UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

OR

o 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 0-28579

NOVO NETWORKS, INC.

6440 North Central Expressway, Suite 620
Dallas, Texas 75206
(Address of Principal Executive Offices)

(214) 777-4100
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

On May 19, 2005, 200,000,000 shares of the registrant’s common stock, $.00002 par value per share, were outstanding.

NOVO NETWORKS, INC.

QUARTERLY REPORT FORM 10-Q
INDEX

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NOVO NETWORKS, INC.

The accompanying notes are an integral part of these financial statements.

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NOVO NETWORKS, INC.

The accompanying notes are an integral part of these financial statements.

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NOVO NETWORKS, INC.

The accompanying notes are an integral part of these financial statements.

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NOVO NETWORKS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity

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NOVO NETWORKS, INC.

1. History and Description of Business

History of Business

Novo Networks, Inc. (“Novo Networks”, “we”, “us” and “our”) was originally incorporated in Delaware in 1987 as Adina, Inc. (“Adina”). Adina’s corporate existence was permitted to lapse in February of 1996 and was subsequently reinstated as eVentures Group, Inc., (“eVentures”) in August of 1999. During the Fall of 1999, eVentures completed a series of transactions whereby it became a holding company with two wholly-owned operating subsidiaries, e.Volve Technology Group, Inc. (“e.Volve”) and AxisTel Communications, Inc. (“AxisTel”), and made a strategic investment in Gemini Voice Solutions, Inc. (“Gemini Voice”), formerly PhoneFree.com, Inc. During the Spring of 2000, eVentures acquired Internet Global Services, Inc. (“iGlobal”) and made additional strategic investments. In December of 2000, eVentures changed its name to Novo Networks.

During fiscal 2002, e.Volve and AxisTel and several other of our principal telecommunications operating subsidiaries filed voluntary petitions under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Delaware Bankruptcy Court”), and Internet Global Systems, Inc. filed a voluntary petition under Chapter 7 of the Title 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas (the “Texas Bankruptcy Court”.) We have had no operations from these subsidiaries since December of 2001 due to our former operating subsidiaries (the “Debtor Subsidiaries”) bankruptcy proceedings. The Delaware Bankruptcy Court entered a final decree in the Debtor Subsidiaries bankruptcy proceedings on March 28, 2005.

Previously, we indicated that we were exploring a potential transaction that would include the exchange of a certain amount of our common stock for the equity of a privately held company that values our assets, including, without limitation, our cash, and our status as a reporting company under the Securities Exchange Act of 1934 (a “Strategic Combination”). On February 18, 2005, we entered into an asset purchase agreement with Berliner Communications, Inc. (“Berliner Communications”) and BCI Communications, Inc. (“BCI”), a Delaware corporation and our wholly owned subsidiary, whereby BCI acquired (the “Acquisition”) the operations and substantially all of the assets (the “Berliner Assets”) and liabilities of Berliner Communications. For more information regarding the Acquisition, see Note 8 to the Consolidated Financial Statements entitled “Acquisition of Berliner Communications.”

We also own a minority interest in Paciugo Management, LLC and Ad Astra Holdings, LP and certain related companies. These entities own and manage a gelato manufacturing, retailing and catering business operated under the brand name “Paciugo.” For more information regarding Paciugo, see Note 5 of the Notes to the Consolidated Financial Statements entitled “Equity Investments.”

Description of Acquired Business

Founded in 1995, Berliner Communications originally provided wireless carriers with comprehensive real estate site acquisition and zoning services. Over the course of the following 10 years, the service offerings were expanded to include radio frequency and network design and engineering, infrastructure equipment construction and installation, radio transmission base station modification and project management services. With the consummation of the Acquisition, BCI will now carry on the historical operations of Berliner Communications. Unless otherwise specified or otherwise clear from the context, each reference to BCI in this Quarterly Report will be deemed to be a reference to both BCI and the historical operations and activities of Berliner Communications prior to February 18, 2005.

2. Basis of Presentation

Since the Acquisition was settled through an issuance of a controlling interest in our common stock, Berliner Communications is deemed to be the acquirer for accounting purposes. Further, since we were a shell company prior to the Acquisition, purchase accounting has not been applied. Therefore, the transaction is being accounted for as a reverse acquisition and a recapitalization of Berliner Communications.

The accompanying consolidated financial statements as of March 31, 2005, and for the three months ended March 31, 2005, and 2004, respectively, have been prepared by us, without audit, pursuant to the interim financial statements rules and regulations of the United States Securities and Exchange Commission (“SEC”). In our opinion, the accompanying consolidated financial statements include all adjustments necessary to present fairly the results of

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our operations and cash flows at the dates and for the periods indicated. The results of operations for the interim periods are not necessarily indicative of the results for the full fiscal year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2004, and the historical consolidated financial statements of Berliner Communications included in our Form 8-K/A, which was filed on May 9, 2005.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accompanying statement of operations for the three months ended March 31, 2005, include the accounts of Berliner Communications through February 18, 2005, and the accounts of BCI, our wholly owned subsidiary, and our accounts since February 18, 2005 as compared to the three months ended March 31, 2004, of Berliner Communications, the accounting acquirer. The balance sheet as of December 31, 2004 is that of Berliner Communications.

Revenue Recognition. Revenues are recognized from radio frequency and network design and engineering services as work is performed, from real estate site acquisition and zoning services upon the identification of an acceptable site and when the lease is signed between the landlord and the customer. Revenues associated with multiple element contracts are allocated based on the relative fair value of the services included in the contract. Revenues from infrastructure equipment construction and installation contracts, which are generally completed within 90 days, are recorded under the percentage-of-completion method based on the percentage that total direct costs incurred to date bear to estimated total direct costs at completion. Losses on construction contracts are recognized when such losses become known.

Cost of Revenues. The cost of revenues consists primarily of wages and benefits, materials, subcontractor costs, equipment rentals and travel expenses.

Selling, General and Administrative Expenses. Selling, general and administrative expenses are primarily composed of wages and benefits, travel and entertainment, professional fees, insurance, repairs and maintenance, rents, sales and marketing expenses and general office expenses.

Depreciation and Amortization. Depreciation and amortization represents the depreciation of property and equipment and amortization of leasehold improvements.

Loss in Equity Investments. Loss in equity investments results from our minority ownership interest in Paciugo, which is accounted for under the equity method of accounting. Under the equity method, our proportionate share of each subsidiary’s operating loss is included in loss in equity investments. The values of our outstanding equity interests, other than Paciugo, have been reduced to zero either by recording our proportionate share of prior period losses incurred by each subsidiary to the cost of that interest or from impairment losses. We do not expect to record future charges related to those losses, as the interests have no carrying value. We expect Paciugo to continue in the near future to incur operating losses, and we will continue to record our proportionate share of those operating losses.

Risks and Uncertainties. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of accounts receivable. We routinely assess the financial strength of our customers and do not require collateral or other security to support our customer receivables. Credit losses are provided for in the consolidated financial statements in the form of an allowance for doubtful accounts. Our allowance for doubtful accounts is based upon the expected collectibility of all of our accounts receivable. We determine our allowance by considering a number of factors, including the length of time it is past due, our previous loss history and the customer’s current ability to pay its obligation. Accounts receivable are written off when they become uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Inventories. Inventories, which consist mainly of raw materials, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

Equity Investments. Subsidiaries whose results are not consolidated, but over whom we exercise significant influence, are generally accounted for under the equity method of accounting. Whether we exercise significant influence with respect to a subsidiary depends on an evaluation of several factors, including, without limitation, representation on the subsidiary’s governing board and ownership level, which is generally a 20% to 50% interest in the voting securities of the subsidiary, including, without limitation, voting rights associated with our holdings in common stock, preferred stock and other convertible instruments in the subsidiary. Under the equity method of accounting, the subsidiary’s accounts are not reflected in our consolidated financial statements. Our proportionate share of a subsidiary’s operating earnings and losses are included in the caption “Loss in equity investments” in our consolidated statements of operations.

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Currently, we have minority equity interests in Paciugo and certain development stage Internet and communications companies. The values of those equity interests, other than Paciugo, have been reduced to zero either by recording our proportionate share of prior period losses incurred by each subsidiary to the cost of that interest or from impairment losses. The Paciugo interest is accounted for under the equity method.

Property and Equipment. Property and equipment are recorded at historical cost less accumulated depreciation. Expenditures for maintenance and repairs are expensed as costs are incurred. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The estimated useful lives for property and equipment are as follows:

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. Our long-lived assets consist of property and equipment. SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions.

We assess the recoverability of long-lived assets by determining whether the net book value of the assets can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on fair value and is charged to operations in the period in which the impairment occurs.

Income (Loss) Per Share. We calculate earnings (loss) per share in accordance with SFAS No. 128, “Earnings Per Share” (“EPS”). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face of the income statement for all entities with complex capital structures. Basic EPS is computed as net income (loss) less preferred dividends divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and convertible debentures. Diluted EPS has not been presented, as the effect would be antidilutive.

Earnings per share in the accompanying Statement of Operations is computed based upon recapitalization accounting. The 147,676,299 common shares issued in the transaction are deemed to be outstanding as of January 1, 2004, and the 52,323,701 recapitalized common shares held by Novo shareholders are deemed to be outstanding since February 18, 2005. Therefore, the weighted average number of common shares utilized in the earnings per share computation for the quarter ended March 31, 2005, and 2004, was 171,512,693 and 147,676,299, respectively.

Stock Options. At March 31, 2005, we sponsored two stock option plans, the 1999 Omnibus Securities Plan (the “1999 Plan”) and the 2001 Equity Incentive Plan (the “2001 Plan”). We have elected to account for those plans under Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.”

The FASB issued SFAS No. 123, “Accounting for Stock Based Compensation,” which defines a fair value based method of accounting for stock-based compensation. However, SFAS No. 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by APB No. 25, “Accounting for Stock Issued to Employees.” Entities electing to follow APB No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value method of accounting defined in SFAS No. 123 had been applied. We have elected to account for our stock-based compensation to employees under APB No. 25.

In December of 2004, the FASB issued SFAS No. 123 (revised), “Share-Based Payment.” SFAS No. 123(R) will provided investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. We will be required to adopt SFAS No. 123(R) in the first quarter of fiscal 2006, which ends on September 30, 2005. We do not anticipate that the adoption of SFAS No. 123(R) will have a significant impact on our overall results of operations or financial position.

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For purposes of pro forma disclosure, the estimated fair values of the options are amortized to expense over the options’ vesting periods of one to three years.

3. Accounts Receivable

Accounts receivable at March 31, 2005, and December 31, 2004, consist of the following:

Unbilled receivables principally represent the value of services rendered to customers not billed as of the balance sheet date. Unbilled receivables are generally billed within three months subsequent to the provision of the services.

4. Property and Equipment

Property and equipment at March 31, 2005, and December 31, 2004, consist of the following:

Depreciation and amortization expense on property and equipment for the three months ended March 31, 2005, and 2004, was $76,566 and $93,163, respectively.

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5. Equity Investments

The value of our outstanding equity interests, other than Paciugo, have been reduced to zero either by recording our proportionate share of losses incurred by the subsidiary up to the cost of that interest or from impairment losses. As of June 30, 2004, we impaired our interest in Paciugo to equal our interest in the net book value of Paciugo. For the equity interests that were previously impaired completely, we ceased recording our share of losses incurred by the subsidiary. During the three months ended March 31, 2005, and 2004, we recorded equity losses totaling $15,791 and zero, respectively.

Equity investments consisted of the following at March 31, 2005: