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 June 30, 2005
[ ] 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)
Nevada 59-2928366
----------------------- ---------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
1100 Wilso Drive, Baltimore, Maryland 21223
---------------------------------------------
(Address of principal executive offices)
(410) 646-3000
--------------------------
(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 July 27, 2005, View Systems, Inc. had 81,530,422 shares of common stock
outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements...............................................2
Item 2. Management's Discussion and Analysis or Plan of Operation..........8
Item 3. Controls and Procedures...........................................12
PART II: OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........12
Item 6. Exhibits..........................................................13
Signatures.................................................................13
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 six month periods ended June 30, 2005 and 2004 is
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 six month period
ended June 30, 2005 are not necessarily indicative of results to be expected
for any subsequent period.
2
View Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
June 30, December 31,
2005 2004
------------- -------------
(unaudited)
Current Assets
Cash $ 93,269 $ 173,486
Accounts Receivable (Net of allowance of
$20,054 at December 31, 2004) 13,972 108,342
Inventory 26,197 61,197
------------- -------------
Total current assets 133,438 343,025
------------- -------------
Property & Equipment (Net) 9,518 14,803
------------- -------------
Other Assets
Licenses 1,626,854 1,626,854
Loans to Shareholder 62,000 66,500
Due from Affiliates 103,358 98,457
Deposits 2,319 2,319
------------- -------------
Total Other Assets 1,794,531 1,794,130
------------- -------------
Total Assets $ 1,937,487 $ 2,151,958
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 143,377 $ 331,776
Accrued Expenses 30,802 100,548
Accrued Interest 71,400 66,000
Notes Payable 149,000 149,000
------------- -------------
Total Current Liabilities 394,579 647,324
------------- -------------
Stockholers' Equity
Preferred Stock, Authorized 10,000,000 Shares,
$.01 Par Value, Issued and Outstanding -0- - -
Common Stock, Authorized 100,000,000 Shares,
$0.001 Par Value, Issued and Outstanding
81,509,422 81,510 -
Issued and Outstanding 76,533,922 - 76,534
Additional Paid in Capital 17,337,271 17,119,596
Retained Earnings (Deficit) (15,875,873) (15,691,496)
------------- -------------
Total Stockholders' Equity 1,542,908 1,504,634
------------- -------------
Total Liabilities and Stockholders' Equity $ 1,937,487 $ 2,151,958
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
3
View Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2005 2004 2005 2004
-------------- ------------- ------------- -------------
Revenues, Net $ 195,914 $ 158,041 $ 481,556 $ 192,394
Cost of Sales 125,180 73,872 229,508 106,198
-------------- ------------- ------------- -------------
Gross Profit (Loss) 70,734 84,169 252,048 86,196
-------------- ------------- ------------- -------------
Operating Expenses
Business development 17,617 - 32,646 -
General & Administrative 25,238 325,100 94,020 380,678
Professional Fees 31,341 57,955 69,856 82,174
Salaries and Benefits 148,812 106,639 234,365 240,210
-------------- ------------- ------------- -------------
Total operating expenses 223,008 489,694 430,887 703,062
-------------- ------------- ------------- -------------
Net Operating Income (Loss) (152,274) (405,525) (178,839) (616,866)
-------------- ------------- ------------- -------------
Other Income (Expense)
Interest Expense (5,538) (25,297) (5,538) (28,311)
-------------- ------------- ------------- -------------
Total Other Income
(Expense) (5,538) (25,297) (5,538) (28,311)
-------------- ------------- ------------- -------------
Net Income (Loss) $ (157,812) $ (430,822) $ (184,377) $ (645,177)
============== ============= ============= =============
Net Income (Loss) Per Share $ (0.00) $ (0.01) $ (0.00) $ (0.01)
============== ============= ============= =============
Weighted Average Shares
Outstanding 76,866,047 64,523,490 76,866,047 63,671,982
============== ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements
4
View Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Preferred Stock Common Stock Additional Retained
----------------- --------------------------- Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit)
------- --------- ------------- ------------- ------------- -------------
Balance,
December 31, 2004 - $ - 76,533,922 $ 76,534 $ 17,119,596 $(15,691,496)
January - March 2005 -
shares issued for cash - - 155,000 155 15,345 -
January - March 2005 -
shares issued in payment
of accounts payable - - 128,000 128 18,872 -
April - June 2005 - shares
issued for cash - - 2,287,500 2,288 114,712 -
April - June 2005 - shares
issued for services - - 2,405,000 2,405 68,745 -
Net loss for the period
ended June 30, 2005 - - - - - (184,377)
------- --------- ------------- ------------- ------------- -------------
Balance, June 30, 2005
(unaudited) - $ - 81,509,422 $ 81,510 $ 17,337,270 $(15,875,873)
======= ========= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
5
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30,
--------------------------------
2005 2004
---------------- ---------------
Cash Flows from Operating Activities:
Net Income (Loss) $ (184,377) $ (645,177)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation and Amortization 6,400 17,490
Stock Issued for Services 71,150 239,380
Changes in Operating Assets and Liabilities:
Accounts Receivable 94,370 (14,764)
Inventory 35,000 -
Increase (Decrease) in:
Accounts Payable (169,398) (168,514)
Accrued Expenses (64,346) 32,507
---------------- ---------------
Net Cash Used by Operating Activities (211,201) (539,078)
---------------- ---------------
Cash Flows from Investing Activities:
Purchases of Equipment (1,115) -
Funds Advanced (to) from Affiliated Entities (4,901) -
---------------- ---------------
Net Cash Used in Investing Activities (6,016) -
---------------- ---------------
Cash Flows from Financing Activities:
Funds Advanced (to) from Stockholders 4,500 491,685
Proceeds from Stock Issuance 132,500 47,000
---------------- ---------------
Net Cash Provided by Financing Activities 137,000 538,685
---------------- ---------------
Increase (Decrease) in Cash (80,217) (393)
Cash and Cash Equivalents at Beginning of Period 173,486 19,899
---------------- ---------------
Cash and Cash Equivalents at End of Period $ 93,269 $ 19,506
================ ===============
Cash Paid For:
Interest $ 138 $ -
Income Taxes $ - $ -
Non-Cash Activites:
Stock Issued in Payment of Accounts Payable $ 19,000 $ -
Stock Issued for Notes Payable and Accrued Interest $ - $ 522,105
Stock Issued for Services $ - $ 239,380
The accompanying notes are an integral part of these consolidated financial statements.
6
View Systems, Inc.
Notes to the Consolidated Financial Statements
June 30, 2005
GENERAL
View Systems, Inc. (the Company) has elected to omit substantially all
footnotes to the financial statements for the six months ended June 30, 2005
since there have been no material changes (other than indicated in other
footnotes) to the information previously reported by the Company in their
Annual Report filed on the Form 10-KSB for the twelve months ended December
31, 2004.
UNAUDITED INFORMATION
The information furnished herein was taken from the books and records of the
Company without audit. However, such information reflects all adjustments
which are, in the opinion of management, necessary to properly reflect the
results of the interim period presented. The information presented is not
necessarily indicative of the results from operations expected for the full
fiscal year.
7
In this report references to "View Systems," "we," "us," and "our" refer to
View Systems, Inc. and its subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission ("SEC") encourages companies to
disclose forward-looking information so that investors can better understand
future prospects and make informed investment decisions. This report contains
these types of statements. Words such as "may," "will," "expect," "believe,"
"anticipate," "estimate," "project," or "continue" or comparable terminology
used in connection with any discussion of future operating results or
financial performance identify forward-looking statements. You are cautioned
not to place undue reliance on the forward-looking statements, which speak
only as of the date of this report. All forward-looking statements reflect
our present expectation of future events and are subject to a number of
important factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
EXECUTIVE OVERVIEW
View Systems acquires, develops and markets technologies related to
surveillance, detection and security for the purpose of commercializing them.
We offer:
. Visual First Responder - a lightweight, wireless camera system housed in
a tough, waterproof flashlight body.
. SecureScan Concealed Weapons Detection System - a walk-through concealed
weapons detector which uses sensing technology and artificial
intelligence algorithms to accurately pinpoint the location, size and
number of concealed weapons.
. ViewMaxx Digitial Video products - a high-resolution, digital video
recording and real-time monitoring system.
Our revenues for the past two years have been from sales of our products.
Management believes that heightened attention to terrorism and other security
threats, and spending by the United States government on Homeland Security
will continue to drive growth in the market for security products.
During 2005 we have continued to provide live demonstrations of our SecureScan
product at sporting and entertainment venues, expos, and at state corrections
facilities. We also have provided demonstrations of our Visual First
Responder for police and civil support teams. These demonstrations have
raised interest in our products and resulted in increased orders of our
products.
During the last nine months we have contracted with the University of Northern
Florida to design new sensor boards for the SecureScan product which has
allowed us to reduce the installed sensor cost by a factor of four. The new
lower costs allow us to offer price points to the market which compete
directly with traditional metal detectors. We feel the new reduced price
points and enhanced interface abilities will allow us to be more competitive,
along with the advantages of three to four times the throughput rate,
non-contact imaging and permanent visual storage, and a log of all individuals
scanned.
In August 2005 we contracted with Inter-Connect Electronics, Inc. to
manufacture and assemble our Visual First Responder units. We have also
contracted with Sports Field Specialties, LLC, an experienced manufacturer, to
build the SecureScan line. These manufacturing agreements will allow us to
clear our current backlog for our product lines and reduce our labor cost.
Our backlog as of the end of July is in excess of $500,000 in orders and
contracts.
We rely on revenues, private financing and sales of common stock to fund our
operations. We have incurred losses
8
for the past two fiscal years and had a net loss of $184,377 for the six month
period ended June 30, 2005. Our auditors have expressed doubt that we can
continue as a going concern based on these operating losses. Management
believes we will incur operating losses for the near future while we continue
to expand our product line and develop our sales and marketing channels.
Management continues to seek additional funding to continue our business plan
development for the next twelve months. However, we can not assure you that
we will be successful at obtaining the necessary funding to continue this
development.
For the next twelve months our primary challenge will be to more fully develop
our sales and distribution network for the United States. We continue to
establish new partnerships, add active resellers and dealers. We intend to
build a United States domestic network of manufacturing representatives and
dealers for the sale and distribution of our products within the 48 states.
Our emphasis has been on marketing and sales programs through dealer channels,
plus internal marketing support for our products. We train our dealers and
support the dealer network by collaborating at customer demonstrations.
However, we cannot assure you that we will be able to develop these sales and
distribution channels to a level which will result in increased revenues or
continued profitability.
LIQUIDITY AND CAPITAL RESOURCES
While our revenues are increasing, we are unable to satisfy our operating
expenses. Net cash used by operating activities was $211,201 for the six
month period ended June 30, 2005 (the "2005 six month period") compared to
$539,078 for the six month period ended June 30, 2004 (the "2004 six month
period"). However, operating expenses for the 2005 periods were less than
half of the 2004 comparable periods. However, operating expenses for the 2005
three month period were less than half of the 2004 comparable period.
For the short term, management believes that revenues, advances and sales of
our common stock will provide funds for operations and further development of
our business plan. For the long term, management expects that the development
of our sales and distribution channels will increase our revenues; however, we
will need to continue to raise additional funds through loans and sales of our
common stock, as needed.
FINANCING
We have financed our operations primarily through revenues and private
financing. Net cash provided by financing activities for the 2005 six month
period was $137,000, primarily from proceeds from sales of common stock. Net
cash provided by financing activities for the 2004 six month period was
$538,685, with $491,685 of that amount related to funds advanced by
stockholders. We estimate that we will require additional financing of
approximately $500,000 to meet our needs for the next six months. We intend
to use this financing to increase ongoing operations to self-sustaining levels
and increase profits.
Management believes that it will be essential to continue to raise additional
capital, both internally and externally, to compete in our markets. We cannot
assure you that we will be able to obtain financing on favorable terms and we
may be required to further reduce expenses and scale back our operations. In
addition to accessing the public and private equity markets, we will pursue
bank credit lines and equipment leases for certain capital expenditures, if
necessary.
COMMITMENTS AND CONTINGENT LIABILITIES
Our base rent for operating leases related to our principal office and
manufacturing facility is approximately $2,300 per month, with an annual rent
escalator of 3%. At December 31, 2004, future minimum payments for operating
leases related to our office and manufacturing facility were $19,964 through
2006.
Our total current liabilities of $394,579 at June 30, 2005 included accounts
payable of $143,377, accrued expenses of $30,802, accrued interest of $71,400
and notes payable of $149,000
9
OFF-BALANCE SHEET ARRANGEMENTS
None.
RESULTS OF OPERATIONS
The following discussions are based on the unaudited consolidated financial
statements of View Systems and its subsidiaries. These charts and discussions
summarize our financial statements for the three and six month periods ended
June 30, 2004 and 2005 and should be read in conjunction with the financial
statements, and notes thereto, included with this report at Part I, Item 1,
above.
Summary Comparison of Three and Six Month Period Operations
------------------------------------------------------------
Six month Six month Three month Three month
period ended period ended period ended period ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Revenues, net $ 481,556 $ 192,394 $ 195,914 $ 158,041
Cost of sales 229,508 106,198 125,180 73,872
Gross profit 252,048 86,196 70,734 84,169
Total operating
expenses 430,887 703,062 223,008 489,694
Total other income
(expense) (5,538) (28,311) (5,538) (25,297)
Net income (loss) (184,377) (645,177) (157,812) (430,822)
Net earnings (loss)
per share $ (0.00) $ (0.01) $ (0.00) $ (0.01)
Revenues for the 2005 six month period increased 150.2% compared to the 2004
six month period due to increased sales of our products. Revenues for the
three month period ended June 30, 2005 (the "2005 second quarter") increased
24.0% compared to the three month period ended June 30, 2004 (the "2004 second
quarter"). However, costs of sales also increased 65.3% for the 2005 six
month period compared to the 2004 six month period and increased 116.0% for
the 2005 second quarter compared to the 2004 second quarter. As a result of
increased revenues in the 2005 six month period our gross profit increased
192.4% from the 2004 six month period. Due to increased cost of sales, gross
profit decreased 16.0% for the 2005 second quarter compared to 2004 second
quarter
For the 2005 six month period total operating expense decreased 54.6% compared
to the 2004 six month period. For the 2005 second quarter total operating
expense decreased 38.7% compared to the 2004 second quarter. The decreases in
the 2005 periods was primarily a result of decreases in general and
administrative expense and salaries and benefits.
Total other expense for the 2005 and 2004 comparable periods was related to
interest on loans.
As a result of the above, our net loss decreased 63.4% for the 2005 six month
period compared to the 2004 six month period and decreased 71.4% for the 2005
second quarter compared to the 2004 second quarter.
The following chart summarizes our balance sheet at June 30, 2005 and December
31, 2004
10
Summary Balance Sheet
-----------------------
For six month
period ended For the year ended
June 30, 2005 December 31, 2004
---------------- -----------------
Cash and cash equivalents $ 93,269 $ 173,486
Total current assets 133,438 343,025
Total assets 1,937,487 2,151,958
Total current liabilities 394,579 647,324
Retained earnings (Deficit) (15,875,873) (15,691,496)
Total stockholders equity $ 1,542,908 $ 1,504,634
Our total assets decreased at June 30, 2005 primarily as a result of decreases
in our total current assets and property and equipment. Total current
liabilities decreased primarily due to decreases in accounts payable and
accrued expenses.
FACTORS AFFECTING FUTURE PERFORMANCE
Our independent auditors have expressed concern whether we can
continue as a going concern.
We have incurred ongoing operating losses and do not currently have financing
commitments in place to meet expected cash requirements for the next twelve
months. We are unable to fund our day-to-day operations through revenues
alone and management believes we will incur operating losses for the near
future while we seek financing commitments during the next twelve months to
fund further development of our business plan. While we have expanded our
product line and established new sales channels, we may be unable to increase
revenues to the point that we attain and are able to maintain profitability.
We are currently dependent on the efforts of our resellers for our
continued growth and must expand our sales channels to increase our
revenues.
We are in the process of developing and expanding our sales channels, but we
expect overall sales to remain down as we develop our marketing activities.
If we are unsuccessful in developing sales channels then we may have to scale
down our business plan. We are actively recruiting and adding other
additional resellers and dealer and must continue to find other methods of
distribution to increase customers.
We may not be able to compete successfully in our market because
we have a small market share and compete with large national and
international companies.
We estimate that we have less than a 1% market share of the surveillance and
weapons detection market. We compete with many companies that have greater
brand name recognition and significantly greater financial, technical,
marketing, and managerial resources. The position of these competitors in the
market may prevent us from capturing more market share. We intend to remain
competitive by increasing our existing business through marketing efforts,
selectively acquiring complementary technologies or businesses and services,
and increasing our efficiency and reducing costs.
Our revenues are dependent in part upon our relationships and alliances
with government agencies and partners.
11
While we own exclusive licenses for the SecureScan technology, we are
dependent upon the continuation of the ongoing contract between the Department
of Energy and National Institute of Justice for continuations and improvements
to the concealed weapons detection technology. We are also dependent upon the
U.S. Department of Energy's Idaho National Engineering and Environmental
Laboratory for further development of the Visual First Responder product. If
either of these entities should discontinue its operations or research and
development we may lose our competitive edge in our markets.
We must successfully introduce new or enhanced products and manage
the costs associated with producing several product lines to
be successful.
Our future success depends on our ability to continue to improve our existing
products and to develop new products using the latest technology that can
satisfy customer needs. However, we cannot be certain that we will be
successful at producing multiple product lines and we may find that the cost
of production of multiple product lines inhibits our ability to maintain or
improve our gross profit margins. In addition, the failure of our products to
gain or maintain market acceptance or our failure to successfully manage our
cost of production could adversely affect our financial condition.
We would be harmed if we were unable to use our manufacturing facility.
We assemble and manufacture a portion of our products at our facility located
in Baltimore, Maryland. If we were unable to continue manufacturing at this
location due to fire, prolonged power shortage or other natural disaster, then
we would be unable to supply products to our customers.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer, who also acts in the capacity of principal
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, he concluded that our disclosure controls and procedures were
effective.
Also, our Chief Executive Officer determined that there were no significant
changes made in our internal controls over financial reporting during the
second quarter of 2005 that have materially affected, or are reasonably likely
to materially affect our internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Securities
The following discussion describes securities sold by View Systems without
registration through a recent date which have not been previously reported.
On March 9, 2005, we issued 200,000 shares of common stock to Liem Nguyen in
consideration for a final and full release. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
On April 6, 2005, we issued 87,500 shares of common stock to William H. Zuhone
for $7,000. We relied on an exemption from registration for a private
transaction not involving a public distribution provided by Section 4(2) of
the Securities Act.
12
On May 3, 2005, we issued 2,000,000 shares of common stock to Clark Companies
in consideration for an agreement. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
On May 11, 2005, we issued 200,000 shares of common stock to Jeffrey B.
McIntosh for $10,000. We relied on an exemption from registration for a
private transaction not involving a public distribution provided by Section
4(2) of the Securities Act.
On June 21, 2005, our board of directors authorized the issuance of 522,000
shares of common stock to Martin J. Maassen for advances to View Systems of
$52,000. Our board of directors also authorized the issuance of 230,000
shares of common stock to Michael L. Bagnoli for direct investments to View
Systems of $11,000 and services rendered to the company. We relied on an
exemption from registration for a private transaction not involving a public
distribution provided by Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS
Part I Exhibits
31.1 Chief Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
Part II Exhibits
3.1 Articles of Incorporation of View Systems, as amended (Incorporated by
reference to exhibit 3.1 to Form 10-QSB filed November 14, 2003)
3.2 By-Laws of View Systems (Incorporated by reference to exhibit 3.2 to
Form 10-QSB filed November 14, 2003)
10.1 Employment agreement between View Systems and Gunther Than, dated
January 1, 2003. (Incorporated by reference to exhibit 10.3 to Form
10-KSB, filed April 14, 2004)
21.1 Subsidiaries (Incorporated by reference to exhibit 21.1 to Form 10-KSB,
filed March 31, 2003)
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.
/s/ Gunther Than
Date: August 15, 2005 By: ______________________________________________
Gunther Than
Chief Executive Officer, Treasurer, Director
and Principal Financial Officer
13