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Quarterly Report -- Small Business · Form 10-QSB
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10QSB · Quarterly Report -- Small Business
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This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]
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United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-31779
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Florida 65-0928369
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
145 Huguenot Street, New Rochelle, New York 10801
(Address of principal executive offices)
(914) 654-8700
(Issuer's telephone number)
Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or
for such shorter period that the registrant was
required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o
The number of shares of common stock $.0001 par
value, of the Registrant issued and outstanding
as of May 9, 2008 was 96,811,726.
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-QSB
PERIOD ENDED MARCH 31, 2008
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets as March 31, 2008
(unaudited) and June 30, 2007 3
Consolidated Statements of Operations
(unaudited) for the three and nine months ended
March 31, 2008 and March 31, 2007 4
Consolidated Statements of Cash Flow
(unaudited) for the nine months ended March 31, 2008 and March 31, 2007 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II - OTHER INFORMATION
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 20
Item 3. Controls and Procedures 20
Item 6. Exhibits and Reports on Form 20
2
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2008 June 30,
(Unaudited) 2007
ASSETS
Current Assets:
Cash $ 12,104 $ 6,823
Inventory 437,758 557,133
Other current assets 5,444 111,784
Total current assets 455,306 675,740
Property and Equipment, at cost less accumulated
depreciation and amortization of $24,083 and
$20,000 at March 31,2008 and June 30, 2007 respectively 917 5,000
Receivable from CCS International, Ltd. less
allowance for uncollectible amounts of $2,936,511
at March 31, 2008 and June 30, 2007 - -
Other assets 16,261 18,199
Total assets $ 472,484 $ 698,939
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 3,902,519 $ 3,373,233
Note payable - CEO/stockholder 1,892,394 2,086,784
Notes payable affiliate - revolving credit
agreement 656,360 680,000
Notes payable - other 384,750 389,750
Customer deposits 2,285,454 2,167,489
Deferred revenue 556,783 556,783
Total current liabilities 9,678,260 9,254,039
Long term debt - convertible notes payable 494,000 494,000
Total liabilities 10,172,260 9,748,039
Commitments and contingencies - See Notes
Stockholders' deficit:
Preferred stock, $.0001 par value, 10,000,000 shares authorized:
Series A Convertible-$1.00 per share liquidation
preference, 3,500,000 shares authorized, issued
and outstanding 350 350
Series B Convertible-$1.00 per share liquidation
preference, 1,500,000 shares authorized, issued
and outstanding 150 150
Series C Convertible-$.01 per share liquidation
preference, 5,000,000 shares authorized, issued
and outstanding - -
Common stock, $.0001 par value, 300,000,000
shares authorized, 96,811,726 and 93,584,668
issued and outstanding at March 31, 2008 and June
30, 2007 respectively 9,681 9,358
Additional paid in capital 9,128,618 8,828,941
Accumulated deficit (18,875,227 ) (17,929,828 )
Accumulated other comprehensive income 36,652 41,929
Total stockholders' deficit (9,699,776 ) (9,049,100 )
Total liabilities and stockholders' deficit $ 472,484 $ 698,939
The accompanying notes are an integral part of these financial statements.
3
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SECURITY INTELLIGENCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2008 2007 2008 2007
Revenues $ 1,063,999 $ 487,636 $ 2,729,328 $ 1,796,255
Costs and expenses:
Cost of sales 374,812 180,836 1,277,069 613,571
Compensation and
benefits 278,355 275,722 847,205 1,182,889
Professional fees 228,794 225,784 346,802 316,241
Stock based compensation - 20,442 - 62,236
Selling, general and administrative
expenses 282,665 310,599 944,830 955,638
Depreciation and amortization 83 2,000 4,083 6,000
1,164,709 1,015,383 3,419,989 3,136,575
Operating loss (100,710 ) (527,747 ) (690,661 ) (1,340,320 )
Interest expense 91,208 85,203 254,738 208,864
Net loss $ (191,918 ) $ (612,950 ) $ (945,399 ) $ (1,549,184 )
Loss per share, basic and diluted $ (0.00 ) $ (0.01 ) $ (0.01 ) $ (0.02 )
Weighted average number of
shares 96,811,726 93,584,668 96,483,153 93,371,010
The accompanying notes are an integral part of these financial statements.
4
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SECURITY INTELLIGENCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
2008 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (945,399 ) $ (1,549,184 )
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,083 6,000
Amortization of deferred compensation - 62,236
Stock issued to consultants and employees for services - 9,000
Stock issued to 401 K plan - 1,298
(Decrease) increase in other comphrensive income (5,277 ) 26,884
Noncash compensation - CEO/stockholder 187,500 187,500
Noncash interest expense - CEO/stockholder 56,227 59,225
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease in inventory 119,375 67,834
Decrease in other current assets 106,340 75,402
Decrease in other assets 1,938 -
Increase in accounts payable and accrued expenses 529,286 684,982
Increase in customer deposits 117,965 486,439
Increase in deferred revenue - 49,690
Net cash provided by operating activities 172,038 167,306
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes payable - other - 200,000
(Repayments) of notes payable - other (5,000 ) (81,750 )
(Repayments) under note payable - CEO/stockholder (438,117 ) (297,811 )
(Repayments) under revolving credit agreement -
affiliate (23,640 ) (5,000 )
Proceeds from issuance of common stock 300,000 -
Net cash used in financing activities (166,757 ) (184,561 )
Net increase (decrease) in cash 5,281 (17,255 )
Cash, beginning of period 6,823 27,126
Cash, end of period $ 12,104 $ 9,871
The accompanying notes are an integral part of these financial statements.
5
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Security Intelligence Technologies, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2008 and 2007
(Unaudited)
1 - Interim Financial Statements
The accompanying unaudited consolidated financial
statements of Security Intelligence Technologies,
Inc. and subsidiaries (the "Company") have been
prepared pursuant to generally accepted
accounting principles for interim financial
statements and the rules and regulations of the
Securities and Exchange Commission. Accordingly,
certain information and note disclosures normally
included in annual financial statements prepared
in accordance with generally accepted accounting
principles have been condensed or omitted
pursuant to those rules and regulations. These
financial statements should be read in
conjunction with the financial statements and the
notes thereto included in the Company's latest
audited financial statements for the year ended
June 30, 2007 filed on Form 10-KSB.
In the opinion of management, all adjustments
(consisting of normal recurring adjustments)
necessary for a fair presentation of the
Company's financial condition, results of
operations and cash flows for the periods
presented have been included. The Company's
quarterly results presented herein are not
necessarily indicative of results for a full year.
Organization and Nature of Business
The Company is engaged in the design, assembly
and sale of security and surveillance products
and systems. The Company purchases finished items
for resale from independent manufacturers, and
also assembles off-the-shelf electronic devices
and other components into proprietary products
and systems at its own facilities. The Company
generally sells to businesses, distributors,
government agencies and consumers through its
sales office in Miami, Florida, and its executive
offices located in New Rochelle, New York.
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its wholly-owned
subsidiaries, Homeland Security Strategies, Inc.,
a Delaware corporation, that commenced operations
on July 14, 2003; Homeland Security Strategies of
California, Inc., a California corporation, that
operated a sales office that commenced operations
on December 26, 2003 and closed in September
2004; Homeland Security Strategies of Florida,
Inc., a Florida corporation, that operates a
sales office that commenced operations on January
30, 2004, Homeland Security Strategies (UK), Ltd.
(formerly Counter Spy Shop of Mayfair Limited), a
United Kingdom corporation that operated a retail
store/service center that ceased operations on
December 31, 2006 and HSS Express Funds, Inc.,
that commenced operations on January 8, 2007 to
provide administrative services to all of the
consolidated companies. All significant
intercompany balances and transactions have been eliminated in consolidation.
Going Concern and Liquidity
The financial statements of the Company have been
prepared assuming the Company will continue as a
going concern, which contemplates the realization
of assets and the satisfaction of liabilities in
the normal course of business.
The Company incurred net losses of $945,399 and
$2,286,944 for the nine months ended March 31,
2008 and the fiscal year ended June 30, 2007,
respectively. In addition, at March 31, 2008, the
Company had a working capital deficit of
$9,222,954, long term debt of $494,000, and a
deficiency in stockholdersÂ’ equity of $9,699,776.
The Company's bank facility terminated in 2002,
and the only source of funds other than
operations has been loans from the Company's
chief executive officer and GCOM Consultants,
Inc. a company owned by the wife of the chief
executive officer, deposits from customers and
distributors, proceeds from notes and the sale of
common stock. (See Notes 3, 4, 5, 6 and 8). These
factors raise substantial doubt about the
Company's ability to continue as a going concern.
To address the CompanyÂ’s immediate cash
requirements which are necessary for the Company
to continue in business, management discontinued substantially
6
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Security Intelligence Technologies, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2008 and 2007
(Unaudited)
1. Nature of Business and Summary of Significant
Accounting Policies - continued:
Going Concern and Liquidity - continued:
all of its retail operations during the fiscal
year ended June 30, 2004 and re-focused its
marketing efforts to focus on its sophisticated
bomb jamming and cellular monitoring systems to
the United States and friendly international
governments and contractors of the United States
Government. Sales to these groups of these
systems were approximately $1,853,000 during the
nine months ended March 31, 2008 and
approximately $405,000 during the fiscal year
ended June 30, 2007. At March 31, 2008, the
Company had outstanding purchase orders for an
additional amount of approximately $1,980,000 for
these systems however; customers representing
$1,072,000 of these orders have instituted
litigation against the Company for failure to
deliver. As part of this marketing effort, the
Company has re-focused its staff, and is actively
pursuing additional equity and debt financing to
supplement cash flow from operations. However,
the CompanyÂ’s low stock price and its continuing
losses make it difficult to obtain either equity
or debt financing, and, there can be no
assurances that additional financing which is
necessary for the Company to continue in
business, will be available to the Company on
acceptable terms, or at all, or that the Company
will generate the necessary cash flow from
operations. The Company and its management
believe that its bomb jamming and cellular
monitoring systems and the United States and
friendly international governmentsÂ’ marketplace
are viable products and markets in which to
compete, and ultimately achieve profitability.
The CompanyÂ’s ability to continue its operations
is dependent upon its ability to generate
sufficient cash flow either from operations or
from financing, to meet its obligations on a
timely basis and to further develop and market
its products. However, the CompanyÂ’s financial
condition and continuing losses may inhibit
potential customers from purchasing the CompanyÂ’s
products. The accompanying financial statements
do not include any adjustments that might result
from the outcome of these uncertainties.
Revenue recognition
The Company recognizes revenue from sales upon
the delivery of merchandise to a customer. The
Company recognizes revenue from its sophisticated
monitoring systems and bomb jamming systems after
installation, testing and customer acceptance.
Non-refundable advance payments received under
marketing and distribution arrangements are
deferred and either applied as payments towards
customer purchases made pursuant to the terms of
the respective agreements, or recognized as
income at the termination of the agreement if
specified purchase quotas have not been met by
the customer. Customer deposits are initially
recorded as liabilities and recognized as revenue
when the related goods are shipped.
Contingent Liabilities of CCS
On March 22, 2005, the Company sold all of the
stock of its wholly owned subsidiary CCS
International Ltd. (“CCS”). The Company’s balance
sheet at March 31, 2008 does not reflect any
liabilities of CCS, since the Company was not an
obligor or guarantor with respect to any of the
liabilities except as set forth in Note 3. Prior
to the sale of CCS the Company issued shares of
common stock to settle debt obligations of CCS or
its subsidiaries. These agreements contain a
price guarantee that requires CCS to settle in
cash any difference between the original face
amounts of the debt and proceeds from the
creditorÂ’s subsequent sale of the shares. Since
the obligation to make the payment is an
obligation of CCS, and not the Company, the
amount by which the target prices exceeded the
value of the stock on March 31, 2008, which was
approximately $819,000, is not reflected as a
liability of the Company at March 31, 2008. In
addition at March 31, 2008, CCSÂ’s creditors had
initiated lawsuits against CCS for nonpayment of
accrued liabilities and its distributors have
initiated litigation for breeches of their
agreements in the total amount of approximately
$966,000. Judgments of approximately $770,000
have been entered against CCS in these matters.
Although the Company has no contractual
obligation with respect to any of the obligations
of CCS, and the Company believes that it has a valid defense
7
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Security Intelligence Technologies, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2008 and 2007
(Unaudited)
1. Nature of Business and Summary of Significant
Accounting Policies - continued:
Contingent Liabilities of CCS - continued:
to any claim that it has any liability with
respect to any liabilities or obligations of CCS,
it is possible that creditors of CCS or its
subsidiaries may make a claim against the Company
and that they may prevail. Two CCS creditors have
obtained a default judgment against the Company
based upon the claim that the Company was
responsible for CCSÂ’s obligations and another CCS
creditor has initiated an action against the
Company claiming that the Company is responsible
for CCSÂ’s obligations. (See Note 11).
Stock-based Compensation
Effective July 1, 2006, The Company adopted
Statement of Financial Accounting Standards
Statement 123(R) “Share Based Payment”
(“SFAS123(R)”) utilizing the “modified
prospective” method as described in SFAS 123(R).
In the “modified prospective” method,
compensation cost is recognized for all
share-based payments granted after the effective
date and for all unvested awards granted prior to
the effective date. In accordance with SFAS
123(R) prior period amounts were not restated.
SFAS 123(R) also requires the tax benefit
associated with these share-based payments to be
classified as financing activities in the
Statement of Cash Flows, rather than operating
cash flows as required under previous regulations.
FASB Statement 123, “Accounting for Stock-Based
Compensation,” requires the Company to provide
pro forma information regarding net income (loss)
and income (loss) per share as if compensation
cost for the CompanyÂ’s stock option issuances had
been determined in accordance with the fair value
based method prescribed in FASB Statement 123.
The Company estimates the fair value of each
stock option at the grant date by using the
Black-Scholes option-pricing model with the
following weighted-average assumptions used for
grants in fiscal 2005, 2004, 2003 and 2002:
dividend yield of 0%, risk-free interest rates
ranging from of 3.38% to 4.32%, expected lives of
eight years, and expected volatility ranging from 120% to 178%.
Foreign Currency Translation
The functional currency of the Company's United
Kingdom subsidiary is pound sterling.
Accordingly, the Company translates all assets
and liabilities into U.S. dollars at current
rates. Revenues, costs, and expenses are
translated at average rates during each reporting
period. Gains and losses resulting from the
translation of the consolidated financial
statements are excluded from results of
operations and are reflected as a translation
adjustment and a separate component of
stockholders' deficit. Gains and losses resulting
from foreign currency transactions are recognized
in the consolidated statement of operations in the period they occur.
Warranties
The Company warrants the products and systems
it sells to be free from defects in materials and
workmanship under normal use. Parts and labor
costs to repair defective products or systems are
covered during the first ninety days after
delivery of the product or system. Thereafter the
cost is billed to the customer. A tabular
reconciliation of the CompanyÂ’s aggregate product
warranty liability for the nine months ended
March 31, 2008 and 2007 is as follows:
8
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Security Intelligence Technologies, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2008 and 2007
(Unaudited)
1. Nature of Business and Summary of Significant
Accounting Policies - continued:
Nine Months Ended
March 31,
2008 2007
Balance July 1, $ 35,000 $ 35,000
Charges for warranty work - -
Accrual for product warranties issued during the period - -
Balance at March 31 $ 35,000 $ 35,000
Use of estimates
The preparation of financial statements in
conformity with accounting principles generally
accepted in the United States requires management
to make estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities
at the date of the consolidated financial
statements, and the reported amounts of revenue
and expenses during the reporting periods. Actual
results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property and equipment
Assets are stated at cost. Depreciation is
computed over the estimated useful life of the
assets generally using the straight-line method
over periods ranging from five to seven years.
Additions and major renewals and betterments are
capitalized and depreciated over their estimated
useful lives. Repairs and maintenance are charged
to operating expenses as incurred.
Income taxes
The Company uses the liability method to
determine its income tax expense. Under this
method, deferred tax assets and liabilities are
computed based on differences between financial
reporting and tax basis of assets and liabilities
and are measured using the enacted rates and laws
that will be in effect when the differences are
expected to reverse. Deferred tax assets are
reduced by a valuation allowance if, based on the
weight of the available evidence, it is more
likely than not that all or some portion of the
deferred tax assets will not be realized. The
ultimate realization of the deferred tax asset
depends on the CompanyÂ’s ability to generate
sufficient taxable income in the future.
9
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Security Intelligence Technologies, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2008 and 2007
(Unaudited)
1. Nature of Business and Summary of Significant
Accounting Policies - continued:
Loss Per Share
The Company calculates earnings per share in
accordance with SFAS No. 128, Earnings Per Share,
and SEC Staff Accounting Bulletin No. 98.
Accordingly, basic and diluted loss per share is
computed using the weighted average number of
shares of common stock outstanding and excludes
all common stock equivalents outstanding during the period.
Common stock equivalents consist of shares
issuable upon the exercise of stock options and
warrants using the treasury stock method. Stock
options and preferred stock that are convertible
into common stock based on the CompanyÂ’s
attainment of performance goals are not
includible in the calculation of earnings per
share until the specified targets are met. The
following securities have been excluded from the
diluted computation for the three and nine months
ended March 31, 2008 and 2007 because they are
contingently issuable and/or antidilutive:
Three & Nine Months Ended
March 31,
2008 2007
Series A convertible preferred stock 10,500,000 10,500,000
Series B convertible preferred stock 4,500,000 4,500,000
Series C convertible preferred stock 15,000,000 15,000,000
Stock options 43,828,500 43,828,500
Warrants - 1,500,000
New Authoritative Accounting Prouncements
The Company does not anticipate the adoption of
recently issued accounting pronouncements to have
a significant impact on the CompanyÂ’s results of
operations, financial position or cash flows.
2. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at March
31, 2008 consisted of the following:
Accounts payable - trade $ 782,836
Professional fees 916,184
Payroll liabilities (includes delinquent payroll
taxes and associated interest and penalties of $1,646,904) 1,972,073
Accrued Interest 134,753
Deferred rent payable 39,120
Other 57,553
$ 3,902,519
10
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Security Intelligence Technologies, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2008 and 2007
(Unaudited)
3. Note Payable - CEO/stockholder
This amount represents a note payable to the
Company's chief executive officer and includes
deferred salary of $834,476 and accrued interest
of $289,543 based on an interest rate of 5% per
annum. The Note is due on demand and is secured
by substantially all of the assets of the Company
and is subordinated to outstanding borrowings
under the Notes Payable Affiliate - revolving
credit agreement (See Note 4). Prior to the sale
of CCS (See Note 7), the CompanyÂ’s chief
executive officer had advanced to CCS the sum of
$750,741. Pursuant to his employment agreement
with the Company, the Company guaranteed CCSÂ’
obligations to him to the maximum amount of
$738,000. The CompanyÂ’s obligations under this
guaranty are payable only from cash flow from
operations not required for the CompanyÂ’s
business. Because of CCSÂ’ financial condition,
the guaranteed obligations have been reflected as
a liability on the CompanyÂ’s balance sheet.
4. Notes Payable Affiliate - Revolving Credit Agreement
In August 2005, the Company entered into a
revolving credit agreement with GCOM Consultants,
Inc., which is owned by the wife of the CompanyÂ’s
chief executive officer, under which the Company
may borrow up to $680,000. The Agreement
terminates on September 1, 2015 and requires
monthly payments of $4,410 during the term.
Borrowings under the agreement bear interest at
the annual rate of 7.025%, are due on demand, and
are secured by a security interest in
substantially all of the CompanyÂ’s assets. In
connection with this agreement, the CompanyÂ’s
chief executive officer has subordinated his
security interest in the CompanyÂ’s assets to any
borrowings under this agreement (See Note 3). As
of March 31, 2008 the Company had borrowed
approximately $656,000 under this agreement.
5. Notes Payable - Others
This amount represents notes payable to two
individuals, which the Company issued in January
2005 and July 2006, and a note payable issued to
a customer of the Company in January 2006. The
notes to the two individuals are payable on
demand, bears interest at the rate of 11% and 12%
per annum, and are unsecured. The note to the
CompanyÂ’s customer was due in February 2006, is
currently in default, bears interest at the rate
of 12% per annum and is secured by 1,500,000
shares of the CompanyÂ’s common stock.
6. Long Term Debt - Notes Payable - Convertible
Credit Facility; Debt Issuance Expense
On June 10, 2004 the Company entered into a
convertible credit agreement with private
investors pursuant to which the Company borrowed
$494,000. The notes bear interest at the rate of
10% per annum, are convertible into the CompanyÂ’s
common stock at $.0333 per share and matured on
June 30, 2005, except that in the event of
default the conversion rate is reduced to $.01667
per share. On June 30, 2005 the Company and the
lenders entered into an agreement amending the
terms of the notes which included an extension of
the maturity date until June 30, 2010, a lowering
of the conversion price to $.01667 per share and
the lowering of the interest rate to 0% or the
minimum allowed by law, subsequent to July 31,
2005. The conversion feature was valued at
$3,847,832 using the Black-Scholes option-pricing
model and was expensed during year ended June 30,
2005 as debt issuance expense. There were no
similar expenses during the nine months ended March 31, 2008 and 2007.
7. Disposition of Assets - Sale of CCS International, Ltd.
On March 22, 2005, the Company sold all of the
stock of CCS for $100 and contingent
consideration consisting of 5% of CCSÂ’s and its
subsidiariesÂ’ net sales through March 31, 2015.
CCS has not generated any sales since that date
of sale. Because of CCSÂ’s financial condition the
Company has established a full reserve for
uncollectible amounts due from them of
$2,936,511. Prior to the sale of CCS, the
CompanyÂ’s president and chief executive office,
had advanced to CCS the sum of $750,741. Pursuant
to Mr. JamilÂ’s employment agreement with the
Company, the Company guaranteed CCSÂ’s
11
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Security Intelligence Technologies, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2008 and 2007
(Unaudited)
7. Disposition of Assets - Sale of CCS International, Ltd. - continued:
obligations to Mr. Jamil to the maximum amount of
$738,000 (See Notes 3). The CompanyÂ’s obligations
under this guaranty are payable only from cash
flow from operations not required for the
CompanyÂ’s business. Because of CCSÂ’s financial
condition, the guaranteed obligations have been
reflected as a liability on the CompanyÂ’s balance
sheet under the caption “Notes Payable - CEO/Stockholder”.
8. Common Stock
During the nine months ended March 31, 2008 the
Company sold 3,227,058 shares of common stock to
an accredited investor for $300,000.
9. 401(K) Savings Plan
The Company maintains a qualified deferred
compensation plan under section 401(k) of the
Internal Revenue Code. Under the plan, employees
may elect to defer up to 15% of their salary,
subject to the Internal Revenue Service limits.
The Company may make a discretionary match as
well as a discretionary contribution. During the
nime months ended March 31, 2008 there were no
employee contributions to the plan. During the
nine months ended March 31, 2007 the Company
matched employeeÂ’s contributions of $1,298 by
issuing 49,373 shares of its common stock to the plan.
10. Income taxes
The Company did not incur any income tax
liabilities during the nine months ended March
31, 2008 and 2007 due to operating losses. As of
March 31, 2008 the Company has increased its tax
valuation allowance to offset the deferred tax
benefits of net operating losses and other
temporary differences arising during the nine
months ended March 31, 2008 because management is
uncertain as to their ultimate realization.
11. Legal Matters
On or about February 10, 2005 the Company
commenced an action in the Supreme Court of New
York, Westchester County, against the landlord of
its New York offices; captioned Security
Intelligence Technologies, Inc. v. GHP Huguenot
LLC, claiming the landlord breached the lease
between the parties by not providing certain
agreed to services. The case is currently in discovery.
On or about March 11, 2005, an action was
commenced against the Company in the City Court
of the City of New Rochelle, New York by the
CompanyÂ’s landlord of its New York offices,
captioned GHP Huguenot LLC v. Security
Intelligence Technologies, Inc., claiming the
Company was a habitually late in paying its
monthly rent and seeking to evict the Company
from the premises. The Company has denied the
material allegations of the claim and has raised
affirmative defenses thereto and believes that it
has valid defenses to the claim. The case is
currently in discovery. The Company is unable to
determine whether it is reasonably possible that
it will incur a loss and cannot make an estimate
of the possible loss or range of loss should the
Plaintiff prevail in this action.
In March 2006, the District of Columbia filed a
wage and hour claim on the Company on behalf of a
former employee alleging he is owed commissions
on the sales of equipment. On March 26, 2007 a
judgment was entered against the Company in the
amount of $161,377 and this amount was accrued by
a charge to income. The Company plans to seek to
negotiate a settlement of the judgment but can
give no assurances that it will be successful in
negotiating any reduction in the amount of the judgment.
12
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Security Intelligence Technologies, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2008 and 2007
(Unaudited)
On or about May 19, 2006, an action was commenced
against the Company in the Supreme Court of New
York, Westchester County, captioned Munir
Sukhtian Group Co. v. Security Intelligence
Technologies, Inc. claiming the Company failed to
deliver certain equipment and demanding a refund
of the $105,000 deposit it had paid. The Company
has denied the material allegations of the claim
and has raised affirmative defenses thereto and
believes that it has valid defenses to the claim.
The Company is unable to determine whether it is
reasonably possible that it will incur a loss in
this matter. The Company has the recorded the
$105,000 as a current liability in Customer
deposits. Accordingly, if the Plaintiff prevails
there will be no loss to the Company.
On or about March 7, 2005, an action was
commenced against the Company in the Supreme
Court of New York, captioned 444 Madison, LLC v.
Security Intelligence Technologies, Inc.,
claiming the Company is a successor in interest
to CCS International Ltd. (“CCS”) and should be
held liable for a judgment the plaintiff had had
been awarded against CCS. On December 23, 2005
the plaintiff was awarded a default judgment in
the amount of $229,990 plus interest of
approximately $50,000 and these amounts have been
accrued by a charge to income. In July 2006 the
Company retained new outside counsel and filed an
order seeking to vacate the judgment and
restoring the case to the CourtÂ’s calendar
claiming the Company had ineffective counsel. On
August 21, 2006, the Court denied the motion and
reaffirmed the judgment. The Company believes it
has valid defenses to any claim that they are a
successor in interest to CCS International Ltd.
The Company plans to seek to negotiate a
settlement of the judgment and pursue a
malpractice action against its prior outside
counsel but can give no assurances that it will
be able to negotiate any reduction in the
judgment or that it will recover any amounts from
its outside counsel if it institutes an action against him.
On or about September 21, 2005, an action was
commenced against the Company in the Circuit
Court For Miami Dade County captioned Allan
Dunteman and Zarco Einhorn Salkowski & Britto, PA
v. Security Intelligence Technologies, Inc.
claiming the Company had failed to perform
certain duties it was to perform to facilitate a
settlement the plaintiff had previously reached
with CCS International Ltd. and demanding $15,000
and that the Company is a successor in interest
to CCS and should be liable for the amount of
CCSÂ’s settlement of $88,750 plus interest. On
March 4, 2008 a default judgment was entered
against the Company in the amount of $119,789 and
this amount was accrued by a charge to income.
The Company plans to seek to negotiate a
settlement of the judgment but can give no
assurances that it will be successful in
negotiating any reduction in the amount of the judgment.
On or about January 19, 2006, an action was
commenced against CCS and the Company in the
Supreme Court of the State of New York,
Westchester County, captioned El Mundo Co., Ltd.
v. CCS International Ltd. and Security
Intelligence Technologies, Inc. claiming that CCS
breached the distribution agreement it had
entered into with CCS in 1997 and demanding the
return of $433,284 it had paid to CCS and that
the Company should be held liable as a successor
in interest to CCS. The case is currently in
discovery. The Company has denied the material
allegations of the claim and has raised
affirmative defenses thereto and believes that it
has valid defenses to the claim that it is a
successor in interest to CCS International Ltd.
The Company is unable to determine whether it is
reasonably possible that it will incur a loss in
this matter. Should the Plaintiff prevail the
Company will incur a loss in the range of $0 to
$433,284 plus statutory interest of 9% per annum from July 1998.
On or about September 12, 2006, an action was
commenced against the CompanyÂ’s subsidiary
Homeland Security Strategies, Inc. in the
Superior Court of the State of Arizona, captioned
The Armored Group, LLC v. Homeland Security
Strategies, Inc. claiming the Company failed to
deliver certain equipment and demanding a refund
of the $450,000 deposit it had paid and
additional damages of $1,892,000. On or about
December 15, 2006 the Company filed a motion to
dismiss the action for lack of jurisdiction or in
the alternative to transfer the venue from
Arizona to the Southern District of New York. On
April 10, 2007 the Arizona Court dismissed the
action for lack of jurisdiction. On or about
October 31, 2007, the plaintiff brought this
action against the Company in the United States
District Court, Southern District of New York
captioned The Armored Group, LLC v. Homeland
Security Strategies, Inc and Security
Intelligence Technologies, Inc. again claiming
the Company failed to deliver certain equipment
and demanding a refund of the $450,000 deposit it
had paid and additional damages of not less than
$1,500.000. The Company plans to deny the
material allegations of the claim and will raise
affirmative defenses thereto and believes that it
has valid defenses to the claim. The Company is
unable to determine whether it is reasonably
possible that it will incur a loss in this
matter. The Company has the recorded the $450,000
as a current liability in Customer deposits.
Should the Plaintiff prevail the Company will
incur a loss in the range of $0 to $1,500,000 plus interest.
13
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Security Intelligence Technologies, Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2008 and 2007
(Unaudited)
On or about January 2, 2007, an action was
commenced against the CompanyÂ’s subsidiary
Homeland Security Strategies, Inc. in the Supreme
Court of the State of New York, Westchester
County, captioned Formosa Forensic Analysis
Technology, Inc. v. Homeland Security Strategies,
Inc. claiming the Company failed to deliver
certain equipment and demanding a refund of the
$64,800 deposit it had paid and additional
damages in an amount to be determined by the
Court. The Company has denied the material
allegations of the claim and has raised
affirmative defenses thereto and believes that it
has valid defenses to the claim. The Company is
unable to determine whether it is reasonably
possible that it will incur a loss in this
matter. The Company has the recorded the $64,800
as a current liability in Customer deposits.
Accordingly, should the Plaintiff prevail there
will be no loss to the Company.
In addition to these matters, CCS and one or more
of its subsidiaries are the defendant in a number
of actions, in which the total amount claimed, is
approximately $966,000. Judgments have been
rendered against CCS in these matters in the
approximate amount of $770,000. Although the
Company is not a party to any agreement with the
plaintiff in any of these actions and has not
taken any action to guarantee these obligations,
it is possible that the plaintiffs may seek to
make a claim against it. The Company believes
that it has no liability in any of these actions,
and will vigorously defend any action which seeks
to impose liability upon it. The Company is
unable to determine whether it is reasonably
possible that it will incur a loss in these
matters. The Company estimates the range of the
potential loss it may incur in these matters to be between $0 and $966,000.
At March 31, 2008, the CompanyÂ’s liabilities
included delinquent payroll taxes and associated
interest and penalties of $1,646,904 primarily
owed to the Internal Revenue Service and the
state of New York. The Company is in discussions
with the Internal Revenue Service and the state
of New York seeking a reduction in the penalties
that have been assessed and a long-term payment
schedule to pay the delinquent payroll taxes
however, the Company can give no assurances that
it will be successful in reducing the assessed
penalties or that it will be successful in
negotiating a long-term payment schedule to pay
the delinquent payroll taxes. Further, if the
Company is successful in negotiating a long-term
payment schedule to pay the delinquent payroll
taxes it can give no assurances that it will be
able to make the payments on a timely basis.
12. Supplemental Disclosures of Cash Flow Information
Supplemental disclosures of cash flow information
for the nine month periods ended March 31, 2008 and 2007 are as follows:
Nine Months Ended
March 31,
2008 2007
Interest paid $ 76,665 $ 110,860
Taxes paid $ 877 $ 835
Accrued interest and deferred salary credited to
note payable - CEO/stockholder $ 243,727 $ 246,725
14
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Overview
The following discussion should be read in
conjunction with our financial statements,
including the notes thereto. Our financial
statements and information have been prepared to
reflect our financial position as of March 31,
2008 and March 31, 2007. Historical results and
trends should not be taken as indicative of future operations.
We are operating under a heavy financial burden
as reflected in our substantial working capital
deficiency and our continuing losses and negative
cash flow from operations. We have sought to
address these problems during fiscal 2004 by
closing our retail operations, although we
continue to generate modest retail sales from our
headquarters, and by entering into credit
agreements with certain stockholders pursuant to
which we borrowed $494,000. These notes were
initially due in June 2005, and were extended for five years.
In August 2005, we entered into a revolving
credit agreement with GCOM Consultants, Inc.,
which is owned by the wife of our chief executive
officer, under which we may borrow up to
$680,000. The agreement terminates on September
1, 2015 and requires monthly payments of $4,410
during the term. Borrowings under the agreement
bear interest at the annual rate of 7.025%, are
due on demand, and are secured by a security
interest in substantially all of our assets. In
connection with this agreement, our chief
executive officer has subordinated his security
interest in our assets to any borrowings under
this agreement. As of March 31, 2008, we had
borrowed approximately $656,000 under this agreement.
Our working capital deficiency has made it
difficult for us to attract new business and
maintain relations with our customers and
suppliers. Other than our credit agreement and
loans from our chief executive officer, our main
source of funds has been our customer deposits which we use for our operations.
Because of our working capital problems we are
delinquent in payment of payroll taxes. At March
31, 2008, our liabilities included delinquent
payroll taxes and associated interest and
penalties of $1,646,904, primarily owed to the
Internal Revenue Service and the state of New
York. We are in discussions with the Internal
Revenue Service and the state of New York seeking
a reduction in the penalties that have been
assessed and a long-term payment schedule to pay
the delinquent payroll taxes however, we can give
no assurances that we will be successful in
reducing the assessed penalties or that we will
be successful in negotiating a long-term payment
schedule to pay the delinquent payroll
taxes. Further, if we are successful in
negotiating a long-term payment schedule to pay
the delinquent payroll taxes we can give no
assurances that we will be able to make the payments on a timely basis.
If we are unable to increase our sales and pay
our note holders and other creditors, it may be
necessary for us to cease business and seek
protection under the Bankruptcy Code.
Prior to 2004, a significant portion of our
revenue was derived from sales by our retail
stores which were operated by CCS, which was then
our wholly-owned subsidiary. In March 2005, we
sold the stock of CCS to Menahem Cohen, who was
then our vice president and a director, for $100
and contingent consideration consisting of 5% of
CCSÂ’s and its subsidiariesÂ’ net sales through
March 31, 2015. Although we no longer have any
interest in CCS, CCS has significant liabilities
and contractual obligations, and creditors of CCS
may claim that we are liable for CCSÂ’
obligations. One creditor of CCS has obtained a
default judgment against us, and another has
commenced litigation against us for obligations
of CCS. If creditors of CCS obtain and seek to
enforce any significant judgment against us, we
may seek protection under the Bankruptcy Code.
During the fiscal year ended June 30, 2004 and
continuing thereafter, we changed the direction
of our sales effort. We substantially reduced our
retail operations by closing our retail stores or
converting to them to sales offices, followed in
March 2005 with the sale of our retail
subsidiaries. We expanded our marketing efforts
directed at commercial and governmental users,
particularly with respect to our sales of our
bomb-jamming systems and our communications
monitoring systems. We do not anticipate that
retail sales will account for a significant
portion of our sales on an ongoing basis.
15
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Although we have marketed a number of products
in the past, we believe that our ability to
generate profits in the future will be dependent
upon our ability to develop market and sell our
bomb-jamming equipment and market and sell the
communications monitoring equipment that we
distribute pursuant to a distribution agreement
with a foreign supplier. If we are not able to
generate sales from these products or from any
new products which we may either develop or for
which we may acquire distribution rights, we may
be unable to operate profitably and it may be
necessary for us to discontinue our operations
and seek protection under the Bankruptcy Code.
A significant portion of our revenue for the
year ended June 30, 2007 represents
non-refundable deposits from distributors which
were forfeited upon expiration or termination of
the distribution agreements as a result of the
failure of the distributors to purchase our
products. The deposits were to be applied to the
purchase price of products ordered pursuant to
the distribution agreement. Although we recognize
these deposits as revenue upon expiration or
termination of the contracts, the distributors
may claim that they are entitled to a refund of
the unused deposits, notwithstanding the
characterization of the deposits as
non-refundable. Although we believe that we are
complying with the terms of the contracts, we
cannot assure you that the distributors will not
be successful if they bring these claims against
us. There was no similar revenue for the nine months ended March 31, 2008.
Critical accounting policies
We prepare our financial statements in accordance
with accounting principles generally accepted in
the United States of America. Preparing financial
statements in accordance with generally accepted
accounting principles requires us to make
estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities
as of the date of the financial statements and
the reported amounts of revenues and expenses
during the reporting period. The following
paragraphs include a discussion of some of the
significant accounting policies and methods
applied to the preparation of our consolidated
financial statements. See Note 1 of Notes to
Consolidated Financial Statements for further
discussion of significant accounting policies.
Revenue recognition
The Company recognizes revenue from sales upon
the delivery of merchandise to a customer. The
Company recognizes revenue from its sophisticated
monitoring systems and bomb jamming systems after
installation, testing and customer acceptance.
Non-refundable advance payments received under
marketing and distribution arrangements are
deferred and either applied as payments towards
customer purchases made pursuant to the terms of
the respective agreements, or recognized as
income at the termination of the agreement if
specified purchase quotas have not been met by
the customer. Customer deposits are initially
recorded as liabilities and recognized as revenue
when the related goods are shipped.
Contingent Liabilities of CCS
Prior to 2004, a significant portion of the
CompanyÂ’s revenue was derived from sales by
retail stores which were operated by the
CompanyÂ’s wholly-owned subsidiary, CCS
International, Inc. (“CCS”). Commencing in mid
2003 and continuing through March 2004, the
Company closed all of its retail stores, although
the Company continues to make modest retail sales
from its headquarters. On March 22, 2005, the
Company sold the stock of CCS for $100 and
contingent consideration consisting of 5% of
CCSÂ’s and its subsidiariesÂ’ net sales through
March 31, 2015. Because of CCSÂ’s financial
condition the Company has established a full
reserve for uncollectible amounts due from them
of $2,936,511. The CompanyÂ’s balance sheet at
March 31, 2008 does not reflect any liabilities
of CCS, since the Company was not an obligor or
guarantor with respect to any of the liabilities
except as set forth in Notes 3 and 7. The Company
issued shares of common stock to settle debt
obligations of CCS or its subsidiaries. These
agreements contain a price guarantee that
requires CCS to settle in cash any difference
between the original face amounts of the debt and
proceeds from the creditors subsequent sale of
the shares. Since the obligation to make the
payment is an obligation of CCS, and not the
Company, the amount by which the target prices
exceeded the value of the stock on March 31,
2008, which was approximately $819,000, is not
reflected as a liability of the Company at March
31, 2008. In addition at March 31, 2008, CCSÂ’s
creditors had initiated lawsuits against CCS for
nonpayment of accrued liabilities and its
distributors have initiated litigation for
breaches of their agreements in the total amount
of approximately $966,000. Judgments of
approximately $770,000 have been entered against
CCS in these matters. Although the Company has no
contractual obligation with respect to any of the
obligations of CCS, and the Company believes that
it has a valid defense to any claim that it has
any liability with respect to any liabilities or
obligations of CCS, creditors of CCS or its
subsidiaries have and may continue to make claims
against the Company and they may prevail. Two CCS
creditor have obtained a default judgment against
the Company based upon the claim that the Company
was responsible for CCSÂ’s obligations and another
CCS creditors has initiated an action against the
Company claiming that the Company is responsible
for CCSÂ’s obligations. (See Note 11 of Notes to Financial Statements).
16
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Stock-based Compensation
Effective July 1, 2006, The Company adopted
Statement of Financial Accounting Standards
Statement 123(R) “Share Based Payment”
(“SFAS123(R)”) utilizing the “modified
prospective” method as described in SFAS 123(R).
In the “modified prospective” method,
compensation cost is recognized for all
share-based payments granted after the effective
date and for all unvested awards granted prior to
the effective date. In accordance with SFAS
123(R) prior period amounts were not restated.
SFAS 123(R) also requires the tax benefit
associated with these share-based payments to be
classified as financing activities in the
Statement of Cash Flows, rather than operating
cash flows as required under previous regulations.
FASB Statement 123, “Accounting for Stock-Based
Compensation,” requires the Company to provide
pro forma information regarding net income (loss)
and income (loss) per share as if compensation
cost for the CompanyÂ’s stock option issuances had
been determined in accordance with the fair value
based method prescribed in FASB Statement 123.
The Company estimates the fair value of each
stock option at the grant date by using the
Black-Scholes option-pricing model with the
following weighted-average assumptions used for
grants in fiscal 2005, 2004, 2003 and 2002:
dividend yield of 0%, risk-free interest rates
ranging from of 3.38% to 4.32%, expected lives of
eight years, and expected volatility ranging from 120% to 178%.
Foreign Currency Translation
The functional currency of the Company's United
Kingdom subsidiary is pound sterling.
Accordingly, the Company translates all assets
and liabilities into U.S. dollars at current
rates. Revenues, costs, and expenses are
translated at average rates during each reporting
period. Gains and losses resulting from the
translation of the consolidated financial
statements are excluded from results of
operations and are reflected as a translation
adjustment and a separate component of
stockholders' deficit. Gains and losses resulting
from foreign currency transactions are recognized
in the consolidated statement of operations in the period they occur.
Warranties
The Company warrants the products and systems
it sells to be free from defects in materials and
workmanship under normal use. Parts and labor
costs to repair defective products or systems are
covered during the first ninety days after
delivery of the product or system. Thereafter the
cost is billed to the customer.
Use of estimates
The preparation of financial statements in
conformity with accounting principles generally
accepted in the United States requires management
to make estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities
at the date of the combined financial statements,
and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those estimates.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
17
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Property and equipment
Assets are stated at cost. Depreciation is
computed over the estimated useful life of the
assets generally using the straight-line method
over periods ranging from five to seven years.
Additions and major renewals and betterments are
capitalized and depreciated over their estimated
useful lives. Repairs and maintenance are charged
to operating expenses as incurred.
Income taxes
The Company uses the liability method to
determine its income tax expense. Under this
method, deferred tax assets and liabilities are
computed based on differences between financial
reporting and tax basis of assets and liabilities
and are measured using the enacted rates and laws
that will be in effect when the differences are
expected to reverse. Deferred tax assets are
reduced by a valuation allowance if, based on the
weight of the available evidence, it is more
likely than not that all or some portion of the
deferred tax assets will not be realized. The
ultimate realization of the deferred tax asset
depends on the CompanyÂ’s ability to generate
sufficient taxable income in the future.
Use of estimates
RESULTS OF OPERATIONS - Nine Months Ended March 31, 2008 and March 31, 2007
Revenues. Revenues for the nine months ended
March 31, 2008 (the “2008 Period”) were
$2,729,328, an increase of $933,073, or 52.0%,
from revenues of $1,796,255 for the nine months
ended March 31, 2007 (the “2007 Period”)
primarily as a consequence of an increase in
product sales of $1,163,019, or 74.3%, to
$2,729,328 in the 2008 Period from $1,566,309 in
the 2007 Period partially offset by a decrease of
$229,946 in revenues recognized from the
termination of distribution agreements with non
refundable deposit balances from the 2007 Period to the 2008 Period.
Cost of Revenue. Cost of sales increased by
$663,498, or 108.1% to $1,277,069 in the 2008
Period from $613,571 in the 2007 Period as a
consequence of increased product sales. Cost of
sales as a percentage of product sales was 46.8%
in the 2008 Period and 39.2% the 2007 Period
which increase is primarily the result of an
$880,000 sale of cellular monitoring equipment in
the 2008 Period that had an associated cost of sales of 63.6%.
Compensation and benefits. Compensation and
benefits decreased by $335,684, or 28.4%, to
$847,205 in the 2008 Period from $1,182,889 in
the 2007 Period primarily due to (i) outsourcing
certain marketing and sales functions to outside
consultants, and (ii) the result of implementing cost cutting programs.
Professional fees and legal matters. Professional
fees and legal matters increased by $30,561, or
9.7%, to $346,802 in the 2008 Period from
$316,241 in the 2007 Period. Based on a review of
our outstanding legal matters and CCSÂ’s
outstanding legal matters and unpaid settlements,
we have established, in consultation with outside
counsel, reserves for litigation costs that we
believe are probable and can be reasonable
estimated. We can provide no assurance, however,
that such reserves will be sufficient to absorb
actual losses that may result from unfavorable
outcomes. Moreover, it is possible that the
resolution of litigation contingencies will have
a material adverse impact on our consolidated
financial condition, results of operations, and cash flows.
Stock based compensation. Stock based
compensation was $62,236 during the 2007 Period
and is attributable to the grant of options and
warrants to employees in accordance with FASB
123(R) that became effective for us on July 1,
2006. There was no comparable expense in the 2008
Period as these costs had been fully amortized in
the fiscal year ended June 30, 2007.
Selling, general and administrative expenses.
Selling, general and administrative expenses
decreased by $10,808, or 1.1%, to $944,830 in the
2008 Period from $955,638 in the 2007 Period.
This decrease was primarily the result of the
implementation of cost cutting programs designed
to decrease a number of administrative support services.
Depreciation and amortization. Depreciation and
amortization decreased by $1,917, or 31.2%, to
$4,083 in the 2008 Period from $6,000 in the 2007
Period. This decrease is the result of assets
becoming fully depreciated at December 31, 2007.
18
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Interest expense. Interest expense increased by
$45,874, or 22.0% to $254,738 in the 2008 Period
from $208,864 in the 2007 Period primarily as a
result of increased costs resulting from a
continued increase in the CompanyÂ’s interest
bearing outstanding debt obligations.
As a result of the factors described above, our
net loss decreased by $603,785, or 39.0%, to
$945,399, $.01 per share, in the 2008 Period from
$1,549,184, $.02 per share, in the 2007 Period.
Liquidity and Capital Resources
At March 31, 2008 we had cash of $12,104, no
accounts receivable, a working capital deficit of
$9,222,954 and long term debt of $494,000. Our
accounts payable and accrued expenses at March
31, 2008 were $3,902,519. As a result of our
continuing losses, our working capital deficiency
has increased. We funded our losses through the
sale of our common stock, loans from our chief
executive officer and a company owned by his wife
and the issuance of notes to private investors.
We also utilized vendor credit and customer deposits.
Our accounts payable and accrued expenses
increased from $3,373,233 at June 30, 2007 to
$3,902,519 at March 31, 2008 an increase of
$529,286 reflecting our inability to pay
creditors currently. We also had customer
deposits and deferred revenue of $2,842,237 which
relate to payments on orders which had not been
filled at that date. We have used our advance
payments to fund our operations. If our vendors
do not extend us necessary credit we may not be
able to fill current or new orders, which may
affect the willingness of our clients to continue to place orders with us.
During the past three years we have sought, and
been unsuccessful, in our efforts to obtain
adequate funding for our business. Because of our
losses and our working capital deficiency, we are
not able to increase our borrowing. Our bank
facility terminated on November 1, 2002 and since
that date we have not been able to arrange
financing with a replacement bank or
institutional lender. In June 2004, we entered
into a convertible credit agreement with certain
stockholders pursuant to which we borrowed
$494,000. Our obligations to these lenders
matured on June 30, 2005, and were extended until
June 30, 2010. In August, 2005, we entered into a
revolving credit agreement with GCOM Consultants,
Inc., a company owned by the wife of our chief
executive officer, under which we may borrow up
to $680,000. We borrowed approximately $656,000
under this agreement. These borrowings are due on
demand. If demand is made, we do not presently
have the resources to pay the lender. If the
lender seeks to demand payment or otherwise
enforce the notes, it may be necessary for us to
seek protection under the Bankruptcy Code. We
continue to require funds for our operations, and
our failure either to obtain financing or
generate cash flow from operations would
materially impair our ability to continue in
business, and we cannot assure you that we will
be able to obtain the necessary financing. If we
do not obtain necessary funding, either from
operations or from investors, we may be unable to
continue our operations and it may be necessary
for us to seek protection under the Bankruptcy Code.
Our main source of funds other than the private
investors has been from loans from our chief
executive officer, a company owned by the chief
executive officerÂ’s wife, customer deposits and
vendor credits. During the 2008 Period we
received $300,000 from the sale of our common
stock. We cannot provide any assurance that we
will be able to raise any more money through the
sale of our equity securities. We may not be able
to obtain any additional funding, and, if we are
not able to raise funding, we may be unable to
continue in business. Furthermore, if we are able
to raise funding in the equity markets, our
stockholders might suffer significant dilution
and the issuance of securities may result in a
change of control. These factors raise
substantial doubt about our ability to continue
as a going concern. Our financial statements do
not include any adjustments that might result
from the outcome of these uncertainties.
In March 2005, we sold the stock of CCS. Prior to
the sale CCS had incurred liabilities, which
continue as liabilities of CCS. Although we did
not guaranty payment of the obligations of CCS,
it is possible that creditors of CCS may seek
payment from us. Although we believe that we have
no liability to creditors of CCS, we cannot
assure you that a court would not reach a
contrary conclusion. Regardless of whether we
ultimately prevail, we would incur significant
legal and other costs in defending any such action.
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PART II OTHER INFORMATION
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.
During the nine months ended March 31, 2008 we
issued the following in transactions which were
not registered pursuant to the Securities Act of 1933:
· .We sold 3,227,058 shares of common stock
to an accredited investor for $300,000.
None of these shares were issued in transactions
involving a public offering pursuant to Section
4(2) of the Securities Act of 1933, as amended.
No underwriting or broker was involved in the
stock issuances and the Company did not pay any
compensation to any person in connection with the stock issuances.
Item 3. Controls and Procedures
As of the end of the nine months ended March 31,
2008, our chief executive officer and chief
financial officer evaluated the effectiveness of
our disclosure controls and procedures. Based on
their evaluation, the chief executive officer and
the chief financial officer have concluded that
our disclosure controls and procedures are
effective in alerting them to material
information that is required to be included in
the reports that we file or submit under the
Securities Exchange Act of 1934 and that the
information required to be disclosed in the
reports that we file or submit under the
Securities Exchange Act of 1934 is accumulated
and communicated to our management, including our
chief executive officer and chief financial
officer, to allow timely decisions regarding required disclosure.
There has been no change in our internal control
over financial reporting that occurred during our
last fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 6. EXHIBITS AND REPORTS ON FORM 8K
31.1 Certificate of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SECURITY INTELLIGENCE TECHNOLOGIES, INC.
By: /s/ Ben Jamil
Ben Jamil, chief executive officer
By: /s/ Chris R. Decker
Chris R. Decker, chief financial officer
Date: May 15, 2008
20
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Dates Referenced Herein and Documents Incorporated By Reference
This 10QSB Filing Date Other Filings
11/1/02
7/14/03
12/26/03
1/30/04 4
6/10/04
6/30/04 10KSB, 8-K, NT 10-K
2/10/05
3/7/05
3/11/05
3/22/05 4, 8-K
6/30/05 10KSB, NT 10-K
7/31/05
9/21/05
12/23/05
1/19/06
5/19/06
7/1/06
8/21/06
9/12/06
12/15/06
12/31/06 10QSB, NT 10-Q
1/2/07
1/8/07
3/26/07
3/31/07 10QSB, NT 10-Q
4/10/07
6/30/07 10KSB, NT 10-K
10/31/07
12/31/07 10QSB, NT 10-Q
3/4/08
For The Period Ended 3/31/08
5/9/08
Filed On / Filed As Of 5/15/08
6/30/10
3/31/15
9/1/15
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World Class, Professional, Ethical, and Competent Bug Sweeps, and
Wiretap Detection using Sophisticated Laboratory Grade Test Equipment.
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James M. Atkinson Phone: (978) 546-3803
Granite Island Group Fax: (978) 546-9467
127 Eastern Avenue #291 Web:
http://www.tscm.com/
Gloucester, MA 01931-8008 E-mail: mailto:jm..._at_tscm.com
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We perform bug sweeps like it's a full contact sport, we take no prisoners,
and we give no quarter. Our goal is to simply, and completely stop the spy.
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Received on Sat Mar 02 2024 - 00:57:27 CST