10-Q 1 a115953.txt 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 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

NEXLAND INC 10-Q