UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
| | TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-30178
VIEW SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Florida 59-2928366
(State of incorporation) (I.R.S. Employer Identification No.)
7717 West 6th Avenue, Suite A & B
Lakewood, Colorado 80205
(Address of principal executive offices)
(303) 237-8439
(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 | |
As of October 29, 2002, the issuer had 41,610,620 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes | | No |X|
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements.............................................3
Item 2: Management's Discussion and Analysis............................13
Item 3: Controls and Procedures.........................................17
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K ...............................18
Signatures and Certifications............................................19
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information set forth below with respect to our statements
of operations for the three and nine month periods ended September 30, 2002
and 2001 are unaudited. This financial information, in the opinion of
management, includes all adjustments consisting of normal recurring entries
necessary for the fair presentation of such data. The results of operations
for the nine months ended September 30, 2002, are not necessarily indicative
of results to be expected for any subsequent period.
2
VIEW SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2002 2001
------------- --------------
(Unaudited)
CURRENT ASSETS:
Cash $ - $ 73,344
Accounts receivable (Net of allowance
for uncollectible accounts of $1,141,779
and $279,149 at September 30, 2002
and December 31, 2001 respectively.) 259,151 938,230
Inventory 443,900 55,644
------------- --------------
Total current assets 703,051 1,067,218
------------- --------------
PROPERTY AND EQUIPMENT:
Equipment 348,385 332,967
Leasehold improvements 18,683 3,000
Software tools 34,571 34,571
Vehicles 46,832 46,832
------------- --------------
448,471 417,370
Less accumulated depreciation 186,933 138,307
------------- --------------
Net value of property and equipment 261,538 279,063
------------- --------------
OTHER ASSETS:
Goodwill and other intangible assets 2,371,195 781,248
Investments - 275,000
Due from affiliated entitles 121,146 105,552
Due from officers - 88,099
Deposits 3,102 2,532
------------- --------------
Total other assets 2,495,443 1,252,431
------------- --------------
TOTAL ASSETS $ 3,460,032 $ 2,598,712
============= ==============
See Accompanying Notes
3
VIEW SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2002 2001
------------- --------------
(Unaudited)
CURRENT LIABILITIES:
Cash overdraft $ 8,783 $ -
Accounts payable 369,837 345,657
Note payable - 6,052
Accrued interest 70,093 33,000
Note payable 110,000 110,000
Due to shareholders 416,517 -
------------- --------------
Total current liabilities 975,230 494,709
------------- --------------
LONG-TERM DEBT:
Notes payable - -
------------- --------------
Total liabilities 975,230 494,709
------------- --------------
STOCKHOLDERS' EQUITY:
Common stock-par value $0.001
50,000,000 shares authorized,
40,985,620 shares issued and outstanding 40,985 -
20,193,031 shares issued and outstanding - 20,193
Additional paid-in capital 13,422,191 10,119,024
Accumulated deficit (10,978,374) (8,035,214)
------------- --------------
Total stockholders' equity 2,484,802 2,104,003
------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,460,032 $ 2,598,712
============= ==============
See Accompanying Notes
4
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- -------------- -------------
REVENUE:
Sales of security systems $ 175,061 $ 312,353 $ 306,657 $ 744,842
Sales of weapons detection portals 92,480 - 92,480 -
Sales of assembled electronic components - - - 9,512
------------- ------------- -------------- -------------
Total sales 267,541 312,353 399,137 754,354
Cost of goods sold 149,747 161,675 221,861 360,575
------------- ------------- -------------- -------------
GROSS PROFIT ON SALES 117,794 150,678 177,276 393,779
------------- ------------- -------------- -------------
OPERATING EXPENSES:
Advertising and promotion 22,915 31,168 32,025 32,294
Amortization - 28,284 - 84,852
Bad debts 627,821 - 862,630 -
Business development 23,888 11,618 94,145 35,723
Depreciation 15,189 11,191 45,567 33,573
Dues and subscriptions - 885 - 2,795
Insurance 8,768 11,443 25,263 28,138
Interest 4,192 3,202 15,846 11,800
Investor relations 4,035 22,525 55,864 73,575
Miscellaneous expense 973 249 10,908 9,741
Office expense 27,266 18,751 122,806 82,208
Professional fees 571,517 75,362 892,708 302,936
Rent 11,566 7,779 37,834 88,752
Repairs and maintenance 3,369 820 7,433 8,560
Research and development 26,843 - 101,729 -
Salaries and benefits 471,445 116,961 766,471 422,178
Taxes-other - - 2,150 9,151
Travel 3,037 11,618 33,816 35,723
Utilities 4,596 2,348 13,241 14,074
------------- ------------- -------------- -------------
Total operating expenses 1,827,420 354,204 3,120,436 1,276,073
------------- ------------- -------------- -------------
NET LOSS FOR THE PERIODS $ (1,709,626) $ (203,526) $ (2,943,160) $ (882,294)
============= ============= ============== =============
LOSS PER SHARE:
Basic $ (0.05) $ (0.01) $ (0.09) $ (0.07)
============= ============= ============== =============
Diluted $ (0.05) $ (0.01) $ (0.09) $ (0.07)
============= ============= ============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING 34,439,000 13,985,500 31,370,334 13,337,333
============= ============= ============== =============
See Accompanying Notes
5
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
September 30, September 30,
2002 2001
--------------- --------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,943,160) $ (882,294)
Adjustments to reconcile net loss to net cash
provided by operating activates:
Depreciation and amortization 45,567 118,425
Bad debt expense 862,630 -
Employee and other compensation paid with stock 1,068,259 25,000
Changes in operating assets and liabilities:
Accounts receivable (155,419) (407,471)
Inventory (28,609) (78,103)
Deposits and other assets (570) (2,500)
Accounts payable 17,710 (8,077)
Accrued interest 8,250 8,250
Other accrued liabilities - (30,461)
--------------- --------------
Net cash used in operating activities (1,125,342) (1,257,231)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (27,854) (34,255)
Funds advanced to affiliated entities (15,594) -
Cash element in Milestone Acquisition 58,849 -
--------------- --------------
Net cash provided by (used in) investing activities 15,401 (34,255)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Funds advanced to shareholders (4,834) (61,189)
Repayment of note payable-bank (6,052) (35,363)
Proceeds from sales of stock 1,038,700 1,489,000
--------------- --------------
Net cash provided by financing activities 1,027,814 1,392,448
--------------- --------------
NET (DECREASE) INCREASE IN CASH (82,127) 100,962
CASH AT BEGINNING OF PERIOD 73,344 265,245
--------------- --------------
CASH AT END OF PERIOD $ (8,783) $ 366,207
=============== ==============
SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
Common stock issued in exchange for net assets of
Milestone Technology, Inc. as follows:
Accounts receivable 28,132
Inventory 359,647
Fixed assets 188
Patents 1,317,467
Accounts payable (6,470)
Notes payable (703,449)
Accrued interest (28,843)
SIGNIFICANT NON-CASH FINANCING ACTIVITIES:
Common stock issued in payment of note payable 194,000
See Accompanying Notes
6
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Equity
------------ ------------- -------------- --------------
Balances at January 1, 2001 $ 11,481 $ 7,364,502 $ (6,097,930) $ 1,278,053
Sales of common stock 2,764 1,486,236 - 1,489,000
Issuance of common stock as compensation
to employees and others 60 24,940 - 25,000
Net loss for the nine months ended
September 30, 2001 - - (882,294) (882,294)
------------ ------------- -------------- --------------
Balances at September 30, 2001 (Unaudited) 14,305 8,875,678 (6,980,224) 1,909,759
Sales of common stock 2,736 273,264 - 276,000
Issuance of common stock as compensation
to employees and others 2,652 695,582 - 698,234
Issuance of common stock in exchange for
interest In Milestone Technology, Inc. 500 274,500 - 275,000
Net loss for the three months ended
December 31, 2001 - - (1,054,990) (1,054,990)
------------ ------------- -------------- --------------
Balances at December 31, 2001 20,193 10,119,024 (8,035,214) 2,104,003
Sales of common stock 6,075 1,032,625 - 1,038,700
Issuance of common stock in exchange for
interest in Milestone Technology, Inc. 3,300 1,019,700 - 1,023,000
Issuance of common stock as compensation
to employees and others 10,682 1,057,577 - 1,068,259
Issuance of common stock in payment of
a note payable 735 193,265 - 194,000
Net loss for the nine months ended
September 30, 2002 - - (2,943,160) (2,943,160)
------------ ------------- -------------- --------------
Balances at September 30, 2002 (Unaudited) $ 40,985 $ 13,422,191 $ (10,978,374) $ 2,484,802
============ ============= ============== ==============
See Accompanying Notes
7
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
--------------------
View Systems, Inc. (the "Company") designs and develops computer software
and hardware used in conjunction with surveillance capabilities. The
technology utilizes the compression and decompression of digital inputs. In
March 2002, the Company acquired Milestone Technology, Inc. which has
developed a concealed weapons detection portal.
Basis of Presentation
---------------------
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America and the rules and regulations of the Securities
and Exchange Commission for interim financial information. Accordingly, they
do not include all the information and footnotes necessary for a comprehensive
presentation of financial position and results of operations. It is
management's opinion, however, that all adjustments (consisting of normal
recurring adjustments0 have been made which are necessary for a fair financial
statement presentation. The results for the interim period are not
necessarily indicative of the results to be expected for the year.
Basis of Consolidation
----------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Milestone Technology, Inc. ("Milestone"),
Real View Systems, Inc. ("Real View"), Xyros Systems, Inc. ("Xyros") and
Eastern Tech Manufacturing, Inc. ("ETMC"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
----------------
Management uses estimates and assumptions in preparing financial
statements in accordance with accounting principles generally accepted in the
United States of America. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could
differ from the estimates that were used.
Revenue Recognition
-------------------
The Company and its subsidiaries recognize revenue and the related cost
of goods sold upon shipment of the product.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in-first-out method (LIFO). The inventory at September
30, 2002 includes the costs associated with the development and production of
the weapons detection portals, which are the principal product of Milestone
Technology, Inc. The costs also include amounts spent to document the designs
of the systems.
8
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Property and Equipment
----------------------
Property and equipment is recorded at cost and depreciated over their
estimated useful lives, using the straight-line and accelerated depreciation
methods. Upon sale or retirement, the cost and related accumulated
depreciation are eliminated from the respective accounts, and the resulting
gain or loss is included in the results of operations. The useful lives of
property and equipment for purposes or computing depreciation are as follows:
Equipment 5-7 years
Software tools 3 years
Repairs and maintenance charges, which do not increase the useful lives
of assets, are charged to operations as incurred. Depreciation expense for
the nine months ended September 30, 2002 and 2001 amounted to $45,567 and
$33,573 respectively.
Income Taxes
------------
Deferred income taxes are recorded under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences, measured by enacted tax rates, attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss carryforwards.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period the rate change becomes effective.
Valuation allowances are recorded for deferred tax assets when it is more
likely than not that such deferred tax assets will not be realized.
Research and Development
------------------------
Research and development costs are expensed as incurred. Equipment and
facilities acquired for research and development activities that have
alternative future uses are capitalized and charged to expense over the
estimated useful lives.
Advertising
-----------
Advertising costs are charged to operations as incurred. Advertising
costs for the nine months ended September 30, 2002 and 2001 were $32,025, and
$32,294 respectively.
Nonmonetary Transactions
------------------------
Nonmonetary transactions are accounted for in accordance with Accounting
Principles Board Opinion No. 29 Accounting for Nonmonetary Transactions which
requires the transfer or distribution of a nonmonetary asset or liability to
be based, generally, on the fair value of the asset or liability that is
received or surrendered, whichever is more clearly evident.
Financial Instruments
---------------------
For most financial instruments, including cash, accounts receivable,
accounts payable and accruals, management believes that the carrying amount
approximates fair value, as the majority of these instruments are short-term
in nature.
9
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Net Loss Per Common Share
-------------------------
Basic net loss per common share ("Basic EPS") is computed by dividing
net loss available to common stockholders by the weighted average number of
common shares outstanding. Diluted net loss per common share
("Diluted EPS") is computed by dividing net loss available to common
stockholders by the weighted average number of common shares and dilutive
potential common share equivalents then outstanding. Potential common shares
consist of shares issuable upon the exercise of stock options and warrants.
The calculation of the net loss per share available to common stockholders for
the nine months ended September 30, 2002 does not include potential shares of
common stock equivalents, as their impact would be antidilutive.
Segment Reporting
-----------------
The company has determined that it does not have any separately
reportable operating segments as of September 30, 2002.
New Accounting Pronouncements
-----------------------------
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, as well as all purchase method
business combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values and reviewed for impairment.
The provisions of SFAS No. 142 were adopted by the Company as required
effective January 1, 2002. The adoption of SFAS Nos. 141 and 142 had no
effect on the Company's financial condition or results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment of Disposal of Long-Lived Assets", which
supercedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed Of' and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequent
Occurring Events and Transactions"' for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS No. 144 retains the
fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses in long-lived assets held for use and long-lived assets to
be disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. The provisions of SFAS No. 144 are effective
for years beginning after December 15, 2001. This Statement did not have a
material impact on the Company's financial statements.
2. FINANCIAL CONDITION
Since its inception, the Company has incurred significant losses and as
of September 30, 2002 had an accumulated deficit of $11 million. The Company
believes that it will incur operating losses for the foreseeable future.
There can be no assurance that the Company will be able to generate sufficient
revenues to achieve or sustain profitability in the future. However, the
Company believes that its projected sales revenue and anticipated equity
infusions will be sufficient to sustain operations through September 30, 2003.
10
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
3. BUSINESS COMBINATION
The Company purchased 100% of the common stock of Milestone Technology,
Inc. effective March 25, 2002. The purchase was accomplished in two
transactions. The Company acquired 6% of Milestone in December 2001 in
exchange for 500,000 shares of the Company's common stock. In March 2002 the
Company acquired the remaining 94% of Milestone for 3,300,000 shares of the
Company's common stock. Based on the then market value of the Company's
common stick ($0.55 per share in December and $0.31 per share in March) the
total cost of the acquisition was $1,298,000.
Milestone Technology, Inc. is a developer of concealed weapons detections
systems. Its primary product is a walk-through detector that uses advanced
magnetic technology to accurately pinpoint the location, size and numbers of
concealed weapons. Prior to its acquisition, Milestone Technology, Inc. was
considered to be a development stage enterprise.
Summarized unaudited financial statements for Milestone Technology, Inc.
as of and for the year ended December 31, 2001 are as follows:
Milestone Technology, Inc.
Balance Sheet (Unaudited)
As of December 31, 2001
Assets
Current Assets $ 200,043
Fixed Assets 188
Other assets 177,127
Licenses and patents 264,000
------------
Total assets $ 641,358
============
Liabilities and Stockholders' Equity
Notes payable-current $ 84,000
Other current liabilities 300,768
Notes payable to shareholders 277,750
Notes payable-long term 160,000
------------
Total liabilities 822,518
Stockholders equity (181,160)
------------
Total liabilities and
stockholders' Equity $ 641,358
============
Statement of Operations (Unaudited)
For the Year Ended December 31,2001
Revenue $ 21,667
------------
Expenses
Operating expenses $ 134,608
------------
Net loss for the year $ (112,941)
============
11
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
4. INVENTORIES
Inventories consist of the following components:
2002 2001
------------- -----------
Materials $ 81,709 $ 55,644
Finished goods 362,191
------------- ------------
$ 443,900 $ 55,644
============= ============
12
In this report references to "View Systems," "we," "us," and "our" refer
to View Systems, Inc.
FORWARD LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements that involve
risks and uncertainties, such as statements of the View System's plans and
expectations. Any statements contained in this Form 10-QSB that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "estimate" or "continue" or comparable terminology
are intended to identify forward-looking statements. These statements by
their nature involve substantial risks and uncertainties, and actual results
may differ materially depending on a variety of factors, many of which are not
within View Systems's control. These factors include but are not limited to
economic conditions generally and in the market which View Systems may
participate; competition within View Systems's chosen market and failure by
View Systems to successfully develop business relationships.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Since start-up of operations in September 1998, and until the end of 2001
we have devoted most of our resources to the development, sale and marketing
of digital video surveillance and security products. We have generated
limited revenues from our security products to date, but are rapidly expanding
our sales and distribution network. At the same time we are working on
delivering new products to market and enhancing and upgrading our product
line. We have had some success in capturing interest and limited sales in
overseas markets such as Europe.
In December of 2001 we entered into a joint venture with Milestone
Technology to enhance and further develop their Concealed Weapons Detection
portal. This relationship was precipitated by our ability to manufacture
electronic boards and the fact that we had skills in developing facial
recognition systems. In March of 2002, the relationship evolved into a
complete merger of the two companies. Milestone had two patents and
intellectual property which included licenses and patents pending that become
available to be integrated into sellable products. This also resulted in a
net increase in assets to over $4,000,000. We believe that the combination of
our products: Digital Video Monitoring Centers, advanced biometric access
control, such as facial recognition and Concealed Weapons Detection will help
us meet the new heightened awareness demands of security due to the September
11th events.
We have restructured the company and refocused our efforts towards
marketing this Concealed Weapons Detection portal as an entr e and adding
other capabilities such as explosives detection capability to build a
comprehensive entry control device. This direction is requiring us to make
changes in personnel, engineering and staff that is experienced in doing
business with the federal government and local jurisdictions. A new Chairman
of the board has been elected and a new working management advisory group has
been formed. With the melded companies, Milestone and View Systems,
functional changes have been made to integrate efforts and increase revenues.
Revenues resulting from these changes are starting to be realized with an
increase of more than three times sales over the previous quarter. We believe
that sales will be even greater the fourth quarter as a result of this new
direction. We already received over $440,000 in purchase orders for delivery
in the fourth quarter and we are increasing our capacity to manufacture
additional units.
During the last six months we have opened a new sales, inventory stocking
and customer support facility in Denver, Colorado, and are opening a sales and
service location in the Los Angeles area. We are maintaining the former
Milestone Idaho facility for research and development purposes. The federal
lab researches use this facility for testing and development. The facility is
also consider an "in kind" contribution to NIJ's continuing
13
investigations and refinement.
The need to support our resellers has increased in complexity due to the
increased complexity of our systems. We have constructed a new web site to
facilitate sales and customer support. Our product information is now
accessible via telecommunications and is kept current via cost efficient
electronic means.
We have elected a new chairman of the board and are constructing a
prestigious senior executive advisory board. A working management consulting
group was formed with individuals experienced in the areas of expertise that
we need. This highly experienced and successful group of senior executives is
taking control and redirecting our efforts. More are being interviewed and we
expect will join the board of directors and management consulting advisory
board. A sales force is being built and headed by our new president and
former president of Milestone, Paul Reep. Our intent is to place units
strategically with focus on largest potential first to increase revenue and
expand our reach in the government security market. Multiple federal and
state courts have tested and purchased units and are ordering more.
RESULTS OF OPERATIONS
Revenue - For the nine months ended September 30, 2002, revenues from
sales of our products decreased $355,217 or 47%, to $399,137 from $754,354 in
the same period last year. For the three months ended September 30, 2002,
revenues from sales of our products decreased $44,812 or 14%, to $267,541 from
$312,353 in the same period last year. This is largely due to our shift in
focus from purely digital video storage recorders to the introduction of our
award winning SecureScan Concealed Weapons Detection system. The sales cycles
in the new market we are addressing are long and require the approval of
highly bureaucratic decision makers. In contrast, the price points and
margins are many multiples larger.
Gross Profit - Gross profit on sales for the nine months ended September
30, 2002 decreased $216,503 or 55% to $177,276 compared with $393,779 in the
same period last year. Gross profit margin for the nine months ended
September 30, 2002 was 44% compared with 52% in the same period last year.
Gross profit on sales for the three months ended September 30, 2002 decreased
$32,884 or 22% to $117,794 compared with $150,678 in the same period last
year. Gross profit margin for the three months ended September 30, 2002 was
44% compared with 48% in the same period last year. Because of low net sales
we achieved in the period ended September 30, 2002, for reasons explained in
the previous paragraph under "Revenue", we do not believe gross profit margin
comparisons are meaningful at this state of our operations.
Operating Expenses - Operating expenses for the nine months ended
September 30, 2002, increased to $3,120,436, compared with $1,276,073 for the
comparable period in 2001. The increase is principally due to increasing the
allowance for bad debts by $862,630, increased expenditures in research and
development and increased professional fees. Professional fees as of
September 30, 2002 included $757,577 from the issuance of common stock as
compensation for management, legal services and marketing services rendered in
lieu of cash. The increases have been necessary due to shifts in our product
line to the Concealed Weapons Detection units. There is no amortization of
the value of the patents and licenses, which were a part of the Milestone
acquisition, pending the final determination of the value of those items.
Once that value is determined the patents and licenses will be amortized over
the respective useful lives. Any goodwill remaining from the acquisition will
not be amortized, but will be subject to an annual test for impairment of its
value. That test will be conducted at the end of our accounting year, which
is December 31, 2002.
Operating expenses for the three months ended September 30, 2002,
increased to $1,827,420, compared with $354,204 for the comparable period in
2001. The increase is principally due to increasing the allowance for
doubtful accounts by $627,821 and increases in professional fees and salaries
and benefits. Professional fees as of the three month period ended September
30, 2002 included $546,043 from the issuance of common stock as
14
compensation for services rendered in lieu of cash. The increases have been
necessary due to shifts in our product line to the Concealed Weapons Detection
units.
As a result of the foregoing, net loss was $2,943,160 for the nine months
ended September 30, 2002, compared to a net loss of $882,294 for the nine
months ended September 30, 2001. The net loss was $1,709,626 for the three
months ended September 30, 2002, compared to a net loss of $203,526 for the
three months ended September 30, 2001.
Costs of Products and Services Sold - The cost of products and services
sold, was $221,861 for the nine months ended September 30, 2002 and
represented 56% of revenue for the period, compared to $360,575 for the nine
months ended September 30, 2001 which represents 48% of revenues for that
period. The cost of products and services sold, was $149,747 for the three
months ended September 30, 2002 and represented 56% of revenue for the period,
compared to $161,675 for the three months ended September 30, 2001 which
represents 52% of revenues for that period. Because of our low sales volume
during these periods, we do not consider the costs of goods sold in the same
period last year to be a good measure of our true costs of goods sold. As our
product sales increase and account for a larger percentage of our overall
sales, we expect that our costs of goods and services sold will decline and
stabilize as a percentage of total revenue. We are continually working on
engineering changes in our security products that we expect will lower
component costs for these products. We do not determine our inventory on a
quarterly basis, instead we do it on an annual basis. Therefore, our cost of
goods sold calculations are based on estimates of inventory used in products
sold.
Research and Development Expense - We spent $101,729 on research and
development for the nine months ended September 30, 2002, as compared with $0
in the same period last year. We did not record any research and development
expenses in the three month periods. We are working on changing our
production facilities to manufacture the Concealed Weapons Detection portal.
The changes in the production facility will allow our margins to double and
possibly triple. Currently we purchase the Concealed Weapons Detection portal
for about 60% of our selling price. Manufacturing ourselves will allow us to
sell at about three times the cost of manufacturing.
Bad Debt Expense - Bad debt expense increased to $892,708 for the 2002
nine month period and $627,821 for the 2002 three month period as we continue
to attempt to collect receivables for 2001 sales made to an international
customer. We are currently in negotiations to collect the amounts but we
believe that amounts actually collected will not be the full sales amounts and
that the allowance established at this time will be sufficient.
Salaries and Benefits - We spent $766,471 on salaries and benefits for the
nine months ended September 30, 2002, as compared with $422,178 in the same
period last year. Salaries and benefits for the nine months ended September
30, 2002 included $300,000 from the issuance of common stock as compensation
for services rendered in lieu of cash. We spent $471,445 on salaries and
benefits for the three months ended September 30, 2002, as compared with
$116,961 in the same period last year. Salaries and benefits for the three
months ended September 30, 2002 includes $300,000 from the issuance of common
stock as compensation for services rendered in lieu of cash.
Business Development Expense - We incurred $94,145 on business development
expenses for the nine-month period ended September 30, 2002 as compared with
$35,723 in the same period a year ago. We incurred $23,888 on business
development expenses for the three month period ended September 30, 2002 as
compared with $11,618 in the same period a year ago. We expect the business
development expense to increase sharply as we launch the new products into the
market
Net Operating Loss - We incurred approximately $2,943,160 of net operating
loss carry forwards for the nine month period ended September 30, 2002, which
may be used to offset taxable income and income taxes in future years.
15
The refocusing of our sales and manufacturing to the Concealed Weapons
Detection portal is making comparisons for the three month period a year ago
not significant. It will most likely take another three months until we get a
steady revenue flow to be able to make valid comparisons. Manufacturing,
shipping and service is significantly different and requires a longer time to
compare.
LIQUIDITY AND CAPITAL RESOURCES
Since the start-up of our operations in 1998, we have funded our cash
requirements primarily through equity transactions. We received $11,702,775
since inception through the issuance of our common stock. We are not
currently generating cash from our operations in sufficient amounts to finance
our business and will continue to need to raise capital from other sources.
We used the proceeds from these sales of equity to fund operating activities,
including, product development, sales and marketing, and to invest in the
acquisition of technology, assets and business. As of September 30, 2002, we
had total assets of $3,460,032, an increase of $861,320 over last year's
$2,598,712 at December 31, 2001. This increase is due to the purchase of
Milestone and the valuation of its patents at $1.3 million. Total liabilities
were $975,230, at September 30, 2002, resulting in stockholders' equity of
$2,484,802, an increase of $380,799 from the December 31, 2001 balance of
$2,104,003.
During the nine months ended September 30, 2002, our cash decreased from
$73,344 at December 31, 2001, to $0 at September 30, 2002. Net cash used in
operating activities was $1,116,559 for the nine months ended September 30,
2002, including decreases in accounts receivable of $707,211 (primarily from
write downs), increases in inventory of $28,609, and increases in accounts
payable of $26,493.
Net cash generated from financing activities during the nine months ended
September 30, 2002 was $1,027,814, consisting of proceeds received from sales
of stock of $1,038,700, collections of loans to shareholders of $31,332, less
payments of $6,052 made on a promissory note to Columbia Bank.
Our inventory balance at September 30, 2002, was estimated to be $443,900.
We do not take inventory on a quarterly basis, and we made inventory estimates
based on annual inventory determinations. With expected increased product
sales, we will need to make increased inventory expenditures. However, the
terms of our product sales requires a twenty five percent (25%) deposit on
order. In addition, we endeavor to keep inventory levels low. Therefore, we
do not believe that increased product sales, associated materials purchases
and inventory increases will adversely affect liquidity.
Under our outstanding employment and consulting agreements, we are
obligated to pay Mr. Than $96,000 per year. If we terminate the employment
with Mr. Than without cause or because of merger, acquisition or change in
control, we will be obligated to pay him approximately $350,000 in severance
payments on a three-year period.
We believe that cash from operations and funds available will not be
sufficient to meet anticipated operating capital expenditure and debt service
requirements for the next twelve months and that we will be dependent on
raising additional capital through equity sales or debt financing.
We also had outstanding warrants with various investors with an exercise
price of $.40 per share. These have been renegotiated and the majority were
exercised during the third quarter and the proceeds used for working capital.
PLAN OF OPERATION
The amount of capital that we need to raise depends upon many factors
primarily including:
.. the rate of sales growth and market acceptance of our product lines;
16
.. the amount and time of necessary research and development expenditures;
.. the amount and time of expenditures to sufficiently market and promote
our products;
.. the amount and timing of any accessory product introductions; and
.. the amount of after market support will be needed to sustain our product
line.
We intend to use the cash raised from the private sale of shares to the
following:
.. continue to bring our SecureScan (concealed weapons detection), ViewMaxx
(digital video capture and storage) and FlashView (mobile video capture)
products to market;
.. continue our product development efforts and expand our product lines;
.. build our manufacturing capability to increase unit production and
reduce costs;
.. expand our sales, marketing and promotional activities for the
SecureView line of products; and
.. increase our engineering, production management, quality control, and
customer support staff.
We operate in a very competitive industry that requires continued large
amounts of capital to develop and promote our products. We believe that it
will be essential to continue to raise additional capital, both internally and
externally, to compete and increase market share in this industry.
In addition to accessing the public and private equity markets, we will
pursue bank credit lines and equipment lease lines for certain capital
expenditures. We currently estimate we will need between $2 million and $3
million to launch our expanded business operations in accordance with our
current business plan and $1 million to $2 million to modify and expand our
manufacturing capacity.
ITEM 3: CONTROLS AND PROCEDURES
As a result of new SEC regulations, our board of directors formalized the
disclosure controls and procedures we use to ensure that material information
regarding our company and its operations is provided to the public in a timely
manner. On October 11, 2002, our CEO and principal financial officer
evaluated the effectiveness of these disclosure controls and procedures and
determined that there were no significant deficiencies in these procedures.
Also, our CEO and principal financial officer did not identify any
deficiencies or material weaknesses in our internal controls nor did they
identify fraud that involved management or other employees who had a
significant role in our internal controls, or other factors which would
require changes to be made or corrective actions to be taken related to our
internal controls.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On September 12, 2002 our Board of Directors appointed Bruce Bradley as
Chairman of our Board of Directors, Paul J.Reep as President, and Michael J.
Woodford as a Director. Mr. Bradley has experience in investment banking and
investment research. He served as advisor to CEIA-USA and Invision
Technologies. He served as Chairman of Lombard Technologies, which he
founded. He also served as President of Savoy Group, an NASD investment
banking and research firm for institutional investors in the United States and
Europe.
Mr. Reep will serve as our President in addition to his duties as our
Chief Operating Officer. Mr. Reep founded Milestones Technology, Inc. in
1996. He has held senior management positions with Lockheed Martin and
developed a variety of mission areas for the Department of Energy. He holds
numerous patents and has directed research sponsored by NASA.
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In addition to serving as our Director, Mr. Woodford also acts as our
corporate counsel. He is a partner in the law firm of Woodford & Martien,
P.C.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
Part II Exhibits
----------------
3.1 Articles of Incorporation and all articles of amendment (1)
3.2 By-laws (1)
___________________________________________
(1) Incorporated by reference from issuer's registration statement on Form
SB-2 filed with the Securities and Exchange Commission on January 11, 2000
Reports on Form 8-k
-------------------
None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
View Systems, Inc.
11/13/02 /S/ Gunther Than
Date: _____________ By:________________________________________
Gunther Than
C.E.O., Principal Financial Officer and
Director
11/13/02 /s/ Paul Reep
Date: _____________ By:_________________________________________
Paul Reep
President
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Gunther Than, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of View Systems,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statement made, in light of the circumstances under which statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
19
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
11/13/02 /S/ Gunther Than
Date: _____________ ____________________________________
Gunther Than, CEO
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
I, Gunther Than, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of View Systems,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statement made, in light of the circumstances under which statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
20
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
11/13/02 /S/ Gunther Than
Date: __________ ____________________________________
Gunther Than, Principal Financial Officer
21