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 June 30, 2005
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)
15235 Alton Parkway, Suite 200, Irvine, CA 92618
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(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 Issuer 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 July 28, 2005 there were 16,545,505 shares of Common Stock issued and
outstanding, $0.001 par value.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES [ ] NO [X]
NETWORK INSTALLATION CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
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Part I - Financial Information
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Item 1 - Financial Statements.
----------------------------------
Consolidated Balance Sheet as of June 30, 2005 2
-----------------------------------------------------
Consolidated Statements of Operations for the Three and Six 3
Months Ended June 30, 2005 and June 30, 2004
---------------------------------------------------------
Consolidated Statements of Cash Flows for the Nine Months 3
Ended June 30, 2005 and June 30, 2004
-------------------------------------------------
Consolidated Stockholders' Equity (Deficit) as of June 30, 2005 4
----------------------------------------------------------------------
Report on Review by Independent Public Accountant 5
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Notes to Consolidated Financial Statements 6
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Item 2 - Management's Discussion and Analysis or Plan of Operation. 11
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Item 3 - Controls and Procedures. 14
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Part II - Other Information
-------------------------------
Item 1 - Legal Proceedings. 14
-------------------------------
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds. 14
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Item 3 - Defaults Upon Senior Securities. 15
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Item 4 - Submission of Matters to a Vote of Security Holders. 15
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Item 5 - Other Information. 15
-------------------------------
Item 6 - Exhibits and Reports on Form 8-K. 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
1
Network Installation Corp.
Consolidated Balance Sheets
June 30, December 31,
2005 2004
(Unaudited)
------------- --------------
ASSETS
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 408,900 $ 1,732
Accounts Receivable . . . . . . . . . . . . . . . . . . 1,054,830 500,833
Allowance for Doubtful Accounts . . . . . . . . . . . . (95,486) (95,486)
Inventory . . . . . . . . . . . . . . . . . . . . . . . 133,559 -
Prepaid Expenses. . . . . . . . . . . . . . . . . . . . 17,187 595,812
------------- --------------
Total Current Assets . . . . . . . . . . . . . . . . 1,518,990 1,002,891
------------- --------------
Fixed Assets:
Vehicles. . . . . . . . . . . . . . . . . . . . . . . . 48,515 -
Equipment . . . . . . . . . . . . . . . . . . . . . . . 18,767 -
Furniture and Fixtures. . . . . . . . . . . . . . . . . 46,098 46,098
------------- --------------
113,380 46,098
Less: Accumulated Depreciation. . . . . . . . . . . . . (48,454) (9,937)
------------- --------------
Total Fixed Assets . . . . . . . . . . . . . . . . . 64,926 36,161
------------- --------------
Other Assets:
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . 628,614 -
Security Deposits . . . . . . . . . . . . . . . . . . . 20,690 19,916
------------- --------------
Total Other Assets . . . . . . . . . . . . . . . . . 649,304 19,916
------------- --------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . $ 2,233,220 $1,058,968
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable & Accrued Expenses . . . . . . . . . . 1,623,418 1,148,428
Bank Line of Credit . . . . . . . . . . . . . . . . . . 101,001 -
Notes Payable . . . . . . . . . . . . . . . . . . . . . 267,153 85,075
Notes Payable - Stockholder . . . . . . . . . . . . . . 52,790 120,580
------------- --------------
Total Current Liabilities. . . . . . . . . . . . . . 2,044,362 1,354,083
------------- --------------
Long-Term Debt:
Convertible Debentures - Long-Term Debt . . . . . . . . 2,385,270 1,582,516
------------- --------------
Total Long-Term Debt. . . . . . . . . . . . . . . . . . 2,385,270 1,582,516
------------- --------------
Stockholders Equity
Common stock, no par value, 50,000,000 shares. . . . . . 16,546 23,484
authorized, 16,545,505 shares issued and outstanding
6/30/05, 23,483,873 shares issued and outstanding
12/31/04
Additional Paid-in Capital . . . . . . . . . . . . . . . 15,508,432 7,617,181
Subscriptions Receivable . . . . . . . . . . . . . . . . - -
Shares to be issued. . . . . . . . . . . . . . . . . . . 116,357 116,249
Accumulated Deficit. . . . . . . . . . . . . . . . . . . (17,837,747) (9,634,545)
------------- --------------
Total Stockholders' Equity (Deficit) . . . . . . . . (2,196,412) (1,877,631)
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY. . . . . . . . . . $ 2,233,220 $ 1,058,968
============= ==============
See Accountants Review Report
2
Network Installation Corp.
Consolidated Statement of Operations
(Unaudited)
Three-Months Ended Six-Months Ended
June 30, June 30,
2005 2004 2005 2004
Revenue:
Revenue $1,138,383 $729,405 $1,889,099 $1,239,927
Cost of Goods Sold 902,620 347,091 1,326,698 667,311
---------- -------- ---------- ----------
Gross Profit 235,763 382,314 562,401 572,616
Costs and Expenses:
Investor Relations 160,144 217,800 507,462 263,350
Office Salaries 265,004 311,308 475,259 411,268
Financing Commissions 121,800 - 121,800 -
Officer Compensation - - 6,575,426 -
Professional Fees 63,963 87,539 93,305 192,241
Telephone 13,803 67,694 33,776 77,716
Insurance 58,266 27,955 71,244 49,357
Consulting Fees 27,188 48,750 60,376 161,250
Rent 39,818 20,873 75,882 31,123
Payroll Taxes 25,966 35,338 42,740 41,261
Depreciation 4,869 1,332 9,738 1,531
Other Operating Expenses 100,054 79,870 196,071 253,729
---------- -------- ---------- ----------
Total Expenses 880,875 898,459 8,263,079 1,482,826
Net Loss from Operations (645,112) (516,145) (7,700,678) (910,210)
Other Income/Expenses
Interest Income $ - 2,017 - 2,017
Interest Expense (330,347) (49,825) (502,524) (201,881)
---------- -------- ---------- ----------
Total Other Income/Expense (330,347) (47,808) (502,524) (199,864)
Net Income (Loss) (975,459) (563,953) (8,203,202) (1,110,074)
========== ========= =========== ===========
Basic and Diluted Loss per Common Share $(0.05) $(0.05) $(0.38) $(0.09)
========== ========= =========== ===========
See Accountants Review Report
Network Installation Corp.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2005 2004
Cash Flows from Operating Activities:
Net Profit $(8,203,202) $(1,110,074)
Stock issued for services and debt reduction 6,476,085 195,000
Beneficial conversion feature expense 377,803 147,625
Stock rescinded (530,590) -
Stock warrants issued for debt inducement 109,342 -
Stock issued for acquisition 200,000 -
Depreciation 38,517 57,332
Adjustments to reconcile net loss to net cash used
by operating activities
Changes in operating assets and liabilities
Increase (Decrease) in Accounts Payable & Accrued Exp 475,015 (262,764)
Decrease in Work in Progress - 164,013
(Decrease) in Deferred Revenue - (280,924)
(Decrease) in Deposit 774 (4,765)
(Increase) in Accounts Receivable (553,997) 30,764
(Increase) Decrease in Prepaid Expenses 578,625 (242,500)
------------ ------------
Net Cash Used in Operating Activities (1,031,626) (1,306,293)
------------ ------------
Cash Flows from Investing Activities
Purchase of Inventory (133,559) -
Purchase of Goodwill (628,614) -
Purchase of property and equipment (67,282) -
------------ ------------
Net Cash Flows Provided by Investing Activities (829,455) -
------------ ------------
Cash Flows from Financing Activities:
Payments made on Notes Payable - Stockholder (67,790) (296,440)
Proceeds from Notes Payable 283,079 661,989
Payments made on Notes Payable - (14,056)
Proceeds from Long-Term borrowing 200,029 -
Issuance of stock for cash 1,023,476 2,235,000
------------ ------------
Net Cash Used for Financing Activities 1,438,794 2,586,493
------------ ------------
Net Increase in Cash & Cash Equivalents 407,168 1,280,200
Beginning Cash & Cash Equivalents 1,732 667
Ending Cash & Cash Equivalents $408,900 $1,280,867
=========== ===========
SUPPLEMENTAL DISCLOSUE OF CASH FLOW INFORMATION
Cash paid for interest $452,147 $151,389
Cash paid for Income Taxes $- $-
=========== ===========
NON-CASH TRANSACTIONS
Stock issued for services and debt reduction $6,476,085 $195,000
Beneficial conversion feature expense $377,803 $147,625
Stock rescinded $(530,590) $-
Stock warrants issued for debt inducement $109,342 $-
Stock issued for acquisition $200,000 $-
=========== ===========
See Accountants Review Report
3
Network Installation Corp.
Consolidated Stockholders' Equity (Deficit)
June 30, 2005
(Unaudited)
Sub-
Addi- scrip- Total
COMMON STOCKS tional tions Shares Accum- Stock-
------------------------- Paid-in Receiv- To Be Treasury ulated holders'
# of Shares Amount Capital able Issued Stock (Net) Deficit Equity
-------------- --------- ------------ ---------- --------- ------------ ------------- ------------
Balance
December 31, 2003 12,616,330 $12,616 $2,743,222 $- $116,295 $- $(5,466,840) $(2,594,707)
Recapitalization of stock
for Reverse Merger (2,149,500) (2,150) 2,185 - (35) - - -
Issuance of stock
for services 372,383 372 365,778 - - - - 366,150
Issuance of stock
for cash 745,001 745 2,234,258 - - - - 2,235,003
Conversion on convertible
Debenture - - 511,275 - - - - 511,275
Issuance of stock
for Acquisition 130,549 131 499,869 - - - - 500,000
Conversion on convertible
Debenture 188,365 189 706,044 - (11) - - 706,222
Issuance of stock warrants - - 466,790 - - - - 466,790
Forward stock split 11,580,745 11,581 (11,581) - - - - -
Issuance of stock warrants
Advisory Board - - 99,341 - - - - 99,341
Net Loss for Year - - - - - - (4,167,705) (4,167,705)
Balance
December 31, 2004 23,483,873 23,484 7,617,181 - 116,249 - (9,634,545) (1,877,631)
Conversion on
convertible debenture - - 52,500 - - - - 52,500
Issuance of stock
Warrants - - 109,342 - - - - 109,342
Issuance of stock for
Acquisition - - 199,891 - 109 - - 200,000
Conversion on
convertible debenture - - 98,900 - 100 - - 99,000
Conversion on convertible
Debenture - - 18,750 - - - - 18,750
Issuance of stock warrants
Officers - - 6,476,085 - - - - 6,476,085
Rescind founders stock - - 1,814 - - (1,814) - -
Rescind of Investor shares - - (529,904) - - (686) - (530,590)
Issuance of stock
(Private Placement) - - 682,691 (30,600) 759 - - 652,850
Issuance of stock
(Private Placement) - - - 30,600 - - - 30,600
Adjustment to Private
Placement - - (301) - 301 - - -
Issuance of stock for
debt conversion 18,939 19 (19) - - - - -
Issuance of stock for
Cash 55,000 55 79,971 - - - - 80,026
Rescind of founders
Stock (1,814,482) (1,814) - - - 1,814 - -
Rescind of Investor
Shares (685,517) (686) - - - 686 - -
Conversion on convertible
Debenture - - 169,349 - - - - 169,349
Issuance of stock
(Private Placement) - - 259,600 - 400 - - 260,000
Conversion on
convertible debenture - - 254,009 - - - - 254,009
Rescind founders stock (6,073,000) (6,073) 6,073 - - - - -
Conversion on
convertible debenture - - 12,500 - - - - 12,500
Issuance of stock
(Private Placement) 1,560,692 1,561 - - (1,561) - - -
Net Profit for Period - - - - - - (8,203,202) (8,203,201)
Balance - June 30, 2005 16,545,505 $16,546 $15,508,432 $- $116,357 $- $(17,837,747) $(2,196,412)
See Accountants Review Report
4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Network Installation Corporation
Irvine, California
We have reviewed the accompanying consolidated balance sheet of Network
Installation Corporation as of June 30, 2005, and the related consolidated
statement of operations for the three-month and six-month period ended June 30,
2005, stockholder's equity, and cash flows for the six-months ended June 30,
2005. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). The review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with standards of the Public Company Accounting Oversight Board (United States),
the objective of which is the expression of an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, conditions
exist which raise substantial doubt about the Company's ability to continue as a
going concern unless it is able to generate sufficient cash flows to meet its
obligations and sustain its operation. Management's plans in regard to these
matters are described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The financial statements for the year ended December 31, 2004 were audited by
other accountants, whose report dated May 6, 2005, expressed an unqualified
opinion on those statements. They have not performed any auditing procedures
since that date. In our opinion, the information set forth in the accompanying
balance sheet as of June 30, 2005 is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
Jaspers + Hall, PC
Denver, CO
July 26, 2005
1. DESCRIPTION OF BUSINESS AND SEGMENTS
5
OVERVIEW
We are a one-source solution company focusing on the design, installation, and
deployment of specialty communication systems for data, voice, video and
telecom. We first determine our clients' requirements by doing a needs analysis
and site audit. We then implement our specific design of the communication
system, which may include either Wired or Wireless Fidelity, also referred to as
Wi-Fi. We seek to exploit the growing demand for high-speed connectivity by
leveraging our extensive installation expertise into providing complete superior
network solutions across a vast majority of communication requirements.
We have distinguished ourselves from our peers by consolidating three
traditionally fragmented industries. Our technicians design the applications
required for network build-outs, structured cabling, deployment, security,
training, and technical support and we use the best available Wi-Fi, Voice over
Internet Protocol, or VoIP, and traditional telecom products. We earn revenue
for services rendered which include; (i) the installation of data, voice, video
and telecom networks; (ii) the resale of installed networking products, and
(iii) consulting services in the assessment of existing networks.
We seek to exploit the growing demand in high-speed connectivity by providing
complete network solutions including best of breed wireless products,
engineering services for which our technicians design the applications required
for the network build out, structured cabling and deployment. We offer the
ability to integrate superior solutions across the vast majority of
communication requirements.
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 period ended December 31, 2004 were filed on May 6, 2005 with
the Securities and Exchange Commission and are 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 June 30, 2005
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
-----------------------------
The accompanying financial statements include the accounts of Network
Installation Corp. ("NIC"), formerly Flexxtech Corporation (legal acquirer, the
"Parent"), and its 100% owned subsidiaries, Network Installation Corporation,
COM Services, Inc. ("COM"), and Del Mar Systems International, Inc. ("DMSI").
All significant inter-company accounts and transactions have been eliminated in
consolidation. The results include the accounts of NIC, COM, and Flexxtech for
the three months ended June 30, 2005. The historical results for the three
months ended March 31, 2004 include NIC and DMSI only.
REVENUE RECOGNITION
--------------------
In the second quarter of 2004, the Company continued to utilize a different
revenue recognition method, the completed contracts approach. This approach was
changed with the 10KSB/A reporting submitted for the year ended December 31,
2004 to the percentage-of-completion method, which the Company believes better
represents business activity. However, when comparing second quarter numbers for
2005 to those for 2004, the comparison involves numbers calculated using
differing methods.
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 using the
percentage-of-completion method of accounting. Accordingly, income is recognized
in the ratio that costs incurred bears to estimated total costs. Adjustments to
cost estimates are made periodically, and losses expected to be incurred on
contracts in progress are charged to operations in the period such losses are
determined. The aggregate of costs incurred and income recognized on uncompleted
contracts in excess of related billings is shown as a current asset, and the
aggregate of billings on uncompleted contracts in excess of related costs
incurred and income recognized is shown as a current liability.
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.
6
We estimate the likelihood of customer payment based principally on a customer's
credit history and our general credit experience. To the extent our estimates
differ materially from actual results, the timing and amount of revenues
recognized or bad debt expense recorded may be materially misstated during a
reporting period.
CASH & CASH EQUIVALENTS:
----------------------------
The Company considers all highly liquid debt instruments, purchased with an
original maturity at date of purchase of three months or less, to be cash
equivalents. Cash and cash equivalents are carried at cost, which approximates
market value
PROPERTY & EQUIPMENT:
-----------------------
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets, e.g.
computers (5 years), software (3 years), office furniture and equipment (3-7
years), tenant improvements (life of the lease-approximately 60 months.
ACCOUNTS RECEIVABLE:
---------------------
The Company maintains an allowance for doubtful accounts for estimated losses
that may arise if any of its consumers are unable to make required payments.
Management specifically analyzes the age of customer balances, historical bad
debt experience, customer credit-worthiness and changes in customer payment
terms when making estimates of the uncollectabilty of the Company's trade
accounts receivable balances. If the Company determines that the financial
conditions of any of its customers have deteriorated, whether due to customer
specific or general economic issues, increase in the allowance may be made.
Accounts receivable are written off when all collection attempts have failed.
INVENTORY
-------------------
Inventory consists of a networking materials and equipment in the process of
being installed at years end. Work in progress is stated at the lower of cost,
determined by the first-in, first-out ("FIFO") method, or market. The Company
has reviewed its inventory for obsolescence on a quarterly basis since
operations began and has not written-off any inventory for obsolescence.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
----------------------------------------
Accounts payable and accrued liabilities are carried at
cost, which approximates their face value, due to the relatively short maturity
of these instruments. As of June 30, 2005 and 2004, the Company's notes payable
have stated borrowing rates that are consistent with those currently available
to the Company and, accordingly, the Company believes the carrying value of
these debt instruments approximates their fair value.
ACCOUNTING FOR IMPAIRMENTS IN LONG-LIVED ASSETS
------------------------------------------------
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of assets may not be recoverable. Management periodically evaluates the carrying
value and the economic useful life of its long-lived assets based on the
Company's operating performance and the expected future undiscounted cash flows
and will adjust the carrying amount of assets which may not be recoverable.
USE OF ESTIMATES:
-------------------
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Significant estimates made in preparing these financial
statements include the allowance for doubtful accounts, deferred tax asset
valuation allowance and useful lives for depreciable and amortizable assets.
Actual results could differ from those estimates.
7
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 pro-forma 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 June 30, 2005 and 2004.
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". 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 debentures and warrants were converted or exercised.
SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure
About Segments of an Enterprise and Related Information" requires use of the
"management approach" model for segment reporting. The management approach model
is based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a company. SFAS
131 has no effect on the Company's consolidated financial statements for the
period ended June 30, 2005 and 2004, as substantially all of the Company's
operations are conducted in one industry segment.
3. GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has accumulated deficit of
$17,837,747, 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 in the near term. Management devoted
considerable effort toward obtaining additional equity financing through various
private placements, raised funds through convertible debentures, and has
endeavored to improve operational performance using marketing methods, cost
cutting and the like.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses is comprised of the following:
June 30, 2005
--------------
Accounts payable. . $ 1,123,000
Payroll tax payable 405,418
Litigation accrual. 95,000
----------
$1,623,418
==========
Payroll tax liabilities of $53,927 and $351,491, $405,418 in total, are payable
for 2005 and 2004, respectively. As of the date of these financial statements,
the Company is negotiating with the Internal Revenue Service to determine an
installment payment plan. The Company intends to commence installment payments
in 2005.
5. BANK LINE OF CREDIT AND NOTES PAYABLE
The Company assumed a $100,000 revolving line of credit with a balance of
$100,538 in connection with the COM acquisition. This note bears interest at a
variable rate, 8.75% as of June 30, 2005, and is due on demand. The balance
outstanding as of June 30, 2005 was $101,001.
8
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
installments of $42,804, maturing in April 2005. The balance outstanding as of
June 30, 2005 was $85,075. The company is pursuing litigation to recover monies
paid on this note payable, and has suspended additional payments since January
of 2005. As of the date of this filing, the outcome of the pending litigation is
undeterminable.
The Company assumed a $7,850 note payable secured by an automobile with a
balance of $7,450 in connection with the COM acquisition. The loan bears
interest of 7.99%. The balance outstanding as of June 30, 2005 was $5,828.
The Company contracted a $126,000 note payable in January 2005 in connection
with the COM acquisition. This note bears interest at 6% and is payable in
monthly installments of $5,250, maturing in January 2007. The balance
outstanding as of June 30, 2005 was $126,000.
The Company contracted a $54,000 note payable in January 2005 in connection with
the COM acquisition. This note bears interest at 6% and is payable in monthly
installments of $2,250, maturing in January 2007. The balance outstanding as of
June 30, 2005 was $54,000.
6. RELATED PARTY TRANSACTIONS
RELATED PARTY NOTES PAYABLE - CURRENT
------------------------------------------
The Company has an unsecured, non-interest bearing note, due on demand, to a
former officer. The balance outstanding as of June 30, 2005, was $52,970.
During the period ended June 30, 2005, the Company issued $810,000 in debentures
to a major shareholder of the Company. These debentures carry an interest rate
of 8% per annum, and are due in April, May, and June of 2010. These debentures
were issued with a discounted price from the face value of $125,000. The Holder
is entitled to convert the face amount of the Debentures, 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 June
30, 2005 has been recorded in the amount of $222,500.
7. INCOME TAXES
No provision was made for Federal income tax since the Company has significant
net operating loss. Through December 31, 2004, the Company incurred net
operating losses for tax purposes of approximately $17,837,747. The net
operating loss carry forwards may be used to reduce taxable income through the
year 2023. The availability of the Company's net operating loss carry-forwards
are subject to limitation if there is a 50% or more positive change in the
ownership of the Company's stock. A valuation allowance for 100% of the deferred
taxes asset has been recorded due to the uncertainty of its realization.
8. COMMITMENTS & CONTINGENCIES
Litigation:
-----------
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 services. 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 (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 re-filed the complaint. Although the Company intends to continue to
oppose the action in court, 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
discussions with the plaintiff.
9
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 subsidiaries.
Management does not believe implication of this litigation will have any
material impact on the Company's financial statements.
9. STOCKHOLDERS' EQUITY
EQUITY
------
During the four months ended June 30, 2005, the Company issued and agreed to
issue common stock as follows:
During the four months ended June 30, 2005, the Company issued 1,460,692 shares
of common stock to accredited investors for a total of $943,450.
During the three months ended June 30, 2005, the Company issued 55,000 shares of
common stock valued at $80,025 for investor relations services to be consummated
in April of 2005.
During the three months ended June 30, 2005, the founder and former CEO agreed
to rescind 6,073,000 shares of common stock back to the Company. These shares of
common stock had been acquired by the founder and former CEO in connection with
the organization of the Company. As such, the shares were originally recorded
with a $0 value and have been rescinded with a $0 value.
CONVERTIBLE DEBENTURES - RELATED PARTIES
--------------------------------------------
During the period ended June 30, 2005, the Company issued $810,000 in debentures
to a major shareholder of the Company. These debentures carry an interest rate
of 8% per annum, and are due in April, May, and June 2010. These debentures
carried a discounted price from the face value of $125,000. The 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 June
30, 2005 has been recorded in the amount of $222,500.
10. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share for the three-month period ended March 31,
2005 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.
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
The Company paid income taxes of $0 during the three months ended June 30, 2005
and 2004, respectively.
12. WARRANTS
In Note 9's discussion of Convertible Debentures for financing, the following
Warrants have been issued. On April 22, 2005, we issued a warrant to purchase
150,000 shares of our common stock to Dutchess Private Equities Fund, II, LP at
$1.20. On May 27, 2005 we issued a warrant to purchase 300,000 shares of common
stock to Dutchess Private Equities Fund, II, LP at $1.10. On May 12, 2005, we
issued a warrant to purchase 300,000 shares of common stock to Dutchess Private
Equities Fund, II, LP for $1.03.
13. FINANCIAL ACCOUNTING DEVELOPMENTS
Recently issued Accounting Pronouncements
In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity". SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. This
statement establishes new standards of how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires that an issuer classify a financial instrument that
is within the scope of this statement as a liability because the financial
instrument embodies an obligation of the issuer. This statement applies to
certain forms of mandatorily redeemable financial instruments including certain
types of preferred stock, written put options and forward contracts. SFAS 150
did not materially effect the financial statements.
10
In December 2003, the FASB issued FASB Interpretation No. 146, (revised
December 2003) "Consolidation of Variable Interest Entities" (FIN 146) which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN No. 146R replaces FASB
Interpretation No. 146, "Consolidation of Variable Interest Entities", which was
issued in January 2003. Companies are required to apply FIN No. 146R to
variable interests in variable interest entities ("VIEs") created after December
31, 2003. For variable interest in VIEs created before January 1, 2004, the
Interpretation is applied beginning January 1, 2005. For any VIEs that must be
consolidated under FIN No. 146R that were created before January 1, 2004,the
assets, liabilities and non-controlling interests of the VIE initially are
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change.
If determining the carrying amounts is not practicable, fair value at the date
FIN No. 146R first applies may be used to measure the assets, liabilities and
non-controlling interest of the VIE. The Company doe not have any interest in
any VIE.
In March 2003, the FAS issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. This statement amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 149did
not materially effect the financial statements.
In December 2004, the FASB issued SFAS No. 123(R)(revised 2004), "Share Based
Payment" which amends FASB Statement No. 123 and will be effective for public
companies for interim or annual periods after January 15, 2005. The new
standard will require entities to expense employee stock options and other
share-based payments. The new standard may be adopted in one of three ways -
the modified prospective transition method, a variation of the modified
prospective transition method or the modified retrospective transition method.
The Company is to evaluate how it will adopt the standard and evaluate the
effect that the adoption of SFAS 123(R) will have on our financial position and
results of operations.
In November 2004, the FASB issued SFAS NO. 151, "Inventory Costs, an amendment
of ARB No 43, Chapter 4". This statement amends the guidance in ARB No. 43,
Chapter 4 Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling cost, and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that, "under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight and rehandling costs may be so abnormal as to require treatment as
current period charges." SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal". In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the prospectively
and are effective for inventory costs incurred during fiscal years beginning
after June 5, 2005, with earlier application permitted for inventory costs
incurred during fiscal years beginning after the date this Statement was issued.
The adoption of SFAS No. 151 is not expected to have a material impact on the
Company's financial position and results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29. The guidance in APB Opinion 29,
Accounting for Non-monetary Transactions, is based on the principle that
exchange of non-monetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for non-monetary exchanges of similar productive assets that do not
have commercial substance. A non-monetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for non-monetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have a material impact on the Company's financial
position and results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The discussion and financial statements contained herein are for the three
months ended June 30, 2005 and June 30, 2004. The following discussion should be
read in conjunction with our financial statements and notes included
herewith.
11
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.
THREE MONTHS PERIOD ENDED JUNE 30, 2005 AS COMPARED TO THREE MONTHS ENDED JUNE
30, 2004
CHANGE IN REVENUE RECOGNITION POLICY
We changed our revenue recognition policy with the 10KSB/A report submitted for
the year ending December 31, 2004 to the percentage-of-completion method, which
we believe better represents our business activity. However, when comparing
second quarter numbers for 2005 to those for 2004, the comparison involves
numbers calculated using differing methods of revenue recognition. Generally,
revenue will be recognized earlier using the percentage-of-completion method.
RESULTS OF OPERATIONS
NET REVENUE
------------
We generated consolidated net revenues of $1,138,383 for the three months ended
June 30, 2005, as compared to $729,405 for the three month period ended June 30,
2004. 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 COM Services which contributed to our
revenue for the quarter.
COST OF REVENUE
-----------------
We incurred Cost of Revenue of $902,620 for the three months ended June 30,
2005, as compared to $347,091 for the three month period ended June 30, 2004.
Our Cost of Revenue increase is due to an increase in the expansion of business
from the prior quarter which were expensed in the period ended June 30, 2005.
GROSS PROFIT
-------------
We generated gross profit of $235,763 for the three month period ended June 30,
2005, as compared to $382,314 for the three month period ended June 30, 2004.
The increase in gross profit is due to a larger volume of projects completed.
COSTS AND EXPENSES
---------------
We incurred costs of $880,875 for the three month period ended June 30, 2005 as
compared to $818,459 for the three month period ended June 30, 2004,
respectively.
NET INCOME (LOSS)
-------------------
We had a loss before taxes of ($975,459) for the three month period ended June
30, 2005 as compared to a loss of ($563,953) for the three month period ended
June 30, 2004.
BASIC AND DILUTED INCOME (LOSS) PER SHARE
-----------------------------------------------
Our basic and diluted income (loss) per share for the three month period ended
June 30, 2005 was ($0.05) as compared to ($0.05) for the period ended June 30,
2004. The increase in our loss per share is due to the increase in our net loss
to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
As of June 30, 2005, our Current Assets were $1,518,990 and Current Liabilities
were $2,044,362. Cash and cash equivalents were $408,900. Our Stockholder's
Deficit at June 30, 2005 was ($2,196,412).
We had a net usage of cash due to operating activities for the three month
period ended June 30, 2005 of ($1,031,626) compared to a ($1,306,293), for the
three-month period ended June 30, 2004. The increase is due to an increase in
warrants issued for debt inducements and stock paid for acquisitions. We had
net cash provided by financing activities of for the three month period ended
June 30, 2005 and 2004 of $1,438,794 and $2,586,493, respectively. The increase
is due to an increase in proceeds from Notes Payable and Long Term Borrowings.
We had $483,108 from borrowings in the period ended June 30, 2005 as compared to
$661,989 in the corresponding 2004 quarter.
12
FINANCING ACTIVITIES
---------------------
On April 22, 2005, we issued convertible debentures of $150,000 to Dutchess
Private Equities Fund, II, 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 8% cumulative interest, in cash or in shares of common
stock, at the holder's option, at the time of each conversion. The debentures
are payable in 2010. The convertible debentures are convertible into shares of
our common stock.
In connection with the above financing, on April 22, 2005, we issued a warrant
to purchase 150,000 shares of our common stock to Dutchess at $1.30.
On May 12, 2005, we issued convertible debentures of $180,000 to Dutchess
Private Equities Fund, II, 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 8% cumulative interest, in cash or in shares of common
stock, at our option, at the time of each conversion. The debentures are payable
in 2010. The convertible debentures are convertible into shares of our common
stock.
In connection with the above financing, on May 12, 2005, we issued a warrant to
purchase 180,000 shares of our common stock to Dutchess at $1.20.
On May 26, 2005, we issued convertible debentures of $30,000 to Preston Capital
Partners, LLC. 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 8% cumulative interest, in cash or in shares of common stock, at our option,
at the time of each conversion. The debentures are payable in 2010. The
convertible debentures are convertible into shares of our common stock.
On May 27, 2005, we issued convertible debentures of $180,000 to Dutchess
Private Equities Fund, II, 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 8% cumulative interest, in cash or in shares of common
stock, at our option, at the time of each conversion. The debentures are payable
in 2010. The convertible debentures are convertible into shares of our common
stock.
In connection with the above financing, on May 27, 2005, we issued a warrant to
purchase 180,000 shares of our common stock to Dutchess at $1.10.
On June 6, 2005, we issued convertible debentures of $300,000 to Dutchess
Private Equities Fund, II, 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 8% cumulative interest, in cash or in shares of common
stock, at our option, at the time of each conversion. The debentures are payable
in 2010. The convertible debentures are convertible into shares of our common
stock.
In connection with the above financing, on May 12, 2005, we issued a warrant to
purchase 300,000 shares of our common stock to Dutchess at $1.03.
On June 20, 2005, we issued convertible debentures of $50,000 to Preston Capital
Partners, LLC. 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 8% cumulative interest, in cash or in shares of common stock, at our option,
at the time of each conversion. The debentures are payable in 2010. The
convertible debentures are convertible into shares of our common stock.
SUBSIDIARIES
As of June 30, 2005, we had three wholly-owned subsidiaries, Network
Installation Corp., Del Mar Systems International, Inc., and COM Services, Inc.
13
ITEM 3. CONTROLS AND PROCEDURES.
Our management evaluated, with the participation of our Chief Executive Officer
and our Chief Financial Officer, the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this Annual Report on Form
10-QSB. Based on this evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Securities Exchange Act of 1934 (i) is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. Our disclosure controls and procedures are designed to
provide reasonable assurance that such information is accumulated and
communicated to our management. Our disclosure controls and procedures include
components of our internal control over financial reporting. Management's
assessment of the effectiveness of our internal control over financial reporting
is expressed at the level of reasonable assurance that the control system, no
matter how well designed and operated, can provide only reasonable, but not
absolute, assurance that the control system's objectives will be met.
There was no change in our internal control over financial reporting that
occurred during the second quarter of the year covered by this report that
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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. We believe that we were never issued proper service
of process for the complaint. In addition, on August 20, 2002, we sold North
Texas Circuit Board to BC Electronics Inc. Pursuant to terms of the share
purchase agreement, BC Electronics assumes all liabilities of North Texas
Circuit Board. 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. In February 2004, the plaintiff re-filed the complaint. In
March 2005, the complaint was settled for the sum of $25,000. Commencing in
March 2005, we agreed to make five equal monthly installments of $5,000 to
Insulectro. Pursuant to the settlement terms, since March 2005 we have made
two installment payments of $5,000 each.
On January 24, 2005, we filed an action in the Superior Court of California,
County of Orange against Steve and Dorota Pearson for damages and injunctive
relief based on alleged fraud and breach of contract relating to our purchase of
Del Mar Systems International, Inc. from Steve and Dorota Pearson. The complaint
was amended on March 14, 2005 to seek rescission of our purchase of Del Mar
Systems from Steve and Dorota Pearson. The defendants have not yet filed
responsive pleadings in the case. The Defendant has recently filed a
cross-complaint in the above action seeking recovery under various employment
and contract theories for unpaid compensation, expenses and benefits totaling
approximately $90,000. Defendant also seeks payment of an outstanding balance
of a note related to the purchase by the Company of Del Mar Systems totaling
approximately $85,000. Further, Defendant is seeking injunctive relief for
enforcement of the stock purchase agreement of Del Mar Systems. Management is
vigorously opposing these claims and does not feel the claims have substantial
merit.
We may be involved in litigation, negotiation and settlement matters that may
occur in our day-to-day operations. Management does not believe the implication
of these litigations will, including those discussed above, have a material
impact on our financial statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Recent Sales of Unregistered Securities
On April 22, 2005, we issued convertible debentures of $150,000 to Dutchess
Private Equities Fund, II, 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 8% cumulative interest, in cash or in shares of common
stock, at the holder's option, at the time of each conversion. The debentures
are payable in 2010. The convertible debentures are convertible into shares of
our common stock.
In connection with the above financing, on April 22, 2005, we issued a warrant
to purchase 150,000 shares of our common stock to Dutchess at $1.30.
14
On May 12, 2005, we issued convertible debentures of $180,000 to Dutchess
Private Equities Fund, II, 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 8% cumulative interest, in cash or in shares of common
stock, at our option, at the time of each conversion. The debentures are payable
in 2010. The convertible debentures are convertible into shares of our common
stock.
In connection with the above financing, on May 12, 2005, we issued a warrant to
purchase 180,000 shares of our common stock to Dutchess at $1.20.
On May 26, 2005, we issued convertible debentures of $30,000 to Preston Capital
Partners, LLC. 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 8% cumulative interest, in cash or in shares of common stock, at our option,
at the time of each conversion. The debentures are payable in 2010. The
convertible debentures are convertible into shares of our common stock.
On May 27, 2005, we issued convertible debentures of $180,000 to Dutchess
Private Equities Fund, II, 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 8% cumulative interest, in cash or in shares of common
stock, at our option, at the time of each conversion. The debentures are payable
in 2010. The convertible debentures are convertible into shares of our common
stock.
In connection with the above financing, on May 27, 2005, we issued a warrant to
purchase 180,000 shares of our common stock to Dutchess at $1.10.
On June 6, 2005, we issued convertible debentures of $300,000 to Dutchess
Private Equities Fund, II, 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 8% cumulative interest, in cash or in shares of common
stock, at our option, at the time of each conversion. The debentures are payable
in 2010. The convertible debentures are convertible into shares of our common
stock.
In connection with the above financing, on May 12, 2005, we issued a warrant to
purchase 300,000 shares of our common stock to Dutchess at $1.03.
On June 20, 2005, we issued convertible debentures of $50,000 to Preston Capital
Partners, LLC. 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 8% cumulative interest, in cash or in shares of common stock, at our option,
at the time of each conversion. The debentures are payable in 2010. The
convertible debentures are convertible into shares of our common stock.
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.
NOT APPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
15
(a) Exhibits
NUMBER DESCRIPTION
------------ -------------------
3.1 Articles of Incorporation, dated March 24, 1998 (included as exhibit 3.1 to
the Form 10-SB filed March 5, 1999, and incorporated herein by reference).
3.2 By-laws, dated March 24, 1998 (included as exhibit 3.2 to the Form 10-SB
filed March 5, 1999, and incorporated herein by reference).
3.3 Amendment to By-laws, dated May 6, 1999 (included as exhibit 3.2.2 to the
Form 10-SB filed May 14, 1999, and incorporated herein by reference).
3.4 Certificate of Amendment of Articles of Incorporation (included as exhibit
3.2 to the Form 8-K filed November 29, 2000, and incorporated herein by
reference).
3.5 Certificate of Amendment of Articles of Incorporation (included as exhibit
3.3 to the Form 8-K filed November 29, 2000, and incorporated herein by
reference).
3.6 Certificate of Amendment to Articles of Incorporation, dated January 10,
2003 (included as exhibit 3.3 to the Form 10-KSB filed April 15, 2003, and
incorporated herein by reference).
3.7 Certificate of Amendment to the Certificate of Incorporation, dated June
26, 2003 (included as exhibit 4.1 to the Form 10-QSB filed November 13, 2003,
and incorporated herein by reference).
4.1 Warrant #101 issued to C.C.R.I. Corp., dated September 29, 2003 (included as
exhibit 4.1 to the Form SB-2 filed October 16, 2003, and incorporated herein by
reference).
4.2 Warrant #102 issued to C.C.R.I. Corp., dated September 29, 2003 (included as
exhibit 4.2 to the Form SB-2 filed October 16, 2003, and incorporated herein by
reference).
4.3 Convertible Debenture Exchange Agreement between the Company and Dutchess
Private Equities Fund LP, dated February 27, 2004 (included as exhibit 4.1 to
the Form 10-QSB filed May 24, 2004, and incorporated herein by reference).
4.4 Form of Debenture between the Company and Dutchess Private Equities Fund
LP, dated March 1, 2004 (included as exhibit 4.2 to the Form 10-QSB filed May
24, 2004, and incorporated herein by reference).
4.5 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, L.P., dated March 31, 2004 (included as exhibit 4.3 to the Form 10-QSB filed
May 24, 2004, and incorporated herein by reference).
4.6 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated March 31, 2004 (included as exhibit 4.8 to the Form
10-QSB filed August 23, 2004, and incorporated herein by reference).
4.7 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated April 8, 2004 (included as exhibit 4.9 to the Form
10-QSB filed August 23, 2004, and incorporated herein by reference).
4.8 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated April 13, 2004 (included as exhibit 4.10 to the Form
10-QSB filed August 23, 2004, and incorporated herein by reference).
4.9 Form of Warrant, dated May 18, 2004 (included as exhibit 4.6 to the Form
SB-2 filed July 27, 2004, and incorporated herein by reference).
4.10 Form of Warrant, dated May 26, 2004 (included as exhibit 4.7 to the Form
SB-2 filed July 27, 2004, and incorporated herein by Reference).
4.11 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated September 25, 2004 (included as exhibit 4.11 to the
Form 10-QSB filed November 22, 2004, and incorporated herein by
reference).
4.12 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, dated October 21, 2004 (included as exhibit 4.12 to
the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.13 Form of Warrant, dated October 21, 2004 (included as exhibit 4.13 to the
Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.14 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, L.P., dated November 2, 2004 (included as exhibit 4.14 to the
Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.15 Form of Warrant, dated November 2, 2004 (included as exhibit 4.15 to the
Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.16 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, II, L.P., dated November 9, 2004 (included as exhibit 4.16
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.17 Form of Warrant, dated November 9, 2004 (included as exhibit 4.17
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.18 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated December 1, 2004 (included as exhibit 4.18 to
the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.19 Form of Warrant, dated December 1, 2004 (included as exhibit 4.19
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.20 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated December 9, 2004 (included as exhibit 4.20 to the
Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.21 Form of Warrant, dated December 9, 2004 (included as exhibit 4.21
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.22 Convertible Debenture Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated December 22, 2004 (included as exhibit 4.22 to
the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.23 Form of Warrant, dated December 22, 2004 (included as exhibit 4.23
to the Form 10-KSB filed May 6, 2005, and incorporated herein by reference).
4.24 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated January 6, 2005 (included as exhibit 4.24 to the Form 10-QSB filed
May 24, 2005, and incorporated herein by reference).
4.25 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP dated January 6, 2005 (included as exhibit 4.25 to the Form 10-QSB filed
May 24, 2005, and incorporated herein by reference).
4.26 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated January 21, 2005 (included as exhibit 4.26 to the Form 10-QSB
filed May 24, 2005, and incorporated herein by reference).
4.27 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP dated January 21, 2005 (included as exhibit 4.27 to the Form 10-QSB filed
May 24, 2005, and incorporated herein by reference).
4.28 Form of Debenture between the Company and Preston Capital Partners, LLC,
dated February 3, 2005 (included as exhibit 4.28 to the Form 10-QSB filed May
24, 2005, and incorporated herein by reference).
4.29 Form of Debenture between the Company and Preston Capital Partners, LLC,
dated February 10, 2005 (included as exhibit 4.29 to the Form 10-QSB filed May
24, 2005, and incorporated herein by reference).
4.30 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated April 22, 2005 (filed herewith).
4.31 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP dated April 22, 2005 (filed herewith).
4.32 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated May 12, 2005 (filed herewith).
4.33 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP dated May 12, 2005 (filed herewith).
4.34 Form of Debenture between the Company and Preston Capital Partners, LLC,
dated May 26, 2005 (filed herewith).
4.35 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated May 27, 2005 (filed herewith).
4.36 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP dated May 27, 2005 (filed herewith).
4.37 Form of Debenture between the Company and Dutchess Private Equities Fund,
II, LP, dated June 6, 2005 (filed herewith).
4.38 Warrant Agreement between the Company and Dutchess Private Equities Fund,
II, LP dated June 6, 2005 (filed herewith).
4.39 Form of Debenture between the Company and Preston Capital Partners, LLC,
dated June 20, 2005 (filed herewith).
10.1 Reseller Agreement between the Company and Vivato, Inc., dated August 14,
2002 (included as exhibit 10.1 to the Form 10-QSB filed November 13, 2003, and
incorporated herein by reference).
10.2 Short Term Rental Agreement between the Company and Vidcon Solutions
Group, Inc., dated February 5, 2003 (included as exhibit 10.3 to the Form 10-QSB
filed November 13, 2003, and incorporated herein by reference).
10.3 Consulting Agreement between the Company and Dutchess Advisors, LLC, dated
April 1, 2003 (included as exhibit 10.3 to the Form 8-K filed April 23, 2003,
and incorporated herein by reference).
10.4 Restructuring and Release Agreement between the Company, Dutchess Advisors
LLC, Dutchess Capital Management LLC, Michael Novielli, Western Cottonwood
Corporation, Atlantis Partners, Inc., John Freeland, Greg Mardock, and VLK
Capital Corp., dated April 9, 2003 (included as exhibit 10.2 to the Form 8-K
filed April 23, 2003, and incorporated herein by reference).
10.5 Stock Purchase Agreement between the Company and Michael Cummings, dated
May 16, 2003 (included as exhibit 2.1 to the Form 8-K filed June 13, 2003, and
incorporated herein by reference).
10.6 Consulting Agreement between the Company and Marketbyte, LLC, dated July
24, 2003 (included as exhibit 10.8 to the Form SB-2 filed July 27, 2004, and
incorporated herein by reference).
10.7 Motorola Reseller Agreement between the Company and Motorola, Inc., dated
August 18, 2003 (included as exhibit 10.2 to the Form 10-QSB filed November 13,
2003, and incorporated herein by reference).
10.8 Investment Agreement between the Company and Preston Capital Partner, LLC,
dated January 21, 2004 (included as exhibit 10.7 to the Form SB-2 filed January
21, 2004, and incorporated herein by reference).
10.9 Registration Rights Agreement between the Company and Preston Capital
Partners, LLC, dated January 21, 2004 (included as exhibit 10.8 to the Form SB-2
filed January 21, 2004, and incorporated herein by reference).
10.10 Placement Agent Agreement between the Company and Park Capital
Securities, LLC, dated January 21, 2004 (included as exhibit 10.9 to the Form
SB-2 filed January 21, 2004, and incorporated herein by reference).
10.11 Premier Reseller Agreement between the Company and Aruba Wireless
Networks, Inc., dated January 29, 2004 (included as exhibit 10.10 to the Form
SB-2/A filed February 9, 2004, and incorporated herein by reference).
10.12 Investor Relations Service Agreement between the Company and Eclips
Ventures International, dated February 2, 2004 (included as exhibit 10.9 to the
Form SB-2 filed July 27, 2004, and incorporated herein by reference).
10.13 XO Communications, Inc. Agent Agreement between the Company and XO
Communications, Inc., dated March 8, 2004 (included as exhibit 10.13 to the Form
SB-2 filed July 27, 2004, and incorporated herein by reference).
10.14 Mpartner Independent Agent Agreement between the Company and Mpower
Communications Corp., dated March 23, 2004 (included as exhibit 10.10 to the
Form SB-2 filed on July 27, 2004, and incorporated herein by reference).
10.15 Sales Agent Agreement between the Company and PAETEC Communications,
dated March 23, 2004 (included as exhibit 10.11 to the Form SB-2 filed July 27,
2004, and incorporated herein by reference).
10.16 Qwest Services Corporation Master Representative Agreement between the
Company and Qwest Services Corp., dated March 23, 2004 (included as exhibit
10.12 to the Form SB-2 filed July 27, 2004, and incorporated herein by
reference).
10.17 Lease Agreement - Las Vegas location between the Company and HQ Global
Workplaces, dated January 2, 2004 (included as exhibit 10.8 to the Form SB-2
filed July 27, 2004, and incorporated herein by reference).
10.18 Lease Agreement - Los Angeles location between the Company and HQ Global
Workplaces, dated March 1, 2004 (included as exhibit 10.15 to the Form SB-2
filed July 27, 2004, and incorporated herein by reference).
10.19 Lease Agreement - Gold River location between the Company and HQ Global
Workplaces, dated May 20, 2004 (included as exhibit 10.16 to the Form SB-2 filed
July 27, 2004, and incorporated herein by reference).
10.20 Lease Agreement - Scottsdale location between the Company and HQ Global
Workplaces, dated June 1, 2004 (included as exhibit 10.17 to the Form SB-2 filed
July 27, 2004, and incorporated herein by reference).
10.21 Lease Agreement - Seattle location between the Company and HQ Global
Workplaces, dated June 1, 2004 (included as exhibit 10.18 to the Form SB-2 filed
July 27, 2004, and incorporated herein by reference).
10.22 Promissory Note Agreement between the Company and Stephen Pearson, for
the acquisition of Del Mar Systems, Inc., dated March 1, 2004 (included as
exhibit 10.19 to the Form SB-2 filed July 27, 2004, and incorporated herein by
reference).
10.23 Promissory Note between the Company and Dutchess Private Equities Fund,
dated December 17, 2003 (included as exhibit 10.20 to the Form SB-2 filed July
27, 2004, and incorporated herein by reference).
10.24 Promissory Note between the Company and Dutchess Private Equities Fund,
dated January 9, 2004 (included as exhibit 10.21 to the Form SB-2 filed July 27,
2004, and incorporated herein by reference).
10.25 Promissory Note between the Company and Dutchess Private Equities Fund,
dated February 2, 2004 (included as exhibit 10.22 to the Form SB-2 filed July
27, 2004, and incorporated herein by reference).
10.26 Promissory Note between the Company and Dutchess Private Equities Fund,
dated February 5, 2004 (included as exhibit 10.23 to the Form SB-2 filed July
27, 2004, and incorporated herein by reference).
10.27 Employment Agreement between the Company and Robert W. Barnett, dated
January 19, 2004 (included as exhibit 10.25 to the Form SB-2 filed July 27,
2004, and incorporated herein by reference).
10.28 Promissory Note between the Company and Michael Cummings, dated December
30, 2003 (included as exhibit 10.26 to the Form SB-2 filed July 27, 2004, and
incorporated herein by reference).
10.29 Promissory Note between the Company and Michael Cummings, dated March 15,
2004 (included as exhibit 10.27 to the Form SB-2 filed July 27, 2004, and
incorporated herein by reference).
10.30 Territory License Agreement between the Company and 5G Wireless
Communications, Inc., dated February 2004 (included as exhibit 10.27 to the
Form 10-QSB filed August 23, 2004, and incorporated herein by reference).
10.31 Lease Agreement between the Company and Alton Plaza Property, Inc., dated
June 29, 2004 (included as exhibit 10.28 to the Form 10-QSB filed August 23,
2004, and incorporated herein by reference).
10.32 Stock Purchase Agreement between the Company, Raymond Mallory, and Will
Stice, dated January 17, 2005 (included as exhibit 2.1 to the Form 8-K filed
January 24, 2005, and incorporated herein by reference).
10.33 Employment Agreement between the Company and Jeffrey R. Hultman, dated
March 7, 2005 (included as exhibit 99.2 to the Form 8-K filed March 9, 2005, and
incorporated herein by reference).
10.34 Employment Agreement between the Company and Michael V. Rosenthal, dated
March 14, 2005 (included as exhibit 99.2 to the Form 8-K filed March 14,
2005, and incorporated herein by reference).
14.1 Code of Ethics (included as exhibit 14.1 to the Form 10-KSB filed April 9,
2004, and incorporated herein by reference).
21.1 List of Subsidiaries (filed herewith).
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports Filed on Form 8-K
On January 24, 2005, the Company filed an 8-K reflecting a Stock Purchase
Agreement with Raymond Mallory and Will Stice to acquire California-based
networking services firm Com Services, Inc. for $430,000 in cash and stock.
On January 28, 2005, the Company filed an 8-K reflecting Michael Novielli's
interview with Larry Isen of Marketbyte, LLC.
On February 18, 2005, the Company filed an 8-K reflecting the dismissal by the
Board of Directors of Rose, Snyder & Jacobs as our principal accountant and the
appointment by the Board of Directors of Michael Johnson & Co., LLC to serve as
our independent public accountants for the fiscal year ending December 31, 2004.
On March 9, 2005, the Company filed an 8-K reflecting acceptance by the Board of
Directors of Michael Cummings' resignation as Chief Executive Officer and the
appointment by the Board of Directors of Jeffrey Hultman to serve as our new
Chief Executive Officer.
On March 17, 2005, the Company filed an 8-K reflecting Michael Rosenthal
becoming our new Chief Financial Officer.
On May 11, 2005, the Company filed an 8-K reflecting acceptance by the Board of
Directors of Michael Cummings' resignation as Director.
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: July 29, 2005 By: /s/ Jeffrey R. Hultman
--------------------------------
Jeffrey R. Hultman
President & Chief Executive Officer
By: /s/ Michael V. Rosenthal
---------------------------------
Michael V. Rosenthal
Chief Financial Officer
16