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EX-10.8 - AMENDMENT TO ASSET PURCHASE AGREEMENT BETWEEN ON4 COMMUNICATIONS, INC. AND ON4 COMMUNICATIONS INC. (CANADA) DATED OCTOBER 29, 2010 - ON4 COMMUNICATIONS INC.ex10-8.htm
EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ON4 COMMUNICATIONS INC.ex32-1.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) OR 15D-14(A) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ON4 COMMUNICATIONS INC.ex31-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2010

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission file number: 001-34297

ON4 COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE
 
N/A
 (State or Other Jurisdiction of Incorporation of Organization)
 
(I.R.S. Employer Identification No.)

16413 N. 91 Street, C 100
Scottsdale, AZ 85260
(Address of principal executive offices)

480.619.5510
(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.0001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes þ  No o

Indicate by check mark whether the registrant (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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
(Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)  Yes o  No þ

As of April 30, 2010 the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity as of such date, was $8,596,714.34.

As of March 18, 2011 the registrant’s outstanding common stock consisted of 66,602,490 shares.
 
 
 

 

Table of Contents
 
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Item 15.  Exhibits, Financial Statement Schedules 24
 
 
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Forward-Looking Statements

This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable laws, including the securities laws of the United States, we do not intend to update any of the forward-looking statements so as to conform these statements to actual results.

As used in this annual report, the terms "we", "us" and "our" mean On4 Communications, Inc., unless otherwise indicated.

All dollar amounts refer to U.S. dollars unless otherwise indicated.

Corporate History

We were incorporated as a Delaware company on June 4, 2001 under the name Sound Revolution Inc. On July 2, 2009 we changed our name to On4 Communications, Inc. Our fiscal year end is October 31. Our address is 16413 N. 91 Street, C 100, Scottsdale, AZ 85260. Our telephone number is (480) 619-5510.

On March 12, 2009, we entered into a merger agreement with On4 Communications Inc., a private Arizona company incorporated on June 5, 2006 (“On4”). We subsequently amended this agreement on April 7, 2009, and on May 1, 2009 we completed the merger with On4, with us as the surviving entity. Upon the completion of the merger, we had three wholly-owned subsidiaries: (i) Charity Tunes Inc., a Delaware company incorporated on June 27, 2005 for the purpose of operating a website for the distribution of music online (“Charity Tunes”); (ii) Sound Revolution Recordings Inc., a British Columbia, Canada company incorporated on June 20, 2001 for the purpose of carrying on music marketing services in British Columbia (“SRR”); and (iii) PetsMobility Inc., a Delaware company incorporated on March 23, 2006 for the purpose of operating the website www.petsmo.com and related business (“PetsMobility”).

On April 29, 2010 we sold our interest in PetsMobility, excluding certain specific assets, to On4 Communications Inc., a private Canadian company and our shareholder (“On4 Canada”) pursuant to an asset purchase agreement in exchange for On4 Canada returning 2,000,000 shares of our common stock to our treasury for cancellation. On October 29, 2010 we amended the asset purchase agreement to clarify certain terms of the purchase and sale. A copy of the amendment is attached as Exhibit 10.8 to this annual report. As a result, we currently have two wholly-owned subsidiaries.
 
We are a development stage company, providing wireless communications services to telecommunication companies, consumers and businesses. Our platform comprises global positioning system (“GPS”) device management, location-based services (“LBS”) capabilities, and the broadcasting of proprietary and non-proprietary content. LBS is a term used to describe the delivery of information and entertainment content to consumers with mobile devices based on the geographical position of the mobile device. We intend to deliver LBS via two-way communication tracking devices with applications that are able to track people, pets, assets and inventory. Our solution platform integrates various location-aware devises, such as GPS receivers, and transmits data to a range of devices, including Web browsers, instant messengers, short message service/mail, and mobile phones.
 
 
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Business Development

We have not generated significant revenues from our business activities, although we have signed contracts for the generation of over $200,000 in revenues through Charity Tunes since our inception. As at October 31, 2010, we had a working capital deficit of $1,550,109 and an accumulated deficit of $13,493,801 since our inception. Furthermore, during the year ended October 31, 2010, we recorded sales revenue of $204,120 but incurred an operating loss of $2,514,468.

Over the past year we have worked to focus our business on our core competency of providing services to the LBS marketplace. We have engaged a number of strategic vendors who already posses the prerequisite resources to support and distribute the required services to other LBS customers. In the past year, we have signed a licensing agreement with Smith & Wesson Corp. to provide a Smith & Wesson-branded solution to the LBS industry. In addition, we are also working very closely with TeleNav, Inc. to provide tracking services to both the consumer and enterprise markets. We have continued to develop our own proprietary patent pending devices but have also gone out to source existing CDMA and GSM devices.
 
Our Products and Services

Charitytunes.com

Through our wholly owned subsidiary Charity Tunes, we have developed a website, www.charitytunes.com, through which we sell digital music downloads over the Internet.  This website allows customers to choose from a selection of charities with whom we have partnered and who receive a percentage of the purchase price of each downloaded song.

Distribution Methods

Charity Tunes distributes our digital music through an online electronic content delivery and management platform developed by us. We own the copyright in the delivery and management platform, which also incorporates customary third party software, such as Microsoft’s Windows Media Digital Rights Management, which protects and securely delivers content for playback on computers, portable devices and network devices. Our delivery and management platform has the capacity to handle millions of products, as well as to collect, organize and report information for accounting, marketing and promotional purposes. Key features of the platform include:

  a web service application programming interface to facilitate the seamless integration of songs with third party web sites;

  gift functionality;

  the capacity to track affiliate royalty payments on a per-product basis;

  automated sales reports to track of affiliate commissions;

  logins for charities and record labels (or other content owners) to track hits, views, preview plays, sales, royalties and donations;

  automated generation of various “top 10” style lists for songs or other products;

  capacity to sell digital content by individual song unit, by album;,or in pre-set packages (in development)

  embedded Flash music player allowing users to preview songs without an external player;

  scalable capacity to accommodate millions of products, charities and other affiliates;

  automated content updates and user-friendly content management system;

  customizable search features linked to a content management database (available with or without content); and

  customizable support for co-branding, localized and white-labeled sites with a shared product database.

 
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Competition

We currently possess a very small share of the retail market for distributing music online in electronic format. Our online music business faces competition from traditional retail music distributors such as Virgin Megastores, as well as other online retailers such as Amazon.com, who sell music in physical formats such as compact disc, digital video disc, Blu-ray disc and, to a lesser extent, vinyl records. These retailers may include regional, national and international music chains with physical stores; deep-discount retailers; mass merchandisers; consumer electronics outlets; mail order record clubs; small independent operators; and online-based music distributors of compact discs, digital video discs and other physical music media.  Many of these competitors have greater financial and other resources than we do. To the extent that consumers choose to purchase media in traditional, non-electronic formats, our potential sales and profits will be reduced.

Our main online music services competitor is Apple Inc.’s iTunes Music Store. We compete for revenues with a wide range of companies who offer user downloads, including broadband Internet service providers such as Yahoo! and MSN, as well as Internet retailers such as Amazon.com, Bestbuy.com, Barnes & Noble, Virgin and Walmart.com. Finally, we also compete with internet file sharing services where music may be downloaded free of charge, often in contravention of applicable copyright laws.

Many of our music retail competitors have significantly more resources than we do, including greater access to desirable digital music catalogs and the ability to license those catalogs at preferential prices. Such competitors may therefore be able to offer goods and services at lower prices than we can, and may be better positioned to attract customers than we are, all of which could harm the ability of our online music business to compete effectively in the marketplace.

New Products and Services

Wireless Communications and Location-Based Services and Products

On May 1, 2009, we merged with On4 and adopted its business. As a result, we now carry on business in the field of wireless communications, offering a suite of complimentary services to telecommunications companies, consumers and businesses. Our platform is comprised of three core components: GPS device management, LBS capabilities and the broadcasting of proprietary and non-proprietary content.

With these three core components, we are capable of delivering comprehensive wireless solutions that can be tailored to address a wide range of markets. Our solution platform integrates a range of location-aware devices such as GPS receivers, and transmits data to a range of devices (e.g. web browsers, instant message services/email and cell phones). Based on our core LBS platform, we intend to develop various wireless services that deliver dynamic, personalized location-driven information to subscribers. To date, our wireless communications operation has been focused on the development of a two-way waterproof speakerphone GPS assisted tracking device.

We have established domestic and international relationships with Original Equipment Manufacturers (OEMs), carriers and other industry leading companies in the LBS market space which will assist us in entering our targeted market segments. Our patent-pending hardware, combined with the integrated suite of products in concert with our strategic partnerships will help us in facilitating the co-branding, distribution and marketing with telecommunication companies, wireless carriers, national retailers, major consumer brand companies and mass media, and will align our sales and marketing efforts with established sales channels.

A.  LBS Industry Overview

The primary economic catalyst behind LBS is the desire of wireless/cellular service carriers to grow both average revenue per user (ARPU) and the number of subscribers in their core cellular markets. As a result, wireless carriers and their partners are developing many new products, services and business models which are based on providing location information. The value to the end user is not only the actual location service, but also the information which the carrier can send to the end user in relation to where they are located.

By employing GPS and existing land-based cellular infrastructure, wireless carriers are able to provide location information and related entertainment services to end users through a variety of wireless mobile devices. As a result, consumers now have access a variety of personalized location services ranging from basic self-positioning functions to locating nearby business, services and amenities.

Examples of the various location-enabled applications now available include those designed to allow corporate managers and business owners to monitor employees, dispatch personnel based on location information, and generate a wide range of reports that include detailed location related information. The value in these applications is their ability to assess and improve employee productivity, optimize the use of human resources and other assets, and optimize critical management and customer service response times.

The International Telecommunications Union estimated that as of December 2007, there were 255 million wireless subscribers in the U.S, and the market for wireless data services exceeded $23 billion.  Our management believes that this profound acceptance of wireless products by the public has generated unprecedented opportunities for manufacturers and retailers to influence consumers on a consistent basis. The future of the wireless location-based-services market will be one where the importance of pure location-driven service will become secondary, in as much as the location-based-services platform will be the basis upon which valuable data and information will be delivered to the end user or consumer.

 
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B.  Neutral Architecture

With the LBS industry rapidly evolving in terms of technology, we believe that the only way for a service provider to be successful is by embracing this diverse environment rather than attempting to pick an individual winning technology or single carrier. This neutral or “agnostic” approach to technology requires the functional system to be an order of magnitude more intelligent than a system where a single choice is made. However, once architected and constructed property, the system can evolve gracefully because it was designed to do so accordingly. New devices, network connections and application technology can be integrated with a minimal amount of effort, speeding the time-to-market for new innovative products and services. This approach has been specified to all infrastructure partners with whom we are working.

C.  Buy vs. Build

Our approach to building our solution will be a thorough buy vs. build analysis on every component. When a class of components has become an industry commodity, there is no need or advantage to re-designing it. When a component is not a commodity, is highly strategic to own and is cost-effective to build, we intend to develop and operate such a proprietary component. Using this approach we intend to leverage outsourced vendors for the bulk of our infrastructure needs and focus our internal resources on marketing, sales and distribution.

We have engaged a number of strategic vendors who already posses, support and distribute the required services to other LBS providers. Some of the vendors we have engaged include: Qualcomm Chipset Division, Qualcomm QES, WaveMarket, DataTrail Inc., Networks In Motion (NIM), Aria Systems and OpenSource Inc., to name a few. One strategic relationship that will be extremely critical and valuable to us will be with Qualcomm. In this relationship, we have been identified as a launch partner for its new InGeo device technology. The InGeo reference design represents the latest generation of devices that provide a complete tracking solution for non-cell phone personal location devices and services, enabling enhanced GPS performance, improved battery management and lower device costs. In addition, we are working with Qualcomm and a Qualcomm certified contract manufacturer to build a custom version of the InGeo device that is waterproof and robust enough for the pet market and other environmentally challenging markets.

D.  Principal Products/Services

We intend to offer next generation location-based products and services with a unique business model encompassing media content distribution, which ultimately would deliver an end-to-end consumer and enterprise solution to a rapidly growing location-based services market by the first quarter of 2009. Our multimedia content development and aggregation system will deliver voice, video and data over most standards of both wired and wireless networks worldwide. Our innovative patent pending device and proprietary content, PetsCell, is a dynamic, software controlled wireless device and community-based web portal built to disseminate a full line of products and services.

E.  PetsCell

We have developed a remotely-controlled waterproof mobile communication device, comprised of the following:

  a two way waterproof speaker/microphone;

  an incoming number protection;

  one button call back;

  a global positioning device component;

  a detachable faceplate for use in multiple verticals;

  three programmable buttons; and

  programmable indicator lights.

The objective of the design was to create a product that would have uses in multiple consumer and enterprise verticals, and to avoid the need for different hardware and circuit boards. We decided to design one unit which could be used in a number of conditions and applications and would share the same basic platform architecture.

The device has been specifically designed to enable it to be used in numerous defined verticals, such as child safety, parental supervision, personal protection, Alzheimer patients, law enforcement, animal tracking identification and property assets tracking markets. The PetsCell, model TX200, has not yet been sold into the market place. It has been approved by the Federal Communications Commission (FCC) and has “Safe for Network Certification” status on both the TELUS and Sprint wireless networks.

 
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F.  Location-Based Services Platform

Our platform allows our partners to tailor the functionality of the embedded applications to suit the unique requirements of their target markets. A web-based platform is very easy to adapt to unique market requirements. It is possible to use “as-is” or to employ components of the total solution to provide customized solutions. The LBS platform is highly configurable and scalable with an in-house mapping engine. Software installation is not required on the user’s machines as all that is required is a standard web browser to access the application.

G.  Manufacturing

Our manufacturing partners have established relationships with code division multiple access (CDMA) and global system for mobile communications (GSM) wireless carriers both in North America and abroad. We have chosen to focus on the CDMA wireless carriers for the superiority of their digital networks (coverage and the technical capabilities) and the Qualcomm GPS CDMA technology.

Markets

We anticipate that the future of the wireless LBS market will be one where the importance of pure "locates" will become secondary in importance, inasmuch as the LBS platform will serve as the basis upon which usable data and information will be delivered to the end user or consumer-specific segment. A 2008 research study by ABI Research identified that the top 5 largest LBS segments both in 2006 and in 2013 will be personal navigation, enterprise, family tracker, information (points of interest) and friend finder. Personal navigation services are projected to reach 82 million worldwide subscribers, with information services projected to reach 48 million worldwide subscribers. Enterprise and personal navigation are projected to be the highest revenue generating sectors, with the enterprise segment projected to reach sales of $6.5 billion annually and the personal navigation segment $4.3 billion annually.

LBS Market Enabling Developments

Over the past three years, significant market enabling developments have occurred, including the following:

1.
The arrival of highly accurate, reliable, cost-effective tracking devices that have achieved critical battery life and form factor (size & weight) thresholds. In addition, due to the physical size and performance of the devices, they are now being produced by a growing number of manufacturers both small and large. It has also become a priority for wireless carriers to certify these devices for the rapidly growing LBS and Telematic marketplaces.

2.
Wireless carriers are now providing lower cost data-only plans. A major change in carrier pricing has occurred as they acknowledge the significance and future revenue importance of data-only devices in the LBS and integrated telecommunications and computer/information system markets. This is a result of next generation digital networks that improve the network capacity for data.

3.
The acceptance by Fortune 1000 companies of Internet-based, third party-hosted corporate solutions. Whether contracting out payroll, sales force management or asset management, large corporations are accepting this as a standard and necessary competitive practice.

4.
Overall solution cost of ownership reductions due to the combined impact of the above market drivers have made LBS solutions available to a wider market. LBS solutions provide asset security and improved logistics that now demonstrate a much more tangible return on investment.

5.
LBS technologies are able to support security-based applications for government, corporate and personal markets.

6.
Growing consumer awareness and demand for LBS solutions.

7.
With the above market drivers in place and consistent technology, performance and economic improvements as per standard technology and market evolution, it can be definitively stated that the true commercial age of wireless LBS has arrived.

 
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Key Market Drivers

There are a number of key factors dictating the deployment, acceptance and use of LBS technologies by both the consumer and enterprise segments. The key market drivers are privacy protection, social, government, technology and economic.

1.
Privacy Protection

Privacy-based issues, or security- and privacy-based issues, are one major impediment in preventing widespread use and/or acceptance of LBS-enabled products. From both a consumer and LBS provider's perspective, the critical issues facing the LBS market revolve around security and privacy. Consumers currently consider location information to be highly sensitive, and are very wary of “Big Brother” or “Orwellian” products initiated by large corporations. Successfully addressing the privacy concerns of consumers will allow for accelerated growth and market acceptance.

2.
Social

Technology often runs well ahead of consumer acceptance. As more widespread penetration of LBS information into mainstream use occurs, familiarity with LBS will increase. Services such as Google maps all work toward alleviating consumer anxiety as there is an ever-increasing visibility of LBS information in everyday life through news programs.

3.
Government

The increasing willingness of governments to mandate the use of and public supply of LBS information is a key driver of mobile LBS. Mobile operators are increasingly required to comply with legal regulations to provide caller location information to emergency services. This has been particularly the case in the U.S., Europe and Japan. Government sites, web portals, etc. have to some extent paved the way for more innovative (mobile) LBS globally.

4.
Technology

Prior to any product gaining widespread acceptance, the design and engineering underlying it must produce a cost effective, easy to use device/solution for end-users. Just as internet usage dramatically increased once the 56K download speed was surpassed, so too, is it with mobile LBS. Broadband can now support many more LBS applications. Initial consumer acceptance of early renditions of LBS-enabled products and services was hindered by the unsophisticated nature of the product offering; specifically, cost of service and the limited performance of the devices.

In general, there has been a vast improvement in mobile technology such as longer battery life, accompanied by larger screens, color graphics and the overall maturation of geo-spatial technology and delivery platforms. As mobile technology continues to improve, the demand and uptake by consumers will increase.

5.
Economic

The variety of LBS-enabled devices and customer market specific solutions, in conjunction with new carrier data services, are driving the LBS market. Carriers are endeavoring to increase the subscribed units in service and LBS applications are an ideal way to achieve this objective.

LBS applications cover nearly every attractive wireless demographic market, including parents, teenagers, singles, college students, online communities, business executives and entrepreneurs. This also includes businesses that significantly depend on mobile voice and/or data communications to operate their business, such as companies with significant field employee organizations, and businesses dependent on knowing the location of their assets at any moment, such as interstate highway trucking.

 
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Consumer Segment

The key driver of mobile wireless applications and LBS-enabled products is the ever-increasing number of cell phones in the marketplace. On a global basis, all GPS handsets manufactured since 2005 include full LBS capability, and as a consequence, global shipments of GPS handsets are projected to increase from an estimated 198 million units annually in 2007 to over 618 million units annually in 2013 (ABI Research, 2008). The cumulative total of GPS-enabled handsets shipped during this 2007 to 2013 period will exceed 3 billion units.

There are four basic reasons consumers are increasingly purchasing wireless phones:

  wireless prices continue to decline;

  the number of minutes in landline service plans continues to increase;

  wireless carriers are bundling large increments of evening, weekend, local and long distance calling into consumer calling plans at little to no additional cost; and

  wireless carriers continue to improve their available geographic coverage with network build-outs.

With mobile carriers creating innovative pricing packages to drive demand in the wireless consumer and enterprise segments, the end result is that wireless subscribers and wireless usage in general will continue to increase. Traditional landline subscribers are migrating to cell phones in increasing numbers, thereby increasing the number of cell phones in the market place.

In addition to the increasing number of overall mobile subscribers, there is also a trend towards an increase in the number of minutes used per wireless subscriber on a year-over-year basis. The Cellular Telecommunications and Internet Association (CTIA), which is the international association for the wireless industry, reported that mobile data usage, such as text and multimedia messaging, mobile web and downloads, have increased substantially since 1995.

The underlying theme is that wireless communication is so pervasive because, culturally, it is now seen as a standard and acceptable way to communicate in most environments. The almost seamless interaction between the Internet and the mobile consumer has created growth opportunities in emerging verticals and for products that were not accessible to vendors a few years ago. For the first time, manufacturers and retailers have the ability to “touch” and influence consumers on a daily or even hourly basis. The consumer demand for mobile wireless products will continue to increase as device form factors improve, usage costs decrease and user interface enhancements continue.

Shipments for portable devices with LBS capabilities have also increased in recent years. Total global shipments of mobile GPS navigation devices in 2007 were up 132% from 2006. Navigational assistance was the first LBS segment to gain widespread market acceptance and have high commercial uptake. With the success of navigational assistance, other LBS segments are expected to follow a similar market acceptance trend.

Consumer friendly devices enabled for LBS that are integrated with stable, accurate, broadly implemented handset-based (e.g. assisted GPS) location technologies will facilitate a strategic trend towards client-based mobile applications. Improvements to network-based infrastructures have greatly enhanced network transmission capabilities for data exchange and this has led to an increase in mobile subscribers over the last 4-5 years.

Enterprise Segment

Current versions of location-enabled applications are giving managers the ability to track time spent on jobs, to dispatch based on location, and to generate a range of reports that include location information. The readily identifiable business value is coming from applications targeted at improving employee productivity, eliminating paper-based data collection and associated errors and delays, and increasing the utilization of assets while decreasing service response times.

The wireless and LBS markets already have what they need from an infrastructure perspective to be successful in terms of widespread usage and acceptance of the products and services from both a consumer and enterprise perspective. The regulatory environment is at worst neutral for LBS services, and in fact can be seen as very positive in some areas such as regulation concerning security services related to lone-workers.

Market Growth

The composition of usage both in wireline and wireless markets will continue to shift towards greater acceptance by consumers for data/infotainment to be delivered to their handsets. The widespread cultural acceptance of wireless communication will result in a robust environment for wireless and LBS opportunities for the foreseeable future, in both the consumer and enterprise segments. Industry statistics corroborate analysts’ projections for increased cell phone usage well beyond 2010.

 
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Marketing Plans and Strategies

Target Markets

While the design, robustness and underlying technology for PetsCell enables our LBS platform to be used in almost all identifiable verticals, from an operational and strategic point of view it is unlikely that we would be able to successfully roll out the application in numerous verticals simultaneously. We have segmented the potential applications of the technology into an enterprise segment and a consumer segment, each of which is then divided into sub-segments.

Enterprise Segment
 
Industry: Maintenance, Transportation, Delivery, Security, Investigation, Event
 
Government: Police, Medical, Education, Military, Search & Rescue

Business breakdown by employment in specific industries (from the U.S. Bureau of Labor Statistics):

2.4 million people are employed in agriculture, forestry, fishing, hunting and mining;

9.1 million people are employed in construction;

17 million people are employed in manufacturing;

6.8 million people are employed in transportation, warehousing and utilities; and

12.4 million people are employed in professional, scientific, management, administrative and waste management services.

These include fleet management/dispatch, workforce and sales force management and a variety of public sector location applications.

Consumer Segment

Personal Assets: Auto, Recreational Vehicles, All Terrain Vehicles, Marine (personal water craft), Security, Kids/Teens, Pets

Current studies all support the notion that one of the underlying primary drivers for the demand for LBS is safety. Consumers view wireless LBS as a means of alleviating concerns about safety either at home or away. It is estimated that on a national basis parents or primary care givers will on average contact law enforcement authorities over 2,100 times per day regarding the disappearance of a missing child (Missing Child World Press, 2008).

The National Center for Missing and Exploited Children (NCMEC) reports that 74% of abducted children who are murdered are dead within three hours of the abduction. These figures indicate the strong market need for a method of quickly and reliably locating missing children. This so-far untapped market is quite large. According to the National Center for Education Statistics, in the U.S. alone there are:

  33 million children in elementary school (grades 1-8)

  4 million children in kindergarten

  4.6 million children in nursery/preschool

 
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Though the market potential for kid/teen monitoring is substantial, we believe that there will be a significant push back from parent organizations as well as resistance from kids/teens in general to be tracked 24/7. Most of the concerns will revolve around privacy issues. However, if properly implemented in specific situations, child tracking would alleviate many of the privacy issues and still be acceptable from a business perspective. We have the potential to sell tracking units and services for over 60,492,447 children under the age of 14.

Another potentially lucrative market segment is the pet segment. The pet industry is massive and continues to show substantial year-over-year growth. In 1994, spending in the pet industry in the U.S. alone was $17 billion. By 2007, the figure was $41.2 billion and is expected to exceed $43 billion in 2008. To place the magnitude of this dollar amount into perspective, in 2003 consumers in the U.S. spent $20 billion on toys, $24 billion on candy and $32 billion on pet related products (American Pet Products Manufacturers Association).

The medical market is another vertical which we plan to enter. Our devices are ideally suited for this segment. As an example of the revenue potential in the medical market, there are an estimated 5.2 million people in the United States afflicted with Alzheimer’s (Alzheimer’s Association, Alzheimer’s Fact and Figures 2008). Of note, the median family income for this segment is greater than $51,000 per annum.

Target Market Strategy

For any company in an emerging market, the key is to build product and brand awareness and to gain market share as quickly as possible. We plan to sell our device through joint venture partnerships and original equipment manufacturers into both consumer and enterprise verticals where the device is applicable.

Distribution

We intend to sell our products domestically through direct and indirect sales channels and specialty markets. Our initial sales and distribution strategy is to establish product awareness and build volume through a distribution strategy comprised of a combination of direct and indirect channels. Ongoing inquiries from consumers interested in purchasing our products directly from the U.S. and traffic to our website provide strong evidence of the underlying consumer interest in acquiring our product. We believe a concerted Internet-based marketing effort will work in harmony with traditional brick-and-mortar sales channels to produce a cost-effective way of establishing our products in the market. Direct-to-consumer distribution channels include e-commerce, telesales, partner programs and possibly our own kiosks located in high traffic retail locations.

Retail Sales Channels

To achieve our volume and awareness goals, our sales efforts are focused on gaining distribution through national consumer stores and various security companies, as well as regional and local retailers. We intend to distribute the PetsCell through strategic partners focused on the pet industry. To date, we have received significant interest from most of the major nationally recognized pet retailers including Pet Smart and Pet Mod. We also plan to look to big-box retail stores such as Best Buy, Circuit City, RadioShack, Staples, Wal-Mart and Target as potential sales channels.

Additional Sales Channels and Direct to Enterprise

To build market share and profitability, we plan to augment our sales efforts through additional channels, including OEM, government and business-to-business channels. We believe these broad distribution channels, along with the retail and the direct-to-consumer channels, will create opportunities for us to pursue a diverse range of consumers throughout the United States and abroad.

Order Fulfillment and Provisioning

Order fulfillment is a critical component of the sales and distribution process. We intend to outsource the order fulfillment for PetsCell. The key components of order fulfillment are as follows:

  inventory management;

  order management (accepting and processing sales orders that originate from designated sales channels);

  warehouse management;

  distribution management; and

  returns and repair management.

We plan to outsource device provisioning to either our manufacturing partner or to a third party that specializes in the provisioning of mobile wireless handsets.

 
10

 
 
Channel Market to OEM’s

We will focus our efforts to partner with Original Equipment Manufacturers of nationwide cellular providers and computer manufacturers, emphasizing our products’ potential as an additional source of revenue for them, both at the front end for product sales, and in the case of cellular providers, with recurring monthly revenues. This should make our product a desirable addition to their product lines. By solidifying these partnership agreements, we also plan to enable cross-marketing to consumers through the efforts of the OEM’s advertising and sales forces, thereby increasing our nationwide sales capability. We believe that once partnered with these companies, our channel market partners (resellers) will advertise our devices and services as new products in their traditional outlets, primarily via print advertising and in-house point of sale material, in order to increase mutual sales and brand awareness, thus benefiting both us and them.

Business Market

We plan to market PetsCell to businesses through traditional sales efforts, such as advertising in trade publications and establishing a presence at select trade shows geared towards businesses in our industry segment. For any larger companies that we target, we will offer free use of a limited number of our products for a limited time to establish their impact in controlling costs of outside fleets and personnel, in order to penetrate and gain market share in this segment. We believe once senior management of these businesses feel more confident of the whereabouts of their outside concerns (personnel and vehicles, deliveries, packages, equipment, etc.) they will understand that they can, in essence, manage their outside logistics from the comfort of their office more efficiently than through traditional methods.

The success of our corporate strategy is predicated on our ability to either develop and launch our own proprietary products, or to work in conjunction with existing telecommunications carriers and retail manufacturers on a partnership or joint venture basis. We will look to a royalty share revenue model in these instances to facilitate this deployment of pet-related communication products and services.

Future Developments

As the product development cycle for technology products can take several years, it is imperative we initiate new products well before existing products become obsolescent. We have already begun to plan a second-generation product. Working closely with a major U.S. chip manufacturer, this new product is technologically superior to the first generation PetsCell.

Intellectual Property

We own the copyright in the content of the websites www.soundrevolution.net, www.charitytunes.com and www.on4communications.com.  We also own all the copyright and common law trademark rights in our logos for Charity Tunes and On4.

We also own the intellectual property described in the following patent applications:
 
2475823 titled “pet communication system”, filed in Canada on July 16, 2004 and laid open for public inspection on January 16, 2006 (abandoned);
 
PCT/CA2005/001122 titled “mobile communication system and device”, filed under the Patent Cooperation Treaty on July 18, 2005 claiming priority to Canadian patent application 2475823; and
 
EP20050767052 titled “mobile communication system and device”, filed in the European Union claiming priority to the PCT application (national phase entry on May 25, 2007).

However, there can be no assurances that we will obtain any intellectual property protection as a result of these applications or that any of these applications will be granted by the applicable intellectual property office. No patent applications have yet been granted so we do not currently have any patent protection for our products.

 
11

 
 
Government Regulations

Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. In addition to recent laws enacted by the United States Congress regulating children’s privacy, copyrights and taxation, we are and will continue to be subject to rules and regulations around the world which affect the business of the Internet. Also, because we carry on business in Canada, we are subject to laws regarding employment, taxes and other regulatory issues for our Canadian operations. In addition, the European Union recently enacted its own privacy regulations that may result in limits on the collection and use of certain user information.

The laws governing the Internet remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and commerce will prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business on the Internet. Furthermore, the Federal Trade Commission recently investigated the disclosure of personal identifying information obtained from individuals by Internet companies.

Evolving areas of law that are relevant to our business include privacy law, proposed encryption laws, website content regulation and sales and use tax. For example, changes in copyright laws could require us to change the manner in which we conduct business or increase our costs of doing business. Because of this rapidly evolving and uncertain regulatory environment, we cannot predict how these laws and regulations may affect our business. In addition, these uncertainties make it difficult to ensure compliance with the laws and regulations governing the Internet. These laws and regulations could harm us by subjecting us to liability or forcing us to change the way in which we do business.

We will also be subject to laws and regulations related to the telecommunications industry. This industry is highly regulated, and the regulatory environment in which we intend to operate is subject to change. In accordance with Federal Communication Commission (“FCC”) rules and regulations, wireless transceiver and cellular handset products are required to be certified by the FCC and comparable authorities in foreign countries where they are sold. If we sell our anticipated products in Europe, we will be required to comply with relevant directives of the European Commission. A delay in receiving required certifications for our new products or enhancements to our products, or a loss of certification for our intended products, may adversely affect our business.

Employees and Consultants

As of March 18, 2011, we employed consultants in the area of management, sales, marketing, accounting, product and business development and legal services.


Not required.


None.


Our principal office is located at 16413 N. 91 Street, C 100, Scottsdale, AZ 85260. We also have an operations office in Phoenix, Arizona, and an operations and product development facility in Richmond, British Columbia. Both of these facilities are leased to us at no cost by our shareholders.
 

We are not aware of any legal proceedings (i) to which we are a party, (ii) to which any of our subsidiaries is a party, or (iii) of which either our property or the property of any our subsidiaries is the subject. None of our directors, officers, affiliates, any owner of record or beneficially of more than 5% of our voting securities, or any associate of any such director, officer, affiliate or security holder are (i) a party adverse to us in any legal proceedings, or (ii) have a material interest adverse to us in any legal proceedings. We are not aware of any other legal proceedings that have been threatened against us.

 
 
12

 
 


Market Information

Our common stock is not traded on any exchange. Our common stock is quoted on the OTC Bulletin Board under the symbol “ONCI.OB”. Trading in stocks quoted on the OTC Bulletin Board is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company's operations or business prospects. We cannot assure you that there will be a market for our common stock in the future.

Our common stock became eligible for quotation on the OTC Bulletin Board on June 23, 2005. The following table shows for the periods presented the high and low bid quotations for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

OTC Bulletin Board
Quarter Ended
High ($)
Low ($)
October 31, 2010
0.08
0.02
July 31, 2010
0.23
0.045
April 30, 2010
0.42
0.10
January 31, 2010
0.62
0.20
October 31, 2009
0.71
0.21
July 31, 2009
0.30
0.11
April 30, 2009
0.11
0.11
January 31, 2009
0.11
0.10

Holders

As of March 18, 2011, there were approximately 80 holders of record of our common stock. Many holders also hold our common stock in street name.

Dividends

Historically, we have not paid dividends on shares of our common stock and we do not expect to declare or pay dividends on shares of our common stock for the foreseeable future. The payment of any dividends will depend upon our future earnings, if any, our financial condition, and other factors deemed relevant by our Board of Director.

Equity Compensation Plans

As March 18, 2011, we did not have any equity compensation plans.

Recent Sales of Unregistered Securities

On October 5, 2010 we issued 600,000 shares of our common stock at a deemed price of $0.025 per share to one U.S. investor pursuant to a contract for service. These securities were issued without a prospectus pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). Our reliance upon the exemption under Section 4(2) was based on the fact that the issuance of these shares did not involve a “public offering.” Each offering was not a "public offering" as defined in Section 4(2) due to size, manner and number of investors involved in the offering. In addition, the investor had the necessary investment intent as required by Section 4(2) since he agreed to and received a share certificate bearing a legend stating that such shares were restricted pursuant to Rule 144 under the Securities Act. This restriction ensures that the shares will not be immediately redistributed into the market and therefore not be part of a "public offering". The investor negotiated the terms of the transaction directly with our executive officers. No general solicitation was used, no commission or other remuneration was paid in connection with this transaction, and no underwriter participated.

Other than as described above, during the fiscal year ended October 31, 2010 we did not complete any unreported sales of our equity securities that were not registered under the Securities Act.

Use of Proceeds from Sale of Registered Securities

We did not receive any proceeds from the sale of registered securities during the fiscal year ended October 31, 2010.

 
13

 
 

Not required.


The following discussion should be read in conjunction with our consolidated financial statements for the fiscal year ended October 31, 2010, including the notes thereto, appearing elsewhere in this annual report. The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.

Results of Operations

Revenues

During the year ended October 31, 2010 we generated revenues from music downloads of $204,120 at a cost of sales of $93,881, for a gross margin of $110,239. During the year ended October 31, 2009 we generated nominal revenues of $18,746 at a cost of sales of $3,349, for a gross margin of $15,397. From our inception on June 4, 2001 to October 31, 2010 we generated revenues of $222,866 at a cost of sales of $97,230, for a gross margin of $125,636.

Expenses

During the fiscal year ended October 31, 2010, we incurred total expenses of $2,624,707, including $1,223,709 in impairment of goodwill, $744,582 in consulting fees, $225,000 in management fees, $117,923 in general and administrative expenses, $245,361 in professional fees, $34,493 in foreign exchange loss and $10,648 in advertising and marketing expenses.

During the fiscal year ended October 31, 2009, we incurred total operating expenses of $5,307,164, including $2,050,401 in impairment of goodwill, $2,115,000 in impairment of intangible assets, $478,999 in consulting fees, $284,096 in management fees, $158,141 in general and administrative expenses, $104,702 in professional fees, $41,426 in foreign exchange loss and $54,687 in advertising and marketing expenses.

From our inception on June 5, 2006 to October 31, 2010 we incurred operating total expenses of $11,369,380, including $3,274,110 in impairment of goodwill, $2,219,724 in impairment of intangible assets, $2,148,737 in consulting fees, $1,162,596 in management fees, $1,068,214 in general and administrative expenses, $648,131 in professional fees, $318,360 in research and development, $254,200 in foreign exchange loss and $191,480 in advertising and marketing expenses.

Our general and administrative expenses include fees for telephone service, courier service, postage, office supplies, banking and website, server and software maintenance.

Net Loss

During the fiscal year ended October 31, 2010 we incurred a net loss of $2,408,836 compared to a net loss of $5,420,719 during the year ended October 31, 2009. Our net loss per share from continuing operations during these periods was $0.03 and $0.14, respectively.  From our inception on June 4, 2001 to October 31, 2010 we incurred a net loss of $13,410,329.  Our net loss was mostly funded by a combination of private placements and shareholder loans.

Liquidity and Capital Resources

As of October 31, 2010 we had $7,558 in cash, $11,152 in total assets, $1,557,667 in total liabilities and working capital deficit of $1,550,109. This compares to $473 in cash, $1,342,613 in total assets, $3,085,611 in total liabilities and a working capital deficit of $2,981,663 for the fiscal year ended October 31, 2009.

As of October 31, 2010 we had an accumulated deficit of $13,493,801, an increase of $2,408,836 from our accumulated deficit of $11,084,965 as of October 31, 2009.

From our inception on June 5, 2006 to October 31, 2010 we spent $2,655,299 on operating activities, including $126,068 during the year ended October 31, 2010 and $269,322 during our prior fiscal year. Our spending improvement on operating activities is mainly attributable to a marked decrease in our net loss for the period and an increase in our accrued interest payable balance due to lack of sufficient cash flow to repay our obligations.

From our inception on June 5, 2006 to October 31, 2010 we received $3,936,903 from financing activities, including $117,401 during the year ended October 31, 2010 and $79,282 during our prior fiscal year. The increase in our receipts from financing activities was primarily the result of proceeds from related parties of $41,692 and notes payable of $75,000, as offset by a decrease in our proceeds from the issuance of our common stock of $132,282.

From our inception on June 5, 2006 to October 31, 2010 we spent $1,328,908 on investing activities, including $182,687 on the acquisition of intangible assets and $1,114,182 on advances for a note receivable that we ultimately wrote off. During the year ended October 31, 2010 we spent $2,897 on investing activities related to the purchase of equipment, whereas we received $1,523 from investing activities during our prior fiscal year, all of which was cash proceeds related to the merger transaction. 

We do not anticipate any significant changes in our level of activity. We have not been able to reach the break-even point since our inception and have had to rely on outside capital resources. We do not anticipate making any significant revenues during the next year.
 
 
14

 
 
Our planned operation and exploration expenditures over the next 12 months (beginning March 2011) are summarized as follows:
 
Description
Potential
Completion Date
Estimated
Expenses
($)
General and administrative expenses
12 months
250,000
Research and development
12 months
100,000
Sales and marketing
12 months
200,000
Accounting and legal
12 months
150,000
Unallocated working capital
12 months
100,000
Debt repayment
12 months
900,000
Total
 
1,700,000

Our general and administrative expenses for the year will consist primarily of telephone service, courier service, postage, office supplies, banking, and website, server and software maintenance.

Based on our planned expenditures, we require additional funds of approximately $1,700,000 to proceed with our business plan over the next 12 months. If we secure less than the full amount of financing that we require, we will be forced to proceed with an alternative or scaled back business plan based on our available financial resources.

We intend to raise the balance of our cash requirements for the next 12 months from private placements or a registered public offering (either self-underwritten or through a broker-dealer). If we are unsuccessful in raising enough money through our capital-raising efforts, we may review other financing possibilities such as bank loans. At this time we do not have a commitment from any broker-dealer to provide us with financing. There is no assurance that any financing will be available to us or if available, on terms that will be acceptable to us. We intend to negotiate with our management and consultants to pay parts of their salaries and fees with stock and stock options instead of cash.

Even though we plan to raise capital through equity or debt financing, we believe that the latter may not be a viable alternative for funding our operations as we do not have tangible assets to secure any such financing. We anticipate that any additional funding will be in the form of equity financing from the sale of our common stock. However, we do not have any financing arranged and we cannot provide any assurance that we will be able to raise sufficient funds from the sale of our common stock to finance our operations.

Going Concern

Our financial statements for the fiscal year ended October 31, 2010 have been prepared on a going concern basis and contain an additional explanatory paragraph in Note 1 which identifies issues that raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

 
15

 
 
Critical Accounting Policies

Our financial statements are affected by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 1 of the notes to our financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by management.

Revenue Recognition

We recognize revenue from the online sale of music in accordance with ASC 605, Revenue Recognition. Revenue consists of the sale of music and is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the product is shipped, and collectibility is reasonably assured. We enter into contracts that provide access to our music library for a specified period of time. We recognize revenue from these contracts on a straight-line basis over the term of the contract.

Goodwill

In accordance with ASC 350, Intangibles – Goodwill and Other, goodwill is required to be tested for impairment on an annual basis, or more frequently if certain indicators arise, using the guidance specifically provided.

Management reviews goodwill at least annually, and on an interim basis when conditions require, evaluates events or changes in circumstances that may indicate impairment in the carrying amount of such assets. An impairment loss is recognized in the statement of operations in the period that the related asset is deemed to be impaired.

Stock Based Compensation

We record stock-based compensation in accordance with ASC 718, Compensation – Stock Based Compensation, and ASC 505-50, Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.


Not required.

 
 
16

 



ON4 COMMUNICATIONS, INC.
Consolidated Financial Statements
Year Ended October 31, 2010
(Expressed in US dollars)


 
17

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
On4 Communications, Inc.
(A Development Stage Company)
 
We have audited the accompanying consolidated balance sheets of On4 Communications, Inc. (A Development Stage Company) as of October 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years then ended and accumulated from June 5, 2006 (Date of Inception) to October 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of October 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended and accumulated from June 5, 2006 (Date of Inception) to October 31, 2010, in conformity with accounting principles generally accepted in the United States.
 
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has not generated significant revenue, has a working capital deficit, and has incurred operating losses since inception. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
/s/ SATURNA GROUP CHARTERED ACCOUNTANTS LLP
 
 
Vancouver, Canada
 
March 11, 2011
 
 
F-1

 
 
On4 Communications, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
(Expressed in US Dollars)

   
October 31,
   
October 31,
 
   
2010
   
2009
 
    $    
$
 
             
ASSETS
           
             
Current Assets
           
             
Cash
    7,558       473  
Accounts receivable
          64,737  
Prepaid expenses and deposits
          38,738  
                 
Total Current Assets
    7,558       103,948  
                 
Goodwill (Note 3)
          1,163,884  
Intangible assets (Note 5)
          66,779  
Property and equipment (Note 6)
    3,594       8,002  
                 
Total Assets
    11,152       1,342,613  
                 
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
                 
Current Liabilities
               
                 
Accounts payable
    625,086       533,273  
Accrued liabilities
          17,299  
Accrued interest payable
    138,514       141,307  
Deferred revenue
          90,385  
Due to related parties (Note 7)
    327,049       1,303,492  
Notes payable (Note 8)
    467,018       881,637  
Convertible note payable to related party, net of unamortized discount of $nil (2009 - $1,782) (Note 7)
          118,218  
                 
Total Liabilities
    1,557,667       3,085,611  
                 
Nature of Operations and Continuance of Business (Note 1)
               
Commitments (Note 12)
               
                 
Stockholders’ Deficit
               
                 
Preferred stock: 10,000,000 shares authorized, non-voting, no par value;
No shares issued and outstanding
           
Common stock:  100,000,000 shares authorized, $0.0001 par value;
66,602,490 and 99,874,977 shares issued and outstanding, respectively
    6,660       9,987  
                 
Additional paid-in capital
    11,870,626       9,261,980  
                 
Common stock issuable
    70,000       70,000  
                 
Deficit accumulated during the development stage
    (13,493,801 )     (11,084,965 )
                 
Total Stockholders’ Deficit
    (1,546,515 )     (1,742,998 )
                 
Total Liabilities and Stockholders’ Deficit
    11,152       1,342,613  
 
 (The accompanying notes are an integral part of these consolidated financial statements)
 
 
F-2

 
 
On4 Communications, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(Expressed in US Dollars)
 
   
For the Year
Ended
   
For the Year
Ended
   
Accumulated From
June 5, 2006
(Date of
Inception)
 
   
October 31,
   
October 31,
   
to October 31,
 
   
2010
   
2009
   
2010
 
    $     $    
$
 
                   
Revenue
    204,120       18,746       222,866  
Cost of sales
    93,881       3,349       97,230  
                         
Gross margin
    110,239       15,397       125,636  
                         
Expenses
                       
                         
Advertising and marketing
    10,648       54,687       191,480  
Amortization of intangible assets
    6,954       7,059       18,138  
Amortization of property and equipment
    7,305       11,917       36,174  
Consulting fees
    744,582       478,999       2,148,737  
Foreign exchange loss
    34,493       41,426       254,200  
General and administrative
    117,923       158,141       1,068,214  
Impairment of goodwill (Note 3)
    1,223,709       2,050,401       3,274,110  
Impairment of intangible assets (Note 5)
          2,115,000       2,219,724  
Management fees (Note 7(h))
    225,000       284,096       1,162,596  
Payroll
          432       29,516  
Professional fees
    245,361       104,702       648,131  
Research and development
    8,732       304       318,360  
                         
Total Expenses
    2,624,707       5,307,164       11,369,380  
                         
Operating Loss
    (2,514,468 )     (5,291,767 )     (11,243,744 )
                         
Other Income (Expense)
                       
                         
Gain on settlement of debt
    465,171       185,145       651,436  
Interest and other income
                59,900  
Interest expense
    (344,134 )     (114,225 )     (582,224 )
Write-off of note receivable
                (1,114,182 )
                         
Total Other Income (Expense)
    121,037       70,920       (985,070 )
                         
Loss from Continuing Operations
    (2,393,431 )     (5,220,847 )     (12,228,814 )
                         
Loss from Discontinued Operations (Note 4)
    (15,405 )     (199,872 )     (1,181,515 )
                         
Net Loss
    (2,408,836 )     (5,420,719 )     (13,410,329 )
                         
Net Loss Per Share from Continuing Operations – Basic and Diluted
    (0.03 )     (0.14 )        
                         
Net Loss Per Share from Discontinued Operations – Basic and Diluted
                   
                         
Weighted Average Shares Outstanding
    70,174,000       40,056,000          
 
 (The accompanying notes are an integral part of these consolidated financial statements)
 
 
F-3

 
 
On4 Communications, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Period from June 5, 2006 (Date of Inception) to October 31, 2010
 
                           
Deficit
       
                           
Accumulated
       
               
Additional
   
Share
   
During the
       
   
Preferred Stock
   
Common Stock
   
Paid-in
   
Subscriptions
   
Development
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Receivable
   
Stage
   
Total
 
   
#
   
$
   
#
   
$
   
$
   
$
   
$
   
$
 
                                                 
Balance – June 5, 2006 (Date of Inception)
                                               
                                                                 
Issuance of common stock for cash at $0.0001 per share
                10,000,000       1,000             (1,000 )            
                                                                 
Issuance of common stock for cash at $0.07 per share
                10,000,000       700,000             (25,000 )           675,000  
                                                                 
Net loss for the period
                                            (282,206 )     (282,206 )
                                                                 
Balance – October 31, 2006
                20,000,000       701,000             (26,000 )     (282,206 )     392,794  
                                                                 
Issuance of 2,000,000 Series A Preferred Shares at $0.50 per share
    2,000,000       1,000,000                                     1,000,000  
                                                                 
Stock subscriptions received
                                  25,120             25,120  
                                                                 
Issuance of common stock at $0.50 per share
                500,000       250,000                         250,000  
                                                                 
Issuance of common stock to subsidiary
                1                                
                                                                 
Fair value of share purchase warrants issued
                            497,980                   497,980  
                                                                 
Fair value of stock options granted
                            108,710                   108,710  
                                                                 
Cumulative preferred dividends
                                        (48,472 )     (48,472 )
                                                                 
Net loss for the year
                                            (2,183,150 )     (2,183,150 )
                                                                 
Balance – October 31, 2007
    2,000,000       1,000,000       20,500,001       951,000       606,690       (880 )     (2,513,828 )     42,982  
                                                                 
Issuance of common stock at $0.50 per share
                3,021,200       1,516,000                         1,516,000  
                                                                 
Stock subscriptions received
                                  880             880  
                                                                 
Share issuance costs
                      (78,015 )                       (78,015 )
                                                                 
Fair value of share purchase warrants issued
                            29,350                   29,350  
                                                                 
Fair value of stock options granted
                            102,960                   102,960  
                                                                 
Cumulative preferred dividends
                                        (35,000 )     (35,000 )
                                                                 
Net loss for the year
                                        (3,115,418 )     (3,115,418 )
                                                                 
Balance – October 31, 2008
    2,000,000       1,000,000       23,521,201       2,388,985       739,000             (5,664,246 )     (1,536,261 )

 (The accompanying notes are an integral part of these consolidated financial statements)
 
 
F-4

 

On4 Communications, Inc.
(A Development Stage Company)
Consolidated Statements of Stockholders’ Equity (Deficit)
For the Period from June 5, 2006 (Date of Inception) to October 31, 2010
 
                           
Deficit
       
                           
Accumulated
       
               
Additional
   
Common
   
During the
       
   
Preferred Stock
   
Common Stock
   
Paid-in
   
Stock
   
Development
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Issuable
   
Stage
   
Total
 
   
#
   
$
   
#
   
$
   
$
   
$
   
$
   
$
 
                                                 
Balance – October 31, 2008
    2,000,000       1,000,000       23,521,201       2,388,985       739,000             (5,664,246 )     (1,536,261 )
                                                                 
Issuance of common stock for services at $0.50 per share
                100,000       50,000                         50,000  
                                                                 
Stock-based compensation
                            94,539                   94,539  
                                                                 
Common shares issued upon conversion of preferred stock
    (2,000,000 )     (1,000,000 )     4,000,000       1,000,000                          
                                                                 
Common shares issued upon conversion of preferred dividend payable
                333,888       83,472                         83,472  
                                                                 
Balance, May 1, 2009 before recapitalization (Note 3)
                27,955,089       3,522,457       833,539             (5,664,246 )     (1,308,250 )
                                                                 
May 1, 2009 Recapitalization Transactions
                                                               
                                                                 
Shares acquired by legal parent
                (27,955,089 )                              
                                                                 
Shares of Sound Revolution Inc.
                68,258,478                                
                                                                 
Shares issued to shareholders of On4 Communications Inc.
                27,955,089       2,796       2,658,893                   2,661,689  
                                                                 
To record par value adjustment
                        (3,515,632 )     3,515,632                    
                                                                 
Stock subscriptions received
                661,410       66       132,216                   132,282  
                                                                 
Share issuance costs
                            (8,000 )                 (8,000 )
                                                                 
Issuance of common stock for acquisition
                3,000,000       300       2,129,700                   2,130,000  
                                                                 
Common stock issuable for services
                                  70,000             70,000  
                                                                 
Net loss for the year
                                        (5,420,719 )     (5,420,719 )
                                                                 
Balance – October 31, 2009
                99,874,977       9,987       9,261,980       70,000       (11,084,965 )     (1,742,998 )
                                                                 
Beneficial conversion feature
                            75,000                   75,000  
                                                                 
Shares issued upon conversion of notes
                3,400,472       340       169,684                   170,024  
                                                                 
Shares issued upon settlement of related party debt
                14,950,972       1,495       1,643,667                   1,645,162  
                                                                 
Cancellation of shares
                (54,223,931 )     (5,422 )     5,422                    
                                                                 
Shares issued for services
                2,600,000       260       407,740                   408,000  
                                                                 
Fair value of stock options granted
                            307,133                   307,133  
                                                                 
Net loss for the year
                                        (2,408,836 )     (2,408,836 )
                                                                 
Balance – October 31, 2010
                66,602,490       6,660       11,870,626       70,000       (13,493,801 )     (1,546,515 )
 
 (The accompanying notes are an integral part of these consolidated financial statements)
 
 
F-5

 
 
On4 Communications, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Expressed in US Dollars)

   
For the Year
Ended
October 31,
2010
$
   
For the Year
Ended
October 31,
2009
$
   
Accumulated From
June 5,
2006
(Date of
Inception)
to October 31,
2010
$
 
                   
Operating Activities
                 
                   
Net loss from continuing operations
    (2,393,431 )     (5,220,847 )     (12,228,814 )
                         
Adjustments to reconcile net loss to net cash used in operating activities:
                       
Accretion of discount on convertible debt
    76,782       10,218       87,000  
Amortization of property and equipment
    7,305       11,917       36,174  
Amortization of intangible assets
    6,954       7,059       18,138  
Gain on settlement of debt
    (465,171 )     (185,145 )     (650,316 )
Impairment of goodwill
    1,223,708       2,050,401       3,274,109  
Impairment of intangible assets
          2,115,000       2,219,724  
Issuance of notes payable for services and penalties
                90,402  
Issuance of shares for services
    408,000       120,000       528,000  
Stock-based compensation
    307,133       94,539       1,140,672  
Write-off of notes receivable
                1,114,182  
                         
Changes in operating assets and liabilities:
                       
Accounts receivable
    64,737       (64,737 )      
Prepaid expenses and deposits
    22,629       (19,541 )     (7,745 )
Accounts payable and accrued liabilities
    207,043       378,903       779,123  
Accrued interest payable
    267,660       116,338       421,416  
Deferred revenue
    (90,385 )     90,385        
Due to related parties
    230,968       226,188       522,636  
                         
Net Cash Used In Operating Activities
    (126,068 )     (269,322 )     (2,655,299 )
                         
Investing Activities
                       
Acquisition of intangible assets
                (182,687 )
Cash acquired in reverse merger
          1,523       1,523  
Acquisition of property and equipment
    (2,897 )           (33,562 )
Advances for note receivable
                (1,114,182 )
                         
Net Cash Provided by (Used In) Investing Activities
    (2,897 )     1,523       (1,328,908 )
                         
Financing Activities
                       
Proceeds from issuance of common stock
          132,282       1,821,267  
Proceeds from issuance of preferred stock
                1,000,000  
Proceeds from notes payable
    75,000             727,022  
Repayment of notes payable
                (81,250 )
Proceeds from related parties
    81,472             561,935  
Repayments to related parties
    (39,780 )     (45,000 )     (84,780 )
Cash from disposition of Pets Mobility
    709             709  
Share issuance costs
          (8,000 )     (8,000 )
                         
Net Cash Provided By Financing Activities
    117,401       79,282       3,936,903  
                         
Effects of Exchange Rate Changes on Cash
    18,649       36,213       54,862  
                         
Net Cash Used in Discontinued Operations:
                       
                         
Operating Activities
                (118,178 )
Investing Activities
                (661,509 )
Financing Activities
                779,687  
                         
                   
                         
Increase (Decrease) in Cash
    7,085       (152,304 )     7,558  
                         
Cash - Beginning of Period
    473