UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 2001
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _________ to __________.
Commission File No. 333-3074
NEXLAND, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 37-1356503
-------- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
1101 BRICKELL AVENUE, NORTH TOWER, SUITE 200, MIAMI, FLORIDA 33131
------------------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(305-358-7771)
--------------
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 [X] Yes [ ] No
As of May 15, 2001, there were 36,153,385 shares outstanding of issuer's common
stock.
PART I
FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2001 December 31, 2000
(Unaudited)
------------------------ ------------------
ASSETS
CURRENT
Cash $ 31,720 $ 59,523
Accounts receivable 155,527 119,131
Inventory 128,427 75,949
------------------------ ------------------
TOTAL CURRENT ASSETS 315,674 254,603
PROPERTY AND EQUIPMENT, less accumulated depreciation 38,085 32,072
DEPOSITS AND OTHER ASSETS 33,000 30,000
------------------------ ------------------
TOTAL ASSETS 386,759 316,675
======================== ==================
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES
Accounts payable 89,946 56,876
Accrued professional fees 275,714 219,194
Accrued expenses 130,153 73,424
Due to factor 43,151 -
Due to related party supplier 523,053 401,819
Other liabilities 97,356 97,356
------------------------ ------------------
TOTAL LIABILITIES 1,159,373 848,669
CAPITAL DEFICIT
Preferred stock, $0.0001 par value; shares
authorized 10,000,000; no shares outstanding - -
Common Stock, $0.0001 par value; shares
authorized 50,000,000; 36,153,385 and 34,094,703 shares
issued and outstanding, respectively 3,616 3,603
ADDITIONAL PAID-IN CAPITAL 3,204,127 3,001,613
UNEARNED COMPENSATION (270,837) (333,336)
DEFICIT (3,709,520) (3,203,874)
------------------------ ------------------
TOTAL CAPITAL DEFICIT (772,614) (531,994)
------------------------ ------------------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 386,759 $ 316,675
======================== ==================
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
SALES $757,698 $208,607
COST OF SALES 441,633 85,732
------------------------ ------------
GROSS PROFIT 316,065 122,875
------------------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 813,540 539,755
Depreciation 2,616 840
------------------------ ------------
TOTAL OPERATING EXPENSES 816,156 540,595
------------------------ ------------
INTEREST EXPENSE 5,555 5,536
------------------------ ------------
NET (LOSS) ($505,646) ($423,256)
------------------------ ------------
PER SHARE AMOUNTS:
Net loss per common share, basic and diluted ($0.01) ($0.01)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES, BASIC AND DILUTED 36,045,579 34,128,708
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
OPERATING ACTIVITIES
Net loss $(505,646) $(423,256)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Compensation charge in connection with employment agreement 62,499 -
Contributed research and development services 113,919 -
Expenses paid by issuance of common stock 88,591 332,054
Provision for bad debts - 8,996
Depreciation 2,616 840
(Increase) decrease in:
Accounts receivable (36,396) (34,626)
Inventory (52,478) (149,012)
Deposits and other assets (3,000) -
(Decrease) increase in:
Accounts payable 33,070 269,681
Accrued professional fees 56,520 -
Accrued expenses 56,729 -
Due to factor 43,151 -
Due to related party supplier 121,234 -
Other liabilities (35) -
--------------------- -------------
Total adjustments 486,420 427,933
--------------------- -------------
Net cash (used in) provided by operating activities (19,226) 4,677
--------------------- -------------
INVESTING ACTIVITIES
Purchases of property and equipment (8,594) (8,380)
--------------------- -------------
Net cash (used in) investing activities (8,594) (8,380)
--------------------- -------------
FINANCING ACTIVITIES
Proceeds from exercise of warrants and options 17 160,000
--------------------- -------------
Net cash provided by financing activities 17 160,000
--------------------- -------------
Net (decrease) increase in cash (27,803) 156,297
Cash, beginning of period 59,523 4,231
--------------------- -------------
Cash, end of period $31,720 $160,528
===================== =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $5,555 $-
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NEXLAND, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements as of March 31, 2001 and for the three months
ended March 31, 2001 and 2000 have been prepared in accordance with the
instructions to Form 10-Q and include all adjustments (consisting only of normal
recurring accruals), which are necessary for a fair presentation for the periods
presented. Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The condensed consolidated balance
sheet information as of December 31, 2000 was derived from the audited
consolidated financial statements included in the Company's Form 10-K. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 2000. The results of operations for the three months ended March
31, 2001 are not necessarily indicative of the results to be expected for the
full year.
2. EARNINGS PER SHARE
Net loss per share of common stock is based on the weighted average
number of common shares outstanding during each period. Diluted loss per share
of common stock is computed on the basis of the weighted average number of
common shares and dilutive options and warrants outstanding. All outstanding
options and warrants have an anti-dilutive effect and are excluded from the
calculation.
3. CAPITAL DEFICIT
During the three months ended March 31, 2001 the Company issued
126,000 shares of its common stock pursuant to the consulting services agreement
relating to capital investment and recorded a charge to consulting fees (based
on the then market value of the common stock) with a corresponding credit to
equity in the amount of $88,591.
On February 1, 2001, the Company granted the following options under
the 2000 Stock Incentive Plan:
o To an employee of the Company, options to purchase up to 75,000
shares of common stock at an exercise price of $0.70 per share on
February 1, 2001 and 75,000 shares of common stock at an exercise
price not less than 100% of the fair market value of a share of
common stock on the grant date per share on February 1, 2002.
These options vest one-forth on each of the first, second, third
and forth anniversaries of the grant date. These options may be
exercised within 10 years of the date of grant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This filing contains forward-looking statements, including statements
regarding, among other things, (a) the growth strategies of Nexland, Inc. (the
"Company"), (b) anticipated trends in the Company's industry, (c) the Company's
future financing plans and (d) the Company's ability to obtain financing and
continue operations. In addition, when used in this filing, the words
"believes," "anticipates," "intends," "in anticipation of," and similar words
are intended to identify certain forward-looking statements. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, many of which are beyond the
Company's control. Actual results could differ materially from these
forward-looking statements as a result of changes in trends in the economy and
the Company's industry, reductions in the availability of financing and other
factors. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this filing will in fact occur.
The Company does not undertake any obligation to publicly release the results of
any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.
GOING CONCERN
Our Company's auditors stated that the consolidated financial
statements of our Company for the years ended December 31, 2000 and December 31,
1999 were prepared on a going-concern basis. For the years ended December 31,
2000 and 1999, respectively, our Company incurred a net annual loss of
$2,876,244 and $131,343, respectively, and our Company had deficits of
$3,203,874 and $327,630, respectively, in the corresponding periods. These
losses raise substantial doubt about the ability of our Company to continue as a
going concern. Management believes that resources will be available from private
and public sources in 2001 to continue the marketing of our Company's Internet
sharing devices. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
our Company cannot continue in existence.
Management has established plans intended to increase the sales of our
Company's products. Management intends to seek new capital from new equity
securities offerings to provide funds needed to increase liquidity, fund growth
and implement its business plan; however, no assurance can be given that our
Company will be able to raise any additional capital.
SIGNIFICANT PLANT OR EQUIPMENT PURCHASES
We do not currently anticipate any significant plant or equipment
purchases during the next twelve months.
CHANGES IN THE NUMBER OF EMPLOYEES
We currently have twelve (12) employees in Miami and nine (9) in
Canada. If our Company is successful in increasing its sales level or in raising
significant new capital, we anticipate hiring twelve (12) additional personnel
during the remainder of 2001. We believe that these personnel will be adequate
to accomplish the tasks set forth in its plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
(1) REVENUES. For the quarter ended March 31, 2001, our Company had
$757,698 in revenue consisting of sales of 4,529 units of Internet access
"hardware routers" for small office and home users. During the three months
ended March 31, 2000, our Company had sales of $208,607 from the sale of 763
units. During the three months ended March 31, 2001, our average selling price
per unit decreased by $106 per unit as compared to the same period in 2000. This
decrease resulted from our Company reducing its selling price to take advantage
of large volume sales opportunities.
(2) COST OF SALES. Cost of sales for the quarter ended March 31, 2001
was $441,633, as compared to $85,732 for the same period in 2000. Cost of sales
consisted substantially of the purchase price and in-bound freight of
pre-assembled finished goods inventory from subcontractors in Taiwan, Republic
of China. During the three months ended March 31, 2001, our average purchase
cost per unit decreased by $14 per unit as compared to the same period in 2000.
This decrease resulted from a combination of two factors, the first of which is
our Company's success in obtaining lower priced units from our supplier and also
as a result from our Company effectively modifying our product specifications
which resulted in a lower cost to purchase. While our Company expects the dollar
amount of purchases of pre-assembled finished goods inventory from
subcontractors to increase in the future as our Company increases sales, our
Company anticipates paying lower prices as a result of increased volume
purchases.
(3) GROSS PROFIT. The gross profit of our products was approximately
42% for the quarter ended March 31, 2001, as compared to 59% for the same period
in 2000. The decrease in the gross profit is attributable to reductions in our
selling prices to take advantage of volume sales opportunities. Our Company
expects pricing pressures from our competition, but we believe that we will
continue to lower our cost procurement from subcontractors by obtaining the
benefits of lower product costs through volume purchases. The gross margin could
be lower in the future.
(4) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $813,540 for the quarter ended March 31,
2001 as compared to $539,755 for the quarter ended March 31, 2000. The increase
of $273,785 is primarily the result of our growth in sales, and the increase in
personnel and other related costs, which are explained below. In this
connection, our payroll costs increased by $120,000, professional fees increased
by $66,000 and other operating expenses decreased by $46,000. During this
period, we had three transactions that resulted in non-cash expenditures by our
Company. A company controlled by one of our principal shareholders, incurred
research and development costs on our behalf for the further development of our
Internet access hardware routers. In this connection, we recorded as a capital
contribution $113,919, which represents the actual costs, incurred by this
company on our behalf, substantially consisting of technician salaries for
subcontractors located in Taiwan. We have no formal agreement with this company
and we are in the preliminary phase of evaluating the acquisition of this
company during the next 12 months. During the comparable period in 2000, our
Company did not incur any research and development costs, since we purchased
ready to sell finished goods inventory. In addition, our Company recorded a
charge of $62,499 in connection with the issuance of common stock to the Chief
Financial Officer to amortize his unearned compensation in accordance with his
employment agreement. Lastly, our Company incurred an expense of $88,591 in
connection with the issuance of common stock for consulting services relating to
venture capital and, or debt financing. Our Company expects to increase its
selling, general and administrative in the future in proportion to our Company's
anticipated growth in sales.
LIQUIDITY AND CAPITAL RESOURCES.
Since inception, our Company has relied principally upon the proceeds
of private equity financings and loans to fund its working capital requirements
and capital expenditures. Our Company's net cash used in operating activities
for the quarter ended March 31, 2001 was ($19,226) compared to cash provided by
operating activities of $4,677 for the quarter ended March 31, 2000, a decrease
of $23,903. This decrease resulted from increases in our Company's net loss,
which included non-cash charges of (i) $62,499 for compensation in connection
with an employment agreement, (ii) $88,591 for consulting services paid with
common stock (iii) $113,919 contributed research and development services and
increases in receivables and inventories, offset by increases in accounts
payable, accrued professional fees and expenses, and due to related party
supplier. These increases resulted from the expansion of our Company's
operations.
Our Company's net cash provided by financing activities for the three
month period ended March 31, 2001 was $17 resulting from proceeds received from
the exercise of stock options. Our Company's short-term and long-term liquidity
requirements are expected to result from working capital needs to purchase
inventory and pay other operating expenses. Although our Company cannot
accurately predict the precise timing of its future capital, we estimate that we
will need to expend approximately $2,000,000, within the next twelve months. Our
Company estimates that of that amount (i) $1,000,000 will be for pre-assembled
finished goods inventory from subcontractors, (ii) $250,000 for sales and
marketing forces, (iii) $250,000 for professional fees and (iv) $500,000 for
other operating expenses, such as payroll, rent and office expenses.
Our Company has no assured available financial resources to meet its
March 31, 2001 working capital deficit of $843,699 and future operating costs.
Our Company is seeking additional equity capital from private and
public offerings. There is no assurance, that our Company will be able to raise
such additional capital during the next 12 months. If our Company is unable to
obtain the necessary additional capital, our Company may be required to change
its proposed business plan and decrease its planned operations, which could have
a material adverse effect upon its business, financial condition, or results of
operations.
The management of our Company has taken the following steps to improve
its cash flow:
(a) On January 31, 2001, our Company, entered into a factoring
agreement. The agreement expires on January 31, 2002 or until terminated by
either party with proper notice given as defined. Our Company has assigned
substantially all of its accounts receivable to the factor, typically on a
recourse basis. Our Company may request advances up to 75% of the eligible
receivables. The factor charges our Company a commission equal to .0667% per day
for each uncollected receivable from the invoice date to the payment date of
such invoice, plus interest on advanced funds equal to the greater of 10% or the
interest publicly announced by Citibank N. A., plus 2%. Obligations due to the
factor under the factoring agreement are collateralized by "receivables", as
defined. At March 31, 2001, $43,151 is due to factor.
(b) On March 19, 2001, we entered into an Equity Line of Credit
Agreement. Pursuant to the equity line of credit, an institutional investor
agreed, if requested by the Company, to purchase up to $5 million of our
debentures. The debentures are convertible into shares of our Common Stock at a
conversion price equal to a 20% discount of the market price of such stock, as
defined in the agreement. The timing of each sale and the number of debentures
to be sold is at our discretion, subject to various conditions, including an
effective registration of the conversion shares. The dollar amount that our
Company can request under any individual sale is subject to the average trading
volume of our Common Stock for the preceding 40-day trading period. The maximum
term of the equity line of credit is two years from the date of the agreement.
The agreement contains various representations, warranties and covenants by us,
including limitations on our ability to sell Common Stock or Common Stock
equivalents, all assets, merge or enter into certain other transactions. There
were no amounts outstanding on the equity line of credit at March 31, 2001.
(c) On March 19, 2001, our Company also entered into Securities
Purchase Agreement with third-party investors and a Placement Agent Agreement to
provide up to $250,000 less certain fees and expenses of the placement agent by
the issuance of convertible debentures. The debentures bear interest at 6% per
year and convert into our Company's common stock as defined. In connection with
the issuance of such debentures, the difference between the conversion price and
the fair value of the common stock to which the debentures are convertible,
multiplied by the number of shares into which the debt is convertible at the
issuance date of the debt or the date at which the debentures become convertible
will be recorded as intrinsic value of the benefical conversion feature and
charged to interest expense in our Company's statement of operations. Such
amounts may be material to our Company's 2001 financial statements. Through May
18, 2001, our Company issued debentures of $95,000 from which our Company
received net proceeds of approximately $65,000. There were no debentures
outstanding at March 31, 2001. The debenture holders are entitled to convert all
or part of the principal amount plus accrued interest into shares of our
Company's Common Stock equal to either (a) an amount equal to 120% of the
closing bid price of our Company's Common Stock as of the date of the debenture
issuance or (b) an amount equal to 80% of the lowest three closing bid prices of
our Company's Common Stock for the 10 days immediately preceding the date of
conversion of the debenture. Our Company is obligated to register the resale of
the conversion shares under the Securities Act of 1933. The debentures are
subordinate and junior in right of payment to all accounts payable of our
Company incurred in the ordinary course of business and/or bank debt of our
Company not to exceed $250,000. Our Company has the right to require the
debenture holders to convert any unpaid principal and accrued interest on the
debentures upon the five-year anniversary of the debenture issuance.
PART II
ITEM 1. LEGAL PROCEEDINGS
The officers and directors of our Company believe that to the best of
their knowledge, neither our Company nor any of its officers and Directors are
parties to any legal proceeding or litigation. Further, the officers and
directors know of no threatened or contemplated legal proceedings or litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ending March 31, 2001 the company issued
126,000 shares of its common stock pursuant to a consulting services agreement
for venture capital amounting to $88,591.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. EXHIBITS
The following documents are incorporated by reference from the
Registrant's Form S-1 Registration Statement filed with the Securities and
Exchange Commission (the "Commission"), Commission File No. 333-3074 on April 1,
1996 and declared effective by the Commission on August 16, 1996.
NUMBER DOCUMENT
3.1 Articles of Incorporation
3.2 Amended Articles of Incorporation
3.3 Bylaws of the Company
4.1 Specimen certificate for Common Stock
4.2 Specimen certificate for Class A Redeemable Warrant
4.3 Specimen certificate for Class B Redeemable Warrant
The following documents are incorporated by reference from the
Registrant's Form 10-K Annual Report for the period ended December 31, 1997:
NUMBER DOCUMENT
99.1 Stock Purchase Agreement
99.2 Employment Agreement with Fred Schmidt
The following documents are incorporated by reference from the
Registrant's Form 10-K Annual Report for the period ended December 31, 1998:
NUMBER DOCUMENT
3.3 Amended Articles of Incorporation dated December 31, 1997
3.4 Amended Articles of Incorporation dated April 15, 1998
The following documents are incorporated by reference from the
Registrant's Form 8-K Report filed with the Commission, Commission file
#333-3074, on December 3, 1999:
2.01 Acquisition Agreement and Exhibits attached thereto.
The following documents are incorporated by reference from the
Registrant's Post-Effective Amendment 2 to Form S-1 Registration Statement filed
with the Commission on April 3, 2000:
NUMBER DOCUMENT
10.1 March 14, 2000 Consulting Agreement between Nexland S.A. and
the Company
10.2 November 17, 1999, Mutual Non-Competition Agreement between
Nexland S.A. and the Company
10.3 November 17, 1999, Co-Operation Agreement between Smerwick,
Ltd. and the Company
The following documents are incorporated by reference from the
Registrant's Form 8-K filed with the Commission, Commission file #333-3074, on
May 12, 2000:
10.4 Employment Contract of Enrique Dillon
10.5 Employment Contract of Martin Dell'Oca
The following documents are incorporated by reference from the
Registrant's Form 10-K filed with the Commission on May 14, 2001.
4.4 2000 Stock Incentive Plan
10.6 Promissory Note dated August 1, 2000, by the Company payable
to Israel D. Sultan
10.7 Conversion Agreement dated October 26, 2000, between Israel
D. Sultan and the Company.
10.8 Line of Credit Agreement dated March 19, 2001, between
Cornell Capital Partners, L.P. and the Company.
10.9 Registration Rights Agreement dated March 19, 2001, between
Cornell Capital Partners, L.P. and the Company.
10.10 Escrow Agreement dated March 19, 2001, between Cornell
Capital Partners, L.P., the Company, Butler Gonzalez LLP and
First Union National Bank.
10.11 Form of Convertible Debenture
10.12 Consulting Services Agreement dated March 19, 2001, between
Yorkville Advisors Management, L.L.C. and the Company.
10.13 Securities Purchase Agreement dated March 19, 2001, between
the investors on Schedule I attached thereto (the
"Investors") and the Company.
10.14 Registration Rights Agreement dated March 19, 2001, between
the Investors and the Company.
10.15 Placement Agent Agreement dated March 19, 2001, between May
Davis Group, Inc. ("May Davis") and the Company.
10.16 Escrow Agreement dated March 19, 2001, between May Davis,
the Company and First Union National Bank.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: MAY 23, 2001 NEXLAND, INC.
By: /s/ Martin Dell'Oca
------------------------------
Martin Dell'Oca