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Form 10-QSB
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______.
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Commission File No. 1-15383
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USURF America, Inc.
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(Exact Name of Small Business Issuer as Specified in its Charter)
NEVADA 91-2117796
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6005 Delmonico Drive, Suite 140, Colorado Springs, Colorado 80919
(Address of Principal Executive Offices, including Zip Code)
(719) 260-6455
(Issuer's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant as required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding as of 5-16-03
- ----------------------------------- -----------------------------------
Common Stock, $.0001 par value 78,532,203
1
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
USURF America, Inc. and Subsidiaries
Page
----
Consolidated Balance Sheets as of March 31, 2003 (unaudited),
and December 31, 2002 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2003 and 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 (unaudited) 6
Notes to Consolidated Statements 8
2
USURF AMERICA, INC. AND SUBSIDIARIES
COLORADO SPRINGS, COLORADO
------------------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 (AUDITED), AND
MARCH 31, 2003 (UNAUDITED)
ASSETS
3/31/03 12/31/02
(unaudited)
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 27,699 $ 111,568
Accounts receivable 23,675 224
Inventory 26,715 2,715
Other current assets 13,590 4,942
----------- -----------
Total Current Assets 91,679 119,449
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PROPERTY AND EQUIPMENT
Cost 129,660 73,359
Less: accumulated depreciation (15,548) (7,336)
----------- -----------
Total Property and Equipment 114,112 66,023
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INTANGIBLES 201,604 201,604
Less: accumulated amortization (3,477) 0
----------- -----------
Total Intangibles 198,127 201,604
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OTHER ASSETS
Prepaid consulting 0 0
Notes receivable - current 32,000 0
Other 50,000 20,000
----------- -----------
Total Other Assets 82,000 20,000
----------- -----------
TOTAL ASSETS $ 485,918 $ 407,076
=========== ===========
The accompanying notes are an integral part of these statements.
3
USURF AMERICA, INC. AND SUBSIDIARIES
------------------------------------
COLORADO SPRINGS, COLORADO
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 (AUDITED), AND
MARCH 31, 2003 (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
3/31/03 12/31/02
(unaudited)
------------ ------------
CURRENT LIABILITIES
Payroll taxes payable $ 6,342 $ 0
Sales taxes payable 1,834 0
Accounts payable 158,278 131,146
Note Payable 87,604 87,604
Accrued payroll 98,376 0
Other current liabilities 3,600 0
Notes payable to stockholder 1,000 1,000
------------ ------------
Total Liabilities 357,034 219,750
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STOCKHOLDERS' EQUITY
Common stock, $.0001 par value; Authorized: 100,000,000 7,810 7,145
shares; Issued and outstanding: 78,097,203 at March 31,
2003, and 71,445,338 at December 31, 2002
Additional paid-in capital 41,194,994 40,778,870
Accumulated deficit (40,790,221) (40,207,489)
Subscriptions receivable (21,200) (21,200)
Deferred consulting (262,499) (370,000)
------------ ------------
Total Stockholders' Equity 128,884 187,326
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 485,918 $ 407,076
============ ============
The accompanying notes are an integral part of these statements.
4
USURF AMERICA, INC. AND SUBSIDIARIES
COLORADO SPRINGS, COLORADO
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Three Months Ended March 31,
----------------------------
2003 2002
(unaudited) (unaudited)
------------ ------------
Revenues $ 31,608 $ 4,626
Internet access costs, cost of goods sold (13,499) (8,482)
Inventory write-down 0 0
------------ ------------
Gross profit (loss) 18,109 (3,856)
------------ ------------
OPERATING EXPENSES
Depreciation and amortization 11,689 7,033
Professional fees 107,501 270,147
Rent 19,975 7,681
Salaries and commission 168,506 242,314
Advertising 3,013 62,000
Other general and administrative 290,158 14,743
------------ ------------
Total Operating Expenses 600,842 603,918
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LOSS FROM OPERATIONS (582,733) (607,774)
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OTHER (EXPENSE)
Interest expense 0 (183)
------------ ------------
Total Other Expense 0 (183)
------------ ------------
LOSS BEFORE INCOME TAX (582,733) (607,957)
INCOME TAX BENEFIT 0 0
------------ ------------
NET LOSS (582,733) $ (607,957)
============ ============
Net loss per common share $ (0.007) $ (0.02)
============ ============
Weighted average number of shares outstanding 73,919,960 25,503,752
============ ============
The accompanying notes are an integral part of these statements.
5
USURF AMERICA, INC. AND SUBSIDIARIES
COLORADO SPRINGS, COLORADO
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Three Months Ended March 31,
----------------------------
2003 2002
(unaudited) (unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net loss $ (582,733) $ (607,957)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 11,689 7,033
Consulting and other fees paid with stock 188,807 247,663
Compensation expense paid with stock 0 1,631,464
Advertising expense paid with stock 0 62,000
Legal fees paid with stock 0 6,000
Changes in operating assets and liabilities
Accounts receivable (23,451) 0
Inventory 0 0
Accounts payable 27,133 (8,032)
Accrued payroll 98,376 6,842
Deferred consulting 107,501 0
Other current liabilities 11,776 0
------------ ------------
Net cash (used in) operating activities (160,902) (123,305)
------------ ------------
6
CASH FLOWS FROM INVESTING ACTIVITIES
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Capital expenditures (56,301) 0
Other assets (8,648) 0
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Net cash (used in) investing activities (64,949) 0
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
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Payments on subscriptions receivable 0 70,000
Payments on notes payable - stockholder 0 (18,521)
Issuance of common stock for cash 103,000 64,000
Warrants exercised 70,982 13,000
Notes receivable (32,000) 0
Fee for stock issuance 0 (4,900)
------------ ------------
Net cash provided by financing activities 141,982 123,579
------------ ------------
Net increase (decrease) in cash and cash equivalents (83,869) 274
Cash and cash equivalents, beginning of period 111,568 10
------------ ------------
Cash and cash equivalents, end of period $ 27,699 $ 284
============ ============
The accompanying notes are an integral part of these statements.
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND OTHER CASH FLOW INFORMATION
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Three Months Ended March 31, 2003
- -----------------------------------------------------
- In March 2003, the Company issued 2,500,000 shares as a
commitment fee under a common stock purchase agreement, which
shares were valued at $75,000.
Three Months Ended March 31, 2002
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- In January 2002, the Company issued 120,000 shares under a
one-year consulting agreement, which shares were valued at
$10,800.
- In February 2002, the Company issued 300,000 shares under a
four month consulting agreement, which shares of stock were
valued at $30,000.
- In March 2002, the Company issued 75,000 shares under a
one-month consulting agreement, which shares were valued at
$7,500.
- In March 2002, the Company issued 75,000 shares in payment of
legal services, which shares of stock were valued at $6,000.
7
USURF AMERICA, INC. AND SUBSIDIARIES
------------------------------------
COLORADO SPRINGS, COLORADO
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED)
Note 1. Nature of Business, Organization and Basis of Presentation
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Basis of Presentation
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USURF America, Inc. (the "Company"), formerly Internet Media
Corporation, was incorporated as Media Entertainment, Inc. in the State
of Nevada on November 1, 1996. The Company currently provides
telecommunications services to customers in Colorado.
Principles of Consolidation
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The accompanying consolidated financial statements include all the
accounts of USURF and all wholly owned subsidiaries. Inter-company
transactions and balances have been eliminated in the consolidation.
Loss Per Common Share
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The loss per common share is presented in accordance with the
provisions of SFAS No. 128, Earnings Per Share. Basic loss per common
share has been computed by dividing the net loss available to the
common stockholder by the weighted average number of shares of common
stock outstanding for the period.
Note 2. Interim Consolidated Financial Statements
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In the opinion of management, the accompanying consolidated financial
statements for the three months ended March 31, 2003 and 2002, reflect
all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition, results of
operations and cash flows of USURF, including subsidiaries, and include
the accounts of USURF and all of its subsidiaries. All material
inter-company transactions and balances are eliminated.
The financial statements included herein have been prepared by USURF,
without audit, pursuant to the rules and regulations of the SEC.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles in the United States have been condensed or
omitted pursuant to such rules and regulations. It is suggested that
these unaudited financial statements be read in conjunction with the
financial statements and notes thereto included in USURF's Annual
Report on Form 10-KSB/A for the year ended December 31, 2002, as filed
with the SEC. Certain reclassifications and adjustments may have been
made to the financial statements for the comparative period of the
prior fiscal year to conform with the 2002 presentation. The results of
operations for the interim periods are not necessarily indicative of
the results to be obtained for the entire year.
8
Note 3. Notes Payable to Shareholder
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March 31, 2003 December 31, 2002
(unaudited)
----------------- -----------------
Notes payable to stockholder, interest $1,000 $1,000
accrues at 8%, due on demand and
unsecured
Note 4. Stock and Warrant Issuances
- --------------------------------------------------------------
During the three months ended March 31, 2003, the Company issued (or
became obligated to issue) shares of common stock and common stock
purchase warrants, as follows:
- 400,000 shares in consideration of certain assets;
- 1,517,000 shares upon the exercise of certain warrants;
- 375,000 shares to acquire a business; 1,859,865 shares for
cash;
- 2,500,000 shares as a commitment fee in connection with a
financing transaction; and
- 2,030,000 warrants (540,000 warrants, exercise price $.049 per
share; 213,368 warrants, exercise price $.10 per share;
885,954 warrants, exercise price of $.20 per share; 266,710
warrants, exercise price of $.25 per share; 123,968 warrants,
exercise price of $.30 per share) were issued.
Note 5. Contingencies
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A. Involuntary Bankruptcy
-----------------------------------------------------
On September 29, 2000, three creditors of CyberHighway filed an
involuntary petition in the Idaho Federal Bankruptcy Court, styled In
Re:CyberHighway, Inc.. In December 2000, CyberHighway and the
petitioning creditors filed a joint motion to dismiss this proceeding.
However, some of CyberHighway's creditors objected to the joint motion
to dismiss and the motion failed.
At December 31, 2002 and 2001, approximately $953,561 of accounts
payable of CyberHighway is not reflected on the balance sheet. As a
result of the bankruptcy, this subsidiary is not consolidated with the
Company. The effect of not consolidating CyberHighway on the Company's
December 31, 2001, financial statements had no effect on net income
before extraordinary items, eliminated the extraordinary item and
increased the net loss by $489,905. The effect on net loss per common
share was an increase of $.03 per share of net loss.
B. Outstanding Judgments
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In 2000, the Company began arbitration proceedings against a former
vice president for violations of his employment agreement with the
Company, and, in 2002, an award of $75,000, plus reimbursement of legal
expenses of approximately $25,000 was awarded to the former officer.
Also during 2002, the Company was informed of a default judgment from
unchallenged litigation in the amount of $22,000. These amounts are
included in accounts payable on the balance sheet.
9
C. American Stock Exchange Listing
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Currently, the Company is not in compliance with the continued listing
guidelines of AMEX. During the second quarter of 2001, AMEX first
inquired with respect to our plan for achieving compliance with its
continued listing guidelines. The Company's response to AMEX included
an explanation of its anticipated future funding under the first Fusion
Capital agreement and the positive effects this funding would likely
have on the Company's business and financial condition, particularly in
increasing its total assets and stockholders' equity. In July 2002, the
Company was notified by AMEX that it had fallen below the continued
listing standards of AMEX. The Company has 18 months in which to regain
compliance with AMEX's continued listing standards. The Company has
fallen below certain of AMEX's continued listing standards: (1) losses
from operations in its two most recent fiscal years with shareholders'
equity below $2 million; and (2) sustained losses so substantial in
relation to the company's overall operations or its existing financial
resources, or its financial condition in relation to its overall
operations or its existing financial resources, or its financial
condition has become so impaired that it appears questionable, in the
opinion of AMEX, as to whether the company will be able to continue
operations and/or meet its obligations as they mature. After AMEX
reviewed the Company's plan for regaining compliance, it was granted an
extension of time (18 months) to regain compliance with the continued
listing standards. The Company is subject to periodic review by the
AMEX staff during the extension period. Failure to make progress
consistent with the plan or to regain compliance with the continued
listing standards by the end of the extension period could result in
the Company's being delisted from AMEX.
Note 6. Financing Transactions
- --------------------------------------------------------------
In May 2001, the Company signed an amended and restated common stock purchase
agreement with an unrelated company to sell up to 6,000,000 shares of common
stock for up to $10,000,000. This agreement terminated in March 2003, upon the
purchase of the last available shares under the agreement. During its term, the
purchase price of the shares under the purchase agreement varied, based on
market prices of the Company's common stock. The registration statement filed
with respect to this financing transaction became effective on June 29, 2001.
The commencement date of the purchase agreement was July 10, 2001. The Company
received a total of $585,000 in proceeds under the purchase agreement during
2001, 2002 and 2003, in consideration of 6,000,000 shares.
In March 2003, the Company signed a common stock purchase agreement with an
unrelated company to sell up to $10,000,000 of Company common stock. The
purchase price per share under this purchase agreement varies, based on market
prices of the Company's common stock. The purchase agreement calls for the
Company to meet certain requirements and maintain certain criteria with respect
to its common stock in order to avoid an event of default. Upon the occurrence
of the event of default the buyer is no longer obligated to purchase any
additional shares of common stock. A registration statement is expected to be
filed in the near future with respect to this financing transaction. There is no
assurance that the Company will benefit from such agreement.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- --------------------------------------------------------------------------------
Background
- --------------------------------------------------------------
During 2001 and the first quarter of 2002, we focused all of our
efforts and capital on the exploitation of our wireless Internet access
products. Beginning in April 2002, with the arrival of our new
president, we began to expand our business. By the beginning of 2003,
we had become a provider of a broad range of telecommunications
services.
Current Overview
- --------------------------------------------------------------
We currently operate as a provider of voice (telephone), video (cable
television) and data (Internet) services to business and residential
customers. We also market and sell telecommunications-related hardware
and software.
Our business plan involves obtaining, through internal growth, as many
voice, video and data customers as possible. Our growth strategy also
includes acquisitions of telecommunications-related businesses and/or
properties which would provide an immediate or potential customer base
for our services.
In early 2003, we restructured our operations by creating three new
subsidiary corporations that reflect our operating divisions. In the
future, our reports on operations can be expected to contain business
segment information. However, for the first quarters of 2003 and 200,
no discussion of business segment operations appears.
We offer a broad array of products and the start to this part of our
business has shown some success. In March 2003, we booked approximately
$35,000 in equipment sales. We have begun to build our wireless
Internet network in Denver. Also, we have begun to build our wireless
Internet network in Colorado Springs. We have become the preferred
telecommunications services provider in four Denver-area MDU
properties, providing voice, video and data services to these
properties. In the aggregate, we now provide cable television services
to approximately 160 customers in Denver.
First Quarter 2003 Acquisitions
-----------------------------------------------------
During the first quarter of 2003, we acquired certain assets from a
telecommunications company that have enabled us to begin to operate as
a seller of telecommunications-related hardware and software. Since
acquiring these assets, we have booked approximately $50,000 in sales
In March 2003, we entered into an agreement whereby we agreed to
purchase the customer base of an Arizona competitive local exchange
carrier (CLEC), subject to the requisite approvals from the Arizona
Corporation Commission (ACC) and other regulatory authorities. The
purchase price, payable 90 days from the execution date of the
agreement, is to be based upon the number of remaining paying customers
at the end of the 90 day period. At the execution of the agreement,
there were approximately 1,700 customers generating approximately
$100,000 gross revenue per month.
We do not hold a certificate for operating as a CLEC in the State of
Arizona and, therefore, have entered into an agency agreement with a
CLEC to provide services to these customers, until such time as we have
obtained CLEC certification in Arizona.
11
Currently, it is uncertain whether the ACC will approve the transfer of
the acquired customer base; based upon information currently available
to our management, it appears unlikely that the transfer of customers
will be approved by the ACC. Based upon this uncertainty, for the three
months ended March 31, 2003, we did not record any revenue or related
expense related to the transaction. We have not made any payments nor
have we realized any revenue from the transaction. Ultimately, should
the customer transfer not be approved by the ACC prior to the 90-day
look-back date for determining the purchase price of the customer base,
the effect would be that there are no paying customers and we would,
therefore, have no payment obligation with respect to the transaction.
First Fusion Capital Financing Transaction
-----------------------------------------------------
In May 2001, we entered into an amended and restated common stock
purchase agreement with Fusion Capital, pursuant to which Fusion
Capital agreed to purchase up to $10 million of our common stock. The
selling price of the shares was equal to a price based upon the market
price of our common stock without any fixed discount to the market
price. In March 2003, this agreement ended, with Fusion Capital having
purchased all 6,000,000 shares available for sale under the agreement
for cash in the total amount of approximately $585,000.
The majority of these funds were used for operating expenses. We will
need further capital, as we continue to expand our business.
Second Fusion Capital Financing Transaction
-----------------------------------------------------
In March 2003, we entered into another similar common stock purchase
agreement with Fusion Capital, pursuant to which Fusion Capital agreed
to purchase up to $10 million of our common stock. The selling price of
the shares will be equal to a price based upon the future market price
of the common stock without any fixed discount to the market price.
Sales under this agreement will not commence until such time as we have
completed a registration proceeding with respect thereto. We expect to
file a registration statement relating to this transaction in the very
near future.
CyberHighway Bankruptcy
-----------------------------------------------------
In September 2000, an involuntary bankruptcy petition was filed against
CyberHighway in the Idaho Federal Bankruptcy Court, styled In Re:
CyberHighway, Inc., Case No. 00-02454, by ProPeople Staffing, CTC
Telecom, Inc. and Hawkins-Smith. We expect a final order of discharge
to be issued in the future. We cannot predict when this final order
will be issued.
Critical Accounting Policies
- --------------------------------------------------------------
There have been no material changes to our critical accounting policies
during the three months ended March 31, 2003.
12
Management's Discussion and Analysis discusses the results of
operations and financial condition as reflected in our consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, management evaluates its
estimates and judgments, including those related to accounts
receivable, inventory valuation, amortization and recoverability of
long-lived assets, including goodwill, litigation accruals and revenue
recognition. Management bases its estimates and judgments on our
historical experience and other relevant factors, the results of which
form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources.
While we believe that the historical experience and other factors
considered provide a meaningful basis for the accounting policies
applied in the preparation of our consolidated financial statements, we
cannot guarantee that our estimates and assumptions will be accurate.
If such estimates and assumptions prove to be inaccurate, we may be
required to make adjustments to these estimates in future periods.
Results of Operations
- --------------------------------------------------------------
General
-----------------------------------------------------
During the first quarter of 2002, we derived our small amount of
revenues from our wireless Internet access business. During the second
quarter of 2002, our management expanded our business plan and caused
an evolution of our business, which has led to changes in our operating
structure. We began to derive revenues from our expanded and
reorganized business in the first quarter of 2003, with our small
amount of revenues from the first quarter of 2003 being derived from
our video services and equipment sales. We currently lack the capital
necessary to pursue our full-scale business plan, and we may never
possess enough capital with which to do so. In this circumstance, it is
likely that we would never earn a profit.
In the third quarter of 2001, we began wireless Internet operations in
Del Rio, Texas, and that system grew to have 50 customers online in a
short period of time. Our growth there, during 2002, was inhibited
significantly due to our lack of capital. Then, during the fourth
quarter of 2002, our management determined to cease operations in Del
Rio, due to Del Rio's geographic separation from our home area of
Eastern Colorado.
Our revenues for the first quarter of 2002 were small, due to a lack of
funds with which to expand our operations. Although we began to derive
greater revenues from our operations during the first quarter of 2003,
the level of our future revenues cannot be predicted, due to our
significant lack of capital.
Three Months Ended March 31, 2003, versus
Three Months Ended March 31, 2002.
-----------------------------------------------------
During the 2002 period, our small amount of revenues were derived from
our wireless Internet access business; during the 2003, period, our
small amount of revenues were derived from our video services and
equipment sales. Without additional capital, our revenues will remain
at these levels.
Our operating results for the first quarters of 2003 and 2002 are
summarized in the following table:
13
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
(unaudited) (unaudited)
-------------- --------------
Revenues $ 31,608 $ 4,626
Internet Access Costs, Cost of Goods Sold (13,499) (8,482)
Gross Profit (Loss) 18,109 (3,856)
Operating Expenses 600,842 603,918
Loss from Operations (582,733) (607,774)
Net Loss (582,733) (607,957)
Our net loss of $582,733 (unaudited) for the first quarter of 2003 was
slightly lower than our net loss for the 2002 period of $270,147
(unaudited). Certain line items in our statem ents of operations
changed materially from the 2002 period to the 2003 p eriod, which
contributed to the small reduction in our net loss for the current
period, as follows:
- Professional fees decreased from $270,147 in the 2001 period
to $107,501 in the 2003 period. This decrease is a result of
our not having required professional services during the 2003
period at the levels required during the 2002 period. Should
we continue to lack cash reserves, it is likely that, during
the remainder of 2003, we would issue shares of our common
stock in payment of certain professional fees.
- Salaries and commissions decreased from $242,314 in the 2002
period to $168,506 during the current period. This decrease in
salaries and commissions occurred due to the 2002 period's
one-time charge associated with the issuance of 34,536 shares
of our common stock to one of our officers, in payment of a
portion of his accrued salary in the approximate amount of
$140,000.
- During the 2002 period, we incurred $62,000 in advertising
expense compared to $3,913 in the current period. All of our
advertising expenses during the 2002 period were attributable
to the exercise of options to acquire shares of our common
stock by a consultant.
- Other general and administrative expenses increased from
$14,743 in the 2002 period to $290,158 in the current period.
This increase is due, in part, to two non-recurring charges:
(1) a charge of approximately $125,000 associated with our
issuing 2,500,000 shares of our common stock as a commitment
fee under the second Fusion Capital agreement; and (2) a
charge of approximately $65,000 associated with the issuance
of certain option to a consultant. This line item increased
also as a result of our having expanded the scope of our
business plan, after the first quarter of 2002.
We expect that our results of operations for the second quarter of 2003
will be similar to those of the first quarter of 2003.
Due to our severe lack of capital during 2002 period, we issued shares
of our stock to consultants in payment of their services. The fair
value of the shares issued to consultants is included in our statements
of operations under the "Professional Fees" line item. Issuing shares
of our common stock was the only means by which we could obtain the
consultants' services. The value of the consulting services received by
us under each agreement has been expensed in equal monthly amounts over
their respective terms:
- during the first three months of 2002, we issued 570,000
shares of our common stock under consulting agreements; these
shares were valued for financial accounting purposes at
$61,500, in the aggregate. All of this total amount was
expensed during 2002.
- during the first three months of 2003, we issued no shares of
our common stock in payment of services.
14
Liquidity and Capital Resources
- --------------------------------------------------------------
General.
-----------------------------------------------------
Since our inception, we have had a significant working capital deficit.
Currently, we are substantially illiquid, although we do possess enough
cash, through the result of recent securities sales, to continue our
current level of business activities, until we begin to obtain funds
under the second Fusion Capital common stock purchase agreement. As the
level of funding under the first Fusion Capital agreement was lower
than we had anticipated, during 2002 and the first quarter of 2003, we
obtained additional funds through sales of our securities to other
parties to meet our cash requirements. During the first quarter of
2003, we obtained approximately $70,000 from the exercise of certain
warrants and approximately $100,000 under the first Fusion Capital
agreement.
The majority of these funds were used for operating expenses.
We will need further capital, as we continue to expand our business. It
is possible that we will not be able to secure adequate capital as we
need it. Also, without additional capital, it is possible that we would
be forced to cease operations.
In July 2002, we became aware of an existing default judgment against
us, dated June 7, 2001, in the approximate amount of $22,000. The
lawsuit went unchallenged as a result of administrative error. In
August 2002, an arbitrator ruled against us in an arbitration
proceeding against our former chief financial officer, in the amount of
$100,000. We are currently negotiating terms with respect to each of
these liabilities.
Our Capital Needs.
-----------------------------------------------------
Due to our expanded business plan, our current capital needs are
significantly greater than they were during the first quarter of 2002.
To sustain our current level of operations for the next twelve months,
we will require additional capital of approximately $500,000. To
accomplish our business objectives, we will require at least $2
million. If we are unable to obtain this needed capital, we could be
forced to cease our operations.
Currently we do not possess enough capital to accomplish our business
objectives on a full-scale basis.
Fusion Capital Agreements
-----------------------------------------------------
Beginning in July 2001, we began to receive the first funds under our
first agreement with Fusion Capital. Through December 31, 2002, we had
received only $445,000 in payment of a total of 4,200,000 shares under
that agreement. This agreement ended in March 2003, with Fusion Capital
having purchased all 6,000,000 shares available for sale under the
agreement for a total of $585,000 in cash.
In March 2003, we entered into a second common stock purchase agreement
with Fusion Capital, which agreement is substantially similar to the
first agreement. Under the second agreement, Fusion Capital is to
purchase up to $10 million of our common stock, based on future stock
prices. We will not begin to sell shares to Fusion Capital under this
agreement, until such time as we have completed a registration
proceeding relating thereto with the SEC. No prediction as to the
timing of this circumstance can be made. We expect to file a
registration statement relating to this transaction in the very near
future.
Should all of our outstanding warrants be exercised, we would receive
cash proceeds of approximately $2,000,000. Any funds derived from the
exercise of warrants would be used for working capital.
You should note that we may never receive any of the funds discussed
above. Our failure to obtain capital from these sources could cause us
to cease our operations.
15
March 31, 2003.
-----------------------------------------------------
Historically, we have had a significant working capital deficit. At
March 31, 2003, our working capital deficit was $265,355 (unaudited)
which is higher than our $100,301 deficit at December 31, 2002. The
weaken of our capital position is due to our lack of revenues compared
to our ongoing expenses. Without additional capital, our working
capital deficit can be expected to become larger each quarter.
The following table sets forth our current assets and current
liabilities at March 31, 2003, and December 31, 2002:
16
March 31, 2003 December 31, 2002
(unaudited)
----------------------- -----------------------
Current Assets Cash $27,699 $111,568
Accounts receivable 23,675 224
Inventory 26,715 2,715
Other current assets 13,590 4,942
Current Liabilities Accounts Payable 158,278 131,146
Note Payable 87,604 87,604
Accrued Payroll 98,376 0
Notes Payable to Stockholder 1,000 1,000
Our accrued payroll at March 31, 2003, is attributable to accrued
salaries of our officers. Due to our lack of capital, our officers have
agreed to be paid less than their full salaries, until such time as we
improve our capital position.
During the first quarter of 2003, we obtained a total of $173,982 in
cash from sales of our securities:
- $103,000 from the sale of 1,859,865 shares of our common
stock; and
- $70,782 from the exercise of 1,517,000 outstanding warrants to
purchase a like number of shares.
The funds received were applied primarily to operating expenses.
Subsequent to March 31, 2003, in April 2003, we obtained funds through
sales of our securities, as follows:
- $25,000 from the exercise of options - 500,000 shares at $.05
per share. These funds were applied exclusively to operating
expenses.
- $50,000 from the exercise of 1,200,000 outstanding warrants to
purchase a like number of shares. A portion of these funds are
to be used for operating expenses, while the balance is to be
utilized in our efforts to expand our business.
Without obtaining at least $1,000,000 in new capital, we will continue
to have a significant working capital deficit and will not be able to
operate from a position of liquidity. This will impair our ability to
pursue our full-scale business plan and, thus, our ability ever to earn
a profit.
If we are unable to obtain significant additional capital, it is
possible that we would be forced to cease operations.
Cash Flows from Operating Activities.
-----------------------------------------------------
During the first quarter of 2003, our operations used $160,902
(unaudited) in cash compared to cash used of $123,305 (unaudited)
during the first quarter of 2002. In both periods, the use of cash in
operations was a direct result of the lack of revenues compared to our
operating expenses, particularly salaries and commissions.
Cash Flows from Investing Activities.
-----------------------------------------------------
During the first quarter of 2002, our investing activities neither
provided nor used cash. However, during the first quarter of 2003, our
investing activities used $64,949 (unaudited) in cash, nearly all of
which is attributable to equipment purchases. Because we lack working
capital, we cannot predict our cash flows from investing activities for
the remainder of 2003.
17
Cash Flows from Financing Activities.
-----------------------------------------------------
For the first quarter of 2003, our financing activities provided
$141,982 (unaudited) in cash. Notes receivable of $32,000 offset our
issuance of common stock for cash of $103,000 and the exercise of
warrants of $70,982. For the first quarter of 2002, our financing
activities provided $123,579 (unaudited) in cash. Our payments on notes
payable to stockholder of $18,521 and $4,900 in finder's fees were
offset by payments on subscriptions receivable of $70,000, $64,000 in
cash from sales of our common stock and $13,000 in cash obtained by the
exercise of certain warrants. We continue to seek capital and cannot,
therefore, predict future levels of cash flows from financing
activities.
Management's Plans Relating to Future Liquidity
- ---------------------------------------------------------------------------
To sustain our current level of operations for the next twelve months,
we will require additional capital of approximately $500,000. To
accomplish our business objectives, we will require at least $2
million.
Our best opportunity for obtaining needed funds is pursuant to the
second Fusion Capital agreement. We cannot predict the level of funding
to be obtained under this agreement or the commencement date
thereunder.
Since we only plan to sell up to 20,000,000 shares to Fusion Capital
under the second Fusion Capital agreement, the selling price of our
stock sold to Fusion Capital will need to average $.50 per share for us
to receive the maximum proceeds of $10 million under that agreement.
Assuming a selling price of $.09 per share, the closing sale price of
the common stock on May 19, 2003, and the purchase by Fusion Capital of
the full amount of shares purchasable under the second Fusion Capital
agreement, total proceeds to us would only be approximately $1,800,000,
unless we choose to issue more than 20,000,000 shares, which we have
the right to do.
Should we obtain at least $2 million under the Fusion Capital
agreement, we believe that we will be able to make significant progress
in implementing our business plan.
We cannot assure you that we will accomplish these objectives.
Currently, we have no other sources for funding on the scale
contemplated by the Fusion Capital transaction.
If we do not obtain the necessary funding, we would be forced to cease
operations.
Capital Expenditures
- ---------------------------------------------------------------------------
During the first three months of 2003, we made capital expenditures of
$64,949, primarily for needed equipment. We currently have limited
capital with which to make any significant capital expenditures. Should
we obtain significant funding, of which there is no assurance, we would
be able to make significant expenditures on equipment. The amount of
these equipment purchases cannot be predicted due to the uncertainty of
funding levels and timing. However, without additional capital, we will
make no capital expenditures.
18
CERTAIN STATEMENTS CONTAINED IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" ARE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND
ARE, THUS, PROSPECTIVE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. THE MOST SIGNIFICANT OF SUCH RISKS, UNCERTAINTIES AND OTHER FACTORS
IS OUR ABILITY TO OBTAIN CAPITAL IN AMOUNTS NECESSARY FOR US TO ACCOMPLISH OUR
PLAN FOR THE EXPLOITATION OF OUR QUICK-CELL WIRELESS INTERNET ACCESS PRODUCTS,
AS WELL AS CONSUMER ACCEPTANCE OF THESE PRODUCTS.
Item 3. Controls and Procedures
- --------------------------------------------------------------------------------
Our Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 Rules 240.13a-14(c) and
15d-14(c)) as of a date within 90 days before the filing date of this quarterly
report on Form 10-QSB and have concluded that such disclosure controls and
procedures are effective in timely alerting them to material information about
our company required to be disclosed by us in our periodic reports that we file
or submit under the Securities Exchange Act of 1934. There have not been any
significant changes in our internal controls or in other factors that could
significantly affect these internal controls subsequent to the date of the
evaluation.
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings.
- --------------------------------------------------------------------------------
CyberHighway Involuntary Bankruptcy
-----------------------------------------------------
On September 29, 2000, an involuntary bankruptcy petition was filed
against CyberHighway in the Idaho Federal Bankruptcy Court, styled In
Re: CyberHighway, Inc., Case No. 00-02454. The petitioning creditors
were ProPeople Staffing, CTC Telecom, Inc. and Hawkins-Smith. In
December 2000, CyberHighway and the petitioning creditors filed a joint
motion to dismiss this proceeding. The joint motion to dismiss was
denied because the creditors believe that CyberHighway's as-yet
unasserted damage claims against the original petitioning creditors and
their law firm and a claim against Dialup USA, Inc. represent
CyberHighway's most valuable assets. These as-yet unasserted claims
include claims for bad faith filing of the original bankruptcy petition
as to the original petitioning creditors and their law firm, as well as
claim for tortious interference with beneficial business relationships
as to Dialup USA, Inc. It is likely that, at some time in the future, a
final order of bankruptcy will be entered with respect to CyberHighway,
no prediction of the timing of such an order can be made, although we
believe that such an order would come only after the final adjudication
of the claims described above.
Other Litigation
-----------------------------------------------------
In November 2000, CyberHighway requested and received a temporary
restraining order against Darrell Davis, formerly one of our officers,
and his wife, Deanna Davis. We have alleged that the Davises have
diverted dial-up customers from CyberHighway to a company controlled by
him, all while he was an employee of USURF America. It is our
expectation that this legal proceeding will be abandoned by us in the
near future. This case is styled: CyberHighway, Inc. versus Deanna
Davis, individually and d/b/a Cyber- Trail, Inc., and Darrell D. Davis,
19th Judicial District Court, Parish of East Baton Rouge, State of
Louisiana, Case No. 478320.
19
In January 2000, we instituted arbitration proceedings against
Christopher L. Wiebelt, our former vice president of finance and chief
financial officer. At the recent hearing, we alleged that Mr. Wiebelt
violated certain terms of his employment agreement and sought damages
resulting from those violations, while Mr. Wiebelt claimed wrongful
termination under his employment agreement. The arbitrator has awarded
Mr. Wiebelt $75,000, plus legal expenses of approximately $25,000. We
are attempting to negotiate payment terms. This case is styled: USURF
America, Inc. versus Christopher L. Wiebelt, American Arbitration
Association, Case No. 71-160-00087-01.
In July 2002, we became aware of an existing default judgment against
us, dated June 7, 2001, in the approximate amount of $22,000. The
lawsuit, filed by a law firm in Boise, Idaho, went unchallenged as a
result of administrative error. We are attempting to negotiate payment
terms. This case is styled: Marcus, Merrick, Montgomery, Christian &
Hardee, LLP vs. USURF America, Inc., District Court of the Fourth
Judicial District of the State of Idaho, in and for the County of Ada,
Case No. CV OC 0101693D.
Item 2. Changes in Securities.
- --------------------------------------------------------------------------------
During the three months ended March 31, 2003, we issued securities as follows:
1. (a) Securities Sold. In January 2003, 375,000 shares of
our common stock were issued.
(b) Underwriter or Other Purchasers. Such shares were
issued to DMJ Communications, Inc.
(c) Consideration. Such shares were issued pursuant to a
stock purchase agreement and were valued at $20,000.
(d) Exemption from Registration Claimed. We relied upon
the exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and
Rule 506 thereunder. This purchaser was an accredited
investor.
2. (a) Securities Sold. In March 2003, 2,500,000 shares of
our common stock were issued.
(b) Underwriter or Other Purchasers. Such shares were
issued to Fusion Capital Fund II, LLC.
(c) Consideration. Such shares were issued pursuant to a
common stock purchase agreement and were valued at
$75,000.
(d) Exemption from Registration Claimed. We relied upon
the exemption from registration afforded by Section
4(2) of the Securities Act of 1933, as amended, and
Rule 506 thereunder. This purchaser was an accredited
investor.
3. (a) Securities Sold. In February 2003, a total of
2,030,000 common stock purchase warrants were issued.
(b) Underwriter or Other Purchasers. Such shares were
issued to Shelter Capital Ltd.
(c) Consideration. Such shares were issued pursuant to a
letter agreement.
(d) Exemption from Registration Claimed. These securities
were sold to a single non-U.S. purchaser and are
exempt from registration under the Securities Act of
1933, as amended, pursuant to the provisions of
Regulation S thereunder.
(e) Terms of Conversion or Exercise. The exercise prices
of the warrants are: 540,000 warrants, exercise price
$.049 per share; 213,368 warrants, exercise price
$.10 per share; 885,954 warrants, exercise price of
$.20 per share; 266,710 warrants, exercise price of
$.25 per share; 123,968 warrants, exercise price of
$.30 per share; all of the warrants are exercisable
for a period of five years from issuance.
Item 3. Defaults upon Senior Securities.
- --------------------------------------------------------------------------------
None.
20
Item 4. Submission of Matters to a Vote of Security Holders.
- --------------------------------------------------------------------------------
None.
Item 5. Other Information.
- --------------------------------------------------------------------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
- --------------------------------------------------------------------------------
(a) Exhibits.
- --------------------------------------------------------------
Exhibit No. Description
----------- --------------------------------------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350 of President
and CEO
99.2 Certification Pursuant to 18 U.S.C. Section 1350 of Chief
Financial Officer and Principal Accounting Officer
(b) Reports on Form 8-K.
- --------------------------------------------------------------
During the three months ended March 31, 2003, we filed one Current
Report on Form 8-K, as follows:
- Date of event: January 16, 2003, wherein we reported a change
in independent auditors;
- Date of event: March 10, 2003, wherein we reported our
entering into a financing transaction with a third party; and
- Date of event: March 31, 2003, wherein we reported (1) a
change in the location of our executive offices and (2) the
resignation of one of our directors.
21
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 20, 2003 USURF AMERICA, INC.
By: /s/ CHRISTOPHER K. BRENNER
----------------------------
Christopher K. Brenner
Vice President of Finance and
Administration, Chief Financial
Officer [Principal Accounting
Officer] and Secretary
22
CERTIFICATION OF PERIODIC REPORT
- --------------------------------------------------------------------------------
I, Douglas O. McKinnon, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of USURF America,
Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003.
/s/ DOUGLAS O. MCKINNON
- ------------------------
Douglas O. McKinnon
President and CEO
23
I, Christopher K. Brenner, certify that:
1. I have reviewed this quarterly report on Form 10-KSB/A of USURF America,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 20, 2003.
/s/ CHRISTOPHER K. BRENNER
- --------------------------
Christopher K. Brenner
Vice President of Finance
and Administration, Chief
Financial Officer and
Secretary
24