UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
[ ] 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 000-24829
FTS GROUP, INC.
---------------
(exact name of small business issuer as specified in its charter)
Nevada 84-1416864
----------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7610 West Hillsborough Ave., Tampa, Florida 33615
-------------------------------------------------
(Address of principal executive offices)
(813) 600-3600
--------------
(issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the 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 in for the past 90 days. Yes [ X ]
No [ ]
As of March 31, 2005, we had 54,877,195 shares of common stock, par value
$0.001, outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
FTS GROUP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
- --------------------------------
Item 1. Financial Statements-Unaudited. 2
Item 2. Management's Discussion and Analysis or Plan of Operation. 10
Item 3. Controls and Procedures. 12
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings. 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 12
Item 3. Defaults Upon Senior Securities. 13
Item 4. Submission of Matters to a Vote of Security Holders. 13
Item 5. Other Information. 13
Item 6. Exhibits and Reports on Form 8-K. 13
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Financial Statements (unaudited) Page
Balance Sheets - March 31, 2005 2
Statements of Operations 3
Three months ended March 31, 2005 and 2004
Statements of Cash Flows
Three months ended March 31, 2005 and 2004 4
Notes to Consolidated Financial Statements
March 31,2005 and 2004 5
1
FTS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(UNAUDITED)
2005
ASSETS
CURRENT ASSETS
Cash 736
Accounts receivable 211,819
Inventory 54,134
Prepaid Expenses 27,272
-----------------
Total current assets 293,961
-----------------
PROPERTY AND EQUIPMENT, NET 201,542
-----------------
OTHER ASSETS
Investment in private entity 7,500
Deposits 20,489
-----------------
Total other assets 27,989
-----------------
523,492
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 228,040
Notes payable - individuals 3,250
Notes payable - related parties 1,867
Note payable-Dutchess Private Equities Fund
Net of debt discount, $7,516 at March 31,2005 35,907
-----------------
Total current liabilities 269,064
-----------------
STOCKHOLDERS' EQUITY
10% Convertible preferred stock, Series A, $0.01 par
value, 150,000 shares authorized, 0 shares issued and
outstanding
Preferred stock, $0.01 par value, 4,850,000
undesignated shares authorized, none issued
Common stock, $0.001 par value, 150,000,000 shares
authorized, 54,877,195 issued and outstanding
at March 31, 2005 54,877
Additional paid in capital 9,335,064
Accumulated deficit (9,079,513)
-----------------
310,428
Less: Stock subscription receivable (56,000)
-----------------
Total stockholders' equity 254,428
-----------------
523,492
=================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
FTS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
- -----------
2005 2004
------------ ------------
REVENUES
Sales , Net $303,970 $181,335
------------ ------------
COST OF GOODS SOLD 135,518 143,134
------------ ------------
GROSS PROFIT 168,452 38,201
------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses 755,327 907,906
------------ ------------
LOSS FROM OPERATIONS (586,875) (869,705)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (184,112) -
------------ ------------
NET LOSS (770,987) (869,705)
------------ ------------
PER SHARE INFORMATION:
WEIGHTED AVERAGE SHARES OUTSTANDING
(BASIC AND DILUTED) 47,575,884 19,169,673
------------ ------------
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) $(0.02) $(0.05)
------------ ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
FTS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
- -----------
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(770,987) $(869,705)
---------- ----------
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 8,077 2,775
---------- ----------
Issuance of common shares for services 294,350 643,450
---------- ----------
Decrease in deferred compensation - 42,300
---------- ----------
Amortization of debt discount 180,877 -
---------- ----------
Changes in operating assets and liabilities
Increase in accounts receivable (124,334) (34,144)
---------- ----------
Increase in inventories (9,136) (2,763)
---------- ----------
Decrease in prepaid expenses 8,158 -
---------- ----------
(Increase) Decrease in other assets (1,000) 4,005
---------- ----------
Increase in accounts payable
and accrued expenses - -
---------- ----------
and accrued expenses 45,682 40,813
---------- ----------
Net cash used in operating activities (368,313) (173,269)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (85,064) (3,561)
---------- ----------
Net cash used in investing activities (85,064) (3,561)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of loans from related parties - 15,403
---------- ----------
Repayment of loans from related parties (159,815) -
---------- ----------
Proceeds from issuance of stock 713,460 297,142
---------- ----------
Repayment of convertible debenture (26,876) (104,139)
---------- ----------
Proceeds from stock issued under equity line 270,994 -
---------- ----------
Proceeds from Note Payable-Dutchess Private
Equities Fund, II, LP 500,000 -
---------- ----------
Repayments to Note Payable-Dutchess Private
Equities Fund, II, LP (817,599) -
---------- ----------
Repayments of loans from individuals (34,000)
---------- ----------
Net cash provided by financing activities 446,164 208,406
---------- ----------
Net (decrease) increase in cash (7,213) 31,576
Cash, beginning of period 7,949 6,887
---------- ----------
Cash, end of period $736 $38,463
---------- ----------
4
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------------
2005 2004
Cash paid during the year for:
Interest expense $33,715 -
------- --------
SUPPLEMENTARY DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued in exchange for long-term debt $73,617 -
------- --------
Stock issued as loan inducements $38,462 -
------- --------
Stock issued in payment of accounts payable and
accrued expenses $77,365 -
------- --------
Stock subscription receivable $56,000 -
------- --------
<FN>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FTS Group, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
--------------------
FTS Group, Inc. (the "Company"), was incorporated under the laws of the State of
Nevada. The Company is engaged in the acquisition and development of a chain of
full service retail wireless stores. The Company's primary business is the
marketing, sale and activation of cellular and satellite handsets, cellular
accessories and other related wireless products such as Wi-Fi service and
related access equipment for residential or business purposes.
5
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary: FTS Wireless, Inc. All significant inter-company
transactions and balances have been eliminated in consolidation.
BASIS OF PRESENTATION
---------------------
The accompanying unaudited interim financial statements have been prepared in
accordance with Accounting Principles Generally Accepted ("GAAP")in the United
States of America for interim financial information and with the instructions to
Form 10-QSB. Accordingly the accompanying financial statements and related
footnotes have been condensed and do not contain certain information that will
be included in the Company's annual financial statements and footnotes thereto.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Results for the three months ended March 31, 2005 are not indicative of the
results that may be expected for the year ending December 31, 2005.
As contemplated by the Securities and Exchange Commission, these statements
should be read in conjunction with consolidated financial statements and related
footnotes thereto included in the Company's annual report on Form 10-KSB for the
year ended December 31, 2004.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ significantly from those
estimates. The Company considers its calculation for the reserve for
charge-backs to be a significant estimate and it is reasonably possible that
this estimate could change in the near term.
INVENTORIES
Inventories, which consist of cellular phones and related accessories, are
stated at the lower of cost (determined on a first in first out method) or
market value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repairs are charged
to expense when incurred; major renewals and betterment are capitalized. When
property or equipment is sold or retired, the related cost and accumulated
depreciation is removed from the accounts and any gain or loss is included in
the results of operations. Depreciation is calculated using the straight line
method over the estimated useful lives of the respective assets ranging from
three to five years.
DEBT DISCOUNT
Costs incurred with parties who are providing actual financing, which include
the value of loan premiums and stock are reflected as debt discount. These
discounts are generally amortized over the life of the related debt.
Amortization expense related to these discounts approximated $181,000 and $0 for
the three months ended March 31, 2005 and 2004, respectively.
FINANCIAL INSTRUMENTS
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of March 31, 2005 and 2004.
The respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash,
accounts payable, accrued expenses and notes payable. Fair values are assumed to
approximate carrying values for these financial instruments because they are
short term in nature, or are receivable or payable on demand, and their carrying
amounts approximate fair value.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets including property and equipment and
its identifiable intangible assets subject to amortization whenever current
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine recoverability of its
long-lived assets, the Company evaluates the estimated future undiscounted cash
flows that are directly associated with and that are expected to arise as a
direct result of the use and eventual disposition of that long-lived asset. If
the estimated future undiscounted cash flows demonstrate that recoverability is
not probable, an impairment loss would be recognized. An impairment loss would
be calculated based on the excess carrying amount of the long-lived asset over
the long-lived assets fair value.
6
NET LOSS PER COMMON SHARE
Basic net loss per common share was computed by dividing the net loss by the
weighted average number of common shares outstanding for the three months ended
March 31, 2005 and 2004, the effect of including common stock equivalents in the
calculation of net loss per share would be anti-dilutive. Therefore, outstanding
common stock equivalents have not been included in the calculation of the net
loss per share. As a result, basic net loss per share is the same as diluted net
loss per share for the three months ended March 31, 2005 and 2004.
STOCK-BASED COMPENSATION
The Company accounts for equity instruments issued to employees for services
based on the fair value of the equity instruments issued and accounts for equity
instruments issued to other than employees based on the fair value of the
consideration received or the fair value of the equity instruments, whichever is
more reliably measurable. The Company accounts for stock based compensation in
accordance with SFAS 123, "Accounting for Stock-Based Compensation." The
provisions of SFAS 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25") but disclose the pro forma effects on net income (loss)
had the fair value of the options been expensed. The Company has elected to
continue to apply APB 25 in accounting for its stock option incentive plans.
REVENUE RECOGNITION
Net revenues from product sales are recognized upon the transfer of title and
risk of ownership to customers. Allowances for estimated returns, discounts and
doubtful accounts are provided when sales are recorded. Shipping and handling
costs are included in the cost of sales. The Company also recognizes revenue
from the sale and activation of wireless handsets at the time of activation or
sale.
ACCOUNTS RECEIVABLE
Accounts receivable are uncollateralized customer obligations due under the
normal trade terms requiring payment within 45 days, depending on contractual
terms. Customer account balances with invoices dated over 90 days old are
considered delinquent. Unpaid accounts do not bear interest. Accounts receivable
are stated at the amount billed to the customer. Payments of accounts receivable
are allocated to the specific invoices identified on the customers remittance
advice or if unspecified, are applied to the earliest unpaid balance.
The carrying amount of accounts receivable is reduced by a valuation allowance
that reflects management's best estimates of the amounts that will not be
collected. Management individually reviews all accounts receivable balances that
exceed 90 days from the invoice date and based on an assessment of current
credit worthiness estimates the portion, if any, of the balance that will not be
collected.
INCOME TAXES
Deferred income tax assets and liabilities are determined based on differences
between the financial statement reporting and the tax basis of assets and
liabilities and are measured using the enacted tax rate and laws that will be in
effect when the differences are expected to reverse. The measurement of the
deferred income tax assets is reduced, if necessary, by a valuation allowance
for any tax benefits that are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in the tax rates is
recognized in the period that such rate changes are enacted.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards,
or SFAS, No. 123R "Share-Based Payment." SFAS No. 123R establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires that the fair value of
such equity instruments be recognized as an expense in the historical financial
statements as services are performed. SFAS 123R, replaces SFAS 123, Accounting
for Stock Based Compensation and Supercedes APB opinion No.25, Accounting for
Stock Issued to Employees. This guidance is effective as of the first interim or
annual reporting period after December 15, 2005 for Small Business Filers. The
adoption of SFAS 123 (R) is not expected to have a material effect on our
financial position or operations.
7
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29." The guidance in Accounting
Principles Board ("APB") Opinion No. 29, "Accounting for Nonmonetary
Transactions," is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in APB Opinion No. 29, however, included certain exceptions to that principle.
SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 will be applied prospectively to
nonmonetary asset exchange transactions in fiscal year 2006. The adoption of
SFAS No. 153 is not expected to have a material effect on the Company's
financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151 (SFAS 151), "Inventory Costs".
SFAS 151 amends ARB No. 43, Chapter 4. This statement clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). SFAS 151 is the result of a broader effort by the
FASB and the IASB to improve financial reporting by eliminating certain narrow
differences between their existing accounting standards. This statement is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The adoption of SFAS 151 will not have a material impact on the
results of operations or financial position of the Company.
NOTE 2 GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business.
At March 31, 2005 the Company continues to incur losses. For the three months
ended March 31, 2005, the Company incurred a net loss of $770,987. These
financial conditions of the Company raise substantial doubt about its ability to
continue as a going concern. As part of management's plans, management is
seeking to raise additional capital to execute its business plans.
The Company will have to raise additional funds, either through debt or equity
offerings, in order to implement its business expansion and acquisition
strategies. The Company has engaged professional advisors for this purpose.
There can be no assurance that the Company will be successful in its attempts to
raise additional capital and become profitable or maintain itself as a going
concern.
The financial statements do not include any adjustments to reflect the possible
future effects of the recoverability and classifications of assets or the
amounts and classifications of liabilities that may result from the possible
inability of the Company to continue as a going concern.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment are as follows at March 31, 2005:
Office furniture, fixtures and equipment $233,397
Less: accumulated depreciation (31,855)
--------
Net property and equipment $201,542
========
Depreciation expense for the three months ended March 31, 2005 and 2004 was
$8,077 and $2,775 respectively.
NOTE 4 STOCK FOR SERVICES
During January 2005, the Company issued 2,030,000 shares of common stock for
services pursuant to a Form S-8 registration. The shares were valued at fair
market on the date it was agreed that the shares would be issued. The non-stock
compensation expense of $294,350 has been charged to operations during the
period and reported under Selling, General and Administrative Expenses.
NOTE 5 FINANCING ACTIVITIES
During the three months ended March 31, 2005, the Company issued 10,675,000
shares of common stock to a group of accredited investors in private placements
at an average price of $.08 per share for gross proceeds of $769,460 after 10%
commission and 3% expense fee. In accordance with the subscription agreement,
the investors will receive two classes of warrants, called Series A and Series B
warrants, for each share of common stock purchased. The A warrants have an
exercise price of $0.08 and B warrants have an exercise price of $0.12. The
Company filed the terms and conditions of the financing and registration rights
in March of 2005 on Form 8-K. The funds raised in the private placement were
primarily used for working capital, costs related to the opening of new
locations and to reduce outstanding liabilities.
8
During the three months ended March 31, 2005, $51,017 worth of debentures was
converted into 522,086 shares of stock relating to the Company's convertible
debenture with Dutchess Private Equities Fund. The convertible debenture was
fully extinguished during the period.
During the three months ended March 31, 2005, 2,085,426 shares of stock were
issued relating to the Company's equity line of credit for proceeds of $270,994.
Funds were used to repay outstanding notes.
As of March 31, 2005 there was a $56,000 receivable due from an investor
relating to stock issued for the private placement. The receivable was collected
in April of 2005.
NOTE 6 NOTE PAYABLE - DUTCHESS PRIVATE EQUITIES FUND
The Company signed a short-term note payable to Dutchess Equities Fund, II L.P.
in the amount of $500,000 plus a $100,000 premium. The note, dated January 10th,
2005 matures on August 10,2005. The note bears interest at 12% per annum. The
note carries certain restrictions relating to additional financing and
registration rights to certain shares issued to Dutchess. As of May 5th, 2005,
the note and interest have been paid in full.
The note contained a stipulation that the Company would deliver 500,000 shares
of common stock with "Piggy-Back" registration rights. In addition, the Company
issued 250,000 shares of restricted common stock in March 2005 relating to loan
inducements for a loan in 2004.
NOTE 7 EQUITY LINE OF CREDIT
The Company maintains an equity line of credit with Dutchess Private Equities
Fund. The Company may cancel this line of credit at any time. The agreement
provides for a maximum of $6,000,000 with 15,000,000 shares of common stock
registered and available to repay credit line advances. As of March 31, 2005,
10,759,705 shares remain available under the terms of the equity line agreement.
Shares are convertible based on 93% of the three day average of the lowest three
out of five days subsequent to a put for funds.
NOTE 8 NOTES PAYABLE RELATED PARTY AND INDIVIDUALS
During the year ended December 31, 2004 the Company received loans from two of
its officers and directors totaling $195,000 with an interest rate of 12% per
annum. The funds were primarily used to finance acquisitions and to pay loans
with Dutchess Private Equities Fund.
The notes contained a stipulation that each officer would receive shares of
stock as an inducement to provide the financing. Combined restricted shares of
932,500 were issued to the officers and directors in March 2005.
Outstanding Notes Payable at March 31, 2005 consisted of:
Unsecured outstanding demand note with interest at 8% per annum payable to an
individual investor in the amount of $3,250.
Unsecured outstanding demand note with interest at 8% per annum payable to an
officer in the amount of $1,867.
NOTE 9 CONTINGENCIES
The Company did not have liability and workers compensation insurance for the
three month period ended March 31, 2005. The Company is currently negotiating
renewals of its liability and workers compensation policies and anticipates
securing the necessary policies.
NOTE 10 WARRANTS AND OPTIONS
The Company has a Non-Qualified Stock Option and Stock Grant Plan (the "Plan"),
adopted in July 1997.For the three months ended the Company has not granted any
options and currently intends to cancel the plan. Under the Company's Plan, the
Company's Board of Directors has reserved 2,500,000 shares that may be granted
at the Board of Directors' discretion. No option may be granted after July 27,
2007 and the maximum term of the options granted under the Plan is ten years.
The effect of applying SFAS 123 on a pro forma basis was $0 in 2004 and 2003
because all of the options were granted and fully vested prior to 2003. Changes
in options outstanding under the plan are summarized as follows:
Number of shares Weighted Average
Exercise Price
----------------- ---------------
Outstanding at December
31, 2004 598,000 $ 1.50
---------------- ---------------
Granted - -
Exercised - -
Forfeited - -
Outstanding at March 31,
2005 598,000 $ 1.50
--------------- ---------------
9
The exercise price for all options is at or above the market value of the common
stock as of the date of grant.
The following table summarizes information about fixed price stock options:
OUTSTANDING AND EXERCISABLE
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Number Contractual Exercise
Price Outstanding Life Price
=========== ----------- ---------- --------
0.81-1.38 4,000 6.1 years $ 1.14
1.50-2.75 594,000 6.7 years $ 1.50
- ----------- ----------- ----------- --------
The following details warrants outstanding as of March 31, 2005:
During the three months ended March 31, 2005 the Company had 3,000,000 warrants
outstanding relating to a dividend declared to stockholders of record on August
27, 2004. In accordance with the subscription agreement relating to the recent
private placement the Company issued the following warrants. Investors will
receive two classes of warrants, called Series A and Series B warrants, for each
share of common stock purchased. The A warrants have an exercise price of $0.08
and B warrants have an exercise price of $0.12. The Company filed the terms and
conditions of the financing and registration rights in March of 2005 on Form
8-K. The funds raised in the private placement were primarily used for working
capital, costs related to the opening of new locations and to reduce outstanding
liabilities
2005 2005
Underlying Exercise
Price Shares
========== =========
Warrants issued during 2000 1,036,000 $ 1.50
Warrants issued during 2004
(10% Warrant Div) 3,000,000 $ 0.25
Warrants issued during 2004
and 2005(A and B Warrants) 28,987,500 $.08/$.12
---------- ---------
NOTE 11 CONCENTRATIONS OF CREDIT RISK
The Company's concentrations of credit risk consist principally of Accounts
Receivable and Accounts Payable. The Company purchases approximately 90% of
their wireless handsets and other supplies from two vendors who represent
approximately 71% of accounts payable at March 31, 2005. Additionally, these
same two vendors are also major customers of the Company who provide over 94% of
revenue, and represent 100% of accounts receivable at March 31, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis covers material changes in our financial
condition since the year ended December 31, 2004 and a comparison of the results
of operations for the three months ended March 31, 2005 and the same period in
2004. This discussion and analysis should be read in conjunction with
"Management's Discussion and Analysis or Plan of Operation" included in our Form
10-KSB for the year ended December 31, 2004.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This report on Form 10-QSB contains forward-looking statements that involve
risks and uncertainties. We generally use words such as "believe," "may,"
"could," "will," "intend," "expect," "anticipate," "plan," and similar
expressions to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements. Our actual results could differ
materially from those anticipated in the forward-looking statements for many
reasons, including the risks described below and elsewhere in this report.
Although we believe the expectations reflected in the forward-looking statements
are reasonable, they relate only to events as of the date on which the
statements are made, and our future results, levels of activity, performance or
achievements may not meet these expectations. We do not intend to update any of
the forward-looking statements after the date of this document to conform these
statements to actual results or to changes in our expectations, except as
required by law.
10
OVERVIEW
We focus on developing, investing in, and acquiring cash-flow positive
businesses and viable business projects primarily in the wireless and technology
industries. As of the end of March 2005, we operated a total of 8 retail
wireless locations; we lease four locations in Tampa, FL, one in St. Petersburg,
FL, one in Brandon, FL, one in Lutz, FL, and one in Clearwater, FL.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In December, 2001, the SEC issued a cautionary advice to elicit more precise
disclosure about accounting policies management believes are most critical in
portraying our financial results and in requiring management's most difficult
subjective or complex judgments. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments and estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION:
Net revenues from product sales are recognized upon the transfer of title and
risk of ownership to customers. Allowances for estimated returns, discounts and
doubtful accounts are provided when sales are recorded. Shipping and handling
costs are included in cost of sales.
We recognize revenue from the sale and activation of wireless handsets and
related accessories.
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company reviews its long-lived assets including property and equipment and
its identifiable intangible assets subject to amortization whenever current
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine recoverability of its
long-lived assets, the Company evaluates the estimated future undiscounted cash
flows that are directly associated with and that are expected to arise as a
direct result of the use and eventual disposition of that long-lived asset. If
the estimated future undiscounted cash flows demonstrate that recoverability is
not probable, an impairment loss would be recognized. An impairment loss would
be calculated based on the excess carrying amount of the long-lived asset over
the long-lived assets fair value.
Results of Operations
Sales revenue for the three months ended March 31, 2005 increased $122,635, or
68%, to $303,970, as compared to $181,335 for the period ended March 31, 2004.
The increase in sales revenue was primarily related to the acquisition and
development of new retail outlets and an increased focus on post pay wireless
activations.
Even with a 68% increase in revenue, Cost of Goods Sold for the period ended
March 31, 2005, decreased by $7,616 to $135,518, as compared to $143,134 for the
period ended March 31, 2004. The decrease in Cost of Goods Sold is primarily due
to economies of scale related to wireless handset purchasing.
Gross profits increased by $130,251 from $38,201 in 2004 to $168,452 in 2005 and
as a percentage of sales increased from 21% to 55%. The increase in gross profit
margins are directly attributed to the successful launch of our new wireless
superstore in February. The location restructuring completed by management over
the past six months resulting in the closure of three under performing locations
and improved operational execution resulting in three consecutive months of
increases in the sale and activation of new wireless handsets.
Selling, General and Administrative for the period ended March 31, 2005,
decreased $152,579 to $755,327, as compared to $907,906 for the period ended
March 31, 2004. The decrease in Selling, General and Administrative expense was
due to a number of factors including, a decrease in consulting fee's,
professional fee's and investor relations fee's. We anticipate further
reductions in the areas mentioned above throughout 2005.
Our net loss decreased by $98,718 to $770,987 on revenue of $303,970 for the
period ended March 31, 2005, as compared to a net loss of $869,705 on revenue of
$181,335 for the period ended March 31, 2004. The decrease was primarily related
to reduced professional fees and stock compensation expenses incurred during the
period. The decrease in net loss is also attributable to the increase in revenue
and related gross profit.
INTEREST EXPENSE
Interest expense increased to $184,111 for the period ended March 31, 2005, as
compared to $0 for the period ended March 31, 2004. The increase was due mainly
to financing costs incurred on promissory notes.
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LIQUIDITY AND CAPITAL RESOURCES
Our requirements for capital are to fund (i) sales growth, (ii) financing for
possible acquisitions and, (iii) capital expenditures mainly related to store
build-outs and IT system upgrades. Our primary source of financing during the
three months ended March 31, 2005 included cash received from the issuance of
common stock and cash flows from operations.
As of March 31, 2005, total current assets were $293,961, which consisted of
$211,819 of accounts receivable, $54,134 of inventory, $27,272 of prepaid
expenses and cash of $736.
As of March 31, 2005, total current liabilities were $269,064, which consisted
of $228,040 of accounts payable and accrued expenses, promissory notes of
$35,907 and notes payable of $5,117.
We believe that our continued existence depends on our ability to make our
wireless operations profitable and our ability to raise additional capital.
Accordingly, the notes to our unaudited, interim financial statements express
substantial doubt about our ability to continue as a going concern.
Financing Activities
On March 4, 2005, we finalized a private placement in which we issued 14,493,750
shares of common stock and associated warrants for gross proceeds of $1,159,500.
We agreed to file a Registration Statement with the SEC to register the resale
of the shares of our common stock and the shares that may be issued if the
investors exercise the warrants. The A warrants allow investors to purchase
14,493,750 shares of our common stock at an exercise price of $0.12, subject to
adjustment, the A warrants expire in March 2008. The B warrants allow investors
to purchase 14,493,750 shares of our common stock at an exercise price of $0.08,
subject to adjustment, the B warrants expire 180 days after a Registration
Statement is declared effective by the Securities and Exchange Commission. These
funds were primarily used for working capital, costs related to new store
openings and to reduce outstanding liabilities.
During the three months ended March 31, 2005, 522,086 shares were issued
relating to our convertible debenture with Dutchess Private Equities Fund. The
convertible debenture was fully extinguished during the period.
During the three months ended March 31, 2005, 2,085,426 shares were issued
relating to our equity line of credit for proceeds of approximately $269,909.
Funds were used to repay outstanding notes.
Subsidiary
As of March 31, 2005, we had one wholly-owned subsidiary, FTS Wireless, Inc.
ITEM 3. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer
and our Chief Financial Officer, the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this Quarterly Report on
Form 10-QSB. Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934 (i)
is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Management's assessment of the
effectiveness of our internal control over financial reporting is expressed at
the level of reasonable assurance that the control system, no matter how well
designed and operated, can provide only reasonable, but not absolute, assurance
that the control system's objectives will be met.
Changes in Internal Controls
During the period we improved our internal controls and procedures by utilizing
independent financial experts on a consulting basis as a result of an evaluation
completed during our 2004 audit process. We believe the changes to controls and
procedures will improve the reporting process as we continue to expand
operations in 2005.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not aware of any legal matters that could have a material impact on our
business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
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RECENT SALES OF SECURITIES
During the quarter ended March 31, 2005 we sold 10,675,000 shares of restricted
common stock to a group of accredited investors in private placements at an
average price of $.08 per share. In accordance with the terms of certain of the
private placements, some investors receivedtwo classes of warrants, Series "A"
and "B", for each share purchased. The A warrants allow investors to purchase
14,493,750 shares of our common stock at an exercise price of $0.12, subject to
adjustment, and the A warrants expire in March 2008. The B warrants allow
investors to purchase 14,493,750 shares of our common stock at an exercise price
of $0.08, subject to adjustment, and the B warrants expire 180 days after a
Registration Statement is declared effective by the Securities and Exchange
Commission. We agreed to register the shares of common stock that we issued in
the private placements and the shares of common stock that will be issued upon
exercise of the warrants. We filed the terms and conditions of the financing,
including registration rights, on March 24, 2005 on Form 8-K. Funds from the
private placement have been and will continue to be used to reduce debt, fund
future acquisitions and for general working capital purposes.
During the quarter ended March 31, 2005, we delivered 500,000 shares to Dutchess
Private Equities Fund, per a note agreement entered into during the period ended
December 31, 2004.
During the quarter ended March 31, 2005, we issued 932,500 shares to two
officers of our officers relating to note agreements entered into during 2004.
The securities issued in the foregoing transactions were made in reliance upon
an exemption from registration under Rule 701 promulgated under Section 3(b) of
the Securities Act. Alternatively, these issuance's of securities were
undertaken under Rule 506 of Regulation D under the Securities Act of 1933, as
amended, by the fact that:
- - the sale was made to a sophisticated or accredited investor;
- - we gave the purchaser the opportunity to ask questions and receive answers
concerning the terms and conditions of the offering and to obtain any additional
information which we possessed or could acquire without unreasonable effort or
expense that is necessary to verify the accuracy of information furnished;
- - at a reasonable time prior to the sale of securities, we advised the purchaser
of the limitations on resale in the manner contained in Rule 502(d)2;
- - neither we nor any person acting on our behalf sold the securities by any form
of general solicitation or general advertising; and
- - we exercised reasonable care to assure that the purchaser of the securities is
not an underwriter within the meaning of Section 2(11) of the Securities Act of
1933 in compliance with Rule 502(d).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
NUMBER DESCRIPTION OF EXHIBIT
3.1 Articles of Incorporation dated December 23, 2003 (filed as Attachment B to
the Registrant's Definitive Proxy on Schedule 14A filed on January 9, 2004 and
incorporated herein by reference).
3.2 Bylaws (filed as Attachment C to the Registrant's Definitive Proxy on
Schedule 14A filed on January 9, 2004 and incorporated herein by reference).
10.1 Investment Agreement between the Registrant and Dutchess Private Equities
Fund, LP, dated January 9, 2004 (filed as exhibit 10.15 to the Registrant's SB-2
filed on January 28, 2004 and incorporated herein by reference).
10.2 Registration Rights Agreement between the Registrant and Dutchess Private
Equities Fund, LP, dated January 9, 2004 (filed as Exhibit 10.16 to the
Registrant's SB-2 filed on January 28, 2004 and incorporated herein by
reference).
10.3 Placement Agent Agreement between the Registrant, Dutchess Private Equities
Fund, LP, and Charleston Capital Securities, dated January 9, 2004 (filed as
Exhibit 10.17 to the Registrant's SB-2 filed on January 28, 2004 and
incorporated herein by reference).
13
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FTS GROUP, INC.
Date: July 18, 2005 By: /s/ Scott Gallagher
-------------------------------
Scott Gallagher
Chief Executive Officer
By: /s/ Linda Ehlen
-------------------------------
Linda Ehlen
Chief Financial Officer and
Principal Accounting Officer