10QSB/A 1 v010924_10qsba.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A Amendment No. 2 Quarterly report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2004 WIRELESS FRONTIER INTERNET, INC. -------------------------------- (Exact name of small business issuer as specified in its charter) ================================================================================ Delaware 0-08281 76-0402866 -------------------------------------------------------------------------------- (State or other jurisdiction of (Commission File Number) (IRS Employer incorporation) Identification No.) ================================================================================ 104 West Callaghan, Fort Stockton, Texas 79735 ---------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (432) 336-0336 -------------- Securities registered under Section 12 (b) of the Exchange Act: NONE Securities registered under Section 12 (g) of the Exchange Act: Common Stock Par Value $ 0.001 per share Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |_| No |X| State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 66,507,787 common shares as of December 31, 2004. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| 1 TABLE OF CONTENTS Page ---- PART I Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - As of June 30, 2004 (unaudited) and December 31, 2003................3 Unaudited Condensed Consolidated Statements of Operations For the Three Months and Six Months ended June, 2004 and 2003........4 Unaudited Condensed Consolidated Statements of Cash Flows For the Six Months ended June 30, 2004 and 2003......................5 Notes to Unaudited Condensed Consolidated Financial Statements.......7 Item 2. Management's Discussion and Analysis of Plan of Operation............13 Item 3. Controls and Procedures..............................................16 PART II Other Information Item 1. Legal Proceedings....................................................17 Item 3. Defaults Upon Senior Securities......................................17 Item 6. Exhibits and Reports on Form 8-K.....................................18 Signatures 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS WIRELESS FRONTIER INTERNET, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2004 and December 31, 2003
ASSETS 2004 2003 ----------- ----------- (unaudited) CURRENT ASSETS Cash $ 86,602 $ 226,324 Accounts receivable 140,941 252,615 Inventories 192,256 171,477 Prepaid expenses and other current assets 281,040 2,525 ----------- ----------- Total Current Assets 700,839 652,941 PROPERTY AND EQUIPMENT, net 2,090,740 2,378,606 OTHER INTANGIBLE ASSETS, net 4,489,313 3,509,244 ----------- ----------- TOTAL ASSETS $ 7,280,892 $ 6,540,791 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003 ----------- ----------- CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,041,604 $ 672,394 Current portion of debt 2,286,710 831,551 ----------- ----------- Total Current Liabilities 3,328,314 1,503,945 LONG-TERM DEBT 708,465 616,772 ----------- ----------- Total liabilities 2,120,717 4,036,779 STOCKHOLDERS' EQUITY Common stock, $0.001 par value, 100,000,000 shares authorized, 61,808 62,226 61,807,520 and 62,225,632 shares issued at June 30, 2004 and December 31, 2003 respectively Additional paid-in capital 7,231,169 5,837,355 Accumulated deficit (4,046,838) (1,474,747) ----------- ----------- 4,424,834 3,246,139 Less common stock in treasury at cost: 2004 - 943,308 shares 2003 - 1,323,308 shares (2,026) (4,760) ----------- ----------- Total stockholders' equity 3,244,113 4,420,074 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,280,892 $ 6,540,791 =========== ===========
See accompanying notes to condensed consolidated financial statements. 3 WIRELESS FRONTIER INTERNET, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended June 30, June 30, ------------------------------- ------------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ REVENUES: Equipment sales $ 473,586 $ 72,794 $ 715,636 $ 95,216 Cost of equipment sales 362,473 72,093 519,741 70,122 ------------ ------------ ------------ ------------ Gross profit equipment sales 111,113 701 195,895 25,093 Internet service 786,479 1,304,325 1,572,884 1,771,125 Cost of service 333,779 271,004 640,178 656,979 ------------ ------------ ------------ ------------ Gross profit internet service 452,700 1,033,320 932,706 1,114,146 TOTAL GROSS PROFIT 563,813 1,034,022 1,128,601 1,139,239 OTHER OPERATING EXPENSES: General and administrative 1,213,754 829,825 2,292,684 1,122,881 Depreciation and amortization 248,580 80,759 527,826 123,689 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS (898,519) 123,438 (1,691,909) (107,331) INTEREST EXPENSE 408,718 28,124 856,663 32,397 ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (1,307,237) (2,548,572) (139,728) 95,314 OTHER INCOME (LOSS) (23,519) 0 (23,519) 0 ------------ ------------ ------------ ------------ NET LOSS $ (1,330,756) $ $ (2,572,091) $ (139,728) 95,314 ============ ============ ============ ============ BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.02) $ (0.04) BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 59,622,212 62,779,136
See accompanying notes to condensed consolidated financial statements. 4 WIRELESS FRONTIER INTERNET, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2004 and 2003
2004 2003 ----------- ----------- OPERATING ACTIVITIES: Net loss $(2,572,091) $ (139,728) Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 527,826 110,223 Stock issued for services 2,734 0 Amortization of loan discount related to detachable warrants 657,500 0 Loss (Gain) on sale of assets 23,519 0 Changes in operating assets and liabilities: Decrease (Increase) in accounts receivable 111,674 (737,215) Decrease (Increase) in inventories (20,779) (111,151) (Increase) in prepaid expenses (278,516) (122,428) (Decrease) Increase in accounts payable and accrued liabilities 334,312 260,828 ----------- ----------- Net cash used by operating activities (1,213,820) (739,470) INVESTING ACTIVITIES: Purchases of property and equipment (519,581) (1,408,208) FINANCING ACTIVITIES: Net proceeds from issuance of common stock 61,210 1,682,841 Net proceeds from issuance of debentures and notes 1,638,252 474,304 Payments on debentures and notes payable (105,783) (25,933) ----------- ----------- Net cash provided by financing activities 1,593,679 2,131,212 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (139,722) (16,466) CASH AND CASH EQUIVALENTS, beginning of period 226,324 88,990 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 86,602 $ 172,524 =========== ===========
See accompanying notes to condensed consolidated financial statements 5 SUPPLEMENTAL INFORMATION: Cash paid for interest $ 56,494 $ 32,397 Non-cash activity: Acquisitions: Assets: Accounts receivable $ 0 $ 126,651 Inventories 95,657 26,717 Property and equipment 233,392 800,283 Intangible assets 260,853 510,000 Goodwill 966,798 2,113,826 ----------- ----------- 1,556,700 3,577,477 Liabilities: Accounts payable and accrued expenses 0 140,983 Debt 350,619 172,894 ----------- ----------- Net assets acquired for stock $ 1,206,081 $ 3,263,600 =========== =========== Sale of assets acquired in prior acquisition: Property and equipment, net $ 466,648 Intangible assets and Goodwill, net 89,552 ----------- Stock reacquired $ 556,200 =========== Other transactions, net $ 23,519 ===========
See accompanying notes to condensed consolidated financial statements. 6 WIRELESS FRONTIER INTERNET, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The interim condensed consolidated financial statements included herein have been prepared by Wireless Frontier Internet, Inc. and subsidiary (collectively, the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company's management, the accompanying interim condensed consolidated financial statements reflect all adjustments, of a normal recurring nature, that are necessary for a fair presentation of the Company's financial position, results of operations and cash flows for such periods. It is recommended that these interim condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-KSB and Form 10-KSB/A for the year ended December 31, 2003. Results of operations for the interim periods are not necessarily indicative of results that may be expected for any other interim periods or the full fiscal year. Basic and Diluted Weighted Average Shares Outstanding for the three months and six months ended June 30, 2003 are not included in the financial statements because the Company was not a publicly trading company until September 30, 2003. Consequently, the Basic and Diluted Net Loss Per Common Share is not reported for this period. Note 2. Intangible Assets Intangible assets are summarized by major classifications as of June 30, 2004 as follows: Customer Lists $ 929,059 Covenants not to compete 10,000 ----------- 939,059 Less: Accumulated amortization (353,838) ----------- 585,221 Goodwill 3,904,092 ----------- Total $ 4,489,313 =========== The Company has no tax deductible Goodwill. Note 3. Acquisitions On June 30, 2003, the Company entered into an agreement to purchase all the assets of Strategic Abstract & Title Corporation for $4,000 and 4,166,640 shares of common stock valued at $680,600. The original agreement called for an issuance of 416,664 shares of common stock. The number of shares issued was revalued in January 2004 to 4,166,640 shares. This purchase added three commercial buildings valued at $285,000 and the assets and business of Strategic Abstract & Title Corporation. On June 9, 2004, the Company sold the assets and business for 3,791,210 of the shares issued at the time of the acquisition plus 250,000 5-year stock purchase warrants that are exercisable at $0.25 per share. The value of the shares was $568,862 and the value of the warrants was $36,000. A loss of $23,519 was recorded on the sale. On February 9, 2004, the Company entered into an Asset Purchase Agreement with Office Products Incorporated, Computer Division ("OPI") to purchase Internet subscribers, certain assets, and computer service customers. The number of shares issued was 3,527,623 shares of the Company's common stock. The Company also issued the seller a note for $350,619 to be paid $20,000 plus 10% interest per month. The assets acquired were as follows: 7 Inventory $ 95,657 Equipment and 207,035 furniture Customer List 125,782 Goodwill 781,786 ---------- Total $1,210,260 ========== Had the operations of OPI been included in the Company's statements of operations for the six months ended June 30, 2004 and 2003, respectively, the pro forma revenues, losses and related per share data would have been as follows: 2004 2003 ----------- ----------- Pro forma revenue $ 2,393,157 $ 2,338,069 Pro forma loss $(2,683,451) $ (274,186) Pro forma earnings per share, basic and diluted $ (0.04) $ (0.01) On March 17, 2004, the Company entered into an Asset Purchase Agreement with BCOM.NET, INC to purchase certain assets and Internet subscribers of BCOM.NET, INC. This purchase extends the Company's service to an area south of San Antonio, Texas. The Company issued 355,600 shares of common stock to acquire these assets. The supplemental pro forma information required by FAS 141 has been omitted as such amounts are considered to be immaterial. The assets acquired were as follows: Equipment and furniture $ 26,358 Customer List 82,000 Goodwill 185,012 -------- Total $293,370 ======== On April 5, 2004 the Company entered into an Asset Purchase Agreement with RayTech Internet, Inc. to purchase certain assets and Internet subscribers. The Company paid $10,000 in cash and issued 50,672 shares of the Company's common stock to acquire these assets. This purchase extends the Company's service to Big Springs, Texas. The supplemental pro forma information required by FAS 141 has been omitted as such amounts are considered to be immaterial. The assets acquired were as follows: Customer List $53,071 Note 4. Debt On November 14, 2002, the Company entered into a Line of Credit Agreement with a local bank for $170,000 due June 4, 2004. This loan was subsequently renewed and is now due on December 20, 2004. The interest rate is 6.75%. The loan is secured by all accounts and other rights to payments, inventories, equipment, instruments and chattel paper, general intangibles, documents, and deposit accounts owned by the Company. The majority stockholder and officer of the Company also guaranteed the loan. The balance at June 30, 2004 was $170,000. As part of the Xramp agreement on June 30, 2003, the Company issued a note to pay the owners of Xramp $50,000. The loan was paid in March 2004. On December 18, 2003, the Company entered into a loan agreement with a bank for $353,279. The interest rate varies at 2 points over the Wall Street Journal Prime Rate. The rate was 6.75% at June 30, 2004. The note was renewed and now matures on March 23, 2005. The note is secured by all vehicles, office equipment, accounts receivable, telephone equipment and all other assets. The balance outstanding was $328,279 at June 30, 2004. The Company issued a note for $350,619 in connection with the acquisition of Office Products Incorporated, Computer Division. This note is to be paid in monthly installments of $20,000 principal plus 10% interest until the balance of this note is repaid. The balance outstanding was $350,619 at June 30, 2004. 8 In March 2004, the Company issued convertible debentures to a number of noteholders, in the aggregate principal amount of $1,315,000, at an interest rate of 10%, plus late penalties, and warrants to purchase an aggregate of 6,575,000 shares of the Company's common stock at an exercise price of $0.10 per share. These debentures matured on April 11, 2004, and the Company was unable to pay the debentures. In July 2004, the Company agreed with the noteholders to extend the maturity date to August 11, 2004 and to reduce the conversion price of the debentures to $0.05 per share. The Company paid the debentures plus interest of $172,000 with the proceeds of a Private Placement Offering on August 6, 2004. Pursuant to a letter agreement between the Company and the noteholders, the warrants are now exercisable for $0.05 per share. The Company also reported non-cash interest expense of $424,194 in the quarter ended March 31, 2004 and $233,306 in the quarter ended June 30, 2004 related to a discount of the debentures for the purchase warrants issued and subsequently repriced. On May 30, 2002, the Company entered into a loan agreement with a bank for $469,073. The loan calls for 24 monthly payments of $7,000, followed by 47 monthly payments of $8,500 and 1 payment of $16,901. All payments include interest which varies with the Wall Street Journal Prime Rate plus 2 percentage points (6.75% at June 30, 2004). The loan is secured by all equipment, accounts receivable, and inventories whether now owned or hereafter acquired, wherever located. Certain stockholders, an employee and an officer of the Company also guaranteed the loan. The balance due was $362,890 at June 30, 2004. On January 8, 2003, the Company entered into a loan agreement with a bank for $14,500. The loan calls for 30 monthly payments of $532 including interest at the Wall Street Journal Prime Rate plus 2 percentage points. The initial interest was 6.75%. The loan is secured by the vehicle purchased. Certain stockholders and officers of the Company also guarantee the loan. The balance outstanding was $7,110 at June 30, 2004. On April 15, 2003, the Company entered into a loan agreement with a bank for $88,340. The loan calls for 60 monthly payments of $1,566 plus interest at the Wall Street Journal Prime Rate plus 2 percentage points. The initial interest was 6.75%. The loan is secured by the installation vehicles purchased. The majority stockholder and an officer of the Company also guaranteed the loan. The balance outstanding was $73,589 at June 30, 2004. On April 15, 2003, the Company entered into a loan agreement with a finance company for $28,394. The loan calls for 60 monthly payments of $473. The loan is secured by the vehicle purchased. The majority stockholder and an officer of the Company also guaranteed the loan. The balance outstanding was $22,739 at June 30, 2004. On April 21, 2003, the Company entered into a loan agreement with a credit union for $35,402. The loan calls for 60 monthly payments of $504 plus interest at 6.75%. The loan is secured by the installation vehicle purchased. The majority stockholder and an officer of the Company also guaranteed the loan. The balance outstanding was $29,498 at June 30, 2004. On April 21, 2003, the Company entered into a loan agreement with a finance company for $38,702. The loan calls for 60 monthly payments of $645 plus interest at 6.25%. The loan is secured by the installation vehicle purchased. The majority stockholder and an officer of the Company also guaranteed the loan. The balance outstanding was $31,588 at June 30, 2004. On April 21, 2003, the Company entered into a loan agreement with a finance company for $34,592. The loan calls for 60 monthly payments of $571 plus interest at 6.25%. The loan is secured by the installation vehicle purchased. The majority stockholder and an officer of the Company also guaranteed the loan. The balance outstanding was $28,261 at June 30, 2004. On May 1, 2003, the Company assumed a loan of an employee in exchange for the vehicle secured by the loan. The loan amount assumed was financed by a finance company and was for $32,005, the balance due at May 1, 2003. The loan calls for 40 additional monthly payments of $762. The loan is secured by the installation vehicle purchased. The employee of the Company is still liable for the loan. The balance outstanding was $30,522 at June 30, 2004. On May 1, 2003, the Company entered into a loan agreement with a finance company for $40,546. The loan calls for 60 monthly payments of $676. The loan is secured by the installation vehicle purchased. The majority stockholder and an officer of the Company also guaranteed the loan. The balance outstanding was $32,471 at June 30, 2004. In May 2003, the Company entered into a loan agreement with an individual for $90,000, effective to May 1, 2001 to purchase the Company's headquarters building in Fort Stockton, Texas. Rent paid since May 1, 2001 has been applied to the note and recorded as other income in the first quarter of 2003. The loan calls for 180 monthly payments of $900 including interest at 8.759%. The note is secured by the building. The balance outstanding was $76,296 at June 30, 2004. In connection with the acquisition of Momentum Online Computer Services, Inc. ("Momentum") on June 1, 2003, the Company assumed the following loans: Line of Credit dated November 11, 2002 with a local bank for $75,000 payable on demand and if no demand is made, then on November 22, 2003. The note was renewed in December 2003 when an interest payment was made and the new maturity date is June 19, 2004. The interest rate is 8.5%. The loan is secured by all monies the Company has on deposit with the bank. The note is guaranteed by a stockholder of Momentum. The balance outstanding was $59,422 at June 30, 2004. 9 A loan with an individual and stockholder for $59,250 for working capital funds advanced to Momentum since inception. The loan is due on demand with an interest rate of 8% due monthly. The note is unsecured. The balance outstanding was $54,203 at June 30, 2004. A loan with a finance company for $25,860 to purchase a vehicle. The loan calls for 48 monthly payments of $658 including interest at 10.2%. The installation vehicle secures the note. A stockholder and employee of the Company also guarantee the note. The balance outstanding was $2,569 at June 30, 2004. A loan with a bank for $54,785 to purchase equipment. The loan is due on demand and if no demand is made, in 35 monthly payments of $1,771 including interest at 10.0%. The equipment secures the note along with funds that Momentum has on deposit with the bank. A stockholder and officer of Momentum also guaranteed the note. The balance outstanding was $4,552 at June 30, 2004. A loan with a finance company for $13,600 to purchase equipment. The loan calls for 36 monthly payments of $465 including interest at 15.9%. The equipment secures the note. The balance outstanding was $7,171 at June 30, 2004. Note 5. Employee Stock Option Plan and Other Employee Related Actions In their October 1, 2003 meeting, the Board of Directors agreed to allocate 20,000,000 shares to the Employee Stock Option Plan to be established later. There have been no options issued in connection with this plan. On July 7, 2004, certain officers of the Company contributed to the capital of the Company the number of issued and outstanding shares of the common stock, par value $0.001 per share, of the Company set forth opposite his name below. The contribution of these shares was accounted for through a reduction in the Common Stock account with a corresponding increase in Additional Paid-in Capital at par value. Shareholder Number of Shares ----------- ---------------- Alex J. Gonzalez 13,762,122 Joe Chris Alexander 883,334 Ronald J. Marosko, Jr. 883,334 Jaime R. Velasco 1,100,000 On June 7, 2004, the Company entered into employment agreements with the following employees of the Company: Alex J. Gonzalez, Joe Chris Alexander, Ronald J. Marosko, Jr. and Kelly E. Simmons. The Company approved the grant to certain of its employees of employee stock options to purchase the number of shares of Common Stock set forth opposite his name below. Each option will be exercisable as follows: (i) 25% of such option shall become exercisable on December 31, 2004, at a price of $0.25 per share; (ii) an additional 25% of such option shall become exercisable on December 31, 2005, at a price of $0.31 per share; (iii) an additional 25% of such option shall become exercisable on December 31, 2006, at a price of $0.40 per share; and (iv) an additional 25% of such option shall become exercisable on December 31, 2007, at price of $0.50 per share. The exercise of these options will be conditioned upon the satisfaction of certain conditions set forth in each shareholder's respective option agreements. Shareholder Number of Options to be Granted -------------- ------------------------------- Alex J. Gonzalez 13,762,122 Joe Chris Alexander 883,334 Ronald J. Marosko, Jr. 883,334 Jaime R. Velasco 1,100,000 Based on the provisions of APB 25, there was no intrinsic value of the options granted on June 7, 2004, and therefore, no compensation expense was recorded. The fair value of the options was approximately $2,350,000 on June 7, 2004. The fair value of the stock contributed to the Company which gave rise to the issuance of the options was approximately $2,500,000 on July 7, 2004 based on the quoted market price. As a result, there was no compensation expense 10 associated with the granting of the options. Therefore, no disclosure is required of the pro forma information as provided for by SFAS 148. The following assumptions were used for the grant of the options to the employees to compute the fair value of the options using the Black-Scholes option-pricing model: dividend yield of 0%; expected volatility of 183.0%; risk free interest rate of 3.66%; and expected life of 5 years. Note 6. Stockholders' Equity In January 2004, the Company revalued the number of shares of common stock issued to stockholders in connection with certain acquisitions and investments in the Company that occurred during 2003. The original number of shares issued for these transactions in 2003 was 1,128,872. The number of shares issued as a result of this revaluation was 10,159,848, resulting in the total number of shares issued for these transactions of 11,288,720. The issuance of these shares was accounted for through an increase in the Common Stock account with a corresponding decrease in Additional Paid-in Capital at par value. During the first quarter and second quarter of 2004, The Company issued stock for the compensation of certain legal and consulting services. The shares issued in the first quarter were 181,818, and the shares issued in the second quarter were 170,000. The services were valued at $36,364 in the first quarter, and $34,000 in the second quarter. The issuance of these shares was accounted for each quarter through an increase in the Common Stock account at par value and an increase in Additional Paid-in Capital for the remainder of the value of the services. On July 7, 2004, certain officers of the Company contributed 16,628,790 shares of common stock to the capital of the Company. The contribution of these shares was accounted for through a reduction in the Common Stock account with a corresponding increase in Additional Paid-in Capital at par value. In July through September 2004, the Company completed a private placement transaction in which 21,763,890 shares of common stock and warrants to purchase up to 10,881,913 shares of common stock were issued. Common stock can be purchased with these warrants for $0.15 per share. The Company received approximately $3,264,592 from this placement; the proceeds of which were used to repay the debentures plus interest mentioned above, and $865,133 was used to pay placement agent and legal fees. Note 7. Litigation On November 10, 2003, Momentum filed a complaint against the Company in state district court for the State of Texas in relation to the asset purchase agreement the Company entered into with Momentum on June 1, 2003. The complaint alleges the Company breached its contract as a result of the failure to deliver shares of common stock of the Company as required pursuant to the asset purchase agreement. The court issued an injunction requiring that any revenue generated from the subject assets be placed in escrow and utilized to pay any outstanding invoices in connection with the use of the assets. The assets acquired, liabilities assumed, revenue generated, and associated expenses are included in these financial statements since the acquisition date. The revenues and expenses generated by Momentum and included in the accompanying statement of operations during the six months ended June 30, 2004 were $724,106 and $765,456, respectively. The assets and liabilities related to Momentum that are included on the balance sheet at June 30, 2004 are in the following table: Assets: Cash $ 66,128 Accounts receivable 133,299 Inventory 30,584 Equipment and furniture 175,604 Other assets 44,600 Customer List 291,666 Goodwill 1,992,202 ---------- Total Assets $2,734,083 ========== Liabilities: Accounts payable and accrued liabilities $ 225,328 Notes payable 234,724 ---------- Total Liabilities $ 460,052 ========== 11 On January 6, 2004, Momentum filed for voluntary bankruptcy in Federal Bankruptcy Court. This action stopped the proceeding in state court until a hearing on the Company's holdings can be heard. On October 4, 2004, the parties appeared before a Bankruptcy Court appointed mediator, but did not resolve the dispute. The court has not set a date to hear this case,, so it is unclear at this point when this matter will be resolved. The Company believes that Momentum's lawsuit is without merit and intends to vigorously defend the matter. Note 8. Going Concern The Company has a history of losses, negative cash flows and has had some difficulty meeting the terms of some of its debt instruments. As of June 30, 2004, the Company had a working capital deficit of $2,627,475. The Company's continuation as a going concern depends upon its ability to attain profitable operations and to obtain additional sources of capital and financing. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The steps that the Company is taking to alleviate the deficiency of capital includes a focus on increasing revenues, the reduction of staff, selling of unnecessary equipment such as vehicles, the implementation of new selling practices that are less expensive than traditional media marketing, and the raising of additional debt or equity capital. Note 9. Restatement of Previously Issued Financial Statements in Form 10-QSB The accompanying financial statements reflect a restatement of the financial statements previously issued on August 18, 2004 by the Company with the Securities and Exchange Commission on Form 10QSB for the three months and six months ended June 30, 2004. Net loss and basic and diluted net loss per share ("LPS") as previously reported in the appropriate interim periods as reflected below have been restated to account for the non-cash transactions related to (1) common stock issued for legal services (see note 6), (2) the sale of Strategic Abstract & Title Corporation for common stock of the Company (see note 3) and (3) interest expense resulting from the discount of the convertible debentures issued with detachable warrants and their subsequent re-pricing (Note 4.). The effect of the restatement on net loss and basic and diluted net loss per share in previously issued financial statements for the three months ended March 31, 2004, and for the three months and six months ended June 30, 2004 are as follows:
As Previously Reported As Restated Net Loss LPS Net Loss LPS ------------- -------- ------------- -------- Three months ended March 31, 2004 ($885,868) ($0.01) ($1,241,335) ($0.02) Three months ended June 30, 2004 ($1,040,101) ($0.02) ($1,330,756) ($0.02) Six months ended June 30, 2004 ($1,925,969) ($0.03) ($2,572,091) ($0.04)
12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION Introduction The following discussion of our financial condition and results of our operations should be read in conjunction with the Financial Statements and Notes thereto. This document contains certain forward-looking statements including, among others, anticipated trends in our financial condition and results of operations and our business strategy. Statements contained herein that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include, but are not limited to, (i) the Company's ability to obtain additional financing; (ii) the Company's ability to deploy its high-speed network in a timely fashion; (iii) the Company's ability to keep pace with technological changes in its industry; and (iv) the Company's ability to attract and retain its customers. In addition, significant fluctuations in quarterly results may occur as a result of the timing of customer demand for the Company's high-speed services and the timing of the installation of the Company's networks. Additional factors that would cause actual results to differ materially from those projected or suggested in any forward-looking statements are contained in the Company's filings with the Securities and Exchange Commission, including those factors discussed under the caption "Risk Factors" in the Company's most recent Annual Report on Form 10-KSB/A. The Company undertakes no obligation to publicly release the revisions in such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events or circumstances, except as otherwise required by securities and other applicable laws. Plan of Operation The Company is a wireless broadband Internet service provider located in Fort Stockton, Texas. In addition, the Company is also a traditional Internet service provider. The Company currently provides services to customers in over 100 cities throughout Southwest Texas and Kansas. The Company was designed to deliver efficient, reliable and cost effective solutions to bringing high-speed Internet access to rural markets within the United States. The Company believes it has positioned itself to meet the Internet access needs of organizations and consumers which require broadband access to the Internet in its operating area, but do not have access to cable or DSL from the traditional service providers. The Company offers broadband Internet service through a network of point-to-point and point-to-multipoint wireless networks. The Company uses terrestrial circuits to connect the Internet backbone and then distributes the signal through a series of towers and repeaters to customer premise equipment (CPE) located at the subscriber's residence or business. Also, by utilizing the expertise of the Company's Network Engineers, the Company delivers value added services to its subscribers by offering network integration services. This service is provided by selling, installing and maintaining the hardware necessary for virtual private networks (VPN's), Voice over IP (VoIP) and data integration services. The Company has focused its marketing efforts on providing wireless broadband access services to customers located in rural areas of Texas and Kansas and then throughout the United States. The Company will also focus on cities of less than 150,000 inhabitants. As the Company positions itself as a high quality service provider, it offers network reliability complemented by quality customer support. As part of its business strategy, the Company plans to continue to make acquisitions of complementary companies, products and technologies. In order to implement these strategies and to fund its operations and repay its indebtedness, the Company will need to raise substantial amounts of capital over the next year. Please see discussion below under "Liquidity and Capital Resources." The Company will focus its effort on customer satisfaction by attracting and retaining a core team of professionals. We plan to increase our staffing levels only as required by our operation. We currently have no plans to significantly increase the number of our employees. Results of Operations Results of operations for the three months ended June 30, 2004 compared to the three months ended June 30, 2003. For the three months ended June 30, 2004, the Company generated $473,586 in equipment sales and $786,479 in Internet service revenue. For the three months ended June 30, 2003, the Company generated $72,794 in equipment sales revenue, and $1,304,325 in Internet service revenue. The increase in equipment sales is primarily from the acquisitions expanding our customer base. The decrease in internet service revenue reflects some community network service grants that were recognized in the second quarter of 2003. This source of revenue was limited and was approximately $799,000 in the three months ended June 30, 2003 compared to no revenue from community service network grants during the three months ended June 30, 2004. Without this revenue source in the 2003 period, the comparison with 2004 reflects an increase in the subscriber revenue and other Internet income due primarily to the acquisitions expanding the Company's customer base. 13 The cost of equipment sales for the three months ended June 30, 2004, which consists of purchasing equipment and accessories, was $362,473. The cost of service sales for the three months ended June 30, 2004, which consists of telephone lines, installation costs, rental costs, and service costs, was $333,779. The gross profit margin for equipment sales was 23% for the three months ended June 30, 2004 compared to 1% for the three months ended June 30, 2003. The increase in the Company's gross profit margin for equipment sales for that period was due to the mix of sales with an increase of services sales resulting in a higher profit margin than equipment sales. The gross profit margin for Internet sales was 58% for the three months ended June 30, 2004 compared to 79% for the three months ended June 30, 2003. The higher margin in gross profit in 2003 is the result of some large community network service grants in the second and third quarters of 2003. There was very little additional cost incurred by the Company to perform the services under these grants and the corresponding gross margins reflect that. These grants are considered to be isolated opportunities for the Company and the Company has not received any additional grants in 2004. The Company incurred total operating expenses of $1,213,754 for the three months ended June 30, 2004 compared to $829,825 for the three months ended June 30, 2003, a total increase of 46%. The major components of the expenses were as follows:
General and Administrative Expenses: Three Months Ended Three Months Ended Percentage June 30, 2004 June 30, 2003 Change ------------- ------------- ---------- Advertising and promotion $ 24,205 $ 32,364 (25)% Legal and professional 307,842 57,425 436% Auto and travel 84,987 73,088 16% Commissions and contract labor 38,185 67,761 (44)% Office expenses and supplies 48,411 24,071 101% Salaries and wages 653,098 455,885 43% Utilities 34,781 25,545 36% Depreciation and amortization: 248,579 80,759 208%
The increase in the Company's expenses for the three months ended June 30, 2004 is the result of (i) an increase in legal and professional fees primarily due to the Company's merger with Fremont, the ongoing costs of operating as a public company, and the litigation with the former owner of Momentum; (ii) an increase in office expenses related to the growth in the number of personnel over the past 12 months; (iii) an increase in salaries and wages due to the hiring of additional staff from the Company's acquisition of additional companies, and due to the increase in staff required to manage the public company; and (iv) the increase of the depreciation and amortization costs with the acquisition of new companies. In addition, the Company's interest expenses for the three months ended June 30, 2004 compared to the same period in 2003 increased due to a non-cash interest expense that was incurred from the debenture offering in March through August 2004. The Company believes that while the trend of losses may continue, 2004 expenses reflect investment in future operational capabilities as a company and management believes that revenues will increase without substantial expense increases. The Company has already taken steps to reduce the number of employees and to decrease operating expenses. The lawsuit involving Momentum has prevented the Company from making such changes to this operation even though the results from that operation are included in the financial statements. Other loss for the three months and six months ended June 30, 2004 are due to the loss generated from the sale of Strategic Abstract to its original owner. The Company sustained a net loss of $1,330,756 for the three months ended June 30, 2004, as compared to net income of $95,314 for the same period in 2003. The major difference in the net results between these two periods is (i) the larger amount of revenue from Community Network implementations in 2003, (ii) the increased employee, operating and legal expenses in 2004 incurred from going public and acquiring new companies, and (iii) the interest expense incurred in 2004 of $380,594 from the debenture offering in 2004. Loss from operations in the three months ended 2004 was $1,307,237, compared to net income of $95,314 in the same period in 2003. 14 Results of operations for the six months ended June 30, 2004 compared to the six months ended June 30, 2003. For the six months ended June 30, 2004 and 2003, equipment sales were $715,636 and $95,216, respectively. Internet service revenue was $1,572,884 and $1,771,125 for the six months ended June 30, 2004 and 2003, respectively. The increase in equipment sales is primarily from the acquisitions expanding our customer base. The decrease in internet service revenue reflects some large community network service grants that were recognized in the second quarter of 2003. For the six months ended June 30, 2004 and 2003, revenue from community service network grants was $122,000 and $799,000, respectively. Without this revenue source in the 2003 periods, the comparison with 2004 reflects an increase in subscriber revenue and other internet income due primarily from the acquisitions expanding our customer base. The cost of equipment sales was $519,741 for the six months ended June 30, 2004, which consists of purchasing equipment and accessories. The cost of Internet services was $640,178 for the six months ended June 30, 2004, which consists of telephone lines, installation costs, rental costs, and service costs. The gross profit margin for equipment sales was 27% for the six months ended June 30, 2004 compared to 26% for the six months ended June 30, 2003. The gross profit margin for Internet sales was 59% for the six months ended June 30, 2004, compared to 63% for the six months ended June 30, 2003. The higher margin in the six month gross profit in 2003 is the result of the large community network service grants that were recognized in the second quarter of 2003. There was very little additional cost incurred by the Company to perform the services under these grants and the corresponding gross margins reflect that. These grants are considered to be isolated opportunities for the Company, and the Company has not received any additional grants in 2004. The Company incurred operating expenses of $2,292,684 for the six months ended June 30, 2004, compared to $1,122,881 for the six months ended June 30, 2003, a total increase of 104%. The major components of the expenses were as follows:
General and Administrative Expenses: Six months Ended Six months Ended Percentage June 30, 2004 June 30 ,2003 Change ------------- ------------- ------ Advertising and promotion $ 40,573 $ 40,401 0% Legal and professional 525,148 59,390 784% Auto and travel 131,773 93,976 40% Commissions and contract labor 64,832 32,431 100% Office expenses and supplies 84,372 69,652 21% Insurance 54,709 50,500 8% Rent 40,617 36,147 12% Salaries and wages 1,177,403 677,594 74% Utilities 67,085 38,471 74% Depreciation and amortization: 527,826 123,689 327%
The increase in the Company's expenses for the six months ended June 30, 2004, compared to the same period in 2003 was primarily due to (i) an increase in legal and professional fees principally due to the Company's merger with Fremont and the associated SEC filings, the ongoing costs of operating as a public company, and the litigation with the former owner of Momentum; (ii) an increase in office expenses related to the temporary growth in the number of personnel during the first six months of 2004; (iii) an increase in salaries and wages due to the hiring of additional staff from the Company's acquisition of additional companies, and due to the increase in staff required to manage the public company; and (iv) the increase of the depreciation and amortization costs with the acquisition of new companies. In addition, the Company's interest expenses for the six months ended June 30, 2004 compared to the same period in 2003 increased due to a non-cash interest expense that was incurred from the debenture offering in March through August 2004. 15 The Company believes that while the trend of losses may continue, 2004 expenses reflect investment in future operational capabilities as a company and management believes that revenues will increase without substantial expense increases. The Company has already taken steps to reduce the number of employees and to decrease operating expenses. The lawsuit involving Momentum has prevented the Company from making such changes to this operation even though the results from that operation are included in the Company's financial statements. Liquidity and Capital Resources At June 30, 2004, we had a working capital deficit of $2,627,475, due primarily to the current maturities of debt of $2,286,710. We have historically sustained our operations and funded our capital requirements with the funds received from loans received from various financial institutions, as well as the private placement of equity securities and debentures, as more fully described below. The Company is also applying for low interest loans and grants from various Federal agencies who are promoting the proliferation of broadband services throughout rural America. We believe that the Company qualifies for these loans and grants, but there is no guarantee that we will receive any funds from this effort. The Company will continue to seek other methods of funding its operations, primarily from the sale of its common stock. In order to reduce the number of shares outstanding, certain officers and founders of the Company contributed an aggregate of 16,628,790 shares to the Company that were subsequently cancelled on July 7, 2004. These officers were also awarded stock options to purchase up to 16,628,790 shares of the Company's common stock with escalating strike prices beginning at $0.25 per share. As of June 30, 2004, we had $86,602 in cash and $140,941 in accounts receivable that could be used in connection with funding our operations. The Company anticipates funding its operations from additional sales of its common stock or issuance of additional debt. If adequate funds are not available, we may be unable to repay the remaining short-term indebtedness or to grow and expand our business, in which case there would be substantial doubt about our ability to continue as a going concern. We believe that the impact of inflation on our operations since our inception has not been material. In March 2004, the Company issued convertible debentures to a number of noteholders, in the aggregate principal amount of $1,315,000, at an interest rate of 10%, plus late penalties, and warrants to purchase an aggregate of 6,575,000 shares of the Company's common stock at an exercise price of $0.10 per share. The award of these warrants and the subsequent change of the strike price to $0.05 generated a non-cash interest expense of $657,500 that is in the accompanying consolidated financial statements. Under the terms of the debentures, the noteholders had the option to convert the principal balance of the debentures, in whole or in part, into shares of the Company's common stock at a conversion price equal to $0.10 per share. These debentures matured on April 11, 2004, and the Company was unable to pay off the debentures at maturity. In July 2004, the Company agreed with the noteholders to extend the maturity date to August 11, 2004 and to reduce the conversion price of the debentures to $0.05 per share. The Company paid the debt plus interest of $172,000 with the proceeds of a Private Placement Offering on August 6, 2004. Pursuant to a letter agreement between the Company and the noteholders, the warrants are now exercisable for $0.05 per share. We will need to obtain additional capital in the future. We were successful in raising $3,264,592 in a private placement offering that closed in July through September 2004. The proceeds were used for (i) payment of legal and placement fees of $865,138; (ii) repayment of debentures with interest and penalties of $1,487,000; (iii) current payables and bank debt of approximately $800,000; and (iv) future working capital of approximately $534,000. We intend to obtain funding through the use of various types of short-term funding, loans or working capital financing arrangements from banks or financial institutions. It may also be necessary for us to raise additional capital in public or private equity markets. Our ability to raise additional capital in public or private markets will depend primarily upon prevailing market conditions and the demand for our products and services. No assurance can be given that we will be able to raise additional capital, when needed or at all, or that such capital, if available, will be on terms acceptable to the Company. Any additional sale of our common stock will also dilute the percentage of ownership of our existing shareholders. Please see "Note 4." to the financial statements in this filing for a discussion of the Company's debt. Item 3. CONTROLS AND PROCEDURES Evaluation of Internal and Disclosure Controls The Company's principal executive and principal financial officers have evaluated the effectiveness of the Company's controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report and have concluded that such disclosure controls and procedures are adequate and effective based upon their evaluation as of such date. 16 There were no significant changes in internal controls over financial reporting that occurred during the second fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On June 1, 2003, the Company purchased the assets of Momentum in exchange for the issuance of common stock of the Company, pursuant to an Asset Purchase Agreement. On November 10, 2003, Momentum filed a complaint against the Company in state district court for the State of Texas, seeking rescission of the purchase agreement and restoration of the parties to their earlier positions prior to June 1, 2003, as if no agreement existed. Momentum's complaint alleges that the Company breached its contract as a result of the failure to deliver shares of common stock of the Company as required pursuant to the Asset Purchase Agreement. The court issued an injunction requiring that any revenue generated from the subject assets be placed in escrow and utilized to pay any outstanding invoices in connection with the use of the assets. In addition, the court also ordered mediation, which did not produce a resolution. On January 7, 2004, Momentum filed a Petition in Bankruptcy. The Bankruptcy Petition stayed all matters pending in state district court and all proceedings were transferred to the Bankruptcy court in Austin, Texas. The Company believes that Momentum's lawsuit is without merit and intends to vigorously defend the matter. Item 3. Defaults Upon Senior Securities In March 2004, the Company issued convertible debentures to a number of noteholders, in the aggregate principal amount of $1,315,000, at an interest rate of 10%, plus late penalties, and warrants to purchase an aggregate of 6,575,000 shares of the Company's common stock at an exercise price of $0.10 per share. The award of these warrants and the subsequent change of the strike price to $0.05 generated a non-cash interest expense of $657,500 that is in the accompanying consolidated financial statements. Under the terms of the debentures, the noteholders had the option to convert the principal balance of the debentures, in whole or in part, into shares of the Company's common stock at a conversion price equal to $0.10 per share. These debentures matured on April 11, 2004, and the Company was unable to pay off the debentures at maturity. The Company agreed with the noteholders to extend the maturity date to August 11, 2004, and to reduce the conversion price of the debentures to $0.05 per share. The Company paid the debt plus interest of $172,000 with the proceeds of a Private Placement Offering on August 6, 2004. Pursuant to a letter agreement between the Company and the noteholders, the warrants are now exercisable for $0.05 per share. 17 Item 6. Exhibits and Reports on Form 8-K The following documents are filed as part of this report: -------------------------------------------------------------------------------- Exhibit No. Description -------------------------------------------------------------------------------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -------------------------------------------------------------------------------- 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -------------------------------------------------------------------------------- 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -------------------------------------------------------------------------------- 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -------------------------------------------------------------------------------- SIGNATURES In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WIRELESS FRONTIER INTERNET, INC. By: /s/ Alex Gonzalez ------------------------------------ Name: Alex Gonzalez Title: Chairman and Chief Executive Officer Date: January 7, 2005 18