments		(67,246	)		(162,987	)		(288,339	)
Net Cash Used In Investing Activities		(7,036,756	)		(7,562,464	)		(21,343,128	)
Cash Flows From Financing Activities
Payments on capital leases		(796,513	)		(784,198	)		(492,479	)
Proceeds upon exercise of options		-			292,389			329,041
Issuance of common stock under employee stock purchase plan		39,908			68,680			99,683
Net proceeds from debt financing		31,056,260			-			-
Fair value of options repurchased		(3,793	)		-			(34,985	)
Net proceeds from sale of common stock		-			30,499,336			-
Net Cash Provided By (Used In) Financing Activities		30,295,862			30,076,207			(98,740	)
Net Increase (Decrease) In Cash and Cash Equivalents		9,845,978			13,029,305			(29,520,361	)
Cash and Cash Equivalents – Beginning of year		28,181,531			15,152,226			44,672,587
Cash and Cash Equivalents – Ending of year	$	38,027,509		$	28,181,531		$	15,152,226
Supplemental Disclosures of Cash Flow Information
Cash paid during the periods for:
Interest	$	833,364		$	220,634		$	105,245
Taxes	$	24,609		$	21,619		$	19,993
Non-cash investing and financing activities:
Fair value of common stock (returned)/ issued in connection with acquisitions	$	-		$	951,256		$	(403,366	)
Acquisition of property and equipment:
Under capital leases	$	339,652		$	80,894		$	2,915,580
Included in accrued expenses	$	524,280		$	867,311		$	1,240,774
Other	$	-		$	-		$	18,679

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

47

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO 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, 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”). Hetnets was formed to operate a new shared wireless infrastructure platform that emerged from the Company's efforts to identify opportunities to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets operates a carrier-class network which has been constructed on "street level rooftops" which are closer to the ground (where Wi-Fi and small cell can operate with less interference from the macro cell) than the Company's traditional fixed wireless network. The Company believes that the wireless communications industry is experiencing a fundamental shift from its traditional macro-cellular architecture to densified small cell architecture where existing cell sites will be supplemented by many smaller base stations operating near street level. Hetnets is structured to operate like a tower company and expects 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, Distributed Antenna System (“DAS”), and Metro and Pico cells, (ii) rental of a channel on Hetnets’ Wi-Fi network for Internet access and the offloading of mobile data, (iii) rental of a port for backhaul or transport, and (iv) power and other related services. The Company refers to the activities of Hetnets as its “Shared Wireless Infrastructure” (or “Shared Wireless”) business.

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

In August 2014, the Company executed a master licensing agreement ("MLA") with a carrier for small cell deployments. The MLA establishes the detailed terms and conditions under which individual orders are governed, and are generally designed to expedite the deployment process. The term of this agreement is for 25 years.

Note 2.    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.

Use of Estimates.     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Actual results could differ from those estimates.

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

Concentration of Credit Risk.     Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, 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, 2014, the Company had cash and cash equivalent balances of approximately $37,506,000 in excess of the federally insured limit of $250,000.

48

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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. Changes in the allowance for doubtful accounts were as follows: 

	Years Ended December 31,
	2014			2013
Beginning of period	$	81,009		$	190,109
Additions		322,000			85,000
Deductions		(343,736	)		(194,100	)
End of period	$	59,273		$	81,009

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 5 years; furniture, fixtures and other from 3 to 5 years and information technology from 3 to 5 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 statement of operations.

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 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 Company has determined that there were no impairments of property and equipment or intangible assets during the years ended December 31, 2014 and 2013.

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 (“Company Locations”) 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.

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 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 identifiable assets acquired and liabilities assumed is recognized as goodwill. If this consideration is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed and included in general and administrative expenses in the Company’s consolidated statements of operations.

The highest level of judgment and estimation involved in accounting for business acquisitions relates to determining the fair value of the customer relationships and network assets acquired. In each of the five acquisitions completed over the past four years, the highest asset value has been allocated to the customer relationships acquired. Determining the fair value of customer relationships involves judgments and estimates regarding how long the customers will continue to contract services with the Company. During the course of completing five acquisitions, the Company has developed a database of historical experience from prior acquisitions to assist in preparing future estimates of cash flows. Similarly, the Company has used its historical experience in building networks to prepare estimates regarding the fair value of the network assets that it acquires.

49

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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 assessment and determined that there was no impairment of goodwill as of December 31, 2014 and 2013, respectively.

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.

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, 2014, 2013 and 2012 were approximately $1,133,000, $1,100,000 and $1,096,000, respectively, and are included in sales and marketing expenses in the Company’s consolidated statements of operations.

Intrinsic Value of Stock Options and Warrants. 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-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. All potentially dilutive common shares have been excluded since their inclusion would be anti-dilutive.

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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. The exercise of the stock options and warrants outstanding at December 31, 2014 would generate proceeds up to approximately $16,203,000.

	Years Ended December 31,
	2014		2013		2012
Stock options		3,997,695		4,055,016		3,916,045
Warrants		2,850,000		450,000		450,000
Total		6,847,695		4,505,016		4,366,045

Reclassifications.    Certain accounts in the prior years’ 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.

Recent Accounting Pronouncements. In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” which requires an entity to recognize revenue representing the transfer of promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. ASU 2014-09 is intended to establish principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenues and cash flows arising from the entity’s contracts with customers. ASU 2014-09 will replace most existing revenue recognition guidance in Generally Accepted Accounting Principles (“GAAP”) when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The Company is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

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 is effective for the Company on January 1, 2016. The Company does not expect adoption of ASU 2014-12 to have a significant impact on its consolidated financial statements.

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 is effective for the Company on January 1, 2017. The Company does not expect the adoption of ASU 2014–15 to have a significant impact on its consolidated financial statements. 

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

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 and determined that the acquisition 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. The number of shares issued was based on the closing price of the Company's common stock on the February 28, 2013 closing date which was $2.47.

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	Original			Adjustments			Final
Fair value of consideration transferred:
Cash	$	225,000		$	-		$	225,000
Common stock		1,071,172			(119,916	)		951,256
Other liabilities assumed		-			36,733			36,733
Capital lease obligations assumed		128,929			-			128,929
Total consideration transferred		1,425,101			(83,183	)		1,341,918
Fair value of identifiable assets acquired and liabilities assumed:
Cash		2,058			-			2,058
Accounts receivable		80,524			1,286			79,238
Property and equipment		826,524			18,824			807,700
Security deposits		1,993			-			1,993
Accounts payable		(26,970	)		2,566			(29,536	)
Deferred revenue		(62,110	)		(2,135	)		(59,975	)
Other liabilities		(89,930	)		-			(89,930	)
Total identifiable net tangible assets		732,089			20,541			711,548
Customer relationships		1,634,469			-			1,634,469
Total identifiable net assets		2,366,558			20,541			2,346,017
Gain on business acquisition	$	941,457		$	62,642		$	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 consolidated statements of operations for the year ended December 31, 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 which 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.

The results of operations of Delos have been included in the Company’s consolidated statements of operations since the completion of the acquisition in February 2013. Revenues generated from customers acquired from Delos totaled approximately $517,000 for the year ended December 31, 2013.

During the years ended December 31, 2013 and 2012, respectively, the Company incurred approximately $99,000 and $59,000 of third-party costs in connection with the Delos acquisition. These expenses are included in the general and administrative expenses in the Company’s consolidated statements of operations.

Color Broadband Communications

In December 2011, the Company completed the acquisition of Color Broadband Communications (“Color Broadband”) and determined that it 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. The number of shares issued was based on the closing price of the Company's common stock on the December 2, 2011 closing date which was $2.47.

	Original			Adjustments			Final
Fair value of consideration transferred:
Cash	$	2,800,000		$	-		$	2,800,000
Common stock		2,286,567			(243,309	)		2,043,258
Other liabilities assumed		121,777			-			121,777
Capital lease obligations assumed		111,537			22,424			133,961
Total consideration transferred		5,319,881			(220,885	)		5,098,996
Fair value of identifiable assets acquired and liabilities assumed:
Customer relationships		4,584,756			(39,816	)		4,544,940
Property and equipment		1,976,852			-			1,976,852
Accounts receivable		383,947			(420	)		383,527
Security deposits		7,506			-			7,506
Prepaid expenses and other current assets		48,425			-			48,425
Accounts payable		(5,984	)		-			(5,984	)
Deferred revenue		(488,875	)		(4,106	)		(492,981	)
Customer credits		(656	)		(216,622	)		(217,278	)
Total identifiable net assets		6,505,971			(260,964	)		6,245,007
Gain on business acquisition	$	1,186,090		$	(40,079	)	$	1,146,011

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The Company recognized a gain on business acquisition of $1,146,011 which is included in other income (expense) in the Company’s consolidated statements of operations of which $1,186,090 was recognized in the year ended December 31, 2011 and subsequently adjusted by $40,079 in the year ended December 31, 2012. The challenging economic environment during 2011 made it difficult for smaller companies like Color Broadband to raise sufficient capital to sustain their growth.  As a result, the Company was able to acquire the customer relationships and wireless network of Color Broadband at a discounted price.

In May 2012, the Company finalized the purchase price of Color Broadband which resulted in a reduction of approximately $261,000 of identifiable net assets and a reduction in the gain on business acquisition of approximately $40,000. The purchase price adjustment resulted in a decrease in the number of shares of common stock issued to Color Broadband of 98,506 from 925,736 to 827,230 shares. In addition, 45,600 shares of common stock were returned to the Company principally representing accounts receivable collections retained by Color Broadband during the post-closing transition services period.

During the year ended December 31, 2012, the Company incurred approximately $359,000 of third-party costs in connection with the Color Broadband acquisition. These expenses are included in the general and administrative expenses in the Company’s consolidated statements of operations. 

Pro Forma Information

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

	Years Ended December 31,
	2013			2012
Revenues	$	33,545,854		$	32,954,850
Amortization expense		3,159,196			3,764,041
Total operating expenses		59,073,359			54,056,970
Net loss		(24,756,167	)		(21,219,773	)
Basic net loss per share	$	(0.38	)	$	(0.39	)

The pro forma information presented above does not purport to present what actual results would have been had the Delos acquisition actually occurred at the beginning of 2013 and 2012 nor does the information project results for any future period.

Note 4.    Property and Equipment

Property and equipment is comprised of: 

	As of December 31,
	2014		2013
Network and base station equipment	$	35,836,469	$	32,233,262
Customer premise equipment		26,511,691		24,244,017
Shared wireless infrastructure		21,044,189		19,128,064
Information technology		4,628,555		4,417,869
Furniture, fixtures and other		1,669,340		1,661,567
Leasehold improvements		1,599,393		1,433,984
		91,289,637		83,118,763
Less: accumulated depreciation		57,384,351		44,633,905
Property and equipment, net	$	33,905,286	$	38,484,858

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

	As of December 31,
	2014		2013
Network and base station equipment	$	1,003,875	$	828,027
Shared wireless infrastructure		1,230,305		1,216,142
Customer premise equipment		246,484		96,843
Information technology		1,860,028		1,860,028
		4,340,692		4,001,040
Less: accumulated depreciation		2,135,534		1,333,666
Property acquired through capital leases, net	$	2,205,158	$	2,667,374

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Note 5. Intangible Assets

Intangible assets consist of the following: 

	As of December 31,
	2014		2013
Goodwill	$	1,674,281	$	1,674,281
Customer relationships	$	11,856,127	$	11,856,127
Less: accumulated amortization of customer relationships		10,940,824		10,051,855
Customer relationships, net		915,303		1,804,272
FCC licenses		1,284,555		1,284,555
Intangible assets, net	$	2,199,858	$	3,088,827

Amortization expense for the years ended December 31, 2014, 2013 and 2012 was $888,969, $3,093,817 and $3,371,768, respectively. The customer contracts acquired in December 2010 for the Pipeline Wireless LLC acquisition were amortized over a 17 month period which ended May 2012. The customer contracts acquired in May 2011 for the One Velocity, Inc. acquisition were amortized over a 30 month period ending November 2013. The customer contracts acquired in the Color Broadband acquisition were amortized over a 28 month period ending April 2014. The customer contracts acquired in the Delos acquisition are being amortized over a 50 month period ending April 2017. As of December 31, 2014, the remaining amortization period for the Delos acquisition was 28 months. Balances related to the Company’s other acquisitions have been fully amortized. Future amortization expense is as follows:

Years Ending December 31,
2015	$	392,272
2016		392,272
2017		130,759
	$	915,303

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

Note 6. Accrued Expenses

Accrued expenses consist of the following:	As of December 31,
	2014		2013
Payroll and related	$	726,917	$	937,624
Property and equipment		524,280		867,311
Other		280,413		293,402
Professional services		256,534		186,917
Network		187,440		138,684
Marketing		63,112		108,741
Total	$	2,038,696	$	2,532,679

Network represents costs incurred to provide services to the Company’s customers including tower rentals, bandwidth, troubleshooting and gear removal.

Note 7.    Other Liabilities

Other liabilities consist of the following:	As of December 31,
	2014		2013
Current
Deferred rent	$	46,058	$	-
Deferred acquisition payments		11,184		67,255
Total	$	57,242	$	67,255
Long-Term
Deferred rent	$	1,373,163	$	662,361
Deferred acquisition payments		341		11,516
Deferred taxes		401,337		322,805
Total	$	1,774,841	$	996,682

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Deferred acquisition payments related to Delos totaled $11,525 at December 31, 2014 and bear interest at a rate of 7%. In May 2014, the Company made its last deferred acquisition payment of $16,630 related to the acquisition of Pipeline Wireless LLC.

Note 8.    Long-Term Debt

In October 2014, the Company entered into a loan agreement (the "Loan Agreement") with Melody Business Finance, LLC (the "Lender") which provided the Company with a five-year $35 million term loan (the "Financing" or "Note").  The Note was issued at a 3% discount totaling $1,050,000 which is being amortized over the term of the Note.  The Company recognized interest expense of $95,365 in connection with the amortization of this discount in 2014, and the unamortized balance totaled $954,635 at December 31, 2014.

     The loan bears interest payable in cash at a rate equal to the greater of (i) the sum of the one month Libor rate on each payment date plus 7% or (ii) 8% per annum, and additional paid in kind (“PIK”), or deferred, interest that accrues at 4% per annum.   The Company paid $591,111 of interest and accrued $295,556 of PIK interest for the year ended December 31, 2014.

     In October 2019, the Company must repay the principal amount outstanding plus all accrued interest.  The Company has the option of prepaying the loan (i) on or before October 16, 2016 (the “Second Anniversary”), but only in full, and (ii) at any time after the Second Anniversary, in the minimum principal amount of $5,000,000 or in full if the balance outstanding is less. All optional prepayments are subject to certain premiums.  Mandatory prepayments are required upon the occurrence of certain events, including but not limited to the (i) 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.  As further set forth in a security agreement (the “Security Agreement”), repayment of the loan is secured by a first priority lien and security interest in all of the assets of the Company and its subsidiaries, excluding capital stock of the Company, and certain capital leases, contracts and assets secured by purchase money security interests.  

    The Loan Agreement also 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). 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 Loan Agreement.  As of December 31, 2014, the Company was in compliance with all of the debt covenants.

    In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, the Company issued warrants (the “Warrants”) to purchase 3,600,000 shares of common stock of which two-thirds have an exercise price of $1.26 and one-third have an exercise price of $0.01, subject to customary adjustments under certain circumstances.  The Warrants have a term of seven and a half years.  The fair value of the warrants granted to the Lender of $2,463,231 was calculated using the Black-Scholes option pricing model and recorded as a debt discount.  The debt discount is being amortized over the term of the Note using the effective interest rate.  The Company recognized interest expense of $223,719 in connection with the amortization of this discount in 2014, and the unamortized balance totaled $2,239,512 at December 31, 2014.

   The warrant holders have piggyback registration rights requiring the inclusion of the shares of common stock issuable upon exercise of the Warrants (the “Warrant Shares”) in any registration statement filed by the Company.  In addition, the Company has agreed to file a registration statement to register for resale all of the Warrant Shares and cause the registration statement to become effective by October 16, 2015 (the “Required Registration Statement”).  If the Required Registration Statement is not declared effective by the required date, then (i) the Warrants may be exercised on a cashless basis until the Required Registration Statement becomes effective and the Warrant Shares are listed for trading and (ii) the Company shall pay the holders liquidated damages in the aggregate amount of $5,000 per month, up to $50,000 in total, until both the Required Registration Statement has become effective and the Warrant Shares are listed. 

The Company incurred costs, primarily professional services, of approximately $2,900,000 related to the Loan Agreement.  These costs were recorded as other assets in the Company’s consolidated balance sheet and are being amortized over the term of the Loan Agreement using the effective interest rate.  Amortization expense totaled $262,820 in 2014, and the unamortized balance totaled $2,630,919 at December 31, 2014. 

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Note 9.    Capital Stock

The Company is authorized to issue 5,000,000 shares of preferred stock at a par value of $0.001. There was no preferred stock outstanding as of December 31, 2014 and 2013, respectively.

The Company is authorized to issue 95,000,000 shares of common stock at a par value of $0.001. The holders of common stock are entitled to one vote per share. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of legally available funds. Upon liquidation, dissolution or winding-up, the holders of the Company’s common stock are entitled to share ratably in all assets that are legally available for distribution. The holders of the Company’s common stock have no preemptive, subscription, redemption or conversion rights. The 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 board of directors and issued in the future.

In November 2010, the Company adopted a shareholder rights plan (the “Rights Plan”). Under the Rights Plan, the Company issued one preferred share purchase 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. In general, the rights will become exercisable if a person or group acquires 15% or more of the Company’s common stock or announces a tender offer or exchange offer for 15% or more of the Company’s common stock. Each holder of a right will be allowed to purchase one one-hundredth of a share of a newly created series of the Company’s preferred shares at an exercise price of $18.00. 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.

Stock options were exercised by current or former employees as follows:

	For the Years Ended December 31,
	2014		2013		2012
Cash basis:
Total options exercised		-		284,688		337,128
Total proceeds received	$	-	$	292,389	$	329,041
Cashless basis:
Total options exercised		340,906		135,471		256,955
Net issuance of common stock		192,270		37,770		162,884

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 or warrant compared to the current market price of the Company’s common stock on the date of exercise.

In December 2011, the Company issued 925,736 shares of common stock to Color Broadband as part of the consideration paid for the acquisition. The fair value of the common stock issued was $2,286,567. In May 2012, the Company reduced the number of shares of common stock issued to Color Broadband by 98,506 as a result of an adjustment to the purchase price. In addition, 45,600 shares of common stock were returned to the Company principally representing accounts receivable collections retained by Color Broadband during the post-closing transition services period. The reduction of common stock had a fair value of $403,366.

In February and March 2013, the Company completed an underwritten offering at $3.00 per share which resulted in gross proceeds of $33,000,000 and the issuance of 11,000,000 shares. The Company incurred costs of approximately $2,501,000 related to the offering.

In February 2013, the Company issued 433,673 shares of common stock to Delos as part of the consideration paid for the acquisition. The fair value of the common stock issued was $1,071,172. In May 2013, the Company reduced the number of shares of common stock issued to Delos by 48,549 as a result of an adjustment to the purchase price. The reduction of common stock had a fair value of $119,916.

Note 10. 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 2,403,922. A total of 1,828,063 stock options or common stock have been issued under the 2007 Plan as of December 31, 2014.

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The 2007 Incentive Stock Plan became effective in May 2007 and provides for the issuance of up to 2,500,000 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 2,500,000 to 5,000,000 in November 2012. A total of 2,838,840 stock options, common stock or restricted stock have been issued under the 2007 Incentive Stock Plan as of December 31, 2014.

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, 2014 under the 2007 Plan and the 2007 Incentive Stock Plan combined is 2,737,019 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 1,000,000 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 2,000,000. A total of 1,200,000 stock options or common stock have been issued under the 2008 Directors Plan as of December 31, 2014. 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, 2014 under the 2008 Directors Plan is 800,000 shares.

The Company uses the Black-Scholes model to value options granted to employees, directors and consultants. Compensation expense, including the effect of forfeitures, is recognized over the period of service, generally the vesting period. Stock-based compensation for the amortization of stock options granted under the Company’s stock option plans totaled $953,470, $1,182,523, and $1,532,282 for the years ended December 31, 2014, 2013, and 2012, respectively. Stock-based compensation is included in general and administrative expenses in the accompanying consolidated statements of operations.

The unamortized amount of stock options expense was $1,075,893 as of December 31, 2014 which will be recognized over a weighted-average period of 1.6 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,
	2014			2013			2012
Risk-free interest rate		1.1% -1.8	%		0.8% - 1.9	%		0.6% - 1.0	%
Expected volatility		47% - 60	%		65% - 68	%		65% - 74	%
Expected life (in years)		4.1 - 5.3			5.0 - 6.5			5.0 - 5.3
Expected dividend yield		0	%		0	%		0	%

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. Beginning in the fourth quarter of 2014, the Company began utilizing its historical data regarding the Company’s activity as it relates to 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.

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 vested over a three year period, of which 60,000 shares were vested and 30,000 shares of restricted stock were forfeited due to the resignation of an executive in November 2012. Stock-based compensation for restricted stock totaled zero, $59,100 and $108,350 for the years ended December 31, 2014, 2013 and 2012, respectively. There was no unrecognized compensation cost at December 31, 2014.

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Option transactions under the stock option plans during the years ended December 31, 2014, 2013 and 2012 were as follows:

	Number ofOptions			Weighted AverageExercisePrice
Outstanding as of January 1, 2012		4,635,624		$	2.85
Granted during 2012		250,000			3.62
Exercised		(594,083	)		1.19
Forfeited /expired		(375,496	)		6.04
Outstanding as of December 31, 2012		3,916,045		$	2.85
Granted during 2013		950,000			2.40
Exercised		(420,159	)		1.23
Forfeited /expired		(390,870	)		5.07
Outstanding as of December 31, 2013		4,055,016		$	2.70
Granted during 2014		737,073			1.42
Exercised		(340,906	)		0.74
Forfeited /expired		(453,488	)		1.78
Outstanding as of December 31, 2014		3,997,695		$	2.73
Exercisable as of December 31, 2014		2,724,763		$	2.84

Grants under the stock option plans were as follows:

	For the Years Ended December 31,
	2014		2013		2012
Annual grants to outside directors		200,000		200,000		200,000
Executive grants		172,073		125,000		-
Employee grants		315,000		625,000		-
Non-employee grants		50,000		-		50,000
Total		737,073		950,000		250,000

All options granted during the reporting period had a ten year term and were issued at an exercise price equal to the fair value on the date of grant. Director grants vest 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 two year period from the date of issuance. Employee grants vest over a two or three year period from the date of issuance. Non-employee grants vesting periods range from vesting immediately upon issuance to vesting over one year from the date of issuance.

Forfeited or expired options under the stock option plans were as follows:

	For the Years Ended December 31,
	2014		2013		2012
Employee terminations		185,208		390,870		281,746
Expired		254,030		-		75,000
Repurchased		14,250		-		18,750
Total		453,488		390,870		375,496

The weighted-average fair values of the options granted during 2014, 2013, and 2012 were $0.67, $1.44, and $2.16, respectively. Outstanding options of 3,997,695 as of December 31, 2014 had exercise prices that ranged from $0.68 to $5.25 and had a weighted-average remaining contractual life of 6.3 years. Exercisable options of 2,724,763 as of December 31, 2014 had exercise prices that ranged from $0.68 to $5.25 and had a weighted-average remaining contractual life of 5.2 years.

The aggregate intrinsic value of outstanding and exercisable options totaled $683,423 and $361,785, respectively, as of December 31, 2014. The closing price of the Company’s common stock at December 31, 2014, was $1.85 per share.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Stock Warrants

Warrant transactions during the years ended December 31, 2014, 2013 and 2012 were as follows:

	Number of Warrants		Weighted Average Exercise Price
Outstanding as of December 31, 2012 and 2013		450,000	$	5.00
Granted during 2014		3,600,000	$	0.84
Outstanding as of December 31, 2014		4,050,000	$	1.31

In October 2014, the Company issued 3,600,000 warrants to purchase shares of common stock under the Company’s Financing of which 1,200,000 warrants had an exercise price of $0.01 per share and 2,400,000 warrants had an exercise price of $1.26 per share.

As of December 31, 2014, all warrants were exercisable and had a weighted average remaining contractual life of 6.7 years.

The aggregate intrinsic value associated with the warrants outstanding and exercisable as of December 31, 2014 was $3,624,000. The closing price of the Company’s common stock at December 31, 2014 was $1.85 per share.

Note 11. 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, 2014, 2013 and 2012.

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 of which 111,580 shares have been issued to date and 88,420 shares are available for future issuance. During the years ended December 31, 2014, 2013, and 2012 a total of 24,958, 31,267, and 28,723 shares were issued under the ESPP Plan with a fair value of $46,928, $80,718 and $117,251 respectively. The Company recognized $7,020, $12,038, and $17,568 of stock-based compensation related to the 15% discount for the years ended December 31, 2014, 2013, and 2012 respectively.

Note 12. Income Taxes

The provision for income taxes consists of the following:  

	Years Ended December 31,
	2014			2013			2012
Current
Federal	$	-		$	-		$	-
State		-			-			-
Total current		-			-			-
Deferred
Federal		(9,325,074	)		(8,333,801	)		(7,017,749	)
State		(1,645,601	)		(1,470,671	)		(1,238,426	)
Change in valuation allowance		11,049,207			9,883,003			8,382,431
Total deferred		78,532			78,531			126,256
Provision for income taxes	$	78,532		$	78,531		$	126,256

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,
	2014			2013			2012
U.S. Federal statutory rate		(34.0	)%		(34.0	)%		(34.0	)%
State taxes		(6.0	)%		(6.0	)%		(6.0	)%
Permanent differences		0.1	%		0.3	%		0.2	%
Valuation allowance		40.2	%		40.0	%		40.4	%
Effective tax rate		0.3	%		0.3	%		0.6	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The Company files income tax returns for Towerstream Corporation and its subsidiaries in the U.S. federal and various state jurisdictions.  As of December 31, 2014, the tax returns for Towerstream Corporation for the years 2011 through 2014 remain open to examination by the Internal Revenue Service and various state authorities.

The Company’s deferred tax assets (liabilities) consisted of the effects of temporary differences attributable to the following:

	Years Ended December 31,
	2014			2013
Deferred tax assets
Net operating loss carryforwards	$	43,362,260		$	33,757,218
Stock-based compensation		2,094,946			1,802,488
Intangible assets		2,583,348			2,441,722
Debt discount		252,788			-
Allowance for doubtful accounts		23,710			32,404
Other		32,716			184,811
Total deferred tax assets		48,349,768			38,218,643
Valuation allowance		(45,195,445	)		(34,146,238	)
Deferred tax assets, net of valuation allowance		3,154,323			4,072,405
Deferred tax liabilities
Depreciation		(3,154,323	)		(4,072,405	)
Intangible assets		(401,337	)		(322,805	)
Total deferred tax liabilities		(3,555,660	)		(4,395,210	)
Net deferred tax liabilities	$	(401,337	)	$	(322,805	)

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 derecogntion, classification, interest and penalties, accounting in interim periods, disclosure and transition.

As of December 31, 2014 and 2013, 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, 2014, 2013, and 2012. 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.

     As of December 31, 2014, 2013 and 2012, the Company had approximately $108,406,000, $84,417,000, and $60,388,000, respectively, of federal and state NOL carryovers. Federal NOLs will begin expiring in 2027. State NOLs began expiring in 2012.

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, 2014 and 2013. The change in valuation allowance was $11,049,207 and $9,883,003, respectively for the years ended December 31, 2014 and 2013.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 Note 13.    Fair Value Measurement

Valuation Hierarchy

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. There were no changes in the valuation techniques during the year ended December 31, 2014.

	Total Carrying Value		Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
December 31, 2014	$	38,027,509	$	38,027,509	$	-	$	-
December 31, 2013	$	28,181,531	$	28,181,531	$	-	$	-

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 August 2023. 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 December 31, 2014, total future operating lease obligations were as follows:

Years Ending December 31,
2015	$	20,885,399
2016		19,548,552
2017		13,793,190
2018		6,281,442
2019		2,758,765
Thereafter		1,029,448
	$	64,296,796

Rent expenses were as follows:

	Year Ended December 31 ,
	2014		2013		2012
Points of Presence	$	7,746,573	$	7,128,778	$	5,823,961
Street level rooftops		13,183,209		11,067,316		5,313,649
Corporate offices		336,437		518,245		493,111
Other		362,281		437,718		389,461
	$	21,628,500	$	19,152,057	$	12,020,182

Rent expenses related to Points of Presence, street level rooftops and other were included in cost of revenues 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.

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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. The Company spent approximately $600,000 in leasehold improvements in connection with consolidating its corporate based employees from two buildings into one building. The Landlord agreed to contribute $380,000 in funding towards qualified leasehold improvements and made such payment to the Company in February 2014. 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 60 month period. Total annual rent payments begin at $53,130 and escalate by 3% annually.

    Capital Lease Obligations

The Company has entered into capital leases to acquire property and equipment expiring through March 2018. As of December 31, 2014, total future capital lease obligations were as follows: 

Years Ending December 31,
2015	$	1,042,934
2016		790,345
2017		517,727
2018		53,922
	$	2,404,928
Less: Interest expense		273,402
Total capital lease obligations	$	2,131,526
Current	$	845,668
Long-Term	$	1,285,858

Other.During the fourth quarter of 2013, the Company renewed a one year information technology infrastructure support agreement. The agreement becomes effective at the end of the first quarter of 2014. Payments of approximately $121,000 are due quarterly through the first quarter of 2015.

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 the Company’s 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 the Company’s operating segments:

	Three Months Ended December 31, 2014 (Unaudited)
	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Eliminations			Total
Revenues	$	7,308,005	$	827,289		$	-		$	(45,499	)	$	8,089,795
Operating Expenses
Cost of revenues (exclusive of depreciation)		2,684,310		3,708,024			4,417			(45,499	)		6,351,252
Depreciation and amortization		2,098,737		1,025,192			220,614			-			3,344,543
Customer support services		326,465		180,866			725,136			-			1,232,467
Sales and marketing		1,274,405		51,139			70,944			-			1,396,488
General and administrative		226,276		101,695			2,282,010			-			2,609,981
Total Operating Expenses		6,610,193		5,066,916			3,303,121			(45,499	)		14,934,731
Operating Income (Loss)	$	697,812	$	(4,239,627	)	$	(3,303,121	)	$	-		$	(6,844,936	)
Capital expenditures	$	1,523,831	$	202,310		$	43,473		$	-		$	1,769,614

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

	Three Months Ended December 31, 2013 (Unaudited)
	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Eliminations			Total
Revenues	$	7,917,411	$	649,781		$	-		$	(45,969	)	$	8,521,223
Operating Expenses
Cost of revenues (exclusive of depreciation)		2,704,120		3,575,172			28,949			(45,969	)		6,262,272
Depreciation and amortization		2,651,546		875,471			170,869			-			3,697,886
Customer support services		342,850		197,391			543,291			-			1,083,532
Sales and marketing		1,302,457		62,365			81,390			-			1,446,212
General and administrative		148,484		182,131			2,328,642			-			2,659,257
Total Operating Expenses		7,149,457		4,892,530			3,153,141			(45,969	)		15,149,159
Operating Income (Loss)	$	767,954	$	(4,242,749	)	$	(3,153,141	)	$	-		$	(6,627,936	)
Capital expenditures	$	1,160,116	$	1,264,893		$	908,796		$	-		$	3,333,805

	Year Ended December 31, 2014
	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Eliminations			Total
Revenues	$	30,119,587	$	3,099,972		$	-		$	(183,406	)	$	33,036,153
Operating Expenses
Cost of revenues (exclusive of depreciation)		10,435,035		14,220,122			48,277			(183,406	)		24,520,028
Depreciation and amortization		8,697,630		3,957,784			984,001			-			13,639,415
Customer support services		1,205,229		683,208			2,907,601			-			4,796,038
Sales and marketing		5,029,112		229,013			312,066			-			5,570,191
General and administrative		600,440		568,985			9,167,079			-			10,336,504
Total Operating Expenses		25,967,446		19,659,112			13,419,024			(183,406	)		58,862,176
Operating Income (Loss)	$	4,152,141	$	(16,559,140	)	$	(13,419,024	)	$	-		$	(25,826,023	)
Capital expenditures	$	5,567,966	$	2,220,644		$	382,264		$	-		$	8,170,874
As of December 31, 2014
Property and equipment, net	$	21,036,228	$	10,758,309		$	2,110,749		$	-		$	33,905,286
Total assets	$	25,809,743	$	13,333,467		$	43,178,628		$	-		$	82,321,838

	Year Ended December 31, 2013
	Fixed Wireless		Shared Wireless Infrastructure			Corporate			Eliminations			Total
Revenues	$	32,075,680	$	1,540,700		$	-		$	(183,096	)	$	33,433,284
Operating Expenses
Cost of revenues (exclusive of depreciation)		9,933,588		11,980,098			123,573			(183,096	)		21,854,163
Depreciation and amortization		11,062,809		3,508,646			779,986			-			15,351,441
Customer support services		1,243,201		784,779			2,855,239			-			4,883,219
Sales and marketing		5,127,756		301,578			350,166			-			5,779,500
General and administrative		592,347		668,627			9,772,083			-			11,033,057
Total Operating Expenses		27,959,701		17,243,728			13,881,047			(183,096	)		58,901,380
Operating Income (Loss)	$	4,115,979	$	(15,703,028	)	$	(13,881,047	)	$	-		$	(25,468,096	)
Capital expenditures	$	4,518,874	$	2,314,236		$	1,258,469		$	-		$	8,091,579
As of December 31, 2013
Property and equipment, net	$	23,069,396	$	12,802,647		$	2,612,815		$	-		$	38,484,858
Total assets	$	28,885,389	$	15,130,388		$	30,901,690		$	-		$	74,917,467

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Note 16. Quarterly Financial Information (unaudited)

	Three Months Ended
	March 31, 2014			June 30, 2014			September 30, 2014			December 31, 2014
Revenues	$	8,379,906		$	8,264,848		$	8,301,604		$	8,089,795
Operating Expenses		14,823,032			14,596,336			14,508,077			14,934,731
Operating Loss		(6,443,126	)		(6,331,488	)		(6,206,473	)		(6,844,936	)
Net Loss		(6,509,807	)		(6,394,606	)		(6,254,073	)		(8,433,264	)
Net Loss per common share – basic and diluted		(0.10	)		(0.10	)		(0.09	)		(0.12	)
Weighted average number of shares outstanding – basic and diluted		66,439,061			66,478,686			66,643,804			67,642,056

 

	Three Months Ended
	March 31, 2013			June 30, 2013			September 30, 2013			December 31, 2013
Revenues	$	8,299,223		$	8,212,175		$	8,400,664		$	8,521,223
Operating Expenses		14,827,742			14,443,667			14,480,814			15,149,159
Operating Loss		(6,528,519	)		(6,231,492	)		(6,080,150	)		(6,627,936	)
Net Loss		(5,626,306	)		(6,231,150	)		(6,143,393	)		(6,774,441	)
Net Loss per common share – basic and diluted		(0.09	)		(0.09	)		(0.09	)		(0.10	)
Weighted average number of shares outstanding – basic and diluted		61,464,706			66,370,789			66,402,499			66,419,380

	Three Months Ended
	March 31, 2012			June 30, 2012			September 30, 2012			December 31, 2012
Revenues	$	7,819,059		$	8,103,321		$	8,127,507		$	8,229,543
Operating Expenses		12,189,123			12,817,112			13,507,490			14,511,371
Operating Loss		(4,370,064	)		(4,713,791	)		(5,379,983	)		(6,281,828	)
Net Loss		(4,380,132	)		(4,758,659	)		(5,408,234	)		(6,442,550	)
Net Loss per common share – basic and diluted		(0.08	)		(0.09	)		(0.10	)		(0.12	)
Weighted average number of shares outstanding – basic and diluted		54,312,066			54,369,177			54,403,237			54,648,241

64

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. 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 December 31, 2014, 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 fourth quarter of the year ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:  

● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework in 2013.

Based on our assessment, our management has concluded that, as of December 31, 2014, our internal control over financial reporting is effective based on those criteria.

65

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Audit Committee of the

Board of Directors and Shareholders of

Towerstream Corporation and Subsidiaries

We have audited Towerstream Corporation and Subsidiaries' (the “Company”) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.

In our opinion, Towerstream Corporation and Subsidiaries maintained, in all material aspects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2014 and 2013 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2014 and 2013 and 2012 of the Company and our report dated March 12, 2015 expressed an unqualified opinion on those financial statements.

/s/ Marcum LLP

Marcum LLP

New York, NY

March 12, 2015

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Item 9B. Other Information.

None.

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PART III 

Item 10. Directors, Executive Officers and Corporate Governance.

Directors and Executive Officers

The following table sets forth the names, ages, and positions of the current directors and executive officers of Towerstream Corporation (“Towerstream”, “we”, “us”, “our” or the “Company”). Our directors hold office for one-year terms until the following annual meeting of stockholders and until his or her successor has been elected and qualified or until the director’s earlier resignation or removal. Officers are elected annually by the Board of Directors (the “Board”) and serve at the discretion of the Board.

Name	Age	Position
Jeffrey M. Thompson	50	President, Chief Executive Officer and Director
Philip Urso	55	Chairman of the Board of Directors
Joseph P. Hernon	54	Chief Financial Officer
Howard L. Haronian, M.D. (1)(2)(3)	53	Director
Paul Koehler (1)(3)	55	Director
William J. Bush (1)(2)	49	Director

 

(1) Member of our Audit Committee.

(2) Member of our Compensation Committee.

(3) Member of our Nominating Committee.

The biographies below include information related to service by the persons below to Towerstream Corporation and our subsidiary, Towerstream I, Inc. On January 4, 2007, we merged with and into a wholly-owned Delaware subsidiary for the sole purpose of changing our state of incorporation to Delaware. On January 12, 2007, a wholly-owned subsidiary of ours completed a reverse merger with and into a private company, Towerstream Corporation, with Towerstream Corporation (the private company) being the surviving company and becoming a wholly-owned subsidiary of ours. Upon closing of the merger, we discontinued our former business and succeeded to the business of Towerstream Corporation as our sole line of business. At the same time, we also changed our name to Towerstream Corporation and, our newly acquired subsidiary, Towerstream Corporation, changed its name to Towerstream I, Inc.

 Jeffrey M. Thompson co-founded Towerstream I, Inc. in December 1999 with Philip Urso. Mr. Thompson has served as a director since inception and as chief operating officer from inception until November 2005 when Mr. Thompson became president and chief executive officer. Since becoming a public entity in January 2007, Mr. Thompson has been our president, chief executive officer and a director. In 1995, Mr. Thompson co-founded and was vice president of operations of EdgeNet Inc., a privately held Internet service provider (which was sold to Citadel Broadcasting Corporation in 1997 and became eFortress (“eFortress”)) through 1999. Mr. Thompson holds a B.S. degree from the University of Massachusetts. Mr. Thompson was appointed to the Board due to his significant experience in the wireless broadband industry, his familiarity with the Company, as well as his extensive business management expertise.

Philip Urso co-founded Towerstream I, Inc. in December 1999 with Jeffrey M. Thompson. Mr. Urso has served as a director and chairman since inception and as chief executive officer from inception until November 2005. Since becoming a public entity in January 2007, Mr. Urso has been our chairman and a director. In 1995, Mr. Urso co-founded eFortress and served as its president through 1999. From 1983 until 1997, Mr. Urso owned and operated a group of radio stations. In addition, Mr. Urso co-founded the regional cell-tower company, MCF Communications, Inc. Mr. Urso was appointed to the Board due to his significant experience in the wireless broadband and tower industries, his familiarity with the Company, as well as his extensive business management expertise.

Joseph P. Hernon has been our chief financial officer, principal financial officer and principal accounting officer since joining Towerstream Corporation in May 2008. From November 2007 until May 2008, Mr. Hernon was a financial consultant to a high technology company. From November 2005 until October 2007, Mr. Hernon served as the chief financial officer of Aqua Bounty Technologies Inc., a biotechnology company dedicated to the improvement of productivity in the aquaculture industry. From August 1996 until October 2005, Mr. Hernon served as vice president, chief financial officer and secretary of Boston Life Sciences Inc., a biotechnology company focused on developing therapeutics and diagnostics for central nervous system diseases. From January 1987 until August 1996, Mr. Hernon held various positions while employed at PriceWaterhouseCoopers LLP, an international accounting firm. Mr. Hernon is a certified public accountant and holds a B.S. degree in Business Administration from the University of Lowell, Massachusetts and a M.S. degree in Accounting from Bentley College in Waltham, MA.

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Howard L. Haronian, M.D., has served as a director of Towerstream I, Inc. since inception in December 1999. Since becoming a public entity in January 2007, Dr. Haronian has been a director. Dr. Haronian is an interventional cardiologist and has been president of Cardiology Specialists, Ltd. of Rhode Island since 1994. Dr. Haronian has served on the clinical faculty of the Yale School of Medicine since 1994. Dr. Haronian graduated from the Yale School of Management Program for Physicians in 1999. Dr. Haronian has directed the Cardiac Catheterization program at The Westerly Hospital since founding the program in 2003. Dr. Haronian was appointed to the Board due to his extensive knowledge of the Company’s operations since its founding and his executive level experience at other organizations.

Paul Koehler has been a director since January 2007. Mr. Koehler has served as vice president of corporate development of Pacific Ethanol, Inc. (NasdaqGM: PEIX) since June 2005. Mr. Koehler has over twenty-five years of experience in the power and renewable fuels industries and in marketing, trading and project development. Prior to working for Pacific Ethanol Inc., from 2001 to 2005, Mr. Koehler developed wind power projects for PPM Energy Inc., a wind power producer and marketer. Mr. Koehler was president and co-founder of Kinergy LLC, a consulting firm focused on renewable energy, project development and risk management from 1993 to 2003. During the 1990s, Mr. Koehler worked for Portland General Electric Company and Enron Corp. in power marketing and energy trading. Mr. Koehler holds a B.A. degree from the Honors College at the University of Oregon. Mr. Koehler currently serves on the board of directors of Oregon College of Art and Craft Foundation since 2011. Mr. Koehler also served on the board of directors of Oregon College of Art and Craft, a private art college from 1998 to 2007 and again from 2009 to 2012. Mr. Koehler was appointed to the Board due to his experience as an executive at other public companies and as a director of other organizations.

William J. Bush has been a director since January 2007. Since January 2010, Mr. Bush has served as the chief financial officer of Borrego Solar Systems, Inc., which is one of the nation’s leading financiers, designers and installers of commercial and government grid-connected solar electric power systems. From October 2008 to December 2009, Mr. Bush served as the chief financial officer of Solar Semiconductor, Ltd., a private vertically integrated manufacturer and distributor of quality photovoltaic modules and systems targeted for use in industrial, commercial and residential applications with operations in India helping it reach $100 million in sales in its first 15 months of operation. Prior to that, Mr. Bush served as chief financial officer and corporate controller for a number of high growth software and online media companies as well as being one of the founding members of Buzzsaw.com, Inc., a spinoff of Autodesk, Inc. Prior to his work at Buzzsaw.com, Mr. Bush served as corporate controller for Autodesk, Inc. (NasdaqGM: ADSK), the fourth largest software applications company in the world. His prior experience includes seven years in public accounting with Ernst & Young, and Price Waterhouse. Mr. Bush holds a B.S. degree in Business Administration from U.C. Berkeley and is a certified public accountant. Mr. Bush was appointed to the Board because he has significant experience in finance.

Board Leadership Structure and Risk Oversight

Currently, the positions of Chief Executive Officer and Chairman of the Board are held by two different individuals. Jeffrey M. Thompson currently serves as President, Chief Executive Officer and as a member of the Board and Philip Urso serves as Chairman of the Board. Although no formal policy currently exists, the Board determined that the separation of these positions would allow Mr. Thompson to devote his time to the daily execution of the Company’s business strategies and Mr. Urso to devote his time to the long-term strategic direction of the Company.

Our Audit Committee is primarily responsible for overseeing our risk management processes on behalf of our Board. The Audit Committee receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our Company’s assessment of risks. In addition, the Audit Committee reports regularly to the full Board which also considers our risk profile. The Audit Committee and the full Board focus on the most significant risks facing our Company and our Company’s general risk management strategy, and also ensure that risks undertaken by our Company are consistent with the Board’s tolerance for risk. While the Board oversees our Company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach to address the risks facing our Company.

Directorships

       Except as otherwise reported above, none of our directors held directorships in other reporting companies or registered investment companies at any time during the past five years.

Family Relationships

Except for Howard L. Haronian, M.D. and Philip Urso, who are cousins, there are no family relationships among our directors or executive officers.

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Involvement in Certain Legal Proceedings

To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:

● Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.

● Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.

● Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.

● Been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission (the “SEC”), or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

● Been the subject to, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.  

Board Committees

Since January 2007, the standing committees of our Board consist of an Audit Committee, a Compensation Committee and a Nominating Committee. Each member of our committees is “independent” as such term is defined under and required by the federal securities laws and the rules of the NASDAQ Stock Market. The charters of each of the committees have been approved by our Board and are available on our website at www.towerstream.com.

Audit Committee

The Audit Committee is comprised of three directors: William J. Bush, Howard L. Haronian, M.D., and Paul Koehler. Mr. Bush is the Chairman of the Audit Committee. The Audit Committee’s duties include recommending to our Board the engagement of independent auditors to audit our financial statements and to review our accounting and auditing principles. The Audit Committee reviews the scope, timing and fees for the annual audit and the results of audit examinations performed by independent public accountants, including their recommendations to improve our system of accounting and our internal control over financial reporting. The Audit Committee oversees the independent auditors, including their independence and objectivity. However, the committee members are not acting as professional accountants or auditors, and their functions are not intended to duplicate or substitute for the activities of management and the independent auditors. The Audit Committee is empowered to retain independent legal counsel and other advisors as it deems necessary or appropriate to assist the Audit Committee in fulfilling its responsibilities, and to approve the fees and other retention terms of the advisors. Each of our Audit Committee members possesses an understanding of financial statements and generally accepted accounting principles. The Board has determined that Mr. Bush is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. The designation of Mr. Bush as an “audit committee financial expert” will not impose on him any duties, obligations or liability that are greater than those that are generally imposed on him as a member of our Audit Committee and Board, and his designation as an “audit committee financial expert” will not affect the duties, obligations or liability of any other member of our Audit Committee or Board.

Compensation Committee

The Compensation Committee is comprised of two directors: Howard L. Haronian, M.D., and William J. Bush. Dr. Haronian is the Chairman of the Compensation Committee. The Compensation Committee has certain duties and powers as described in its charter, including but not limited to periodically reviewing and approving our salary and benefits policies, compensation of executive officers, administering our stock option plans and recommending and approving grants of stock options under such plans.

Compensation Committee Interlocks and Insider Participation

None of the members of our Compensation Committee is an officer or employee of our Company. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our Board or Compensation Committee.

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Nominating Committee 

The Nominating Committee is comprised of two directors: Howard L. Haronian, M.D., and Paul Koehler. Dr. Haronian is Chairman of the Nominating Committee. The Nominating Committee considers and makes recommendations on matters related to the practices, policies and procedures of the Board and takes a leadership role in shaping our corporate governance. As part of its duties, the Nominating Committee assesses the size, structure and composition of the Board and its committees, and coordinates the evaluation of Board performance. The Nominating Committee also acts as a screening and nominating committee for candidates considered for election to the Board.

Changes in Nominating Process

There are no material changes to the procedures by which security holders may recommend nominees to our Board.

Compensation of Directors

The following table summarizes the compensation awarded during the fiscal year ended December 31, 2014 to our directors who are not named executive officers in the summary compensation table below:

Name	Fees Earned or Paid in Cash		Option Awards (1)(2)		Total
Philip Urso	$	60,000	$	42,159	$	102,159
Howard L. Haronian, M.D.	$	55,000	$	42,159	$	97,159
Paul Koehler	$	50,000	$	42,159	$	92,159
William J. Bush	$	55,000	$	42,159	$	97,159

(1) Based upon the aggregate grant date fair value calculated in accordance with the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification. Our policy and assumptions made in the valuation of share-based payments are contained in Note 10 to our December 31, 2014 financial statements.

(2) Option awards relate to the issuance in 2014 of options to purchase 50,000 shares at an exercise price of $1.93 each for Messrs. Urso, Koehler and Bush, and Dr. Haronian.

Pursuant to the 2008 Non-Employee Directors Compensation Plan, each non-employee director is entitled to receive periodic grants of ten-year options to purchase 50,000 shares of our common stock at an exercise price equal to the fair market value of our common stock on the date of grant and that vests monthly over a one year period. An initial grant is made upon such non-employee director’s election or appointment to our Board and thereafter annually on the first business day in June, subject to such director remaining on the Board. Non-employee directors also receive $50,000 per annum in cash. In connection with the additional responsibilities associated with such positions, the Chairman of the Board will receive an additional $10,000 per year, and the Chairman of the Audit and Compensation Committees will each receive an additional $5,000 per year.

Section 16(a) Beneficial Ownership Reporting Compliance  

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our executive officers and directors, and persons who beneficially own more than 10% of our equity securities, to file reports of ownership and changes in ownership with the SEC. Based solely on our review of copies of such reports and representations from our executive officers and directors, we believe that our executive officers and directors complied with all Section 16(a) filing requirements during the year ended December 31, 2014, except that Jeffrey M. Thompson, our Chief Executive Officer, failed by one day to timely file a Form 4 reporting the sale of common stock on September 23, 2014 and failed to timely file a Form 4 for the grant of stock options to purchase shares of our common stock in July and September 2014, and Joseph P. Hernon, our Chief Financial Officer, failed to timely file a Form 4 for the conversion of a portion of his options in June 2014 and the grant of stock options to purchase shares of our common stock in July and September 2014.

Code of Ethics and Business Conduct

Our Board has adopted a code of ethics and business conduct that establishes the standards of ethical conduct applicable to all directors, officers and employees of Towerstream Corporation. The code of ethics and business conduct addresses, among other things, conflicts of interest, compliance with disclosure controls and procedures, and internal control over financial reporting, corporate opportunities and confidentiality requirements. The Audit Committee is responsible for applying and interpreting our code of ethics and business conduct in situations where questions are presented to it. There were no amendments or waivers to the code of ethics and business conduct in fiscal 2014. Our code of ethics and business conduct is available for review on our website at www.towerstream.com. We will provide a copy of our code of ethics and business conduct free of charge to any person who requests a copy. Requests should be directed by e-mail to Joseph P. Hernon, our Chief Financial Officer, at jhernon@towerstream.com, or by mail to Towerstream Corporation, 88 Silva Lane, Middletown, Rhode Island 02842, or by telephone at (401) 848-5848.

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Item 11. Executive Compensation.

Compensation Committee Report

Under the rules of the Securities and Exchange Commission (“SEC”), this Compensation Committee Report is not deemed to be incorporated by reference by any general statement incorporating this Annual Report by reference into any filings with the SEC.

The Compensation Committee has reviewed and discussed the following Compensation Discussion and Analysis with management. Based on this review and these discussions, the Compensation Committee recommended to the Board of Directors that the following Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

Submitted by the Compensation Committee
Howard L. Haronian, M.D., Chairman

William J. Bush

Compensation Discussion and Analysis

  The following discussion and analysis of compensation arrangements of our named executive officers for 2014 should be read together with the compensation tables and related disclosures set forth below.

We believe our success depends on the continued contributions of our named executive officers. Personal relationships and experience are very important in our industry. Our named executive officers are primarily responsible for many of our critical business development relationships. The maintenance of these relationships is critical to ensuring our future success as is experience in managing these relationships. Therefore, it is important to our success that we retain the services of these individuals and prevent them from competing with us should their employment with us terminate.

General Philosophy

Our overall compensation philosophy is to provide an executive compensation package that enables us to attract, retain and motivate executive officers to achieve our short-term and long-term business goals. The goals of our compensation program are to align remuneration with business objectives and performance, and to enable us to retain and competitively reward executive officers who contribute to the long-term success of the Company. We attempt to pay our executive officers competitively in order that we will be able to retain the most capable people in the industry. In making executive compensation and other employment compensation decisions, the Compensation Committee considers achievement of certain criteria, some of which relate to our performance and others of which relate to the performance of the individual employee. Awards to executive officers are based on achievement of Company and individual performance criteria.

The Compensation Committee will evaluate our compensation policies on an ongoing basis to determine whether they enable us to attract, retain and motivate key personnel. To meet these objectives, the Compensation Committee may from time to time increase salaries, award additional stock grants or provide other short and long-term incentive compensation to executive officers and other employees.

  Compensation Program & Forms of Compensation

We provide our executive officers with a compensation package consisting of base salary, bonus, equity incentives and participation in benefit plans generally available to other employees. In setting total compensation, the Compensation Committee considers individual and company performance, as well as market information regarding compensation paid by other companies in our industry.

Base Salary. Salaries for our executive officers are initially set based on negotiation with individual executive officers at the time of recruitment and with reference to salaries for comparable positions in the industry for individuals of similar education and background to the executive officers being recruited. We also consider the individual’s experience, reputation in his industry and expected contributions to the Company. Base salary is continuously evaluated by competitive pay and individual job performance. In each case, we take into account the results achieved by the executive, his future potential, scope of responsibilities and experience, and competitive salary practices. At times, our executive officers have elected to take less than market salaries.  These salaries were subject to increases to base salary that is comparable with his role and responsibilities when compared to companies of comparable size in similar locations.

Bonuses. We design our bonus programs to be both affordable and competitive in relation to the market. Our bonus program is designed to motivate employees to achieve overall goals. Our programs are designed to avoid entitlements, to align actual payouts with the actual results achieved and to be easy to understand and administer. The Compensation Committee and the executive officer work together to establish targets and goals for the executive officer. Upon completion of the fiscal year, the Compensation Committee assesses the executive officer’s performance and with input from management determines the achievement of the bonus targets and the amount to be awarded within the parameters of the executive officer’s agreement with us.

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Equity-Based Rewards

We design our equity programs to be both affordable and competitive in relation to the market. We monitor the market and applicable accounting, corporate, securities and tax laws and regulations, and adjust our equity programs as needed. Stock options and other forms of equity compensation are designed to reflect and reward a high level of sustained individual performance over time. We design our equity programs to align employees’ interests with those of our stockholders.

 Timing of Equity Awards

The Board has authorized the Compensation Committee to approve stock option grants to our executive officers. Stock options are generally granted at scheduled meetings of the Compensation Committee. The exercise price of a newly granted option is the closing price of our common stock on the date of grant.

Benefits Programs

We design our benefits programs to be both affordable and competitive in relation to the market while conforming with local laws and practices. We monitor the market, local laws and practices and adjust our benefits programs as needed. We design our benefits programs to provide an element of core benefits, and to the extent possible, offer options for additional benefits, and balance costs and cost sharing between us and our employees.

 Tax and Accounting Considerations

In the review and establishment of our compensation programs, we consider the anticipated accounting and tax implications to us and our executives.

Section 162(m) of the Internal Revenue Code imposes a limit on the amount of compensation that we may deduct in any one year with respect to our chief executive officer and each of our next four most highly compensated executive officers, unless certain specific and detailed criteria are satisfied. Performance-based compensation, as defined in the Internal Revenue Code, is fully deductible if the programs are approved by stockholders and meet other requirements. We believe that grants of equity awards under our incentive-based equity option plans may qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting us to receive a federal income tax deduction, if applicable, in connection with such awards. In general, we have determined that we will not seek to limit executive compensation so that it is deductible under Section 162(m). However, from time to time, we monitor whether it might be in our interests to structure our compensation programs to satisfy the requirements of Section 162(m). We seek to maintain flexibility in compensating our executives in a manner designed to promote our corporate goals and therefore our Compensation Committee has not adopted a policy requiring all compensation to be deductible. Our Compensation Committee will continue to assess the impact of Section 162(m) on our compensation practices and determine what further action, if any, is appropriate.

Role of Executives in Executive Compensation Decisions

The Board and our Compensation Committee generally seek input from our executive officers when discussing the performance of and compensation levels for executives. The Compensation Committee also works with our Chief Executive Officer and our Chief Financial Officer to evaluate the financial, accounting, tax and retention implications of our various compensation programs. None of our executives participates in deliberations relating to his compensation.

2014 Bonus Payments

Mr. Thompson. Mr. Thompson was awarded bonus payments totaling $240,800 in recognition of services performed during 2014. The bonus payments, constituting approximately 65% of Mr. Thompson’s salary, were awarded on a discretionary basis by our Compensation Committee. In 2013, the Compensation Committee migrated to a simplified process of awarding executive bonuses, in part as a result of the departure of the Company’s Chief Operating Officer during the fourth quarter of 2012 and the additional responsibilities assumed by both the Chief Executive Officer and the Chief Financial Officer. The Compensation Committee awarded the bonuses in 2014 as a result of Mr. Thompson’s contributions in assisting the Company towards achieving its financial and operational goals, which included the execution of a Wi-Fi lease with a national carrier in the third quarter of 2014 and the completion of a debt financing in the fourth quarter of 2014.

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Mr. Hernon. Mr. Hernon was awarded bonus payments totaling $108,125 in recognition of services performed during 2014. The bonus payments, constituting approximately 39% of Mr. Hernon’s salary, were awarded on a discretionary basis by our Compensation Committee. In 2013, the Compensation Committee migrated to a simplified process of awarding executive bonuses, in part as a result of the departure of the Company’s Chief Operating Officer during the fourth quarter of 2012 and the additional responsibilities assumed by both the Chief Executive Officer and the Chief Financial Officer. The Compensation Committee awarded the bonuses in 2014 as a result of Mr. Hernon’s contributions in assisting the Company towards achieving its financial and operational goals, which included the execution of a Wi-Fi lease with a national carrier in the third quarter of 2014 and the completion of a debt financing in the fourth quarter of 2014.

See “Employment Agreements and Change-in-Control Agreements” below for a discussion of our employment agreement with Mr. Thompson and our employment arrangement with Mr. Hernon.

2015 Bonus Criteria

Bonus criteria for executive officers has historically been based on performance-related targets including revenue and adjusted EBITDA, and awarded on a quarterly basis after an analysis of actual results against the targets. In 2013, the Compensation Committee migrated to a simplified, discretionary process of awarding executive bonuses, in part as a result of the departure of the Company’s Chief Operating Officer during the fourth quarter of 2012 and the additional responsibilities assumed by both the Chief Executive Officer and the Chief Financial Officer. The Compensation Committee continued the policy of using a simplified, discretionary process in 2014. The Compensation Committee is presently evaluating the structure of the bonus program for 2015 which is expected to include measurable performance targets.

Compensation Risk Management

We have considered the risk associated with our compensation policies and practices for all employees, and we believe we have designed our compensation policies and practices in a manner that does not create incentives that could lead to excessive risk taking that would have a material adverse effect on us.

The Role of Stockholder Say-on-Pay Votes

The Company provides its stockholders with the opportunity to cast an advisory vote on executive compensation (a “say-on-pay proposal”). The Compensation Committee will consider the outcome of the Company’s say-on-pay votes when making future compensation decisions for the named executive officers.

Summary Compensation Table

The following table summarizes the annual and long-term compensation paid to our chief executive officer and our other most highly compensated executive officer who were serving at the end of 2014, whom we refer to collectively in this Annual Report on Form 10-K as the “named executive officers”:

Name and Principal Position	Year	Salary		Bonus			Non-Equity Incentive Compensation			Option Awards(1)			Total
Jeffrey M. Thompson	2014	$	373,277	$	240,800	(2)	$	-		$	79,992	(3)	$	694,069
President and Chief	2013	$	330,000	$	297,500	(4)	$	-		$	73,209	(5)	$	700,709
Executive Officer	2012	$	330,000	$	61,875	(6)	$	190,034	(7)	$	-		$	581,909
Joseph P. Hernon	2014	$	279,569	$	108,125	(8)	$	-		$	48,945	(9)	$	436,639
Chief Financial Officer	2013	$	250,000	$	170,000	(10)	$	-		$	115,570	(11)	$	535,570
	2012	$	243,750	$	36,249	(12)	$	115,548	(13)	$	-		$	395,547

(1) Based upon the aggregate grant date fair value calculated in accordance with the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification. Our policy and assumptions made in the valuation of share-based payments are contained in Note 10 to our December 31, 2014 financial statements.

(2) Mr. Thompson was awarded a discretionary bonus as a result of his contributions in 2014 in assisting the Company towards achieving its financial and operational goals, which included the execution of a Wi-Fi lease with a national carrier in the third quarter of 2014 and the completion of a debt financing in the fourth quarter of 2014. The discretionary bonus of $240,800 was awarded in 2014 in recognition of services performed during 2014.

(3) On July 22, 2014, Mr. Thompson received a ten-year option to purchase 31,267 shares of our common stock at an exercise price of $1.67 per share in recognition of services performed during 2014, which vest monthly over a two year period, with the first tranche vesting on August 22, 2014.

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On September 26, 2014, Mr. Thompson received a ten-year option to purchase 75,000 shares of our common stock at an exercise price of $1.34 per share in recognition of services performed during 2014, which vest quarterly over a two year period, with the first tranche vesting on December 26, 2014.

(4) Mr. Thompson was awarded a discretionary bonus as a result of his contributions in 2013 in assisting the Company towards achieving its financial and operational goals, which included a public offering and an acquisition in the first quarter of 2013 and the execution of a Wi-Fi lease with a major cable operator in the second quarter of 2013. The discretionary bonus of $297,500 consisted of $125,000 which was awarded in 2013 in recognition of services performed during 2013 and $172,500 which was awarded in January 2014 in recognition of services performed in 2013.

(5) On February 25, 2013, Mr. Thompson received a ten-year option to purchase 50,000 shares of our common stock at an exercise price of $2.62 per share in recognition of services performed during 2013, which is fully vested and exercisable upon issuance.

(6) At the beginning of 2012, the Compensation Committee (the “Committee”) determined that 75% of Mr. Thompson's bonus would be based on financial performance goals and 25% would be awarded at the discretion of the Committee. Mr. Thompson was awarded the full amount of his discretionary bonus based on the determination that the Company had met its financial performance goals as well other operating objectives including the development of its shared wireless network. The discretionary bonus of $61,875 consisted of $15,469 which was awarded in 2012 in recognition of services performed during 2012 and $46,406 which was awarded in May 2013 in recognition of services performed in 2012.

(7) This compensation represents the financial performance component of Mr. Thompson’s annual bonus. The Committee established a scaled payout structure under which attainment of 90% of a budgeted target would result in a 50% payout of the total amount allocated for that target. Other levels of the scaled payout structure included a 100% payout for 100% attainment of the budgeted target, 115% payout for 120% of the target, and 130% payout for 150% of the target.

During the first quarter of 2012, Mr. Thompson was awarded a bonus of $47,334 based on the following (revenue and EBITDA dollars are in thousands):

Metric	Actual			Budget			Achievement of Budget			Bonus Weighting			Scaled Payout Percentage			Scaled Payout Dollars
Churn		1.58	%		1.54	%		97.3	%		20	%		50	%	$	4,641
Revenue	$	7,785		$	7,683			101.3	%		40	%		100	%	$	18,563
EBITDA	$	1,382		$	833			165.9	%		40	%		130	%	$	24,130

During the second and third quarters of 2012, the Committee determined that Mr. Thompson's quarterly financial performance goal would be based on the Company's success in building Wi-Fi hotspots through its recently formed subsidiary, Hetnets Tower Corporation.  The Committee established a scaled payout structure under which attainment of 100% of the target would result in a 100% payout of the eligible quarterly bonus and attainment of 120% of the budget would result in a 115% payout.  During the second quarter of 2012, the Company constructed 571 hotzones which equaled 102% of the target goal of 558.  As a result, the Committee authorized a payment of $46,406 to Mr. Thompson representing 100% of his quarter financial performance bonus. During the third quarter of 2012, the Company constructed 984 hotzones which equaled 102% of the target goal of 967. As a result, the Committee authorized a payment of $46,407 to Mr. Thompson representing 100% of his quarter financial performance bonus.

During the fourth quarter of 2012, the Committee reverted to a program similar to the first quarter as construction activity on Wi-Fi hotspots was not significant.  Mr. Thompson was awarded a bonus of $49,887 based on the following metrics:

Metric	Actual (in 000s)		Budget (in 000s)		Achievement of Budget			Bonus Weighting			Scaled Payout Percentage			Scaled Payout Dollars
Revenue	$	8,229	$	7,874		104.5	%		50	%		100	%	$	23,203
EBITDA	$	1,512	$	1,017		148.7	%		50	%		115	%	$	26,684

There is no comparable disclosure for 2014 and 2013 since the bonuses granted in 2014 and 2013 were discretionary.

(8) Mr. Hernon was awarded a discretionary bonus as a result of his contributions in 2014 in assisting the Company towards achieving its financial and operational goals, which included the execution of a Wi-Fi lease with a national carrier in the third quarter of 2014 and the completion of a debt financing in the fourth quarter of 2014. The discretionary bonus of $108,125 was awarded in 2014 in recognition of services performed during 2014.

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(9) On July 22, 2014, Mr. Hernon received a ten-year option to purchase 15,806 shares of our common stock at an exercise price of $1.67 per share in recognition of services performed during 2014, which vest monthly over a two year period, with the first tranche vesting on August 22, 2014. On September 26, 2014, Mr. Hernon received a ten-year option to purchase 50,000 shares of our common stock at an exercise price of $1.34 per share in recognition of services performed during 2014, which vest quarterly over a two year period, with the first tranche vesting on December 26, 2014.

(10) Mr. Hernon was awarded a discretionary bonus as a result of his contributions in 2013 in assisting the Company towards achieving its financial and operational goals, which included a public offering and an acquisition in the first quarter of 2013 and the execution of a Wi-Fi lease with a major cable operator in the second quarter of 2013. The discretionary bonus of $170,000 consisted of $60,000 which was awarded in 2013 in recognition of services performed during 2013 and $110,000 which was awarded in January 2014 in recognition of services performed in 2013.

(11) On February 25, 2013, Mr. Hernon received a ten-year option to purchase 25,000 shares of our common stock at an exercise price of $2.62 per share in recognition of services performed during 2013, which is fully vested and exercisable upon issuance.

On June 3, 2013, Mr. Hernon received a ten-year option to purchase 50,000 shares of our common stock at an exercise price of $2.56 per share in recognition of services performed during 2013, with the options vesting annually over a five year period, with the first tranche vesting on June 3, 2014.

(12)

At the beginning of 2012, the Committee determined that 75% of Mr. Hernon's bonus would be based on financial performance goals and 25% would be awarded at the discretion of the Committee. Mr. Hernon was awarded the full amount of his discretionary bonus based on the determination that the Company had met its financial performance goals as well other operating objectives including the development of its shared wireless network. The discretionary bonus of $36,249 consisted of $9,062 which was awarded in 2012 in recognition of services performed during 2012 and $27,187 which was awarded in May 2013 in recognition of services performed in 2012.

(13)

This compensation represents the financial performance component of Mr. Hernon’s annual bonus. The Committee established a scaled payout structure under which attainment of 90% of a budgeted target would result in a 50% payout of the total amount allocated for that target. Other levels of the scaled payout structure included a 100% payout for 100% attainment of the budgeted target, 115% payout for 120% of the target, and 130% payout for 150% of the target.

During the first quarter of 2012, Mr. Hernon was awarded a bonus of $27,867 based on the following (revenue and EBITDA dollars in thousands):

Metric	Actual			Budget			Achievement of Budget			Bonus Weighting			Scaled Payout Percentage			Scaled Payout Dollars
Churn		1.58	%		1.54	%		97.3	%		25	%		50	%	$	3,398
Revenue	$	7,785		$	7,683			101.3	%		25	%		100	%	$	6,797
EBITDA	$	1,382		$	833			165.9	%		50	%		130	%	$	17,672

 During the second quarter of 2012, Mr. Hernon was awarded a bonus of $29,227 based on the following:

Metric	Actual (in 000s)		Budget (in 000s)		Achievement of Budget			Bonus Weighting			Scaled Payout Percentage			Scaled Payout Dollars
Revenue	$	8,103	$	7,746		104.6	%		50	%		100	%	$	13,594
EBITDA	$	1,305	$	907		143.9	%		50	%		115	%	$	15,633

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During the third quarter of 2012, Mr. Hernon was awarded a bonus of $29,227, based on the following:

Metric	Actual (in 000s)		Budget (in 000s)		Achievement of Budget			Bonus Weighting			Scaled Payout Percentage			Scaled Payout Dollars
Revenue	$	8,031	$	7,809		102.8	%		50	%		100	%	$	13,594
EBITDA	$	1,451	$	987		147.0	%		50	%		115	%	$	15,633

During the fourth quarter of 2012, Mr. Hernon was awarded a bonus of $29,227, based on the following:

Metric	Actual (in 000s)		Budget (in 000s)		Achievement of Budget			Bonus Weighting			Scaled Payout Percentage			Scaled Payout Dollars
Revenue	$	8,229	$	7,874		104.5	%		50	%		100	%	$	13,594
EBITDA	$	1,512	$	1,017		148.7	%		50	%		115	%	$	15,633

There is no comparable disclosure for 2014 and 2013 since the bonuses granted in 2014 and 2013 were discretionary.

Grants of Plan-Based Awards

The following table summarizes the stock option awards granted to our named executive officers during the year ended December 31, 2014:

Name	Grant Date	All Other Option Awards: Number of Securities Underlying Options		Exercise or Base Price of Option Awards ($/Share)(1)		Grant Date Fair Value of Stock and Option Awards($)(2)
Jeffrey M. Thompson	7/22/14		31,267	$	1.67	$	27,200
	9/26/14		75,000	$	1.34	$	52,792
Joseph P. Hernon	7/22/14		15,806	$	1.67	$	13,750
	9/26/14		50,000	$	1.34	$	35,195

(1) The exercise price of the stock options awarded was determined in accordance with the stock option plans, which provides that the exercise price for an option granted be the closing sale price for our common stock as quoted on the NASDAQ Capital Market on the date of grant.

(2) Based upon the aggregate grant date fair value calculated in accordance with the Stock Compensation Topic of the Financial Accounting Standards Board Accounting Standards Codification. Our policy and assumptions made in the valuation of share-based payments are contained in Note 10 to our December 31, 2014 financial statements.

There were no restricted stock awards granted to our named executive officers during the year ended December 31, 2014.

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Outstanding Equity Awards at Fiscal Year-End

The following table summarizes the outstanding equity awards to our named executive officers as of December 31, 2014:

	Option Awards
Name	Number of Securities Underlying Unexercised Options Exercisable		Number of Securities Underlying Unexercised Options Unexercisable			Option Exercise Price		Option Expiration Date
Jeffrey M. Thompson		175,193		−		$	1.43	4/28/15
		12,010		−		$	2.00	12/2/17
		11,032		−		$	2.00	3/2/18
		100,000		−		$	4.94	6/23/21
		41,250		90,750	(1)	$	5.25	7/6/21
		84,375		71,875	(2)	$	5.25	7/6/21
		50,000		−		$	2.62	2/24/23
		6,515		24,752	(3)	$	1.67	7/21/24
		9,375		65,625	(4)	$	1.34	9/25/24
Joseph P. Hernon		103,426		−		$	1.45	6/1/18
		60,000		−		$	4.94	6/23/21
		20,668		67,332	(5)	$	5.25	7/6/21
		41,877		34,374	(6)	$	5.25	7/6/21
		25,000		−		$	2.62	2/24/23
		10,000		40,000	(7)	$	2.56	6/2/23
		3,295		12,511	(3)	$	1.67	7/21/24
		6,250		43,750	(4)	$	1.34	9/25/24

(1) 88,000 of the options were granted in four tranches of 22,000.  Each tranche will begin to vest in sequential order only when and if the Company completes four (4) acquisitions prior to the expiration date.  Each tranche will vest in quarterly installments over a two year period once each respective acquisition is closed.  The remaining 2,750 will become vested in February 2015.

(2) 25,000 of the options will begin to vest only when and if the Company executes a backhaul contract prior to the expiration date. These options will vest in quarterly installments over a two year period once a backhaul contract is executed. The remaining options unexercisable began vesting upon the previous execution of backhaul contracts of which (i) 6,250 of the options will vest in quarterly installments of 3,125 and become fully vested in June 2015, (ii) 18,750 of the options will vest in quarterly installments of 3,125 and become fully vested in April 2016 and (iii) 21,875 of the options will vest in quarterly installments of 3,125 and become fully vested in August 2016.

(3) Such option vests monthly over a two year period, with the first tranche vesting on August 22, 2014.

(4) Such option vests quarterly over a two year period, with the first tranche vesting on December 26, 2014.

(5) 64,000 of the options were granted in four tranches of 16,000.  Each tranche will begin to vest in sequential order only when and if the Company completes four (4) acquisitions prior to the expiration date.  Each tranche will vest as to one-third on the one year anniversary of the completed acquisition with the remaining two-thirds vesting ratably on a quarterly basis over the following two years once each respective acquisition is closed.  The remaining 3,332 will become vested in February 2016.

(6) 12,500 of the options will begin to vest only when and if the Company executes a backhaul contract prior to the expiration date. These options will vest in quarterly installments over a two year period once a backhaul contract is executed. The remaining options unexercisable began vesting upon the previous execution of backhaul contracts of which (i) 1,562 of the options will vest in quarterly installments of 781 and become fully vested in June 2015, (ii) 9,374 of the options will vest in quarterly installments of 1,562 and become fully vested in April 2016 and (iii) 10,938 of the options will vest in quarterly installments of 1,562 and become fully vested in August 2016.

(7) Such option vests as to one-fifth of the shares subject to the option annually, commencing June 3, 2014.

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Option Exercises and Stock Vested

The following table summarizes, with respect to our named executive officers, all options that were exercised and restricted stock vested during fiscal 2014: 

	Option Awards				Restricted Stock
Name	Number of Shares Acquired on Exercise(#)		Value Realized on Exercise ($)		Number of Shares Vested (#)		Value Realized on Vesting ($)
Jeffrey M. Thompson		75,000	$	122,250
		18,406	$	30,002
		125,000	$	203,750
Joseph P. Hernon						15,000	$	45,000

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Employment Agreements and Change-in-Control Agreements

In December 2007, we entered into an employment agreement with Jeffrey M. Thompson, our principal executive officer, which was amended in December 2011. Pursuant to the terms of the amended agreement, Mr. Thompson agreed to serve as our chief executive officer and president for a period of two years, with automatic one-year renewals, subject to either party electing not to renew. In December 2014, we entered into a second amendment of Mr. Thompson’s employment agreement that provides for annual compensation of $475,000, effective as of November 18, 2014, and a one-time cash bonus of $175,000 for services provided to the Company in 2014. Mr. Thompson shall be eligible to receive options to purchase up to 250,000 shares of common stock during the fiscal year ending December 31, 2015 and shall also be entitled to additional bonus compensation as determined from time to time by the Company’s Compensation Committee of the Board of Directors. The second amendment provides for customary clawback rights upon the occurrence of certain events. Under his initial employment agreement, Mr. Thompson’s base salary was $225,000 which was subsequently adjusted to $248,063 effective January 1, 2010, to $300,000 effective December 16, 2010 and to $363,000 effective February 5, 2014. Under the first amendment, Mr. Thompson was awarded special bonuses totaling $75,000, which included (i) $25,000 on the effective date of the amended agreement, (ii) $25,000 related to the closing of the acquisition of Color Broadband and (iii) $25,000 upon the execution of an agreement with a large technology company. In addition, we will pay 100% of all costs associated with Mr. Thompson’s employee benefits, including without limitation, health insurance.

If Mr. Thompson’s employment is terminated (i) by us without “cause,” (ii) by him for “good reason” or (iii) by us within two years of a “change of control” (as such terms are defined in the agreement), then (a) we will be required to pay Mr. Thompson twenty-four months base salary in monthly installments, (b) any unvested options to purchase shares of our common stock would immediately vest and become exercisable and any restrictions on restricted stock would immediately lapse, and (c) we must continue to provide employee benefits, including health insurance, for a period of five years following such termination.

During Mr. Thompson’s employment with us, and for a period of twelve months following his termination (the “Restricted Period”), except for a termination by Mr. Thompson for “good reason,” he is prohibited from engaging in any line of business in which we were engaged or had a formal plan to enter during the period of his employment with us. We will continue to pay Mr. Thompson his base salary then in effect, in accordance with our customary payroll practices for the duration of any such Restricted Period in the event that Mr. Thompson’s employment is terminated voluntarily by him, except for “good reason,” or by us for “cause.”

In May 2008, Joseph P. Hernon joined the Company as Chief Financial Officer. His employment offer provided for a base annual salary of $190,000 and bonus payments up to 58% of base salary, as determined by the Board. Effective April 1, 2010, Mr. Hernon’s base salary was increased to $199,500. Effective December 16, 2010, Mr. Hernon’s base salary was increased to $225,000. Effective April 1, 2012, Mr. Hernon’s base salary was increased to $250,000. Effective February 5, 2014, Mr. Hernon’s base salary was increased to $275,000. Effective November 18, 2014, Mr. Hernon’s base salary was increased to $325,000. Upon joining the Company, Mr. Hernon was granted options to purchase 150,000 shares of common stock at an exercise price of $1.45 per share, vesting in three annual installments commencing upon the first anniversary of the grant. He has received subsequent awards and is eligible to receive additional stock-based awards at the discretion of the Board and as provided under the Company’s stock-based incentive plans. The Company pays 100% of Mr. Hernon’s health insurance. He is also eligible to participate in the Company’s health and other employee benefit plans. Mr. Hernon is an employee at will.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth information with respect to the beneficial ownership of our common stock as of March 9, 2015 by:

● each person known by us to beneficially own more than 5% of our common stock (based solely on our review of SEC filings);

● each of our directors;

● each of our named executive officers listed in the section entitled “Summary Compensation Table” under Item 11. Executive Compensation; and

● all of our directors and executive officers as a group.

The percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the disposition of, with respect to the security. Except as indicated in the footnotes to this table, each beneficial owner named in the table below has sole voting and sole investment power with respect to all shares beneficially owned and each person’s address is c/o Towerstream Corporation, 88 Silva Lane, Middletown, Rhode Island 02842, unless otherwise indicated. As of March 9, 2015, there were 66,656,789 shares of our common stock outstanding.

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Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership(1)			Percent of Class(1)
5% Stockholders:
Melody Capital Partners, LP (2)		3,600,000	(3)		5.1	%
717 Fifth Avenue, 12th Floor
New York, NY 10022
Columbia Acorn Fund (4)		4,000,000			6.0	%
227 West Monroe Street
Suite 3000
Chicago, IL 60606
Directors and Named Executive Officers:
Philip Urso		1,632,050	(5)		2.4	%
William J. Bush		342,942	(6)		*
Howard L. Haronian, M.D.		1,379,396	(7)		2.1	%
Paul Koehler		305,834	(8)		*
Jeffrey M. Thompson		2,508,369	(9)		3.7	%
Joseph P. Hernon		427,057	(10)		*
All directors and executive officers as a group (6 persons)		6,595,648	(5)(6)(7)(8)(9)(10)		9.6	%

* Less than 1%.

(1) Shares of common stock beneficially owned and the respective percentages of beneficial ownership of common stock assumes the exercise of all options, warrants and other securities convertible into common stock beneficially owned by such person or entity currently exercisable or exercisable within 60 days of March 9, 2015. Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days are deemed outstanding and held by the holder of such options or warrants for computing the percentage of outstanding common stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.

(2) Based on a Schedule 13G filed with the SEC on October 27, 2014. Melody Capital Partners LP (“Melody”), as the investment manager of Melody Special Situations Offshore Credit Mini-Master Fund, L.P. (“Special Situations”) , Melody Capital Partners Offshore Credit Mini-Master Fund, L.P. (“Capital Partners Offshore”) and Melody Capital Partners Onshore Credit Fund, L.P. (“Capital Partners Onshore”) and as the investment manager with respect to certain managed accounts, has the shared power to vote and dispose of the securities of the Company held by each such fund. Melody Capital Advisors, LLC, as the general partner of Melody, has the shared power to vote and dispose of securities of the Company beneficially held by Melody.

(3) Based on a Schedule 13G filed with the SEC on October 27, 2014. Represents (i) 602,077 shares of common stock underlying warrants with an exercise price of $0.01 per share (the “A Warrants”) held by Special Situations and 1,204,154 shares of common stock underlying warrants with an exercise price of $1.26 per share (the “B Warrants”) held by Special Situations, (ii) 227,188 shares of common stock underlying A Warrants held by Capital Partners Offshore and 454,375 shares of common stock underlying B Warrants held by Capital Partners Offshore, and (iii) 224,708 shares of common stock underlying A Warrants held by Capital Partners Onshore and 449,416 shares of common stock underlying B Warrants held by Capital Partners Onshore.

(4) Based on a Schedule 13G/A filed with the SEC on February 11, 2015. Columbia Acorn Fund is a business trust managed by Columbia Wanger Asset Management, LLC (“CWAM”). As the investment advisor of Columbia Acorn Fund, CWAM may be deemed to beneficially own the shares reported by the Columbia Acorn Fund.

(5) Includes 297,796 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within 60 days. Excludes 103,886 shares of common stock held in a trust for the benefit of Mr. Urso’s minor children, of which Mr. Urso is not a trustee. Mr. Urso disclaims beneficial ownership of the 103,886 shares held in trust.

(6) Includes 308,334 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within 60 days. The remaining 34,608 shares are held in trust for the benefit of the Bush family.  Mr. Bush is a trustee of this trust and disclaims beneficial ownership of such 34,608 shares.

(7) Includes 10,000 shares of common stock held by Dr. Haronian’s wife, for which Dr. Haronian has an indirect interest in, and 320,873 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within 60 days.

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(8) Includes 305,834 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within 60 days.

(9) Includes 522,712 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within 60 days.

(10) Includes 287,101 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within 60 days.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 Related parties can include any of our directors or executive officers, certain of our stockholders and their immediate family members. Each year, we prepare and require our directors and executive officers to complete Director and Officer Questionnaires identifying any transactions with us in which the officer or director or their family members have an interest. This helps us identify potential conflicts of interest. A conflict of interest occurs when an individual’s private interest interferes, or appears to interfere, in any way with the interests of the Company as a whole. Our code of ethics and business conduct requires all directors, officers and employees who may have a potential or apparent conflict of interest to immediately notify our Audit Committee of the Board of Directors, which is responsible for considering and reporting to the Board any questions of possible conflicts of interest of Board members. Our code of ethics and business conduct further requires pre-clearance before any employee, officer or director engages in any personal or business activity that may raise concerns about conflict, potential conflict or apparent conflict of interest. Copies of our code of ethics and business conduct and the Audit Committee charter are posted on the corporate governance section of our website at www.towerstream.com.

At no time during the last two fiscal years has any executive officer, director or any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serves as a trustee or in a similar capacity or has a substantial beneficial interest been indebted to the Company or was involved in any transaction in which the amount exceeded $120,000 and such person had a direct or indirect material interest.

In evaluating related party transactions and potential conflicts of interest, our Chief Financial Officer and/or Chairman of the Audit Committee apply the same standards of good faith and fiduciary duty they apply to their general responsibilities. They will approve a related party transaction only when, in their good faith judgment, the transaction is in the best interest of the Company.

Director Independence

Each of William J. Bush , Howard L. Haronian, M.D., Paul Koehler and are independent directors, as provided in NASDAQ Marketplace Rule 5605(a)(2).

 Item 14. Principal Accountant Fees and Services.

 The following table sets forth the fees that the Company accrued or paid to Marcum LLP for the fiscal 2014 and fiscal 2013.

	2014		2013
Audit Fees(1)	$	228,070	$	301,470
Audit-Related Fees(2)		-		−
Tax Fees(3)		-		−
All Other Fees		-		−
Total	$	228,070	$	301,470

(1) Audit fees relate to professional services rendered in connection with the audit of the Company’s annual financial statements and internal control over financial reporting, quarterly review of financial statements included in the Company’s Quarterly Reports on Form 10-Q, and audit services provided in connection with other statutory and regulatory filings. 

(2) Audit-related fees relate to professional services rendered in connection with assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements, including due diligence.

(3) Tax fees relate to professional services rendered for tax compliance, tax advice and tax planning for the Company.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

Exhibit No.	Description
2.1	Agreement of Merger and Plan of Reorganization, dated January 12, 2007, by and among University Girls Calendar, Ltd., Towerstream Acquisition, Inc. and Towerstream Corporation (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on January 19, 2007).
3.1	Certificate of Incorporation of University Girls Calendar, Ltd. (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of University Girls Calendar, Ltd. filed with the Securities and Exchange Commission on January 5, 2007).
3.2	Certificate of Amendment to Certificate of Incorporation of University Girls Calendar, Ltd., changing the Company’s name to Towerstream Corporation (Incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on January 19, 2007).
3.3	Certificate of Designation of Rights, Preferences and Privileges of Series A Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on November 12, 2010).
3.4	By-Laws of Towerstream Corporation (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on January 19, 2007).
3.5	Amendment No. 1 to the By-Laws of Towerstream Corporation (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on August 30, 2007).
3.6	Amendment No. 1 to the Certificate of Incorporation of Towerstream Corporation (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on November 8, 2012).
4.1	Rights Agreement dated as of November 9, 2010 (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on November 12, 2010).
10.1*	Towerstream Corporation 2007 Equity Compensation Plan (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on January 19, 2007).
10.2*	Form of 2007 Equity Compensation Plan Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.18 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on January 19, 2007).
10.3*	Form of 2007 Equity Compensation Plan Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 10.19 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on January 19, 2007).
10.4	Form of Directors and Officers Indemnification Agreement (Incorporated by reference to Exhibit 10.17 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on January 19, 2007).
10.5*	Towerstream Corporation 2007 Incentive Stock Plan (Incorporated by reference to Exhibit B to the Proxy Statement on Schedule 14A of Towerstream Corporation filed with the Securities and Exchange Commission on September 6, 2012).
10.6	Employment Agreement, dated December 21, 2007, between Towerstream Corporation and Jeffrey M. Thompson (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Towerstream Corporation filed with the Securities and Exchange Commission on December 31, 2007).
10.7	Office Lease Agreement dated March 21, 2007 between Tech 2, 3, & 4 LLC (Landlord) and Towerstream Corporation (Tenant) (Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K of Towerstream Corporation filed with the Securities and Exchange Commission on March 18, 2009).
10.8	First Amendment to Office Lease dated August 8, 2007, amending Office Lease Agreement dated March, 21 2007 (Incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K of Towerstream Corporation filed with the Securities and Exchange Commission on March 18, 2009).
10.9**	2008 Non-Employee Directors Compensation Plan (Incorporated by reference to Exhibit B to the Proxy Statement on Schedule 14A of Towerstream Corporation filed with the Securities and Exchange Commission on September 14, 2010).
10.10**	Amendment to Employment Agreement of Jeffrey M. Thompson (Incorporated by reference to the Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 9, 2011).
10.11**	Amendment to Employment Agreement of Jeffrey M. Thompson (Incorporated by reference to the Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on January 13, 2012).

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10.12**	2010 Employee Stock Purchase Plan (Incorporated by reference to Exhibit A to the Proxy Statement on Schedule 14A of Towerstream Corporation filed with the Securities and Exchange Commission on September 14, 2010).
10.13	Second Amendment to Office Lease Agreement dated September 12, 2013, amending Office Lease Agreement dated March, 21 2007. (Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of Towerstream Corporation filed with the Securities and Exchange Commission on March 17, 2014.)
10.14	Loan Agreement dated October 16, 2014 by and among Towerstream Corporation, Towerstream I, Inc. and Hetnets Tower Corporation, as Borrowers, the financial institutions named therein as Lenders and Melody Business Finance, LLC, as Administrative Agent***
10.15	Security Agreement dated October 16, 2014 by and among Towerstream Corporation, Towerstream I, Inc., Hetnets Tower Corporation, Alpha Communications Corp., Omega Communications Corp., and Towerstream Houston, Inc., as Grantors, in favor of Melody Business Finance LLC, as Administrative Agent ***
10.16	Warrant and Registration Rights Agreement dated October 16, 2014 by and among Towerstream Corporation and the warrant holders named therein ***
10.17	Form of A-Warrant Certificate ***
10.18	Form of B-Warrant Certificate ***
10.19**	Second Amendment to Employment Agreement of Jeffrey M. Thompson***
10.20	Office Lease Agreement dated December 12, 2014 between 6800 Broken Sound LLC (Landlord) and Towerstream Corporation***
14.1	Code of Ethics and Business Conduct. (Incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K of Towerstream Corporation filed with the Securities and Exchange Commission on March 17, 2011).
21.1	Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K of Towerstream Corporation filed with the Securities and Exchange Commission on March 17, 2014).
23.1	Consent of Independent Registered Public Accounting Firm. ***
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
101.SCH****	XBRL Taxonomy Extension Schema
101.CAL****	XBRL Taxonomy Extension Calculation
101.DEF****	XBRL Taxonomy Extension Definition
101.LAB****	XBRL Taxonomy Extension Labels
101.PRE****	XBRL Taxonomy Extension Presentation

*	Management compensatory plan
**	Management contract
***	Filed herewith
****XBRL	information is furnished and not 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, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

84

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: March 12, 2015	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)

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Capacity	Date
/s/ Jeffrey M. Thompson
	Director, Chief Executive Officer and President
Jeffrey M. Thompson	(Principal Executive Officer)	March 12, 2015
/s/ Joseph P. Hernon
	Chief Financial Officer	March 12, 2015
Joseph P. Hernon	(Principal Financial Officer and
	Principal Accounting Officer)
/s/ Philip Urso
	Director - Chairman of the Board of Directors	March 12, 2015
Philip Urso
/s/ Howard L. Haronian, M.D.
	Director	March 12, 2015
Howard L. Haronian, M.D.
/s/ William J. Bush
	Director	March 12, 2015
William J. Bush
/s/ Paul Koehler
	Director	March 12, 2015
Paul Koehler