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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB/A NO. 2
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Period Ended
June 30, 2005 Commission File No. 0-18399
SIRICOMM, INC.
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(Exact name of Company as specified in its Charter)
Delaware 62-1386759
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(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2900 Davis Boulevard, Suite 130, Joplin, Missouri 64804
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(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
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 August 12, 2005 was 20,088,950
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SiriCOMM, Inc. hereby amends and restates in its entirety its Quarterly Report
on Form 10-QSB for the period ending June 30, 2005, which was filed on August
15, 2005, by filing this amended quarterly report as provided by the applicable
rules under the Securities and Exchange Act of 1934. The Company has revised
portions of its financial statements and legal disclosure in response to
comments made by the staff of the Securities and Exchange Commission during
their review of the Company's 10-KSB. This Form 10-QSB/A contains a restatement
of the Company's quarterly financial statements and related disclosure to
reflect its responses to those comments.
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations for the nine
months ended June 30, 2005 and June 30, 2004 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the nine months ended June 30, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended June 30, 2005 and June 30, 2004 6
Notes to the Condensed Consolidated Financial Statements 8
2
SIRICOMM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2005 2004
-------------- --------------
Restated Restated
(Unaudited)
Assets
Current Assets
Cash $ 1,317,762 $ 1,019,616
Held to maturity investments 494,935 --
Accounts receivable 2,228 --
Prepaid expenses and other 26,250 16,563
-------------- --------------
Total current assets 1,841,175 1,036,179
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Property and Equipment, At Cost
Equipment 2,301,898 111,818
Network equipment in progress of installation 255,299 646,000
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2,557,197 757,818
Less accumulated depreciation 295,006 62,032
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2,262,191 695,786
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Software, net of amortization 73,935 19,934
Other prepaid consulting services 2,346,192 --
-------------- --------------
Total assets $ 6,523,493 $ 1,751,899
============== ==============
Liabilities and Stockholders' Equity
Current Liabilities
Note payable to bank $ 429,264 $ 122,000
Current maturities of long-term debt - 25,000
Accounts payable 141,405 50,816
Accrued salaries 197,358 269,125
Other accrued expenses 175,794 45,928
Deferred revenue 27,360 --
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Total current liabilities 971,181 512,869
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Total liabilities 971,181 512,869
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Preferred stock - redeemable and convertible, 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 266,772 250,765
Stockholders' Equity
Common stock - par value $.001; 50,000,000 shares authorized; 20,793,950 -
June 30, 2005, 16,255,650-September 30, 2004, issued and outstanding 20,070 16,252
Additional paid-in capital 15,034,837 8,379,044
Deferred compensation (631,176) (722,016)
Retained deficit (9,138,191) (6,685,015)
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Total stockholders' equity 5,285,540 988,265
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Total liabilities and stockholders' equity $ 6,523,493 $ 1,751,899
============== ==============
See Notes to Condensed Consolidated Financial Statements
3
SIRICOMM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Restated)
June 30, 2005 June 30, 2004
------------------------------------- -------------------------------------
3 months ended 9 months ended 3 months ended 9 months ended
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 55,686 $ 89,134 $ - $ -
Operating Expenses:
General and administrative 591,337 927,654 916,468 1,625,487
Salaries 278,295 847,445 209,120 428,854
Satellite access fees 195,615 486,244 - -
Stock-based compensation - - - 50,000
Research and development 12,740 37,520 (15,200) 14,270
Depreciation and amortization 114,681 236,747 5,177 15,107
-------------- -------------- -------------- --------------
Total operating expenses 1,192,668 2,535,610 1,115,565 2,133,718
-------------- -------------- -------------- --------------
Operating loss (1,136,982) (2,446,476) (1,115,565) (2,133,718)
-------------- -------------- -------------- --------------
Other Income (Expense)
Interest income 5,801 11,397 1,299 2,871
Other income - - 37,205 37,223
Interest expense (8,831) (18,097) (5,189) (23,869)
Loan costs - - (19,891) (205,154)
-------------- -------------- -------------- --------------
(3,030) (6,700) 13,424 (188,929)
-------------- -------------- -------------- --------------
Net loss $ (1,140,012) $ (2,453,176) $ (1,102,141) $ (2,322,647)
-------------- -------------- -------------- --------------
Add: Dividends declared on preferred
stock (5,336) (16,006) - -
-------------- -------------- -------------- --------------
Loss available to common shareholders $ (1,145,348) $ (2,469,182) $ (1,102,141) $ (2,322,647)
============== ============== ============== ==============
Basic and diluted loss per common share $ (0.06) $ (0.14) $ (0.07) $ (0.16)
============== ============== ============== ==============
Weighted average shares,
basic and diluted 19,661,956 17,841,314 16,019,569 14,170,317
============== ============== ============== ==============
See Notes to Condensed Consolidated Financial Statements
4
SIRICOMM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Restated
Additional Deferred
Common Stock Paid-in Compen- Accumulated Treasury
Shares Amount Capital sation Deficit Stock Total
---------- ------- ----------- --------- ----------- --------- -----------
For the nine months ended
June 30, 2004
Balance, September 30, 2003 12,966,593 $12,967 $ 3,847,485 $ - $(3,906,608) $(458,838) $ (504,994)
Conversion of debt to equity 426,592 426 429,555 429,981
Stock issued for loan costs 9,593 10 13,670 13,680
Stock issued for services 570,000 570 1,306,610 (722,016) 585,164
Stock warrants- exercised 176,000 176 87,824 88,000
Stock options issued for
services 137,000 137,000
Stock options exercised 20,000 20 19,980 20,000
Proceeds from stock
issuance 2,253,143 2,253 2,943,436 2,945,689
Issuance of options to
employees, net 50,000 50,000
Treasury stock retired (195,250) (195) (458,643) 458,838 -
Net loss for the period (2,322,647) (2,322,647)
---------- ------- ----------- --------- ----------- --------- -----------
Balance, June 30, 2004 16,226,671 $16,227 $ 8,355,375 $(722,016) $(6,229,255) $ - $ 1,420,531
========== ======= =========== ========= =========== ========= ===========
For the nine months ended
June 30, 2005
Balance, September 30, 2004 16,255,650 $16,252 $ 8,379,044 $(722,016) $(6,685,015) $ - $ 988,265
Fair value of conversion options
added to preferred stock - - (21,342) - - - (21,342)
Stock warrants issued for services 600,000 (210,000) 390,000
Stock warrants exercised 95,000 95 179,905 180,000
Stock options exercised 26,800 27 26,773 26,800
Stock options issued for services 91,800 91,800
Stock issued for services 2,043,000 2,043 3,269,937 3,271,980
Vesting of deferred compensation 300,840 300,840
Proceeds from issuance of warrants 56,666 56,666
Net proceeds from issuance of
common stock 1,653,500 1,653 2,446,718 2,448,371
Accrued dividends (16,006) (16,006)
Net Loss (2,453,176) (2,453,176)
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Balance, June 30, 2005 20,073,950 $20,070 $15,034,837 $(631,176) $(9,138,191) $ - $ 5,285,540
========== ======= =========== ========= =========== ========= ===========
See Notes to Condensed Consolidated Financial Statements.
5
SIRICOMM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
June 30,
2005 2004
-------------- --------------
(Unaudited) (Unaudited)
Restated
Operating Activities
Net loss $ (2,453,176) $ (2,322,647)
Items not requiring cash
Depreciation 236,747 15,107
Loan costs - 179,154
Stock-based compensation for services 57,915 806,872
Stock-based compensation to employees - 50,000
Deferred compensation 300,840 -
Other non-cash charges 261,198 1,373
Changes in assets and liabilities:
Current assets (7,325) (141,175)
Accounts payable 104,654 8,629
Accrued expenses 58,099 (53,069)
Deferred revenues 27,360 -
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Net cash flows used in operating activities (1,413,688) (1,455,756)
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Investing Activities
Purchase of held to maturity investments (494,935) -
Purchase of furniture and equipment (787,333) (27,311)
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Net cash flows used in investing activities (1,282,268) (27,311)
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Financing Activities
Borrowings under line of credit, net 307,264 -
Payment of notes payable (25,000) (226,640)
Proceeds from exercise of stock options and warrants 36,800 -
Proceeds from issuance of warrants 56,666 -
Proceeds from sale of common stock 2,618,372 3,053,689
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Net cash flows provided by financing activities 2,994,102 2,827,049
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Increase in Cash 298,146 1,343,982
Cash and Cash Equivalents, beginning of period 1,019,616 56,300
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Cash and Cash Equivalents, end of period $ 1,317,762 $ 1,400,282
============== ==============
See Notes to Condensed Consolidated Financial Statements
6
Supplemental Cash Flows Information:
Interest paid $ 19,785 $ 11,385
Stock and warrants issued in exchange for services and equipment $ 3,871,980 $ 574,624
Stock options issued in exchange for prepaid consulting services $ 91,800 $ -
Accrued dividends for Series A preferred stock $ 16,006 $ -
Shares of common stock issued for loan costs $ - $ 13,680
Conversion of debt to equity $ - $ 642,026
Fair value of conversion options added to preferred stock $ - $ 21,342
See Notes to Condensed Consolidated Financial Statements
7
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(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 marine and transportation
industries. The Company opened its network in December, 2004 for commercial
operation and has commenced selling its InTouch(TM) Internet Service to
individual subscribers.
The Company was considered to be in the development stage during its recent
reporting period ending September 30, 2004. Since September 30, 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, 2004 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 31, 2004 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.
8
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
1. Nature of operations and summary of significant accounting policies
(continued):
Securities:
Investments for which the Company has the positive intent and ability to
hold until maturity are classified as held to maturity and valued at
historical cost, adjusted for amortization of premiums and accretion of
discounts computed by the level-yield method.
Realized gains and losses, based on the specifically identified cost of the
security, are included in net income.
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. The Company
had used the Black-Scholes model during fiscal year 2004, but it has
determined that the trinomial model is better suited to evaluate the
variability of uncertain holding horizons.
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.
Nine Months Ended
June 30,
2005 2004
-------------- --------------
Net loss, as reported $ (2,453,176) $ (2,322,647)
Add back intrinsic values of stock
issued to employees -- 50,000
Less: stock-based employee compensation
under the fair value based method (111,987) (200,950)
-------------- --------------
Pro forma net loss under fair value method $ (2,565,163) $ (2,473,597)
Net loss per common share-basic and diluted:
As reported $ (0.14) $ (0.16)
Pro forma under fair value method $ (0.14) $ (0.17)
9
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
1. Nature of operations and summary of significant accounting policies
(continued):
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.
Reclassification
Certain reclassifications have been made to the June 30, 2004 financial
statements to conform to the June 30, 2005 financial statement
presentation. These reclassifications had no effect on the Company's net
losses.
2: Investments
Held-to-Maturity
Maturities of held-to-maturity investments at June 30, 2005:
Amortized Approximate
Cost Fair Value
--------------------------------------
One year or less $494,935 $494,935
3. Line of Credit:
During 2004, the Company entered into 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 is 80% guaranteed by the U.S. Department
of Agriculture ("USDA") and is secured by the network equipment. This note
is further personally guaranteed by the Company's majority shareholder. The
note is a demand note, but if no demand is made then monthly payments of
accrued interest at an initial rate of 5.5% on the USDA guaranteed portion
and 7.0% on the unguaranteed portion plus monthly principal payments of
$2,358. The note is amortized over 59 months beginning September 25, 2004
with a final payment on August 25, 2009.
10
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
4. Stockholders' Equity:
Pursuant to a contract between Pilot Travel Centers and the Company, in
consideration for Pilot's permitting the Company to install its broadband
wireless network in Pilot's 255 travel centers, the Company issued, upon
completion of the installation and testing in October 2004, 255,000 Common
Stock Purchase Warrants exercisable for five years, expiring on May 27,
2009 at an exercise price of $4.50 per share. The transaction resulted in
the Company recording $91,800 as a prepaid consulting service and
additional paid-in capital. The prepaid asset is being amortized over the
contract period which expires May 27, 2009.
On October 18, 2004 and December 15, 2004, the Company's Chief Financial
Officer and a Director, exercised 700 and 800 stock options, respectively,
at $1.00 per share. The options were granted pursuant to the Company's 2002
Equity Incentive Plan.
On November 1, 2004, an employee of the Company exercised 7,500 stock
options at $1.00 per share. The options were granted pursuant to the
Company's 2002 Equity Incentive Plan.
SiriCOMM, Inc. consummated the private placement of its units (the "Units")
pursuant to a Confidential Investment Proposal dated October 11, 2004 and
amended on December 20, 2004. Funds were disbursed from escrow to the
Company as of January 3, 2005 and shares and warrant certificates were
issued at that time. Each Unit consisted of 50,000 shares (the "Shares") of
the Company's Common Stock and a Common Stock Warrant (the "Warrants") to
purchase 37,500 shares of Common Stock. In the private placement, the
Company sold an aggregate of 6.38 Units (319,000 Shares and Warrants to
purchase 239,250 shares of Common Stock) for an aggregate purchase price of
$638,000, or $100,000 per Unit.
The Warrants entitle the holders to purchase shares of the Common Stock
(the "Warrant Shares") for a period of five years from the date of issuance
at an exercise price of $2.40 per share. The Warrants contain certain
anti-dilution rights and are redeemable by the Company, on terms specified
in the Warrants.
In connection with the private placement, Sands Brothers International
Limited, the placement agent, received a cash commission fee of nine (9%)
of the gross proceeds to the Company, a payment of $30,000 representing the
fees and expenses of its counsel in the private placement and Common Stock
Purchase Warrants (the "Agent Warrants") to purchase ten percent (10%) of
the Shares sold in the Private Placement (the "Agent Shares"). The Agent
Warrants are exercisable for a period of five years at an exercise price of
$2.40 per share and contain the same anti-dilution rights as the Warrants.
As part of the private placement, the Company was required to file with the
Securities and Exchange Commission a Registration Statement covering the
Shares, the Warrant Shares and the Agent Shares, which became effective on
May 5, 2005, within the allotted time frame as set forth in the offering
materials.
On January 5, 2005, the Company issued an aggregate of 85,000 shares of its
Common Stock upon the exercise of a like number of warrants, exercisable at
11
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
$2.00 per share. The warrants were originally issued in January 2004
pursuant to a private placement of the Company's units consisting of common
stock and warrants.
As an inducement to the investors exercising their warrants, the Company
issued an aggregate of 63,750 new warrants to the investors. The new
warrants entitle the holders to purchase shares of the Company's common
stock reserved for issuance thereunder for a period of five years from the
date of issuance at an exercise price of $2.40 per share. The warrants
contain anti-dilution rights and are redeemable by the Company, in whole or
in part, on terms specified in the warrants.
As a further inducement to the investors exercising their warrants, the
Company also agreed to file with the Securities and Exchange Commission a
Registration Statement covering the shares purchased by each investor as
part of the units, the shares issued upon exercise of the warrants and the
shares underlying the new warrants. These shares were registered as part of
the Company's filing of its Registration Statement on Form SB-2 which was
declared effective May 5, 2005.
On February 7, 2005 the Company entered into a Network Installation
Agreement (the "Agreement") with Sat-Net Communications, Inc. ("Sat-Net").
The term of the Agreement is for sixty (60) months commencing on February
7, 2005. The Agreement will be automatically extended on a year-to-year
basis upon expiration of the initial term unless terminated in writing by
either party.
During the term of the Agreement, Sat-Net will provide and install VSAT
terminals at up to 400 truck-stop locations at a predetermined turnkey
price.
Pursuant to the Agreement, the Company issued to Sat-Net 2,000,000 shares
of its Common Stock and 1,000,000 Common Stock Purchase Warrants (the
"Sat-Net Warrants") exercisable for a period of three years at a price of
$2.00 per share. The Sat-Net Warrants are subject to vesting at the rate of
2,500 per truck-stop location installed; provided, however, that the
vesting with respect to the first 250 locations will be deemed to occur
when the wireless infrastructure is "network operational," as defined in
the Agreement.
In addition, the 2,000,000 shares of Common Stock have "piggy-back"
registration rights. These shares were registered as part of the Company's
filing of its Registration Statement on Form SB-2 which was declared
effective May 5, 2005.
On March 16, 2005, the Company issued an aggregate of 10,000 shares to the
partners of the Company's Securities Counsel, Sommer & Schneider LLP. The
shares were issued in lieu of $8,065.25 in unpaid invoices due the firm at
the time and a $6,000 credit to cover the Company's April 2005 retainer
with the firm. The shares were issued under the Company's 2002 Equity
Incentive Plan.
12
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
On March 13, 2005, the Company's Board of Directors, at the recommendation
of the Company's Chief Executive Officer, granted an aggregate of 102,500
options to various Company employees exercisable at prices per share from
$1.75 to $2.00. The shares were issued under the Company's 2002 Equity
Incentive Plan.
On April 11, 2005, SiriCOMM, Inc. consummated the private sale of its
securities to Sunflower Capital, LLC ("Sunflower"). The securities sold
consisted of units comprised of shares of common stock (the "Shares") and
warrants to purchase shares of the Company's common stock. At the closing,
the Company sold an aggregate of 1,066,667 units at an aggregate purchase
price of $1,600,000 or $1.50 per unit. At the closing the Company delivered
an aggregate of 1,066,667 Shares and 1,066,667 warrants to Sunflower. The
warrants entitle the holder to purchase shares of the Company's common
stock reserved for issuance thereunder (the "Warrant Shares") for a period
of five years from the date of issuance at an exercise price of $2.50 per
share. The warrants contain certain anti-dilution rights and are redeemable
by the Company, in whole or in part, on terms specified in the warrants.
In a separate transaction also consummated on April 11, 2005, the Company
sold 413,605 additional warrants to Sunflower Capital, LLC at a purchase
price of $53,333 or approximately $.13 per warrant. These warrants entitle
the holder to purchase shares of the Company's common stock reserved for
issuance thereunder for a period of five years from the date of issuance at
an exercise price of $3.00 per share. These warrants contain certain
anti-dilution rights and are redeemable by the Company, in whole or in
part, on terms specified in these warrants.
William P. Moore, a director and shareholder beneficially owning
approximately 9.10% of the issued and outstanding shares of the Company's
common stock is the managing member of Sunflower Capital, LLC.
On April 13, 2005, the Company's Chief Financial Officer and a Director of
the Company received 15,000 and 10,000 options exercisable at $1.90 per
share. The shares were issued under the Company's 2002 Equity Incentive
Plan and were registered on Form S-8 on April 14, 2003.
The Company issued 10,000 shares of its common stock pursuant to the
exercise of a stock option for a like number of shares in April 2005. The
exercise price of these options was $1.00
On June 16, 2005, the Company issued 2,500 stock options exercisable at
$1.75 to Robert Myers in connection with his hiring by the Company as a
Network Administrator II. The options were issued in accordance with the
Company's 2002 Equity Incentive Plan.
On June 28, 2005, the Company received funds from the private sale of its
securities to ten (10) investors, including Sunflower Capital, LLC a
limited liability company managed by William P. Moore, a director of the
Company. The securities sold consisted of units comprised of shares of the
Company's common stock (the "Shares") and warrants to purchase shares of
the Company's common stock (the "Warrants"). At the closing, the Company
sold an aggregate of 267,833 units at an aggregate purchase price of
approximately $401,750 or $1.50 per unit. At the closing the Company
delivered an aggregate of 267,833 Shares and delivered Warrants to purchase
an additional 267,833 shares of the Company's common stock.
The Warrants entitle the holder to purchase shares of the Company's common
stock reserved for issuance thereunder (the "Warrant Shares") for a period
13
SiriCOMM, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
of five years from the date of issuance at an exercise price of $2.50 per
share. The Warrants contain certain anti-dilution rights and are redeemable
by the Company, in whole or in part, on terms specified in the Warrants.
5. 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.
6. Subsequent Events:
On July 1, 2005 the Company entered into a Consulting Agreement with
Interactive Resources Group, Inc. ("IRG"). The initial term of the
Consulting Agreement expires on October 1, 2005 and is renewable upon the
mutual consent of both parties. During the term of the Consulting
Agreement, IRG shall provide corporate consulting services to the Company
in connection with corporate finance relations, corporate financial
services, mergers and acquisitions as well as introducing the Company to
broker/dealers, investment analysts, funding sources and generally assist
the Company in its efforts to enhance its visibility in the financial
community.
In consideration of the services to be performed by IRG on behalf of the
Company, the Company issued 15,000 shares of its Common Stock and 20,000
Common Stock Purchase Warrants to IRG. The warrants vest on August 30, 2005
and are exercisable for four (4) years as follows:
10,000 shares at $2.50
5,000 shares at $3.00
5,000 shares at $4.00
7. Restatement of Prior Financial Statements:
During the fourth quarter of fiscal 2005 the Company changed its method of
accounting for it Series A redeemable, convertible preferred stock. The
June 30, 2005, March 31, 2005 and September 30, 2004 financial statements,
as previously presented, included preferred stock at par value as a
component of stockholders' equity. The Company has retroactively restated
its June 30, 2005 and September 30, 2004 financial statements to report the
redemption value of Series A preferred stock outside of liabilities and
stockholders' equity. This change had no effect on loss before income taxes
or net loss. As a result of this change, current liabilities and
stockholders' equity as of June 30, 2005 have decreased from the previously
reported totals by $32,013 and $234,759, respectively. Current liabilities
and stockholders' equity as of September 30, 2004 have decreased from the
previously reported totals by $16,006 and $234,759, respectively.
14
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Background
The Company was incorporated as a Delaware corporation under the name
"Fountain Pharmaceuticals, Inc." (the "Company"), in April 1989. 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 the Company (the "Reverse Transaction"). As part
of the Reverse Transaction, all of the then officers and directors of the
Company resigned and were replaced by persons designated by SiriCOMM Missouri
and the name of the Company was changed from Fountain Pharmaceuticals, Inc. 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. The Company and SiriCOMM Missouri are hereinafter collectively referred
to as the "Company."
The Company's corporate address is 2900 Davis Boulevard, Suite 130,
Joplin, Missouri 64804, its telephone number is 417-626-9971 and its fax number
is 417-782-0475.
SiriCOMM Missouri was founded in 2000 to become a broadband wireless
application service provider to supply productivity and cost reduction software
applications to the commercial vehicle industry and other users whose
effectiveness "over-the-road" requires affordable driver connectivity and
vehicle-access software productivity tools.
In April 2005, the Company began installing test sites pursuant to its
agreement with Pre-Pass which will ultimately enable the Company to install an
additional 260 sites. The Company began generating revenues through credit card
sales in early December 2004, but revenues to date are still not sufficient to
cover the Company's operating expenses. In June 2005, Pilot Travel Centers began
offering the Company's InTouch Service as a cash point of purchase item at the
cash registers at its 250 sites nationwide.
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:
15
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 tri-nomial 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 2005: 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
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.
Plan of Operations
SiriCOMM is engaged in the development of broadband wireless software
and network infrastructure solutions for the commercial transportation industry
and government market. The Company has a vertically integrated technology
platform incorporating both software applications and broadband network
infrastructure and access. The vertical-specific, enterprise-grade software
solutions are designed to help businesses of any size and the government to
significantly increase profitability, reduce operating costs, improve
productivity and operational efficiencies, enhance safety, and strengthen
security. The Company's unique, commercial-grade private network solution is
built for enterprises and integrates multiple technologies to enable an ultra
high-speed, open-architecture wireless data network for its software
applications and Internet access. The Company believes that its
vertical-specific software, network technology, deep industry relationships, and
low cost of operations represent significant value to the commercial
transportation industry and the government market.
16
SiriCOMM's patent-pending network infrastructure solution provides
considerable benefits when compared to other solutions competing in the space.
The architecture transmits data at speeds of up to 48,000 kilobits per seconds
("kbps"), or 20 to 100 times faster than other wireless solutions such as GSM
(9.6 kbps), CDMA2000-1XRTT (144 kbps), or Qualcomm's USAT (2 kbps). SiriCOMM
will install network access nodes using Wireless Fidelity (Wi-Fi) access points
at strategic locations nationwide. Each wireless local area network is
interconnected using satellite communications and the Company's proprietary
server solution. The point-to-multipoint broadcast feature of the Company's
network provides considerable cost-to-bandwidth efficiencies. SiriCOMM's
software applications leverage this optimized data network to deliver
significant cost reduction and productivity improvement opportunities to
subscribing companies. For a flat, low monthly fee subscribers will have access
to a suite of productivity software, the Internet, e-mail, proprietary company
intranet information, and similar business tools. Users will connect to the
network using any 802.11-compatible device. For the most mobile subscribers,
SiriCOMM recommends a Wi-Fi-enabled Palm OS handheld computer. SiriCOMM's
solutions began to become commercially available during the second quarter of
the calendar year 2005.
The Company markets its products and services principally through
assorted value added reseller agreements and a select small sales team. As the
trucking industry is highly fragmented and comprised of numerous small to
medium-sized fleet owners, it is impractical to individually reach these fleets,
thus, by using resellers who are similarly selling into this market, the Company
can better manage its cost of sales. Similarly, the Company's own salesforce can
better expend its efforts on the much larger fleets. SiriCOMM's continues to
concentrate its sales efforts on InTouch while installing additional hot spots
to increase its density of site installations across the country.
The accompanying consolidated financial information includes the
accounts of SiriCOMM and its wholly-owned subsidiary, SiriCOMM-Missouri
incorporated under the laws of Delaware and Missouri respectively. All
intercompany accounts and transactions have been eliminated in consolidation.
Results of Operations for the Three Months Ended June 30, 2005 and 2004
Revenues
SiriCOMM generated revenues of $55,686, for the three months ending June
30, 2005 while not generating any revenues during fiscal 2004. Revenues were
solely derived from the Company's offering of its InTouch Internet service. In
late June, Pilot Travel Centers introduced the Company's InTouch Service as a
cash point of purchase transaction at the registers to facilitate purchases. No
billings will be realized until July from these types of transactions.
Previously, the Company was limited to accepting only credit card purchases.
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
InTouch service in the future.
17
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 as compared to the same period in 2004.
During the three months ended June 30, 2005, net operating losses totaled
$1,136,982 as compared to net operating losses of $1,115,565, for the three
months ended June 30, 2004 .
The Company has increased its number of employees in accounting, software
development and customer service which have contributed to the increase in net
operating losses. These expenses were necessary to build the Company's
infrastructure, support the InTouch service and improve the Company's Corporate
Governance.
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 June 30, 2005, SiriCOMM's general and administrative
expenses totaled $591,337 or 49.6% of total operating expenses, while for the
three months ended, June 30, 2004 general and administrative expenses totaled
$916,468 or 82.2% of total operating expenses.
$300,840 represents a non-cash vesting of consulting fees paid by the issuance
of stock granted in 2004. Accounting and legal fees accounted for $102,994 which
increased due to the Company's filing of a Registration Statement on Form SB-2.
Salaries
For the three months ending June 30, 2005, SiriCOMM incurred salaries of
$278,295, representing 23.3% of operating expenses, as compared to $209,120, or
18.7% , of total operating expenses for the three months ended June 30, 2004.
The Company has hired an additional nine employees including a Controller since
the same period ending June 30, 2004.
Satellite Access Fees
Satellite access fees have been incurred as a result of the Company launching
its proprietary network, expenses were realized for the three month period ended
June 30, 2005 of $195,615 or 16.4% of operating expenses. The non-cash component
of the satellite access fees for the three month period ending June 30, 2005 was
$126,009. The Company had not yet launched the network, thus no satellite access
fees had been incurred at the same period ending June 30, 2004.
18
Depreciation and Amortization
Depreciation and amortization expense was $114,681 for the three month period
ending June 30, 2005 as compared to $5,177 for the same period ending June 30,
2004. The increase is primarily due to the fact that the Company placed its
Wi-Fi network in service during 2005.
Interest Expense
For the three months ending June 30, 2005, interest expense was $8,831 as
compared to $5,189 during the three months ended June 30, 2004. The increase in
interest expense is attributable to the Company increasing its borrowing on its
equipment line to $429, 264 from $122,000 during the same period ending June 30,
2004.
Results of Operations For the Nine Months Ended June 30, 2005 and 2004
Revenues
Revenues for the nine month period ended June 30, 2005 were $89,134 which were
derived exclusively from credit card sales of the Company's InTouch Internet
service. The Company had no revenues at this period ending June 30, 2004.
Operating Expenses
During the nine months ended June 30, 2005, net operating losses totaled
$2,446,746 as compared to net operating losses of $2,133,718 for the nine months
ended June 30, 2004
The Company has increased its number of employees in accounting, software
development and customer service which have contributed to the increase in net
operating losses. These expenses were necessary to build the Company's
infrastructure, support the InTouch service and improve the Company's Corporate
Governance.
General and Administrative Expenses
Our General and Administrative expenses include corporate overhead costs,
administrative support, professional fees and amortization of prepaid consulting
fees as compared to the same period in 2004.
For the nine months ending June 30, 2005, SiriCOMM's general and administrative
expenses totaled $927,654, or 36.6% of total operating expenses, while for the
nine months ended, June 30, 2004 general and administrative expenses totaled
$1,625,487, or 76.2% of total operating expenses.
19
Salaries
For the nine months ending June 30, 2005, SiriCOMM incurred salaries of $847,445
representing 33.4% of operating expenses, as compared to $428,854, or 20.1% of
total operating expenses for the nine months ended June 30, 2004.
The Company has hired an additional nine employees including a Controller since
the same period ending June 30, 2004.
Satellite Access Fees
Satellite access fees have been incurred as a result of the Company launching
its proprietary network, expenses of $486,244 were realized for the nine month
period ended June 30, 2005 or 19.2% of total operating costs. The non-cash
component of the satellite access fees for the nine month period ending June 30,
2005 was $250,018. The Company had not yet launched the network thus no
satellite access fees had been incurred at the same period ending June 30, 2004.
Depreciation and Amortization
Depreciation expense was $236,746, or 9.3% of total operating expense for the
nine month period ending June 30, 2005 as compared to $15,107, or 0.7% of total
operating expenses for the same period ending June 30, 2004. The increase is
primarily due to the fact that the Company placed its Wi-Fi network in service
during 2005.
Interest Expense
For the nine months ending June 30, 2005, interest expense was $18,097 as
compared to $23,869 during the nine months ended June 30, 2004.
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 June 30, 2005, our current assets including cash and cash equivalents,
investments, accounts receivables and other current assets amounted to
approximately $1,841,175. Current liabilities amounted to $171,181 and include
note payable to Southwest Missouri 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
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.
20
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
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
In October, 2004, the Company borrowed $200,000 on its line of credit
facility with Southwest Missouri Bank. The proceeds were paid to Sat-Net in
conjunction with the installation and distribution of hotspots.
As of December 31, 2004, SiriCOMM, Inc. consummated the private
placement of its units (the "Units") pursuant to a Confidential Investment
Proposal dated October 11, 2004 and amended on December 20, 2004. Funds were
disbursed from escrow to the Company as of January 3, 2005 and shares and
warrant certificates were issued at that time. Each Unit consisted of 50,000
shares (the "Shares") of the Company's common stock and a Common Stock Warrant
to purchase 37,500 shares of Common Stock. In the Private Placement, the Company
sold an aggregate of 6.38 Units (319,000 Shares and Warrants to purchase 239,250
shares of Common Stock) for an aggregate purchase price of $638,000, or $100,000
per Unit.
The Warrants entitle the holders to purchase shares of the Common Stock
(the "Warrant Shares") for a period of five years from the date of issuance at
an exercise price of $2.40 per share. The Warrants contain certain anti-dilution
rights and are redeemable by the Company, on terms specified in the Warrants.
In connection with the Private Placement, Sands Brothers International
Limited, the placement agent in the Private Placement, received a cash
commission fee of nine percent (9%) of the gross proceeds to the Company of the
securities sold at the closing, a payment of $30,000 representing the fees and
expenses of its counsel in the Private Placement and Warrants (the "Agent
Warrants") to purchase ten percent (10%) of the Shares sold in the Private
Placement (the "Agent Shares"). The Agent Warrants are exercisable for a period
of five years at an exercise price of $2.40 per share and contain the same
anti-dilution rights as the Warrants.
As part of the private placement, the Company was required to file with
the Securities and Exchange Commission a Registration Statement covering the
Shares, the Warrant Shares and the Agent Shares, which became effective on May
5, 2005, within the allotted time frame as set forth in the offering materials.
On January 5, 2005, the Company issued an aggregate of 85,000 shares of
its Common Stock upon the exercise of a like number of warrants, exercisable at
$2.00 per share. The warrants were originally issued in January 2004 pursuant to
a private placement of the Company's units consisting of common stock and
warrants.
As an inducement to the investors exercising their warrants, the
Company issued an aggregate of 63,750 new warrants to the investors. The new
warrants entitle the holders to purchase shares of the Company's common stock
reserved for issuance thereunder for a period of five years from the date of
21
issuance at an exercise price of $2.40 per share. The warrants contain
anti-dilution rights and are redeemable by the Company, in whole or in part, on
terms specified in the warrants.
As a further inducement to the investors exercising their warrants, the
Company also registered the shares issued upon exercise of the warrants and the
shares underlying the new warrants.
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.
The Company will continue its installation plans toward denser coverage
of its nation wide network. Additional financing will be required to fund such
installations, but there can be no assurances that the Company will be able to
obtain such funds under acceptable terms.
On January 24, 2005, the Company repaid the note payable of $25,000
plus accrued interest to an individual investor.
On January 30, 2005, the Company granted 2,000,000 shares of restricted
stock plus 1,000,000 three years warrants exercisable at $2.00 to Sat-Net under
the terms of a Memorandum of Understanding.
On March 11, 2005, the Company borrowed $150,000 on its line of credit
facility with Southwest Missouri Bank. The proceeds were paid to Via-Sat in
conjunction with the installation and distribution of hotspots.
On April 11, 2005, SiriCOMM, Inc. consummated the private sale of its
securities to Sunflower Capital, LLC. The securities sold consisted of units
comprised of shares of the Company's common stock (the "Shares") and warrants to
purchase shares of the Company's common stock (the "Warrants"). At the closing,
the Company sold an aggregate of 1,066,667 units at an aggregate purchase price
of $1,600,000 or $1.50 per unit. At the closing the Company delivered an
aggregate of 1,066,667 Shares and delivered Warrants to purchase an additional
1,066,667 shares of the Company's common stock.
The Warrants entitle the holder to purchase shares of the Company's
common stock reserved for issuance thereunder (the "Warrant Shares") for a
period of five years from the date of issuance at an exercise price of $2.50 per
share. The Warrants contain certain anti-dilution rights and are redeemable by
the Company, in whole or in part, on terms specified in the Warrants.
In a separate transaction also consummated on April 11, 2005 the
Company sold 413,605 warrants to Sunflower Capital, LLC at a purchase price of
$53,333 or approximately $.13 per warrant. These warrants entitle the holder to
purchase shares of the Company's common stock reserved for issuance thereunder
for a period of five (5) years from the date of issuance at an exercise price of
$3.00 per share. These warrants contain certain anti-dilution rights and are
redeemable by the Company, in whole or in part, on terms specified in these
warrants.
22
William P. Moore, a director and shareholder beneficially owning
approximately 9.10% of the issued and outstanding shares of the Company's common
stock is the managing member of Sunflower Capital, LLC.
The securities discussed above were offered and sold in reliance upon
exemptions from the registration requirements of Section 5 of the Securities Act
of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act and Rule506
promulgated thereunder. Such securities were sold exclusively to accredited
investors as defined by Rule 501(a) under the Act.
On May 27, 2005, SiriCOMM granted to MCC Securities and related parties
and aggregate of 33,000 shares pursuant to a financial advisory contract, the
shares were registered on Form S-8 filed with the SEC on April 14, 2003.
The Company received funds in late June from the private sale of its
securities to ten (10) investors, including Sunflower Capital, LLC a limited
liability company managed by William P. Moore, a director of the Company. The
securities sold consisted of units comprised of shares of the Company's common
stock and warrants to purchase shares of the Company's common stock. At the
closing, the Company sold an aggregate of 267,833 units at an aggregate purchase
price of approximately $401,750 or $1.50 per unit. At the closing the Company
delivered an aggregate of 267,833 Shares and delivered Warrants to purchase an
additional 267,833 shares of the Company's common stock.
The Warrants entitle the holder to purchase shares of the Company's
common stock reserved for issuance thereunder (the "Warrant Shares") for a
period of five years from the date of issuance at an exercise price of $2.50 per
share. The Warrants contain certain anti-dilution rights and are redeemable by
the Company, in whole or in part, on terms specified in the Warrants.
In a separate transaction from funds received in June the Company sold
25,850 warrants to Sunflower Capital, LLC at a purchase price of $3,333.50 or
approximately $0.13 per warrant. These warrants entitle the holder to purchase
shares of the Company's common stock reserved for issuance thereunder for a
period of five (5) years from the date of issuance at an exercise price of $3.00
per share. These warrants contain certain anti-dilution rights and are
redeemable by the Company, in whole or in part, on terms specified in these
warrants.
Contractual Obligations and Commercial Commitments
Contractual obligations as of June 30, 2005 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 $ 429,264 $ 429,264 $ - $ - $ -
payable
------------------------------ --------------- ------------------- -------------- -------------- --------------------
Operating leases - - - - -
------------------------------ --------------- ------------------- -------------- -------------- --------------------
Total contractual cash
obligations $ 429,264 $ 429,264 $ - $ - $ -
------------------------------ --------------- ------------------- -------------- -------------- --------------------
23
Recent Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46 (revised),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"
("FIN 46R"). FIN 46R addresses how a business enterprise should evaluate whether
it has a controlling financial interest in an entity through means other than
voting rights and, accordingly, should consolidate the variable interest entity
("VIE"). Fin 46R replaces FIN46 that was issued in January 2003. All public
companies were required to fully implement FIN 46R no later than the end of the
first reporting period ending after March 15, 2004. The adoption of FIN 46R had
no impact on SiriCOMM's financial condition or results of operations.
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
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) at
the end of its year ending September 30, 2007. The Company has not determined
what financial statement impact Statement 123(R) will have on the Company.
COMMITMENTS
We do not have any commitments that are required to be disclosed in
tabular form as of June 30, 2005.
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/A. Management had
previously concluded SiriCOMM's disclosure controls and procedures were
effective as of June 30, 2005. However, in connection with the restatement
described below, management determined that a material weakness existed in
SiriCOMM's internal control over financial reporting. Because of this material
weakness, management determined that SiriCOMM's disclosure controls and
procedures were not effective as of June 30, 2005 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. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
24
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 performed
additional analysis to ensure that SiriCOMM's consolidated financial statements
were 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
The restatement corrects an error in SiriCOMM's consolidated balance
sheets as of September 30, 2004, December 31, 2004, March 31, 2005 and June 30,
2005, related to the treatment of outstanding Series A preferred stock
previously classified as permanent equity. The Series A preferred stock provides
that the holders may request SiriCOMM to redeem their preferred stock at any
time commencing three (3) years from the date of issuance. Following such a
request, SiriCOMM must, out of funds legally available therefore, repurchase
such shares. SiriCOMM has determined the Series A preferred shares are
redeemable shares and should therefore be classified as temporary equity.
Management evaluated the materiality of the correction on its
consolidated financial statements using the guidelines of Staff Accounting
Bulletin No. 99, "Materiality" and concluded that the effects of the corrections
were material to its 2004 annual consolidated financial statements as well as
its interim consolidated financial statements for the quarters ended December
31, 2004, March 31, 2005 and June 30, 2005. Accordingly, management concluded
that it would restate its previously issued 2004 annual consolidated financial
statements as well as its interim consolidated financial statements for the
quarters ended December 31, 2004, March 31, 2005 and June 30, 2005.
Internal Control over Financial Reporting
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 June 30, 2005, 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.
Management's Response to the Material Weaknesses
In response to the material weaknesses described above, we have
undertaken to take the following initiatives with respect to our internal
controls and procedures that we believe are reasonably likely to improve and
25
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;
o Adding additional qualified staff to our finance department;
o Scheduling training for accounting staff to heighten awareness
of generally accepted accounting principles applicable to
complex transactions;
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;
o Engaging an outside accounting firm 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 control or process
improvements and to consult with us on the appropriate
accounting treatment applicable to complex transactions; and
o Implementing the recommendations of our outside accounting
consultants.
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.
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
presently anticipate that we will report in our Annual Report on Form 10-KSB for
the year ended September 30, 2005 that material weaknesses continue to exist.
26
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 defendant will file their answer
to the complaint no later than August 15, 2005. In addition, the defendants are
considering filing counter claims against the plaintiff as part of their answer.
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 April 11, 2005, SiriCOMM, Inc. consummated the private sale of
its securities to Sunflower Capital, LLC. The securities sold consisted of units
comprised of shares of the Company's common stock (the "Shares") and warrants to
purchase shares of the Company's common stock (the "Warrants"). At the closing,
the Company sold an aggregate of 1,066,667 units sat an aggregate purchase price
of $1,600,000 or $1.50 per unit. At the closing the Company delivered an
aggregate of 1,066,667 Shares and delivered Warrants to purchase an additional
1,066,667 shares of the Company's common stock.
The Warrants entitle the holder to purchase shares of the Company's
common stock reserved for issuance thereunder (the "Warrant Shares") for a
period of five years from the date of issuance at an exercise price of $2.50 per
share. The Warrants contain certain anti-dilution rights and are redeemable by
the Company, in whole or in part, on terms specified in the Warrants.
In a separate transaction also consummated on April 11, 2005, the
Company sold 413,605 warrants to Sunflower Capital, LLC at a purchase price of
$53,333 or approximately $.13 per warrant. These warrants entitled the holder to
purchase shares of the Company's common stock reserved for issuance thereunder
for a period of five (5) years from the date of issuance at an exercise price of
$3.00 per share. These warrants contain certain anti-dilution rights and are
redeemable by the Company, in whole or in part, on terms specified in these
warrants.
William P. Moore, a director and shareholder beneficially owning
approximately 9.10% of the issued and outstanding shares of the Company's common
stock is the managing member of Sunflower Capital, LLC.
26
The securities discussed above were offered and sold in reliance upon
exemptions from the registration requirements of Section 5 of the Securities Act
of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act and Rule506
promulgated thereunder. Such securities were sold exclusively to accredited
investors as defined by Rule 501(a) under the Act.
The Company issued an aggregate of 10,000 shares to Staunton McLane
pursuant to the exercise of a stock option for a like number of shares. The
exercise price of these options is $1.00. The Shares underlying the option were
registered on Form S-8 on April 14, 2003. As of the date of this report,
Staunton McLane has a balance of 43,000 options, each exercisable at $1.00 per
share.
On April 13th, 2005, the Company granted 15,000 stock options to J.
Richard Iler, our Chief Financial Officer. These options were granted under the
Company's 2002 Equity Incentive Plan. The exercise price of these options is
$1.90 per share. The shares underlying the options were registered on Form S-8
on April 14, 2003.
On April 13th, 2005, the Company granted 10,000 stock options to Terry
Thompson, a Director of the Company. These options were granted under the
Company's 2002 Equity Incentive Plan. The exercise price of these options is
$1.90 per share. The shares underlying the options were registered on Form S-8
on April 14, 2003.
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.
From funds received in June, SiriCOMM, Inc. consummated the private
sale of its securities to ten (10) investors, including Sunflower Capital, LLC a
limited liability company managed by William P. Moore, a director of the
Company. The securities sold units comprised of shares of the Company's common
stock (the "Shares") and warrants to purchase shares of the Company's common
stock (the "Warrants"). At the closing, the Company sold an aggregate of 267,833
units at an aggregate purchase price of approximately $401,750 or $1.50 per
unit. At the closing the Company delivered an aggregate of 267,833 Shares and
delivered Warrants to purchase an additional 267,833 shares of the Company's
common stock.
The Warrants entitle the holder to purchase shares of the Company's
common stock reserved for issuance thereunder (the "Warrant Shares") for a
period of five years from the date of issuance at an exercise price of $2.50 per
share. The Warrants contain certain anti-dilution rights and are redeemable by
the Company, in whole or in part, on terms specified in the Warrants.
In a separate transaction the Company sold 25,850 warrants to Sunflower
Capital, LLC at a purchase price of $3,333.50 or approximately $.13 per warrant.
These warrants entitle the holder to purchase shares of the Company's common
stock reserved for issuance thereunder for a period of five (5) years from the
date of issuance at an exercise price of $3.00 per share. These warrants contain
certain anti-dilution rights and are redeemable by the Company, in whole or in
part, on terms specified in these warrants.
The securities discussed above were offered and sold in reliance upon
exemptions from the registration requirements of Section 5 of the Securities Act
28
of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act and Rule
506 promulgated thereunder. Such securities were sold exclusively to accredited
investors as defined by Rule 501(a) under the Act.
As described below in Item 5, the Company issued to Interactive
Resources Group, Inc. 15,000 shares of its Common Stock and 20,000 Common Stock
Purchase Warrants exercisable for four years as follows:
10,000 shares at $2.50
5,000 shares at $3.00
5,000 shares at $4.00
On June 16, 2005, the Company issued 2,500 stock options exercisable at
$1.75 per share to Robert Myers in connection with his hiring by the Company as
a Network Administrator II. The options were issued in accordance with the
Company's 2002 Equity Incentive Plan.
(d) Not Applicable
Item 3.: Defaults upon Senior Securities
None
Item 4.: Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May 11, 2005,
the following six directors were elected by a majority of the outstanding shares
of common stock of the Company. Each director was elected to one-year terms.
Henry P. (Hank) Hoffman
David N. Mender
Kory S. Dilman
J. Richard Iler
Terry W. Thompson
William P. Moore.
At the same meeting, the shareholders ratified the appointment of BKD,
LLP to serve as the independent auditors for the fiscal year ended September 30,
2005.
Item 5.: Other Information
On July 1, 2005 the Company entered into a Consulting Agreement with
Interactive Resources Group, Inc. ("IRG"). The initial term of the Consulting
Agreement expires on October 1, 2005 and is renewable upon the mutual consent of
both parties. During the term of the Consulting Agreement, IRG shall provide
corporate consulting services to the Company in connection with corporate
finance relations, corporate financial services, mergers and acquisitions as
well as introducing the Company to broker/dealers, investment analysts, funding
sources and generally assist the Company in its efforts to enhance its
visibility in the financial community.
29
In consideration of the services to be performed by IRG on behalf of
the Company, the Company issued 15,000 shares of its Common Stock and 20,000
Common Stock Purchase Warrants to IRG. The warrants vest on August 30, 2005 and
are exercisable for four (4) years as follows:
10,000 shares at $2.50
5,000 shares at $3.00
5,000 shares at $4.00
Item 6.: Exhibits
The following exhibits are filed as part of this report:
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
30
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: November 1, 2005 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
31