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