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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file no.: 000-32567
PEGASUS WIRELESS CORP.
--------------------------------------------
(Name of small business issuer in its charter)
Nevada 52-2273215
--------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
277 Royal Poinciana Way, Suite 153
Palm Beach, Florida 33480
--------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (510) 490-8288
--------------------------------------------
(Former name or former address, if
changes since last report)
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
None
----------------------------- --------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.0001 par value
------------------------
(Title of class)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10- KSB or any
amendment to this Form 10-KSB. [X]
The Registrant's revenue for the fiscal year ended December 31, 2005:
$103,973,890.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates (computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity) as of March
15, 2007 was $6,386,417.
There were 21,608,848 shares of the registrant's common stock outstanding as of
January 1, 2007.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format: Yes [_] No [X]
SUMMARY TABLE OF CONTENTS
PART I
Item 1. Description of Business................................................4
Item 2. Description of Property................................................9
Item 3. Legal Proceedings......................................................9
Item 4. Submission of Matters to a Vote of Security Holders...................10
PART II
Item 5. Market for Common Equity and Related Shareholder Matters..............10
Item 6. Management's Discussion and Analysis or Plan of Operation.............11
Item 7. Financial Statements.................................................F-1
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..............................................27
Item 8A. Controls and Procedures .............................................27
Item 8B. Other Information ...................................................27
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.....................27
Item 10. Executive Compensation...............................................29
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters......................................30
Item 12. Certain Relationships and Related Transactions.......................31
Item 13. Exhibits.............................................................31
Item 14. Principal Accountant Fees and Services ..............................31
SIGNATURES....................................................................33
PART I
Forward Looking Statements
Certain statements contained in this annual filing including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings. Given
these uncertainties, readers of this Form 10-KSB and investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward- looking statements contained
herein to reflect future events or developments.
Item 1. Description of Business
(a) Development
In June 2005, Pegasus Wireless Corp., (a Nevada corporation, listed on the
OTCBB), acquired OTC Wireless, Inc. by acquiring all the issued and outstanding
shares of Pegasus Wireless Corp. (A Colorado corporation). At the time of this
acquisition the Company changed its fiscal year end to June 30, to match that of
OTC Wireless. On December 22, the Company changed its fiscal year end to
December 31, effective immediately.
On August 31, 2005, the Company completed a two for one forward split of its
common stock, which included the forward split of the authorized common stock to
100,000,000 and the preferred stock to 20,000,000, without affecting the par
value of either class of stock.
On April 21, 2006, the Company began trading on NASDAQ NMS. On October 28, 2006,
the Company voluntarily exited the NASDAQ NMS and returned to the OTCBB. The
Company's letter to NADAQ request delisting stated "Over the preceding two
months, the common stock of PGWC has experienced significant volume increases,
price reductions and volatility. PGWC believes that it is in its shareholders'
best interest" to take this action."
On December 8, 2006, the Company completed a one for five reverse split of its
common stock, which did not affect the authorized number of shares nor the par
value.
In August 2006, the Company announced the issuance of purchase warrants to our
stockholders of record as of close of business August 11, 2006. The warrants are
issued as 1 warrant for each 10 shares held, with a strike price of $8.00 per
share, exercisable beginning one year after issuance and expiring worthless on
the second anniversary of issuance. As of March , 2007, the Company has issued
warrants to these holders of record.
4
The Company has authorized 100,000,000 shares of $0.0001 par value common stock
and 20,000,000 shares of $0.0001 par value preferred stock. Rights and
privileges of the preferred stock are to be determined by the Board of Directors
prior to issuance. The Company had 21,608,848 (at December 31, 2006) and
14,313,808 (at December 31, 2005) shares of common stock and no shares of
preferred stock issued and outstanding.
(b) Business of Issuer.
General
The first acquisition of the Company was OTC Wireless, Inc., (the Company or OTC
Wireless or OTC), It was incorporated in September 1993 as a California
corporation. The Company began its operations in November 1993 in Sunnyvale,
California. OTC Wireless was founded by a group of technologists from microwave
communication and computer networking backgrounds. The OTC's core business was
to provide wireless communication technologies and products to serve the
business, education and industrial application markets.
OTC Wireless introduced the first 900MHz spread spectrum wireless Ethernet
bridge in 1995, among the industry's earliest true plug-and-play wireless
network solution. The Company also submitted its first patent application in
October 1995, based on the spread spectrum receiver technology developed for
this product.
In 1996, OTC Wireless then introduced one of the industry's first 2.4 Ghz
plug-and-play wireless Ethernet bridge, AirEZY and the 2.4GHz wireless serial
radio modem, ADAM, both based on the Company's direct sequence spread spectrum
technology.
In 1999, OTC introduced the enhanced AiEZY series of wireless radios by
combining the plug- and-play feature with the WIPP (wireless internet polling
protocol) multiple access scheme developed by the Company and Jasper Knabb, to
provide a collision-free, adjustable bandwidth wireless access solution
platform. In the same year, OTC and Jasper Knabb also introduced the industry's
earliest 2.4GHz IEEE 802.11b wireless bridges.
In 2002, OTC and Jasper Knabb introduced the first true plug and play wireless
serial communication solution, WiSER, for connecting the interactive whiteboard
and the computer in classrooms as well as meeting rooms. In the same year, OTC
and Mr Knabb developed and introduced its 802.11b wireless projector/display
solution, WiJET.
In 2003, OTC introduced the industry's earliest 54Mbps IEEE 802.11g
plug-and-play indoor and outdoor wireless Ethernet bridge solutions, VCW and
ASR/ACR.
In 2004, Pegasus Wireless, as parent company of OTC Wireless introduced a new
generation of plug-and-play WiSER, the WiSER.ip, that converts the conventional
serial (RS-232) communication based "dumb" industrial devices into TCP/IP-
capable, intelligent network nodes. OTC and Mr. Knabb also introduced two new
wireless display solutions based on the 54Mbps IEEE 802.11g technology and the
WiJet technology developed in 2002 (WiJET.G, and WiJET.Video) that supports
streaming MPEG1 and MPEG2 video files from a computer to a projector, LCD TV or
plasma flat panel display, wirelessly.
In early 2005, Pegasus Wireless Corp. introduced the industry's earliest 54Mbps
IEEE 802.11a/b/g plug-and-play indoor and outdoor wireless Ethernet bridge
solutions, AVCW and ASR/ACR, TriMar.
In January 2006 Pegasus introduced its latest version of WiJet Video, with the
tradename of CynaLynx, with modifications to allow full video streaming, 5.1
surround sound as a full feature rich stand alone internet appliance. To the
Company's knowledge to date, no other company has offered a comparable product
with the same range of features.
5
The Company has applied and been awarded patents, based on the Company's spread
spectrum receiver signal processing technology as well as its WIPP,
plug-and-play and wireless display technology:
"Non-coherent direct sequence spread spectrum receiver for detecting
bit/symbol chip sequences using threshold comparisons of chip sequence
correlation," U.S. Patent No. 5,687,190, awarded 11/11/1997.
"A robust system for wireless projection of computer display and rendering
of motion video contents," U.S. Patent Application No. 60/542,247, filed on
2/4/2004, pending.
"Multiple access scheme for wireless internet connection," US patent
application no. 09/660,285, filed 9/16/1999. Japanese Patent Application No.
2000-281792, filed 9/18/2000.
"Wired protocol to wireless protocol converter," U.S. Patent Application
No. 10/209,118, filed 7/30/2002.
"USB-interface radio," U.S. Patent Application No. 60/388,553, filed
6/12/2002.
Pegasus has applied for a patent, which is pending, for its new CynaLynx video
streaming internet appliance.
Today, the Company offers the following products in three major application
areas:
For indoor and outdoor wireless networking:
Pegasus Model # Application
--------------------- ----------------------------------------------
TRIMAR 54/108 Mbps outdoor wireless access point
AVCW*-AP: 11Mbps outdoor wireless access point
AVCW*-BRG: 11Mbps outdoor wireless bridge station
AVCW*-AP-G: 54 Mbps outdoor wireless access point
AVCW*-BRG-G: 54 Mbps outdoor wireless bridge station
ASR: 11 Mbps indoor wireless access point
ACR: 11Mbps indoor wireless bridge station
ASR-G: 54 Mbps indoor wireless access point
ACR-G: 54 Mbps indoor wireless bridge station
* All AVCW models offer two integrated antenna options 9dBi and 15 dBi and a
third option of a Type-N connector for external antenna connection.
For industrial wireless networking solutions:
Pegasus Model # Application
--------------------- ----------------------------------------------
WiSER: 11 Mbps wireless serial modem
WiSER.ip: 11 Mbps wireless serial TCP/IP modem
For wireless multimedia/video networking solutions:
Pegasus Model # Application
--------------------- ----------------------------------------------
CynaLynx 54/108 Mbps wireless display solution with video
streaming and full feature stand alone internet
appliance
WiJET: 11 Mbps wireless display solution
WiJET.G: 54 Mbps wireless display solution
WiJET.Video: 54 Mbps wireless display solution with video
streaming
6
The Company has been delivering products to customers since 1995, both
domestically and overseas. In addition to system integrators, value-added
resellers and end users worldwide, the Company also offers products to major
account customers who either bundle Pegasus Wireless's solution to their own
products, or carry Pegasus Wireless's products under their own names by private
labeling or OEM custom-designed products from the Company. Over the years, the
Company's major account customers include our largest Japanese customer, CallUS
Computers, which private labels our wireless technology products to Wireless
Internet, (WI) and Nippon Telephone and Telegraph-ME Group, (NTT-ME). The
Company also is a direct supplier to Showa Electric Cable Company (SWCC). In
addition the Company is also the direct supplier of its products to, among
others, Smart Technologies of Canada, Lexmark and Dell in the U.S., and D-Link,
a major worldwide network equipment provider based in Taiwan, each of which
private label our technology products through their distribution networks.
The TRIMAR and AVCW series of outdoor wireless Ethernet bridge products are used
by Internet Service Providers (ISPs) to offer high speed Internet access to
their customers wirelessly. They are also used by business customers and schools
to interconnect computer networks in different buildings. When used in a point
to point configuration, a pair of AVCW radios can reach a distance up to 20
miles. In a point to multiple-point configuration, the radius of a "coverage
cell" typically ranges between 3 to 5 miles. Working with its service providers,
the Company has deployed numerous wireless broadband Internet networks
domestically as well as overseas (including Japan, China and South America).
The Company's ASR and ACR indoor wireless products are used in the Wireless
Local Area Networks (WLAN) by office and home users to interconnect computers
without having to deploy cables. Being designed as a true plug-and-play wireless
solution, Pegasus Wireless' radios require no installation of software drivers,
and can be used to wirelessly interlink any devices equipped with the RJ-45
Ethernet port, not only computers. For example, they can be used to enable
wireless printing, connecting computers and network printers. They can also be
used to connect to game consoles such as X-Box, Play Station or Game Cube with
the wireless home gateways.
The WiSER wireless serial radios are used by both industrial and education
users. Teachers in the schools use WiSER to wirelessly interconnect the
interactive whiteboards to the computers in the classrooms. Industrial users use
the WiSER to connect the central control computer to the remote data collecting
and sensing devices.
The WiJET products are used by both business and education customers. Presenters
in a business meeting or teachers in the classroom can deliver their PowerPoint
slide shows to the audience in the most convenient location with their computers
wirelessly connected to the projector without the restriction of a tethering VGA
cable. Home users can use WiJET to deliver movie files stored on their computer
hard drives to an LCD or plasma flat panel TV wirelessly.
The CynaLynx will play DVD movies wirelessly and is also a feature rich media
gateway, wireless access point as well as an internet appliance offering
simultaneous wireless and wired connections . The CynaLynx can be easily
assimilated into almost any network as a fully integrated and secure network
node offering powerful new functions to mobile work, entertainment or
educational environments.
Pegasus has a number of new products in the pipeline which its management
believe to be innovative and responsive to customer needs and desires. The
Company is planning to introduce a new generation of wireless access point
products that operate in multiple frequency bands and supports backbone and
last- mile functions from a simple, easy to install package. The Company also is
developing its next generation wireless multi-media solution that delivers
enhanced video streaming and audio performance and computer presentation
capability over the wireless connectivity between the computer and the remote
display/sound devices supporting HDMI and component video.
7
In December 2005, Pegasus completed the acquisition of AMAX Engineering and AMAX
Information Technologies (AIT), both based in Fremont, California. The company
owns 51% controlling interest in both subsidiaries.
AMAX Engineering is a computer system and peripheral solution providers. It
manufactures, markets and distributes PC systems and subsystems, components,
networking devices and storage solutions for both consumer and enterprise
markets. It has 2 branch offices covering North America. AMAX has benefitted
greatly from Pegasus' extensive technology capacity and manufacturing expertise.
AMAX Information Technologies provides computing solutions to the enterprise and
government customers. It manufactures and markets cluster servers, grid
computing systems, network storage solutions and interconnect solutions to
business, technology and education users.
Both AMAX and AIT's capability in computer system solutions have benefitted from
Pegasus' extensive technology capacity and manufacturing expertise.
In December 2005, Pegasus completed the acquisition of 51% controlling interest
of CNet Technology, Inc. (CNet) which operates an electronics manufacturing
plant in Wu-Jiang, a city 90 miles west of Shanghai, China. CNet owns SMT and
DIP manufacturing lines and produces both wired and wireless networking devices
for consumer and business users. CNet's manufacturing capacity is expect to
benefit the company in providing a stable production resource.
In January 2006, Pegasus completed the acquisition of 51% controlling interest
of SKI Technologies, Inc.., an electronics manufacturing facility in Taiwan.
This second acquisition has further strengthened the company's capability in
keeping on-schedule products delivering, as SKI sources many of the components
utilized in the Company's current products.
Pegasus introduced the innovative CynaLynx product in the 3rd quarter of 2006,
and began shipments under the product name WiJet.e in Asia, also in the 3rd
quarter. The Company changed the name of the WiJet.e to CynaLynx during the 4th
quarter.
During the 4th quarter the Company decided to relocate the final manufacturing
operation for the CynaLynx and other products from California to Freeport, Grand
Bahama, The Bahamas. The Company spent several months getting all the necessary
permits and approvals from the government of The Bahamas to put this move into
place. The Company took possession of a building in Freeport on February 2, 2007
and began its transformation into this facility. The Company received its last
necessary permit from the government on February 21, 2007, and held its grand
opening on February 22, 2007. The first CynaLynx assembled in this plant rolled
off the production line on February 22, 2007.
COMPETITIVE BUSINESS CONDITIONS
The field of wireless connectivity devices is highly competitive. We compete
with a number of businesses that provide the same or similar products. Many of
these competitors have a longer operating history, greater financial resources,
and provide other products that we do not provide. Pegasus' competitors include
companies such as Linksys, D-Link and Netgear in the consumer networking devices
market. In the multimedia/video wireless market, its major competitors include
companies such as Komatsu and Infocus. In the enterprise infrastructure wireless
market, its major competitors include companies such as Cisco, Nortel and
Motorola. We believe that quality of product, innovative products, proper
pricing and range of product uses offered are the principal factors that will
enable us to compete effectively.
Government Regulation
The Company's operations are subject to various federal, state and local
requirements which affect businesses generally, such as taxes, postal
regulations, labor laws, and environment and zoning regulations and ordinances.
8
Operation of current Pegasus Wireless products are subject to the FCC regulation
under FCC Part 15 rules, specifically, FCC Part 15 subpart C and subpart E. The
company needs to submit its products for the FCC rule compliance test and obtain
certifications before the products are available for sale. The users of the
products need not to obtain usage license from the government.
Research and Development
The Company conducts in research and development on an ongoing basis in order to
improve our current products as well as to develop new products. We do not have
a specific plan of research and development at this stage.
Employees
As of February 10, 2007, the Company has approximately 500 employees, 90 in our
Fremont, California offices, 90 in our Freeport, Bahamas facility, 160 in our
Peoples Republic of China manufacturing facility and 160 in our Taiwan
manufacturing facility.
Manufacturing
As of February 10, 2007, the Company's products are manufactured or parts
sourced in China and Taiwan by the two manufacturing companies we purchased at
the end of December 2005 and early January 2006. As of February 22, 2007, the
CynaLynx is manufactured in our facility in Freeport, Grand Bahama, The Bahamas.
We have begun to manufacture other Pegasus products in the Freeport facility.
Reports to Security Holders
The Company will send out audited annual reports to its shareholders if required
by applicable law. Until such time, the Company does not foresee sending out
such reports. The Company will make certain filings with the SEC as needed, and
any filings the Company makes to the SEC are available and the public may read
and copy any materials the Company files with SEC at the SEC's Public Reference
Room at 450 Fifth Street, N.W. Washington, D.C. 20549. The public may also
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC at (http://www.sec.gov).
Item 2. Description of Property
The corporate headquarters of Pegasus Wireless Corp. is located at 277 Royal
Poinciana Way, Suite 153, Palm Beach, FL 334800 and its telephone number is
(510) 490-8288. We also maintain offices at 1565 Reliance Way, Fremont,
California 94539.
We also maintain manufacturing facilities in the Peoples Republic of China and
in Taiwan. We maintain an manufacturing facility in Freeport, Grand Bahama, The
Bahamas.
Item 3. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising
out of our operations in the normal course of business. The Company is currently
a party to the following legal proceedings:
Alex Tsao v. Pegasus Wireless Corp. et al. - Mr. Tsao, the former CEO of Pegasus
is alleging that Pegasus has breached the retirement agreement with Mr. Tsao by
refusing to pay him. Pegasus denies these allegations. Therefore, the Company
believes that it does not owe Mr. Tsao anything, is disputing his claims and
vigorously defending this case.
9
Philip Keller v. Alex Tsao, et al. - Mr. Keller claims to be a shareholder of
Pegasus. Mr. Keller has named individual members of the Pegasus Board of
Directors as defendants in a shareholder derivative suit against the individual
directors claiming breach of fiduciary duty, abuse of control, mismangement,
waste, unjust enrichment and negligence, and has named Pegasus as a nominal
defendant and plaintiff. Pegasus has not yet made an appearance in this action,
but intends to vigorously defend this case.
Michael Mitchell v. Pegasus Wireless Corp., et al. - Mr. Mitchell claims to be a
shareholder of Pegasus. Mr. Mitchell has filed a class action complaint claiming
that Pegasus, as well as several individual members of the Pegasus Board of
Directors have violated Federal Securities Laws by publishing a series of false
and misleading statements. Pegasus believes that it has not violated any
securities laws and is therefore vigorously defending this case.
D&D Aviation v. Pegasus Wireless Corp., et al - D&D is alleging that certain
transport transactions were scheduled and operated on behalf of Pegasus, and
that these items remain unpaid. No transportation transactions were scheduled or
operated by Pegasus or on behalf of Pegasus, therefore the Company believes that
it does not owe D&D anything. The Company is vigorously defending this case.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
Market Information
* Reflects 2 for 1 stock split effective close of business August 31, 2005 and
the 1 for 5 reverse split effective at close of business December 8, 2006.
2006 HIGH LOW
------ ------ -----
* December 31, 2006 3.00 0.30
* September 30, 2006 45.00 2.50
* June 30, 2006 94.95 28.40
* March 31, 2006 78.75 41.50
2005 HIGH LOW
------ ------ -----
* December 31, 2005 52.50 30.50
* September 30, 2005 36.95 18.50
* June 30, 2005 18.50 0.25
March 31, 2005 0.10 0.10
2004 HIGH LOW
------ ------ -----
December 31, 2004 0.10 0.10
September 30, 2004 0.10 0.10
June 30, 2004 0.25 0.10
March 31, 2004 0.40 0.25
10
2003 HIGH LOW
------ ------ -----
December 31, 2003 1.01 0.35
September 30, 2003 1.25 0.30
June 30, 2003 0.80 0.45
March 31, 2003 2.20 0.20
The approximate number of holders of record of common equity is 2,900 as of
February 10, 2007.
Dividends
The Company has never declared or paid any cash dividends on its common stock
and does not intend to declare any dividends in the foreseeable future.
We currently intend to retain and reinvest future earnings, if any, to finance
our operations.
Transfer Agent
Our transfer agent is Olde Monmouth Stock Transfer Co., Inc., 200 Memorial
Parkway, Atlantic Highlands, NJ 07716. Their telephone number is (732) 872 2727.
Item 6. Management's Discussion and Analysis or Plan of Operation Operations
This report on Transition Form 10-KSB contains forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those discussed in the forward-looking statements and from
historical results of operations. Among the risks and uncertainties which could
cause such a difference are those relating to our dependence upon certain key
personnel, our ability to manage our growth, our success in implementing the
business strategy, our success in arranging financing where required, and the
risk of economic and market factors affecting our customers or us. Many of such
risk factors are beyond the control of the Company and its management
Results of Operations - For the Year and Six Months Ending December 31, 2006 and
2005
Basis of Presentation - On December 22, 2005 the Board of Directors elected to
change the fiscal year end of the Company to December 31, effective immediately.
This was completed as a result of two pending acquisitions of foreign companies,
both of which had December 31 as their fiscal year end. As a result of this
change, the accompanying financial statements include the year ended December
31, 2006 and six months from July 1, 2005 through December 31, 2005.
On December 22, 2005, the Company acquired 51% of AMAX Engineering Corp. and
AMAX Information Technology, Inc. Pursuant to the acquisition agreement, the
accompanying financial statements include the three months of the AMAX companies
from October 1, 2005 through December 31, 2005.
On December 29, 2005, the Company acquired 51% of Cnet Technology, Inc. Pursuant
to the acquisition agreement, financial statement consolidation begins on
January 1, 2006, therefore the accompanying financial statements do not include
any results of Cnet for the last 2 days of 2005.
On January 19, 2006, the Company completed the acquisition of 51% of SKI
Technologies, Inc. Pursuant to the acquisition agreement, financial statement
consolidation begins on January 1, 2006.
11
Financial Condition, Capital Resources and Liquidity
For the year and six months ending December 31, 2006 and 2005, the Company
recorded revenues of $103,973,900 and $17,639,900, respectively. The increase in
revenue is a direct result of the acquisition of the subsidiaries. We were not
able to begin the ramp-up of production of the Pegasus line of products until
the beginning of 2006 as a result of our acquisition of the two manufacturing
companies until the end of December 2005 and beginning of January 2006.
For the year and six months ending December 31, 2006 and 2005, the Company had,
on a consolidated basis, cost of sales of $95,078,300 and $15,414,100. The
increase is a direct result of the acquisition of the subsidiaries.
For the year and six months ending December 31, 2006 and 2005, the Company had,
on a consolidated basis, general and administrative expenses of $4,110,400 and
$1,318,800 respectively. The increase is a direct result of the acquisition of
the subsidiaries.
For the year and six months ending December 31, 2006 and 2005, the Company had,
on a consolidated basis, total operating expenses of $7,447,200 and $2,026,800,
respectively. The relative increase is a direct result of the acquisition of the
subsidiaries.
Net Income
For the year and six months ending December 31, 2006 and 2005, the Company
reported net income from operations of $1,448,400 and $199,000, respectively.
The ability of the Company to grow is dependent upon its ability to deliver
product to its customers in ever increasing quantities. The Company has taken
the steps necessary to address this problem by its acquisitions of the AMAX
companies to provide the distribution channels needed and Cnet and SKI and the
new Grand Bahamas facility for the manufacturing requirements. Given our current
product mix and selling prices, these two manufacuring companies have the
ability to produce approximately $650 million, (at selling price), of Pegasus
products.
Liquidity and Capital Resources
At December 31, 2006 and 2005, the Company had working capital of $9,456,200 and
$4,704,100, respectively. The Company's cash balance increased $796,800 at
December 31, 2006 over 2005. This increase was in spite of a $946,600 use of
cash by operations and was provided by common stock issued for cash from the
Company's CEO, Jasper Knabb. The use of cash by operations was generated by
significant cash expenditures related to the final development of the CynaLynx
product for market as well as for the relocation of the Milmont facility to
Freeport, Grand Bahama. The Company believes that this relocation will
substantially contribute to producing cash flow from operations as opposed to a
use of cash from operations.
Research and Development Plans
Our current research and development activities focus on improving our current
products and the development of new products or new uses for our existing
products.
Our plan is that over time, as our revenues grow, we will continue to increase
our expenditures for research and development.
12
Item 7. Financial Statements
Report of Independent Registered Public Accounting Firm......................F-2
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)........F-4
Consolidated Statements of Stockholders' Equity (Deficiency).................F-5
Consolidated Statements of Cash Flows........................................F-7
Notes to Consolidated Financial Statements...................................F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Pegasus Wireless Corp.
Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of Pegasus Wireless
Corp., (the "Company") as of December 31, 2006 and 2005 and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity (deficiency) and cash flows for the one year and six months
in the period ended December 31, 2006. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2005 and 2005 and the results of its operations and its cash flows
for the one year and six months in the period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.
/s/Pollard-Kelly
Pollard-Kelley Auditing Services, Inc.
Fairlawn, Ohio
March 24, 2007
F-2
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PEGASUS WIRELESS CORP.
Consolidated Balance Sheets
December 31,
ASSETS 2006 2005
--------------------- ----------------------
CURRENT ASSETS
Cash and equivalents $ 1,876,432 $ 1,079,588
Accounts receivable, net of reserve of $17,053 and $5,700 11,995,746 6,676,806
Inventory, net of reserve of $656,602 7,450,706 6,568,274
Prepaid expenses and other current assets 1,991,108 81,186
--------------------- ----------------------
Total current assets 23,313,993 14,405,854
--------------------- ----------------------
PROPERTY AND EQUIPMENT
Land 422,535 0
Buildings 152,606 0
Computers and equipment 1,203,067 1,054,156
Machinery and equipment 2,352,861 320,685
Office furniture, fixtures and equipment 873,485 974,749
Vehicles 552,916 602,254
Leasehold improvements 468,929 470,645
--------------------- ----------------------
Total Property and Equipment 6,026,398 3,422,489
Less accumulated depreciation (3,667,486) (2,879,463)
--------------------- ----------------------
Net property and equipment 2,358,913 543,026
--------------------- ----------------------
OTHER ASSETS
Investment in unconsolidated subsidiary 0 1,000,000
Intangible assets, net 6,952,291 0
Goodwill 7,103,207 5,469,609
Deposits and other assets 2,601,910 1,471,243
--------------------- ----------------------
Total other assets 16,657,408 7,940,852
--------------------- ----------------------
Total Assets $ 42,330,313 $ 22,889,732
===================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY ( DEFICIENCY)
CURRENT LIABILITIES
Accounts payable $ 7,428,003 $ 5,929,969
Accrued expenses 4,113,608 3,627,513
Accrued income taxes payable 0 94,504
Customer deposits 8,921 3,481
Line of credit 2,250,000 0
Current portion of long-term debt 202,223 46,268
--------------------- ----------------------
Total current liabilities 14,002,755 9,701,735
--------------------- ----------------------
LONG-TERM DEBT
Notes payable 429,546 116,105
--------------------- ----------------------
Total long-term debt 429,546 116,105
--------------------- ----------------------
Total Liabilities 14,432,301 9,817,840
--------------------- ----------------------
Minority interest in consolidated subsidiary 3,916,337 2,545,156
--------------------- ----------------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $0.0001 par value, authorized 10,000,000 shares;
none issued and outstanding 0 0
Common stock, $0.0001 par value, authorized 100,000,000 shares;
21,608,848 and 14,313,808 issued and outstanding shares 2,161 1,431
Additional paid-in capital 52,298,269 24,929,169
Deferred compensation (15,261,474) 0
Subscription receivable 0 (750,000)
Accumulated comprehensive income (loss) (15,795) (104)
Accumulated deficit (13,041,485) (13,653,760)
--------------------------------------------
Total stockholders' equity (deficiency) 23,981,676 10,526,736
--------------------- ----------------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 42,330,314 $ 22,889,732
===================== ======================
The accompanying notes are an integral part of the financial statements
F-3
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PEGASUS WIRELESS CORP.
Consolidated Statements of Operations
Year ended Six Months ended
December 31, 2006 December 31, 2005
---------------------- ----------------------
REVENUES $ 103,973,890 $ 17,639,881
COST OF SALES 95,078,301 15,414,086
---------------------- ----------------------
Gross Margin 8,895,589 2,225,795
OPERATING EXPENSES
Sales and marketing 2,885,636 651,346
Depreciation and amortization 451,184 56,661
General and administrative 4,110,390 1,318,782
---------------------- ----------------------
Total operating expenses 7,447,210 2,026,789
---------------------- ----------------------
Operating income (loss) 1,448,379 199,006
---------------------- ----------------------
OTHER INCOME (EXPENSE):
Interest income 0 5,785
Other income 62,038 33,477
Interest expense (32,828) 0
Other expense (26,126) (1,189)
---------------------- ----------------------
Total other income (expense) 3,084 38,073
---------------------- ----------------------
Net income (loss) before extraordinary items and minority interest
1,451,463 237,079
Extraordinary items:
Plant relocation expense 272,202 0
---------------------- ----------------------
Net income (loss) before minority interest 1,179,261 237,079
Minority interest in consolidated subsidiary net income (loss) 566,417 143,375
---------------------- ----------------------
Net income (loss) $ 612,844 $ 93,704
====================== ======================
Net income (loss) per common share - basic $ 0.03 $ 0.01
====================== ======================
Weighted average number of common shares outstanding - basic 21,608,848 12,163,997
====================== ======================
Net income (loss) per common share - fully diluted $ 0.03 $ 0.01
====================== ======================
Weighted average number of common shares outstanding - fully diluted 21,848,848 12,859,997
====================== ======================
The accompanying notes are an integral part of the financial statements
F-4
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PEGASUS WIRELESS CORP.
Consolidated Statements of Stockholders' Equity (Deficiency)*
Number of Number of
Shares - Shares - Amount - Amount -
Preferred Common* Preferred Common
-------------- --------------- -------------- --------------
BEGINNING BALANCE,
June 30, 2004 15,295,206 1,129,057 12,663,209 416,865
============== =============== ============== ==============
Pfd converted to common (15,295,206) 3,352,941 (12,663,209) 12,663,209
Recapitalization 0 1,600,000 0 (13,079,466)
Acquisition of subsidiary 0 600,000 0 60
Recapitalization 0 287,954 0 29
Net loss 0 0 0 0
-------------- --------------- -------------- --------------
BALANCE, June 30, 2005 0 6,969,952 0 697
Employ stk options exercise 0 23,742 0 2
Two for one forward split 0 6,993,693 0 699
Common stk issued for cash 0 114,286 0 11
Comm stk issued - acquisit 0 167,691 0 17
Common stk issued for cash 0 44,444 0 5
Comprehensive inc/loss 0 0 0 0
Net income 0 0 0 0
-------------- --------------- -------------- --------------
Balance, December 31, 2005 0 14,313,808 0 1,431
Recap shares issued 0 724,742 0 72
Receipt of subs receivable 0 0 0 0
Common stk issued for cash 0 40,000 0 4
Comm stk issued-acquisition 0 28,547 0 3
Acquisition shs returned 0 (76,200) 0 (8)
Common stk issued for cash 0 75,000 0 8
Common stock retired 0 (2,804,574) 0 (280)
Common stk opt exercised 0 456,000 0 46
Employ stk options exercise 0 28,333 0 3
Comm stk-retirement pkg 0 395,870 0 40
Comm stk - BOD fees 0 71,431 0 7
Comm stk issued for debt 0 7,376,016 0 737
Comm stk issed for tech 0 580,000 0 58
Comm stk issued for svcs 0 400,000 0 40
Amortize deferred comp 0 0 0 0
Comprehensive inc/loss 0 0 0 0
Net income 0 0 0 0
-------------- --------------- -------------- --------------
Ending Balance,
December 31, 2006 0 21,608,973 $ 0 $ 2,161
============== =============== ============== ==============
* Reflects one for five reverse split effective December 8, 2006.
(Continued)
F-5
PEGASUS WIRELESS CORP.
Consolidated Statements of Stockholders' Equity (Deficiency)
(Continued)
. Stock
Add'l. Subscript Total
Paid-in Receivable/ Accumulated Stockholders'
Capital Def Comp Deficit Equity
-------------- ------------------- ----------------- ----------------
0 0 (13,010,342) 69,732
============== =================== ================= ================
0 0 0
14,104,850 0 0 1,025,384
240 0 0 300
799,785 0 0 799,814
0 0 (672,796) (672,796)
-------------- ------------------- ----------------- ----------------
14,904,875 0 (13,683,138) 1,222,434
25,026 0 0 25,028
(699) 0 0 0
3,999,989 0 0 4,000,000
3,999,983 0 0 4,000,000
1,999,995 (750,000) 0 1,250,000
0 0 (104) (104)
0 0 29,378 29,378
-------------- ------------------- ----------------- ----------------
24,929,169 (750,000) (13,653,864) 10,526,736
(72) 0 0 0
0 750,000 0 750,000
1,999,996 0 0 2,000,000
649,997 0 0 650,000
8 0 0 0
2,999,992 0 0 3,000,000
280 0 0 0
740,954 0 0 741,000
35,414 0 0 35,417
11,381,211 (11,381,251) 0 0
2,053,623 (2,053,630) 0 0
367,795 0 0 368,532
4,999,942 0 0 5,000,000
2,139,960 (2,140,000) 0 0
0 313,407 0 313,407
0 0 (15,691) (15,691)
0 0 612,275 612,275
-------------- ------------------- ----------------- ----------------
52,298,269 (15,261,474) $ (13,057,280) $ 23,981,676
============== =================== ================= ================
The accompanying notes are an integral part of the financial statements
F-6
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PEGASUS WIRELESS CORP.
Consolidated Statements of Cash Flows
Year ended Six Months ended
December 31, 2006 December 31, 2005
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 612,844 $ 29,378
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 451,184 56,661
Amortization of deferred compensation 313,407 0
Extraordinary items - plant relocation write-off 272,202 0
Minority interest in net income (loss) of consolidated subsidiary 566,417 113,997
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (3,533,147) 420,575
(Increase) decrease in inventory (408,979) (2,555,512)
(Increase) decrease in prepaid expenses (1,627,960) 39,957
(Increase) decrease in deposits and other assets (780,068) (1,051,424)
Increase (decrease) in accounts payable 2,092,979 461,285
Increase (decrease) in accrued expenses (719,296) 629,604
Increase (decrease) in other current liabilities 47,458 0
Increase (decrease) in accrued income taxes payable 0 95,304
Increase (decrease) in customer deposits 4,519 (1,615)
--------------------- --------------------
Net cash provided (used) by operating activities (2,708,440) (1,761,790)
--------------------- --------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (337,059) (116,512)
Purchase of R&D (1,952,291) 0
Cash paid for acquisitions (650,000) (5,000,000)
Sale/retirement of fixed assets 38,996 0
--------------------- --------------------
Net cash provided (used) by investing activities (2,900,354) (5,116,512)
--------------------- --------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Cash acquired in acquisition/reorganization 687,618 1,771,201
Proceeds from loans 0 102,988
Repayment of loans (42,706) (5,819)
Exercise of employee stock options for cash 776,417 0
Issuance of common stock for cash 5,000,000 5,250,000
--------------------- --------------------
Net cash provided by financing activities 6,421,329 7,118,370
--------------------- --------------------
Effect of exchange rates on cash (15,691) 0
--------------------- --------------------
Net increase (decrease) in cash and equivalents 796,844 240,068
CASH and equivalents, beginning of period 1,079,588 839,520
--------------------- --------------------
CASH and equivalents, end of period $ 1,876,432 $ 1,079,588
===================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid in cash $ 32,828 $ 1,189
===================== ====================
Income taxes paid in cash $ 245,808 $ 0
===================== ====================
Non-Cash Financing Activities:
Issuance of common stock for deferred compensation $ 15,574,881 $ 0
===================== ====================
Issuance of common stock to settle debt $ 368,531 $ 0
===================== ====================
Issuance of common stock for intangible assets $ 5,000,000 $ 0
===================== ====================
Issuance of common stock to effect acquisition $ 650,000 $ 4,000,000
===================== ====================
The accompanying notes are an integral part of the financial statements
F-7
PEGASUS WIRELESS CORP.
Notes to the Consolidated Financial Statements
NOTE 1 - THE COMPANY
Pegasus Wireless Corp., (f/k/a Blue Industries, Inc.), was incorporated under
the laws of the State of Nevada on April 5, 2000 as Burrard Technologies, Inc.
("Burrard") and was involved in software development. During 2001, the Company
discontinued the software development and became inactive until December 18,
2001, when it acquired all the issued and outstanding shares of Technocall S.A.
("Technocall"), a Swiss company. On April 2, 2002, the Company changed its name
to Blue Industries Inc. In December 2003, the Company again became inactive. In
June 2005, the Company changed its name to Pegasus Wireless Corp., subsequent to
the acquisition, via reverse merger of Homeskills, Inc. The Company is engaged
in the business of designing, manufacturing and marketing wireless hardware and
software solutions for broadband fixed, portable networking and Internet access.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - On December 22, 2005 the Board of Directors elected to
change the fiscal year end of the Company to December 31, effective immediately.
This was completed as a result of two pending acquisitions of foreign companies,
both of which had December 31 as their fiscal year end.
On December 22, 2005, the Company acquired 51% of AMAX Engineering Corp. and
AMAX Information Technology, Inc. Pursuant to the acquisition agreement,
financial statement consolidation began on October 1, 2005. On December 29,
2005, the Company acquired 51% of Cnet Technology, Inc. Pursuant to the
acquisition agreement, financial statement consolidation began on January 1,
2006. On January 19, 2006, the Company acquired 51% of SKI Technology, Inc.
Pursuant to the acquisition agreement, financial statement consolidation began
on January 1, 2006.
Principles of Consolidation - The consolidated financial statements include the
accounts of Pegasus Wireless Corp. and its wholly owned and majority owned
subsidiaries. All inter-company balances and transactions have been eliminated.
Significant Acquisitions - On December 22, 2005, the Company acquired 51% of
AMAX Engineering Corp. and AMAX Information Technology, Inc., (collectively
"AMAX"), California corporations headquartered in Fremont, California. The
Company paid $4,000,000 in cash and 838,454 shares of the Company's common
stock, valued at $4,000,000, or $4.77 per share. The share valuation was based
on 66% of the average closing price for the preceding 30 trading days, as per
the acquisition agreement. The cash portion of the AMAX transaction was provided
by the sale of 571,429 shares of restricted common stock of the Company to
Jasper Knabb, President of Pegasus, in exchange for $4,000,000 in cash, or $7.00
per share. AMAX has distinguished and established itself as a global leader in
providing technology to all levels of the marketplace. As an ISO-9001 certified
corporation, AMAX manufactures and markets innovative server, industrial,
workstation, storage & clustering systems to meet the most stringent of quality
requirements. In March 2006, the sellers of AMAX returned 381,000 shares to the
Company, bringing their per share value to $8.75 per share, or the market
closing price the day before the acquisition was closed.
On December 29, 2005, the Company acquired 51% of Cnet Technology, Inc.,
("Cnet"), a Cayman Islands corporation headquartered in Taipei, Taiwan. The
Company paid $1,000,000 in cash. The acquisition was financed by a purchase of
222,222 restricted shares of Pegasus Wireless Corporation's common stock by
Jasper Knabb, the Company's President, in exchange for $2,000,000 in cash, or
$9.00 per share. The additional $1 million cash will be used to obtain raw
materials to begin the manufacturing of Pegasus Wireless' products that will be
available for distribution within thirty days. CNet Technology, Inc. has been a
leader in designing and manufacturing high-speed, cost-effective solutions for
the worldwide networking and communications market. Their unique combination of
sales and assembly has allowed for CNet to support a vast array of wireless
demands, from the small and home offices to the vast enterprise systems that
span multiple locations. Pegasus has been outsourcing the manufacturing
F-8
PEGASUS WIRELESS CORP.
Notes to the Consolidated Financial Statements
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Significant Acquisitions, continued - its wireless products through various
venues around the world, and now can manufacture its products in a centralized
controlled environment that will greatly enhance the speed and volume of their
product output.
On January , 2006, the Company acquired 51% of SKI Technologies, Inc., ("SKI"),
a Taiwanese corporation headquartered in Taipei, Taiwan. The Company paid
$650,000 in cash and issued 142,735 shares of restricted common stock, valued at
$650,000, or $4.55 per share. The acquisition was financed by a purchase of
200,000 restricted shares of Pegasus Wireless Corporation's common stock by
Jasper Knabb, the Company's President, in exchange for $2,000,000 in cash, or
$10.00 per share. Under the terms of the acquisition agreement, SKI must meet
certain revenue from sales to third parties. If SKI does not meet these
requirements, Pegasus has the right to receive additional shares of SKI, without
additional consideration, in direct proportion to the revenue shortfall.
Cash Equivalents - For purposes of the statement of cash flows, the Company
considers all highly liquid investments with maturity of three months or less
when purchased to be cash equivalents.
Revenue Recognition - The Company recognizes revenue from product sales when
units are shipped, provided no significant obligation remains and collection is
probable.
Inventory - The Company values its inventory at the lower of cost or market,
cost determined using the standard cost method. The Company also utilizes the
reserve method to account for slow moving and obsolete inventory. The reserve
for inventory obsolescence was $656,000 at December 31, 2006 and 2005,
respectively.
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts. Actual results could differ from those estimates.
Income (Loss) Per Share - Income (loss) per share is computed using the Weighted
Average Number of common shares outstanding during the fiscal year. Fully
diluted includes all common shares that would be required to be issued as a
result of various convertible instruments at their stated conversion rates using
December 31, 2006, closing market price of the underlying common stock.
Concentration of Credit Risk - The Company extends credit, based on the
evaluation of each customer's financial condition, and generally requires no
collateral from its customers. Credit losses, if any have been provided for in
the financial statements and have been generally within management's
expectations. During the six months and year ending and at June 30, 2006 and
December 31, 2005, the Company had deposits in banks in excess of the FDIC
insurance limit.
F-9
PEGASUS WIRELESS CORP.
Notes to the Consolidated Financial Statements
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Intangibles - Goodwill in the amount of 7,103,207 was recorded as a result of
the acquisitions of AMAX, Cnet and SKI. The Company will evaluate this asset
periodically to determine impairment, if any. The Company acquired certain
technology in 2006 in exchange for 580,000 shares of common stock, valued at
$5,000,000, or $8.62 per share. The Company will amortize these amounts over
their expected remaining useful life once commercialiazation begins.
Property and Equipment - All property and equipment is recorded at cost and
depreciated over their estimated useful lives, using the straight-line method.
Upon sale or retirement, the costs and related accumulated depreciation are
eliminated from their respective accounts, and the resulting gain or loss is
included in the results of operations. Repairs and maintenance charges which do
not increase the useful lives of the assets are charged to operations as
incurred. Depreciation expense was $451,184 and $56,661 for the year and six
months ended December 31, 2006 and 2005, respectively.
Research & Development - Research and development costs are expensed in the
period incurred.
NOTE 3 - ACCOUNTS RECEIVABLE
The Company uses the allowance method to account for its doubtful accounts. The
allowance for doubtful accounts is based on management's estimates. Accounts
receivable consist of the following:
December 31, 2006 December 31, 2005
------------------ ------------------
Trade accounts receivable $ 11,944,181 $ 6,682,506
Allowance for doubtful accounts (17,053) (5,700)
------------------ ------------------
Total $ 11,927,128 $ 6,676,806
================== ==================
NOTE 4 - INVENTORY
The Company values its inventory at the lower of cost or market, cost determined
using the standard cost method. The Company also utilizes the reserve method to
account for slow moving and obsolete inventory. Inventory consists of the
following:
December 31, 2006 December 31, 2005
------------------ ------------------
Inventory $ 8,107,308 $ 7,609,522
Less: Reserve for obsolescence (656,602) (1,041,248)
------------------ ------------------
Total $ 7,450,706 $ 6,568,274
================== ==================
F-10
PEGASUS WIRELESS CORP.
Notes to the Consolidated Financial Statements
NOTE 5 - STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of 100,000,000 shares of
common stock with a par value of $0.0001 and 20,000,000 shares of preferred
stock with a par value of $0.0001. Rights and privileges of the preferred stock
are to be determined by the Board of Directors prior to issuance. There were
21,608,848 and 14,313,808 shares of common stock outstanding at December 30,
2006 and 2005, respectively.
In May 2005, the Company issued 287,954 shares of common stock in exchange for
$800,000 in cash, or $3.25 per share. In June 2005, the Company issued 5,693,549
shares of common stock to effect the acquisition of OTC Wireless, Inc., the
operating company. In August 2005, eight of the company's employees exercised
their employee stock options. These options were issued in years prior to the
reverse merger and had exercise prices ranging from $0.75 to $2.50 per share. As
a result of these option exercises the Company issued 23,742 shares in exchange
for $25,029 in cash.
In August 2005, the Company amended its Articles of Incorporation to increase
the authorized shares from 50,000,000 to 100,000,000 common and from 10,000,000
to 20,000,000 preferred shares. The par value of each remained the same at
$0.0001 for each class of stock. In addition, in August 2005, the Company
declared a two shares for each share held forward split of the Company's issued
and outstanding common stock, which was effective at close of business August
31, 2005. Pursuant to this, the Company issued 6,993,693 shares of common stock.
In December 2005, the Company issued 114,286 shares of restricted common stock
to the President of the Company in exchange for $4,000,000 in cash , valued at
$35.00 per share. In December 2005, the Company issued 167,691 shares of
restricted common stock to complete the acquisition of AMAX, valued at
$4,000,000, or $23.85 per share. In December 2005, the Company issued 44,444
shares of restricted common stock to the President of the Company in exchange
for $2,000,000 in cash , valued at $45.00 per share.
In the first quarter 2006, the Company issued 724,742 shares, inclusive of
forward split shares, as a direct result of stockholders being unable to get
their Homeskills share certificates from their brokerage house holdings until
this time in order to complete the exchange. In January 2006, the Company issued
40,000 shares of restricted common stock to the President of the Company in
exchange for $2,000,000 in cash , valued at $50.00 per share. In January 2006,
the Company issued 28,547 shares of restricted common stock to complete the
acquisition of SKI, valued at $650,000, or $22.75 per share. In March 2006, the
sellers of AMAX returned 76,200 shares to the Company, bringing their per share
value to $43.75 per share, or the market closing price the day before the
acquisition was closed. On June 28, 2006, the Company issued 75,000 shares of
restricted common stock to the President of the Company in exchange for
$3,000,000 in cash, valued at $4.00 per share. On June 28, 2006, the President
and CFO of the Company exercised their options, (granted in June 2004), for
shares amounting to 240,000 and 216,000, respectively. The cash exercise price
of these options was $1.625 per share, for a total of $390,000 and $351,000,
respectively. In the third quarter, the estate of a former company employee
F-11
PEGASUS WIRELESS CORP.
Notes to the Consolidated Financial Statements
NOTE 5 - STOCKHOLDERS' EQUITY, continued-
exercised their employee stock options. These options were issued in years prior
to the reverse merger and had exercise prices ranging from $0.75 to $2.50 per
share. As a result of this option exercise the Company issued 28,333 shares in
exchange for $35,417 in cash. In the third quarter the Company issued 395,870
shares of common stock as a portion of the retirement and 5-year non- compete
package of Alex Tsao. During 2006 the Company retired 2,804,574 shares of common
stock. During 2006 the Company issued 7,376,016 shares of common stock to
satisfy $368,532 debt owed by the Company from prior to the change in control.
In the third quarter the Company issued 580,000 shares of common stock valued at
$5,000,000 to acquire the Maccontrol technology. In the third quarter the
Company issued 400,000 shares of common stock in exchange for prospective
consulting services valued at $2,140,000. In the third quarter the Company
issued 71,431 shares of common stock to the members of the Board of Directors as
payment of Board compensation, valued at $2,053,630.
Warrants - In August 2006, the Company announced the issuance of purchase
warrants to our stockholders of record as of close of business August 11, 2006.
The warrants are issued as 1 warrant for each 10 shares held, with a strike
price of $8.00 per share, excerisable beginning one year after issuance and
expiring worthless on the second anniversary of issuance. As of March , 2007,
the Company has issued warrants to these holders of record.
NOTE 6 - NOTES PAYABLE
The Company is obligated for four vehicle loans, totaling $54,888, $47,154,
$45,623 and $14,709. The loans call for monthly payments of $1,523, $955, $1,347
and $416 and they mature in 2008, 2010, 2008 and 2009. They bear interest at 6%,
5.6%, 5.95% and 2.9%.
The Company is obligated on notes payable amounting to $145,000 remaining
balance which were undisclosed when current management took control of the shell
company. These notes were entered into at various times in 2003 and were 2 year
notes, all of which have matured. The notes were entered into by a wholly owned
subsidiary but are convertible into common stock of the parent company at the
discretion of the holder. Management two steps back failed to disclose these
notes to subsequent management, thus current management was unaware of their
existence.
NOTE 7 - INCOME TAXES
The Company accounts for its income taxes under the asset and liability
approach, whereby the expected future tax consequences of temporary differences
between the book and tax basis of assets and liabilities are recognized as
deferred tax assets and liabilities.
NOTE 8 - DEFINED CONTRIBUTION PLAN
The Company maintains a voluntary defined contribution plan, covering eligible
employees. Participating employees may elect to defer and contribute a
percentage of their compensation to the plan. The Company did not make any
contributions to the plan for the periods ended December 31, 2006 and 2005.
F-12
PEGASUS WIRELESS CORP.
Notes to the Consolidated Financial Statements
NOTE 9 - OPERATING LEASES
The Company leases several operating facilities and various equipment from third
parties under various operating leases expiring in various years through 2013.
Future minimum lease payments for the remaining lease term are as follows:
2007 $ 1,123,318
2008 1,009,173
2009 1,009,173
2010 1,009,173
2011 1,009,173
Thereafter 1,766,054
-------------
Total $ 6,926,064
=============
NOTE 10 - STOCK OPTION PLAN
In 1995 the Company established an Incentive Stock Option Plan. This plan
provides for the granting of incentive stock options and non-statutory stock
options to employees, directors and consultants at 110% of the fair market value
on the date of the grant. The options to employees vest ratably over a four-year
period. The Company has authorized 728,000 post-split shares of common stock
options. There were 236,317 and 283,800 post-split options outstanding at
December 31, 2006 and 2005, respectively.
NOTE 11 - STOCK OPTION PLAN FOR OFFICERS
The Company's President and CFO elected in July 2004 to accept stock options in
lieu of cash compensation for a period of two years, beginning in July 2004. The
former Chairman also elected to receive his performance based bonus for a period
of two years in stock options as well. For the two years the former Chairman and
President were to receive 240,000 post-split options and the CFO 216,000
post-split options. All of these options are one share per option and carry a
post-split exercise price of $1.625 per share. These options also carried a
cash-less exercise option if elected by the officer at exercise, if the market
price of the Company's common stock is at least $16.25 per share at the time of
exercise, the officer can elect to return shares, to the Company in lieu of cash
payment. These options are exercisable at any time after the Company's share
price exceeds $12.50 per share for a full quarter, and can be exercised
cashlessly on a pro-rata basis. The performance requirement for the former
Chairman for year one is: a) eliminate all debt, b) take the operating company
public and c) reduce the operating company loss by 40%; and for year two to
double the Company's base revenue. If the expenses related to taking the
operating company public are excluded, the Chairman met the requirements for the
first year. On June 28, 2006, the President and CFO of the Company exercised
their options, for shares. The cash exercise price was $390,000 and $351,000,
respectively. The Company is evaluating the stock options of Alex Tsao, the
former Chairman.
F-13
PEGASUS WIRELESS CORP.
Notes to the Consolidated Financial Statements
NOTE 12 - LINE OF CREDIT
The Companies has a line of credit agreement with a bank, which allows the
Company to borrow up to $5,000,000. Outstanding balances bear interest at the
lender's prime rate and are collateralized by inventory, accounts receivable and
property and equipment. The credit facility requires the Companies to maintain
certain financial ratios and comply with certain covenants. This agreement was
renewed in April, 2006, and now expires in June 2007. The Company had borrowed
$2,250,000 and $0 at December 31, 2006 and 2005, respectively.
NOTE 13 - RELATED PARTY TRANSACTIONS
A - Facilities operating lease - The Company leases it building housing the AMAX
csubsidiaries from a minority stockholder. This lease calls for annual rent in
the amount of $863,800.
B- Related companies - The Companies record sales, accounts receivable,
purchases, administrative expenses and accounts payable to and from 5
brother-sister related companies. None of these companies own any stock of the
Companies, nor do the Companies have any investment in these related companies.
They are related by virtue of similar/common control.
[Balance of this page intentionally left blank.]
F-14
Item 8. Changes in and Disagreements with Accountants.
None
Item 8A. Controls and Procedures
Within 90 days prior to the date of this Report, we carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer (or persons performing similar functions) of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer (or persons performing similar functions) concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports that are
filed with the Securities and Exchange Commission. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. In addition, we reviewed our internal
controls, and there have been no significant changes in our internal controls or
in other factors that could significantly affect those controls subsequent to
the date of their last valuation.
(b) Internal Control Over Financial Reporting:
There have been no significant changes in the Company's internal controls or in
other factors since the date of the Chief Executive Officer and Chief Financial
Officer's (or persons performing similar functions) evaluation that could
significantly affect these internal controls during the period covered by this
report or from the end of the reporting period to the date of this Form 10-KSB,
including any corrective actions with regards to significant deficiencies and
material weaknesses.
Item 8B. Other Information
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
DIRECTORS and EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each of our
executive officers and directors. Our directors are generally elected at the
annual shareholders' meeting and hold office until the next annual shareholders'
meeting or until their successors are elected and qualified. Executive officers
are elected by our board of directors and serve at its discretion. Our bylaws
authorize the board of directors to be constituted of not less than one and such
number as our board of directors may determine by resolution or election. As of
February 15, 2006 our board of directors consists of nine members.
27
NAME AGE POSITION
------------- ------ -----------------
Jasper Knabb 40 CEO and Director
Stephen Durland 52 Chief Financial Officer and Director
Billy Horn 43 Director
There are no family relationships between or among the executive officers and
directors of the Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934:
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission (hereinafter referred to as the "Commission")
initial statements of beneficial ownership, reports of changes in ownership and
annual reports concerning their ownership, of Common Stock and other equity
securities of the Company on Forms 3, 4 and 5, respectively. Executive officers,
directors and greater than 10% shareholders are required by Commission
regulations to furnish the Company with copies of all Section 16(a) reports they
file. To the Company's knowledge, all executive officers, directors and greater
than 10% beneficial owners of its common Stock, and have not complied with
Section 16(a) filing requirements applicable to them during the Company's fiscal
year ended June 30,2005.
Business Experience
Officers and Directors
The following is a brief description of the business background of our executive
officers, and directors:
JASPER KNABB, CEO and Director, has more than 20 years experience in the
high tech industry. Mr. Knabb's involvement in the technology business
encompasses PC manufacturing and sales, computer gaming software development,
Internet service provider and wireless system development and marketing. Prior
to Pegasus Wireless, Mr. Knabb was the President of Wireless Frontier, Inc.,
(OTC BB: WFRI), from 2003 to 2004 and was responsible for business development
and successfully negotiating to bring the company to public via a reverse
merger. Prior to Wireless Frontier, Mr. Knabb was a Managing Director at OTC
Wireless responsible for business and product development from 2001 to 2003.
Prior to OTC Wireless, Mr. Knabb founded and became the President of Beach
Access, a privately held Internet Service Providing company, in 1998, and
successfully sold the company in 2000. Between 1985 and 1998, he was the owner
and the President of Microland, a PC retailing business, and SEI, a console game
developer, both privately held companies.
STEPHEN DURLAND, CFO and Director, has been the president of Durland &
Company, CPAs, PA, since he founded it in 1991. Durland & Company has
specialized in the audits of micro-cap public companies since its founding. In
addition, its clients have had operations in 19 foreign countries, giving the
firm very heavy international experience. Since 1998, Mr. Durland has been a
Director of Children's Place at Homesafe, Inc., a local non-profit serving the
needs of abused and/or terminally ill children. He was a Director of Medical
Makeover Corporation of America, (OTC BB: MMAM), June 2004 until March 2006. He
has also been a Director of ExpressAir Delivery Systems, Inc. since 1999 and
Global Eventmakers, Inc. since 2003. They are private operating companies
expecting to become publicly traded in 2005 via reverse merger with publicly
trading shell companies. He was a Director of two other OTC BB listed companies,
American Ammunition, Inc. (July 2001 - March 2002), and JAB International, Inc.
(October 2000 - June 2003). He was CFO/Acting CFO for four private operating
companies, Main Line Medical Acquisition, LLC, (November 2002 - April 2003),
28
Powerhouse Management, Inc., (November 2002 - April 2003), Ong Corp., (March
2001 - June 2002) and American Hydroculture, Inc., (August 2000 - August 2001),
none of which went public, and four OTC BB listed companies, American
Ammunition, Inc. (July 2001 - March 2002), JAB International, Inc. (October 2000
- June 2003), Ocean Resources, Inc. (September 2002 - November 2003), and Safe
Technologies, Inc. (September 2002 - December 2003). Of the public companies,
all but two, (American Ammunition and Pegasus Wireless), had completed their
reverse mergers well before Mr. Durland became aware of the companies. These
CFO/Acting CFO positions have primarily been interim in nature to assist these
companies through periods when they could either not afford or did not need a
full-time CFO. All of the publicly traded companies, except Medical Makeover and
Safe Technologies became public via reverse merger with public shells. Mr.
Durland was not involved with any of the public shells prior to the reverse
mergers. Prior to Durland & Company, he was responsible for the back-office
operations and accounting for two companies with investment portfolios of $800
and $900 million and $36 billion (face amount) of futures and options
transactions. Prior to that, he was a securities Registered Representative for
two years. Mr. Durland received his BAS in Accounting from Guilford College in
1982 and has been a CPA in 14 states.
BILLY HORN, President and CEO of Horn Asset, Inc. a Miami, Florida based
equity hedge fund. Prior to this position Mr. Horn was a trader with two equity
hedge funds for 12 years. Mr. Horn received his BA from Adelphi University,
Garden City, NY.
Item 10. Executive Compensation
The following summary compensation table sets forth the aggregate cash
compensation paid or accrued by the Company to each of the Company's executive
officers and key employees for services rendered to the Company during the
Company's fiscal years ended 2005 and 2004 and all plan and non-plan
compensation awarded to, earned by or paid to certain designated executive
officers.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
------------------ ------- ------------------------ -------------
Annual Compensation Awards
------------------ ------- ------------ ---------- ----------
Securities
Name and Underlying
Principal Year Salary ($) Bonus ($) Options/
Position SARs
------------------ ------- ------------ ---------- ----------
Alex Tsao,
former CEO and 2006 $ 60,000 $ 0 $ 0
Chairman
2005-B $ 60,000 $ 0 $ 0
2005-A $ 120,000 $ 0 $ 0
2004 $ 120,000 $ 0 $ 0
Jasper Knabb, CEO 2006 $ 0 $ 0 $ 0
2005-B $ 0 $ 0 $ 0
2005-A $ 0 $ 0 $ 0
2004 $ 0 $ 0 $ 0
Stephen Durland, CFO 2006 $ 0 $ 0 $ 0
2005-B $ 0 $ 0 $ 0
2005-A $ 0 $ 0 $ 0
2004 $ 0 $ 0 $ 0
29
Mr Knabb and Mr Durland elected in July 2004 to accept stock options in lieu of
cash compensation for a period of two years, beginning in July 2004. Mr Tsao
also elected to receive his performance based bonus for a period of two years in
stock options as well. For the two years Mr Knabb and Mr Tsao were to receive
240,000 post-split options and the CFO 216,000 post-split options. All of these
options are one share per option and carry a post-split exercise price of $1.625
per share. These options also carry a cash-less exercise option if elected by
the officer at exercise, if the market price of the Company's common stock is at
least $16.25 per share at the time of exercise, the officer can elect to return
shares, to the Company in lieu of cash payment. These options are exercisable at
any time after the Company's share price exceeds $12.50 per share for a full
quarter, and can be exercised cash-lessly on a pro- rata basis. The performance
requirement for the Chairman for year one is: a) eliminate all debt, b) take the
operating company public and c) reduce the operating company loss by 40%; and
for year two to double the Company's base revenue. On June 28, 2006, Jasper
Knabb and Stephen Durland elected to exercise their options for cash. The
Company is evaluating Mr Tsao's options at present.
Compensation of Directors
The Company has no standard arrangements for compensating the directors of the
Company for their attendance at meetings of the Board of Directors.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Security Ownership of Certain Beneficial Owners
The following table summarizes certain information with respect to the
beneficial ownership of company shares as of December 31, 2005, regarding the
ownership of common stock by each shareholder known to be the owner of more than
5% of the outstanding shares, each director and all executive officers and
directors as a group. Except as otherwise indicated, each of the shareholders
has sole voting and investment power with respect to the shares of common stock
beneficially owned.
----------------------------------------------------------------------------
Name and Address of Title of Amount and Nature of Percent
Beneficial Owner Class Beneficial Owner of Class
----------------------------------------------------------------------------
Jasper Knabb(1) Common 764,135 3.5%
277 Royal Poinciana Way,
Suite 153
Palm Beach, FL 33480
----------------------------------------------------------------------------
Stephen Durland(1) Common 226,381 1.1%
277 Royal Poinciana Way,
Suite 153
Palm Beach, FL 33480
----------------------------------------------------------------------------
Billy Horn(1) Common 20,000 0.1%
277 Royal Poinciana Way,
Suite 153
Palm Beach, FL 33480
----------------------------------------------------------------------------
All Executive Officers, Directors 1,010,516 4.7%
as a group
30
Certain Beneficial Owners
----------------------------------------------------------------------------
Name and Address of Title of Amount and Nature of Percent
Beneficial Owner Class Beneficial Owner of Class
----------------------------------------------------------------------------
Vision 2000 Ventures, Ltd(1) Common 1,814,752 8.4%
Taiwan, Republic of China
---------------------------------------------------------------------------
Alex Tsao(1) Common 1,860,903 8.6%
Saratoga, CA
---------------------------------------------------------------------------
TOTAL 1,814,752 17.0%
(1) Based upon 21,608,848 shares of the Company's common stock issued and
outstanding as of December 301 2005.
Item 12. Certain Relationships and Related Transactions
None
Item 13. Exhibits
Exhibit
Number Description
------- -----------------------
31.1 Certification Certificate of the Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification Certificate of the Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification Certificate of the Chief Executive Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
32.2 Certification Certificate of the Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
--------
* Filed herewith
(b) Reports on Form 8-K filed in the last quarter of 2006:
None
Item 14. Principal Accountant Fees and Services
The Company paid or accrued the following fees in each of the prior two fiscal
years to it's principal accountant, Pollard-Kelley Auditing Services, Inc.:
Year ended Six Months ended
December 31, December 31,
2006 2005
--------------- ---------------
1. Audit fees $ 60,000 $ 20,000
2. Audit-related fees - -
3. Tax fees - -
4. All other fees - -
--------------- ---------------
Totals $ 60,000 $ 20,000
31
The Company has designated a formal audit committee. In discharging its
oversight responsibility as to the audit process, commencing with the
engagement, the Board obtained from it's independent auditors a formal written
statement describing all relationships between the auditors and the Company that
might bear on the auditors' independence as required by Independence Standards
Board Standard No. 1, "Independence Discussions with Audit Committees." The
Board discussed with the auditors any relationships that may impact their
objectivity and independence, including fees for non-audit services, and
satisfied itself as to the auditors' independence. The Board also discussed with
management and the independent auditors the quality and adequacy of the
Company's internal controls. The Board reviewed with the independent auditors
their management letter on internal controls, if one was issued by the Company's
auditors.
The Board discussed and reviewed with the independent auditors all matters
required to be discussed by auditing standards generally accepted in the United
States of America, including those described in Statement on Auditing Standards
No. 61, as amended, "Communication with Audit Committees".
The Board reviewed the audited financial statements of the Company as of and for
the year and six months ended December 31, 2006 and 2005 with management and its
independent auditors. Management has the sole ultimate responsibility for the
preparation of the Company's financial statements and the respective independent
auditors have the responsibility for their examination of those statements.
Based on the above-mentioned review and discussions with the respective
independent auditors and management, the Board of Directors approved the
Company's audited financial statements and recommended that they be included in
its Annual Report on Form 10-KSB for the year and six months ended December 31,
2006 and 2005, for filing with the Securities and Exchange Commission.
The Company's principal accountant for the year and six months ended December
31, 2006 and 2005, Pollard-Kelley Auditing Services, Inc. did not engage any
other persons or firms other than the respective principal accountant's
full-time, permanent employees.
32
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Pegasus Wireless Corp.
(Registrant)
Date: March 29, 2007 /s/ Jasper Knabb
------------------------------------------------
Jasper Knabb, CEO and Director
/s/Stephen Durland
------------------------------------------------
Stephen Durland, CFO and Director
/s/Billy Horn
------------------------------------------------
Billy Horn, Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
By: /s/Jasper Knabb
-------------------------- CEO & Director March 29, 2007
Jasper Knabb
By: /s/Stephen Durland
-------------------------- CFO & Director March 29, 2007
Stephen Durland
By: /s/Billy Horn
-------------------------- Director March 29, 2007
Billy Horn
33
Dates Referenced Herein and Documents Incorporated by Reference
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