========================================
Form 10-QSB
========================================
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 June 30, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______.
----------------------------------------
Commission File No. 1-15383
----------------------------------------
USURF America, Inc.
-----------------------------------------------------------------
(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 8-14-03
- -------------------------------- --------------------------------
Common Stock, $.0001 par value 84,867,203
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1. Financial Statements.
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
USURF America, Inc. and Subsidiaries
Page
------
Consolidated Balance Sheets as of June 30, 2003 (unaudited),
and December 31, 2002 3
Consolidated Statements of Operations for the Three Months
Ended June 30, 2003 and 2002 (unaudited), and the Six Months
Ended June 30, 2003 and 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 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, AND JUNE 30, 2003 (UNAUDITED)
ASSETS
6/30/03 12/31/02
(unaudited)
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 384,129 $ 111,568
Accounts receivable 41,855 224
Inventory 26,865 2,715
Notes receivable - current 32,000 0
Other current assets 12,910 4,942
----------- -----------
Total Current Assets 497,760 119,449
----------- -----------
PROPERTY AND EQUIPMENT
Cost 190,041 73,359
Less: accumulated depreciation (27,244) (7,336)
----------- -----------
Total Property and Equipment 162,797 66,023
----------- -----------
INTANGIBLES 201,604 201,604
Less: accumulated amortization (6,954) 0
----------- -----------
Total Intangibles 194,650 201,604
----------- -----------
OTHER ASSETS
Prepaid consulting 0 0
Other 50,010 20,000
----------- -----------
Total Other Assets 50,010 20,000
----------- -----------
TOTAL ASSETS $ 905,217 $ 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, AND JUNE 30, 2003 (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
6/30/03 12/31/02
(unaudited)
------------ ------------
CURRENT LIABILITIES
Accounts payable $ 203,083 $ 131,146
Payroll taxes payable 19,007 0
Note Payable 87,604 87,604
Accrued payroll 166,053 0
Other current liabilities 3,689 0
Notes payable to stockholder 0 1,000
------------ ------------
Total Liabilities 479,436 219,750
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value; Authorized: 100,000,000 8,449 7,145
shares; Issued and outstanding: 84,492,203, at June 30, 2003,
and 71,445,338 at December 31, 2002
Additional paid-in capital 42,028,556 40,778,870
Accumulated deficit (41,426,276) (40,207,489)
Subscriptions (9,950) (21,200)
Deferred consulting (174,998) (370,000)
------------ ------------
Total Stockholders' Equity 425,781 187,326
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 905,217 $ 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 JUNE 30, 2003 AND 2002, AND
THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
Revenues $ 39,562 $ 4,676 $ 71,170 $ 9,302
Internet access costs, cost of goods sold (14,180) (8,669) (27,679) (17,151)
Inventory write-down 0 0 0 0
------------ ------------ ------------ ------------
Gross profit (loss) 25,382 (3,993) 43,491 (7,849)
------------ ------------ ------------ ------------
OPERATING EXPENSES
Depreciation and amortization 15,173 7,034 26,862 14,067
Professional fees 121,549 422,910 229,050 693,057
Rent 27,135 7,682 47,110 15,363
Salaries and commissions 157,334 711,995 325,840 817,163
Advertising 0 2,845 3,013 64,845
Other general and administrative 340,253 125,628 630,411 140,371
------------ ------------ ------------ ------------
Total Operating Expenses 661,444 1,278,094 1,262,286 1,742,866
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (636,062) (1,282,087) (1,218,795) (1,750,715)
------------ ------------ ------------ ------------
OTHER (EXPENSE)
Interest income 8 7 8 7
Interest expense 0 0 0 (183)
------------ ------------ ------------ ------------
Total Other Income (Expense) 8 7 8 (176)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX (636,054) (1,282,080) (1,218,787) (1,750,891)
INCOME TAX BENEFIT 0 0 0 0
------------ ------------ ------------ ------------
NET LOSS $ (636,054) $ (1,282,080) $ (1,218,787) $ (1,750,891)
============ ============ ============ ============
Net loss per common share $ (0.0078) $ (0.03) $ (0.0156) $ (0.05)
============ ============ ============ ============
Weighted average number of shares 82,048,870 41,190,086 77,984,415 35,044,692
outstanding ============ ============ ============ ============
The accompanying notes are an integral part of these statements.
5
USURF AMERICA, INC. AND SUBSIDIARIES
COLORADO SPRINGS, COLORADO
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Six Months Ended June 30,
--------------------------
2003 2002
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
- -------------------------------------------------
Net loss $(1,218,787) $(1,750,891)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 26,862 14,067
Consulting and other fees paid with stock 450,258 509,993
Compensation expense paid with stock 0 639,880
Advertising expense paid with stock 0 62,000
Legal fees paid with stock 0 101,000
Changes in operating assets and liabilities
Accounts receivable (41,631) 0
Inventory (150) (4,100)
Other assets (7,968) 0
Accounts payable 71,937 25,164
Accrued payroll 166,053 (16,293)
Deferred consulting 195,002 0
Other current liabilities 22,685 75,000
----------- -----------
Net cash (used in) operating activities (355,739) (344,180)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- -------------------------------------------------
Capital expenditures (116,682) 0
----------- -----------
Net cash (used in) investing activities (116,682) 0
----------- -----------
6
CASH FLOWS FROM FINANCING ACTIVITIES
- -------------------------------------------------
Payments on subscriptions receivable 11,250 240,000
Payments on notes payable - stockholder (1,000) (18,521)
Issuance of common stock for cash 153,000 186,000
Warrants exercised 593,732 13,000
Notes receivable (32,000) 0
Fee for stock issuance 0 (4,900)
----------- -----------
Net cash provided by financing activities 724,982 415,579
----------- -----------
Net increase (decrease) in cash and cash equivalents 272,561 71,399
Cash and cash equivalents, beginning of period 111,568 10
----------- -----------
Cash and cash equivalents, end of period $ 384,129 $ 71,409
=========== ===========
The accompanying notes are an integral part of these statements.
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
OTHER CASH FLOW INFORMATION
- -------------------------------------------------
Six Months Ended June 30, 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.
Six Months Ended June 30, 2002
- -------------------------------------------------
- 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.
- In April 2002, the Company entered into a one-month consulting
agreement, by issuing 75,000 shares of stock valued at $6,000.
- In April 2002, the Company issued 500,000 shares of stock in payment
of legal services, which shares of stock were valued at $35,000.
- In April 2002, the Company issued 500,000 shares of stock to a
consultant, which shares of stock were valued at $35,000.
7
- In April 2002, the Company issued a total of 9,000,000 shares of stock
to certain officers, in connection with their respective employment
agreements, which shares were valued at $960,000.
- In April 2002, the Company issued 200,000 shares of stock in payment
of a $20,000 account payable.
- In April 2002, the Company entered into a six-month consulting
agreement, by issuing 900,000 shares of stock valued at $99,000.
- In April 2002, the Company entered into a six-month consulting
agreement, by issuing 250,000 shares of stock valued at $27,500.
- In April 2002, the Company entered into a six-month consulting
agreement, by issuing 250,000 shares of stock valued at $27,500.
- In April 2002, the Company into a six-month consulting agreement, by
issuing 150,000 shares of stock valued at $15,000.
- In May 2002, the Company issued 900,000 shares of stock in payment of
legal services, which shares of stock were valued at $60,000.
- In May 2002, the Company entered into a one-month consulting
agreement, by issuing 75,000 shares of stock valued at $4,500.
8
USURF AMERICA, INC. AND SUBSIDIARIES
COLORADO SPRINGS, COLORADO
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
Note 1. Nature of Business, Organization and Basis of Presentation
- --------------------------------------------------------------------------
Basis of Presentation
- -----------------------------
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
- -----------------------------
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
- -----------------------------
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
- --------------------------------------------------------------------------
In the opinion of management, the accompanying consolidated financial statements
for the six months ended June 30, 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.
Note 3. Notes Payable to Shareholder
- --------------------------------------------------------------------------
June 30, 2003 December 31, 2002
(unaudited)
----------------- -----------------
Notes payable to stockholder, interest $0 $1,000
accrues at 8%, due on demand and
unsecured
9
Note 4. Stock and Warrant Issuances
- --------------------------------------------------------------------------
During the six months ended June 30, 2003, the Company issued 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;
- 1,500,000 shares upon the exercise of certain options; and
- 1,000,000 shares upon the exercise of certain options.
Note 5. Contingencies
- --------------------------------------------------------------------------
A. Outstanding Judgments
- -----------------------------
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.
B. American Stock Exchange Listing
- ------------------------------------
Currently, the Company is not in compliance with the continued listing
guidelines of AMEX. 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.
10
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.
11
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
communications services.
Current Overview
- --------------------------------------------------------------------------
We currently operate as a provider of video (cable television) and data
(Internet) services to business and residential customers. We also market and
sell telecommunications-related hardware and software. 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
communications-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 six months of 2003 and 200, no discussion of business segment
operations appears.
For the first six months of 2003, we recorded $71,170 in equipment sales and
services. We have begun to build our wireless Internet network in both Denver
and 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.
Recent Sales of Equity.
------------------------------------------------------------------
During June 2003, we obtained approximately $430,000 pursuant to the
exercise of certain warrants and options, as well as the sale of units of
our common stock and warrants. These funds improved our capital position
and provided the funds necessary to purchase equipment necessary to
continue construction of our Colorado Springs and Denver wireless-Internet
networks and for working capital.
First Half 2003 Acquisitions.
-----------------------------------------------------------------
Asset Acquisition.
--------------------------------------------
During the first half 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 services. Since
acquiring these assets, we have recorded revenues of $36,558.
Pending Business Acquisition.
--------------------------------------------
In June 2003, we executed a letter of intent to acquire the assets of
a private company that sells telecommunications-related hardware and
software. A letter agreement executed by the seller contemporaneously
with the letter of intent provides that, pending the execution of a
definitive purchase agreement concerning the transaction, we will
provide all services to certain of the seller's customers and will pay
all costs incurred to provide such service. In exchange, the seller
will pay us a management fee in an amount equal to all revenues
generated by the provision of such services. During the term of such
letter agreement, we will invoice all such customers and retain all
monies collected on such invoices. In June 2003, we recorded revenues
of $28,344 in connection with services provided under the letter
agreement . These revenues appear in our statements of operations for
the period ended June 30, 2003. We will continue to operate under the
letter agreement until a definitive purchase agreement is executed
with the seller. We expect to execute such an agreement in the near
future.
12
Termination of Pending CLEC
Acquisition.
--------------------------------------------
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. During
the second quarter of 2003, based upon the failure of the ACC to
provide the necessary approvals, we terminated this agreement.
Critical Accounting Policies
- ---------------------------------------------------------------------------
There have been no material changes to our critical accounting policies during
the six months ended June 30, 2003.
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 half of 2002, our revenues were derived from our wireless
Internet access business. During the second quarter of 2002, our management
expanded our business plan to include video products. As a result, our
revenues during the first half of 2003 included revenues from the sales of
video services and equipment.
Six Months Ended June 30, 2003, versus Six
Months Ended June 30, 2002.
-----------------------------------------------------
Our operating results for the first two quarters of 2003 and 2002 are
summarized in the following table:
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
(unaudited) (unaudited)
---------------- ----------------
Revenues $ 71,170 $ 9,302
Internet Access Costs, Cost of Goods Sold (27,679) (17,151)
Gross Profit (Loss) 43,491 (7,849)
Operating Expenses 1,262,286 1,742,866
Loss from Operations (1,218,795) (1,750,715)
Net Loss (1,218,787) (1,750,891)
13
Our net loss of $1,218,787 (unaudited) for the first six months of 2003 was
significantly lower than our net loss for the 2002 period of $1,750,891
(unaudited). Certain line items in our statements of operations changed
materially from the 2002 period to the 2003 period, which contributed to the
reduction in our net loss for the current period, as follows:
- Professional fees decreased from $693,057 in the 2002 period to
$229,050 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 $817,163 in the 2002 period to
$325,840 during the current period. This decrease in salaries and
commissions is attributable to the 2002 period's one- time charges
associated with (1) 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 and (2) the issuance of
9,000,000 shares of our common stock to certain of our officers, in
connection with an effective change-in-control transaction, which
shares were valued at approximately $567,000 (net of forgiven accrued
and unpaid salaries and loans).
- During the 2002 period, we incurred $64,845 in advertising expense
compared to $3,013 in the current period. Substantially 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 $140,371 in
the 2002 period to $630,411 in the 2003 period. This increase is due,
in part, to three 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;
(2) a charge of approximately $65,000 associated with the issuance of
certain options to a consultant; and (3) a charge of approximately
$260,000 associated with the issuance of certain options to a
consultant. This line item increased also as a result of our having
expanded the scope of our business, since the first half of 2002.
We expect that our results of operations for the third quarter of 2003 will be
similar to those of the first half of 2003.
Due to our lack of capital during the 2002 and 2003 periods, we issued shares of
our common 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 six months of 2002, we issued 630,000 shares of our
common stock under consulting agreements; these shares were valued for
financial accounting purposes at $300,000, in the aggregate. All of
this total amount was expensed during 2002.
- during the first six 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. However,
during the past year, our working capital deficit has narrowed significantly.
Currently, we 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 half of 2003, we obtained additional
funds through sales of our securities to other parties to meet our cash
requirements. During the first half of 2003, we obtained approximately $593,732
from the exercise of certain warrants and options, $153,000 from private sales
of our securities and approximately $100,000 under the first Fusion Capital
agreement.
Approximately $124,650 of the funds received was used to purchase needed
equipment and the balance of these funds was used for operating expenses and
applied to working capital.
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 half 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
June 30, 2003.
- -----------------------------------------------------
At June 30, 2003, we had a positive working capital position of $18,323
(unaudited) which represents an improvement from our working capital deficit of
$265,355 (unaudited) at March 31, 2003, and our $100,301 working capital deficit
at December 31, 2002. Our working capital position improved due to the receipt
of funds from the exercise of certain warrants and options and private sales of
our securities, although our lack of revenues compared to our ongoing expenses
continues to apply pressure to our working capital position. The note payable of
$87,604 and accrued payroll of $166,053 at June 30, 2003 represent current
liabilities that will be paid entirely with the Company's common stock. Thus,
only $225,779 of cash will be required to satisfy the Company's current
liabilities of $479,436 as of June 30, 2003.
The following table sets forth our current assets and current liabilities at
June 30, 2003, and December 31, 2002:
June 30, 2003 December 31, 2002
(unaudited)
----------------- -----------------
Current Assets Cash $ 384,129 $ 111,568
Accounts receivable 41,855 224
Inventory 26,865 2,715
Notes receivable - current 32,000 0
Other current assets 12,910 4,942
Current Liabilities Accounts payable $ 203,083 $ 131,146
Note payable 87,604 87,604
Accrued payroll 166,053 0
Other current liabilities 22,696 0
Notes payable to stockholder 0 1,000
Our accrued payroll at June 30, 2003, is attributable to accrued salaries of our
officers. In order to preserve working capital, and until such time as our
working capital position improves, our officers have agreed to receive payment
of their salaries in a combination of cash and stock.
During the first half of 2003, we obtained a total of $746,732 in cash from
sales of our securities:
- $153,000 from the sale of shares of our common stock; and
- $593,732 from the exercise of outstanding warrants and options.
The funds received were applied primarily to equipment purchases and operating
expenses.
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.
16
Cash Flows from Operating Activities.
- -----------------------------------------------------
During the first half of 2003, our operations used $355,739 (unaudited) in cash
compared to cash used of $344,180 (unaudited) during the first half 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 half of 2002, our investing activities neither provided nor
used cash. However, during the first half of 2003, our investing activities used
$116,682 (unaudited) in cash, all of which is attributable to equipment
purchases. Because we lack significant working capital, we cannot predict our
cash flows from investing activities for the remainder of 2003.
Cash Flows from Financing Activities.
- -----------------------------------------------------
For the first half of 2003, our financing activities provided $724,982
(unaudited) in cash. Notes receivable of $32,000 was offset by our issuance of
common stock for cash of $153,000 and the exercise of certain warrants and
options of $593,732. For the first half of 2002, our financing activities
provided $415,579 (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 $240,000, $186,000 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
- ---------------------------------------------------------------------------
Since we currently plan to register only 20,000,000 shares of our stock 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 $.15
per share, the closing sale price of the common stock on August 13, 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 $3,000,000, unless we choose to issue more than 20,000,000 shares.
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 our objectives will be accomplished
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 six months of 2003, we made capital expenditures of $116,682,
primarily for needed equipment. We currently have limited capital with which to
make any additional 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.
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
BUSINESS PLAN.
17
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 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.
In June 2003, one of our subsidiaries, USURF Telecom, Inc., was named as a
defendant in a lawsuit filed by Qwest Corporation. USURF Telecom has filed its
answer, denying any liability thereunder. Our management has determined that
USURF Telecom is not liable to Qwest. This case is styled: Qwest Corporation vs.
Maxcom, Inc. (f/k/a Mile High Telecom, CLEC for Sale, Inc. and Mile High
Telecom, Inc.), et al., District Court, City and County of Denver, Colorado,
Case No. 03 CV 1676.
18
Item 2. Changes in Securities.
- --------------------------------------------------------------------------------
During the three months ended June 30, 2003, we issued securities as follows:
1. (a) Securities Sold. In April 2003, 200,000 shares of Company Common Stock
were issued.
(b) Underwriter or Other Purchasers. Such shares of Common Stock were
issued to Richard E. Wilson.
(c) Consideration. Such shares of Common Stock were issued as a bonus and
were valued at $10,000. (d) Exemption from Registration Claimed. These
securities are exempt from registration under the Securities Act of
1933, as amended, pursuant to the provisions of Section 4(2) thereof
and Rule 506 thereunder, as a transaction not involving a public
offering. This purchaser was a sophisticated investor capable of
evaluating an investment in the Company.
2. (a) Securities Sold. In June 2003, 1,500,000 common stock options of the
Company were issued.
(b) Underwriter or Other Purchasers. Such options were issued to Peter
Rochow.
(c) Consideration. Such warrants were issued pursuant to a consulting
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. Exercise price of the options is $.14
per share and are exercisable for a period of one year from issuance.
3. (a) Securities Sold. In June 2003, 132,500 shares of Company Common Stock
were sold.
(b) Underwriter or Other Purchasers. Such shares of Common Stock were sold
to Three Point Properties, LLC.
(c) Consideration. Such shares of Common Stock were sold for $26,500 in
cash, pursuant to a securities purchase agreement.
(d) Exemption from Registration Claimed. These securities are exempt from
registration under the Securities Act of 1933, as amended, pursuant to
the provisions of Section 4(2) thereof and Rule 506 thereunder, as a
transaction not involving a public offering. This purchaser was a
sophisticated investor capable of evaluating an investment in the
Company.
4. (a) Securities Sold. In June 2003, 132,500 common stock purchase warrants
of the Company were issued.
(b) Underwriter or Other Purchasers. Such warrants were issued to Three
Point Properties, LLC.
(c) Consideration. Such warrants were issued pursuant to a securities
purchase agreement for no additional consideration.
(d) Exemption from Registration Claimed. These securities are exempt from
registration under the Securities Act of 1933, as amended, pursuant to
the provisions of Section 4(2) thereof and Rule 506 thereunder, as a
transaction not involving a public offering. This purchaser was a
sophisticated investor capable of evaluating an investment in the
Company.
(e) Terms of Conversion or Exercise. Exercise price of the warrants is
$.20 per share and are exercisable for a period of three years from
issuance.
19
Item 3. Defaults upon Senior Securities.
- --------------------------------------------------------------------------------
None.
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
----------- -----------------------------------------------------------
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a) or Rule 15d-14(b)
31.2 Certification of Chief Financial Officer required by Rule
13a-14(a) or Rule 15d-14(b)
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
20
(b) Reports on Form 8-K.
- ---------------------------------------------------------------------------
During the three months ended June 30, 2003, we did not file a Current
Report on Form 8-K.
================================================================================
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: August 19, 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
21