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, 2003
| | 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 November 11, 2003, View Systems Inc. had 62,330,619 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 ..............................................2
Item 2: Management's Discussion and Analysis..............................12
Item 3: Controls and Procedures...........................................15
PART II: OTHER INFORMATION
Item 1: Legal Proceedings.................................................15
Item 2: Changes in Securities and Use of Proceeds.........................15
Item 5: Other Information.................................................16
Item 6: Exhibits and Reports on Form 8-K .................................17
Signatures.................................................................18
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, 2003
and 2002 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 nine month period ended September 30, 2003, are not necessarily
indicative of results to be expected for any subsequent period. These
statements should be read in conjunction with our Form 10-KSB for the year
ended December 31, 2002, which was filed with the Securities and Exchange
Commission on March 31, 2003.
2
VIEW SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2003 2002
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash $ 73,810 $ 3,229
Accounts receivable (Net of allowance
for uncollectible accounts of $10,000
at September 30, 2003 and December 31,
2002 respectively.) 228,042 62,711
Inventory - 171,326
------------- -------------
Total current assets 301,852 237,266
------------- -------------
PROPERTY AND EQUIPMENT:
Equipment 348,385 348,385
Leasehold improvements 17,940 17,940
Software tools 34,571 34,571
Vehicles 46,832 46,832
------------- -------------
447,728 447,728
Less accumulated depreciation 251,407 204,247
------------- -------------
Net value of property and equipment 196,321 243,481
------------- -------------
OTHER ASSETS:
Goodwill 781,248 781,248
Licenses and patents 1,494,960 1,626,855
Due from affiliated entities 118,827 123,327
Deposits 2,532 2,532
------------- -------------
Total other assets 2,397,567 2,533,962
------------- -------------
TOTAL ASSETS $ 2,895,740 $ 3,014,709
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 260,457 $ 445,623
Accrued interest 52,250 72,843
Notes payable 141,500 599,450
------------- -------------
Total current liabilities 454,207 1,117,916
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock-par value $0.001
100,000,000 shares authorized,
58,295,619 shares issued and outstanding 58,295 -
44,598,620 shares issued and outstanding - 44,598
Additional paid-in capital 15,326,844 13,810,878
Accumulated deficit (12,943,606) (11,958,683)
------------- -------------
Total stockholders' equity 2,441,533 1,896,793
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,895,740 $ 3,014,709
============= =============
See Accompanying Notes
3
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- -------------- ------------- -------------
REVENUE:
Sales of security systems $ 51,806 $ 175,061 $ 151,564 $ 306,657
Sales of weapons detection portals 187,928 92,480 300,345 92,480
------------- -------------- ------------- -------------
Total sales 239,734 267,541 451,909 399,137
Cost of goods sold 132,770 149,747 227,760 221,861
------------- -------------- ------------- -------------
GROSS PROFIT ON SALES 106,964 117,794 224,149 177,276
------------- -------------- ------------- -------------
OPERATING EXPENSES:
Advertising and promotion 5,652 22,915 17,524 32,025
Amortization 43,965 - 131,895 -
Bad debts - 627,821 - 862,630
Business development 25,817 23,888 55,709 94,145
Depreciation 15,720 15,189 47,160 45,567
Dues and subscriptions - - 122 -
Insurance 8,704 8,768 15,792 25,263
Interest 2,940 4,192 8,906 15,846
Investor relations 4,281 4,035 20,400 55,864
Miscellaneous expense 3,085 973 7,976 10,908
Office expense 19,854 27,266 50,295 122,806
Professional fees 27,622 571,517 68,091 892,708
Rent 13,920 11,566 51,700 37,834
Repairs and maintenance - 3,369 - 7,433
Research and development 13,745 26,843 25,177 101,729
Salaries and benefits 423,532 471,445 666,598 766,471
Taxes-other (230) - 2,060 2,150
Travel 11,659 3,037 26,408 33,816
Utilities 2,076 4,596 13,259 13,241
------------- -------------- ------------- -------------
Total operating expenses 622,342 1,827,420 1,209,072 3,120,436
------------- -------------- ------------- -------------
NET LOSS $ (515,378) $ (1,709,626) $ (984,923) $ (2,943,160)
============= ============== ============= =============
NET LOSS PER SHARE:
Basic $ (0.01) $ (0.05) $ (0.02) $ (0.09)
============= ============== ============= =============
Diluted $ (0.01) $ (0.05) $ (0.02) $ (0.09)
============= ============== ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 46,132,270 34,439,000 45,828,321 31,370,334
============= ============== ============= =============
See Accompanying Notes
4
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
September 30, September 30,
2003 2003
-------------- --------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (984,923) $ (2,943,160)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 179,055 45,567
Bad debt expense - 862,630
Stock-based compensation 261,500 1,068,259
Changes in operating assets and liabilities:
Accounts receivable (165,331) (155,419)
Inventory 171,326 (28,609)
Deposits and other assets - (570)
Accounts payable (185,166) 17,710
Accrued interest 8,250 8,250
-------------- --------------
Net cash used in operating activities (715,289) (1,125,342)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (27,854)
Funds advanced (to) from affiliated entities 4,500 (15,594)
Cash element in Milestone acquisition - 58,849
-------------- --------------
Net cash provided by investing activities 4,500 15,401
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds advanced (to) from shareholders 472,820 (4,834)
Repayment of note payable-bank - (6,052)
Net proceeds from sales of stock 308,550 1,038,700
-------------- --------------
Net cash provided by financing activities 781,370 1,027,814
-------------- --------------
NET INCREASE (DECREASE) IN CASH 70,581 (82,127)
CASH AT BEGINNING OF PERIOD 3,229 73,344
-------------- --------------
CASH AT END OF PERIOD $ 73,810 $ (8,783)
============== ==============
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 notes payable 959,613 194,000
Reduction in notes payable due to renegotiations 164,450 -
See Accompanying Notes
5
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
Additional Total
Common Paid-In Accumulated Stockholders'
Stock Capital Deficit Equity
-------------- ------------- ------------- -------------
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 (employee
and other compensation) 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
Sales of common stock 2,475 251,025 - 253,500
Issuance of common stock (employee
and other compensation) 1,138 137,662 - 138,800
Net loss for the three months ended
December 31, 2002 - - (980,309) (980,309)
-------------- ------------- ------------- -------------
Balances at December 31, 2002 44,598 13,810,878 (11,958,683) 1,896,793
Sales of common stock 2,897 305,653 - 308,550
Issuance of common stock (employee
and other compensation) - 261,500 - 261,500
Issuance of common stock in payment
of note payables 10,800 948,813 - 959,613
Net loss for the nine months ended
September 30, 2003 - - (984,923) (984,923)
-------------- ------------- ------------- -------------
Balances at September 30, 2003 (Unaudited) $ 58,295 $ 15,326,844 $(12,943,606) $ 2,441,533
============== ============= ============= =============
See Accompanying Notes
6
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
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 adjustments) 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 subsidiary, Milestone Technology, Inc.
("Milestone"). 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, the price of the product is
fixed or determinable and collectibility is reasonably assured.
7
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
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 December
31, 2002 consists entirely of weapons detection portals.
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
Leasehold improvements Life of lease
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, 2003 and 2002 amounted to $47,160 and
$45,567, 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.
8
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
Advertising
-----------
Advertising costs are charged to operations as incurred.
Advertising costs for the nine months ended September 30, 2003 and 2002 were
$17,524, and $32,025, 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.
Goodwill
--------
Goodwill represents the excess of the cost of assets acquired in
business combinations accounted for under the purchase method of accounting
over the fair value of the net assets acquired at the dates of acquisition.
Effective January 1, 2002 goodwill will no longer be amortized but rather
tested for impairment on an annual basis.
Licenses and Patents
--------------------
The Company has assigned a value to licenses and patents acquired in
its acquisition of Milestone which are being amortized on a straight-line
basis over a ten-year period.
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 three and nine month periods ended September 30, 2003 does not include
potential shares of common stock equivalents, as their impact would be
antidilutive.
9
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
Segment Reporting
-----------------
The company has determined that it does not have any separately
reportable operating segments as of September 30, 2003.
2. FINANCIAL CONDITION
Since its inception, the Company has incurred significant losses and as
of September 30, 2003 had an accumulated deficit of $12.9 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.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30, 2003 December 31, 2002
------------------------------------ -----------------------
Average Gross Gross
Life Carrying Accumulated Carrying Accumulated
(Years) Amount Amortization Amount Amortization
-------- -------------- ------------ ------------- -------------
Amortized intangible assets -
Licenses and patents 10.0 $ 1,758,594 $ 263,634 $ 1,758,594 $ 131,739
============== ============ ============= =============
Intangible assets not subject
to amortization - Goodwill $ 1,346,972 $ 565,724 $ 1,346,972 $ 565,724
============== ============ ============= =============
Amortization expense for the three and nine months ended September 30,
2003 was $43,965 and $131,895, respectively.
Estimated amortization expense for each of the following years ending on
December 31, is as follows:
2003 $175,860
2004 175,860
2005 175,860
2006 175,860
2007 175,860
10
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46 Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51 (FIN 46). FIN 46 provides a new framework for
identifying variable interest entities (VIEs) and determining when a company
should include the assets, liabilities, noncontrolling interests and results
of activities of a VIE in its consolidated financial statements. FIN 46 is
effective immediately for VIEs created after January 31, 2003 and is effective
beginning in the third quarter of 2003 for VIEs created prior to the issuance
of the interpretation. The adoption of this standard will not have a material
impact on the Company's financial statements.
Statement of Financial Accounting Standards (SFAS) No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123 (SFAS 123) provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. SFAS 148 also amends the disclosure requirements of
SFAS 123 Accounting for Stock-Based Compensation to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. The adoption of this standard will not have
a material impact on the Company's financial statements.
On May 15, 2003, the FASB issued SFAS 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity and
is effective May 31, 2003 for all new and modified financial instruments and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS 150 changes the accounting for certain financial
instruments that, under previous guidance issuers could account for as equity.
SFAS 150 requires that those instruments be classified as liabilities (or
assets in some circumstances). The adoption of this standard did not have a
material impact on the Company's financial statements.
11
In this report references to "View Systems," "we," "us," and "our" refer
to View Systems, Inc.
FORWARD LOOKING STATEMENTS
This quarterly report contains certain forward looking statements that
involve risks and uncertainties, such as statements of View System's plans and
expectations. Any statements contained in this report 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 industry which View Systems
participates; competition within View Systems's chosen market and failure by
View Systems to successfully develop business relationships.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
View Systems designs and develops computer software and hardware used in
conjunction with surveillance capabilities. We have incurred losses for the
past two fiscal years and have an accumulated deficit of $12,488,813 at
September 30, 2003. Management believes we will incur operating losses for
the foreseeable future. However, management expects projected sales revenues
and anticipated equity infusions and advances from management to be sufficient
to provide funding to sustain operations through September 30, 2004.
Since start-up of operations in September 1998, we have devoted most of
our resources to the development of digital video surveillance products.
However, in March 2002 we shifted the focus of our operations to the
introduction of our SecureScan Concealed Weapons Detection System. We have
worked diligently to make engineering design changes to the Concealed Weapons
Detection product to accommodate the price points required by competitive
pressures. The engineering design changes required locating new sources for
components and limited field testing. In addition, demonstration of the
product involves the shipping of a large bulky archway and a highly trained
technical staff; consequently, sales cycle times are lengthy.
Acquisition Treatment
In December of 2001 we entered into a joint venture agreement with
Milestone Technology, Inc., an Idaho corporation, to develop its Concealed
Weapons Detection portal. As part of the agreement we issued 500,000 shares
of View Systems common stock for a 6% interest in Milestone Technology and the
rights to the Concealed Weapons Detection technology. Then on March 25, 2002,
View Systems acquired the remaining 94% interest of Milestone Technology in
exchange for 3,300,000 common shares. This acquisition was valued at
approximately $1,298,000 and was accounted for under the purchase method of
accounting. Accordingly, Milestone Technology's results of operation have
been included with View Systems from the closing date in March 2002 and its
consolidated assets and liabilities have been recorded at their fair values on
the same date. In May 2003 a controversy arose regarding the ownership of
Milestone Technology, Inc. and the Concealed Weapons Detection technology. In
October 2003 the controversy was settled and the acquisition of Milestone
Technology was finalized and the license rights to the Concealed Weapons
Detection technology were re-assigned to View Systems.
Results Of Operations
The following discussion and analysis should be read in conjunction with
our unaudited financial statements and the accompanying notes for the three
and nine month periods ended September 30, 2003 and 2002, which are included
in this report.
Revenue - For the nine months ended September 30, 2003, revenue from
sales of our products increased $52,772, or 13%, to $451,909 from $399,137 in
the same period last year. For the three months ended September 30, 2003,
revenues from sales of our products decreased $27,807 or 10%, to $239,734 from
$267,541 in the same
12
period last year. In comparing the 2002 and 2003 nine month periods, we have
shifted the source for the majority of our revenues from predominately
security systems to SecureScan Concealed Weapons Detection portals. The sales
cycles in the concealed weapons detection market are long and require the
approval of highly bureaucratic decision makers. However, in contrast to
digital video storage, the Concealed Weapons Detection product price points
and profit margins are larger.
Costs Of Goods Sold - Cost of products and services sold consist
principally of the costs of hardware components and supplies. We generally
operate through resellers who install and service the units. 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. However, as of September 30, 2003, we had
no weapons detection system portals in inventory. Assembly of the new portals
commenced in October 2003.
The cost of products and services sold was $227,760 for the nine months
ended September 30, 2003, and represented 50% of revenue for the period,
compared to $221,861 for the nine months ended September 30, 2002, which
represents 56% of revenues for that period. The cost of products and services
sold was $132,770 for the three months ended September 30, 2003, and
represented 55% of revenue for the period, compared to $149,747 for the three
months ended September 30, 2002, which represented 56% of revenues for that
period. Because of our low sales volume during this period, we do not
consider the costs of goods sold 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.
Gross Profit - Gross profit on sales for the nine months ended September
30, 2003, increased $46,873, or 26%, to $224,149 compared with $177,276 in the
same period last year. Gross profit margin for the nine months ended
September 30, 2003, was 50% compared with 44% in the same period last year.
Gross profit on sales for the three months ended September 30, 2003, decreased
$10,830, or 9%, to $106,964 compared with $117,794 for the same period last
year. Gross profit margin for the three months ended September 30, 2003, was
45% compared to 44% for the same period last year. Because of low net sales
we achieved in the period ended September 30, 2003, we do not believe gross
profit margin comparisons are meaningful at this state of our operations.
Total Operating Expense - Operating expenses for the nine months ended
September 30, 2003, decreased to $1,209,072, compared with $3,120,436 for the
comparable period in 2002. The decrease is principally due to unusually large
bad debts in the prior year of $862,630 compared to none in the current
period, and decreased expenditures in professional fees. Amortization expense
associated with the value of licenses and patents amounted to $131,895 for the
nine months ended September 30, 2003, compared with no amortization expense in
the same period last year.
Operating expenses for the three months ended September 30, 2003,
decreased to $622,342, compared with $1,827,420 for the comparable period in
2002. The decrease is principally due to unusually large bad debts in the
prior period of $627,821 and significant decreases in professional fees.
Research and Development Expense - We spent $25,177 on research and
development for the nine months ended September 30, 2003, as compared with
$101,729 in the same period last year. We spent $13,745 on research and
development for the three months ended September 30, 2003, as compared with
$26,843 in the same period last year. We are working on changing our
production facilities to manufacture the Concealed Weapons Detection portal in
our facility. Management believes this change will allow our profit margins
to increase due to a reduction in costs of production.
Salaries and Benefits - We spent $666,598 on salaries and benefits
for the nine months ended September 30, 2003, as compared with $766,471 in the
same period last year. We spent $423,532 on salaries and benefits for the
three months ended September 30, 2003, as compared with $471,445 in the same
period last year.
13
Net Loss - As a result of the foregoing, we recorded a net loss from
operations of $984,923 for the nine months ended September 30, 2003, compared
to a net loss of $2,943,160 for the nine months ended September 30, 2002. The
net loss from operations was $515,378 for the three months ended September 30,
2003, compared to a net loss of $1,709,626 for the three months ended
September 30, 2002. As a result, we recorded a net less per diluted share of
$0.02 for the nine month period ended September 30, 2003, compared to a net
loss per diluted share of $0.09 for the comparable 2002 period.
Liquidity and Capital Resources
Historically, we have funded our cash requirements primarily through
equity transactions. We are not currently generating sufficient cash from our
operations 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. We also have
relied on our management for cash infusions to sustain operations. These cash
infusions are in the form of advances without repayment terms and we
anticipate that we will require additional advances in the future; however,
there can be no assurance that these funds will be available in the future
Starting on August 6, 2003, we conducted a Regulation D Rule 505 offering
for an aggregate offering amount of $1,500,000. As of September 25, 2003, we
had sold 14,320,000 common shares at $0.10 per share for an aggregate amount
of $1,432,000. We realized proceeds of $1,417,608 which we intend to use for
manufacturing capital and working capital.
As of September 30, 2003, we had total assets of $2,895,740, a decrease
of $118,969 from $3,014,709 at December 31, 2002. Total liabilities were
$454,207, at September 30, 2003, resulting in stockholders' equity of
$2,441,533, an increase of $544,740 from the December 31, 2002, balance of
$1,896,793. As a result of the foregoing, at September 30, 2003, we had
negative working capital of $152,355, including $228,042 in net trade accounts
receivable and $0 in inventory.
During the nine months ended September 30, 2003, our cash increased from
$3,229 at December 31, 2002, to $73,810 at September 30, 2003. Net cash used
in operating activities was $715,289 for the nine months ended September 30,
2003, compared to net cash used by operating activities of $1,125,342 for the
comparable 2002 period. This decrease primarily is a result of increases in
accounts receivable of $165,331, decreases in inventory of $171,326, and
decreases in accounts payable of $185,166.
Net cash provided by investing activities was $4,500 for the nine month
period ended September 30, 2003, and was related to advances from affiliated
entities. Net cash provided by investing activities was $15,401 for the 2002
comparable period and was primarily the result of the acquisition of cash in
the Milestone Technology acquisition
Net cash generated from financing activities during the nine months ended
September 30, 2003, was $781,370; consisting of proceeds received from sales
of stock of $308,550 and loans from shareholders of $472,820. Net cash
provided for the 2002 comparable period was $1,027,814; primarily from
proceeds from sales of common stock.
Commitments and Contingent Liabilities
Our commitments include operating leases and current liabilities. At
December 31, 2002, future minimum payments for operating leases related to
properties in Colorado, Maryland and Idaho were $183,069 through 2006. Other
commitments include accounts payable of $260,457 and notes payable of
$141,500.
Financing
We operate in a very competitive industry that requires continued large
amounts of capital to develop and
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promote our products. We currently estimate we will need between $1 million
and $2 million to fully develop our products and further expand our business
operations. We believe that it will be essential to continue to raise
additional capital, both internally and externally, to compete in this
industry. We cannot assure 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.
ITEM 3: CONTROLS AND PROCEDURES
Our CEO and principal financial officer, has reevaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report and determined that there continued to be no
significant deficiencies in these procedures. Also, there were no changes
made or corrective actions to be taken related to our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On May 8, 2003, View Systems, Inc. filed a complaint against Messrs.
Steve Williams and Paul Reep, former officers and shareholders of Milestone
Technology, Inc. The complaint was filed in the United States District Court
for the District of Maryland Division and the controversy is related to the
ownership of Milestone Technology, Inc. and the Concealed Weapons Detection
System. View Systems claims ownership of Milestone Technology, Inc. and the
exclusive licensing rights to the Concealed Weapons Detection System.
Management and counsel negotiated a settlement with Mr. Williams and Milestone
Technology, Inc. in July 2003; but we continue to pursue Mr. Reep. In October
2003 we moved to amend the complaint to add additional claims against Mr. Reep
for intentional interference with contractual relations, tortious interference
with economic relations and conversion. The court stayed consideration of our
motion pending the appearance by new counsel for Mr. Reep.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Articles of Incorporation and Bylaws
On July 25, 2003, View Systems incorporated View Systems, Inc. as a
wholly-owned Nevada corporation for the sole purpose of changing the domicile
of the company from Florida to Nevada. On July 31, 2003, articles of merger
were filed with the state of Nevada to complete the domicile merger. As a
result of the domicile merger the articles of incorporation and bylaws of View
Systems are those of the Nevada corporation. The Florida and Nevada articles
of incorporation and bylaws are similar to each other in most material
respects. The Nevada articles of incorporation increase the authorized common
stock to 100,000,000 shares, par value $0.001, and authorize a preferred class
of 10,000,000 shares, par value $0.01. Also, the number of shareholders
required to establish a quorum at a shareholders' meeting is increased from
one-third of the voting stock to a majority of the voting stock.
Pursuant to Nevada Revised Statutes Section 78.7502 and 78.751, our
articles of incorporation and bylaws provide for the indemnification of
present and former directors and officers and each person who serves at our
request as our officer or director. Indemnification for a director is
mandatory and indemnification for an officer, agent or employee is permissive.
We will indemnify such individuals against all costs, expenses and liabilities
incurred in a threatened, pending or completed action, suit or proceeding
brought because such individual is our director or officer. Such individual
must have conducted himself in good faith and reasonably believed that his
conduct was in, or not opposed to, our best interest.
In a criminal action the individual must not have had a reasonable cause
to believe his conduct was unlawful. This right of indemnification is limited
to our financial ability to pay such expenses, but shall not be exclusive of
other rights the individual is entitled to as a matter of law or otherwise.
Our bylaws provide that individuals may receive advances for expenses if the
individual provides a written affirmation of his good faith
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belief that he has met the appropriate standards of conduct and he will repay
the advance if he is judged not to have met the standard of conduct.
We will not indemnify an individual adjudged liable due to his negligence
or wilful misconduct toward us, or if he improperly received personal
benefit. Indemnification in a derivative action is limited to reasonable
expenses incurred in connection with the proceeding. Also, we are authorized
to purchase insurance on behalf of an individual for liabilities incurred
whether or not we would have the power or obligation to indemnify him pursuant
to our bylaws.
Recent Sales of Unregistered Securities
On October 14, 2003, we issued an aggregate of 190,000 common shares in
consideration for services. We issued 100,000 shares to Ruediger Klose and
90,000 shares to Charlotte DeLoof for services rendered under their employment
agreements. We relied on an exemption from the registration requirements of
the Securities Act for a private transaction not involving a public
distribution provided by Section 4(2) under the Securities Act.
On September 10, 2003, our board of directors authorized the issuance of
an aggregate of 950,000 common shares valued at $114,000 for services rendered
to View Systems. We issued 500,000 shares to Daniel W. Jackson for legal
services valued at $60,000. We issued 200,000 shares to William D. Smith for
services rendered to the company valued at $24,000. We issued 250,000 shares
to Barry Feldman for services rendered to the company valued at $30,000. We
relied on an exemption from the registration requirements of the Securities
Act for a private transaction not involving a public distribution provided by
Section 4(2) under the Securities Act.
On September 2, 2003, our board of directors authorized the issuance of
1,150,000 common shares to Gunther Than in consideration for services rendered
to the company valued at $138,000. We relied on an exemption from the
registration requirements of the Securities Act for a private transaction not
involving a public distribution provided by Section 4(2) under the Securities
Act.
Starting on August 6, 2003 we conducted a Regulation D Rule 505 offering
for an aggregate offering amount of $1,500,000. As of September 25, 2003, we
had sold 14,320,000 common shares at $0.10 per share to accredited investors
and two purchasers for an aggregate amount of $1,432,000. We relied on an
exemption from the registration requirements of the Securities Act of 1933 for
a limited offering provided by Section 3(b) and Regulation D.
We believe each purchaser in the above transactions:
. was aware that the securities had not been registered under federal
securities laws;
. acquired the securities for his/her/its own account for investment
purposes under the federal securities laws;
. understood that the securities would need to be held indefinitely
unless registered or an exemption from registration applied to a
proposed disposition; and,
. was aware that the certificate representing the securities would
bear a legend restricting its transfer.
ITEM 5: OTHER INFORMATION
Technology License - As a result of the settlement of our lawsuit with
the former management of Milestone Technology in early October 2003, we were
able to resolve the ownership issues surrounding the Concealed Weapons
Detection technology. On November 11, 2003, the Idaho National Energy and
Environmental Laboratories re-assigned the exclusive license to commercialize,
manufacture and market the Concealed Weapons Detection technology to View
Systems.
Product Development - In early October 2003 we announced an alliance
with School Technology
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Management to integrate and market its products with ours. School Technology
Management has developed the Comprehensive Attendance Administration and
Security System which is designed to use a magnetic card swipe system to
monitor identification of students entering a school and to verify each
student's attendance. Our intent is to combine School Technology
Management's card swipe system with our SecureScan portal. With the combined
technology a student will enter the portal and be scanned for any threat
objects and his or her identity will be concurrently confirmed to school
security officers. We anticipate that the National Institute of Justice will
study a prototype of the combined portal during the next calendar year.
Production of Portals - In early October 2003, we began production of
twenty SecureScan Portals. The SecureScan portal consists of two components;
the work station contains the software and display imagery, and the archway
holds the sensors which detect threat objects. The control unit of the portal
continues to be manufactured internally at our facilities in Baltimore,
Maryland. The archway and sensor are being manufactured and assembled through
Quantum Magnetics, a United States Laboratory supplier. Once complete, the
portal is sent to our Baltimore facility to be tested and shipped to its final
destination.
Of the twenty units, we anticipate four will be installed at federal and
state court facilities in the United States. Thirteen will be designated for
international delivery, training and demonstration. On October 10, 2003, we
announced delivery and installation of the first international SecureScan
portal at the Federation Building, Parliament Hill, Ottawa, Ontario. This
sale was completed through Levitt-Safety Ltd., a Canadian reseller.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
Part II Exhibits
3.1 Articles of Incorporation of View Systems, as amended
3.2 By-Laws of View Systems
10.1 View Systems, Inc. Employment Agreement with Gunther Than.
(Incorporated by reference to registration statement on Form
SB-2, filed January 11, 2000)
21.1 Subsidiaries (Incorporated by reference to Form 10-KSB, filed
March 31, 2003)
31.1 Chief Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
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.
/s/ Gunther Than
Date: November 13, 2003 By:__________________________________________
Gunther Than
CEO, Principal Financial Officer, Treasurer
and Director
/s/ Barry Feldman
Date: November 13, 2003 By:___________________________________________
Barry S. Feldman
President and Director
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