UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, ~~2017~~2018

☐	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~~76 Hammarlund Way

Middletown, Rhode Island

(Address of principal executive offices)

02842

(Zip Code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark, if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of August ~~10, 2017,~~17, 2018, there were ~~28,275,503~~394,409 shares of common stock, par value $0.001 per share, outstanding.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

Table of Contents

		Pages
Part I	FINANCIAL INFORMATION

Item 1.	Financial Statements.	1

	Condensed Consolidated Balance Sheets as of June 30, ~~2017~~2018 (unaudited) and December 31, ~~2016 (restated)~~2017	1

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	2

	Condensed Consolidated Statement of Stockholders’ Deficit for the Six Months Ended June 30, ~~2017~~2018 (unaudited)	3

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017 (unaudited)	44-5

	Notes to Unaudited Condensed Consolidated Financial Statements	~~5-17~~6-18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	~~18-26~~19-25

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	2725

Item 4.	Controls and Procedures.	2725

Part II	OTHER INFORMATION

Item 6.	Exhibits.	28 26

	June 30, 2017 (Unaudited)			December 31, 2016 (Restated)			June 30, 2018 (Unaudited)			December 31, 2017
Assets
Current Assets
Cash and cash equivalents	$	8,968,852		$	12,272,444		$	4,659,088		$	7,568,982
Accounts receivable, net		784,340			505,074
Accounts receivable, net of reserves for uncollectible accounts of $195,440 and $95,884, respectively								565,029			912,333
Prepaid expenses and other current assets		446,567			434,444			343,605			242,320
Current assets of discontinued operations		-			231,978
Total Current Assets		10,199,759			13,443,940			5,567,722			8,723,635

Property and equipment, net		13,032,875			15,252,357			12,164,741			13,430,980

Intangible assets, net		2,882,102			3,652,490			1,602,841			2,242,471
Goodwill		1,674,281			1,674,281			1,674,281			1,674,281
Other assets		386,021			369,769			433,857			386,047
Total Assets	$	28,175,038		$	34,392,837		$	21,443,442		$	26,457,414

Liabilities and Stockholders’ Deficit
Liabilities, Series I Preferred Stock and Stockholders’ Deficit

Current Liabilities
Accounts payable	$	294,519		$	323,625		$	90,210		$	1,150,861
Accrued expenses		834,607			911,210			789,153			1,622,036
Accrued interest								1,140,944			722,629
Deferred revenues		1,129,053			1,161,520			1,066,882			934,450
Current maturities of capital lease obligations		470,481			791,009			326,773			382,918
Current liabilities of discontinued operations		1,088,904			1,240,000			1,016,739			1,029,022
Deferred rent		149,570			110,738			103,626			78,048
Long-term debt, net of debt discount of $1,803,742		-			31,487,253
Long-term debt (callable), net of debt discounts and deferred financing costs of $300,482 and $789,287, respectively								35,054,130			33,868,700
Total Current Liabilities		3,967,134			36,025,355			39,588,457			39,788,664

Long-Term Liabilities
Long-term debt, net of debt discount of $1,246,720		32,705,952			-
Capital lease obligations, net of current maturities		-			158,703			470,654			305,947
Other		968,034			1,062,237			718,786			754,203
Total Long-Term Liabilities		33,673,986			1,220,940			1,189,440			1,060,150
Total Liabilities		37,641,120			37,246,295			40,777,897			40,848,814

Commitments (Note 15)
Commitments (Note 16)

Series I Preferred Stock
Series I Preferred – 100 and 0 shares issued and outstanding, respectively; (Liquidation value – Note 10)								-			-

Stockholders' Deficit
Preferred stock, par value $0.001; 5,000,000 shares authorized;Series A Preferred - No shares issued or outstanding		-			-
Series B Convertible Preferred - No shares issued or outstanding		-			-
Series C Convertible Preferred - No shares issued or outstanding		-			-
Series D Convertible Preferred - 0 and 1,233 shares issued and outstanding, liquidation value of $0 and $1,233,000, respectively		-			2
Series E Convertible Preferred - 0 and 500,000 shares issued and outstanding, liquidation value of $0 and $500, respectively		-			500
Series F Convertible Preferred - 0 and 1,233 shares issued and outstanding, liquidation value of $0 and $1,233,000, respectively		-			1
Series G Convertible Preferred - 738 and 0 shares issued and outstanding, liquidation value of $7,380,000 and $0, respectively		1			-
Series H Convertible Preferred - 501 and 0 shares issued and outstanding, liquidation value of $4,008,000 and $0, respectively		1			-
Common stock, par value $0.001; 200,000,000 shares authorized; 27,275,503 and 18,327,263 shares issued and outstanding, respectively		27,275			18,327
Preferred stock, par value $0.001; 5,000,000 shares authorized
Series G Convertible Preferred – 538 shares issued and outstanding, respectively; Liquidation value of $538,000 as of June 30, 2018								1			1
Series H Convertible Preferred - 501 shares issued and outstanding, respectively; Liquidation value of $501,000 as of June 30, 2018								1			1
Common stock, par value $0.001; 200,000,000 shares authorized; 394,409 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively								394			394
Additional paid-in-capital		174,442,671			173,782,939			174,844,680			174,733,113
Accumulated deficit		(183,936,030	)		(176,655,227	)		(194,179,531	)		(189,124,909	)
Total Stockholders' Deficit		(9,466,082	)		(2,853,458	)		(19,334,455	)		(14,391,400	)
Total Liabilities and Stockholders' Deficit	$	28,175,038		$	34,392,837
Total Liabilities, Series I Preferred Stock and Stockholders' Deficit							$	21,443,442		$	26,457,414

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenues	$	6,220,758		$	6,517,817		$	12,662,560		$	13,090,134

Operating Expenses
Infrastructure and access		2,756,943			2,622,723			5,445,665			5,331,034
Depreciation and amortization		1,603,807			2,100,281			3,307,404			4,533,782
Network operations		684,516			1,085,249			1,749,766			2,286,156
Customer support		362,844			391,335			837,660			759,017
Sales and marketing		385,661			976,790			1,133,662			1,841,766
General and administrative		840,689			1,514,141			2,008,450			3,051,869
Total Operating Expenses		6,634,460			8,690,519			14,482,607			17,803,624
Operating Loss		(413,702	)		(2,172,702	)		(1,820,047	)		(4,713,490	)
Other Expense
Interest expense, net		(1,817,477	)		(1,295,041	)		(3,234,575	)		(2,567,313	)
Total Other Expense		(1,817,477	)		(1,295,041	)		(3,234,575	)		(2,567,313	)
Net Loss		(2,231,179	)		(3,467,743	)		(5,054,622	)		(7,280,803	)
Deemed dividend to Series D and Series F preferred stockholders		-			(1,905,570	)		-			(1,905,570	)
Net loss attributable to common stockholders	$	(2,231,179	)		(5,373,313	)	$	(5,054,622	)	$	(9,186,373	)


Net loss per common share – basic and diluted	$	(5.66	)	$	(17.91	)	$	(12.82	)	$	(32.63	)

Weighted average common shares outstanding – basic and diluted		394,409			299,983			394,409			281,546

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

	For the Six Months Ended June 30,
	2018			2017
Cash Flows From Operating Activities
Net loss	$	(5,054,622	)	$	(7,280,803	)
Adjustments to reconcile loss from continuing operations to net cash used in continuing operating activities:
Provision for doubtful accounts		141,000			7,000
Depreciation for property and equipment		2,667,774			3,763,394
Amortization for intangible assets		639,630			770,388
Amortization for debt discount and deferred financing costs		488,805			557,022
Interest added to principal		696,625			661,677
Accrued interest		418,315			-
Stock-based compensation - Options		111,567			667,821
Stock-based compensation - Employee stock purchase plan		-			53
Loss on the sale of property, plant and equipment		42,152			-
Deferred rent		(9,839	)		(55,370	)
Changes in operating assets and liabilities:
Accounts receivable		206,304			(286,266	)
Prepaid expenses and other current assets		(101,285	)		(12,123	)
Other assets		(47,810	)		(3,328	)
Accounts payable		(1,060,651	)		(29,106	)
Accrued expenses		(912,332	)		(159,686	)
Deferred revenues		132,432			(32,467	)
Total Adjustments		3,412,687			5,849,009
Net Cash Used In Continuing Operating Activities		(1,641,935	)		(1,431,794	)
Net Cash (Used In) Provided By Discontinued Operating Activities		(12,283	)		80,882
Net Cash Used In Operating Activities		(1,654,218	)		(1,350,912	)

Cash Flows From Investing Activities
Acquisitions of property and equipment		(964,390	)		(1,460,829	)
Proceeds from the sale of property, plant and equipment		15,000			-
Change in security deposits		-			(12,925	)
Net Cash Used In Investing Activities		(949,390	)		(1,473,754	)

Cash Flows From Financing Activities
Repayments of capital lease obligations		(306,286	)		(479,231	)
Issuance of common stock under employee stock purchase plan		-			305
Net Cash Used In Financing Activities		(306,286	)		(478,926	)

Net Decrease Cash and Cash Equivalents
Continuing Operations		(2,897,611	)		(3,384,474	)
Discontinued Operations		(12,283	)		80,882
Net Decrease In Cash and Cash Equivalents		(2,909,894	)		(3,303,592	)

Cash and Cash Equivalents - Beginning		7,568,982			12,272,444
Cash and Cash Equivalents - Ending	$	4,659,088		$	8,968,852

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

Note 2. Liquidity,, Going Concern, and Management Plans

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, ~~2017,~~2018, the Company had cash and cash equivalents of approximately ~~$9.0~~$4.7 million and working capital deficiency of approximately ~~$6.2~~$34.0 million. The Company incurred significant operating losses since inception and continues to generate losses from operations and as of June 30, ~~2017,~~2018, the Company has an accumulated deficit of ~~$183.9~~$194.2 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date these financial statements are issued. Management has also evaluated the significance of these conditions in relation to the Company’s ability to meet its obligations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

~~During the year ended December 31, 2016, the Company has raised a total of $9,130,000 and converted $5,000,000 of long-term debt into preferred stock. In addition, the~~The Company has monitored and reduced certain of its operating costs over the course of ~~2016~~2017 and into the first half of ~~2017.~~2018. Historically, the Company has financed its operations through private and public placement of equity securities, as well as debt financing and capital leases. The Company’s ability to fund its longer term cash requirements is subject to multiple risks, many of which are beyond its control. The Company intends to raise additional capital, either through debt or equity financings or through the potential sale of the Company’s assets in order to achieve its business plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that the Company will be able to do so. There is no assurance that any funds raised will be sufficient to enable the Company to attain profitable operations or continue as a going concern. To the extent that the Company is unsuccessful, the Company may need to curtail or cease its operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

In March 2018, the Company announced that its board of directors had commenced an evaluation of strategic repositioning of the Company as it moves to leverage its existing key assets in major U.S. markets. In conjunction with such announcement, the Company began to focus on indirect and wholesale channels and retained Bank Street Group LLC as its independent financial advisor to explore strategic alternatives, including the sale of some or all of the Company’s business or assets. There can be no assurances that the process will result in a transaction. Any potential strategic alternative will be evaluated by the board. The Company does not intend to discuss developments with respect to the evaluation process unless a transaction is approved, or further disclosure becomes appropriate.

In May 2018, the Company adopted a management incentive plan pursuant to which it shall pay up to $2,000,000 in cash bonuses (subject to withholding and deductions) to officers, directors and employees upon either a sale of the Company or a sale of its assets in each case that results in the payment in full of the obligations due under the Loan Agreement (as defined in Note 9, Long-Term Debt) (a “Triggering Sale”). Payments under the management incentive plan shall pay participants an aggregate of $1,000,000 upon a Triggering Sale plus up to an additional aggregate of $1,000,000 to be earned proportionately for a Triggering Sale in which the implied enterprise value of the Company based on the consideration paid in such Triggering Sale increases from a minimum of $45,000,000 to a maximum of $55,000,000.

Note 3. ~~Basis of Presentation and~~ Summary of Significant Accounting Policies

Basis of Presentation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, ~~2017~~2018 and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, ~~2017~~2018 are not necessarily indicative of the operating results for the full fiscal year for any future period.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form ~~10-K/A Amendment No. 2~~10-K for the year ended December 31, ~~2016.~~2017. The Company’s accounting policies are described in the Notes to Consolidated Financial Statements in its Annual Report on Form ~~10-K/A Amendment No. 2~~10-K for the year ended December 31, ~~2016,~~2017, and updated, as necessary, in this Quarterly Report on Form 10-Q.

Retroactive Adjustment for Reverse Stock Split. On ~~July 7, 2016,~~September 29, 2017, the Company effected a ~~one-for-twenty~~one-for-seventy-five reverse stock split of its common stock. Consequently, all earnings per share and other share related amounts and disclosures have been retroactively adjusted for all periods presented.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the amounts of revenues and expenses. Actual results could differ from those estimates. Key estimates include fair value of certain financial instruments, carrying value of intangible assets, reserves for accounts receivable and accruals for liabilities.

Concentration of Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of June 30, ~~2017,~~2018, the Company had cash and cash equivalent balances of approximately ~~$8.7~~$4.4 million in excess of the federally insured limit of $250,000.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

~~Revenue Recognition.~~ The Company generally 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.

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.

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 in the fourth quarter 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. There were no indicators of impairment identified during the three and six ~~month periods~~months ended June 30, ~~2017.~~2018.

Recent Accounting ~~Standards.~~Pronouncements. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 ~~Revenue~~(“ASU 2014-09”), “Revenue from Contracts with ~~Customers~~Customers”. The FASB has consolidated ASU 2014-19 and other revenue accounting standards for specialized transactions and industries into one Accounting Standards Codification (“~~ASU 2014-09”~~ASC”)~~, which requires an entity~~ Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The core principle of ASC 606 is that revenue is recognized when the transfer of goods or services to ~~recognize revenue at~~customers occurs in an amount that reflects the consideration to which the ~~entity~~Company expects to be entitled in exchange for ~~transferring~~those goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which was issued by the FASB in August 2015 and extended the original effective date by one year. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. services. The Company ~~is in~~has adopted ASC 606 as of January 1, 2018and utilized the ~~process~~modified retrospective method of ~~evaluating the effect of the adoption of this standard on our consolidated financial position and results of operations.~~

~~There have been four new ASUs issued amending certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net)~~adoption. See Note 14, Revenues,” was issued in March 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers — Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections for further information regarding the ~~disclosures~~implementation and required for remaining performance obligations in certain cases and makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statementsdisclosures related to the ~~updated guidance provided by these four new ASUs.~~Company’s revenues.

In January 2017, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (ASU) 2017-04: “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 017-04”), which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment test performed with a measurement date after January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In May 2017, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (ASU) 2017-09: Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting which clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The standard is effective beginning after December 15, 2017; early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In July 2017, FASB issued ASU No. 2017-11, Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). ASU 2017-11 consists of two parts. The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

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

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

Note4. 4. Discontinued Operations

During the fourth quarter of 2015, the Company ~~decided~~determined to exit the business conducted by Hetnets Tower Corporation and curtailed activities in its smaller markets. The remaining network, located in New York City, ~~(or “NYC”),~~ was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the ~~NYC~~New York City network. On March 9, 2016, the Company completed a sale and transfer of certain assets pursuant to an asset purchase agreement ~~(the "Agreement")~~ with ~~a large~~the major cable company (the ~~"Buyer"~~“Buyer”). Under the terms of the ~~Agreement,~~agreement, the Buyer assumed certain rooftop leases and acquired ownership of and the right to operate the Wi-Fi access points and related equipment associated with such leases. The Company retained ownership of all backhaul and related equipment, and the parties entered into an agreement under which the Company provides backhaul services to the Buyer. The ~~Agreement~~agreement is for a three-year period with two one-year renewals and is cancellable by the Buyer on ~~sixty days’~~sixty-days’ notice. In connection with the ~~Agreement,~~agreement, the Company transferred to the Buyer a net book value of network assets aggregating $2,660,041 in exchange for the backhaul agreement valued at $3,837,783. The backhaul agreement has been recorded as an intangible asset in the accompanying condensed consolidated balance sheets. ~~As a result, during the first quarter of 2016, the Company recognized a gain of $1,177,742 in its discontinued operations.~~

The Company had determined that it would not be able to sell the remaining network locations in New York City. As a result, the Company recognized charges totaling $1,585,319 in the first quarter of 2016 which included $453,403 representing the estimated cost to settle lease obligations, $528,364 to write off network assets which could not be redeployed into the fixed wireless network, $110,500 related to security deposits which are not expected to be recovered, and $493,052 related to the accelerated expensing of deferred acquisition costs. These costs were partially offset by a $1,244,284 reduction in the accrual for terminated lease obligations that was recorded in the fourth quarter of 2015. This reduction reflects the outcome of settlements negotiated in the first quarter of 2016 with certain landlords. The operating results and cash flows for Hetnets have been presented as discontinued operations in these condensed consolidated financial statements for all periods presented

~~Discontinued Operations~~

~~A more detailed presentation of loss from discontinued operations is set forth below. There has been no allocation of consolidated interest expense to discontinued operations.~~

Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
Revenues
$ - $ - $ - $ 553,302
Operating Expenses:

Infrastructure and access
- - - 2,523,222
Depreciation
- - - 638,681
Network operations
- 9,364 - 192,947
Customer support
- - - 69,804
Sales and marketing
- - - 246
General and administrative
- 58,212 - 105,545
Total Operating Expenses
- 67,576 - 3,530,445
Operating Loss
- (67,576 ) - (2,977,143 )
Gain on sale of assets
- - - 1,177,742
Net Loss
$ - $ (67,576 ) $ - $ (1,799,401 )

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

The components of the balance sheet accounts presented as discontinued operations were as follows:

	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Assets:
Prepaid expenses and other current assets		-		231,978
Total Current Assets	$	-	$	231,978

Liabilities:
Accrued expenses - leases		1,088,904		1,240,000	$	1,016,739	$	1,029,022
Total Current Liabilities	$	1,088,904	$	1,240,000	$	1,016,739	$	1,029,022

Accrued expenses represent the estimated cost of terminating the leases associated with the Hetnets business. Accordingly, disbursements associated with such activity during the period ended June 30, 2018 were recorded as reductions to that estimated liability. As of June 30, 2018 and based upon negotiations, settlements and experiences through that date, the Company had reduced that remaining estimated liability by $12,283 to $1,016,739.

Note 5. Property and Equipment, Net

Property and equipment, net is comprised of:

	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Network and base station equipment	$	42,836,648	$	42,098,570	$	44,321,305	$	43,573,869
Customer premise equipment		34,402,917		33,617,085		36,048,426		34,996,202
Information technology		4,879,306		4,859,875		4,885,481		4,881,332
Furniture, fixtures and other		1,713,430		1,713,430		1,715,524		1,715,524
Leasehold improvements		1,631,893		1,631,322		1,516,678		1,651,300
Accrual – equipment received not invoiced						240,594		605,646
		85,464,194		83,920,282		88,728,008		87,423,873
Less: accumulated depreciation		72,431,319		68,667,925		76,563,267		73,992,893
Property and equipment, net	$	13,032,875	$	15,252,357	$	12,164,741	$	13,430,980

Depreciation expense for the three months ended June 30, 2018 and 2017 was $1,283,992 and ~~2016 was~~ $1,747,777, ~~and $2,626,249,~~ respectively. Depreciation expense for the six months ended June 30, 2018 and 2017 was $2,667,774 and ~~2016 was~~ $3,763,394, ~~and $4,949,222,~~ respectively.

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

	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Network and base station equipment	$	2,620,898	$	2,620,898	$	2,680,000	$	2,629,526
Customer premise equipment		669,792		669,792		1,633,747		1,269,373
Information technology		1,860,028		1,860,028		1,860,028		1,860,028
		5,150,718		5,150,718		6,173,775		5,758,927
Less: accumulated depreciation		4,463,580		4,083,274		4,905,188		4,708,697
Property acquired through capital leases, net	$	687,138	$	1,067,444	$	1,268,587	$	1,050,230

~~Note 6. Intangible Assets~~TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Note 6. Goodwill and Intangible Assets, Net

Goodwill and intangible assets, net consist of the following:

June 30,
2017

December 31,
2016

Goodwill
$ 1,674,281 $ 1,674,281

Customer relationships
$ 11,856,126 $ 11,856,126
Less: accumulated amortization
11,856,126 11,725,369
Customer relationships, net
- 130,757

Backhaul agreement
3,837,783 3,837,783
Less: accumulated amortization
1,705,681 1,066,050
Backhaul agreement, net
2,132,102 2,771,733

FCC licenses
750,000 750,000

Intangible assets, net
$ 2,882,102 $ 3,652,490

	June 30, 2018		December 31, 2017

Goodwill	$	1,674,281	$	1,674,281

Backhaul agreement		3,837,783		3,837,783
Less: accumulated amortization		2,984,942		2,345,312
Backhaul agreement, net		852,841		1,492,471

FCC licenses		750,000		750,000

Intangible assets, net	$	1,602,841	$	2,242,471

Amortization expense for the three months ended June 30, 2018 and 2017 was $319,815 and ~~2016 was~~ $352,504, ~~and $417,883,~~ respectively. Amortization expense for the six months ended June 30, 2018 and 2017 was $639,630 and ~~2016 was~~ $770,388, ~~and $622,556,~~ respectively. The fair value of the backhaul agreement acquired in the transaction with a large cable company, as described in Note 4, is being amortized on a straight-line basis over the three-year term of the agreement. The Company’s licenses with the Federal Communications Commission (the “FCC”) are not subject to amortization as they have an indefinite useful life. Future amortization expense is as follows:

Remainder of 2017		639,631
2018		1,279,261
Remainder of 2018				639,631
2019		213,210		213,210
Total	$	2,132,102	$	852,841

In October 2014, the Company entered into a $35,000,000 note ("Note") with Melody Business Finance, LLC ("Lender") wherein the Company received net proceeds of $33,950,000 after a 3% original issue discount.

This ~~note (the “Note”)~~Note matures on October 16, 2019 and accrues interest on the basis of a 360-day year at:

This Note is secured by a first-priority lien and security interest in all of the assets of the Company and its subsidiaries, excluding the capital stock of the Company, and certain capital leases, contracts and assets secured by purchase money security interests.

The Note contains representations and warranties by the Company and the ~~lender (the “Lender”),~~Lender, certain indemnification provisions in favor of the Lender and customary covenants (including limitations on other debt, liens, acquisitions, investments and dividends), and events of default (including payment defaults, breaches of covenants, a material impairment in the Lender’s security interest or in the collateral, and events relating to bankruptcy or insolvency). The Note contains several restrictive covenants and the most significant of which requires the Company to maintain a minimum cash balance of $6,500,000 at all times. The Company was not in compliance with one of the Note covenants as of March 31, 2017 and December 31, 2016, and such violation was waived by the lender on June 14, 2017 effective March 31, 2017. The Company is in compliance with the Note covenants as of June 30, 2017. Upon the occurrence of an event of default, an additional 5% interest rate will be applied to the outstanding loan balances, and the Lender may terminate its lending commitment, declare all outstanding obligations immediately due and payable, and take such other actions as set forth in the Note to secure its interests.

Effective January 26, 2018, the Company entered into a Forbearance to Loan Agreement (the “Agreement”) with the Lender, as administrative agent to the lenders under the loan agreement entered into on October 16, 2014 by and among the Company, certain of its subsidiaries, the Lender and the lenders party thereto (the “Loan Agreement”). Pursuant to the Agreement, the Lender, through March 30, 2018 (the “Forbearance Period”), waived the Company’s requirement to maintain at least $6,500,000 minimum in deposit accounts or securities accounts (the “$6,500,000 Minimum”) and agreed to forbear from exercising any of its rights with respect to an event of default related to the $6,500,000 Minimum provided that the interest on the Note shall accrue at the default rate. The Forbearance Period shall terminate upon the Company’s failure to maintain at least $4,000,000 minimum in deposit accounts or securities accounts or upon the occurrence of certain events of default. The Agreement was amended and restated effective February 28, 2018 to also include a forbearance of Section 6.1(a)(i) of the Loan Agreement “Qualified Auditor’s Report” in the event that the Company’s audited consolidated financial statements for the year ended December 31, 2017 contained a going concern qualification. The Agreement was further amended and restated effective March 30, 2018 to extend the forbearance period until April 15, 2018.

Effective April 15, 2018, the Company entered into a second amended and restated Forbearance to Loan Agreement (the “Second Amended and Restated Agreement”) with the Lender and the majority lenders under the Loan Agreement. Pursuant to the Second Amended and Restated Agreement, the Lender and the majority lenders waived the Company’s requirement under Section 6.1(a)(i) of the Loan Agreement to deliver to the Lender an auditor’s report without a “going concern” qualification (the “Qualified Report”) through June 30, 2018. The Forbearance Period was extended through June 30, 2018 (the “Second Forbearance Period”). In addition, the Lender, through the Second Forbearance Period, waived the Company’s requirement to maintain the $6,500,000 Minimum in deposit accounts or securities accounts and agreed to forbear from exercising any of its rights with respect to an event of default related to the Qualified Report and the $6,500,000 Minimum through the Forbearance Period. The Second Forbearance Period shall terminate upon the Company’s failure to maintain at least $3,000,000 minimum in deposit accounts or securities accounts or upon the occurrence of certain events of default. The Company also agreed, among other things, (i) to certain milestones in connection with a proposed sale of the Company, (ii) subject to applicable law, to cease filing periodic reports with the Securities and Exchange Commission and (iii) to issue to the Lender a new series of preferred stock that will be entitled to receive upon a liquidation event a distribution as set forth in the Second Amended and Restated Agreement.

On May 24, 2018, the parties amended the Second Amended and Restated Agreement to, among other things, extend the compliance period for certain covenants to May 31, 2018 from April 30, 2018 and to revise the milestones for a proposed sale of the Company as set forth therein. Such ~~amount~~amendment was ~~not assessed by the lender.~~effective as of May 15, 2018.

The Company has classified long term debt within current liabilities as of June 30, 2018 and December 31, 2017, respectively.

The Company has the option to prepay the Note in the minimum principal amount of $5,000,000 plus integral amounts of $1,000,000 beyond that amount subject to certain prepayment penalties. Mandatory prepayments are required upon the occurrence of certain events, including but not limited to: i) the sale, lease, conveyance or transfer of certain assets, ii) issuance or incurrence of indebtedness other than certain permitted debt, iii) issuance of capital stock redeemable for cash or convertible into debt securities; and iv) any change of control.

A discount of $6,406,971 to the face value of the Note was recorded upon its issuance and that discount is being amortized over the term of the Note using the effective interest rate method. That discount consisted of:

On November 8, 2016 and in connection with a financing transaction, an investor acquired $5,000,000 of the Company's obligations to the Lender consisting of principal and accrued interest of $4,935,834 and $64,166, respectively. The investor then immediately exchanged such obligations for 1,000 shares of the Company's Series D Convertible Preferred Stock (the “Series D Preferred Stock”) and warrants for the purchase of up to 4,000,000 shares of the Company's common stock. In connection with that exchange, the Company:TOWERSTREAM CORPORATION AND SUBSIDIARIES

The Company recorded interest expense of ~~$1,019,591~~$1,504,354 and ~~$1,125,988~~$1,019,591 for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The Company recorded interest expense of ~~$1,985,030~~$2,715,051 and ~~$2,240,703~~$1,985,030 for the six months ended June 30, ~~2017~~2018 and ~~2016~~2017, respectively. Of those amounts, the Company paid to the Lender $2,018,425 and $1,323,353 and ~~$1,493,803~~added $696,625 and ~~added~~ $661,677 ~~and $746,900~~ of interest to the principal amount of the Note during the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively.

The Company recorded amortization expense related to the debt discount of ~~$266,322~~$298,480 and ~~$431,273~~$266,322 for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively. Amortization expense totaled ~~$557,022~~$488,805 and ~~$876,234~~$557,022 for the six months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively and classified those amounts as interest expense.

Note 10.10. Capital Stock

On ~~January 9, 2017,~~May 24, 2018, the ~~holder~~Company effected an exchange of ~~500,000~~warrants with the lenders under the Loan Agreement who held an aggregate of 2,400 shares of common stock (as adjusted for the Company’s 1:20 and 1:75 reverse splits effected in July 2016 and September 2017) for an aggregate of 100 shares of the Company’s newly authorized Series ~~E Convertible~~I Preferred Stock (the “Series EI Preferred Stock”) ~~elected to convert them into shares~~. The difference in value was de minimis and therefore no deemed dividend was recorded.

Shares of ~~common stock. In accordance with the conversion terms applicable to the~~ Series EI Preferred Stock ~~the Company issued 500,000 shares of~~are not convertible into common stock.

~~On various dates~~In the event of a liquidation or fundamental transaction, a holder of Series I Preferred Stock shall be redeemed and shall be entitled to receive, per share of Series I Preferred Stock, in cash out of the assets of the Company, whether from ~~January 26, 2017~~capital or from earnings available for distribution to ~~March 23, 2017, inclusive,~~its shareholders (the “Liquidation Funds”), a one-time redemption payment in full satisfaction of all obligations to the holder and in cancellation of ~~390 shares of~~the Series ~~F Convertible~~I Preferred Stock ~~(the “Series F Preferred Stock”) elected to convert them into shares of common stock. In accordance with the conversion terms applicable~~equal to the ~~Series F Preferred Stock,~~quotient of (i) the ~~Company issued 1,950,000 shares~~product of ~~common stock.~~

~~On April 4 and April 13, 2017,~~(x) the ~~holder~~remainder of ~~200 shares of Series F Convertible Preferred Stock elected to convert them into shares of common stock. In accordance with the conversion terms applicable~~Liquidation Funds available for distribution (including any deferred amounts) minus: (A) distribution or payment in full to the ~~Series F Preferred Stock, the Company issued 1,000,000 shares of common stock.~~

~~On May 26, 2017, the Company exchanged 1,233 shares~~holders of the ~~outstanding Series D Preferred Stock and 643 shares of the outstanding Series F Preferred Stock for 938 shares of newly created~~Company’s Series G Convertible Preferred Stock ~~(the “Series G Preferred Stock”) and 938 shares~~ of the ~~newly created~~liquidation preference amount in accordance with the rights and designations of such series of Senior Preferred Stock, (B) distribution or payment to the holders of the Company’s Series H Convertible Preferred Stock of the liquidation preference amount in accordance with the rights and designations of such series of Senior Preferred Stock; (C) $1,025,437 to be reserved for junior stock holders as their interests appear; and (D) up to $2 million in payments under the 2018 Management and Key Employee Incentive Plan adopted by the Corporation (the ~~“Series H~~Liquidation Funds less the amounts required under (A), (B), (C) and (D) hereof, the “Net Liquidation Funds”), multiplied by (y) 25% divided by (ii) the total number of outstanding shares of Series I Preferred ~~Stock”).~~Stock.

~~The key preferences, rights, and limitations~~All shares of capital stock of the Company (when and if issued), except for shares of Series G Convertible Preferred Stock and ~~Series H Preferred Stock, are as follows:~~

~~The Stated Value of each share of Series G Preferred Stock and Series H Preferred Stock is $1,000;~~

~~ii.~~

Series G Preferred Stock and Series H Preferred Stock may be converted into common shares at any time. The number of common shares issuable upon the conversion of the Series G Preferred Stock is determined by multiplying the number of shares of Series G Preferred Stock being converted by their stated value of $1,000 per share and then dividing by the conversion price of $0.10 per common share. The number of common shares issuable upon the conversion of the Series H Preferred Stock is determined by multiplying the number of shares of Series H Preferred Stock being converted by their stated value of $1,000 per share and then dividing by the conversion price of $0.125 per common share;

~~iii.~~

In the event of a Liquidation Event, each share of Series G Preferred Stock and Series H Preferred Stock will be entitled to a per share preferential payment equal to 100% of the stated value of such Series H Preferred Stock, plus all accrued and unpaid dividends, if any. All subsequent issuances and junior preferred issuances of our capital stock will be junior in rank to the Series G Preferred Stock and Series H Preferred Stock with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company. The holders of Series H Preferred Stock will be entitled to receive dividends if and when declared by the Company. The Series G Preferred Stock and Series H Preferred Stock shall participate on an “as converted” basis, with all dividends declared on our common stock. In addition, if the Company grants, issues or sells any rights to purchase securities pro rata to all of the Company’s record holders of its common stock, each holder will be entitled to acquire such securities applicable to the granted purchase rights as if the holder had held the number of shares of common stock acquirable upon complete conversion of all Series G Preferred Stock and Series H Preferred Stock then held.

~~iv.~~

The Company is prohibited from effecting a conversion of the Series G Preferred Stock and Series H Preferred Stock to the extent that, as a result of such conversion, the holder would beneficially own more than 9.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series G Preferred Stock and Series H Preferred Stock, which beneficial ownership limitation may be decreased by the holder at its option. Each holder is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder’s Series G and Series H Preferred Stock, but not in excess of the beneficial ownership limitations.

Additionally, upon the issuance of the Series G Preferred Stock and Series H Preferred Stock, the Company recorded a beneficial conversion feature and a deemed dividend in the amount of $1,905,570. This amount was calculated using the closing price per share of the Company’s common stock on the day of the transaction and subtracting the conversion price per share. This difference was then multiplied by the number of shares of common stock into which the shares of Series G Preferred Stock and Series H Preferred Stock were convertible into on the date of the transaction.

~~On various dates from May 30, 2017 to June 29, 2017, inclusive, the holder of 437~~ shares of Series H Convertible Preferred Stock ~~elected~~outstanding as of May 24, 2018, shall be junior in rank to ~~convert them into shares of common stock. In accordance with the conversion terms applicable to those preferred shares, the Company issued 3,496,000 shares of common stock.~~

~~On June 30, 2017, the holder of 200~~all shares of Series GI Preferred Stock ~~elected~~with respect to ~~convert them~~the preferences as to dividends, distributions and payments upon the liquidation, dissolution, winding-up or fundamental transaction (as defined in the Series I Certificate of Designations) of the Company.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Holders of the Series I Preferred Stock shall have no voting rights except with respect to, and in each case each holder shall be entitled to one vote for each share of Series I Preferred Stock held by such holder: (i) amending, altering or repealing any provision of the Certificate of Incorporation (including the Certificate of Designation) of the Company, if the amendment, alteration or repeal of the Certificate of Incorporation would adversely affect the rights, preferences, powers or privileges of the Series I Preferred Stock or (ii) creating, authorizing, issuing or increasing the authorized or issued amount of any class or series of any of the Company’s equity securities, or any warrants, options or other rights convertible or exchangeable into any class or series of any of the Company’s equity securities, which would constitute senior preferred stock or parity stock or reclassify any authorized stock of the Company into any such stock, or create, authorize or issue any obligation or security convertible into, exchangeable or exercisable for, or evidencing the right to purchase any such stock. In each such case, at least a majority of the outstanding shares of ~~common stock. In accordance with~~Series I Preferred Stock shall vote in favor of such proposal.

The Series I Preferred Stock was accounted for under Section 480-10-S99 - Distinguishing liabilities from Equity (FASB Accounting Standards Codification 480) as amended by ASU 2009-04 - for Redeemable Equity Instruments (“ASU 2009-04”). Under ASU 2009-04, a redeemable equity security is to be classified as temporary equity if it is conditionally redeemable upon the ~~conversion terms applicable to those preferred shares,~~occurrence of an event that is not solely within the ~~Company issued 2,000,000 shares~~control of ~~common stock.~~the issuer.

Note 11.11. Stock Options and Warrants

Stock Options

The Company uses the Black-Scholes option pricing model to value options issued to employees, directors and consultants. Compensation expense, including the estimated effect of forfeitures, is recognized over the period of service, generally the vesting period. Stock compensation expense and the weighted average assumptions used to calculate the fair values of stock options granted during the periods indicated were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2017			2016			2017			2016			2018	2017			2018	2017
Risk-free interest rate	1.6%	-	1.7%	1.1%	-	1.2%	1.6%	-	1.7%	1.1%	-	1.4%	2.7%	1.6%	-	1.7%	2.7%	1.6%	-	1.7%
Expected volatility		113%		80%	-	83%	110%	-	113%	78%	-	83%	105%		113%		105%	110%	-	113%
Expected life (in years)		4.2			4.2			4.2			4.2		4.2		4.2		4.2		4.2
Expected dividend yield		-			-			-			-		-		-		-		-
Estimated forfeiture rates		20%		1%	-	7%		20%		1%	-	7%	20%		20%		20%		20%
Weighted average per sharegrant date fair value		$0.11			$0.11			$0.13			$0.12
Weighted average per share grant date fair value													$1.76		$8.60		$1.76		$9.65
Stock-based compensation		$315,540			$140,474			$667,821			$436,859		$25,034		$315,540		$111,567		$667,821

The risk-free interest rate was based on rates established by the Federal Reserve. The expected volatility was based upon the historical volatility for the Company’s common stock. The Company utilized historical data to determine the expected life of stock options. The dividend yield reflected the fact that the Company has not historically paid dividends, and does not expect to pay dividends in the foreseeable future. Stock-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. The unamortized amount of stock options expense totaled ~~$507,911~~$114,940 as of June 30, ~~2017~~2018 which will be recognized over a weighted-average period of ~~2.3~~1.4 years.

Option transactions under the stock option plans during the six months ended June 30, ~~2017~~2018 were as follows:

Number

Weighted
Average
Exercise Price

Outstanding as of January 1, 2017
2,106,889 $ 5.30
Granted during 2017
3,831,212 0.17
Exercised
- -
Cancelled /expired
(117,514 ) 23.36
Outstanding as of June 30, 2017
5,820,587 $ 1.56
Exercisable as of June 30, 2017
2,342,563 $ 3.40

	Number			Weighted Average Exercise Price
Outstanding as of January 1, 2018		76,601		$	117.42
Granted during 2018		102			2.40
Exercised		-			-
Cancelled /expired		(3,806	)		122.23
Outstanding as of June 30, 2018		72,897		$	117.01
Exercisable as of June 30, 2018		49,483		$	165.18

Grants under the stock option plans during the six months ended June 30, ~~2017~~2018 were ~~as follows:~~related to the annual grants to outside directors which totaled 102 shares of common stock.

	~~Number~~ TOWERSTREAM CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
~~Consultant grants~~		~~25,000~~
~~Executive grants~~		~~3,793,712~~
~~Annual grants to outside directors~~		~~12,500~~
~~Total~~		~~3,831,212~~

Options granted during the reporting period had a term of ten years. All options were issued at an exercise price equal to the fair value on the date of grant. Consultant grants vest six months from the date of issuance. Executive grants, except as noted below, vesting periods range from vesting immediately upon issuance, vesting quarterly over a two-year period, vesting annually for one year then quarterly over the next two years period, and vesting annually for one year then quarterly over the next three years period from the date of issuance. DirectorThe director grants vest over a one year period from the date of issuance. The aggregate fair value of the options granted was ~~$493,090~~$180 for the six months ended June 30, ~~2017.~~2018.

On January 24, 2017, the Company entered into an employment agreement with Ernest Ortega wherein the Company issued options for the purchase of up to 2,037,085 shares of the Company common stock at $0.17 per share for a period of ten years. Those options vest as follows: 940,193 will vest on January 24, 2018; 626,795 will vest in eight quarterly installments during the twenty-four months ending January 24, 2020; 548,446 will vest upon the achievement of three consecutive quarters of positive cash flow; and 548,446 will vest upon the sale of the Company's earth station assets in Miami, Florida for gross proceeds equal to or greater than $15,000,000.

Certain stock options awarded to Ernest Ortega, Chief Executive Officer, in conjunction with his 2017 employment agreement contained performance based criteria. The fair value of the awards is determined based on the market value of the underlying stock price at the grant date and marked to market over the vesting period based on probabilities and projections of the underlying performance measures. The aggregate fair value of the performance based options granted was $140,708Cancellations for the six months ended June 30, 2017. The Company has not recorded any expense associated with the performance based stock options issued in the six month period ended June 30, 2017. The Company will continue to evaluate the probability of achieving the criteria associated with performance based stock options and will record any associated compensation expense at such time.

On February 3, 2017, the Company awarded options for the purchase of up to 1,189,987 shares of the Company's common stock at an exercise price of $0.18 per share for a period of ten years. Terms of such option awards conformed to the Company's standard form of option agreement which includes a provision for cashless exercise. The awards2018 consisted of options for 500,653 shares to Mr. Philip Urso for his past service as Interim Chief Executive Officer, options for 439,008 shares to Mr. Arthur Giftakis, the Company's Chief Operating Officer, and options for 250,326 shares to Mr. Frederick Larcombe, the Company's former Chief Financial Officer. Mr. Urso's options vested 100% upon issuance and the options issued to Messrs. Giftakis and Larcombe vest ratably on a quarterly basis over the eight quarters immediately following the date of the awards. The options awarded to Mr. Frederick Larcombe were subsequently modified and fully expensed on May 15, 2017 to reflect immediate vesting and, unless exercised prior to May 15, 2018, shall be forfeited.

On May 15, 2017, the Company entered into an employment agreement with Laura Thomas, Chief Financial Officer, wherein she was issued options to purchase up to 2% of the Company’s common stock on a fully diluted basis as of May 15, 2017, or 566,640 options. The options vest 25% after one year of service and the remaining will vest ratably over the following three years.

~~Cancellations for the three months ended June 30, 2017 consisted of 110,014~~3,683 related to employee terminations and ~~7,500~~123 were associated with the expiration of options.

The weighted average remaining contractual life of the outstanding options as of June 30, ~~2017~~2018 was ~~9.4~~8.4 years.

The intrinsic value associated with the options outstanding was $24 as of June 30, 2018. There was no intrinsic value associated with the options ~~outstanding and~~ exercisable as of June 30, ~~2017.~~2018. The closing price of the Company’s common stock at June ~~30, 2017~~29, 2018 was ~~$0.10~~$2.64 per share.

Stock Warrants

~~There were 180,000 warrants outstanding and exercisable as of~~Warrant transactions during the six months ended June 30, ~~2017 and December 31, 2016, respectively, with a weighted-average exercise price of $16.87~~2018 were as ~~of June 30, 2017. The weighted average remaining contractual life of the warrants was 4.8 years.~~follows:

	Number			Weighted Average Exercise Price
Outstanding as of January 1, 2018		2,400		$	1,265.25
Exchanged during 2018		(2,400	)		1,265.25
Outstanding and exercisable as of June 30, 2018		-		$	-

~~There was no intrinsic value associated~~

On May 24, 2018, the Company effected an exchange of 2,400 warrants with the ~~warrants outstanding and exercisable as~~Lender for an aggregate of ~~June 30, 2017.~~100 shares of Series I Preferred Stock. See Note 10, Capital Stock, for further information regarding the exchange of warrants.

Note ~~14.~~14. Revenues

In May 2014, the FASB issued ASC 606, “Revenue from Contracts with Customers.” The core principle of ASC 606 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company has adopted ASC 606 as of January 1, 2018and utilized the modified retrospective method of adoption which includes the deferral of commission costs associated with obtaining its customer contracts and revenues associated with customer installations. The impact to revenues for the three and six months ended June 30, 2018 was a reduction of $48,252 and $113,828, respectively, as a result of applying Topic 606. The prior year information has not been restated as the application of Topic 606 did not have a material impact on the accounting treatment of 2017 revenues and continues to be reported under the accounting standards in effect for that period.

Revenue Recognition

Generally, the Company considers all revenues as arising from contracts with customers. Revenue is recognized based on the five-step process outlined in ASC 606:

Step 1 – Identify the Contract with the Customer – A contract exists when (a) the parties to the contract have approved the contract and are committed to perform their respective obligations, (b) the entity can identify each party’s rights regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods or services to be transferred, (d) the contract has commercial substance and (e) it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

Step 2 – Identify Performance Obligations in the Contract – Upon execution of a contract, the Company identifies as performance obligations each promise to transfer to the customer either (a) goods or services that are distinct or (b) a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. To the extent a contract includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are capable of being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted for as a combined performance obligation.

Step 3 – Determine the Transaction Price – When (or as) a performance obligation is satisfied, the Company recognizes as revenue the amount of the transaction price that is allocated to the performance obligation. The contract terms are used to determine the transaction price. Generally, all contracts include fixed consideration. If a contract did include variable consideration, the Company would determine the amount of variable consideration that should be included in the transaction price based on expected value method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable that a significant future reversal of cumulative revenue under the contract would not occur.

Step 4 – Allocate the Transaction Price – After the transaction price has been determined, the next step is to allocate the transaction price to each performance obligation in the contract. If the contract only has one performance obligation, the entire transaction price will be applied to that obligation. If the contract has multiple performance obligations, the transaction price is allocated to the performance obligations based on the relative standalone selling price at contract inception.

Step 5 – Satisfaction of the Performance Obligations (and Recognize Revenue) – When an asset is transferred and the customer obtains control of the asset (or the services are rendered), the Company recognizes revenue. At contract inception, the Company determines if each performance obligation is satisfied at a point in time or over time. For device sales, revenue is recognized at a point in time when the goods are transferred to the customer and they obtain control of the asset. For maintenance contracts, revenue is recognized over time as the performance obligations in the contracts are completed.

TOWERSTREAM CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Disaggregation of Revenue

We provide fixed wireless business internet service to companies ranging from small businesses to fortune 500 companies. 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 generally enters into contractual agreements with its customers for periods ranging between one to three years.

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.

The Company also defers installation fees billed to the customer and commission costs associated with obtaining new contracts. The installation fees and commission costs are amortized over the average contract term of new contracts. As of June 30, 2018, the Company had $113,828 of deferred installation fees which is included in Deferred Revenues on the Company’s condensed consolidated balance sheet and $150,977 of deferred commission costs included in Other Current Assets on the Company’s condensed consolidated balance sheet.

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 June ~~2024.~~2023. Certain of these operating leases include extensions, at the Company's option, for additional terms ranging from one to fifteen years. Amounts associated with the extension periods have not been included in the table below as it is not presently determinable which options, if any, the Company will elect to exercise. As of June 30, ~~2017,~~2018, total future operating lease obligations were as follows:

Rent expenses related to Points of Presence were included in infrastructure and access in the Company’s condensed consolidated statements of operations. Rent expense related to our corporate offices was allocated between general and administrative, sales and marketing, customer support, and network operations expense in the Company’s condensed consolidated statements of operations. Other rent expenses were included in network operations within the Company’s condensed consolidated statements of operations.

In ~~September 2013,~~October 2017, the Company ~~entered into a new~~amended the lease agreement for its corporate offices and ~~new~~ warehouse ~~space.~~space located in Rhode Island. The amended lease commenced on January 1, ~~2014~~2018 and expires on December 31, ~~2019~~2024 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 in February 2014. Total annual rent payments ~~began~~begin at ~~$359,750~~$183,256 for ~~2014~~2018 and escalate by 3%approximately 2.5% annually reaching ~~$416,970~~$213,422 for ~~2019.~~2024.

In December 2014, the Company entered into a new lease agreement in Florida, primarily for a second sales center. The lease commenced in February 2015 for 38 months with an option to renew for an additional five-year period. Total annual rent payments started at $53,130 and escalated by 3% annually. In April 2016, the Company terminated the Florida lease. Under the terms of the agreement, the Company forfeited its security deposit of $26,648 and agreed to make a termination payment of $25,000.

In April 2017, the Company entered into a new lease agreement for its sales office located in Virginia. The lease commenced on April 15, 2017 and expires on December 31, 2017 with an automatic renewal equal to the original term. Total annual rent payments are fixed at $32,021 for the contract term. In June 2017, the Company leased additional office space in Virginia. The second lease commenced on June 1, 2017 and expires on December 31, 2017 with an automatic renewal equal to the original term. Total annual rent payments are fixed at $20,734 for the duration of the contract term.

The Company has entered into capital leases to acquire property and equipment expiring through ~~June 2018.~~August 2020. As of June 30, ~~2017,~~2018, total future capital lease obligations were as follows:

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

The following discussion and analysis summarizes the significant factors affecting our condensed consolidated results of operations, financial condition and liquidity position for the three and six months ended June 30, ~~2017.~~2018. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form ~~10-K/A Amendment No.2~~10-K for the year ended December 31, ~~2016~~2017 and the condensed consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

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

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

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

We offer 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.

Infrastructure and access expenses relate directly to maintaining our network and providing connectivity to our customers. Infrastructure primarily relates to our Points-of-Presence ("PoPs") where we install a substantial amount of equipment, mostly on the roof, which we utilize to connect numerous customers to the internet. We enter into long term lease agreements to maintain our equipment on these PoPs and these rent payments comprise the majority of our infrastructure and access costs. Access expenses primarily consist of bandwidth connectivity agreements that we enter into with national service providers.

Network operations costs relate to the daily operations of our network and ensuring that our customers have connectivity within the terms of our service level agreement. We have employees based in our largest markets who are dedicated to ensuring that our network operates effectively on a daily basis. Other employees monitor network operations from our network operating center which is located at our corporate headquarters. Payroll comprises approximately ~~55%~~50% to 60% of network operations costs. Information technology systems and support comprises approximately 15% to 20% of network operations costs.

Customer support costs relate to our continuing communications with customers regarding their service level agreement. Payroll comprises approximately ~~83%~~65% to ~~88%~~75% of customer support costs. Other costs include shipping, troubleshooting, and facilities related expenses.

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.

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 and finance personnel are included in this category. Other costs include accounting, legal and other professional services, and other general operating expenses.

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, disaster recovery, bundled data and video services. ~~We currently provide service to business customers in twelve metropolitan markets.~~

As of June 30, ~~2017,~~2018, we ~~operated~~provide service to business customers 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~~period.

In March 2018, we announced that our board of directors had commenced an evaluation of strategic repositioning of the Company as we move to leverage existing key assets in major U.S. markets. In conjunction with such announcement, we launched a concerted focus on indirect and wholesale channels and retained Bank Street Group LLC as our independent financial advisor to explore strategic alternatives, including the sale of some or all of our business or assets. There can be no assurances that the process will result in a transaction. Any potential strategic alternative will be evaluated by the board. We do not intend to discuss developments with respect to the evaluation process unless a transaction is approved, or further disclosure becomes appropriate.

As further described in Note 4 to our condensed consolidated financial statements, on March 9, 2016, the Company completed a sale and transfer of certain assets to the major cable company (the “Buyer”). The asset purchase agreement ~~("Agreement")~~ provided that the Buyer would assume certain rooftop leases in NYC and acquire ownership of the Wi-Fi access points and related equipment associated with operating the network. The Company retained ownership of all backhaul and related equipment and the parties entered into a backhaul services agreement under which the Company will provide bandwidth to the Buyer at the locations governed by the leases. The ~~Agreement~~agreement is for a three-year period with two one-year renewals and is cancellable by the Buyer on sixty days’ notice. The operating results and cash flows for Hetnets have been presented as discontinued ~~operating results~~operations in these condensed consolidated financial statements.

Three Months Ended June 30, ~~201~~72018 Compared to Three Months Ended June 30, ~~201~~62017

Revenues. Revenues totaled $6,220,758 during the three months ended June 30, 2018 compared to $6,517,817 during the three months ended June 30, 2017 ~~compared to $6,872,342 during the three months ended June 30, 2016~~ representing a decrease of ~~$354,525,~~$297,059, or 5%. ~~Although the number of customers remained relatively consistent for the two periods, the revenue~~The decrease is due to personnel reductions within the salesforce team, $48,252 net impact of adopting ASC 606, and fewer total customers offset by new ~~acquisitions (“new customers”)~~customers having a ~~lower~~higher average rate per ~~unit as compared to the customers churning.~~unit.

Customer Churn. Customer churn, calculated as a percent of revenue lost on a monthly basis from customers terminating service or reducing their service level, totaled 1.45% during the three months ended June 30, 2018 compared to 1.48% during the three months ended June 30, ~~2017 compared~~2017. Churn levels can fluctuate from period to ~~1.59%~~period depending upon whether customers move to a location not serviced by the Company, go out of business, or a myriad of other reasons.

Infrastructure and Access. Infrastructure and access totaled $2,756,943 during the three months ended June 30, ~~2016.~~

~~Infrastructure and~~A~~ccess. Infrastructure and access totaled~~2018 compared to $2,622,723 during the three months ended June 30, 2017 ~~compared~~representing an increase of $134,220, or 5%. The increase primarily relates to ~~$2,650,134~~higher tower rent and maintenance costs.

Depreciation and Amortization.Depreciation and amortization totaled $1,603,807 during the three months ended June 30, ~~2016 representing a decrease of $27,411, or 1%. The decrease primarily relates~~2018 compared to ~~a reduction in bandwidth costs offset by increased rent and other expenses.~~

~~Depreciation and Amortization.~~~~Depreciation and amortization totaled~~ $2,100,281 during the three months ended June 30, 2017 ~~compared to $3,044,132~~representing a decrease of $496,474 or 24%. Depreciation expense totaled $1,283,992 during the three months ended June 30, ~~2016 representing a decrease of $943,851 or 31%. Depreciation expense totaled~~2018 compared to $1,747,777 during the three months ended June 30, 2017 ~~compared~~representing a decrease of $463,785, or 27%. The depreciation decrease is due to ~~$2,626,249~~capital investment activity being lower than historical levels and a higher percentage of assets becoming fully depreciated.

Amortization expense totaled $319,815 during the three months ended June 30, ~~2016 representing a decrease of $878,472, or 33%.~~

~~Amortization expense totaled~~2018 compared to $352,504 during the three months ended June 30, 2017 ~~compared~~representing a decrease of $32,689 or 9%. The decrease in amortization expense was due to ~~$417,883~~customer related intangible assets that were fully amortized as of the first quarter of 2018.

Network Operations. Network operations totaled $684,516 during the three months ended June 30, ~~2016 representing a decrease of $65,379, or 16%. Amortization expense relates~~2018 compared 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.

~~Network~~O~~perations. Network operations totaled~~ $1,085,249 during the three months ended June 30, 2017 ~~compared~~representing a decrease of $400,733 or 37%. The decrease is due to ~~$1,279,570~~lower payroll related expenses of $332,140, or 51%, associated with employee headcount levels, IT costs decreased by $22,652, or 15%, due primarily to lower third party support and software license fees, and a $20,778 reduction in travel and entertainment.

Customer Support. Customer support totaled $362,844 during the three months ended June 30, ~~2016 representing a decrease of $194,321 or 15%. Payroll costs totaled $656,161 in the 2017 period~~2018 compared to $785,513 in the 2016 period representing a decrease of $129,352, or 16% due primarily to staffing reductions. Information technology support expenses totaled $147,490 in the 2017 period compared to $231,031 in the 2016 period representing a decrease of $83,541 or 36%, due primarily to a decrease in third party support costs.

~~Customer Support~~. ~~Customer support totaled~~ $391,335 during the three months ended June 30, 2017 ~~compared~~representing a decrease of $28,491, or 7%. Payroll expense decreased $60,061, or 21%, due to ~~$484,664~~the reduction of employee headcount in the 2018 period, offset by increased support costs of $31,569, or 32%.

Sales and Marketing. Sales and marketing expenses totaled $385,661 during the three months ended June 30, ~~2016 representing a decrease of $93,329, or 19%. Payroll expense totaled $291,202 during the 2017 period~~2018 compared to $429,073 during the 2016 period representing a decrease of $137,871 or 32%. Average headcount was lower in the 2017 period as the Company consolidated departments and improved efficiencies. Other customer support costs totaled $100,133 during the three months ended June 30, 2017 compared to $55,591 during the 2016 period representing an increase of $44,542 or 80%. This increase was principally attributable to higher customer troubleshooting costs which can fluctuate from period to period.

~~Sales and Marketing~~.~~Sales and marketing expenses totaled~~ $976,790 during the three months ended June 30, 2017 compared to $883,961 during the three months ended June 30, 2016 representing an increase of $92,829, or 11%. Payroll costs totaled $652,248 during the 2017 period compared to $574,571 during the 2016 period representing an increase of $77,677, or 14%. The payroll increase is primarily related to increased staffing levels associated with the new sales office located in Virginia which was opened in the second quarter of 2017. Advertising expenses totaled $28,220 during the 2017 period as compared to $59,562 during the 2016 period representing a decrease of ~~$31,342,~~$591,129, or ~~53%~~61%. The Company has significantly reduced its Internet marketing initiatives in connection with its current marketing focus on specific businesses in certain connected buildings rather than marketing broadly to all businesses within a market. Indirect channel commissions, previously referred to as outside commissions, totaled $221,583 in the 2017 period compared to $190,165 in the 2016 period representing an increase of $31,418,Payroll expenses have decreased $568,016, or ~~17%. The increase relates almost exclusively~~87%, due to the ~~Company’s residual program which pays continuing commissions as long as the referred business is a customer.~~reduction of employee headcount.

General and Administrative. General and administrative expenses totaled $840,689 during the three months ended June 30, 2018 compared to $1,514,141 during the three months ended June 30, 2017 ~~compared to $1,604,542 during the three months ended June 30, 2016~~ representing a decrease of ~~$90,401,~~$673,452, or 6%. Payroll costs decreased to $404,017 in the 2017 period compared to $500,046 in the 2016 period representing a decrease of $96,029, or 19%. The decrease relates to severance paid to a former executive in the 2016 period.~~Stock based compensation totaled $315,540 during the 2017 period compared to $141,805 during the 2016 period representing an increase of $173,735, or more than 100%~~44%. Stock-based compensation ~~can fluctuate significantly from period to period depending on the timing, quantity and valuation~~decreased $290,506 as there were a minimal number of stock option grants. Corporate travel expenses totaled $42,827 in the 2017 period compared to $14,854 in the 2016 period representing an increase of $27,973, or more than 100%. The increase is related to executive travel in 2017. Non-recurring expenses decreased $167,486, or 100%, for the three months ended June 30, 2017. The decrease primarily relates to the Miami lawsuit which the Company settledoptions issued during the ~~2016 period. Public company expenses~~quarter, professional fees decreased $193,160, and payroll costs decreased by $120,879 due to $55,562 in the 2017 period compared to $90,023 in the 2016 period representing a decrease of $34,461, or 38%. The decrease relates to the reduction of public company filing fees and the contract termination with our investor relation firms in 2017.headcount reductions.

Interest Expense, Net. Interest expense, net totaled ~~$1,298,920~~$1,817,477 during the three months ended June 30, 2018 compared to $1,295,041 during the three months ended June 30, 2017 ~~compared to $1,588,291 during the three months ended June 30, 2016~~ representing ~~a decrease~~an increase of ~~$289,371,~~$522,436 or ~~18%~~40%. Interest expense relates to the $35,000,000 secured term loan which closed in October ~~2014.~~2014 and capital lease arrangements. The ~~decrease~~increase is primarily attributable to the ~~$5,000,000 reduction of debt in~~interest rate change which occurred with the ~~fourth quarter of 2016~~forbearance agreement as more fully described in Note 9, Long-Term ~~Debt.~~Debt to the condensed consolidated financial statements.

~~Revenues~~~~. Revenue was zero for the three months ended June 30, 2017 and 2016.~~

~~Infrastructure and Access.~~~~Infrastructure and Access totaled zero during the three months ended June 30, 2017 and 2016.~~

~~Depreciation.~~ ~~Depreciation totaled zero during the three months ended June 30, 2017 and 2016.~~

~~Network Operations.~~Network operations totaled zero during the three months ended June 30, 2017 compared to $9,364 during the three months ended June 30, 2016 representing a decrease of $9,364, or 100%. Certain costs were incurred in the 2016 period related to the termination of the business.

~~Customer Support Services.~~ ~~Customer support services totaled zero during the three months ended June 30, 2017 and 2016.~~

~~Sales and Marketing.~~ ~~Sales and marketing expenses totaled zero during the three months ended June 30, 2017 and 2016.~~

~~General and Administrative.~~ General and administrative expenses totaled zero during the three months ended June 30, 2017 compared to $58,212 during the three months ended June 30, 2016 representing a decrease of $58,212, or 100%. The decrease reflects professional service fees incurred in the 2016 period related to the termination of the business.

Revenues. Revenues totaled $12,662,560 during the six months ended June 30, 2018 compared to $13,090,134 during the six months ended June 30, 2017 ~~compared to $13,606,432 during the six months ended June 30, 2016~~ representing a decrease of ~~$516,298,~~$427,574, or 4%3%. ~~Although the number of customers remained relatively consistent for the two periods, the revenue~~The decrease is due to personnel reductions within the salesforce team, $113,828 net impact of adopting ASC 606, and fewer total customers offset by new customers having a ~~lower~~higher average rate per ~~unit as compared to the customers churning.~~unit.

Infrastructure and Access. Infrastructure and access totaled $5,445,665 during the six months ended June 30, 2018 compared to $5,331,034 during the six months ended June 30, 2017 ~~compared to $5,220,881 during the six months ended June 30, 2016~~ representing an increase of ~~$110,153,~~$114,631, or 2%. The increase primarily relates to higher tower rental ~~expense offset by reduced bandwidth~~ costs.

Depreciation and Amortization.Depreciation and amortization totaled $3,307,404 during the six months ended June 30, 2018 compared to $4,533,782 during the six months ended June 30, 2017 ~~compared to $5,571,778~~representing a decrease of $1,226,378 or 27%. Depreciation expense totaled $2,667,774 during the six months ended June 30, ~~2016 representing an decrease of $1,037,996 or 19%. Depreciation expense totaled~~2018 compared to $3,763,394 during the six months ended June 30, 2017 ~~compared~~representing a decrease of $1,095,620, or 29%. The depreciation decrease is due to ~~$4,949,222~~capital investment activity being lower than historical levels and a higher percentage of assets becoming fully depreciated.

Amortization expense totaled $639,630 during the six months ended June 30, ~~2016 representing a decrease of $1,185,828, or 24%.~~

~~Amortization expense totaled~~2018 compared to $770,388 during the six months ended June 30, 2017 ~~compared~~representing a decrease of $130,758, or 17%. The decrease in amortization expense was due to ~~$622,556~~customer related intangible assets that were fully amortized as of the first quarter of 2018.

Network Operations. Network operations totaled $1,749,766 during the six months ended June 30, ~~2016 representing an increase of $147,832, or 24%. The increase is related~~2018 compared to our backhaul agreement with a major cable company. 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.

~~Network~~O~~perations. Network operations totaled~~ $2,286,156 during the six months ended June 30, 2017 ~~compared~~representing a decrease of $536,390, or 23%. The primary reasons for the decrease is lower payroll costs of $301,257, or 22%, due to ~~$2,551,738~~employee headcount reductions, and lower IT costs of $129,045, or 35%, due to decreased third party support and software license fees.

Customer Support. Customer support totaled $837,660 during the six months ended June 30, ~~2016 representing a decrease of $265,582, or 10%. Payroll costs totaled $1,375,526 in the 2017 period~~2018 compared to $1,557,352 in the 2016 period representing a decrease of $181,826, or 12% due primarily to staffing reductions. Network costs totaled $371,639 in the six months ended June 30, 2017 compared to $485,115 during the six months ended June 30, 2016 representing a decrease of $113,476, or 23%. The decrease was primarily due to a reduction in third party support costs.Field activities costs totaled $297,986 in the six months ended June 30, 2017 compared to $244,121 during the six months ended June 30, 2016 representing an increase of $53,865, or 22% due to higher installation volume during 2017.

~~Customer Support~~. ~~Customer support totaled~~ $759,017 during the six months ended June 30, 2017 ~~compared~~representing an increase of $78,643, or 10%. Customer support costs increased $90,338 due to ~~$1,027,855~~higher maintenance costs offset by a decrease in payroll expense of $11,696, or 2%.

Sales and Marketing. Sales and marketing expenses totaled $1,133,662 during the six months ended June 30, ~~2016 representing a decrease of $268,838, or 26%. Payroll expense totaled $600,143 during the 2017 period~~2018 compared to $845,171 during the 2016 period representing a decrease of $245,028 or 29%. Average headcount was lower in the 2017 period as the Company consolidated departments and improved efficiencies. Other customer support costs totaled $158,877 during the six months ended June 30, 2017 compared to $182,684 during the 2016 period representing a decrease of $23,807 or 13%. This decrease was principally attributable to lower customer troubleshooting costs which can fluctuate from period to period.

~~Sales and Marketing.~~~~Sales and marketing expenses totaled~~ $1,841,766 during the six months ended June 30, 2017 ~~compared to $2,378,881 during the six months ended June 30, 2016~~ representing a decrease of ~~$537,115,~~$708,104, or ~~23%~~38%. Payroll ~~costs totaled $1,205,246 during the 2017 period compared~~expenses have decreased $708,393, or 59%, due to ~~$1,541,426 during the 2016 period representing a decrease of $336,180, or 22%. The payroll decrease relates to lower~~employee headcount associated with cost savings initiatives and the closure of our Florida sales office in the first quarter of 2016 offset by additional hires in the new Virginia sales office. Advertising expenses totaled $46,496 during the six months ended June 30, 2017 compared to $242,639 during the six months ended June 30, 2016 representing a decrease of $196,143 or 81%. The Company has significantly reduced its Internet marketing initiatives in connection with its current marketing focus on specific businesses in certain connected buildings rather than marketing broadly to all businesses in a market. Indirect channel commissions totaled $435,835 in the 2017 period compared to $396,094 in the 2016 period representing an increase of $39,741, or 10%. The increase relates to the Company’s residual program which pays continuing commissions as long as the referred business is a customer.reductions.

General and Administrative. General and administrative expenses totaled $2,008,450 during the six months ended June 30, 2018 compared to $3,051,869 during the six months ended June 30, 2017 ~~compared to $3,584,334 during the six months ended June 30, 2016~~ representing a decrease of ~~$532,465,~~$1,043,419 or 15%. Payroll costs decreased to $827,742 in the 2017 period compared to $1,264,753 in the 2016 period representing a decrease of $437,011, or 35%. The decrease is related to severance payments made in 2016 period to former executives and lower headcount associated with staffing reductions. Stock based compensation totaled $667,874 during the 2017 period compared to $459,795 during the 2016 period representing an increase of $208,079, or 45%34%. Stock-based compensation ~~can fluctuate significantly from period to period depending on the timing, quantity and valuation~~decreased $556,307 as there were a minimal number of stock option grants. Professional fees totaled $714,419 in the 2017 period compared to $839,324 in the 2016 period representing a decrease of $124,905, or 15%. The decrease is related to decreased legal fees offset by higher recruiting expenses. Non-recurring expenses decreased to $2,751 for the six months ended June 30, 2017 compared to $199,411 for the six month period ended June 30, 2016 representing a decrease of $196,660, or 99%. The decrease primarily relates to the Miami lawsuit which the Company settledoptions issued during the 2016. Public company costs for the six months ended June 30, 2017 were $117,157 compared to $164,527 during the six months ended June 30,2016 representing a decrease of $47,370, or 29%. The decrease relates to the reduction ofperiod, professional fees decreased $392,593, and public company ~~filing~~ fees the contract termination with our investor relation firms in 2017, offset by an increase in annual meeting expenses. Other expenses increased to $414,435 for the six months ended June 30, 2017 compared to $330,310 for the six month period ended June 30, 2016 representing an increase of $84,125, or 25%. The increase primarily relates to increased business taxes.decreased $96,290.

Interest Expense, Net. Interest expense, net totaled ~~$2,572,821~~$3,234,575 during the six months ended June 30, 2018 compared to $2,567,313 during the six months ended June 30, 2017 ~~compared to $3,195,411 during the six months ended June 30, 2016~~ representing ~~a decrease~~an increase of ~~$622,590,~~$667,262, or ~~20%~~26%. Interest expense relates to the $35,000,000 secured term loan which closed in October ~~2014.~~2014 and capital lease arrangements. The ~~decrease~~increase is primarily attributable to the ~~$5,000,000 reduction of debt in~~interest rate change which occurred with the ~~fourth quarter of 2016~~forbearance agreement as more fully described in Note 9, Long-Term Debt.

~~Revenues~~~~. Revenues for~~to the Shared Wireless business totaled zero during the six months ended June 30, 2017 compared to $553,302 during the six months ended June 30, 2016 representing a decrease of $553,302 or 100%. The decrease primarily related to our contract with a major cable company which was terminated in March 2016 resulting in no revenue in the six months ended June 30, 2017 versus two months of revenue in the 2016 period.

~~Infrastructure and Access.~~Infrastructure and access totaled zero during the six months ended June 30, 2017 compared to $2,523,222 during the six months ended June 30, 2016 representing a decrease of $2,523,222, or 100%. Rent expense for rooftop locations totaled zero in the 2017 period compared to $1,994,858 in the 2016 period representing a decrease of $1,994,858 or 100%. All business activities associated with the shared wireless business were terminated in the first quarter of 2016. Loss on fixed assets totaled zero during the six months ended June 30, 2017 compared to $528,364 during the six months ended June 30, 2016. During the first quarter of 2016, the Company sold certain network infrastructure assets to a major cable company. The Company determined to shut down the remaining network locations and recognized a loss of $528,364 which represented the net book value of capitalized installation costs as well as equipment which could not be redeployed into the fixed wireless network.

~~Depreciation.~~ Depreciation totaled zero during the six months ended June 30, 2017 compared to $638,681 during the six months ended June 30, 2016. All business activities associated with the shared wireless business were terminated during the first quarter of 2016.

~~Network Operations.~~Network operations totaled zero during the six months ended June 30, 2017 compared to $192,947 during the six months ended June 30, 2016 representing a decrease of $192,947, or 100%. Certain costs were incurred in the 2016 period related to the termination of the business.

~~Customer Support Services.~~ Customer support services totaled zero during the six months ended June 30, 2017 compared to $69,804 during the six months ended June 30, 2016 representing a decrease of $69,804 or 100%. The business was terminated in early March 2016.

~~Sales and Marketing.~~ Sales and marketing expenses totaled zero during the six months ended June 30, 2017 compared to $246 during the six months ended June 30, 2016 representing a decrease of $246, or 100%. The decrease reflects a lack of sales and marketing efforts prior to terminating the business in March 2016.

~~General and Administrative.~~ General and administrative expenses totaled zero during the six months ended June 30, 2017 compared to $105,545 during the six months ended June 30, 2016. The increase reflects professional services fees incurred in the 2016 period for terminating the business.

~~Loss from Discontinued Operations.~~Loss from discontinued operations for the six months ended June 30, 2017 totaled zero compared to $1,799,401 for the six months ended June 30, 2016 representing a decrease of $1,799,401, or 100% and reflects the termination of the business in March 2016.

Changes in capital resources during the six months ended June 30, ~~2017~~2018 and ~~2016~~2017 are described below.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, ~~2017, the Company~~2018, we had cash and cash equivalents of approximately ~~$9.0~~$4.7 million and working capital deficiency of approximately ~~$6.2~~$34.0 million. ~~The Company has~~We have incurred significant operating losses since inception and ~~continues~~continue to generate losses from operations and as of June 30, ~~2017, the Company has~~2018, we have an accumulated deficit of ~~$183.9~~$194.2 million. These matters raise substantial doubt about ~~the Company’s~~our ability to continue as a going concern within one year after the date these financial statements are issued. Management has also evaluated the significance of these conditions in relation to the Company's ability to meet its obligations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should ~~the Company~~we be unable to continue as a going concern.

Historically, ~~the Company has~~we have financed ~~its operation~~our operations through private and public placement of equity securities, as well as debt financing and capital leases. ~~The Company’s~~Our ability to fund ~~its~~our longer term cash requirements is subject to multiple risks, many of which are beyond ~~its~~our control. ~~The Company intends~~We intend to raise additional capital, either through debt or equity financings or through the potential sale of ~~the Company’s~~our assets in order to achieve ~~its~~our business plan objectives. Management believes that it can be successful in obtaining additional capital; however, no assurance can be provided that ~~the Company~~we will be able to do so. There is no assurance that any funds raised will be sufficient to enable ~~the Company~~us to attain profitable operations or continue as a going concern. To the extent that ~~the Company is~~we are unsuccessful, ~~the Company~~we may need to curtail or cease ~~its~~our operations and implement a plan to extend payables or reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be ~~successful~~successful.

Net Cash Used In Operating Activities. Net cash used in operating activities for the six months ended June 30, ~~2017~~2018 totaled ~~$1,431,794~~$1,641,935 compared to ~~$4,389,683~~$1,431,794 for the six months ended June 30, ~~2016~~2017 representing an increase of $210,141. The increase in cash used in operations is due to a ~~decrease of $2,957,889. Revenues generated from continuing operations were $516,298 lower~~$1,260,366 increase in ~~the 2017 period which adversely impacted~~ cash flows ~~available to support operating activities. Changes in~~associated with operating assets and liabilities, ~~used cash~~and a $1,175,956 decrease in non-cash items offset by a decrease of ~~$522,976 during the 2017 period compared to $2,119,814 used~~$2,226,181 in the 2016 period, which represented a total difference of $1,596,838. Changes in operating assets and liabilities generally represent timing differences regarding payments and receipts, and are normally not indicative of operating results.net loss.

Net Cash Used in Investing Activities. Net cash used in investing activities for the six months ended June 30, ~~2017~~2018 totaled ~~$1,473,754~~$949,390 compared to ~~$1,160,400~~$1,473,754 for the six months ended June 30, ~~2016~~2017 representing ~~an increase~~a decrease of ~~$313,354.~~$524,364. Cash capital expenditures totaled $964,390 in the 2018 period compared to $1,460,829 in the 2017 period ~~compared to $1,160,400 in the 2016 period~~ representing an increase of ~~$300,429.~~$496,439. Capital expenditures 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.

Net Cash ~~Provided by~~Used in~~(Used in)~~Financing Activities. Net cash used in financing activities for the six months ended June 30, ~~2017~~2018 totaled ~~$478,926~~$306,286 compared to net cash provided by financing activities of $1,754,706 for the six months ended June 30, 2016, representing a decrease of $2,233,632. During the 2016 period, the Company completed an equity offering which resulted in net proceeds of $2,230,000.

~~Net Cash~~~~Provided by (~~~~Used In~~) ~~Operating Activities.~~ ~~Net cash provided by operating activities~~$478,926 for the six months ended June 30, 2017, ~~totaled $80,882 compared~~representing a decrease of $172,640. The majority of the payments for both periods relate to ~~$1,343,659~~capital leases.

Net cash used in discontinued operations for the six months ended June 30, ~~2016 representing an increase~~2018 was $12,283 compared to net cash provided by discontinued operations of ~~$1,424,541. Operating activities~~$80,882 for the ~~discontinued business were terminated in March 2016 which resulted in lower cash requirements~~six months ended June 30, 2017, representing a decrease of $93,165. See Note 4, Discontinued Operations, within the notes to our condensed consolidated financial statements for ~~the 2017 period. The Company also received cash proceeds in 2017 due to a refund of a security deposit associated with~~additional information about our discontinued operations.

~~Net Cash Used in Investing Activities.~~ ~~There were no investing activities during either period.~~

~~Net Cash Provided by~~~~(Used in)~~~~Financing Activities~~~~. There were no financing activities during either period.~~

In January 2013, the Company incorporated a wholly-owned subsidiary, Hetnets Tower Corporation (“Hetnets”), to operate a new business designed to leverage its fixed wireless network in urban markets to provide other wireless technology solutions and services. Hetnets built a carrier-class network which offered a shared wireless infrastructure platform, primarily for (i) co-location of customer owned antenna and related equipment and (ii) Wi-Fi access and offloading. The Company referred to this as its “Shared Wireless Infrastructure” or “Shared Wireless” business. During the fourth quarter of 2015, the Company determined to exit this business and curtailed activities in its smaller markets. The remaining network, located in New York City (or “NYC”), was the largest and had a lease access contract with a major cable company. As a result, the Company explored opportunities during the fourth quarter of 2015 and continuing into the first quarter of 2016 to sell the New York City network. On March 9, 2016, the Company completed a sale and transfer of certain assets to a major cable company (the “Buyer”). The asset purchase agreement (“Agreement”) provided that the Buyer would assume certain rooftop leases in NYC and acquire ownership of the Wi-Fi access points and related equipment associated with operating the network. The Company retained ownership of all backhaul and related equipment and the parties entered into a backhaul services agreement under which the Company will provide internet bandwidth to the Buyer at the locations governed by the leases. The Agreement is for a three year period with two, one year renewals and is cancellable by the Buyer on sixty days’ notice. The net effect of the Buyer (i) assuming certain rooftop leases, (ii) entering into a backhaul services agreement, and (iii) terminating the access agreement is projected to result in a net reduction in cash requirements of approximately $6 million annually. During the first quarter of 2016, the Company determined that it would not be able to sell the remainder of the New York City network, and accordingly, all remaining assets are being redeployed into the fixed wireless network or written off. The operating results and cash flows for Hetnets have been reclassified and presented as discontinued operating results for all periods presented in these condensed consolidated financial statements.Other Considerations

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 $35,000,000 secured term ~~loan (the “Financing”).~~loan. The ~~Financing~~loan was issued at a 3% discount and the Company incurred $2,893,739 in debt issuance costs. Net proceeds were $31,056,260. During the fourth quarter of 2016, the Company entered into a financing agreement with an investor whereas the investor acquired $5,000,000 of outstanding principal and accrued interest in exchange for 1,000 shares of convertible preferred stock and warrants as further described in Note 9.

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 had 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 $5,000,000 plus multiples of $1,000,000.

In connection with the Loan Agreement and pursuant to a Warrant and Registration Rights Agreement, we issued warrants to purchase 2,400 shares of common stock of which two-thirds have an exercise price of $1,890.00 and one-third have an exercise price of $15.00, subject to standard anti-dilution provisions. The warrants have a term of seven and a half years.

In November 2016, the Company entered into a series of agreements wherein $5,000,000 of the Company’s senior secured debt due to Lender was canceled and the Company simultaneously issued 1,000 shares of Series D Convertible Preferred Stock and warrants to purchase 53,334 shares of common stock at an exercise price of $100.50 per share. The cancellation of that debt serves to reduce the balloon payment due in October 2019 by that amount and reduce interest payments by $400,000 on an annual basis.

On May 24, 2018, the Company effected an exchange of 2,400 warrants with the Lender for an aggregate of 100 shares of Series I Preferred Stock. See Note 10, Capital Stock, for further information regarding the exchange of warrants.

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 generally enter into contractual agreements with our customers for periods ranging between one to three years. We recognize the total revenue provided under a contract ratably over the contract period including any periods under which we have agreed to provide services at no cost. Deferred revenues are recognized as a liability when billings are issued in advance of the date when revenues are earned. We ~~recognize~~apply the revenue ~~when~~recognition principles set forth under ASC 606 which provides for revenue to be recognized based on the application of a principle based five-step model as follows: (i) ~~persuasive evidence~~identification of ~~an arrangement exists,~~the contract, (ii) ~~delivery or installation has been completed,~~identification of the performance obligations in the contract, (iii) determination of the ~~customer accepts~~transaction price, (iv) allocation of the transaction price to the performance obligations, and ~~verifies receipt, and (iv) collectability is reasonably assured.~~(v) recognition of revenue as the performance obligations are satisfied.

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.

~~Recent Accounting Standards~~~~. See Note 3 of our condensed consolidated financial statements.~~

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

Market risk is the potential loss arising from adverse changes in market rates and prices. Our primary market risk relates to interest rates. At June 30, ~~2017,~~2018, 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.~~

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 ~~were not~~are effective, as of June 30, ~~2017,~~2018, 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.

During the second quarter, the Company had determined there was a material weakness in its system of internal control as it relates to monitoring compliance with covenants in its debt agreement. Management has commenced implementation of a remediation plan, which is ongoing and will be complete during the third quarter. The remediation plan includes the following steps:

There were no other changes in our system of internal control over financial reporting during the three months ended June 30, ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

* - Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2017~~2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statement of Stockholders’ Deficit, and (v) related notes to these financial statements.

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.

	Series G Convertible				Series H Convertible								Additional
	Preferred Stock				Preferred Stock				Common Stock				Paid-In-		Accumulated
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			Total

Balance at January 1, 2018		538	$	1		501	$	1		394,409	$	394	$	174,733,113	$	(189,124,909	)	$	(14,391,400	)
Stock based compensation for options		-		-		-		-		-		-		111,567		-			111,567
Net loss		-		-		-		-		-		-		-		(5,054,622	)		(5,054,622	)
Balance at June 30, 2018		538	$	1		501	$	1		394,409	$	394	$	174,844,680	$	(194,179,531	)	$	(19,334,455	)

	Six Months Ended June 30,
Supplemental Disclosures of Cash Flow Information	2018		2017
Cash paid during the periods for:
Interest	$	1,671,680	$	1,354,804
Income taxes	$	12,794	$	13,440
Acquisition of property and equipment:
Included in accrued expenses	$	240,594	$	201,222
Included in capital leases	$	414,848	$	-
Interest added to note principal	$	696,625	$	661,677

	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Payroll and related					$	174,359	$	515,448
Professional services	$	182,481	$	263,928		100,672		318,979
Payroll and related		203,800		294,006
Other						106,346		279,374
Property and equipment		201,222		118,139		240,594		320,043
Network		93,837		92,645		167,182		188,192
Other		153,267		142,492
Total	$	834,607	$	911,210	$	789,153	$	1,622,036

	As of June 30,				As of June 30,
	2017		2016		2018		2017
Stock options		5,820,587		294,893		72,897		77,608
Warrants		180,000		952,500		-		2,400
Series G preferred stock		7,380,000		-		71,734		98,400
Series H preferred stock		4,008,000		-		53,440		53,440
Total		17,388,587		1,247,393		198,071		231,848

Remainder of 2017	$	3,695,205
2018		6,318,665
Remainder of 2018			$	3,779,418
2019		4,846,377		6,215,654
2020		2,627,912		4,420,229
2021		667,892		2,501,647
2022				1,231,349
Thereafter		231,105		484,105
Total	$	18,387,156	$	18,632,402

	Series D ConvertiblePreferred Stock						Series E ConvertiblePreferred Stock						Series F ConvertiblePreferred Stock						Series G Convertible Preferred Stock					Series H ConvertiblePreferred Stock					Common Stock				AdditionalPaid-In-			Accumulated
	Shares			Amount			Shares			Amount			Shares			Amount			Shares			Amount		Shares			Amount		Shares		Amount		Capital			Deficit			Total

Balance at January 1, 2017		1,233		$	2			500,000		$	500			1,233		$	1			-			-		-			-		18,327,263	$	18,327	$	173,782,939		$	(176,655,227	)	$	(2,853,458	)
Conversion on January 9, 2017 of Series E convertible preferred into common shares		-			-			(500,000	)		(500	)		-			-			-			-		-			-		500,000		500		-			-			-
Conversion on various dates from January 26, 2017 to April 13,2017, inclusive, Series F convertible preferred into common shares		-			-			-			-			(590	)		-			-			-		-			-		2,950,000		2,950		(2,950	)		-			-
Conversion on May 26, 2017 of Series D Convertible Preferred Stock into Series G Preferred stock, and the conversion of Series F Convertible Preferred stock into Series H Convertible Preferred Stock		(1,233	)		(2	)		-			-			(643	)		(1	)		938			1	��	938			1		-		-		1			-			-
Conversion on various dates from May 30, 2017 to June 29,2017, inclusive, Series H convertible preferred into common shares		-			-			-			-			-			-			-			-		(437	)		-		3,496,000		3,496		(3,496	)		-			-
Conversion on June 30, 2017 of Series G convertible preferred into common shares		-			-			-			-			-			-			(200	)		-		-			-		2,000,000		2,000		(2,000	)		-			-
Stock-based compensation for options		-			-			-			-			-			-			-			-		-			-		-		-		667,821			-			667,821
Issuance of common stock under employee stock purchase plan		-			-			-			-			-			-			-			-		-			-		2,240		2		356			-			358
Net Loss		-			-			-			-			-			-			-			-		-			-									(7,280,803	)		(7,280,803	)
Balance at June 30, 2017		-		$	-			-		$	-			-		$	-			738		$	1		501		$	1		27,275,503	$	27,275	$	174,442,671		$	(183,936,030	)	$	(9,466,082	)

		For the Six Months EndedJune 30,
		2017			2016
Cash Flows Used In Operating Activities:
Net loss		$	(7,280,803	)	$	(11,723,848	)
Loss from discontinued operations			-			(1,799,401	)
Loss from continuing operations			(7,280,803	)		(9,924,447	)
Adjustments to reconcile loss from continuing operations to net cash used in continuing operating activities:
Provision for doubtful accounts			7,000			-
Depreciation for property and equipment			3,763,394			4,949,222
Amortization of intangible assets			770,388			622,556
Amortization of debt discount and deferred financing costs			557,022			876,234
Accrued interest added to principal			661,677			746,900
Stock-based compensation - Options			667,821			436,859
Stock-based compensation - Stock issued for services			-			20,000
Stock-based compensation - Employee stock purchase plan			53			2,936
Deferred rent			(55,370	)		(129	)
Changes in operating assets and liabilities:
Accounts receivable	��		(286,266	)		(102,009	)
Prepaid expenses and other current assets			(12,123	)		(282,211	)
Other assets			(3,328	)		(4,573	)
Accounts payable			(29,106	)		(542,611	)
Accrued expenses			(159,686	)		(274,516	)
Deferred revenues			(32,467	)		(341,784	)
Other liabilities			-			(572,110	)
Total Adjustments			5,849,009			5,534,764
Net CashUsed InContinuing Operating Activities			(1,431,794	)		(4,389,683	)
Net CashProvided By (Used In) Discontinued Operating Activities			80,882			(1,343,659	)
Net Cash Used In Operating Activities			(1,350,912	)		(5,733,342	)

Cash Flows Used In Investing Activities:
Acquisitions of property and equipment			(1,460,829	)		(1,160,400	)
Payments of security deposits			(12,925	)		-
Net Cash UsedIn Continuing Investing Activities			(1,473,754	)		(1,160,400	)

Cash Flows (Used In) Provided By Financing Activities:
Payments on capital lease obligations			(479,231	)		(491,933	)
Net proceeds from the issuance of common stock and warrants			-			2,230,000
Proceeds from the issuance of common stock under employee stock purchase plan			305			16,639
Net Cash (Used In) Provided By Continuing Financing Activities			(478,926	)		1,754,706

Net(Decrease) Increase In Cashand Cash Equivalents
Continuing Operations			(3,384,474	)		(3,795,377	)
Discontinued Operations			80,882			(1,343,659	)
Net Decrease In Cashand Cash Equivalents			(3,303,592	)		(5,139,036	)
Cash and Cash Equivalents - Beginning			12,272,444			15,116,531
Cash and Cash Equivalents - End of Period		$	8,968,852		$	9,977,495

Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest		$	1,354,804		$	1,560,999
Income taxes		$	13,440		$	12,780
Acquisition of property and equipment - Included in accrued expenses		$	201,222		$	145,248
Exchange of intangible assets - discontinued operations (Note 4)		$	-		$	3,837,783

	June 30, 2017		December 31, 2016

Goodwill	$	1,674,281	$	1,674,281

Customer relationships	$	11,856,126	$	11,856,126
Less: accumulated amortization		11,856,126		11,725,369
Customer relationships, net		-		130,757

Backhaul agreement		3,837,783		3,837,783
Less: accumulated amortization		1,705,681		1,066,050
Backhaul agreement, net		2,132,102		2,771,733

FCC licenses		750,000		750,000

Intangible assets, net	$	2,882,102	$	3,652,490

	Number			Weighted Average Exercise Price
Outstanding as of January 1, 2017		2,106,889		$	5.30
Granted during 2017		3,831,212			0.17
Exercised		-			-
Cancelled /expired		(117,514	)		23.36
Outstanding as of June 30, 2017		5,820,587		$	1.56
Exercisable as of June 30, 2017		2,342,563		$	3.40

Total Capital lease obligation:
Remainder of 2017	$	327,014
2018		161,770
Remainder of 2018			$	194,250
2019				388,500
2020				300,374
Subtotal		488,784		883,124
Less: Interest Expense		18,303
Less: Interest expense				85,697
Total	$	470,481	$	797,427

Total Capital lease obligation:
Current	$	470,481	$	326,773
Long-term		-		470,654
Total	$	470,481	$	797,427

Exhibit No.	Description
10.1	Third Amended and Restated Forbearance to Loan Agreement dated August 20, 2018
31.1	Section 302 Certification of Principal Executive Officer.
31.2	Section 302 Certification of Principal Financial Officer.
32.1	Section 906 Certification of Principal Executive Officer.
32.2	Section 906 Certification of Principal Financial Officer.
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Calculation Linkbase Document*
101.LAB	XBRL Taxonomy Labels Linkbase Document*
101.PRE	XBRL Taxonomy Presentation Linkbase Document*
101.DEF	XBRL Definition Linkbase Document*

	TOWERSTREAM CORPORATION


Date: August ~~11, 2017~~20, 2018	By:	/s/Ernest Ortega
		Ernest Ortega Chief Executive Officer (Principal Executive Officer)

	By:	/s/~~Laura W. Thomas~~ John Macdonald
		~~Laura W. Thomas~~John Macdonald
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)