10QSB 1 form10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB 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 Identification No.) incorporation)
104 West Callaghan, Fort Stockton, Texas 79735 -------------------------------------------------------------------------------- (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: 61,807,520 common shares as of June 30, 2004. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] TABLE OF CONTENTS
Page ---- PART I Financial Information Item 1. Condensed Consolidated Balance Sheets (unaudited) - As of June 30, 2004 and June 30, 2003.............................1 Condensed Consolidated Statements of Operations (unaudited) - For the Three Months ended June 30, 2004 and 2003.......2 Condensed Consolidated Statements of Cash Flows (unaudited) - For the Three Months ended June 30, 2004 and 2003.......3 Notes to Condensed Consolidated Financial Statements (unaudited)......................................................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................18 Item 3. Controls and Procedures..............................................................................................20 PART II Other Information Item 1. Legal Proceedings....................................................................................................21 Item 3. Defaults Upon Senior Securities......................................................................................21 Item 4. Exhibits and Reports on Form 8-K.....................................................................................21 Signatures
i PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS WIRELESS FRONTIER INTERNET, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET June 30, 2004 and December 31, 2003
ASSETS June 30, December 31, 2004 2003 ----------- ----------- CURRENT ASSETS Cash $ 86,602 $ 226,324 Accounts receivable 140,941 252,615 Inventories 192,256 171,477 Prepaid expenses and other current assets 281,041 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 SHAREHOLDERS' 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 4,036,779 2,120,717 SHAREHOLDERS' EQUITY Common stock, $0.001 par value, 100,000,000 shares 61,808 62,226 authorized, 61,807,520 and 62,225,632 shares outstanding at June 30, 2004 and December 31, 2003 respectively Additional paid-in capital 6,585,047 5,837,355 Treasury stock (2,026) (4,760) Retained deficit (3,400,716) (1,474,747) ----------- ----------- Total shareholders' equity 3,244,113 4,420,074 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,280,892 $ 6,540,791 =========== ===========
See accompanying notes to condensed consolidated financial statements 1 WIRELESS FRONTIER INTERNET, INC. 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 1,179,923 829,825 2,327,581 1,122,882 Amortization and depreciation 248,580 80,759 527,826 123,689 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS (864,689) 123,438 (1,726,806) (107,331) INTEREST EXPENSE 175,411 28,123 199,163 32,397 0 ------------ ------------ ------------ ------------ NET LOSS $ (1,040,101) $ 95,314 $ (1,925,969) $ (139,728) ============ ============ ============ ============ NET LOSS PER COMMON SHARE: $ (0.02) $ 0.00 $ (0.03) $ (0.00) COMMON SHARES OUTSTANDING: 61,807,520 30,470,910 61,807,520 30,470,910
See accompanying notes to condensed consolidated financial statements. 2 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2004 and 2003
2004 2003 ----------- ----------- OPERATING ACTIVITIES: Net income $(1,925,969) $ (139,728) Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 513,443 110,223 Stock issued for services 2,734 0 Changes in operating assets and liabilities: Accounts receivable 111,674 (737,215) Inventories (20,779) (111,151) Prepaid expenses and other current assets (278,516) (122,428) Accounts payable and accrued liabilities 369,209 260,828 ----------- ----------- Net cash (used in) provided by operating activities (1,228,203) (739,470) INVESTING ACTIVITIES: Purchases of property and equipment (519,581) (1,408,208) FINANCING ACTIVITIES: Proceeds from issuance of common equity 61,210 1,682,841 Net borrowings on lines of credit and notes payable 1,546,852 448,371 ----------- ----------- Net cash (used in) provided by financing activities 1,608,062 2,131,212 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (139,722) (16,466) CASH AND CASH EQUIVALENTS, beginning of period 226,324 188,990 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 86,602 $ 172,524 =========== =========== SUPPLEMENTAL INFORMATION: Cash paid for interest $ 56,494 $ 32,397
See accompanying notes to condensed financial statements. 3 WIRELESS FRONTIER INTERNET, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For the Period Ended June 30, 2004
ADDITIONAL NUMBER OF COMMON CONTRIBUTED RETAINED TREASURY SHARES STOCK CAPITAL DEFICIT SHARES TOTAL ----------- ----------- ----------- ----------- ----------- ----------- BALANCE January 1, 2003 7,453,000 $ 1,000 $ 664,316 $ (220,472) $ -- $ 444,844 Recapitalize for stock split 7,453,000 13,906 (13,906) -- -- -- Shares sold 4,498,947 4,499 1,272,033 -- -- 1,276,532 Acquisitions 4,272,765 4,273 3,835,805 3,840,078 Merger with Fremont Corporation 5,861,900 5,862 -- (543,011) (4,760) (541,909) Debt exchanged for stock in merger 448,204 448 110,220 -- -- 110,668 Services in connection with merger 1,125,000 1,125 -- -- -- 1,125 Net Loss for 2003 -- -- -- (711,264) -- (711,264) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE December 31, 2003 31,112,816 31,113 5,868,468 (1,474,747) (4,760) 4,420,074 Acquisitions 1,997,584 1,998 1,142,993 1,144,991 Treasury stock sold -- -- 106,806 -- 2,734 109,540 Stock for services 90,909 91 104,909 -- -- 105,000 Recapitalized for stock split 33,201,309 33,201 (33,201) -- -- -- Net loss for the Quarter -- -- -- (885,868) -- (885,868) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE March 31, 2004 66,402,618 $ 66,403 $ 7,189,975 $(2,360,615) $ (2,026) $ 4,893,737 =========== =========== =========== =========== =========== =========== Adjustments to prior Acquisitions (1,024,560) (1,024) (95,373) Acquisitions 50,672 51 43,020 43,071 Stock for services 170,000 170 (170) Sale back of Strategic Abstract Title Co Assets (3,791,210) (3,792) (552,405) -- -- (556,197.49) Net loss for the Quarter -- -- -- (1,040,101) -- (1,040,101) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE June 30,2004 61,807,520 $ 61,808 $ 6,585,047 $(3,400,716) $ (2,026) $ 3,340,510 =========== =========== =========== =========== =========== ===========
See accompanying notes to condensed financial statements. 4 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES HISTORY The Company was incorporated under the laws of the state of Texas on July 7, 1998 for the purpose of making equipment sales within the state of Texas and Colorado. On February 8, 2000 the controlling interest in the Company was purchased by Alex Gonzalez, CEO. The current majority shareholder, on January 1, 2001 contributed the assets and operations of West-Tex Internet to the Company. At that time the Company also became an Internet Service Provider with about 475 customers in the Fort Stockton, Texas area. The Company purchased on November 30, 2001 the assets and operations of Overland Network for $200,000. This purchase expanded the Company's Internet Service Provider area to include the Alpine, Fort Davis, Marathon and Marfa, Texas areas. The Company also obtained, for $5,000, a three-year covenant not to compete, within a 50-mile radius of the Company's operations including the areas purchased from the seller. The Company purchased on May 31, 2002 the assets and operations of Brooks Data Consultants, Inc. for $245,000. This purchase expanded the Company's Internet Service Provider area to include the Terlingua, Presidio, Sanderson, Sheffield, Comstock, Big Bend National Park and Heath Canyon, Texas areas. The Company also obtained, for $5,000, a five-year covenant not to compete, within a 50-mile radius of the Company's operations including the areas purchased, from the seller. On January 20, 2003 the Company's Board of Directors declared a 100 to 1 stock split increasing the authorized common shares from 1,000,000 to 100,000,000. On May 28, 2003 the stockholders of the Company exchanged all the outstanding shares of the Company for 14,906,000 shares of common stock. On the same date the Company's Board of Directors declared a 2 to 1 stock split. These financial statements reflect this split as if it happened at the beginning of the periods reported. All share amounts from this point on in the report have been adjusted for the March 31, 2003, 2 for 1 stock split. On June 1, 2003, the Company entered into an agreement to purchase all the assets and assume certain liabilities of Momentum Online Computer Services, Inc. for 873,712 shares of common stock valued at $2,621,410. In December 2003, the purchase agreement and certain terms of the employment agreement entered into with Robert McClung, the CEO and principal shareholder of Momentum, were satisfied by the issuance of 138,430 shares and 800,000 shares, respectively, to Robert McClung increasing the total to 1,673,712 shares of common stock. This purchase expanded the Company's Internet Service Provider area to the Highway 281 of Texas corridor, which extends roughly from south of the Dallas, Fort Worth area to the north of San Antonio. The Company is presently involved in a lawsuit and other legal matters with the former owner of Momentum over the agreement and ownership of the assets purchased on June 1, 2003. See note 10 to notes to Consolidated Financial Statements. On June 30, 2003, the Company entered into an agreement to purchase all the assets of Kolinek Internet service for 280,480 shares of common stock. The acquisition was valued at $42,072. The original agreement called for a purchase price of 28,048 shares of common stock. The acquisition was re-evaluated in December 2003 to 280,480 shares. This purchase expanded the Company's Internet Service Provider area in the Highway 281 of Texas corridor. 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 a purchase price of 416,664 shares of common stock. The acquisition was re-evaluated 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. During the second quarter of 2004, the Company determined that the business of Strategic did not match the direction of the Company. The owner of Strategic is a shareholder of the Company. On June 9, 2004, the Company bought back 3,791,210 shares of the Company's common stock in exchange for the assets originally acquired plus 250,000 stock purchase warrants. The warrants have an exercise price of $0.25 per share. A gain of $12,481 was recorded to Additional Paid-in Capital, and not to income, since the original purchase and subsequent sale of these assets were effected using shares of the Company's common stock. On or about July 1, 2003, the Company acquired all the outstanding shares of US Mex Communications and West Texas Horizons for 2,206,640 shares of the Company's common stock valued at $330,996 and the assumption of $51,000 in notes payable. The note was paid in full with the December 18, 2003 notes payable. The original agreement called for a purchase price of 220,664 shares of common stock. The acquisition was re-evaluated in January 2004 to 2,206,640 shares. The acquired company sells phone cards and provides pay phone services in Southwestern Texas. All assets, liabilities and operations have been transferred to Wireless Frontier Internet, Inc. (Texas), a wholly-owned subsidiary of the Company. 5 On September 30, 2003, the Company entered into an Agreement and Plan of Merger with Fremont Corporation a publicly traded company. Pursuant to the merger agreement Networker Systems, Inc., a wholly owned subsidiary of the Fremont, was merged into the Company with the Company being the surviving corporation. The shareholders of the Company exchanged all the outstanding shares of the Company for 32,053,158 shares of the common stock of Fremont in a one for one exchange. As a result of this transaction the Company became a wholly owned subsidiary of Fremont. This combination was treated as a reverse merger whereby the acquired company is treated as the acquiring company for accounting purposes. In addition, Fremont also entered into an Asset Purchase Agreement with Million Treasure Enterprises Limited, a British Virgin Islands corporation. Pursuant to this agreement, Million acquired all of Fremont's equity interest in Winfill (a subsidiary of Fremont) for Millions return to Fremont of the 661,654 (pre-split) shares of common stock held by Million, the cancellation of Million's warrant to purchase 2,000,000 (pre-split) shares of common stock and the forgiveness of all sums owed by Fremont to Million. On September 30, 2003 the Company entered into an Asset Purchase Agreement with Limited Liability Partnership d/b/a Xramp, to purchase certain assets and Internet subscribers of the Partnership. The purchase price was 294,643 shares of the Company's common stock valued at $165,000 and a note for $50,000. On February 9, 2004 the Company entered into an Agreement for Purchase and Sale of Stock with all the shareholders of Office Products Incorporated Computer Division, a Kansas Corporation for 3,905,514 shares of common stock. This agreement is effective January 1, 2004. On March 17, 2004 the Company entered into an Asset Purchase Agreement for the purchase of the assets of BCOM.NET, INC. for 355,600 shares of common stock valued at $293,370. The agreement was effective on March 17, 2004. On April 5, 2004 the Company entered into an Asset Purchase Agreement with RayTech Internet, Inc. to purchase certain assets and Internet subscribers of the Partnership. The purchase price was $10,000 and 50,672 shares of the Company's common stock. This purchase extends the Company's service to Big Springs, Texas on Interstate 20. CASH AND CASH EQUIVALENTS For the purposes of the statement of cash flows, the Company considers all short-term debt securities to be cash equivalents. Cash paid during the six months ended June 30, 2004 for: Interest $56,494 Income taxes -0- INCOME TAXES The Company accounts for income taxes under a method which requires a company to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements carrying amounts and tax basis of assets and liabilities using enacted tax rates. The Company presently prepares its tax return on the cash basis and its financial statements on the accrual basis. No deferred tax assets or liabilities have been recognized at this time, since the Company has shown losses for both tax and financial reporting. The Company has a net operating loss carry forward at June 30, 2004 of approximately $2,500,000. DEPRECIATION AND AMORTIZATION The Company provides for depreciation of fixed assets utilizing the straight-line method to apportion costs over the following estimated lives: Years ----- Buildings 40 Equipment 5 Vehicles 5 The Company provides for amortization of purchased Customer Lists, which represents the value of Internet subscribers purchased, utilizing the straight-line method, to apportion costs over a 3 year estimated life. 8 The Company provides for amortization of the covenants not to compete utilizing the straight-line method to apportion costs over the life of the covenant. Presently the Company has two covenants not to compete. One has a three-year life and the other has a five-year life. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE -2 FIXED ASSETS Fixed assets are summarized by major classifications as follows: June 30, 2004 2003 ----------- ----------- Buildings $ 90,000 $ 375,000 Equipment 1,709,669 1,201,423 Vehicles 521,131 466,334 ----------- ----------- 2,320,800 2,042,757 Accumulated Depreciation (765,522) (311,791) ----------- ----------- $ 1,555,278 $ 1,730,966 =========== =========== Depreciation expense for the six months ended June 30, 2004 and 2003 was $349,582 and $91,645 respectively. NOTE 3 - GOODWILL AND COVENANTS NOT TO COMPETE On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires the Company to evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform to the new criteria in SFAS No. 141 for recognition apart from goodwill. Accordingly, the Company is required to reassess the useful lives and residual values of all identifiable intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments. In addition, to the extent an intangible asset is then determined to have an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. The Company's valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. If these assumptions differ materially from future results, the Company may record impairment charges in the future. Additionally, the Company's policy is to perform its annual impairment testing for all reporting units in the fourth quarter of each fiscal year. At June 30, 2004 the Company's carrying value of goodwill totaled $3,904,092. On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No. 144, the Company tests certain long-lived assets or group of assets for recoverability whenever events or changes in circumstances indicate that the Company may not be able to recover the asset's carrying amount. SFAS No. 144 defines impairment as the condition that exists when the carrying amount of a long-lived asset or group exceeds its fair value. The Company's valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. If these assumptions differ materially from future results, the Company may record impairment charges in the future. Goodwill and covenants not to compete are summarized by major classifications as follows: June 30, 2004 2003 ----------- ----------- Goodwill $ 3,904,092 $ 2,877,246 Customer Lists 929,059 633,206 Covenants not to compete 10,000 10,000 ----------- ----------- 4,843,151 3,520,452 Less: Accumulated amortization (353,838) (69,349) ----------- ----------- $ 4,489,313 $ 3,451,103 =========== =========== Amortization expense for the six months ended June 30, 2004 and 2003 was $178,244 and $32,044 respectively. 9 Future amortization expense for the next five years is as follows: 2004 $306,841 2005 $306,841 2006 $306,841 2007 $8,539 2008 $0 NOTE 4 - ACQUISITIONS On June 1, 2003, the Company entered into an agreement to purchase all the assets and assume certain liabilities of Momentum Online Computer Services, Inc. for 873,714 shares of common stock valued at $2,621,410. This purchase expanded the Company's Internet Service Provider area to the Highway 281 of Texas corridor, which extends roughly from south of the Dallas, Fort Worth area to the north of San Antonio. The Company is presently involved in a lawsuit and other legal matters with the former owner of Momentum over the agreement and ownership of the assets purchased on June 1, 2003. See litigation footnote. Assets Acquired were: Cash $12,053 Accounts receivable 123,490 Inventory 26,717 Equipment and furniture 280,425 Customer List 500,000 Goodwill 1,992,202 ---------- Total Assets $2,934,887 ========== Liabilities Assumed were: Accounts payable $97,792 Accrued payroll 24,177 Accrued interest 1,123 Accrued taxes 17,891 Lines of credit 59,422 Notes payable 59,250 Long - Term debt 54,222 ---------- Total Liabilities $ 313,877 ========== On June 30, 2003, the Company entered into an agreement to purchase all the assets of Kolinek Internet service for 280,480 shares of common stock. The acquisition was valued at $42,072. The original agreement called for a purchase price of 28,048 shares of common stock. The acquisition was re-evaluated in December 2003 to 280,480 shares. This purchase expanded the Company's Internet Service Provider area in the Highway 281 of Texas corridor. Assets Acquired: Customer List $10,000 Goodwill $32,072 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 a purchase price of 416,664 shares of common stock. The acquisition was re-evaluated 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 bought back 3,791,210 shares of the Company's stock in exchange for the assets originally acquired plus 250,000 stock purchase warrants. The warrants have an exercise price of $0.25 per share. Assets Acquired were: Cash $ 15,425 Accounts receivable 3,161 Buildings 285,000 Equipment and furniture 234,858 Goodwill 89,552 -------- Total Assets $628,996 ======== 10 On or about July 1, 2003, the Company acquired all the outstanding shares of US Mex Communications and West Texas Horizons for 2,206,640 shares of the Company's common stock valued at $330,996 and the assumption of $51,000 in notes payable. The note was paid in full with the December 18, 2003 notes payable. The original agreement called for a purchase price of 220,664 shares of common stock. The acquisition was re-evaluated in January 2004 to 2,206,640 shares. The acquired company sells phone cards and provides pay phone services in Southwestern Texas. All assets, liabilities and operations have been transferred to Wire Frontier Internet, Inc. (Texas), a wholly-owned subsidiary of the Company. Assets Acquired: Equipment and furniture $270,682 Goodwill 381,996 ------- Total Assets $652,678 ======== Liabilities Assumed: Accounts payable $ 51,000 Notes payable 270,682 ------- Total Liabilities $321,682 ======== On September 30, 2003 the Company entered into an Asset Purchase Agreement (the"Xramp Agreement") with Bartell & Griffith, LTD. L.L.P., d/b/a/ Xramp ("Xramp Partnership") to purchase certain assets and Internet subscribers of the Xramp Partnership. The purchase price was 294,643 shares of the Company's common stock and a note for $50,000. The note was paid off in March 2004. Assets Acquired: Equipment and furniture $ 46,950 Customer List 35,000 Goodwill 133,050 -------- Total $215,000 ======== Liabilities Assumed: Note payable $ 50,000 ======== On February 9, 2004 the Company entered into an Asset Purchase Agreement with Office Products Incorporated, to purchase Internet subscribers, certain assets, and Computer Service customers d/b/a Office Products Incorporated Computer Division. The purchase price was 3,527,623 shares of the Company's common stock. In addition, 377,892 shares plus $275,000 was to be provided to pay for debt of $373,252 within 90 days of the signing of the agreement. These amounts have not been remitted by the Company as of August 16, 2004. The Company is in negotiations with the former owners over the final amounts due. Assets Acquired: Inventory $ 95,657 Equipment and 207,034 furniture Customer List 125,782 Goodwill 796,400 ---------- Total $1,224,873 ========== Liabilities Assumed: Note payable $ 373,252 ========== On March 17, 2004 the Company entered into an Asset Purchase Agreement with BCOM.NET, INC to purchase certain assets and Internet subscribers of the Incorporation. The purchase price was 355,600 shares of the Company's common stock. 11 Assets Acquired: 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 of the Partnership. The purchase price was $10,000 and 50,672 shares of the Company's common stock. This purchase extends the Company's service to Big Springs, Texas on Interstate 20. Assets Acquired: Customer List $53,071 NOTE 5 - 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 shareholder and officer of the Company also guaranteed the loan. The balance due at June 30, 2004 was $170,000. The Company is on good terms with this lender and we have no reason to believe that this lender will not renew this loan in the future. On June 1, 2003, in connection with the acquisition of Momentum, the Company assumed a Line of Credit Agreement 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 the former shareholder of Momentum, who is also an Officer of the Company. At June 30, 2004 the balance outstanding for Wireless Frontier Internet under this agreement was $55,656. In connection with the Momentum acquisition, on April 1, 2003 the Company entered into a loan agreement with an individual and shareholder for $59,250 for working capital funds advance to the Momentum since inception. The loan is due on demand with an 8% interest rate. Accruing interest is due monthly. The note is unsecured. The balance due at June 30, 2004 was $54,885. On September 30, 2003 as part of the Xramp Agreement the Company agreed to pay $50,000. The agreement was satisfied in March 2004 by payment in full of the loan. 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 at June 30, 2004 was 6%. The Note was renewed and now matures on September 17, 2004. The note is secured by all vehicles, office equipment, accounts receivable, telephone equipment and all other assets. At June 30, 2004 the balance outstanding under this agreement was $328,279. The Company is on good terms with this lender and we have no reason to believe that this lender will not renew this loan in the future. On February 9, 2004, the Company entered into an Agreement for Purchase and Sale of Stock with Office Products Incorporated, Computer Division. This agreement called for $373,252 to be paid in stock and cash within 90 days from the signing of the agreement. This amount has not been paid as of August 16, 2004. The Company is presently in discussions with the former owners concerning this amount. At June 30, 2004 the balance outstanding under this agreement was $373,252. 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 $0.20 per share. 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 $0.20 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 $0.10 per share. The Company paid off the debt of $1,315,000 and interest of $142,668 with the proceeds of a Private Placement Offering on August 6, 2004. At June 30, 2004 the principal balance outstanding under these agreements was $1,315,000, with accrued interest and penalties $142,668. Pursuant to a letter agreement between the Company and the noteholders, the warrants are now exercisable for $0.05 per share. On May 30, 2002, the Company entered into a loan agreement with a local 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 $11,603. All payments include interest at 6.75%, which varies with the Wall Street Journal Prime Rate. The loan is secured by all equipment, accounts receivable, and inventories whether now owned or hereafter acquired, wherever located. Certain shareholders and officers of the Company also guaranteed the loan. The balance due at June 30, 2004 was $362,890. 12 On January 8, 2003, the Company entered into a loan agreement with a local bank for $14,500. The loan calls for 30 monthly payments of $532 including interest. The initial interest was 7.5%, which varies with Wall Street Journal Prime Rate. The loan is secured by the vehicle purchased. Certain shareholders and officers of the Company also guaranteed the loan. The balance at June 30, 2004 outstanding under this agreement was $7,110. On April 15, 2003, the Company entered into a loan agreement with a local bank for $88,340. The loan calls for 60 monthly payments of $1,566 plus interest. The initial interest was 6.75%, which varies with the Wall Street Journal Prime Rate. The loan is secured by the installation vehicles purchased. The majority shareholder and an officer of the Company also guaranteed the loan. The balance at June 30, 2004 outstanding under this agreement was $73,589. 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 including 0% interest. The loan is secured by the vehicle purchased. The majority shareholder and an officer of the Company also guaranteed the loan. The balance at June 30, 2004 outstanding under this agreement was $22,739. On April 21, 2003, the Company entered into a loan agreement with a local 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 shareholder and an officer of the Company also guaranteed the loan. The balance outstanding at June 30, 2004 under this agreement was $29,498. 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 shareholder and an officer of the Company also guaranteed the loan. The balance at June 30, 2004 outstanding under this agreement was $31,588. On April 21, 2003, the Company entered into a loan agreement with a Finance Company for $35,402. 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 shareholder and an officer of the Company also guaranteed the loan. The balance at June 30, 2004 outstanding under this agreement was $28,261. 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 plus interest at 0%. The loan is secured by the installation vehicle purchased. The employee of the Company is still liable for the loan. The balance at June 30, 2004 outstanding under this agreement was $30,522. 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 plus interest at 0%. The loan is secured by the installation vehicle purchased. The majority shareholder and an officer of the Company also guaranteed the loan. The balance at June 30, 2004 outstanding under this agreement was $32,471. 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 at June 30, 2004 outstanding under this agreement was $76,296. On June 1, 2003 in connection with the acquisition of Momentum the Company assumed the following loans: On October 18, 2000 the Company entered into a loan agreement 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 shareholder and officer of the Company also guaranteed the note. The balance at June 30, 2004 outstanding under this agreement was $2,569. On April 16, 2001 the Company entered into a loan agreement with a finance company for $17,125 to purchase equipment. The loan calls for 36 monthly payments of $586 including interest at 15.9%. The equipment secures the note. A shareholder and officer of the Company also guaranteed the note. The balance at June 30, 2004 outstanding under this agreement was $0. On July 10, 2001 the Company entered into a loan agreement with a local bank for $54,785 to purchase equipment. The loan is due on demand and if no demand is made, then 35 monthly payments of $1,771 including interest at 10.0%. The equipment secures the note along with funds that the Company has on deposit with the bank. A shareholder and officer of the Company also guaranteed the note. The balance at June 30, 2004 outstanding under this agreement was $4,552. 13 On December 30, 2002 the Company entered into a loan agreement 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 at June 30, 2004 outstanding under this agreement was $7,171. Total Debt at June 30 is as follows: 2004 Debt $2,995,175 Less Current portion (2,286,710) ----------- Long-term debt $ 708,465 ========== Maturities on long-term debt are as follows: Year ending December 31, 2003 $147,730 2004 2,286,710 2005 135,379 2006 135,678 2007 108,586 Thereafter 100,021 NOTE 6 - EMPLOYEE STOCK OPTION PLAN AND OTHER EMPLOYEE RELATED ACTIONS The Board of Directors in their October 1, 2003 meeting agreed to allocate 20,000,000 shares to the Employee Stock Option Plan to be established later. There has been no further action as of this time. On July 7, 2004, certain officers of Wireless Frontier Internet, Inc. (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 (the "Common Stock"), of the Company set forth opposite his name below. 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 officers 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 officers of employee stock options to purchase the number of shares of Common Stock set forth opposite his name below. Each option will be vested immediately and 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 14 NOTE 7 - EQUITY In January 2004 the Company renegotiated all but one of the Company's acquisitions and most of its stock sale contracts entered into during 2003. The additional shares issued resulting from these negotiations is reflected in these financial statements as if they were issued at the time of the original contract. 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 a purchase price of 416,664 shares of common stock. On June 9, 2004, the Company bought back 3,791,210 shares of the Company's stock in exchange for the assets originally acquired plus 250,000 stock purchase warrants. The warrants have an exercise price of $0.25 per share. The 3,791,210 shares were cancelled. 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 $0.05 per share. NOTE 8 - COMMITMENTS The Company leases real estate in Sanderson, Texas under a one-year agreement due to expire in 2005, with an option to renew each year until 2007. The lease calls for monthly payments of $650 per month and half of the monthly electric bill. The Company leases real estate in Fort Stockton, Texas under a one-year agreement due to expire in 2004. The lease calls for monthly payments of $750 per month. The Company leases real estate in Alpine under a five-year agreement due to expire in 2008. The lease calls for monthly payments of $675 per month. The Company leases equipment on a 48 month lease from Pinnacle Towers (Global Signal) due to expire in 2007. The lease calls for monthly payments of $324.48 per month. The Company leases real estate in Marble Falls, Texas under a 5-year agreement due to expire April 30, 2008. The Company may terminate this lease at any time after the third full year of the lease with six months notice. The lease calls for monthly payments of $1,200 per month. The Company leases antenna space on the Kingsland site in Kingsland, Texas under a five-year agreement due to expire in 2006. The lease calls for monthly payments of $275 per month. The lease has two automatic five year term renewals unless cancelled with 90-day notice. The Company leases antenna space on the Rebecca Creek site in Spring Branch, Texas under a five-year agreement due to expire in 2006. The lease calls for payments of $250 per month. The lease has two automatic five-year renewals unless cancelled with 90-day notice. The Company leases antenna space on the Fairland site in Marble Falls, Texas under a five-year agreement due to expire in 2006. The lease calls for payments of $200 per month. The lease has two automatic five-year renewals unless cancelled with 90-day notice. The Company leases antenna space on the Burnet site in Burnet site in Burnet, Texas under a five-year agreement due to expire in 2006. The lease calls for payments of $200 per month. The lease has two automatic five-year renewals unless cancelled with 90-day notice. The Company leases antenna space on the N-R Ranch site in Blanco, Texas under a five year agreement due to expire in 2004. The lease calls for payments of $100 per month. The lease has unlimited automatic five-year renewals unless cancelled with 60-day notice. The Company leases antenna space on the Storage Tank site in Llano, Texas under a five year agreement due to expire in 2007. The lease calls for payments of $200 per month. The lease has one automatic three-year renewal unless cancelled with 30-day notice. The Company leases real estate from Robert McClung in Blanco, Texas on an on-going basis. The lease calls for monthly payments of $1,200 per month. 15 The Company leases antenna space from Uptown Blanco LTD in Blanco, Texas under a three-year agreement due to expire in 2006. The lease calls for payments of $200 per month. The Company leases antenna space William Proctor in Blanco, Texas under a three-year agreement due to expire in 2006. The lease calls for payments of $100 per month. The Company leases antenna space on the Bulverde VFW Tower site in Blanco, Texas under a three-year agreement due to expire in 2006. The lease calls for payments of $100 per month. The Company leases antenna space on the Kings Point Water Tower in Blanco, Texas under a three-year agreement due to expire in 2006. The lease calls for payments of $100 per month. The Company leases antenna space from Blanco Communications in Blanco, Texas under a three-year agreement due to expire in 2006. The lease calls for payments of $100 per month. The Company leases antenna space from City of Ellinwood, Kansas under a five-year agreement due to expire in October 2008. The lease calls for payments of $600 per month. The Company leases antenna space from City of Hoisington, Kansas under a five-year agreement due to expire in 2008. The lease calls for payments of $0 per month. The Company leases antenna space from Great Bend Housing Authority, Kansas under a three-year agreement due to expire in 2006. The lease calls for payments of $350 per month. The Company leases antenna space from Carpenter Properties in Alpine, Texas under a two-year agreement due to expire in May 2006. The lease calls for payments of $200 per month. The Company leases antenna space from Paul Ruby, SR in Beeville, Texas under a two-year agreement due to expire in December, 2005. The lease calls for payments of $150 per month. Future minimum lease payments are as follows: 2004 $106,294 2005 $99,294 2006 $85,694 2007 $54,594 2008 $48,300 NOTE 9 - RELATED PARTY TRANSACTIONS There are no significant related party transactions during the second quarter of 2004. NOTE 10 - LITIGATION On November 10, 2003 Momentum filed a complaint against the Company in district state 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. In addition, the court also ordered mediation, which did not produce a resolution. 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. The Company believes that Momentum's lawsuit is without merit and intends to vigorously defend the matter. 16 NOTE 11 - SUBSEQUENT EVENTS 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 $0.20 per share. 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 $0.20 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 $0.10 per share. The Company paid off the debt of $1,315,000 and interest of $142,668 with the proceeds of a Private Placement Offering on August 6, 2004. At June 30, 2004 the principal balance outstanding under these agreements was $1,315,000, with accrued interest and penalties $142,668. Pursuant to a letter agreement between the Company and the noteholders, the warrants are now exercisable for $0.05 per share. The Company is in the process of raising capital through a Private Placement Offering of investment units, with each unit consisting of one share of the Company's common stock and a warrant to purchase one-half of one share of the Company's common stock. The Company has raised $2,648,962 through August 16, 2004. The proceeds of these funds were used primarily to repay the debentures mentioned above, and associated placement and legal fees. The maximum amount of the Private Placement Offering is $5 million. There are no assurances that the Company will be able to raise the maximum amount in the Private Placement Offering. NOTE 12 - GOING CONCERN The Company has not generated significant profits to date and has had difficulty repaying some of its debt. The Company's continuation as a going concern depends upon its ability 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. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 will focus its primary 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 targets to offer 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 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. Discontinued Operations The Company discontinued all of the operations of the Fremont businesses in late 1998 and 1999, due to lack of capital, bad debt and unprofitability. Any assets were liquidated or written off. Debts were settled or negotiated. No operating results of the prior Fremont businesses are included in this discussion or in the operating statements of the Company due to such discontinuance. 18 Results of Operations Results of operations for the quarter ended June 30, 2004 compared to the quarter 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. For the six month periods of 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 in 2004 and 2003, respectively. The increase in equipments 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. This source of revenue was limited and was approximately $799,000 in that quarter compared to no revenue from community service network grants in the second quarter of 2004. For the six month periods of 2004 and 2003, the 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 sales for the three months in 2004 for equipment sales revenue was $362,473 which consists of purchasing equipment and accessories. The cost of sales for the three months in 2004 for Internet sales was $333,779 which consists of telephone lines, installation costs, rental costs, and service costs. 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 in June 30, 2003. The increase in the Company's gross profit margin for equipment sales for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003 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 the quarterly and six month gross profit in 2003 is the result of some large community network service grants 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 total operations expenses of $1,428,602 for the three months ended June 30, 2004 compared to $910,584 for the three months ended June 30, 2003, a total increase of 57%. 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 274,012 57,425 377% 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% Salary and wages 653,098 455,885 43% Utilities 34,781 25,545 36% Amortization and depreciation: 248,579 80,759 208%
The increase in the Company's expenses for three months ended June 30, 2004 compared to the same period in 2003 was primarily due to (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. 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 increase. 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 reported on the Company's books. The Company sustained a net loss of $1,040,200 for the three months ended June 30, 2004 as compared to net income of $95,314 for the same period in 2003. The net loss per share was ($0.02) for three months ended June 30, 2004 and earnings per share were $0.00 for the same period in 2003. 19 Liquidity and Capital Resources At June 30, 2004, we had working capital deficit of $2,627,474, due primarily to the current status of the $1,315,000 in debentures and another $1,345,000 in short-term loans. The debentures were repaid as of August 6, 2004 from funds raised in a Private Placement Offering that is still in progress as of August 16, 2004. Some of the remaining short-term debt may be retired depending on the success of the Private Placement Offering. We have historically sustained our operations and funded our capital requirements with the funds received from working capital 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. 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. However, the Private Placement Offering has generated additional cash reserves for the Company as of August 16, 2004. While the final amount to be received from this offering is unclear presently, we believe that we will receive additional funds to add to our cash reserves which should be sufficient to continue our operations over the next twelve months. 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. As we generally obtain most of our funding from operations, a decrease in revenue could negatively impact our short and long term liquidity. 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 $0.20 per share. 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 $0.20 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 $0.10 per share. The Company paid off the debt of $1,315,000 and interest of $142,668 with the proceeds of a Private Placement Offering on August 6, 2004. At June 30, 2004 the principal balance outstanding under these agreements was $1,315,000, with accrued interest and penalties $142,668. Pursuant to a letter agreement between the Company and the noteholders, the warrants are now exercisable for $0.05 per share. We may need to obtain additional capital in the future. If the need arises, we may attempt to obtain funding through the use of various types of short-term funding, loans or working capital financing arrangements from banks or financial institutions. We may also be required 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. Please review "Note 5. - Debt" 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 disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the quarter ended June 30, 2004 and have concluded that such disclosure controls and procedures are adequate and effective based upon their evaluation as of such date to ensure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the periods specified by the SEC's rules and forms. 20 There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of the most recent evaluation of such officers, nor were there any significant deficiencies or material weaknesses in the Company's internal controls requiring corrective action. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 1, 2003, Partners Alliance Group, Inc. ("PAG"), pursuant to that certain Asset Purchase Agreement, purchased the assets of Momentum in exchange for the issuance of shares of PAG. On November 10, 2003, Momentum filed a complaint against PAG in district state 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 PAG breached its contract as a result of the failure to deliver shares of common stock of PAG 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. All legal issues are currently pending before the Bankruptcy Court. The management of the Company believes that Momentum's lawsuit is without merit and intends to vigorously defend this 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 $0.20 per share. 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 $0.20 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 $0.10 per share. The Company paid off the debt of $1,315,000 and interest of $142,668 with the proceeds of a Private Placement Offering on August 6, 2004. At June 30, 2004 the principal balance outstanding under these agreements was $1,315,000, with accrued interest and penalties $142,668. Pursuant to a letter agreement between the Company and the noteholders, the warrants are now exercisable for $0.05 per share. ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following documents are filed as part of this report:
-------------- -------------------------------------------------------------------------------------------------- EXHIBIT NO. DESCRIPTION -------------- -------------------------------------------------------------------------------------------------- 4.1 Form of Subscription Agreement by and between the Company and each investor party thereto, entered into by the parties thereto as of July 23, 2004 and August 4, 2004 -------------- -------------------------------------------------------------------------------------------------- 4.2 Form of Common Stock Purchase Warrant by and between the Company and each holder thereto, issued on July 23, 2004 and August 4, 2004 -------------- -------------------------------------------------------------------------------------------------- 4.3 Form of Common Stock Purchase Warrant by and between the Company and Casimir Capital, LP, issued on July 23, 2004 and August 4, 2004 -------------- -------------------------------------------------------------------------------------------------- 4.4 Form of Letter Agreement, dated as of July 29, 2004, by and between the Company and the holders of convertible debentures of the Company -------------- -------------------------------------------------------------------------------------------------- 4.5 Letter Agreement, dated as of July 7, 2004, by and between the Company and Alex J. Gonzalez -------------- -------------------------------------------------------------------------------------------------- 4.6 Letter Agreement, dated as of July 7, 2004, by and between the Company and Joe Chris Alexander -------------- -------------------------------------------------------------------------------------------------- 4.7 Letter Agreement, dated as of July 7, 2004, by and between the Company and Ronald J. Marosko, Jr. -------------- -------------------------------------------------------------------------------------------------- 4.8 Letter Agreement, dated as of July 7, 2004, by and between the Company and Jaime R. Velasco -------------- -------------------------------------------------------------------------------------------------- 10.1 Form of Registration Rights Agreement by and between the Company and each investor party thereto, entered into by the parties thereto as of July 23, 2004 and August 4, 2004 -------------- -------------------------------------------------------------------------------------------------- 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 -------------- --------------------------------------------------------------------------------------------------
(b) Reports on Form 8-K (1) We filed a Current Report on Form 8-K dated June 16, 2004 in which we reported under Item 5 the following: a. Certain officers contributed 16,628,790 common shares to the Company. b. The saleback of certain assets related to Strategic Abstract & Title Corporation, in which the Company cancelled 3,791,210 common shares. c. The employment agreements of certain officers of the Company. d. The grant of stock options to certain officers. e. The extension of the maturity date of the debentures. f. The announcement of a new CFO for the Company and the change of status of another officer. 21 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: August 18, 2004 22