UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 filing requirements for the past 90 days.
(1) Yes [X] No [ ] (2) Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. N/A
The issuer's revenues for the fiscal year ended December 31, 2002, were
$1,658,000.
The aggregate market value of common stock held by non-affiliates of the
issuer as of April 10, 2003, was $1,706,818, based upon the average bid and
asked price on such date for the 20,080,213 common shares held by
non-affiliates.
The number of shares outstanding of the issuer's common stock as of April 10,
2003, was 25,388,276.
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
PART I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . 5
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 15
PART II
Item 5. Market for Common Equity and Related Stockholder Matters . . . 15
Item 6. Management's Discussion and Analysis . . . . . . . . . . . . . 17
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . 24
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . 44
PART III
Item 9. Directors and Executive Officers of the Registrant . . . . . . 44
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . 45
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters. . . . . . . . . . . . . . . 47
Item 12. Certain Relationships and Related Transactions . . . . . . . . 49
Item 13. Exhibits, List and Reports on Form 8-K . . . . . . . . . . . . 51
Item 14 Controls and Procedures. . . . . . . . . . . . . . . . . . . . 52
Forward-Looking Statements
This Form 10-KSB, including the section entitled "Management's
Discussion and Analysis," contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements include our present expectations
or beliefs concerning future events. We caution readers that such
statements are necessarily based on certain assumptions, which are subject
to risks and uncertainties that could cause actual results to materially
differ from those contained in these forward-looking statements. Such
forward-looking statements may include, without limitation, statements that
we do not expect that lawsuits, commitments, including future contractual
obligations, contingent liabilities, financing availability, or other
matters will have a material adverse effect on our consolidated financial
condition, statements concerning future capital needs and sources of such
capital funding, future growth potential of our business, performance of
our products, other similar expressions concerning matters that are not
historical facts, and projections relating to our financial results.
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We caution readers that such statements are necessarily based on certain
assumptions, which are subject to risks and uncertainties that could cause
actual results to materially differ from those contained in these forward-
looking statements. Important factors that could cause such differences
include, but are not limited to, rapid changes in technology relating to
the Internet; the continued growth and use of the Internet; changes in
government regulations; changes in our business strategies; market
acceptance of our products; 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; and catastrophic and universal hardware failure.
As a result of these and other factors, we may experience material
fluctuations in future operating results on a quarterly or annual basis,
which could materially and adversely affect our business, financial
condition, operating results and stock price.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date hereof. We undertake
no obligation to publicly release revisions to these forward-looking
statements that reflect events or circumstances after the date hereof or
reflect the occurrence of unanticipated events.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Our History and Background
We were originally incorporated under the laws of the State of Utah on
August 12, 1983, under the name "Raddatz Exploration, Inc." The name was
changed to "Renaissance Guild, Inc." on February 16, 1984, and to
"C.O.N.S.E.R.V.E Corporation" on October 3, 1985. On April 28, 1997, we
changed domicile to the State of Delaware by merging into a Delaware
corporation incorporated on October 14, 1980, under the name "Costs of
Owning the Newest Systems of Energy Reduction are Virtually Eliminated,
Inc." The name was changed to "Conserve, Inc." on May 11, 1999. On August
3, 1999, our corporate name was changed to "NMXS.com, Inc."
Through our wholly owned subsidiaries, New Mexico Software, Inc. and
Working Knowledge, Inc., we develop and market proprietary Internet
technology-based software for the management of digital high-resolution
graphic images, video clips, and audio recordings. Through New Mexico
Software we develop and market the software, and through Working Knowledge
we provide data maintenance services related to the New Mexico Software
digital asset management system.
What New Mexico Software Products Provide Customers
New Mexico Software operates as a business segment with the role of
product development and support. Currently, New Mexico Software has
developed a media asset management product called AssetWare. We market
AssetWare in two ways; as a hosted application on the Internet, and as a
highly customized application according to clients' specifications. A
hosted application provides a customer access to the AssetWare product over
the Internet. Customers log on to our server and use AssetWare to manage,
view and distribute their media assets. The hosted application customers'
media files are also stored on our server. Customers can choose the number
of features needed for the particular business and are billed according to
the number of features chosen and the amount of disk space the customer's
media files will occupy. New Mexico Software has developed a product
called MagZoom that allows magnified views of images on the Internet.
MagZoom can be purchased as a hosted application or for local installation
on a customer's web server.
In addition to the products we have developed based on our technology,
we have cooperative agreements with other vendors to either incorporate
their products with our product, or offer their products as an additional
feature. For instance, we cooperate with manufacturers like Toshiba with
whom we sell our software pre-loaded on their hardware.
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Our Technology
We engineer products around a central core of unique Internet
technology that makes it possible to rapidly view, distribute and manage
media files such as graphic images, animation sequences and film clips.
Characteristically, media files are very large, thus making them more time-
consuming to view and distribute using conventional Internet technology.
For instance, a media file such as an x-ray might be as large as 70mb.
Conventional Internet technology moves the entire media file. Using a
standard 56.6-kb modem connection, moving such a file would take more than
20 hours to load to a Netscape or Internet Explorer browser window if the
Internet connection could be maintained that long, and if the browser did
not crash. Using our technology that same 70mb file can be viewed in
approximately 37 seconds over a 56.6-kb modem connection. If it is
necessary to move the actual media file, our technology provides a highly
expedited method of doing this as well. However, for many e-commerce and
other common Internet uses, it is not necessary to move the file, only to
view it. In addition, our viewing technology also provides several
magnification features. One type of magnification makes it possible to
magnify regions of interest in a graphic image by clicking on them with the
computer mouse. The viewer can then move the mouse around to magnify
different areas of the image. Another type of magnification provides the
ability to click on the image to greatly magnify the entire image. By
holding down the mouse button and moving the mouse, the viewer can then
move the magnified image to fit in the screen. While the ability to
magnify images over the Internet is not unique, our product differs from
many others in that the viewer does not require any special software to
perform these various types of magnification. The magnification capability
is generated by our Internet technology on our server--a high speed
computer that handles multiple streams of incoming and outgoing data--
rather than being deployed as an application that must reside on the
viewer's desktop computer. This means that e-commerce sites using our
technology can offer their viewers the ability to examine products in
detail without requiring them to download additional software.
Besides our viewing technology we also provide the ability to manage
large numbers of media files in a visual database displaying small,
thumbnail representations of the media. This database can be searched by
natural language queries.
Our core technology is characterized by these additional features that
also contribute to what we perceive to be marketplace advantages:
* Ability to use high-resolution graphics files large files with
lots of detail as opposed to the low resolution files with
indistinct detail used by conventional Internet technology.
* Ability to use a single image in multiple resolutions.
* Media stored using our unique technology has more modest storage
requirements than media stored in conventional formats.
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* Our technology works on MacIntosh, PC and UNIX computers. If a
business has a network of these different types of computers it
will work with combinations of these computers.
* Ability to print photographic quality images directly from the
Internet. That is, images of the same quality that would normally
require a color separation and professional printing process.
* The ability to create private, password required viewing salons
on the Internet for the purposes of inter-business collaboration.
* Ability to convert existing images in other file formats such as
computer aided design files and medical digital imaging and
communications in medicine files to the file format used by our
technology.
* Easy to use because it does not require any new software
programs, only a familiarity with Netscape or Internet Explorer.
We employ programmers and engineers tasked with adding new features to
our products and fixing any problems users might encounter. There are
risks inherent in software development including unanticipated delays,
technical problems that could mean significant deviation from original
product specifications, and hardware problems. In addition, once
improvements and bug fixes are deployed there is no assurance that they
will work as anticipated or that they will be durable in actual use by
customers.
During the years ended December 31, 2002 and 2001, our research and
development costs were $176,000 and $279,000, respectively, none of the
costs of which were borne directly by our customers.
Working Knowledge
Working Knowledge, Inc. provides services that are necessary to
prepare, enter, and maintain the customer's data on our image management
system. These include web design, database development, image scanning,
asset uploading, and database support. In addition, Working Knowledge is
able to serve the customer by utilizing the stored images to produce
compact discs, digital prints, and large poster formats. These
complementary services allow us to complete our cycle of comprehensive
image management.
Marketing
Our primary sales and marketing efforts have been to develop alliances
with large companies that help to bring our products to market using their
sales forces and distribution channels. Our marketing focus has been in
three principal fields. Approximately 80% of our
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clients have been in the entertainment industry, approximately 10% have been
in the medical field, and approximately 10% have been government agencies
* Medical AssetWare
New Mexico Software is developing many new products for medical asset
management, including products from our core technology to new products
from our strategic partner, BOSS. Boss is an application service provider
which is developing an Internet based accounting system. We are combining
their technology with our AssetWare digital asset management system.
Together we are integrating products like Smart Doctor which manages
patient record files, MagZoom, and accounting, patient rights management,
and HIPAA compliant medical applications.
New Mexico Software, through its MagZoom technology, can deliver even
the highest resolution X-ray over the web in a matter of seconds, with no
loss of resolution regardless of how close the client zooms. Management
believes this technology has several advantages, including faster, more
accurate readings, with fewer problems for the physician, less waiting time
for the patient, and less cost for the insurance company. Each X-ray image
can be permanently stored in a digital format, complete with detailed
patient information and physician notes.
Our technology permits the information to be stored on a specially
built server called a NAS (Network Appliance Server), which has as its
core technology our AssetWare built into the server.
* Entertainment Industry; Television, Movie Studios, and Ad Agencies
We also provide digital asset management to the Hollywood
entertainment studios. New Mexico Software provides software solutions for
the management of large volumes of media of digital material sent over the
Internet. These digital files include database management of graphic
images, animation sequences, video clips, audio recordings, text,
television program material, and educational films.
Our technology allows clients and their customers to access certain
files themselves and limits their access to only those jobs the studio
wants them to have. This is especially significant since we serve clients
with multiple offices all over the world. We can allow our customer's
customers to access marketing materials and archived data created at the
studio instantly, securely, and at virtually no cost. In addition, our
technology permits them to find what they need easily because of powerful
cataloging features that can be accessed by keyword, color, texture or
shape, or phonetic searching.
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* Government
We also work with many government agencies and have developed for them
an asset sharing multiple database technology that allows assets from
different agencies to share information. Our technology permits agencies
to upload one record for all divisions, which we believe would save money
for the agency by eliminating duplication of the same file(s) by different
divisions.
Customers
During the year ended December 31, 2002, we were dependent upon a
small number of clients. Three of these clients accounted for
approximately 67% of our gross revenues. Due to the nature of our
business, we will continue to deal with a relatively small number of
customers. However, we are working to expand our products and sales
volume, and we anticipate that our reliance on any one or two customers
will decrease.
Our Intellectual Properties
We have several proprietary aspects to our software that we believe
make our products unique and desirable in the marketplace. Consequently,
we regard protection of the proprietary elements of our products to be of
paramount importance and we attempt to protect them by relying on
trademark, service mark, trade dress, copyright and trade secret laws, and
restrictions on disclosure and transferring of title. We have entered into
confidentiality and non-disclosure agreements with our employees and
contractors in order to limit access to, and disclosure of, our proprietary
information. There can be no assurance that these contractual arrangements
or the other steps taken by us to protect our intellectual property will
prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies.
Although we do not believe that we infringe the proprietary rights of
third parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current, or future technologies.
We expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our
industry grows. Any such claim, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays, or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements may not be available on terms acceptable to us or at
all. As a result, any such claim could have a material adverse effect upon
our business, results of operations, and financial condition.
While we have commenced the process to protect our trade names, we
have not completed the process. Thus, others could attempt to use trade
names which we have selected. Such misappropriation of our brand identity
could cause significant confusion in the highly competitive Internet
technology marketplace and legal defense against such misappropriation
could prove costly and time-consuming. As part of the brand identity
creation process that
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defines our products to be unique in the Internet technology marketplace and
proprietary in nature, we have begun the process to protect certain product
names and slogans as registered trademarks to designate exclusivity and
ownership.
Although trademarked in the U.S., effective trademark, copyright or
trade secret protection may not be available in every country in which our
products may eventually be distributed. There can also be no assurance
that the steps taken by us to protect our rights to use these trademarked
names and slogans and any future trademarked names or slogans will be
adequate, or that third parties will not infringe or misappropriate our
copyrights, trademarks, service marks, and similar proprietary rights.
Government Regulation
Our company, operations, products, and services are all subject to
regulations set forth by various federal, state and local regulatory
agencies. We take measures to ensure our compliance with all such
regulations as promulgated by these agencies from time to time. The
Federal Communications Commission sets certain standards and regulations
regarding communications and related equipment.
There are currently few laws and regulations directly applicable to
the Internet. It is possible that a number of laws and regulations may be
adopted with respect to the Internet covering issues such as user privacy,
pricing, content, copyrights, distribution, antitrust and characteristics
and quality of products and services. The growth of the market for online
commerce may prompt calls for more stringent consumer protection laws that
may impose additional burdens on companies conducting business online. Tax
authorities in a number of states are currently reviewing the appropriate
tax treatment of companies engaged in online commerce, and new state tax
regulations may subject us to additional state sales and income taxes.
Because our services are accessible worldwide, other jurisdictions may
claim that we are required to qualify to do business as a foreign
corporation in a particular state or foreign country. Our failure to
qualify as a foreign corporation in a jurisdiction where it is required to
do so could subject us to taxes and penalties for the failure to qualify
and could result in our inability to enforce contracts in such
jurisdictions. Any such new legislation or regulation, or the application
of laws or regulations from jurisdictions whose laws do not currently apply
to our business, could have a material adverse effect on our business,
results of operations, and financial condition.
How We Compete
The media asset management market is one of the newest in the rapidly
growing information services industry. Competition at this time is broad
with many vendors offering systems that have some comparable features as
our current product. However, to our knowledge, few have comparable
features for the management and distribution of images and to
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the best of our knowledge none has the advanced viewing technology that
we provide. We believe our viewing technology offers a competitive advantage
over companies that offer just media asset management products.
Another competitive strategy we are using is offering our product as a
hosted application. We believe that our strategy to provide AssetWare as a
hosted application and our custom system design capabilities provide us a
diversity of competitive market penetration opportunities.
An important development in the sales and marketing of our products
occurred in 2002. In May, 2002 we started a new relationship with an
existing customer, Toshiba America Information Systems. Toshiba and New
Mexico Software are now marketing a product called the Digital Filing
Cabinet. Originally, the product was to be called DoorS for which we had
applied for a trademark. The trademark was granted in January 2003.
However, it was later learned that a Swedish company, Telelogic, had used
the name in commerce since 1993 for a type of software used by programmers.
Although the name probably would not be a conflict for either of the two
companies, it was decided that New Mexico Software would withdraw our use
of the name, DoorS.
A Digital Filing Cabinet organizes, searches, retrieves, displays,
archives and distributes digital content from a central repository.
Further, it converts analog and digital files to all digital. It uses the
Linux based operating system. The software handles photographs and images,
email, electronic files, and paper documents. It includes a web server,
database, firewall and search engine. The product receives faxes in digital
and searchable Adobe PDF format. It can scan documents from high speed
Fujitsu document scanners. Like AssetWare Professional version, the Digital
Filing Cabinet can e-mail customized collection baskets of unlimited size -
sending recipients a link and not an attachment. It also provides
instantaneous distribution which reduces the cost of over-night courier
services.
Additional features which are provided to the user of the Digital
Filing Cabinet are:
* Fax and Scan documents into the database.
* Copy documents into the database with a network-enabled copier.
(Toshiba, Canon, Kyocera, Sharp)
* Documents are automatically converted to Adobe PDF and scanned
with New Mexico Software OCR technology.
* Document conversion from PDF to Word and Word to PDF.
* Improved search engine; quick search and Boolean search; and
search entire database or search specific folders.
* Locate a document: type into the search field a keyword, name or
invoice number off the document and that document is instantly
retrieved and displayed.
* Users are assigned to groups, groups are given certain
permissions (viewing, downloading, and emailing) and assigned to
catalogs.
* Easy to set-up and user friendly.
* Upload and download original files of any size.
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* Creates a Web site automatically with the customer simply
providing the content.
* Creates thumbnails for all office file types.
* Ships with Open Office Suite and compatible with Microsoft Office
2003.
* Strong control environment and permission structure allows
administrators to decide who has access to what content.
* Version control.
* Full Text Indexing for Office documents.
* Master/slave software to use multiple servers for backup on
different IP addresses and different networks at different
locations (requires second license). Ideal for disaster recovery
programs.
* CD or DVD archiving. (In Beta)
* Search within CD or DVD without the need for a server connection.
(In Beta)
* Search indexed words within PDF documents for content on the
Internet or after downloaded. Print specific page from search
page.
* Enhanced MagZoom. Cinemascope Loupe technology for reading
documents and images.
* Scan preview of pages coming into the copier queue.
* Scan to a selected file folder.
* Create barcode templates for each directory and use separator
pages to scan to the directory or sub-directory in which the
documents belong.
* New Folder creation for ordinary users. Non administrative users
can upload or delete files if given permissions.
* Turn OCR on/off. Turn Version Control on/off.
* Backup software for Exabyte Tape Backup Systems.
The program with Toshiba includes marketing funds, joint marketing and
sales programs, trade show exposure, and an advertising program in Forbes
Magazine and Forbes.com. The Forbes advertising program is being funded in
part by Toshiba and the majority of the program is funded by sales of our
software. The program has been prepaid to Forbes magazine with the first
advertisements already appearing on Forbes.com and the magazine
advertisements will start with one half page four color pages in the May or
June 2003 issues. They will continue for several months to help build
exposure for the program.
Another marketing effort was started with ITMC. IT Marketing
Corporation is located in Austin, Texas. New Mexico Software is working
with ITMC to distribute products built by Toshiba and New Mexico Software.
In addition they are providing telemarketing assistance to help build the
reseller distribution channel which will support the sales of the
Toshiba/New Mexico Software Digital Filing Cabinet.
We believe that establishing and maintaining brand identity of our
products and services is critical to attracting new customers and retaining
our customer base of large corporations. The importance of brand
recognition will continue to increase as new competitors enter the digital
asset management marketplace. Promotion and enhancement of our brands will
depend largely on our success in continuing to provide high quality service
and developing leading edge
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products and this cannot be assured. If businesses do not associate our
product names or brands with high quality, or if we introduce new products
or services that are not favorably received, we will run the risk of
compromising our product line and decreasing the attractiveness of our products
to potential new customers. In addition, to attract and maintain customers
and to promote our products in response to competitive pressures, we may find
it necessary to increase our financial commitment substantially to create and
maintain product loyalty among our customers. If we are unable to provide
high quality services, or otherwise fail to promote and maintain our products,
or if we incur excessive expenses in an attempt to improve our services, or
promote and maintain our products, our business, results of operations, and
financial condition could be adversely affected.
Other, better financed companies may be developing similar products as
ours which could compete with our products. Such competition could
materially adversely affect our financial condition. Although we have been
established for eight years, our initial product was not marketed until
1998. There may exist better-capitalized companies on a parallel
development path with similar products addressing our target markets.
While the Internet technology marketplace is extremely competitive, we have
anticipated a first-to-market advantage with our products. However, other
highly capitalized companies that have recognized the absence of digital
image management products could overwhelm our first-to-market advantage
with expensive and expansive media blitzes that create the perception of a
dominant market presence and/or superior products. If we are unsuccessful
in addressing these risks and uncertainties, our business, results of
operations, and financial condition will be materially and adversely
affected.
We are continuing to develop our core products using a mix of readily
available open source software development tools. Knowledgeable
competitors may be able to deduce how we have assembled our code base and
be able to develop competing products. The principal advantage in
utilizing open source tools is the extremely high degree of portability
they ensure. Migrating our products from one operating system or hardware
base to another is more easily accomplished by avoiding proprietary
development tools. The risk factor inherent in the use of such freely
available tools is the fact that a sophisticated competitor might be able
to imitate our work and produce similar functionality. Our product has two
unique and highly desirable features for e-commerce, medical, and other
commercial applications. Our product offers the ability to magnify details
in high-resolution graphic images. Our product also allows rapid
transmission of a portion of such an image based on user input,
significantly enhancing the responsiveness of the system to deliver images
over the Internet. The ability to perform these operations is based on a
specific graphic image file format. We recognize that these significant
features of our product could be a target for imitation. Any such
imitation, should it occur, could have material adverse effects on our
business, operations, and financial condition.
Copyrights and Trademarks
We have four copyright registrations, one which was effective June 18,
2001, and three federal trademark applications which were filed in January
2000. The copyright is for our
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MagZoom product. Three additional trademarks were granted in 2002 and they
are: for the names "AssetWare," "Real Time Real Organized Real Simple," and
"The Look and Feel of e-Commerce."
Employees
As of April 10, 2003, we had 13 employees, including 7 in systems
engineering and quality assurance; 4 in administration and sales; and 2 in
scanning and site development. We offer and share in the cost of health
and dental insurance. A stock option plan and a stock issuance plan for
employees and others were adopted on August 3, 1999, and July 27, 2001,
respectively. The competition for qualified personnel in our industry and
geographic location is intense, and there can be no assurance that we will
be successful in attracting, integrating, retaining and motivating a
sufficient number of qualified personnel to conduct our business in the
future. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider our
relations with our employees to be good. From time to time, we also
utilize services of independent contractors for specific projects or to
support our research and development effort.
ITEM 2. DESCRIPTION OF PROPERTY
We lease a 6,002 square foot facility in Albuquerque, New Mexico, at a
cost of approximately $8,253 per month, increasing to approximately $8,503
beginning August 1, 2003. The lease expires approximately July 31, 2004.
The facility provides both administration and engineering offices. It is
in close proximity to the location of the servers, and the two locations
are networked together by fiber optics. The current space provides
adequate room for expansion. It also contains an advanced telephone system
which will provide the capability needed to provide adequate customer
telephone support.
We have also leased approximately 1,200 square feet of office space in
Santa Monica, California, to house the Working Knowledge, Inc. operations.
The lease term commenced June 8, 2000, and expires on June 8, 2003.
Current monthly lease payments are $3,337. We intend to renew this lease
prior to termination. If we are unable to renew the lease with terms
satisfactory to us, we believe similar space would be available at
comparable rates.
ITEM 3. LEGAL PROCEEDINGS
Neither our parent company nor any of its subsidiaries, or any of
their properties, is a party to any pending legal proceeding. We are not
aware of any contemplated proceeding by a governmental authority. Also, we
do not believe that any director, officer, or affiliate, any owner of
record or beneficially of more than five percent of the outstanding common
stock, or security holder, is a party to any proceeding in which he or she
is a party adverse to us or has a material interest adverse to us.
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Nevertheless, 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. In particular, we are in a dispute with Sun
Microsystems, Inc. This dispute involves computer equipment previously
used by us. The term on the lease of the equipment expired in 2002. Sun
claims that we owed them $18,000 at December 31, 2002, plus approximately
$7,000 per month for lease payments, and we claim that the lease expired
and we over-paid Sun by $50,000. Management is actively working with Sun
and the other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information
Our stock is currently quoted on the OTC Bulletin Board under the
symbol "NMXS." The table below sets forth for the periods indicated the
high and low sales prices as reported on the Internet. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
Quarter High Low
FISCAL YEAR ENDED
DECEMBER 31, 2001 First $1.00 $0.28
Second $0.93 $0.15
Third $0.65 $0.45
Fourth $0.50 $0.26
FISCAL YEAR ENDED
DECEMBER 31, 2002 First $0.40 $0.32
Second $0.50 $0.20
Third $0.26 $0.17
Fourth $0.23 $0.17
FISCAL YEAR ENDING
DECEMBER 31, 2003 First $0.19 $0.05
15
Our shares are subject to Rule 15g-9 under the Exchange Act. That
rule imposes additional sales practice requirements on broker-dealers that
sell low-priced securities designated as "penny stocks" to persons other
than established customers and institutional accredited investors. The
SEC's regulations define a "penny stock" to be any equity security that has
a market price less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. Currently our stock
is a penny stock. We cannot assure you that our shares will ever qualify
for exemption from these restrictions. For transactions covered by this
rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the
transaction prior to sale. Consequently, the rule may affect the ability
of broker-dealers to sell our shares and may affect the ability of holders
to sell their shares in the secondary market.
Shareholders
As of April 10, 2003, there were 356 holders of record of our common
shares. Such number of record owners was determined from our shareholders'
records maintained by our transfer agent and does not include beneficial
owners of our common stock held in the name of various security holders,
dealers and clearing agencies.
Dividends
We did not declare any cash dividends on our common stock during the
years ended December 31, 2002 and 2001. We have no plans to pay any
dividends to the holders of our common stock.
Sales of Unregistered Securities
During the fourth quarter ended December 31, 2002, the following
securities were sold by us without registering the securities under the
Securities Act:
* In October 2002 we issued 300,000 shares of common stock to twenty
investors, nine of whom were accredited, for gross proceeds of
$20,000. The shares were offered to persons who attended our open
house held on October 4, 2002. The shares were issued without
registration under the Securities Act by reason of the exemption from
registration afforded by the provisions of Rule 506 of Regulation D.
Each of the investors received a term sheet containing the same type
of information which would have been included in a prospectus. Each
of the investors acknowledged the investment nature of the securities
issued and consented to the imposition of restrictive legends upon the
certificates evidencing the shares and the warrants. The investors
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. Each investor was
also afforded the opportunity to ask questions of our management and
to receive answers concerning the
16
terms and conditions of the transaction. No underwriting discounts or
commissions were paid in connection with such issuance.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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, IBM, Windows, or Linux
operating systems.
During third quarter of 2002 our engineers upgraded our customized
technology which will permit the installation of a high-speed 6Ghz "Triage"
data cluster. This will provide increased speed, redundancy, failover
capability, and load balancing to our AssetWare enterprise database. The
new system will also help balance image and data processing server side
loads. Management believes this upgrade is a normal part of the business
of the company and will allow us to remain competitive in this industry.
We have begun offering this upgrade to its software. However, management
is unable to assess the specific effect, if any, this new technology will
have on our business or on future revenue generated from the sale of the
AssetWare software.
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 is unable to determine
at this time the effect, if any, this will have on our business.
17
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 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 realizes 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, 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 is in the process of standardizing the
license fees on its products and also establishing a standard maintenance
fee based on a fixed percentage of the initial license fee. 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.
Cost of services consist 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
18
assets and liabilities at the date of our financial statements. Actual results
may differ from these estimates under different assumptions or conditions.
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 that 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 provides for the licensing of the technology
for $500,000, which amount was recorded as income during 2002; however, as
of the date of filing this report, none of the proceeds from this sale had
been received from PTN.
Year Ended December 31, 2002, Compared to Year Ended December 31, 2001
A summary of operating results for the years ended December 31, 2002
and 2001 is as follows:
2002 2001
---------------------- ----------------------
% of % of
Amount Revenue Amount Revenue
------------ ------- ------------ -------
Revenues $ 1,658,000 100% $ 1,279,000 100%
Cost of services 527,000 31.8% 487,000 38.1%
----------- -----------
Gross profit 1,131,000 68.2% 792,000 61.9%
----------- -----------
General & administrative 1,386,000 83.6% 2,723,000 212.9%
Research & development 176,000 10.6% 279,000 21.8%
Impairment of goodwill 22,000 1.3% - -
----------- -----------
1,584,000 95.5% 3,002,000 234.7%
----------- -----------
Other income (expense) (69,000) (4.2)% (30,000) (2.3)%
----------- -----------
Net income (loss) $ (522,000) (31.5)% $ (2,240,000) (175.1)%
=========== ===========
2002 2001
---------- ----------
Earnings (loss) per share: $ (0.02) $ (0.10)
19
Revenues. Total revenues increased 29.6%, or $379,000, for the year
ended December 31, 2002, as compared to the same period in the prior year
(the "comparable prior year period"). These revenues were generated from
the following four revenue streams:
* Revenues generated by software maintenance increased 163%, or
$653,000, for the year ended December 31, 2002, as compared to the
comparable prior year period. This increase is attributable to the
increase in the number of license agreements with continuing annual
maintenance fee provisions. This increase was also due in part to a
single contract with Physicians Telehealth Network (PTN) from which we
recognized revenue of $500,000 in license fees during the first half
of this year. The agreement with PTN provides for the licensing of
the technology for $500,000, which amount was booked as revenue in the
first half of this year. The agreement, dated June 15, 2002, called
for a down payment by PTN of $25,000 and the balance in 90 days.
Neither the down payment nor any of the balance has been paid by PTN.
In February, 2003 PTN assets were acquired by a group of investors
headed by Kurt Grossman. PTN assets, including contract rights, trade
secrets, and intellectual property, have been acquired by a new
corporation named Doctors Telehealth Network (DTN). DTN also assumed
the obligation to pay the $500,000 under the original PTN agreement.
PTN was unable to fulfill its original contract with New Mexico
Software and this significantly delayed the deployment of their
network. Mr. Grossman, also an investor in our company, reconfirmed
his intention to work with New Mexico Software to develop the latest
generation of AssetWare Medical for DTN. Prior to year-end, we had
booked the $500,000 as license fee revenue. Support, maintenance, and
development costs related to this contract are estimated at $500,000
and will be governed by a separate agreement, which management hopes
to complete during the first half of 2003. Management anticipates
that revenues in this category will continue to increase, although
there is no assurance that they will increase at the current rate.
* Custom programming revenue decreased 73%, or $287,000, for the year
ended December 31, 2002, as compared to the comparable prior year
period. This decrease was primarily due to a shift from providing
customized software services to marketing of developed software
products. Management anticipates that the decrease in revenue from
custom programming will continue.
* Revenues generated by license fees decreased 44.2%, or $138,000, for
the year ended December 31, 2002, as compared to the comparable prior
year period. This decrease is primarily attributable to the fact that
we did not enter into any new significant licenses during the year.
The renewal fees under our license agreements are substantially lower
than the initial license fee paid when the license is first entered
into with the client. We anticipate in the future that sales of
licenses will be static but will be broader to a larger customer base.
* Revenue generated by scanning services decreased 46.4%, or $65,000,
for the year ended December 31, 2002, as compared to the comparable
prior year period. Although
20
management anticipates that revenues generated by Working Knowledge will
remain consistent or even increase modestly in the future, the services
provided by Working Knowledge will generally be limited to our existing
or future clients and will not be our primary focus. However, Working
Knowledge will continue to accept unsolicited work.
* Other revenue was generated by commissions from Sprint, consulting
services for data base design, and other miscellaneous items. Revenue
generated by these other services increased 635% or 216,000, for the
year ended December 31, 2002, as compared to the comparable prior year
period. The Sprint agreement was terminated by both parties and a
settlement of monies owed by both parties was agreed to in late
January 2003. The agreement calls for New Mexico Software to make a
total of $16,000 in payments to Sprint. Payments will be made over a
period of 16 months at the rate of $1,000 per month.
Cost of Services. Cost of services increased 8.2%, or $40,000, for
the year ended December 31, 2002, as compared to the comparable prior year
period. Cost of services as a percentage of revenues decreased to 31.8%
for the year ended December 31, 2002 from 38.1% for the comparable prior
year period. This decrease was primarily due to a decrease in salaries and
compensation previously associated with the development of our AssetWare
software in the comparable prior year period. During the first year ended
December 31, 2002, this product went into production which required less
expense. 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 49.1%, or $1,337,000, for the year ended December 31, 2002, as
compared to the comparable prior year period. This decrease was primarily
attributable to the reduction in the number of employees and the change of
auditors. General and administrative expenses as a percentage of revenues
were 83.6% for the year ended December 31, 2002, as compared to 212.9% 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
36.9%, or $103,000, for the year ended December 31, 2002, as compared to
the comparable prior year period. This decrease was primarily due to the
completion of the development of our core software products during the last
quarter of 2001 and the refocusing of research and development to upgrading
the existing products to remain competitive in the industry.
Other Income. Interest income decreased 80%, or $4,000, for the year
ended December 31, 2002, as compared to the comparable prior year period.
Interest expense increased 28.6%, or $10,000, for the year ended December
31, 2002, as compared to the comparable year period.
21
The increase in interest income was attributable to the increase in the
interest expense due to additional promissory notes sold by us. The loss
on disposal of fixed assets was attributable to the return of the Sony
Petasite equipment. This equipment had been sold to us by Sony for a
custom project which was completed during the period. Although Sony had
invoiced us for the equipment, the invoice had not been paid, so that with
the return of the equipment, we realized no additional cash. Rather it
received a credit on the invoice, less a restocking fee and other costs
charged by Sony and nominal transportation expenses.
Liquidity and Capital Resources
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. 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 December 31,
2002, we had trade accounts payable in the amount of $307,401, of which
$67,179 were current, $18,182 were between 31 and 60 days delinquent,
$5,992 were between 61 and 90 days delinquent, and $211,212 were over
ninety days delinquent. The four largest creditors include our former
auditor ($91,255), Sprint Data Services ($14,000), another former auditor
($11,878.00), and legal counsel ($8,605). 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 the president, which at December 31, 2002, was an aggregate of
$109,003. Payroll taxes due at December 31, 2002, were $145,827, excluding
penalties and interest. 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.
Accounts receivable increased from $469,000 in 2001 to $643,000. Of
the total increase, $500,000 is due to the receivable from PTN. Taking
into account this single account receivable, receivables have decreased
significantly from last year. Management believes this is due to better
collection methods initiated during the year and the completion of more
projects.
Operating activities generated $76,000 of cash for the year ended
December 31, 2002, as compared to operating activities using $321,000 of
cash for the comparable prior year period. The decrease in the use of cash
was primarily due to lower operating expenses and decreased salaries, some
of which was a result of completing much of the development stage of the
AssetWare product, and in a significant increase in accounts payable and
accrued expenses. There was a significant decrease in deferred revenue
from hosting activities provided by a change in sales methodology where
sales of licenses are immediately included in revenue instead of a term
contract over a period of time which required deferral of revenue. In
addition, because we did not have access to available cash for payroll
during the period, we paid employee salaries and outside consulting fees
with equity based compensation.
Investing activities used $354,000 of cash for the year ended December 31,
2002, as compared to $49,000 for the comparable prior year period. The
increase in the cash used for
22
investing activities for the year ended December 31, 2002, was primarily
attributable to the disposal of the Sony Petasite equipment.
Financing activities provided $260,000 in cash for the year ended
December 31, 2002, as compared to financing activities providing $413,000
for the comparable prior year period. The decrease in cash provided by
financing activities was primarily attributable to a reduction in funds
borrowed by us. Of the cash provided by financing activities for the year
ended December 31, 2002, $63,000 of the total amount was attributable to
loans from two individuals who are acquaintances of management. On April
23, 2002, we issued a one year convertible promissory note to one of these
individuals for $50,000 with a fixed sum of interest of $5,000. The note
is convertible into shares of common stock at the rate of one share for
each $0.25 of principal and imputed interest due on the conversion date.
The remaining $13,000 was advanced to us without a promissory note and is
deemed due on demand. Also, $148,000 was attributable to net proceeds from
a private stock offering of shares of common stock and Series D warrants.
In September 2002 we issued 1,346,545 shares of common stock and 1,346,545
Series D Warrants for gross proceeds of $148,120. The Series D Warrants
are exercisable at $0.21 per share at any time prior to July 22, 2009. In
October 2002 we issued 300,000 shares of common stock to twenty investors
for gross proceeds of $20,000.We also reduced the amount due on our line of
credit during this period by $50,000. Also during the year we used the
proceeds of a certificate of deposit used as security on a loan from Bank
of the West to retire the loan.
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.
At December 31, 2002, 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. 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 on July 24, 2002. We were able to negotiate an extension
of the amount due on the line of credit until April 24, 2003, by paying
$25,000 of the principal amount due and $4,555 in interest due at October 24,
2002. The principal balance due for this line of credit is now $225,000.
We and the bank have negotiated another six month extension by the payment
of $25,000 on or before April 24, 2003. 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
foreclosed on the note.
We do not currently have material commitments for capital expenditures
and do not anticipate entering into any such commitments during the next
twelve months. Our current
23
commitments consist primarily of lease obligations for office space. 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. If we are unable to secure additional sources of
capital, or significantly increase revenues from operations, it may not be
able to continue operating.
24
ITEM 7. FINANCIAL STATEMENTS
Beckstead and Watts, LLP
Certified Public Accountants
3340 Wynn Road, Suite B
Las Vegas, NV 89102
702.257.1984
702.362.0540 (fax)
INDEPENDENT AUDITORS' REPORT
Board of Directors
NMXS.com, Inc. and Subsidiaries
Albuquerque, New Mexico
We have audited the Balance Sheets of NMxS.com, Inc. and Subsidiaries (the
"Company"), as of December 31, 2002 and 2001, and the related Statements of
Operations, Stockholders' Equity, and Cash Flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on my audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statement presentation. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that my audit provides a reasonable basis for my opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NMXS.com, Inc. and
Subsidiaries as of December 31, 2002 and 2001, and the results of its
operations and cash flows for the years then ended, in conformity with
generally accepted accounting principles in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note A to the financial
statements, the Company has had limited operations and have not commenced
planned principal operations. This raises substantial doubt about its
ability to continue as a going concern. Management's plan in regard to these
matters are also described in Note A. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
/s/ Beckstead and Watts, LLP
February 6, 2003
25
NMXS.com, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
-------------------------
2002 2001
----------- -----------
Assets
Current assets:
Cash and equivalents $ 39,000 $ 57,000
Restricted cash - 42,000
Accounts receivable, net 643,000 469,000
Estimated earnings in excess of billings on uncompleted contract - 18,000
Prepaid expenses and other assets 42,000 50,000
Officer advances 1,000 32,000
----------- -----------
Total current assets 725,000 668,000
----------- -----------
Furniture, equipment and improvements, net 226,000 652,000
Security deposits 39,000 54,000
Goodwill, net 75,000 97,000
----------- -----------
$ 1,065,000 $ 1,471,000
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 315,000 $ 680,000
Deferred revenue 318,000 424,000
Notes payable 287,000 337,000
----------- -----------
Total current liabilities 920,000 1,441,000
----------- -----------
Stockholders' equity:
Preferred stock, $0.001 par value, 500,000 shares
authorized, no shares issued and outstanding
as of 12/31/02 and 12/31/01, respectively - -
Common stock, $0.001 par value, 50,000,000 shares
authorized, 24,757,726 and 22,116,784 shares issued and
outstanding as of 12/31/02 and 12/31/01, respectively 24,000 22,000
Additional paid-in capital 8,185,000 7,550,000
Retained (deficit) (8,064,000) (7,542,000)
----------- -----------
145,000 30,000
----------- -----------
$ 1,065,000 $ 1,471,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
26
NMXS.com, Inc. and Subsidiaries
Consolidated Statements of Operations
For the years ended
December 31,
---------------------------
2002 2001
------------ ------------
Revenue
Software maintenance $ 1,053,000 $ 400,000
Custom programming 106,000 393,000
License fees 174,000 312,000
Scanning services 75,000 140,000
Other 250,000 34,000
------------ ------------
1,658,000 1,279,000
------------ ------------
Operating costs and expenses:
Cost of services 527,000 487,000
General and administrative 1,386,000 2,723,000
Research and development 176,000 279,000
Impairment of goodwill 22,000 -
------------ ------------
Total operating costs and expenses 2,111,000 3,489,000
------------ ------------
Net operating (loss) (453,000) (2,210,000)
Other income (expense):
Interest income 1,000 5,000
Interest (expense) (45,000) (35,000)
(Loss) on disposal of fixed assets (25,000) -
------------ ------------
Total other income (expense) (69,000) (30,000)
------------ ------------
Net (loss) $ (522,000) $ (2,240,000)
============ ============
Weighted average number of
common shares outstanding - basic and fully diluted 23,270,000 21,520,000
============ ============
Net (loss) per share - basic and fully diluted $ (0.02) $ (0.10)
============ ============
The accompanying notes are an integral part of these financial statements.
27
NMXS.com, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Common Stock Additional Total
---------------------- Paid-in Retained Stockholder
Shares Amount Capital (Deficit) Equity
---------- --------- ----------- ------------- ------------
Balance forward
December 31, 2000 20,733,836 $ 20,000 $ 6,071,000 $ (5,302,000) $ 789,0000
Issuance of shares
previously issuable 75,000 -
Sale of common stock, net 287,500 115,000 115,000
Issuance of common stock
for personal guarantee 250,000 188,000 188,000
Issuance of common stock
for salaries 46,396 22,000 22,000
Issuance of stock options
for services 399,000 399,000
Issuance of warrants
for services 225,000 225,000
Issuance of common stock
for services 724,052 2,000 410,000 412,000
Fair value of services
provided by founder 120,000 120,000
Net (loss)
For the year ended
December 31, 2001 (2,240,000) (2,240,000)
---------- --------- ----------- ------------- ------------
Balance, December 31, 2001 22,116,784 22,000 7,550,000 (7,542,000) 30,000
Issuance of shares
previously issuable 21,946 -
Issuance of common stock
for salaries 42,349 15,000 15,000
Issuance of common stock
for services 29,497 212,000 212,000
Issuance of common stock
for services 492,480 1,000 90,000 91,000
Issuance of common stock
for severance 34,422 13,000 13,000
Issuance of common stock
for salaries 148,082 53,000 53,000
Issuance of common stock
for services 103,305 58,000 58,000
Issuance of common stock
for salaries 122,316 27,000 27,000
Sale of common stock, net 1,346,545 1,000 147,000 148,000
Sale of common stock, net 300,000 20,000 20,000
Net (loss)
For the year ended
December 31, 2002 (522,000) (522,000)
---------- --------- ----------- ------------- ------------
Balance, December 31, 2002 24,757,726 $ 24,000 $ 8,185,000 $ (8,064,000) $ 145,000
========== ========= =========== ============= ============
The accompanying notes are an integral part of these financial statements.
28
NMXS.com, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended
December 31,
---------------------------
2002 2001
------------ ------------
Cash flows from operating activities
Net (loss) $ (522,000) $ (2,240,000)
Adjustments to reconcile net (loss) to
net cash (used) by operating activities:
Common stock issued for salaries 108,000 -
Common stock issued for services 205,000 434,000
Stock options issued for services 156,000 399,000
Warrants issued for services - 225,000
Fair value of services provided by founder - 120,000
Depreciation 100,000 104,000
Provision for bad debt - 23,000
Amortization of goodwill 22,000 30,000
Amortization of gurantee fee - 176,000
Loss on disposal of fixed assets 25,000 -
Changes in:
Accounts receivable (174,000) (269,000)
Estimated earnings in excess of billings on uncompleted contracts 18,000 165,000
Prepaid expenses and other assets 8,000 24,000
Officer advances 31,000 18,000
Accounts payable and accrued expenses 365,000 170,000
Deferred revenue (266,000) 300,000
------------ ------------
Net cash (used) by operating activities 76,000 (321,000)
------------ ------------
Cash flows from investing activities
Acquisition of fixed assets (369,000) (8,000)
Security deposits 15,000 (41,000)
------------ ------------
Net cash (used) by investing activities (354,000) (49,000)
------------ ------------
Cash flows from financing activities
Proceeds from notes payable 100,000 350,000
Repayment of note payable (50,000) (50,000)
Net proceeds from the issuance of common stock 168,0000 115,000
Restricted cash 42,000 (2,000)
------------ ------------
Net cash provided by financing activities 260,000 413,000
------------ ------------
Net increase (decrease) in cash equivalents (18,000) 43,000
Cash equivalents - beginning 57,000 14,000
------------ ------------
Cash equivalents - ending $ 39,000 $ 57,000
============ ============
Supplemental disclosures:
Interest paid $ - $ 24,000
============ ============
Income taxes paid $ - $ -
============ ============
Non-cash transactions:
Issuance for a note payable $ - $ 188,000
============ ============
Number of shares issued for services - 250,000
============ ============
Obligation for acquisition of fixed assets - 337,000
============ ============
The accompanying notes are an integral part of these financial statements.
29
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A - ORGANIZATION AND OPERATIONS
NMXS.com, Inc. and its wholly-owned subsidiaries New Mexico Software, Inc.
("NMS") and Working Knowledge, Inc. ("WKI") (collectively "the Company"),
each operating as a business segment that develop and market proprietary
internet technology-based software for the management of digital high-
resolution graphic images, video clips and audio recordings. The Company
believes that its software has applications for the media, advertising,
publishing, medical, entertainment, e-commerce and university markets.
In August 1999, the Company effected a reverse merger in which
NMXS.com, Inc. acquired all of the outstanding common stock of NMS.
NMS, a New Mexico corporation, was formed in April 1996. NMS develops and
markets proprietary internet technology-based software.
During April 2000, the Company purchased 100% of the capital stock of WKI, a
Kansas corporation located in California, for a total price of $152,000. The
business combination has been accounted for using the purchase method.
Tangible assets purchased were of nominal value. WKI provides services which
are necessary to prepare, enter, and maintain the customer's data on the
Company's digital asset management system. The Company recorded goodwill of
$150,000 in connection with the acquisition. The accompanying financial
statements include the results of operations of WKI commencing April 1, 2000
(date of acquisition).
The Company has commenced principal business operations and conducts its
operations in the United States. Subsequent to September 30, 2001, the
Company is no longer in the development stage.
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 contemplates 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 B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Principles of consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material inter-company accounts and
transactions have been eliminated.
30
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
[2] Revenue recognition:
Revenue from proprietary software sales that does not require further
commitment from the company is recognized upon shipment. Maintenance contract
revenue is recognized on a straight-line basis over the life of the
respective contract. Revenue from custom software development, which is
generally billed separately from the Company's proprietary software, is
recognized based on its percentage of completion. Revenue recognized under
percentage of completion contracts are generally based upon specific
milestones achieved as specified in customer contracts. The Company also
derives revenue from the sale of third party hardware and software.
Consulting revenue is recognized when the services are rendered. License
revenue is recognized ratably over the term of the license.
Due to uncertainties inherent in the estimation process it is at least
reasonably possible that completion costs for contracts in progress will be
further revised in the near-term.
The cost of services, consisting of staff payroll, outside services,
equipment rental, communication costs and supplies, is expensed as incurred.
[3] Cash and cash equivalents:
The Company considers all highly liquid instruments purchased with a maturity
of three months or less to be cash equivalents.
[4] Furniture, equipment and improvements:
Furniture, equipment and improvements are recorded at cost. The cost of
maintenance and repairs is charged against results of operations as incurred.
Depreciation is charged against results of operations using the straight-line
method over the estimated economic useful life. Leasehold improvements are
amortized on a straight-line basis over the life of the related lease.
[5] Income taxes:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined on the basis of the differences between the tax basis
of assets and liabilities and their respective financial reporting amount
("temporary differences") at enacted tax rates in effect for the years in
which the differences are expected to reverse.
[6] Per share data:
The basic and diluted per share data has been computed on the basis of the
net loss available to common stockholders for the period divided by the
historic weighted average number of shares of common stock. Weighted average
number of shares in 2002 and 2001 also includes 0 and 29,946 shares issuable
as of December 31, 2002 and 2001, respectively. The 29,946 shares were issued
in March 2002. All potentially dilutive securities have been excluded from
the computations since they would be antidilutive, however, these dilutive
securities could potentially dilute earnings per share in the future.
[7] Research and development expenses:
Costs of research and development activities are expensed as incurred.
31
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
[8] Advertising expenses:
The Company expenses advertising costs which consist primarily of direct
mailings, promotional items and print media, as incurred. Advertising
expenses amounted to $15,348 and $21,000 for the years ended December 31,
2002 and 2001, respectively.
[9] Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amount of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
[10] Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123") allows companies to either expense the
estimated fair value of stock options and warrants, or to continue following
the intrinsic value method set forth in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") but disclose
the pro forma effects on net loss had the fair value of the options and
warrants been expensed. The Company has elected to apply APB 25 in accounting
for grants to employees under its stock based incentive plans. Equity
instruments issued to non-employees are measured based on their fair values.
[11] Software development:
The Company accounts for computer software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed". As
such, all costs incurred prior to the product achieving technological
feasibility are expensed as research and development costs. Technological
feasibility is generally achieved upon satisfactory beta test results. Upon
achieving technological feasibility, programming costs are capitalized and
amortized over the economic useful live which is estimated to be two years.
There were no capitalized software development costs as of December 31, 2002
and 2001.
[12] Rental expense:
The Company has recognized the total minimum rental payments due under the
lease on a straight-line basis over the lease term. As of December 31, 2001,
the Company has a prepaid rent asset of $7,000.
32
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
[13] Goodwill:
The Financial Accounting Standards Board ("FASB") recently issued Statements
of Financial Accounting Standards Nos. 141 "Business Combinations", 142
"Goodwill and Other Intangible Assets" and 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS 141", "SFAS 142" and "SFAS 144").
All of these pronouncements are effective for fiscal years beginning after
December 31, 2001. Under SFAS 141, a company must use the purchase method of
accounting for all business acquisitions. SFAS 142 requires a company to
periodically evaluate for impairment (as opposed to amortize) goodwill and
intangible assets.
Goodwill resulting from the acquisition of Working Knowledge, Inc., accounted
for as a purchase, was being amortized on a straight-line basis over 5 years
through December 31, 2001. The Company adopted SFAS No. 142 effective January
1, 2002 and as such, will test the goodwill balance for impairment at least
on an annual basis. Such analysis will be based upon the expected future cash
flows of Working Knowledge, Inc. There was $22,000 and $0 as impairment of
goodwill as of December 31, 2002 and 2001.
Amortization of $30,000 has been included in general and administrative
expenses for the year ended December 31, 2001.
SFAS 144 supercedes SFAS 121. Management does not expect SFAS 144 to have a
material impact on the consolidated financial statements.
NOTE C - RESTRICTED CASH
As of December 31, 2001, the Company renewed a certificate of deposit in the
amount of $42,000 to collateralize a note payable. Interest is compounded on
a quarterly basis at an annual percentage yield of 3.875%. As of December 31,
2002, there was no restricted cash.
NOTE D - FURNITURE, EQUIPMENT, AND IMPROVEMENTS
Furniture, equipment, and improvements as of December 31, 2002 consisted of
the following:
Computers $ 270,000
Furniture, fixtures and equipment 172,000
Leasehold improvements 83,000
----------
525,000
----------
Accumulated depreciation (298,000)
----------
227,000
==========
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 (Note F). 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. The remaining $225,000 of principal was extended until
April 24, 2003 at a current interest rate of 7%. As of December 31, 2002, the
Company had a balance due of $225,000.
33
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - CAPITAL TRANSACTIONS
Common stock:
During the year ended December 31, 2001, the Company effected the following
stock transactions:
During January, the Company borrowed $300,000 for working capital purposes.
The loan is collateralized by substantially all of the Company's assets and
personally guaranteed by an officer of the Company as well as a then
unrelated third party. The third party was issued 250,000 shares of the
Company's common stock valued at approximately $187,500 in exchange for the
personal guarantee. Approximately $176,000 has been included in general and
administrative expenses in the statement of operations for the year ended
December 31, 2001.
During May, the Company sold 287,500 shares of its common stock for $115,000.
The Company compensated two employees in lieu of cash in the form of the
Company's common stock. The Company issued 46,396 shares of its common stock
to these employees, and approximately $22,000 is included in the statement of
operations for the year ended December 31, 2001.
In July, the Company issued 75,000 shares of common stock to it's Chief
Executive Officer (Note H)
The Company issued 724,052 shares and has 29,946 shares issuable of its
common stock for various legal and other professional services. Approximately
$405,000 has been included in the statement of operations for the year ended
December 31, 2001.
On July 27, 2001 the Board of Directors adopted the 2001 Stock Issuance Plan.
On February 5, 2002, the Board of Directors amended the plan to increase the
number of shares available under the plan from the original 800,000 to
1,600,000. The plan provides for a stock issuance program under which, at the
sole discretion of the plan administrator, eligible persons may be issued
shares of our common stock by the immediate purchase of such shares or as a
bonus for either past service to our company, or any of its subsidiaries, or
as an incentive to accept employment or a board position with our company or
any of its subsidiaries.
During the year ended December 31, 2002, the Company effected the following
stock transactions:
During February, the Company compensated four employees in the form of the
Company's common stock as additional compensation. The Company issued 42,349
shares of its common stock to these employees, and approximately $15,000 is
included in the statement of operations for the three months ended March 31,
2002.
The Company issued 51,443 shares, including 21,946 shares which had been
issuable at December 31, 2001, for legal expenses and sales commission
advances. A total of 13,512 shares for legal expenses are shown as issuable
at March 31, 2002. In addition, 227,941 shares are shown as issuable as
payment for consulting services rendered during 2001.
The Company issued 574,509 shares for legal and consulting services during
the three months ended June 30, 2002, 256,853 of which were shown as issuable
at March 31, 2002. Approximately $91,000 of expense is included in the
statement of operations for the three months ended June 30, 2002. No shares
are shown as issuable at June 30, 2002.
During April, the Company compensated five employees in the form of the
Company's common stock as a severance package. A total of 34,422 shares were
issued to these employees, and approximately $13,000 was included in the
statement of operations for the three months ended June 30, 2002.
34
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - CAPITAL TRANSACTIONS (CONTINUED)
Common stock: (continued)
During April and May, the Company compensated all its employees in the form
of the Company's common stock in lieu of payroll. A total of 148,082 shares
of the Company's common stock were issued to these employees, and
approximately $53,000 was included in the statement of operations for the
three months ended June 30, 2002.
During the three months ended September 30, 2002, the Company issued 103,304
shares for legal and consulting services. Approximately $18,000 was included
in the statement of operations for that period.
In July, the Company compensated all its employees in the form of the
Company's common stock in lieu of payroll. A total of 122,316 shares were
issued to these employees, and approximately $27,000 was included in the
statement of operations for the three months ended September 30, 2002.
In September, the Company sold 1,346,545 shares of its common stock for
$148,000.
In December, the Company sold 300,000 shares of its common stock for $20,000.
Warrants:
In conjunction with the closing of the reverse merger (Note A), the Company
declared a distribution of 1,000,000 Series A warrants at the rate of one
warrant for each 5.3 common shares held by the stockholders of record as of
the beginning of business on August 3, 1999. The warrants have an exercise
price of $1.25 per share and a three year contractual life from date of
issuance. The warrants are redeemable by the Company for $0.01 per warrant
subject to 30 days written notice at any time the closing bid price of the
stock equals or exceeds 300% of the exercise price of the warrant for ten
consecutive trading days. The warrants became issuable on November 14, 2000,
the date the Company's Form SB-2 filing was declared effective. As a result,
the Company recorded a warrant dividend valued at $1,153,000, the fair value
of the warrants on the effective date. The fair value was estimated using the
Black-Scholes pricing model. The following assumptions were used in computing
the fair value of the warrant dividend: risk free interest rate of 5.7%, zero
dividend yield, volatility of the Company's common stock 218% and an expected
life of three years. The warrants were issued on January 25, 2001.
In January and February of 2000, the Company issued 1,090,000 Series B
warrants in connection with a private placement offering. The Series B
warrants are exercisable for a period of up to five years from the date of
issuance.
On February 20, 2001, the Company entered into a stock swap agreement with a
principal corporate stockholder (a public company). The agreement provides
for the exchange of cashless assignable Series C warrants to purchase
1,500,000 shares of the Company's common stock at an exercise price of $.50
per share for 150,000 restricted shares of the stockholder's common stock.
The transaction was recorded as an investment valued at $225,000, which
represented the market value of the stockholder's common stock exchanged on
the date of the agreement (See Note L).
In September, the Company issued 1,346,545 warrants in conjunction with the
sale of the 1,346,545 shares above at the rate of one warrant for each common
share. The warrants have an exercise price of $0.21 per share and a seven
year contractual life from date of issuance. The fair value of the warrants
has been estimated on the date of grant using the Black-Scholes option
pricing model. The weighted average fair value of these warrants was $0.17.
The following assumptions were used in computing the fair value of these
warrants: weighted average risk-free interest rate of 4.05%, zero dividend
yield, volatility of the Company's common stock of 122% and an expected life
of the warrants of seven years. Approximately $2,000 of expense was included
in the statement of operations for the three months ended September 30, 2002.
35
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - CAPITAL TRANSACTIONS (CONTINUED)
Warrants: (continued)
No warrants have been exercised through December 31, 2002.
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
December 31, 2001 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
----------- ----------- ---------------- -------- ----------- --------
$0.17-$0.30 97,000 9.83 $0.17 0 $0.00
$0.31-$0.50 1,215,000 8.66 $0.38 60,000 $0.31
$0.54-$0.83 790,000 3.45 $0.71 330,000 $0.72
$1.25-$2.13 460,000 7.54 $1.66 361,000 $1.75
Summary of Options Granted and Outstanding:
For the Years Ended December 31,
----------------------------------------------
2002 2001
--------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- -------- ----------- --------
Options:
Outstanding at
beginning of year 2,202,000 $0.77 1,593,000 $1.33
Granted 332,000 $0.29 1,739,000 $0.47
Cancelled (2,000) $1.25 (1,130,000) $0.09
Outstanding at
end of year 2,553,000 $0.63 2,202,000 $0.77
The fair value of each option granted prior to 2000 has been estimated on the
date of grant using the Black-Scholes option pricing model. The weighted
average fair value of the options granted during 1999 was $2.42. The
following weighted average assumptions were used in computing the fair value
of option grants for 1999: weighted average risk-free interest rate of 5.50%;
zero dividend yield, volatility of the Company's common stock of 40% and an
expected life of the options of five years. The options vest ratably over a
five year period.
36
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - CAPITAL TRANSACTIONS (CONTINUED)
Stock options: (continued)
During the year ended December 31, 2001, the Company granted the following
stock options:
In January 2001, the Company granted 83,000 stock options to employees with
an exercise price of $.77, equal to the fair value of the common stock, with
a contractual life of ten years and a two year vesting period, 50% at the end
of each one year period from the date of grant, 25,000 of such options have
been cancelled. 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 $.77. The following assumptions were used in
computing the fair value of these option grants: weighted average risk-free
interest rate of 6.05%; zero dividend yield, volatility of the Company's
common stock of 218% and an expected life of the options of ten years.
During March, 2001, the Company granted 60,000 stock options for legal
services to a member of the Board of Directors with an exercise price of
$.3125, equal to the fair value of the common stock, with a contractual life
of five years and a thirty day vesting period from the date of grant. The
fair value of the options has been estimated using the Black- Scholes option
pricing model. The weighted average fair value of these options was $.3125.
The following assumptions were used in computing the fair value of these
option grants: weighted average risk-free interest rate of 4.64%; zero
dividend yield, volatility of the Company's common stock of 247% and an
expected life of the options of five years. Options valued at approximately
$19,000 were earned and are included in general and administrative expense
for the year ended December 31, 2001.
During April, 2001, the Company granted 300,000 stock options for outside
consulting services with an exercise price of $.28, equal to the fair value
of the common stock, with a contractual life of five years, exercisable as of
the date of grant. The fair value of the options has been estimated on the
date of grant using the Black-Scholes option pricing model. The options were
forfeited as of December 31, 2001 and no expense has been recognized for
2001.
During April, 2001, the Company granted 100,000 stock options for outside
consulting services with an exercise price of $.39, $.11 more than the fair
value of the common stock, with a contractual life of ten years and a two
year vesting period, 50% at the end of each one year period from the date of
grant. 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 $.28. The following assumptions were used in computing
the fair value of these option grants: weighted average risk-free interest
rate of 5.14%; zero dividend yield, volatility of the Company's common stock
of 247% and an expected life of the options of ten years. An expense of
approximately $10,000 is included in general and administrative expense for
the year ended December 31, 2001 for the estimated value of the options over
the period services are to be received.
During April 2001, the Company granted 300,000 stock options to an employee
with an exercise price of $.50, $.25 over the fair value of the common stock,
with a contractual life of ten years and a two year vesting period, 50% at
the end of each one year period from the date of grant. 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
$.25. The following assumptions were used in computing the fair value of
these option grants: weighted average risk-free interest rate of
6.05%; zero dividend yield, volatility of the Company's common stock of 247%
and an expected life of the options of ten years.
37
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - CAPITAL TRANSACTIONS (CONTINUED)
Stock options: (continued)
During April, 2001, the Company granted 60,000 stock options for professional
services with an exercise price of $.61, equal to the fair value of the
common stock, with a contractual life of five years, exercisable as of the
date of grant. 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 $.61. The following assumptions were used in
computing the fair value of these option grants: weighted average risk- free
interest rate of 4.76%; zero dividend yield, volatility of the Company's
common stock of 247% and an expected life of the options of five years. An
expense of approximately $36,000 is included in general and administrative
expense for the year ended December 31, 2001, for the estimated value of
options over the period services are to be received.
During June 2001, the Company granted 35,000 stock options to an employee
with an exercise price of $1.49, $.84 over the fair value of the common
stock, with a contractual life of ten years and a vesting period of 50% at
the end of five months and 50% at the end of seventeen months. 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 $.65. The following assumptions were used in computing the fair
value of these option grants: weighted average risk-free interest rate of
6.05%; zero dividend yield, volatility of the Company's common stock of 247%
and an expected life of the options of ten years.
During July 2001, the Company granted 100,000 stock options to an employee
with an exercise price of $.54, equal to the fair value of the common stock,
with a contractual life of ten years and a vesting period of 50% at the end
of five months and 50% at the end of seventeen months. 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
$.54. The following assumptions were used in computing the fair value of
these option grants: weighted average risk-free interest rate of
6.05%; zero dividend yield, volatility of the Company's common stock of 247%
and an expected life of the options of ten years.
During October 2001, the Company granted 650,000 stock options to three
employees, 450,000 options with an exercise price of $.34, and 200,000
options with an exercise price of $.70, all equal to the fair value of the
common stock, with a contractual life of ten years and a two year vesting
period, 50% at the end of each one year period from the date of grant. 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 $.45. The following assumptions were used in computing the fair
value of these option grants: weighted average risk- free interest rate of
4.57%; zero dividend yield, volatility of the Company's common stock of 222%
and an expected life of the options of ten years.
During October, 2001, the Company granted 50,000 stock options for outside
consulting services with an exercise price of $.34, equal to the fair value
of the common stock, with a contractual life of ten years and a two year
vesting period, 50% at the end of each one year period from the date of
grant. 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 $.34. The following assumptions were used in computing
the fair value of these option grants: weighted average risk- free interest
rate of 4.57%; zero dividend yield, volatility of the Company's common stock
of 222% and an expected life of the options of ten years. An expense of
approximately $1,000 is included in general and administrative expense for
the year ended December 31, 2001, for the estimated value of options over the
period services are to be received.
38
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE F - CAPITAL TRANSACTIONS (CONTINUED)
Stock options: (continued)
During the year ended December 31, 2002, the Company granted the following
stock options:
In January 2002, the Company granted 53,000 stock options to employees with
an exercise price of $.34, equal to the fair value of the common stock, with
a contractual life of ten years and a two year vesting period, 50% at the end
of each one year period from the date of grant. 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 $.34. The
following assumptions were used in computing the fair value of these option
grants: weighted average risk-free interest rate of 5.04%, zero dividend
yield, volatility of the Company's common stock of 222% and an expected life
of the options of ten years.
During January 2002, the Company granted 3,000 stock options for outside
consulting services with an exercise price of $.34, equal to the fair value
of the common stock, with a contractual life of ten years and a two year
vesting period, 50% at the end of each one year period from the date of
grant. 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 $.34. The following assumptions were used in computing
the fair value of these option grants: weighted average risk-free interest
rate of 5.04%, zero dividend yield, volatility of the Company's common stock
of 222% and an expected life of the options of ten years.
During February 2002, the Company granted 200,000 stock options to an
employee with an exercise price of $.34, equal to the fair value of the
common stock, with a contractual life of ten years and a two year vesting
period, 50% at the end of each one year period from the date of grant. 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 $.34. The following assumptions were used in computing the fair
value of these option grants: weighted average risk-free interest rate of
4.91%, zero dividend yield, volatility of the Company's common stock of 222%
and an expected life of the options of ten years.
In August 2002, the Company granted 103,125 stock options to an employee with
an exercise price of $0.17, equal to the fair value of the common stock, with
a contractual life of ten years and a 21 month vesting period. 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 $0.16. 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.
Stock options: (continued)
The following table summarizes the pro forma operating results of the Company
for December 31, 2002 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 loss available to common stockholders ($406,000)
Proforma basic and diluted loss per share ($0.02)
As of December 31, 2002, the Company has reserved 884,865 shares of its
common stock for issuance upon exercise of stock options and warrants.
39
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE G - INCOME TAXES
The Company accounts for income taxes using the liability method, under which
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and the tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
As of December 31, 2002, the Company had net operating loss carryforwards of
approximately $4,000,000, which expire in varying amounts between 2016 and
2021. Realization of this potential future tax benefit is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforward. The deferred tax asset related to this potential future tax
benefit has been offset by a valuation allowance in the same amount. The
amount of the deferred tax asset ultimately realizable could be increased in
the near term if estimates of future taxable income during the carryforward
period are revised.
The difference between the statutory federal income tax rate on the Company's
pre-tax loss and the Company's effective income tax rate is summarized as
follows:
2002 2001
------- -------
Statutory federal income tax rate (34.0%) (34.0%)
Increase in valuation allowance 34.0% 34.0%
Other 0.0% 0.0%
------- -------
Effective income tax rate 0.0% 0.0%
======= =======
NOTE H - RELATED PARTY TRANSACTIONS
Officer advances:
Represents advances to the Chief Executive Officer who is a principal
stockholder of the Company which bears interest at 7% per annum. During 2001,
repayments of $25,000 were made by the principal stockholder which was offset
by advances of $4,000 plus interest earned but not paid of $3,000. The amount
was charged against interest expense and accrued payroll.
Rent:
In May 2000, the Chief Executive Officer, who is a principal stockholder of
the Company, transferred 75,000 shares to a lessor of the Company for future
rent obligations and certain leasehold improvements. As a result of this
transaction, the Company recognized a credit to additional paid-in capital of
$109,000, representing the fair value of the stock transaction. The Company
issued 75,000 replacement shares to this individual in July 2001.
NOTE I - COMMITMENTS
Leases:
The Company leases office space, equipment and an automobile under operating
leases. Future minimum lease payments as of December 31, 2002 are as follows:
Year Amount
---- --------
2003 $121,000
2004 70,000
Rent expense for the years ended December 31, 2002 and 2001 amounted to
$149,000 and $272,000, respectively.
40
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Employment agreement:
The Company entered into an employment and noncompetition agreement with a
stockholder to act in the capacity of President and Chief Executive Officer.
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 $120,000 is included in general and administrative expenses for
the year ended December 31, 2002; the individual has agreed to forgo his
compensation for the year ended December 31, 2001. The Company recorded a
charge to operations of $120,000 representing the fair value of such services
rendered with a corresponding increase to additional paid in capital. The
noncompetition agreement commences upon the termination of the employment
agreement for a period of one year. As of December 31, 2002, there was a
total of $109,000 in accrued payroll.
NOTE J - MAJOR CUSTOMERS
During the year ended December 31, 2002, three customers accounted for 47%,
11% and 9% of the Company's revenue. During the year ended December 31, 2001,
three customers accounted for 16%, 13%, and 12% of the Company's revenue.
As of December 31, 2002, balances due from two customers comprised 70% and 8%
of total accounts receivable. As of December 31, 2001, balances due from two
customers comprised 57% and 21% of total accounts receivable.
NOTE K - CONSULTING AGREEMENT
The Company entered into an agreement with a company to provide consulting
and public relation services. The consultant received an initial fee of
150,000 shares of Manhattan Scientifics, Inc. stock. In consideration of
furnishing this initial fee, the Company issued 1,500,000 Series C warrants
to Manhattan Scientifics, Inc. (see Note F). In addition, a total fee of
75,000 shares was furnished during the term of agreement. The agreement, as
revised, was terminated as of October 31, 2001. Expense of $267,000 has been
included in the statement of operations for the year ended December 31, 2001.
41
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE L - REPORTABLE SEGMENTS
Management has identified the Company's reportable segments based on separate
legal entities. NMS derives revenues from the development and marketing
proprietary internet technology-based software and WKI provides data
maintenance services related to NMS digital asset management system.
Information related to the Company's reportable segments for 2002 is as
follows:
NMS WKI Total
----------- ----------- -----------
Revenue $ 1,607,000 $ 51,000 $ 1,658,000
Cost of services 485,000 42,000 527,000
General and administrative 1,227,000 159,000 1,386,000
Research and development 176,000 - 176,000
Impairment of goodwill 22,000 - 22,000
Operating income (loss) (303,000) (150,000) (453,000)
Total assets $ 1,029,000 $ 36,000 $ 1,065,000
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 loss $ (453,000)
Other income (expense) (69,000)
----------
Consolidated net loss/comprehensive loss $ (522,000)
==========
Prior to acquisition of Working Knowledge, Inc., in April 2000, the Company
operated within one business segment.
For the year ended December 31, 2002, amortization and depreciation expense
amounted to $75,000 and $25,000 for NMS and WKI, respectively. Also, total
fixed asset additions amounted to $ 6,000 and $0 for NMS and WKI,
respectively, while fixed asset disposals amounted to $342,000 and $0 for
NMS and WKI, respectively.
NOTE M - COMMITMENTS AND CONTINGENCIES
Contingencies:
During the year ended December 31, 2002, the Company 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 during the first six months
of 2003.
During the year ended December 31, 2002, 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.
42
NMXS.com INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE M - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Outstanding Payroll Taxes:
The Company has unpaid Federal and State payroll taxes totaling $145,827 as
of December 31, 2002. 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 they cannot reasonably determine the amount
due in penalties and interest.
43
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 13, 2002, we filed a Form 8-K announcing the dismissal of
Richard A. Eisner & Company, LLP and the engagement of Atkinson & Company,
Ltd. as our independent auditor.
On December 10, 2002, we filed a Form 8-K announcing the resignation
of Atkinson & Company, Ltd. as our independent auditor. On January 24,
2003, we filed a Form 8-K announcing the engagement of Beckstead and Watts,
LLP as our independent auditor.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth our directors and executive officers,
their ages, and all offices and positions held with our company. A
director holds office until his successor is elected and qualified. Annual
meetings to elect directors are scheduled to be held on the 5th day of April
in each year if not a legal holiday, and if a legal holiday, then on the
next succeeding day that is not a holiday, at 10:00 am. Officers are
chosen by the Board of Directors and hold office until their successors are
chosen and qualified. Officers may be removed with or without cause by the
affirmative vote of a majority of the whole Board of Directors.
Name Age Position Director Since
---- --- -------- --------------
Richard Govatski 57 Chairman, President & CEO 1999
Teresa B. Dickey 56 Director, Secretary & Treasurer 2003
John E. Handley 41 Director 2003
Set forth below is certain biographical information regarding our
executive officers and directors:
RICHARD GOVATSKI has been the president of NMXS.com, Inc. since August
1999, and has been chairman, CEO, and president of New Mexico Software,
Inc., since 1996.
TERESA B. DICKEY has been the secretary/treasurer of our company since
August 1999. From 1988 until 1999 she was employed by Sandia National
Laboratory as art director. Sandia National Laboratory is a U.S.
Department of Energy national security laboratory.
JOHN E. HANDLEY has been self-employed since September 2002 as a
telecommunications consultant. From August 1987 until August 2002 he was
employed, as an associate partner (from September 1997 until August 2000)
and as a partner (September 2000 until August 2002), by Accenture LLP,
a business and technology consulting and outsourcing company.
44
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Executive Officers
Summary Compensation Table. The following table sets forth
information concerning the annual and long-term compensation awarded to,
earned by, or paid to the named executive officer for all services rendered
in all capacities to our company, or any of its subsidiaries, for the years
ended December 31, 2002, 2001, and 2000:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
--------------------------------------- -----------------------
Securities
Restricted Under-
Name and Other Annual Stock lying
Principal Position Year Salary Bonus Compensation Award(s) Options
($) ($) ($) ($) (#)
Richard Govatski, CEO 2002 $120,000(1) -0- $3,600(2) -0- -0-
2001 $-0-(3) -0- -0- -0- -0-
2000 $120,000(4) -0- -0- -0- -0-
(1) Mr. Govatski did not receive payment of any of his 2002 salary,
but he did apply $26,000 of the amount of this payable toward the
satisfaction of a like amount advanced by us to him in prior years. The
remaining $94,000 has been booked as an account payable to him.
(2) Mr. Govatski is afforded the use of a company automobile.
(3) Mr. Govatski agreed to forgo his annual salary for 2001, none of
which was paid. However, the company did record a charge to operations in
the amount of $120,000 to reflect the fair value of the services rendered
during 2001.
(4) During the year 2000, $15,000 of the salary of Mr. Govatski was
not paid, but has been accrued.
Option Grants Table. The following table sets forth information
concerning individual grants of stock options to purchase our common stock
made to the executive officer named in the Summary Compensation Table
during fiscal 2002.
OPTIONS GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Number of securities Percent of total
underlying options options granted to Exercise or base
granted employees in last price Expiration
Name (#) fiscal year ($/Share) Date
Richard Govatski -0- N/A N/A N/A
45
Aggregated Option Exercises and Fiscal Year-End Option Value Table.
The following table sets forth certain information regarding stock options
exercised during fiscal 2002 and held as of December 31, 2002, by the
executive officer named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
at Fiscal at Fiscal
Year-End(#) Year-End($)(1)
------------- --------------
Shares acquired on Exercisable/ Exercisable/
Name exercise (#) Value realized ($) Unexercisable Unexercisable
Richard Govatski -0- N/A 300,000/200,000 $-0-/$-0-(2)
(1) Value is based on the closing sale price of the Common Stock on
December 31, 2002, the last trading day of fiscal 2002 ($0.13), less the
applicable option exercise price.
(2) Of these options, 380,000 were exercisable at $0.75 per share and
120,000 were exercisable at $0.825 per share.
Employment Contracts
We had a three-year employment contract with Mr. Govatski to act as
our president and chief executive officer on a full-time basis. The
agreement commenced on January 1, 2000 and expired on December 31, 2002.
The annual base salary was $120,000. He was entitled to a bonus from time-
to-time as may be determined solely by the Board of Directors. As part of
his benefits he received options to purchase 500,000 shares of our common
stock. We also agreed to provide him with a long-term disability
insurance policy and with group health, hospitalization, major medical
insurance, and other similar benefits as we may adopt in the future. We
also agreed to maintain a $1,000,000 life insurance policy which permits
him to designate the beneficiary. We also purchased an automobile for
approximately $36,000 and provide him use of the automobile for business
purposes. The employment contract also contained standard confidentiality
provisions and a one-year non-competition provision after termination. The
agreement was terminable for cause by a vote of two-thirds of the
directors. It could also be terminated upon three-month's notice if he
becomes incapacitated for a period of six months or immediately upon his
death. We intend to renegotiate a similar employment contract with Mr.
Govatski.
Compensation of Directors
Directors are permitted to receive fixed fees and other compensation
for their services as directors. The Board of Directors has the authority
to fix the compensation of directors. No amounts have been paid to, or
accrued to, directors in such capacity. During the year ended
46
December 31, 2001, we granted options to Scott Bach, one of our Directors
at the time, to purchase up to 60,000 shares of common stock at an exercise
price of $.3125 per share. These options were issued for services rendered
by Mr. Bach as a director. The options are fully vested and expire on
March 28, 2006. Also during the year ended December 31, 2001, we issued
64,655 shares of common stock to Marvin Maslow, one of our directors at the
time, for services rendered as a director. These shares were returned to us
and cancelled by Mr. Maslow during the year and there is no further obligation
to reissue these shares. On February 26, 2002, we issued 227,941 shares to
Mr. Maslow as a bonus for being a director.
Stock Option and Stock Issuance Plans
Our 1999 Stock Option Plan permits the grant of options exercisable
for shares of our common stock to corporate officers, directors, employees,
and consultants upon such terms, including exercise price and conditions
and timing of exercise, as may be determined by the Board of Directors. The
plan authorizes the grants of awards up to a maximum of 3,000,000 shares of
our common stock. In 2002, we granted 352,686 stock options under the
plan. At April 10, 2003, 2,732,267 remained outstanding and unexercised.
Of these outstanding options, 1,275,474 had vested.
Our 2001 Stock Issuance Plan, as amended, permits the grant of shares
of our common stock to employees of our company and any of its
subsidiaries, non-employee members of our board or non-employee members of
the board of directors of any of our subsidiaries, and consultants and
other independent advisors who provide services to us or any of our
subsidiaries, upon such terms and conditions as may be determined by the
Board of Directors. The plan authorizes the grants of awards up to a
maximum of 2,400,000. In 2002 we granted 878,995 shares under the plan.
At April 10, 2003, an aggregate of 1,449,443 shares had been granted under
the plan, all of which were fully vested upon issuance.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information derived from the
named person, or from the transfer agent, concerning the ownership of
common stock as of April 10, 2003, of (i) each person who is known to us to
be the beneficial owner of more than 5 percent of the common stock;
(ii) all directors and executive officers; and (iii) directors and executive
officers as a group:
Amount and Nature
Name and Address of Beneficial
of Beneficial Owner Ownership(1) Percent of Class
Richard Govatski 5,485,500(2) 21.35%
5041 Indian School Rd NE
Albuquerque, NM 87110
47
Teresa B. Dickey 424,453(3) 1.65%
John Handley 265,000(4) *
Executive Officers and
Directors as a Group
(3 Persons) 6,174,953 23.52%
Manhattan Scientifics, Inc. 4,461,300(5) 16.59%
Olympic Tower
641 5th Ave.
Suite 36 F
New York, NY 10022
Pollin Partnership 1,500,000(6) 5.91%
1418 Chester Pike
Crum Lynn, PA 19022
* Represents beneficial ownership of less than 1% of the total number
of shares of common stock outstanding.
(1) All of the persons are believed to have sole voting and investment
power over the shares of common stock listed or share voting and investment
power with his or her spouse, except as otherwise provided.
(2) This number of shares includes options to purchase 300,000 shares,
which options have vested and are currently exercisable. The shares
underlying these options are included in the table and are considered to be
outstanding for purposes of computing the percentage interest held by Mr.
Govatski. The number of shares also includes 400,000 shares pledged by Mr.
Govatski to secure a loan to the company which is due and payable on June 30,
2003. Mr. Govatski retains the right to vote these shares until foreclosure
under the terms of the pledge agreement.
(3) This number of shares includes options to purchase 424,453 shares,
which options have vested and are currently exercisable. The shares
underlying these options are included in the table and are considered to be
outstanding for purposes of computing the percentage interest held by
Ms. Dickey.
(4) This number includes 250,000 shares which were purchased in
January 2003, but have not yet been issued by the transfer agent.
(5) The beneficial stock ownership information for Manhattan
Scientifics, Inc. is derived from our stock ownership records maintained by
our transfer agent and our corporate records. The total number of shares
beneficially owned by Manhattan Scientifics also includes warrants to
purchase 1,500,000 shares, which warrants are currently exercisable. The
shares underlying these warrants are included in the table and are
considered to be outstanding for purposes of computing the percentage
interest held by Manhattan Scientifics.
(6) The beneficial stock ownership information for Pollin Partnership
is derived from our stock ownership records maintained by our transfer
agent and our corporate records.
48
Equity Compensation Plan Information
The following table sets forth certain information as of December 31,
2002, with respect to compensation plans under which our equity securities
are authorized for issuance:
(a) (b) (c)
-------------------- -------------------- ------------------------
Number of securities
remaining available
Number of securities for future issuance
to be issued upon Weighted-average under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excludeing securites
warrants and rights warrants and rights reflected in column (a))
-------------------- -------------------- ------------------------
Equity compensation
plans approved by
security holders 2,532,267 $0.63 618,290(2)
Equity compensation
plans not approved
by security holders 4,936,545(2) $0.68 -0-
Total 8,398,225 150,557
(1) Represents 467,733 shares available for issuance under our Stock
Option Plan and 150,557 under our 2001 Stock Issuance Plan as of December 31,
2002.
(2) Includes 1,000,000 shares of common stock issuable upon exercise
of Series A warrants exercisable at $1.25 per share at any time through
November 14, 2003; 1,090,000 Series B warrants exercisable at $1.00 per
share at any time through August 1, 2005; 1,500,000 Series C warrants
exercisable at $0.50 per share at any time through February 20, 2006; and
1,346,545 Series D warrants exercisable at $0.21 per share through July 22,
2009.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Richard Govatski, our president, director, and principal shareholder,
may be deemed a promoter or founder in relation to the organization of our
business. In connection with the acquisition of New Mexico Software, Mr.
Govatski exchanged all 1,000 of his shares of New Mexico Software for
5,597,000 shares in the public company.
During the years ended December 31, 1999 and 2000, we advanced a total
of $50,000 to Mr. Govatski. After repayment of $25,000 by Mr. Govatski in
2001, the principal and interest due was reduced to approximately $32,000
at December 31, 2001, including $4,000 advanced by us to Mr. Govatski
during 2001. During 2002, Mr. Govatski received none of his agreed annual
salary of $120,000. However, effective December 31, 2002, he agreed to
cancel $26,000 of the
49
2002 salary amount and apply it to the former advances. At December 31,
2002, he owed a balance of $6,000 for the prior cash advances.
In January 2001 our wholly owned subsidiary, New Mexico Software,
Inc., entered into a line of credit agreement with Los Alamos National Bank
in the maximum principal amount of $300,000. It also issued a promissory
note dated January 24, 2001, in the principal amount of $300,000,
representing the amount that it borrowed under the line of credit. The
note is secured by all of New Mexico Software's furniture, fixtures,
equipment, inventory, accounts, chattel paper, tangibles and general
intangibles, and a letter of credit in the amount of $250,000 issued by
another bank and provided by Murray Kelly. We issued 250,000 shares to Mr.
Kelly for providing this letter of credit as collateral on this note. The
note was originally due on or before July 24, 2001, and was extended to
July 24, 2002. At July 24, 2002, we negotiated a three-month extension
until October 24, 2002, by paying $50,000, plus accrued interest. At or
about October 24, 2002, we were able to negotiate an extension of the note
until April 24, 2003, by paying $25,000, plus interest. The note bears
interest at 7%. Mr. Govatski has personally guaranteed to the bank
repayment of $50,000 of this line of credit.
The lease payments for our office space in Albuquerque, New Mexico, of
$47,000 and improvements of approximately $28,000 were provided through the
payment of 75,000 shares of our common stock to the landlord by Richard
Govatski, our president, a director, and a principal shareholder. In March
2001 we issued 75,000 shares to Mr. Govatski for providing his shares to
the landlord.
In March 2001 we issued 1,500,000 Series C Warrants to Manhattan
Scientifics, Inc., one of our 5% shareholders. These warrants were issued
in consideration of Manhattan Scientifics issuing 100,000 of its common
shares to a consultant for services performed by the consultant for our
company.
We have granted options to Mr. Govatski under our option plan to
purchase an aggregate of 500,000 shares of common stock. The options were
granted in August 1999 and vest at the rate of 20% per year. Of the total
options, 380,000 are exercisable at $0.75 per share and 120,000 are
exercisable at $0.825 per share.
We have granted options under our option plan to Teresa Dickey, one of
our executive officers, to purchase an aggregate of 518,780 shares. Of the
total options, 56,000 were granted in January 2000 and are exercisable at
$2.125 per share; 56,000 were granted in July 2000 and are exercisable at
$1.25 per share; 3,000 were granted in January 2001 and are exercisable at
$0.77 per share; 400,000 were granted in October 2001 and are exercisable
at $0.34 per share; and 3,780 were granted in January 2002 and are
exercisable at $0.34 per share. The options vest at the rate of 50% per
year.
In March 2003 we borrowed $25,000 from an outside lender. To secure
repayment of this loan Mr. Govatski pledged 400,000 of his person shares as
collateral.
50
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are included as part of
this report:
Exhibit
No. Description of Exhibit Location
2.1 Reorganization agreement dated August 3, 1999 (1)
2.2 Acquisition Agreement with Working Knowledge (2)
3.1 Articles of Incorporation, as amended (1)
3.2 By-Laws of the Company (6)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Series A Warrant Certificate (1)
4.3 Form of Warrant Agency Agreement for Series A Warrants (1)
4.4 Form of Series B Warrant Certificate (1)
4.5 & 10.9 Series C Warrant Certificate dated November 12, 2001 (3)
4.6 Form of Series D Warrant Certificate (7)
10.1 Sun Microsystems Lease (1)
10.2 Building Lease (Albuquerque) dated August 4, 1999 (1)
10.3 Building Lease (Albuquerque) Amendment dated
May 17, 2000 (5)
10.4 Office Lease (California) dated June 8, 2000,
as amended (5)
10.5 Form of Employee Confidentiality Agreement (1)
10.6 Stock Option Plan (1)
10.7 Employment Agreement of Mr. Govatski (2)
10.8 2001 Stock Issuance Plan, as amended January 9, 2003 (4)
10.9 Letter Agreement dated February 20, 2001, with
Manhattan Scientifics, Inc. (3)
10.10 Commercial Loan Agreement with Los Alamos National
Bank, Promissory Note, and Personal Guaranty, all dated
January 24, 2001, and extension dated January 24, 2002 (5)
10.11 William Copeland Agreement dated August 31,2001 (5)
10.12 Sony Software Distribution Agreement dated
December 14, 2001 (5)
21.1 List of Subsidiaries (1)
23.1 Consent of Auditor Attached
99.1 Written Statement of the Chief Executive Officer
with respect to compliance with Section 13(a) of
the Securities Exchange Act of 1934 Attached
99.2 Written Statement of the Principal Financial Officer
with respect to compliance with Section 13(a) of
the Securities Exchange Act of 1934 Attached
(1) Filed with the Securities and Exchange Commission on February 11,
2000, as an exhibit with our original filing of a registration statement on
Form SB-2 (SEC File No. 333-30176).
51
(2) Filed with the Securities and Exchange Commission on July 31,
2000, as an exhibit with our second amended filing of a registration
statement on Form SB-2 (SEC File No. 333-30176).
(3) Filed with the Securities and Exchange Commission on November 14,
2001, as an exhibit with our third quarter report on Form 10-QSB (SEC File
No. 333-30176).
(4) Filed with the Securities and Exchange Commission on February 13,
2003, as an exhibit with the third post-effective amendment to our
registration statement on Form S-8 (SEC File No. 333-66580).
(5) Filed with the Securities and Exchange Commission on April 15,
2002, as an exhibit with our annual report on Form 10-KSB for the year
ended December 31, 2001 (SEC File No. 333-30176).
(6) Filed with the Securities and Exchange Commission on September 24,
2002, as an exhibit with our current report on Form 8-K dated September 19,
2002 (SEC File No. 333-30176).
(7) Filed with the Securities and Exchange Commission on November 19,
2002, as an exhibit with our third quarter report on Form 10-QSB (SEC File
No. 333-30176).
(b) Reports on Form 8-K: During the second quarter ended March 31,
2002, we filed a report on Form 8-K dated May 8, 2002, as amended, which
reported the dismissal of our certifying accountant, Richard A. Eisner &
Company, LLP. We failed to disclose this filing in our second quarter
report on Form 10-QSB. During the fourth quarter ended December 31, 2002,
we filed a report on Form 8-K dated December 3, 2002, as amended, to report
the resignation of our certifying accountant, Atkinson & Company Ltd.
ITEM 14. 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.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NMXS.COM, Inc.
Date: April 15, 2003 By /s/ Richard Govatski
Richard Govatski, President and
Chief Executive Officer
52
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacitates
and on the dates indicated.
Date: April 15, 2003 /s/ Richard Govatski
Richard Govatski, Director
Date: April 15, 2003 /s/ Teresa Dickey
Teresa B. Dickey, Director &
Principal Financial Officer
Date: April 15, 2003 /s/ John Handley
John E. Handley, Director
CERTIFICATIONS
I, Richard Govatski, President of NMXS.com, Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB of NMXS.com,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
53
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 15, 2003 /s/ Richard Govatski
Richard Govatski, President
I, Teresa Dickey, Principal Financial Officer of NMXS.com, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-KSB of NMXS.com,
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
54
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 15, 2003 /s/ Teresa Dickey
Teresa Dickey, Principal Financial Officer
54
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(d) OF THE
EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report has been sent to security holders covering the
registrant's last fiscal year.