UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended JUNE 30, 2002
[ ] 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 (I.R.S. Employer
incorporation or organization) 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) Registrant 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 August 1, 2002, there were 34,853,385 shares outstanding of
issuer's common stock.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD
ENDED JUNE 30, 2002
3
TABLE OF CONTENTS
-----------------
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001 (Unaudited).......................................F - 1
Condensed Consolidated Statements of Operations for
the six months ended June 30, 2002 and 2001 (Unaudited)
and the three months ended June 30, 2002 and 2001 (Unaudited)......F - 2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 (Unaudited)..........................F - 3
Notes to Condensed Consolidated Financial Statements.........F - 4 through F - 6
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
------
JUNE 30, DECEMBER 31,
2002 2001*
---------- ------------
Current assets:
Cash $ 11,029 $ 39,901
Accounts receivable 128,611 113,739
Inventory 126,835 319,482
Prepaid expenses 370,258 -
----------- -----------
Total current assets 636,733 473,122
----------- -----------
Property and equipment, net 70,679 62,503
Other assets:
Deposits 25,231 32,968
Loan closing cost - 41,960
----------- -----------
25,231 74,928
----------- -----------
Total assets $ 732,643 $ 610,553
=========== ===========
LIABILITIES AND CAPITAL DEFICIT
-------------------------------
Current liabilities:
Accounts payable $ 504,907 $ 200,018
Accrued professional fees 209,753 282,093
Accrued expenses 433,529 285,309
Due to related party supplier 607,113 666,209
Convertible debentures - 255,000
Other liabilities 97,356 97,356
----------- -----------
Total current liabilities 1,852,658 1,785,985
----------- -----------
Commitments and contingencies
Capital deficit:
Preferred stock, $0.0001 par value;
10,000,000 shares authorized; no
shares outstanding - -
Common stock, $0.0001 par value;
50,000,000 shares authorized;
35,653,385 shares issued and
outstanding at June 30, 2002 and
December 31, 2001 3,566 3,566
Additional paid-in capital 3,819,418 3,775,418
Unearned compensation - (83,340)
Accumulated deficit (4,942,999) (4,871,076)
----------- -----------
Total capital deficit (1,120,015) (1,175,432)
----------- -----------
Total liabilities and capital
deficit $ 732,643 $ 610,553
=========== ===========
*NOTE: The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to condensed consolidated financial statements.
F-1
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- --------------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
Sales $ 1,822,234 $ 777,473 $ 2,856,187 $ 1,535,171
Cost of sales 908,790 382,851 1,353,403 824,484
------------ ------------ ------------ -------------
Gross profit 913,444 394,622 1,502,784 710,687
------------ ------------ ------------ -------------
Operating expenses:
Selling, general and administrative 705,472 1,068,061 1,406,066 1,881,601
Depreciation and amortization 2,315 3,035 9,282 5,651
------------ ------------ ------------ -------------
Total operating expenses 707,787 1,071,096 1,415,348 1,887,252
------------ ------------ ------------ -------------
Income (loss) from operations 205,657 (676,474) 87,436 (1,176,565)
------------ ------------ ------------ -------------
Other expense:
Interest expense 57,427 70,580 80,980 76,135
------------ ------------ ------------ -------------
Total other expense 57,427 70,580 80,980 76,135
------------ ------------ ------------ -------------
Net income (loss) before extraordinary
item 148,230 (747,054) 6,456 (1,252,700)
------------ ------------ ------------ -------------
Extraordinary Item:
Loss on extinguishment of debt 78,378 - 78,378 -
Net income (loss) $ 69,852 $ (747,054) $ (71,922) $(1,252,700)
============ ============ ============= =============
Net loss per common share,
basic and diluted $ 0.00 $ (0.02) $ 0.00 $ (0.03)
============ ============ ============= =============
Weighted-average number of 35,653,385 36,100,189 35,653,385 36,153,385
common shares ============ ============ ============= =============
See accompanying notes to condensed consolidated financial statements.
F - 2
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
------------------------
2002 2001
------------ -----------
Net cash provided by (used in) operating activities $ 284,735 $ (194,676)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (17,847) (11,837)
------------ -----------
Cash flows from financing activities:
Proceeds from exercise of warrants and options - 17
Proceeds from issuance of convertible debentures - 255,000
Costs on issuance of convertible debentures - (41,960)
Extinguishment of debentures (295,760) -
------------ -----------
Net cash provided by (used in) financing activities (295,760) 213,057
------------ -----------
Net increase (decrease) in cash (28,872) 6,544
Cash, beginning of period 39,901 59,523
------------ -----------
Cash, end of period $ 11,029 $ 66,067
============ ===========
Supplemental Cash Flow Information:
- -----------------------------------
Cash paid for interest $ 86,379 $ -
============ ===========
Cash paid for taxes $ - $ -
============ ===========
Cash paid for extraordinary item -
Extinguishment of debt $ 36,418 $ -
============ ===========
Non Cash Supplemental Information:
- ----------------------------------
Compensation expense in connection with
employment agreement $ 83,340 $ 124,988
============ ===========
Expenses in connection with stock options
and stock issued $ 14,938 $ 431,081
============ ===========
See accompanying notes to condensed consolidated financial statements.
F-3
NEXLAND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - FINANCIAL STATEMENTS AND INTERIM PERIOD
- ------------------------------------------------
In the opinion of the Company, the accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and Regulation SB.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals), which are necessary for a fair presentation for the periods
presented, have been included. Certain information and footnote disclosures
normally included in the consolidated financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
It is suggested that these condensed consolidated financial statements be read
in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2001. The results of operations for the six months ended June
30, 2002 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - STOCK OPTIONS
- ----------------------
During the six months ended June 30, 2002, the Company cancelled options to
purchase 616,000 shares of the Company's common stock to certain employees of
the Company and granted options to purchase 154,000 shares of common stock to
these same employees of the Company. The Company accounted for this cancellation
and re-issuance of shares under Financial Interpretation No. 44 recognizing
approximately $3,000 in compensation expense. The Company granted 200,000
options during the six-month period ended June 30, 2002 to certain consultants.
The weighted average fair value of options granted during the six months ended
June 30, 2002 is estimated on the date of the grant, using an option-pricing
model for public companies. The weighted average grant-date fair value was $0.26
for options whose exercise price was equal to the market price on the date of
the grant. All options granted have an exercise price equal to the market price
on the date of grant. The Company also granted 450,000 options during the
six-month period ended June 30, 2002 to certain Officers and Directors. The
weighted average grant-date fair value was $0.13 for options whose exercise
price was equal to the market price on the date of the grant. All options
granted have an exercise price equal to the market price on the date of grant.
The Company has elected to account for the stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense has been
recognized on the employee stock options. The Company accounts for stock options
granted to consultants under Financial Accounting Standards Board Statement No.
123, "Accounting For Stock-Based Compensation."
The fair value of each option is estimated on the date of grant using the fair
value-pricing model with the assumption:
Risk-free interest rate 6.0%
Expected life (years) 10
Expected volatility 1.23
Expected dividends None
Had the compensation expense for the employee stock options been determined
based on the fair value of the options at the grant date consistent with the
methodology prescribed under Statement of Financial Standards No. 123,
"Accounting for Stock Based Compensation", the Company's net loss for the six
months ended June 30, 2002 would have changed.
F-4
NEXLAND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - STOCK OPTIONS, continued
- ---------------------------------
The Company's net loss and loss per share would have been reduced to the pro
forma amounts indicated below:
2002 2001
------------- --------------
Net loss
As reported $ (71,922) $ (1,252,700)
============= ==============
Pro forma $ (131,922) $ (1,438,700)
NOTE 3 - EXTINGUISHMENT OF DEBT
- -------------------------------
In June 2002, the Company prepaid the holders of certain privately placed senior
notes in an aggregate amount of $312,000. These payments were made out of
available cash. Interest accrued on these privately placed senior notes at 6%
and was $16,240. In connection with this transaction, the Company was required
to pay prepayment penalties of $40,760, and wrote off the unamortized deferred
financing costs of approximately $37,618. The total of $78,378 has been recorded
as a net extraordinary loss in the 2002 statement of operations.
The company has not recognized any benefit of net operating loss carryforwards
in the accompanying financial statements in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes," as the realization of this deferred
tax benefit is not more likely than not. A 100% valuation allowance has been
recognized to offset the entire effect of the Company's net deferred tax assets.
NOTE 4 - CONCENTRATIONS
- -----------------------
Approximately 49% of the Company's revenues in the six months ended June 30,
2002 were generated by one customer in the technology sector and none in the
same period in 2001.
NOTE 5 - GOING CONCERN
- ----------------------
The accompanying condensed consolidated financial statements were prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of operations. Since
inception, the Company has been involved in the development of its Internet
sharing devices organizational infrastructure, and the performance of
preliminary marketing and sales. The Company's ultimate ability to attain
profitable operations is dependent upon obtaining additional financing or to
achieve a level of sales adequate to support its cost structure.
Accordingly, there are no assurances that the Company will be successful in
achieving the above plans, or that such plans, if consummated, will enable the
Company to obtain profitable operations or continue as a going concern.
NOTE 6 - SUBSEQUENT EVENTS
- --------------------------
In July 2002 the Company granted 541,667 options to certain consultants. The
weighted average grant-date fair value was $0.19 for options whose exercise
price was equal to the market price on the date of the grant. The weighted
average fair value of options granted is estimated on the date of the grant,
using an option-pricing model for public companies. The $104,167 fair value of
the grant was expensed in July.
F-5
NEXLAND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - SUBSEQUENT EVENTS, continued
- -------------------------------------
On November 22, 2000, the Company entered into a settlement agreement in which
it agreed to dismiss a threatened lawsuit against Fred Schmid, Fred Schmid,
Inc., Dale Runyon, a former principal shareholder of WindStar, and Erik Nelson
(WindStar parties), and to terminate Schmid's consulting agreement. In this
connection, Schmid and Nelson agreed to escrow the consulting shares and the
penalty shares with an Escrow Agent and Dale Runyon agreed to return 800,000
transfer shares of common stock that were issued to him in a prior year. In July
2002 the agreement was deemed to be fully performed and the Company recorded the
return of these shares.
F-6
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
The Company's auditors stated in their reports on the financial statements
of the Company for the years ended December 31, 2001 and December 31, 2000 that
the Company is dependent on outside financing and has had losses since inception
that raise substantial doubt about our ability to continue as a going concern.
For the years ended December 31, 2001 and 2000, the Company incurred net annual
losses of $1,667,202 and $2,876,244, respectively, and the Company had an
accumulated deficit of $4,871,076 and $3,203,874, respectively. Management
believes that resources will be available from private and operating sources in
2002 to continue the marketing of the 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 the Company
cannot continue in existence.
Management has established plans intended to increase the sales of the
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 the
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 twenty five (25) employees in Miami and seven (7) in
Canada. If the Company is successful in increasing its sales level or in raising
significant new capital, we anticipate hiring five (5) additional personnel
during the remainder of 2002. We believe that these personnel will be adequate
to accomplish the tasks set forth in the plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Reporting Release No. 60, which was recently released by the
U.S. Securities and Exchange Commission, encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our consolidated financial statements include a summary of
the significant accounting policies and methods used in the preparation of our
consolidated financial statements.
Management believes the following critical accounting policies affect the
significant judgments and estimates used in the preparation of the financial
statements.
4
REVENUE RECOGNITION
Revenues are recognized at the time of shipment of the respective
merchandise. Our Company includes shipping and handling fees billed to customers
as revenues. Costs of sales include outbound freight. Products are under an
unconditional money-back guarantee for the first 30 days after purchase. A five
year warranty covering the repair of the unit is provided on all products.
USE OF ESTIMATES
Management's discussion and analysis of financial condition and results
of operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to allowances for doubtful accounts
receivable and the carrying value of inventories and long-lived assets.
Management bases these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
RESULTS OF OPERATIONS
FOR THE THREE MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
(1) REVENUES. For the three months ended June 30, 2002, our Company had
$1,822,234 in revenue as compared to $777,473 in revenue for the three months
ended June 30, 2001, an increase of 134.4%. Sales of units of our Internet
access "hardware routers" for small offices and home users increased to 11,686
for the three months ended June 30, 2002 from 6,398 units for the three months
ended June 30, 2001, an increase of 82.7%. During the three months ended June
30, 2002, the average selling price per unit was $154 as compared to an average
selling price per unit of $122 for the corresponding period in 2001. Other
revenues consist of related accessories to the "hardware routers."
For the six months ended June 30, 2002, our Company had $2,856,187 in
revenue as compared to $1,535,171 in revenue for the six months ended June 30,
2001, an increase of 86.1%. Sales of units of our Internet access "hardware
routers" increased to 17,309 units from 10,927 units for the six months ended
June 30, 2002, an increase of 58.4%. During the six months ended June 30, 2002
the average selling price per unit was $163 as compared to an average selling
price per unit of $141 for the corresponding period in 2001. The increase in
average selling price is due to the Company selling more of the higher priced
units.
(2) COST OF SALES. For the three months ended June 30, 2002, our Company
had $908,790 (50%) in cost of sales as compared to $382,851 (49%) in cost of
sales for the three months ended June 30, 2001.
For the six months ended June 30 2002, our Company had $1,353,403 (47%) in
cost of sales as compared to $824,484 (54%) in cost of sales for the six months
ended June 30, 2001. The increase in the dollar amount of the cost of sales for
the three months and six months ended June 30, 2002 was due to the increase in
the number of units sold.
(3) GROSS PROFIT. For the three months ended June 30, 2002, our Company's
gross profit was 50% as compared to 51% in gross profit for the three months
ended June 30, 2001. The gross profit decreased for the three months ended June
30, 2002, compared to the corresponding period in 2001 due to a product with a
lower margin to a customer in the technology sector.
For the six months ended June 30, 2002, our Company's gross profit was 53%
as compared to 46% in gross profit for the six months ended June 30, 2001. The
gross profit increased for the six months ended June 30, 2002 compared to the
corresponding period in 2001 due to lower costs and selling of higher priced
units. The new generation of the Internet access "hardware routers" were phased
in during the second quarter of 2001, resulting in these increases in average
sales prices and lower product costs.
5
(4) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
THREE MONTHS ENDED JUNE 30, 2002 AND 2001. Selling, general and
administrative expenses decreased to $705,472 for the three months ended June
30, 2002 as compared to $1,068,061 for the three months ended June 30, 2001. The
decrease of $362,589 is the result of a decrease of legal expenses by $58,000, a
decrease of commissions expense by $52,000, a decrease of accounting expenses by
$13,000, an increase of other expenses by $17,000 and non-cash expenditure
decreases in amortization of unearned compensation of $42,000 and stock based
compensation paid to consultants of $215,000.
During the three month period ended June 30, 2002, the Company had three
transactions that resulted in non-cash selling, general and administrative
expenditures: i) a charge of $20,841 in connection with the issuance of common
stock to the Chief Financial Officer to amortize his unearned compensation in
accordance with his employment agreement; ii) $14,938 in option expenses to
consultants; and iii) amortization of loan closing asset of $1,988. During the
comparable period in 2001, the Company had three non-cash transactions that
resulted in non-cash expenditures: i) the Company recorded a charge of $20,500
in connection with the issuance of common stock to the Chief Financial Officer
to amortize his unearned compensation in accordance with his employment
agreement; ii) the Company incurred an expense of $214,854 in connection with
the issuance of options to consultants; and iii) 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 for
$127,636, which was recorded as a capital contribution. The Company expects to
increase its selling, general and administrative expenses in the future in
proportion to the Company's anticipated growth in sales.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001. Selling, general and
administrative expenses decreased to $1,406,066 for the six months ended June
30, 2002 as compared to $1,881,601 for the six months ended June 30, 2001. The
decrease of $475,535 is the result of a decrease of legal expenses by $112,000,
a decrease of commissions expense by $63,000, a decrease of accounting expenses
by $27,000, a decrease of other expenses by $17,000 and non-cash expenditure
decreases in amortization of unearned compensation of $42,000 and stock based
compensation paid to consultants of $215,000.
During the six month period ended June 30, 2002, the Company had three
transactions that resulted in non-cash selling, general and administrative
expenditures: i) a charge of $83,340 in connection with the issuance of common
stock to the Chief Financial Officer to amortize his unearned compensation in
accordance with his employment agreement; ii) $14,938 in option expenses to
consultants; iii) amortization of loan closing asset of $4,342. During the
comparable period in 2001, the Company had four non-cash transactions that
resulted in non-cash expenditures: i) the Company recorded a charge of $125,000
in connection with the issuance of common stock to the Chief Financial Officer
to amortize his unearned compensation in accordance with his employment
agreement; ii) the Company incurred an expense of $214,854 in connection with
the issuance of options to consultants; iii) 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 for $127,636,
which was recorded as a capital contribution; and iv) we issued 126,000 shares
of common stock to a consultant for services and recorded a non-cash transaction
of $88,591. The Company expects to increase its selling, general and
administrative expenses in the future in proportion to the Company's anticipated
growth in sales.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has relied principally upon the proceeds of
private equity financings and loans to fund its working capital requirements and
capital expenditures. The Company's net cash provided by (used in) operating
activities for the six months ended June 30, 2002 was $284,735, compared to cash
used in operating activities of ($194,676) for the six months ended June 30,
2001, an increase of $479,411. This increase in cash flow resulted primarily
from decreases in the Company's net operating loss on increased sales during the
comparable six-month periods.
The Company's net cash used by investing activities for the six-month
period ended June 30, 2002 was $17,847 for purchase of property and equipment.
The Company's net cash used by financing activities for the six-month
period ended June 30, 2002 was $295,760. During the six month period ending June
30, 2002, the convertible debentures in the principle amount of $255,000 were
redeemed for $295,760 plus accrued interest of $16,240.
The Company has no assured financial resources available to meet its June
30, 2002 working capital deficit of $1,215,925 and future operating costs.
6
RISK FACTORS
Our Company is subject to various risks which may materially harm our
business, financial condition and results of operations. Certain risks are
discussed below.
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. For the six months ended June 30, 2002,
we sustained losses of $71,922. For the year ended December 31, 2001 and the
year ended December 31, 2000, we sustained losses of $1.67 million and $2.88
million, respectively. Future losses are likely to occur. Our independent
auditors have noted that our Company may not have significant cash or other
material assets to cover its operating costs and to allow it to continue as a
going concern. Our ability to obtain additional funding will determine our
ability to continue as a going concern.
WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM OUR INDEPENDENT
AUDITORS
Our independent auditors have added explanatory paragraphs to their audit
opinions issued in connection with the 2001 and 2000 financial statements which
states that our Company has had losses since inception that raise substantial
doubt about our ability to continue as a going concern. Our financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
WE HAVE BEEN AND CONTINUE TO BE SUBJECT TO A WORKING CAPITAL DEFICIT AND
ACCUMULATED DEFICIT
We had a working capital deficit of $1.22 million at June 30, 2002. We had
a working capital deficit of $1.3 million and $0.6 million at December 31, 2001
and 2000, respectively. We had an accumulated deficit of $5.0 million at June
30, 2002. We had an accumulated deficit of $4.9 million and $3.2 million at
December 31, 2001 and 2000, respectively. No assurances can be given that we
will be successful in reaching or maintaining profitable operations.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
There has been a limited public market for our common stock and there can
be no assurance that an active trading market for our common stock will develop.
As a result, this could adversely affect our shareholders' ability to sell our
common stock in short time periods, or possibly at all. Our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations, which could adversely affect the market price of our common
stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results, announcements
by our competitors and changes in the overall economy or the condition of the
financial markets could cause the price of our common stock to fluctuate
substantially.
WE HAVE HAD A HISTORY OF A LIMITED CUSTOMER BASE AND THIS MAY CONTINUE
At present, our customer base consists primarily of Internet service
providers, telephone companies, and value-added resellers. Our ability to
operate depends on increasing our customer base and achieving sufficient gross
profit margins. We cannot assure you that we will be able to increase our
customer base or to operate profitably. If any of our major customers stop or
delay their purchases of our products, our revenue and profitability would be
adversely affected. We anticipate that sales of our products to relatively few
customers will continue to account for a significant portion of our revenue. In
2000, sales to 10 customers accounted for 53% of our revenue, while in 2001,
sales to 10 customers accounted for 48% of our revenue. For the six months ended
June 30, 2002, one customer in the technology sector generated 49% of the
Company's revenue. If these customers cancel or delay their purchase orders, our
revenue may decline and the price of our common stock may fall. We cannot assure
you that our current customers will continue to place orders with us, that
orders by existing customers will continue at the levels of previous periods or
that we will be able to obtain orders from new customers. Although our financial
performance depends on large orders from a few key customers and resellers, we
do not have binding commitments from any of them.
7
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of key executives
and consultants, including Gregory S. Levine, our President and a Director of
our Company, and Martin Dell'Oca, our Chief Financial Officer and a Director of
our Company. The loss of the services of any of these people could materially
harm our business because of the cost and time necessary to replace and train
such personnel. Such a loss would also divert management attention away from
operational issues. We have entered into employment agreements with Mr. Levine
and Mr. Dell'Oca, respectively. We do not maintain key-man life insurance
policies on any of these people.
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 ended June 30, 2002, our Company redeemed
convertible debentures in the principal amount of $255,000 for $295,760 plus
accrued interest of $16,240.
On November 22, 2000, our Company entered into a settlement agreement in
which it agreed to dismiss a threatened lawsuit against Fred Schmid, Fred
Schmid, Inc., Dale Runyon, a former principal shareholder of WindStar, and Erik
Nelson (WindStar parties), and to terminate Schmid's consulting agreement.
Pursuant to the agreement, Messrs. Schmid and Nelson agreed to escrow the
consulting shares and the penalty shares with an escrow agent and Mr. Runyon
agreed to return 800,000 transfer shares of common stock that were issued to him
in a prior year. In July 2002, the agreement was deemed to be fully performed
and our Company recorded the return of these shares.
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 herein by reference from the
Registrant's Form S-1 Registration Statement filed with the Securities and
Exchange Commission (the "Commission"), Commission file #333-3074 on April 1,
1996 and declared effective by the Commission 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 Warrants.
4.3 Specimen certificate for Class B Redeemable Warrants.
The following documents are incorporated herein by reference from the
Registrant's Form 10-K Annual Report for the period ended December 31, 1997:
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99.1 Stock Purchase Agreement.
99.2 Employment Agreement with Fred Schmid.
The following documents are incorporated herein by reference from the
Registrant's Form 10-K Annual Report for the period ended December 31, 1998:
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 herein by reference from the
Registrant's Post Effective Amendment 1 to Form S-1 Registration Statement filed
with the Commission, Commission file #333-3074 on June 17,1998 and declared
effective by the Commission June 19,1998:
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 herein by reference from the
Registrant's Form 8-K Report filed on December 3, 1999:
2. 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, Commission file #333-3074 on April 3, 2000.
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 8K 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.
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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.
The following documents are incorporated by reference from the
Registrant's Form 10-Q filed with the Commission on November 14, 2001:
10.17 Employment Agreement, effective August 16, 2001, between the
Company and Robert W. Nelson.
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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: August 12, 2002 NEXLAND, INC.
By: /s/ Martin Dell'Oca
--------------------------
Martin Dell'Oca
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Nexland, Inc. (the "Company") on Form
10-QSB for the period ended June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), each of the undersigned,
in the capacities and on the dates indicated below, hereby certifies pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
/s/ Gregory S. Levine
- -----------------------------
Gregory S. Levine
Chief Executive Officer
/s/ Martin Dell'Oca
- -----------------------------
Martin Dell'Oca
Chief Financial Officer
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