UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended July 31, 2010
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to _____________.
Commissions file number 000-52827
OMNICITY CORP.
(Exact name of registrant as specified in its charter)
Nevada 98-0512569
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
807 S State Rd 3, Rushville, Indiana, U.S.A. 46173
(Address of Principal Executive Offices) (Zip Code)
(765) 570-4221
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001
Par Value (Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) 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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, as of November 16, 2010 was approximately $1,838,000.
The registrant had 43,745,414 shares of common stock outstanding as of November
17, 2010.
FORWARD LOOKING STATEMENTS
This annual report contains forward-looking statements that involve risks and
uncertainties. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as "may",
"will", "should", "expect", "plan", "intend", "anticipate", "believe",
"estimate", "predict", "potential" or "continue", the negative of such terms or
other comparable terminology. In evaluating these statements, you should
consider various factors, including the assumptions, risks and uncertainties
outlined in this annual report under "Risk Factors". These factors or any of
them may cause our actual results to differ materially from any forward-looking
statement made in this annual report. Forward-looking statements in this annual
report include, among others, statements regarding:
* our capital needs;
* business plans; and
* expectations.
While these forward-looking statements, and any assumptions upon which they are
based, are made in good faith and reflect our current judgment regarding future
events, our actual results will likely vary, sometimes materially, from any
estimates, predictions, projections, assumptions or other future performance
suggested herein. Some of the risks and assumptions include:
* our need for additional financing;
* our history of operating losses;
* the competitive environment in which we operate;
* changes in governmental regulation and administrative practices;
* conflicts of interest of our directors and officers;
* our ability to fully implement our business plan;
* our ability to effectively manage our growth; and
* other regulatory, legislative and judicial developments.
We advise the reader that these cautionary remarks expressly qualify in their
entirety all forward-looking statements attributable to us or persons acting on
our behalf. Important factors that you should also consider, include, but are
not limited to, the factors discussed under "Risk Factors" in this annual
report.
The forward-looking statements in this annual report are made as of the date of
this annual report and we do not intend or undertake to update any of the
forward-looking statements to conform these statements to actual results, except
as required by applicable law, including the securities laws of the United
States.
AVAILABLE INFORMATION
Omnicity Corp. files annual, quarterly and current reports, proxy statements,
and other information with the Securities and Exchange Commission (the "SEC").
You may read and copy documents referred to in this Annual Report on Form 10-K
that have been filed with the SEC at the SEC's Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also
obtain copies of our SEC filings by going to the SEC's website at
http://www.sec.gov.
REFERENCES
As used in this annual report: (i) the terms "we", "us", "our", "Omnicity" and
the "Company" mean Omnicity Corp.; (ii) "SEC" refers to the Securities and
Exchange Commission; (iii) "Securities Act" refers to the United States
SECURITIES ACT OF 1933, as amended; (iv) "Exchange Act" refers to the United
States SECURITIES EXCHANGE ACT OF 1934, as amended; and (v) all dollar amounts
refer to United States dollars unless otherwise indicated.
2
TABLE OF CONTENTS
ITEM 1. BUSINESS....................................................... 4
ITEM 1A. RISK FACTORS................................................... 11
ITEM 1B. UNRESOLVED STAFF COMMENTS...................................... 13
ITEM 2. PROPERTIES..................................................... 13
ITEM 3. LEGAL PROCEEDINGS.............................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.............. 14
ITEM 6. SELECTED FINANCIAL DATA........................................ 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 23
ITEM 8. FINANCIAL STATEMENTS........................................... 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 43
ITEM 9A(T). CONTROLS AND PROCEDURES........................................ 43
ITEM 9B. OTHER INFORMATION.............................................. 44
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE......... 44
ITEM 11. EXECUTIVE COMPENSATION......................................... 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS................................ 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE................................................... 50
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES......................... 51
ITEM 15. EXHIBITS....................................................... 52
3
PART I
ITEM 1. BUSINESS
NAME, INCORPORATION AND PRINCIPAL OFFICES
We were incorporated under the laws of the State of Nevada on October 12, 2006
under the name "Bear River Resources Inc.". On October 21, 2008, we effected a
forward split of our shares of common stock on the basis of 7.7 new shares of
our common stock for each one share of common stock outstanding on that date and
increased our authorized share capital from 200,000,000 shares of common stock
to 1,540,000,000 shares of common stock. Also on October 21, 2008, in
contemplation of the acquisition of Omnicity, Incorporated, we merged with our
wholly-owned subsidiary incorporated under the laws of the State of Nevada, and
changed our name to Omnicity Corp. or ("the Company"). On February 17, 2009, the
Company acquired all of the issued and outstanding shares of Omnicity,
Incorporated. Omnicity, Incorporated (incorporated on August 13, 2003) provides
broadband access, including advanced services of voice, video and data, in
un-served and underserved small and rural markets and is planning to be a
consolidator of rural market broadband nationwide. The total purchase price was
23,000,000 common shares of the Company.
The closing of the acquisition of Omnicity, Incorporated represented a change in
control of our Company. For accounting purposes, this change in control
constituted a re-capitalization of Omnicity, Incorporated, and the acquisition
was accounted for as a reverse merger whereby Omnicity Corp., as the legal
acquirer, is treated as the acquired entity, and Omnicity Incorporated, as the
legal subsidiary, is treated as the acquiring company with the continuing
operations.
Omncity Corp. had a fiscal year end of June 30. Pursuant to a Directors
Resolution and 8K filed on March 20, 2009 and amended 8K filed on May 21, 2009,
the Company changed its fiscal year end to July 31 to coincide with the fiscal
year end of Omnicity, Incorporated, being the accounting acquirer. All reporting
periods, starting with April 30, 2009, is filed on a basis consistent with the
Company's new fiscal year end of July 31. As a transitional matter, the Company
supplied quarterly information for the quarter ended January 31, 2009 in its
April 30, 2009 10Q filed on June 15, 2009.
The Company's principal and operations office and registered and records office
is located at 807 S State Rd 3, Rushville, Indiana, U.S.A. Tel: (317) 903-8178;
Fax: (866) 567-3897.
OUR PRIOR BUSINESS
Up to July 29, 2008, Omnicity Corp. (formerly Bear River Resources, Inc.) was an
exploration stage company engaged in the acquisition and exploration of mineral
properties. Omnicity Corp. received a geologist report on February 6, 2008, the
results of which were not as expected. Given the prospects, management
determined to allow the claims to lapse on July 29, 2008. See Omnicity Corp's
(formerly Bear River Resources, Inc.) annual report filed on Form 10-KSB for the
year ended June 30, 2008 for more information relating to our business prior to
the acquisition of Omnicity, Incorporated.
OUR CURRENT BUSINESS
OVERVIEW
Omnicity Corp., through its wholly-owned subsidiary Omnicity, Incorporated,
collectively the "Company" or "Omnicity", provides broadband access via wireless
and fiber infrastructure to business, government and residential customers in
rural markets in the Midwest. Omnicity's strategy is to become a premier
broadband and communications services provider in rural and urban cluster
markets, beginning in the Midwest and extending nationally. These markets,
consisting of over 40 million homes and 500,000 businesses, have been
underserved or un-served by existing providers, creating an opening for Omnicity
to offer high-speed and broadband-enabled services to customers with pent-up
demand, and taking advantage of key industry developments, including:
* The forecasted increase of demand for broadband and broadband-enabled
services, including: web use and social networking; video (TV, movies,
and personal video); software-as-a-service (SaaS); and cloud
computing;
* The availability of high-speed 4G Worldwide Interoperability for
Microwave Access (WIMAX) equipment;
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* Weakness of existing service providers in Omnicity's target markets,
primarily small telephone companies and Wireless Internet Service
Providers ("WISPs");
* A push by the federal government, Congress, and state governments to
increase the availability of broadband services in rural and
underserved markets.
THE COMPANY'S OPERATING PLAN IS TO GROW BY:
* Consolidating WISPs in rural and urban cluster markets initially
within the Midwestern United States;
* Developing and expanding, through organic growth, the subscriber base
through disciplined sales and marketing programs;
* Partnering with Rural Electric Membership Cooperatives ("REMCs"),
local and state governments, rural telephone companies ("Telcos") and
Original Equipment Manufacturers ("OEMs") to efficiently and cost
effectively expand its network across rural America;
* Developing and expanding its service offerings to become a total
broadband solution provider, including VOIP, IPTV and Satellite
Internet, to increase value and average revenue per subscriber unit
(ARPU);
* Completing further debt and equity offerings, in stages, of $10m by
February 28, 2011.
DESCRIPTION OF BUSINESS AND BUSINESS STRATEGY
Omnicity's business strategy, as mentioned above, is to become a premier
broadband and communications services provider in rural and small urban cluster
markets, beginning in the Midwest by: acquiring and consolidating WISPs into
regional market clusters; driving organic growth in acquired markets through
uniform sales and marketing and product offerings; layering on new services
(voice/VoIP, video distribution) that attract additional customers and drive up
ARPU; building marketing and sales partnerships with REMCs, local governments,
and telcos that can accelerate penetration; and creating and leveraging
economies of scale that cannot be easily matched by competitors.
By acquiring existing WISPs, Omnicity believes it can enter new geographies
quickly with an established revenue base and build meaningful revenue and market
share ahead of competitors, while taking advantage of economies of scale in
operations, sales, marketing, and network build-outs. Further, the Company
believes that delivering services using wireless technology (both licensed and
unlicensed) provides it several competitive advantages, including:
* Wireless costs about $300 per acquired subscriber making it cost
effective in low-density markets where new wired services (fiber,
high-speed CATV) cannot be easily justified;
* Wireless infrastructure can be deployed in about 3 months vs. years
for new wired services;
* Wireless can cover an entire geographic area with high-speed service
vs. only structures passed by wired infrastructure.
Generally, the Company plans to target WISPs for acquisition in contiguous areas
to create regional market clusters. Due to capital and other constraints, many
WISPs have penetrated only a small percentage of homes and businesses that can
be serviced by their existing antennas, creating the opportunity for organic
growth post acquisition. Using disciplined sales and marketing programs and a
uniform product set, Omnicity believes it can increase demand in these markets,
while taking advantage of economies of scale, to drive cash flow positive
operations.
Currently, Omnicity uses standards-based wireless equipment in the
license-exempt 700Mhz, 900MHz, 2.4GHz and 5.8GHz spectrum bands, providing
multiple paths to cover subscribers in its markets. The Company deploys its
wireless networks by installing antennas on cellular and other commercial
towers, and municipally or privately owned structures such as tall silos and
rooftops. Customers receive the wireless signal via customer premise equipment
(CPE) that currently costs $250 per unit. The Company is evolving its technology
and spectrum strategy as it becomes more opportune and cost effective to utilize
licensed spectrum and related equipment.
The Company plans to target multiple customer segments, including: business and
healthcare providers (both local and regional/national entities that require
bandwidth at multiple locations); local and state government entities; and
residential customers. To reach these customers, Omnicity expects to sell
through a variety of channels including: direct sales to business and
local/state government customers; direct mail and web-based sales to residential
customers with affiliate sales through local school systems; agency sales
through local retailers; and through marketing partnerships with REMCs and
telcos. The Company also plans to undertake marketing programs, such as
5
providing web pages for the communities it serves that feature local content
such as news, sports - video broadcasts of high-school football and businesses
information. The Company has been providing "hands-on", experiential marketing
at community events through its Experiential Marketing Unit ("EMU").
Marketing partnerships with REMCs form a part of Omnicity's business strategy.
REMCs are cooperatives that provide electricity to about 40 million homes and
operate in 80% of counties in the U.S. The Company has partnered with REMCs to
provide broadband services to REMC customers, and to provide the REMCs
value-added services, such as remote meter reading and fiber construction.
Omnicity also expects to work with municipalities and other governmental
entities to provide broadband services in their often under-served communities,
and to provide these entities with mobile broadband for emergency vehicles,
high-speed networks for government offices, and remote meter reading for
municipal-owned utilities. On March 24, 2009, Omnicity announced the
installation of a "First Responder" emergency mobile and fixed wireless
broadband network in Parker City, Indiana. This network will provide mobile data
connections for police vehicles and broadband connectivity to water and sewer
systems, and to town-owned buildings. Using this model, Omnicity plans to
provide communications infrastructure to small towns and municipalities that can
become anchor tenants on its networks.
TARGET MARKET: RURAL AREAS AND URBAN CLUSTERS
The Company targets "rural" and small "urban cluster" markets, defined by the
U.S. Census Bureau ("Census Bureau") as areas with less than 10,000 people.
These markets historically have had fewer service options and competitors than
urban and metropolitan areas. Nationally, these markets account for 115.8
million people, about 41% of the total population, according to the U.S.
Department of Agriculture, and about 40 million occupied housing units. Within
the Midwest, these areas account for about 28 million people, about 44% of the
population, and 11 million occupied housing units. Consumer demand for
broadband-enabled services (Internet access, telephone services and video
services) is estimated to be $17.6 billion per year in Midwest states and $64.1
billion per year in rural and small markets nationally.
While many choices are available to urban and large-cluster market consumers for
broadband and advanced services (such as Internet TV, business and SaaS
solutions), consumers and businesses in the Company's target market have had
limited options for broadband services due to the high cost of building wired
networks (copper, fiber, CATV) in sparsely populated areas, and the fragmented
service areas of small market telcos and WISPs, which limit the ability of these
firms to build scale and access capital. About 30% of consumers are estimated to
have no access to broadband services, according to the "Rural Broadband Policy
Brief" published by The Rural Policy Research Institute in December 2008.
Concerns about the availability of broadband in rural and under-served markets
led Congress to direct the Federal Communications Commission (FCC) to create "a
comprehensive rural broadband strategy", which the FCC released on May 22, 2009
in a report entitled "Bringing Broadband to Rural America: Report On A Rural
Broadband Strategy". In that report, the FCC noted that only about 38% of rural
residents have broadband connections at home compared with 57%-60% of urban and
suburban residents. Additionally, $7.2 billion was allocated under The American
Recovery and Reinvestment Act of 2009 to fund various broadband programs in
small and rural markets.
ACQUISITIONS COMPLETED DURING THE YEAR ENDED JULY 31, 2010
AAA WIRELESS, INC. (INDIANA)
On January 7, 2010 the Company acquired the telecommunication network and system
assets of AAA Wireless, Inc. The total purchase price was $493,545, which was
paid in cash. The purchase price was allocated as follows: land - $15,000;
towers, infrastructures and house and school drops - $315,232; automobiles -
$16,500; and computer and wireless equipment including spare parts - $146,813.
No value was placed on customers' relationships as these relationships had to be
renewed through the efforts of the Company. The purchase price allocation was
based on relative fair market values of all of the assets acquired.
CLINTON COUNTY WIRELESS, LLC (INDIANA)
On January 14, 2010 the Company acquired the customers' relationships and
telecommunication network and system assets of Clinton County Wireless, LLC,
located in Clinton County, Indiana. The total purchase price was $60,000 to be
paid in common shares. The number of common shares was determined based on the
15 trading day average closing price of the Company's common shares prior to
March 15, 2010, being $0.36. The total number of common shares on July 26, 2010
was 176,667. The purchase price was allocated $10,000 to property and equipment
and $50,000 to customers' relationships based on the relative fair values of the
assets acquired.
6
USPPP, INC. (INDIANA)
On March 23, 2010 the Company acquired the customers' relationships and
telecommunication network and system assets of USppp, Inc., located in Decatur,
Indiana. The total purchase price was $225,000. Consideration was $55,000 cash,
$20,000 payable upon receiving certain deliverables, a long-term 5% note for
$67,500 and $82,500 to be paid in common shares. The number of common shares was
determined based on the 15 trading day average closing price of the Company's
common shares prior to May 22, 2010, being $0.3167. The total number of common
shares to be issued is 260,526; these shares have not yet been issued. The
purchase price was allocated $140,000 to telecommunication network assets and
$85,000 to customers' relationships based on the relative fair values of the
assets acquired.
BRIGHT CHOICE, INC. (OHIO)
On March 31, 2010 the Company acquired the customers' relationships and
telecommunication network and system assets of Bright Choice, Inc., a subsidiary
of Consolidated Electric Cooperative, a rural electric cooperative located in
North Central Ohio. The total purchase price was $231,050. Consideration was
$220,000 cash and a 5% note for $11,050. The purchase price was allocated
$126,400 to telecommunication network and system assets, $48,600 to vehicles and
$56,050 to customers' relationships based on the relative fair values of the
assets acquired.
DIGITAL SOLUTIONS NETWORK, INC. DBA LIGHTSPEED WIRELESS (OHIO)
On April 22, 2010 the Company acquired the customers' relationships and
telecommunication network and system assets of Lightspeed Wireless located in
Berlin, Ohio. The total purchase price was $1,400,000. Consideration was
$700,000 cash, a note payable of $50,000 and a long-term 6% note payable for
$500,000 and $150,000 to be paid in common shares. The number of common shares
will be determined based on the 15 trading day average closing price of the
Company's common shares prior to June 21, 2010 being $0.2967 per common share. A
total of 505,561 common shares are to be issued; these shares are not yet
issued. The purchase price was allocated $237,000 to telecommunication network
and system assets, $13,000 to vehicles and $1,150,000 to customers'
relationships based on the relative fair values of the assets acquired.
COMPETITION
Traditionally, customers in Omnicity's target markets have had four primary
options for broadband service, though not all options are available to all
customers, and about 30% of homes are estimated to have no option for broadband.
Each of these options has limitations and cannot be quickly upgraded to
high-speed (>10 Mbps), leaving a gap for Omnicity to offer high-speed and
broadband-enabled services to underserved customers. See Table below.
* Telcos - telcos offer digital subscriber line (DSL), where available,
that supports download speeds of up to 6Mbps. DSL (including ADSL,
IDSL) has an effective serving range of less than 2 miles from the
telco central office (CO) for high-speed service, and is very
dependent on the quality of the existing copper plant. Small and rural
market telcos may lack capital to overbuild/improve the plant,
especially as these companies lose traditional phone service customers
to mobile phone providers.
* Cable - cable TV companies provide broadband over cable lines, where
available, that supports download speeds of up to about 10Mbps. While
cable generally is faster than DSL, cable broadband speed degrades
based on user load since the service is shared among all users on a
particular cable run. In some cases, cable plant must be overbuilt to
support broadband services, requiring significant capital outlay.
* Satellite - Satellite broadband has the advantage of being available
to any customer with a line of sight to the satellite, making the
service attractive for very remote users. However, broadband over
satellite is relatively slow (up to 1.5Mbps), and can suffer from
latency associated with a long cycle time of bouncing signal to the
satellite. The Company now offers Omnicity Satellite Internet through
a re-branding agreement.
* WISPs - offer broadband using wireless technology. Wireless technology
can support speeds of up to 100Mbps and has omni-directional antennas
so that users in all directions can "see" the signal. Wireless
services are available to any subscriber within range of the tower
(about 5 miles) versus wired solutions that are available only to
structures passed by the wire.
7
RURAL AND SMALL URBAN CLUSTER BROADBAND OPTIONS
Broadband Service Speed Comments
- ----------------- ----- --------
DSL (Telcos) Up to 6 Mbps Speed depends on quality of copper
plant; limited speeds if customer
located >1 mile from telco central
office (CO); very limited/no
service if customer located >2
miles from CO
Cable (Cable companies) Up to 10 Mbps Depends on age of CATV plant - may
require overbuild; capital expense
may not justified in small markets;
speed depends on number of users
Satellite (Satellite &
Satellite TV companies) Up to 1.5 Mbps Suffers `latency' in data transfer;
poor quality for video applications;
relatively expensive
Wireless (WISPs) Up to 3 Mbps Can be deployed quickly; covers large
residential; geographic areas; high-speed
up to 100 Mbps
Source: "Rural Broadband Policy Brief", The Rural Policy Research Institute,
December 2008; Company estimates.
Although Omnicity will compete with telcos in some instances, many telcos in
Omnicity's target markets are small (a few hundred to a few thousand customers),
and are frequently undercapitalized, limiting their ability to provide
higher-speed broadband and new services and build scale. Moreover, smaller
telcos are losing revenues as users shift to mobile phones and disconnecting
landlines. As a result, Omnicity expects to partner with telcos, providing these
companies with high-speed broadband and new broadband-enabled services that can
be marketed to the telco customer base, accelerating Omnicity's market
penetration and helping telcos stem revenue loss.
In addition to telcos and cable companies, Omnicity will compete with WISPs in
its target footprints that Omnicity cannot, or chooses not, to acquire, and with
WISPs pursuing similar strategies. Like telcos, many WISPs operating in
Omnicity's markets are small and are often under capitalized limiting the
ability to grow, provide high-speed services, and gain scale. Nonetheless, the
presence of a competitive WISP may impact Omnicity's ability to penetrate a
given market and reach profitability in the area. In addition to individual
WISPs, three other companies are known by Omnicity to be pursuing a wireless
strategy in smaller markets, including ERF Wireless, DigitalBridge
Communications Corp., and Open Range Communications. See Table below. Clearwire
Corporation also is pursuing a national wireless services strategy, but is
focusing on metropolitan markets to date.
COMPANIES PURSUING WIRELESS/4G SERVICES BUSINESSES
Company Status Market Focus Direct Competitor
- ------- ------ ------------ -----------------
ERF Wireless Public (OTC BB: Similar to Omnicity, but focused in Texas, Not at this time
ERFW) Louisiana, New Mexico
DigitalBridge Private Focused in on metro-edge and small metro Not at this time
Communications Corp. markets with up to 150,000 people.
Serving 4 cities in Indiana
Open Range Private Similar to Omnicity, focused on 17 states Possible competitor
Communications including 4 in Midwest in some markets
ERF Wireless is a publicly traded company (OTC BB: ERFW) focused on providing
wireless services to customers in Texas, Louisiana, and New Mexico. According to
ERF Wireless' press releases, the company has completed 15 WISP acquisitions in
Texas, Louisiana, and New Mexico and reported having 9,000 residential customers
as of December 31, 2008. ERF Wireless also specializes in providing services to
banks in Texas and has signed an agreement with Schlumberger to market its
wireless services and products to the oil and gas industry in the United States,
Canada and the Gulf of Mexico. While ERF Wireless is pursuing a similar strategy
to Omnicity the company has thus far limited its business to Texas, Louisiana,
and New Mexico, and to oil installations serviced by Schlumberger, and therefore
is not a direct competitor to the Company at this time.
DigitalBridge Communications is a private company that is pursuing metro-edge
markets and smaller metropolitan areas with populations up to 150,000 people,
according to the company's web site. On April 29, 2009, DigitalBridge announced
that the National Rural Telecommunications Cooperative had made an undisclosed
investment in the company. DigitalBridge currently serves 14 markets, including
4 markets in Indiana. Because DigitalBridge is focused on metro areas the
Company does believe it is a direct competitor at this time.
8
Open Range Communications is a private company that is focused on delivering
wireless broadband services to up to 500 small markets in 17 states (including
Illinois, Indiana, Nebraska, Ohio, and Wisconsin in the Midwest) with an average
of 10,000 people, according to the company's web site and press releases. The
services are to be provided on licensed spectrum held by Globalstar, Inc.
(NASDAQ:GSAT) under Globalstar's Ancillary Terrestrial Component (ATC)
authority, according to a company press release issued March 27, 2008. On March
25, 2008, the company announced that it was approved for a $267 million
Broadband Access Loan by the United States Department of Agriculture's Rural
Development Utilities Program (RDUP) and on January 9, 2009, Open Range
announced an investment of $100 million from One Equity Partners (terms not
disclosed), which the company's web site indicates satisfies the RDUP
requirements for making the loan available. Based on available information, the
Company believes that Open Range may compete with it in some markets in the
Midwest.
Clearwire Corporation also is pursuing a nationwide network rollout using
wireless/4G technology. Clearwire is a publically traded company (NASDAQ: CLWR)
developing networks for large metropolitan areas. While it is significantly
larger than Omnicity, because Clearwire is focused on metro areas, the Company
does not believe it is a direct competitor at this time.
Omnicity believes it will be competitively differentiated from telcos, cable
companies, and small WISPs in several ways, including:
* Telcos - able to deliver higher speeds than telco DSL and able to
serve customers that cannot be served by DSL. Omnicity is positioned
to partner with telcos to service telco phone customers that cannot
receive DSL due to plant constraints;
* Cable companies - able to deliver higher speeds than cable data
service and able to serve customers that cannot be served by cable
data service;
* WISPs - leveraging scale, able to create wide market footprint that
attracts customers; able to develop and offer a larger set of services
to better meet customer needs.
The Company also believes it is positioned to compete with other national WISP
companies should they enter Omnicity's target markets by:
* Entering markets quickly through acquisitions, gaining an ongoing
revenue stream vs. starting with new operations, sales and branding;
* Leveraging its status as a public company to make acquisitions vs.
making cash outlays to build systems and operations from scratch;
* Partnering with REMCs, local governments, and telcos to accelerate
Omnicitys market penetration and help these entities expand services,
products and revenues;
* Utilizing available unlicensed radio technology to build revenue and
market share. Several potential competitors are focused on using
licensed spectrum to operate.
NETWORKS AND TECHNOLOGY
Service is delivered by antennas deployed on cellular and other commercial
towers, municipally or privately owned structures such as water towers, tall
silos and rooftops. Customers receive the wireless signal via customer premise
equipment (CPE) that currently costs $240 per unit and that is typically mounted
on rooftops. Most customers with line of sight to the antenna that and who are
within 5 miles of the tower can receive the signal. Access points mounted on
each tower can support 100-150 customers depending on the mix of bandwidth
subscriptions and antenna equipment. Antennas are connected to Internet access
points via point-to-point radio and fiber connections through agreements with
fiber carriers and telcos where traffic is backhauled to the Internet backbone.
Networks generally are designed in a ring topology to mitigate service failures
in the event that a tower or network connection is lost. The Company's
operations are managed through a Network Operations Center (NOC) in Rushville,
Indiana, which also handles customer support. Omnicity can currently offer
services to homes in about 1/3 of the geography of Indiana.
Currently, Omnicity uses standards-based wireless equipment in the
license-exempt 900MHz, 2.4GHz and 5.8GHz spectrum bands, providing multiple
paths to cover subscribers in its markets. The Company is evolving its
technology and spectrum strategy as it becomes more opportune and cost effective
9
to utilize licensed spectrum and related equipment and is evaluating options for
using the 700Mhz, 2.5GHz and 3.65Ghz bands for WIMAX-based services. Backhaul
from wireless distribution points is provided via point-to-point radio, and
fiber connections through agreements with backhaul carriers.
MILESTONES
Upon completion of Omnicity's reverse merger transaction on February 17, 2009, a
number of milestones have been achieved in the execution of Omnicity's business
strategy:
* Completed ten WISP asset purchases. Including acquisitions, Omnicity
currently has a portfolio of transmission rights covering 452 tower
sites located principally in Indiana and Ohio. These markets represent
approximately 434,000 households, approximately 369,000 of which are
believed to be serviceable by line-of-sight transmissions from
Omnicity antenna locations;
* The Company's revenues for 2010 increased by $1,750,000 to $3,433,000,
an increase of 104%. This significant increase reflects an increase in
recurring service revenue from our four acquisitions from 2009 and six
acquisitions from 2010. Revenues from our first acquisition began in
February, 2009. The numbers of subscribers increased from 1,800 in
February, 2009 to 11,500 at July 31, 2010 by virtue of these
acquisitions and organic growth;
* Completed its first local government project, providing mobile data
connections for the police vehicles and broadband connectivity to the
water, sewer and town hall buildings in Parker City, Indiana;
* Entered into a $1 million master lease facility with Agility Ventures,
LLC for operating leases of radio and other equipment to expand its
business.
COST FACTORS
Traditional hard-wire systems typically cost significantly more to build than
wireless systems. Hardwire systems must install a network of cable and
amplifiers in order to deliver signals to their subscribers. This considerable
cost is not incurred by wireless operators and is only partially offset by the
cost a wireless operator incurs to purchase and install the wireless radios and
related equipment necessary for each subscriber's location. These lower system
development costs typically result in lower debt burdens per subscriber for
wireless operators as compared to comparably sized traditional hard wire
systems.
The system operating costs for wireless systems also are generally lower than
those for comparable hard-wire systems. This is attributable to lower system
network maintenance and depreciation expense.
We anticipate that each additional wireless subscriber will require an
incremental capital expenditure by us. This amount consists of material and
installation labor and overhead charges. These per subscriber capital costs will
not be incurred until a subscriber has been added and is about to generate
revenue for us and will be offset in part by installation fees paid by the
subscriber at the time of installation.
EMPLOYEES
As of July 31, 2010, we had a total of 49 full time employees. None of our
employees is subject to a collective bargaining agreement. We have experienced
no work stoppages and believe that we have good relations with our employees. We
also occasionally utilize the services of independent contractors to build and
install our wireless systems and market our services.
SUBSIDIARIES
We own 100% of Omnicity, Incorporated, a company organized under the laws of the
State of Indiana.
PATENTS AND TRADEMARKS
We have no patents or patents pending. We have trademarked the following:
"Bringing Broadband to the Heartland".
10
ITEM 1A. RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A NUMBER OF VERY SIGNIFICANT RISKS.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND UNCERTAINTIES IN ADDITION
TO OTHER INFORMATION IN THIS ANNUAL REPORT IN EVALUATING OUR COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF OUR COMMON STOCK. OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION COULD BE SERIOUSLY HARMED DUE TO ANY OF THE
FOLLOWING RISKS. THE RISKS DESCRIBED BELOW MAY NOT BE ALL OF THE RISKS FACING
OUR COMPANY. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY
CONSIDER IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. YOU COULD LOSE ALL
OR PART OF YOUR INVESTMENT DUE TO ANY OF THESE RISKS.
RISKS RELATING TO OUR BUSINESS
WE LACK PROFITABLE OPERATIONS.
Omnicity's business commenced in 2003 and substantially all of its revenues have
been generated by the 10 Indiana and Ohio WISP network infrastructures and
customers' relationships. Omnicity has recorded net losses in each of the last
four fiscal years ended July 31, 2010, 2009, 2008 and 2007, due primarily to
Omnicity's rapid growth through acquisitions, building an acquisition team,
related administrative costs, public company costs including investor relations,
legal and audit, interest and financing expense and charges for depreciation and
amortization of capital expenditures to develop its wireless systems. We may
continue to experience net losses while we develop and expand our wireless
systems even if mature individual systems of our company are profitable.
Prospective investors should be aware of the difficulties encountered by
enterprises in the early stages of development, particularly in light of
potential competition. There can be no assurance that an increase in the number
of subscribers or the launch of additional wireless systems will result in
profitability for our company in future years.
OUR BUSINESS DEPENDS ON LEASES AND MATERIAL AGREEMENTS WITH UNAFFILIATED THIRD
PARTIES FOR A SIGNIFICANT PORTION OF OUR CUSTOMER PREMISES EQUIPMENT AND OUR
WIRELESS TOWER TRANSMISSION RIGHTS.
We are partially dependent on leases with unaffiliated third parties for some of
our wireless transmission rights. The remaining terms of most of Omnicity's site
leases are approximately three years. Most of these leases provide for automatic
renewal of the lease term, grant a right of first refusal to the sites and/or
require the parties to negotiate lease renewals in good faith. The termination
of or failure to renew our operating leases would result in Omnicity being
unable to deliver services from such site to the households in its footprint.
For customer premises equipment, after three years, we have the option of
acquiring the equipment at the then fair market value. Such a termination or
failure in a market that we actively serve could have a material adverse effect
on our Company.
In connection with our distribution of wireless Internet service, we are
dependent on third party agreements for high-speed return path access
("Backhaul"). Although we have no reason to believe that any such agreement will
be cancelled or will not be renewed upon expiration, if such contracts are
cancelled or not renewed, we will have to seek Backhaul from other sources.
There is no assurance that other Backhaul will be available to us on acceptable
terms or at all or, if so available, that it will be of a grade and speed
acceptable to our subscribers.
WE WILL NEED ADDITIONAL FINANCING IN ORDER FOR OUR COMPANY TO GROW.
The growth of our business will require substantial investment on a continuing
basis to finance capital expenditures and related expenses for subscriber growth
and system development. We will require additional financing to continue to add
significant numbers of subscribers to our systems, develop our markets, and make
critical acquisitions of additional wireless transmission assets. These
activities may be financed in whole or in part through debt or equity
financings, operating equipment leases, public and/or private joint ventures or
other arrangements. There is no assurance that any additional funds necessary to
finance the development and expansion of our wireless systems will be available
on satisfactory terms and conditions, if at all. To the extent that any future
financing requirements are satisfied through the issuance of equity securities,
investors may experience significant dilution in the net tangible book value per
share of our common stock. The amount and timing of our future capital
requirements will depend upon a number of factors, many of which are not within
our control, including service costs, capital costs, marketing expenses,
staffing levels, subscriber growth and competitive conditions. Failure to obtain
any required additional financing could adversely affect the growth of our
Company.
OUR COMPANY IS DEPENDENT ON THE KNOWLEDGE AND EXPERIENCE OF OUR EXISTING
MANAGEMENT AND KEY EMPLOYEES.
We are dependent, in large part, on the experience and knowledge of our existing
management team. The loss of the services of any one or more of our current
executive officers could have a material adverse effect upon our Company. Our
11
success is also dependent upon our ability to attract and retain qualified
employees to develop and operate our wireless systems.
RISKS RELATING TO OUR INDUSTRY
THE WIRELESS BROADBAND SERVICE PROVIDER INDUSTRY IS HIGHLY COMPETITIVE.
The wireless broadband service provider industry is highly competitive. Wireless
systems face or may face competition from several sources, such as traditional
hard-wire companies, telephone companies, satellite providers, and other
alternative methods of distributing and receiving Internet and voice
transmissions. In addition, within each market, we may compete with others to
acquire rights to transmission sites. Legislative, regulatory and technological
developments may result in additional and significant competition, including
competition from local telephone companies. In our existing systems, we have
targeted our marketing to households that are not served or underserved by
traditional hard-wire providers and that have limited access to high speed
internet service from other sources (primarily having access only to dial-up
internet access, if any). Accordingly, we have not encountered significant
direct competition from traditional hard-wire companies. No assurance can be
given, however, that we will not face direct competition from traditional
hard-wire companies in the future. The standard service offering package offered
in each of our existing systems is comparable to that offered by traditional
hard-wire operators. Many actual and potential competitors have greater
financial, marketing and other resources than our Company. No assurance can be
given that we will compete successfully.
THERE ARE PHYSICAL LIMITATIONS OF WIRELESS TRANSMISSION.
Wireless broadband service is transmitted through the air via microwave
frequencies from radios at a transmission facility to a small receiving radio at
each subscriber's location, which generally requires a direct `line-of-sight"
from the transmission facility to the subscriber's receiving radio. Therefore,
in communities with tall trees, hilly terrain, tall buildings or other
obstructions in the transmission path, wireless transmission can be difficult or
impossible to receive at certain locations without the use of signal repeaters.
Based on our installation and operating experience, we believe that our signal
can be received directly by approximately 85% of the households within our
expected signal patterns for such markets. The terrain in most of our markets is
generally conducive to wireless transmission and we do not presently anticipate
any material use of beam benders or repeater stations. In addition, in limited
circumstances, extremely adverse weather can damage transmission facilities and
receiving radios. However, we do not believe such potential damage is a material
risk.
WE ARE SUBJECT TO GOVERNMENT REGULATION.
Although much of the microwave spectrum used by our Company for transmission of
our services is not required to be licensed by the FCC, many of the frequencies
that we may use in the future are highly regulated. We cannot predict precisely
what effect any potential regulations may have on our Company.
Wireless operators are also subject to regulation by the Federal Aviation
Administration with respect to the use and construction of transmission towers
and to certain local zoning regulations affecting construction of towers and
other facilities. There may also be restrictions imposed by local authorities.
There can be no assurance that we will not be required to incur additional costs
in complying with such regulations and restrictions.
RISKS RELATING TO OUR COMMON STOCK
OUR STOCKHOLDERS MAY EXPERIENCE DILUTION AS A RESULT OF OUR ISSUANCE OF
ADDITIONAL COMMON STOCK OR THE EXERCISE OF OUTSTANDING WARRANTS AND CONVERTIBLE
SECURITIES.
We have entered into commitments to issue common stock pursuant to issued and
outstanding warrants and other convertible securities, which would require the
issuance of additional common stock, and we may grant share purchase warrants
and stock options at any point in the future. The conversion of convertible
securities or the exercise of share purchase warrants or options and the
subsequent resale of such common stock in the public market could adversely
affect the prevailing market price and our ability to raise equity capital in
the future at a time and price which we deem appropriate. Any share issuances
from our treasury will result in immediate dilution to our existing
stockholders.
WE HAVE NEVER DECLARED OR PAID CASH DIVIDENDS ON OUR COMMON STOCK.
12
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future cash dividends, if any, will be at the
discretion of our board of directors and will depend on our financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and other factors that our board of directors considers relevant.
Accordingly, investors may only see a return on their investment if the value of
our securities appreciates.
THERE IS A LIMITED TRADING MARKET FOR OUR COMMON STOCK, AND OUR INVESTORS MAY BE
UNABLE TO SELL THEIR SHARES.
We have a limited trading market for our common stock on FINRA's
Over-the-Counter Bulletin Board ("OTCBB"). As a result, investors may not be
able to sell the shares of our common stock that they have purchased and may
lose all of their investment.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC, WHICH WILL
MAKE TRANSACTIONS IN OUR COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN
INVESTMENT IN OUR COMMON STOCK.
Our common stock is quoted on the Financial Industry Regulatory Authority's OTC
Bulletin Board, which is generally considered to be a less efficient market than
markets such as NASDAQ or other national exchanges, and which may cause
difficulty in conducting trades and obtaining future financing. Further, our
securities are subject to the "penny stock rules" adopted pursuant to Section
15(g) of the Securities Exchange Act of 1934, as amended. The penny stock rules
apply generally to companies whose common stock trades at less than US$5.00 per
share, subject to certain limited exemptions. Such rules require, among other
things, that brokers who trade "penny stock" to persons other than "established
customers" complete certain documentation, make suitability inquiries of
investors and provide investors with certain information concerning trading in
the security, including a risk disclosure document and quote information under
certain circumstances. Many brokers have decided not to trade "penny stock"
because of the requirements of the "penny stock rules" and, as a result, the
number of broker-dealers willing to act as market makers in such securities is
limited. In the event that we remain subject to the "penny stock rules" for any
significant period, there may develop an adverse impact on the market, if any,
for our securities. Because our securities are subject to the "penny stock
rules", investors will find it more difficult to dispose of our securities.
Further, it is more difficult: (i) to obtain accurate quotations, (ii) to obtain
coverage for significant news events because major wire services, such as the
Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING.
Our Company's consolidated financial statements include a statement that our
financial statements are prepared on a going concern basis, and therefore that
certain reported carrying values are subject to our Company receiving the future
continued support of our stockholders, obtaining additional financing and
generating revenues to cover our operating costs. The going concern assumption
is only appropriate provided that additional financing continues to become
available.
A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO RAISE
FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR OPERATIONS.
A decline in the price of our common stock could result in a reduction in the
liquidity of our common stock and a reduction in our ability to raise additional
capital for our operations. Because our operations to date have been principally
financed through the sale of equity securities and the issuance of debt and debt
securities, a decline in the price of our common stock could have an adverse
effect upon our liquidity and our continued operations. A reduction in our
ability to raise equity capital in the future would have a material adverse
effect upon our business plan and operations, including our ability to continue
our current operations. If our stock price declines, we may not be able to raise
additional capital or generate funds from operations sufficient to meet our
obligations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease, on a month to month basis, our executive and operations offices. These
offices are located together at 807 South State Rd 3, Rushville, Indiana, U.S.A.
We also lease, on a month to month basis, small warehouse facilities that house
certain smaller segments of our operations including spare parts to our system.
13
We also own 100% of the issued and outstanding shares of Omnicity, Incorporated,
an Indiana corporation, which is our sole operating subsidiary.
ITEM 3. LEGAL PROCEEDINGS
The Company has been served with a Complaints filed with the Rush Circuit Court
in the State of Indiana dated August 25, 2010. The plaintiff has made claims
against the Company for failure to make required installment payments that were
due pursuant to promissory notes. The Company has recorded all debt relating to
this claim as a current liability. On September 14, 2010 the Company filed an
Appearance and Notice of Extension of Time to answer the Complaint. On November
8, 2010 the Company filed an Answer to this Complaint. This Answer denied
certain allegations due to breach by the vendor of the Asset Purchase Agreement
entered into. The Company expects to receive a favorable outcome.
The Company has been served with a Complaint filed with the Rush Circuit Court
in the State of Indiana dated September 1, 2010. The plaintiff has made claims
against the Company for failure to make required installment payments that were
due pursuant to promissory notes. The Company has recorded all debt relating to
this claim as a current liability. On September 14, 2010 the Company filed an
Appearance and Notice of Extension of Time to answer the Complaints. The Company
is in the process of filing an Answer to this Complaint which will include a
denial of certain allegations due to breach by the vendor of the Asset Purchase
Agreement and expects to receive a favorable outcome.
The Company has been served with a Complaint filed with the Holmes County Court
in the State of Ohio dated September 16, 2010. The plaintiff has made claims
against the Company for failure to make required installment payments that were
due pursuant to promissory notes. The Company has recorded all debt relating to
this claim as a current liability. On November 8, 2010 the Company filed an
Answer and Counterclaim with the Holmes County Court. This Answer and
Counterclaim includes counterclaims for various damages, including punitive
damages, suffered by the Company and also seeks an injunction. The Company
expects to receive a favorable outcome.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The market for our common stock is limited, volatile and sporadic. The following
table sets forth the high and low bid prices relating to our common stock for
the periods indicated, as provided by the OTC Bulletin Board. These quotations
reflect inter-dealer prices without retail mark-up, mark-down, or commissions,
and may not reflect actual transactions.
QUARTER ENDED HIGH BID LOW BID
- ------------- -------- -------
July 31, 2010 $0.36 $0.11
April 30, 2010 $0.40 $0.25
January 31, 2010 $0.41 $0.22
October 31, 2009 $0.62 $0.35
HOLDERS
As of November 17, 2010, we had approximately 700 shareholders of record.
DIVIDEND POLICY
No dividends have been declared or paid on our common stock. We have incurred
recurring losses and do not currently intend to pay any cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Effective on August 18, 2009, we issued a total of 229,855 common shares from
treasury to four individuals to complete the common share portion to complete
two Asset Purchase Agreements at an agreed price of $0.71 per common share. We
relied on exemptions from registration under the Securities Act provided by Rule
506 for U.S. accredited investors based on representations and warranties
provided by the individuals.
14
Effective on October 13, 2009, we issued a total of 268,818 common shares from
treasury to eleven individuals to complete the common share portion to complete
two Asset Purchase Agreements at an agreed price of $0.465 per common share. We
relied on exemptions from registration under the Securities Act provided by Rule
506 based on representations and warranties provided by the individuals.
Effective on November 10, 2009, we completed a non-brokered private placement
pursuant to which we issued from treasury to one subscriber a total of 4,000,000
Units at a subscription price of $0.35 per unit for proceeds of $1,400,000. Each
unit consisted of one share of common stock and one-half of one share purchase
warrant. Each whole warrant entitles the holder to acquire an additional share
of common stock at an exercise price of $0.50 per share until October 20, 2011.
We relied on exemptions from registration under the Securities Act provided by
Rule 506 for U.S. accredited investors based on representations and warranties
provided by the subscriber in his subscription agreement entered into between
the subscriber and the Company.
Effective on November 13, 2009, we completed a non-brokered private placement
pursuant to which we issued from treasury to five subscribers a total of 278,840
Units at a subscription price of $0.35 per unit for proceeds of $97,594. Each
unit consisted of one share of common stock and one-half of one share purchase
warrant. Each whole warrant entitles the holder to acquire an additional share
of common stock at an exercise price of $0.50 per share until November 13, 2011.
We relied on exemptions from registration under the Securities Act provided by
Rule 506 for U.S. accredited investors based on representations and warranties
provided by the subscriber in his subscription agreement entered into between
the subscriber and the Company.
Effective on March 31, 2010 we issued 5,000 common shares to one individual to
complete the purchase of a vehicle pursuant to a Bill of Sale dated November 19,
2009. We relied on an exemption from registration under the Securities Act
provided by Section 4(2) thereof.
Effective on March 31, 2010 we issued 5,714 common shares to one individual
complete a Letter Agreement to settle a claim. We relied on exemptions from
registration under the Securities Act provided by Rule 506 for U.S. accredited
investors.
On April 9, 2010 we issued 8,571 common shares to one individual to complete a
Letter Agreement to settle a claim. We relied on exemptions from registration
under the Securities Act provided by Rule 506 for U.S. accredited investors.
On April 26, 2010 we issued an aggregate of 235,000 common shares to two
entities pursuant to Agreements for services to be rendered. With respect to
165,000 of these shares, we relied on exemptions from registration under the
Securities Act provided by Rule 506 for U.S. accredited investors; with respect
to the remaining 70,000 shares, we relied on exemptions from registration under
the Securities Act provided by Regulation S.
On April 29, 2010, we completed a non-brokered private placement pursuant to
which we issued from treasury to two subscribers a total of 228,571 Units at a
subscription price of $0.35 per unit to settle debt of $80,000. Each unit
consisted of one share of common stock and one-half of one share purchase
warrant. Each whole warrant entitles the holder to acquire an additional share
of common stock at an exercise price of $0.50 per share until April 29, 2012. We
relied on exemptions from registration under the Securities Act provided by Rule
506 for U.S. accredited investors based on representations and warranties
provided by the subscribers in the subscription agreements entered into between
each subscriber and the Company.
Effective on July 26, 2010, we issued a total of 166,667 common shares from
treasury to two individuals to complete the common share portion to complete an
Asset Purchase Agreement at an agreed price of $0.36 per common share. We relied
on exemptions from registration under the Securities Act provided by Rule 506
based on representations and warranties provided by the individuals.
NO REPURCHASES
Neither we nor any of our affiliates have made any purchases of our equity
securities during the fourth quarter of our fiscal year ended July 31, 2010.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act
and are not required to provide the information required under this item.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition, changes in financial
condition, plan of operations and results of operations should be read in
conjunction with (i) our audited consolidated financial statements as at July
31, 2010 and 2009 and (ii) the section entitled "Business", included in Item 1
in this Form 10-K Annual Report.
The discussion contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of many
factors, including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this Annual Report.
PLAN OF OPERATIONS
Our business plan is to be a rural wireless internet service provider in the
United States through a consolidation strategy and organic growth of all
acquired business units and to partner with REMCs, Telcos and local governments
for nationwide marketing. We also plan to partner with regional and national
telecommunication companies for the delivery of voice services and complete
negotiations and logistics of DirecTV resell agreements. We further plan to
partner with local governments to provide essential services, including mobile
internet for emergency mobile communications, fire and police and to establish
new utility applications such as automated meter reading. We plan to bring WISP
based services to rural America through three distinct market channels: (1)
Telco and Electric partnerships, (2) strategic acquisitions and (3) local
government and private enterprise partnerships.
Utilizing our relationship with the REMCs and "value added" institutional
services and facilities we provide for municipalities and local governments, we
plan to organize and consolidate within the rural broadband market initially in
Indiana and then in the Midwestern United States and ultimately nationwide.
Collaborations with both the REMCs and municipalities may act as effective
barriers for competition and provide additional sources of revenue and customer
service for the REMCs and municipalities as well as income and cash flow for our
company. The bundling of broadband services, including internet, voice, and
video, in partnership with rural electric and/or municipal services provides an
opportunity to imbed, cross promote, and extend services in collaboration with
these institutional providers.
OUR PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS IS TO:
* develop and expand, through organic growth, the subscriber base
through our sales and marketing programs, to increase our number of
sales teams in the field, and to launch new marketing initiatives
tailored to specific markets;
* acquire, and transition into our operations assets of competing WISP
operators and expand our network in Indiana , Ohio, and other states,
connecting these network clusters by July 31, 2011 and continue
expansion into all of Midwest USA by identifying strategic regional
acquisitions;
* launch the next generation of WiMax equipment in all new builds and in
all rebuild opportunities to standardize Omnicity networks with
carrier grade deployments;
* increase operational cash flow to over $250,000 per month and build a
liquidity floor under operations of $200,000 minimum by July 31, 2011;
* continue to partner with Rural Electric Membership Cooperatives
"REMCs", local and State governments, Rural Telcos and Original
Equipment Manufacturers "OEMs" to efficiently and cost effectively
expand our network across rural America; and
* develop and expand our service offerings to become a total broadband
solution including VOIP and video.
FUTURE FINANCING REQUIREMENTS
At July 31, 2010, we had cash of $39,000 and a working capital deficit of
$3,810,000. Approximately $4 million was injected into the Company during the
year ended July 31, 2010. We estimate that approximately $6 million will be
required during the twelve months ended July 31, 2011 to finance our short-term
working capital deficit and to finance the expansion of, and the addition of
subscribers through acquisition to, our existing and to be acquired network
infrastructures. A total of $1 million will be required for working capital
purposes, $1.5 million for organic growth and $3.5 million for acquisitions.
Upon closing our second large acquisition in Ohio at the end of March, 2010, and
with a reduction of employees, we became operationally cash flow positive and
will require no additional funds to finance operational deficits. We will
continue to seek a combination of equity and long-term debt financing as well as
other traditional cash flow and asset backed financing to meet our financing
needs and to reduce our overall cost of capital. Additionally, in order to
16
accelerate our growth rate and to finance general corporate activities, we may
supplement our existing sources of funds with financing arrangements at the
operating system level or through additional borrowings, joint ventures or other
off balance sheet arrangements. As a further capital resource, we may sell or
lease certain wireless rights or assets from our portfolio as appropriate
opportunities become available. However, there can be no assurance that we will
be able to obtain any additional financing, on acceptable terms or at all.
CURRENT FINANCING ARRANGEMENTS
We are currently in negotiations to raise $1 million to $3 million under a
capital lease program with private investors to fund our acquisitions and
organic growth. We expect to close this financing by December 31, 2010. We are
also in negotiations to raise $2.5 million in equity with private investors. In
addition to the proposed equity injection of $2.5 million, expected to complete
by December 31, 2010, a commitment for three additional tranches of $2. 5
million, $7.5 million in total, will be made. These additional financings will
be in the form of convertible debentures to be funded when the Company needs the
funds.
We will continue to seek traditional cash flow and asset backed financing to
supplement our efforts discussed above and to reduce our overall cost of
capital. Additionally, in order to accelerate our growth rate and to finance
general corporate activities, we may supplement our existing sources of funds
with financing arrangements at the operating system level or through additional
borrowings, joint ventures or other off balance sheet arrangements. As a further
capital resource, we may sell or lease certain wireless rights or assets from
our portfolio as appropriate opportunities become available. However, there can
be no assurance that we will be able to obtain any additional financing, on
acceptable terms or at all.
YEAR ENDED JULY 31, 2010 AND 2009
The following table sets forth certain financial information relating to the
Company for the Year ended July 31, 2010 ("2010") and July 31, 2009 ("2009").
The financial information presented has been rounded to the nearest thousand $
and is derived from the audited consolidated financial statements included under
Item 8 in this Form 10-K.
2010 2009
---------- ----------
$ $
Sales, net 3,475,828 1,684,350
---------- ----------
Expenses:
Service costs 225,876 30,712
Plant and signal delivery 1,511,067 967,406
Marketing and sales 17,806 45,375
General and administration 940,398 744,616
Salaries and benefits 2,128,760 1,276,016
Stock based compensation -- 289,629
Depreciation and amortization 845,083 536,113
---------- ----------
Total Expenses 5,668,990 3,889,867
---------- ----------
Loss from Operations (2,193,162) (2,205,517)
---------- ----------
Other Income (Expense):
Other income 216,667 --
Gain on sale of assets, net 30,719 --
Financing expense (161,547) (190,039)
Interest (374,968) (241,096)
---------- ----------
Total Other Income (Expense) (327,867) (431,135)
---------- ----------
Net Loss (2,521,029) (2,636,652)
========== ==========
Net Loss per Share - Basic and Diluted (.06) (.08)
========== ==========
Weighted Average Shares Outstanding -
Basic and Diluted 41,737,000 34,160,000
========== ==========
The following discussion should be read in conjunction with the audited
consolidated financial statements (including the notes thereto) included under
Item 8 in this Form 10-K.
17
REVENUES
The Company's revenues for 2010 increased by $1,792,000 to $3,476,000 (2009 -
$1,684,000) an increase of 106%. This significant increase reflects an increase
in installation revenues for 2010 which increased by $129,000 to $203,000 (2009
- - $74,000) and an increase in recurring service revenues for 2010 which
increased by $1,663,000 to $3,273,000 (2009 - $1,610,000) an increase of 103%.
These significant increases were achieved mainly through our five additional
acquisitions folded in from August 1, 2009 through July 31, 2010 and through
organic growth, which is increasing at a rapid rate. The number of subscribers
increased from 5,200 to 11,500 during the year ended July 31, 2010. This
subscriber count does not differentiate a subscriber, for example, one school,
hospital or business subscriber is counted as one subscriber. On an equivalent
subscriber unit basis we increased our equivalent subscribers from 5,586 at July
31, 2009 to 12,350 as at July 31, 2010. This is important to note because going
forward the Company will be adding schools, hospitals and business accounts at
an accelerated rate. During the first 9 months of the fiscal year ended July 31,
2009 the Company had 1,800 subscribers, during the final 3 months of fiscal 2009
the Company added 3,400 subscribers mainly through five acquisitions completed
during that period. The Company receives revenue mainly from monthly service and
modem rental fees collected from its subscribers. The Company's installation
revenue, while representing 6% of revenues currently, is expected to increase
rapidly as we complete current financing arrangements and, as a result, we
expand our marketing efforts. The Company also receives web hosting fees, fiber
construction project fees and late fees which together represent less than 1% of
total revenue. The Company expects revenues to increase rapidly as a result of
organic growth, planned acquisitions and increase in average revenue per unit
("ARPU").
OPERATIONAL EXPENSES
Operational expenses include service costs, plant and signal delivery, marketing
and sales, general and administration and salaries and benefits, stock based
compensation and depreciation and amortization.
SERVICE COSTS include the cost of billing and collection, the cost of buying DSL
service and the cost of providing Lifeline and satellite services in Ohio.
During 2010, service costs increased by $195,000 to $226,000 (2009 - $31,000).
This increase was due mainly to the acquisition of Bright Choice, Inc. in Ohio.
Approximately two-thirds of Bright Choice revenue comes from satellite and
Lifeline services which started in April, 2010. The increase also comes from an
increase in the number of customers accounts offset by a decrease in the cost of
collection.
PLANT AND SIGNAL DELIVERY expenses include the rental of towers, the cost of
internet transmission ("backhaul") the cost of installing equipment on the
towers and at customers' premises ("housedrops") and the operating lease costs
of housedrop or tower equipment. We currently have a portfolio of transmission
rights covering 452 tower sites located principally in Indiana and Ohio. These
markets represent approximately 434,000 households, approximately 369,000 of
which are believed to be serviceable by line-of-sight transmissions from
Omnicity antenna locations. During 2010, plant and signal delivery expenses
increased by $543,000 to $1,511,000 (2009 - $967,000), an increase of 56%. The
increase in revenues was 106% during this period. As subscribers are added to
the network the incremental cost of providing our signal to that subscriber is
lower. This increase was due mainly to the increase in the number of towers
under rental arrangements, the amount of backhaul needed to service the increase
in subscribers, the increase in tower and customer premises equipment being
leased pursuant to operating lease arrangements and the increase in customer
installations. Plant and signal delivery costs per customer will significantly
decrease as the Company populates its towers with customers. The Company, on
average, has a penetration of approximately 4% of homes passed whereas the
minimum target penetration is at least 20% (>74,000 subscribers) which is the
penetration rate in the Wabash REMC coverage area.
MARKETING AND SALES expenses include REMC fees, advertising and preparation of
marketing materials. During 2010, marketing and sales expenses decreased by
$28,000 to $18,000 (2009- $45,000). In 2009 the Company paid contract
commissions for sales of $25,000 whereas none were paid in 2010. Marketing and
sales expenses are expected to significantly increase during 2011 as the Company
increases its marketing plan to significantly increase organic growth. The
Company now has four full-time sales people, which costs are included in
salaries and benefits. In December, 2009, we upgraded our marketing and sales
models which increased new installations from 50 during December, 2009 to 155
during January, 2010 and 220 during February, 2010. Our current growth, on a
month over month basis, is 35% which is expected to increase once sufficient
growth financing is secured.
GENERAL AND ADMINISTRATION expenses include professional fees (legal, audit,
accounting and outside professional consulting), investor relations consulting
fees, office expenses (including rent, property tax, utilities, telephone and
insurance), travel and automobile, software fees and fees associated with late
payments and bank charges. During 2010, general and administration expenses
increased by $195,000 to $940,000 (2009 - $745,000), an increase of 26%. Travel
18
and automobile costs held constant at $98,000 whereas fees associated with late
payments and bank charges decreased by $32,000 to $43,000. Telephone costs
increased by $30,000; insurance, mainly D&O insurance, increased by $33,000,
rent increased by $42,000, investor relations expenses increased by $14,000,
annual property taxes increased by $27,000 and professional fees increased by
$81,000. These increases are mainly due to expanding our subscriber base and
being a public company during 2010 versus a private company during the majority
of 2009. There are significant additional costs associated with being a public
company including legal costs, auditing, investor relations and regulatory fees.
As the Company expanded into Ohio it picked up a small portion of general and
administrative expenses, however, the additional expenses are significantly
lower on an incremental basis. General and administration expenses are not
expected to increase significantly in 2011 in relation to increased revenue. As
the Company grows, general and administration expenses become significantly
lower on a percentage of revenue basis.
SALARIES AND BENEFITS for 2010 have increased by $853,000 to $2,129,000 (2009 -
$1,276,000) and increase of 67% while revenue increased by 104%. This increase
is mainly due to the additional costs associated with hiring of senior and
middle management to oversee the acquisition, marketing, financial reporting and
operations teams. The Company went from 25 employees during the year ended July
31, 2009 to as high as 68 employees at its peak at April 309, 2010. This staff
has been rationalized and the staffing levels have been lowered to 49 full-time
employees as at July 31, 2010. The Company does not expect to increase its
number of employees significantly during 2011, except for certain key people to
be brought on as a result of acquisitions and increasing the number of marketing
teams we have in current and new regions brought on through acquisitions.
Installations are now contracted out to an independent contractor. The Company
continues to upgrade its employees as better trained personnel become available
through acquisitions.
STOCK BASED COMPENSATION of $290,000 was charged to operations on January 2,
2009 with no corresponding charge during 2010.
DEPRECIATION AND AMORTIZATION for 2010 increased by $309,000 to $845,000 (2009 -
$536,000). This increase was attributed to an increase in amortization of
customers' relationships of $229,000 to $334,000 (2009 - $105,000) and an
increase in depreciation of our network system, automobiles, software and office
equipment of $80,000 to $511,000.
OTHER INCOME AND EXPENSE
INTEREST EXPENSE for 2010 increased by $134,000 to $375,000 (2009 - $241,000).
The increase was a result of increased short-term and long-term debt levels
offset by an overall reduction in the cost of debt to 6.8% achieved through
negotiations with all creditors. During the year ended July 31, 2010 the
Company's cost of short-term and long-term debt decreased by 2% to 6.8% from
8.8%. Interest expense will increase in 2010 as the Company plans to finance a
portion of its growth through the issuance of debt instruments. The Company will
also issue short-term and long-term notes as part consideration of planned
acquisitions.
FINANCING EXPENSES are costs associated with consultants hired to secure
additional debt and/or equity financing for the Company. Once equity financing
is secured the related cost will reduce the proceeds of the equity instrument
issued. Financing expense for 2010 decreased by $28,000 to $162,000 (2009 -
$190,000). The decrease was a result of the Company not issuing warrants to
secure customer premises equipment leasing arrangements during 2010 whereas the
Company recorded $190,000 in 2009 for warrants committed to be issued pursuant
to an equipment leasing arrangement. The financing expense relates to financial
consultants hired to assist the Company in raising capital..
GAIN ON SALE OF ASSETS, NET included a gain of $41,000 offset by an asset
write-off of $10,000. During 2010 the Company received $225,000 from a director
of the Company pursuant to a sale of towers to the director. The towers had a
net book value of $184,000 and the Company recorded a gain on sale of assets of
$41,000 (2009 - $nil). During 2010 the Company had written-off a $10,000
non-refundable deposit on a 2008 planned acquisition that did not complete.
OTHER INCOME included accounts payable written-off of $178,000 and a gain on
reversal of accounts receivable credits not used of $39,000 (2009 - $nil).
19
NET LOSS
The net loss for 2010 decreased by $100,000 to $2,487,000 (2009 - $2,637,000).
This decrease in loss was due to the 104% while expenses increased at a lower
rate and will continue to increase at an incrementally lower rate, as a
percentage of revenue, as we expand through acquisitions and organic growth. To
highlight this trend our net loss for quarter four of fiscal 2010 was $517,000
and our fourth quarter earnings before interest, income taxes, depreciation and
amortization ("EBITDA") was negative $17,000 ($1,186,000 for all of 2010).
LIQUIDITY AND CAPITAL RESOURCES
The Company completed its acquisition of Omnicity, Incorporated on February 17,
2009. Prior to this the Company was a dormant early exploration stage company
with no operations. Since then, the Company's acquisition and transition teams
have acquired and folded in ten WISP's increasing its subscriber base from 1,800
to 11,500 as at July 31, 2010. See discussion under "Revenues" above for our
increase in cash flow from our customers.
July 31, 2010 July 31, 2009
------------- -------------
$ $
Cash 39,000 159,000
Working Capital (Deficiency) (3,810,000) (2,585,000)
Total Assets 5,851,000 3,350,000
Total Liabilities 7,095,000 4,424,000
Stockholders' Deficit (1,244,000) (1,074,000)
Long-term debt principal repayments of $4,387,000 are due over the next five
years are as follows:
Year $ Year $
---- --- ---- ---
2011 1,455,000 2014 175,000
2012 1,135,000 2015 1,032,000
2013 189,000 Thereafter 401,000
CASH TO OPERATING ACTIVITIES
During the year ended 2010, operating activities used cash of $968,000 (2009 -
$1,131,000). Our loss for 2010 was $2,487,000 (2009 - $2,637,000), which
included a non-cash outlay for interest expense accreted of $61,000 (2009 -
$nil), a financing charge of $5,000 (2009 - $190,000, expenses settled with
equity or debt $179,000 (2009 - $82,000) an asset written-off of $10,000 (2009 -
$nil), a gain on accounts payable written-off of $144,000 (2009 - $nil), a gain
on sale of tower equipment of $41,000 (2009 - $nil), depreciation and
amortization of $845,000 (2009 - $536,000), and a non-cash stock based
compensation expense of $nil (2009 - $290,000); for a net cash outflow of
$1,622,000 (2009 - $1,539,000) before changes in working capital items. Our
accounts receivable have increased by $195,000 (2009 - $23,000) due to our
increase in customer base in Indiana during 2009 and Indiana and Ohio during
2010. Prepaid expenses decreased by $9,000 (2009 - $34,000). Our accounts
payable and accrued liabilities have increased by $851,000 (2009 - $484,000) due
to our operations being partially financed by our creditors. We plan to decrease
our reliance on creditor support as we secure additional financing.
CASH TO INVESTING ACTIVITIES
Our business is a capital intensive business. Since inception, the Company has
expended funds to lease or otherwise acquire transmission site rights in various
locations and markets, to construct the existing network tower infrastructures
and house drops to the customers' premises and to finance initial operating
losses. The Company intends to expand the existing systems and launch additional
wireless systems and will require additional funds. The Company estimates that a
launch by it of a wireless internet provider system in a typical new tower
location will involve the expenditures for wireless internet system transmission
equipment and incremental installation costs per subscriber for customer premise
equipment. As a result of these costs, operating losses are likely to be
incurred by a system during the roll-out period.
20
During 2010, investing activities used net cash of $2,159,000 (2009 - $146,000).
We acquired, through asset purchase agreements and equipment purchases, tower
and customers' premises equipment totaling $1,636,000, net of sale leaseback
proceeds of $225,000 (2009 - $165,000, net of sale leaseback proceeds of
$689,000). We acquired customers' relationships, through asset purchase
agreements, totaling $1,466,000; cash consideration was $518,000 and non-cash
consideration was $948,000.
CASH FROM FINANCING ACTIVITIES
During 2010, financing activities provided cash of $3,787,000 (2009 -
$1,662,000). Proceeds of $1,020,000 was received from common stock subscriptions
(2009 - $1,105,309). During 2010, proceeds of $602,000 (2009 - $411,000) were
received from short-term loans and $2,160,000 (2009 - $145,000) from long-term
debt. A total of $684,000 of short-term debt became long-term debt due to
renegotiations with note holders. We repaid $780,000 (2009 - $2,196,000) of
short-term debt, long-term debt and capital lease obligations.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this report, the Company and its subsidiary, Omnicity
Incorporated, do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
changes of financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to
investors.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
FAIR VALUE
The Company's financial instruments consist principally of notes payable and
convertible debentures. Notes payable and convertible debentures are financial
liabilities with carrying values that approximate fair value. The Company
determines the fair value of notes payable and convertible debentures based on
the effective yields of similar obligations. The Company believes all of the
financial instruments' recorded values approximate fair market value because of
their nature and respective durations.
The Company complies with the provisions of ASC 820, "FAIR VALUE MEASUREMENTS
AND DISCLOSURES" ("ASC 820"), previously referred to as SFAS No. 157. ASC 820
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements required under other accounting
pronouncements. ASC 820-10-35, "FAIR VALUE MEASUREMENTS AND DISCLOSURES -
SUBSEQUENT MEASUREMENT" ("ASC 820-10-35"), clarifies that fair value is an exit
price, representing the amount that would be received from the sale of an asset
or paid to transfer a liability in an orderly transaction between market
participants. ASC 820-10-35 also requires that a fair value measurement reflect
the assumptions market participants would use in pricing an asset or liability
based on the best information available. Assumptions include the risks inherent
in a particular valuation technique (such as a pricing model) and/or the risks
inherent in the inputs to the model. The Company also follows ASC 825 "INTERIM
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS", previously referred to
as FAS 107-1 to expand required disclosures.
ASC 820-10-35 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurement) and the lowest priority to unobservable inputs
(level 3 measurements). The three levels of the fair value hierarchy under ASC
820-10-35 are described below:
Level 1 - Valuations based on quoted prices in active markets for identical
assets or liabilities that an entity has the ability to access.
Level 2 - Valuations based on quoted prices for similar assets or liabilities,
quoted prices for identical assets or liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by observable
data for substantially the full term of the assets or liabilities.
Level 3 - Valuations based on inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
USE OF ESTIMATES
The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
21
the date of the financial statements and the reported amounts of revenue and
expenses in the reporting period. The Company regularly evaluates estimates and
assumptions related to the useful life and recoverability of long-lived assets,
stock-based compensation, and deferred income tax asset valuation allowances.
The Company bases its estimates and assumptions on current facts, historical
experience and various other factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and the accrual of costs and
expenses that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from the
Company's estimates. To the extent there are material differences between the
estimates and the actual results, future results of operations will be affected.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with maturities of three
months or less at the time of issuance to be cash equivalents. Amount due bank
represents checks written and released but not yet presented to the bank for
payment, effectively outstanding checks in excess of bank balances.
CONCENTRATION OF BUSINESS AND CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company reviews a
customer's credit history before extending credit. There were no individual
customers with balances in excess of 10% of the accounts receivable or net sales
balances at July 31, 2010 and 2009.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation based on
estimated useful lives utilizing the straight-line method. The Company
capitalizes costs associated with the construction of new transmission
facilities. Capitalized construction costs include materials, labor and
interest. The Company's methodology for capitalization of internal construction
labor and internal and contracted third party installation costs (including
materials) utilizes actual costs. Materials and external labor costs associated
with construction activities are capitalized based on amounts invoiced to the
Company by third parties.
Computers and wireless equipment also consists of spare equipment and supplies
not put in use such as radios, antennas, cable and wire and is stated at the
lower of cost (first-in, first-out basis) or market. The carrying value of such
equipment was $392,132 (2009 - $234,867). The spare electronic equipment is
maintained to provide replacement parts when and if needed in a short time
period to provide minimal service disruption to customers in the event of a
parts failure and to install new customers' premises equipment timely when
ordered. Spare equipment and supplies are not depreciated until put into use.
Improvements that extend asset lives are capitalized. Other repairs and
maintenance costs are charged to operations as incurred. Estimated useful lives
for property and equipment are as follows:
Description Life
- ----------- ----
Computer and wireless equipment 3 years
Towers and infrastructures 5 years
Furniture and fixtures 7 years
Vehicles 5 years
Software 3 years
The Company periodically evaluates the useful lives of its property and
equipment. The Company's property and equipment is reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability is measured by comparison of the
carrying amount to the future net undiscounted cash flows expected to be
generated by the related assets. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount the carrying value
exceeds the fair market value of the assets. No impairment was recorded at July
31, 2010 or 2009.
CUSTOMERS' RELATIONSHIPS
Customers' relationships represent the value attributed to customers'
relationships acquired in asset acquisitions and are amortized over a 7-year
period.
LONG-LIVED ASSETS
The Company evaluates property and equipment and amortizable intangible assets
for impairment whenever current events and circumstances indicate the carrying
amounts may not be recoverable. The evaluation of long-lived assets for
22
impairment requires a high degree of judgment and involves the use of
significant estimates and assumptions. If the carrying amount is greater than
the expected future undiscounted cash flows to be generated, the Company
recognizes an impairment loss equal to the excess, if any, of the carrying value
over the fair value of the asset. The Company generally measures fair value
based upon the present value of estimated future net cash flows of an asset
group over its remaining useful life.
FINANCIAL INSTRUMENTS
The fair value of financial instruments, which include cash and accounts
payable, were estimated to approximate their carrying values due to the
immediate or short-term maturity of these financial instruments. Foreign
currency transactions are primarily undertaken in Canadian dollars. The
financial risk is the risk to the Company's operations that arise from
fluctuations in foreign exchange rates and the degree of volatility of these
rates. Currently, the Company does not use derivative instruments to reduce its
exposure to foreign currency risk.
REVENUE RECOGNITION
The Company charges a recurring subscription fee for providing wireless
broadband services to its subscribers. Revenue from service is recognized as
monthly services are rendered in accordance with individual customer
arrangements. Credit risk is managed by disconnecting services to customers
whose accounts are delinquent for a specified number of days. Consistent with
SFAS No. 51, installation revenue obtained from the connection of subscribers to
the system is recognized in the period installation services are provided to the
extent of related direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period that customers are expected to
remain connected to the system. From time to time, the Company enters into
barter arrangements whereby it provides certain customers with wireless
broadband services in exchange for use of towers and equipment owned by
customers. Revenue and expenses recorded under barter arrangements was $99,336
(2009 - $66,851).
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the
provisions of SFAS No. 123(R), "SHARE BASED PAYMENTS". The Company measures the
cost of employee services in exchange for an award of equity instruments based
on the grant-date fair value. On January 2, 2009 the Company issued 1,655,009
Omnicity, Incorporated common shares valued at $289,629 to certain employees as
a performance bonus. There is no stock option plan adopted by the Board of
Directors.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding for the year. Diluted loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding plus common stock equivalents (if dilutive) related to stock options
and warrants for each year. There were no common equivalent shares outstanding
at April 30, 2010 and 2009 that have been included in dilutive loss per share
calculation as the effects would have been anti-dilutive. There were no common
equivalent shares outstanding at July 31, 2010 and 2009 that have been included
in dilutive loss per share calculation as the effects would have been
anti-dilutive. There are no stock options issued and outstanding as at July 31,
2010 and 2009. Total potentially dilutive common shares, relating to stock
purchase warrants issuable in the future, as at July 31, 2010 totals 10,666,730
including 5,614,929 common shares issuable on the exercise of warrants,
4,285,714 common shares issuable if the $1,500,000 convertible debenture is
converted into common shares at $0.35 per share and 766,087 common shares to be
issued in connection with the completion of two asset purchase agreements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act
and are not required to provide the information required under this item.
23
ITEM 8. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Omnicity Corp.
Rushville, Indiana
We have audited the accompanying consolidated balance sheets of Omnicity Corp.
("the Company") as of July 31, 2010 and 2009 and the related consolidated
statements of operations, changes in stockholders' deficit and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Omnicity Corp. as of July 31,
2010 and 2009, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and had negative
working capital as at July 31, 2010 that raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in the Note 1. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Weaver & Martin, LLC
- -----------------------------------
Weaver & Martin, LLC
Kansas City, Missouri
November 17, 2010
24
Omnicity Corp.
Consolidated Balance Sheets
As at July 31, 2010 and 2009
2010 2009
------------ ------------
$ $
(Restated - Note 17)
Assets
Current Assets:
Cash 39,405 159,119
Accounts receivable, net 273,387 78,007
Other receivable -- 5,000
Prepaid expenses and deposits 14,409 114,173
------------ ------------
Total Current Assets 327,201 356,299
Property and Equipment (Note 3) 2,425,092 1,022,675
Deposits and Other Assets (Note 4) 125,094 129,886
Customers' Relationships (Note 5) 2,973,713 1,841,247
------------ ------------
Total Assets 5,851,100 3,350,107
============ ============
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts payable 1,267,413 838,336
Accrued liabilities (Note 7) 398,410 276,563
Short-term notes payable (Note 8) 942,050 1,222,716
Current portion of long-term debt (Note 9) 1,455,137 511,521
Current portion of capital lease obligations (Note 13) 74,569 50,147
Deferred revenue -- 42,000
------------ ------------
Total Current Liabilities 4,137,579 2,941,283
Capital Lease Obligations (Note 13) 25,929 46,868
Long-term Debt (Note 9) 2,931,844 1,436,053
------------ ------------
Total Liabilities 7,095,352 4,424,204
------------ ------------
Nature of Operations and Continuance of Business (Note 1)
Commitments (Note 13)
Legal Proceedings (Note 15)
Stockholders' Deficit:
Common Stock, par value $.001, 1,540,000,000 shares
authorized, 43,445,418 and 38,018,382 issued and
outstanding, respectively (Note 11) 43,445 38,018
Common Stock Subscribed and/or Reserved (Note 11 (m)) 232,500 641,594
Additional Paid-in Capital 8,650,151 5,929,479
Deficit (10,170,348) (7,683,188)
------------ ------------
Total Stockholders' Deficit (1,244,252) (1,074,097)
------------ ------------
Total Liabilities and Stockholders' Deficit 5,851,100 3,350,107
============ ============
(See accompanying notes to these consolidated financial statements)
25
Omnicity Corp.
Consolidated Statements of Operations
For the Years Ended July 31, 2010 and 2009
2010 2009
---------- ----------
$ $
(Restated - Note 17)
Sales, net 3,475,828 1,684,350
---------- ----------
Expenses:
Service costs 225,876 30,712
Plant and signal delivery 1,511,067 967,406
Marketing and sales 17,806 45,375
General and administration 940,398 744,616
Salaries and benefits 2,128,760 1,276,016
Stock based compensation -- 289,629
Depreciation and amortization 845,083 536,113
---------- ----------
Total Expenses 5,668,990 3,889,867
---------- ----------
Loss from Operations (2,193,162) (2,205,517)
---------- ----------
Other Income (Expense):
Other income 216,667 --
Gain on sale of assets, net 30,719 --
Financing expense (Note 12 (a)) (166,416) (190,039)
Interest (374,968) (241,096)
---------- ----------
Total Other Income (Expense) (293,998) (431,135)
---------- ----------
Net Loss (2,487,160) (2,636,652)
========== ==========
Net Loss per Share - Basic and Diluted (.06) (.08)
========== ==========
Weighted Average Shares Outstanding -
Basic and Diluted 41,737,000 34,160,000
========== ==========
(See accompanying notes to these consolidated financial statements)
26
Omnicity Corp.
Consolidated Statement of Changes in Stockholders' Deficit
For The Years Ended July 31, 2010 and 2009
Additional Common
Common Paid-in Stock
Stock Amount Capital Subscribed Deficit Total
----- ------ ------- ---------- ------- -----
# $ $ $ $ $
Balance, July 31, 2008 (Restated - Note 15) 5,501,355 3,383,487 -- -- (5,046,536) (1,663,049)
Stock issued for cash on September 19, 2008 11,112 5,000 -- -- -- 5,000
Stock issued for cash on October 16, 2008 1,429 500 -- -- -- 500
Stock issued to settle debt on October 31, 2008 1,087,335 383,386 -- -- -- 383,386
Stock awards to employees on January 2, 2009 1,655,009 289,629 -- -- -- 289,629
Recapitalization Transactions - February 17, 2009 -- -- -- -- -- --
Shares acquired by Omnicity Corp. (8,256,240) (4,062,002) 4,062,002 -- -- --
Shares of Omnicity Corp. 43,967,007 43,967 (43,967) -- -- --
Cancellation of founders shares (33,880,000) (33,880) 33,880 -- -- --
Shares issued to shareholders of Omnicity,
Incorporated to effect the recapitalization 23,000,000 23,000 (23,000) -- -- --
Net liabilities assumed of Omnicity Corp. -- -- (168,352) -- -- (168,352)
Stock issued for acquisition of assets 1,973,988 1,974 890,726 -- -- 892,700
Stock issued for cash pursuant to a Unit and Unit for
debt private placement at $0.35 per Unit 2,607,387 2,607 909,978 -- -- 912,585
Stock issued pursuant to an investor relations contract 350,000 350 123,900 -- -- 124,250
Share issuance costs -- -- (52,595) -- -- (52,595)
Warrants issued pursuant to a Master Lease Agreement -- -- 196,907 -- -- 196,907
Asset acquisition consideration to be paid in common
shares as at July 31, 2010 -- -- -- 164,000 -- 164,000
Common stock subscribed for -- -- -- 477,594 -- 477,594
Net loss (Restated -Note 17) -- -- -- -- (2,636,652) (2,636,652)
----------- ----------- --------- -------- ----------- ----------
Balance, July 31, 2009 38,018,382 38,018 5,929,479 641,594 (7,683,188) (1,074,097)
Asset acquisition consideration paid in common shares
on August 18, 2009 229,855 230 163,770 (164,000) -- --
Asset acquisition consideration paid in common shares
on October 13, 2009 268,818 269 124,731 -- -- 125,000
Value of warrants issued on October 13, 2009 pursuant
to a Master Lease Agreement -- -- 63,132 -- -- 63,132
Stock issued on November 10, 2009 for cash pursuant to
a Unit private placement at $0.35 per Unit 4,000,000 4,000 1,396,000 (400,000) -- 1,000,000
Stock issued on November 13, 2009 for cash pursuant to
a Unit private placement at $0.35 per Unit 278,840 279 97,315 (77,594) -- 20,000
Value of warrants issued and a beneficial conversion
feature of a convertible debenture issued on
December 24, 2009 (Note 10 (h)) -- -- 659,873 -- -- 659,873
Stock issued on February 17, 2010 to acquire a vehicle 5,000 5 1,495 -- -- 1,500
Stock issued April 9, 2010 to settle debt 14,285 14 4,986 -- -- 5,000
Stock issued on April 26, 2010, at a fair value of
$0.303 per share pursuant to an investor relations
contract 165,000 165 49,835 -- -- 50,000
Stock issued on April 26, 2010, at a fair value of
$0.2857 per share pursuant to a website development
contract 70,000 70 19,930 -- -- 20,000
Stock issued on April 29, 2010 for debt settlement
pursuant to a Unit for debt private placement at
$0.35 per Unit 228,571 229 79,771 -- -- 80,000
Asset acquisition consideration paid on July 26, 2010 166,667 166 59,834 -- -- 60,000
Asset acquisition consideration to be paid as at
July 31, 2010 -- -- -- 232,500 -- 232,500
Net loss -- -- -- -- (2,487,160) (2,487,160)
----------- ----------- --------- -------- ----------- ----------
Balance, July 31, 2010 43,445,418 43,445 8,650,151 232,500 (10,170,348) (1,244,252)
=========== =========== ========= ======== =========== ==========
27
Omnicity Corp.
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2010 and 2009
2010 2009
---------- ----------
$ $
Cash flows from (to) operating activities:
Net loss (2,487,160) (2,636,652)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 845,085 536,113
Stock based compensation -- 289,629
Other income (143,653) --
Gain on sale of assets, net (30,719) --
Financing expense paid with equity 5,000 190,039
Interest expense accreted 60,562 --
Expenses settled with equity 179,000 60,157
Expenses settled through short-term borrowings -- 22,105
(Increase) decrease in:
Accounts and other receivable (195,380) (23,352)
Prepaid expenses (9,236) (34,289)
Increase (decrease) in:
Accounts payable and accrued liabilities 850,820 484,625
Customer deposits and unearned revenue (42,000) (20,000)
---------- ----------
Net cash used in operating activities (967,680) (1,131,625)
---------- ----------
Cash flows from (to) investing activities:
(Increase) in deposits (5,008) 19,677
Proceeds from sale leaseback of property and equipment 225,000 689,368
Customers' relationships acquired (518,036) --
Acquisition of property and equipment (1,861,188) (854,706)
---------- ----------
Net cash used in investing activities (2,159,432) (145,661)
---------- ----------
Cash flows from (to) financing activities:
Proceeds from short-term notes 602,000 411,000
Repayment of short-term notes (200,017) (128,173)
Related party repayment (advance) 5,000 (5,000)
Repayment of bank borrowings -- (909)
Proceeds from long-term debt 2,160,000 145,000
Repayment of long-term debt and capital lease obligations (579,585) (90,822)
Proceeds from issuance of common stock, net of issuance costs 1,020,000 627,715
Proceeds from common stock subscriptions -- 477,594
---------- ----------
Net cash provided by financing activities 3,007,398 1,436,405
---------- ----------
(Decrease) increase in cash (119,714) 159,119
Cash, beginning of year 159,119 --
---------- ----------
Cash, end of year 39,405 159,119
========== ==========
Supplemental cash flow information:
Cash paid for interest 202,422 52,711
Cash paid for income taxes -- --
========== ==========
Supplemental disclosure of non-cash investing and financing activities:
Net liabilities assumed in corporate reorganization -- (168,352)
Customer relationships acquired in exchange for debt and common stock 948,430 1,117,645
Equipment acquired pursuant to debt and equity agreements 236,595 6,800
Conversion of short-term debt into equity 80,000 409,421
Warrants issued pursuant to a financing arrangement -- 196,907
(See accompanying notes to these consolidated financial statements)
28
Omnicity Corp.
Notes to the Consolidated Financial Statements
1. Nature of Operations and Continuance of Business
The Company was incorporated as Bear River Resources, Inc. in the State of
Nevada on October 12, 2006 and was registered as an extra-provincial company
under the Business Corporations Act of British Columbia on November 6, 2006. On
October 21, 2008 the Company changed its name to Omnicity Corp.
On February 17, 2009, the Company acquired all of the issued and outstanding
shares of Omnicity, Incorporated. Omnicity, Incorporated (incorporated on August
13, 2003) provides broadband access, including advanced services of voice, video
and data, in un-served and underserved small and rural markets and is planning
to be a consolidator of rural market broadband nationwide. The total purchase
price was 23,000,000 common shares of the Company.
These financial statements have been prepared on a going concern basis, which
implies the Company will continue to realize its assets and discharge its
liabilities in the normal course of business. The Company has generated
substantial revenues but has sustained losses since inception and has never paid
any dividends and is unlikely to pay dividends in the immediate or foreseeable
future. The continuation of the Company as a going concern is dependent upon the
ability of the Company to obtain necessary debt and/or equity financing to fund
its growth strategy, pay debt when due, to continue operations, and to attain
profitability. As at July 31, 2010, the Company had a working capital deficit of
$3,810,378 and a stockholders' deficit of $1,278,121. All of these factors
combined raises substantial doubt regarding the Company's ability to continue as
a going concern. These financial statements do not include any adjustments to
the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Although the Company is operationally cash flow positive as at July 31, 2010,
the Company must continue to address its liquidity and working capital issues.
The Company continues to raise additional capital through the issuance of
short-term and long-term debt and equity to private investors to maintain its
aggressive acquisition strategy, increase its organic growth and to repay
principal and interest when due. Management believes this additional capital and
the expanded customer base through acquisitions and organic growth will provide
the Company the opportunity to increase its operational cash flow and ultimately
to be profitable over the next twelve months.
2. Significant Accounting Policies
RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS
On July 1, 2009, the Financial Accounting Standards Board ("FASB") officially
launched the FASB ASC 105 -- GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, which
established the FASB Accounting Standards Codification ("the Codification"), as
the single official source of authoritative, nongovernmental, U.S. GAAP, in
addition to guidance issued by the Securities and Exchange Commission. The
Codification is designed to simplify U.S. GAAP into a single, topically ordered
structure. All guidance contained in the Codification carries an equal level of
authority. The Codification is effective for interim and annual periods ending
after September 15, 2009. Accordingly, the Company refers to the Codification in
respect of the appropriate accounting standards throughout this document as
"FASB ASC". Implementation of the Codification did not have any impact on the
Company's consolidated financial statements.
The following FASB pronouncements have been adopted by the Company during the
twelve months ended July 31, 2010:
Effective November 1, 2009, the Company adopted the FASB ASC "Fair Value
Measurements and Disclosures" guidance with respect to recurring financial
assets and liabilities. Effective November 1, 2009, the Company adopted the FASB
ASC "Fair Value Measurements and Disclosures" guidance as it relates to
nonrecurring fair value measurement requirements for nonfinancial assets and
liabilities. The ASC guidance defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosure about fair value
measurements. The adoption of the standard had no impact on the Company's
financial statements.
On June 30, 2009, FASB issued Accounting Standard Update (ASU) No. 2009-01
(Topic 105) - Generally Accepted Accounting Principles - amendments based on -
Statement of Financial Accounting Standards No. 168 "The FASB Accounting and
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles". Beginning with this Statement FASB will no longer issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standard Updates. This
ASU includes FASB Statement No. 168 in its entirety. While ASU's will not be
29
considered authoritative in their own right, they will serve to update the
Codification, provide the bases for conclusions and changes in the Codification,
and provide background information about the guidance. The Codification modifies
the GAAP hierarchy to include only two levels of GAAP: authoritative and
non-authoritative. ASU No. 2009-01 became effective for the Company's quarter
ended October 31, 2009. Implementation of this Standard did not have any impact
on the Company's financial statements.
In August 2009, FASB issued ASU No. 2009-05 - Fair Value Measurements and
Disclosures (Topic 820) - Measuring Liabilities at Fair Value. This ASU
clarifies the fair market value measurement of liabilities. In circumstances
where a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using one or
more of the following techniques: a technique that uses quoted price of the
identical or a similar liability or liabilities when traded as an asset or
assets, or another valuation technique that is consistent with the principles of
Topic 820 such as an income or market approach. ASU No. 2009-05 was effective
upon issuance and it did not result in any significant financial impact on the
Company upon adoption.
In September 2009, FASB issued ASU No. 2009-12 - Fair Value Measurements and
Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net
Asset Value per Share (or its equivalent). This ASU permits use of a practical
expedient, with appropriate disclosures, when measuring the fair value of an
alternative investment that does not have a readily determinable fair value. ASU
No. 2009-12 became effective for the Company's quarter ended January 31, 2010.
Since the Company does not currently have any such investments, the adoption of
the ASU did not have any significant financial impact on the Company's financial
statements.
In January 2010, FASB issued ASU No. 2010-06 regarding fair value measurements
and disclosures and improvement in the disclosure about fair value measurements.
This ASU requires additional disclosures regarding significant transfers in and
out of Levels 1 and 2 of fair value measurements, including a description of the
reasons for the transfers. This section of the ASU is effective for interim and
annual reporting periods beginning after December 15, 2009 Further, this ASU
requires additional disclosures for the activity in Level 3 fair value
measurements, requiring presentation of information about purchases, sales,
issuances, and settlements in the reconciliation for fair value measurements.
This section of the ASU is effective for interim and annual reporting periods
beginning after December 15, 2010. The adoption of this ASU did not have a
material impact on its financial statements.
In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events
and amendments to certain recognition and disclosure requirements. Under this
ASU, a public company that is a SEC filer, as defined, is not required to
disclose the date through which subsequent events have been evaluated. This ASU
is effective upon issuance. The adoption of this ASU did not have a material
impact on its financial statements.
Other recently issued ASC guidance has either been implemented or are not
significant to the Company.
FAIR VALUE
The Company's financial instruments consist principally of notes payable and
convertible debentures. Notes payable and convertible debentures are financial
liabilities with carrying values that approximate fair value. The Company
determines the fair value of notes payable and convertible debentures based on
the effective yields of similar obligations. The Company believes all of the
financial instruments' recorded values approximate fair market value because of
their nature and respective durations.
The Company complies with the provisions of ASC 820, "FAIR VALUE MEASUREMENTS
AND DISCLOSURES" ("ASC 820"), previously referred to as SFAS No. 157. ASC 820
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements required under other accounting
pronouncements. ASC 820-10-35, "FAIR VALUE MEASUREMENTS AND DISCLOSURES -
SUBSEQUENT MEASUREMENT" ("ASC 820-10-35"), clarifies that fair value is an exit
price, representing the amount that would be received from the sale of an asset
or paid to transfer a liability in an orderly transaction between market
participants. ASC 820-10-35 also requires that a fair value measurement reflect
the assumptions market participants would use in pricing an asset or liability
based on the best information available. Assumptions include the risks inherent
in a particular valuation technique (such as a pricing model) and/or the risks
inherent in the inputs to the model. The Company also follows ASC 825 "INTERIM
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS", previously referred to
as FAS 107-1 to expand required disclosures.
ASC 820-10-35 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
30
liabilities (level 1 measurement) and the lowest priority to unobservable inputs
(level 3 measurements). The three levels of the fair value hierarchy under ASC
820-10-35 are described below:
Level 1 - Valuations based on quoted prices in active markets for identical
assets or liabilities that an entity has the ability to access.
Level 2 - Valuations based on quoted prices for similar assets or liabilities,
quoted prices for identical assets or liabilities in markets that are not
active, or other inputs that are observable or can be corroborated by observable
data for substantially the full term of the assets or liabilities.
Level 3 - Valuations based on inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
BASIS OF PRESENTATION
These financial statements and related notes are presented in accordance with
accounting principles generally accepted in the United States, and are expressed
in US dollars. The Company's fiscal year-end is July 31. These financial
statements include the accounts of the Company's wholly-owned Indiana operating
subsidiary, Omnicity, Incorporated.
USE OF ESTIMATES
The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses in the reporting period. The Company regularly evaluates estimates and
assumptions related to the useful life and recoverability of long-lived assets,
stock-based compensation, and deferred income tax asset valuation allowances.
The Company bases its estimates and assumptions on current facts, historical
experience and various other factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and the accrual of costs and
expenses that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from the
Company's estimates. To the extent there are material differences between the
estimates and the actual results, future results of operations will be affected.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with maturities of three
months or less at the time of issuance to be cash equivalents. Amount due bank
represents checks written and released but not yet presented to the bank for
payment, effectively outstanding checks in excess of bank balances.
CONCENTRATION OF BUSINESS AND CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company reviews a
customer's credit history before extending credit. There were no individual
customers with balances in excess of 10% of the accounts receivable or net sales
balances at July 31, 2010 and 2009.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an allowance for doubtful accounts based on specifically
identified amounts that are believed to be uncollectible. An additional
allowance is recorded based on certain percentages of aged receivables, which
are determined based on historical experience and assessment of the general
financial conditions affecting the Company's customer base. If actual
collections experience changes, revisions to the allowance may be required.
After all attempts to collect a receivable have failed, the receivable is
written-off against the allowance. The allowance for doubtful accounts was
$10,000 at July 31, 2010 and 2009.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation based on
estimated useful lives utilizing the straight-line method. The Company
capitalizes costs associated with the construction of new transmission
facilities. Capitalized construction costs include materials, labor and
interest. The Company's methodology for capitalization of internal construction
labor and internal and contracted third party installation costs (including
materials) utilizes actual costs. Materials and external labor costs associated
with construction activities are capitalized based on amounts invoiced to the
Company by third parties.
31
Computers and wireless equipment also consists of spare equipment and supplies
not put in use such as radios, antennas, cable and wire and is stated at the
lower of cost (first-in, first-out basis) or market. The carrying value of such
equipment was $392,132 (2009 - $234,867). The spare electronic equipment is
maintained to provide replacement parts when and if needed in a short time
period to provide minimal service disruption to customers in the event of a
parts failure and to install new customers' premises equipment timely when
ordered. Spare equipment and supplies are not depreciated until put into use.
Improvements that extend asset lives are capitalized. Other repairs and
maintenance costs are charged to operations as incurred. Estimated useful lives
for property and equipment are as follows:
Description Life
- ----------- ----
Computer and wireless equipment 3 years
Towers and infrastructures 5 years
Furniture and fixtures 7 years
Vehicles 5 years
Software 3 years
The Company periodically evaluates the useful lives of its property and
equipment. The Company's property and equipment is reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability is measured by comparison of the
carrying amount to the future net undiscounted cash flows expected to be
generated by the related assets. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount the carrying value
exceeds the fair market value of the assets. No impairment was recorded at July
31, 2010 or 2009.
CUSTOMERS' RELATIONSHIPS
Customers' relationships represent the value attributed to customers'
relationships acquired in asset acquisitions and are amortized over a 7-year
period.
LONG-LIVED ASSETS
The Company evaluates property and equipment and amortizable intangible assets
for impairment whenever current events and circumstances indicate the carrying
amounts may not be recoverable. The evaluation of long-lived assets for
impairment requires a high degree of judgment and involves the use of
significant estimates and assumptions. If the carrying amount is greater than
the expected future undiscounted cash flows to be generated, the Company
recognizes an impairment loss equal to the excess, if any, of the carrying value
over the fair value of the asset. The Company generally measures fair value
based upon the present value of estimated future net cash flows of an asset
group over its remaining useful life.
FINANCIAL INSTRUMENTS
The fair value of financial instruments, which include cash and accounts
payable, were estimated to approximate their carrying values due to the
immediate or short-term maturity of these financial instruments. Foreign
currency transactions are primarily undertaken in Canadian dollars. The
financial risk is the risk to the Company's operations that arise from
fluctuations in foreign exchange rates and the degree of volatility of these
rates. Currently, the Company does not use derivative instruments to reduce its
exposure to foreign currency risk.
FOREIGN CURRENCY TRANSACTIONS
The Company's functional and reporting currency is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are translated
using the exchange rate prevailing at the balance sheet date. Gains and losses
arising on settlement of foreign currency denominated transactions or balances
are included in the determination of income. Foreign currency transactions are
minimal but primarily undertaken in Canadian dollars. The Company has not, to
the date of these financials statements, entered into derivative instruments to
offset the impact of foreign currency fluctuations.
REVENUE RECOGNITION
The Company charges a recurring subscription fee for providing wireless
broadband services to its subscribers. Revenue from service is recognized as
monthly services are rendered in accordance with individual customer
arrangements. Credit risk is managed by disconnecting services to customers
whose accounts are delinquent for a specified number of days. Consistent with
SFAS No. 51, installation revenue obtained from the connection of subscribers to
the system is recognized in the period installation services are provided to the
extent of related direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period that customers are expected to
remain connected to the system. From time to time, the Company enters into
32
barter arrangements whereby it provides certain customers with wireless
broadband services in exchange for use of towers and equipment owned by
customers. Revenue and expenses recorded under barter arrangements was $99,336
(2009 - $66,851).
ADVERTISING COSTS
The Company incurs advertising costs in the normal course of business, which are
expensed as incurred. Advertising costs were $6,473 (2009 - $3,459).
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the
provisions of SFAS No. 123(R), "SHARE BASED PAYMENTS". The Company measures the
cost of employee services in exchange for an award of equity instruments based
on the grant-date fair value. On January 2, 2009 the Company issued 1,655,009
Omnicity, Incorporated common shares valued at $289,629 to certain employees as
a performance bonus. There is no stock option plan adopted by the Board of
Directors.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding for the year. Diluted loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding plus common stock equivalents (if dilutive) related to stock options
and warrants for each year. There were no common equivalent shares outstanding
at July 31, 2010 and 2009 that have been included in dilutive loss per share
calculation as the effects would have been anti-dilutive. There are no stock
options issued and outstanding as at July 31, 2010 and 2009. Total potentially
dilutive common shares, relating to stock purchase warrants issuable in the
future, as at July 31, 2010 totals 10,666,730 including 5,614,929 common shares
issuable on the exercise of warrants, 4,285,714 common shares issuable if the
$1,500,000 convertible debenture is converted into common shares at $0.35 per
share and 766,087 common shares to be issued in connection with the completion
of two asset purchase agreements.
3. Property and Equipment
Property and equipment consists of the following:
2010 2009
---------- ----------
$ $
Computer and wireless equipment 1,094,215 320,041
Tower equipment, infrastructures and house drops 1,441,707 768,643
Fiber build-out and test equipment 121,601 --
Furniture and fixtures 74,562 44,959
Vehicles 168,629 74,529
Software 78,841 42,183
---------- ----------
2,979,555 1,250,355
Less: accumulated depreciation (961,595) (462,547)
---------- ----------
2,017,960 787,808
Land 15,000 --
Network replacement parts not put in use 392,132 234,867
---------- ----------
Property and equipment, net 2,425,092 1,022,675
========== ==========
4. Deposits and Other Assets
Deposits and other assets consist of the following:
2010 2009
-------- --------
$ $
Non-refundable deposits -- 10,000
Operating lease deposits 86,682 86,682
Other long-term deposits 38,412 33,204
-------- --------
125,094 129,886
======== ========
33
5. Customers' Relationships
The carrying value of customers' relationships acquired consists of:
2010 2009
---------- ----------
$ $
Capitalized value 3,406,167 1,939,700
Less: accumulated amortization (432,454) (98,453)
---------- ----------
Customers' relationships, net 2,973,713 1,841,247
========== ==========
6. Acquisitions
a) NDWave, LLC (Indiana)
On February 26, 2009 the Company acquired the customers' relationships and
telecommunication network and system assets of NDWave, LLC, located in Anderson
County, Indiana, pursuant to an Asset Purchase Agreement dated October 7, 2008
and amended February 26, 2009. The total purchase price was $1,000,000.
Consideration was $135,000 cash, $365,000 note payable at 5% and $500,000 to be
paid in common shares. The number of common shares was determined based on the
15 trading day average closing price of the Company's common shares prior to
April 27, 2009, being $0.35. The total number of common shares issued on April
28, 2009 was 1,428,571. The purchase price was allocated $375,000 to property
and equipment and $625,000 to customers' relationships based on the relative
fair values of the assets acquired.
b) Cue Connex, LLC (Indiana)
On April 1, 2009 the Company acquired the customers' relationships of Cue
Connex, LLC, located in Hartford City, Indiana, pursuant to an Asset Purchase
Agreement dated March 18, 2009. The total purchase price was $99,000.
Consideration was $10,000 cash and $89,000 to be paid in common shares. The
number of common shares was determined based on the 15 trading day average
closing price of the Company's common shares prior to May 30, 2009, being
$0.733. The total number of common shares issued on August 18, 2009 was 121,474.
The purchase price was allocated $99,000 to customers' relationships.
c) ForePoint Networks, LLC (Indiana)
On March 31, 2009 the Company acquired the customers' relationships and
telecommunication network and system assets of ForePoint Networks, LLC, located
in Lafayette, Indiana, pursuant to an Asset Purchase Agreement dated October,
2008 and amended March 25, 2009. The total purchase price was $1,225,700.
Consideration was $332,200 cash, $499,800 note payable at 5% and $392,700 paid
in common shares. The number of common shares was determined based on the 15
trading day average closing price of the Company's common shares prior to May
30, 2009, being $0.72. The total number of common shares issued on June 9, 2009
was 545,417. The purchase price was allocated $285,000 to property and equipment
and $940,700 to customers' relationships based on the relative fair values of
the assets acquired.
d) North Central Communications, Inc. (Indiana)
On April 30, 2009 the Company acquired the customers' relationships and
telecommunication network and system assets of North Central Communications,
Inc., located in Peru, Indiana, pursuant to an Asset Purchase Agreement dated
October 30, 2008 and amended April 24, 2009. The total purchase price was
$350,000. Consideration was $14,000 cash, $199,000 in notes payable at 5%, and
the assumption of SBA loans totaling $62,000 and $75,000 paid in common shares.
The number of common shares was determined based on the 15 trading day average
closing price of the Company's common shares prior to June 30, 2009, being
$0.692. The total number of common shares issued on August 18, 2009 was 108,381.
The purchase price was allocated $75,000 to property and equipment and $275,000
to customers' relationships based on the relative fair values of the assets
acquired.
e) Rushville Internet Services LLC (Indiana)
On May 23, 2009 the shareholders of Rushville Internet Services LLC ("RIS")
agreed to wind-up RIS and sell its assets to the Company for $125,000. The
Company received their assets, being wireless equipment and tower
infrastructures, having a fair value of $68,706, and to settle inter-company
34
debt of $56,294. On October 13, 2009 the Company issued 268,818 restricted
common shares to the shareholders of RIS at a fair value of $0.465 per common
share.
f) AAA Wireless, Inc. (Indiana)
On January 7, 2010 the Company acquired the telecommunication network and system
assets of AAA Wireless, Inc. The total purchase price was $493,545, which was
paid in cash. The purchase price was allocated as follows: land - $15,000;
towers, infrastructures and house and school drops - $315,232; automobiles -
$16,500; and computer and wireless equipment including spare parts - $146,813.
No value was placed on customers' relationships as these relationships had to be
renewed through the efforts of the Company. The purchase price allocation was
based on relative fair market values of all of the assets acquired.
g) Clinton County Wireless, LLC (Indiana)
On January 14, 2010 the Company acquired the customers' relationships and
telecommunication network and system assets of Clinton County Wireless, LLC,
located in Clinton County, Indiana. The total purchase price was $60,000 to be
paid in common shares. The number of common shares was determined based on the
15 trading day average closing price of the Company's common shares prior to
March 15, 2010, being $0.36. The total number of common shares on July 26, 2010
was 166,667. The purchase price was allocated $10,000 to property and equipment
and $50,000 to customers' relationships based on the relative fair values of the
assets acquired.
h) USppp, Inc. (Indiana)
On March 23, 2010 the Company acquired the customers' relationships and
telecommunication network and system assets of USppp, Inc., located in Decatur,
Indiana. The total purchase price was $225,000. Consideration was $55,000 cash,
$20,000 payable upon receiving certain deliverables, a long-term 5% note for
$67,500 and $82,500 to be paid in common shares. The number of common shares was
determined based on the 15 trading day average closing price of the Company's
common shares prior to May 22, 2010, being $0.3167. The total number of common
shares to be issued is 260,526; these shares have not yet been issued. The
purchase price was allocated $140,000 to telecommunication network assets and
$85,000 to customers' relationships based on the relative fair values of the
assets acquired.
i) Bright Choice, Inc. (Ohio)
On March 31, 2010 the Company acquired the customers' relationships and
telecommunication network and system assets of Bright Choice, Inc., a subsidiary
of Consolidated Electric Cooperative, a rural electric cooperative located in
North Central Ohio. The total purchase price was $231,050. Consideration was
$220,000 cash and a 5% note for $11,050. The purchase price was allocated
$126,400 to telecommunication network and system assets, $48,600 to vehicles and
$56,050 to customers' relationships based on the relative fair values of the
assets acquired.
j) Digital Solutions Network, Inc. dba Lightspeed Wireless (Ohio)
On April 22, 2010 the Company acquired the customers' relationships and
telecommunication network and system assets of Lightspeed Wireless located in
Berlin, Ohio. The total purchase price was $1,400,000. Consideration was
$700,000 cash, a note payable of $50,000 and a long-term 6% note payable for
$500,000 and $150,000 to be paid in common shares. The number of common shares
will be determined based on the 15 trading day average closing price of the
Company's common shares prior to June 21, 2010 being $0.2967 per common share. A
total of 505,561 common shares are to be issued; these shares are not yet
issued. The purchase price was allocated $237,000 to telecommunication network
and system assets, $13,000 to vehicles and $1,150,000 to customers'
relationships based on the relative fair values of the assets acquired.
7. Accrued Liabilities
2010 2009
-------- --------
$ $
Accrued interest 184,838 65,822
Commitment to issue warrants pursuant to
equipment leasing arrangement -- 63,132
Due to Rushville Internet Services, LLC -- 56,294
Payroll and severance liabilities 177,090 55,486
Real property and sales taxes and other accruals 36,482 35,829
-------- --------
398,410 276,563
======== ========
35
8. Short-term Notes Payable
2010 2009
---------- ----------
$ $
Notes payable, due on demand, unsecured and bearing interest
at rates between 8% and 9.5% per annum (a $30,000 note does
not bear interest) 340,000 223,500
Notes payable to the Chairman of the Board of the Company
and a company beneficially owned bearing interest at 8% per annum 35,000 8,416
Note payable due to a company controlled by a director, due
January 1, 2011, unsecured and bearing interest at 9% per annum
with interest payable quarterly 150,000 --
Note payable due to a director, unsecured, due on September 27, 2010
and bearing interest at 8% per annum. This note was renewed and is
now due on March 27, 2011 30,000 --
Vendor Note, unsecured and bearing interest at 5% per annum.
See Note 15 for legal proceedings 326,000 365,000
Vendor Notes, unsecured and bearing interest at 5% per annum.
These notes were re-negotiated into long-term debt, see Note 9 -- 625,800
Vendor Note, unsecured, bearing interest at 5% and repayable
in 4 quarterly installments of $2,762 plus interest with first
payment due September 28, 2010 11,050 --
Vendor Note, unsecured, non-interest bearing and due on August 20, 2010.
See Note 15 for legal proceedings 50,000 --
---------- ----------
942,050 1,222,716
========== ==========
9. Long-term Debt
2010 2009
---------- ----------
$ $
Notes payable to Jay County Development Corporation
Non-interest bearing, repayable monthly based on the
number of subscribers in Jay County, Indiana
Collateralized by certain equipment located in Jay County
Principal is currently repayable at $500 per month 291,411 296,911
Notes payable to Wabash Rural Electric Membership Cooperative
("Wabash"). Six separate notes were renewed pursuant to
a Memorandum of Understanding effective September 24, 2009
Interest rates are between 5.7% and 7.45% annually and are
collateralized by certain equipment in Wabash County,
Indiana 590,247 629,388
Note payable to Muncie Industrial Revolving Loan Fund Board
Repayable in monthly installments of principal and interest
of $4,570, matures on December 13, 2011, at which time the
loan will be reviewed by Muncie's Board of Directors
This note is collateralized by certain equipment in Muncie
County and Delaware County, Indiana 249,225 283,741
Note payable to Star Financial Bank. Interest is paid monthly
at 8.6% per annum. This note was due February 1, 2010. This
loan is collateralized by certain equipment and is guaranteed
by the State of Indiana as to 80% of the loan 187,846 193,170
Notes payable to First Farmers Trust & Bank. These notes were
repaid in full -- 43,076
Unsecured notes payable to the Chairman of the Company, the
son of the Chairman of the Company and to companies controlled
by the Chairman. (See Note 10 (d) for repayments over the
next five years) 210,755 217,663
Convertible 8% debenture having a face value of $1,500,000
issued to a director including warrants to acquire up to
1,500,000 common shares at $0.50 per share expiring
December 24, 2014. The debenture is convertible into common
shares at a price of $0.35 per common share up to
December 24, 2014. (See Note 10 (h)) 900,689 --
36
Unsecured notes payable to a director of the Company, interest
only at 8% and maturing April 2012 470,000 --
Unsecured notes payable to a director of the Company
Repayable in monthly installments of principal and interest
totaling $4,613. Interest is 10% per annum 59,644 102,733
Debentures, 8% interest paid quarterly of which $20,000 is
due to a director of the Company. Various maturities between
January, 2011 and June, 2012 190,000 20,000
Unsecured vendor and investor notes payable with monthly
or quarterly payments of principal and interest ranging
from 5% to 10%. (See Note 15 for two long-term vendor notes
that are subject to legal proceedings) 1,237,164 160,892
---------- ----------
Total 4,386,981 1,947,574
Less: current portion 1,455,137 511,521
---------- ----------
Long-term portion 2,931,844 1,436,053
========== ==========
Long-term debt principal repayments due over the next five years are as follows:
Year $ Year $
---- --------- ---- ---------
2011 1,455,137 2014 174,616
2012 1,135,441 2015 1,032,311
2013 188,960 Thereafter 400,516
10. Related Party Transactions and Balances
a) Included in accrued liabilities at July 31, 2009 was $56,294 owing to
Rushville Internet Services, LLC ("RIS") which represented amounts due to RIS
under certain lease agreements. The Company and RIS have shareholders in common.
The shareholders of RIS agreed to wind-up RIS and sell its assets to the Company
for $125,000. The Company received their assets, being wireless equipment and
tower infrastructures, having a fair value of $68,706, and to settle
inter-company debt of $56,294. All shareholders of RIS accepted to receive
restricted common shares of the Company. On October 13, 2009 the Company issued
268,818 common shares to the shareholders of RIS at a fair value of $0.465 per
common share.
b) The Company's capital lease obligations relate to assets leased from the
Chairman of the Company or a company beneficially owned by the Chairman of the
Company, totaling $58,186 (July 31, 2009 - $97,015 (See Note 13).
c) The Wabash Rural Electric Membership Cooperative's ("Wabash") Chief Executive
Officer was a director of the Company up until his resignation on July 26, 2010.
See Note 9 for notes owing to Wabash.
d) Unsecured notes payable to the Chairman of the Company and the son of the
Chairman of the Company and to companies controlled by the Chairman, total
$245,755 (July 31, 2009 - $217,663). During 2009 the Chairman of the Board
converted a $150,000 short-term note plus accrued interest into common stock of
Omnicity, Incorporated prior to the reverse merger on February 17, 2009. A total
of $30,000 is repayable on October 15, 2010, $5,000 is repayable over twelve
months ending July 31, 2011, and $210,755 is repayable in monthly installments
of principal and interest at 8% as follows:
$
------
2011 78,913
2012 57,605
2013 37,317
2014 36,920
e) During 2009 a director and two companies controlled by two directors
subscribed for 499,886 Units at $0.35 per Unit and received 499,886 common
shares and warrants to acquire a further 249,943 common shares at $0.50 per
share expiring May 8, 2011.
f) On October 20, 2009 the Company received $1,000,000 from a director and major
shareholder in addition to $400,000 received on July 3, 2009. On October 20,
2009 the director subscribed for 4,000,000 units at $0.35 per unit. These units
were issued on November 10, 2009. Each unit contained one common share and one
half of one common share purchase warrant. Each whole warrant is exercisable
into one common share at an exercise price of $0.50 per share expiring November
10, 2011.
37
g) On November 23, 2009 the Company received $150,000 from a company controlled
by a director of the Company and issued a promissory note due January 1, 2011,
which is unsecured and bears interest at 9% per annum with interest payable
quarterly. The Company is also indebted to the director in the amount of $20,000
which is secured by a debenture which bears interest at 8% per annum, interest
paid quarterly and due January 2, 2011. The director can request settlement in
common shares or cash on the maturity date. During 2009 a company owned 1/3 by a
director loaned the Company $15,000 which was repaid during 2009 including
$1,500 of bonus interest.
h) On December 24, 2009 the Company received $1,500,000 from a director and
major shareholder of the Company and issued a convertible debenture having a
face value of $1,500,000, plus warrants to acquire up to 1,500,000 common shares
at $0.50 per share expiring December 24, 2014. This convertible debenture
accrues interest at 8% per annum and principal and interest is convertible into
common shares at a price of $0.35 per common share up to December 24, 2014 being
the maturity date. The Company discounted this debenture by $222,794 being the
relative fair market value of the beneficial conversion feature. The Company
also valued the warrants at $437,079 being the relative fair value of the
warrants. The value of the warrants was discounted from the face value of the
debenture. The total discounted value of the debenture, being $840,127, is being
accreted up to its face value to maturity, being December 24, 2014. Total
accreted interest expense for the period ended July 31, 2010 is $60,562 and
accrued interest as at July 31, 2010 is $71,753.
i) In April, 2010 the Company received $500,000 from a director to close two
acquisitions. Two notes, totaling $470,000 are unsecured, bear interest at 8%
per annum and mature in April 2012. A $30,000 note is unsecured, bears interest
at 8% per annum and is due September 27, 2010. During the year this director
loaned $100,000 on a short-term basis and was repaid including a $10,000 bonus
interest payment 90 days later. The Company is also indebted to this same
director as at July 31, 2010 pursuant to two long-term notes payable totaling
$59,644 (2009 - $102,733). These two notes are repayable as follows:
$
------
2011 48,717
2012 10,927
j) On April 20, 2010 the Company received $225,000 from a director of the
Company pursuant to a sale of towers to the director. The towers had a net book
value of $184,281 and the Company recorded a gain on sale of assets of $40,719.
11. Common Stock
a) On October 21, 2008 the Company increased, by way of a stock dividend, its
issued share capital on a 7.7 new for 1 old basis. There were 43,967,007 common
shares outstanding after the forward split. As part of a stock dividend the
Company also increased its authorized share capital to 1,540,000,000 common
shares.
b) On February 17, 2009, the Company acquired, by way of an Agreement and Plan
of Merger, all of the issued and outstanding shares of Omnicity, Incorporated,
an Indiana company (See Note 1). The Company issued a total of 23,000,000
post-forward split restricted common shares of the Company to the shareholders
of Omnicity, Incorporated for 100% of Omnicity, Incorporated. In addition, the
Company caused 33,880,000 founders' post-forward split common shares of the
Company to be cancelled leaving 33,087,007 post-forward split common shares
issued and outstanding as at February 17, 2009.
c) On April 29, 2009 and June 9, 2009 the Company issued a total of 1,973,988
common shares of the Company at an average fair value of $0.45 per common share,
totaling $892,700, to acquire tower infrastructures, wireless equipment and
customers' relationships.
d) In May and June, 2009 the Company issued a total of 2,607,387 Units of the
Company at $0.35 per Unit pursuant to Unit and Unit for Debt Private Placement
Offerings. Each Unit contained one common share and one-half of one share
purchase warrant. Each whole warrant is exercisable into one common share at
$0.50 per share expiring two years after issuance. A total of $912,585 was
received ($674,810 of cash and $237,775 of debt settled) pursuant to Unit and
Unit for Debt Subscription Agreements. A total of $52,595 of legal expenses was
netted against this offering for total net proceeds of $859,990.
e) On June 1, 2009 the Company entered into an agreement with Onyx Consulting
Group, LLC ("Onyx") to manage all aspects of the Company's investor and media
relations program. The Company paid a fee to Onyx in the amount of $40,000 for
the period June 1, 2009 to November 30, 2009 and issued 350,000 common shares of
the Company having a fair value of $0.355 per common share or $124,250 in total.
38
The Company charged $55,250 as an expense in 2009 and $109,000 in 2010. The
Company is considering seeking an injunction on these shares issued due to non
performance of their contract.
f) On August 18, 2009, pursuant to two completed Asset Purchase Agreements, the
Company issued 229,855 common shares having a fair value of $0.71 per share,
totaling $164,000, to acquire tower infrastructures, wireless equipment and
customers' relationships. This amount was recorded as common stock reserved as
at July 31, 2009.
g) On October 13, 2009 the Company acquired tower infrastructures and tower and
customer premises equipment and settled an inter-company liability. The Company
issued, as consideration, 268,818 common shares at $0.465 per share.
h) The Company received $97,594 pursuant to Unit Private Placement Subscription
Agreements with certain private investors. The Company issued 278,840 units at
$0.35 per unit on November 13, 2009. Each unit contained one common share and
one half of one common share purchase warrant. Each whole warrant is exercisable
into one common share at $0.50 per share expiring November 13, 2011.
i) The Company received $1,000,000 from a director and major shareholder on
October 20, 2009. These funds plus $400,000 received on July 3, 2009 were
combined and a subscription agreement for 4,000,000 units at $0.35 per unit was
executed on October 20, 2009. These units were issued on November 11, 2009. Each
unit contained one common share and one half of one common share purchase
warrant. Each whole warrant is exercisable into one common share at an exercise
price of $0.50 per common share expiring November 11, 2011.
j) The Company issued 254,285 common shares as follows: 5,000 common shares to
acquire a vehicle valued at $1,500; 14,285 common shares valued at $5,000 to
settle a financing obligation; and 235,000 common shares valued at $70,000
pursuant to two consulting contracts.
k) On April 26, 2010 the Company settled $80,000 of short-term debt by issuing
228,571 Units at $0.35 per unit pursuant to two Unit for Debt Private Placement
Subscription Agreements. Each unit contained one common share and one half of
one common share purchase warrant. Each whole warrant is exercisable into one
common share at an exercise price of $0.50 per common share expiring April 29,
2011.
l) On July 26, 2010, pursuant to a completed Asset Purchase Agreement dated
January 10, 2010, the Company issued 166,667 common shares having a fair value
of $0.36 per share, totaling $60,000, to acquire tower infrastructures, wireless
equipment and customers' relationships.
m) See Note 6 (h) and (j) for 766,087 common shares committed to be issued
pursuant to two completed asset purchase agreements to settle $232,500 of common
share commitments.
12. Warrants and Capital Stock Issuable Upon Conversion of Debentures
Pursuant to a Master Lease Agreement with Agility Venture Fund II, LLC ("Agility
II") dated December 24, 2008, the Company and Agility agreed to provide funding
under new sale lease back arrangements totalling $1,000,000. This new facility
is in addition to and in conjunction with a November 6, 2006 agreement. On
February 17, 2009, March 27, 2009, July 9, 2009 and July 14, 2009 the Company
received an aggregate of $749,749 pursuant to four sale leaseback schedules
completed - $689,368 in connection with sale leaseback arrangements pursuant to
the Master Lease Agreements and an aggregate of $60,381 in connection with sale
leaseback arrangements for assets purchased from various unrelated vendors.
Each sale leaseback transaction requires a 10% deposit as additional security
for the stream of lease payments and 30% warrant coverage as a financing
expense. Each lease agreement is for a period of 36 months with a buy-out at the
end of the lease equal to the fair value of the equipment at that time. Our
Chief Executive Officer and Chairman of the Board of the Company have provided
personal guarantees for all remaining lease payments.
Pursuant to Warrant Agreements appended to the Master Lease Agreements with
Agility and Agility II, the Company was obligated to provide the Lessor with 30%
warrant coverage. On June 24, 2009, the Company settled the commitment to issue
warrants under the November 6, 2006 Master Lease Agreement and issued 155,556
warrants exercisable at $0.45 per common share expiring December 1, 2011. Also
on June 24, 2009 the Company settled the commitments to issue warrants on the
first two of four sale leaseback schedules. The Company issued 77,569 warrants
exercisable at $0.51 per common share expiring February 17, 2019 and issued
39
184,914 warrants exercisable at $0.58 per common share expiring March 27, 2019.
These warrants were valued at $126,907 and charged as a financing expense in
2009. The Company was committed to issuing 139,490 share purchase warrants to
acquire 139,490 common shares at an exercise price of $0.56 per common share
expiring July 14, 2019 pursuant to the July 9, 2009 and July 14, 2009 sale
leaseback arrangements. These warrants were issued on October 13, 2009. The
Company recorded $63,132 as an accrued liability and financing expense as at and
for the year ended July 31, 2009. This amount was calculated using Black-Scholes
Option Pricing Model using the following assumptions: 5 year expected life, 0%
expected dividends, 90% volatility and an average risk-free interest rate of
2.36%.
As at July 31, 2010 the Company has common share purchase warrants issued and
outstanding to purchase up to 5,614,929 common shares at an average exercise
price of $.50 per common share having an average remaining life of 2.54 years as
follows:
Exercise
Price
# $ Expiry Date
--------- ----- -----------
1,199,408 .50 May 8, 2011
100,000 .50 June 24, 2011
4,287 .50 September 17, 2011
2,000,000 .50 November 10, 2011
139,420 .50 November 13, 2011
155,556 .45 December 1, 2011
77,569 .51 February 17, 2019
184,914 .58 March 27, 2019
139,490 .56 July 14, 2019
114,285 .50 April 29, 2011
1,500,000 .50 December 24, 2014
----------
5,614,929
==========
Pursuant to an 8% convertible debenture having a face value of $1,500,000,
interest payable quarterly, the Company has reserved up to 4,285,714 common
shares to be issued upon conversion at $0.35 per share.
13. Lease Obligations
Future minimum lease payments for equipment acquired under non-cancellable
capital leases and operating leases with initial terms of more than one year are
as follows:
Capital Operating
Leases Leases
-------- --------
$ $
Year ending July 31,
2011 80,675 375,963
2012 18,613 260,899
2013 9,374 --
-------- --------
Total minimum lease payments 108,662
Less: amounts representing interest 8,163
--------
Present value of net minimum lease payments 100,498
Less: current portion 74,569
--------
Long-term capital lease obligations 25,929
========
The principal portion of capital lease obligations is to be repaid as follows:
$
------
2011 74,569
2012 16,872
2013 9,057
40
14. 401(K) Plan
The Company established a 401(K) plan (the "Plan") effective October 1, 2008.
All employees having attained the age of 21 and having completed three months of
service are eligible to participate in the Plan. Plan participants may elect to
have 1% to 15% of their annual compensation contributed to the Plan. The Company
plans to provide a discretionary match of up to 4% of the participants' basic
compensation. To date the Company has not made any discretionary matching
payments.
15. Legal Proceedings
The Company has been served with two Complaints filed with the Rush Circuit
Court in the State of Indiana dated August 25, 2010 and September 1, 2010 and
one Complaint filed with the Holmes County Court in the State of Ohio dated
September 16, 2010. The plaintiffs have made claims against the Company for
failure to make required installment payments that were due pursuant to
promissory notes. The Company has recorded all debt relating to these claims as
current liabilities under current portion of long-term debt. On September 14,
2010 the Company filed an Appearance and Notice of Extension of Time to answer
the Complaints. On November 8, 2010 the Company filed an Answer and Counterclaim
with the Holmes County Court. This Answer and Counterclaim includes
counterclaims for various damages, including punitive damages, suffered by the
Company and also seeks an injunction. Also on November 8, 2010 the Company filed
an Answer to one of the Rush Circuit Court Complaints and is in the process of
filing the second Answer. As the Company has recorded all amounts owing as
current liabilities the Company expects to receive favorable outcomes on all
three legal proceedings mentioned above.
16. Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Income tax
expense differs from the amount that would result from applying the Federal and
State income tax rates to earnings before income taxes. Federal and State income
tax losses of approximately $6,700,000 are no longer immediately available to
the Company pursuant to the change of control rules of Section 382 of the
Internal Revenue Code. However, an annual deduction equal to approximately
$238,000 is available to reduce taxable income of future years for the next 28
years. This annual deduction is available until a total of $6,700,000 has been
deducted in total.
The Company has consolidated net operating losses ("NOL") of approximately
$4,800,000 to carry forward. These NOLs are available to offset taxable income
in future years and begin expiring in fiscal 2027. Pursuant to SFAS 109, the
potential benefit of these NOLs carried forward have not been recognized in the
consolidated financial statements since the Company cannot be assured that it is
more likely than not that such benefit will be realized in future years. The
following is a summary of the components of the provision for income tax benefit
and related valuation allowance for the years ended July 31:
2010 2009
-------- --------
$ $
Deferred income tax benefit:
Federal (34%) 927,000 660,000
State (8.5%) 64,000 45,000
-------- --------
991,000 705,000
Valuation allowance (991,000) (705,000)
-------- --------
Total income tax benefit -- --
======== ========
A reconciliation of the provision for income taxes to the statutory federal and
state rates is as follows:
2010 2009
------ ------
$ $
Statutory tax rate Federal and State: 42.5% 42.5%
Change in valuation allowance (42.5%) (42.5%)
------ ------
Effective Tax Rate 0% 0%
====== ======
41
17. Restatement of Prior Periods due to Correction
The Company has restated previously issued financial statements pursuant to an
error correction. Previously issued financial statements and comparative
financial statements issued currently are to be restated for correction of
errors. Cumulative effects of errors are reflected in beginning balances of
assets and liabilities with the offsetting adjustment reflected in the beginning
deficit balance.
On May 21, 2009 a stock subscription in the amount of $4,594 was incorrectly
recorded as revenue. This error was identified by management in November, 2009
and the correction of this error resulted in a net increase to stock
subscriptions as at May 21, 2009 of $4,594 and a decrease to revenue of $4,594
and an increase to net loss and deficit of $4,594 for 2009. The effect of this
error on the balance sheet and statement of operations as at July 31, 2009 is as
follows:
Previously Error
Reported Correction Restated
-------- ---------- --------
$ $ $
Balance Sheet (Equity Section):
Common Stock Subscribed 637,000 4,594 641,594
Deficit 7,678,594 4,594 7,683,188
Statement of Operations:
Revenue 1,688,944 (4,594) 1,684,350
Net Loss 2,632,058 4,594 2,636,652
18. Subsequent Events
Subsequent to July 31, 2010 the Company has:
a) received loans from two directors of the Company totaling $150,000. No terms
of repayment has been specified;
b) legal proceedings in progress as discussed in Note 15;
c) issued 299,996 common shares at $0.15 per share to settle an amount owing of
$30,000 pursuant to a Services Agreement dated June 29, 2010; and
d) entered into a Debenture Agreement and related Purchase Order to buy
equipment from a vendor. The total value of equipment the Company can acquire
under the Purchase Order and Debenture Agreement is $200,000.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no disagreements with our principal independent accountants.
ITEM 9A(T). CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Greg Jarman our principal executive officer and Don Prest, our principal
financial officer, have concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not
effective as of the end of the period covered by this report, based on their
evaluation of these controls and procedures required by paragraph (b) of Rules
13a-15 and 15d-15, due to the deficiencies in our internal control over
financial reporting as described below.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) under the
Exchange Act.
The management of the Company assessed the effectiveness of the Company's
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting
such assessments. Based on this assessment, management determined that, during
the year ended July 31, 2010, our internal controls and procedures were not
effective to detect the inappropriate application of US GAAP rules, as more
fully described below. This was due to deficiencies in the design or operation
of the Company's internal control that adversely affected the Company's internal
controls and that may be considered to be material weaknesses.
Management identified the following material weaknesses in internal control over
financial reporting:
1. The Company has limited segregation of duties which is not consistent
with good internal control procedures.
2. The Company does not have a written internal control procedurals
manual which outlines the duties and reporting requirements of the
Directors and any staff to be hired in the future. This lack of a
written internal control procedurals manual does not meet the
requirements of the SEC or good internal controls.
Management believes that the material weaknesses set forth in items 1 and 2
above did not have an affect on the Company's financial results.
The Company and its management will endeavor to correct the above noted
weaknesses in internal control once it has adequate funds to do so.
Management will continue to monitor and evaluate the effectiveness of the
Company's internal controls and procedures and its internal controls over
financial reporting on an ongoing basis and are committed to taking further
action and implementing additional enhancements or improvements, as necessary
and as funds allow.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only the management's
report in this annual report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to our internal control over financial reporting that
occurred during the last quarter of our fiscal year ended July 31, 2010 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
43
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our executive officers and directors and their respective ages as of the date of
October 23, 2009 are as follows:
Name and Municipality of Residence Age Current Office
- ---------------------------------- --- --------------
Richard Beltzhoover 71 Chairman, Director
Carmel, Indiana, USA
Greg Jarman 47 President, Chief Executive
Rushville, Indiana, USA Officer, Director
Don Prest 50 Chief Financial Officer,
Vancouver, Canada Director
David Bradford 62 Chief Operating Officer,
Angola, Indiana, USA Director
Paul Brock 46 Director
Vancouver, Canada
Richard Reahard 61 Director
Carmel, Indiana, USA
William Herdrich 64 Director
Rushville, Indiana, USA
Gregory Dunn 57 Director
Columbus, Ohio, USA
The following describes the business experience of each of our directors and
executive officers, including other directorships held in reporting companies:
GREG JARMAN - Mr. Jarman was appointed our President and Chief Executive Officer
on June 23, 2009. Mr. Jarman is the chief architect of Omnicity's rural
broadband focus and its long-term development strategy. Mr. Jarman has been with
the Company since 2003, Chief Operating Officer since 2006 and President since
2008. Mr. Jarman most recently served as President of RushDSL, a rural broadband
services provider. Mr. Jarman has also served as Chief Technology Officer of
Q-media, a network services and managed services provider and was Chief
Technology Officer and board member of Netisun LLC where he directed Netisun's
technical services group and managed network infrastructure. Mr. Jarman was a
founder and executive of Indiana Communications & Systems, Inc., which was a
rural business ISP and managed service providers acquired by Netisun LLC. He has
25 years of technical experience working with many corporate and governmental
agencies, and has consulted with Northrop, The Associated Group, United Student
Aid Funds, Cinergy, Sperry, Unisys, and EDS. Mr. Jarman received his AS in
Computer Information Services from Indiana Central University and has spent 10
years of his career in information systems consulting.
DON PREST - Mr Prest has been our Chief Financial Officer and a member of our
board of directors since July 18, 2007. Mr. Prest leads the SEC public financial
reporting process for the Company and the overall financing plan. Mr. Prest has
been a US and Canadian public company assurance partner for 17 years at a large
regional PCAOB registered accounting firm located in Canada, where his career
began 26 years ago. Prior to December 31, 2009 Mr. Prest was an assurance
partner for over 150 public US companies. Mr. Prest has retired from this
position as at December 31, 2008 to focus on the business of the Company. Mr.
Prest is a 1/3 owner of FBP Capital Corp. ("FBP"), a merchant bank, for 6 years
where he has leveraged his international tax and assurance practice and contacts
to assist FBP's clients in going and being public. Mr. Prest also served as the
Chief Financial Officer for Power Air Corporation for three years. Power Air is
a public fuel cell company. Mr. Prest started his career in 1983 upon graduating
from BCIT in Financial Management. Mr. Prest received his Canadian CA
designation in 1991 and his US CPA designation in 1997.
DAVID BRADFORD - Mr. Bradford became our Chief Operating Officer on July 30,
2009 and is in charge of managing the profitability of the Company's day-to-day
operations in support of established policies, goals and objectives while
providing leadership, strategic direction and vision to the Company. He also
assists senior officers of the Company in the design and development of the
Company's long-term strategic planning, organization of resources to execute its
plan, and the timely and accurate reporting and analysis of operating results.
44
His responsibilities include management of acquisitions, operations, and
financial matters, and ensuring their most effective synthesis to the
maximization of the Company's strategic and operating plans. Mr. Bradford has
devoted the majority of his senior management career to the telecommunications
industry. From 1977 through 1987 he served in executive positions at the Chicago
Tribune's broadcast and cable television divisions. Positions included Vice
President and General Manager for Tribune Cable Communications, Vice President
of Operations for WGN Electronic Systems Company, and Director of Strategic
Planning for Tribune Cable and subsidiaries. After leaving the Tribune companies
Mr. Bradford served as President of Empire Communications and Bradford
Communications, Inc., both rural cable television multi-system operators. Mr.
Bradford subsequently served as President of National Telsat, Inc., a rural
wireless television and data provider. Mr. Bradford brings over thirty years of
successful subscriber based telecommunications operating experience to the
Company as well as participation and oversight of numerous debt and equity
financings, acquisitions, and restructurings.
RICHARD BELTZHOOVER - Mr. Beltzhoover was formerly our Chief Executive Officer
from inception until June 23, 2009. He now devotes his time to the Board of
Directors and assisting the CEO in capital raising efforts. He was the first
investor of Omnicity Incorporated and brings more than 35 years' business and
corporate venturing experience to the Company. Mr. Beltzhoover was the Chief
Operations Officer and Board member of National Vulcanized Fibre and, since
1975, has served as founder and President of Insul Reps, which represents
manufacturers in the electronic and electro-mechanical markets. Mr. Beltzhoover
grew sales to $40 million and directed Insul Reps expansion. Mr. Beltzhoover was
also instrumental in funding and guiding Indy Connection into becoming an $8
million revenue ground transportation company, ultimately selling to Carey
Limousine for $12 million. Other companies he founded include Midwest Rail,
Prestige Magazine, Hunt Graphics, and Digital Arts, all of which sold to private
companies. Mr. Beltzhoover holds a Bachelor of Science in Mechanical Engineering
from Penn State University.
PAUL BROCK - Mr. Brock is a business management consultant with experience
running public and private companies involved primarily in the telecom and
financial services sector, developing software and applied electronic
technologies in the UK, the Middle East, Asia, Latin America, as well as
throughout the US and Canada. In 1988 Mr. Brock co-founded VendTek Systems Inc.
(TSX:VSI), which grew to over $100 million in revenues by 2008 when he resigned
as Chairman. During his tenure at VendTek he created and also served as
President of VendTek Industries Inc. (Canada), a Director of VendTek
International Inc. (USA), President (until June 2002) of Now Prepay Inc.
(Canada), and President of VendTek China Systems Technologies (Beijing) Co., Ltd
(China). Mr. Brock was a co-founder in 2003 and President of Fortune Partners
Inc., which listed on the OTCBB, and later acquired Power Air Corp. where he
continues as a Director. He was co-founder and President of Rochdale Mining
Corp. listed on the OTCBB and later acquired Zoro Mining Corp. where he
continues as a Director. Mr. Brock is the founder in 1999 and President of Bent
International Inc., which is a privately owned business consulting company. Mr.
Brock now serves as a director of the following public companies; Power Air
Corp, i-Level Media Corp, Zoro Mining Corp, Silica Resources Corp, and VendTek
Systems Inc. Mr. Brock is a graduate of the British Columbia Institute of
Technology's Robotics and Automation Technology Program, a graduate of Simon
Fraser University's Executive Management Development Program. He is a member in
good standing of the professional association of the Applied Science
Technologists of BC, and an accredited professional director with the Institute
of Charters Secretaries and Administrators (ICSA) in Canada.
WILLIAM HERDRICH - Mr. Herdrich is a Rushville, Indiana native and has been
involved in finance in the oil and gas industry for forty years. He has a deep
understanding of Midwest rural markets having been a retailer and wholesaler in
the petroleum industry, and actively participating in numerous leadership roles
on regional and national boards. Mr. Herdrich has assisted in the creation of
several firms including finance, environmental and real estate development.
RICHARD REAHARD - Mr. Reahard earned his BS in Business Administration from
Indiana University in 1971 and his MBA from Butler University in 1975. Mr.
Reahard was President of Telecom Resource, Inc from 1993 to December 31, 2004.
His background over the last 35 years is in sales and marketing.
GREGORY DUNN - Mr. Dunn is a resident of Columbus, Ohio. Mr. Dunn graduated from
A.B. Davidson College in 1975 and the J.D., Capital University Law School in
1978. Mr Dunn was admitted to the Ohio Bar Association and the US District Court
- - S.D. Ohio in 1978. Mr Dunn belongs to numerous professional associations
including: American Bar Association, Ohio State Bar Association, Columbus Bar
Association, Ohio Cable Telecommunications Association, Federal Communications
Bar Association and the National Association of Telecommunications, Officers and
Advisors, Ohio Chapter. Mr. Dunn was formerly an Assistant City Attorney for the
City of Columbus and then became VP of Legal Affairs for Time Warner Cable,
responsible for 26 States and over 90 cable systems. In 1987 Mr. Dunn joined a
company which consulted in Eastern Europe regarding cable television franchising
and deployment. In 1993 Mr. Dunn returned to the practice of law at Crabbe,
45
Brown and James, joining Schottenstein, Zox and Dunn ("SZD") in 1998. Mr. Dunn
has a comprehensive knowledge of the telecommunications industry from both a
legal and consulting perspective. Mr. Dunn's clients' include ove 40
municipalities, the State of Ohio, the Georgia Municipal Association and The
Ohio Supercomputer Center. In Mr. Dunn's capacity as counsel for such entities
he has been involved in RFP's/RFI's for a variety of technology projects
including Wi-Fi systems, fiber optic systems, and telecommunications services.
Mr. Dunn also consults on telecommunications public policy issues with SZD's
ancillary service, SZD Whiteboard.
TERM OF OFFICE
Our directors are appointed for a one-year term to hold office until the next
annual general meeting of our stockholders or until removed from office in
accordance with our bylaws. Our officers are appointed by our board of directors
and hold office until removed by the board.
SIGNIFICANT EMPLOYEES
We have no significant employees other than the officers and directors described
above.
FAMILY RELATIONSHIPS
There are no family relationships among our directors or officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Our directors, executive officers and control persons have not been involved in
any of the following events during the past five years:
1. any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time
of the bankruptcy or within two years prior to that time;
2. any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offences);
3. being subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; or
4. being found by a court of competent jurisdiction (in a civil action),
the SEC or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has
not been reversed, suspended or vacated.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the SECURITIES EXCHANGE ACT OF 1934 requires the executive
officers and directors, and persons who beneficially own more than ten percent
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. During the fiscal year ended July
31, 2009, except as disclosed below, these filings were made on a timely basis:
No. of Late/Unfiled Reports No. of Late/Unfiled Reports
During the Fiscal Year During the Fiscal Year
Reporting Person Ended July 31, 2010 Ended July 31, 2009
- ---------------- ------------------- -------------------
Don Prest Nil 1 - late Form 4 regarding
one transaction
William Herdrich Nil 1 - failed to file Form 3
CODE OF ETHICS
On October 22, 2009 our Board of Directors adopted a Corporate Governance Manual
which includes a Code of Ethics applicable to its principal executive officer,
its principal financial officer, its principal accounting officer or controller,
or persons performing similar functions.
46
COMMITTEES
On June 17, 2009 our Board of Directors adopted our nominating, audit and
compensation committee charters. Pursuant to these charters independent
directors are the only members of the audit committee. Paul Brock and William
Herdrich are the two independent members of each of these committees.
The Board can elect one additional non-independent member for the nominating and
compensation committees. On October 22, 2009 the Board elected Greg Jarman to be
the one non-independent member of the compensation committee.
Two out of our three independent directors sitting on our audit committee are
considered "financial experts".
47
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
The table below summarizes all compensation awarded to, earned by or paid to our
executive officers by any person for all services rendered in all capacities to
us during our fiscal years ended July 31, 2010 and 2009.
Non-Equity Nonqualified
Name and Incentive Deferred
Principal Stock Option Plan Compensation All Other
Position Year Salary($) Bonus($) Awards($) Awards($) Compensation($) Earnings($) Compensation($) Totals($)
-------- ---- --------- -------- --------- --------- --------------- ----------- --------------- ---------
Greg Jarman(1) 2009 73,455 nil 93,187 nil nil nil nil 166,642
Chief Executive 2010 90,000 nil nil nil nil nil nil 90,000
Officer and
President
Richard 2009 30,000 nil 104,125 nil nil nil nil 134,125
Beltzhoover(1) 2010 n/a n/a n/a n/a n/a n/a n/a n/a
Don Prest 2009 35,750 nil nil nil nil nil nil 35,750
Chief Financial 2010 78,000 nil nil nil nil nil nil 78,000
Officer
David 2009 n/a n/a n/a n/a n/a n/a n/a n/a
Bradford(2) 2010 66,000 nil nil nil nil nil nil 66,000
Chief Operating
Officer
- ----------
(1) Mr. Beltzhoover resigned as our Chief Executive Officer on June 17, 2009
and Mr. Jarman was appointed our Chief Executive Officer in his place on
June 17, 2009. Mr. Beltzhoover is our Chairman of the Board and is not
considered an Executive Officer.
(2) Mr. Bradford became our Chief Operating Officer on August 1, 2009. Prior to
that Mr. Bradford was our Vice President of Corporate Development. In 2009
Mr. Bradford was not considered an Executive Officer.
OUTSTANDING EQUITY AWARDS
As at July 31, 2010, there were no unexercised options, stock that had not
vested or outstanding equity incentive plan awards with respect to any of our
officers or directors.
COMPENSATION OF DIRECTORS
Except as disclosed below, we did not pay our directors any fees or other
compensation for acting as directors during our fiscal year ended July 31, 2010.
Certain of our current or former directors serve or have served as officers of
the Company, and any compensation they received due to their service as an
officer is disclosed in the table above and is not included in the table below:
DIRECTOR COMPENSATION
Fees Non-Equity Nonqualified
Name and Earned Incentive Deferred
Principal Paid in Stock Option Plan Compensation All Other
Position Cash($) Awards($) Awards($) Compensation($) Earnings($) Compensation($) Total($)
- -------- ------- --------- --------- --------------- ----------- --------------- --------
Richard Beltzhoover nil nil nil nil nil nil nil
Greg Jarman nil nil nil nil nil nil nil
Don Prest nil nil nil nil nil nil nil
David Bradford nil nil nil nil nil nil nil
Paul Brock nil nil nil nil nil nil nil
Richard Reahard nil nil nil nil nil nil nil
William Herdrich nil nil nil nil nil nil nil
Gregory Dunn nil nil nil nil nil nil nil
48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information concerning the number of
shares of our common stock owned beneficially as of November 17, 2010 by: (i)
each person (including any group) known to us to own more than 5% of any class
of our voting securities, (ii) each of our directors, (iii) each of our officers
and (iv) our officers and directors as a group. Each stockholder listed
possesses sole voting and investment power with respect to the shares shown.
Amount and nature Percentage of
Title of class Name and address of beneficial owner (2) of beneficial owner class (1)
- -------------- ---------------------------------------- ------------------- ---------
Common Stock Richard Beltzhoover (3)
Carmel, Indiana, USA 5,919,800 13.53
Common Stock Greg Jarman (4)
Rushville, Indiana, USA 1,633,855 3.73
Common Stock Don Prest (7)
Vancouver, Canada 227,143 0.5
Common Stock David Bradford
Angola, Indiana, USA nil Nil
Common Stock Paul Brock
Vancouver, Canada nil Nil
Common Stock Richard Reahard
Carmel, Indiana, USA 4,971,648 11.36
Common Stock William Herdrich (6)
Rushville, Indiana, USA 499,248 1.14
Common Stock All executive officers and directors
as a group (seven persons) 13,251,694 30.29
Shareholders of Greater than 5% of Issued and Outstanding Stock
Common Stock Schwarz Partners LLC (5) 5,515,059 12.61
- ----------
(1) Based on 43,745,414 shares of common stock issued and outstanding as of
November 17, 2010. Under Rule 13d-3 of the Exchange Act a beneficial owner
of a security includes any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or
shares: (i) voting power, which includes the power to vote, or to direct
the voting of shares; and (ii) investment power, which includes the power
to dispose or direct the disposition of shares. Certain shares may be
deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of
an option) within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the amount
of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of these
acquisition rights.
(2) The address of the executive officers and directors is c/o Omnicity,
Incorporated, 807 South SR 3, Rushville, Indiana, USA, 46173.
(3) Richard Beltzhoover is the beneficial owner of 892,612 shares owned by
Insul Reps Profit Sharing Plan and 225,912 shares owned by Insul Reps,
Inc., and 43,000 shares owned by Linda Beltzhoover, wife of Richard
Beltzhoover.
(4) Greg Jarman is a beneficial owner of 11,143 shares owned by Lea Ann Jarman.
(5) John Schwarz is beneficial owner of Schwarz Partners LLC.
(6) William Herdrich is the beneficial owner of 321,448 shares owned by Capital
Investors Limited.
(7) Don Prest beneficially owns one-third of FBP Capital Corp.
49
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
The table set forth below presents information relating to our equity
compensation plans as of the date of July 31, 2010:
Number of Securities to be Number of Securities
Issued Upon Exercise of Weighted-Average Exercise Remaining Available for
Outstanding Options, Price of Outstanding Options, Future Issuance Under
Warrants and Rights Warrants and Rights Equity Compensation Plans
Plan Category (a) (b) (excluding column (a))
------------- ------------------- ------------------- -------------------------
Equity Compensation Plans to n/a n/a n/a
be Approved by Security
Holders
Equity Compensation Plans Not n/a n/a n/a
Approved by Security Holders
CHANGES IN CONTROL
We are unaware of any contract, or other arrangement or provision of our
Articles, the operation of which may at any subsequent date result in a change
in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Except as described below, none of the following parties has, in the last two
fiscal years, had any material interest, direct or indirect, in any transaction
with us or in any presently proposed transaction that has or will materially
affect us:
1. any of our directors or officers;
2. any person proposed as a nominee for election as a director;
3. any person who beneficially owns, directly or indirectly, shares
carrying more than 10% of the voting rights attached to our outstanding
shares of common stock; or
4. any member of the immediate family (including spouse, parents,
children, siblings and in-laws) of any of the above persons.
Paul Brock, William Herdrich and Greg Dunn are independent directors of the
Company as provided in the listing standards of the American Stock Exchange.
TRANSACTIONS
TRANSACTIONS WITH WILLIAM HERDRICH:
Included in accrued liabilities at July 31, 2009 was $56,294 owing to Rushville
Internet Services, LLC ("RIS") which represented amounts due to RIS under
certain lease agreements. The Company and RIS have shareholders in common. The
shareholders of RIS agreed to wind-up RIS and sell its assets to the Company for
$125,000. The Company received their assets, being wireless equipment and tower
infrastructures, having a fair value of $68,706, and to settle inter-company
debt of $56,294. All shareholders of RIS accepted to receive restricted common
shares of the Company. On October 13, 2009 the Company issued 268,818 common
shares to the shareholders of RIS at a fair value of $0.465 per common share.
On April 15, 2009 Mr. Herdrich and Capital Investors Limited, a company
controlled Mr. Herdrich, subscribed for an aggregate of 342,743 Units of our
Company at $0.35 per Unit and received 342,743 common shares and warrants to
acquire a further 171,372 common shares as $0.50 per share expiring May 8, 2011.
50
On July 2, 2009, Mr. Herdrich loaned the Company $20,000 pursuant to a senior
subordinated debenture. 8% interest per annum is payable quarterly and matures
January 2, 2011. Mr. Herdrich can settle in common shares or cash on the
maturity date of January 2, 2011.
On November 23, 2009 the Company received $150,000 from a Riverpoint Financial,
LLC., a company controlled by Mr. Herdrich and issued a promissory note due
January 1, 2011, unsecured and bearing interest at 9% per annum with interest
payable quarterly. On April 20, 2010 the Company received $225,000 from
Riverpoint Financial, LLC pursuant to a sale of towers. The towers had a net
book value of $184,281 and the Company recorded a gain on sale of assets of
$40,719.
TRANSACTIONS WITH GREG DUNN:
None.
TRANSACTIONS WITH PAUL BROCK:
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Weaver & Martin, LLC served as our independent registered public accounting firm
and audited our consolidated financial statements for the fiscal years ended
July 31, 2010 and 2009. Aggregate fees for professional services rendered to us
by our current and predecessor auditors are set forth below:
Year Ended Year Ended
July 31, 2010 July 31, 2009
------------- -------------
Audit Fees $28,500 $28,250
Audit-Related Fees $12,100 $ 6,800
Tax Fees $ nil $ nil
All Other Fees $ nil $ nil
------- -------
Total $40,600 $26,800
======= =======
AUDIT FEES
Audit fees are the aggregate fees billed for professional services rendered by
our independent auditors for the audit of our annual financial statements, the
review of the financial statements included in each of our quarterly reports and
services provided in connection with statutory and regulatory filings or
engagements.
AUDIT RELATED FEES
Audit related fees are the aggregate fees billed by our independent auditors for
assurance and related services that are reasonably related to the performance of
the audit or review of our financial statements and are not described in the
preceding category.
TAX FEES
Tax fees include fees billed by our independent principal auditors for tax
compliance, tax advice and tax planning.
ALL OTHER FEES
All other fees include fees billed by our independent principal auditors for
products or services other than as described in the immediately preceding three
categories.
POLICY ON PRE-APPROVAL OF SERVICES PERFORMED BY INDEPENDENT AUDITORS
It is our Board of Directors' policy to pre-approve all audit and permissible
non-audit services performed by the independent auditors. We approved all
services that our independent principal accountants provided to us in the past
two fiscal years.
51
ITEM 15. EXHIBITS
The following exhibits are filed with this Annual Report on Form 10-K:
Exhibit No. Description
- ----------- -----------
10.1 Promissory Notes between Company and Richard Beltzhoover and
Insulreps Profit Sharing Plan all dated July 15, 2010
10.2 Asset Purchase Agreement with USppp, Inc.
10.3 Memorandum of Understanding between Company and Tipmont Holding,
Inc. to convert
31.1 Certifications of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certifications of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
52
SIGNATURES
Pursuant to the requirements of Section 13 and 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.
OMNICITY CORP.
By: /s/ Greg Jarman
-----------------------------------------
Greg Jarman
Chief Executive Officer, President, and
a director
Date: November 17, 2010
By: /s/ Don Prest
-----------------------------------------
Don Prest
Chief Financial Officer and a director
Date: November 17, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Richard Beltzhoover Chairman of the Board and Director November 17, 2010
- ----------------------------------
Richard Beltzhoover
/s/ Greg Jarman President, Chief Executive Officer and Director November 17, 2010
- ----------------------------------
Greg Jarman
/s/ Don Prest Chief Financial Officer and Director November 17, 2010
- ----------------------------------
Don Prest
/s/ David Bradford Chief Operating Officer and Director November 17, 2010
- ----------------------------------
David Bradford
/s/ Paul Brock Director November 17, 2010
- ----------------------------------
Paul Brock
/s/ Greg Dunn Director November 17, 2010
- ----------------------------------
Greg Dunn
/s/ Bill Herdrich Director November 17, 2010
- ----------------------------------
William Herdrich
/s/ Richard Reahard Director November 17, 2010
- ----------------------------------
Richard Reahard
53
