UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 2)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended July 31, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ________________.
Commission file number 000-52827
OMNICITY CORP.
(Exact name of registrant as specified in its charter)
Nevada 98-0512569
(State or other jurisdiction (I.R.S. Employer
of incorporation of organization) Identification No.)
807 S State Rd 3, Rushville, Indiana, U.S.A. 46173
(Address of Principal Executive Offices) (Zip Code)
(317) 903-8178
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [_] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(do not check if a smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, as of October 22, 2009 was approximately $10,683,000.
The registrant had 38,517,055 shares of common stock outstanding as of October
23, 2009.
EXPLANATORY NOTE
This Form 10-K/A (Amendment No. 2) is being filed by the Company in response to
certain comments from the U.S. Securities and Exchange Commission (the "SEC") to
the Company regarding the Company's Annual Report on Form 10-K for its fiscal
year ended July 31, 2009, as originally filed with the SEC on October 23, 2009
and amended (Amendment No. 1) filed with the SEC on September 29, 2010. This
Form 10-K/A (Amendment No. 2) is sometimes referred to herein as "Form 10-K",
and any references herein to "Form 10-K" or "10-K" should be read to refer to
this Form 10-K/A unless otherwise specified or as required based on the context
in which the term "Form 10-K" or "10-K" is used.
FORWARD LOOKING STATEMENTS
This annual report contains forward-looking statements that involve risks and
uncertainties. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. In some cases,
you can identify forward-looking statements by terminology such as "may",
"will", "should", "expect", "plan", "intend", "anticipate", "believe",
"estimate", "predict", "potential" or "continue", the negative of such terms or
other comparable terminology. In evaluating these statements, you should
consider various factors, including the assumptions, risks and uncertainties
outlined in this annual report under "Risk Factors". These factors or any of
them may cause our actual results to differ materially from any forward-looking
statement made in this annual report. Forward-looking statements in this annual
report include, among others, statements regarding:
* our capital needs;
* business plans; and
* expectations.
While these forward-looking statements, and any assumptions upon which they are
based, are made in good faith and reflect our current judgment regarding future
events, our actual results will likely vary, sometimes materially, from any
estimates, predictions, projections, assumptions or other future performance
suggested herein. Some of the risks and assumptions include:
* our need for additional financing;
* our limited operating history;
* our history of operating losses;
* the competitive environment in which we operate;
* changes in governmental regulation and administrative practices;
* our dependence on key personnel;
* conflicts of interest of our directors and officers;
* our ability to fully implement our business plan;
* our ability to effectively manage our growth; and
* other regulatory, legislative and judicial developments.
We advise the reader that these cautionary remarks expressly qualify in their
entirety all forward-looking statements attributable to us or persons acting on
our behalf. Important factors that you should also consider, include, but are
not limited to, the factors discussed under "Risk Factors" in this annual
report.
The forward-looking statements in this annual report are made as of the date of
this annual report and we do not intend or undertake to update any of the
forward-looking statements to conform these statements to actual results, except
as required by applicable law, including the securities laws of the United
States.
AVAILABLE INFORMATION
Omnicity Corp. files annual, quarterly and current reports, proxy statements,
and other information with the Securities and Exchange Commission (the "SEC").
You may read and copy documents referred to in this Annual Report on Form 10-K
that have been filed with the SEC at the SEC's Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also
obtain copies of our SEC filings by going to the SEC's website at
http://www.sec.gov.
2
REFERENCES
As used in this annual report: (i) the terms "we", "us", "our", "Omnicity" and
the "Company" mean Omnicity Corp.; (ii) "SEC" refers to the Securities and
Exchange Commission; (iii) "Securities Act" refers to the United States
SECURITIES ACT OF 1933, as amended; (iv) "Exchange Act" refers to the United
States SECURITIES EXCHANGE ACT OF 1934, as amended; and (v) all dollar amounts
refer to United States dollars unless otherwise indicated.
3
TABLE OF CONTENTS
ITEM 1. BUSINESS......................................................... 5
ITEM 1A. RISK FACTORS..................................................... 12
ITEM 1B. UNRESOLVED STAFF COMMENTS........................................ 15
ITEM 2. PROPERTIES....................................................... 15
ITEM 3. LEGAL PROCEEDINGS................................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 15
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES................ 16
ITEM 6. SELECTED FINANCIAL DATA.......................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 27
ITEM 8. FINANCIAL STATEMENTS............................................. 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................... 50
ITEM 9A(T). CONTROLS AND PROCEDURES.......................................... 50
ITEM 9B. OTHER INFORMATION................................................ 50
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE........... 51
ITEM 11. EXECUTIVE COMPENSATION........................................... 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.................................. 55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE..................................................... 56
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES........................... 57
ITEM 15. EXHIBITS......................................................... 58
4
PART I
ITEM 1. BUSINESS
NAME, INCORPORATION AND PRINCIPAL OFFICES
We were incorporated under the laws of the State of Nevada on October 12, 2006
under the name "Bear River Resources Inc.". On October 21, 2008, we effected a
forward split of our shares of common stock on the basis of 7.7 new shares of
our common stock for each one share of common stock outstanding on that date and
increased our authorized share capital from 200,000,000 shares of common stock
to 1,540,000,000 shares of common stock. Also on October 21, 2008, in
contemplation of the acquisition of Omnicity, Incorporated, we merged with our
wholly-owned subsidiary incorporated under the laws of the State of Nevada, and
changed our name to "Omnicity Corp."
Our principal and operations office and registered and records office is located
at 807 S State Rd 3, Rushville, Indiana, U.S.A. Tel: (317) 903-8178; Fax: (866)
567-3897.
OUR PRIOR BUSINESS
Up to July 29, 2008, Omnicity Corp. (formerly Bear River Resources, Inc.) was an
exploration stage company engaged in the acquisition and exploration of mineral
properties. Omnicity Corp. received a geologist report on February 6, 2008, the
results of which were not as expected. Given the prospects, management
determined to allow the claims to lapse on July 29, 2008. See Omnicity Corp's
(formerly Bear River Resources, Inc.) annual report filed on Form 10-KSB for the
year ended June 30, 2008 for more information relating to our business prior to
the acquisition of Omnicity, Incorporated.
THE ACQUISITION OF OMNICITY, INCORPORATED
On February 16, 2009, Omnicty Corp. closed the acquisition (the "Acquisition")
of Omnicity, Incorporated, effected by way of merger pursuant to an Agreement
and Plan of Merger (the "Agreement"), dated December 29, 2008, among Omnicity
Corp., Omnicity, Incorporated, and MergerSub, our wholly-owned subsidiary
incorporated under the laws of the State of Indiana in connection with the
Acquisition ("MergerSub").
Omnicity, Incorporated was a private company incorporated under the laws of the
State of Indiana pursuant to the Indiana Business Corporation Law on August 14,
2003. In August 2003, Omnicity, Incorporated began acquiring the rights to and
constructing wireless internet service infrastructure in the State of Indiana,
USA. In September 2003, Omnicity, Incorporated acquired the assets of the Circle
City Wireless Division of Hi-Tech Business Machines, LLC in exchange for common
stock of Omnicity, Incorporated.
Omnicity, Incorporated convened a special meeting of its shareholders on January
17, 2009 to obtain approval of the adoption of the Agreement, the Acquisition
and all other transactions contemplated thereby (the "Special Meeting"). At the
Special Meeting, Omnicity, Incorporated obtained the required approvals of the
holders of a majority of its common shares.
The merger was effective on February 17, 2009 and time at which the merger
became effective is referred to herein as the "Effective Time". At the Effective
Time, MergerSub merged with and into Omnicity, Incorporated, pursuant to which
the identity and separate corporate existence of MergerSub ceased and Omnicity,
Incorporated became the surviving corporation in the merger (the "Surviving
Corporation") and a wholly-owned subsidiary of the Company.
Under the terms of the Agreement, at closing, (i) all of the issued and
outstanding Omnicity, Incorporated shares, totaling 8,256,240, were converted
and exchanged for 23,000,000 shares of the Company, or 2.7858 common shares of
the Company for each Omnicity, Incorporated share held; each common share issued
had a deemed fair value of $0.35 per share, in accordance with the procedures
set out in the Agreement, (ii) each share of Omnicity, Incorporated issued and
outstanding immediately prior to the Effective Time and owned by Omnicity Corp.
or MergerSub was cancelled and extinguished without any conversion thereof and
no payment was made with respect thereto, and (iii) all issued and outstanding
shares of common stock of MergerSub held by Omnicity Corp. immediately prior to
the Effective Time were converted into and became one validly issued, fully paid
and non-assessable share of common stock of Omnicity, Incorporated.
5
Pursuant to the terms of the Agreement on and after the Effective Time, (i)
until surrendered for exchange, each outstanding share certificate representing
shares of Omnicity, Incorporated's common stock (except for shares cancelled
pursuant to the provisions of the Agreement) were deemed to evidence ownership
of and represent the number of shares of the Company into which such Omnicity,
Incorporated common shares shall convert pursuant to the Agreement, and (ii)
each holder of such outstanding certificates representing shares of Omnicity,
Incorporated's common stock were entitled to vote on any matters on which the
holders of record of the Company's common shares having voting rights are
entitled to vote.
At closing, (i) all the property, rights, privileges, powers and franchises of
Omnicity Incorporated and MergerSub vested in the Surviving Corporation, and all
debts, liabilities and duties of Omnicity Incorporated and MergerSub became the
debts, liabilities and duties of the Surviving Corporation, (ii) the articles of
incorporation of MergerSub became the articles of incorporation of the Surviving
Corporation, (iii) the bylaws of MergerSub became the bylaws of the Surviving
Corporation, and (v) the name of the Surviving Corporation became "Omnicity,
Incorporated".
The closing of the Acquisition represented a change in control of our Company.
For accounting purposes, this change in control constituted a re-capitalization
of Omnicity, Incorporated, and the acquisition has been accounted for as a
reverse merger whereby Omnicity Corp., as the legal acquirer, are treated as the
acquired entity, and Omnicity Incorporated, as the legal subsidiary, is treated
as the acquiring company with the continuing operations.
Omncity Corp. had a fiscal year end of June 30. Pursuant to a Directors
Resolution and 8K filed on March 20, 2009 and amended 8K filed on May 21, 2009,
the Company changed its fiscal year end to July 31 to coincide with the fiscal
year end of Omnicity, Incorporated, being the accounting acquirer. All reporting
periods, starting with April 30, 2009, is filed on a basis consistent with the
Company's new fiscal year end of July 31. As a transitional matter, the Company
supplied quarterly information for the quarter ended January 31, 2009 in its
April 30, 2009 10Q filed on June 15, 2009.
OUR CURRENT BUSINESS
OVERVIEW
Omnicity Corp., through its wholly-owned subsidiary Omnicity, Incorporated,
collectively the "Company" or "Omnicity", provides broadband access via wireless
and fiber infrastructure to business, government and residential customers in
rural markets in the Midwest. Omnicity's strategy is to become a premier
broadband and communications services provider in rural and urban cluster
markets, beginning in the Midwest and extending nationally. These markets,
consisting of over 40 million homes and 500,000 businesses, have been
underserved or un-served by existing providers, creating an opening for Omnicity
to offer high-speed and broadband-enabled services to customers with pent-up
demand, and taking advantage of key industry developments, including:
* The forecasted increase of demand for broadband and broadband-enabled
services, including: web use and social networking; video (TV, movies,
and personal video); software-as-a-service (SaaS); and cloud
computing;
* The availability of high-speed 4G Worldwide Interoperability for
Microwave Access (WIMAX) equipment;
* Weakness of existing service providers in Omnicity's target markets,
primarily small telephone companies and Wireless Internet Service
Providers ("WISPs");
* A push by the federal government, Congress, and state governments to
increase the availability of broadband services in rural and
underserved markets, including $7.2 billion in stimulus funds
earmarked for rural broadband services.
THE COMPANY'S OPERATING PLAN IS TO GROW BY:
* Consolidating WISPs in rural and urban cluster markets initially
within the Midwestern United States;
* Developing and expanding, through organic growth, the subscriber base
through disciplined sales and marketing programs;
* Partnering with Rural Electric Membership Cooperatives ("REMCs"),
local and state governments, rural telephone companies ("Telcos") and
Original Equipment Manufacturers ("OEMs") to efficiently and cost
effectively expand its network across rural America;
6
* Developing and expanding its service offerings to become a total
broadband solution provider, including VOIP, IPTV and Satellite
Internet, to increase value and average revenue per subscriber unit
(ARPU);
* Completing further debt and equity offerings, in stages, of $15m by
July 31, 2010.
DESCRIPTION OF BUSINESS AND BUSINESS STRATEGY
Omnicity's business strategy, as mentioned above, is to become a premier
broadband and communications services provider in rural and small urban cluster
markets, beginning in the Midwest by: acquiring and consolidating WISPs into
regional market clusters; driving organic growth in acquired markets through
uniform sales and marketing and product offerings; layering on new services
(voice/VoIP, video distribution) that attract additional customers and drive up
ARPU; building marketing and sales partnerships with REMCs, local governments,
and telcos that can accelerate penetration; and creating and leveraging
economies of scale that cannot be easily matched by competitors.
By acquiring existing WISPs, Omnicity believes it can enter new geographies
quickly with an established revenue base and build meaningful revenue and market
share ahead of competitors, while taking advantage of economies of scale in
operations, sales, marketing, and network build-outs. Further, the Company
believes that delivering services using wireless technology (both licensed and
unlicensed) provides it several competitive advantages, including:
* Wireless costs about $300 per acquired subscriber making it cost
effective in low-density markets where new wired services (fiber,
high-speed CATV) cannot be easily justified;
* Wireless infrastructure can be deployed in about 3 months vs. years
for new wired services;
* Wireless can cover an entire geographic area with high-speed service
vs. only structures passed by wired infrastructure.
Generally, the Company plans to target WISPs for acquisition in contiguous areas
to create regional market clusters. Due to capital and other constraints, many
WISPs have penetrated only a small percentage of homes and businesses that can
be serviced by their existing antennas, creating the opportunity for organic
growth post acquisition. Using disciplined sales and marketing programs and a
uniform product set, Omnicity believes it can increase demand in these markets,
while taking advantage of economies of scale, to drive cash flow positive
operations.
Currently, Omnicity uses standards-based wireless equipment in the
license-exempt 700Mhz, 900MHz, 2.4GHz and 5.8GHz spectrum bands, providing
multiple paths to cover subscribers in its markets. The Company deploys its
wireless networks by installing antennas on cellular and other commercial
towers, and municipally or privately owned structures such as tall silos and
rooftops. Customers receive the wireless signal via customer premise equipment
(CPE) that currently costs $180 per unit. The Company is evolving its technology
and spectrum strategy as it becomes more opportune and cost effective to utilize
licensed spectrum and related equipment.
The Company plans to target multiple customer segments, including: business and
healthcare providers (both local and regional/national entities that require
bandwidth at multiple locations); local and state government entities; and
residential customers. To reach these customers, Omnicity expects to sell
through a variety of channels including: direct sales to business and
local/state government customers; direct mail and web-based sales to residential
customers with affiliate sales through local school systems; agency sales
through local retailers; and through marketing partnerships with REMCs and
telcos. The Company also plans to undertake marketing programs, such as
providing web pages for the communities it serves that feature local content
such as news, sports - video broadcasts of high-school football and businesses
information. The Company has been providing "hands-on", experiential marketing
at community events through its Experiential Marketing Unit ("EMU").
Marketing partnerships with REMCs form a core part of Omnicity's business
strategy. REMCs are cooperatives that provide electricity to about 40 million
homes and operate in 80% of counties in the U.S. The Company has partnered and
expects to partner with many REMCs to provide broadband services to REMC
customers, and to provide the REMCs value-added services, such as remote meter
reading and fiber construction. To date, Omnicity has formed an exclusive
partnership with Service Concepts, a marketing organization that packages
products and services for sale by REMCs, to offer Omnicity wireless broadband
services to its REMC customers. Service Concepts is owned by 29 Indiana-based
REMCs and serves more than 300 of the 800 REMCs located in the United States.
Omnicity also expects to work with municipalities and other governmental
entities to provide broadband services in their often under-served communities,
and to provide these entities with mobile broadband for emergency vehicles,
7
high-speed networks for government offices, and remote meter reading for
municipal-owned utilities. On March 24, 2009, Omnicity announced the
installation of a "First Responder" emergency mobile and fixed wireless
broadband network in Parker City, Indiana. This network will provide mobile data
connections for police vehicles and broadband connectivity to water and sewer
systems, and to town-owned buildings. Using this model, Omnicity plans to
provide communications infrastructure to small towns and municipalities that can
become anchor tenants on its networks.
Finally, Omnicity is currently reviewing the opportunities for accessing and
utilizing funds under various Federal, and State broadband stimulus programs and
governmental grants.
TARGET MARKET: RURAL AREAS AND URBAN CLUSTERS
The Company expects to target "rural" and small "urban cluster" markets, defined
by the U.S. Census Bureau ("Census Bureau") as areas with less than 10,000
people. These markets historically have had fewer service options and
competitors than urban and metropolitan areas. Nationally, these markets account
for 115.8 million people, about 41% of the total population, according to the
U.S. Department of Agriculture, and about 40 million occupied housing units.
Within the Midwest, these areas account for about 28 million people, about 44%
of the population, and 11 million occupied housing units. Consumer demand for
broadband-enabled services (Internet access, telephone services and video
services) is estimated to be $17.6 billion per year in Midwest states and $64.1
billion per year in rural and small markets nationally.
While many choices are available to urban and large-cluster market consumers for
broadband and advanced services (such as Internet TV, business and SaaS
solutions), consumers and businesses in the Company's target market have had
limited options for broadband services due to the high cost of building wired
networks (copper, fiber, CATV) in sparsely populated areas, and the fragmented
service areas of small market telcos and WISPs, which limit the ability of these
firms to build scale and access capital. About 30% of consumers are estimated to
have no access to broadband services, according to the "Rural Broadband Policy
Brief" published by The Rural Policy Research Institute in December 2008.
Concerns about the availability of broadband in rural and under-served markets
led Congress to direct the Federal Communications Commission (FCC) to create "a
comprehensive rural broadband strategy", which the FCC released on May 22, 2009
in a report entitled "Bringing Broadband to Rural America: Report On A Rural
Broadband Strategy". In that report, the FCC noted that only about 38% of rural
residents have broadband connections at home compared with 57%-60% of urban and
suburban residents. Additionally, $7.2 billion was allocated under The American
Recovery and Reinvestment Act of 2009 to fund various broadband programs in
small and rural markets.
ACQUISITIONS COMPLETED DURING THE YEAR ENDED JULY 31, 2009
The Company initialized its business strategy with the completion of asset
purchase agreements with four WISPs through the year ended July 31, 2009
including NDWave, Inc, Forepoints Networks Inc., Cue Connex and North Central
Communications, Inc. in consideration for cash, short-term notes, and common
shares of Omnicity Corp. as disclosed in the Table below. These four
acquisitions added approximately 3,200 subscribers to Omnicity's subscriber
base, which, combined with organic growth, totaled approximately 5,200
subscribers as of July 31, 2009. This represents approximately 3% penetration of
homes passed by our signal. Including these acquisitions, the Company now has
its network infrastructure across over 200 towers and is positioned to offer
services to approximately 173,000 homes, over 1/3 of the geography of Indiana.
The Company is targeting in excess of a 15% penetration in all its rural
markets.
Net consideration for these completed asset acquisitions during the years ended
July 31:
$
----------
Cash 482,200
Cash received in sale leaseback of acquired equipment (689,368)
Extinguishment of debt 10,000
Vendor notes payable 1,063,800
Assumption of debt 62,000
Capital stock to be issued 164,000
Capital stock issued 892,700
----------
Total Consideration Paid 1,985,332
==========
8
The purchase price was allocated as follows:
$
----------
Equipment, net of sale leaseback 45,632
Customers' Relationships 1,939,700
----------
Assets Acquired 1,985,332
==========
The Company also, subsequent to July 31, 2009, completed the acquisition of
Rushville Internet Services, LLC ("RIS"). The shareholders of RIS agreed to
wind-up RIS and sell RIS's assets to Omnicity for $125,000. The Company will
receive their assets, being wireless equipment and tower infrastructures, having
a fair value of $68,706 and to settle the inter-company debt of $56,294. All
shareholders of RIS accepted to receive restricted common shares of the Company.
Subsequent to July 31, 2009 the Company issued 268,818 restricted common shares
to the shareholders of RIS at a fair value of $0.465 per common share.
COMPETITION
Traditionally, customers in Omnicity's target markets had four primary options
for broadband service, though not all options are available to all customers,
and about 30% of homes are estimated to have no option for broadband. Each of
these options has limitations and cannot be quickly upgraded to high-speed (>10
Mbps), leaving a gap for Omnicity to offer high-speed and broadband-enabled
services to underserved customers. See Table below.
* Telcos - telcos offer digital subscriber line (DSL), where available,
that supports download speeds of up to 6Mbps. DSL (including ADSL,
IDSL) has an effective serving range of less than 2 miles from the
telco central office (CO) for high-speed service, and is very
dependent on the quality of the existing copper plant. Small and rural
market telcos may lack capital to overbuild/improve the plant,
especially as these companies lose traditional phone service customers
to mobile phone providers.
* Cable - cable TV companies provide broadband over cable lines, where
available, that supports download speeds of up to about 10Mbps. While
cable generally is faster than DSL, cable broadband speed degrades
based on user load since the service is shared among all users on a
particular cable run. In some cases, cable plant must be overbuilt to
support broadband services, requiring significant capital outlay.
* Satellite - Satellite broadband has the advantage of being available
to any customer with a line of sight to the satellite, making the
service attractive for very remote users. However, broadband over
satellite is relatively slow (up to 1.5Mbps), and can suffer from
latency associated with a long cycle time of bouncing signal to the
satellite. The Company now offers Omnicity Satellite Internet through
a re-branding agreement.
* WISPs - offer broadband using wireless technology. Wireless technology
can support speeds of up to 100Mbps and has omni-directional antennas
so that users in all directions can "see" the signal. Wireless
services are available to any subscriber within range of the tower
(about 5 miles) versus wired solutions that are available only to
structures passed by the wire.
RURAL AND SMALL URBAN CLUSTER BROADBAND OPTIONS
Broadband Service Speed Comments
- ----------------- ----- --------
DSL (Telcos) Up to 6 Mbps Speed depends on quality of copper
plant; limited speeds if customer
located >1 mile from telco central
office (CO); very limited/no
service if customer located >2
miles from CO
Cable (Cable companies) Up to 10 Mbps Depends on age of CATV plant - may
require overbuild; capital expense
may not justified in small markets;
speed depends on number of users
Satellite (Satellite &
Satellite TV companies) Up to 1.5 Mbps Suffers `latency' in data transfer;
poor quality for video applications;
relatively expensive
Wireless (WISPs) Up to 3 Mbps Can be deployed quickly; covers large
residential; geographic areas; high-speed
up to 100 Mbps
Source: "Rural Broadband Policy Brief", The Rural Policy Research Institute,
December 2008; Company estimates.
Although Omnicity will compete with telcos in some instances, many telcos in
Omnicity's target markets are small (a few hundred to a few thousand customers),
and are frequently undercapitalized, limiting their ability to provide
9
higher-speed broadband and new services and build scale. Moreover, smaller
telcos are losing revenues as users shift to mobile phones and disconnecting
landlines. As a result, Omnicity expects to partner with telcos, providing these
companies with high-speed broadband and new broadband-enabled services that can
be marketed to the telco customer base, accelerating Omnicity's market
penetration and helping telcos stem revenue loss.
In addition to telcos and cable companies, Omnicity will compete with WISPs in
its target footprints that Omnicity cannot, or chooses not, to acquire, and with
WISPs pursuing similar strategies. Like telcos, many WISPs operating in
Omnicity's markets are small and are often under capitalized limiting the
ability to grow, provide high-speed services, and gain scale. Nonetheless, the
presence of a competitive WISP may impact Omnicity's ability to penetrate a
given market and reach profitability in the area. In addition to individual
WISPs, three other companies are known by Omnicity to be pursuing a wireless
strategy in smaller markets, including ERF Wireless, DigitalBridge
Communications Corp., and Open Range Communications. See Table below. Clearwire
Corporation also is pursuing a national wireless services strategy, but is
focusing on metropolitan markets to date.
COMPANIES PURSUING WIRELESS/4G SERVICES BUSINESSES
Company Status Market Focus Direct Competitor
- ------- ------ ------------ -----------------
ERF Wireless Public (OTC BB: Similar to Omnicity, but focused in Texas, Not at this time
ERFW) Louisiana, New Mexico
DigitalBridge Private Focused in on metro-edge and small metro Not at this time
Communications Corp. markets with up to 150,000 people.
Serving 4 cities in Indiana
Open Range Private Similar to Omnicity, focused on 17 states Possible competitor
Communications including 4 in Midwest in some markets
ERF Wireless is a publicly traded company (OTC BB: ERFW) focused on providing
wireless services to customers in Texas, Louisiana, and New Mexico. According to
ERF Wireless' press releases, the company has completed 15 WISP acquisitions in
Texas, Louisiana, and New Mexico and reported having 9,000 residential customers
as of December 31, 2008. ERF Wireless also specializes in providing services to
banks in Texas and has signed an agreement with Schlumberger to market its
wireless services and products to the oil and gas industry in the United States,
Canada and the Gulf of Mexico. While ERF Wireless is pursuing a similar strategy
to Omnicity the company has thus far limited its business to Texas, Louisiana,
and New Mexico, and to oil installations serviced by Schlumberger, and therefore
is not a direct competitor to the Company at this time.
DigitalBridge Communications is a private company that is pursuing metro-edge
markets and smaller metropolitan areas with populations up to 150,000 people,
according to the company's web site. On April 29, 2009, DigitalBridge announced
that the National Rural Telecommunications Cooperative had made an undisclosed
investment in the company. DigitalBridge currently serves 14 markets, including
4 markets in Indiana. Because DigitalBridge is focused on metro areas the
Company does believe it is a direct competitor at this time.
Open Range Communications is a private company that is focused on delivering
wireless broadband services to up to 500 small markets in 17 states (including
Illinois, Indiana, Nebraska, Ohio, and Wisconsin in the Midwest) with an average
of 10,000 people, according to the company's web site and press releases. The
services are to be provided on licensed spectrum held by Globalstar, Inc.
(NASDAQ:GSAT) under Globalstar's Ancillary Terrestrial Component (ATC)
authority, according to a company press release issued March 27, 2008. On March
25, 2008, the company announced that it was approved for a $267 million
Broadband Access Loan by the United States Department of Agriculture's Rural
Development Utilities Program (RDUP) and on January 9, 2009, Open Range
announced an investment of $100 million from One Equity Partners (terms not
disclosed), which the company's web site indicates satisfies the RDUP
requirements for making the loan available. Based on available information, the
Company believes that Open Range may compete with it in some markets in the
Midwest.
Clearwire Corporation also is pursuing a nationwide network rollout using
wireless/4G technology. Clearwire is a publically traded company (NASDAQ: CLWR)
developing networks for large metropolitan areas. While it is significantly
larger than Omnicity, because Clearwire is focused on metro areas, the Company
does not believe it is a direct competitor at this time.
Omnicity believes it will be competitively differentiated from telcos, cable
companies, and small WISPs in several ways, including:
10
* Telcos - able to deliver higher speeds than telco DSL and able to
serve customers that cannot be served by DSL. Omnicity is positioned
to partner with telcos to service telco phone customers that cannot
receive DSL due to plant constraints;
* Cable companies - able to deliver higher speeds than cable data
service and able to serve customers that cannot be served by cable
data service;
* WISPs - leveraging scale, able to create wide market footprint that
attracts customers; able to develop and offer a larger set of services
to better meet customer needs.
The Company also believes it is positioned to compete with other national WISP
companies should they enter Omnicity's target markets by:
* Entering markets quickly through acquisitions, gaining an ongoing
revenue stream vs. starting with new operations, sales and branding;
* Leveraging its status as a public company to make acquisitions vs.
making cash outlays to build systems and operations from scratch;
* Partnering with REMCs, local governments, and telcos to accelerate
Omnicity's market penetration and help these entities expand services,
products and revenues;
* Utilizing available unlicensed radio technology to build revenue and
market share. Several potential competitors are focused on using
licensed spectrum to operate.
NETWORKS AND TECHNOLOGY
Service is delivered by antennas deployed on cellular and other commercial
towers, municipally or privately owned structures such as water towers, tall
silos and rooftops. Customers receive the wireless signal via customer premise
equipment (CPE) that currently costs $180 per unit and that is mounted on
rooftops. Any customer with line of sight to the antenna that is within 5 miles
can receive the signal. Each tower can support 100-150 customers depending on
the mix of bandwidth subscriptions and antenna equipment. Antennas are connected
to Internet access points via point-to-point radio and fiber connections through
agreements with fiber carriers and telcos where traffic is backhauled to the
Internet backbone. Networks generally are designed in a ring topology to
mitigate service failures in the event that a tower or network connection is
lost. The Company's operations are managed through a Network Operations Center
(NOC) in Rushville, Indiana, which also handles customer support. Omnicity can
currently offer services to homes in about 1/3 of the geography of Indiana.
Currently, Omnicity uses standards-based wireless equipment in the
license-exempt 700Mhz, 900MHz, 2.4GHz and 5.8GHz spectrum bands, providing
multiple paths to cover subscribers in its markets. The Company is evolving its
technology and spectrum strategy as it becomes more opportune and cost effective
to utilize licensed spectrum and related equipment and is evaluating options for
using the 2.5GHz band for WIMAX-based services. Backhaul from wireless
distribution points is provided via point-to-point radio, and fiber connections
through agreements with backhaul carriers.
MILESTONES
Upon completion of Omnicity's reverse merger transaction on February 17, 2009, a
number of milestones have been achieved in the execution of Omnicity's business
strategy:
* Completed five WISP asset purchases. Including acquisitions, Omnicity
currently has a portfolio of transmission rights in six small to
mid-size WISP markets located principally in Indiana. These markets
represent approximately 225,000 households, approximately 173,000 of
which are believed to be serviceable by line-of-sight transmissions
from Omnicity antenna locations;
* The Company's revenues for 2009 increased by $655,000 to $1,689,000
(2008 - $1,034,000), an increase of 63%. More importantly, revenue for
Q4 2009 increased by $288,000 to $611,000 (2008 - $322,000), an
increase of 89%. Additionally, Q4 2009 revenues increased by $186,000
to $611,000 (Q3 2009 - $425,000), an increase of 44%. This is after a
46% increase Q3 2009 compared to Q2 2009. These significant increases
reflect an increase in recurring service revenue from our four
acquisitions. Revenues from our first acquisition began in February,
2009. The numbers of subscribers increased from 1,800 to 5,200 by
virtue of these acquisitions;
11
* Completed its first local government project, providing mobile data
connections for the police vehicles and broadband connectivity to the
water, sewer and town hall buildings in Parker City, Indiana;
* Entered into a $1 million master lease facility with Agility Ventures,
LLC for operating leases of radio and other equipment to expand its
business.
COST FACTORS
Traditional hard-wire systems typically cost significantly more to build than
wireless systems. Hardwire systems must install a network of cable and
amplifiers in order to deliver signals to their subscribers. This considerable
cost is not incurred by wireless operators and is only partially offset by the
cost a wireless operator incurs to purchase and install the wireless radios and
related equipment necessary for each subscriber's location. These lower system
development costs typically result in lower debt burdens per subscriber for
wireless operators as compared to comparably sized traditional hard wire
systems.
The system operating costs for wireless systems also are generally lower than
those for comparable hard-wire systems. This is attributable to lower system
network maintenance and depreciation expense.
We anticipate that each additional wireless subscriber will require an
incremental capital expenditure by us. This amount consists of material and
installation labor and overhead charges. These per subscriber capital costs will
not be incurred until a subscriber has been added and is about to generate
revenue for us and will be offset in part by installation fees paid by the
subscriber at the time of installation.
EMPLOYEES
As of July 31, 2009, we had a total of 36 full time employees and as of October
23, 2009 we had a total of 38 full time employees. None of our employees is
subject to a collective bargaining agreement. We have experienced no work
stoppages and believe that we have good relations with our employees. We also
utilize the services of independent contractors to build and install our
wireless systems and market our services.
SUBSIDIARIES
We own 100% of Omnicity, Incorporated, a company organized under the laws of the
State of Indiana.
PATENTS AND TRADEMARKS
We have no patents or patents pending. We have trademarked the following:
"Bringing Broadband to the Heartland".
ITEM 1A. RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A NUMBER OF VERY SIGNIFICANT RISKS.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND UNCERTAINTIES IN ADDITION
TO OTHER INFORMATION IN THIS ANNUAL REPORT IN EVALUATING OUR COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF OUR COMMON STOCK. OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION COULD BE SERIOUSLY HARMED DUE TO ANY OF THE
FOLLOWING RISKS. THE RISKS DESCRIBED BELOW MAY NOT BE ALL OF THE RISKS FACING
OUR COMPANY. ADDITIONAL RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY
CONSIDER IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. YOU COULD LOSE ALL
OR PART OF YOUR INVESTMENT DUE TO ANY OF THESE RISKS.
RISKS RELATING TO OUR BUSINESS
WE HAVE LIMITED OPERATING HISTORY AND LACK PROFITABLE OPERATIONS.
Omnicity's business commenced in 2003 and substantially all of its revenues have
been generated by the six Indiana systems, which began serving subscribers in
March 2004. Prospective investors, therefore, have limited historical financial
information about us upon which to base an evaluation of our performance and an
investment in our common stock. Omnicity has also recorded net losses in each of
the last two fiscal years and April 30, 2009 fiscal year to date, due primarily
to administrative costs, interest expense and charges for depreciation and
12
amortization of capital expenditures to develop its wireless systems. We may
continue to experience net losses while we develop and expand our wireless
systems even if mature individual systems of our company are profitable.
Prospective investors should be aware of the difficulties encountered by
enterprises in the early stages of development, particularly in light of
potential competition. There can be no assurance that an increase in the number
of subscribers or the launch of additional wireless systems will result in
profitability for our company in future years.
OUR BUSINESS DEPENDS ON LEASES AND MATERIAL AGREEMENTS WITH UNAFFILIATED THIRD
PARTIES FOR A SIGNIFICANT PORTION OF OUR CUSTOMER PREMISES EQUIPMENT AND OUR
WIRELESS TOWER TRANSMISSION RIGHTS.
We are dependent on leases with unaffiliated third parties for most of our
wireless transmission rights. The remaining terms of most of Omnicity's site
leases are approximately three years. Most of these leases provide for automatic
renewal of the lease term, grant a right of first refusal to the sites and/or
require the parties to negotiate lease renewals in good faith. The termination
of or failure to renew our operating leases would result in Omnicity being
unable to deliver services from such site to the households in its footprint.
For customer premises equipment, after three years, we have the option of
acquiring the equipment at the then fair market value. Such a termination or
failure in a market that we actively serve could have a material adverse effect
on Omnicity.
In connection with our distribution of wireless Internet service, we are
dependent on third party agreements for high-speed return path access
("Backhaul"). Although we have no reason to believe that any such agreement will
be cancelled or will not be renewed upon expiration, if such contracts are
cancelled or not renewed, we will have to seek Backhaul from other sources.
There is no assurance that other Backhaul will be available to us on acceptable
terms or at all or, if so available, that it will be of a grade and speed
acceptable to our subscribers.
WE WILL NEED ADDITIONAL FINANCING IN ORDER FOR OUR COMPANY TO GROW.
The growth of our business will require substantial investment on a continuing
basis to finance capital expenditures and related expenses for subscriber growth
and system development. We may require additional financing to continue to add
significant numbers of subscribers to our systems, develop our markets, and make
critical acquisitions of additional wireless transmission assets. These
activities may be financed in whole or in part through debt or equity
financings, joint ventures or other arrangements. There is no assurance that any
additional funds necessary to finance the development and expansion of our
wireless systems will be available on satisfactory terms and conditions, if at
all. To the extent that any future financing requirements are satisfied through
the issuance of equity securities, investors may experience significant dilution
in the net tangible book value per share of the common stock offered hereby. The
amount and timing of our future capital requirements will depend upon a number
of factors, many of which are not within our control, including service costs,
capital costs, marketing expenses, staffing levels, subscriber growth and
competitive conditions. Failure to obtain any required additional financing
could adversely affect the growth of the Company.
OUR COMPANY IS DEPENDENT ON THE KNOWLEDGE AND EXPERIENCE OF OUR EXISTING
MANAGEMENT AND KEY EMPLOYEES.
We are dependent in large part on the experience and knowledge of existing
management. The loss of the services of any one or more of our current executive
officers could have a material adverse effect upon Omnicity. Our success is also
dependent upon its ability to attract and retain qualified employees to develop
and operate its wireless systems.
RISKS RELATING TO OUR INDUSTRY
THE WIRELESS BROADBAND SERVICE PROVIDER INDUSTRY IS HIGHLY COMPETITIVE.
The wireless broadband service provider industry is competitive. Wireless
systems face or may face competition from several sources, such as traditional
hard-wire companies, telephone companies, satellite providers, and other
alternative methods of distributing and receiving Internet and voice
transmissions. In addition, within each market, we may compete with others to
acquire rights to transmission sites. Legislative, regulatory and technological
developments may result in additional and significant competition, including
competition from local telephone companies. In our existing systems, we have
targeted our marketing to households that are not served or underserved by
traditional hard-wire providers and that have limited access to high speed
internet service from other sources (primarily having access only to dial-up
internet access, if any). Accordingly, we have not encountered significant
direct competition from traditional hard-wire companies. No assurance can be
given, however, that we will not face direct competition from traditional
hard-wire companies in the future. The standard service offering package offered
in each of the Existing Systems is comparable to that offered by traditional
13
hard-wire operators. Many actual and potential competitors have greater
financial, marketing and other resources than our company. No assurance can be
given that we will compete successfully.
THERE ARE PHYSICAL LIMITATIONS OF WIRELESS TRANSMISSION.
Wireless broadband service is transmitted through the air via microwave
frequencies from radios at a transmission facility to a small receiving radio at
each subscriber's location, which generally requires a direct `line-of-sight"
from the transmission facility to the subscriber's receiving radio. Therefore,
in communities with tall trees, hilly terrain, tall buildings or other
obstructions in the transmission path, wireless transmission can be difficult or
impossible to receive at certain locations without the use of signal repeaters.
Based on our installation and operating experience, we believe that our signal
can be received directly by approximately 85% of the households within our
expected signal patterns for such markets. The terrain in most of our markets is
generally conducive to wireless transmission and we do not presently anticipate
any material use of beam benders or repeater stations. In addition, in limited
circumstances, extremely adverse weather can damage transmission facilities and
receiving radios. However, we do not believe such potential damage is a material
risk.
WE ARE SUBJECT TO GOVERNMENT REGULATION.
Although much of the microwave spectrum used by our company for transmission of
our services is not required to be licensed by the FCC, many of the frequencies
that we use in the future are highly regulated. We cannot predict precisely what
effect any potential regulations may have on our company.
Wireless operators are also subject to regulation by the Federal Aviation
Administration with respect to the use and construction of transmission towers
and to certain local zoning regulations affecting construction of towers and
other facilities. There may also be restrictions imposed by local authorities.
There can be no assurance that we will not be required to incur additional costs
in complying with such regulations and restrictions.
RISKS RELATING TO OUR COMMON STOCK
OUR STOCKHOLDERS MAY EXPERIENCE DILUTION AS A RESULT OF OUR ISSUANCE OF
ADDITIONAL COMMON STOCK OR THE EXERCISE OF OUTSTANDING OPTIONS.
We may enter into commitments in the future, which would require the issuance of
additional common stock, and we may grant share purchase warrants and stock
options. The exercise of such share purchase warrants or options and the
subsequent resale of such common stock in the public market could adversely
affect the prevailing market price and our ability to raise equity capital in
the future at a time and price which we deem appropriate. Any share issuances
from our treasury will result in immediate dilution to our existing
stockholders.
WE HAVE NEVER DECLARED OR PAID CASH DIVIDENDS ON OUR COMMON STOCK.
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future cash dividends, if any, will be at the
discretion of our board of directors and will depend on our financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and other factors that our board of directors considers relevant.
Accordingly, investors may only see a return on their investment if the value of
our securities appreciates.
THERE IS A LIMITED TRADING MARKET FOR OUR COMMON STOCK, AND OUR INVESTORS MAY BE
UNABLE TO SELL THEIR SHARES.
We have a limited trading market for our common stock on the National
Association of Securities Dealers Inc.'s OTC Bulletin Board. As a result,
investors may not be able to sell the shares of our common stock that they have
purchased and may lose all of their investment.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC, WHICH WILL
MAKE TRANSACTIONS IN OUR COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN
INVESTMENT IN OUR COMMON STOCK.
Our common stock is quoted on the Financial Industry Regulatory Authority's OTC
Bulletin Board, which is generally considered to be a less efficient market than
markets such as NASDAQ or other national exchanges, and which may cause
difficulty in conducting trades and obtaining future financing. Further, our
securities are subject to the "penny stock rules" adopted pursuant to Section
15(g) of the Securities Exchange Act of 1934, as amended. The penny stock rules
apply generally to companies whose common stock trades at less than US$5.00 per
share, subject to certain limited exemptions. Such rules require, among other
14
things, that brokers who trade "penny stock" to persons other than "established
customers" complete certain documentation, make suitability inquiries of
investors and provide investors with certain information concerning trading in
the security, including a risk disclosure document and quote information under
certain circumstances. Many brokers have decided not to trade "penny stock"
because of the requirements of the "penny stock rules" and, as a result, the
number of broker-dealers willing to act as market makers in such securities is
limited. In the event that we remain subject to the "penny stock rules" for any
significant period, there may develop an adverse impact on the market, if any,
for our securities. Because our securities are subject to the "penny stock
rules", investors will find it more difficult to dispose of our securities.
Further, it is more difficult: (i) to obtain accurate quotations, (ii) to obtain
coverage for significant news events because major wire services, such as the
Dow Jones News Service, generally do not publish press releases about such
companies, and (iii) to obtain needed capital.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING.
Our company's consolidated financial statements include a statement that our
financial statements are prepared on a going concern basis, and therefore that
certain reported carrying values are subject to our company receiving the future
continued support of our stockholders, obtaining additional financing and
generating revenues to cover our operating costs. The going concern assumption
is only appropriate provided that additional financing continues to become
available.
A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO RAISE
FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR OPERATIONS.
A decline in the price of our common stock could result in a reduction in the
liquidity of our common stock and a reduction in our ability to raise additional
capital for our operations. Because our operations to date have been principally
financed through the sale of equity securities, a decline in the price of our
common stock could have an adverse effect upon our liquidity and our continued
operations. A reduction in our ability to raise equity capital in the future
would have a material adverse effect upon our business plan and operations,
including our ability to continue our current operations. If our stock price
declines, we may not be able to raise additional capital or generate funds from
operations sufficient to meet our obligations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive and operations offices are located at 807 South State Rd 3,
Rushville, Indiana, U.S.A.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings nor are we aware of any
legal proceedings pending or threatened against us or our properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of our fiscal year to a vote
of security holders, through the solicitation of proxies or otherwise.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our shares of common stock were quoted for trading on the OTC Bulletin Board
under the symbol "BRVR.OB" on September 8, 2008. Effective October 21, 2008 our
symbol was changed to "OMCY.OB". The market for our common stock is limited,
volatile and sporadic. The following table sets forth the high and low bid
prices relating to our common stock for the periods indicated, as provided by
the OTC Bulletin Board. These quotations reflect inter-dealer prices without
retail mark-up, mark-down, or commissions, and may not reflect actual
transactions.
Quarter Ended High Bid Low Bid
------------- -------- -------
July 31, 2009 $0.95 $0.50
April 30, 2009 $0.73 $0.51
January 31, 2009 $0.61 $0.46
October 31, 2008 $0.50 $0.50
HOLDERS
As of October 23, 2009, we had approximately 650 shareholders of record.
DIVIDEND POLICY
No dividends have been declared or paid on our common stock. We have incurred
recurring losses and do not currently intend to pay any cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the closing of the Acquisition, we issued 23,000,000 shares
of common stock in the capital of our Company to shareholders of Omnicity,
Incorporated. These securities were issued pursuant to Rule 506 of Regulation D
under the United States Securities Act of 1933, as amended (the "US Securities
Act") to non-accredited and accredited investors (as defined in Rule 501 under
Regulation D under the US Securities Act) based upon representations made by the
acquirers.
Effective on April 29, 2009, we issued a total of 1,428,571 common shares from
treasury to 2 individuals to complete the common share portion to complete an
Asset Purchase Agreement dated October 7, 2008 and amended February 26, 2009 at
an agreed price of $0.35 per common share. We relied on exemptions from
registration under the Securities Act provided by Rule 506 for U.S. accredited
investors based on representations and warranties provided by the individuals.
Effective on June 9, 2009, we issued a total of 545,417 common shares from
treasury to 11 individuals to complete the common share portion to complete an
Asset Purchase Agreement dated October 7, 2008 and amended March 25, 2009 at an
agreed price of $0.72 per common share. We relied on exemptions from
registration under the Securities Act provided by Rule 506 for U.S. accredited
investors based on representations and warranties provided by the individuals.
Effective on May 8, 2009 and June 24, 2009, we completed a non-brokered private
placement pursuant to which we issued from treasury to 33 subscribers 1,928,029
units at a subscription price of $0.35 per unit for proceeds of $674,810.
Effective on May 8, 2009 and June 24, 2009, we completed a non-brokered
units-for-debt private placement pursuant to which we issued from treasury to 8
subscribers 679,358 units at a deemed issuance price of $0.35 per unit in
retirement of an aggregate of $237,775 of Company debt. Stock issuance costs of
$52,595 was charged as a reduction of proceeds. The proceeds of the combined
Unit and Unit for debt non-brokered private placement, net of stock issuance
costs, were $859,990. Each unit consisted of one share of common stock and
one-half of one share purchase warrant. Each whole warrant entitles the holder
to acquire an additional share of common stock at an exercise price of $0.50 per
share until May 8, 2011 as to 1,199,408 shares and June 24, 2009 as to 100,000
shares and September 17, 2009 as to 4,287 shares. We relied on exemptions from
registration under the Securities Act provided by (i) Regulation S (with respect
to two of the subscribers), and (ii) Rule 506 for U.S. accredited investors
(with respect to 24 of the subscribers), and (iii) Rule 506 for non-accredited
16
investors (with respect to 15 of the subscribers) in each case based on
representations and warranties provided by the subscribers in their respective
subscription agreements entered into between each subscriber and the Company.
Effective on May 26, 2009, we issued a total of 350,000 common shares from
treasury to a company pursuant to an Investor Relations Consulting Agreement
dated May 25, 2009. We relied on exemptions from registration under the
Securities Act provided by Rule 506 for U.S. accredited investors based on
representations and warranties provided by the Company.
NO REPURCHASES
Neither we nor any of our affiliates have made any purchases of our equity
securities during the fourth quarter of our fiscal year ended July 31, 2009.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act
and are not required to provide the information required under this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition, changes in financial
condition, plan of operations and results of operations should be read in
conjunction with (i) our audited consolidated financial statements as at July
31, 2009 and 2008 and (ii) the section entitled "Business", included in Item 1
in this Form 10-K Annual Report. The discussion contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of many factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this Annual Report.
PLAN OF OPERATIONS
Our business plan is to be a rural wireless internet service provider in the
United States through a consolidation strategy and organic growth of all
acquired business units and to partner with REMCs, Telcos and local governments
for nationwide marketing. We also plan to partner with regional and national
telecommunication companies for the delivery of voice services and complete
negotiations and logistics of DirecTV resell agreements. We further plan to
partner with local governments to provide essential services, including mobile
internet for emergency mobile communications, fire and police and to establish
new utility applications such as automated meter reading. We plan to bring WISP
based services to rural America through three distinct market channels: (1) REMC
partnerships, (2) strategic acquisitions, (3) local government and private
enterprise partnerships.
Utilizing our relationship with the REMCs and "value added" institutional
services and facilities we provide for municipalities and local governments, we
plan to organize and consolidate within the rural broadband market initially in
Indiana and then in the Midwestern United States and ultimately nationwide.
Collaborations with both the REMCs and municipalities may act as effective
barriers for competition and provide additional sources of revenue and customer
service for both the REMCs and municipalities as well as income and cash flow
for our company. The bundling of broadband services, including internet, voice,
and video, in partnership with rural electric and/or municipal services provides
an opportunity to imbed, cross promote, and extend services in collaboration
with these institutional providers.
FUTURE FINANCING REQUIREMENTS
We estimate that approximately $6,000,000 will be required in fiscal 2010 to
finance the expansion of, and the addition of subscribers through acquisition
to, our existing and to be acquired network infrastructures. A total of
$1,130,000 has been raised as at October 22, 2009. A minor portion will be used
to finance our negative operational cash flow to the end of December 31, 2009.
Once targeted acquisitions are complete, by the end of 2009, we will be
operationally cash flow positive and will require no additional funds to finance
these deficits. A portion of these funds will also be used to finance the
acquisition of additional transmission rights, the purchase and installation of
transmission and tower equipment and the cost of customer premises equipment. A
portion of the funds will be earmarked to pay down existing debt that has a high
cost of capital associated with it and to make principal and interest payments
of our long-term and short term debt as required.
17
CURRENT FINANCING ARRANGEMENTS
* 8% Senior Subordinated Redeemable Debenture - to raise up to
$2,000,000 by issuing long-term debentures with interest paid
quarterly;
* Equity Unit Private Placement - to raise up to $2,000,000 pursuant to
a unit private placement being sold to accredited investors of which
$1,130,000 has been raised as at October 22, 2009;
* Equipment Leasing Arrangement - Master Lease Agreement with Agility
Leasing for a $1,000,000 equipment leasing facility. This facility
will be used to help finance customer premise equipment needs for 2009
and 2010. The Company has used $727,368 of this leasing facility. The
Company is in discussions to increase this Master Lease Agreement;
* Private Investment Public Entity ("PIPE") - we have signed an
engagement letter with Bowen Advisors, Inc. out of Boston to assist us
in raising up to $10m in stages over the next fifteen months with the
first stage being $2,500,000. Marketing of this offering has begun and
the Company is discussing with various financial institutions under
Non-disclosure Agreements.
We will continue to seek traditional cash flow and asset backed financing to
supplement our efforts discussed above and to reduce our overall cost of
capital. Additionally, in order to accelerate our growth rate and to finance
general corporate activities, we may supplement our existing sources of funds
with financing arrangements at the operating system level or through additional
borrowings, joint ventures or other off balance sheet arrangements. As a further
capital resource, we may sell or lease certain wireless rights or assets from
our portfolio as appropriate opportunities become available. However, there can
be no assurance that we will be able to obtain any additional financing, on
acceptable terms or at all.
PLAN OF OPERATIONS FOR THE NEXT TWELVE MONTHS
Our plan of operations for the next twelve months through our fiscal year ending
July 31, 2010 is to:
1. complete further debt and equity offerings of $5m by December 31,
2009;
2. develop and expand, through organic growth, the subscriber base
through our sales and marketing program;
3. acquire and transition into our operations assets of competing WISP
operators and expand our network into all of Midwest USA;
4. reach operationally cash flow positive and build a liquidity floor
under operations of $100,000 minimum by December 31, 2009;
5. build a current ratio of 2:1 by December 31, 2009;
6. continue to partner with Rural Electric Membership Cooperatives
"REMCs", local and State governments, Rural Telcos and Original
Equipment Manufacturers "OEMs" to efficiently and cost effectively
expand our network across rural America;
7. develop and expand our service offerings to become a total broadband
solution including VOIP and IPTV; and
8. complete a further equity offering, in stages, of $10m by July 31,
2010.
RESULTS OF OPERATIONS
The following table sets forth certain financial information relating to the
Company for the years ended July 31, 2009 ("2009") and July 31, 2008 ("2008").
The financial information presented is derived from the audited consolidated
financial statements included under Item 8 in this 10-K.
18
YEARS ENDED JULY 31, 2009 AND 2008
$ $
---------- ----------
Sales, net 1,688,944 1,034,310
---------- ----------
Expenses:
Service costs 30,712 26,465
Plant and signal delivery 967,406 566,613
Marketing and sales 45,375 26,487
General and administration 744,616 535,604
Salaries and benefits 1,276,016 482,579
Stock based compensation 289,629 --
Depreciation and amortization 536,113 352,425
---------- ----------
Total expenses 3,889,867 1,989,627
---------- ----------
Loss from operations (2,200,923) (955,317)
---------- ----------
Other income (expense):
Other income -- 57,883
Forgiveness of interest -- 121,889
Interest expense (241,096) (204,316)
Financing expense (190,039) --
---------- ----------
Total other income (expense) (431,135) (24,544)
---------- ----------
Net loss (2,632,058) (979,861)
========== ==========
Net loss per share - basic and diluted (.08) (.03)
========== ==========
The following discussion should be read in conjunction with the audited
consolidated financial statements (including the notes thereto) included under
Item 8 in this 10-K.
REVENUES
The Company's revenues for 2009 increased by $655,000 to $1,689,000 (2008 -
$1,034,000), an increase of 63%. More importantly, revenue for Q4 2009 increased
by $288,000 to $611,000 (2008 - $322,000), an increase of 89%. Additionally, Q4
2009 revenues increased by $186,000 to $611,000 (Q3 2009 - $425,000), an
increase of 44%. This is after a 46% increase Q3 2009 compared to Q2 2009. These
significant increases reflect an increase in recurring service revenue from our
four acquisitions. Revenues from our first acquisition in 2009 began in
February, 2009. The numbers of subscribers increased from 1,800 to 5,200 by
virtue of these acquisitions. For the first six months of 2009 and all of 2008,
subscriber counts were not significantly different. The Company receives revenue
mainly from monthly service and modem rental fees collected from its
subscribers. The Company also receives web hosting fees, installation fees,
fiber construction projects fees and late fees, this is less than 8% of total
revenue. The Company expects revenues to increase over the next fiscal year as a
result of organic growth, planned acquisitions and increase in ARPU.
OPERATIONAL EXPENSES
Operational expenses include service costs, plant and signal delivery, marketing
and sales, general and administration and salaries and benefits.
Service costs include the cost of billing and collection. Service costs for 2009
increased by $4,000 to $31,000 (2008 - $26,000). This increase was due mainly to
the increase in the number of customers accounts offset by a decrease in the
cost of collection. Service costs are not expected to increase significantly in
2010.
Plant and signal delivery expenses include the rental of tower infrastructures,
the purchase of internet transmission (backhaul) the cost of installations at
customers' premises and the customer premises equipment operating lease costs.
Plant and signal delivery expenses for 2009 increased by $401,000 to $967,000
(2008 - $566,000), an increase of 71% which is in line with the increase in
revenues. This increase was due mainly to the increase in the number of towers
under rental arrangements, the amount of backhaul needed to service the increase
in customers, the increase in customer premises equipment being leased pursuant
to operating lease arrangements and the increase in customer installations.
Plant and signal delivery costs per customer will significantly decrease once
the Company populates its towers with customers. The Company, on average, has a
penetration of approximately 4% of homes passed whereas the minimum target
19
penetration is greater than 20% which is the penetration rate in the Wabash REMC
coverage area.
Marketing and sales expenses include REMC fees, advertising, preparation of
marketing materials, commissions paid to our VP of corporate sales and
commissions paid to Service Concepts, a company responsible for marketing to the
REMCs on the Company's behalf. Marketing and sales for 2009 increased by $19,000
to $45,000 (2008 - $26,000). This increase was due mainly to the hiring of
salesperson and Service Concepts beginning their marketing campaign targeted at
the REMCs. Marketing and sales expenses are expected to significantly increase
during 2010 as the Company increases its marketing plan to significantly
increase organic growth.
General and administration expenses include professional fees (including legal,
accounting and outside professional consulting), investor relations fees, office
expenses (including rent, telephone and office), software fees and fees
associated with late payments and bank charges. General and administration
expenses for 2009 increased by $210,000 to $745,000 (2008 - $535,000). This
increase is mainly due to becoming a public company on February 17, 2009 and the
additional costs associated with this transaction and investor relations
expenses, transfer agent expenses and regulatory fees. General and
administration expenses are not expected to increase significantly in 2010 in
relation to increased revenue.
Salaries and benefits for 2009 have increased by $793,000 to $1,276,000 (2008 -
$483,000). This increase is mainly due to becoming a public company on February
17, 2009 and the additional costs associated with hiring senior management such
as a Chief Financial Officers, VP of Corporate Development, VP of Sales and
Marketing, VP of Acquisitions, VP of Field Services, VP of Customer Support and
a corporate sales person. The Company went from 10 employees as at July 31, 2008
to 38 employees currently. The Company does not expect to increase its number of
employees significantly during 2010 as it has now contracted out its
installations to an independent contractor and the Company's current number of
employees is expected to be able to maintain a customer base at least double its
current 5,200 customers.
Stock based compensation for 2009 increased by $290,000 to $290,000 (2008 -
$nil). This was a result of an Omnicity, Incorporated Board of Directors
Resolution dated January 2, 2009 to issue shares to current employees, including
its then Chief Executive Officer and Chief Operating Officer, to compensate them
for all services performed up to the end of December 31, 2008.
Depreciation and amortization for 2009 increased by $184,000 to $536,000 (2008 -
$352,000). A total of $80,000 of this increase was as a function of adding
signal delivery equipment on towers through acquisitions, developing the
Company's Customer Relationship Management software package, acquiring
additional office furniture and equipment and acquiring customer premises
equipment. $98,000 of the increase was attributed to the amortization, over a
period of seven years, the customers' relationships acquired in conjunction with
the four completed asset acquisitions.
OTHER INCOME AND EXPENSE
Interest expense for 2009 increased by $37,000 to $241,000 (2008 - $204,000).
The increase was a result of increased short-term and long-term debt and the
additional interest and late fees charged by Wabash REMC totaling $44,000.
Interest expense is not expected to increase substantially in 2010 as the
Company plans to pay down short-term and long-term debt and to finance growth
through the issuance of equity instruments.
Financing expense for 2009 increased by $190,000 to $190,000 (2008 - $nil). The
Company acquires, either new or as part of asset acquisitions, certain fixed and
wireless tower and customer premises equipment. Pursuant to a Master Lease
Agreement with Agility Venture Fund I, LLC ("Agility") dated November 6, 2006,
the Company sells this equipment to Agility and then leases the equipment back
pursuant to operating lease agreements. On December 1, 2006 the Company received
$233,333 pursuant to a sale leaseback arrangement.
Pursuant to a new Master Lease Agreement with Agility Venture Fund II, LLC
("Agility II") dated December 24, 2008, the Company and Agility agreed to
provide funding under new sale lease back arrangements totalling $1,000,000.
This new facility is in addition to and in conjunction with the November 6, 2006
agreement. On February 17, 2009, March 27, 2009, July 9, 2009 and July 14, 2009
the Company received an aggregate of $749,749 pursuant to four sale leaseback
schedules completed ($689,368 in connection with sale leaseback arrangements
pursuant to the Master Lease Agreements and an aggregate of $60,381 in
connection with sale leaseback arrangements with various unrelated vendors).
20
Each sale leaseback transaction requires a 10% deposit as additional security
for the stream of lease payments and 30% warrant coverage as a financing
expense. Each lease agreement is for a period of 36 months with a buy-out at the
end of the lease equal to the fair value of the equipment at that time. Our
Chief Executive Officer and Chairman of the Board of the Company have provided
personal guarantees for all remaining lease payments.
Pursuant to Warrant Agreements appended to the Master Lease Agreements with
Agility and Agility II, the Company was obligated to provide the Lessor with 30%
warrant coverage. On June 24, 2009, the Company settled the commitment to issue
warrants under the November 6, 2006 Master Lease Agreement and issued 155,556
warrants exercisable at $0.45 per common share expiring December 1, 2011 and
recorded the value of these warrants, being $70,000, as a financing expense.
This expense was not recognized on December 1, 2006 and the Company has restated
its July 31, 2007 financial statements to charge this expense to the appropriate
period. Also on June 24, 2009 the Company settled the commitments to issue
warrants on the first two of four sale leaseback schedules. The Company issued
77,569 warrants exercisable at $0.51 per common share expiring February 17, 2019
and issued 184,914 warrants exercisable at $0.58 per common share expiring March
27, 2019. These warrants were valued at $126,907 and charged as a financing
expense. Subsequently, on October 13, 2009 the Company settled commitments to
issue warrants on the final two sale leaseback schedules. The Company issued
139,490 warrants exercisable at $0.56 per common share expiring October 13,
2019. These warrants were valued at $63,132 and charged as a financing expense
during the year ended July 31, 2009.
Other income and forgiveness of interest for 2009 was $nil (2008 - $180,000) as
result of not incurring these items in 2009.
NET LOSS
The net loss for 2009 increased by $1,652,000 to $2,632,000 (2008 - $980,000).
This increase in loss was due to increases in operational expenses of $1,900,000
offset by an increase in revenue of $655,000 for a net increase in loss from
operations of $1,246,000. This net increase is mainly associated with building
internal infrastructure and the costs of being a public company. Non-cash items
such as stock based compensation and financing expense, totaling $489,000, were
not incurred in 2008. Depreciation also increased by $184,000. Additionally, the
Company did not receive the benefit of $179,000 of other income and forgiveness
of interest in 2009 as compared to 2008.
LIQUIDITY AND CAPITAL RESOURCES
July 31, 2009 July 31, 2008
------------- -------------
$ $
Cash 159,000 nil
Working Capital (Deficiency (2,585,000) (2,056,000)
Total Assets 3,350,000 1,243,000
Total Liabilities 4,424,000 2,906,000
Stockholders' Deficit (1,074,000) (1,663,000)
Included in working capital deficiency are short-term notes totaling $1,222,716.
These notes are all standard unsecured promissory notes due on demand or within
one year at rates varying from 5% on $625,800, 7% on $365,000, 8% on $8,416, 10%
on $10,000 and 20% on $203,500. Also included in working capital deficiency are
long-term obligations totaling $1,947,574. The long-term debt principal payments
due over the next five years and beyond are as follows:
Year $
---- -------
2010 511,521
2011 284,530
2012 224,432
2013 194,426
2014 182,133
Thereafter 550,532
Long-term debt is made up of many smaller debt agreements. The material debt
agreements are as follows:
21
July 31, July 31,
2009 2008
--------- ---------
$ $
Notes payable to Jay County Development Corporation. Non-interest bearing,
repayable monthly based on the number of subscribers in Jay County, Indiana.
Collateralized by certain equipment located in Jay County. 296,911 300,099
Notes payable to Wabash Rural Electric Membership Cooperative ("Wabash"). Six
separate notes were renewed pursuant to a Memorandum of Understanding effective
September 24, 2009. Accrued interest and penalties to this date, totalling
$115,111, were added to the principal amounts outstanding. Interest rates are
between 5.7% and 7.45% annually and are collateralized by certain equipment in
Wabash County, Indiana. Monthly payments of $448 begin on January 31, 2010 on
one note with final payment due December 31, 2015. Quarterly payments of $23,469
begin on December 31, 2009 on three notes with final payments due between
September, 2016 and August, 2017. Quarterly payments of $945 begin on December
31, 2009 on one note with final payment due July 31, 2014 and quarterly payments
of $835 on one note begins on January 31, 2010 with final payment due July 31,
2017. 629,388 490,040
Note payable to Muncie Industrial Revolving Loan Fund Board. Interest of 5% only
was paid to July 13, 2009. Monthly principal and interest of $4,570 payments
start August 13, 2009 and end December 13, 2011, at which time the loan will be
reviewed by Muncie's Board of Directors. This note is collateralized by certain
equipment in Muncie County and Delaware County, Indiana. 283,741 247,361
Note payable to Star Financial Bank. Interest is paid monthly at 8.6% per annum.
This note is due February, 2010 and is collateralized by certain equipment. 193,170 193,170
Notes payable to the son of the Chairman of the Board of the Company and to
Insul Reps Profit Sharing Plan, a company controlled by the Chairman. Repayable
in monthly instalments of principal and interest at 8%, totalling $5,199, to
December, 2010, $4,845 from January, 2010 to May, 2012 and $3,492 from June,
2012 to April 2014. 217,663 --
Senior subordinated redeemable debenture owing to William Herdrich, a director
of the Company - 8% interest per annum payable quarterly. Due January 2, 2011. 20,000 --
--------- ---------
In addition to the debt agreements described above, we have additional long-term
debt payable pursuant to a number of smaller debt agreements with monthly
payments of principal and interest ranging from 5% to 10%, unsecured. 306,701 83,797
--------- ---------
Total long-term debt 1,947,574 1,314,467
========= =========
LIQUIDITY OVERVIEW
We completed our going public transaction on February 17, 2009. Since then, the
Company's acquisition and transition teams have acquired and folded in four
WISP's increasing our subscriber base from 1,800 to over 5,200 as at July 31,
2009. See discussion under "Revenues" above for our increase in cash flow from
our customers.
At July 31, 2009 we had cash of $159,000. Subsequent to July 31, 2009 we
deposited $1,130,000 relating to issuance of equity and debentures. Our payroll
is currently $120,000 per month and we now have 36 employees including
contractors. We manage our cash in a strict manner with a daily, weekly and
multi-weekly cash forecast prepared by our controller and circulated to the
three senior officers for their review, discussion and direction. From February
17, 2009 to October 22, 2009 our creditors have been substantially paid down or
brought more current, paid off, converted into equity or converted into
long-term debt.
CASH TO OPERATING ACTIVITIES
During the year ended July 31, 2009, operating activities used cash of
$1,127,000 (2008 - $264,000). Our loss for the year was $2,632,000 (2008 -
$980,000) which included non-cash items: Depreciation and amortization of
$536,000 (2008 - $352,000), stock based compensation of $290,000 (2008 - $nil),
financing expense paid through issuance of warrants of $190,000 (2008 - $nil)
and expenses and services paid by issuing equity and notes totaling $82,000
(2008 - $nil) for a net cash outflow of $1,534,000 before changes in working
capital items. Our accounts receivable have increased by $23,000 (2008 -
decrease of $83,000) due to doubling our customer base. Our expenses were
22
financed by our vendors as to $485,000 (2008 - $283,000). Our prepaid expenses
increased by $34,000 due to a cash advance of $27,000 to a financial consultant.
CASH TO INVESTING ACTIVITIES
The WISP business is a capital intensive business. Since inception, the Company
has expended funds to lease or otherwise acquire transmission site rights in
various locations and markets, to construct the existing systems and to finance
initial operating losses. The Company intends to expand the existing systems and
launch additional wireless systems and will require additional funds. The
Company estimates that a launch by it of a wireless internet provider system in
a typical new tower location will involve the expenditures for wireless internet
system transmission equipment and incremental installation costs per subscriber
for customer premise equipment. As a result of these costs, operating losses are
likely to be incurred by a system during the roll-out period.
During the year ended July 31, 2009, investing activities used net cash of
$146,000 (2008 - $216,000), primarily related to our four acquisitions. During
fiscal 2009 we acquired $1,119,000 of wireless equipment and tower
infrastructures (2008 - $91,000) of which we sold, and leased back, wireless
equipment totaling $689,000 from Agility Ventures Fund II in four sale operating
leaseback transactions. We also financed $247,000 of equipment purchases through
vendor notes, and $7,000 of equipment through capital lease agreements for a net
cash investment of $166,000. We paid operating lease deposits to Agility Lease
Fund II of $75,000 and used deposits of $115,000 paid in fiscal 2008 to complete
the four asset purchase agreements. We also increased our equipment deposits by
$20,000. An additional deposit of $10,000 paid in fiscal 2008 remains at July
31, 2009. We acquired customers' relationships (subscribers) at a cost of
$1,940,000. These customers were acquired without a cash outlay. To acquire
these customers' relationships we issued $893,000 in common stock, $164,000 in
common stock to be issued, $71,000 assumption of debt and $812,000 in vendor
notes.
From a non-financial viewpoint we have also invested in systems upgrades, hiring
and training of our 36 member workforce, and developed a strategic and operating
plan for the next five years. We have invested in going public and in developing
our acquisition and transition teams which are not necessarily operational
functions.
CASH FROM FINANCING ACTIVITIES
During the year ended July 31, 2009, financing activities provided cash of
$1,432,000 (2008 - $480,000) not including cash of $689,000 received from
Agility Ventures Fund II, $1,068,000 of vendor note financing, and $1,057,000 of
common shares issued and to be issued relating to the four acquisitions
referenced under "Cash from Investing Activities". Net proceeds of $1,100,000,
after issuance costs of $53,000, was received from common stock subscriptions or
common stock issued during the year (2008 - $nil). During the year cash proceeds
of $411,000 (2008 - $645,000) were received from short-term loans and $145,000
(2008 - $nil) from long-term debt. We repaid $219,000 (2008 - $165,000) of
short-term and long-term debt. The Company advanced $5,000 to our Chief
Executive Officer as loan against expenses. Subsequent to July 31, 2009 we
received an additional $1,130,000 through an equity placement of our securities
and our 8% senior subordinated redeemable debenture.
NON-CASH FINANCING ACTIVITIES
Non-cash investing and financing activities during the year ended July 31, 2009
and 2008 included the following:
$ $
--------- ---------
Net liabilities assumed in corporate reorganization (168,352) --
Net assets acquired in exchange for common stock -- 124,938
Current liabilities transferred to long-term debt 556,327 --
Equipment acquired under capital leases 6,800 95,800
Warrants issued pursuant to a Master Lease Agreement 196,907 --
Conversion of debt and accrued interest into common stock 409,421 682,918
Customer relationships acquired in exchange for assumption of debt 60,945 --
Customer relationships acquired in exchange for common stock
issued or to be issued 1,056,700 --
Net liabilities assumed in corporate reorganization (168,352) --
Net assets acquired in exchange for common stock -- 124,938
23
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this report, Omnicity Incorporated does not have any
off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on its financial condition, changes of financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles used in the United
States. Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. We believe that understanding the basis and
nature of the estimates and assumptions involved with the following aspects of
our consolidated financial statements is critical to an understanding of our
financials.
USE OF ESTIMATES
The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses in the reporting period. The Company regularly evaluates estimates and
assumptions related to the useful life and recoverability of long-lived assets,
stock-based compensation, and deferred income tax asset valuation allowances.
The Company bases its estimates and assumptions on current facts, historical
experience and various other factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and the accrual of costs and
expenses that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from the
Company's estimates. To the extent there are material differences between the
estimates and the actual results, future results of operations will be affected.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation based on
estimated useful lives utilizing the straight-line method. The Company
capitalizes costs associated with the construction of new transmission
facilities. Capitalized construction costs include materials, labour and
interest. The Company's methodology for capitalization of internal construction
labour and internal and contracted third party installation costs (including
materials) utilizes actual costs. Materials and external labour costs associated
with construction activities are capitalized based on amounts invoiced to the
Company by third parties.
Computers and wireless equipment also consists of spare equipment and supplies
not put in use such as radios, antennas, cable and wire and is stated at the
lower of cost (first-in, first-out basis) or market. The carrying value of such
equipment was $234,867 (2008 - $163,743). The spare electronic equipment is
maintained to provide replacement parts when and if needed in a short time
period to provide minimal service disruption to customers in the event of a
parts failure and to install new customers premises equipment quickly when
ordered. Spare equipment and supplies are not depreciated until put into use.
Improvements that extend asset lives are capitalized. Other repairs and
maintenance costs are charged to operations as incurred. Estimated useful lives
for property and equipment are as follows:
Description Life
----------- -------
Computer and wireless equipment 3 years
Towers and infrastructures 5 years
Furniture and fixtures 7 years
Vehicles 5 years
Software 3 years
The Company periodically evaluates the useful lives of its property and
equipment. The Company's property and equipment is reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability is measured by comparison of the
carrying amount to the future net undiscounted cash flows expected to be
generated by the related assets. If such assets are considered to be impaired,
24
the impairment to be recognized is measured by the amount the carrying value
exceeds the fair market value of the assets. No impairment was recorded at July
31, 2009 or 2008.
CUSTOMERS' RELATIONSHIPS
Customers' relationships represent the value attributed to customers'
relationships acquired in asset acquisitions and are amortized over a 7-year
period.
LONG-LIVED ASSETS
Pursuant to SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS", the Company evaluates property and equipment and amortizable
intangible assets for impairment whenever current events and circumstances
indicate the carrying amounts may not be recoverable. The evaluation of
long-lived assets for impairment requires a high degree of judgment and involves
the use of significant estimates and assumptions. If the carrying amount is
greater than the expected future undiscounted cash flows to be generated, the
Company recognizes an impairment loss equal to the excess, if any, of the
carrying value over the fair value of the asset. The Company generally measures
fair value based upon the present value of estimated future net cash flows of an
asset group over its remaining useful life.
REVENUE RECOGNITION
The Company charges a recurring subscription fee for providing wireless
broadband services to its subscribers. Revenue from service is recognized as
monthly services are rendered in accordance with individual customer
arrangements. Credit risk is managed by disconnecting services to customers
whose accounts are delinquent for a specified number of days. Consistent with
SFAS No. 51, installation revenue obtained from the connection of subscribers to
the system is recognized in the period installation services are provided to the
extent of related direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period that customers are expected to
remain connected to the system. From time to time, the Company enters into
barter arrangements whereby it provides certain customers with wireless
broadband services in exchange for use of towers and equipment owned by
customers. Revenue and expenses recorded under barter arrangements was $66,851
(2008 - $42,000) for the year ended July 31, 2009.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with the
provisions of SFAS No. 123(R), "SHARE BASED PAYMENTS". The Company measures the
cost of employee services in exchange for an award of equity instruments based
on the grant-date fair value. On January 2, 2009 the Company issued 1,655,009
Omnicity, Incorporated common shares valued at $289,629 to certain employees as
a performance bonus. There is no stock option plan adopted.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective this quarter, the Company implemented SFAS No. 165, "SUBSEQUENT
EVENTS" ("SFAS 165"). This standard establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued. The adoption of SFAS 165 did not impact the
Company's financial position or results of operations. The Company evaluated all
events or transactions that occurred after July 31, 2009 up through October 23,
2009, the date the Company issued these financial statements. During this
period, the Company did not have any material recognizable subsequent events,
other than as disclosed in Note 16.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued SFAS No. 168, "THE FASB ACCOUNTING STANDARDS
CODIFICATION AND THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - A
REPLACEMENT OF FASB STATEMENT NO. 162". The FASB Accounting Standards
Codification ("Codification") will become the source of authoritative U.S.
generally accepted accounting principles ("GAAP") recognized by FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission "SEC" under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of this statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. This statement is effective for financial
statements issued for interim and annual periods ending after September 30,
2009. The adoption of this statement is not expected to have a material effect
on the Company's financial statements.
In June 2009, the FASB issued SFAS No. 167, "AMENDMENTS TO FASB INTERPRETATION
NO. 46(R)". The objective of this statement is to improve financial reporting by
enterprises involved with variable interest entities. This statement addresses
(1) the effects on certain provisions of FASB Interpretation No. 46 (revised
December 2003), "CONSOLIDATION OF VARIABLE INTEREST ENTITIES", as a result of
the elimination of the qualifying special-purpose entity concept in SFAS No.
166, "ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS", and (2) concern about the
25
application of certain key provisions of FASB Interpretation No. 46(R),
including those in which the accounting and disclosures under the Interpretation
do not always provide timely and useful information about an enterprise's
involvement in a variable interest entity. This statement is effective as of the
beginning of each reporting entity's first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The adoption of this statement is not expected to
have a material effect on the Company's financial statements.
In June 2009, the FASB issued SFAS No. 166, "ACCOUNTING FOR TRANSFERS OF
FINANCIAL ASSETS - AN AMENDMENT OF SFAS NO. 140". The object of this statement
is to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor's continuing
involvement, if any, in transferred financial assets. This statement addresses
(1) practices that have developed since the issuance of SFAS No. 140,
"ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES", that are not consistent with the original intent and key
requirements of that statement and (2) concerns of financial statement users
that many of the financial assets (and related obligations) that have been
derecognized should continue to be reported in the financial statements of
transferors. SFAS No. 166 must be applied as of the beginning of each reporting
entity's first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. Earlier application is prohibited. This
statement must be applied to transfers occurring on or after the effective date.
Additionally, on and after the effective date, the concept of a qualifying
special-purpose entity is no longer relevant for accounting purposes. The
disclosure provisions of this statement should be applied to transfers that
occurred both before and after the effective date of this statement. The
adoption of this statement is not expected to have a material effect on the
Company's financial statements.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, "DETERMINING
WHETHER INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT TRANSACTIONS ARE
PARTICIPATING SECURITIES". FSP EITF 03-6-1 addresses whether instruments granted
in share-based payment transactions are participating securities prior to
vesting, and therefore need to be included in the computation of earnings per
share under the two-class method as described in FASB Statement of Financial
Accounting Standards No. 128, "Earnings per Share." FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning on or after December
15, 2008 and earlier adoption is prohibited. The adoption of this statement is
not expected to have a material effect on the Company's financial statements.
In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No.
163, "ACCOUNTING FOR FINANCIAL GUARANTEE INSURANCE CONTRACTS - AN INTERPRETATION
OF FASB STATEMENT NO. 60" ("SFAS 163"). SFAS 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default when there
is evidence that credit deterioration has occurred in an insured financial
obligation. It also clarifies how Statement 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities, and requires expanded
disclosures about financial guarantee insurance contracts. It is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
except for some disclosures about the insurance enterprise's risk-management
activities. SFAS 163 requires that disclosures about the risk-management
activities of the insurance enterprise be effective for the first period
beginning after issuance. Except for those disclosures, earlier application is
not permitted. The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
In May 2008, the FASB issued SFAS No. 162, "THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES" (SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "THE
MEANING OF PRESENT FAIRLY IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES". The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
In March 2008, the FASB issued SFAS No. 161, "DISCLOSURES ABOUT DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - AN AMENDMENT TO FASB STATEMENT NO. 133"
(SFAS 161"). SFAS 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedged items are accounted for under FASB
Statement No. 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years beginning after November 15, 2008, with early adoption
encouraged. The Company is currently evaluating the impact of SFAS No. 161 on
its financial statements, and the adoption of this statement is not expected to
have a material effect on the Company's financial statements.
26
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (SFAS 141 revised"). This statement replaces SFAS No. 141 and
defines the acquirer in a business combination as the entity that obtains
control of one or more businesses in a business combination and establishes the
acquisition date as the date that the acquirer achieves control. SFAS 141
revised requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any non-controlling interest in the acquired at the acquisition
date, measured at their fair values as of that date. SFAS 141 revised also
requires the acquirer to recognize contingent consideration at the acquisition
date, measured at its fair value at that date. This statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is prohibited. The adoption of this
statement is not expected to have a material effect on the Company's financial
statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements Liabilities -an Amendment of ARB No. 51". This
statement amends ARB 51 to establish accounting and reporting standards for the
Non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
The Company does not expect the adoption of any other recently issued accounting
pronouncements to have a material effect on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act
and are not required to provide the information required under this item.
27
ITEM 8. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Omnicity Corp. (formerly Bear River Resources, Inc.)
Rushville, Indiana
We have audited the accompanying consolidated balance sheet of Omnicity Corp,
(formerly Bear River Resources, Inc.) ("the Company") as of July 31, 2009 and
the related consolidated statements of operations, changes in shareholders'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Omnicity Corp. as of July 31,
2009, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses and had negative
cash flows from operations that raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in the Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Weaver & Martin LLC
- ---------------------------------
Weaver & Martin LLC
Kansas City, Missouri
October 23, 2009 except as to Note 15 which is as of March 15, 2010
28
Independent Auditors' Report
Board of Directors
Omnicity, Inc.
Carmel, Indiana
We have audited the accompanying balance sheets of Omnicity, Inc. (the Company)
as of July 31, 2008 and 2007, and the related statements of operations, changes
in stockholders' deficit, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform our audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of Omnicity, Inc. at July 31, 2008 and
2007, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has suffered recurring losses from operations, has negative working capital, and
has relied on cash inflows from private investors to fund working capital
deficits. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regards to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BGBC Partners, LLP
- -------------------------------------
Indianapolis, Indiana
December 4, 2008
29
Omnicity Corp. (formerly Bear River Resources, Inc.)
Consolidated Balance Sheets
(Restated -
Note 15)
July 31, 2009 July 31, 2008
------------- -------------
$ $
Assets
Current Assets:
Cash 159,119 --
Accounts receivable, net 78,007 54,655
Other receivable (Note 9 (e)) 5,000 10,000
Prepaid expenses and deposits (Note 10 (e)) 114,173 2,353
---------- ----------
Total Current Assets 356,299 67,008
Property and Equipment (Note 3) 1,022,675 1,024,625
Deposits and Other Assets (Note 4) 129,886 151,088
Customers' Relationships (Note 5) 1,841,247 --
---------- ----------
Total Assets 3,350,107 1,242,721
========== ==========
Liabilities and Stockholders' Deficit
Current Liabilities:
Amount due bank -- 909
Accounts payable (Note 9) 838,336 386,137
Accrued liabilities (Note 6) 213,431 456,918
Notes payable (Note 7) 1,222,716 560,000
Current portion of long-term debt (Note 8) 511,521 575,258
Current portion of capital lease obligations (Note 12) 50,147 11,874
Reserve for customer credits -- 20,000
Deferred revenue 42,000 42,000
Other liabilities (Note 11) 63,132 70,000
---------- ----------
Total Current Liabilities 2,941,283 2,123,096
Capital Lease Obligations (Note 12) 46,868 43,465
Long-term Debt (Note 8) 1,436,053 739,209
---------- ----------
Total Liabilities 4,424,204 2,905,770
---------- ----------
Nature of Operations and Continuance of Business (Note 1)
Commitments (Note 12)
Stockholders' Deficit:
Common Stock, par value $.001, 1,540,000,000 shares authorized,
38,018,382 and 5,501,355 issued and outstanding, respectively (Note 10) 38,018 3,383,487
Common Stock Subscribed and/or Reserved (Notes 5 and 10) 637,000 --
Additional Paid-in Capital 5,929,479 --
Deficit (7,678,594) (5,046,536)
---------- ----------
Total Stockholders' Deficit (1,074,097) (1,663,049)
---------- ----------
Total Liabilities and Stockholders' Deficit 3,350,107 1,242,721
========== ==========
(See accompanying notes to these consolidated financial statements)
30
Omnicity Corp. (formerly Bear River Resources, Inc.)
Consolidated Statements of Operations
(Restated -
Note 15)
Year Ended Year Ended
July 31, 2009 July 31, 2008
------------- -------------
$ $
Sales, net 1,688,944 1,034,310
---------- ----------
Expenses:
Service costs 30,712 26,465
Plant and signal delivery 967,406 566,067
Marketing and sales 45,375 26,487
General and administration 744,616 535,604
Salaries and benefits 1,276,016 482,579
---------- ----------
Stock based compensation 289,629 --
Depreciation and amortization 536,113 352,425
---------- ----------
Total Expenses 3,889,867 1,989,627
---------- ----------
Loss from Operations (2,200,923) (955,317)
---------- ----------
Other Income (Expense):
Other income -- 57,883
Forgiveness of interest -- 121,889
Interest expense (241,096) (204,316)
Financing expense (Note 11) (190,039) --
---------- ----------
Total Other Income (Expense) (431,135) (24,544)
---------- ----------
Net Loss (2,632,058) (979,861)
========== ==========
Net Loss per Share - Basic and Diluted (.08) (.03)
Weighted Average Shares Outstanding -
Basic and Diluted 34,160,000 33,087,000
========== ==========
(See accompanying notes to these consolidated financial statements)
31
Omnicity Corp. (formerly Bear River Resources, Inc.)
Consolidated Statement of Changes in Stockholders' Deficit
Additional Common
Common Paid-in Stock Accumulated
Stock Amount Capital Subscribed Deficit Total
----- ------ ------- ---------- ------- -----
# $ $ $ $ $
Balance, July 31, 2007 (Restated - Note 15) 3,353,999 2,575,631 -- -- (4,066,675) (1,491,044)
Stock issued to settle debt 1,797,357 682,918 -- -- -- 682,918
Stock issued in acquisition of net assets 349,999 124,938 -- -- -- 124,938
Net loss (Restated - Note 15) -- -- -- -- (979,861) (979,861)
----------- ---------- --------- ------- ---------- ----------
Balance, July 31, 2008 (Restated - Note 15) 5,501,355 3,383,487 -- -- (5,046,536) (1,663,049)
Stock issued for cash on September 19, 2008 11,112 5,000 -- -- -- 5,000
Stock issued for cash on October 16, 2008 1,429 500 -- -- -- 500
Stock issued to settle debt on October 31, 2008 1,087,335 383,386 -- -- -- 383,386
Stock awards to employees on January 2, 2009 1,655,009 289,629 -- -- -- 289,629
Recapitalization Transactions - February 17,
2009 (Note 1) -- -- -- -- -- --
Shares acquired by Omnicity Corp. (8,256,240) (4,062,002) 4,062,002 -- -- --
Shares of Omnicity Corp. 43,967,007 43,967 (43,967) -- -- --
Cancellation of founders shares (33,880,000) (33,880) 33,880 -- -- --
Shares issued to shareholders of Omnicity,
Incorporated to effect the recapitalization 23,000,000 23,000 (23,000) -- -- --
Net liabilities assumed of Omnicity Corp. -- -- (168,352) -- -- (168,352)
Stock issued for acquisition of assets 1,973,988 1,974 890,726 -- -- 892,700
Stock issued for cash pursuant to a Unit and Unit
for debt private placement at $0.35 per Unit 2,607,387 2,607 909,978 -- -- 912,585
Stock issued pursuant to an investor relations
contract 350,000 350 123,900 -- -- 124,250
Share issuance costs -- -- (52,595) -- -- (52,595)
Warrants issued pursuant to a Master Lease
Agreement -- -- 196,907 -- -- 196,907
Asset acquisition consideration to be paid in
common shares -- -- -- 164,000 -- 164,000
Common stock subscribed for -- -- -- 473,000 -- 473,000
Net loss -- -- -- -- (2,632,058) (2,632,058)
----------- ---------- --------- ------- ---------- ----------
Balance, July 31, 2009 38,018,382 38,018 5,929,479 637,000 (7,678,594) (1,074,097)
=========== ========== ========= ======= ========== ==========
(See accompanying notes to these consolidated financial statements)
32
Omnicity Corp. (formerly Bear River Resources, Inc.)
Consolidated Statements of Cash Flows
(Restated -
Note 15)
Year Ended Year Ended
July 31, 2009 July 31, 2008
------------- -------------
$ $
Cash flows from (to) operating activities:
Net loss (2,632,058) (979,861)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 536,113 352,425
Financing expense - warrants issued 190,039 --
Stock based compensation 289,629 --
Consulting services paid and expenses settled by issuing common stock 60,157 --
Expenses settled through short-term borrowings 22,105 --
(Increase) decrease in:
Accounts and other receivable (23,352) 83,270
Prepaid expenses (34,289) 19,641
Increase (decrease) in:
Accounts payable and accrued liabilities 484,625 260,367
Customer deposits (20,000) --
---------- ----------
Net cash used in operating activities (1,127,031) (264,158)
---------- ----------
Cash flows from (to) investing activities:
(Increase) decrease in deposits 19,677 (125,000)
Proceeds from sale leaseback of property and equipment 689,368 --
Acquisition of property and equipment (854,706) (90,810)
---------- ----------
Net cash used in investing activities (145,661) (215,810)
---------- ----------
Cash flows from (to) financing activities:
Proceeds from short-term notes 411,000 645,000
Repayment of short-term notes (128,173) --
Related party advance (5,000) --
Repayment of bank borrowings (909) --
Proceeds from long-term debt 145,000 --
Repayment of long-term debt and capital lease obligations (80,822) (165,032)
Proceeds from issuance of common stock 680,310 --
Proceeds from common stock subscriptions 473,000 --
Common stock issuance costs (52,595) --
---------- ----------
Net cash provided by financing activities 1,431,811 479,968
---------- ----------
Increase in cash 159,119 --
Cash, beginning of year -- --
---------- ----------
Cash, end of year 159,119 --
========== ==========
Supplemental cash flow information:
Cash paid for interest 52,711 17,707
Cash paid for income taxes -- --
Supplemental disclosure of non-cash investing and financing activities:
Net liabilities assumed in corporate reorganization (168,352) --
Net assets acquired in exchange for common stock -- 124,938
Current liabilities transferred to long-term debt 556,327 --
Equipment acquired under capital leases 6,800 95,800
Warrants issued pursuant to a Master Lease Agreement 196,907 --
Conversion of debt and accrued interest into common stock 409,421 682,918
Customer relationships acquired in exchange for assumption of debt 60,945 --
Customer relationships acquired in exchange for common stock issued or to be issued 1,056,700 --
(See accompanying notes to these consolidated financial statements)
33
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
1. Nature of Operations and Continuance of Business
The Company was incorporated as Bear River Resources, Inc. in the State of
Nevada on October 12, 2006 and was registered as an extra-provincial company
under the Business Corporations Act of British Columbia on November 6, 2006.
Prior to February 17, 2009 the Company was a Development Stage Company, as
defined by Statement of Financial Accounting Standard ("SFAS") No.7 "ACCOUNTING
AND REPORTING FOR DEVELOPMENT STAGE ENTERPRISES". The Company's principal
business was the acquisition and exploration of mineral resources.
The Company filed a Registration Statement with the United States Securities and
Exchange Commission to register 10,087,000 post-forward split common shares for
sale by existing shareholders. The Company did not receive any proceeds from the
resale of common stock by existing shareholders. The Registration Statement was
declared effective on September 18, 2007.
On October 21, 2008 the Company changed its name to Omnicity Corp. and increased
its issued share capital on a 7.7 new for 1 old basis. The Company increased its
authorized share capital to 1,540,000 common shares and changed its trading
symbol to "OMCY.OB". All share and per share amounts have been retroactively
restated.
On February 17, 2009, the Company acquired, by way of an Agreement and Plan of
Merger with Omnicity Acquisition Co. (a wholly-owned Indiana subsidiary) and
Omnicity, Incorporated, an Indiana company, all of the issued and outstanding
shares of Omnicity, Incorporated. Omnicity, Incorporated (incorporated on August
13, 2003) provides broadband access, including advanced services of voice, video
and data, in un-served and underserved small and rural markets and is planning
to be a consolidator of rural market broadband nationwide. The Company's
strategy is to provide a total broadband solution and continue growth through
acquisitions, organic growth and partner with rural electric membership co-ops
("REMCs") and rural telephone companies. The total purchase price was 23,000,000
post-forward split restricted common shares of the Company. In addition the
Company caused 33,880,000 post-forward split restricted common shares of the
Company to be cancelled leaving 33,087,007 post-forward split common shares
issued and outstanding, of which 10,087,000 were not restricted.
These financial statements have been prepared on a going concern basis, which
implies the Company will continue to realize its assets and discharge its
liabilities in the normal course of business. The Company has generated
substantial revenues but has sustained losses since inception and has never paid
any dividends and is unlikely to pay dividends in the immediate or foreseeable
future. The continuation of the Company as a going concern is dependent upon the
continued cooperation from its creditors and the ability of the Company to
obtain necessary debt and/or equity financing to repay overdue obligations, to
fund its growth strategy and to continue operations, and the attainment of
profitability. As at July 31, 2009, the Company had a working capital deficit of
$2,584,984 and a stockholders' deficit of $1,074,097. All of these factors
combined raises substantial doubt regarding the Company's ability to continue as
a going concern. These financial statements do not include any adjustments to
the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company has been addressing its liquidity and working capital issues and
continues to raise additional capital through the issuance of vendor and
short-term notes, a senior subordinated debenture offering and issuance of
equity securities to private and institutional investors. Management believes
this additional capital and the expanded customer base through acquisitions and
organic growth will provide the Company the opportunity to be operationally cash
flow positive and profitable over the next twelve months.
2. Summary of Significant Accounting Policies
Basis of Presentation
These financial statements and related notes are presented in accordance with
accounting principles generally accepted in the United States, and are expressed
in US dollars. The Company's fiscal year-end is July 31. Pursuant to a Board of
Directors Resolution dated March 20, 2009 Omnicity Corp. changed its fiscal year
end from June 30 to July 31 to coincide with the fiscal year end of its acquired
operating subsidiary, Omnicity, Incorporated.
34
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (cont.)
Use of Estimates
The preparation of financial statements in accordance with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses in the reporting period. The Company regularly evaluates estimates and
assumptions related to the useful life and recoverability of long-lived assets,
stock-based compensation, and deferred income tax asset valuation allowances.
The Company bases its estimates and assumptions on current facts, historical
experience and various other factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and the accrual of costs and
expenses that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from the
Company's estimates. To the extent there are material differences between the
estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturities of three
months or less at the time of issuance to be cash equivalents. Amount due bank
represents checks written and released but not yet presented to the bank for
payment, effectively outstanding checks in excess of bank balances.
Concentration of Business and Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company reviews a
customer's credit history before extending credit. There were no individual
customers with balances in excess of 10% of the accounts receivable or net sales
balances at July 31, 2009 and 2008.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts based on specifically
identified amounts that are believed to be uncollectible. An additional
allowance is recorded based on certain percentages of aged receivables, which
are determined based on historical experience and assessment of the general
financial conditions affecting the Company's customer base. If actual
collections experience changes, revisions to the allowance may be required.
After all attempts to collect a receivable have failed, the receivable is
written-off against the allowance. The allowance for doubtful accounts was
$10,000 at July 31, 2009 and 2008.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation based on
estimated useful lives utilizing the straight-line method. The Company
capitalizes costs associated with the construction of new transmission
facilities. Capitalized construction costs include materials, labour and
interest. The Company's methodology for capitalization of internal construction
labour and internal and contracted third party installation costs (including
materials) utilizes actual costs. Materials and external labour costs associated
with construction activities are capitalized based on amounts invoiced to the
Company by third parties.
Computers and wireless equipment also consists of spare equipment and supplies
not put in use such as radios, antennas, cable and wire and is stated at the
lower of cost (first-in, first-out basis) or market. The carrying value of such
equipment was $234,867 (2008 - $163,743). The spare electronic equipment is
maintained to provide replacement parts when and if needed in a short time
period to provide minimal service disruption to customers in the event of a
parts failure and to install new customers premises equipment quickly when
ordered. Spare equipment and supplies are not depreciated until put into use.
35
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (cont.)
Improvements that extend asset lives are capitalized. Other repairs and
maintenance costs are charged to operations as incurred. Estimated useful lives
for property and equipment are as follows:
Description Life
----------- -------
Computer and wireless equipment 3 years
Towers and infrastructures 5 years
Furniture and fixtures 7 years
Vehicles 5 years
Software 3 years
The Company periodically evaluates the useful lives of its property and
equipment. The Company's property and equipment is reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability is measured by comparison of the
carrying amount to the future net undiscounted cash flows expected to be
generated by the related assets. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount the carrying value
exceeds the fair market value of the assets. No impairment was recorded at July
31, 2009 or 2008.
Customers' Relationships
Customers' relationships represent the value attributed to customers'
relationships acquired in asset acquisitions and are amortized over a 7-year
period.
Long-lived Assets
Pursuant to SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS", the Company evaluates property and equipment and amortizable
intangible assets for impairment whenever current events and circumstances
indicate the carrying amounts may not be recoverable. The evaluation of
long-lived assets for impairment requires a high degree of judgment and involves
the use of significant estimates and assumptions. If the carrying amount is
greater than the expected future undiscounted cash flows to be generated, the
Company recognizes an impairment loss equal to the excess, if any, of the
carrying value over the fair value of the asset. The Company generally measures
fair value based upon the present value of estimated future net cash flows of an
asset group over its remaining useful life.
Financial Instruments
The fair value of financial instruments, which include cash and accounts
payable, were estimated to approximate their carrying values due to the
immediate or short-term maturity of these financial instruments. Foreign
currency transactions are primarily undertaken in Canadian dollars. The
financial risk is the risk to the Company's operations that arise from
fluctuations in foreign exchange rates and the degree of volatility of these
rates. Currently, the Company does not use derivative instruments to reduce its
exposure to foreign currency risk.
Foreign Currency Transactions
The Company's functional and reporting currency is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are translated
in accordance with SFAS No. 52 "FOREIGN CURRENCY TRANSLATION", using the
exchange rate prevailing at the balance sheet date. Gains and losses arising on
settlement of foreign currency denominated transactions or balances are included
in the determination of income. Foreign currency transactions are minimal but
primarily undertaken in Canadian dollars. The Company has not, to the date of
these financials statements, entered into derivative instruments to offset the
impact of foreign currency fluctuations.
36
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (cont.)
Deferred Revenue
Deferred revenue represents services billed but unearned.
Revenue Recognition
The Company charges a recurring subscription fee for providing wireless
broadband services to its subscribers. Revenue from service is recognized as
monthly services are rendered in accordance with individual customer
arrangements. Credit risk is managed by disconnecting services to customers
whose accounts are delinquent for a specified number of days. Consistent with
SFAS No. 51, installation revenue obtained from the connection of subscribers to
the system is recognized in the period installation services are provided to the
extent of related direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period that customers are expected to
remain connected to the system. From time to time, the Company enters into
barter arrangements whereby it provides certain customers with wireless
broadband services in exchange for use of towers and equipment owned by
customers. Revenue and expenses recorded under barter arrangements was $66,851
(2008 - $42,000) for the year ended July 31, 2009.
Advertising Costs
The Company incurs advertising costs in the normal course of business, which are
expensed as incurred. Advertising costs were $3,459 for the year ended July 31,
2009.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with the
provisions of SFAS No. 123(R), "SHARE BASED Payments". The Company measures the
cost of employee services in exchange for an award of equity instruments based
on the grant-date fair value. On January 2, 2009 the Company issued 1,655,009
Omnicity, Incorporated common shares valued at $289,629 to certain employees as
a performance bonus. There is no stock option plan adopted.
Basic and Diluted Net Income (Loss) Per Share
Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding for the year. Diluted loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding plus common stock equivalents (if dilutive) related to stock options
and warrants for each year. There were no common equivalent shares outstanding
at April 30, 2010 and 2009 that have been included in dilutive loss per share
calculation as the effects would have been anti-dilutive. There are no stock
options issued and outstanding as at July 31, 2009 and 2008. Total potentially
dilutive common shares, relating to stock purchase warrants issuable in the
future, as at July 31, 2009 totals 4,001,000 (See Note 11).
Recently Adopted Accounting Pronouncements
Effective this quarter, the Company implemented SFAS No. 165, "SUBSEQUENT
EVENTS" ("SFAS 165"). This standard establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued. The adoption of SFAS 165 did not impact the
Company's financial position or results of operations. The Company evaluated all
events or transactions that occurred after July 31, 2009 up through October 23,
2009, the date the Company issued these financial statements. During this
period, the Company did not have any material recognizable subsequent events,
other than as disclosed in Note 16.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, "THE FASB ACCOUNTING STANDARDS
CODIFICATION AND THE HIERARCHY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - A
REPLACEMENT OF FASB STATEMENT NO. 162". The FASB Accounting Standards
Codification ("Codification") will become the source of authoritative U.S.
generally accepted accounting principles ("GAAP") recognized by FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the
Securities and Exchange Commission "SEC" under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of this statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative. This statement is effective for financial
statements issued for interim and annual periods ending after September 30,
2009. The adoption of this statement is not expected to have a material effect
on the Company's financial statements.
37
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (cont.)
In June 2009, the FASB issued SFAS No. 167, "AMENDMENTS TO FASB INTERPRETATION
NO. 46(R)". The objective of this statement is to improve financial reporting by
enterprises involved with variable interest entities. This statement addresses
(1) the effects on certain provisions of FASB Interpretation No. 46 (revised
December 2003), "CONSOLIDATION OF VARIABLE INTEREST ENTITIES", as a result of
the elimination of the qualifying special-purpose entity concept in SFAS No.
166, "ACCOUNTING FOR TRANSFERS OF FINANCIAL ASSETS", and (2) concern about the
application of certain key provisions of FASB Interpretation No. 46(R),
including those in which the accounting and disclosures under the Interpretation
do not always provide timely and useful information about an enterprise's
involvement in a variable interest entity. This statement is effective as of the
beginning of each reporting entity's first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The adoption of this statement is not expected to
have a material effect on the Company's financial statements.
In June 2009, the FASB issued SFAS No. 166, "ACCOUNTING FOR TRANSFERS OF
FINANCIAL ASSETS - AN AMENDMENT OF SFAS NO. 140". The object of this statement
is to improve the relevance, representational faithfulness, and comparability of
the information that a reporting entity provides in its financial statements
about a transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor's continuing
involvement, if any, in transferred financial assets. This statement addresses
(1) practices that have developed since the issuance of SFAS No. 140,
"ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES", that are not consistent with the original intent and key
requirements of that statement and (2) concerns of financial statement users
that many of the financial assets (and related obligations) that have been
derecognized should continue to be reported in the financial statements of
transferors. SFAS No. 166 must be applied as of the beginning of each reporting
entity's first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. Earlier application is prohibited. This
statement must be applied to transfers occurring on or after the effective date.
Additionally, on and after the effective date, the concept of a qualifying
special-purpose entity is no longer relevant for accounting purposes. The
disclosure provisions of this statement should be applied to transfers that
occurred both before and after the effective date of this statement. The
adoption of this statement is not expected to have a material effect on the
Company's financial statements.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, "DETERMINING
WHETHER INSTRUMENTS GRANTED IN SHARE-BASED PAYMENT TRANSACTIONS ARE
PARTICIPATING SECURITIES". FSP EITF 03-6-1 addresses whether instruments granted
in share-based payment transactions are participating securities prior to
vesting, and therefore need to be included in the computation of earnings per
share under the two-class method as described in FASB Statement of Financial
Accounting Standards No. 128, "Earnings per Share." FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning on or after December
15, 2008 and earlier adoption is prohibited. The adoption of this statement is
not expected to have a material effect on the Company's financial statements.
In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No.
163, "ACCOUNTING FOR FINANCIAL GUARANTEE INSURANCE CONTRACTS - AN INTERPRETATION
OF FASB STATEMENT NO. 60" ("SFAS 163"). SFAS 163 requires that an insurance
enterprise recognize a claim liability prior to an event of default when there
is evidence that credit deterioration has occurred in an insured financial
obligation. It also clarifies how Statement 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities, and requires expanded
disclosures about financial guarantee insurance contracts. It is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
except for some disclosures about the insurance enterprise's risk-management
activities. SFAS 163 requires that disclosures about the risk-management
activities of the insurance enterprise be effective for the first period
beginning after issuance. Except for those disclosures, earlier application is
not permitted. The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
38
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (cont.)
In May 2008, the FASB issued SFAS No. 162, "THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES" (SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "THE
MEANING OF PRESENT FAIRLY IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES". The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
In March 2008, the FASB issued SFAS No. 161, "DISCLOSURES ABOUT DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - AN AMENDMENT TO FASB STATEMENT NO. 133"
(SFAS 161"). SFAS 161 is intended to improve financial standards for derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance, and cash flows. Entities are required to provide enhanced
disclosures about: (a) how and why an entity uses derivative instruments; (b)
how derivative instruments and related hedged items are accounted for under FASB
Statement No. 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years beginning after November 15, 2008, with early adoption
encouraged. The Company is currently evaluating the impact of SFAS No. 161 on
its financial statements, and the adoption of this statement is not expected to
have a material effect on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (SFAS 141 revised"). This statement replaces SFAS No. 141 and
defines the acquirer in a business combination as the entity that obtains
control of one or more businesses in a business combination and establishes the
acquisition date as the date that the acquirer achieves control. SFAS 141
revised requires an acquirer to recognize the assets acquired, the liabilities
assumed, and any non-controlling interest in the acquired at the acquisition
date, measured at their fair values as of that date. SFAS 141 revised also
requires the acquirer to recognize contingent consideration at the acquisition
date, measured at its fair value at that date. This statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is prohibited. The adoption of this
statement is not expected to have a material effect on the Company's financial
statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements Liabilities -an Amendment of ARB No. 51". This
statement amends ARB 51 to establish accounting and reporting standards for the
Non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
3. Property and Equipment
Property and equipment consists of the following:
July 31, 2009 July 31, 2008
------------- -------------
$ $
Computer and wireless equipment 1,555,645 1,464,210
Towers and infrastructures 785,970 551,937
Furniture and fixtures 44,959 28,754
Vehicles 74,529 70,529
Software 57,719 17,906
---------- ----------
2,518,822 2,133,336
Less: accumulated depreciation and amortization (1,496,147) (1,108,711)
---------- ----------
Property and equipment, net 1,022,675 1,024,625
========== ==========
39
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
4. Deposits and Other Assets
Deposits and other assets consist of the following:
July 31, 2009 July 31, 2008
------------- -------------
$ $
Asset Purchase Agreement deposits 10,000 125,000
Operating lease deposits 86,682 11,853
Other long-term deposits 33,204 12,710
Loan acquisition costs, net -- 1,525
------- -------
129,886 151,088
======= =======
The Company, as part of its growth strategy through acquisitions, enters into
Asset Purchase Agreements to acquire certain net assets of businesses that
provide wireless broadband services in rural areas of Midwestern, USA. A total
of $10,000 (July 31, 2008 - $125,000) of non-refundable deposits paid were paid.
See Note 5 for four Asset Purchase Agreements that closed between February, 2009
and July 31, 2009. As at July 31, 2009 the Company had one Agreement that had
not closed.
The Company and a leasing company agreed to add an additional $1,000,000 to
their existing Master Lease Agreement facility. This new facility is in addition
to and in conjunction with earlier agreements the companies signed in November,
2006. The Company has used $749,749 of this additional $1,000,000 facility. The
Company acquires, either new or as part of asset acquisitions, certain fixed and
wireless tower and customer premises equipment. The Lessor, in turn, acquires
these assets and leases them back to the Company pursuant to operating equipment
leases. Each sale leaseback transaction requires a 10% deposit as additional
security for the stream of lease payments and each lease agreement is for a
period of 36 months with a buy-out at the end of the lease equal to the fair
value of the equipment at that time. Our Chief Executive Officer and Chairman of
the Board of the Company have provided personal guarantees for all remaining
lease payments. As at July 31, 2009 a total of $86,682 was held by the Lessor as
security deposits. The Company must also provide 30% warrant coverage as
additional consideration pursuant to the Master Lease Agreement. See Note 11
regarding warrants issued and to be issued to the Lessor.
5. Acquisition of Assets
Pursuant to Asset Purchase Agreements completed between March, 2009 and July 31,
2009, the Company acquired tower and network infrastructures, wireless tower and
customer premises equipment and customers' relationships of wireless internet
service providers.
Net consideration for completed asset acquisitions during the years ended July
31 was as follows:
2009 2008
---------- ----------
$ $
Cash 482,200 --
Cash received in sale leaseback of acquired equipment (689,368) --
Extinguishment of debt 10,000 --
Vendor notes payable 1,063,800 --
Assumption of debt 62,000 --
Capital stock to be issued 164,000 --
Capital stock issued 892,700 124,938
---------- --------
Total Consideration Paid 1,985,332 124,938
========== ========
The consideration paid was allocated to the following assets based on their fair
values:
2009 2008
---------- ----------
$ $
Current assets, net of current liabilities -- 61,179
Equipment, net of sale leaseback 45,632 63,759
Customers' Relationships 1,939,700 --
--------- --------
Assets Acquired 1,985,332 124,938
========= ========
40
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
5. Acquisition of Assets (cont.)
The carrying value of customers' relationships acquired as at July 31, 2009
consists of:
$
----------
Capitalized value 1,939,700
Less: accumulated amortization (98,453)
----------
Customers' relationships, net 1,841,247
==========
6. Accrued Liabilities
July 31, July 31,
2009 2008
------- -------
$ $
Accrued interest 65,822 80,069
Professional fees accrued -- 140,437
Due to Rushville Internet Services, LLC (Note 9 (a)) 56,294 17,496
Payroll and severance liabilities 55,486 38,788
Other current liabilities 35,829 139,197
Credit cards payable -- 40,931
------- -------
213,431 456,918
======= =======
7. Notes Payable
July 31, July 31,
2009 2008
-------- --------
$ $
Notes payable, due on demand, unsecured and bearing interest at 20%
per annum (2008 -10% per annum. 150,000 150,000
Note payable, senior subordinated security position, interest at 20%
per annum, due June, 2011. 53,500 --
Note payable due to the Chairman of the Board of the Company, on
demand, unsecured and bearing interest at 8% per annum. 8,416 150,000
Notes payable, due on demand, unsecured and bearing interest at 10%
per annum. 10,000 260,000
Vendor Note - unsecured and bearing interest at 7%. Three quarterly
payments of $121,667 starting May 26, 2009. The May 26 and August 26,
2009 payments were postponed after a $5,000 payment was made on August
17, 2009. 365,000 --
Vendor Note - unsecured and bearing interest at 5%. Three quarterly
payments of $166,600 starting June 30, 2009. On June 30, 2009 the
creditor accepted $50,000 as a partial payment and has postponed the
balance of this payment, and the payment due September 30, 2009, until
a future date to be determined by the Company and the note holder. 449,800 --
Vendor Note - unsecured and bearing interest at 5%. A $23,000 payment
was due on August 31, 2009. This payment has been postponed until a
future date to be determined by the Company and the note holder. A
final payment is due on November 30, 2009. 46,000 --
Vendor Note - unsecured and bearing interest at 5%. Three quarterly
payments of $43,333 starting October 31, 2009. 130,000 --
--------- -------
1,222,716 560,000
========= =======
41
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
8. Long-term Debt
July 31, July 31,
2009 2008
-------- --------
$ $
Notes payable to Jay County Development Corporation. Non-interest
bearing, repayable monthly based on the number of subscribers in Jay
County, Indiana. Collateralized by certain equipment located in Jay
County. 296,911 300,099
Notes payable to Wabash Rural Electric Membership Cooperative
("Wabash"). Six separate notes were renewed pursuant to a Memorandum
of Understanding effective September 24, 2009. Accrued interest and
penalties to this date, totalling $115,111, were added to the
principal amounts outstanding. Interest rates are between 5.7% and
7.45% annually and are collateralized by certain equipment in Wabash
County, Indiana. Monthly payments of $448 begin on January 31, 2010 on
one note with final payment due December 31, 2015. Quarterly payments
of $23,469 begin on December 31, 2009 on three notes with final
payments due between September, 2016 and August, 2017. Quarterly
payments of $945 begin on December 31, 2009 on one note with final
payment due July 31, 2014 and quarterly payments of $835 on one note
begins on January 31, 2010 with final payment due July 31, 2017. 629,388 490,040
Note payable to Muncie Industrial Revolving Loan Fund Board. Interest
of 5% only was paid to July 13, 2009. Monthly principal and interest
of $4,570 payments start August 13, 2009 and end December 13, 2011, at
which time the loan will be reviewed by Muncie's Board of Directors.
This note is collateralized by certain equipment in Muncie County and
Delaware County, Indiana. 283,741 247,361
Note payable to Star Financial Bank. Interest is paid monthly at 8.6%
per annum. This note is due February, 2010 and is collateralized by
certain equipment. 193,170 193,170
Note payable to First Farmers Trust & Bank. Monthly principal payments
of $6,092 plus variable interest at 4.5%, collateralized by certain
equipment purchased in the acquisition of North Central
Communications, Inc. Final payment is due December, 2009. 24,419 --
Note payable to First Farmers Trust & Bank. Interest at 4.5% per
annum, collateralized by certain equipment purchased in the
acquisition of North Central Communications, Inc. Principal and
interest payments of $912 are due monthly. Final payment due April,
2011. 18,657 --
Notes payable to the son of the Chairman of the Board of the Company
and to companies controlled by the Chairman. Repayable in monthly
instalments of principal and interest at 8%, totalling $5,199, to
December, 2010, $4,845 from January, 2010 to May, 2012 and $3,492 from
June, 2012 to April 2014. 217,663 --
Senior subordinated redeemable debenture owing to a director of the
Company - 8% interest per annum payable quarterly. Due January 2, 2011. 20,000 --
Notes payable with monthly payments of principal and interest ranging
from 5% to 10%, unsecured. Total payments of principal and interest
are $12,511 per month to January, 2010; $8,169 to April, 2011; $5,169
to December, 2011; $3,556 to April, 2012; $2,102 to May, 2013. 263,625 83,797
--------- ---------
Total long-term debt 1,947,574 1,314,467
Less: current portion 511,521 575,258
--------- ---------
Long-term portion 1,436,053 739,209
========= =========
Long-term debt principal payments due over the next five years are as follows:
Year $
---- -------
2010 511,521
2011 284,530
2012 224,432
2013 194,426
2014 182,133
Thereafter 550,532
42
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
9. Related Party Transactions and Balances
a) Included in accrued liabilities is $56,294 (2008 - $17,493) owing to
Rushville Internet Services, LLC ("RIS") which represents amounts due to
RIS under certain lease agreements. The Company and RIS have shareholders
in common. The shareholders of RIS agreed to wind-up RIS and sell RIS's
assets to Omnicity for $125,000. The Company will receive their assets,
being wireless equipment and tower infrastructures, having a fair value of
$68,706, and to settle inter-company debt of $56,294. All shareholders of
RIS accepted to receive restricted common shares of the Company. Subsequent
to July 31, 2009 the Company issued 268,818 restricted common shares to the
shareholders of RIS at a fair value of $0.465 per common share.
b) The Company's capital lease obligations entirely relate to assets leased
from a company beneficially owned by the Chairman of the Board of the
Company (See note 12). During the year, a further $6,800 was received from
this related party pursuant to two capital leases and interest of $11,212
and principal of $43,724 was paid during the year.
c) Current liabilities owing to the son of the Chairman of the Board of the
Company and to companies controlled by the Chairman, totalling $217,663,
were converted into long-term debt during the year. These loans are
repayable in monthly instalments of principal and interest, at 8%,
totalling $5,199 to December 2010, $4,845 from January, 2010 to April, 2012
and $3,492 from May, 2012 to April 2014. The Chairman of the Board also
converted a $150,000 short-term note plus accrued interest into common
stock of Omnicity, Incorporated prior to the reverse merger.
d) The Company advanced $5,000 to its Chief Executive Officer as an advance
for expenses. This advance is non-interest bearing, unsecured and due on
demand. The Company advanced $10,000 to Cue Connex, LLC, a company owned
the Company's VP of Sales and Marketing prior to the Company acquiring the
assets of Cue Connex, LLC for $99,000. Consideration paid was the
settlement of the $10,000 advance and 121,417 restricted common shares of
the Company having a value of $89,000. These shares were issued on August
18, 2009.
e) Wabash REMC's Chief Executive Officer is a director of the Company. See
Note 8 for six loans owing to Wabash REMC and the related Memorandum of
Understanding dated September 24, 2009. A loan of $30,000 was received
during the year and a total of $60,298 of interest and penalties was
charged to operations.
f) A director and two companies controlled by two directors subscribed for
499,886 Units at $0.35 per Unit and received 499,886 common shares and
warrants to acquire a further 249,943 common shares at $0.50 per share
expiring May 8, 2011.
g) A director loaned $20,000 pursuant to a senior subordinated redeemable
debenture. 8% interest per annum is payable quarterly and matures January
2, 2011. The director can request settlement in common shares or cash on
the maturity date. A company owned 1/3 by a director loaned the Company
$15,000 during the year which was repaid including a $1,500 bonus.
h) The Company recognized interest expense attributed to all related party
debt of $95,820 (2008 - $61,082) for the years ended July 31, 2009 and
2008.
43
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
10. Common Stock
a) On October 21, 2008 the Company increased, by way of a stock dividend, its
issued share capital on a 7.7 new for 1 old basis. There were 43,967,007
common shares outstanding after the forward split. As part of a stock
dividend the Company also increased its authorized share capital to
1,540,000,000 common shares.
b) On February 17, 2009, the Company acquired, by way of an Agreement and Plan
of Merger, all of the issued and outstanding shares of Omnicity,
Incorporated, an Indiana company (See Note 1). The Company issued a total
of 23,000,000 post-forward split restricted common shares of the Company to
the shareholders of Omnicity, Incorporated for 100% of Omnicity,
Incorporated. In addition, the Company caused 33,880,000 founders'
post-forward split common shares of the Company to be cancelled leaving
33,087,007 post-forward split common shares issued and outstanding as at
February 17, 2009.
c) On April 29, 2009 and June 9, 2009 the Company issued a total of 1,973,988
restricted common shares of the Company at an average fair value of $0.45
per common share, totalling $892,700, to acquire tower infrastructures,
wireless equipment and customers' relationships.
d) In May and June, 2009 the Company issued a total of 2,607,387 Units of the
Company at $0.35 per Unit pursuant to Unit and Unit for Debt Private
Placement Offerings. Each Unit contained one common share and one-half of
one share purchase warrant. Each whole warrant is exercisable into one
common share at $0.50 per share expiring two years after issuance. A total
of $912,585 was received ($674,810 of cash and $237,775 of debt settled)
pursuant to Unit and Unit for Debt Subscription Agreements. A total of
$52,595 of legal expenses was netted against this offering for total net
proceeds of $859,990.
e) On June 1, 2009 the Company entered into an agreement with Onyx Consulting
Group, LLC ("Onyx") to manage all aspects of the Company's investor and
media relations program. The Company paid a fee to Onyx in the amount of
$40,000 for the period June 1, 2009 to November 30, 2009 and issued 350,000
restricted common shares of the Company having a fair value of $0.355 per
common share or $124,250 in total. As at July 31, 2009 the Company charged
$54,750 to operations and recorded $111,500 as a prepaid expense.
f) As at July 31, 2009, pursuant to two completed Asset Purchase Agreements,
the Company was committed to issuing 229,855 restricted common shares of
the Company at an average fair value of $0.71 per common share, totalling
$164,000, to acquire tower infrastructures, wireless equipment and customer
relationships. These shares were issued on August 18, 2009.
g) See Note 9 (a) regarding a commitment to issue 268,818 restricted common
shares at $0.465 per common share to acquire tower infrastructures and
tower and customer premises equipment and to settle an inter-company
liability. These shares were issued on October 13, 2009.
h) The Company received $73,000, and subsequently received a further $20,000,
pursuant to Unit Private Placement Subscription Agreements with certain
private investors. The Company has agreed to issue 146,000 units at $0.50
per unit. Each unit will contain one common share and one half of one
common share purchase warrant. Each whole warrant is exercisable into one
common share at $1.00 per share expiring two years from receipt of funds.
i) The Company received $1,000,000 from a major shareholder on October 20,
2009. These funds plus $400,000 received on July 3, 2009 were combined and
a subscription agreement for 4,000,000 units at $0.35 per unit was executed
on October 20, 2009. Each unit will contain one common share and one half
of one common share purchase warrant. Each whole warrant is exercisable
into one common share at an exercise price of $0.50 per common share
expiring October 20, 2011 (See Note 16 (f)).
44
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
11. Warrants
On December 1, 2006, pursuant to a Master Lease Agreement and related Warrant
Agreement (the "Agreements"), the Company received $233,333 pursuant to a sale
leaseback arrangement and was obligated to provide the Lessor with 30% warrant
coverage. This liability was not recorded on December 1, 2006, in error, and
therefore the Company has restated its comparative periods presented to increase
liabilities and deficit as at July 31, 2007 and 2008 by $70,000. This amount was
calculated using Black Scholes Option Pricing Model using the following
assumptions: 5 year expected life, 0% expected dividends, 90% volatility and a
risk-free interest rate of 1.65%.
Pursuant to a new Master Lease Agreement with Agility Venture Fund II, LLC
("Agility II") dated December 24, 2008, the Company and Agility agreed to
provide funding under new sale lease back arrangements totaling $1,000,000. This
new facility is in addition to and in conjunction with the November 6, 2006
agreement. On February 17, 2009, March 27, 2009, July 9, 2009 and July 14, 2009
the Company received an aggregate of $749,749 pursuant to four sale leaseback
schedules completed ($689,368 in connection with sale leaseback arrangements
pursuant to the Master Lease Agreements (See Note 5) and an aggregate of $60,381
in connection with sale leaseback arrangements for assets purchased from various
unrelated vendors).
Each sale leaseback transaction requires a 10% deposit as additional security
for the stream of lease payments and 30% warrant coverage as a financing
expense. Each lease agreement is for a period of 36 months with a buy-out at the
end of the lease equal to the fair value of the equipment at that time. Our
Chief Executive Officer and Chairman of the Board of the Company have provided
personal guarantees for all remaining lease payments.
Pursuant to Warrant Agreements appended to the Master Lease Agreements with
Agility and Agility II, the Company was obligated to provide the Lessor with 30%
warrant coverage. On June 24, 2009, the Company settled the commitment to issue
warrants under the November 6, 2006 Master Lease Agreement and issued 155,556
warrants exercisable at $0.45 per common share expiring December 1, 2011. Also
on June 24, 2009 the Company settled the commitments to issue warrants on the
first two of four sale leaseback schedules. The Company issued 77,569 warrants
exercisable at $0.51 per common share expiring February 17, 2019 and issued
184,914 warrants exercisable at $0.58 per common share expiring March 27, 2019.
These warrants were valued at $126,907 and charged as a financing expense. This
amount was calculated using Black Scholes Option Pricing Model using the
following assumptions: 5 year expected life, 0% expected dividends, 90%
volatility and an average risk-free interest rate of 1.75%.
As at July 31, 2009 the following warrants are exercisable:
a) at $0.45 per common share as to 155,556 warrants expiring December 1,
2011;
b) at $0.51 per common share as to 77,569 warrants expiring February 17,
2019;
c) at $0.58 per common share as to 184,914 warrants expiring March 27,
2019.
The Company was committed to issuing 139,490 share purchase warrants to acquire
139,490 common shares at an exercise price of $0.56 per common share expiring
July 14, 2019 pursuant to the July 9, 2009 and July 14, 2009 sale leaseback
arrangements. These warrants were issued on October 13, 2009. The Company
recorded $63,132 as an other liability and financing expense. This amount was
calculated using Black Scholes Option Pricing Model using the following
assumptions: 5 year expected life, 0% expected dividends, 90% volatility and an
average risk-free interest rate of 2.36%.
Pursuant to $0.35 Unit and Unit for Debt Private Placement Subscription
Agreements there are 1,303,695 common share purchase warrants outstanding
exercisable at $0.50 per common share expiring as follows:
a) as to 1,199,408 warrants - expiring May 8, 2011;
b) as to 100,000 warrants - expiring June 24, 2011;
c) as to 4,287 warrants - expiring - September 17, 2011.
See Note 16 (e) and (f) for 2,291,697 common share purchase warrants issued on
October 20, 2009. These warrants are exercisable at $0.50 per common share
expiring October 20, 2011.
In total, including warrants issued subsequent to July 31, 2009, the Company has
common share purchase warrants issued and outstanding to purchase up to
1,861,224 common shares at an average exercise price of $.51 per common share
having an average remaining life of 3 years.
45
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
12. Lease Obligations
Pursuant to the Master Lease Agreement disclosed in Note 4, the Company received
$749,749 pursuant to four sale leaseback schedules completed. These sale
leaseback arrangements are treated as operating leases and repaid over a 36
month period. During the year, rental expense under operating leases was
$211,047 (2008 - $95,980).
Future minimum lease payments for equipment acquired under non-cancellable
capital leases from a related party (See Note 9) and operating leases with
initial terms of more than one year are as follows:
Capital Operating
Leases Leases
------ ------
Twelve months ending July 31, $ $
2010 57,497 434,173
2011 32,666 386,953
2012 13,768 262,585
2013 6,620 19,200
2014 -- 19,200
------- -------
Total minimum lease payments 110,552
Less: amounts representing interest 13,537
-------
Present value of net minimum lease payments 97,015
Less: current portion 50,147
-------
Long-term capital lease obligations 46,868
=======
Long-term capital lease obligations are to be repaid over the next five years as
follows:
Year $
---- ------
2010 28,434
2011 12,873
2012 5,561
2013 --
2014 --
13. 401(K) Plan
The Company established a 401(K) plan (the "Plan") effective October 1, 2008.
All employees having attained the age of 21 and having completed three months of
service are eligible to participate in the Plan. Plan participants may elect to
have 1% to 15% of their annual compensation contributed to the Plan. The Company
plans to provide a discretionary match of up to 4% of the participants' basic
compensation.
46
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
14. Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Income tax
expense differs from the amount that would result from applying the Federal and
State income tax rates to earnings before income taxes. Federal and State income
tax losses of approximately $6,700,000 are no longer immediately available to
the Company pursuant to the change of control rules of Section 382 of the
Internal Revenue Code. However, an annual deduction equal to approximately
$238,000 is available to reduce taxable income of future years for the next 28
years. This annual deduction is available until a total of $6,700,000 has been
deducted in total.
The Company has consolidated net operating losses ("NOL") of approximately
$2,040,000 to carry forward. These NOL's are available to offset taxable income
in future years and begin expiring in fiscal 2027. Pursuant to SFAS 109, the
potential benefit of these NOL's carried forward have not been recognized in the
consolidated financial statements since the Company cannot be assured that it is
more likely than not that such benefit will be realized in future years. The
following is a summary of the components of the provision for income tax benefit
and related valuation allowance for the years ended July 31:
2009 2008
-------- --------
$ $
Deferred income tax benefit:
Federal (34%) (660,000) (352,000)
State (8.5%) (45,000) (58,000)
-------- --------
(705,000) (410,000)
Valuation allowance 705,000 410,000
-------- --------
Total income tax benefit -- --
======== ========
A reconciliation of the provision for income taxes to the statutory federal and
state rates is as follows:
2009 2008
-------- --------
$ $
Statutory tax rate Federal and State: 42.5% 42.5%
Change in valuation allowance (42.5%) (42.5%)
-------- --------
Effective Tax Rate 0% 0%
======== ========
47
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
15. Restatement of Prior Periods due to Corrections of Errors
The Company has restated prior period financial statements pursuant to error
corrections. Pursuant to SFAS No. 154, "Accounting Changes and Error
Corrections", previously issued financial statements and comparative financial
statements issued currently are to be restated for correction of errors.
Cumulative effects of errors are reflected in beginning balances of assets and
liabilities with the offsetting adjustment reflected in the beginning deficit
balance.
The Company corrected errors in the recording of liabilities for equipment and
services not actually received and royalties not actually owing during the years
2006, 2007 and 2008. The result of recording these liabilities in error resulted
in a reduction of $170,474 in current liabilities. A total of $96,425 resulted
in an increase to revenue due to royalties not incurred that originally were
offset to arrive at net sales (2008 - $36,866; 2007 - $51,335; 2006 - $8,224). A
total of $48,212 was due to marketing fees owing to an REMC which resulted in a
decrease to operating expenses (2008 - $18,433; 2007 - $25,667; 2006 - $4,112).
A total of $25,837 was for tower rental services not received and invoices
recorded in error (2008 - $11,245; 2007 - $11,022; 2006 - $3,570),with a
corresponding net increase to net income of prior years and a decrease to
deficit of $127,477. The Company also corrected an error for services received
but no liability was recorded totaling $17,161 (2008 - $11,773; 2007 - $5,388).
On December 1, 2006, pursuant to a Master Lease Agreement and related Warrant
Agreement, the Company received $233,333 pursuant to a sale leaseback
arrangement and was obligated to issue warrants. This liability was not recorded
on December 1, 2006, in error, and the Company has restated its comparative
periods presented to increase liabilities and deficit as at July 31, 2007 and
2008 by $70,000 being the value of warrants to be issued.
The combined effect of these errors in the financial statements for the year
ended July 31, 2008 is as follows:
Error Error
Corrections Correction
Previously (Accounts (Other
Reported Payable) Liability) Restated
---------- ---------- ---------- ----------
$ $ $ $
Balance Sheet:
Accounts payable 539,450 (153,313) -- 386,137
Other liability -- -- 70,000 70,000
Deficit 5,129,849 (153,313) 70,000 5,046,536
Statement of Operations:
Revenue 997,444 36,866 -- 1,034,310
Plant and signal delivery 584,246 (17,906) -- 566,340
Net loss 1,034,633 (54,772) -- 979,861
Loss per share - basic and diluted (.03) -- -- (.03)
Stockholders' Deficit:
Deficit - beginning of year 4,095,216 (98,541) 70,000 4,066,675
48
Omnicity Corp. (formerly Bear River Resources, Inc.)
Notes to Consolidated Financial Statements
16. Subsequent Events
Subsequent to July 31, 2009 the Company has:
a) received $10,000 pursuant to the Company's 8%, 18 month senior
subordinated debenture $20,000 pursuant to the Company's $0.50 unit
private placement. See Note 10 (h).
b) issued 229,855 restricted common shares of the Company on August , at
a fair value of $0.71 per common share, totalling $164,000, pursuant
to the acquisition of wireless equipment, tower infrastructures and
customers' relationships. A total of $164,000 was recorded as common
stock subscribed for as at July 31, 2009;
c) issued 139,490 common share purchase warrants to acquire 139,490
common shares at an exercise price of $0.56 per common share expiring
July 14, 2019;
d) issued 268,818 restricted common shares to the shareholders of RIS at
a fair value of $0.465 per common shares (See Note 9 (a)).
e) received $100,000 from a major shareholder on September 9, 2009
pursuant to a short-term loan. On October 20, 2009 this loan plus
accrued interest of $4,767 plus two long-term debt notes totalling
$99,420 were converted into equity. Pursuant to a $0.35 unit for debt
private placement subscription agreement the Company has agreed to
issue 583,394 Units at $0.35 per unit. Each unit will contain one
common share and one half of one common share purchase warrant. Each
whole warrant is exercisable into one common share at an exercise
price of $0.50 per common share expiring October 20, 2011;
f) received $1,000,000 from a major shareholder on October 20, 2009.
These funds plus $400,000 received on July 3, 2009 were combined and a
subscription agreement for 4,000,000 units at $0.35 per unit was
executed on October 20, 2009. Each unit will contain one common share
and one half of one common share purchase warrant. Each whole warrant
is exercisable into one common share at an exercise price of $0.50 per
common share expiring October 20, 2011.
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no disagreements with our principal independent accountants.
ITEM 9A(T). CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Greg Jarman our principal executive officer and Don Prest, our principal
financial officer, have concluded that our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not
effective as of the end of the period covered by this report, based on their
evaluation of these controls and procedures required by paragraph (b) of Rules
13a-15 and 15d-15, due to the deficiencies in our internal control over
financial reporting as described below.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) under the
Exchange Act.
The management of the Company assessed the effectiveness of the Company's
internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting
such assessments. Based on this assessment, management determined that, during
the year ended July 31, 2009, our internal controls and procedures were not
effective to detect the inappropriate application of US GAAP rules, as more
fully described below. This was due to deficiencies in the design or operation
of the Company's internal control that adversely affected the Company's internal
controls and that may be considered to be material weaknesses.
Management identified the following material weaknesses in internal control over
financial reporting:
1. The Company has limited segregation of duties which is not consistent
with good internal control procedures.
2. The Company does not have a written internal control procedurals
manual which outlines the duties and reporting requirements of the
Directors and any staff to be hired in the future. This lack of a
written internal control procedurals manual does not meet the
requirements of the SEC or good internal controls.
Management believes that the material weaknesses set forth in items 1 and 2
above did not have an affect on the Company's financial results.
The Company and its management will endeavor to correct the above noted
weaknesses in internal control once it has adequate funds to do so.
Management will continue to monitor and evaluate the effectiveness of the
Company's internal controls and procedures and its internal controls over
financial reporting on an ongoing basis and are committed to taking further
action and implementing additional enhancements or improvements, as necessary
and as funds allow.
This annual report does not include an attestation report of the company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only the management's
report in this annual report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to our internal control over financial reporting that
occurred during the last quarter of our fiscal year ended July 31, 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
50
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our executive officers and directors and their respective ages as of the date of
October 23, 2009 are as follows:
Name and Municipality
of Residence Age Current Office
------------ --- --------------
Richard Beltzhoover
Carmel, Indiana, USA 70 Chairman, Director
Greg Jarman
Rushville, Indiana, USA 46 President, Chief Executive Officer, Director
Don Prest
Vancouver, Canada 49 Chief Financial Officer, Director
David Bradford
Angola, Indiana, USA 61 Chief Operating Officer, Director
Paul Brock
Vancouver, Canada 45 Director
Robert Pearson
Wabash, Indiana, USA 52 Director
William Herdrich
Rushville, Indiana, USA 63 Director
The following describes the business experience of each of our directors and
executive officers, including other directorships held in reporting companies:
GREG JARMAN
Mr. Jarman was appointed President and Chief Executive Officer on June 23, 2009.
Mr. Jarman has been the chief architect of Omnicity's rural broadband focus and
its long-term development strategy. Mr. Jarman has been with the Company since
2003, Chief Operating Officer since 2006 and President since 2008. Mr. Jarman
most recently served as President of RushDSL, a rural broadband services
provider. Mr. Jarman has also served as Chief Technology Officer of Q-media, a
network services and managed services provider and was Chief Technology Officer
and board member of Netisun LLC where he directed Netisun's technical services
group and managed network infrastructure. Mr. Jarman was a founder and executive
of Indiana Communications & Systems, Inc., which was a rural business ISP and
managed service providers acquired by Netisun LLC. He has 25 years of technical
experience working with many corporate and governmental agencies, and has
consulted with Northrop, The Associated Group, United Student Aid Funds,
Cinergy, Sperry, Unisys, and EDS. Mr. Jarman received his AS in Computer
Information Services from Indiana Central University and has spent 10 years of
his career in information systems consulting.
DON PREST has been our Chief Financial Officer and a member of our board of
directors since July 18, 2007. Mr. Prest will lead the SEC public financial
reporting process for the Company and the overall financing plan. Mr. Prest has
been a US and Canadian public company assurance partner for 17 years at a large
regional PCAOB registered accounting firm located in Canada, where his career
began 26 years ago. Prior to December 31, 2009 Mr. Prest was an assurance
partner for over 150 public US companies. Mr. Prest has retired from this
position as at December 31, 2008 to focus on the business of the Company. Mr.
Prest is a 1/3 owner of FBP Capital Corp. ("FBP"), a merchant bank, for 6 years
where he has leveraged his international tax and assurance practice and contacts
to assist FBP's clients in going and being public. Mr. Prest also served as the
Chief Financial Officer for Power Air Corporation for three years. Power Air is
a public fuel cell company. Mr. Prest is currently serving as President and
Chief Financial Officer for Omnicity Corp., the OTCBB listed company that will
be the parent company for Omnicity Incorporated. Mr. Prest will stay on as the
Chief Financial Officer of the Company and continue to be a director. Mr. Prest
started his career in 1983 upon graduating from BCIT in Financial Management.
Mr. Prest received his Canadian CA designation in 1991 and his US CPA
designation in 1997.
DAVID BRADFORD Mr. Bradford became our Chief Operating Officer on July 30, 2009
and is in charge of managing the profitability of the Company's day-to-day
operations in support of established policies, goals and objectives while
providing leadership, strategic direction and vision to the Company. He also
assists senior officers of the Company in the design and development of the
Company's long-term strategic planning, organization of resources to execute its
plan, and the timely and accurate reporting and analysis of operating results.
His responsibilities include management of acquisitions, operations, and
51
financial matters, and ensuring their most effective synthesis to the
maximization of the Company's strategic and operating plans. Mr. Bradford has
devoted the majority of his senior management career to the telecommunications
industry. From 1977 through 1987 he served in executive positions at the Chicago
Tribune's broadcast and cable television divisions. Positions included Vice
President and General Manager for Tribune Cable Communications, Vice President
of Operations for WGN Electronic Systems Company, and Director of Strategic
Planning for Tribune Cable and subsidiaries. After leaving the Tribune companies
Mr. Bradford served as President of Empire Communications and Bradford
Communications, Inc., both rural cable television multi-system operators. Mr.
Bradford subsequently served as President of National Telsat, Inc., a rural
wireless television and data provider. Mr. Bradford brings thirty years of
successful subscriber based telecommunications operating experience to the
Company as well as participation and oversight of numerous debt and equity
financings, acquisitions, and restructurings.
RICHARD BELTZHOOVER Mr. Beltzhoover was formerly the Chief Executive Officer
from inception until June 23, 2009. He now devotes his time to the Board of
Directors and assisting the CEO in capital raising efforts. He was the first
investor of Omnicity Incorporated and brings more than 35 years' business and
corporate venturing experience to the Company. Mr. Beltzhoover was the Chief
Operations Officer and Board member of National Vulcanized Fibre and, since
1975, has served as founder and President of Insul Reps, which represents
manufacturers in the electronic and electro-mechanical markets. Mr. Beltzhoover
grew sales to $40 million and directed Insul Reps expansion. Mr. Beltzhoover was
also instrumental in funding and guiding Indy Connection into becoming an $8
million revenue ground transportation company, ultimately selling to Carey
Limousine for $12 million. Other companies he founded include Midwest Rail,
Prestige Magazine, Hunt Graphics, and Digital Arts, all of which sold to private
companies. Mr. Beltzhoover holds a Bachelor of Science in Mechanical Engineering
from Penn State University.
PAUL BROCK Paul Brock is a business management consultant with experience
running public and private companies involved primarily in the telecom and
financial services sector, developing software and applied electronic
technologies in the UK, the Middle East, Asia, Latin America, as well as
throughout the US and Canada. In 1988 Mr. Brock co-founded VendTek Systems Inc.
(TSX:VSI), which grew to over $100 million in revenues by 2008 when he resigned
as Chairman. During his tenure at VendTek he created and also served as
President of VendTek Industries Inc. (Canada), a Director of VendTek
International Inc. (USA), President (until June 2002) of Now Prepay Inc.
(Canada), and President of VendTek China Systems Technologies (Beijing) Co., Ltd
(China). Mr. Brock was a co-founder in 2003 and President of Fortune Partners
Inc., which listed on the OTCBB, and later acquired Power Air Corp. where he
continues as a Director. He was co-founder and President of Rochdale Mining
Corp. listed on the OTCBB and later acquired Zoro Mining Corp. where he
continues as a Director. Mr. Brock is the founder in 1999 and President of Bent
International Inc., which is a privately owned business consulting company. Mr.
Brock now serves as a director of the following public companies; Power Air
Corp, i-Level Media Corp, Zoro Mining Corp, Silica Resources Corp, and VendTek
Systems Inc. Mr. Brock is a graduate of the British Columbia Institute of
Technology's Robotics and Automation Technology Program, a graduate of Simon
Fraser University's Executive Management Development Program. He is a member in
good standing of the professional association of the Applied Science
Technologists of BC, and an accredited professional director with the Institute
of Charters Secretaries and Administrators (ICSA) in Canada.
ROBERT PEARSON has been a member of our board of directors since February 17,
2009. Mr. Pearson has been employed by the Wabash County, Indiana REMC since
1990 and is currently the Chief Executive Officer since 1995.
WILLIAM HERDRICH is a Rushville, Indiana native and has been involved in finance
in the oil and gas industry for forty years. He has a deep understanding of
Midwest rural markets having been a retailer and wholesaler in the petroleum
industry, and actively participating in numerous leadership roles on regional
and national boards. Mr. Herdrich has assisted in the creation of several firms
including finance, environmental and real estate development.
TERM OF OFFICE
Our directors are appointed for a one-year term to hold office until the next
annual general meeting of our stockholders or until removed from office in
accordance with our bylaws. Our officers are appointed by our board of directors
and hold office until removed by the board.
SIGNIFICANT EMPLOYEES
We have no significant employees other than the officers and directors described
above.
52
FAMILY RELATIONSHIPS
There are no family relationships among our directors or officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Our directors, executive officers and control persons have not been involved in
any of the following events during the past five years:
1. any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time
of the bankruptcy or within two years prior to that time;
2. any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor
offences);
3. being subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; or
4. being found by a court of competent jurisdiction (in a civil action),
the SEC or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has
not been reversed, suspended or vacated.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the SECURITIES EXCHANGE ACT OF 1934 requires the executive
officers and directors, and persons who beneficially own more than ten percent
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. During the fiscal year ended July
31, 2009, except as disclosed below, these filings were made on a timely basis:
No. of Late/Unfiled Reports No. of Late/Unfiled Reports
During the Fiscal During the Fiscal
Reporting Person Year Ended July 31, 2009 Year Ended July 31, 2008
- ---------------- ------------------------ ------------------------
Don Prest 1 - late Form 4 regarding Nil
one transaction
William Herdrich 1 - failed to file Form 3 N/A
CODE OF ETHICS
On October 22, 2009 our Board of Directors adopted a Corporate Governance Manual
which includes a Code of Ethics applicable to its principal executive officer,
its principal financial officer, its principal accounting officer or controller,
or persons performing similar functions.
COMMITTEES
On June 17, 2009 our Board of Directors adopted our nominating, audit and
compensation committee charters. Pursuant to these charters independent
directors are the only members of the audit committee. Paul Brock and William
Herdrich are the two independent members of each of these committees.
The Board can elect one additional non-independent member for the nominating and
compensation committees. On October 22, 2009 the Board elected Greg Jarman to be
the one non-independent member of the compensation committee.
Both of our independent directors sitting on our audit committee are considered
"financial experts".
53
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
The table below summarizes all compensation awarded to, earned by or paid to our
executive officers by any person for all services rendered in all capacities to
us during our fiscal years ended July 31, 2009 and 2008.
SUMMARY COMPENSATION TABLE
Non-Equity Nonqualified
Name and Incentive Deferred All Other
Principal Stock Option Plan Compensation Compen-
Position Year Salary($) Bonus($) Awards($) Awards($) Compensation($) Earnings($) sation($) Totals($)
-------- ---- --------- -------- --------- --------- --------------- ----------- --------- ---------
Richard Beltzhoover 2008 0 nil nil nil nil nil nil 0
(Former) Chief 2009(1) 30,000 nil 104,125 nil nil nil nil 134,125
Executive Officer
Don Prest 2008 35,750 nil nil nil nil nil nil 35,750
Chief Financial 2009 nil nil nil nil nil nil nil nil
Officer
Greg Jarman 2008 68,445 nil nil nil nil nil nil 68,445
Chief Executive 2009 73,455 nil 93,187 nil nil nil nil 166,642
Officer and President
- ----------
(1) Mr. Beltzhoover resigned as our Chief Executive Officer on June 17, 2009
and Mr. Jarman was appointed our Chief Executive Officer in his place on
the same day.
OUTSTANDING EQUITY AWARDS
As at July 31, 2009, there were no unexercised options, stock that had not
vested or outstanding equity incentive plan awards with respect to any of our
officers or directors.
COMPENSATION OF DIRECTORS
Except as disclosed below, we did not pay our directors any fees or other
compensation for acting as directors during our fiscal year ended July 31, 2009.
Certain of our current or former directors serve or have served as officers of
the Company, and any compensation they received due to their service as an
officer is disclosed in the table above and is not included in the table below:
DIRECTOR COMPENSATION
Fees Non-Equity Nonqualified
Name and Earned Incentive Deferred
Principal Paid in Stock Option Plan Compensation All Other
Position Cash($) Awards($) Awards($) Compensation($) Earnings($) Compensation($) Total($)
- -------- ------- --------- --------- --------------- ----------- --------------- --------
Richard Beltzhoover nil nil nil nil nil nil nil
Greg Jarman nil nil nil nil nil nil nil
Don Prest nil nil nil nil nil nil nil
David Bradford nil nil nil nil nil nil nil
Paul Brock nil nil nil nil nil nil nil
Robert Pearson nil nil nil nil nil nil nil
William Herdrich nil nil nil nil nil nil nil
54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information concerning the number of
shares of our common stock owned beneficially as of October 23, 2009 by: (i)
each person (including any group) known to us to own more than 5% of any class
of our voting securities, (ii) each of our directors, (iii) each of our officers
and (iv) our officers and directors as a group. Each stockholder listed
possesses sole voting and investment power with respect to the shares shown.
Amount and nature Percentage of
Title of class Name and address of beneficial owner (2) of beneficial owner class (1)
- -------------- ---------------------------------------- ------------------- ---------
Common Stock Richard Beltzhoover (3)
Carmel, Indiana, USA 5,852,800 15.20
Common Stock Greg Jarman (4)
Rushville, Indiana, USA 1,633,855 4.24
Common Stock Don Prest
Vancouver, Canada nil Nil
Common Stock David Bradford
Angola, Indiana, USA nil Nil
Common Stock Paul Brock
Vancouver, Canada nil Nil
Common Stock Robert Pearson
Wabash, Indiana, USA nil Nil
Common Stock William Herdrich
Rushville, Indiana, USA 342,743 .89
Common Stock All executive officers and directors
as a group (seven persons) 7,829,398 20.33
Shareholders of Greater than 5% of Issued and Outstanding Stock
Common Stock Schwarz Partners LLC (5) 5,515,059 14.32
Harris Family Limited Partnership and
Common Stock individual member holdings 1,949,153 5.06
- ----------
(1) Based on 38,517,055 shares of common stock issued and outstanding as of
October 23, 2009. Under Rule 13d-3 of the Exchange Act a beneficial owner
of a security includes any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or
shares: (i) voting power, which includes the power to vote, or to direct
the voting of shares; and (ii) investment power, which includes the power
to dispose or direct the disposition of shares. Certain shares may be
deemed to be beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the shares). In
addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire the shares (for example, upon exercise of
an option) within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the amount
of shares outstanding is deemed to include the amount of shares
beneficially owned by such person (and only such person) by reason of these
acquisition rights.
(2) The address of the executive officers and directors is c/o Omnicity,
Incorporated, 807 South SR 3, Rushville, Indiana, USA, 46173.
(3) Richard Beltzhoover is the beneficial owner of 671,976 shares owned by
Insul Reps Profit Sharing Plan and 225,912 shares owned by Insul Reps, Inc.
(4) Greg Jarman is a beneficial owner of 11,143 shares owned by Lea Ann Jarman.
(5) John Schwarz is beneficial owner of Schwarz Partners LLC
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
The table set forth below presents information relating to our equity
compensation plans as of the date of July 31, 2009:
55
Number of Securities to be Number of Securities
Issued Upon Exercise of Weighted-Average Exercise Remaining Available for
Outstanding Options, Price of Outstanding Options, Future Issuance Under
Warrants and Rights Warrants and Rights Equity Compensation Plans
Plan Category (a) (b) (excluding column (a))
------------- ------------------- ------------------- -------------------------
Equity Compensation Plans to n/a n/a n/a
be Approved by Security
Holders
Equity Compensation Plans Not n/a n/a n/a
Approved by Security Holders
CHANGES IN CONTROL
We are unaware of any contract, or other arrangement or provision of our
Articles, the operation of which may at any subsequent date result in a change
in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Except as described below, none of the following parties has, in the last two
fiscal years, had any material interest, direct or indirect, in any transaction
with us or in any presently proposed transaction that has or will materially
affect us:
1. any of our directors or officers;
2. any person proposed as a nominee for election as a director;
3. any person who beneficially owns, directly or indirectly, shares
carrying more than 10% of the voting rights attached to our
outstanding shares of common stock; or
4. any member of the immediate family (including spouse, parents,
children, siblings and in-laws) of any of the above persons.
Paul Brock, Robert Pearson and William Herdrich are independent directors of the
Company as provided in the listing standards of the American Stock Exchange.
TRANSACTIONS WITH WILLIAM HERDRICH:
Included in accrued liabilities is $56,294 (2008 - $17,493) owing to Rushville
Internet Services LLC ("RIS") which represents amounts due to RIS under certain
lease agreements. The Company and RIS have shareholders in common including a
company controlled by Mr. Herdrich. The shareholders of RIS agreed to wind-up
RIS and sell RIS's assets to Omnicity for $125,000. The Company will receive
their assets, being wireless equipment and tower infrastructures, having a fair
value of $68,706 and to settle the inter-company debt of $56,294. All
shareholders of RIS accepted to receive restricted common shares of the Company.
On October 13, 2009 the Company issued 268,818 restricted common shares to the
shareholders of RIS at a fair value of $0.465 per common share.
On April 15, 2009 Mr. Herdrich and Capital Investors Limited, a company
controlled Mr. Herdrich, subscribed for an aggregate of 342,743 Units of our
Company at $0.35 per Unit and received 342,743 common shares and warrants to
acquire a further 171,372 common shares as $0.50 per share expiring May 8, 2011.
On July 2, 2009, Mr. Herdrich loaned the Company $20,000 pursuant to a senior
subordinated debenture. 8% interest per annum is payable quarterly and matures
January 2, 2011. Mr. Herdrich can settle in common shares or cash on the
maturity date of January 2, 2011.
56
TRANSACTIONS WITH ROBERT PEARSON:
Wabash REMC's Chief Executive Officer is Robert Pearson. Since December 21, 2004
six loans have been provided by Wabash REMC. A total of $30,000 was received
during the year ended July 31, 2009 and $60,298 of interest and penalties was
charged to operations. Pursuant to a Memorandum of Understanding dated September
24, 2009 accrued interest and penalties to this date, totalling $115,111, were
added to the Principal amounts outstanding of $520,040 for a total of $635,151
of Principal and Interest outstanding. These notes were then converted into
long-term notes. Interest rates are between 5.7% and 7.45% annually and are
collateralized by certain equipment in Wabash County, Indiana. Monthly payments
of $448 begin on January 31, 2010 on one note with final payment due December
31, 2015. Quarterly payments of $23,469 begin on December 31, 2009 on three
notes with final payments due between September 1, 2016 and August 1, 2017.
Quarterly payments of $945 begin on December 31, 2009 on one note with final
payment due July 31, 2014 and quarterly payments of $835 on one note begins on
January 31, 2010 with final payment due July 31, 2017.
TRANSACTIONS WITH PAUL BROCK:
None.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Weaver & Martin LLC served as our independent registered public accounting firm
and audited our consolidated financial statements for the fiscal year ended July
31, 2009. BGBC Partners LLC served as our independent registered public
accounting firm and audited our consolidated financial statements for the fiscal
year ended July 31, 2008. Aggregate fees for professional services rendered to
us by our current and predecessor auditors are set forth below:
Year Ended Year Ended
July 31, 2009 July 31, 2008
------------- -------------
Audit Fees $28,250 $61,072
Audit-Related Fees $ 6,800 $ 2,700
Tax Fees $ nil $ 3,837
All Other Fees $ nil $ nil
------- -------
Total $26,800 $67,609
======= =======
AUDIT FEES
Audit fees are the aggregate fees billed for professional services rendered by
our independent auditors for the audit of our annual financial statements, the
review of the financial statements included in each of our quarterly reports and
services provided in connection with statutory and regulatory filings or
engagements.
AUDIT RELATED FEES
Audit related fees are the aggregate fees billed by our independent auditors for
assurance and related services that are reasonably related to the performance of
the audit or review of our financial statements and are not described in the
preceding category.
TAX FEES
Tax fees are billed by our independent auditors for tax compliance, tax advice
and tax planning.
ALL OTHER FEES
All other fees include fees billed by our independent auditors for products or
services other than as described in the immediately preceding three categories.
57
POLICY ON PRE-APPROVAL OF SERVICES PERFORMED BY INDEPENDENT AUDITORS
It is our Board of Directors' policy to pre-approve all audit and permissible
non-audit services performed by the independent auditors. We approved all
services that our independent accountants provided to us in the past two fiscal
years.
ITEM 15. EXHIBITS
The following exhibits are filed with this Annual Report on Form 10-K/A
(Amendment No. 2)
Exhibit No. Description
- ----------- -----------
3.1 Articles of Incorporation.(1)
3.2 Articles of Merger.(2)
3.3 Certificate of Change..(2)
3.4 Bylaws.(1)
10.1 Agreement and Plan of Merger among the Company, MergerSub and
Omnicity Incorporated, dated for reference effective on December
29, 2008.(3)
10.2 Master Lease Agreement with Agility Venture Fund I, LLC. (4)
10.3 Master Lease Agreement with Agility Venture Fund II, LLC. (4)
10.4 Agreement Concerning Debt with Jay County Development
Corporation. (4)
10.5 Memorandum of Understanding between the Company and Wabash County
REMC. (4)
10.6 Loan Modification Agreement between the Company and Muncie
Industrial Revolving Loan Board. (4)
10.7 Promissory Note Payable to Star Financial Bank. (4)
10.8 Promissory Note Payable to Insul Reps, PSP. (4)
10.9 Convertible Redeemable Debenture Payable to William J. Herdrich.
(4)
10.10 Form of $0.35 Unit Private Placement Subscription Agreement
entered into by William Herdrich. (4)
10.11 Form of $0.35 Unit for Debt Private Placement Subscription
Agreement entered into by Capital Investors Limited. (4)
10.12 Promissory Note Payable to George Beltzhoover. (4)
10.13 Asset Purchase Agreement with ND Wave, LLC, as amended. (4)
10.14 Asset Purchase Agreement with Fore Point Networks, LLC, as
amended. (4)
10.15 Asset Purchase Agreement with Cue Connex, LLC. (4)
10.16 Asset Purchase Agreement with North Central Communications, Inc.
(4)
10.17 Form of Letter Agreement between Company and Shareholders of
Rushville Internet Services LLC. (4)
10.18 Form of Subscription Agreement between Company and Shareholders
of Rushville Internet Services LLC. (4)
21.1 Subsidiaries of the Company - see Subsidiaries
31.1 Certifications of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certifications of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ----------
(1) Incorporated by reference from our Company's registration statement on Form
SB-2 as filed with the SEC on September 10, 2007.
(2) Incorporated by reference from our Company's Current Report on Form 8-K
filed with the SEC on October 23, 2008.
(3) Incorporated by reference from our Company's Current Report on Form 8-K
filed with the SEC on December 31, 2008.
(4) Incorporated by reference from our Company's Form 10K/A (Amendment No. 1)
for the year ended July 31, 2009 filed with the SEC on September 29, 2010
58
SIGNATURES
Pursuant to the requirements of Section 13 and 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
OMNICITY CORP.
BY: /s/ Greg Jarman
--------------------------------------------------
Greg Jarman
Chief Executive Officer, President, and a Director
Date: October 29, 2010
BY: /s/ Don Prest
--------------------------------------------------
Don Prest
Chief Financial Officer and a Director
Date: October 29, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard Beltzhoover Chairman of the Board and Director October 29, 2010
- --------------------------------
Richard Beltzhoover
/s/ Greg Jarman President, Chief Executive Officer and Director October 29, 2010
- --------------------------------
Greg Jarman
/s/ Don Prest Chief Financial Officer and Director October 29, 2010
- --------------------------------
Don Prest
/s/ David Bradford Chief Operating Officer and Director October 29, 2010
- --------------------------------
David Bradford
/s/ Paul Brock Director October 29, 2010
- --------------------------------
Paul Brock
/s/ Greg Dunn Director October 29, 2010
- --------------------------------
Greg Dunn
/s/ William Herdrich Director October 29, 2010
- --------------------------------
William Herdrich
/s/ Richard Reahard Director October 29, 2010
- --------------------------------
Richard Reahard
59