Again with the flying horse
It's been awhile since I penned an update on erstwhile networking highflier Pegasus Wireless (OTCBB: PGWC). This week's Q3 results mean it's time for another look, because investors who forget history are doomed to repeat it.

On Tuesday, Pegasus issued an upbeat press release touting a "record" quarter and its "explosive growth pattern."

Is it cold in here?
Let me cut through the cheese: I think this is a snow job. Pegasus started from a base of nearly nothing last year; then it began its acquisition binge. Those acquisitions are responsible for the "explosive" growth. And of course, anything more than next to nothing is going to constitute a "record."

Turning back to the press release, we find this gem. "Pegasus also reported gross profit of $1.8 million in the third quarter of 2006."

That's it. No financial tables. Nothing about net profits to equity holders. No balance sheet. Zilch.

Why not?

I submit it's because the real results aren't as easy to spin as the Cliffs Notes version provided by CEO Jasper Knabb. Fortunately, Pegasus reported the full story in its 10QSB this morning. Among the amusing tidbits tucked away where (naive) investors aren't likely to see them: Pegasus's ex-CEO, Alex Tsao, is suing the company.

Remedial math
But here's a nastier dose of truth: In the 10Q, Pegasus' comprehensive income (net income minus foreign exchange losses) came to next to nothing. But it doesn't even seem able to report that correctly, even in the 10Q.

To wit: Pegasus reports earning $0.01 per share for the quarter. However, comprehensive income is reported at $30,292. Diluted share count, around 17.6 million. Now, my calculator seems to think that $30,292 divided by that share count isn't a penny, but $0.0017, or 1.7 tenths of a penny per share.

Bring me a match, and a wad of hundreds!
Despite the seemingly good news that Pegasus could report $0.04 per share for the first three-quarters of the year, this is a company that continues to torch a significant pile of cash. It lost $2.7 million in operations for the period, and burned an additional $2 million on capital spending and acquisitions.

Where does it get the money to run? By issuing shares, of course.

Now, the Pegasus believers (and compliant business journalists) out there like to claim that Knabb's status as one of the biggest buyers proves that he is one of the great believers in this stock.

I believe this much-touted "insider buying" was nothing more than an attempt to put a Street-friendly face on a dire financial necessity. And I take a very dim view of the way Knabb's purchases suddenly stopped around the time the stock crashed. This was allegedly because a planned deal fell through, but I haven't seen any of that hyped-up open-market buying since August. If management loved these shares at $5 and change, they ought to be grabbing them hand over fist at $0.62 each, right? Where's the true believer now?

Par for the course
Pumping out the PR, unfortunately. While Pegasus proves itself to be a mediocre roll-up in ultra-competitive markets, Knabb resorts to bizarre missives like this one, in which he attempts to blame the company's misfortune on "suspicious trading," and seems to try and imply that The Motley Fool is in cahoots with the class-action lawyers (shameless vultures, in my opinion) who are circling the Pegasus carcass.

Investors shouldn't fall for it. This is simply the latest round from what I consider to be one of the most brazen stock promotions of the past year. As you may remember, this company flew to a nosebleed valuation on the back of a lot of promising statements issued by Knabb, its CEO and chief cheerleader. Knabb also staged some very public (and spectacularly unsuccessful) battles against short sellers, most notably by offering a warrant dividend, but only to shareholders who took their holdings out of street name -- in other words, made them unavailable for borrow.

Unfortunately for shareholders, the maneuver didn't work and, eventually, the truth of Pegasus' overvaluation came home to roost. The stock tanked. Pegasus continued to cry foul, and even managed to enlist a Forbes writer who swallowed the idea that there's a "hit" out on Pegasus.

She also, for some reason, bought Knabb's familiar sales pitch: that Pegasus' video-serving networking products could somehow beat out competing products like the upcoming iTV from Apple (NASDAQ:AAPL), or Microsoft's (NASDAQ:MSFT) Xbox 360, which can already stream hi-def content wirelessly -- in addition to playing games and linking up with portable media players. Of course, minor players like Cisco (NASDAQ:CSCO) and Netgear (NASDAQ:NTGR) will want to play in this pool as well.

Since the crash, Knabb took the odd step of voluntarily delisting his stock from the Nasdaq, making the claim that removing the shares to a less liquid market would somehow benefit shareholders.

It won't. The only thing that will benefit shareholders is if Pegasus can move a lot of product profitably. Considering Knabb's continued smokescreens, I don't think he and Pegasus are up to the task.

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At the time of publication, Seth Jayson was long Microsoft common and calls but had no positions in any other company mentioned. View his stock holdings and Fool profile here. Microsoft is a Motley Fool Inside Value recommendation. Fool rules are here.