Form 10-Q for OMNICITY CORP.
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17-Mar-2010
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. In evaluating these statements, you should consider various factors, including the assumptions, risks and uncertainties outlined in this report under "Risk Factors". These factors or any of them may cause our actual results to differ materially from any forward-looking statement made in this report. Forward-looking statements in this report include, among others, statements regarding:
� our capital needs;
� business plans; and
� expectations.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding future events, our actual results will likely vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Some of the risks and assumptions include:
� our need for additional financing;
� our limited operating history;
� our history of operating losses;
� the competitive environment in which we operate;
� changes in governmental regulation and administrative practices;
� our dependence on key personnel;
� conflicts of interest of our directors and officers;
� our ability to fully implement our business plan;
� our ability to effectively manage our growth; and
� other regulatory, legislative and judicial developments.
We advise the reader that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Important factors that you should also consider, include, but are not limited to, the factors discussed under "Risk Factors" in this report.
The forward-looking statements in this report are made as of the date of this report and we do not intend or undertake to update any of the forward-looking statements to conform these statements to actual results, except as required by applicable law, including the securities laws of the United States.
REFERENCES
As used in this quarterly report: (i) the terms "we", "us", "our", "Omnicity" and the "Company" mean Omnicity Corp.; (ii) "SEC" refers to the Securities and Exchange Commission; (iii) "Securities Act" refers to the United States Securities Act of 1933, as amended; (iv) "Exchange Act" refers to the United States Securities Exchange Act of 1934, as amended; and (v) all dollar amounts refer to United States dollars unless otherwise indicated.
Plan of Operations
Our business plan is to be a rural wireless internet service provider in the United States through a consolidation strategy and organic growth of all acquired business units and to partner with REMCs, Telcos and local governments for nationwide marketing. We also plan to partner with regional and national telecommunication companies for the delivery of voice services and complete negotiations and logistics of DirecTV resell agreements.
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We further plan to partner with local governments to provide essential services, including mobile internet for emergency mobile communications, fire and police and to establish new utility applications such as automated meter reading. We plan to bring WISP based services to rural America through three distinct market channels: (1) REMC partnerships, (2) strategic acquisitions, (3) local government and private enterprise partnerships.
Utilizing our relationship with the REMCs and "value added" institutional services and facilities we provide for municipalities and local governments, we plan to organize and consolidate within the rural broadband market initially in Indiana and then in the Midwestern United States and ultimately nationwide. Collaborations with both the REMCs and municipalities may act as effective barriers for competition and provide additional sources of revenue and customer service for the REMCs and municipalities as well as income and cash flow for our company. The bundling of broadband services, including internet, voice, and video, in partnership with rural electric and/or municipal services provides an opportunity to imbed, cross promote, and extend services in collaboration with these institutional providers.
Our plan of operations for the next twelve months is to:
1. develop and expand, through organic growth, the subscriber base through our sales and marketing program and to increase our number of marketing teams;
2. acquire, and transition into our operations assets of competing WISP operators and expand our network in Indiana and Ohio and connecting these two network clusters by July 31, 2010 and continue expansion into all of Midwest USA by identifying strategic regional acquisitions;
3. reach operationally cash flow positive and build a liquidity floor under operations of $100,000 minimum by March 31, 2010;
4. continue to partner with Rural Electric Membership Cooperatives "REMCs", local and State governments, Rural Telcos and Original Equipment Manufacturers "OEMs" to efficiently and cost effectively expand our network across rural America; and
5. develop and expand our service offerings to become a total broadband solution including VOIP and IPTV.
Future Financing Requirements
At January 31, 2010, we had cash of $583,957 and a working capital deficit of $1,914,859. We estimate that approximately $6 million will be required in fiscal 2010 to finance the expansion of, and the addition of subscribers through acquisition to, our existing and to be acquired network infrastructures. A total of approximately $2.85 million has been raised during the six months ended January 31, 2010. A portion will be used to finance our negative operational monthly cash flow to the end of March 31, 2010. Once targeted acquisitions are complete, by the end of March 2010, we anticipate that we will be operationally cash flow positive and will require no additional funds to finance these operational deficits. A portion of these funds will also be used to finance the acquisition of additional transmission rights, the purchase and installation of transmission and tower equipment and the cost of customer premises equipment. A portion of these funds will be used to make principal and interest payments of our long-term and short-term debts as required.
We will continue to seek equity and debt financing as well as other traditional cash flow and asset backed financing to meet our financing needs and to reduce our overall cost of capital. Additionally, in order to accelerate our growth rate and to finance general corporate activities, we may supplement our existing sources of funds with financing arrangements at the operating system level or through additional borrowings, joint ventures or other off balance sheet arrangements. As a further capital resource, we may sell or lease certain wireless rights or assets from our portfolio as appropriate opportunities become available. However, there can be no assurance that we will be able to obtain any additional financing, on acceptable terms or at all.
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Results of Operations
Three months ended January 31, 2010 and 2009
The following table sets forth certain financial information relating to the
Company for the three months ended January 31, 2010 ("2010") and January 31,
2009 ("2009"). The financial information presented has been rounded to the
nearest thousand $ and is derived from the unaudited interim consolidated
financial statements included under Item 1 in this Form 10-Q.
Three Months Three Months
Ended January Ended January
31, 2010 31, 2009
$ $
Sales, net 636,000 290,000
Expenses:
Service costs 13,000 8,000
Plant and signal delivery 318,000 171,000
Marketing and sales 5,000 4,000
General and administration 230,000 148,000
Salaries and benefits 500,000 276,000
Stock based compensation - 290,000
Depreciation and amortization 147,000 104,000
Total Expenses (1,213,000) (1,000,000)
Loss from Operations (576,000) (710,000)
Other Income (Expense):
Other income 3,000 16,000
Assets written-off (10,000) -
Financing expense (10,000) -
Interest expense (40,000) (31,000)
Total Other Income (Expense) (57,000) (15,000)
Net Loss (634,000) (725,000)
Net Loss per Share - Basic and Diluted (.01) (.02)
The following discussion should be read in conjunction with the unaudited interim consolidated financial statements (including the notes thereto) included under Item 1 in this Form 10-Q.
Revenues
The Company's revenues for 2010 increased by $346,000 to $636,000 (2009 - $290,000) an increase of 119%. This significant increase reflects an increase in installation revenues for 2010 which increased by $41,000 to $51,000 (2009 - $10,000) and an increase in recurring service revenues for 2010 which increased by $305,000 to $585,000 (2009 - $281,000) an increase of 108%. These significant increases were achieved partially through organic growth, which is increasing at a rapid rate, and mainly through our five acquisitions folded in as at November 1, 2009 and the one acquisition folded in as at January 1, 2010. The number of subscribers increased from 5,600 to 6,100 during the three months ended January 31, 2010. This subscriber count does not differentiate a subscriber, for example, one school, hospital or business subscriber is counted as one subscriber. On an equivalent subscriber unit basis we increased our equivalent subscribers from 6,053 at October 31, 2009 to 6,605 at January 31, 2010. This is important to note because going forward the Company will be adding schools, hospitals and business accounts at an accelerated rate. During the three months ended January 31, 2009 the Company had 1,800 subscribers. The Company receives revenue mainly from monthly service and modem rental fees collected from its subscribers. The Company's installation revenue, while representing 8% of revenues currently, is expected to increase rapidly as our marketing teams expand. The Company also receives web hosting fees, fiber construction projects fees and late fees which together represents less than 1% of total revenue. The Company expects revenues to increase rapidly as a result of organic growth, planned acquisitions and increase in average revenue per unit ("ARPU").
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Operational Expenses
Operational expenses include service costs, plant and signal delivery, marketing and sales, general and administration and salaries and benefits.
Service costs include the cost of billing and collection. During 2010, service costs increased by $5,000 to $13,000 (2009 - $8,000). This increase was due mainly to the increase in the number of customers accounts offset by a decrease in the cost of collection. Service costs have not, and are not expected to increase significantly during the remainder of 2010.
Plant and signal delivery expenses include the rental of tower infrastructures, the purchase of internet transmission (backhaul) the cost of installations at customers' premises and the customer premises equipment operating lease costs. During 2010, plant and signal delivery expenses increased by $147,000 to $318,000 (2009 - $171,000), an increase of 86%. The increase in revenues was 119% during this period and as subscribers are added to the network the incremental cost of that subscriber is lower. This increase was due mainly to the increase in the number of towers under rental arrangements, the amount of backhaul needed to service the increase in subscribers, the increase in customer premises equipment being leased pursuant to operating lease arrangements and the increase in customer installations. Plant and signal delivery costs per customer will significantly decrease once the Company populates its towers with customers. The Company, on average, has a penetration of approximately 4% of homes passed whereas the minimum target penetration is greater than 20% which is the penetration rate in the Wabash REMC coverage area.
In December, 2009, we upgraded our marketing and sales models which increased new installations from 50 during December, 2009 to 155 during January, 2010 and 220 during February, 2010. Our current growth, on a month over month basis, is 35% which is expected to increase each month.
Marketing and sales expenses include REMC fees, advertising and preparation of marketing materials. During 2010, marketing and sales expenses were $5,000 (2009- $4,000). Marketing and sales expenses are expected to significantly increase during 2010 as the Company increases its marketing plan to significantly increase organic growth. The Company now has five full-time salespeople, which costs are included in salaries and benefits.
General and administration expenses include professional fees (legal, audit, accounting and outside professional consulting), investor relations consulting fees, office expenses (including rent, telephone and insurance), software fees and fees associated with late payments and bank charges. During 2010, general and administration expenses increased by $82,000 to $230,000 (2009 - $148,000). This increase is mainly due to being a public company during 2010 versus a private company during 2009. There are significant additional costs associated with being a public company including legal costs, auditing, investor relations and regulatory fees. General and administration expenses are not expected to increase significantly in 2010 in relation to increased revenue.
Salaries and benefits for 2010 have increased by $224,000 to $500,000 (2009 - $276,000). This increase is mainly due to the additional costs associated with hiring of senior and middle management to oversee the acquisition, marketing, financial reporting and operations teams. The Company went from 25 employees during the three months ended January 31, 2009 to 43 employees during the three months ended January 31, 2010. The Company does not expect to increase its number of employees significantly during 2010, except for certain key people to be brought on as a result of acquisitions and increasing the number of marketing teams we have in current and new regions brought on through acquisitions. Installations are now contracted out to an independent contractor and the Company's current number of employees is expected to be able to maintain a customer base at least double its current size. The Company continues to upgrade its employees as better trained personnel become available through acquisitions.
Stock based compensation of $290,000 was charged to operations on January 2, 2009 with no corresponding charge during 2010.
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Depreciation and amortization for 2010 increased by $43,000 to $147,000 (2009 - $104,000). This increase was attributed to amortization of customers' relationships of $70,000 (2009 - $nil). This increase was offset by a decrease of $27,000 in depreciation of our property and equipment due to assets being fully depreciated.
Other Income and Expense
Interest expense for 2010 increased by $9,000 to $40,000 (2009 - $31,000). The increase was a result of increased short-term and long-term debt levels offset by an overall reduction in the cost of debt to 6.8% achieved through negotiations with all creditors. During the three months ended January 31, 2010 the Company's cost of short-term and long-term debt decreased by .5% to 6.8% from 7.3%. Interest expense will increase in 2010 as the Company plans to issue senior subordinated convertible debt securities at 6% and bonds at 4% to 5%. The Company will also issue short-term notes as part consideration of planned acquisitions.
During 2010 the Company had written-off a $10,000 non-refundable deposit on a 2008 planned acquisition that was not completed.
Net Loss
The net loss for 2010 decreased by $91,000 to $634,000 (2009 - $725,000). This decrease in loss was due to a 119% increase in revenues of $346,000 and a one-time stock based compensation expense in 2009 of $290,000 which was not incurred during 2010. These positive events to earnings during 2010 were offset by increases in other operational expenses of $491,000. These operational expense increases were mainly due to variable items such as increase in plant and delivery of $147,000 and an increase in salaries and benefits of $224,000. General and administration increased by $82,000 as a result of being a public company.
Six months ended January 31, 2010 and 2009
The following table sets forth certain financial information relating to the Company for the six months ended January 31, 2010 ("2010") and January 31, 2009 ("2009"). The financial information presented has been rounded to the nearest thousand $ and is derived from the unaudited interim consolidated financial statements included under Item 1 in this Form 10-Q.
Six Months Six Months
Ended January Ended January
31, 2010 31, 2009
$ $
Sales, net 1,253,000 609,000
Expenses:
Service costs 27,000 13,000
Plant and signal delivery 656,000 360,000
Marketing and sales 8,000 5,000
General and administration 523,000 281,000
Salaries and benefits 911,000 528,000
Stock based compensation - 290,000
Depreciation and amortization 317,000 208,000
Total Expenses (2,442,000) (1,685,000)
Loss from Operations (1,189,000) (1,076,000)
Other Income (Expense):
Other income 49,000 17,000
Assets written-off (10,000) -
Financing expense (10,000) -
Interest expense (118,000) (69,000)
Total Other Income (Expense) (89,000) (52,000)
Net Loss (1,278,000) (1,128,000)
Net Loss per Share - Basic and Diluted (.03) (.03)
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The following discussion should be read in conjunction with the unaudited interim consolidated financial statements (including the notes thereto) included under Item 1 in this Form 10-Q.
Revenues
The Company's revenues for 2010 increased by $644,000 to $1,253,000 (2009 - $609,000) an increase of 106%. This significant increase reflects an increase in installation revenues for 2010 which increased by $81,000 to $101,000 (2009 - $20,000) and an increase in recurring service revenues for 2010 which increased by $563,000 to $1,152,000 (2009 - $589,000) an increase of 96%. These significant increases were achieved partially through organic growth, which is increasing at a rapid rate, and mainly through our five acquisitions folded in as at August 1, 2009 and the one acquisition folded in as at January 1, 2010. The number of subscribers increased from 5,200 to 6,100 during the six months ended January 31, 2010. This subscriber count does not differentiate a subscriber, for example, one school, hospital or business subscriber is counted as one subscriber. On an equivalent subscriber unit basis we increased our equivalent subscribers from 5,586 at July 31, 2009 to 6,605 as at January 31, 2010. This is important to note because going forward the Company will be adding schools, hospitals and business accounts at an accelerated rate. During the Six months ended January 31, 2009 the Company had 1,800 subscribers. The Company receives revenue mainly from monthly service and modem rental fees collected from its subscribers. The Company's installation revenue, while representing 8% of revenues currently, is expected to increase rapidly as our marketing teams expand. The Company also receives web hosting fees, fiber construction projects fees and late fees which together represent less than 1% of total revenue. The Company expects revenues to increase rapidly as a result of organic growth, planned acquisitions and increase in average revenue per unit ("ARPU").
Operational Expenses
Operational expenses include service costs, plant and signal delivery, marketing and sales, general and administration and salaries and benefits.
Service costs include the cost of billing and collection. During 2010, service costs increased by $14,000 to $27,000 (2009 - $13,000). This increase was due mainly to the increase in the number of customers accounts offset by a decrease in the cost of collection. Service costs have not, and are not expected to increase significantly during the remainder of 2010.
Plant and signal delivery expenses include the rental of tower infrastructures, the purchase of internet transmission (backhaul) the cost of installations at customers' premises and the customer premises equipment operating lease costs. During 2010, plant and signal delivery expenses increased by $296,000 to $656,000 (2009 - $360,000), an increase of 82%. The increase in revenues was 106% during this period and as subscribers are added to the network the incremental cost of that subscriber is lower. This increase was due mainly to the increase in the number of towers under rental arrangements, the amount of backhaul needed to service the increase in subscribers, the increase in customer premises equipment being leased pursuant to operating lease arrangements and the increase in customer installations. Plant and signal delivery costs per customer will significantly decrease once the Company populates its towers with customers. The Company, on average, has a penetration of approximately 4% of homes passed whereas the minimum target penetration is greater than 20% which is the penetration rate in the Wabash REMC coverage area.
In December, 2009, we upgraded our marketing and sales models which increased new installations from 50 during December, 2009 to 155 during January, 2010 and 220 during February, 2010. Our current growth, on a month over month basis, is 35% which is expected to increase each month.
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Marketing and sales expenses include REMC fees, advertising and preparation of marketing materials. During 2010, marketing and sales expenses were $8,000 (2009- $5,000). Marketing and sales expenses are expected to significantly increase during 2010 as the Company increases its marketing plan to significantly increase organic growth. The Company now has five full-time sales people, which costs are included in salaries and benefits.
General and administration expenses include professional fees (legal, audit, accounting and outside professional consulting), investor relations consulting fees, office expenses (including rent, telephone and insurance), software fees and fees associated with late payments and bank charges. During 2010, general and administration expenses increased by $218,000 to $523,000 (2009 - $281,000). This increase is mainly due to being a public company during 2010 versus a private company during 2009. There are significant additional costs associated with being a public company including legal costs, auditing, investor relations and regulatory fees. General and administration expenses are not expected to increase significantly in 2010 in relation to increased revenue.
Salaries and benefits for 2010 have increased by $383,000 to $911,000 (2009 - $528,000). This increase is mainly due to the additional costs associated with hiring of senior and middle management to oversee the acquisition, marketing, financial reporting and operations teams. The Company went from 25 employees during the six months ended January 31, 2009 to 43 employees during the six months ended January 31, 2010. The Company does not expect to increase its number of employees significantly during 2010, except for certain key people to be brought on as a result of acquisitions and increasing the number of marketing teams we have in current and new regions brought on through acquisitions. Installations are now contracted out to an independent contractor and the Company's current number of employees is expected to be able to maintain a customer base at least double its current size. The Company continues to upgrade its employees as better trained personnel become available through acquisitions. Stock based compensation of $290,000 was charged to operations on January 2, 2009 with no corresponding charge during 2010.
Depreciation and amortization for 2010 increased by $109,000 to $317,000 (2009 - $208,000). This increase was attributed to amortization of customers' relationships of $139,000 (2009 - $nil). This increase was offset by a decrease of $30,000 in depreciation of our property and equipment due to assets being fully depreciated.
Other Income and Expense
Interest expense for 2010 increased by $49,000 to $118,000 (2009 - $69,000). The increase was a result of increased short-term and long-term debt levels offset by an overall reduction in the cost of debt to 6.8% achieved through negotiations with all creditors. During the six months ended January 31, 2010 the Company's cost of short-term and long-term debt decreased by 2% to 6.8% from 8.8%. Interest expense will increase in 2010 as the Company plans to issue senior subordinated convertible debt securities at 6% and bonds at 4% to 5%. The Company will also issue short-term notes as part consideration of planned acquisitions.
During 2010 the Company had written-off a $10,000 non-refundable deposit on a 2008 planned acquisition that did not complete. Other income included accounts payable written-off of $45,000 (2009 - $17,000).
Net Loss
