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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Period Ended
March 31, 2006 Commission File No. 0-18399
SIRICOMM, INC.
(Exact name of Company as specified in its Charter)
Delaware 62-1386759
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4710 East 32nd Street, Joplin, Missouri 64804
(Address of Principal Executive Office) (Zip Code)
Company's telephone number, including area code: (417) 626-9971
Former name, former address and former fiscal year, if changed since last
report: N/A
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Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for a shorter period that the Company was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Company's Common Stock, $.001 par value,
as of May 15, 2006 was 25,004,676
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2006 and September 30, 2005 3
Condensed Consolidated Statements of Operations for the six
months ended March 31, 2006 and March 31, 2005 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the six months ended March 31, 2006 and
March 31, 2005 5
Condensed Consolidated Statements of Cash Flows for the six 6
months ended March 31, 2006 and March 31, 2005
Notes to the Condensed Consolidated Financial Statements 7
2
SIRICOMM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2006 2005
------------ ------------
(Unaudited)
Assets
Current Assets
Cash $ 3,711,337 $ 931,787
Certificate of deposit 500,000 -
Accounts receivable 54,734 11,370
Prepaid expenses and other 18,907 5,923
------------ ------------
Total current assets 4,284,978 949,080
------------ ------------
Property and Equipment, at cost
Equipment 3,086,116 2,547,001
Network equipment in progress of installation 150,000 258,326
------------ ------------
3,236,116 2,805,327
Less accumulated depreciation 683,956 412,956
------------ ------------
2,552,160 2,392,371
Software, net of amortization 735,156 145,042
------------ ------------
Intangible assets, net of amortization 1,954,395 2,215,593
------------ ------------
Total assets $ 9,526,689 $ 5,702,086
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Note payable to bank $ 390,000 $ 407,346
Accounts payable 675,930 190,221
Accrued salaries 42,083 146,324
Other accrued expenses 198,500 112,083
Deferred revenue 86,461 46,561
------------ ------------
Total current liabilities 1,392,974 902,535
------------ ------------
Total liabilities 1,392,974 902,535
------------ ------------
Preferred stock - Series A par value $.001; 500,000 shares
authorized; 213,417 shares issued and outstanding; dividend
rate of $0.025 per share per quarter commencing March 2004;
liquidation preference of $1 per outstanding share cash payment 282,779 272,107
Stockholders' Equity
Common stock - par value $.001; 50,000,000 shares authorized;
issued and outstanding 2006- 24,976,513 shares, 2005- 20,092,950 shares 24,977 20,089
Additional paid-in capital 20,626,856 15,063,814
Treasury stock (90,000) -
Deferred compensation (539,176) (631,176)
Retained deficit (12,171,721) (9,925,283)
------------ ------------
Total stockholders' equity 7,850,936 4,527,444
------------ ------------
Total liabilities and stockholders' equity $ 9,526,689 $ 5,702,086
============ ============
See Notes to Condensed Consolidated Financial Statements
3
SIRICOMM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
March 31, 2006 March 31, 2005
----------------------------------- ---------------------------------
3 Months Ended 6 Months Ended 3 Months Ended 6 Months Ended
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 201,743 $ 355,696 $ 27,175 $ 33,448
Operating Expenses:
General and administrative 364,781 690,881 186,128 336,320
Salaries 352,275 669,971 333,813 569,150
Satellite access fees 297,817 544,360 196,759 290,629
Research and development 2,148 8,870 12,180 24,780
Depreciation and amortization 145,595 272,886 114,778 122,066
------------ ------------ ----------- -----------
Total operating expenses 1,162,616 2,186,968 843,658 1,342,945
------------ ------------ ----------- -----------
Operating loss (960,873) (1,831,272) (816,483) (1,309,497)
------------ ------------ ----------- -----------
Other Income (Expense)
Interest income 23,098 27,111 3,737 5,597
Interest expense (431,800) (442,277) (4,805) (9,265)
------------ ------------ ----------- -----------
(408,702) (415,166) (1,068) (3,668)
------------ ------------ ----------- -----------
Net loss $ (1,369,575) $ (2,246,438) $ (817,551) $(1,313,165)
============ ============ =========== ===========
Add: Dividends declared on preferred stock (5,336) (10,670) (5,335) (10,670)
------------ ------------ ----------- -----------
Loss available to common shareholders $ (1,374,911) $ (2,257,108) $ (822,886) $(1,323,835)
============ ============ =========== ===========
Net loss per share, basic and diluted $ (0.06) $ (0.10) $ (0.05) $ (0.08)
============ ============ =========== ===========
Weighted average shares,
basic and diluted 22,938,868 21,506,398 17,606,094 16,930,993
============ ============ =========== ===========
See Notes to Condensed Consolidated Financial Statements
4
SIRICOMM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional
---------------------- Paid-in Deferred Accumulated Treasury
Shares Amount Capital Compensation Deficit Stock Total
----------- ------- ------------ ---------- ------------ --------- -----------
For the six months ended
March 31, 2005
Balance, September 30, 2004 16,255,650 $16,252 $ 8,379,044 $ (722,016) $ (6,685,015) $ - $ 988,265
Stock warrants issued for services - - 600,000 (210,000) - - 390,000
Stock warrants exercised 90,000 90 174,910 - - - 175,000
Stock options exercised 26,800 27 26,773 - - - 26,800
Stock options issued for services - - 91,800 - - - 91,800
Stock issued for services 2,010,000 2,010 3,212,055 - - - 3,214,065
Proceeds from stock issuance -
completed January 3, 2005; net
of consideration of $87,420 319,000 319 550,261 - - - 550,580
Accrued dividends - - (10,671) - - - (10,671)
Net loss for the period - - - - (1,313,165) - (1,313,165)
----------- ------- ------------ ---------- ------------ --------- -----------
Balance March 31, 2005 18,701,450 $18,698 $ 13,024,172 $ (932,016) $ (7,998,180) $ - $ 4,112,674
=========== ======= ============ ========== ============ ========= ===========
For the six months ended
March 31, 2006
Balance September 30, 2005 20,092,950 $20,089 $ 15,063,814 $ (631,176) $ (9,925,283) $ - $ 4,527,444
Treasury stock purchased, 90,000
shares - - - - - (90,000) (90,000)
Imputed discount on convertible
debt issued - - 76,271 - - - 76,271
Stock and warrants issued for
services 65,000 65 85,876 - - - 85,941
Exercise of options & warrants 126,300 127 78,823 - - - 78,950
Proceeds from stock issued on
Feb 8, 2006, net of
consideration of $403,285 4,253,478 4,257 4,483,958 - - - 4,488,215
Conversion of debt to equity 438,785 439 504,164 - - - 504,603
Fair value of beneficial
conversion option and warrants
associated with convertible debt - - 344,620 - - - 344,620
Recognition of warrants earned
for software received - - - 92,000 - - 92,000
Accrued preferred stock dividends - - (10,670) - - - (10,670)
Net loss for the period - - - - (2,246,438) - (2,246,438)
----------- ------- ------------ ---------- ------------ --------- -----------
Balance March 31, 2006 24,976,513 $24,977 $ 20,626,856 $ (539,176) $(12,171,721) $ (90,000) $ 7,850,936
=========== ======= ============ ========== ============ ========= ===========
See Notes to Condensed Consolidated Financial Statements.
5
SIRICOMM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
March 31,
------------------------------
2006 2005
---- ----
(Unaudited) (Unaudited)
Operating Activities
Net loss $(2,246,438) $(1,313,165)
Items not requiring cash
Depreciation and amortization 534,084 252,664
Stock-based compensation for services 85,941 -
Write-off imputed discount upon debt conversion 76,271 -
Fair value of beneficial conversion option and warrants
associated with convertible debt 344,620 -
Changes in
Current assets (56,348) 10,900
Accounts payable 235,711 177,131
Accrued expenses (13,221) 152,837
Deferred revenues 39,900 16,209
----------- -----------
Net cash flows used in operating activities (999,480) (703,424)
----------- -----------
Investing Activities
Certificate of deposit purchased (500,000) -
Purchase of software (250,000) -
Purchase of furniture and equipment (430,789) (589,533)
----------- -----------
Net cash flows used in investing activities (1,180,789) (589,533)
----------- -----------
Financing Activities
Borrowings under line of credit, net (17,346) 322,743
Payment of notes payable - (25,000)
Purchase of treasury stock at cost (90,000) -
Proceeds from exercise of stock options and warrants 78,950 201,800
Borrowings from related party 500,000 -
Proceeds from sale of common stock 4,488,215 550,580
----------- -----------
Net cash flows provided by financing activities 4,959,819 1,050,123
----------- -----------
Increase (Decrease) in Cash 2,779,550 (242,834)
Cash, beginning of period 931,787 1,019,616
----------- -----------
Cash, end of period $ 3,711,337 $ 776,782
=========== ===========
Supplemental Cash Flows Information
Cash paid for interest $ 19,623 $ 11,022
Stock and warrants issued in exchange for services and equipment $ $ 3,814,065
Stock options issued in exchange for prepaid consulting services $ $ 91,800
Accrued dividends for Series A preferred stock $ 10,670 $ 10,671
Imputed discount for warrants issued with convertible debt $ 76,271 $ -
Conversion of debt to equity $ 504,603 $ -
Accrued liabilities incurred for purchase of software $ 250,000 $ -
Recognition of warrants earned for software received $ 92,000 $ -
See Notes to Condensed Consolidated Financial Statements
6
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
1. Nature of Operations and Summary of Significant Accounting Policies:
Nature of Operations:
SiriCOMM, Inc., a Delaware corporation (the "Company"), through its wholly
owned subsidiary of the same name, which was incorporated in the State of
Missouri on April 24, 2000, has developed broadband wireless application
service technologies intended for use in the transportation industry. The
Company opened its network in December, 2004 for commercial operation and
has commenced selling its InTouch(TM) Internet Service to individual
subscribers.
Since December, 2004, the Company has commenced revenue producing
operations and continues to market its service technologies, including
satellite communications, wireless networking, and productivity enhancing
software.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Interim Information: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments that are in the opinion of the Company's
management, necessary to fairly present the financial position, results of
operations and cash flows of the Company. Those adjustments consist only of
normal recurring adjustments.
The condensed balance sheet of the Company as of September 30, 2005 has
been derived from the audited consolidated balance sheet of the Company as
of that date. Certain information and note disclosures normally included in
the Company's annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-KSB annual
report for fiscal year ended September 30, 2005 filed with the Securities
and Exchange Commission.
The results of operations for the period are not necessarily indicative of
the results to be expected for the full year.
7
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
Stock-based Compensation:
The Company accounts for compensation costs associated with stock options
issued to employees under the provisions of Accounting Principles Board
Opinion No. 25 whereby compensation is recognized to the extent the market
price of the underlying stock at the grant date exceeds the exercise price
of the option granted. Stock-based compensation to non-employees is
accounted for using the fair-value based method prescribed by Financial
Accounting Standard No. 123 - Accounting for Stock-Based Compensation. The
Company uses the trinomial options-pricing model to determine the fair
value of stock-based compensation and capital contributions.
Had compensation cost for the Company's stock option plan been determined
on the fair value at the grant dates for stock-based employee compensation
arrangements consistent with the method required by SFAS 123, the Company's
net loss and net loss per common share would have been the pro forma
amounts indicated below.
Six Months Ended
March 31,
2006 2005
------------- -------------
Net loss, as reported $ (2,246,438) $ (1,313,165)
Less: stock-based employee compensation
under the fair value based method (3,412) (57,929)
------------- -------------
Pro forma net loss under fair value method $ (2,249,850) $ (1,371,094)
Net loss per common share-basic and diluted:
As reported $ (0.10) $ (0.08)
Pro forma under fair value method $ (0.10) $ (0.08)
Research and development costs:
The Company incurs costs, associated with computer software to be marketed
in the future. Costs incurred in connection with establishing technological
feasibility have been expensed as research and development costs.
Net loss per share:
Net loss per share represents the net loss available to common stockholders
divided by the weighted average number of common shares outstanding during
the year. Diluted earnings per share reflect the potential dilution that
could occur if convertible preferred stock was converted into common stock.
Diluted net loss per share is considered to be the same as basic net loss
per share since the effect of the issuance of common stock associated with
the convertible stock is anti-dilutive.
8
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
Reclassification
Certain reclassifications have been made to the March 31, 2006 financial
statements to conform to the March 31, 2005 financial statement
presentation. These reclassifications had no effect on the Company's net
losses.
2. Line of Credit:
On February 8, 2006, the Company entered into a line of credit with Liberty
Bank of Springfield, Missouri for $500,000 secured by a certificate of
deposit. The note has monthly interest only payments at a rate of 1%
greater than the rate to be earned on the certificate of deposit and is
renewable at the discretion of the Company in August 2006.
On February 4, 2006, the Company retired a line of credit with Southwest
Missouri Bank for the purchase of network infrastructure equipment up to a
maximum of $1,000,000. This note was 80% guaranteed by the U.S. Department
of Agriculture ("USDA") and was secured by the Company's network equipment.
This note was further personally guaranteed by the Company's majority
shareholder. The security interest on the equipment and the personal
guarantee of the majority shareholder were released upon retirement of the
note.
3. Stockholders' Equity:
On January 31, 2006, SiriCOMM, Inc. consummated the private placement of
its securities pursuant to a Placement Agent Agreement (the "Agency
Agreement") entered into between it and Sanders Morris Harris, Inc. as
Placement Agent dated December 12, 2005. The securities sold were units
(the "Units") consisting of one share of the Company's common stock, $.001
par value (the "Shares") and one redeemable Common Stock purchase warrant
(the "Warrant"). At the closing, the Company sold an aggregate of 4,692,263
Units at an aggregate purchase price of $5,396,103 or $1.15 per unit. At
the closing, the Company delivered an aggregate of 4,692,263 Shares and
4,692,263 Warrants to the purchasers.
Each Warrant entitles the holder to purchase one share of Common Stock at
an exercise price of $1.50 per share commencing on the date of issuance and
expiring at the close of business on the fifth anniversary of the issuance
date. The Warrants contain provisions that protect the holder against
dilution by adjustment of the exercise price in certain events including,
but not limited to, stock dividends, stock splits, reclassifications, or
mergers. The Company may redeem the Warrants, at a price of $.10 per
Warrant, at any time following the issuance date upon not less than 30 days
or more than 60 days prior written notice if (a) the Common Stock
underlying the Warrants has been registered with the SEC, and (b) the
closing price of the Common Stock exceeds a 200% premium of the exercise
price of the Warrants for 20 out of 30 consecutive trading days.
Under the terms of the Agency Agreement, the Placement Agent received a
commission equal to 5% of the offering price of the Units sold in the
Private Placement, a financial advisory fee equal to 2% of the offering
9
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
price of the Units sold in the Private Placement and a Placement Agent
warrant to purchase Common Stock equal to 5% of the Shares of Common Stock
underlying the Units sold in the Private Placement at an exercise price of
$1.15 per share.
As part of the Private Placement, the Company entered into a Registration
Rights Agreement with each subscriber who purchased Units in the Private
Placement. Under the Registration Rights Agreement, the Company, as
promptly as reasonably practicable after closing of the Private Placement
but in no event later than 30 days following the closing, the Company was
obligated to file a Registration Statement on Form SB-2, relating to the
resale by the holders of the Common Stock underlying the Units, Warrants
and Placement Agent Warrant. The Company filed the Registration Statement
on a timely basis and it was declared effective by the SEC on May 12, 2006.
Sunflower Capital, LLC, a limited liability company managed by William P.
Moore, a director of the Company, purchased an aggregate of 1,764,872 Units
in the offering, which consisted of a new investment of $1,525,000 to
purchase 1,326,087 Units and the conversion of a Promissory Note issued to
Sunflower on December 27, 2005 in the principal amount of $500,000 plus
accrued interest in the amount of $4,602 to purchase 438,785 Units.
On December 15, 2005, the Company issued 25,000 shares of its common stock
to IRG pursuant to a consulting agreement dated November 30, 2005. Pursuant
to the consulting agreement the Company issued an additional 25,000 shares
to the consultant during the quarter ended March 31, 2006. Additionally,
the consultant received 50,000 four (4) year warrants with the following
exercise prices:
16,666 at $1.25
16,667 at $1.35
16,667 at $1.45
During the quarter ended March 31, 2006, the Company received consideration
equal to $63,950 upon the exercise of an aggregate of 96,300 previously
issued warrants and stock options.
4. Commitments and Contingencies:
Litigation:
On December 17, 2004, certain officers and directors of the Company were
named defendants in a lawsuit entitled Greg Sanders v. Henry Hoffman et al.
Messrs. Hoffman, Dillman, Mendez and Iler are officers and directors of the
Company, Mr. Thompson is a director of the Company and Mr. Noland is a
former officer and director of the Company. The action alleges fraud,
misrepresentation and breach of fiduciary duty relating to a settlement
agreement entered into between the Company and Mr. Sanders. The complaint
seeks damages in excess of $9,679,903. Although the Company was not named
as a defendant, it will pay all expenses relating to the defense of this
matter. In management's opinion this case is without merit and the
defendants intend on defending this matter vigorously. The defendants
subsequently have answered the complaints and have filed counter claims to
this action as of August 15, 2005.
10
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
5. Subsequent Events:
On April 20, 2006, the Company issued 28,163 shares to Jackie Seneker, an
employee of the Company at that time. The exercise price of these options
was $1.00 and Ms. Seneker exercised this option on a cashless basis by
delivering to the Company 29,337 options exercisable at $1.00 per share.
On April 19, 2006, SiriCOMM entered into a network access services
agreement with ACS Government Solutions, Incorporated ("ACS"), an affiliate
of Affiliated Computer Services, Incorporated, to provide data access at
each of the 260 PrePass weigh station sites in 25 states. Under the terms
of the three year agreement, ACS will purchase network access services from
SiriCOMM for the benefit of its HELP, Inc. contract for automated vehicle
identification and weigh station bypass.
On May 10, 2006, SiriCOMM entered into a three (3) year lease agreement
with 4301 Main LLC to lease 2,743 square feet of office space at 3535
Broadway, Suite 402, Kansas City, Missouri 64106. The monthly rent for this
location is $1,900 per month. Software development and administration of
the Company's network operations center are conducted from this location.
During the quarter to end June 30, 2006, the Company has drawn an
additional $100,000 on the secured line of credit with Liberty Bank of
Springfield, Mo.
11
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Background
SiriCOMM is an application service provider specializing in wireless
Internet connectivity and productivity applications tailored to the highway
transportation industry. The Company is guided by its mission of helping truck
fleets to improve productivity, reduce costs, increase safety, and strengthen
security. To achieve that goal, SiriCOMM has deployed a network of SiriCOMM
Wi-Fi hot spots at locations convenient to highway travelers. SiriCOMM's
proprietary network, the foundation for its applications, delivers wireless
broadband connectivity at a fraction of the cost of conventional wireless
networks. By providing both Internet access and a robust application host
platform, SiriCOMM delivers a more responsive and convenient way for all
industry stakeholders to interact with information needed on a regular basis.
Presently, SiriCOMM's network is the most widely available wireless
Internet access network built for the highway transportation market. To date we
have installed over 415 Wi-Fi "hot spots" at major truck stops and weigh
stations and have agreements with leading truck stop chains and weigh station
operators such as Pilot Travel Centers ("Pilot"), Love's Travel Stops ("Loves"),
Petro TruckStops, Freight and More, Inc./DIS - Direct Internet Services and
others to install access points at approximately 300 additional sites.
The Company's network technology is built upon a distributed server
model that uses satellite for data backhaul. This architecture provides key
advantages: 1) the network is truly go-anywhere and operates independently of
any terrestrial-based communication infrastructure; 2) the satellite multicast
features allows data to be simultaneously available at all SiriCOMM Wi-Fi hot
spots; 3) bandwidth management is handled from a single location as opposed to
multiple points that would be required by a nationwide terrestrial network; 4)
the remote server makes each hot spot an extension of fleet operations; and, 5)
proprietary technologies mitigate inherent weaknesses found in conventional
satellite networks.
SiriCOMM completed phase one installations in 2004 and opened the
network for business in December 2004. Initially, network access subscriptions
were limited to only credit card sales through the company's web site. By June
2005 Pilot began offering cash point of sales (POS) subscriptions at its
in-store registers.
We market our products and services principally through assorted value
added reseller agreements and a direct sales force. As the trucking industry is
highly fragmented and comprises many small to medium-sized fleets, we use
numerous resellers to maximize our sales reach. Our direct sales force is
focused on the large fleets as well as coordinating the efforts of our value
added resellers. Currently we are continuing to concentrate our sales efforts on
InTouch(TM) while installing additional hot spots across the country. Sales of
Pulse and Beacon will commence once nationwide network density reaches 400-500
sites.
Our senior management team, led by CEO Henry (Hank) Hoffman and
composed primarily of the founders of the Company, has significant experience in
both the transportation and communications industries.
12
We were incorporated as a Delaware corporation under the name DFW
Technologies, Inc., Inc., in March 1989. In 1992, DFW Technologies, Inc. changed
their name to Fountain Pharmaceuticals, Inc. In approximately November 2002, the
shareholders of SiriCOMM, Inc., a privately-held Missouri corporation,
incorporated in 2000 ("SiriCOMM Missouri"), exchanged all of the issued and
outstanding common stock of SiriCOMM Missouri for a controlling interest in
Fountain Pharmaceuticals, Inc. (the "Reverse Transaction"). As part of the
Reverse Transaction, all of the then officers and directors of Fountain
Pharmaceuticals, Inc. resigned and were replaced by persons designated by
SiriCOMM Missouri and the name of Fountain Pharmaceuticals, Inc. was changed to
SiriCOMM, Inc. As a result of the Reverse Transaction, SiriCOMM Missouri became
a wholly-owned subsidiary of the Company and the prior shareholders of SiriCOMM
Missouri became the controlling shareholders, officers and directors of the
Company.
Our corporate address is 4710 East 32nd Street, Joplin, Missouri 64804,
our telephone number is 417-626-9971, and our fax number is 417-782-0475.
Critical Accounting Policies and Estimates:
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosure of contingent assets and liabilities.
We evaluate our estimates, including those related to contingencies, on an
ongoing basis. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policy, among others;
involve the more significant judgments and estimates used in the preparation of
our consolidated financial statements:
The Company accounts for compensation costs associated with stock
options and warrants issued to non-employees using the fair-value based method
prescribed by Financial Accounting Standard No. 123 - Accounting for Stock-Based
Compensation. The Company uses the trinomial options-pricing model to determine
the fair value of these instruments as well as to determine the values of
options granted to certain lenders by the principal stockholder. The following
estimates are used for grants in 2006: Expected future volatility over the
expected lives of these instruments is estimated to mirror historical experience
of 75%; expected lives of 2 years is estimated based on management's judgment of
the time period by which these instruments will be exercised.
Information Relating To Forward-Looking Statements
When used in this Report on Form 10-QSB, the words "may," "will,"
"expect," "anticipate," "continue," "estimate," "intend," "plans", and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends which may affect the Company's future plans of operations, business
13
strategy, operating results and financial position. Such statements are not
guarantees of future performance and are subject to risks and uncertainties and
actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such factors include,
among others: (i) the Company's ability to obtain additional sources of capital
to fund continuing operations; in the event it is unable to timely generate
revenues (ii) the Company's ability to retain existing or obtain additional
licensees who will act as distributors of its products; (iii) the Company's
ability to obtain additional patent protection for its technology; and (iv)
other economic, competitive and governmental factors affecting the Company's
operations, market, products and services. Additional factors are described in
the Company's other public reports and filings with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.
Fair Value of Equity Instruments
The valuation of certain items, including valuation of warrants or
restricted stock that may be offered as compensation for goods or services
received within its contracts, involve significant estimations with underlying
assumptions judgmentally determined. Warrants are valued using the most reliable
measure of fair value, such as the value of the goods or services rendered, if
obtainable, if such value is not readily obtainable, the valuation of warrants
and stock options are then based upon a trinomial valuation model, which
involves estimates of stock volatility, expected life of the instruments and
other assumptions. As the Company's stock is thinly traded, the amounts recorded
for equity instruments, which are based partly on historical pricing of the
Company's stock, are subject to the assumption used by management in determining
the fair value.
Results of Operations
For the Three Months Ended March 31, 2006 and 2005
Revenues
SiriCOMM generated revenues of $201,743 for the three months ending
March 31, 2006 while generating revenues of $27,175 during the same period in
fiscal 2005. Revenues were solely derived from the Company's sales of its
InTouch Internet service. To date, the Company has only conducted limited
marketing and advertising of its InTouch Internet service and there is no
assurance that the Company will generate significant revenues from the offering
of this service in the future.
Operating Expenses
Our operating expenses consist of product research and development
costs, general and administrative, selling depreciation and amortization, as
well as amortization of long-term prepaid assets.
During the three months ended March 31, 2006, net operating losses
totaled $960,873 as compared to net operating losses of $816,483, for the three
months ended March 31, 2005.
14
The Company has increased its number of employees in accounting,
software development and customer service from 9 in the same period ending March
31, 2005 to 27 for the quarter ending March 31, 2006. Network installations and
network administration costs have contributed to the increase in net operating
losses. These expenses are necessary to increase the Company's infrastructure,
support the Company's InTouch Internet service and improve the Company's
operations.
Satellite Access Fees
The Company incurs bandwidth costs associated with providing its
InTouch Internet service and its other products. The Company has a contract with
a satellite provider that provides for a fixed monthly cost per site which
increases as the Company adds additional sites. Satellite access fees for the
three months ending March 31, 2006 were $297,817 as compared to $196,759 for the
three months ending March 31, 2005. This increase is the direct result of the
Company adding additional sites. As a result of signing an agreement with
Sat-Net in February 2005, the Company is now amortizing prepaid satellite
expenses that were derived from that agreement. The Company expensed $126,009
representing amortization for each of the three months ending March 31, 2006 and
2005.
General and Administrative Expenses
Our general and administrative expenses consist of corporate overhead
costs, administrative support, professional fees and amortization of prepaid
consulting fees.
For the three months ending March 31, 2006, SiriCOMM's general and
administrative expenses totaled $364,781, or 31.3% of total operating expenses,
while for the three months ended March 31, 205 general and administrative
expenses totaled $186,128 or 22.1% of total operating expenses.
General and administrative expense increased as a result of the Company
engaging an investor relations firm, loan issuance costs and network maintenance
costs which contributed principally to the net operating loss.
Salaries
For the three months ending March 31, 2006, SiriCOMM incurred salaries
of $352,275, representing 30.3% of the operating expenses, as compared to
$333,813 or 39.6% of total operating expenses for the three months ended March
31, 2005. The Company has increased its personnel in accounting customer support
to operate its InTouch Internet service.
Depreciation and Amortization
Depreciation expense was $145,595 for the three month period ending
March 31, 2006 as compared to $114,778 for the same period ending March 31,
2005.
15
Interest Expense
For the three months ending March 31, 2006, net interest expense was
$408,702 as compared to $1,068 during the three months ended March 31, 2005. The
increase in interest expense for the quarter ended March 31, 2006 was a result
of the valuation of warrants and a beneficial conversion option given to
Sunflower Capital as an inducement for a bridge loan given to the Company in
advance of the Company closing on an equity underwriting.
For the Six Months Ended March 31, 2006 and 2005
Revenues
SiriCOMM generated revenues of $355,696 for the six months ending March
31, 2006 while generating revenues of only $33,448 during fiscal 2005. Revenues
were solely derived from the Company's offering of its InTouch Internet service.
Limited advertising has been conducted to date and no assurances can be offered
that the Company will generate any meaningful revenues from the offering of the
In Touch service in the future.
Operating Expenses
Our operating expenses consist of product research and development
costs, general and administrative, selling, depreciation and amortization, as
well as amortization of long-term prepaid assets.
During the six months ended March 31, 2006, net operating losses
totaled $1,831,272 as compared to net operating losses of $1,309,497, for the
six months ended March 31, 2005.
The Company has increased its number of employees in accounting,
software development and customer service and network administration which have
contributed to the increase in net operating losses. These expenses are
necessary to increase the Company's infrastructure, support the InTouch service
and improve the Company's operations.
Satellite Access Fees
With the opening of the network for introduction of its InTouch
service, the Company will incur bandwidth costs associated with providing this
service and its other products. The contract with its satellite provider
provides for a fixed monthly cost per site which will increase as the Company
adds additional sites. Satellite access fees for the six months ending March 31,
2006 were $544,360 as compared to $290,629 for the six months ending March 31,
2005. With the signing of an agreement with Sat-Net in February 2005, the
Company is now amortizing prepaid satellite access that was the benefit derived
from this agreement. The Company expensed $252,018 as the non-cash amortization
for the six months ending March 31, 2006.
16
General and Administrative Expenses
Our general and administrative expenses consist of corporate overhead
costs, administrative support, professional fees and amortization of prepaid
consulting fees.
For the six months ending March 31, 2006, SiriCOMM's general and
administrative expenses totaled $690,881, or 31.6% of total operating expenses,
while for the six months ended, March 31, 2005 general and administrative
expenses totaled $336,320 or 25.0% of total operating expenses.
General and administrative expenses increased as a result of the
Company's engaging an investor relations, loan issuance costs and network
maintenance costs which contributed principally to the net operating loss.
Salaries
For the six months ending March 31, 2006, SiriCOMM incurred salaries of
$669,971 representing 30.6% of operating expenses, as compared to $569,150, or
42.4%, of total operating expenses for the six months ended March 31, 2005. The
Company has increased its personnel in accounting and customer support to
operate its InTouch ISP service.
Depreciation and Amortization
Depreciation expense was $272,886 for the six month period ending March
31, 2006 as compared to $122,066 for the same period ending March 31, 2005.
Depreciation Expense has risen as the number of hotspot installations
has now increased to 415 as compared to approximately 280 sites in the same
period ended March 31, 2005.
Interest Expense
For the six months ending March 31, 2006, net interest expense was
$415,166 as compared to $3,668 during the six months ended March 31, 2005. The
increase in interest expense is arising from the loan costs incurred from the
Sunflower Capital bridge loan as noted previously.
Liquidity and Capital Resources
We continue to finance our operations entirely from invested funds and
limited borrowing for capital expenditures. No assurances can be given that
revenues will increase sufficiently to cover operating expenses or that the
Company can continue to attract capital under terms favorable to it
shareholders.
As of March 31, 2006, our current assets including cash, a certificate
of deposit, accounts receivables and other current assets amounted to
approximately $4,284,978. Current liabilities amounted to approximately
$1,392,974 and include notes payable to Liberty Bank , accounts payable, accrued
salaries, and other accrued expenses.
As an emerging wireless applications services provider, we are involved
in a number of business development projects, continued network installation and
general operating capital requirements that will continue to require external
17
capital to finance the Company as it introduces its applications within its
business model. No assurances can be given as to the industry's willingness to
purchase the Company's products or services.
As we continue to ramp-up our business and obtain new ISP contracts,
the Company believes that it has adequate liquidity and that we can achieve
profitability in late 2006. The Company is dedicating its efforts currently to
building its Internet Service and growing its network site density in order to
facilitate the launch of its other planned software products.
Capital Resources
On December 27, 2005, the Company entered into a Loan Agreement with
Sunflower Capital, LLC. The loan of $500,000 was evidenced by a Convertible
Promissory Note due July 1, 2006. As consideration for Sunflower making the
loan, the Company issued to Sunflower a warrant to purchase 200,000 shares of
the Company's common stock at $1.26 per share.
The Note mandatorily converted into the Company's units consisting of
one share of common stock and one redeemable common stock purchase warrant
exercisable at $1.50 per share during the period commencing on the date of
issuance and expiring five (5) years thereafter. As discussed below, the Note
converted into such units at the rate of $1.15 per unit on February 1, 2006.
On January 31, 2006, the Company consummated the private placement of
its securities pursuant to a Placement Agent Agreement entered into between it
and Sanders Morris Harris, Inc. as Placement Agent dated December 12, 2005. The
securities sold were units consisting of one share of the Company's common
stock, $.001 par value and one redeemable Common Stock purchase warrant. At the
closing, the Company sold an aggregate of 4,692,263 Units at an aggregate
purchase price of $5,396,103 or $1.15 per unit. At the closing, the Company
delivered an aggregate of 4,692,263 Shares and 4,692,263 Warrants to the
purchasers.
Each Warrant entitles the holder to purchase one Share of Common Stock
at an exercise price of $1.50 per share commencing on the date of issuance and
expiring at the close of business on the fifth anniversary of the issuance date.
The Warrants contain provisions that protect the holder against dilution by
adjustment of the exercise price in certain events including, but not limited
to, stock dividends, stock splits, reclassifications, or mergers. The Company
may redeem the Warrants, at a price of $.10 per Warrant, at any time following
the issuance date upon not less than 30 days nor more than 60 days prior written
notice if (a) the Common Stock underlying the Warrants has been registered with
the SEC, and (b) the closing price of the Common Stock exceeds a 200% premium of
the exercise price of the Warrants for 20 out of 30 consecutive trading days.
Under the terms of the Agency Agreement, the Placement Agent received a
commission equal to 5% of the offering price of the Units sold in the Private
Placement, a financial advisory fee equal to 2% of the offering price of the
Units sold in the Private Placement and a Warrant to purchase Common Stock equal
to 5% of the Shares of Common Stock underlying the Units sold in the Private
Placement at an exercise price of $1.15 per share.
As part of the Private Placement, the Company entered into a
registration rights agreement with each subscriber who purchased Units in the
Private Placement. Under the Registration Rights Agreement, the Company, as
18
promptly as reasonably practicable after closing of the Private Placement but in
no event later than 30 days following the closing, the Company was obligated to
file a registration statement on Form SB-2, relating to the resale by the
holders of the Common Stock underlying the Units, Warrants and Placement Agent
Warrant. The Company met the required filing of the Registration Statement
within the required time frame. The Registration Statement was declared
effective on May 12, 2006.
Sunflower Capital, LLC, a limited liability company managed by William
P. Moore, a director of the Company, purchased an aggregate of 1,764,872 Units
in the offering, which consisted of a new investment of $1,525,000 to purchase
1,326,087 Units and the conversion of the Note plus accrued interest in the
amount of $4,602 to purchase 438,785 Units.
During the quarter ended March 31, 2006, the Company drew down $390,000
on a line of credit of $500,000 from Liberty Bank which is secured by a
certificate of deposit of a like amount.
During the quarter ended March 31, 2006, the Company received an
aggregate of $63,950 upon the exercise of an aggregate of 96,300 previously
issued warrants and stock options.
The cash proceeds of the above sales of securities of the Company were
used for general corporate purposes in developing the Company's planned
services.
Contractual Obligations and Commercial Commitments
Contractual obligations as of March 31, 2006 are as follows:
Payments Due by Period
------------------------------ ----------------------------------------------------------------------------
Contractual Less than
Obligations Total 1 year 1-3 years 4-5 years After 5 years
------------------------------ --------------- ------------------- ------------ ----------- ---------------
Line of credit and note
payable $ 390,000 $ 390,000 $ - $ - $ -
------------------------------ --------------- ------------------- ------------ ----------- ---------------
Operating leases $ 114,000 $ 18,500 $ 95,500 - -
------------------------------ --------------- ------------------- ------------ ----------- ---------------
Total contractual cash
obligations $ 504,000 $ 408,500 $ 95,500 $ - $ -
------------------------------ --------------- ------------------- ------------ ----------- ---------------
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends FASB Statement No. 95, Statement of Cash Flows. The
approach to accounting for share-based payments in Statement 123(R) is similar
19
to the approach described in Statement 123. However, Statement 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
and no longer allows pro forma disclosure as an alternative to financial
statement recognition. The Company will be required to adopt Statement 123(R)
during the first quarter of its year ending September 30, 2007. The Company has
not determined what financial statement impact Statement 123(R) will have on the
Company.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements.
Item 3: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, under the supervision of and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of SiriCOMM's disclosure controls and
procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end
of the period covered by this Quarterly Report on Form 10-QSB. Management has
concluded that its disclosure controls and procedures were still not effective
as of March 31, 2006 as follows:
o we did not have adequate transaction controls over the
accounting review and process of certain unusual or complex
transactions;
o we did not have a systematic and documented program of
internal controls and procedure over our accounting and
financial reporting process to ensure that unusual or complex
transactions are recorded, processed, summarized and reported
on a timely basis in our financial disclosures; and
o there is a need for the improved supervision and training of
our accounting staff.
In connection with the restatement described below, management
determined that a material weakness existed in SiriCOMM's internal control over
financial reporting for the year ended September 30, 2004. Because of this
material weakness, management determined that SiriCOMM's disclosure controls and
procedures were not effective as of September 30, 2004 to ensure that all
material information required to be included in SiriCOMM's reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission. As stated in more detail below, this determination was in
response to the identified weakness and not part of management's assessment of
internal controls that will be required to be included in our annual report on
Form 10-KSB for our fiscal year ending September 30, 2007. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
20
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer's management, including it's principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure.
To address this material weakness, SiriCOMM's management, with the
assistance of its accounting consultant, continues to perform additional
analysis of our accounting procedures and the need for additional personnel in
our accounting department to ensure that SiriCOMM's consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in the United States of America. Accordingly, management believes that
(i) the consolidated financial statements, as restated, fairly present in all
material respects SiriCOMM's financial condition, results of operations and cash
flows for the periods presented, and (ii) this report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report.
Consideration of the Restatement
On December 10, 2003, SiriCOMM issued an aggregate of 213,417 shares of
its Series A Preferred Stock to two investors upon conversion of debt in the
aggregate principal amount of $200,000 plus accrued interest of $13,417. These
shares were accounted for on the Company's balance sheet as part of its
permanent equity. Because the Series A Preferred Stock provided the holder the
right to redeem those shares at any time commencing three (3) years from the
date of issuance, those shares should have been classified as temporary equity.
As a result of the foregoing, management restated its September 30,
2004 annual consolidated financial statement as well as its interim consolidated
financial statements for the quarters ended December 31, 2004, March 31, 2005
and June 30, 2005. The reclassification of the Series A Preferred Stock did not
effect the Company's results of operations for any of the above listed periods.
Internal Control over Financial Reporting
As a result of Section 404 of the Sarbanes-Oxley Act of 2002 and the
rules issued thereunder, the Company will be required to include in its Annual
Report on Form 10-KSB for the year ending September 30, 2007 a report on
management's assessment of the effectiveness of the Company's internal control
over financial reporting. The Company's independent auditor will also be
required to attest to and report on management's assessment. Current auditing
standards provide that a restatement is a strong indicator of a material
weakness in the Company's internal control over financial reporting. Considering
this guidance, the Company has evaluated these methodological errors and has
concluded that the restatement resulted from a material weakness in the
Company's internal control, which the Company believes it has since remediated.
This process of assessment and remediation is not of the scope and did not
include rigorous documentation of internal controls which will be required under
Section 404. In that regard, management did not prepare a report in conformity
with paragraph (a) of Item 308 which should have contained the following:
o a statement of management's responsibility for establishing
and maintaining adequate internal control over financial
reporting;
21
o a statement identifying the framework used by management to
evaluate the effectiveness of the Company's internal control
over financial reporting;
o management's assessment of the effectiveness of the Company's
internal control over financial reporting as of September 30,
2005, including a statement as to whether or not it is
effective; and
o a statement that the Company's external auditor has issued an
attestation report on management's assessment.
The Company was also not required to obtain and has not obtained its
independent auditors' report with respect to this voluntary assessment. In an
effort to bolster existing controls and prepare for the required management
assessment of internal controls over financial reporting which will be required
to be included in the Company's annual report on Form 10-KSB for the year ending
September 30, 2007, the Company retained an accounting consultant in November,
2005 to assist in the documentation, assessment and development of more
effective internal control under the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria).
A material weakness is a control deficiency or combination of control
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected. As of September 30, 2004, SiriCOMM did not maintain
effective control over financial reporting to ensure the Series A preferred
stock was accurately presented or that the accounting treatment related to the
redeemable shares was appropriately reviewed to ensure compliance with
accounting principles generally accepted in the United States of America. The
transaction related to these redeemable shares was non-routine in nature.
Specifically, the Company did not have adequate controls over the classification
of the Series A preferred shares subject to redemption requests nor the proper
evaluation of the relevant accounting literature related to such shares. This
material weakness resulted in a restatement of SiriCOMM's financial statements.
As of March 31, 2006, the Company still lacked the personnel and technical
expertise necessary to insure that a material weakness did not exist at that
time.
A significant deficiency is a control deficiency, or combination of
control deficiencies, that adversely affects the Company's ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the Company's annual or interim
financial statements that is more than inconsequential will not be prevented or
detected. We have better defined the roles of certain of our personnel relating
to internal controls over financial reporting and are disclosing the following
significant deficiencies:
o The Director of Support Services has significant abilities to
perform functions in the purchasing cycle, including updating
vendor files, recording transactions, and accessing signed
checks.
o The Chief Executive Officer has the ability to perform EDI
transactions and approving and signing checks with little or
no oversight from other members of management.
22
o The Chief Financial Officer can perform most functions
associated with the purchasing cycle, including signing check
which is predominantly done in the absence of the Chief
Executive Officer.
o The Director of Support Services can perform most functions
within the payroll cycle, including file maintenance,
recording of transactions and adjusting payroll data.
o The Director of Support Services can perform most functions in
the revenue and accounts receivable cycle including, billing
customers, recording revenue transactions, submitting credit
card remittances and reconciling the bank statements.
o The Company has not established adequate procedures to
properly accrue for goods and services rendered.
Management's Response to the Material Weakness and Significant Deficiencies
In response to the material weakness and significant deficiencies
described above, we have undertaken the following initiatives with respect to
our internal controls and procedures that we believe are reasonably likely to
improve and materially affect our internal control over financial reporting. We
anticipate that remediation will be continuing throughout fiscal 2006, during
which we expect to continue pursuing appropriate corrective actions, including
the following:
o Preparing appropriate written documentation of our financial
control procedures. The Company did not begin this process
during the quarter ended December 31, 2005. The Company
intends to complete written documentation of its financial
control procedures during the fiscal year ended September 30,
2006;
o In November, 2005 we hired an outside accounting consultant
who has acted as our interim controller. The Company has been
actively recruiting a full time controller to be added to our
finance department;
o Scheduling training for accounting staff to heighten awareness
of generally accepted accounting principles applicable to
complex transactions. The Company began training its
accounting staff during the quarter ended March 31, 2006. The
Company intends to complete the training in the fiscal year
ended September 30, 2006;
o Strengthening our internal review procedures in conjunction
with our ongoing work to enhance our internal controls so as
to enable us to identify and adjust items proactively. The
Company did not begin this process during the quarter ended
March 31, 2006. The Company intends to complete the
strengthening of its internal review procedure during the
fiscal year ended September 30, 2006;
o In November 2005 we engaged an outside accounting consultant
to support our Sarbanes-Oxley Section 404 compliance
activities and to provide technical expertise in the selection
and application of generally accepted accounting principles
related to complex transactions to identify areas that require
23
control or process improvements and to consult with us on the
appropriate accounting treatment applicable to complex
transactions;
o Upon the advice of our outside accounting consultant, we made
certain procedural changes with respect to the Company's
billing process. This began during the quarter ended December
31, 2005 and has continued through the quarter ended March 31,
2006; and
o As stated above, during the quarter ended December 31, 2005 we
established adequate procedures to properly accrue for goods
and services rendered to insure they are recorded in the
proper reporting period.
To date, we have retained an outside accounting consultant to assist
the Company in strengthening our controls and procedures. Our management and
Audit Committee will monitor closely the implementation of our remediation plan.
The effectiveness of the steps we intend to implement is subject to continued
management review, as well as Audit Committee oversight, and we may make
additional changes to our internal control over financial reporting. Management
expects that all material weaknesses will be cured by September 30, 2007.
We cannot assure you that we will not in the future identify further
material weaknesses in our internal control over financial reporting. We
currently are unable to determine when the above-mentioned material weaknesses
will be fully remediated. However, because remediation will not be completed
until we have added finance staff and strengthened pertinent controls, we
believe the aforementioned material weakness and significant deficiencies may
continue to exist. The Company has yet to develop procedures to adequately
assess financial statement and disclosure reporting requirements so that
regulatory filings are accurate and complete.
24
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
On December 17, 2004, Henry Hoffman, Kory Dillman, David Mendez, Tom
Noland, Richard Iler and Terry Thompson were named defendants in a lawsuit
entitled Greg Sanders v. Henry Hoffman et al. Messrs. Hoffman, Dillman, Mendez
and Iler are officers and directors of the Company, Mr. Thompson is a director
of the Company and Mr. Noland is a former officer and director of the Company.
The action was brought in the Circuit Court of Jackson County, Missouri at
Kansas City (04CV236387). The action alleges fraud, misrepresentation and breach
of fiduciary duty relating to a settlement agreement entered into between the
Company and Mr. Sanders. The Company is not a party to this lawsuit. The
complaint seeks damages in excess of $9,679,903. The defendant's filed a motion
to dismiss which was denied by the Court. The defendants have subsequently filed
counter claims against the plaintiff as part of their answer on August 18th,
2005. The Company will pay all expenses relating to the defense of this matter.
In management's opinion this case is without merit and the defendants intend on
defending this matter vigorously.
Item 2: Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) On December 15, 2005, the Company issued 25,000 shares of its
common stock to IRG pursuant to a consulting agreement dated November 30, 2005.
Pursuant to the consulting agreement, the Company issued an additional 25,000
shares to the consultant during the quarter ended March 31, 2006. Additionally,
the consultant received 50,000 four (4) year warrants with the following
exercise prices:
16,666 at $1.25
16,667 at $1.35
16,667 at $1.45
On December 27, 2005, the Company entered into a Loan Agreement with Sunflower
Capital, LLC. The loan is in the principal amount of $500,000 and is evidenced
by a Convertible Promissory Note due July 1, 2006. As consideration for
Sunflower making the loan, the Company issued to Sunflower a warrant to purchase
200,000 shares of the Company's common stock at $1.26 per share. The warrant
expires December 15, 2010.
The Note mandatorily converted into the Company's units consisting of one share
of common stock and one redeemable common stock purchase warrant exercisable at
$1.50 per share during the period commencing on the date of issuance and
expiring five (5) years thereafter. As discussed below, the Note converted into
such units at the rate of $1.15 per unit on February 1, 2006.
On January 31, 2006, the Company consummated the private placement of its
securities pursuant to a Placement Agent Agreement entered into between it and
Sanders Morris Harris, Inc. as Placement Agent dated December 12, 2005. The
25
securities sold were units consisting of one share of the Company's common
stock, $.001 par value and one redeemable Common Stock purchase warrant. At the
closing, the Company sold an aggregate of 4,692,263 Units at an aggregate
purchase price of $5,396,103 or $1.15 per unit. At the closing the Company
delivered an aggregate of 4,692,263 Shares and 4,692,263 Warrants to the
purchasers.
Each Warrant entitles the holder to purchase one Share of Common Stock at an
exercise price of $1.50 per share commencing on the date of issuance and
expiring at the close of business on the fifth anniversary of the issuance date.
The Warrants contain provisions that protect the holder against dilution by
adjustment of the exercise price in certain events including, but not limited
to, stock dividends, stock splits, reclassifications, or mergers. The Company
may redeem the Warrants, at a price of $.10 per Warrant, at any time following
the issuance date upon not less than 30 days nor more than 60 days prior written
notice if (a) the Common Stock underlying the Warrants has been registered with
the SEC, and (b) the closing price of the Common Stock exceeds a 200% premium of
the exercise price of the Warrants for 20 out of 30 consecutive trading days.
Under the terms of the Agency Agreement, the Placement Agent received a
commission equal to 5% of the offering price of the Units sold in the Private
Placement, a financial advisory fee equal to 2% of the offering price of the
Units sold in the Private Placement and a Warrant to purchase Common Stock equal
to 5% of the Shares of Common Stock underlying the Units sold in the Private
Placement at an exercise price of $1.15 per share.
As part of the Private Placement, the Company entered into a registration rights
agreement with each subscriber who purchased Units in the Private Placement.
Under the Registration Rights Agreement, the Company, as promptly as reasonably
practicable after closing of the Private Placement but in no event later than 30
days following the closing, the Company was obligated to file a registration
statement on Form SB-2, relating to the resale by the holders of the Common
Stock underlying the Units, Warrants and Placement Agent Warrant. The Company
filed the Registration Statement on a timely basis and it was declared effective
by the SEC on May 12, 2006.
Sunflower Capital, LLC, a limited liability company managed by William P. Moore,
a director of the Company, purchased an aggregate of 1,764,872 Units in the
offering, which consisted of a new investment of $1,525,000.05 to purchase
1,326,087 Units and the conversion of the Note plus accrued interest in the
amount of $4,602 to purchase 438,785 Units.
On February 22, 2006, the Company issued 1,500 shares to Daron Good pursuant to
the exercise of a stock option for a like number of shares. The exercise price
of these options is $1.30. The shares underlying the option were registered on
Form S-8 on April 14, 2003 (SEC File No. 333-204508).
During the quarter ended March 31, 2006, the Company issued an aggregate of
65,000 shares to Mr. Clark Burns upon the exercise of a warrant. The exercise
price of the warrant was $.50 per share.
During the quarter ended March 31, 2006, the Company issued 19,800 shares to
Staunton McLane LLC pursuant to the exercise of a stock option for a like number
of shares. The exercise price of these options was $1.00. The shares underlying
the option were registered on Form S-8 on April 14, 2003 (SEC File No.
333-104508).
26
On February 28, 2006, the Company issued 10,000 shares to Jackie Seneker, an
employee at the time, pursuant to the exercise of a stock option for a like
number of shares. The exercise price of these options was $1.00. The shares
underlying the option were registered on Form S-8 on April 14, 2003 (SEC File
No. 333-104508).
On April 20, 2006, the Company issued 28,163 shares to Jackie Seneker pursuant
to the exercise of a stock option. The exercise price of these options was $1.00
and Ms. Seneker exercised this option on a cashless basis by delivering to the
Company 29, 337 options exercisable at $1.00 per share. The shares underlying
the option were registered on Form S-8 on April 14, 2003 (SEC File No.
333-104508).
Except as otherwise stated, each of the aforementioned securities have been and
will be issued under the exemption from registration provided in Section 4(2) of
the Act.
The cash proceeds of the above sales of securities of the Company were used for
general corporate purposes in developing the Company's planned services.
(d) Not Applicable
Item 3.: Defaults upon Senior Securities
None
Item 4.: Submission of Matters to a Vote of Security Holders
None
Item 5.: Other Information
On December 20, 2005, the Company entered into a Service Agreement with Petro
Stopping Centers, LP. Pursuant to the agreement, the Company will provide its
Wi-Fi Hot Spot platform for wireless Internet access at Petro's 64 nationwide
full service travel plazas.
On March 2, 2006, the Company announced that it began offering FleetNav Express
at all of its Wi-Fi Hot Spot locations. FleetNav Express is an online,
subscription-based navigational aid that allows owner-operator drivers and small
fleets to get an unlimited number of truck designated routes and full color
interactive maps.
On March 10, 2006, the Company entered into a three (3) year lease with The
Spicer LLLP for approximately 5,490 square feet of office space at 4710 East
32nd Street, Joplin, Missour 64804. The first year's monthly rent is $3,000 per
month, thereafter monthly rent increases to $3,500 per month. tThe Company also
received two months of free rent in the first year. The Company's principal
executive offices are located on this property.
27
On March 15, 2006, the Company entered into an Amendment Agreement with Idling
Solutions, L.L.C., a Texas limited liability company. This amended agreement
amends the Network Access Services Agreement dated February 7, 2005. The
amendment lowers the initial monthly fee per truck, sets forth minimum purchase
requirements, further defines certain deployment dates and sets the purchase
price and payment terms that the Company will sell its Pulse Box product to
Idling Solutions.
On March 15, 2006, the Company entered into an Amendment Agreement with Sat-Net
Communications, L.L.C. ("Sat-Net"), a Texas limited liability company. The
amended agreement amends the Network Installation Agreement dated February 7,
2005 which provided for, among other things,that Sat-Net was to provide and
install its VSAT/802.11 terminals at the Company's designated locations.
Pursuant to the amendment, Sat-Net agreed to reimburse the Company $50,000 for
servers and access points previously delivered to the Company that no longer
function to the Company's specificity or are out of warranty. The Company agreed
to defer the reimbursement and will ultimately forgive such reimbursement should
Sat-Net cause Idling Solutions to purchase at least 20,000 Pulse Box units from
the Company within the eighteen (18) months from the successful operational date
of the Company's 900 mhz network.
In addition, Sat-Net agreed to assign 200,000 shares of the Company's common
stock that was originally issued by the Company to Sat-Net pursuant to the
Network Installation Agreement.
On March 15, 2006, the Company entered into an Agreement with DirecTruck,
L.L.C., a Texas limited liability company, whereby the Company agreed to acquire
from DirecTruck certain proprietary rights, intellectual property, test results
and other rights, title and interest related to the product known as the Pulse
Box. These additional enhancements to the Pulse Box were specifically developed
by DirecTruck outside of the Company's original intended use of the device and
these enhancements are essential to the intended use of Idling Solutions. This
allows the Company to own all proprietary information and intellectual property
related to the use of the Pulse Box product.
Sat-Net, Idling Solutions and DirecTruck are affiliated entities.
On April 19, 2006, the Company entered into a network access services agreement
with ACS Government Solutions, Incorporated ("ACS"), an affiliate of Affiliated
Computer Services, Incorporated, to provide data access at each of the 260
PrePass weigh station sites in 25 states. Under the terms of the three year
agreement, ACS will purchase network access services from the Company for the
benefit of its HELP, Inc. contract for automated vehicle identification and
weigh station bypass.
On May 8, 2006, the Company entered into a three (3) year lease agreement,
effective May 10, 2006, with 4301 Main LLC to lease 2,743 square feet of office
space at 3535 Broadway, Suite 402, Kansas City, Missouri 64106. The monthly rent
for this location is $1,900 per month. Software development and administration
of the Company's network operations center are conducted from this location.
28
Item 6.: Exhibits
The following exhibits are filed as part of this report:
10.1 Lease Agreement dated March 10, 2006 between the
Company and The Spicer LLLP
10.2 Lease Agreement dated May 8, 2006 between the Company
and 4301 Main LLC
31.1 Certification of Chief Executive Officer of Periodic
Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification of Chief Financial Officer of Periodic
Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: May 22, 2006 SIRICOMM, INC.
By: /s/ Henry P. Hoffman
-------------------------------------
Henry P. Hoffman, President and
Chief Executive Officer
By: /s/ J. Richard Iler
-------------------------------------
J. Richard Iler, Executive Vice
President and Chief Financial Officer
30