UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 2
Quarterly report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2004
WIRELESS FRONTIER INTERNET, INC.
--------------------------------
(Exact name of small business issuer as specified in its charter)
================================================================================
Delaware 0-08281 76-0402866
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
================================================================================
104 West Callaghan, Fort Stockton, Texas 79735
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (432) 336-0336
--------------
Securities registered under Section 12 (b) of the Exchange Act: NONE
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock Par Value $ 0.001 per share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 |_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 66,507,787 common shares as of
December 31, 2004.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
1
TABLE OF CONTENTS
Page
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PART I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
As of June 30, 2004 (unaudited) and December 31, 2003................3
Unaudited Condensed Consolidated Statements of Operations
For the Three Months and Six Months ended June, 2004 and 2003........4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2004 and 2003......................5
Notes to Unaudited Condensed Consolidated Financial Statements.......7
Item 2. Management's Discussion and Analysis of Plan of Operation............13
Item 3. Controls and Procedures..............................................16
PART II Other Information
Item 1. Legal Proceedings....................................................17
Item 3. Defaults Upon Senior Securities......................................17
Item 6. Exhibits and Reports on Form 8-K.....................................18
Signatures
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
WIRELESS FRONTIER INTERNET, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004 and December 31, 2003
ASSETS 2004 2003
----------- -----------
(unaudited)
CURRENT ASSETS
Cash $ 86,602 $ 226,324
Accounts receivable 140,941 252,615
Inventories 192,256 171,477
Prepaid expenses and other current assets 281,040 2,525
----------- -----------
Total Current Assets 700,839 652,941
PROPERTY AND EQUIPMENT, net 2,090,740 2,378,606
OTHER INTANGIBLE ASSETS, net 4,489,313 3,509,244
----------- -----------
TOTAL ASSETS $ 7,280,892 $ 6,540,791
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003
----------- -----------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,041,604 $ 672,394
Current portion of debt 2,286,710 831,551
----------- -----------
Total Current Liabilities
3,328,314 1,503,945
LONG-TERM DEBT 708,465 616,772
----------- -----------
Total liabilities 2,120,717
4,036,779
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value, 100,000,000 shares authorized, 61,808 62,226
61,807,520 and 62,225,632 shares issued at June 30, 2004
and December 31, 2003 respectively
Additional paid-in capital 7,231,169 5,837,355
Accumulated deficit (4,046,838) (1,474,747)
----------- -----------
4,424,834
3,246,139
Less common stock in treasury at cost:
2004 - 943,308 shares
2003 - 1,323,308 shares (2,026) (4,760)
----------- -----------
Total stockholders' equity 3,244,113 4,420,074
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,280,892 $ 6,540,791
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
WIRELESS FRONTIER INTERNET, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Equipment sales $ 473,586 $ 72,794 $ 715,636 $ 95,216
Cost of equipment sales 362,473 72,093 519,741 70,122
------------ ------------ ------------ ------------
Gross profit equipment sales 111,113 701 195,895 25,093
Internet service 786,479 1,304,325 1,572,884 1,771,125
Cost of service 333,779 271,004 640,178 656,979
------------ ------------ ------------ ------------
Gross profit internet service 452,700 1,033,320 932,706 1,114,146
TOTAL GROSS PROFIT 563,813 1,034,022 1,128,601 1,139,239
OTHER OPERATING EXPENSES:
General and administrative 1,213,754 829,825 2,292,684 1,122,881
Depreciation and amortization 248,580 80,759 527,826 123,689
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (898,519) 123,438 (1,691,909) (107,331)
INTEREST EXPENSE 408,718 28,124 856,663 32,397
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,307,237) (2,548,572) (139,728)
95,314
OTHER INCOME (LOSS) (23,519) 0 (23,519) 0
------------ ------------ ------------ ------------
NET LOSS $ (1,330,756) $ $ (2,572,091) $ (139,728)
95,314
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.02) $ (0.04)
BASIC AND DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 59,622,212 62,779,136
See accompanying notes to condensed consolidated financial statements.
4
WIRELESS FRONTIER INTERNET, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months
Ended June 30, 2004 and 2003
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net loss $(2,572,091) $ (139,728)
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization 527,826 110,223
Stock issued for services 2,734 0
Amortization of loan discount related to detachable warrants 657,500 0
Loss (Gain) on sale of assets 23,519 0
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 111,674 (737,215)
Decrease (Increase) in inventories (20,779) (111,151)
(Increase) in prepaid expenses (278,516) (122,428)
(Decrease) Increase in accounts payable and accrued liabilities 334,312 260,828
----------- -----------
Net cash used by operating activities (1,213,820) (739,470)
INVESTING ACTIVITIES:
Purchases of property and equipment (519,581) (1,408,208)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 61,210 1,682,841
Net proceeds from issuance of debentures and notes 1,638,252 474,304
Payments on debentures and notes payable (105,783) (25,933)
----------- -----------
Net cash provided by financing activities
1,593,679 2,131,212
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (139,722) (16,466)
CASH AND CASH EQUIVALENTS, beginning of period 226,324 88,990
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 86,602 $ 172,524
=========== ===========
See accompanying notes to condensed consolidated financial statements
5
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 56,494 $ 32,397
Non-cash activity:
Acquisitions:
Assets:
Accounts receivable $ 0 $ 126,651
Inventories 95,657 26,717
Property and equipment 233,392 800,283
Intangible assets 260,853 510,000
Goodwill 966,798 2,113,826
----------- -----------
1,556,700 3,577,477
Liabilities:
Accounts payable and accrued expenses 0 140,983
Debt 350,619 172,894
----------- -----------
Net assets acquired for stock $ 1,206,081 $ 3,263,600
=========== ===========
Sale of assets acquired in prior acquisition:
Property and equipment, net $ 466,648
Intangible assets and Goodwill, net 89,552
-----------
Stock reacquired $ 556,200
===========
Other transactions, net $ 23,519
===========
See accompanying notes to condensed consolidated financial statements.
6
WIRELESS FRONTIER INTERNET, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The interim condensed consolidated financial statements included herein have
been prepared by Wireless Frontier Internet, Inc. and subsidiary (collectively,
the "Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company's management, the accompanying interim condensed
consolidated financial statements reflect all adjustments, of a normal recurring
nature, that are necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for such periods. It is
recommended that these interim condensed consolidated financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-KSB and Form 10-KSB/A
for the year ended December 31, 2003. Results of operations for the interim
periods are not necessarily indicative of results that may be expected for any
other interim periods or the full fiscal year.
Basic and Diluted Weighted Average Shares Outstanding for the three months and
six months ended June 30, 2003 are not included in the financial statements
because the Company was not a publicly trading company until September 30, 2003.
Consequently, the Basic and Diluted Net Loss Per Common Share is not reported
for this period.
Note 2. Intangible Assets
Intangible assets are summarized by major classifications as of June 30, 2004 as
follows:
Customer Lists $ 929,059
Covenants not to compete 10,000
-----------
939,059
Less: Accumulated amortization (353,838)
-----------
585,221
Goodwill 3,904,092
-----------
Total $ 4,489,313
===========
The Company has no tax deductible Goodwill.
Note 3. Acquisitions
On June 30, 2003, the Company entered into an agreement to purchase all the
assets of Strategic Abstract & Title Corporation for $4,000 and 4,166,640 shares
of common stock valued at $680,600. The original agreement called for an
issuance of 416,664 shares of common stock. The number of shares issued was
revalued in January 2004 to 4,166,640 shares. This purchase added three
commercial buildings valued at $285,000 and the assets and business of Strategic
Abstract & Title Corporation. On June 9, 2004, the Company sold the assets and
business for 3,791,210 of the shares issued at the time of the acquisition plus
250,000 5-year stock purchase warrants that are exercisable at $0.25 per share.
The value of the shares was $568,862 and the value of the warrants was $36,000.
A loss of $23,519 was recorded on the sale.
On February 9, 2004, the Company entered into an Asset Purchase Agreement with
Office Products Incorporated, Computer Division ("OPI") to purchase Internet
subscribers, certain assets, and computer service customers. The number of
shares issued was 3,527,623 shares of the Company's common stock. The Company
also issued the seller a note for $350,619 to be paid $20,000 plus 10% interest
per month. The assets acquired were as follows:
7
Inventory $ 95,657
Equipment and 207,035
furniture
Customer List 125,782
Goodwill 781,786
----------
Total $1,210,260
==========
Had the operations of OPI been included in the Company's statements of
operations for the six months ended June 30, 2004 and 2003, respectively, the
pro forma revenues, losses and related per share data would have been as
follows:
2004 2003
----------- -----------
Pro forma revenue $ 2,393,157 $ 2,338,069
Pro forma loss $(2,683,451) $ (274,186)
Pro forma earnings per share, basic and diluted $ (0.04) $ (0.01)
On March 17, 2004, the Company entered into an Asset Purchase Agreement with
BCOM.NET, INC to purchase certain assets and Internet subscribers of BCOM.NET,
INC. This purchase extends the Company's service to an area south of San
Antonio, Texas. The Company issued 355,600 shares of common stock to acquire
these assets. The supplemental pro forma information required by FAS 141 has
been omitted as such amounts are considered to be immaterial. The assets
acquired were as follows:
Equipment and furniture $ 26,358
Customer List 82,000
Goodwill 185,012
--------
Total $293,370
========
On April 5, 2004 the Company entered into an Asset Purchase Agreement with
RayTech Internet, Inc. to purchase certain assets and Internet subscribers. The
Company paid $10,000 in cash and issued 50,672 shares of the Company's common
stock to acquire these assets. This purchase extends the Company's service to
Big Springs, Texas. The supplemental pro forma information required by FAS 141
has been omitted as such amounts are considered to be immaterial. The assets
acquired were as follows:
Customer List $53,071
Note 4. Debt
On November 14, 2002, the Company entered into a Line of Credit Agreement with a
local bank for $170,000 due June 4, 2004. This loan was subsequently renewed and
is now due on December 20, 2004. The interest rate is 6.75%. The loan is secured
by all accounts and other rights to payments, inventories, equipment,
instruments and chattel paper, general intangibles, documents, and deposit
accounts owned by the Company. The majority stockholder and officer of the
Company also guaranteed the loan. The balance at June 30, 2004 was $170,000.
As part of the Xramp agreement on June 30, 2003, the Company issued a note to
pay the owners of Xramp $50,000. The loan was paid in March 2004.
On December 18, 2003, the Company entered into a loan agreement with a bank for
$353,279. The interest rate varies at 2 points over the Wall Street Journal
Prime Rate. The rate was 6.75% at June 30, 2004. The note was renewed and now
matures on March 23, 2005. The note is secured by all vehicles, office
equipment, accounts receivable, telephone equipment and all other assets. The
balance outstanding was $328,279 at June 30, 2004.
The Company issued a note for $350,619 in connection with the acquisition of
Office Products Incorporated, Computer Division. This note is to be paid in
monthly installments of $20,000 principal plus 10% interest until the balance of
this note is repaid. The balance outstanding was $350,619 at June 30, 2004.
8
In March 2004, the Company issued convertible debentures to a number of
noteholders, in the aggregate principal amount of $1,315,000, at an interest
rate of 10%, plus late penalties, and warrants to purchase an aggregate of
6,575,000 shares of the Company's common stock at an exercise price of $0.10 per
share. These debentures matured on April 11, 2004, and the Company was unable to
pay the debentures. In July 2004, the Company agreed with the noteholders to
extend the maturity date to August 11, 2004 and to reduce the conversion price
of the debentures to $0.05 per share. The Company paid the debentures plus
interest of $172,000 with the proceeds of a Private Placement Offering on August
6, 2004. Pursuant to a letter agreement between the Company and the noteholders,
the warrants are now exercisable for $0.05 per share. The Company also reported
non-cash interest expense of $424,194 in the quarter ended March 31, 2004 and
$233,306 in the quarter ended June 30, 2004 related to a discount of the
debentures for the purchase warrants issued and subsequently repriced.
On May 30, 2002, the Company entered into a loan agreement with a bank for
$469,073. The loan calls for 24 monthly payments of $7,000, followed by 47
monthly payments of $8,500 and 1 payment of $16,901. All payments include
interest which varies with the Wall Street Journal Prime Rate plus 2 percentage
points (6.75% at June 30, 2004). The loan is secured by all equipment, accounts
receivable, and inventories whether now owned or hereafter acquired, wherever
located. Certain stockholders, an employee and an officer of the Company also
guaranteed the loan. The balance due was $362,890 at June 30, 2004.
On January 8, 2003, the Company entered into a loan agreement with a bank for
$14,500. The loan calls for 30 monthly payments of $532 including interest at
the Wall Street Journal Prime Rate plus 2 percentage points. The initial
interest was 6.75%. The loan is secured by the vehicle purchased. Certain
stockholders and officers of the Company also guarantee the loan. The balance
outstanding was $7,110 at June 30, 2004.
On April 15, 2003, the Company entered into a loan agreement with a bank for
$88,340. The loan calls for 60 monthly payments of $1,566 plus interest at the
Wall Street Journal Prime Rate plus 2 percentage points. The initial interest
was 6.75%. The loan is secured by the installation vehicles purchased. The
majority stockholder and an officer of the Company also guaranteed the loan. The
balance outstanding was $73,589 at June 30, 2004.
On April 15, 2003, the Company entered into a loan agreement with a finance
company for $28,394. The loan calls for 60 monthly payments of $473. The loan is
secured by the vehicle purchased. The majority stockholder and an officer of the
Company also guaranteed the loan. The balance outstanding was $22,739 at June
30, 2004.
On April 21, 2003, the Company entered into a loan agreement with a credit union
for $35,402. The loan calls for 60 monthly payments of $504 plus interest at
6.75%. The loan is secured by the installation vehicle purchased. The majority
stockholder and an officer of the Company also guaranteed the loan. The balance
outstanding was $29,498 at June 30, 2004.
On April 21, 2003, the Company entered into a loan agreement with a finance
company for $38,702. The loan calls for 60 monthly payments of $645 plus
interest at 6.25%. The loan is secured by the installation vehicle purchased.
The majority stockholder and an officer of the Company also guaranteed the loan.
The balance outstanding was $31,588 at June 30, 2004.
On April 21, 2003, the Company entered into a loan agreement with a finance
company for $34,592. The loan calls for 60 monthly payments of $571 plus
interest at 6.25%. The loan is secured by the installation vehicle purchased.
The majority stockholder and an officer of the Company also guaranteed the loan.
The balance outstanding was $28,261 at June 30, 2004.
On May 1, 2003, the Company assumed a loan of an employee in exchange for the
vehicle secured by the loan. The loan amount assumed was financed by a finance
company and was for $32,005, the balance due at May 1, 2003. The loan calls for
40 additional monthly payments of $762. The loan is secured by the installation
vehicle purchased. The employee of the Company is still liable for the loan. The
balance outstanding was $30,522 at June 30, 2004.
On May 1, 2003, the Company entered into a loan agreement with a finance company
for $40,546. The loan calls for 60 monthly payments of $676. The loan is secured
by the installation vehicle purchased. The majority stockholder and an officer
of the Company also guaranteed the loan. The balance outstanding was $32,471 at
June 30, 2004.
In May 2003, the Company entered into a loan agreement with an individual for
$90,000, effective to May 1, 2001 to purchase the Company's headquarters
building in Fort Stockton, Texas. Rent paid since May 1, 2001 has been applied
to the note and recorded as other income in the first quarter of 2003. The loan
calls for 180 monthly payments of $900 including interest at 8.759%. The note is
secured by the building. The balance outstanding was $76,296 at June 30, 2004.
In connection with the acquisition of Momentum Online Computer Services, Inc.
("Momentum") on June 1, 2003, the Company assumed the following loans:
Line of Credit dated November 11, 2002 with a local bank for $75,000
payable on demand and if no demand is made, then on November 22, 2003. The note
was renewed in December 2003 when an interest payment was made and the new
maturity date is June 19, 2004. The interest rate is 8.5%. The loan is secured
by all monies the Company has on deposit with the bank. The note is guaranteed
by a stockholder of Momentum. The balance outstanding was $59,422 at June 30,
2004.
9
A loan with an individual and stockholder for $59,250 for working capital
funds advanced to Momentum since inception. The loan is due on demand with an
interest rate of 8% due monthly. The note is unsecured. The balance outstanding
was $54,203 at June 30, 2004.
A loan with a finance company for $25,860 to purchase a vehicle. The loan
calls for 48 monthly payments of $658 including interest at 10.2%. The
installation vehicle secures the note. A stockholder and employee of the Company
also guarantee the note. The balance outstanding was $2,569 at June 30, 2004.
A loan with a bank for $54,785 to purchase equipment. The loan is due on
demand and if no demand is made, in 35 monthly payments of $1,771 including
interest at 10.0%. The equipment secures the note along with funds that Momentum
has on deposit with the bank. A stockholder and officer of Momentum also
guaranteed the note. The balance outstanding was $4,552 at June 30, 2004.
A loan with a finance company for $13,600 to purchase equipment. The loan
calls for 36 monthly payments of $465 including interest at 15.9%. The equipment
secures the note. The balance outstanding was $7,171 at June 30, 2004.
Note 5. Employee Stock Option Plan and Other Employee Related Actions
In their October 1, 2003 meeting, the Board of Directors agreed to allocate
20,000,000 shares to the Employee Stock Option Plan to be established later.
There have been no options issued in connection with this plan.
On July 7, 2004, certain officers of the Company contributed to the capital of
the Company the number of issued and outstanding shares of the common stock, par
value $0.001 per share, of the Company set forth opposite his name below. The
contribution of these shares was accounted for through a reduction in the Common
Stock account with a corresponding increase in Additional Paid-in Capital at par
value.
Shareholder Number of Shares
----------- ----------------
Alex J. Gonzalez 13,762,122
Joe Chris Alexander 883,334
Ronald J. Marosko, Jr. 883,334
Jaime R. Velasco 1,100,000
On June 7, 2004, the Company entered into employment agreements with the
following employees of the Company: Alex J. Gonzalez, Joe Chris Alexander,
Ronald J. Marosko, Jr. and Kelly E. Simmons.
The Company approved the grant to certain of its employees of employee stock
options to purchase the number of shares of Common Stock set forth opposite his
name below. Each option will be exercisable as follows: (i) 25% of such option
shall become exercisable on December 31, 2004, at a price of $0.25 per share;
(ii) an additional 25% of such option shall become exercisable on December 31,
2005, at a price of $0.31 per share; (iii) an additional 25% of such option
shall become exercisable on December 31, 2006, at a price of $0.40 per share;
and (iv) an additional 25% of such option shall become exercisable on December
31, 2007, at price of $0.50 per share. The exercise of these options will be
conditioned upon the satisfaction of certain conditions set forth in each
shareholder's respective option agreements.
Shareholder Number of Options to be Granted
-------------- -------------------------------
Alex J. Gonzalez 13,762,122
Joe Chris Alexander 883,334
Ronald J. Marosko, Jr. 883,334
Jaime R. Velasco 1,100,000
Based on the provisions of APB 25, there was no intrinsic value of the options
granted on June 7, 2004, and therefore, no compensation expense was recorded.
The fair value of the options was approximately $2,350,000 on June 7, 2004. The
fair value of the stock contributed to the Company which gave rise to the
issuance of the options was approximately $2,500,000 on July 7, 2004 based on
the quoted market price. As a result, there was no compensation expense
10
associated with the granting of the options. Therefore, no disclosure is
required of the pro forma information as provided for by SFAS 148. The following
assumptions were used for the grant of the options to the employees to compute
the fair value of the options using the Black-Scholes option-pricing model:
dividend yield of 0%; expected volatility of 183.0%; risk free interest rate of
3.66%; and expected life of 5 years.
Note 6. Stockholders' Equity
In January 2004, the Company revalued the number of shares of common stock
issued to stockholders in connection with certain acquisitions and investments
in the Company that occurred during 2003. The original number of shares issued
for these transactions in 2003 was 1,128,872. The number of shares issued as a
result of this revaluation was 10,159,848, resulting in the total number of
shares issued for these transactions of 11,288,720. The issuance of these shares
was accounted for through an increase in the Common Stock account with a
corresponding decrease in Additional Paid-in Capital at par value.
During the first quarter and second quarter of 2004, The Company issued stock
for the compensation of certain legal and consulting services. The shares issued
in the first quarter were 181,818, and the shares issued in the second quarter
were 170,000. The services were valued at $36,364 in the first quarter, and
$34,000 in the second quarter. The issuance of these shares was accounted for
each quarter through an increase in the Common Stock account at par value and an
increase in Additional Paid-in Capital for the remainder of the value of the
services.
On July 7, 2004, certain officers of the Company contributed 16,628,790 shares
of common stock to the capital of the Company. The contribution of these shares
was accounted for through a reduction in the Common Stock account with a
corresponding increase in Additional Paid-in Capital at par value.
In July through September 2004, the Company completed a private placement
transaction in which 21,763,890 shares of common stock and warrants to purchase
up to 10,881,913 shares of common stock were issued. Common stock can be
purchased with these warrants for $0.15 per share. The Company received
approximately $3,264,592 from this placement; the proceeds of which were used to
repay the debentures plus interest mentioned above, and $865,133 was used to pay
placement agent and legal fees.
Note 7. Litigation
On November 10, 2003, Momentum filed a complaint against the Company in state
district court for the State of Texas in relation to the asset purchase
agreement the Company entered into with Momentum on June 1, 2003. The complaint
alleges the Company breached its contract as a result of the failure to deliver
shares of common stock of the Company as required pursuant to the asset purchase
agreement. The court issued an injunction requiring that any revenue generated
from the subject assets be placed in escrow and utilized to pay any outstanding
invoices in connection with the use of the assets. The assets acquired,
liabilities assumed, revenue generated, and associated expenses are included in
these financial statements since the acquisition date. The revenues and expenses
generated by Momentum and included in the accompanying statement of operations
during the six months ended June 30, 2004 were $724,106 and $765,456,
respectively. The assets and liabilities related to Momentum that are included
on the balance sheet at June 30, 2004 are in the following table:
Assets:
Cash $ 66,128
Accounts receivable 133,299
Inventory 30,584
Equipment and furniture 175,604
Other assets 44,600
Customer List 291,666
Goodwill 1,992,202
----------
Total Assets $2,734,083
==========
Liabilities:
Accounts payable and accrued liabilities $ 225,328
Notes payable 234,724
----------
Total Liabilities $ 460,052
==========
11
On January 6, 2004, Momentum filed for voluntary bankruptcy in Federal
Bankruptcy Court. This action stopped the proceeding in state court until a
hearing on the Company's holdings can be heard. On October 4, 2004, the parties
appeared before a Bankruptcy Court appointed mediator, but did not resolve the
dispute. The court has not set a date to hear this case,, so it is unclear at
this point when this matter will be resolved. The Company believes that
Momentum's lawsuit is without merit and intends to vigorously defend the matter.
Note 8. Going Concern
The Company has a history of losses, negative cash flows and has had some
difficulty meeting the terms of some of its debt instruments. As of June 30,
2004, the Company had a working capital deficit of $2,627,475. The Company's
continuation as a going concern depends upon its ability to attain profitable
operations and to obtain additional sources of capital and financing. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The steps that the
Company is taking to alleviate the deficiency of capital includes a focus on
increasing revenues, the reduction of staff, selling of unnecessary equipment
such as vehicles, the implementation of new selling practices that are less
expensive than traditional media marketing, and the raising of additional debt
or equity capital.
Note 9. Restatement of Previously Issued Financial Statements in Form 10-QSB
The accompanying financial statements reflect a restatement of the financial
statements previously issued on August 18, 2004 by the Company with the
Securities and Exchange Commission on Form 10QSB for the three months and six
months ended June 30, 2004. Net loss and basic and diluted net loss per share
("LPS") as previously reported in the appropriate interim periods as reflected
below have been restated to account for the non-cash transactions related to (1)
common stock issued for legal services (see note 6), (2) the sale of Strategic
Abstract & Title Corporation for common stock of the Company (see note 3) and
(3) interest expense resulting from the discount of the convertible debentures
issued with detachable warrants and their subsequent re-pricing (Note 4.). The
effect of the restatement on net loss and basic and diluted net loss per share
in previously issued financial statements for the three months ended March 31,
2004, and for the three months and six months ended June 30, 2004 are as
follows:
As Previously Reported As Restated
Net Loss LPS Net Loss LPS
------------- -------- ------------- --------
Three months ended March 31, 2004 ($885,868) ($0.01) ($1,241,335) ($0.02)
Three months ended June 30, 2004 ($1,040,101) ($0.02) ($1,330,756) ($0.02)
Six months ended June 30, 2004 ($1,925,969) ($0.03) ($2,572,091) ($0.04)
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
Introduction
The following discussion of our financial condition and results of our
operations should be read in conjunction with the Financial Statements and Notes
thereto. This document contains certain forward-looking statements including,
among others, anticipated trends in our financial condition and results of
operations and our business strategy. Statements contained herein that are not
historical fact may be forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are based
largely on our current expectations and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from these
forward-looking statements. Important factors to consider in evaluating such
forward-looking statements include, but are not limited to, (i) the Company's
ability to obtain additional financing; (ii) the Company's ability to deploy its
high-speed network in a timely fashion; (iii) the Company's ability to keep pace
with technological changes in its industry; and (iv) the Company's ability to
attract and retain its customers. In addition, significant fluctuations in
quarterly results may occur as a result of the timing of customer demand for the
Company's high-speed services and the timing of the installation of the
Company's networks. Additional factors that would cause actual results to differ
materially from those projected or suggested in any forward-looking statements
are contained in the Company's filings with the Securities and Exchange
Commission, including those factors discussed under the caption "Risk Factors"
in the Company's most recent Annual Report on Form 10-KSB/A. The Company
undertakes no obligation to publicly release the revisions in such
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrences of unanticipated events or
circumstances, except as otherwise required by securities and other applicable
laws.
Plan of Operation
The Company is a wireless broadband Internet service provider located in Fort
Stockton, Texas. In addition, the Company is also a traditional Internet service
provider. The Company currently provides services to customers in over 100
cities throughout Southwest Texas and Kansas. The Company was designed to
deliver efficient, reliable and cost effective solutions to bringing high-speed
Internet access to rural markets within the United States. The Company believes
it has positioned itself to meet the Internet access needs of organizations and
consumers which require broadband access to the Internet in its operating area,
but do not have access to cable or DSL from the traditional service providers.
The Company offers broadband Internet service through a network of
point-to-point and point-to-multipoint wireless networks. The Company uses
terrestrial circuits to connect the Internet backbone and then distributes the
signal through a series of towers and repeaters to customer premise equipment
(CPE) located at the subscriber's residence or business. Also, by utilizing the
expertise of the Company's Network Engineers, the Company delivers value added
services to its subscribers by offering network integration services. This
service is provided by selling, installing and maintaining the hardware
necessary for virtual private networks (VPN's), Voice over IP (VoIP) and data
integration services.
The Company has focused its marketing efforts on providing wireless broadband
access services to customers located in rural areas of Texas and Kansas and then
throughout the United States. The Company will also focus on cities of less than
150,000 inhabitants. As the Company positions itself as a high quality service
provider, it offers network reliability complemented by quality customer
support.
As part of its business strategy, the Company plans to continue to make
acquisitions of complementary companies, products and technologies. In order to
implement these strategies and to fund its operations and repay its
indebtedness, the Company will need to raise substantial amounts of capital over
the next year. Please see discussion below under "Liquidity and Capital
Resources."
The Company will focus its effort on customer satisfaction by attracting and
retaining a core team of professionals. We plan to increase our staffing levels
only as required by our operation. We currently have no plans to significantly
increase the number of our employees.
Results of Operations
Results of operations for the three months ended June 30, 2004 compared to the
three months ended June 30, 2003.
For the three months ended June 30, 2004, the Company generated $473,586 in
equipment sales and $786,479 in Internet service revenue. For the three months
ended June 30, 2003, the Company generated $72,794 in equipment sales revenue,
and $1,304,325 in Internet service revenue. The increase in equipment sales is
primarily from the acquisitions expanding our customer base. The decrease in
internet service revenue reflects some community network service grants that
were recognized in the second quarter of 2003. This source of revenue was
limited and was approximately $799,000 in the three months ended June 30, 2003
compared to no revenue from community service network grants during the three
months ended June 30, 2004. Without this revenue source in the 2003 period, the
comparison with 2004 reflects an increase in the subscriber revenue and other
Internet income due primarily to the acquisitions expanding the Company's
customer base.
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The cost of equipment sales for the three months ended June 30, 2004, which
consists of purchasing equipment and accessories, was $362,473. The cost of
service sales for the three months ended June 30, 2004, which consists of
telephone lines, installation costs, rental costs, and service costs, was
$333,779.
The gross profit margin for equipment sales was 23% for the three months ended
June 30, 2004 compared to 1% for the three months ended June 30, 2003. The
increase in the Company's gross profit margin for equipment sales for that
period was due to the mix of sales with an increase of services sales resulting
in a higher profit margin than equipment sales. The gross profit margin for
Internet sales was 58% for the three months ended June 30, 2004 compared to 79%
for the three months ended June 30, 2003. The higher margin in gross profit in
2003 is the result of some large community network service grants in the second
and third quarters of 2003. There was very little additional cost incurred by
the Company to perform the services under these grants and the corresponding
gross margins reflect that. These grants are considered to be isolated
opportunities for the Company and the Company has not received any additional
grants in 2004.
The Company incurred total operating expenses of $1,213,754 for the three months
ended June 30, 2004 compared to $829,825 for the three months ended June 30,
2003, a total increase of 46%. The major components of the expenses were as
follows:
General and Administrative Expenses: Three Months Ended Three Months Ended Percentage
June 30, 2004 June 30, 2003 Change
------------- ------------- ----------
Advertising and promotion $ 24,205 $ 32,364 (25)%
Legal and professional 307,842 57,425 436%
Auto and travel 84,987 73,088 16%
Commissions and contract labor 38,185 67,761 (44)%
Office expenses and supplies 48,411 24,071 101%
Salaries and wages 653,098 455,885 43%
Utilities 34,781 25,545 36%
Depreciation and amortization: 248,579 80,759 208%
The increase in the Company's expenses for the three months ended June 30, 2004
is the result of (i) an increase in legal and professional fees primarily due to
the Company's merger with Fremont, the ongoing costs of operating as a public
company, and the litigation with the former owner of Momentum; (ii) an increase
in office expenses related to the growth in the number of personnel over the
past 12 months; (iii) an increase in salaries and wages due to the hiring of
additional staff from the Company's acquisition of additional companies, and due
to the increase in staff required to manage the public company; and (iv) the
increase of the depreciation and amortization costs with the acquisition of new
companies. In addition, the Company's interest expenses for the three months
ended June 30, 2004 compared to the same period in 2003 increased due to a
non-cash interest expense that was incurred from the debenture offering in March
through August 2004. The Company believes that while the trend of losses may
continue, 2004 expenses reflect investment in future operational capabilities as
a company and management believes that revenues will increase without
substantial expense increases. The Company has already taken steps to reduce the
number of employees and to decrease operating expenses. The lawsuit involving
Momentum has prevented the Company from making such changes to this operation
even though the results from that operation are included in the financial
statements.
Other loss for the three months and six months ended June 30, 2004 are due to
the loss generated from the sale of Strategic Abstract to its original owner.
The Company sustained a net loss of $1,330,756 for the three months ended June
30, 2004, as compared to net income of $95,314 for the same period in 2003. The
major difference in the net results between these two periods is (i) the larger
amount of revenue from Community Network implementations in 2003, (ii) the
increased employee, operating and legal expenses in 2004 incurred from going
public and acquiring new companies, and (iii) the interest expense incurred in
2004 of $380,594 from the debenture offering in 2004. Loss from operations in
the three months ended 2004 was $1,307,237, compared to net income of $95,314 in
the same period in 2003.
14
Results of operations for the six months ended June 30, 2004 compared to the six
months ended June 30, 2003.
For the six months ended June 30, 2004 and 2003, equipment sales were
$715,636 and $95,216, respectively. Internet service revenue was $1,572,884 and
$1,771,125 for the six months ended June 30, 2004 and 2003, respectively. The
increase in equipment sales is primarily from the acquisitions expanding our
customer base. The decrease in internet service revenue reflects some large
community network service grants that were recognized in the second quarter of
2003. For the six months ended June 30, 2004 and 2003, revenue from community
service network grants was $122,000 and $799,000, respectively. Without this
revenue source in the 2003 periods, the comparison with 2004 reflects an
increase in subscriber revenue and other internet income due primarily from the
acquisitions expanding our customer base.
The cost of equipment sales was $519,741 for the six months ended June 30,
2004, which consists of purchasing equipment and accessories. The cost of
Internet services was $640,178 for the six months ended June 30, 2004, which
consists of telephone lines, installation costs, rental costs, and service
costs.
The gross profit margin for equipment sales was 27% for the six months
ended June 30, 2004 compared to 26% for the six months ended June 30, 2003. The
gross profit margin for Internet sales was 59% for the six months ended June 30,
2004, compared to 63% for the six months ended June 30, 2003. The higher margin
in the six month gross profit in 2003 is the result of the large community
network service grants that were recognized in the second quarter of 2003. There
was very little additional cost incurred by the Company to perform the services
under these grants and the corresponding gross margins reflect that. These
grants are considered to be isolated opportunities for the Company, and the
Company has not received any additional grants in 2004.
The Company incurred operating expenses of $2,292,684 for the six months
ended June 30, 2004, compared to $1,122,881 for the six months ended June 30,
2003, a total increase of 104%. The major components of the expenses were as
follows:
General and Administrative Expenses: Six months Ended Six months Ended Percentage
June 30, 2004 June 30 ,2003 Change
------------- ------------- ------
Advertising and promotion $ 40,573 $ 40,401 0%
Legal and professional 525,148 59,390 784%
Auto and travel 131,773 93,976 40%
Commissions and contract labor 64,832 32,431 100%
Office expenses and supplies 84,372 69,652 21%
Insurance 54,709 50,500 8%
Rent 40,617 36,147 12%
Salaries and wages 1,177,403 677,594 74%
Utilities 67,085 38,471 74%
Depreciation and amortization: 527,826 123,689 327%
The increase in the Company's expenses for the six months ended June 30,
2004, compared to the same period in 2003 was primarily due to (i) an increase
in legal and professional fees principally due to the Company's merger with
Fremont and the associated SEC filings, the ongoing costs of operating as a
public company, and the litigation with the former owner of Momentum; (ii) an
increase in office expenses related to the temporary growth in the number of
personnel during the first six months of 2004; (iii) an increase in salaries and
wages due to the hiring of additional staff from the Company's acquisition of
additional companies, and due to the increase in staff required to manage the
public company; and (iv) the increase of the depreciation and amortization costs
with the acquisition of new companies. In addition, the Company's interest
expenses for the six months ended June 30, 2004 compared to the same period in
2003 increased due to a non-cash interest expense that was incurred from the
debenture offering in March through August 2004.
15
The Company believes that while the trend of losses may continue, 2004
expenses reflect investment in future operational capabilities as a company and
management believes that revenues will increase without substantial expense
increases. The Company has already taken steps to reduce the number of employees
and to decrease operating expenses. The lawsuit involving Momentum has prevented
the Company from making such changes to this operation even though the results
from that operation are included in the Company's financial statements.
Liquidity and Capital Resources
At June 30, 2004, we had a working capital deficit of $2,627,475, due
primarily to the current maturities of debt of $2,286,710. We have historically
sustained our operations and funded our capital requirements with the funds
received from loans received from various financial institutions, as well as the
private placement of equity securities and debentures, as more fully described
below. The Company is also applying for low interest loans and grants from
various Federal agencies who are promoting the proliferation of broadband
services throughout rural America. We believe that the Company qualifies for
these loans and grants, but there is no guarantee that we will receive any funds
from this effort. The Company will continue to seek other methods of funding its
operations, primarily from the sale of its common stock.
In order to reduce the number of shares outstanding, certain officers and
founders of the Company contributed an aggregate of 16,628,790 shares to the
Company that were subsequently cancelled on July 7, 2004. These officers were
also awarded stock options to purchase up to 16,628,790 shares of the Company's
common stock with escalating strike prices beginning at $0.25 per share.
As of June 30, 2004, we had $86,602 in cash and $140,941 in accounts
receivable that could be used in connection with funding our operations. The
Company anticipates funding its operations from additional sales of its common
stock or issuance of additional debt. If adequate funds are not available, we
may be unable to repay the remaining short-term indebtedness or to grow and
expand our business, in which case there would be substantial doubt about our
ability to continue as a going concern.
We believe that the impact of inflation on our operations since our
inception has not been material.
In March 2004, the Company issued convertible debentures to a number of
noteholders, in the aggregate principal amount of $1,315,000, at an interest
rate of 10%, plus late penalties, and warrants to purchase an aggregate of
6,575,000 shares of the Company's common stock at an exercise price of $0.10 per
share. The award of these warrants and the subsequent change of the strike price
to $0.05 generated a non-cash interest expense of $657,500 that is in the
accompanying consolidated financial statements. Under the terms of the
debentures, the noteholders had the option to convert the principal balance of
the debentures, in whole or in part, into shares of the Company's common stock
at a conversion price equal to $0.10 per share. These debentures matured on
April 11, 2004, and the Company was unable to pay off the debentures at
maturity. In July 2004, the Company agreed with the noteholders to extend the
maturity date to August 11, 2004 and to reduce the conversion price of the
debentures to $0.05 per share. The Company paid the debt plus interest of
$172,000 with the proceeds of a Private Placement Offering on August 6, 2004.
Pursuant to a letter agreement between the Company and the noteholders, the
warrants are now exercisable for $0.05 per share.
We will need to obtain additional capital in the future. We were
successful in raising $3,264,592 in a private placement offering that closed in
July through September 2004. The proceeds were used for (i) payment of legal and
placement fees of $865,138; (ii) repayment of debentures with interest and
penalties of $1,487,000; (iii) current payables and bank debt of approximately
$800,000; and (iv) future working capital of approximately $534,000. We intend
to obtain funding through the use of various types of short-term funding, loans
or working capital financing arrangements from banks or financial institutions.
It may also be necessary for us to raise additional capital in public or private
equity markets. Our ability to raise additional capital in public or private
markets will depend primarily upon prevailing market conditions and the demand
for our products and services. No assurance can be given that we will be able to
raise additional capital, when needed or at all, or that such capital, if
available, will be on terms acceptable to the Company. Any additional sale of
our common stock will also dilute the percentage of ownership of our existing
shareholders. Please see "Note 4." to the financial statements in this filing
for a discussion of the Company's debt.
Item 3. CONTROLS AND PROCEDURES
Evaluation of Internal and Disclosure Controls
The Company's principal executive and principal financial officers have
evaluated the effectiveness of the Company's controls and procedures (as defined
in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this quarterly report and have concluded that such
disclosure controls and procedures are adequate and effective based upon their
evaluation as of such date.
16
There were no significant changes in internal controls over financial
reporting that occurred during the second fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On June 1, 2003, the Company purchased the assets of Momentum in exchange for
the issuance of common stock of the Company, pursuant to an Asset Purchase
Agreement. On November 10, 2003, Momentum filed a complaint against the Company
in state district court for the State of Texas, seeking rescission of the
purchase agreement and restoration of the parties to their earlier positions
prior to June 1, 2003, as if no agreement existed. Momentum's complaint alleges
that the Company breached its contract as a result of the failure to deliver
shares of common stock of the Company as required pursuant to the Asset Purchase
Agreement. The court issued an injunction requiring that any revenue generated
from the subject assets be placed in escrow and utilized to pay any outstanding
invoices in connection with the use of the assets. In addition, the court also
ordered mediation, which did not produce a resolution. On January 7, 2004,
Momentum filed a Petition in Bankruptcy. The Bankruptcy Petition stayed all
matters pending in state district court and all proceedings were transferred to
the Bankruptcy court in Austin, Texas. The Company believes that Momentum's
lawsuit is without merit and intends to vigorously defend the matter.
Item 3. Defaults Upon Senior Securities
In March 2004, the Company issued convertible debentures to a number of
noteholders, in the aggregate principal amount of $1,315,000, at an interest
rate of 10%, plus late penalties, and warrants to purchase an aggregate of
6,575,000 shares of the Company's common stock at an exercise price of $0.10 per
share. The award of these warrants and the subsequent change of the strike price
to $0.05 generated a non-cash interest expense of $657,500 that is in the
accompanying consolidated financial statements. Under the terms of the
debentures, the noteholders had the option to convert the principal balance of
the debentures, in whole or in part, into shares of the Company's common stock
at a conversion price equal to $0.10 per share. These debentures matured on
April 11, 2004, and the Company was unable to pay off the debentures at
maturity. The Company agreed with the noteholders to extend the maturity date to
August 11, 2004, and to reduce the conversion price of the debentures to $0.05
per share. The Company paid the debt plus interest of $172,000 with the proceeds
of a Private Placement Offering on August 6, 2004. Pursuant to a letter
agreement between the Company and the noteholders, the warrants are now
exercisable for $0.05 per share.
17
Item 6. Exhibits and Reports on Form 8-K
The following documents are filed as part of this report:
- --------------------------------------------------------------------------------
Exhibit No. Description
- --------------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WIRELESS FRONTIER INTERNET, INC.
By: /s/ Alex Gonzalez
------------------------------------
Name: Alex Gonzalez
Title: Chairman and
Chief Executive Officer
Date: January 7, 2005
18