Notes to the Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim financial statements of Nexus Enterprise Solutions, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information in accordance with Securities and Exchange Commission (SEC) Regulation S-X rule 8-03. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited interim financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented herein. The financial data and other information disclosed in these notes to the interim financial statements related to the period are unaudited. The results for the three month period ended March 31, 2017, are not necessarily indicative of the results to be expected for any subsequent quarters or for the entire year ending December 31, 2017. These financial statements should be read in conjunction with the financial statements of the Company for the year ended December 31, 2016.
Reclassifications
Certain prior period amounts have been reclassified to conform to current period presentation.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern. The Company has a working capital deficit of $918,175 and an accumulated deficit of $2,513,786 as of March 31, 2017. The Company currently has limited liquidity and has not completed its efforts to establish a stabilized source of revenues sufficient to cover operating costs over an extended period of time. These factors raise substantial doubt about the Company's ability to continue as a going concern.
Management anticipates that the Company will be dependent, for the near future, on additional investment capital, primarily from its shareholders, to fund operating expenses. The Company intends to position itself so that it may be able to raise additional funds through the private placement of its common stock. In light of management's efforts, there are no assurances that the Company will be successful in this or any of its endeavors or become financially viable and continue as a going concern.
NOTE 3 – RELATED PARTY TRANSACTIONS
As of March 31, 2017 and December 31, 2016, the outstanding balance of accrued payroll to officers was $118,000 and $118,000, respectively.
The Company pays monthly consulting fees to two stockholders. During the three months ended March 31, 2017 and 2016, these fees aggregated $53,500 and $42,300, respectively.
During the three months ended March 31, 2017 and 2016, $23,000 and $24,000 was paid to Scott Schluer, Chief Technology Officer, for consulting services.
NEXUS ENTERPRISE SOLUTIONS, INC.
Notes to the Financial Statements
(Unaudited)
NOTE 4 – NOTES PAYABLE TO RELATED PARTIES
As of March 31, 2017, and December 31, 2016, the Company had outstanding notes payable to related parties of $133,985. These notes are unsecured, bear interest between 0% and 15%, and are due on demand.
NOTE 5 – NOTES PAYABLE
In April 2013, the Company and a third party reached an agreement for Nexus to use certain intellectual property in its lead generation business into perpetuity in exchange for a $150,000 note and 500,000 common shares which were previously issued during February 2012 (the fair value of these shares of $125,000 was reclassified from deposits to intangible assets during the year ended December 31, 2013). The note will be repaid in 18 monthly installments, with the monthly payments varying based on the Company's gross profit for that month. The monthly payments range from $5,000 to $25,000. The note does not bear interest unless a monthly payment is not made, at which time the note will bear interest at 12.5% until the non-payment is cured. During 2016, and 2015, the Company made payments of $0 and $30,500, respectively. The outstanding balance under this note payable was $0 as of March 31, 2017, and December 31, 2016, respectively. The outstanding balance of interest payable related to this agreement was $5,502 as of March 31, 2017, and December 31, 2016, respectively.
The note is currently in default over the amount of accrued interest of $5,502. Currently, the Company is in talks with the third party to settle the default amount owed. The third party has delivered a default notice to the issuer and voiced intentions on suing the Company over amount of $5,502. In the event the third party sues, the Company does not see it having any material effect.
On June 4, 2014, the Company borrowed $387,000 from an unrelated third party entity ("Holder") in the form of a convertible note. The note bears a zero percent interest rate until December 31, 2014, at which point the note will accrue interest at a rate of 8 percent per annum commencing on January 1, 2015. The principal balance of the note with accrued interest was originally due on February 15, 2017. On March 1, 2017, the parties agreed to extend the due date to July 1, 2017. According to the note, monthly payments commenced in January 2015, with the first payment of $17,500 due on January 15, 2015 and every payment due on or near the 15
th
of each month thereafter. On January 15, 2016, the monthly payments decreased to $15,000 per month until maturity. The Holder is prohibited from converting all or any portion of the outstanding principal and accrued interest provided timely monthly payments are received by the Holder pursuant to the terms set forth in the payment schedule. If the note becomes convertible due to timely monthly payments not being made, the note will be convertible into common stock at 55% of the lowest closing bid price of the Company's common stock during the 25 trading days preceding the date of conversion. In addition, the Company is obligated to pay a penalty of $1,000 per day for each business day that the loan is in default. Any such penalty is convertible into common stock at 55% of the lowest closing bid price of the Company's common stock during the 25 trading days preceding the date of conversion. On October 1, 2016, an amendment to the note, which added a floor for conversions for the convertible provision of $0.0001, was signed into effect by both parties. The Company defaulted on payments on the note in 2016. In 2017, the Holder agreed to waive all default penalties due up to October 31, 2016. The Company evaluated the convertible note along with the accrued late-payment penalties, under FASB ASC 815 and determined it qualified as a derivative liability. As of March 31, 2017, the note was in default due to payments not being made according to the payment schedule. The outstanding balance under the note was $112,300 as of both March 31, 2017 and December 31, 2016. Late-payment penalties in the amount of $109,000 have been accrued to March 31, 2017. Interest is being accrued at the default interest rate of 12%.
As of March 31, 2017, and December 31, 2016, the Company had aggregate outstanding third party notes payable of $112,300 and $112,300, respectively. The unamortized debt discount at March 31, 2017 was $0 ($9,800 at December 31, 2016).
NEXUS ENTERPRISE SOLUTIONS, INC.
Notes to the Financial Statements
(Unaudited)
NOTE 6 – DERIVATIVE LIABILITIES
During the year ended December 31, 2016, one convertible note issued by the Company became convertible and qualified as a derivative liability under FASB ASC 815. The accrued penalty for late payments under the convertible note also qualifies as a derivative liability.
The Company uses Level 3 inputs to estimate the fair value of its derivative liabilities.
The following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of March 31, 2017:
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Fair Value Measurements as of
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March 31, 2017
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Level 1
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Level 2
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Level 3
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Assets
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None
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$
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-
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$
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-
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$
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-
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Total assets
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-
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-
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-
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Liabilities
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Conversion option derivative liability
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-
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-
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113,565
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Total liabilities
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$
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-
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$
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-
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$
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113,565
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As of March 31, 2017 and December 31, 2016, the aggregate fair value of the outstanding derivative liability was $113,565 and $54,187. The Company estimated the fair value of the derivative liability using the Black-Scholes option pricing model using the following key assumptions during the three months ended March 31, 2017:
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Quarter Ended
March 31,
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2017
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Volatility
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144.29%
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Risk-free interest rate
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0.76%
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Expected dividends
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-%
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Expected term
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0.25 years
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The following table sets forth a reconciliation of changes in the fair value of derivative liabilities classified as Level 3 in the fair value hierarchy during the three months ended March 31, 2017:
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Significant Unobservable Inputs (Level 3) Three Months Ended March 31, 2017
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Fair value as of December 31, 2016
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$
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54,187
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Additions recognized as derivative loss
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55,538
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Change in fair value
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3,840
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Fair value as of March 31, 2017
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$
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113,565
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NOTE 7 – COMMITMENTS AND CONTINGENCIES
On April 13, 2017, the Company was served with a lawsuit by Affluent ADS LLC, d/b/a Leadnomics ("Affluent"), which alleges that the Company owes $33,596.85 as compensation for services rendered by Affluent. The Company has not accrued any amount for this claim, as it believes the claim is without merit.
NOTE 8 – SUBSEQUENT EVENTS
In March 2017, the holder of the convertible debenture dated June 4, 2014 agreed to waive payment of the daily default penalty owed by the Company through October 31, 2016. The daily default penalty resumed from November 1, 2016 until cured. The parties also agreed to extend the maturity date of the debenture from February 15, 2017 to July 1, 2017.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included in Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.
Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management beliefs, and certain assumptions made by our management. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth herein and in other reports and documents that we file from time to time with the Securities and Exchange Commission, particularly the Report on Form 10-K, Form 10-Q and any Current Reports on Form 8-K.
Overview and History
Nexus Enterprise Solutions, Inc. ("Nexus") was incorporated in the State of Wyoming on October 19, 1995 as Global Link Technologies, Inc. On June 10, 2008, Global Link Technologies filed Articles of Amendment with the State of Wyoming changing its name to MutuaLoan Corporation. On June 16, 2011 (as filed with the State of Wyoming on September 16, 2011), MutuaLoan Corporation entered into a business combination with Nexus Enterprise Solutions, Inc. ("Nexus Florida"). The business combination was accounted for as a reverse merger recapitalization. The accounting target/legal acquirer was MutuaLoan. The accounting acquirer/legal target was Nexus Florida. Nexus is currently conducting operations and generating revenue.
The Company operations are currently being conducted out of the Company office located at 5340 N Federal Hwy STE 206 Lighthouse Point, FL 33406 1375; (561) 767-4346. It considers that the current principal office space arrangement adequate and will reassess its needs based upon the future growth of the Company. Its fiscal year end is December 31
st
.
Our Company's primary service is lead generation for its customers. The Company's target customers are currently companies in the insurance and financial service industries, but we intend to expand to additional industries in the future. Our Company uses both online leads and offline lead generation techniques in order to generate revenue by selling such leads, as well as various other services, to our customers.
Online Generation
There are many ways to generate leads online. Each has its own formula that needs to be perfected in order to find the balance between quantity and quality. The online lead generation methods used by our Company include, but are not limited to, Proprietary Lead Portals, Pay Per Click Advertising, Email Advertising and Website Banners.
Offline Lead Generation
Using a combination of a predictive dialer call center solution and an overseas outsourced call center solution, our Company is able to generate custom live transfer leads for our customers. We utilize this method of lead generation in situations where we are confident that a high volume of live leads can be generated and sold for a profit.
Revenue Model and Distribution methods of the products or services
Our revenue model is based on customer development. We either purchase leads from accredited brokers or locate leads based on the methods described above, and then resell those leads to our customers through our automated system. The leads must meet the stringent criteria of our system. The leads are vetted through our fraud filters in order to ensure quality.
We are currently focusing our attention on the auto insurance market, but expect to expand to other industries in the very near future. The Company will identify and address additional target markets for its services other than the insurance and financial industries with market research and feedback from its customers.
Results of Operations
For the Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016
The Company generated $239,119 in revenue for the three month period ended March 31, 2017, which compares to revenue of $367,837 for the three month period ended March 31, 2016. Our revenues decreased during the three month period ended March 31, 2017 due to decreased sales of our services to our current customers during this period.
Cost of sales for the three month period ended March 31, 2017 was $118,937, which compares to cost of sales of $127,130 for the three month period ended March 31, 2016. Our revenues decreased during the three months ended March 31, 2017, and as our sales revenue decreased, our cost of sales correspondingly decreased.
Operating expenses, which consisted solely of general and administrative expenses, and consulting and professional fees for the three month period ended March 31, 2017, were $147,478. This compares with operating expenses for the three month period ended March 31, 2016 of $152,526. The major components of general and administrative expenses include accounting fees, legal and professional fees.
As a result of the foregoing, we had a net loss of from operations of $27,296 for the three month period ended March 31, 2017. This compares with net income from operations for the three month period ended March 31, 2016 of $88,181.
Other operating expenses were made up of interest expense, loan default penalties on the convertible note, and loss on derivative liabilities. In the three month period ended March 31, 2017, interest expense was $13,916, an increase of $10,515 over the $3,401 charged in the three month period ended March 31, 2016. The increase was due primarily to the write-down of the remaining balance of debt discount. Loan default penalties were incurred as a result of the failure to make timely payments under the convertible debenture. Loss on derivative liabilities was $59,378 ($0 in 2016).
In its audited financial statements as of December 31, 2016, the Company was issued an opinion by its auditors that raised substantial doubt about the ability to continue as a going concern based on the Company's current financial position. Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to successfully develop and market our products and our ability to generate revenues.
Liquidity and Capital Resources
As of March 31, 2017 we had cash or cash equivalents of $1,317. As of December 31, 2016, we had cash or cash equivalents of $6,176.
We believe that with our existing cash flows we have sufficient cash to meet our operating requirements for the next twelve months due to the fact that we believe our revenue will increase throughout the year. We believe that the amount of revenue we are generating will allow us to meet our operating requirements during the next twelve months. If our revenue is not sufficient to allow us to meet our cash requirements during the next twelve months, the company may need to raise additional funds through the sale of its equity securities. We cannot guarantee that we will be successful in generating sufficient revenues or other funds in the future to cover these operating costs. Failure to generate sufficient revenues or additional financing when needed could cause us to go out of business.
Net cash used in operating activities for the three months ended March 31, 2017 was $4,859. This compares to net cash provided by operating activities of $28,423 for the three month period ended March 31, 2016. This change is primarily due to the net loss incurred in the period, offset in part by non-cash loss on derivatives, an increase in accrued expenses, and a decrease in increase in accounts receivable.
Cash flows from investing activities were $0 for the three month period ended March 31, 2017 and 2016. We do not anticipate significant cash outlays for investing activities over the next twelve months.
Cash flows used in financing activities was $0 for the three month period ended March 31, 2017 which compares to cash flows used in financing activities of $43,000 for the three month period ended March 31, 2016. During the three months ended March 31, 2016, the Company made payments totaling $43,000 on the convertible note.
As of March 31, 2017, our total assets were $46,413 and our total liabilities were $964,588. As of December 31, 2016, our total assets were $86,573 and our total liabilities were $795,159.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Plan of Operation
Our plan for the twelve months beginning March 31, 2017 is to operate at a profit or at break even. Our plan is to attract sufficient additional product sales and services within our present organizational structure and resources to become profitable in our operations.
Our revenue model is based on customer development. We either purchase leads from accredited brokers or locate leads based on the methods described above, and then resell those leads to our customers through our automated system. The leads must meet the stringent criteria of our system. The leads are vetted through our fraud filters in order to ensure quality.
We are currently focusing our attention on the auto insurance market, but expect to expand to other industries in the very near future.
We are redefining the current prospect and lead generation and acquisition industry by developing an information exchange service which allows sellers and buyers of leads, and other information assets, to operate in an optimized, transparent, and efficient way to transact deals in a more efficient manner than what is experienced in today's markets and systems. This is accomplished primarily through systems and processes which enable enhanced business intelligence and management thereby empowering stakeholders on both sides of the transaction to make well-informed and meaningful connections with each other.
Our Company generates revenue through its lead generation services, which are comprised of the lead generation methods described above and are accessed by our customers through our automated system. The cost of developing an automated system such as ours is prohibitive for a majority of companies. We fulfill a need by allowing these companies to use our technology, forms, landing pages etc., for a fee. We currently are back logged with the amount of companies looking to buy and sell leads to us, our carriers and agencies. In return, we get compensated when we sell a lead by charging our customers a fee for each lead purchased.
The Company will identify and address additional target markets for its services other than the insurance and financial industries with market research and feedback from its customers.
Recently Issued Accounting Pronouncements
We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.
Seasonality
We do not expect our revenues to be impacted by seasonal demands for our services.