Form 10QSB for NEXIA HOLDINGS INC

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27-Aug-2004

Quarterly Report

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements

The information herein 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, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward looking statements involve risks and uncertainty, including, without limitation, the ability of Nexia to continue its business strategy, changes in the real estate markets, labor and employee benefits, as well as general market conditions, competition, and pricing. Although Nexia believes that the assumptions underlying the forward looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward looking statements included in the Form 10QSB will prove to be accurate. In view of the significant uncertainties inherent in the forward looking statements included herein, the inclusion of such information should not be regarded as a representation by Nexia or any other person that the objectives and plans of Nexia will be achieved.

General

Nexia operates in two primary areas of business: Nexia acquires, leases and sells real estate; and, Nexia provides financial consulting services. The following discussion examines Nexia's financial condition as a result of operations for the three and months ended June 30, 2004, and compares those results with the comparable period from last year.

Real Estate Operations

Nexia's objective, with respect to real estate operations, is to acquire, through subsidiaries, properties which management believes to be undervalued and which Nexia is able to acquire with limited cash outlays. Nexia will consider properties anywhere within the continental United States. Nexia attempts to acquire such properties by assuming existing favorable financing and paying the balance of the purchase price with nominal cash payments or through the issuance of shares of common stock. Once such properties are acquired, Nexia leases them to primarily commercial tenants. Nexia also makes limited investments to improve the properties with the objective of increasing occupancy and cash flows. Management believes that, with limited improvements and effective management, properties can be sold at a profit within a relatively short period of time.

On June 30, 2003 Nexia sold its interest in Wichita Development Corporation (Wichita) and its subsidiaries Salt Lake Development Corporation and Wichita Properties to Diversified Financial Resource Corporation ("DFRC"). A similar transaction did not occur for the period ended June 30, 2004.

Nexia recorded rental revenues of $118,864 and $247,001 for the three and six months ended June 30, 2004 respectively, as compared to $122,306 and $239,224 for the same periods in 2003. Nexia's rental revenues for the comparative three month and six months periods did not fluctuate significantly. Management's current belief id that rental revenues are stabilizing and with certain improvements being made to various properties rental revenues should improve over the next 12 months.

Nexia had a loss from real estate operations of $100,729 and $164,954 for the three and six months ended June 30, 2004, compared to a loss of $14,037 and a gain of $82,269 for the same periods in 2003. The increase in loss is attributable primarily to the decrease in occupancy.

Nexia will continue efforts to improve profitability and cash flow by working to increase occupancy and rental income from those properties which have a high vacancy rate as well as focusing on properties with the highest per square foot rental rates. Nexia also intends to continue to purchase real estate primarily for appreciation purposes. Accordingly, Nexia hopes to not only minimize any real estate cash flow deficit, but also generate sufficient cash to record a substantial profit upon property disposition.

Consulting Operations

Nexia, through its majority owned subsidiary, Hudson Consulting Group, Inc., ("Hudson") provides a variety of financial consulting services to a wide range of clients. The primary service performed by Hudson involves assisting clients in structuring mergers and acquisitions. This includes locating entities suitable to be merged with or acquired by Nexia's clients, as well as providing general advice related to the structuring of mergers or acquisitions. Hudson also assists clients in restructuring their capital formation, advises with respect to general corporate problem solving and provides shareholder relations services designed to expose its clients to the investment community.

Nexia's consulting subsidiary generates revenues through consulting fees payable in the client's equity securities, cash, other assets or some combination of the three. The primary form of compensation received is the equity securities of clients. When payment is made in the form of equity, the number of shares to be paid is usually dependent upon the price of the client's common stock (if such price is available) and the extent of consulting services provided. When stock is received as payment it is booked as deferred revenue at its currently quoted market value. After the stock is sold, it is then booked as revenue along with an accompanying gain or loss on the sale.

Nexia generates cash flow, in part, by liquidating non_cash assets (equity securities) received as fees for consulting services. As most fees are paid in the form of equity, the revenues and cash flows realized by Nexia are somewhat tied to the price of its clients' securities and Nexia's ability to sell such securities. A decline in the market price of a client's stock can affect the total asset value of Nexia's balance sheet and can result in Nexia incurring substantial losses on its income statement.

Nexia's portfolio consists primarily of restricted and unrestricted shares of common stock in micro to small cap publicly traded companies. This portfolio currently consists of shares of common stock in different companies whose operations range from that of high-tech to oil and gas companies. The Company's ownership in the above publicly traded companies is less than 20% and thus accounts for them as investments available for sale at the lower of cost or market. Nonetheless, Nexia's portfolio is considered extremely volatile.

Revenues from Nexia's financial consulting operations decreased for the period ended June 30, 2004, as compared to the comparable periods in 2003. Nexia recorded $34,819 and $56,433 in revenues for the three months and six months ended June 30, 2004, respectively, from its financial consulting operations as compared to $52,630 and $110,833 for the same periods in 2003. Nexia experienced a loss from consulting operations of $108,732 and $196,390 for the three and six months ended June 30, 2004, as compared to profits of $5,351 and $6,463 for the same periods in 2003. The increase in losses from consulting is a result of Nexia's efforts to restructure and redefine the types of services it will provide in the future.

Company Operations as a Whole

Revenues

Gross revenues for the three and six month periods ended June 30, 2004, were $153,683 and $303,444 respectively as compared to $174,936 and $350,057 for the same periods in 2003. The decrease in six month revenues of $46,613 is due to a decrease in consulting revenues due to restructuring efforts.

Losses

Nexia recorded operating losses of $502,253 and $1,408,653 for the three and six month periods ended June 30, 2004 respectively, compared to losses of $29,122 and $105,188 for the comparable periods in the year 2003.

Nexia recorded net losses of $397,671 and $1,149,236 for the three and six months ended June 30, 2004, as compared to net income of $209,914 and $118,851 for the same periods in 2003. The increase in losses is attributable primarily to the issuance of shares of common stock to pay for services rendered which increased expenses, and a decrease in consulting revenues.

Nexia does not expect to operate at a profit through fiscal 2004. Since Nexia's activities are closely tied to the securities markets and the ability to operate its real estate properties at a profit, future profitability or its revenue growth tends to follow changes in the securities and real estate market place. There can be no guarantee that profitability or revenue growth can be realized in the future.

Expenses

General and administrative expenses for the three and six months ended June 30, 2004, were $290,674 and $859,419, respectively, compared to $20,436 and $24,360 for the same periods in 2003. The increase in expenses is due primarily to directors fees of $480,000 and $107,153 in legal and accounting fees. The Company issued 10,000,000 shares of restricted stock to each director as fees during the first quarter of the year.

Depreciation expenses for the six months ended June 30, 2004 and June 30, 2003, were $65,398 and $70,484, respectively. This change was due primarily to the sale of properties by the Company.

Capital Resources and Liquidity

On June 30, 2004, Nexia had current assets of $312,219 and $3,460,986 in total assets. Nexia had a net working capital deficit of $1,384,742 at June 30, 2004. The working capital deficit is due primarily to mortgages, which will, or may, come due in the next twelve months and are thus considered as current liabilities.

Net cash used in operating activities was $131,346 for the six months ended June 30, 2004, compared to net cash used in operating activities of $403,764 for the six months ended June 30, 2003.

Cash used in investing activities was $117,030 for the six months ended June 30, 2004, compared to cash used by investing activities of $2,761 for the same period in 2003.

Cash provided by financing activities was $229,292 for the six months ended June 30, 2004, compared to cash provided of $129,177 for the same period in 2003.

Due to Nexia's debt service on real estate holdings, willingness to acquire properties with negative cash flow shortages and acceptance of non-cash assets for consulting services, Nexia may experience occasional cash flow shortages. To cover these shortages we may need to sell securities from time to time at a loss. In addition, the Company is currently experiencing challenges with regard to cash flows. We are looking at several options to improve this situation, including the private placement of Nexia common stock.

Stock and Options To Employees and Contractors

During the quarter ending June 30, 2004, Nexia's subsidiary, Hudson Consulting Group, Inc., has continued a policy of limited cash payments to its employees and relied primarily on the issuance of Nexia's common stock registered under the Company's S-8 Registration Statement for employee compensation.

Impact of Inflation

Nexia believes that inflation has had a negligible effect on operations over the past three years. Nexia believes that it can offset inflationary increases in the cost of materials and labor by increasing sales and improving operating efficiencies.

Known Trends, Events, or Uncertainties

General Real Estate Investment Risks

Nexia's investments are subject to varying degrees of risk generally incident to the ownership of real property. Real estate values and income from Nexia's current properties may be adversely affected by changes in national or local economic conditions and neighborhood characteristics, changes in interest rates and in the availability, cost and terms of mortgage funds, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, changes in governmental rules and fiscal policies, civil unrest, acts of God, including earthquakes and other natural disasters which may result in uninsured losses, acts of war, adverse changes in zoning laws and other factors which are beyond the control of Nexia.

Value and Illiquidity of Real Estate

Real estate investments are relatively illiquid. The ability of Nexia to vary its ownership of real estate property in response to changes in economic and other conditions is limited. If Nexia must sell an investment, there can be no assurance that Nexia will be able to dispose of it in the time period it desires or that the sales price of any investment will recoup the amount of Nexia's investment.

Property Taxes

Nexia's real property is subject to real property taxes. The real property taxes may increase or decrease as property tax rates change and as the property is assessed or reassessed by taxing authorities. If property taxes increase, Nexia's operations could be adversely affected.

In response to numerous inquiries from Nexia shareholders, the current issued and outstanding shares as of July 20, 2004 are 956,833,594. The public float is approximately 721,866,324.