10QSB 1 pgwc-10qsb_092006.txt United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: September 30, 2006 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, FL 33480 ----------------------------------------- ----------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (510) 490-8288 Securities registered under Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None ------------------------------- ----------------------------- Securities registered under Section 12(g) of the Act: Common Stock, $0.0001 par value per share -------------------------------------------------------- (Title of class) Indicate by Check whether the issuer (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 [_] As of November 15, 2006, there were 19,837,531 reverse split adjusted shares of voting common stock of the registrant issued and outstanding. PART I ITEM 1. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Consolidated Balance Sheets..................................................F-2 Consolidated Statements of Operations and Comprehensive Income (Loss)........F-3 Consolidated Statements of Stockholders' Equity (Deficiency).................F-4 Consolidated Statements of Cash Flows........................................F-5 Notes to Consolidated Financial Statements...................................F-6 F-1
PEGASUS WIRELESS CORP. Consolidated Balance Sheets ASSETS September 30, December 31, 2006 2005 ------------------ ------------------- CURRENT ASSETS (Unaudited) Cash and equivalents $ 3,512,114 $ 1,079,588 Accounts receivable, net of reserve of $16,885 and $5,700 11,846,330 6,676,806 Inventory, net of reserve of $656,602 6,160,382 6,568,274 Prepaid expenses and other current assets 1,827,110 81,186 ------------------ ------------------- Total current assets 23,345,936 14,405,854 ------------------ ------------------- PROPERTY AND EQUIPMENT Land 416,279 0 Buildings 150,346 0 Computers and equipment 1,381,943 1,054,156 Machinery and equipment 2,673,546 320,685 Office furniture, fixtures and equipment 976,823 974,749 Vehicles 600,839 602,254 Leasehold improvements 468,929 470,645 ------------------ ------------------- Total Property and Equipment 6,668,705 3,422,489 Less accumulated depreciation (4,176,599) (2,879,463) ------------------ ------------------- Net property and equipment 2,492,106 543,026 ------------------ ------------------- OTHER ASSETS Investment in unconsolidated subsidiary 0 1,000,000 Intangible assets 6,252,291 0 Goodwill 7,103,207 5,469,609 Deposits and other assets 2,287,228 1,471,243 ------------------ ------------------- Total other assets 15,642,726 7,940,852 ------------------ ------------------- Total Assets $ 41,480,768 $ 22,889,732 ================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY ( DEFICIENCY) CURRENT LIABILITIES Accounts payable $ 8,361,427 $ 5,929,969 Accrued expenses 4,418,245 3,627,513 Accrued income taxes payable 0 94,504 Customer deposits 12,486 3,481 Short-term debt 800,000 0 Current portion of long-term debt 51,327 46,268 ------------------ ------------------- Total current liabilities 13,643,485 9,701,735 ------------------ ------------------- LONG-TERM DEBT Notes payable 446,250 116,105 ------------------ ------------------- Total long-term debt 446,250 116,105 ------------------ ------------------- Total Liabilities 14,089,735 9,817,840 ------------------ ------------------- Minority interest in consolidated subsidiaries 3,846,753 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; 19,837,531 and 14,313,808 issued and outstanding shares 1,984 1,431 Additional paid-in capital 52,193,715 24,929,169 Subscription receivable 0 (750,000) Deferred compensation (15,574,881) 0 Accumulated comprehensive income (loss) 32,582 (104) Accumulated deficit (13,109,120) (13,653,760) -------------------------------------- Total stockholders' equity (deficiency) 23,544,280 10,526,736 ------------------ ------------------- Total Liabilities and Stockholders' Equity (Deficiency) $ 41,480,768 $ 22,889,732 ================== ===================
The accompanying notes are an integral part of the financial statements F-2
PEGASUS WIRELESS CORP. Consolidated Statements of Operations Three and Nine Months Ended September 30, (Unaudited) Three Months Nine Months ---------------------------- ---------------------------- 2006 2005 2006 2005 ---------------------------- -------------- ------------- REVENUES $ 27,079,582 $ 474,979 $ 75,551,214 $ 1,787,995 COST OF SALES 25,251,388 210,498 69,131,293 935,476 ---------------------------- -------------- ------------- Gross Margin 1,828,194 264,481 6,419,921 852,519 OPERATING EXPENSES: General and administrative expenses 947,472 462,109 2,998,604 1,714,835 Selling and marketing expenses 695,498 0 2,106,300 100,858 Depreciation and amortization 35,766 21,194 302,086 73,493 ---------------------------- -------------- ------------- Total expenses 1,678,736 483,303 5,406,990 1,889,186 ---------------------------- -------------- ------------- Income (Loss) from operations 149,458 (218,822) 1,012,931 (1,036,667) ---------------------------- -------------- ------------- OTHER INCOME (EXPENSE): Other income 16,936 25,800 59,064 36,179 Interest expense (2,840) 0 (11,204) (7,415) Other expense (21,052) 0 (35,442) 0 ---------------------------- -------------- ------------- Total other income (expense) (6,956) 25,800 12,418 28,764 ---------------------------- -------------- ------------- Net income (loss) before income tax (credit) and minority interest 142,502 (193,022) 1,025,349 (1,007,903) Income tax (credit) 0 0 0 800 Minority interest in consolidated subsidiary income (loss) (61,031) 0 (480,709) 0 ---------------------------- -------------- ------------- Net income (loss) 81,471 (193,022) 544,640 (1,007,103) Other comprehensive income (loss) Foreign currency translation gain (loss) (51,179) 0 32,686 0 ---------------------------- -------------- ------------- Comprehensive income (loss) $ 30,292 $ (193,022)$ 577,326 $ (1,007,103) ============================ ============== ============= Income (loss) per weighted average common share - basic $ 0.01 $ (0.01)$ 0.04 $ (0.08) ============================ ============== ============= Income (loss) per weighted average common share - fully diluted $ 0.01 $ (0.01)$ 0.04 $ (0.08) ============================ ============== ============= Number of weighted average common shares outstanding-basic 17,610,050 13,403,096 15,266,563 13,403,096 ============================ ============== ============= Number of weighted average common shares outstanding-diluted 17,610,050 13,403,096 15,266,563 13,403,099 ============================ ============== =============
The accompanying notes are an integral part of the financial statements F-3
PEGASUS WIRELESS CORP. Consolidated Statements of Stockholders' Equity (Deficiency) * Number of Number of Add'l. Stock Total Shares - Shares - Amount - Amount - Paid-in Subscript Accumulated Stockholders' Preferred Common* Preferred Common Capital Receivable/ Deficit Equity Def Comp ----------- --------- ---------- ----------- ---------- ----------- -------------- --------------- BEGINNING BALANCE, June 30, 2004 15,295,206 1,129,057 12,663,209 416,865 0 0 (13,010,342) 69,732 Pfd converted to common (15,295,206) 3,352,941 (12,663,209) 12,663,209 0 0 0 Recapitalization 0 1,600,000 0 (13,079,466) 14,104,850 0 0 1,025,384 Acquisition of subsidiary 0 600,000 0 60 240 0 0 300 Recapitalization 0 287,954 0 29 799,785 0 0 799,814 Net loss 0 0 0 0 0 0 (672,796) (672,796) ----------- ---------- ---------- ----------- ---------- ----------- -------------- --------------- BALANCE, June 30, 2005 0 6,969,952 0 697 14,904,875 0 (13,683,138) 1,222,434 Employ stk options exercise 0 23,742 0 2 25,026 0 0 25,028 Two for one forward split 0 6,993,693 0 699 (699) 0 0 0 Common stk issued for cash 0 114,286 0 11 3,999,989 0 0 4,000,000 Comm stk issued - acquisit 0 167,691 0 17 3,999,983 0 0 4,000,000 Common stk issued for cash 0 44,444 0 5 1,999,995 (750,000) 0 1,250,000 Comprehensive inc/loss 0 0 0 0 0 0 (104) (104) Net income 0 0 0 0 0 0 29,378 29,378 ----------- ---------- ---------- ----------- ---------- ----------- -------------- --------------- Balance, December 31, 2005 0 14,313,808 0 1,431 24,929,169 (750,000) (13,653,864) 10,526,736 Recap shares issued 0 724,742 0 72 (72) 0 0 0 Receipt of subs receivable 0 0 0 0 0 750,000 0 750,000 Common stk issued for cash 0 40,000 0 4 1,999,996 0 0 2,000,000 Comm stk issued-acquisition 0 28,547 0 3 649,997 0 0 650,000 Acquisition shs returned 0 (76,200) 0 (8) 8 0 0 0 Common stk issued for cash 0 75,000 0 8 2,999,992 0 0 3,000,000 Common stock retired 0 (2,476,016) 0 (248) 248 0 0 0 Common stk opt exercised 0 456,000 0 46 740,954 0 0 741,000 Employ stk options exercise 0 28,333 0 3 35,414 0 0 35,417 Comm stk-retirement pkg 0 395,870 0 40 11,381,211 (11,381,251) 0 0 Comm stk - BOD fees 0 71,431 0 7 2,053,623 (2,053,630) 0 0 Comm stk issued for debt 0 5,276,016 0 528 263,273 0 0 263,801 Comm stk issed for tech 0 580,000 0 58 4,999,942 0 0 5,000,000 Comm stk issued for svcs 0 400,000 0 40 2,139,960 (2,140,000) 0 0 Comprehensive inc/loss 0 0 0 0 0 0 32,478 32,478 Net income 0 0 0 0 0 0 544,640 544,640 ----------- ---------- ---------- ----------- ---------- ----------- --------------- --------------- Ending Balance, September 30, 2006 (unaudited) 0 19,837,531 $ 0 $ 1,984 $52,193,715 (15,574,881) $ (13,076,746) $ 23,544,072 =========== ========== ========== =========== ========== ============ =============== ===============
* Reflects one for five reverse split announced November 21, 2006. The accompanying notes are an integral part of the financial statements F-4
PEGASUS WIRELESS CORP. Consolidated Statements of Cash Flows Nine Months Ended September 30, (Unaudited) 2006 2005 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 544,641 $ (1,007,103) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 302,286 73,493 Minority interest in net income (loss) of consolidated subsidiary 480,708 0 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (5,169,524) 351,398 (Increase) decrease in inventory 407,892 7,446 (Increase) decrease in prepaid expenses (1,745,924) 5,919 (Increase) decrease in deposits and other assets (815,985) (12,000) Increase (decrease) in accounts payable 2,431,458 (120,742) Increase (decrease) in accrued expenses 914,533 68,346 Increase (decrease) in accrued income taxes payable (94,504) 0 Increase (decrease) in customer deposits 8,099 (3,413) ------------------ ------------------ Net cash provided (used) by operating activities (2,736,320) (636,656) ------------------ ------------------ CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment (106,266) 0 Purchase of intangible assets (1,252,291) 0 Cash paid for acquisitions (650,000) 0 Sale/retirement of fixed assets 38,996 0 ------------------ ------------------ Net cash provided (used) by investing activities (1,969,561) 0 ------------------ ------------------ CASH FLOW FROM FINANCING ACTIVITIES: Cash acquired in acquisition/reorganization 687,618 828,931 Exercise of employee stock options or cash 35,417 25,029 Proceeds from loans 550,000 265,901 Repayment of loans (16,829) (561,464) Issuance of common stock for cash 5,750,000 0 ------------------ ------------------ Net cash provided by financing activities 7,006,206 558,397 ------------------ ------------------ Net increase (decrease) in cash and equivalents 2,300,325 (78,259) Effect of exchange rates on cash 132,201 0 ------------------ ------------------ CASH and equivalents, beginning of period 1,079,588 828,931 ------------------ ------------------ CASH and equivalents, end of period $ 3,512,114 $ 750,672 ================== ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid in cash $ 11,204 $ 61,464 ================== ================== Income taxes paid in cash $ 245,808 $ 0 ================== ================== Non-Cash Financing Activities: Issuance of common stock to effect acquisition $ 650,000 $ 0 ================== ================== Issuance of common stock for deferred compensation $ 15,574,881 $ 0 ================== ================== Issuance of common stock for intangible assets $ 5,000,000 $ 0 ================== ==================
The accompanying notes are an integral part of the financial statements F-4 PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements (Information with regard to the nine months ended September 30, 2006 and 2005 is unaudited) 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 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. F-5 PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Significant Acquisitions, continued - 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 June 30, 2006 and December 31, 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, 2005, 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. 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. 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 $266,320 and $52,299 for the six months ended June 30, 2006 and 2005, respectively. Research & Development - Research and development costs are expensed in the period incurred. Interim financial information - The financial statements for the nine months ended September 30, 2006 and 2005, are unaudited and include all adjustments which in the opinion of management are necessary for fair presentation, and such adjustments are of a normal and recurring nature. The results for the nine months are not indicative of a full year's results. F-6 PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements 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: September 30, 2006 December 31, 2005 -------------------- ----------------- Trade accounts receivable $ 11,774,903 $ 6,682,506 Allowance for doubtful accounts (16,885) (5,700) -------------------- ----------------- Total $ 11,758,018 $ 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: September 30, 2006 December 31, 2005 -------------------- ----------------- Inventory $ 6,816,984 $ 7,609,522 Less: Reserve for obsolescence (656,602) (1,041,248) -------------------- ----------------- Total $ 6,160,382 $ 6,568,274 ==================== ================= 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 19,837,531 and 14,313,808 shares of common stock outstanding at September 30, 2006 and December 31, 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. F-7 PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements NOTE 5 - STOCKHOLDERS' EQUITY, continued 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 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 the third quarter the Company retired 2,476,016 shares of common stock that was converted into shares of OTC Wireless, Inc. During the third quarter the Company issued 5,276,016 shares of common stock to satisfy $263,800 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. 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%. 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 September 30, 2006 and December 31, 2005. F-8 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: 2006 $ 1,637,528 2007 1,123,318 2008 1,009,173 2009 1,009,173 2010 1,009,173 Thereafter 2,775,227 ------------------------ Total $ 8,563,592 ======================== 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, 2005 and June 30, 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 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 Chairman and President are 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 cashlessly 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. 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. 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. F-9 PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements NOTE 13 - RELATED PARTY TRANSACTIONS A - Facilities operating lease - The Company leases it headquarters building 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-10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 Results of Operations The revenues for the nine months ended September 30, 2006 were $75,551,200 which represented an increase of 4,225% over the $1,788,000 of the same period of 2005. Revenue growth is primarily attributable the strong organic sales growth. The third quarter 2006 was a continuation of the transition process for us. Our two manufacturing subsidiaries began tooling for our new products and began first production at the end third quarter of this year. Our gross profit for the six months ended September 30, 2006 was $6,419,900, representing an increase of 753% over the $852,500 of the same period of 2005. A portion of our revenue growth consisted of product with a lower gross margin than we are normally accustomed to. Gross profit percentage is expected to return to our accustomed level as the we begin focusing on sales of our new products manufactured in our own plants increase and the new channels these products will be sold through. We began shipping Cynalynx in Asia in October 2006, and expect to begin shipments of the US version in November 2006. Our operating expenses for the nine months ended September 30, 2006 were $5,407,000, which represented an increase of 286% over the $1,889,200 of the same quarter of 2005. The increase over 2005, is principally attributable to the addition of our three new subsidiaries as well as expenses related to bringing Cynalynx and Trimar to market. Our operating profit for the nine months ended September 30, 2006, was $1,012,900, representing an reversal over the loss of $1,036,700 for the same period of 2005. Our operating profit growth is principally attributable to our revenue growth passing our breakeven point. Our net profit for the nine months ended September 30, 2006 was $544,600, representing a 150% reversal over the loss of $1,007,100 for the same period of 2005. Our net profit growth is principally attributable to our revenue growth passing our breakeven point. FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005 Results of Operations The revenues for the three months ended September 30, 2006, were $27,079,600, an increase of 5,700% over the $475,000 of the same quarter of 2005, and 6.6% over the $25,409,700 of the second quarter of 2006. Revenue growth is primarily attributable the strong organic sales growth. The third quarter 2006 was a continuation of the transition process for us. Our two manufacturing subsidiaries began tooling for our new products and began first production at the end third quarter of this year. Our gross profit for the three months ended September 30, 2006, was $1,828,200, an increase of 691% over the $264,500 of the same quarter of 2005. A portion of our revenue growth consisted of product with a lower gross margin than we are normally accustomed to. Gross profit percentage is expected to return to our accustomed level as the we begin focusing on sales of our new products manufactured in our own plants increase and the new channels these products will be sold through. We began shipping Cynalynx in Asia in the October 2006, and expect to begin shipments of the US version in November 2006. Our operating expenses for the three months ended September 30, 2006, were $1,678,700, representing an increase of 347% over the $483,300 of the same quarter of 2005, and 14% under the second quarter of 2006, $1,952,500. The increase over the second quarter 2005, is principally attributable to the addition of our three new subsidiaries. 12 Our operating profit for the three months ended September 30, 2006, was $142,500, an 200% turnaround over the loss of $193,000 for the same quarter of 2005, and 25% of the $577,400 of the first quarter of 2006. Our operating profit growth is principally attributable to our revenue growth passing our breakeven point. Our net profit for the three months ended September 30, 2006, was $81,500, a 150% turnaround over the $193,000 loss of the same quarter of 2005. Our net profit growth is principally attributable to our revenue growth passing our breakeven point. Liquidity and Capital Resources At September 30, 2006 and December 31, 2005, respectively, the Company had working capital of approximately $9,578,000 and $4,704,000. The Company also has a bank line of credit in the amount of $5,000,000. The Company has drawn $500,000 on this line. Net Operating Loss Carry-forwards The Company has net operating loss carry-forwards of $13,109,000, expiring beginning June 30, 2008. We have begun reporting a profit on a consistent basis. As long as this trend continues we will evaluate reducing our reserve for our income tax asset. Forward-Looking Statements This Form 10-QSB includes "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. All statements, other than statements of historical facts, included or incorporated by reference in this Form 10-QSB which address activities, events or developments which the Company expects or anticipates will or may occur in the future, including such things as future capital expenditures (including the amount and nature thereof), finding suitable merger or acquisition candidates, expansion and growth of the Company's business and operations, and other such matters are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results or developments will conform with the Company's expectations and predictions is subject to a number of risks and uncertainties, general economic market and business conditions; the business opportunities (or lack thereof) that may be presented to and pursued by the Company; changes in laws or regulation; and other factors, most of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this Form 10-QSB are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequence to or effects on the Company or its business or operations. The Company assumes no obligations to update any such forward-looking statements. ITEM 3. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's President, Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Company's President, Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. 13 Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. PART II ITEM 1. LEGAL PROCEEDINGS. During the third quarter Alex Tsao, former CEO of the Company, filed suit against the Company for breach of contract relating to his retirement and non-competition agreement. The Company is vigorously defending this action. During the third quarter D&D Aviation, of Utah, filed suit for breach of contract. The Company never contracted with D&D for services of any type and is vigorously defending this action. In November 2006, the Company was served with a class action lawsuit claiming various violations of federal securities laws. The Company intends to vigorously defend itself in this action. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 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 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 the third quarter the Company retired 2,476,016 shares of common stock that was converted into shares of OTC Wireless, Inc. During the third quarter the Company issued 5,276,016 shares of common stock to satisfy $263,800 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. On November 20, 2006, the Board of Directors approved a one for five reverse split of the Company's issued and outstanding common stock, without affecting the total shares authorized and par value. This reverse split is effective at close of business December 8, 2006. This reverse split is taken in anticipation of moving the trading of the Company's common stock to a different exchange. ITEM 3. DEFAULTS IN SENIOR SECURITIES None 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted during the quarter ending September 30, 2006, covered by this report to a vote of the Company's shareholders, through the solicitation of proxies or otherwise. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The exhibits required to be filed herewith by Item 601 of Regulation S-B, as described in the following index of exhibits, are incorporated herein by reference, as follows: Exhibit No. Description ---------------------------------------------------------------------- 31.1 * Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 * Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1 * Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32.2 * Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002. --------------------- * Filed herewith During the quarter we filed the following Forms 8-K: July 18, 2006 - To report the BOD vote to spin-off OTC Wireless, Inc. July 25, 2006 - To report the election of Jasper Knabb as co-CEO. August 4, 2006 - To include the August 4, 2006 press release regarding the property dividend August 22, 2006 - To announce the acquisition of the Maccontrol technology and the resignations of Alex Tsao, Caspar Lee and Jerry Shih. SIGNATURES In accord with Section 13 or 15(d) of the Securities Act of 1933, as amended, the Company caused this report to be signed on its behalf by the undersigned, thereto duly authorized. Pegasus Wireless Corp. Dated: November 21, 2006 By: /s/ Stephen Durland --------------------------- Stephen Durland Chief Financial Officer 15