SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment 1 to the
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
Commission file number 000-25499
Flexxtech Corporation
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(Exact name of small business issuer as specified in its charter)
Nevada 88-0390360
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State or other jurisdiction of (IRS Employer
Incorporation or organization Identification Number)
18 Technology Dr., Suite 140A
Irvine, CA 92618
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(Address of principal executive offices) (Zip Code)
(949) 753-7499
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
As of June 30, 2003, the issuer had outstanding 10,325,407 shares of
its Common Stock, $0.001 par value.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FLEXXTECH CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
(Unaudited)
ASSETS
Current Asset:
Cash and cash equivalents . . . . . . . . . . . . $ 6,730
Accounts receivable . . . . . . . . . . . . . . . 450,879
Notes receivable - related parties. . . . . . . . 80,534
Other current assets. . . . . . . . . . . . . . . 2,289
540,432
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Property and Equipment, net. . . . . . . . . . . . . . . . . . . 8,580
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,745,840
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TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,294,852
=============
LIABILITIES & STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses . . . . . . $ 1,219,181
Loans payable . . . . . . . . . . . . . . . . . . 69,281
Loans payable related parties . . . . . . . . . . 3,500
Due to factor . . . . . . . . . . . . . . . . . . 299,515
Convertible debt - current. . . . . . . . . . . . 762,761
Total Current Liabilities . . . . . . . . . . . . . . . . 2,354,238
-------------
Long-term Liabilities:
Convertible debt net of debenture cost. . . . . . 220,000
STOCKHOLDERS' DEFICIT
Common stock, authorized 100,000,000 shares at $.001 par
value, issued and outstanding 10,325,407 shares. . 10,325
Additional paid in capital. . . . . . . . . . . . . . . 17,679,523
Shares to be issued . . . . . . . . . . . . . . . . . . 16,900
Accumulated deficit . . . . . . . . . . . . . . . . . . (17,986,134)
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Total Stockholders' Deficit . . . . . . . . . . . . (279,386)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT. . . . . . . . . . . $ 2,294,852
=============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FLEXXTECH CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------------- ------------------------
2003 2002 2003 2002
-------------- ------------ ----------- ------------
NET REVENUE. . . . . . . . . . . . . . . . . . . . . . . . . . $ 196,571 - $ 196,571 -
COST OF REVENUE. . . . . . . . . . . . . . . . . . . . . . . . 135,835 - 135,835 -
-------------- ------------ ----------- ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . 60,736 - 60,736 -
OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . 266,714 581,129 317,244 854,455
-------------- ------------ ----------- ------------
LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . (205,978) (581,129) (256,508) (854,455)
Other income (expense)
Litigation settlement. . . . . . . . . . . . . . . . . . . - (41,743) - (41,743)
Interest income. . . . . . . . . . . . . . . . . . . . . . 660 - 1,320 -
Loss on settlement debt. . . . . . . . . . . . . . . . . . - (172,444) - (172,444)
Interest expense . . . . . . . . . . . . . . . . . . . . . (12,300) (104,293) (25,565) (136,672)
-------------- ------------ ----------- ------------
Total other income (expense). . . . . . . . . . . . (11,640) (318,480) (24,245) (350,859)
-------------- ------------ ----------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES. . . . . . (217,618) (899,609) (280,753) (1,205,314)
Provision of Income tax. . . . . . . . . . . . . . . . . . . . - - 800 800
-------------- ------------ ----------- ------------
LOSS FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . (217,618) (899,609) (281,553) (1,206,114)
LOSS FROM DISCONTINUED OPERATIONS. . . . . . . . . . . . . . . - (609,888) - (1,427,963)
-------------- ------------ ----------- ------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (217,618) $(1,509,497) $ (281,553) $(2,634,077)
============== ============ =========== ============
Basic and diluted loss per share from continuing operations. . $ (0.05) $ (7.27) $ (0.11) $ (10.38)
Basic and diluted loss per share from discontinued operations. $ - $ (4.93) $ - $ (12.29)
-------------- ------------ ----------- ------------
Basic and diluted loss per share . . . . . . . . . . . . . . . $ (0.05) $ (12.21) $ (0.11) $ (22.68)
============== ============ =========== ============
Basic and diluted weighted average shares outstanding. . . . . 4,712,836 123,671 2,611,048 116,146
============== ============ =========== ============
* The basic and diluted net loss per share has been restated to retroactively effect a 200:1 reverse stock
split at January 23, 2003
Weighted average number of shares used to compute basic and diluted loss per share is the same since
since the effect of dilutive securities is anti-dilutive.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FLEXXTECH CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
2003 2002
========== ============
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(281,553) $(2,634,077)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities
Depreciation and amortization. . . . . . . . . . . . . . . 5,365 149,594
Issuance of stocks for consulting services & compensation. 121,950 687,419
Issuance of stocks for settlement of debt. . . . . . . . . - 426,514
Loss on settlement of debt . . . . . . . . . . . . . . . . - 172,444
(Increase) / decrease in current assets
Accounts receivable . . . . . . . . . . . . . . . . . 61,143 58,546
Inventory . . . . . . . . . . . . . . . . . . . . . . - (257,357)
Deposits & other current assets . . . . . . . . . . . 3,775 (19,042)
Increase /(decrease) in current liabilities
Accrued expenses & accounts payable . . . . . . . . . 147,363 (33,259)
---------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES FROM CONTINUED OPERATIONS . . . . . 58,043 (1,449,218)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received in acquisition of subsidiary. . . . . . 3,311 -
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of common stock. . . . . . . . . . - 824,191
Proceeds from shares to be issued. . . . . . . . . . . 2,150 -
Repayment of notes receivable. . . . . . . . . . . . . (39,320) (110,300)
Proceeds from borrowings . . . . . . . . . . . . . . . - 496,187
Payments of loans. . . . . . . . . . . . . . . . . . . (21,360) (59,200)
---------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. . (58,530) 1,150,878
---------- ------------
NET INCREASE (DECREASE IN) CASH AND CASH EQUIVALENTS . . . . . . 2,824 (298,340)
CASH AND CASH EQUIVALENTS -BEGINNING . . . . . . . . . . . . . . 3,906 370,784
---------- ------------
CASH AND CASH EQUIVALENTS -ENDING. . . . . . . . . . . . . . . . $ 6,730 $ 72,444
========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION:
The accompanying unaudited condensed interim financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for the presentation of interim financial information, but
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The audited financial
statements for the two years ended December 31, 2002 and 2001 were filed on
April 23, 2003 with the Securities and Exchange Commission and is hereby
referenced. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the six-month
periods ended June 30, 2003 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2003.
BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
DESCRIPTION OF BUSINESS
The Company was organized on March 24, 1998, under the laws of the State of
Nevada, as Color Strategies. On December 20, 1999, the Company changed its name
to Infinite Technology Corporation. The Company changed its name to Flexxtech
Corporation in April 2000.
On May 23, 2003, the Company closed a purchase agreement to acquire 100% of the
issued and outstanding common stock of Network Installation Corporation (NIC).
The purchase price consisted of $50,000 cash, 7,382,000 shares of the Company's
common stock and five year option to purchase an additional 618,000 shares of
the Company stock if NIC's total revenue exceeds $450,000 for the period
beginning on June 1, 2003 and ending August 31, 2003. The option is exercisable
at a price equal to the closing bid price of the stock on August 31, 2003 (note
12).
NIC was incorporated on July 18, 1997, under the laws of the State of
California. The Company is a full service computer cabling, networking and
telecommunications integrator contractor, providing networks from stem to stem
in house. The Company participated in the worldwide network infrastructure
market to end users, structured cabling market and the telephony services.
The Company has disposed off all other subsidiaries by December 31, 2002.
REVENUE RECOGNITION
Revenue Recognition Revenue is recognized when the contract is completed
(Completed-Contract Method). 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. Because of short duration of the contracts, the
Company did not have any work in progress as of June 30, 2003. Expenses are
recognized in the period in which the corresponding liability is incurred.
ISSUANCE OF SHARES FOR SERVICE
The Company accounts for the issuance of equity instruments to acquire goods and
services based on the fair value of the goods and services or the fair value of
the equity instrument at the time of issuance, whichever is more reliably
measurable.
RECLASSIFICATIONS
For comparative purposes, prior years' consolidated financial statements have
been reclassified to conform with report classifications of the current year.
2. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Flexxtech
Corporation (the "Parent"), and its 100% owned subsidiary, Network Installation
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation. The historical results for the period ended June
30, 2003 include the Company and Network Installation Corporation (from the
acquisition date), while the historical results for the period ended June 30,
2002 include only Flexxtech Corporation.
3. RECENT PRONOUCEMENTS
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used, on reported
results. The Statement is effective for the Companies' interim reporting period
ending January 31, 2003. The adoption of SFAS 148 does not have a material
effect on the earnings or financial position of the Company.
On April 30 2003, the FASB issued FASB Statement No. 149 (FAS 149), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. FAS 149 amends
and clarifies the accounting guidance on (1) derivative instruments (including
certain derivative instruments embedded in other contracts) and (2) hedging
activities that fall within the scope of FASB Statement No. 133 (FAS 133),
Accounting for Derivative Instruments and Hedging Activities. FAS 149 also
amends certain other existing pronouncements, which will result in more
consistent reporting of contracts that are derivatives in their entirety or that
contain embedded derivatives that warrant separate accounting. FAS 149 is
effective (1) for contracts entered into or modified after June 30, 2003, with
certain exceptions, and (2) for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. The Company does not expect
the adoption of SFAS No. 149 to have a material impact on its financial position
or results of operations or cash flows.
On May 15, 2003, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 150 (FAS 150), Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. FAS 150 changes the accounting
for certain financial instruments that, under previous guidance, could be
classified as equity or "mezzanine" equity, by now requiring those instruments
to be classified as liabilities (or assets in some circumstances) in the
statement of financial position. Further, FAS 150 requires disclosure regarding
the terms of those instruments and settlement alternatives. FAS 150 affects an
entity's classification of the following freestanding instruments: a)
Mandatorily redeemable instruments b) Financial instruments to repurchase an
entity's own equity instruments c) Financial instruments embodying obligations
that the issuer must or could choose to settle by issuing a variable number of
its shares or other equity instruments based solely on (i) a fixed monetary
amount known at inception or (ii) something other than changes in its own equity
instruments d) FAS 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. The guidance in FAS 150 is
generally effective for all financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. For private companies, mandatorily
redeemable financial instruments are subject to the provisions of FAS 150 for
the fiscal period beginning after December 15, 2003. The Company does not expect
the adoption of SFAS No. 150 to have a material impact on its financial position
or results of operations or cash flows.
4. GOING CONCERN
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of the
Company as a going concern. However, the Company has accumulated deficit of
$17,986,134 including a net loss of $281,553 for the six month period ended June
30, 2003. The continuing losses have adversely affected the liquidity of the
Company. The Company faces continuing significant business risks, including but
not limited to, its ability to maintain vendor and supplier relationships by
making timely payments when due.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to raise additional capital, obtain
financing and to succeed in its future operations. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
during the period ended June 30, 2003, towards obtaining additional equity
financing through various private placements and evaluation of its distribution
and marketing methods. In that regard, during the year ended December 31, 2002,
the Company disposed off all of its losing subsidiaries.
5. NOTES RECEIVABLE/PAYABLE - RELATED
Notes receivable from related parties
Through December 31, 2002, the Company had advanced $6,008 to an entity related
through common director and $38,000 to a shareholder and former officer of the
Company. As a part of the reorganization of the Company on April 9, 2003, the
amount were forgiven as a part of the whole transaction.
The Company has a receivable from a company related by common officer amounting
$73,206 as of June 30, 2003. The amount is unsecured, due on demand and non
interest bearing.
Notes payable to related parties
The notes payable to related parties through common major shareholders and
officer of the Company and individuals related to major shareholders of the
Company, amounting $1,727,908 were forgiven per restructuring agreement at April
9, 2003. The notes were due on demand, with interest rate ranging from 10% to
18% per year and secured by the assets of the Company. Interests on the notes
along with any accrued interest were also forgiven per a restructuring agreement
(note 12). As part of restructuring agreement, the Company issued 690,000 shares
of common stock to the related parties. The Company recorded $1,727,908 as an
addition to the stockholders' equity.
The Company has $3,500 payable to the major shareholder and officer of the
Company based on the purchase agreement of the subsidiary.
6. LOAN PAYABLE
NIC, the Company's wholly owned subsidiary, has an unsecured note payable of
$47,500, guaranteed by the officer and shareholder of the Company, bearing an
interest rate of 8.75%. The note was payable through a revolving line of
credit, which commenced on November 6, 2001, the date of the note, and was to be
expired in three years following the note date. The Company was to pay a total
of 36 payments of interest only on the disbursed balance beginning one month
from the note date and every month thereafter. The term period was to commence
upon the termination of the revolving line of credit period. During the term
period, the Company was to pay principal and interest payments in equal
installment sufficient to fully amortize the principal balance outstanding,
beginning one month from the commencement of the term period. All remaining
principal and accrued interest was due and payable 7 years from the date of the
note.
As a result of acquisition of NIC by the Company, NIC was in default on this
note, since the note prohibited a change of ownership over 25% of NIC's common
stock outstanding. The entire principal amount became due upon default and the
revolving line of credit is no longer available to NIC. The Company is in the
process of making payment arrangement with the financing institution.
The Company has notes payable to unrelated parties amounting $21,781. These
notes are due on demand, bear interest rate of 6% per annum and unsecured.
7. DUE TO FACTOR
On February 27, 2003, NIC, the subsidiary of the Company, entered into a
factoring and security agreement to sell, transfer and assign certain accounts
receivable to Orange Commercial Credit (OCC). OCC may on its sole discretion
purchase any specific account. All accounts sold are with recourse on seller.
All of the Company's property of NIC including accounts receivable, inventories,
equipment and promissory notes are collateral under this agreement. OCC will
advance 80% of the face amount of each account. The difference between the face
amount of each purchased account and advance on the purchased account shall be
reserve and will be released after deductions of discount and charge backs on
the 15th and the last day of each month. OCC charges 1% of gross face value of
purchased receivable for finance charge and 1% for administrative fees with
minimum charge of $750 on each settlement date. As of June 30, 2003, the
Company factored receivables of approximately $299,515. In connection with the
factoring agreement, the Company included fees of $2,493 in the period ended
June 30, 2003.
8. INCOME TAXES
No provision was made for Federal income tax since the Company has significant
net operating loss carryforwards. Through June 30, 2003, the Company incurred
net operating losses for tax purposes of approximately $16,800,000. The net
operating loss carryforwards may be used to reduce taxable income through the
year 2017. Net operating loss for carryforwards for the State of California are
generally available to reduce taxable income through the year 2007. The
availability of the Company's net operating loss carryforwards are subject to
limitation if there is a 50% or more positive change in the ownership of the
Company's stock. The provision for income taxes consists of the state minimum
tax imposed on corporations.
Temporary differences which give rise to deferred tax assets and liabilities at
June 30, 2003 comprised of depreciation and amortization and net operating loss
carry forward. The gross deferred tax asset balance as of June 30, 2003 was
approximately $6,720,000. A 100% valuation allowance has been established
against the deferred tax assets, as the utilization of the loss carrytforwards
cannot reasonably be assured.
9. STOCKHOLDERS' EQUITY
During the six month periods ended June 30, 2003, the Company issued stocks at
various times, as described per the following. The stocks were valued at the
average fair market value of the freely trading shares of the Company as quoted
on OTCBB on the date of issuance.
STOCK SPLIT
On January 23, 2003, the Company announced a 1 for 200 reverse stock split of
its common stock. All fractional shares are rounded up and the authorized shares
remain the same. The financial statements have been retroactively restated for
the effects of stock splits.
COMMON STOCK:
During the six month period ended June 30, 2003, the Company issued common stock
as follows:
75,000 shares of common stock were issued to an entity related through common
officer at that time, for consulting fees, amounting $3,750.
7,382,000 shares of common stock valued at $1,107,300 were issued for
acquisition of its subsidiary, Network Installation Corporation.
On April 7, 2003, the Company issued 800,000 shares of common stock to a major
shareholder as inducement for debenture amounting $80,000. The shares were
valued at $120,000 and recorded as deemed dividend to the major shareholder.
On April 7, 2003, the Company issued 250,000 shares of common stock to an
unrelated party as inducement for debenture amounting $25,000. The shares were
recorded as debenture issuance cost up-to the amount of debenture of $25,000.
The debentures have been presented net of debentures issuance cost in the
financial statements at June 30, 2003.
The Company issued 700,000 shares of common stock to the major shareholder for
consulting services amounting $105,000.
The Company issued 690,000 shares of common stock as a part of restructuring on
April 9, 2003 (note 12).
CONVERTIBLE DEBENTURES:
In the year ended December 31, 2001, the company issued debentures amounting
$720,000, carrying an interest rate of 6% per annum, due in August 2003. The
holders are entitled to, at any time or from time to time, convert the
conversion amount into shares of common stock of the Company, par value $.001
per share at a conversion price for each share of common stock equal to the
lower of (a) 120% of the losing bid price per share (as reported by Bloomberg,
LP) on the closing date, and (b) 80% of the lowest closing bid price per share
(as reported by Bloomberg, LP) of the Company's common stock for the five
trading days immediately preceding the date of conversion. As of June 30, 2003,
the outstanding balance of the debentures amounted to $662,761.
On April 7, 2003, in connection with the recession agreement (note 11), the
Company issued convertible debentures of $140,000 to various parties. The
Company has recorded the debentures as recession cost in the financial
statements at December 31, 2002. The Holder of the debentures is entitled to
convert the face amount of this Debenture, plus accrued interest, anytime
following the Restricted Period, 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 average 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. The Debentures shall pay six percent (6%) cumulative interest, in
cash or in shares of common stock, par value $.001 per share, of the Company
("Common Stock"), at the Company's option, at the time of each conversion. The
debentures are payable on April 8, 2008.
On April 7, 2003, the company issued debentures amounting $105,000, carrying an
interest rate of 6% per annum, due in April 2008. The face amount of this
Debenture may be converted, in whole or in part, any time following the Closing
Date. 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 average 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 connection with issuance of debentures, the Company issued 250,000 shares of
common stock to an unrelated party and 800,000 shares of common stock to a
related party. The shares issued to the unrelated party were recorded as
debenture issuance cost up-to the amount of debenture amounting $25,000. The
debentures have been presented net of debentures issuance cost in the financial
statements at June 30, 2003. The shares issued to the related party have been
recorded as deemed dividend amounting $120,000.
CONVERTIBLE PROMISSORY NOTES PAYABLE
In the year ended December 31, 2001, the Company issued convertible promissory
notes of $100,000 due on April 1, 2004, carrying an interest rate of 10% per
annum. The holder of $100,000 promissory notes is entitled to convert the
conversion amount into shares of common stock of the Company, par value $.001,
at any time, per share at a conversion price for each share of common stock
equal $7.00 per share of common stock. The note is secured and collateralized by
shares of common stock of the Company at one share per every five dollars
($5.00) of the principal.
STOCK OPTION PLAN
The Company has adopted a Stock option plan for the granting of options to
employees, consultants and other providers of goods and services to the Company.
The Company has set aside 1,000,000 shares of common stock under the plan. No
option has been granted under the plan through June 30, 2003.
10. LITIGATION
In the year ended December 31, 2002, a suit was brought against the Company
alleging the Company made false written and oral representations to induce the
plaintiff to invest in the Company and that such investment occurred despite the
Plaintiff's request that the funds be held in a brokerage account maintained by
a related entity. A co-defendant in the case also filed a cross-complaint in the
action alleging theories of recovery against the Company and several other
defendants and alleging fraud, breach of contract, misrepresentation, conversion
and securities fraud against the Company. Presently, the complaint and
cross-complaint have been answered by the Company and discovery has commenced.
The plaintiff has filed a motion to compel further discovery and for sanctions.
Management of the Company is opposing the claims and alleges that it delivered a
properly issued convertible note to the plaintiff. In the opinion of the
Company's counsel, the Company's exposure in the case is $100,000 for the
investment plus interest. However, if the claims against the Company are
successful, the punitive damages could triple the damages. The Company has
accrued $300,000 in the accompanying financial statements against any possible
outcome.
On April 25, 2003 the Superior Court Of The State of California entered a
judgment in the amount of $46,120 against the Company, in favor of a vendor of
the Company's former subsidiary North Texas Circuit Board ("NTCB"). The Company
believes that it was never issued proper service of process for the complaint.
In addition, on August 20, 2002 NTCB was sold by the Company to a purchaser
("Purchaser"). Pursuant to terms of the share purchase agreement, Purchaser
assumes all liabilities of NTCB. The Company plans to vigorously oppose the
action.
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. Management of the Company intends to oppose the
claims.
The Company may be involved in litigation, negotiation and settlement matters
that may occur in the day-to-day operations of the Company and its subsidiary.
Management does not believe implication of these litigations will have any other
material impact on the Company's financial statements.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as
defined under the Financial Accounting Standard No. 95.
The Company paid $-0- for income taxes and interest during the six month period
ended June 30, 2003. The Company paid income taxes of $-0- and interest of
$15,100 during the six month period ended June 30, 2002.
The statement of cash flows does not include effect of non-cash transaction of
issuance of shares (note 9).
12. RESTRUCTURING AND ACQUISITIONS
On October 1, 2002, the Company signed to acquire 80% of the outstanding Common
Shares of W3M, Inc. (dba "Paradigm Cabling Systems"), a privately held
California corporation ("Paradigm"), in a stock for stock exchange. Paradigm was
incorporated in California in May of 1998, under its current corporate name,
W3M, Inc. Paradigm was a full service computer cabling, networking and
telecommunications integrator contractor, providing networks from stem to stern
in house, for larger, medium and smaller industrial, educational and residential
complexes. As part of the transaction, the Company agreed to use its best
efforts to arrange in the future for an infusion of $250,000 in additional
capital, either as debt or equity or some combination of both, to Paradigm, in
order to increase its working capital. However, the Company was unable to
arrange infusion of the capital per the agreement.
On April 8, 2003, the Company and Paradigm agreed that the transaction is void
ab initio (that is, at its inception), with the effect that Paradigm remains the
owner of all of its Assets and the shares of the Company's Preferred Stock are
restored to the status of authorized but un-issued shares. The Purchase
Agreement and all related documents and all documents delivered in connection
therewith were thereby terminated ab initio and are of no force or effect
whatsoever. In connection with funds invested as working capital into Paradigm
during the period from October 1, 2002 until April 1, 2003, the Company issued
to Ashford Capital LLC and e-fund Capital/Barrett Evans (or its designee), 5
year convertible debentures in the amount of sixty five thousand dollars
($65,000) and seventy five thousand dollars ($75,000) respectively. The Company
recorded $140,000 as loss on acquisition and recession in the financial
statements at December 31, 2002.
On April 9, 2003, the Company signed a restructuring agreement with Duchess
Advisors LLC and its affiliates. Under the agreement, Western Cottonwood
Corporation, a related party through major shareholder, agreed to forgive Notes
receivable and interest receivable from the Company (note 5). Under the
agreement, Western Cottonwood and Atlantis Partners shall maintain a combined
ownership percentage of a non-dilutive 4.9% and Greg Mardock, former president
of the Company, shall maintain a combined ownership percentage of a non-dilutive
2% through the Company's first merger or acquisition transaction. Per the
agreement, the president of the Company resigned and nominees of Dutchess
Advisors LLC were appointed officers of the Company. Pursuant to the consulting
Agreement, the Company issued Seven Hundred Thousand (700,000) shares or common
stock of the Company to Dutchess Advisors, Ltd. (the "consultant"). Also, the
Company will pay to the Consultant, the sum of three thousand dollars per month
($3,000) for non accountable expenses for months 1-12. The Retainer shall
increase to five thousand dollars ($5,000) per month for months 13-24. Payment
of nine thousand dollars ($9,000) for the first three months is due upon
execution of this Agreement. Payment for the remaining months shall be due by
the fifth business day of each month and payable in the form of corporate check
or wire transfer. The Company shall reimburse Consultant for those reasonable
and necessary out-of-pocket expenses (including but not limited to travel,
transportation, lodging, meals etc.) which have been approved by the President
of the Company prior to their incurrence and which have been incurred by
Consultant in connection with the rendering of services hereunder. The term of
this Agreement shall be twenty four (24) months commencing on the date and year
first above written.
On May 23, 2003, the Company closed a purchase agreement to acquire 100% of the
issued and outstanding common stock of Network Installation Corporation (NIC).
The purchase price consisted of $50,000 cash, 7,382,000 shares of the Company's
common stock and five year option to purchase an additional 618,000 shares of
the Company stock if NIC's total revenue exceeds $450,000 for the period
beginning on June 1, 2003 and ending August 31, 2003. The option is exercisable
at a price equal to the closing bid price of the stock on August 31, 2003. A
summary of the NIC assets acquired, liabilities assumed and consideration for is
as follows:
Allocated
Amount
-------------------------------------------------------------
Cash $ 3,311
Accounts receivable 511,722
Notes receivable 73,206
Fixed assets 10,262
Other assets 2,289
Current liabilities (1,189,330)
Goodwill 1,745,840
------------
$ 1,157,300
============
Consideration paid Amount
-------------------------------------------------------
Cash $ 50,000
Common stock-7,382,000 shares 1,107,300
-----------
$1,157,300
===========
Unaudited Pro-forma revenue, net income and income per share assuming the
transaction had been completed at the beginning of the periods reported, on
pro-forma financial results would be as follows:
For Six months period
June 30, 2003 June 30, 2002
---------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Revenue $ 754,944 $ 53,093
Net loss for the period $ 495,681 $ 2,698,837
Net loss per share $ 0.19 $ 0.36
ITEM 2. Management's Discussion and Analysis or Plan of Operation
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Report on Form 10-QSB contains forward-looking statements,
including, without limitation, statements concerning possible or assumed future
results of operations and those preceded by, followed by or that include the
words "believes," "could," "expects," "intends" "anticipates," or similar
expressions. Our actual results could differ materially from these anticipated
in the forward-looking statements for many reasons including: materially adverse
changes in economic conditions in the markets that we and our subsidiaries
serve; competition from others in the markets and industry segments occupied by
us and our subsidiaries; the ability to enter, the timing of entry and the
profitability of entering new markets; greater than expected costs or
difficulties related to the integration of the businesses acquired by our
subsidiaries; and other risks and uncertainties as may be detailed from time to
time in our public announcements and SEC filings. Although we believe the
expectations reflected in the forward-looking statements are reasonable, they
relate only to events as of the date on which the statements are made, and our
future results, levels of activity, performance or achievements may not meet
these expectations. We do not intend to update any of the forward-looking
statements after the date of this document to conform these statements to actual
results or to changes in our expectations, except as required by law.
The discussion and financial statements contained herein are for the
three months ended June 30, 2003 and June 30, 2002. The following discussion
should be read in conjunction with our financial statements and the notes
thereto included herewith.
Overview:
On October 1, 2002, we signed to acquire 80% of the outstanding Common
Shares of W3M, Inc. (dba "Paradigm Cabling Systems"), a privately held
California corporation ("Paradigm"), in a stock for stock exchange. Paradigm was
incorporated in California in May of 1998, under its current corporate name,
W3M, Inc. Paradigm is a full service computer cabling, networking and
telecommunications integrator contractor, providing networks from stem to stern
in house, for larger, medium and smaller industrial, educational and residential
complexes. As part of the transaction, we agreed to use our best efforts to
arrange in the future for an infusion of $250,000 in additional capital, either
as debt or equity or some combination of both, to Paradigm, in order to increase
its working capital. However, we were unable to arrange infusion of the capital
per the agreement.
On April 8, 2003, we and Paradigm agreed that the transaction is void ab
initio (that is, at its inception), with the effect that Paradigm remains
the owner of all of its Assets and the shares of our Preferred Stock
are restored to the status of authorized but un-issued shares. The Purchase
Agreement and all related documents and all documents delivered in connection
therewith were thereby terminated ab initio and are of no force or effect
whatsoever. In connection with funds invested as working capital into
Paradigm during the period from October 1, 2002 until April 1, 2003, we issued
to Ashford Capital LLC and e-fund Capital/Barrett Evans (or its designee),
5 year convertible debentures in the amount of sixty five thousand dollars
($65,000) and seventy five thousand dollars ($75,000) respectively. We recorded
$140,000 as loss on acquisition and recession in the financial statements at
December 31, 2002. We recorded $140,000 as loss on acquisition and recession
in the financial statements at December 31, 2002. Michael Cummings, President
of Paradigm also resigned as a Director of the Company's Board of Directors.
On April 9, 2003, we executed a Restructuring Agreement pursuant to which
Western Cottonwood Corporation, a related party through a major shareholder,
agreed to forgive its Notes receivable and interest receivable from us as of
December 31, 2002. Pursuant to the agreement, (i) Western Cottonwood and
Atlantis Partners shall maintain a combined ownership percentage of a
non-dilutive 4.9% and Greg Mardock, our former president, shall maintain a
combined ownership percentage of a non-dilutive 2% through our first merger
or acquisition transaction and (ii) our president of resigned and (iii) nominees
of Dutchess Private Equities Fund, LP were appointed officers. It is the intent
of the new board of directors to continue as a public company and seek out
business opportunities that will add value to our Company.
On April 17, 2003, we executed a Letter of Intent to merge with
Irvine, CA - based Network Installation Corporation. Network Installation is a
designer and installer of data, voice, and video networks. The transaction
closed on May 16, 2003.
A detailed description of the terms and conditions of (i) the voided
Paradigm Cabling Purchase Agreement and (ii) the Restructuring Agreement are
available in our filing on Form 8-K dated April 23, 2003. A detailed
description of the acquisition of Network Installations, Inc. is included
in the Company's filing on Form 8-K dated June 13, 2003.
While there is no assurance that we will be successful in raising
additional capital, we are actively seeking private equity financing to assure
that we will be capable of financing the continuation of our business. Any
additional capital raised above and beyond what we need as our monthly
expenditure would be used in increasing marketing, sales efforts and
acquisitions. Should we fail to raise additional funding, we will be forced to
curtail our growth, both through internal development and through acquisitions.
As only a holding company to date, we do not generate our own revenues, but we
rely on additional financing to pay our operating expenses.
THREE MONTHS AND SIX MONTH PERIODS ENDED JUNE 30, 2003 AS COMPARED TO THREE
MONTHS AND SIX MONTH PERIODS ENDED JUNE 30,
2002 (restated for disposal of subsidiaries)
Results of Operations
-----------------------
We generated consolidated revenues of $196,571 for the three months
ended June 30, 2003 as compared to $0 for the three months ended June 30, 2002.
Currently, our cash needs include, but are not limited to, legal and accounting
services, and future acquisitions.
Net Revenues
-------------
We had net revenues of $196,571 for the quarter ended June 30, 2003 as
compared to $0 for the quarter ended June 30, 2002. We had net revenues of
$196,571 for the quarter ended June 30, 2003 as compared to $0 for the quarter
ended June 30, 2002. All of our revenue in the current period is from our
subsidiary Network Installation Corporation. Our operations from the
subsidiaries disposed off in 2002 have been separately classified in the
Statements of Operations.
Cost of Revenue
-----------------
We incurred Cost of Revenue of $135,835 for the three and six month period
ended June 30, 2003 as compared to $0 for the three and six month period ended
June 30, 2002.
General, Administrative and Selling Expenses
------------------------------------------------
We incurred costs of $266,714 and $317,244 for the three and six month
ended June 30, 2003 as compared to $581,129 and $854,455 for the three month and
six month periods ended June 30, 2002, respectively. The decrease in General,
Administrative and Selling Expenses in the current period primarily because
we issued shares of common stock amounting $687,419 as consulting fees in the
prior period as compared to issuance of common shares amounting $121,950 in the
current period.
Net loss before income taxes and loss on discontinued segments
-----------------------------------------------------------------------
We had a loss before taxes and discontinued segments of ($217,618) and
($280,753) for the three and six month period ended June 30, 2003, as compared
to a loss of ($899,609) and ($1,206,114) for the three and six month periods
ended June 30, 2002. The decrease in net loss before income taxes and loss on
discontinued segments is due to the factors described above as well as the fact
that we did not have any loss on settlement of debt in the current period as
compared to $$172,444 in the corresponding periods last year.
.
Loss from discontinued operations
------------------------------------
We had a loss from operations of discontinued entities of $609,888 and
1,427,963 in the three and six month periods ended June 30, 2002, respectively.
We did not have such loss in 2003 since the entities, Flexxtech Holdings, Inc.
and its wholly owned subsidiary, Primavera, were disposed off by December 31,
2002.
Net loss
---------
We had a net loss of ($217,618) and ($281,553) for the three and six month
periods ended June 30, 2003 as compared to a net loss of ($1,509,497) and
($2,634,077)for the three and six month periods ended June 30, 2002.
Basic and diluted loss per share
-------------------------------------
Our basic and diluted loss per share for the quarter ended June 30, 2003
was ($0.05) as compared to ($12.21) for the quarter ended June 30, 2002
Liquidity and Capital Resources
----------------------------------
We must continue to raise capital to fulfill its plan of acquiring companies
and assisting in the development of those companies internally. If we are unable
to raise any additional capital our operations will be curtailed. As of June
30, 2003, we had total Current Assets of $540,432 and Current Liabilities of
$2,354,238. Cash and cash equivalents were $6,730 as compared to $72,444 at
June 30, 2002. Our Stockholder's Deficit at June 30, 2003 was ($279,386).
We had a net usage of cash due to operating activities in June 30, 2003 and
2002 of $58,043 and $1,449,218 respectively. The major factor in contributing
negative cash flows in the corresponding period last year was the net loss for
the period amounted to $2,634,077 as compared to a net loss of $281,553 in the
six month period ended June 30, 2003. We had net cash provided by financing
activities of ($58,530) and $1,150,878 in the three month period ended June 30,
2003 and 2002, respectively. The reason for decrease in the current period is no
sale shares for cash as compared to sale of shares for cash of $824,191 in the
corresponding period last year. We had $0 from borrowings in the period ended
June 30, 2003 as compared to $496,187 in the corresponding period last year.
Subsidiaries
------------
As of June 30, 2003, we have one subsidiary, Network Installation
Corporation.
Substantial Indebtedness
-------------------------
We have a substantial amount of indebtedness. As a result of our level of
debt and the terms of our debt instruments:
- our vulnerability to adverse general economic conditions is heightened;
- we will be required to dedicate a substantial portion of our cash flow
from operations to repayment of debt, limiting the availability of cash for
other purposes;
- we are and will continue to be limited by financial and other restrictive
covenants in our ability to borrow additional funds, consummate asset sales,
enter into transactions with affiliates or conduct mergers and acquisitions;
- our flexibility in planning for, or reacting to, changes in its business
and industry will be limited;
- we are sensitive to fluctuations in interest rates because some of our
debt obligations are subject to variable interest rates; and
- our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired.
Our ability to pay principal and interest on our indebtedness and to
satisfy our other debt obligations will depend upon our future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, some of which are beyond our control. If
we are unable to service our indebtedness, we will be forced to take actions
such as reducing or delaying capital expenditures, selling assets, restructuring
or refinancing our indebtedness, or seeking additional equity capital. There is
no assurance that we can effect any of these remedies on satisfactory terms, or
at all.
Item 3. Controls and Procedures
Evaluation of disclosure controls and procedures. We maintain controls and
procedures designed to ensure that information required to be disclosed in this
report is recorded, processed, accumulated and communicated to our management,
including our chief executive officer and our interim chief financial officer,
to allow timely decisions regarding the required disclosure. Within the 90 days
prior to the filing date of this report, our management, with the participation
of our chief executive officer and interim chief financial officer, carried out
an evaluation of the effectiveness of the design and operation of these
disclosure controls and procedures. Our chief executive officer and interim
chief financial officer concluded, as of fifteen days prior to the filing
date of this report, that these disclosure controls and procedures are
effective.
Changes in internal controls. Subsequent to the date of the above
evaluation, we made no significant changes in our internal controls or in other
factors that could significantly affect these controls, nor did we take any
corrective action, as the evaluation revealed no significant deficiencies or
material weaknesses.
PART II
Item 1. Litigation
In the year ended December 31, 2002, a suit was brought against us alleging
we made false written and oral representations to induce the plaintiff to invest
in our Company and that such investment occurred despite the Plaintiff's request
that the funds be held in a brokerage account maintained by a related entity. A
co-defendant in the case also filed a cross-complaint in the action alleging
theories of recovery against us and several other defendants and alleging
fraud, breach of contract, misrepresentation, conversion and securities fraud.
Presently, we have answered the complaint and cross-complaint and discovery
has commenced. The plaintiff has filed a motion to compel further discovery
and for sanctions. We are vigorously opposing the claims. In the opinion of
our counsel, our exposure in the case is $100,000 for the investment plus
interest. However, if the claims against us are successful, the punitive
damages could triple the damages. We have accrued $300,000 in the accompanying
financial statements against any possible outcome. We are attempting to settle
the case with the plaintiff, and has made a good faith payment of $20,000
towards a definitive settlement agreement.
On April 25, 2003 the Superior Court Of The State of California entered a
judgment in the amount of $46,120 against us; in favor of a vendor of our
former subsidiary North Texas Circuit Board ("NTCB"). We believe that we were
never issued proper service of process for the complaint. In addition, on
August 20, 2002, we sold NTCB to a purchaser. Pursuant to terms of
the share purchase agreement, the purchaser assumed all liabilities of NTCB.
We plan to vigorously oppose the action and to pursue the purchaser to pay the
judgment under its contractual obligation.
On April 29, 2003 a suit was brought against us by an investor, alleging
breach of contract pursuant to a settlement agreement executed between us and
investor dated November 20, 2002. The suit alleges that we are delinquent in
its repayment of a $20,000 promissory note, of which $5,000 has been repaid to
date. Management intends to oppose the claims.
Other that the litigation disclosed above, we are not aware of
threatened or existing litigation that could have an adverse material impact on
our financial statements.
Item 2: Changes in Securities
(a) Not Applicable
(b) Not Applicable
(c)
We issued 7,382,000 shares of common stock valued at $1,107,300 on May 10th,
2003 for acquisition of our subsidiary, Network Installation Corporation.
On April 7, 2003, we issued 800,000 shares of common stock to a major
shareholder as inducement for debenture amounting $80,000. The shares were
valued at $120,000.
On April 7, 2003, we issued 250,000 shares of common stock to an unrelated
party as inducement for debenture amounting $25,000. The shares were recorded
as debenture issuance cost up-to the amount of debenture of $25,000.
We issued 700,000 shares of common stock to the major shareholder for
consulting services amounting $105,000 on June 11th, 2003.
On April 8, 2003, we issued convertible debenture of $140,000 to Dutchess
Private Equities Fund, LP. The debentures convert into common stock
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 average of
the closing bid prices for the twenty (20) trading days immediately preceding
the Closing Date of the Transaction.
We issued 690,000 shares of common stock as a part of restructuring on April
9, 2003 to former management as per the transaction disclosed on Form 8-K filed
April 23, 2003
The securities issued in the foregoing transactions were offered and sold in
reliance upon exemptions from the Securiies Act of 1033 ("Securities Act")
registration requirements set forth in Sections 3(b) and 4(2) of the Securites
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.
(d) Not Applicable
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
(a) EXHIBITS
Number Description
------ -----------
3.1 Articles of Incorporation filed as Exhibit 3.1 to the Company's
Registration Statement on Form 10SB filed on March 5th, 1999 and
Incorporated herein by reference.
3.2 By-laws filed as Exhibit 3.2 to the Company's Registration Statement
on Form 10SB filed on March 5th, 1999 and incorporate herein by
reference.
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Interim Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 1350
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 1350
(b) Reports on Form 8-K
We filed a Form 8-K on April 23, 2003. We filed a Form 8-K on June 13, 2003.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLEXXTECH CORPORATION
(Registrant)
Date: August 21, 2003 By: /s/ Michael Cummings
--------------------------------
Michael Cummings
President & Chief Executive Officer