FiberTower CORP

As discussed in Note 12, Subsequent Event, in July 2011, we received an additional $5.6 million from AT&T Mobility from the collection of early termination charges related to the termination of T-1 circuits during March, May and June 2011.  In July 2011, AT&T Mobility terminated additional T-1 circuits across 144 billing locations which, at the time of termination, were generating approximately $304 thousand of monthly service revenues.  Together with AT&T Mobility’s early termination charges resulting from the T-1 circuits terminated in July 2011, we may receive an additional $4.1 million in early termination charges from AT&T Mobility during the third quarter of 2011.  Therefore, as revenue from customers’ early termination of their service is recognized when payment is received, we may record approximately $9.7 million as revenue from AT&T Mobility during the third quarter of 2011 for early termination charges related to the termination of T-1 circuits through July 2011.

Construction of our network is a complex process involving the interaction and assembly of multiple components that result in internal labor, third party and equipment costs. We regularly assess the recoverability of costs accumulated in construction-in-progress as well as those relating to our in-service network assets.  These assessments involve significant assumptions and estimates including the remaining useful life of the assets, technology requirements of our customers, and network configurations.  Actual results may differ from these estimates and assumptions as we execute our network build-out plan and such differences may result in impairment charges in future periods.   We recorded impairment charges of $3.1 million in the three months ended June 30, 2011 and $0.9 million in the three months ended June 30, 2010 related to this process which is included in cost of service revenues.  These impairment charges were $3.4 million in the six months ended June 30, 2011 and $1.0 million in the six months ended June 30, 2010.

We operate in a transforming market. Our future success depends on an increased demand for wireless services for voice and other mobile broadband services such as transmissions of photos or videos and internet communication.  A significant majority of our current customer contracts provide T-1 backhaul service. These contracts generally have a five-year term, and a significant number of these contracts expire each year. As a result of increased data usage by cell phone users, we expect our customers will generally not renew this T-1 backhaul service, and will instead seek backhaul service, such as Ethernet backhaul service that we provide, that has greater data capacity.   In addition, as described above, recently, we have had two significant customers terminate service contracts in certain markets with us as a result of various reasons, including cost cutting efforts by customers and a shift from TDM-based T-1 circuits to Ethernet-based circuits.  We are not able to predict at this time whether such customers will choose to terminate additional service contracts with us or whether other customers will choose to terminate their contracts in the future.  If we are unable to obtain replacement contracts, whether for Ethernet service or otherwise, upon expiration or early termination of our T-1 contracts, our business and results of operations will be adversely affected.

Service revenues for the six months ended June 30, 2011 increased 30% to $46.9 million compared to $36.2 million for the six months ended June 30, 2010. This increase, net of the revenue from the collection of early termination charges, was primarily driven by selling additional capacity and Ethernet services to customers at existing sites. We recognized $5.6 million in the six months ended June 30, 2011 and $0.9 million in the six months ended June 30, 2010 from the collection of early termination charges.  The six months ended June 30, 2011 revenue from early termination charges includes $3.3 million from Clearwire and $2.1 million from AT&T Mobility.  Net of revenue recognized from the collection of early termination charges, service revenues grew 17% in the six months ended June 30, 2011 over the six months ended June 30, 2010.  The average monthly revenue per deployed site, net of the revenue from the collection of early termination charges, increased to $2,073 in the six months ended June 30, 2011 compared to $1,884 for the same period of 2010.  As discussed in Note 12, Subsequent Event, as revenue from customers’ early termination of their service is recognized when payment is received, we may record approximately $9.7 million as revenue from AT&T Mobility during the third quarter of 2011 for early termination charges related to the termination of T-1 circuits through July 2011.

Our business does not currently generate sufficient cash flow from operations to fund our short-term or long-term liquidity needs.  Our business is in its early stages, and as such we have invested heavily in capital requirements to build and expand our network. As a result, we have incurred operating and net losses and negative cash flows since our inception, and we expect that we will continue to incur operating and net losses and negative cash flows for the next few years.  As a result, we have relied primarily on the proceeds from equity and debt financings to fund our operating and investing activities, and we believe that we will be required to raise additional capital in the near future.  Based upon our current plans, we believe that our existing cash and cash equivalents of $12.4 million at June 30, 2011, together with the cash received in July 2011 of $5.6 million resulting from early termination charges discussed in Note 2, Basis of Presentation and Accounting Policies and Note 12, Subsequent Event, will be sufficient to cover our estimated liquidity needs until at least June 30, 2012.

However, our business is capital intensive, and we believe we will require additional amounts to fund capital expenditures and pay operating expenses in the near future. We may also require additional capital to finance our current growth plans, take advantage of business opportunities or pursue potential transactions. To raise capital, we may be required to issue equity securities in public or private offerings or to seek debt financing, or both. We may be unable to secure such additional financing when needed which could harm our business.  If we are unable to secure capital when needed, we may be required to change our business plans and curtail our operations, and our business prospects, financial condition and results of operations would likely be adversely affected.  In addition, we may be required to sell assets or refinance or restructure all or a portion of our indebtedness at or before maturity. We may not be able to accomplish any of these alternatives. In addition, the terms of our debt agreements may restrict us from adopting some of these alternatives.  In addition, any financing we do obtain could be subject to onerous terms. Any additional debt financing could cause us to incur significant interest expense and increase our future financial commitments, and any additional equity financing could be dilutive to our stockholders.