UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
|X| Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2004
|_| Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _________ to __________.
COMMISSION FILE NO. 001-15383
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
incorporation or organization) Identification Number)
6005 DELMONICO DRIVE, SUITE 140, COLORADO SPRINGS, CO 80919
(Address of principal executive offices)
Registrant's telephone number, including area code: (719) 260-6455
------------------------------------------------------------------
Check whether the issuer filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and has been subject to
such filing requirements for the past 90 days |X| Yes |_| No
As of December 10, 2004, there were 201,960,088 shares of the issuer's
outstanding common stock.
Transitional Small Business Disclosure Format (Check One): [ ] Yes [X] No
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USURF AMERICA, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
Consolidated Balance Sheets as of September 30, 2004 (Unaudited) and December 31, 2003 3
Consolidated Statements of Operations for the three months ended September 30, 2004 and 2003 (Unaudited) and the
nine months ended September 30, 2004 and 2003 (Unaudited) 5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (Unaudited) 6
Notes to Consolidated Financial Statements 9
2
USURF AMERICA, INC. AND SUBSIDIARIES
COLORADO SPRINGS, COLORADO
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003
AND SEPTEMBER 30, 2004
ASSETS
(UNAUDITED)
9/30/04 12/31/03
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 260,795 $ 72,597
Marketable securities 200,000 280,000
Securities receivable 440,000 -0-
Accounts receivable 253,707 69,205
Financing Costs net of $210,183 of amortization 492,217 -0-
Inventory 31,795 71,906
Deposits and other assets 52,075 44,910
----------- -----------
Total Current Assets 1,730,589 538,618
----------- -----------
PROPERTY AND EQUIPMENT
Cost 1,309,863 681,511
Less: accumulated depreciation (312,056) (98,836)
----------- -----------
Total Property and Equipment 997,807 582,675
----------- -----------
INTANGIBLES 3,981,416 909,932
----------- -----------
OTHER LONG TERM ASSETS 20,000 805,000
----------- -----------
TOTAL ASSETS $ 6,729,812 $ 2,836,225
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
3
USURF AMERICA, INC. AND SUBSIDIARIES
COLORADO SPRINGS, COLORADO
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003
AND SEPTEMBER 30, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
9/30/04 12/31/03
------------ ------------
CURRENT LIABILITIES
Notes payable, current portion (Net of unamortized discount of $225,383) $ 1,869,617 $ 168,300
Accounts payable
717,468 429,954
Accrued liabilities and payroll 186,660 119,825
Other current liabilities 393,759 156,379
Customer deposits 14,270 17,867
Deferred Revenues 259,971 403,333
------------ ------------
Total Current Liabilities 3,441,745 1,295,658
------------ ------------
LONG TERM LIABILITIES
Notes payable (Net of unamortized discount of $134,932) 2,190,068 -0-
------------ ------------
Total Long Term Liabilities 2,190,068 -0-
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value; Authorized: 100,000,000, none
Outstanding
Common stock, $.0001 par value; Authorized: 400,000,000 shares;
Issued and outstanding: 177,861,835 at September 30, 2004 and 114,684,486 at
December 31, 2003 17,787 11,468
Additional paid-in capital 57,632,847 47,159,317
Accumulated deficit (56,310,384) (43,861,845)
Deferred consulting (62,251) (1,608,373)
Other comprehensive loss (180,000) (160,000)
------------ ------------
Total Stockholders' Equity 1,097,999 1,540,567
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,729,812 $ 2,836,225
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
4
USURF AMERICA, INC. AND SUBSIDIARIES
COLORADO SPRINGS, COLORADO
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- -------------
REVENUES
Revenues $ 2,638,971 $ 165,278 $ 5,098,714 $ 236,448
Internet access costs, cost of goods sold (918,791) (103,391) (2,471,969) (131,070)
------------- ------------- ------------- -------------
Gross profit 1,720,180 61,887 2,626,745 105,378
------------- ------------- ------------- -------------
OPERATING EXPENSES
Professional fees 1,438,637 200,529 4,283,727 754,837
Salaries and commissions 467,475 256,246 1,030,871 582,086
Rent 23,043 30,923 95,001 78,033
Depreciation and amortization 303,674 41,040 717,293 67,902
Other general and administrative 1,401,953 296,422 2,993,418 604,588
------------- ------------- ------------- -------------
Total Operating Expenses 3,634,782 825,160 9,120,309 2,087,446
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (1,914,603) (763,273) (6,493,565) (1,982,068)
------------- ------------- ------------- -------------
OTHER (EXPENSE)
Accretion of interest expense on convertible
debt (206,011) -0- (990,036) -0-
Other expense (30,818) 548 (55,112) 556
Write off of other assets and
reclassification of related expenses (3,273,258) (3,273,258)
Gain (loss) on debt modification (1,568,688) -0- (1,568,688) -0-
Gain (loss) on disposition of asset (24,234) -0- 75,613 -0-
Interest expense (80,425) (9,283) (143,494) (9,283)
------------- ------------- ------------- -------------
Total Other Expense (5,183,434) (8,735) (5,954,974) (8,727)
------------- ------------- ------------- -------------
NET LOSS (7,098,037) (772,008) (12,448,539) (1,990,795)
------------- ------------- ------------- -------------
Imputed dividend attributable to rights
applicable to certain shareholders (850,000) -0- (850,000) -0-
------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO OTHER SHAREHOLDERS $ (7,948,037) $ (772,008) $ (13,298,539) $ (1,990,795)
------------- ------------- ------------- -------------
Net loss per common share $ (0.0453) $ (0.0083) $ (0.0853) $ (0.0240)
------------- ------------- ------------- -------------
Weighted average number of shares outstanding 175,491,835 93,359,842 155,878,255 83,109,557
------------- ------------- ------------- -------------
The accompanying notes are an integral part of these
consolidated financial statements.
5
USURF AMERICA, INC. AND SUBSIDIARIES
COLORADO SPRINGS, COLORADO
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Nine Months Ended September 30,
2004 2003
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(12,448,539) $ (1,990,795)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 717,292 67,902
Consulting and other fees paid with stock 4,249,931 1,183,511
Accretion of interest expense on convertible debt 990,036 -0-
Loss on debt modification 1,568,688 -0-
Write off advances 1,830,000 -0-
Loss on Sale of assets for securities (99,847) -0-
Changes in operating assets and liabilities
Accounts receivable (184,502) (66,342)
Marketable Securities and Securities Receivable (80,000) -0-
Inventory 40,111 (1,383)
Accounts payable 287,514 130,996
Accrued Payroll (73,640) -0-
Accrued Interest 140,475 -0-
Deferred revenue (198,312) -0-
Other assets and liabilities (485,894) 12,268
------------ ------------
Net cash used in operating activities (3,190,063) (663,843)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property and equipment (709,412) (384,715)
Cash paid for other assets (1,045,000) -0-
Cash paid for intangibles and other long term assets (1,319,028) (28,434)
------------ ------------
Net cash used in investing activities (3,073,440) (413,149)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Disbursement for notes receivable (111,300) (332,000)
Payments on subscriptions receivable -0- (468,875)
Proceeds from notes payable 4,963,000 (1,000)
Issuance of common stock for cash 1,600,000 1,433,876
Warrants exercised -0- 593,732
------------ ------------
Net cash provided by financing activities 6,451,700 1,225,733
------------ ------------
Net increase in cash and cash equivalents 188,198 148,741
Cash and cash equivalents, beginning of period 72,597 111,568
------------ ------------
Cash and cash equivalents, end of period $ 260,795 $ 260,309
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 3,019 $-0-
------------ ------------
Stock issued for acquisition of assets $ 2,656,999 $ 531,720
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
6
SUPPLEMENTAL DISCLOSURE
OF NON-CASH INVESTING AND
OTHER CASH FLOW INFORMATION
NINE MONTHS ENDED SEPTEMBER 30, 2004
In January 2004, the Company issued 57,550 shares under a consulting
agreement, which shares were valued at $13,812.00.
In January 2004, the Company issued 55,380 shares under a consulting
agreement, which shares were valued at $13,291.00.
In January 2004, the Company issued 28,000 shares under a consulting
agreement, which shares were valued at $7,840.00.
In January 2004, the Company issued 246,000 shares under a consulting
agreement, which shares were valued at $59,040.00.
In January 2004, the Company issued 130,000 shares under a consulting
agreement, which shares were valued at $24,000.00.
In January 2004, the Company issued 273,000 shares under a consulting
agreement, which shares were valued at $65,520.00.
In January 2004, the Company issued 320,000 shares under a consulting
agreement, which shares were valued at $76,800.00.
In January 2004, the Company issued 300,000 shares under a consulting
agreement, which shares were valued at $72,000.00.
In January 2004, the Company issued 175,000 shares under a consulting
agreement, which shares were valued at $43,750.00.
In January 2004, the Company issued 61,000 shares under a consulting
agreement, which shares were valued at $14,640.00.
In January 2004, the Company issued 61,000 shares under a consulting
agreement, which shares were valued at $14,640.00.
In January 2004, the Company issued 612,350 shares under a consulting
agreement, which shares were valued at $89,490.00.
In January 2004, the Company issued 66,500 shares under a consulting
agreement, which shares were valued at $11,280.00.
In January 2004, the Company issued 134,000 shares to a new employee as an
inducement to employment, which shares were valued at $36,180.00.
In February 2004, the Company issued 49,150 shares under a consulting
agreement, which shares were valued at $13,762.00.
In February 2004, the Company issued 34,000 shares under a consulting
agreement, which shares were valued at $9,520.00.
In February 2004, the Company issued 25,000 shares under a consulting
agreement, which shares were valued at $7,000.00.
7
In February 2004, the Company issued 81,600 shares under a consulting
agreement, which shares were valued at $22,848.00.
In February 2004, the Company issued 73,500 shares under a consulting
agreement, which shares were valued at $20,580.00.
In February 2004, the Company issued 75,000 shares to an employee as
compensation for services rendered, which shares were valued at $5,250.00.
In February 2004, the Company issued 50,000 shares to an employee as
compensation for services rendered, which shares were valued at
$11,000.00.
In February 2004, the Company issued 60,000 shares to an employee as
compensation for services rendered, which shares were valued at $9,600.00.
In February 2004, the Company issued 250,000 shares under a one-year
consulting agreement for services rendered during 2003, which shares were
valued at $17,500.00.
In February 2004, the Company issued 300,000 shares under a one-year
consulting agreement for services rendered during 2004, which shares were
valued at $72,000.00.
In February 2004, the Company issued 600,000 shares as full payment of
principal and accrued interest under a promissory note, which shares were
valued at $96,000.00.
In February 2004, the Company issued 1,514,500 shares to a new employee as
an inducement to employment, which shares were valued at $302,900.00.
In February 2004, the Company issued 1,514,500 shares to a new employee as
an inducement to employment, which shares were valued at $302,900.00.
In February 2004, the Company issued 160,000 shares to a new employee as
an inducement to employment, which shares were valued at $32,000.
In February 2004, the Company issued 120,000 shares to a new employee as
an inducement to employment, which shares were valued at $24,000.00.
In February 2004, the Company issued 120,000 shares to a new employee as
an inducement to employment, which shares were valued at $24,000.00.
In February 2004, the Company issued 200,000 shares to a new employee as
an inducement to employment, which shares were valued at $40,000.00.
In February 2004, the Company issued 431,818 shares to acquire certain
assets, which shares were valued at $95,000.
In February 2004, the Company issued 1,188,679 shares to acquire certain
assets, which shares were valued at $199,698.
In February 2004, the Company issued 282,031 shares to acquire certain
assets, which shares were valued at $47,381.
In February 2004, the Company issued 39,189 shares to acquire certain
assets, which shares were valued at $6,584.
8
In February 2004, the Company issued 849,786 shares to acquire certain
assets, which shares were valued at $142,764.
In February 2004, the Company issued 494,482 shares to acquire certain
assets, which shares were valued at $83,073.
In March 2004, the Company issued 50,000 shares to a vendor as payment for
services rendered or to be rendered, which shares were valued at $3,000.
In April 2004, the Company issued 1,333,334 shares to obtain exclusive
licensing rights in certain intellectual property, which shares were
valued at $200,000.
In April 2004, the Company issued 14,250,000 shares to acquire a business,
which shares were valued at $1,425,000.
In April 2004, the Company issued 450,000 shares to an employee as
compensation for services rendered, which shares were valued at $27,000.
In April 2004, the Company issued 375,000 shares to an employee as
compensation for services rendered, which shares were valued at $22,500.
In April 2004, the Company issued 250,000 shares to a former employee as
compensation for services rendered, which shares were valued at $15,000.
In April 2004, the Company issued 125,000 shares to an employee as
compensation for services rendered, which shares were valued at $7,500.
In April 2004, the Company issued 175,000 shares to an employee as
compensation for services rendered, which shares were valued at $10,500.
In April 2004, the Company issued 1,250,000 shares to acquire a business,
which shares were valued at $90,000.
In May 2004, the Company issued 1,000,000 shares under a consulting
agreement for services to be rendered during 2004, which shares were
valued at $120,000.
In May 2004, the Company issued 1,000,000 shares to a new employee as an
inducement to employment, which shares were valued at $100,000.
In May 2004, the Company issued 1,000,000 shares to a new employee as an
inducement to employment, which shares were valued at $100,000.
In May 2004, the Company issued 1,000,000 shares to a new employee as an
inducement to employment, which shares were valued at $100,000.
In May 2004, the Company issued 400,000 shares to an employee as
compensation for services rendered, which shares were valued at $40,000.
In May 2004, the Company issued 50,000 shares for professional services to
be rendered during 2004, which shares were valued at $5,000.
In May 2004, the Company issued 625,000 shares for consulting services
rendered in connection with a business acquisition, which shares were
valued at $75,000.
In June 2004, the Company issued 122,000 shares to a vendor as payment for
services rendered or to be rendered, which shares were valued at $12,200.
9
In June 2004, the Company issued 475,000 shares for consulting services
rendered in connection with a financing transaction, which shares were
valued at $47,500.
In June 2004, the Company issued 250,000 shares for consulting services
rendered in connection with a financing transaction, which shares were
valued at $25,000.
In June 2004, the Company issued 275,000 shares for consulting services
rendered in connection with a financing transaction, which shares were
valued at $27,500.
In June 2004, the Company issued 100,000 shares to an employee as bonus
compensation for services rendered in 2003, which shares were valued at
$10,000.
In June 2004, the Company issued 25,000 shares to an employee as bonus
compensation for services rendered in 2003, which shares were valued at
$2,500.
In June 2004, the Company issued 15,000 shares to an employee as bonus
compensation for services rendered in 2003, which shares were valued at
$1,500.
In June 2004, the Company issued 50,000 shares to an employee as bonus
compensation for services rendered in 2003, which shares were valued at
$5,000.
In June 2004, the Company issued 15,000 shares to an employee as bonus
compensation for services rendered in 2003, which shares were valued at
$1,500.
In June 2004, the Company issued 15,000 shares to an employee as bonus
compensation for services rendered in 2003, which shares were valued at
$1,500.
In June 2004, the Company issued 600,000 shares for professional services
to be rendered during 2004, which shares were valued at $60,000.
In June 2004, the Company issued 950,000 shares for consulting services
rendered in connection with a business acquisition, which shares were
valued at $95,000.
In June 2004, the Company issued 750,000 shares for consulting services
rendered in connection with a business acquisition, which shares were
valued at $75,000.
In June 2004, the Company issued 2,000,000 shares under a consulting
agreement for services to be rendered during 2004, which shares were
valued at $200,000.
In June 2004, the Company issued 250,000 shares for consulting services
rendered in connection with a business acquisition, which shares were
valued at $25,000.
In June 2004, the Company issued 154,000 shares for consulting services
rendered in connection with a business acquisition, which shares were
valued at $15,030.
In June 2004, the Company issued 175,000 shares to a vendor for services
to be rendered during the next twelve months, which shares were valued at
$17,500.
In June 2004, the Company issued 175,000 shares to a vendor for services
to be rendered during the next twelve months, which shares were valued at
$17,500.
In June 2004, the Company issued 280,000 shares to an employee as
compensation for services rendered during the first half of 2004, which
shares were valued at $21,000.
In June 2004, the Company issued 480,000 shares to an employee as
compensation for services rendered during the first half of 2004, which
shares were valued at $36,000.
10
In June 2004, the Company issued 200,000 shares to an employee as
compensation for services rendered during the fourth quarter of 2003 and
the first quarter of 2004, which shares were valued at $40,000.
In July 2004, the Company issued 80,000 shares for consulting services,
which shares were valued at $5,600.
In September 2004, the Company issued 75,000 shares for consulting
services, which shares were valued at $13,500.
In September 2004, the Company issued 2,200,000 shares for consulting
services, which shares were valued at $132,000.
In September 2004, the Company issued 1,200,000 shares for consulting
services, which shares were valued at $72,000.
NINE MONTHS ENDED SEPTEMBER 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.
In July 2003, the Company issued 75,000 shares under a consulting
agreement, which shares were valued at $14,250.
In July 2003, the Company issued 100,000 shares under a consulting
agreement, which shares were valued at $17,000.
In August 2003, the Company issued 3,000,000 shares under an amended
one-year consulting agreement, which shares were valued at $480,000.
In August 2003, the Company issued 333,333 shares in payment of a $4,800
account payable and $45,200 of future services, which shares were valued
at $50,000.
In September 2003, the Company issued 1,650,000 shares to certain
directors, in lieu of cash, in payment of directors' fees, which shares
were valued at $141,500.
In September 2003, the Company issued 75,000 shares under a consulting
agreement, which shares were valued at $14,250.
In September 2003, the Company issued 100,000 shares under a consulting
agreement, which shares were valued at $17,000.
In September 2003, the Company issued a total of 4,475,000 shares of stock
to certain officers, in lieu of cash compensation, pursuant to their
respective employment agreements, which shares were valued at $281,750.
In September 2003, the Company issued 2,800,000 shares to acquire certain
assets, which shares were valued at $532,000.
In September 2003, the Company issued 600,000 shares in payment of a note
payable and related accrued interest, which shares were valued at $96,000.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying consolidated financial statements
as of and for the three and nine months ended September 30, 2004 and 2003,
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. These
unaudited financial statements should be read in conjunction with the financial
statements and notes thereto included in USURF's Annual Report on Form 10-KSB
for the year ended December 31, 2003, 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 2003
presentation. The results of operations for the interim periods are not
necessarily indicative of the results to be obtained for the entire year.
NOTE 2. CRITICAL ACCOUNTING POLICIES
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.
STOCK-BASED COMPENSATION
Transactions in equity instruments with non-employees for goods or services are
accounted for on the fair value method, as described in SFAS No. 123. No options
were granted to employees, officers or directors during 2003. During 2004,
certain directors, officers and employees were granted a total of 6,650,000
options and 17,500,000 warrants to purchase an equivalent number of shares of
the Company's stock.
STOCK FOR SERVICES
The Company has issued stock pursuant to various consulting agreements. Deferred
consulting costs which are valued at the stock price on the date of a particular
agreement are recorded as a reduction of stockholders' equity and are amortized
over the useful lives of the respective agreements.
REVENUE RECOGNITION
The Company charges its video and data customers monthly service fees and
recognizes the revenue in the month the services are provided or equipment is
sold. The Company bills monthly for its voice (telephone) services in advance
and generally receives payments during the month in which the services are
provided. To the extent that revenue is received, but not earned, the Company
records these amounts as deferred revenue.
BAD DEBT
The Company estimates the amount of uncollectible accounts receivable and
records an allowance for bad debt. Uncollectible accounts receivable are then
charged against this allowance.
12
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. The effect
of considering all potential dilutive securities is not presented as the effects
would be anti-dilutive.
MARKETABLE SECURITIES AND SECURITIES RECEIVABLE
In May 2004, the Company sold Children's Technology Group, Inc., dba
MomsandDads, to ZKID Network Company (OTCBB: ZKID). The terms of the sale
provided for ZKID to pay the Company $600,000 in stock consideration (the
"Purchase Price'). At closing the Company received 4,000,000 shares of ZKID
common stock valued at $0.15 per share. The terms of the purchase and sale
agreement provide that if the shares issued to the Company do not have a market
value of at least $600,000, then ZKID would issue additional shares to the
Company for the difference. At September 30, 2004 the market value of the shares
was $160, 000 and therefore the Company recorded a $440,000 securities
receivable.
NOTE 3. STOCK, OPTION AND WARRANT ISSUANCES
During the nine months ended September 30, 2004, the Company issued shares of
common stock and common stock purchase warrants, as follows:
23,485,985 shares to acquire various businesses or business assets;
19,000,000 shares for cash;
21,191,364 shares in exchange for consulting and other services; and
56,488,312 warrants (350,000 w/exercise price of $0.20 per share; 1,000,000
w/exercise price of $0.18 per share; 2,500,000 w/exercise price of $0.15 per
share; 39,419,562 w/exercise price of $0.12 per share; 1,968,750 w/exercise
price of $0.08 per share; 7,500,000 w/exercise price of $0.12 per share;
3,750,000 w/exercise price of $0.12 per share) were issued.
During the quarter ended September 30, 2004 the Board of Directors granted
options to certain key employees and consultants totaling 6,650,000. The options
have an exercise price of $0.10 per share and are exercisable in three
installments, each of which become exercisable when the market price for common
share of the Company's stock reaches $0.15 per share, $0.22 per share and $0.30
per share respectively. The Company used the BlackScholes method to calculate
the fair market value of the options given to consultants as $43,499; this
amount was recorded as an expense.
Additionally, the Board granted warrants for the purchase of 17,500,000 shares
of the Company's common stock to the new Chairman. The exercise price for the
warrants is $0.07 per share and the warrants are exercisable in whole or in part
through September 30, 2006.
The Company uses the intrinsic value method for accounting for employee stock
based compensation. Under the intrinsic value method, the compensation cost, if
any, is the excess of the quoted market price of the stock over the exercise
price. All of the warrants and options were granted with an exercise price in
excess of market at the date of grant and therefore no compensation expense is
recognized in the financial statements. For years ended after December 31, 2004,
the Financial Accounting Standards Board may require the use of the fair value
method. Had the Company used the fair value method for the quarter ended
September 30, 2004 the Company would have recognized an additional expense of
$149,348 for the options granted employees and $615,638 in additional expense
for the warrants. Below is the proforma net loss and earnings per share if the
company used the fair value method.
13
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2004 2003 2004 2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
NET LOSS $ (7,098,037) $ (772,008) $(12,448,539) $ (1,990,795)
FAIR VALUE OF OPTIONS AND WARRANTS GRANTED (764,986) (764,986)
------------ ------------ ------------ ------------
PROFORMA NET LOSS $ (7,863,023) $ (772,008) $(13,213,525) $ (1,990,795)
============ ============ ============ ============
PROFORMA NET LOSS PER COMMON SHARE ($ 0.045) ($ 0.008) ($ 0.085) ($ 0.024)
============ ============ ============ ============
NOTE 4. FINANCING TRANSACTIONS
In December 2003, the Company executed a convertible loan agreement under which
the Company could borrow up to $700,000. At December 31, 2003, the balance of
the loan was $57,000. The loan(s) are due one year from funding, pay interest at
the rate of ten percent (10%) per annum and are convertible into common stock of
the Company at a conversion price of $0.15 per share. Additionally, the
agreement called for the issuance of two warrants with an exercise price of
$0.18 and $0.26 respectively for each share converted. During the first quarter
of 2004, the Company borrowed an additional $543,000 under the agreement
bringing the balance to $600,000. This amount was converted into 5,000,000
shares of common stock. In connection with the conversion, the conversion price
and the exercise price of the warrants were reduced to $0.12 per share. The
entire proceeds from the convertible promissory note were allocated to the
warrants and the beneficial conversion feature based on a calculation using the
Black-Scholes model. As of September 30, 2004 interest expense related to the
accretion of the convertible promissory note to its face value and price
reduction for $555,800 was recorded as the notes are convertible immediately.
In January 2004, the Company entered into an agreement with Atlas Capital
Services, LLC ("Atlas") to provide financing directly or indirectly to the
Company. Under the terms of the agreement, the Company will pay to Atlas a fee
equal to 10% of the principal amount of the Transaction Amount to be paid as
proceeds are received by the Company from each Transaction.
In March 2004, Atlas arranged for the Company to complete the closing of a
private placement totaling $3,095,000. The placement consisted of $1,000,000 in
common stock at $0.10 per share, $2,095,000 in convertible debentures
convertible into common stock at $0.10 per share, with 125% warrant coverage at
an exercise price of $0.12 per share. The convertible debentures, if not
converted, are due September 15, 2005 and bear interest at six percent (6%)
payable quarterly. Under the terms of the private placement, the investors have
the right to purchase up to an amount equal to, at the election of such
investors, $3,000,000 principal amount of additional debentures. Any additional
investment will be on terms identical those set forth in the private placement.
The entire proceeds from the convertible debentures were allocated to the
warrants and the beneficial conversion feature based on a calculation using the
Black-Scholes model. The interest expense related to the accretion of the
convertible debentures to their face value totals $934,798 and will be amortized
over eighteen months, the term of the convertible note. As of September 30, 2004
interest expense of $207,733 was amortized and recorded as additional interest
expense.
During the second quarter of 2004, Atlas arranged for the Company to complete
the closing of an additional private placements totaling $1,575,000, consisting
of $1,575,000 in convertible debentures convertible into common stock at $0.08
per share, with 75% warrant coverage at an exercise price of $0.12 per share.
The convertible debentures, if not converted, are due June, 2006 and bears
interest at eight percent (8.0%) payable quarterly. Under the terms of these
private placements, the investors have the right to purchase up to an amount
equal to, at the election of such investors, $1,500,000 principal amount of
additional debentures. Any additional investment will be on terms identical
those set forth in the private placements. The entire proceeds from the
convertible debentures were allocated to the warrants and the beneficial
conversion feature based on a calculation using the Black-Scholes model. The
interest expense related to the accretion of the convertible debentures to their
face value totals $491,830 and will be amortized over 24 months, the term of the
convertible note. As of September 30, 2004 interest expense of $20,493 was
amortized and recorded as additional interest expense.
14
During the third quarter of 2004, Atlas arranged for the Company to complete the
closing of two additional private placements totaling $750,000, consisting of
$750,000 in convertible debentures convertible into common stock at $0.05 per
share. The convertible debentures, if not converted, are due June, 2006 and bear
interest at twelve percent (12.0%) payable quarterly. Under the terms of these
private placements, the investors have the right to purchase up to an amount
equal to, at the election of such investors, $750,000 principal amount of
additional debentures. Any additional investment will be on terms identical
those set forth in the private placements. The proceeds from the convertible
debentures were allocated to notes payable and the beneficial conversion feature
based on intrinsic value. The debt discount related to the beneficial conversion
feature totals $435,000 and will be amortized over 24 months, the term of the
convertible notes. As of September 30, 2004 interest expense of $58,123 was
amortized and recorded as additional interest expense.
Additionally in July 2004, the Company repriced the purchase price and
conversion price of the above first and second quarter transactions to $0.05 per
share. As a result, the Company will issue an additional 17,000,000 shares for
shares purchased under a securities purchase agreement and certain notes,
previously converted, and has reserved an additional 32,762,500 shares to be
issued upon conversion of the outstanding convertible debentures. The Company
recognized $850,000 as an imputed dividend to these shareholders for this right.
This amount is subtracted from net loss to determine the net loss to the other
shareholders. According to FASB Statement Number 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" and FASB's
EITF Issue 96-19 "Debtor's Accounting for a Modification or Exchange of Debt
Instruments" the repricing of the conversion price results in the deemed
extinguishment of the convertible debt and replacement with new convertible
debt. As a result, the Company recorded $1,568,688 as loss on debt modification.
In addition $396,050 of debt discount and $284,487 of debt premium was recorded
in connection with the deemed new convertible debt according to the guidelines
suggested in FASB's EITF Issue 00-27 regarding the application of issue No.
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios" and will be amortized over the
remaining life of the debentures. The debt discount and premium respectively
will be amortized over the remaining lives months of the debentures. The net
interest expense for the quarter ended September 30, 2004 for these debentures
is $46,074.
At September 30, 2004 total short term notes payable under the above is
$2,095,000, the debt discount of $225,383 is netted with the total resulting in
a balance of $1,869,617. The total long term notes payable under the above is
$2,325,000, the debt discount of $380,625 and debt premium of $245,693 are
netted with the total resulting in a balance of $2,190,068 for the balance sheet
presentation.
SUBSEQUENT EVENT
Subsequent to September 30, 2004, the Company executed a Subscription Agreement
(the "Agreement) with Monarch Pointe Fund, Ltd. and Mercator Advisory Group, LLC
(collectively referred to as "Purchasers"), whereby the Company agreed to issue
and sell to the Purchasers, 10,000 shares of Series A Convertible Preferred
Stock ("Series A Stock") at $100.00 per share, for a total consideration of
$1,000,000. In connection with the purchase and sale of the Series A Stock, the
Purchasers will receive Warrants to purchase up to an aggregate of 7,000,000
shares of the Company's common stock, at an exercise price of $0.075 per share
subject to certain adjustment. The Series A Stock is convertible into the
Company's common stock at a conversion price ranging from $0.05 to $0.075 as
calculated in accordance with the Certificate of Designation. Generally, the
conversion price per share for the Series A Stock shall be equal to eighty-five
percent (85%) of the Market Price provided, however, that subject to certain
provisions, in no event shall the conversion price be less than $0.05 per share
(the "Floor Price") or exceed $0.075 (the "Ceiling Price").
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements, including the notes thereto, included elsewhere in this
Form 10-QSB, and the Management's Discussion and Analysis of Financial Condition
and Results of Operations included in our 2003 Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding, among other things, (a) our growth
strategies, (b) anticipated trends in our industry, (c) our future financing
plans and (d) our ability to obtain financing and continue operations. In
addition, when used in this filing, the words "believes," "anticipates,"
"intends," "in anticipation of," and similar words are intended to identify
certain forward-looking statements. These forward-looking statements are based
on the Company's expectations and are subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
could differ materially from these forward-looking statements as a result of
changes in trends in the economy and the Company's industry, reductions in the
availability of financing and other factors. In light of these risks and
uncertainties, the forward-looking statements contained in this report may not
occur. Except to fulfill our obligation under the United States securities laws,
we do not undertake any obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
OVERVIEW OF OUR BUSINESS
During 2003 and through September 30, 2004, we continued to implement and expand
our business plan beyond solely offering wireless Internet access service. We
currently operate as a provider of video (cable television) and data (Internet)
services to business and residential customers and since the completion of the
acquisition of Connect Paging Inc. d/b/a/ Get-A-Phone, we also offer additional
telecommunications services including local, long distance and enhanced
telephone (voice) services. Our current business plan involves obtaining,
through internal growth, as many, voice, video and data customers as possible
offering various combinations of bundled packages of communications services.
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.
SUNWEST COMMUNICATIONS, INC. AND APOLLO COMMUNICATIONS, INC.
In October 2003, the Company signed a Letter of Intent to acquire the assets of
Apollo Communications, Inc. of Colorado Springs ("Apollo"). Apollo provides data
and high-speed internet access services as well as local and long distance
telephone services. Additionally, in February, 2004, the Company signed a
definitive agreement to acquire the assets of SunWest Communications, Inc.
("SunWest"). The assets included SunWest's network of fiber optic lines, its
operations facilities and equipment and, subject to Colorado Public Utility
Commission approval, its customer base.
Through September 30, 2004 the Company advanced a combined total of $1,830,000
to SunWest and Apollo and recorded this amount as "other long term assets".
Through September 30, 2004 the Company supported through its operations
$1,443,257.71 of customer care and related expenses of SunWest and Apollo.
During the quarter ended September 30, 2004 the senior secured lenders of
SunWest and Apollo foreclosed on the assets of these companies. As a result, the
Company has written off the balance of other assets of $1,830,000 and
reclassified the related expenses of $1,443,257.71 as write off of other assets
and reclassification of related expenses. The Company has not made a
determination whether to seek legal recourse to recover damages as a result of
the foreclosure.
GOING CONCERN
Our auditor stated in its report on our financial statements for the period
ended December 31, 2003 and 2002 that the Company has experienced recurring
losses and operated with negative working capital and, as a result, there exists
substantial doubt about our ability to continue as a going concern. For the nine
months ended September 30, 2004 and 2003, we incurred a net loss of $12,448,539
and $1,990,795, respectively. As of September 30, 2004, USURF had an accumulated
deficit of $56,310,384. We are actively seeking customers for our services. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
16
CRITICAL ACCOUNTING POLICIES
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 principals generally accepted
in the United States. The preparation of financial statements in conformity with
accounting principals generally accepted in the United States 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. These critical
accounting policies are described in more detail under item 6 in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our Annual Report on Form 10-KSB for the year ended
December 31,2003 filed with the Securities and Exchange Commission. Management
bases its estimates and judgments on its 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
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
REVENUES
For the nine months ended September 30, 2004 and 2003, USURF had $5,098,714 and
$236,448, respectively in revenue, an increase of $4,862,266. This increase is
primarily due to the acquisition of Connect Paging, Inc. d/b/a Get-A-Phone in
April 2004. During the nine months ended September 30, 2004, USURF's revenues
were derived primarily from the sale of telecommunication services, internet
access services, telecommunications-related hardware and services and
satellite-based CATV access services. These revenues are recognized and recorded
as services are performed.
OPERATING EXPENSES
For the nine months ended September 30, 2004 and 2003, operating expenses were
$9,120,309 and $2,087,446, respectively. During the nine months ended September
30, 2004, operating expenses consisted primarily of professional and consulting
fees of $4,283,727, of which $4,249,931 was paid in stock, salaries and
commissions of $1,030,871, and other general and administrative expenses of
$2,993,418 consisting primarily of bad debt related to Get-A-Phone accounts
receivable ($1,516,788), right of entry expense ($336,278), software expense
($127,054) and insurance expense ($122,516).
NET LOSS
For the nine months ended September 30, 2004, we had a net loss of $12,448,539,
or $0.0799 per share. In the comparable period of the prior year, we had a net
loss of $1,990,795, or $0.0240 per share.
17
LIQUIDITY
At September 30, 2004, USURF had a net working capital deficit of $1,711,155,
compared to a net working capital deficit of $757,040 at December 31 2003. A net
working capital deficit means that current liabilities exceeded current assets.
Current assets are generally assets that can be converted into cash within one
year and can be used to pay current liabilities.
Currently, we believe we have sufficient cash from the sale of securities and
commitments from Atlas Capital financing transactions to continue current
business operations through December 31, 2004. During the nine months ended
September 30, 2004, we received approximately $1,600,000 from the sale of
securities, $543,000 in debt from Evergreen that was converted to securities and
$4,420,000 in debt from the Atlas Capital financing transaction. At September
30, 2004, we had cash on hand of $260,795.
Subsequent to September 30, 2004, the Company executed a Subscription Agreement
whereby the Company agreed to issue and sell to the Purchasers, 10,000 shares of
Series A Convertible Preferred Stock ("Series A Stock") at $100.00 per share,
for a total consideration of $1,000,000. In connection with the purchase and
sale of the Series A Stock, the Purchasers will receive Warrants to purchase up
to an aggregate of 7,000,000 shares of the Company's common stock, at an
exercise price of $0.075 per share subject to certain adjustment.
We anticipate that our capital needs will be met through financing transactions
arranged by Atlas Capital. We will also seek other sources of financing to fund
operations, although we may not be successful in such efforts. We may not be
able to secure adequate capital as we need it. Without additional capital, we
would be forced to curtail or cease our operations.
CASH USED IN OPERATING ACTIVITIES
During the nine months ended September 30, 2004, the Company's operations used
cash of $3,190,063 compared to $663,843 used during the same period in 2003. In
each period reported, the use of cash was a direct result of the increase in net
loss. During the nine months ended September 30, 2004, $990,036 of accreted
interest expense and $1,568,688 loss on debt modification was recorded in
relation to our notes payable with beneficial conversion features; during the
same period in 2003 we did not incur any accreted interest expense or debt
modification expense.
CASH USED IN INVESTING ACTIVITIES
During the first three quarters of 2004, the Company engaged in a significant
amount of capital investment activity, primarily through the acquisition of
business assets from other companies. The total value of capital investments for
the period was $1,045,000 compared to only $413,149 for the same period in 2003.
During the 2004 period, capital assets were also acquired through the issuance
of stock valued at $2,656,998.
CASH PROVIDED BY FINANCING ACTIVITIES
During the first three quarters of 2004, the total value of the Company's
financing activities was $6,451,700 compared to a value of $1,225,733 provided
during the same period in 2003. During the 2004 period, $1,600,000 of cash was
provided through the sale of stock and $4,420,000 (presented as $4,059,685 net
of unamortized discount of $360,315) was provided through debt issuance.
OFF-BALANCE SHEET FINANCING ACTIVITIES
We do not have any off-balance sheet arrangements that have, or are reasonably
likely to a current or future effect on our financial condition, changes in
financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material.
18
FACTORS AFFECTING OUR BUSINESS AND PROSPECTS
There are many factors that affect our business and the results of our
operations, some of which are beyond our control. These factors include:
o we have a limited operating history with significant losses and
expect our losses to continue for the foreseeable future;
o the market price of our common stock is very volatile and the value
of your investment may be subject to sudden decreases;
o a low market price may severely limit the potential market for our
common stock, and
o our stock has been de-listed from the American Stock Exchange and is
categorized as a "penny stock."
For a discussion of these and other factors affecting our business and
prospects, see "Item 1. - Description of Business--Risk Factors Concerning Us
and Our Common Stock" in our Annual Report on Form 10-KSB for the year ended
December 31, 2003. In addition, the following factors may affect our business,
the results of our operations and the market price of our securities:
OUR INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS EXPRESSED IN THEIR
AUDIT REPORT RELATED TO OUR FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 2003, SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN
In its opinion on our financial statements for the year ended December 31, 2003,
our independent auditor, Hein & Associates LLP, expressed substantial doubt
about our ability to continue as a going concern. This means that, when issuing
its opinion relating to our financial statements for the period ended December
31, 2003, given our then-current and historical lack of capital, our independent
auditor had substantial doubt that we would be able to continue as a going
business concern. Please review the Independent Auditor's Report included in our
Annual Report on Form 10-KSB for the year ended December 31, 2003.
WE ARE DEPENDENT UPON LONG-TERM FINANCING.
Our ability to implement our business plan and grow is dependent on raising a
significant amount of capital. We have sustained our operations in large part
from sales of our equity. We may not be able to successfully generate revenues
or raise additional funds sufficient to finance our continued operations. In the
long term, failure to generate sufficient revenues or obtain financing would
have a material adverse effect on our business and would jeopardize our ability
to continue our operations.
WE HAVE IN THE PAST AND MAY IN THE FUTURE ENGAGE IN
ACQUISITIONS, WHICH WILL CAUSE US TO INCUR A VARIETY OF COSTS
AND WHICH MAY NOT ACHIEVE ANTICIPATED RESULTS.
From time to time, we engage in discussions with third parties concerning
potential acquisitions of businesses, products, technologies and other assets.
Acquisitions may require us to make considerable cash outlays and can entail the
need for us to issue equity securities, incur debt and contingent liabilities,
incur amortization expenses related to intangible assets, and can result in the
impairment of goodwill, which could harm our profitability. Acquisitions involve
a number of additional risks, including:
o difficulties in and costs associated with the assimilation of the
operations, technologies, personnel and products of the acquired
companies;
o assumption of known or unknown liabilities or other unanticipated
events or circumstances;
o risks of entering markets in which we have limited or no experience;
and
o potential loss of key employees.
19
Any of these risks could harm our ability to achieve profitability of acquired
operations or to realize other anticipated benefits of an acquisition.
Our leverage and debt service obligations may adversely affect
our cash flow
We have substantial amounts of outstanding indebtedness, primarily from our
secured convertible notes due 2005 and 2006. We may be unable to generate cash
sufficient to pay the principal of, interest on and other amounts in respect of
our indebtedness when due. As of September 30, 2004, the total principal amount
of our debt outstanding was approximately $4.42 million. Our substantial
leverage could have significant negative consequences on our business, the
results of our operations and the market price of our securities including:
o increasing our vulnerability to general adverse economic and
industry conditions;
o limiting our ability to obtain additional financing;
o requiring the dedication of a substantial portion of our expected
cash flow from operations to service our debt, thereby reducing the
amount of our expected cash flow available for other purposes,
including capital expenditures;
o limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we compete; and
o placing us at a possible competitive disadvantage compared to
less-leveraged competitors and competitors that have better access
to capital resources.
ANTI-DILUTION RIGHTS OF SOME OF OUR INVESTORS MAY CAUSE US TO
ISSUE SUCH INVESTORS ADDITIONAL SHARES OF OUR COMMON STOCK
Certain holders of our common stock have anti-dilution rights that require us to
issue such holders additional shares of our common stock if we issue or sell any
shares of our common stock, or other rights to subscribe to our common stock,
below certain price thresholds. These anti-dilution adjustments could accelerate
and increase the magnitude of a decline in the trading price for our common
stock. Certain warrant holders also have the right to purchase an increasing
amount of shares if we issue or sell any shares of our common stock or other
rights to subscribe to our common stock below certain price thresholds.
Future sales of common stock may cause the price of our common
stock to decline
Future sales of substantial amounts of common stock pursuant to Rule 144 under
the Securities Act of 1933 or otherwise by certain shareholders could have a
material adverse impact on the market price for the common stock at the time. As
of September 30, 2004, there are 55,500,000 outstanding shares of our common
stock held by shareholders which are deemed "restricted securities" as defined
by Rule 144 under the Securities Act. Under certain circumstances, these shares
may be sold without registration pursuant to the provisions of Rule 144. In
general, under Rule 144, a person (or persons whose shares are aggregated) who
has satisfied a one-year holding period may, under certain circumstances, sell
within any three-month period a number of restricted securities which does not
exceed the greater of one (1%) percent of the shares outstanding or the average
weekly trading volume during the four calendar weeks preceding the notice of
sale required by Rule 144. In addition, Rule 144 permits, under certain
circumstances, the sale of restricted securities without any quantity
limitations by a person who is not an affiliate of ours and has satisfied a
two-year holding period. Any sales of shares by shareholders pursuant to Rule
144 may cause the price of our common stock to decline.
20
In addition, future sales of shares of common stock by shareholders and us,
including subsequent sales of common stock by the holders of warrants, could
have an adverse effect on the prices of our securities. The sale of a
significant amount of these shares at any given time could cause the trading
price of our common stock to decline.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET, AND WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY AGAINST ESTABLISHED COMPETITORS WITH
GREATER FINANCIAL RESOURCES AND MORE DIVERSE STRATEGIC PLANS
We face competition from many communications providers with significantly
greater financial, technical and marketing resources, longer operating
histories, well-established brand names, larger customer bases and diverse
strategic plans and technologies. Intense competition has led to declining
prices and margins for many communications services. We expect this trend to
continue as competition intensifies in the future. We expect significant
competition from traditional and new communications companies, including local,
long distance, cable modem, Internet, digital subscriber line, fixed and mobile
wireless and satellite data service providers, some of which are described in
more detail below. If these potential competitors successfully focus on our
market, we may face intense competition which could harm our business. In
addition, we may also face severe price competition for building access rights,
which could result in higher sales and marketing expenses and lower profit
margins.
REGULATION OF THE INTERNET COULD MATERIALLY AND ADVERSELY AFFECT
OUR BUSINESS
Due to the increasing popularity and use of the Internet by broad segments of
the population, it is possible that laws and regulations may be adopted with
respect to the Internet pertaining to content of Web sites, privacy, pricing,
encryption standards, consumer protection, electronic commerce, taxation, and
copyright infringement and other intellectual property issues. No one is able to
predict the effect, if any, that any future regulatory changes or developments
may have on the demand for our Internet access or other Internet-related
services. Changes in the regulatory environment relating to the Internet access
industry, including the enactment of laws or promulgation of regulations that
directly or indirectly affect the costs of telecommunications access or that
increase the likelihood or scope of competition from national or regional
telephone companies, could materially and adversely affect our business,
operating results and financial condition.
ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2004, we carried out an evaluation, under the supervision
and with the participation of our Chief Executive Officer and Principal
Financial Officer of the effectiveness of the design and operation of our
disclosure controls and procedures. Our disclosure controls and procedures are
designed to ensure that information required to be disclosed in our reports
filed under the Securities Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and forms. Based
on this evaluation, our Chief Executive Officer and Principal Financial Officer
have concluded that our controls and procedures are effective in timely alerting
them to material financial information required to be disclosed and included in
our periodic SEC filings. There has been no change in our internal control over
financial reporting that occurred during the quarter ended September 30, 2004
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of our financial reporting and preparation of financial statements for external
reporting purposes in accordance with generally accepted accounting principles.
This quarterly report was not filed timely due to the identification by our
auditor of an accounting issue that required us to retain the services of a
valuation expert. Until we obtained the expert's analysis, we were unable to
complete our financial statements.
21
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2002, an adverse arbitration decision was rendered against the Company
in favor of one of our former employees, Christopher L. Wiebelt. The amount of
the award was approximately $100,000, including legal expenses. This amount was
included in accounts payable on the balance sheet at December 31, 2003. The
arbitration matter was styled: USURF America, Inc. versus Christopher L.
Wiebelt, American Arbitration Association, Case No. 71-160-00087-01. In February
2004, the Company entered into a settlement agreement with Mr. Weibelt under
which the Company agreed to satisfy the judgment by making an initial payment of
$30,000 and six equal monthly payments thereafter for the balance. The judgment
was fully satisfied in August 2004.
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. To date, there has been no activity in the case
involving USURF Telecom, nor has the plaintiff directed any attention to USURF
Telecom beyond the original filing of the lawsuit. Company management believes
that Qwest's allegations are without merit. 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.
In April 2004, a complaint was filed in the District Court, El Paso County,
Colorado styled Pipeline Networks of Colorado, LLC vs. Usurf Communications,
Inc. and Usurf America, Inc.; Case No. 2004cv1565. The lawsuit arose out of a
dispute regarding an agreement to pay Pipeline $156,300 in Shares or in cash by
April 13, 2004 as part of the original asset purchase and extension agreements
to purchase the assets and rights used in connection with the Internet services
business operated by Pipeline. This matter was fully settled by the parties in
July of 2004. Under the settlement agreement, Pipeline exchanged its 1,356,960
shares of USURF common stock for a cash payment of $170,000. The settlement
resulted in a net charge of $14,000 against the Company's second quarter
earnings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2004, we issued the following
securities:
1. (a) Securities Issued. In September 2004, 75,000 shares of the Company's
common stock were issued.
(b) Underwriter or Other Purchasers. Such shares of stock were issued to
Ed Basquez.
(c) Consideration. Such shares were issued pursuant to the terms of a
consulting agreement.
(d) Exemption from Registration. These securities are exempt from
registration under the Securities Act of 1933, as amended, pursuant
to the provisions of Section 4(2) thereof, as a transaction not
involving a public offering. This purchaser is a sophisticated
investor capable of evaluating an investment in the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
22
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
EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of the Chief Executive Officer re: Section 302
31.2 Certification of the Principal Accounting Officer re: Section
302
32.1 Certification of the Chief Executive Officer and Principal
Accounting Officer re: Section 906
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: December 10, 2004 USURF AMERICA, INC.
By: /S/ Douglas O. McKinnon
-------------------------------------
Douglas O. McKinnon
Chief Executive Officer
24