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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
June 30, 2006 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)
4710 East 32nd Street, 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
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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 August 8, 2006 was 25,034,676.
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2006 and September 30, 2005 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended June 30, 2006 and June 30, 2005 4
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended June 30, 2006 and June 30, 2005 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 2006 and June 30, 2005
Notes to the Condensed Consolidated Financial Statements 7
2
SIRICOMM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2006 2005
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash $ 2,148,932 $ 931,787
Certificate of deposit, pledged 500,000 --
Accounts receivable 50,962 11,370
Prepaid expenses and other 16,918 5,923
------------ ------------
Total current assets 2,716,812 949,080
------------ ------------
Property and Equipment, at cost
Equipment 3,645,789 2,547,001
Network equipment in progress of installation 150,000 258,326
------------ ------------
3,795,789 2,805,327
Less accumulated depreciation 864,007 412,956
------------ ------------
2,931,782 2,392,371
Software, net of amortization 732,646 145,042
------------ ------------
Intangible assets, net of amortization 1,921,910 2,215,593
------------ ------------
Total assets $ 8,303,150 $ 5,702,086
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Note payable to bank $ 490,000 $ 407,346
Accounts payable 892,234 190,221
Accrued salaries 3,846 146,324
Other accrued expenses 85,612 112,083
Deferred revenue 111,242 46,561
------------ ------------
Total current liabilities 1,582,934 902,535
------------ ------------
Total liabilities 1,582,934 902,535
------------ ------------
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 288,114 272,107
Stockholders' Equity
Common stock - par value $.001; 50,000,000 shares authorized; issued and
outstanding 2006 - 25,034,676 shares, 2005- 20,092,950 shares 25,035 20,089
Additional paid-in capital 20,756,817 15,063,814
Treasury stock (90,000) -
Deferred compensation (261,600) (631,176)
Retained deficit (13,998,150) (9,925,283)
------------ ------------
Total stockholders' equity 6,432,102 4,527,444
------------ ------------
Total liabilities and stockholders' equity $ 8,303,150 $ 5,702,086
============ ============
See Notes to Condensed Consolidated Financial Statements
3
SIRICOMM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
June 30, 2006 June 30, 2005
-------------------------------- -------------------------------
3 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 294,913 $ 650,609 $ 55,686 $ 89,134
Operating Expenses:
General and administrative 1,031,437 1,722,318 591,337 927,654
Salaries 456,755 1,126,727 278,295 847,445
Satellite access fees 466,132 1,010,493 195,615 486,244
Research and development 3,348 12,218 12,740 37,520
Depreciation and amortization 182,560 455,446 114,681 236,747
------------ ------------ ------------ ------------
Total operating expenses 2,140,232 4,327,202 1,192,668 2,535,610
------------ ------------ ------------ ------------
Operating loss (1,845,319) (3,676,593) (1,136,982) (2,446,476)
------------ ------------ ------------ ------------
Other Income (Expense)
Interest income 25,432 52,543 5,801 11,397
Interest expense (6,541) (448,817) (8,831) (18,097)
------------ ------------ ------------ ------------
18,891 (396,274) (3,030) (6,700)
------------ ------------ ------------ ------------
Net loss $ (1,826,428) $ (4,072,867) $ (1,140,012) $ (2,453,176)
============ ============ ============ ============
Add: Dividends declared on preferred stock (5,336) (16,008) (5,335) (16,005)
------------ ------------ ------------ ------------
Loss available to common shareholders $ (1,831,764) $ (4,088,875) $ (1,145,347) $ (2,469,181)
============ ============ ============ ============
Net loss per share, basic and diluted $ (0.07) $ (0.18) $ (0.06) $ (0.14)
============ ============ ============ ============
Weighted average shares,
basic and diluted 25,004,391 22,672,396 19,661,956 17,841,314
============ ============ ============ ============
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
---------- ------- ----------- ---------- ------------ --------- -----------
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 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
Proceeds from stock issuance -
- completed January 3, 2005; net of -
consideration of $87,420 319,000 319 550,261 - - - 550,580
- Completed 3rd quarter 1,334,500 1,334 1,896,457 1,897,791
Vesting of deferred compensation 300,840 300,840
Proceeds from issuance of warrants 56,666 56,666
Accrued dividends - - (16,006) - - - (16,006)
Net loss for the period - - - - (2,453,176) - (2,453,176)
---------- ------- ----------- ---------- ------------ --------- -----------
Balance, June 30, 2005 20,073,950 $20,070 $15,034,837 $ (631,176) $(9,138,191) $ - $ 5,285,540
========== ======= =========== ========== ============ ========= ===========
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 95,000 95 167,536 - - - 167,631
Exercise of options & warrants 154,463 155 106,959 - - - 107,114
Proceeds from stock issue on Feb 8, 2006
net of issue costs 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
Vesting of deferred compensation - - - 159,576 - - 159,576
Vesting of warrants earned based on network
site installations - - 25,500 118,000 - - 143,500
Accrued dividends - - (16,005) - - - (16,005)
Net loss for the period - - - - (4,072,867) - (4,072,867)
---------- ------- ----------- ---------- ------------ --------- -----------
Balance, June 30, 2006 25,034,676 $25,035 $20,756,817 $ (261,600) $(13,998,150) $ (90,000) $ 6,432,102
========== ======= =========== ========== ============ ========= ===========
See Notes to Condensed Consolidated Financial Statements
5
SIRICOMM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30,
--------------------------------
2006 2005
------------- -------------
(Unaudited) (Unaudited)
Operating Activities
Net loss $ (4,072,867) $ (2,453,176)
Items not requiring cash
Depreciation and amortization 455,446 236,747
Write-off imputed discount upon debt conversion 76,271 -
Fair value of beneficial conversion option and warrants
associated with convertible debt 344,620 -
Stock-based compensation for services 167,631 57,915
Recognition of deferred compensation 159,576 300,840
Other non-cash charges 394,134 261,198
Changes in
Current assets (50,585) (7,325)
Accounts payable 702,013 104,654
Accrued expenses (164,346) 58,099
Deferred revenues 64,681 27,360
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Net cash flows used in operating activities (1,923,426) (1,413,688)
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Investing Activities
Purchase of held to maturity investments - (494,935)
Certificate of deposit purchased (500,000) -
Purchase of furniture and equipment (1,447,412) (787,333)
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Net cash flows used in investing activities (1,947,412) (1,282,268)
------------- -------------
Financing Activities
Borrowings under line of credit, net 82,654 307,264
Payment of notes payable - (25,000)
Proceeds from related party note 500,000 -
Purchase of treasury stock (90,000) -
Proceeds from exercise of stock options and warrants 107,114 36,800
Proceeds from issuance of warrants - 56,666
Proceeds from sale of common stock 4,488,215 2,618,372
------------- -------------
Net cash flows provided by financing activities 5,087,983 2,994,102
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Increase in Cash 1,217,145 298,146
Cash, beginning of period 931,787 1,019,616
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Cash, end of period $ 2,148,932 $ 1,317,762
============= =============
Supplemental Cash Flows Information
Cash paid for interest $ 25,782 $ 19,785
Stock and warrants issued in exchange for services and equipment $ - $ 3,871,980
Stock options issued in exchange for prepaid consulting services $ - $ 91,800
Accrued dividends for Series A preferred stock $ 16,007 $ 16,006
Imputed discount for warrants issued with convertible debt $ 76,271 $ -
Conversion of debt to equity $ 504,603 $ -
Recognition of warrants earned for software received $ 92,000 $ -
Recognition of warrants earned for network site installations $ 143,500 $ -
See Notes to Condensed Consolidated Financial Statements
6
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.
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
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.
Nine Months Ended
June 30,
2006 2005
---------------- ----------------
Net loss, as reported $ (4,072,867) $ (2,453,176)
Less: stock-based employee compensation
under the fair value based method (5,661) (111,987)
---------------- ----------------
Pro forma net loss under fair value method $ (4,078,528) $ (2,565,163)
Net loss per common share-basic and diluted:
As reported under fair value method $ (0.18) $ (0.14)
Pro forma under fair value method $ (0.18) $ (0.14)
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
Reclassification
Certain reclassifications have been made to the June 30, 2006 financial
statements to conform to the June 30, 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
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 June 30, 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.
On April 20, 2006, Jackie Seneker, an employee of the Company at that time,
exercised 57,500 options and the Company issued 28,163 shares as Ms.
Seneker exercised this option on a cashless basis by delivering 29,337
options exercisable at $1.00 per share.
On April 26, 2006 and May 30, 2006, respectively, the Company issued 10,000
and 30,000 shares of its common stock to Interactive Resources Group
("IRG") pursuant to a consulting agreement between the Company and IRG.
9
4. Commitments and Contingencies:
Litigation:
The Company entered into a settlement agreement as of June 1, 2006 with
Greg Sanders related to a lawsuit filed on December 17, 2004 with certain
officers and directors of the Company who 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 Company was subsequently admitted as a
defendant. The action alleged fraud, misrepresentation and breach of
fiduciary duty relating to a settlement agreement entered into between the
Company and Mr. Sanders. The complaint sought damages in excess of
$9,679,903 The Company paid legal and settlement expenses of approximately
$300,000 relating to the defense of this matter and released the Company
from any future claims between the parties.
5. Subsequent Events:
On July 5, 2006, SiriCOMM, Inc. entered into a letter agreement with
William W. Graham under which Mr. Graham will serve as our President and
Chief Executive Officer for an initial term of three to six months. The
agreement calls for monthly compensation of $14,583.33, a health insurance
reimbursement benefit of $850.00 per month and a grant of 50,000 options to
purchase shares of our common stock, as of the date of this report these
options have not yet been issued to Mr. Graham.
On July 27, 2006, the Company accepted the resignation of J. Richard Iler
as Chief Financial Officer, Corporate Secretary and Director of the Company
to be effective August 9, 2006.
10
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 500 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 after nationwide network density reaches 400-500
sites.
Our senior management team has significant experience in both the
transportation and communications industries.
11
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
strategy, operating results and financial position. Such statements are not
12
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 June 30, 2006 and 2005
Revenues
SiriCOMM generated revenues of $294,913 for the three months ending
June 30, 2006 while generating revenues of $55,686 during the same period in
fiscal 2005. Revenues were solely derived from the Company's sales of its
InTouch Internet service. The Company initiated a limited marketing and
advertising program of its InTouch Internet service. Though the Company has
increased its revenue generation, 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.
13
During the three months ended June 30, 2006, net operating losses
totaled $1,845,319 as compared to net operating losses of $1,136,982 for the
three months ended June 30, 2005.
The Company has increased its number of employees in accounting,
software development and customer service from 9 in the same period ending June
30, 2005 to 27 for the quarter ending June 30, 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. Certain expenses related to litigation involving officers and the
Company contributed to the rise in the net operating loss.
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 June 30, 2006 were $466,132 as compared to $195,615 for the
three months ending June 30, 2005. This increase is the direct result of the
Company adding additional sites and increasing the amount of bandwidth. 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 $128,345 and $126,009 representing amortization for the three
months ending June 30, 2006 and 2005, respectively.
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, 2006, SiriCOMM's general and
administrative expenses totaled $1,031,437, or 48.2% of total operating
expenses, while for the three months ended June 30, 2005 general and
administrative expenses totaled $591,337 or 49.6% of total operating expenses.
General and administrative expense increased as a result of the Company
engaging an investor relations consultant, litigation expense related to the
settlement with Greg Sanders and network maintenance costs which contributed
principally to the net operating loss.
Salaries
For the three months ending June 30, 2006, SiriCOMM incurred salaries
of $456,755, representing 21.3% of the operating expenses, as compared to
$278,295 or 23.3% of total operating expenses for the three months ended June
30, 2005. The Company has increased its personnel in accounting customer support
to operate its InTouch Internet service.
14
Depreciation and Amortization
Depreciation and amortization expense was $182,560 for the three month
period ending June 30, 2006 as compared to $114,681 for the same period ending
June 30, 2005 attributable to the addition of a number of hotspots.
Interest Income/Expense
For the three months ending June 30, 2006, net interest income was
$18,891 as compared to net interest expense of $3,030 during the three months
ended June 30, 2005.
For the Nine Months Ended June 30, 2006 and 2005
Revenues
SiriCOMM generated revenues of $650,609 for the nine months ending June
30, 2006 while generating revenues of only $89,134 during the same period in
2005. Revenues were solely derived from the Company's offering of its InTouch
Internet service. Limited advertising has only been recently 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 nine months ended June 30, 2006, net operating losses
totaled $3,676,593 as compared to net operating losses of $2,446,476, for the
nine months ended June 30, 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 has incurred 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 nine months ending June 30,
2006 were $1,010,493 as compared to $486,244 for the nine months ending June 30,
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 $380,363 and $252,018 as the non-cash
amortization for the nine months ending June 30, 2006 and 2005, respectively.
15
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 nine months ending June 30, 2006, SiriCOMM's general and
administrative expenses totaled $1,722,318, or 39.8% of total operating
expenses, while for the nine months ended June 30, 2005 general and
administrative expenses totaled $927,654 or 36.5% of total operating expenses.
General and administrative expenses increased as a result of the
Company's engaging an investor relations, loan issuance costs, litigation
expense and network maintenance costs which contributed principally to the net
operating loss.
Salaries
For the nine months ending June 30, 2006, the Company incurred salaries
of $1,126,727 representing 26.0% of operating expenses, as compared to $847,445,
or 33.4 %, of total operating expenses for the nine months ended June 30, 2005.
The Company has increased its personnel in accounting and customer support to
operate its InTouch ISP service.
Depreciation and Amortization
Depreciation expense was $455,446 for the nine month period ending June
30, 2006 as compared to $236,747 for the same period ending June 30, 2005. The
increase is due in large part to the increased number of network sites.
Interest Income/Expense
For the nine months ending June 30, 2006, net interest expense was
$396,274 as compared to $6,700 during the nine months ended June 30, 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 June 30, 2006, our current assets including cash, a certificate
of deposit, accounts receivables and other current assets amounted to
approximately $2,716,812. Current liabilities amounted to approximately
$1,582,934 and include notes payable to Liberty Bank, accounts payable, accrued
salaries, and other accrued expenses.
16
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.
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.
17
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 met the required filing of the Registration Statement
within the required time frame, and it became effective within the period of 120
days after closing, thus relieving the Company of a potential penalty payment to
the investors of 1% of the gross proceeds of the offering for each month in
which the Company fails to comply with such requirements.
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.
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.
During the quarter ended June 30, 2006, the Company drew down $100,000
on a line of credit from Liberty Bank which is secured by a certificate of
deposit in the amount of $500,000.
On April 24, 2006 the Company issued 28,163 shares to a former employee
pursuant to the exercise of options previously granted under the 2002 employee
equity incentive plan. The former employee exercised 57,500 shares as a cashless
exercise thereby forfeiting 29,337 shares.
On April 26, 2006 the Company issued 10,000 shares to Integrated
Resources Group pursuant to a contract dated March 15, 2006 to perform certain
financial advisory and consulting services.
On May 30, 2006, the Company issued 30,000 shares to Integrated
Resources Group pursuant to a contract for dated March 15, 2006 to perform
certain financial advisory and consulting services.
Contractual Obligations and Commercial Commitments
Contractual obligations as of June 30, 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 $ 490,000 $ 490,000 $ - $ - $ -
------------------------------ --------------- ------------------- -------------- -------------- --------------------
Operating leases $ 178,600 $ 41,300 $ 137,300 $ - $ -
------------------------------ --------------- ------------------- -------------- -------------- --------------------
Total contractual cash
obligations $ 668,600 $ 531,300 $ 137,000 $ - $ -
------------------------------ --------------- ------------------- -------------- -------------- --------------------
18
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
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 June 30, 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
19
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
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, June 30, 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
20
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;
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 June 30, 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:
21
o Certain accounting staff have 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.
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 Certain accounting staff can perform most functions within the
payroll cycle, including file maintenance, recording of
transactions and adjusting payroll data.
o Certain accounting staff 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 June 30, 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
22
June 30, 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
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 June 30,
2006; and
o Adequate procedures to properly accrue for goods and services
are continuing to be added through training and oversight.
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.
23
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 alleged fraud, misrepresentation and breach
of fiduciary duty relating to a settlement agreement entered into between the
Company and Mr. Sanders. The Company originally was not a party to this action,
but was subsequently added as a defendant. The complaint sought damages in
excess of $9,679,903. The Company incurred legal and settlement costs of
approximately $300,000 to settle all claims and relieve the Company of any
future actions between the parties.
Item 2: Changes in Securities and Use of Proceeds
(a) None
(b) None
(c) On April 26, 2006 and May 30, 2006, respectively, the Company
issued 10,000 and 30,000 shares of its common stock to IRG pursuant to a
consulting agreement between the Company and IRG.
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).
On May 23, 2006, the Company granted 40,000 Incentive Stock Options to Ms.
Deborah Cameron, 20,000 are exercisable at $1.50 per share and 20,000 are
exercisable at $2.50 per share. The options vest over three years with the first
1/3 vesting on February 10, 2007 and thereafter 1/3 on February 10, 2008 and 1/3
on February 10, 2009. The options were issued pursuant to the Company's 2002
Equity Incentive Plan.
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
24
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 10, 2006, 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. Mendez
Kory S. Dillman
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 Company's independent auditors for the fiscal year ended September
30, 2006.
Item 5.: Other Information
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.
On July 5, 2006, SiriCOMM, Inc. entered into a letter agreement with William W.
Graham under which Mr. Graham will serve as our President and Chief Executive
Officer for an initial term of three to six months. The agreement calls for
monthly compensation of $14,583.33, a health insurance reimbursement benefit of
$850.00 per month and a grant of 50,000 options to purchase shares of our common
stock, as of the date of this report these options have not yet been issued to
Mr. Graham.
At the same time we entered into the agreement with Mr. Graham, we entered into
a new employment agreement with Henry P. Hoffman to serve as our Chairman for an
initial term of two years commencing July 5, 2006. The term automatically renews
for one additional year unless we or Mr. Hoffman provide written notice not to
renew at least 90 days prior to the end of the term. Mr. Hoffman will receive an
25
annual salary of not less than $175,000 per year under this agreement. Mr.
Hoffman agreed to terminate his employment agreement dated February 19, 2002 on
July 5, 2006, simultaneously with his resignation as President and CEO and the
signing of his new agreement to serve as Chairman.
On July 5, 2006, our board of directors accepted the resignation of Henry P.
Hoffman as our President and CEO, appointed Mr. Hoffman Chairman of the Board
and appointed William W. Graham to serve as President and CEO.
On July 26,2006, the Company has accepted the resignation of its Chief Financial
Officer, J. Richard Iler to be effective as of August 9, 2006. Mr. Iler has also
resigned his positions as Corporate Secretary and Director to be effective as of
August 9, 2006.
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
26
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: August 8, 2006 SIRICOMM, INC.
By: /s/ William W. Graham
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William W. Graham, President and
Chief Executive Officer
..
By: /s/ J. Richard Iler
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J. Richard Iler, Executive Vice
President and Chief Financial Officer
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