UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number: 333-30176
NMXS.COM, INC.
(Exact name of Registrant as specified in charter)
DELAWARE 91-1287406
State or other jurisdiction of I.R.S. Employer I.D. No.
incorporation or organization
5041 INDIAN SCHOOL ROAD NE, SUITE 200, ALBUQUERQUE, NM 87110
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (505) 255-1999
Check whether the Issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such fling requirements for the past 90 days.
(1) Yes [X] No [ ] (2) 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: At August 18, 2003, there
were 27,758,387 shares of the Registrant's Common Stock outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NMXS.com, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
June 30,
2003
------------
Assets
Current assets:
Cash and equivalents $ 15,000
Accounts receivable, net 379,000
Inventory 6,000
Prepaid expenses and other assets 52,000
----------
Total current assets 452,000
Furniture, equipment and improvements, net 184,000
Security deposits 39,000
Goodwill, net 75,000
----------
$ 750,000
==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 218,000
Accrued expenses 478,000
Deferred revenue 40,000
Notes payable 300,000
----------
Total current liabilities 1,036,000
Stockholders' equity:
Preferred stock, $0.001 par value, 500,000 shares
authorized, no shares issued and outstanding -
Common stock, $0.001 par value, 50,000,000 shares
authorized, 27,258,387 shares issued and outstanding 28,000
Additional paid-in capital 8,439,000
Subscriptions payable 30,000
Deferred compensation (40,000)
Prior period adjustment (6,000)
Retained (deficit) (8,737,000)
----------
(286,000)
----------
$ 750,000
==========
The accompanying notes are an integral part of these financial statements.
2
NMXS.com, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
For the three months ended For the six months ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue
Software sales and maintenance $ 124,000 $ 155,000 $ 490,000 $ 262,000
Custom programming 21,000 18,000 49,000 83,000
License fees 15,000 563,000 15,000 911,000
Scanning services 35,000 18,000 71,000 20,000
Other 2,000 - 2,000 -
---------- ---------- ---------- ----------
197,000 754,000 627,000 1,276,000
Operating costs and expenses:
Cost of services 78,000 97,000 165,000 261,000
General and administrative 283,000 469,000 558,000 837,000
Research and development 27,000 37,000 62,000 94,000
Bad debt expense 501,000 - 501,000 -
---------- ---------- ---------- ----------
Total operating costs and expenses 889,000 603,000 1,286,000 1,192,000
---------- ---------- ---------- ----------
Net operating profit (loss) (692,000) 151,000 (659,000) 84,000
Other (expense):
Interest income - - - 1,000
Interest (expense) (5,000) (6,000) (14,000) (13,000)
(Loss) on disposal of fixed assets - (25,000) - (25,000)
---------- ---------- ---------- ----------
Total other (expense) (5,000) (31,000) (14,000) (37,000)
---------- ---------- ---------- ----------
Net income (loss) $ (697,000) $ 120,000 $ (673,000) $ 47,000
========== ========== ========== ==========
Weighted average number of
common shares outstanding - basic and fully diluted 26,249,021 22,808,000 25,687,301 22,393,000
========== ========== ========== ==========
Net income (loss) per share - basic and fully diluted $ (0.03) $ 0.01 $ (0.03) $ 0.00
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
3
NMXS.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
For the six months ended
June 30,
---------------------------
2003 2002
------------ ------------
Cash flows from operating activities
Net income (loss) $ (673,000) $ 47,000
Adjustments to reconcile net income (loss) to
net cash (used) by operating activities:
Prior period adjustment (6,000) -
Common stock issuable for services - -
Common stock issued for salaries 69,000 82,000
Common stock issued for services 109,000 187,000
Stock options issued for services 9,000 115,000
Bad debt expense 501,000 -
Depreciation and amortization 45,000 49,000
Loss on disposal of fixed assets - 25,000
Changes in:
Restricted cash - (1,000)
Accounts receivable (237,000) (320,000)
Estimated earnings in excess of billings on uncompleted contracts - 18,000
Prepaid expenses and other assets (10,000) 11,000
Officer advances 1,000 (18,000)
Accounts payable (97,000) 101,000
Accrued expenses 160,000 -
Deferred revenue 40,000 (380,000)
---------- ----------
Net cash (used) by operating activities (89,000) (84,000)
Cash flows from investing activities
Acquisition of fixed assets (6,000) (3,000)
Security deposits - 2,000
---------- ----------
Net cash provided (used) by investing activities (6,000) (1,000)
Cash flows from financing activities
Proceeds from notes payable 25,000 63,000
Repayment of note payable (12,000) -
Net proceeds from the issuance of common stock 28,000 -
Increase in subscriptions payable 30,000 -
---------- ----------
Net cash provided by financing activities 71,000 63,000
---------- ----------
Net increase (decrease) in cash and equivalents (24,000) (22,000)
Cash and equivalents - beginning 39,000 57,000
---------- ----------
Cash and equivalents - ending $ 15,000 $ 35,000
========== ==========
Supplemental disclosures:
Interest paid $ - $ 10,000
========== ==========
Income taxes paid $ - $ -
========== ==========
Non-cash transactions:
Disposal of fixed asset and corresponding reduction
in accounts payable $ - $ 327,000
Common shares issuable for leasehold improvements
and prepaid rent - 62,000
Acquisition of investment - (225,000)
Disposition of investment - 225,000
The accompanying notes are an integral part of these financial statements.
4
NMXS.com, INC. AND SUBSIDIARIES
Notes to consolidated Financial Statements
NOTE A - BASIS OF PRESENTATION
The interim financial statements included herein, presented in accordance
with United States generally accepted accounting principles and stated in
US dollars, have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that
these interim financial statements be read in conjunction with the
financial statements of the Company for the year ended December 31, 2002
and notes thereto included in the Company's Form 10-KSB. The Company
follows the same accounting policies in the preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results.
NOTE B - GOING CONCERN
There is no assurance that the Company's marketing efforts will be
successful, or that the Company will achieve the necessary sales volume to
sustain operations. The Company has incurred net losses and negative cash
flows from operations since its inception. In addition, the Company
operates in an environment of rapid change in technology and is dependent
upon the services of its employees and its consultants. If the Company is
unable to increase its sales volume, the Company would require additional
funding and there is no assurance that such funding will be available to
the Company under acceptable conditions. If such events do not occur, it is
unlikely that the Company could continue its business.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business. The Company
will continue to require the infusion of capital until operations become
profitable. During 2003, the Company anticipates increasing revenues and
continuing to monitor their expenses primarily in the area of compensation.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
NOTE C - ACCOUNTS RECEIVABLE
During the six months ended June 30, 2003, the Company elected to write off
$500,000 of accounts receivable to bad debt due to one customer. The
Company is no longer doing business with this customer and is in
negotiations to collect the entire balance.
NOTE D - FURNITURE, EQUIPMENT, AND IMPROVEMENTS
Furniture, equipment, and improvements as of June 30, 2003 consisted of the
following:
Computers $ 300,000
Furniture, fixtures and equipment 144,000
Leasehold improvements 83,000
----------
527,000
Accumulated depreciation (343,000)
----------
184,000
==========
5
NMXS.com, INC. AND SUBSIDIARIES
Notes to consolidated Financial Statements
NOTE E - NOTE PAYABLE
During January 2001, the Company borrowed $300,000. The loan is
collateralized by substantially all of the Company's assets and personally
guaranteed by an officer of the Company. Additional collateral was provided
by a letter of credit issued by a then unrelated third party. The letter of
credit expired on January 19, 2002. The note was renewed with a due date of
July 24, 2002 at a current interest rate of 7%. On July 24, 2002, the
Company paid $50,000 of principal and $10,525 of interest. The remaining
$250,000 of principal was extended to October 24, 2002 at a current
interest rate of 7%. On October 24, 2002 the Company paid $25,000 of
principal and $4,555 of interest. On April 24, 2003, the Company paid
$12,224 of principal and $12,768 of interest. The remaining $212,849 of
principal was extended until October 15, 2003 at a current interest rate of
7%. As of June 30, 2003, the Company had a balance due of $212,849.
On April 22, 2002, the Company borrowed $50,000. The loan is due on April 23,
2003 at a current interest rate of 10% per annum. This note is secured
by 500,000 shares of the Company's $0.001 par value common stock. As of
June 30, 2003, the Company is in default and is negotiating with the note
holder.
In April 2002, the Company borrowed $12,500. The loan is due on demand and
bears no interest. As of June 30, 2003, the Company had a balance due of
$12,500.
On March 1, 2003, the Company borrowed $25,000. The loan is due on June 30,
2003 at a current interest rate of 7% per annum. As of June 30, 2003, the
Company had a balance due of $25,000.
NOTE F - CAPITAL TRANSACTIONS
Preferred stock:
During the six month period ended June 30, 2003, the Company effected the
following stock transactions:
The Company received a total of $30,000 from three individuals to purchase
30 shares of the Company's $0.001 par value preferred stock. As of June 30,
2003, the Company had the preferred stock offering open and the total
amount is considered subscriptions payable. Upon the close of the
offering, all of the shareholders will receive their preferred stock.
Common stock:
During the six month period ended June 30, 2003, the Company effected the
following stock transactions:
On January 13, 2003, the Company issued a total of 65,351 shares of the
Company's $0.001 par value common stock to its employees in lieu of salary
which was valued at $12,000.
On January 31, 2003, the Company issued 250,000 shares of its $0.001 par
value common stock to an individual for cash of $28,000.
On February 20, 2003, the Company issued a total of 154,741 shares of the
Company's $0.001 par value common stock to its employees in lieu of salary
which was valued at $21,000 and to its independent contractors for services
rendered in the amount of $2,000.
On March 10, 2003, the Company issued a total of 217,467 shares of the
Company's $0.001 par value common stock to its employees in lieu of salary
which was valued at $22,000 and to its independent contractors for services
rendered in the amount of $2,000.
On March 24, 2003, the Company issued a total of 182,991 shares of the
Company's $0.001 par value common stock to its employees in lieu of salary
which was valued at $16,000 and to its independent contractors for services
rendered in the amount of $4,000.
6
NMXS.com, INC. AND SUBSIDIARIES
Notes to consolidated Financial Statements
On March 31, 2003, the Company issued a total of 10,000 shares of the
Company's $0.001 par value common stock to its independent contractors for
services rendered in the amount of $1,100.
On April 17, 2003, the Company issued a total of 100,000 shares of the
Company's $0.001 par value common stock to a former director for services
rendered in the amount of $20,000.
On May 16, 2003, the Company issued a total of 170,000 shares of the
Company's $0.001 par value common stock to its independent contractor for
services rendered in the amount of $17,000.
On May 30, 2003, the Company issued a total of 42,500 shares of the
Company's $0.001 par value common stock to its independent contractor for
services rendered in the amount of $2,975.
On June 6, 2003, the Company issued a total of 1,557,611 shares of the
Company's $0.001 par value common stock to its independent contractors for
services rendered in the amount of $108,000.
Warrants:
During the six month period ended June 30, 2003 there were no warrants
issued or exercised.
Stock options:
Disclosures required by Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), including
pro forma operating results had the Company prepared its financial
statements in accordance with the fair value based method of accounting for
stock-based compensation prescribed therein are shown below. Exercise
prices and weighted-average contractual lives of stock options outstanding
as of June 30, 2003 are as follows:
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Prices Exercisable Price
----------- ----------- ---------------- -------- ----------- --------
$0.10-$0.30 1,644,000 9.32 $0.19 1,347,000 $0.21
$0.31-$0.50 1,139,000 8.06 $0.39 449,000 $0.39
$0.54-$0.83 693,000 2.61 $0.70 643,000 $0.67
$1.25-$2.13 180,000 7.05 $1.69 180,000 $1.69
Summary of Options Granted and Outstanding:
For the six months ended June 30,
---------------------------------------------
2003 2002
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------- ---------- --------
Options:
Outstanding at
beginning of year 2,526,000 $0.63 2,202,000 $0.77
Granted 1,000,000 $0.29 255,000 $0.34
Cancelled (6,000) $1.25 (2,000) $1.25
--------- ----- --------- -----
Outstanding at
end of year 3,520,000 $0.63 2,455,000 $0.72
========= ===== ========= =====
7
NMXS.com, INC. AND SUBSIDIARIES
Notes to consolidated Financial Statements
On February 27, 2003, the Company granted 1,000,000 stock options to Gerald
Grafe with an exercise price of $0.06, equal to the fair value of the
common stock, with a contractual life of 5 years and the options vest
immediately. The fair value of the options has been estimated on the date
of grant using the Black-Scholes option pricing model. The weighted average
fair value of these options was $12,800. The following assumptions were
used in computing the fair value of these option grants: weighted average
risk-free interest rate of 4.42%, zero dividend yield, volatility of the
Company's common stock of 122%, and an expected life of the options of ten
years.
The following table summarizes the pro forma operating results of the
Company for June 30, 2003 had compensation costs for the stock options
granted to employees been determined in accordance with the fair value
based method of accounting for stock based compensation as prescribed by
SFAS No. 123.
Proforma net income (loss) available to common stockholders $ 24,000
Proforma basic and diluted loss per share $ 0.00
NOTE G - COMMITMENTS
Leases:
The Company leases office space, equipment and an automobile under
operating leases. Future minimum lease payments as of June 30, 2003 are as
follows:
Year Amount
---- ----------
2003 $ 121,000
2004 70,000
Rent expense for the period ended June 30, 2003 amounted to $61,000.
Employment agreement:
The Company entered into an employment and non-competition agreement with a
stockholder to act in the capacity of President and Chief Executive Officer
(CEO). The term of the employment agreement is for three years commencing
on January 1, 2000. The agreement allows for a one year renewal option
unless terminated by either party. Base salary is $120,000 per annum with
available additional cash compensation as defined in the agreement.
Compensation under this agreement of $30,000 is included in general and
administrative expenses for the period ended June 30, 2003. As of June 30,
2003 the Company is currently negotiating the terms of the renewal with its
President and CEO. The non-competition agreement commences upon the
termination of the employment agreement for a period of one year. As of
June 30, 2003, there was a total of $179,000 in accrued payroll.
NOTE H - MAJOR CUSTOMERS
During the six month period ended June 30, 2003, one customer accounted for
49% of the Company's revenue. The Company recognized $245,000 as revenue
from barter agreements for the six months ended June 30, 2003.
As of June 30, 2003, balances due from one customer comprised 66% of total
accounts receivable.
NOTE I - REPORTABLE SEGMENTS
Management has identified the Company's reportable segments based on
separate legal entities. New Mexico Software, Inc. (NMS) derives revenues
from the development and marketing proprietary internet technology-based
software and Working Knowledge, Inc. (WKI) provides data maintenance
services related to NMS digital asset management system. Information
related to the Company's reportable segments for 2003 is as follows:
8
NMXS.com, INC. AND SUBSIDIARIES
Notes to consolidated Financial Statements
NMS WKI Total
----------- ----------- -----------
Revenue $ 616,000 $ 11,000 $ 627,000
Cost of services 138,000 27,000 165,000
General and administrative 496,000 62,000 558,000
Research and development 62,000 - 62,000
Bad debt expense 500,000 1,000 501,000
---------- ---------- ----------
Operating income (loss) $ (580,000) $ (79,000) $ (659,000)
========== ========== ==========
Total assets $ 597,000 $ 153,000 $ 750,000
========== ========== ==========
WKI revenue consists primarily of software maintenance and scanning
services.
A reconciliation of the segments' operating loss to the consolidated net
loss/comprehensive loss is as follows:
Segment's operating income $ (659,000)
Other income (expense) (14,000)
----------
Consolidated net income/comprehensive income $ (673,000)
==========
Prior to acquisition of WKI, in April 2000, the Company operated within one
business segment.
For the six month period ended June 30, 2003, amortization and depreciation
expense amounted to $32,301 and $12,260 for NMS and WKI, respectively.
Also, total fixed asset additions amounted to $6,000 and $0 for NMS and
WKI, respectively.
NOTE J - CONTINGENCIES AND OTHER LIABILITIES
Contingencies:
As of June 30, 2003, the Company had accumulated debt totaling $55,000 in
line charges with Sprint. The Company was also owed commissions in
connection with its contract with Sprint as a Sprint Data Partner. The
Company and Sprint have agreed in principle to apply the outstanding
commissions to the debt thereby reducing the debt from $55,000 to $16,000.
The Company expects to pay the $16,000 over a period of 16 months starting
Feb 2003. During the six months period ended June 30, 2003, the Company
has paid a total of $5,000 to Sprint.
As of June 30, 2003, the Company was in dispute with Sun Microsystems, Inc.
(Sun) over the terms of equipment leased from Sun whereby the Company
continued to make lease payments and failed to notify Sun past the lease
termination date during 2002. The Company ceased making payments in October
2002 until the matter was resolved. Sun is pursuing collection of payments
it considers in arrears totaling $18,000. The Company claims that the
missed termination date is a technicality, and that it has overpaid Sun by
$50,000. The Company intends to return the equipment to Sun as settlement
in full, and does not consider this to impair its ability to continue
servicing its customer base. On July 23, 2003, the Company settled with
Sun and agreed to pay a total of $1,000 and return the equipment to Sun.
9
NMXS.com, INC. AND SUBSIDIARIES
Notes to consolidated Financial Statements
Outstanding Payroll Taxes:
The Company has unpaid Federal and State payroll taxes totaling $277,371 as
of June 30, 2003. No action has been taken by the Company or the Internal
Revenue Service (IRS) to negotiate payment terms, and no plan for repayment
has been determined by the Company. The penalties and interest associated
with this liability is estimated to be in excess of 10% of the total
payroll taxes due, but has not been accrued because the Company feels that
until a settlement is reached with the IRS the Company cannot reasonably
determine the amount due in penalties and interest. On June 1, 2003, the
Company settled with the State of New Mexico and agreed to pay $1,000 per
month of past due payroll taxes plus the current amount due. During the
six months ended June 30, 2003, the Company paid a total of $2,000 of past
due payroll taxes.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATIONS.
OVERVIEW
We are a leading provider of digital asset management solutions. We
provide full ASP services for content owners to better manage the digital
lifecycle of intellectual property which includes digitizing, encoding,
storing, managing, licensing, and distributing digital files in government,
medical, entertainment, and IT markets. Our core product, AssetWare, is an
enterprise-level platform that manages digital assets, which is anything
digital that a company or organization would consider an asset. It manages
assets by creating catalogs, or groups of assets, catalog hierarchies,
users, user groups, and user permissions. The assets are managed by our
database that maintains both the membership of the asset in a catalog, or
catalogs, and information about the asset. AssetWare's main user interface
is a web browser, which makes it accessible and more intuitive to a greater
number of users. AssetWare can be run on Solaris or Linux operating
systems.
Our engineers upgraded our customized technology which permits the
installation of a high-speed 6Ghz "Triage" data clusters. This provides
increased speed, redundancy, failover capability, and load balancing to our
AssetWare enterprise database. The system also helps balance image and
data processing server side loads. Management believes this upgrade is a
normal part of the business of the company and allows us to remain
competitive in this industry. We currently offer this upgrade to our
software. Management has assessed that this technology will help our
business become more competitive on future AssetWare software sales.
AssetWare is offered in a number of configurations, including the
following: AssetWare - hosted model; AssetWare - licensed model; AssetWare -
E-commerce module; AssetWare - For Kiosks; AssetWare - Workgroup; AssetWare -
Rapid Deployment; AssetWare - For Government; and AssetWare - Source Code API.
We also now offer two lower-end versions of AssetWare, called Digital Filing
Cabinet, to smaller users providing a concurrent user system for from 25 to
100 concurrent users.
During third quarter of 2002, we finalized the arrangements to preload
our Linux-based Digital Filing Cabinet software, formerly available only on
our AssetWare enterprise software, on Toshiba's Magnia SG20 and Z series
servers. Management believes this arrangement is designed to appeal to
small business and consumers who desire to organize, store, find, and
manage information at a reasonable cost. Management has seen the results
of the first two quarters of 2003 sales as a good beginning for the Digital
File Cabinet. We have begun a marketing program through the assistance of
Toshiba to start identifying new dealer potential among copier resellers
and computer resellers. Thus far, we have attracted 25 new resellers to
the program and our staff is currently training and educating the resellers
in selling the product.
Through the third quarter of 2001 our focus was on research and
development and testing of our software. Beginning in the fourth quarter
of 2001 we commenced production and marketing of the Digital Filing
Cabinet. Although we continue to perform research and development, these
11
activities are currently limited to upgrading the existing product,
creating new features requested by clients, and matching the product to
various OEM hardware. Also, since the core product is now available for
mass distribution, we intend to reduce the amount of custom programming
previously performed and focus on marketing our core products.
We presently realize revenues from four primary sources: (i) software
maintenance; (ii) custom programming; (iii) license fees; and (iv) scanning
and related services. Two of these revenue streams, license fees and
software maintenance, are directly related. With each sale of our
products, including the sales of the Toshiba products, the end user enters
into a license agreement for which an initial license fee is paid. The
license agreement also provides that in order to continue the license, the
licensee must pay an annual software maintenance fee for which the party
receives access to product upgrades and bug fixes or product patches.
Management has standardized the license fees on its products and
established a standard maintenance fee based on a fixed percentage of the
initial license fee depending on the product purchased. In the past,
license and maintenance fees were established on an individual client
basis. We are currently in the second year of several of these initial
license agreements which accounts for the increase in revenue generated
from software maintenance. Management anticipates that this source of
revenue will continue to increase as more products are sold. During the
initial stage of product development, we focused more on custom programming
for clients and, with the completion of our core product, will perform less
customized services, which could result in a continued decline in this
source of revenue. Scanning services are performed by Working Knowledge at
its site in Santa Monica, California. With management's focus on marketing
our core products, less attention has been devoted to developing this
segment of our business. Management anticipates that these services will
be reserved in the future primarily for customers of our core products,
although revenue could be generated from unsolicited customers. While the
scanning business remained static during the last several quarters, early
indications are that the scanning business has been revitalizing in the
last six weeks and it may be possible that the scanning revenue will
increase in sales in the future.
Cost of services consists primarily of engineering salaries and
supplies, and compensation-related expenses, as well as hardware purchases
and equipment rental. General and administrative expenses consist
primarily of salaries and benefits of personnel responsible for business
development and operating activities, and include corporate overhead
expenses. Corporate overhead expenses relate to salaries and benefits of
personnel responsible for corporate activities, including acquisitions,
administrative, and reporting responsibilities. We record these expenses
when incurred.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the
reported amount of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the date of our
financial statements. Actual results may differ from these estimates under
different assumptions or conditions.
12
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions. We
believe there are no critical accounting policies which would have a
material impact on our financial presentation.
Notwithstanding the foregoing, we recognize revenue from sales of
proprietary software which do not require further commitment from us upon
shipment. During 2002 we shipped software under a contract with Physicians
Telehealth Network ("PTN") and recognized $500,000 in license fees from the
sale. The agreement with PTN provided for the licensing of the technology
for $500,000, which amount was recorded as income during 2002. In the
first quarter, 2003, certain of PTN's assets were taken over by a group of
investors headed by Kurt Grossman and the initial contract we received
continued with the new investor group named Doctors Telehealth Network
("DTN"). DTN has made no payments under the contract. Management does not
intend to pursue the contract and has rescinded the license granted in the
agreement.
THREE AND SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 2002
A summary of operating results for the three months ended June 30,
2003 and 2002 is as follows:
2003 2002
% of % of
Amount Revenue Amount Revenue
---------- -------- ---------- --------
Revenues $ 197,000 100% $ 754,000 100%
Cost of services 78,000 39.6% 97,000 12.9%
--------- ---------
Gross profit 119,000 60.4% 657,000 87.1%
General & administrative 283,000 143.7% 469,000 62.2%
Research & development 27,000 13.7% 37,000 4.9%
Bad Debt 501,000 254.3% 0 0.0%
--------- ---------
811,000 411.7% 506,000 67.1%
Other income (expense) (5,000) (2.5)% (31,000) (4.1)%
--------- ---------
Net income (loss) $ (697,000) (353.8)% $ 120,000 15.9%
========= =========
2003 2002
---- ----
Earnings (loss) per share: $(0.03) $0.01
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A summary of operating results for the six months ended June 30, 2003
and 2002 is as follows:
2003 2002
% of % of
Amount Revenue Amount Revenue
---------- -------- ---------- --------
Revenues $ 627,000 100% $1,276,000 100%
Cost of services 165,000 26.3% 261,000 20.5%
--------- ---------
Gross profit 462,000 73.7% 1,015,000 79.6%
General & administrative 558,000 89.0% 837,000 65.6%
Research & development 62,000 9.9% 94,000 7.4%
Bad Debt 501,000 79.9% 0 0.0%
--------- ---------
1,121,000 178.8% 931,000 73.0%
Other income (expense) (14,000) (2.2)% (37,000) (2.9)%
--------- ---------
Net income (loss) $ (673,000) (107.3)% $ 47,000 3.7%
========= =========
2003 2002
---- ----
Earnings (loss) per share: $(0.03) $(0.00)
Revenues. Total revenues decreased 73.9%, or $557,000, for the three
months ended June 30, 2003, as compared to the same period in the prior
year (the "comparable prior year period"). Total revenues decreased 50.9%,
or $649,000, for the six months ended June 30, 2003, as compared to the
comparable prior year period. These revenues were generated from the
following four revenue streams:
* Revenues generated by software maintenance decreased 20.0%, or
$31,000, for the three months ended June 30, 2003, as compared to the
comparable prior year period. Revenues generated by software
maintenance increased 187.0%, or $228,000, for the six months ended
June 30, 2003, as compared to the comparable prior year period. This
increase is attributable to the fact that additional software
maintenance programs for existing customers were sold and the
reclassification of some income. Software maintenance will remain
strong in the future due to an increasing number of customers
requiring our services.
* Custom programming revenue increased 16.7%, or $3,000, for the three
months ended June 30, 2003, as compared to the comparable prior year
period. Custom programming revenue decreased 41.0%, or $34,000, for
the six months ended June 30, 2003, as compared to the comparable
prior year period. This decrease was primarily due to a shift from
providing
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customized software services to marketing of developed software
products. Management anticipates that the decrease in revenue from
custom programming will improve based on new contracts signed with
existing customers for upgrades to their systems through the remainder
of 2003.
* Revenues generated by license fees decreased 97.3%, or $548,000, for
the three months ended June 30, 2003, as compared to the comparable
prior year period. Revenues generated by license fees decreased
98.4%, or $896,000, for the six months ended June 30, 2003, as
compared to the comparable prior year period. This decrease is
primarily attributable to lack of one time AssetWare enterprise sales
in the first quarter compared to the large sale in the first quarter
of 2002. Management anticipates that revenues in this category will
continue to improve in the remaining quarters of 2003 due to the
accounting that will show sales of the Digital Filing Cabinet. Based
on the accounting procedure used by Toshiba, royalty reports and
payments occur forty five (45) days after the quarter ends.
* Revenue generated by scanning services and other services increased
94.4%, or $17,000, for the three months ended June 30, 2003, as
compared to the comparable prior year period. This type of revenue
increased 255%, or $51,000, for the six months ended June 30, 2003, as
compared to the comparable prior year period. This increase was
primarily due to new contracts received by Working Knowledge division.
Although management anticipates that revenues generated by Working
Knowledge will increase significantly in the future, the services
provided by Working Knowledge will generally be limited to existing or
future clients and will not be our primary focus. However, Working
Knowledge will continue to accept unsolicited work.
We continue to rely on a small number of customers to generate our
revenues. During the quarter ended June 30, 2003, Toshiba accounted for
49% of the total revenues generated during the quarter. In addition,
Forbes.Inc. comprised 66% of the total accounts receivable balance at
June 30, 2003.
Cost of Services. Cost of services decreased 19.6%, or $19,000, for
the three months ended June 30, 2003, as compared to the comparable prior
year period. Cost of services decreased 36.8%, or $96,000, for the six
months ended June 30, 2003, as compared to the comparable prior year
period. This decrease was primarily due to a decrease in salaries and
compensation. Cost of services as a percentage of revenues increased to
26.3% for the six months ended June 30, 2003 from 20.5% for the comparable
prior year period. Management believes this current percentage is more
indicative of the percentage of costs associated with revenues in the
future, but until we have been in the active marketing phase for a longer
period, management is unable to yet determine to what extent this
percentage may change in the future.
General and Administrative. General and administrative expenses
decreased 39.7%, or $186,000, for the three months ended June 30, 2003, as
compared to the comparable prior year period. General and administrative
expenses decreased 33.3%, or $279,000, for the six months ended June 30,
2003, as compared to the comparable prior year period. This decrease was
primarily
15
attributable to a reduction in engineering and administrative staff.
General and administrative expenses as a percentage of revenues were 89.0%
for the six months ended June 30, 2003, as compared to 65.6% for the
comparable prior year period. Management believes this current percentage
is more indicative of the percentage of general and administrative costs
associated with revenues in the future, but until we have been in the
active marketing phase for a longer period, management is unable to yet
determine to what extent this percentage may change in the future.
Research and Development. Research and development expenses decreased
27.0%, or $10,000, for the three months ended June 30, 2003, as compared to
the comparable prior year period. Research and development expenses
decreased 34.1%, or $32,000, for the six months ended June 30, 2003, as
compared to the comparable prior year period. This decrease was primarily
due to the need to develop additional product areas. Since our products
are mature and now in the market, most of the R&D category will be replaced
by a Maintenance Development category in the future.
Bad Debt. Management has determined that the account receivable from
Doctors Telehealth Network generated by the sale of a software license for
$500,000 is not collectable. Therefore, management has decided to write-
off the receivable during the three months ended June 30, 2003.
Other Income. Interest expense decreased 16.7%, or $1,000, for the
three months ended June 30, 2003, as compared to the comparable prior year
period. Interest expense increased 7.7%, or $1,000, for the six months
ended June 30, 2003, as compared to the comparable prior year period. The
increase in interest expense was attributable to accruing interest due on
additional promissory notes issued by us.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, cash and cash equivalents totaled $15,000,
representing a $20,000 decrease from the June 30, 2002, balance of $35,000.
Cash used in operations was $89,000 during the first six months of 2003.
This compares to cash used in operating activities of $84,000 during the
first six months of 2002.
Our negative cash flow continues to be of concern to management. As
discussed below, we suffer from a lack of available cash to meet our
continuing operating requirements. At June 30, 2003, we had negative
working capital of ($584,000). At June 30, 2003, we also owed
approximately $277,371, without penalties and interest, for unpaid federal
and state payroll taxes. Amounts due a number of suppliers for services
and products remain delinquent which may cause these parties to seek legal
action against us to collect delinquent accounts. At June 30, 2003, we had
trade accounts payable in the amount of $218,000, of which $9,960 were
current as of June 30, 2003, $10,353 were between 31 and 60 days
delinquent, $2,997 were between 61 and 90 days delinquent, and $194,561
were over ninety days delinquent. The four largest creditors, excluding
taxing agencies, include our original auditor ($98,567), Forbes Magazine
($25,000), our landlord ($16,614), and former legal counsel ($12,583).
Management continues to work with our creditors and to seek additional
sources of capital, but there is no assurance that it will be successful,
or that additional capital can be obtained at rates or terms favorable to
us. We also continue to accrue the salary of our president,
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which at June 30, 2003, was an aggregate of $179,000. We may also settle
some of our outstanding liabilities by exchanging shares of our common or
preferred stock for amounts owed. Our inability to pay or settle these
obligations, especially the amount due to the IRS, could have a material
negative impact on our business and could affect our ability to continue as
a going concern.
During the six months ended June 30, 2003, we issued common stock or
stock options for salaries and services totaling $187,000, as compared with
$384,000 for the comparable prior year period. We anticipate that this
downward trend in such compensation will continue as we are able to reduce
our compensation expenses and generate more revenue from operations.
However, we will likely continue to compensate employees and consultants
with equity incentives where possible and during the remainder of 2003 will
continue to utilize equity instruments to compensate existing and new
employees and consultants hired to minimize cash outlays. We believe this
strategy provides the ability to increase stockholder value as well as
utilize cash resources more effectively. To support this strategy we may
seek an increase in the number of equity securities that can be issued
under our existing stock plan in order to allow management greater
flexibility in its use of stock based compensation. The continued issuance
of equity securities under the stock plan may result in dilution to
existing shareholders.
Investing activities used $6,000 of cash for the six months ended
June 30, 2003, as compared to $1,000 for the comparable prior year period.
The increase in the cash used for investing activities was primarily
attributable to acquisition of fixed assets for replacement of computer
hardware.
Financing activities provided $71,000 in cash for the six months ended
June 30, 2003, as compared to financing activities providing $63,000 for
the comparable prior year period. The increase in cash provided by
financing activities was primarily attributable to an increase in funds
borrowed by us and sales of our stock. Of the cash provided by financing
activities for the six months ended June 30, 2003, $25,000 of the total
amount was attributable to a loan from one corporation. In March 2003 we
issued a promissory note for $25,000 with an interest rate of 7%. The note
was due on June 30, 2003. We are currently negotiating an extension of
this note. Also in March, $30,000 was provided by subscriptions received
in a private stock offering of 30 shares of Series A preferred stock. The
Series A shares are convertible into common shares at the option of the
holder at the rate of 70% of the average bid price of the common stock on
the conversion date, based upon the value of the Series A shares being
converted which is deemed to be $1,000 per share. The remaining $28,000
was provided by net proceeds from a private stock offering of shares of
common stock to one individual who is a director.
Management anticipates that our primary uses of capital in the future
periods will be allocated to satisfy delinquent obligations and for working
capital purposes. Our business strategy is to achieve growth internally
through continued sale of licenses for our AssetWare products, and
maintenance of these licenses, and externally through the sale of
potentially dilutive securities. We may also continue to incur debt as
needed to meet our operating needs. In addition, we may be forced to issue
additional equity compensation to employees and outside consultants to meet
payroll and pay for needed legal and other services.
17
At June 30, 2003, we had an outstanding balance on a line of credit
with Los Alamos National Bank which was originally due on July 24, 2002.
The outstanding principal amount due at that date was $300,000, plus
interest of $10,545. On July 24, 2002, we negotiated a three month
extension on the repayment of the outstanding balance of the line of credit
by reducing the principal amount of the debt with the payment of $50,000
and the payment of the interest due. At October 24, 2002, we negotiated a
six month extension of the amount due on the line of credit by paying
$25,000 of the principal amount due and $4,555 in interest due. On
April 15, 2003 another six month extension was negotiated by the payment of
$12,500 of the principal amount due and $7,500 in interest due. The loan
is now due October 15, 2003, and the principal balance due for this line of
credit is now $212,500. Our inability to retire this debt, negotiate an
extension of the payment amount and/or date, or obtain an alternative loan
would likely have a material negative impact on our business, and could
impair our ability to continue operations if the bank were to foreclose on
the note.
Our financial statements have been prepared based upon the assumption
that we will be able to continue as a going concern. There is no assurance
that our marketing efforts will be successful, or that we will be able to
achieve the necessary sales volume to sustain our operations. We have
incurred net losses and negative cash flows from operations since
inception. Also, we operate in a business environment of rapidly changing
technology. We are also dependent upon the services of our employees and
our consultants, many of whom have been willing to accept equity
compensation in lieu of cash. Also, we have incurred significant tax
liabilities for unpaid withholding taxes, as well as other significant past
due debt. If we are unable to increase our sales volume, we would require
additional funding. We have no immediate source or commitment for any
additional funding. Further, there is no assurance that such funding, if
secured, would be available under acceptable terms. If we are unable to
increase our sales volume, satisfy our debts, or obtain additional
financing, it is unlikely that we would be able to continue our business.
There is no assurance that our capital resources are sufficient to meet our
present obligations and those to be incurred in the normal course of
business for the next twelve months.
FORWARD-LOOKING STATEMENTS
This report contains statements that plan for or anticipate the
future. Forward-looking statements include statements about the future of
operations involving the marketing and maintenance of products which manage
large volumes of media or digital material, statements about our future
business plans and strategies, and most other statements that are not
historical in nature. In this report forward-looking statements are
generally identified by the words "anticipate," "plan," "believe,"
"expect," "estimate," and the like. Although management believe that any
forward-looking statements it makes in this report are reasonable, because
forward-looking statements involve future risks and uncertainties, there
are factors that could cause actual results to differ materially from those
expressed or implied. For example, a few of the uncertainties that could
affect the accuracy of forward-looking statements include the following:
* Rapid changes in technology relating to the Internet;
* the continued growth and use of the Internet;
* changes in government regulations;
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* changes in our business strategies;
* hardware failure of a catastrophic proportion;
* terrorist interference with the operation of the Internet or effects
of terrorist activities on the economy;
* difficulty recruiting and retaining staff of sufficient technical
caliber to provide adequate and on-going customer support and product
maintenance and development;
* failure to successfully market our products through the Internet and
our representatives;
* the inability to locate sources to retire our line of credit or to
obtain alternative lending sources; and
* the inability to solve cash flow problems.
In light of the significant uncertainties inherent in the forward-
looking statements made in this report, particularly in view of our early
stage of operation, the inclusion of this information should not be
regarded as a representation by us or any other person that our objectives
and plans will be achieved.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, our management
conducted an evaluation, under the supervision and with the participation
of our president and principal financial officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based
on this evaluation, the president and principal financial officer concluded
that our disclosure controls and procedures are effective. There have been
no significant changes in our internal controls or in other factors that
could significantly affect those controls subsequent to the date of our
last evaluation.
PART II
ITEM 1. LEGAL PROCEEDINGS
Except as set forth below, this report contains no reportable legal
proceedings, we are delinquent in payment to a number of service or product
providers, any one of which could institute legal proceedings against us in
the future. Management is actively working with these creditors to settle
the amounts owed or negotiate more favorable payment terms. There is no
assurance that management will be successful in settling these accounts or
renegotiating payment terms. If we are unsuccessful in doing so, the
enforcement of collection of the amounts owed could have a material
negative impact on our business.
On August 11, 2003, management received electronic notice from Kurt
Grossman, the holder of a promissory note issued by us on April 23, 2002,
threatening legal action in the collection of the promissory note if we do
not make immediate arrangements to repay the note. The note, in the
principal amount of $50,000, plus interest in the amount of $5,000, was due
on April 23, 2003.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2003, the following securities were
sold by us without registering the securities under the Securities Act:
* In June 2003 we issued 1,500,000 shares of common stock to one
accredited investor for services performed under a consulting
agreement. These securities were issued without registration under
the Securities Act by reason of the exemption from registration
afforded by the provisions of Section 4(6) thereof, as a transaction
by an issuer to accredited investors, and pursuant to the provisions
of Rule 506 of Regulation D. The investor acknowledged the investment
nature of the securities issued and consented to the imposition of
restrictive legends upon the certificates evidencing the shares. The
investor did not enter into the transaction as a result of or
subsequent to any advertisement, article, notice, or other
communication published in any newspaper, magazine, or similar media
or broadcast on television or radio, or presented at any seminar or
meeting. The investor was also afforded the opportunity to ask
questions of our management and to receive answers concerning the
terms and conditions of the transaction. No underwriting discounts or
commissions were paid in connection with such issuance.
* Also in June 2003 we issued 57,611 shares of common stock to one
accredited investor for services performed under an employment
agreement. These securities were issued without registration under
the Securities Act by reason of the exemption from registration
afforded by the provisions of Section 4(6) thereof, as a transaction
by an issuer to accredited investors, and pursuant to the provisions
of Rule 506 of Regulation D. The investor acknowledged the investment
nature of the securities issued and consented to the imposition of
restrictive legends upon the certificates evidencing the shares. The
investor did not enter into the transaction as a result of or
subsequent to any advertisement, article, notice, or other
communication published in any newspaper, magazine, or similar media
or broadcast on television or radio, or presented at any seminar or
meeting. The investor was also afforded the opportunity to ask
questions of our management and to receive answers concerning the
terms and conditions of the transaction. No underwriting discounts or
commissions were paid in connection with such issuance.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the quarter ended June 30, 2003, we were delinquent in the
payment of interest and principal on a $50,000 promissory note payable to
Kurt and Ann Grossman. The note was due and payable on April 23, 2003, and
bears interest of $5,000. As of the filing date of this report, the total
amount due on the note is $55,000.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are attached to this report:
31.1 Certification by Chief Executive Officer
31.2 Certification by Chief Financial Officer
32.1 Section 906 Certification of CEO and Principal Financial
Officer.
(b) Reports on Form 8-K. A current report on Form 8-K dated April
17, 2003, was filed on April 30, 2003. The report included under Items 9
and 12 an earnings release for the year ended December 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
NMXS.com, INC.
Date: August 19, 2003 By /s/ Richard Govatski
Richard Govatski, President
Date: August 19, 2003 By /s/ Teresa Dickey
Teresa Dickey, Treasurer
(Principal Financial Officer)
21