UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________
Commission file number 000-25499
NETWORK INSTALLATION CORPORATION
--------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 88-0390360
-------------------- -----------------------
State or other jurisdiction of (IRS Employer
Incorporation or organization Identification Number)
18 Technology Dr., Suite 140A
Irvine, CA 92618
--------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(949) 753-7551
--------------
(Issuer's telephone number, including area code)
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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of March 31, 2004, the Issuer had outstanding 12,960,857 shares of its common
stock, $0.001 par value.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES [ ] NO [X]
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
NETWORK INSTALLATION CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
CONSOLIDATED BALANCE SHEETS 1
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS 2
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4-10
ASSETS
(Unaudited) (Audited)
March 31, December 31,
2004 2003
------------ --------------
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . $ - $ 667
Accounts receivable, net of allowance for doubtful
accounts of $80,000 and $79,309 at March 31, 2004
and December 31, 2003, respectively . . . . . . . . . . . 80,946 353,119
Work in progress. . . . . . . . . . . . . . . . . . . . . 35,987 200,000
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . 162,500 -
Other current assets. . . . . . . . . . . . . . . . . . . 4,461 2,289
------------ --------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . 283,894 556,075
------------ --------------
NET PROPERTY & EQUIPMENT. . . . . . . . . . . . . . . . . 5,398 6,898
------------ --------------
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 -
------------ --------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . $ 1,289,292 $ 562,973
============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bookoverdraft . . . . . . . . . . . . . . . . . . . . . . $ 17,271 $ -
Accounts payable and accrued expenses . . . . . . . . . . 1,239,054 1,532,893
Deferred revenue. . . . . . . . . . . . . . . . . . . . . 78,869 280,924
Loans payable . . . . . . . . . . . . . . . . . . . . . . 569,781 45,500
Loans payable - related parties . . . . . . . . . . . . . 134,180 163,691
Due to factor . . . . . . . . . . . . . . . . . . . . . . 10,759 14,056
Convertible debt - current. . . . . . . . . . . . . . . . 21,781 517,616
------------ --------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . 2,071,695 2,554,680
------------ --------------
LONG TERM LIABILITIES
Loans payable . . . . . . . . . . . . . . . . . . . . . . - 65,000
Loans payable - related parties . . . . . . . . . . . . . 5,000 35,000
Convertible debt. . . . . . . . . . . . . . . . . . . . . 165,000 165,000
Convertible debt - related parties. . . . . . . . . . . . 748,500 338,000
Debt discount . . . . . . . . . . . . . . . . . . . . . . (93,500) -
------------ --------------
TOTAL LONG TERM LIABILITIES. . . . . . . . . . . . . . . 825,000 603,000
------------ --------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . 2,896,695 3,157,680
------------ --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 100,000,000 shares at $.001 par
value, issued and outstanding 12,960,857 shares . . . . 12,961 12,616
Additional paid-in capital. . . . . . . . . . . . . . . . 4,135,233 2,743,222
Shares to be issued . . . . . . . . . . . . . . . . . . . 84,201 116,295
Accumulated deficit . . . . . . . . . . . . . . . . . . . (5,839,798) (5,466,840)
------------ --------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT). . . . . . . . . . . (1,607,403) (2,594,707)
------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT). . . . . . . . . . . . . . . . . . . . $ 1,289,292 $ 562,973
============ ==============
2004 2003
------------ ---------
NET REVENUE . . . . . . . . . . $ 510,522 $442,463
COST OF REVENUE . . . . . . . . 320,220 186,359
------------ ---------
GROSS PROFIT. . . . . . . . . 190,302 256,104
OPERATING EXPENSES. . . . . . . 575,568 265,019
------------ ---------
Loss from operations. . . . . . (385,266) (8,915)
OTHER INCOME (EXPENSES)
Other income (expenses) . . . . 33,893 (247)
Interest expense. . . . . . . . (21,584) -
------------ ---------
TOTAL OTHER INCOME
(EXPENSES). . . . . . . . . . 12,309 (247)
------------ ---------
LOSS BEFORE INCOME TAXES. . . . (372,957) (9,162)
------------ ---------
Provision of income taxes . . . - -
------------ ---------
NET LOSS. . . . . . . . . . . . $ (372,957) $ (9,162)
============ =========
BASIC AND DILUTED LOSS
PER SHARE . . . . . . . . . . $ (0.03) $ -
============ =========
WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING. 12,709,532 -
============ =========
Three
months ended
March 31, 2004
----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . $ (372,957)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . 71,500
Accounts receivable. . . . . . . . . . . . . . . . 272,173
Work in progress . . . . . . . . . . . . . . . . . 164,013
Deposit and other current assets . . . . . . . . . (2,172)
Increase in current liabilities:
Accrued expenses and accounts payable. . . . . . (279,985)
Deferred revenue . . . . . . . . . . . . . . . . (202,055)
----------------
NET CASH USED IN OPERATING ACTIVITIES. . . . . . . (349,483)
----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition of Del Mar . . . . . . . (500,000)
----------------
NET CASH USED IN INVESTING ACTIVITIES. . . . . . . (500,000)
----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft . . . . . . . . . . . . . . . . . . 17,271
Proceeds (payments) from factor. . . . . . . . . . (3,297)
Proceeds from shares to be issued. . . . . . . . . 24,362
Proceeds from borrowings . . . . . . . . . . . . . 930,500
Repayment of long term debt. . . . . . . . . . . . (120,020)
----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES. . . . . 848,816
----------------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . (667)
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . 667
----------------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . $ -
================
NETWORK INSTALLATION CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
1. DESCRIPTION OF BUSINESS AND SEGMENTS
Network Installation Corp (NIC) was incorporated on July 18, 1997, under the
laws of the State of California. NIC is a full service computer cabling,
networking and telecommunications integrator contractor, providing networks from
stem to stem in house. NIC participates in the worldwide network infrastructure
market to end users, structured cabling market and the telephony services. NIC,
Flexxtech and Del Mar Systems International, Inc. (DMSI) are together referred
to as "the Company".
Pursuant to a purchase agreement on May 23, 2003, Flexxtech Corporation
("Flexxtech") acquired 100% of the issued and outstanding common stock of (NIC).
The purchase price consisted of $50,000 cash, 7,382,000 shares of Flexxtech's
common stock and five year option to purchase an additional 618,000 shares of
Flexxtech stock if NIC's total revenue exceeds $450,000 for the period beginning
on June 1, 2003 and ending August 31. The option is exercisable at a price
equal to the closing bid price of the stock on August 31, 2003.
According to the terms of the share exchange agreement, control of the combined
companies (the "Company") passed to the former shareholders of NIC. This type of
share exchange has been treated as a capital transaction accompanied by
recapitalization of NIC in substance, rather than a business combination, and is
deemed a "reverse acquisition" for accounting purposes since the former owners
of NIC controlled majority of the total common shares outstanding immediately
following the acquisition.
On March 1, 2004, NIC acquired 100% of the outstanding shares of Del Mar Systems
International, Inc. (DMSI), a Company operating in the telecommunication
solutions industry. The operations of DMSI have been consolidated with the
operations of the Company, since March 1, 2004.
Flexxtech Corporation ("Flexxtech") was organized on March 24, 1998, under the
laws of the State of Nevada, as Color Strategies. On December 20, 1999,
Flexxtech changed its name to Infinite Technology Corporation. Flexxtech
changed its name to Flexxtech Corporation in April 2000.
A certificate of amendment was filed on July 10, 2003 to change the parent
company's name from Flexxtech Corporation to Network Installation Corp.
The accompanying unaudited condensed interim financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for the presentation of interim financial information, but
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The audited financial
statements for the two years ended December 31, 2003 and 2002 were filed on
April 9, 2004 with the Securities and Exchange Commission and is hereby
referenced. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the
three-month periods ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004.
The statement of operations and cash flows for the three months ended March 31,
2003 are not presented, as they are still being completed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
-----------------------------
The accompanying financial statements include the accounts of Network
Installation Corp., formerly Flexxtech Corporation (legal acquirer, the
"Parent"), and its 100% owned subsidiaries, Network Installation Corporation and
Del Mar Systems International, Inc. All significant inter-company accounts and
transactions have been eliminated in consolidation. The results include the
accounts of NIC and Flexxtech for the three months ended March 31, 2004, and the
results of DMSI from the date of acquisition, March 1, 2004 through March 31,
2004. The historical results for the three months ended March 31, 2003 include
NIC only.
The Company's revenue recognition policies are in compliance with all applicable
accounting regulations, including American Institute of Certified Public
Accountants (AICPA) Statement of Position (SOP) 81-1, Accounting for Performance
of Construction-Type and Certain Production-Type Contracts. Revenues from
installations, cabling and networking contacts are recognized when the contracts
are completed (Completed-Contract Method). The completed-contract method is
used because the contracts are short-term in duration or the Company is unable
to make reasonably dependable estimates of the costs of the contracts.
Under the Completed-Contract Method, revenues and expenses are recognized when
services have been performed and the projects have been completed. For
projects, which have been completed but not yet billed to customers, revenue is
recognized based on management's estimates of the amounts to be realized. When
such projects are billed, any differences between the initial estimates and the
actual amounts billed are recorded as increases or decreases to revenue.
Expenses are recognized in the period in which the corresponding liability is
incurred. Deferred revenue represents revenue that has been received or is
receivable before it is earned, i.e., before the related services are performed.
Deferred revenue amounted to $78,869 and $280,924 at March 31, 2004 and
December 31, 2003, respectively.
The Company's revenue recognition policy for sale of network products is in
compliance with Staff accounting bulletin (SAB) 104. Revenue from the sale of
network products is recognized when a formal arrangement exists, the price is
fixed or determinable, the delivery is completed and collectibility is
reasonably assured. Generally, the Company extends credit to its customers and
does not require collateral. The Company performs ongoing credit evaluations of
its customers and historic credit losses have been within management's
expectations.
Stock-based Compensation
-------------------------
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" amended by SFAS No 148, "Accounting for Stock Based Compensation
Transition and Disclosure". SFAS No. 123 prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123 requires compensation expense to be recorded (i) using the
new fair value method or (ii) using the existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for stock issued to
employees" (APB 25) and related interpretations with proforma disclosure of what
net income and earnings per share would have been had the Company adopted the
new fair value method. The Company uses the intrinsic value method prescribed
by APB 25 and has opted for the disclosure provisions of SFAS No.123. No
options were issued during the three months ended March 31, 2004 and 2003.
Basic and Diluted Net Loss Per Share
------------------------------------------
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average
number of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method.
Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if funds
obtained thereby were used to purchase common stock at the average market price
during the period.
3. GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has accumulated deficit of
$5,839,798, and is generating losses from operations. The continuing losses
have adversely affected the liquidity of the Company. The Company faces
continuing significant business risks, including but, not limited to, its
ability to maintain vendor and supplier relationships by making timely payments
when due.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to raise additional capital, obtain
financing and to succeed in its future operations. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
towards obtaining additional equity financing through various private placements
and evaluation of its distribution and marketing methods.
4 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses is comprised of the following:
March 31, December 31,
2004 2003
---------- -------------
Accounts payable. . $ 359,932 $ 655,334
Payroll tax payable 155,805 122,749
Litigation accrual. 430,000 430,000
Accrued expenses. . 293,317 324,810
---------- -------------
$1,239,054 $ 1,532,893
========== =============
Payroll tax liabilities amounting to $92,890 pertains to the calendar years from
1999 to 2001. The Company has agreed to pay the payroll tax liability in
monthly installment of $6,500 beginning March 15, 2003 until entire amount is
paid in full.
5. NOTE PAYABLE
The Company contracted a $500,000 note payable in March 2004 in connection with
the DMSI acquisition. This note bears interest at 5% and is payable in monthly
installment of $42,804, maturing in April 2005.
The Company has unsecured, non-interest bearing notes for $65,000 due November
2005.
6. RELATED PARTY TRANSACTIONS
Related Party Notes Payable - Current
------------------------------------------
The Company an unsecured, non-interest bearing note for $119,180 due June 15,
2004, due to an officer.
During the three months ended March 31, 2004, the Company repaid a $76,000 due
to the majority shareholder under a factoring agreement.
Related Party Notes Payable - Long Term
---------------------------------------------
The Company has an unsecured, non-interest bearing note for $5,000 due December
17, 2005 due to the majority shareholder.
7. INCOME TAXES
No provision was made for Federal income tax since the Company has significant
net operating loss. Through December 31, 2003, the Company incurred net
operating losses for tax purposes of $3,450,000, approximately. The net
operating loss carry forwards may be used to reduce taxable income through the
year 2003. The availability of the Company's net operating loss carryforwards
are subject to limitation if there is a 50% or more positive change in the
ownership of the Company's stock. The provision for income taxes consists of
the state minimum tax imposed on corporations.
8. COMMITMENTS & CONTINGENCIES
Litigation
----------
In the year ended December 31, 2002, a suit was brought against the Company and
its former management in the Superior Court of the State of California, County
of San Francisco, by an individual alleging that the Company made false written
and oral representations to induce the plaintiff to invest in the Company and
that such investment occurred despite the plaintiff's request that the funds be
held in a brokerage account maintained by a related entity. A co-defendant, an
individual in the case also filed a cross-complaint in the action alleging
theories of recovery against the Company and several other defendants and
alleging fraud, breach of contract, misrepresentation, conversion and securities
fraud against the Company. On November 21, 2003, the Company reached a
settlement with the plaintiffs for $160,000. The unpaid balance at March 31,
2004 was $65,000.
On April 25, 2003 the Superior Court of the State of California, County of
Orange, entered a judgment in the amount of $46,120 against the Company and its
former management in favor of a vendor of the Company's former subsidiary, North
Texas Circuit Board, or NTCB. On August 20, 2002 the Company sold NTCB to BC
Electronics Inc. Pursuant to terms of the share purchase agreement, BC
Electronics assumed all liabilities of NTCB. In December 2003 the Company filed
a motion to vacate the judgment for lack of personal service. In February 2004,
the Court ruled in favor of the Company and the judgment was vacated. Although
the Company was the guarantor on the loan, NTCB is the principal debtor and (i)
the Company will bring action against NTCB to seek relief or (ii) because
partial payment was made by NTCB, it could affect the legal status of the
guarantee, which the Company believes may absolve it of liability. In February
2004, the plaintiff refiled the complaint. Although the Company will continue
to oppose the action the Company and its current management have begun
settlement discussions with the plaintiff.
On April 29, 2003 a suit was brought against the Company by an investor,
alleging breach of contract pursuant to a settlement agreement executed between
the Company and investor dated November 20, 2002. The suit alleges that the
Company is delinquent in its repayment of a $20,000 promissory note, of which
$5,000 has been repaid to date. Although management of the Company intends to
oppose the claims, the Company's current management plans to begin settlement
discussion with the plaintiff.
The Company may be involved in litigation, negotiation and settlement matters
that may occur in the day-to-day operations of the Company and its subsidiary.
Management does not believe implication of these litigations will have any other
material impact on the Company's financial statements.
9. DUE TO FACTOR
On February 27, 2003, NIC entered into a factoring and security agreement to
sell, transfer and assign certain accounts receivable to Orange Commercial
Credit (OCC). OCC may on its sole discretion purchase any specific account. All
accounts sold are with recourse on seller. All of the Company's property of NIC
including accounts receivable, inventories, equipment and promissory notes are
collateral under this agreement. OCC will advance 80% of the face amount of each
account. The difference between the face amount of each purchased account and
advance on the purchased account shall be reserve and will be released after
deductions of discount and charge backs on the 15th and the last day of each
month. OCC charges 1% of gross face value of purchased receivable for finance
charge and 1% for administrative fees with minimum charge of $750 on each
settlement date. Due to factor amounted to $10,759 and $14,056 as of March 31,
2004 and December 31, 2003, respectively.
10. STOCKHOLDERS' EQUITY
During the three months ended March 31, 2004, the Company issued shares of its
common stock, as described per the following. The stocks were valued at the
average fair market value of the freely trading shares of the Company as quoted
on OTCBB on the date of issuance.
Stock Split
------------
On January 23, 2003, the Company announced a 1 for 200 reverse stock split of
its common stock. All fractional shares are rounded up and the authorized
shares remain the same. The financial statements have been retroactively
restated for the effects of stock splits.
Equity
------
During the three months ended March 31, 2004, the Company issued common stock as
follows:
130,549 shares of common stock valued at $500,000 were issued for the
acquisition of its subsidiary, Del Mar Systems International, Inc.
The Company issued 8,000 shares of common stock to a shareholder for conversion
of a Promissory Note amounting to $40,003.
The Company issued 138,106 shares of common stock for conversion of a debenture
in the amount of to $430,900. The Company was to issue 11,462 share of common
stock for conversion of debenture amount of $32,552 to a related party, a major
shareholder of the Company.
The Company issued 50,000 shares of common stock to a consultant for service
rendered valued at $195,004.
The Company issued 6,410 shares of common stock for a consideration of $24,362.
Convertible Debentures
-----------------------
During the period ended March 31, 2004, the Company issued $410,500 debentures
to a major shareholder of the Company. These debentures carry an interest rate
of 6% per annum, due in December 2008 and February and March of 2009. Holder is
entitled to convert the face amount of this Debenture, plus accrued interest,
anytime following the Closing Date, at the lesser of (i) 75% of the lowest
closing bid price during the fifteen (15) trading days prior to the Conversion
Date or (ii) 100% of the closing bid prices for the twenty (20) trading days
immediately preceding the Closing Date ("Fixed Conversion Price"), each being
referred to as the "Conversion Price". No fractional shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded up or down, as the case may be, to the nearest
whole share. In accordance with EITF 00-27 98-5, the beneficial conversion
feature on the issuance of the convertible debenture for the quarter ended March
31, 2004 has been recorded in the amount of $100,000 of which $6,500 was
expensed.
11. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share for the three-month period ended March 31,
2004 were determined by dividing net loss for the periods by the weighted
average number of basic and diluted shares of common stock outstanding. Weighted
average number of shares used to compute basic and diluted loss per share is the
same since the effect of dilutive securities is anti-dilutive.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
The Company paid interest of $2,084 and $0 during the three months ended March
31, 2004 and 2003, respectively. The Company paid income taxes of $0 and $0
during the three months ended March 31, 2004 and 2003, respectively.
13. ACQUISITION OF DEL MAR SYSTEMS INTERNATIONAL, INC.
Pursuant to an acquisition agreement, the Company acquired 100% of the
outstanding shares of San Diego area-based telecommunication solutions firm Del
Mar Systems International, Inc. on March 1, 2004 for $1 million structured as a
(i) $500,000 12 month 5% Note consisting of 12 equal monthly installments of
$42,804 and (ii) $500,000 in shares of the Company's restricted common stock.
The pro forma information including the operations of DMSI is not available for
the three months ended March 31, 2004, and for the year ended December 31, 2003,
as they are in the process of being compiled.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Report on Form 10-QSB contains forward-looking statements, including,
without limitation, statements concerning our possible or assumed future results
of operations. These statements are preceded by, followed by or include the
words "believes," "could," "expects," "intends" "anticipates," or similar
expressions. Our actual results could differ materially from those anticipated
in the forward-looking statements for many reasons including: our ability to
continue as a going concern, adverse economic changes affecting markets we
serve; competition in our markets and industry segments; our timing and the
profitability of entering new markets; greater than expected costs, customer
acceptance of wireless networks or difficulties related to our integration of
the businesses we may acquire and other risks and uncertainties as may be
detailed from time to time in our public announcements and SEC filings. Although
we believe the expectations reflected in the forward-looking statements are
reasonable, they relate only to events as of the date on which the statements
are made, and our future results, levels of activity, performance or
achievements may not meet these expectations. We do not intend to update any of
the forward-looking statements after the date of this document to conform these
statements to actual results or to changes in our expectations, except as
required by law.
The discussion and financial statements contained herein are for the three
months ended March 31, 2004 and March 31, 2003. The following discussion should
be read in conjunction with our financial statements and the notes thereto
included herewith.
THREE MONTHS PERIOD ENDED MARCH 31, 2004 AS COMPARED TO THREE MONTHS ENDED MARCH
31, 2003
RESULTS OF OPERATIONS
-----------------------
We generated consolidated revenues of $510,522 for the three month period ended
March 31, 2004 as compared to $442,463 for the three month period ended March
31, 2003. The increase in revenues for this quarter when compared to the same
quarter last year is due to the increase in marketing expenditures,
increase in our sales force and the acquisition of Del Mar Systems which
contributed only nominally to our revenue for the quarter.
NET REVENUES
-------------
We generated net revenues of $190,302 for the three month period ended March
31, 2004 as compared to $256,104 for the three month period ended March 31,
2003. The decrease in net revenues for this quarter when compared to the
same quarter last year is due to an increase in our Cost Of Revenue.
COST OF REVENUE
-----------------
We incurred Cost of Revenue of $320,220 for the three month period ended March
31, 2004 as compared to $186,359 for the three month period ended March 31,
2003. Our Cost of Revenue increase is due to an increase in deferred expenses
from the prior quarter which were expensed in the period ending March 31, 2004.
We had no deferred expenses in the quarter prior to March 31, 2003.
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
------------------------------------------------
We incurred costs of $575,568 for the three month period ended March 31,
2004 as compared to $265,019 for the three month period ended March 31,
2003, respectively. General, Administrative and Selling Expenses in the current
period increased is due to the increase in marketing expenses, travel, rent
and headcount including branch sales managers, VP Marketing & Sales and direct
sales force.
Net loss before income taxes and loss on discontinued segments
-----------------------------------------------------------------------
We had a loss before taxes of ($372,957) for the three month period ended March
31, 2004, as compared to a loss of ($9,162) for the three month period
ended March 31, 2003. The increase is due to and increase in our expenses
including marketing expenses, travel and headcount including branch sales
managers, VP Marketing & Sales and direct sales force.
Net loss
---------
We had a loss of ($372,957)for the three month period ended March 31, 2004, as
compared to a loss of ($9,162) for the three month period ended March 31, 2003.
The decrease increase in net loss is due to the factors described above.
Basic and diluted loss per share
-----------------------------------
Our basic and diluted loss per share for the three month period ended March 31,
2004 was ($0.03).
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
As of March 31, 2004, our Current Assets were $283,894 and Current Liabilities
were $2,071,695. Cash and cash equivalents were $0. Our Stockholder's Deficit at
March 31, 2004 was ($1,607,403).
We had a net usage of cash due to operating activities for the three month
period ended March 31, 2004 of $(349,483)and ($7,729), respectively. We had net
cash provided by financing activities of $848,816 for the three month period
ended March 31, 2004. We had $930,500 from borrowings in the period ended March
31, 2004 We had a net usage of cash due to operating activities for the three
months March 31, 2003 and 2002 of $747,380 and $43,584 respectively. We had
net cash provided by financing activities of $730,061 and ($34,142) for the
years ended December 31, 2003 and 2002, respectively. We had $303,399 from
borrowings in the year ended December 31, 2003 as compared to $0 in the
corresponding period in 2002.
On February 27, 2004, we issued convertible debentures of $260,000 to Dutchess
Private Equities Fund, LP. The holders of the debentures are entitled to convert
the face amount of these debentures, plus accrued interest at the lesser of (i)
75% of the lowest closing bid price during the 15 trading days prior to the
conversion date or (ii) 100% of the average of the closing bid prices for the 20
trading days immediately preceding the closing date. The convertible debentures
shall pay 6% cumulative interest, in cash or in shares of common stock, at our
(certificate of designation says at the holder's option, and defined holder as
Dutchess)option, at the time of each conversion. The debentures are payable on
February 27, 2009 The convertible debentures are convertible into shares of our
common stock.
On March 1, 2004, we issued convertible debentures of $150,500 to Dutchess
Private Equities Fund, LP. The holders of the debentures are entitled to
convert the face amount of these debentures, plus accrued interest at the lesser
of (i) 75% of the lowest closing bid price during the 15 trading days prior to
the conversion date or (ii) 100% of the average of the closing bid prices for
the 20 trading days immediately preceding the closing date. The convertible
debentures shall pay 6% cumulative interest, in cash or in shares of common
stock, at our option, at the time of each conversion. The debentures are payable
on March 1, 2008. The convertible debentures are convertible into shares of our
common stock.
We have signed an Investment Agreement with Preston Capital for $2,500,000 in an
Equity Line arrangement. The Investment Agreement allows us to "put" to Preston
Capital at least $10,000, but no more than $100,000. The purchase price for our
common stock identified in the Put Notice shall be equal to 95% of the average
of four lowest posted bid prices of our common stock during the five days after
we deliver the put notice to Preston Capital. We can initiate a new put after we
close on the prior put. We can not drawdown under the Equity Line arrangement
until we have an effective registration statement. As of May 20, 2004, we do not
have an effective registration statement.
Subsidiaries
As of March 31, 2004, we had two wholly-owned subsidiaries, Network Installation
Corp. and Del Mar Systems International, Inc.
ITEM 3. CONTROLS AND PROCEDURES
We have established disclosure controls and procedures to ensure that material
information relating to us, including our subsidiaries, is made
known to the officers who certify our financial reports and to other members of
senior management and the Board of Directors.
Evaluation of disclosure controls and procedures. Our management, with the
participation of our chief executive officer and interim chief financial
officer, has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this Quarterly Report on Form 10-QSB. Based on this
evaluation, our chief executive officer and interim chief financial officer
concluded that these disclosure controls and procedures are effective and
designed to ensure that the information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the requisite time periods.
Changes in internal controls. There was no change in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) that occurred during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the year ended December 31, 2002, a suit was brought against us and
our former management in the Superior Court of the State of California,
County of San Francisco, by Martin Mast an individual alleging that we made
false written and oral representations to induce the plaintiff to invest
in our company and that such investment occurred despite the plaintiff's
request that the funds be held in a brokerage account maintained by a related
entity. A co-defendant Aslam Shaw an individual in the case also filed a
cross-complaint in the action alleging theories of recovery against us and
several other defendants and alleging fraud, breach of contract,
misrepresentation, conversion and securities fraud against us. On November
21, 2003, we reached a settlement with Martin Mast for $160,000. We are making
payments in installments through April 2004. Through April 1, 2004 $130,000 has
been paid. We had accrued $300,000 in the accompanying financial statements
against any possible outcome.
On April 25, 2003 the Superior Court of the State of California, County of
Orange, entered a judgment in the amount of $46,120 against us and our
former management in favor of Insulectro Corp., a vendor of our former
subsidiary, North Texas Circuit Board, or NTCB. We believe that we were never
issued proper service of process for the complaint. In addition, on August 20,
2002 we sold NTCB to BC Electronics Inc. Pursuant to terms of the share
purchase agreement, BC Electronics assumes all liabilities of NTCB. In
December 2003, we filed a motion to vacate the judgment for lack of personal
service. In February 2004, the Court ruled in our favor and the judgment was
vacated. Although we are the guarantor on the loan, NTCB is the principal debtor
and (i) we will bring action against NTCB to seek relief or (ii) because partial
payment was made by NTCB, it could affect the legal status of the guarantee,
which we believe may absolve us of liability. In February 2004, the plaintiff
re-filed the complaint. Although we will continue to oppose the action we have
begun settlement discussions with the plaintiff.
On April 29, 2003, Arman Moheban an individual brought a suit against us and
our former management in the Superior Court of the State of California,
County of Los Angeles, alleging breach of contract pursuant to a settlement
agreement dated November 20, 2002. The suit alleges that we are delinquent in
our repayment of a $20,000 promissory note, of which $5,000 has been repaid to
date. Although we plan to vigorously oppose the claim, we plan to begin
settlement discussion with the plaintiff.
ITEM 2. CHANGES IN SECURITIES
On February 27, 2004, we issued convertible debentures of $335,000 to Dutchess
Private Equities Fund, LP. The holders of the debentures are entitled to convert
the face amount of these debentures, plus accrued interest at the lesser of (i)
75% of the lowest closing bid price during the 15 trading days prior to the
conversion date or (ii) 100% of the average of the closing bid prices for the 20
trading days immediately preceding the closing date. The convertible debentures
shall pay 6% cumulative interest, in cash or in shares of common stock, at our
(certificate of designation says at the holder's option, and defined holder as
Dutchess) option, at the time of each conversion. The debentures are payable on
February 27, 2009. The convertible debentures are convertible into shares of our
common stock.
On March 1, 2004, we issued convertible debentures of $150,000 to Dutchess
Private Equities Fund, LP. The holders of the debentures are entitled to
convert the face amount of these debentures, plus accrued interest at the lesser
of (i) 75% of the lowest closing bid price during the 15 trading days prior to
the conversion date or (ii) 100% of the average of the closing bid prices for
the 20 trading days immediately preceding the closing date. The convertible
debentures shall pay 6% cumulative interest, in cash or in shares of common
stock, at our option, at the time of each conversion. The debentures are payable
on March 1, 2008. The convertible debentures are convertible into shares of our
common stock.
We have signed an Investment Agreement with Preston Capital for $2,500,000 in an
Equity Line arrangement. The Investment Agreement allows us to "put" to Preston
Capital at least $10,000, but no more than $100,000. The purchase price for our
common stock identified in the Put Notice shall be equal to 95% of the average
of four lowest posted bid prices of our common stock during the five days after
we deliver the put notice to Preston Capital. We can initiate a new put after we
close on the prior put. We can not drawdown under the Equity Line arrangement
until we have an effective registration statement. As of May 20, 2004, we do not
have an effective registration statement.
The securities issued in the foregoing transactions were offered and sold in
reliance upon exemptions from the Securities Act of 1933 ("Securities Act")
registration requirements set forth in Sections 3(b) and 4(2) of the Securities
Act, and any regulations promulgated thereunder, relating to sales by an issuer
not involving any public offering. No underwriters were involved in the
foregoing sales of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NOT APPLICABLE.
ITEM 5. OTHER INFORMATION.
In addition to our acquisition of Del Mar Systems, during the period ending
March 31, 2004, we opened additional sales and service locations in Los
Angeles, CA and Las Vegas, NV. The leases for both locations are
renewable monthly at approximately $1,500 per month. During this period we also
hired a VP of Marketing & Sales responsible for increasing and managing our
direct sales force.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Description
3.1 Articles of Incorporation filed as Exhibit 3.1 to the Company's
Registration Statement on Form 10SB filed on March 5th, 1999 and
incorporated herein by reference.
3.2 Certificate of Amendment to Article of Incorporation filed as Exhibit 3.3
to the Company's Form 10-KSB on April 15, 2003 and incorporated herein by
reference.
3.3 By-laws filed as Exhibit 3.2 to the Company's Registration Statement on
Form 10SB filed on March 5th, 1999 and incorporated herein by reference.
3.4 Certificate of Amendment to the Certificate of Incorporation of Flexxtech
Corporation filed as Exhibit 4.1 to the Company's Form 10-QSB dated
November 13, 2003 and incorporated herein by reference.
4.1 Convertible Debenture Exchange Agreement/Conversion of Notes between the
Company and Dutchess Private Equities Fund dated February 27, 2004;
Debenture Exchange Agreement/Note Conversion between the Company and the
Holder; Certificate of Designation between the Company and Dutchess Private
Equities Fund; Notice of Conversion.
4.2 Form of Debenture between the Company and Dutchess Private Equities Fund
dated March 1, 2004; Notice of Conversion.
4.3 Form of Debenture between the Company and Dutchess Private Equities Fund
dated March 31, 2004; Notice of Conversion.
10.1 Consulting Agreement between the Company and Dutchess Advisors, LLC dated
April 1, 2003 filed as Exhibit 10.3 to the Company's Form 8-K on April 23,
2003 and incorporated herein by reference.
10.2 Reseller Agreement between Vivato, Inc. and the Company dated August 14,
2002 filed as Exhibit 10.1 to the Company's Form 10-QSB dated November 13,
2003 and incorporated herein by reference.
10.3 Motorola Reseller Agreement between Motorola, Inc. and the Company dated
August 18, 2003 filed as Exhibit 10.2 to the Company's Form 10-QSB dated
November 13, 2003 and incorporated herein by reference.
10.4 Short Term Rental Agreement between Vidcon Solutions Group, Inc. and the
Company dated February 5, 2003 filed as Exhibit 10.3 to the Company's Form
10-QSB dated November 13, 2003 and incorporated herein by reference.
10.5 Restructuring and Release Agreement Dutchess Advisors LLC, Dutchess Capital
Management LLC, Michael Novielli, Western Cottonwood Corporation, Atlantis
Partners, Inc., John Freeland, Greg Mardock, VLK Capital Corp. and the
Company dated April 9, 2003 filed as Exhibit 10.2 to the Company's Form 8-K
filed on April 23, 2003 and incorporated herein by reference.
10.6 Stock Purchase Agreement between Michael Cummings and the Company dated May
16, 2003 filed as Exhibit 2.1 to the Company's Form 8-K filed on June 13,
2003 and incorporated herein by reference.
10.7 Investment Agreement between the Company and Preston Capital Partner, LLC
dated January 21, 2004 filed as Exhibit 10.7 to the Company's Form SB-2 on
January 21, 2004 and incorporated herein by reference.
10.8 Registration Rights Agreement between the Company and Preston Capital
Partners, LLC dated January 21, 2004 filed as Exhibit 10.8 to the Company's
Form SB-2 on January 21, 2004 and incorporated herein by reference.
10.9 Placement Agent Agreement between the Company and Park Capital Securities,
LLC dated January 21, 2004 filed as Exhibit 10.9 to the Company's Form SB-2
on January 21, 2004 and incorporated herein by reference.
10.10 Agreement between the Company and Aruba Wireless Networks, Inc. dated
January 29, 2004 filed as Exhibit 10.10 to the Company's Form SB-2 on
February 9, 2004 and incorporated herein by reference.
31.1 Section 302 Certification of the Chief Executive Officer.
31.2 Section 302 Certification of the Interim Chief Financial Officer.
32.1 Section 906 Certification of the Chief Executive Officer.
32.2 Section 906 Certification of the Interim Chief Financial Officer.
(b) Reports Filed on Form 8-K
On March 19, 2004, the registrant filed an 8-K/A pursuant to the acquisition of
Network Installation Corporation that contained financial statements and pro
forma financial information.
On April 2, 2004, the registrant filed an 8-K pursuant to the issuance of a
press release to report its financial results for the quarter ended December 31,
2003.
On May 4, 2004, the registrant filed an 8-K pursuant to a change in the
certifying accountant from Kabani & Company to Rose, Synder & Jacobs.
On May 4, 2004, the registrant filed an 8-K pursuant to the acquisition of Del
Mar Systems International.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NETWORK INSTALLATION CORPORATION
(Registrant)
Date: May 24, 2004 By: /s/ Michael Cummings
--------------------------------
Michael Cummings
President & Chief Executive Officer
By: /s/ Michael Novielli
---------------------------------
Michael Novielli
Interim Chief Financial Officer