UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to _____________
Commission file number 000-50213
| AEGIS ASSESSMENTS, INC. |
|
(Exact name of small business issuer as specified in its charter) |
| ||
Delaware |
| 72-1525702 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
| ||
| 7975 N. Hayden Road, Suite D-363, Scottsdale, AZ 85258 |
|
| (Address of principal executive offices) |
|
| ||
| 480.778.9140 |
|
(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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer’s common equity outstanding as of December 5, 2006 was approximately 40,000,000 shares of common stock, par value $.001.
Transitional Small Business Disclosure Format (Check one): Yes [X] No [ ]
INDEX TO FORM 10-QSB FILING
FOR THE PERIOD ENDED OCTOBER 31, 2006
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION |
|
|
| Page |
Item 1. | Financial Statements |
|
| Balance Sheet as of October 31, 2006 | 1 |
| Statements of Operations |
|
| for the three month periods ended October 31, 2006 and October 31, 2005 | 2 |
| Statements of Cash Flows |
|
| for the three month periods ended October 31, 2006 and October 31, 2005 | 3 |
| Notes to the Financial Statements | 5 |
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|
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Item 2. | Management's Discussion and Analysis | 10 |
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Item 3. | Controls and Procedures | 18 |
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| PART II OTHER INFORMATION |
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Item 1. | Legal Proceedings | 18 |
Item 2 | Changes in Securities | 19 |
Item 6. | Exhibits and Reports on Form 8-K | 20 |
| SIGNATURE | 22 |
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Aegis Assessments, Inc.
(A Development Stage Company)
Condensed Balance Sheet
October 31, 2006
(Unaudited)
|
| Assets |
|
|
|
Current Assets |
|
|
| ||
| Cash and cash equivalents |
| $ | 307,434 | |
| Inventory |
|
| 145,615 | |
|
| Total Current Assets |
|
| 453,049 |
|
|
|
|
|
|
Property and equipment, net of accumulated |
|
|
| ||
| depreciation of $151,126 at October 31, 2006 |
|
| 118,905 | |
U.S. Treasury Bonds - Restricted |
|
| 5,001,126 | ||
Other Assets |
|
| 7,616 | ||
Total Assets |
| $ | 5,580,696 | ||
|
| Liabilities and Shareholders' Equity (Deficit) |
|
|
|
Current Liabilities |
|
|
| ||
| Accounts Payable |
| $ | 496,020 | |
| Accrued Payroll |
|
| 187,366 | |
| Deferred Revenue |
|
| 357,000 | |
| Notes payable |
|
| 250,950 | |
| Convertible debentures |
|
| 351,826 | |
| Derivative Liability |
|
| 500,000 | |
| Accrued expenses |
|
| 39,809 | |
| Advance related party |
|
| 3,750 | |
|
| Total Current Liabilities |
|
| 2,186,721 |
Commitments and contingencies |
|
|
| ||
| Contingent loss on derivative and equity swap |
|
| 4,855,136 | |
| Contingent loss on consulting contract settlement |
|
| 440,000 | |
|
|
|
|
|
|
Series A 8% convertible preferred stock $.001 par |
|
|
| ||
| value; 200,000 shares authorized. |
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|
| |
Shareholders' equity (deficit): |
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|
| ||
| Preferred stock, $.001 par value, 10,000,000 shares |
|
|
| |
| authorized for issuance in one or more series. |
|
|
| |
| Common stock, $.001 par value; 100,000,000 shares |
|
|
| |
| authorized; 36,161,260 shares issued and outstanding |
|
| ||
| at October 31, 2006 |
|
| 36,161 | |
| Additional paid-in capital |
|
| 23,947,760 | |
| Stock subscription receivable – related party |
|
| (67,500) | |
| Stock subscription receivable |
|
| (103,015) | |
| Unrealized loss on marketable securities |
|
| (22,395) | |
| Deficit accumulated during the development stage |
|
| (25,692,172) | |
|
| Total shareholders' equity (deficit) |
|
| (1,901,161) |
Total liabilities and shareholders' equity (deficit) |
| $ | 5,580,696 | ||
|
|
|
|
|
|
|
| The accompanying notes are an integral part of the condensed financial statements |
1
Aegis Assessments, Inc. | |||||||||
(A Development Stage Company) | |||||||||
Statements of Operations | |||||||||
(Unaudited) | |||||||||
|
|
|
|
|
|
|
|
| For the period from |
|
|
| For the three |
|
| For the three |
|
| January 16,2002 |
|
|
| months ended |
|
| months ended |
|
| (inception) to |
|
|
| October 31,2006 |
|
| October 31,2005 |
|
| October 31,2006 |
|
|
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
|
|
|
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|
|
|
|
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Revenue |
|
|
|
|
|
| $ | 70,992 | |
Operating expense |
|
|
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|
|
|
| |
| Cost of equipment sold |
|
|
|
|
|
| $ | 35,100 |
| General and administrative expenses - other | $ | 326,520 |
| $ | 419,871 |
| $ | 19,064,939 |
| Loss on impaired assets |
|
|
|
|
|
| $ | 348,390 |
| Consulting fees - related party |
|
|
|
|
|
| $ | 287,065 |
Total Operating expenses | $ | 326,520 |
| $ | 419,871 |
| $ | 19,735,494 | |
| Interest expense | $ | 184,440 |
| $ |
|
| $ | 731,734 |
| (Gain) Loss on interest rate derivative swap | $ | (2,419) |
| $ | 19,564 |
| $ | 105,136 |
| Loss on equity swap |
| 200,000 |
|
| 3,000,000 |
| $ | 4,750,000 |
| Loss on consulting contract settlement |
| 440,000 |
|
|
|
| $ | 440,000 |
|
|
|
|
|
|
|
|
| 0 |
Loss before provision for income taxes |
| (1,148,541) |
|
| (3,439,435) |
|
| (25,691,372) | |
| Provision for income taxes |
|
|
|
|
|
|
| 800 |
Net loss | $ | (1,148,541) |
| $ | (3,439,435) |
| $ | (25,692,172) | |
Other comprehensive income (loss) |
|
|
|
|
|
|
|
| |
| Unrealized gain (loss) on marketable securities |
|
|
|
| (4,678) |
| $ | (22,395) |
Total comprehensive loss | $ | (1,148,541) |
| $ | (3,444,113) |
| $ | (25,714,567) | |
Net loss available to common shareholders |
|
|
|
|
|
|
|
| |
| per common share - basic and diluted | $ | (0.03) |
| $ | (0.12) |
| $ | (1.29) |
Weighted average common shares - basic |
|
|
|
|
|
|
|
| |
| and diluted |
| 35,715,974 |
|
| 28,866,083 |
|
| 19,863,890 |
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The accompanying notes are an integral part of the financial statements |
2
Aegis Assessments, Inc. | ||||||||||||
(A Development Stage Company) | ||||||||||||
Statements of Cash Flows | ||||||||||||
(Unaudited) | ||||||||||||
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| For the period from |
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| For the three |
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| For the three |
|
| January 16,2002 |
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|
|
|
|
| months ended |
|
| months ended |
|
| (inception) to |
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|
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|
|
| October 31,2006 |
|
| October 31,2005 |
|
| October 31,2006 |
|
|
|
|
|
| (Unaudited) |
|
| (Unaudited) |
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| (Unaudited) |
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Cash flows from operating activities: |
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|
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|
|
|
| ||||
| Net loss | $ | (1,148,541) |
| $ | (3,439,435) |
| $ | (25,692,172) | |||
|
| Adjustments to reconcile net |
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|
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| loss to net cash used in operating |
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| |
|
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| activities: |
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| |
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| Non-cash items included in the net |
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|
|
|
|
| |
|
|
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| loss: |
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|
|
|
|
|
|
|
|
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| Depreciation |
| 17,487 |
|
| 19,272 |
|
| 189,041 | |
|
|
| Amortization and expenses related to |
|
|
|
|
|
|
|
| |
|
|
|
| stock and stock options |
|
|
|
| 20,000 |
|
| 13,065,454 |
|
|
| Amortization of the fair value of conversion |
|
|
|
|
|
|
|
| |
|
|
|
| rights and warrants related to notes payable |
| 154,326 |
|
|
|
|
| 651,826 |
|
|
| (Gain) Loss on interest rate derivative swap |
| (2,419) |
|
| 19,563 |
|
| 105,136 | |
|
|
| Loss on equity swap |
| 200,000 |
|
| 3,000,000 |
|
| 4,750,000 | |
|
|
| Loss on consulting contract settlement |
| 440,000 |
|
|
|
|
| 440,000 | |
|
|
| The intrinsic value of non-detachable |
|
|
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|
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| |
|
|
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| conversion rights of the Series A 8% |
|
|
|
|
|
|
|
|
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|
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| preferred stock |
|
|
|
|
|
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| �� 9,800 |
|
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| Issuance of stock for payment of interest |
|
|
|
|
|
|
| 3,266 | |
|
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| Loss on impaired assets |
|
|
|
|
|
|
| 348,390 | |
|
| Change in Assets |
|
|
|
|
|
|
|
| ||
|
|
| Accounts Receivable |
|
|
|
|
|
|
| - | |
|
|
| Inventory |
| (39,115) |
|
|
|
|
| (443,603) | |
|
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| Other Assets |
|
|
|
|
|
|
| (7,616) | |
|
|
| Advance |
|
|
|
| (1,750) |
|
|
| |
|
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| Prepaid Expense |
|
|
|
| (18,072) |
|
|
| |
|
|
|
|
|
| - |
|
|
|
|
| - |
|
| Change in Liabilities: |
|
|
|
|
|
|
|
| ||
|
|
| Accrued payroll |
| 36,838 |
|
| 27,468 |
|
| 187,366 | |
|
|
| Accounts payable |
| 9,227 |
|
| 74,231 |
|
| 496,020 | |
|
|
| Deferred Revenue |
|
|
|
|
|
|
| 357,000 | |
|
|
| Accrued expenses |
| 685 |
|
|
|
|
| 39,809 | |
Net cash used in operating activities | $ | (331,512) |
| $ | (298,723) |
| $ | (5,500,283) | ||||
|
|
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| (continued) |
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The accompanying notes are an integral part of the financial statements |
3
Aegis Assessments, Inc. | ||||||||||||
(A Development Stage Company) | ||||||||||||
Statements of Cash Flows | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| For the period from |
|
|
|
|
|
| For the three |
|
| For the three |
|
| January 16,2002 |
|
|
|
|
|
| months ended |
|
| months ended |
|
| (inception) to |
|
|
|
|
|
| October 31,2006 |
|
| October 31,2005 |
|
| October 31,2006 |
|
|
|
|
|
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
Cash flows used in investing activities: |
|
|
|
|
|
|
|
| ||||
| Payments to acquire property |
|
|
|
|
|
|
|
| |||
|
| and equipment |
|
|
|
|
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| $ | (358,348) | ||
Net cash flows used in investing activities |
| - |
|
| - |
|
| (358,348) | ||||
Cash flows provided by financing activities: |
|
|
|
|
|
|
|
| ||||
| Proceeds from issuance of preferred stock |
| - |
|
|
|
|
| 90,100 | |||
| Proceeds from issuance of common |
|
|
|
|
|
|
|
| |||
|
| stock - related party |
|
|
|
|
|
|
| 22,500 | ||
| Proceeds from issuance of common stock |
| 2,778 |
|
| 185,485 |
|
| 3,587,216 | |||
| Proceeds from exercise of warrants |
|
|
|
|
|
|
| 630,405 | |||
| Proceeds from exercise of options |
|
|
|
|
|
|
| 237,144 | |||
| Proceeds from issuance of debentures |
| 500,000 |
|
|
|
|
| 1,317,000 | |||
| Proceeds from notes payable and |
|
|
|
|
|
|
|
| |||
|
| advances - related parties |
| 3,750 |
|
|
|
|
| 20,750 | ||
|
|
|
|
|
|
|
|
|
|
|
| 0 |
| Stock subscription receivable |
| - |
|
|
|
|
| 10,000 | |||
| Advances from officers |
|
|
|
|
|
|
| 0 | |||
| Note Payable - officer |
|
|
|
| (59,697) |
|
| 0 | |||
| Note Payable - proceeds |
| 127,650 |
|
| 125,000 |
|
| 267,650 | |||
| Note Payable - payments |
|
|
|
|
|
|
| (16,700) | |||
Net cash provided by financing activities |
| 634,178 |
|
| 250,788 |
|
| 6,166,065 | ||||
Net increase in cash and cash equivalents |
| 302,666 |
|
| (47,935) |
|
| 307,434 | ||||
Cash and cash equivalents, beginning of period |
| 4,768 |
|
| 55,508 |
|
| - | ||||
|
|
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|
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Cash and cash equivalents, end of period | $ | 307,434 |
| $ | 7,573 |
| $ | 307,434 | ||||
Supplemental Disclosure of Non-Cash Investing |
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| ||||
and Financing Activities |
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| Exercise of options applied against notes |
|
|
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| $ | 17,000 | |||
| Payment of accounts payable with stock |
|
|
|
|
|
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| 12,025 | |||
| Conversion of preferred stock to common |
|
|
|
|
|
|
|
| |||
|
| stock |
|
|
|
|
|
|
|
| 27,500 | |
| Issuance of common stock for services |
|
|
| $ | 20,000 |
| $ | 12,884,625 | |||
| Issuance of stock for note – related party |
|
|
|
|
|
|
| 67,500 | |||
| Issuance of stock for notes |
|
|
|
|
|
|
| 133,000 | |||
|
|
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|
The accompanying notes are an integral part of the condensed financial statements |
4
Aegis Assessments, Inc.
(A Development Stage Company)
Notes to Financial Statements
For The Three Months Ended October 31, 2006 (Unaudited) and October 31, 2005 (Unaudited), For The Period January 16, 2002 (inception) Through October 31, 2006
____________________________________________________________________________________
1.
Basis of Presentation
The accompanying condensed financial statements are unaudited and have been prepared in conformity with generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles for complete financial statements generally accepted in the United States of America. In the opinion of management, the accompanying financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of October 31, 2006. There has not been any change in the significant accounting policies of Aegis Assessments, Inc. (“The Company”), for the periods presented. The results of operations for the three months ended October 31, 2006 and 2005 are not necessarily indicative of the results for a full year period. It is suggested that these unaudited condensed financial statements be read in conjunct ion with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended July 31, 2006 filed with the Securities and Exchange Commission (the “SEC”).
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States for interim period financial information, which contemplate continuation of Aegis Assessments, Inc. (a Development Stage Company) as a going concern. However, the Company is subject to the risks and uncertainties associated with a new business, has no established source of revenue, and has limited sources of equity capital. These matters raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
2.
Summary of Significant Accounting Policies
Inventory – Inventory is stated at lower of cost or market (average cost method) and consists of units completed and deposits made with an outsourced manufacturer.
Stock-Based Compensation
Prior to January 1, 2006 the Company accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 (“APB 25”). Accordingly, the Company generally recognized compensation expense only when it granted options with a discounted exercise price. Any resulting compensation expense was recognized ratably over the associated service period, which was generally the option vesting term. Prior to January 1, 2006, the Company provided pro-forma disclosure amounts in accordance with FAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure" ("FAS 148"), as if the fair value method defined by FAS No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), had been applied to its stock-based compensation.
There was no stock-based compensation for the quarters ended October 31, 2006 and October 31, 2005.
Effective January 1, 2006 the Company adopted the fair value recognition provisions of “Share Based Payment” (“FAS 123R”), using the modified prospective transition method and therefore has not restated prior periods' results. Stock-based compensation expense for all share-based payment awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of FAS 123R. The Company recognizes these compensation costs over the requisite service period of the award, which is generally the option vesting term.
5
There is no impact to the Financial Statements for the quarter ended October 31, 2006 as a result of adopting FAS 123R when compared to the results had the Company continued to account for stock-based compensation under APB 25. There is no impact on both basic and diluted net loss per share for the quarter ended October 31, 2006. As of October 31, 2006 the Company had no unvested options.
Recently issued Financial Accounting Standards
In May 2005, the Financial Accounting Standard Board (the “FASB”) issued SFAS No. 154,Accounting Changes and Error Corrections,a replacement of APB Opinion No. 20 and FASB Statement No. 3,Reporting Accounting Changes in Interim Financial Statements. FASB No. 154 requires retrospective application for reporting a change in accounting principles unless such application is impracticable or unless transition requirements specific to a newly adopted accounting principle require otherwise. SFAS No. 154 also requires the reporting of a correction of an error by restating previously issued financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 31, 2005. Management believes the adoption of this pronouncement will not have a material impact on our financial statements.
In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of FIN 48 on our consolidated financial statements and disclosures.
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (SFAS No. 157), which defines fair value, establishes guidelines for measuring fair value and expands disclosure regarding fair value measurements. SFAS No. 157 does not require new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, on a prospective basis. We are currently evaluating the impact of SFAS No. 157 on our financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, Financial Statements –Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB No. 108 requires registrants to quantify misstatements using both the income statement and balance sheet approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB No. 108 is effective for years ending after November 15, 2006. We are currently evaluating the impact of SAB No. 108 on our consolidated financial statements.
3.
Stock Transactions
Common Stock
On February 17, 2006, the Company issued convertible debentures with a face value of $800,000 (see Note 3 below). The notes, along with accrued interest, are convertible into common shares at the holders’ option at $.15 per share. However, this conversion price is reduced to the level of any future financing if such financing is at a lower share price. As October 31, 2006 $300,000 of note principal and $9,698 of accrued interest had been converted into 2,699,460 shares of common stock. Of these amounts, $50,000 of note principal and $2,778 of accrued interest were converted into 1,055,586 common shares in the three months ended October 31, 2006..
6
4.
Convertible Debentures
February 2006 Debentures
On February 17, 2006, the Company issued convertible debentures with a face value of $800,000 with attached warrants for net proceeds of $649,467 after various fees and expenses totaling $150,533. A description of the notes is as follows:
·
Maturity: The notes mature on February 17, 2007. The note-holders may elect at any time to convert their notes into shares of common stock at the conversion price (as described below). Each lender is limited to total ownership of 4.99% of the outstanding shares of the Company at any time, so the ability to convert is limited.
·
Interest: The notes provide for simple interest payable on each note at the annual rate of 10%. The subscribers have the right from and after the date of the issuance of the notes until the notes are fully paid, to convert any outstanding and unpaid principal portion of each note, and accrued interest, at the election of such subscriber into fully paid and non-assessable shares of the shares of the Company's common stock .
·
Conversion and conversion price: The outstanding balance of the notes may, at the lenders’ option, be converted to common shares at the rate of $.15 per share. The conversion price may be adjusted downward if The Company subsequently completes any financing at a lower share price.
Warrants: In connection with the financing, warrants were issued as follows:
·
Series A: 5,333,333 warrants were issued with an exercise price of $.25 per share and a 3-year life.
·
Series B: 5,333,333 warrants were issued with an exercise price of $.60 per share and a 3-year life.
The proceeds from the notes have been discounted for the relative fair value of the warrants, the discount, and beneficial conversion feature. All discounts will be amortized over the one-year life of the notes. A summary of the notes is as follows:
|
| Notes Payable |
Face value | $ | 800,000 |
Less: Relative fair value of: |
|
|
Series A warrants |
| (223,669) |
Series B warrants |
| (336,211) |
beneficial conversion feature |
| (240,120) |
Carrying amount of notes on February 17, 2006 | $ | 0 |
Amortization of discounts to October 31, 2006 |
| 650,000 |
Conversions of notes payable |
| (300,000) |
Carrying amount of notes at October 31, 2006 | $ | 350,000 |
As of October 31, 2006 holders of $300,000 of the debentures had converted their notes into common shares.
October 2006 Debentures
On October 27, 2006 we executed definitive agreements for the purchase by institutional investors of $1,000,000 of principal amount of 6% convertible secured promissory notes, maturing three years from the date of issuance. Investors initially purchased $500,000 of the notes. Within two days of our subsequent registration statement being declared effective, the investors will purchase additional notes in the amount of $500,000. The notes will be convertible at the investor’s option, into shares of our common stock. The notes are convertible at a fixed discount to the market price of our shares, and the amount of notes that may be converted during any month is limited.
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In connection with the issuance of the notes, we issued to the investors seven-year common stock purchase warrants to purchase 10,000,000 shares of our common stock. The exercise price of the warrants is $0.10. The warrants do not have registration rights. To secure the investors’ obligations under the notes, we granted the investors a security interest in substantially all of our assets. The security interest granted terminates immediately upon payment or satisfaction of all of our obligations under the notes.
Consistent with the applicable authoritative literature, including FAS 133 and EITF 00-19, we accounted for the transaction by separately recording the fair value of the conversion feature, and warrants, and by recording the notes as derivative liabilities.
|
| Notes Payable |
Face value | $ | 500,000 |
Less: Relative fair value of: |
|
|
Warrants |
| (121,640) |
Beneficial conversion feature |
| (378,360) |
Carrying amount of notes on October 27, 2006 | $ | 0 |
Amortization of discounts to October 31, 2006 |
| 1,826 |
Carrying amount of notes at April 30, 2006 | $ | 1,826 |
As of October 31, 2006 none of the notes had been converted into common shares.
5.
Settlement of Consulting Contract
In September 2005 we arbitrated a dispute with Robert Alcaraz, a former employee. Prior to a final judgment in that matter the parties agreed that a negotiated compromise of this dispute was preferable to continuing the arbitration process. The parties entered into a consulting contract for a one-year period pursuant to which Mr. Alcaraz provided his expertise in evaluating the company’s products. In September 2006 we made the final payment under this contract. The company also reimbursed Mr. Alcaraz for his costs and attorney’s fees in the arbitration.
The parties further agreed that 650,000 shares of Aegis common stock (including exercisable options) previously issued to Mr. Alcaraz were cancelled. Aegis further agreed to reissue 800,000 shares of common stock to Mr. Alcaraz for the purchase price of $8,000, subject to the restrictions embodied in Rule 144. In consideration of the new one year restriction period on the stock, Aegis agreed that, if the closing price of the common stock is less than $.60 per share on the first business day following the restricted period, Mr. Alcaraz shall be entitled to an additional cash payment from Aegis amounting to the difference between $.60 per share and the closing price value of the stock, but not to exceed a total of $500,000. This amount is payable within thirty days.
If we do not make the payments specified, Mr. Alcaraz can seek entry of judgment for all unpaid wages, consulting fees, arbitration expenses and attorneys’ fees that he sought in the original arbitration.
On October 31, 2006 Aegis’s common stock closed trading at $.05. As of October 31, 2006 Mr. Alcaraz had not made a demand for payment under the stock price provision of the agreement. We are currently negotiating with Mr. Alcaraz to alter the payment terms under the agreement relative to our stock price. At October 31, 2006 we recorded a contingent liability and corresponding loss of $440,000 with respect to this agreement.
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6.
Liquidity and Going Concern
The Company has incurred net losses since its inception in January 2002 and has no established sources of revenue. The net losses were $1,148,541, $3,439,435 and $25,692,172 for the quarters ended October 31, 2006 and October 31, 2005 and for the period from January 16, 2002 (inception) to October 31, 2006, respectively. Despite its negative cash flows from operations of $331,512, $298,723, and $5,500,283 for the quarters ended October 31, 2006 and October 31, 2005 and for the period from January 16, 2002 (inception) to October 31, 2006, respectively, the Company has been able to obtain additional operating capital through private funding sources. Management's plans include the continued development of the Company's SafetyNet products and a client awareness program that it believes will enhance its ability to generate revenues from the sale of the Company's products. The Company has relied upon equity funding and loans from shareholders since inception.
During the quarter ended October 31, 2006, the Company financed its operations through private equity funding and loans from officers and others. The Company may offer shares of its common stock during the year ended July 31, 2007. No assurances can be given that the Company can obtain sufficient working capital through the sale of the Company's securities and borrowing, or that the sale of the SafetyNet products will generate sufficient revenues in the future to sustain ongoing operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
7.
Related Party Transaction
On October 3, 2006 an officer and director advanced the Company $3,750 to meet certain short term obligations. The advance is unsecured, and is repayable on demand from available funds.
8.
Loans Payable
On August 21, 2006 three investors loaned the Company a total of $127,650, including an original issue discount of $16,650. The loan is for 60 days, and is unsecured. In addition to the original issue discount, legal and other expenses of $14,012 were withheld from the funding, for net proceeds to the Company of $96,988. The loan was still outstanding at October 31, 2006.
9.
Subsequent Events
On February 17, 2006, the Company issued convertible debentures with a face value of $800,000. As of October 31, 2006 holders of $300,000 of the debentures had converted their notes into common shares. Subsequent to October 31, 2006 holders of $46,600 in note principal and another $7,864 in accrued interest converted these into a total of 5,611,599 shares.
On August 21, 2006 three investors loaned the Company a total of $127,650, including an original issue discount of $16,650. The loan was for 60 days, and is unsecured. In addition to the original issue discount, legal and other expenses of $14,012 were withheld from the funding, for net proceeds to the Company of $96,988. The loan was still outstanding at October 31, 2006. With a payment of $37,000 on November 9, 2006 the Company paid off one of the three investors. The remaining two investors elected to combine their notes with the outstanding balance of convertible notes dated February 17, 2006.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
For a description of our significant accounting policies and an understanding of the significant factors that influenced our performance during the period ended October 31, 2006, this “Management’s Discussion and Analysis” should be read in conjunction with the Financial Statements, including the related notes, appearing in Item 1 of this Quarterly Report. The preparation of this Quarterly Report on Form 10-QSB requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results reported in the future will not differ from those estimates or that revisions of these estimates may not become necessary in the future.
Forward Looking Statements
This portion of this Quarterly Report on Form 10-QSB, includes statements that constitute "forward-looking statements." These forward-looking statements are often characterized by the terms "may," "believes," "projects," "expects," or "anticipates," and do not reflect historical facts. Specific forward-looking statements contained in this portion of the Quarterly Report include, but are not limited to the Company's expectation that it will begin generating significant revenues from the sale of its products rather than from equity or debt financings. Forward-looking statements involve risks, uncertainties and other factors, which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements and cause them to materially differ from those contained in the forward-looking statem ents include, but are not limited to (i) market acceptance of our products; (ii) establishment and expansion of our direct and indirect distribution channels; (iii) attracting and retaining the endorsement of key opinion-leaders in the law enforcement, fire, rescue and other emergency response communities; (iv) the level of product technology and price competition for our products; (v) the degree and rate of growth of the markets in which we compete and the accompanying demand for our products; (vi) potential delays fulfilling orders; (vii) risks associated with rapid technological change and execution and implementation risks of new technology; (viii) new product introduction risks; (ix) ramping manufacturing production to meet demand; (x) future potential litigation resulting from alleged product related injuries; (xi) potential fluctuations in quarterly operating results; (xii) financial and budgetary constraints of prospects and customers; (xiii) fluctuations in component pricing; (xiv) adoption of new o r changes in accounting policies and practices, including pronouncements promulgated by standard setting bodies; (xv) changes in legislation and governmental regulation; (xvi) publicity that may adversely impact our business and/or industry; and (xvii) the other risks and uncertainties set forth below under those identified in the section below titled "Risk Factors," as well as other factors that we are currently unable to identify or quantify, but may exist in the future.
In addition, the foregoing factors may affect generally our business, results of operations and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.
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Executive Overview.
Although we are presently contemplating manufacturing additional public safety products, the only product we currently sell and have manufactured is the SafetyNet RadioBridge™, a portable device which allows most two-way radios to be interconnected regardless of the radio’s frequency, modulation or encryption scheme. Our contract manufacturer, CirTran Corporation, is currently producing a run of 20 of our new version RadioBridge units. As part of our manufacturing process, we worked with EMI Solutions, Inc., headquartered in Irvine, California, and Alden Products, a major manufacturer, to develop a filtered connector to be used in the RadioBridge. Alden is now contemplating adding this connector to its medical, commercial, aerospace and military product lines.
Distribution and Sales.
A limiting factor for the sale of our RadioBridge product has been the time-consuming process associated with government purchasing cycles and procurement practices of our products’ end-users. We have continued to work with our distributor, Quala-tel Enterprises, and have participated in numerous demonstrations to customers throughout the United States, as well as trade shows. We have also continued to work with James Lee Witt Associates, LLC to assist the company with strategic advisory services and help introduce our products to public safety and emergency services organizations. During the last fiscal quarter we received orders for RadioBridges from agencies such as the United States Postal Inspection Service and the Los Angeles County Metropolitan Transit Authority (LACMTA).
Production.We contracted to develop the next generation SafetyNet RadioBridge with new features for enhanced performance with CirTran Corporation located in West Valley, Utah. CirTran Corporation is a full-service electronics contract manufacturer and has an ISO (International Organization for Standardization) 9002 registration. We have engaged CirTran for the first production run of the Version2 RadioBridge. The RadioBridge interconnects incompatible radios and bridges them to provide radio interoperability at an emergency site in a matter of minutes. The enhanced version features improvements in the sound quality of audio transmissions, the addition of an internal storage compartment for cables, headsets and other accessories, and improved bridging of trunked and non-trunked radios.
Results of Operations
We have incurred losses since our inception in 2002 and have relied on the sale of our equity securities and on loans from our officers and shareholders to fund our operations. However, we have begun filling purchase orders for our RadioBridge product and we will record revenues as we deliver RadioBridges to our customers.
There were no revenues for the three-month periods ended October 31, 2006 and 2005.
Our general and administrative expenses other than for related parties for the three-month period ended October 31, 2006 were $326,520, as compared to $419,871 for the comparable period during the prior year. Our operating expenses have decreased as a result of reduction in equity-based compensation paid to employees, outside consultants, and business partners.
Now that we have a finished product ready for delivery to end-users, our marketing activities have increased significantly, and we are incurring increased marketing costs, including costs associated with demonstrating our products to public safety agencies and government officials, major law enforcement officials, fire department officials and federal agencies. We have also incurred increased costs associated with the design, preparation, and printing of marketing and product informational material, courier costs and mailing costs. Moreover, we continue to incur legal and accounting expenses and other expenses incidental to our reporting obligations as a public company and to the increase in our requirements for transactional legal and accounting services.
Our loss before provision for income taxes was $1,148,541 for the three-month period ended October 31, 2006, as compared to $3,439,435 for the same period for the prior year. Our net loss for the three-month period ended October 31, 2006 after provision for income taxes was $1,148,541, as compared to $3,439,435 for the comparable period for the prior year. The decrease was the result primarily of a decrease in the equity-based compensation paid to employees, outside consultants, and business partners.
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Liquidity and Capital Resources
At October 31, 2006, we had $307,434 in cash, as compared with $7,573 in cash during the equivalent period ended October 31, 2005. The increase is due primarily to the funding of convertible debentures on October 27, 2006.
At October 31, 2006 we had accrued payroll liability of $187,366, as compared with $100,683 at October 31, 2005. The increase is attributed to an increase in accrued salary owed officers and directors. Accounts payable and deferred revenue totaled $853,020 at October 31, 2006, as compared to $592,015 at October 31, 2005. Notes payable and Advances totaled $1,106,526 at October 31, 2006, including $3,750 from an officer and director. This compares to $159,303 in notes payable at October 31, 2005. These increases were due to increased costs of operations.
We held property and equipment at October 31, 2006, which was valued, net of depreciation of $151,126, at $118,905, as compared with property valued, net of depreciation of $108,323, at $213,357 at October 31, 2005. The decrease is attributed to the write-off of abandoned assets prior to July 31, 2006, and to periodic charges to depreciation expense. Our total assets at October 31, 2006 were $5,580,696, as compared with $5,595,343 at October 31, 2005.
We believe we have sufficient funds currently available to satisfy our cash requirements for the next 3 months. We also anticipate increased revenues from the sale of RadioBridges during the next 12 months, but it is difficult to project a sales timeline because we believe significant sales are dependent on public safety end-users acquisition practices and our establishment of a customer support infrastructure to support such sales. We believe our relationship with Quala-tel Enterprises, our distributor, will increase our sales volume and decrease these procurement time cycles.
Going Concern
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. To date, we have relied primarily on loans from shareholders and officers, the sale of our equity securities, debt financing, and limited revenues to fund our operations. We have incurred losses since our inception and we continue to incur legal, accounting, and other business and administrative expenses. Our auditor has therefore recognized that there is substantial doubt about our ability to continue as a going concern.
Risk Factors
An investment in our common stock involves a substantial degree of risk. Before making an investment decision, you should give careful consideration to the following risk factors in addition to the other information contained in this report. The following risk factors, however, may not reflect all of the risks associated with our business or an investment in our common stock only if you can afford to lose your entire investment.
Risks Related to Our Business
We have a limited operating history and there is no assurance that our company will achieve profitability.
Until recently, we have had no significant operations or revenues with which to generate profits or create liquidity, and we have not yet generated a sufficient amount of operating revenue to sustain our projected operations. Our ability to generate revenue is uncertain and we may never achieve profitability. Potential investors should evaluate our company in light of the expenses, delays, uncertainties, and complications typically encountered by early-stage businesses, many of which will be beyond our control. These risks include:
·
lack of sufficient capital,
·
unproven business model,
·
marketing difficulties,
·
competition, and
·
uncertain market acceptance of our products and services.
12
As a result of our limited operating history, our plan for growth, and the competitive nature of the markets in which we may compete, our historical financial data are of limited value in anticipating future revenue, capital requirements, and operating expenses. Our planned capital requirements and expense levels will be based in part on our expectations concerning capital investments and future revenue, which are difficult to forecast accurately due to our current stage of development. We may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenue. Our product development, marketing and general administrative expenses may increase significantly if we begin to increase our sales and expand operations. To the extent that these expenses precede or are not rapidly followed by a corresponding and commensurate increase in revenue or additional sources of financing, our business, operating results, and f inancial condition may be materially and adversely affected.
We may need significant infusions of additional capital.
To date, we have relied almost exclusively on outside financing to obtain the funding necessary to operate the business. Based upon our current cash reserves and forecasted operations, we may need to obtain additional outside funding in the future in order to further satisfy our cash requirements. Our need for additional capital to finance our business strategy, operations, and growth will be greater should, among other things, revenue or expense estimates prove to be incorrect. We cannot predict the timing or amount of our capital requirements at this time. If we fail to arrange for sufficient capital on a timely basis in the future, we may be required to reduce the scope of our business activities until we can obtain adequate financing. We may not be able to obtain additional financing in sufficient amounts or on acceptable terms when needed, which could adversely affect our operating results and prospects. Debt financing must be repaid regardless o f whether or not we generate profits or cash flows from our business activities. Equity financing may result in dilution to existing shareholders and may involve securities that have rights, preferences, or privileges that are senior to our common stock.
We may face significant competition, including from companies with greater resources, which could adversely affect our revenues, results of operations and financial condition.
There are existing companies that offer or have the ability to develop products and services that will compete with those that we currently offer or may offer in the future. These include large, well-recognized companies that have substantial resources and established relationships in the markets in which we compete. Their greater financial, technical, marketing, and sales resources may permit them to react more quickly to emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, and sale of competing products and services. Emerging companies also may develop and offer products and services that compete with those that we offer. Increased competitive pressure could lead to reduced market share, as well as lower prices and reduced margins for our products, which would adversely affect our results of operations and financial condition. We cannot assure you that we will be able to compete successfu lly in the future.
We depend materially upon acceptance of our products by specific agencies and markets and if these agencies and markets do not purchase or are not receptive to our products, our revenues will be adversely affected and we may not be able to expand into other markets.
Our business and results of operations will be materially and adversely affected if a substantial number of law enforcement, fire, rescue, other emergency response and public safety agencies do not purchase our RadioBridge product. In addition, we may not be able to expand sales of additional public safety products we are developing into other markets if our products are not widely accepted by these agencies or markets. This also would have an adverse affect on our business and results of operations.
We may face personal injury and other liability claims that could harm our reputation and adversely affect our sales and financial condition.
Our products will be depended upon in emergency, rescue and public safety situations that may involve physical harm or even death to individuals, as well as potential loss or damage to real and personal property. Our products may be associated with these injuries or other losses. A person who sustains injuries, the survivors of a person killed, the owner of damaged or destroyed property in a situation involving the use of our products, or the owner of a facility at which such injury, death or loss occurred may bring legal action against us to recover damages on the basis of theories including personal injury, wrongful death, negligent design, dangerous product or inadequate warning. We may also be subject to lawsuits involving allegations of misuse of our products. If successful, such claims could have a material adverse effect on
13
our operating results and financial condition. Significant litigation could also result in a diversion of management’s attention and resources, negative publicity and an award of monetary damages in excess of our insurance coverage.
Our future success will depend on our ability to expand sales through channel partners, which may include distributors, dealers, and independent sales representatives; our inability to take advantage of our existing distribution network or recruit new distributors, dealers, or independent sales representatives may negatively affect our sales.
Our distribution strategy is to support our current distributor, Quala-tel Enterprises, and also to continue to make direct sales to government end-users. Our inability to successfully sell our products through our distributor or our inability to retain other distributors, dealers, and sales representatives who can successfully sell our products would adversely affect our sales. In addition, if we do not competitively price our products, meet the requirements of our end-users, provide adequate marketing support, or comply with the terms of our distribution arrangement, our distributor may fail to aggressively market our products or may terminate its relationship with us. These developments would likely have a material adverse effect on our sales. Our reliance on others to sell our products also makes it more difficult to predict our revenues, cash flow and operating results.
We expend significant resources in anticipation of a sale due to our lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement, fire, rescue, other emergency response and public safety agencies, as well as commercial end users for homeland security and life safety applications consider a wide range of issues before committing to purchase our products, including product benefits, training costs, the cost to use our products in addition to or in place of other products, product reliability and budget constraints. The length of our sales cycle may range from a few weeks to as long as several years. We may incur substantial selling costs and expend significant effort in connection with the evaluation of our products by potential customers before they place an order. If these potential customers do not purchase our products, we will have expended significant resources and received no revenue in return. This could adversely affect our operating results and financial condition.
Many of our end-users are subject to budgetary and political constraints that may delay or prevent sales.
Many of our end-user customers currently are military, government agencies or entities or para-military or quasi-government entities or agencies. These entities and agencies often do not set their own budgets and therefore have little control over the amount of money they can spend. In addition, these entities and agencies experience political pressure that may dictate the manner in which they spend money. As a result, even if an entity or agency wants to acquire our products, it may be unable to purchase them due to budgetary or political constraints. Some orders also may be canceled or substantially delayed due to budgetary, political or other scheduling delays that frequently occur in connection with the acquisition of products by such entities or agencies.
Many of our end-users rely on state and federal grants to obtain the necessary funding to purchase our products, the delay or unavailability of which could adversely affect our sales and results of operations.
The Department of Homeland Security currently awards funding grants for the purchase of communications equipment that provides interoperability to first responders. These funds are granted through the State Homeland Security Grant Program, the Urban Area Security Initiative, and other grants administered by the Office of Domestic Preparedness, the Federal Emergency Management Agency, and the Transportation Security Administration. Other Federal agency programs include Department of Justice grants for counter-terrorism and general-purpose law enforcement activities through the Office of Community Oriented Policing Services, which distributes funding through a wide range of programs, both as grants and cooperative agreements. Additionally, many grants are administered directly through state agencies and administrative offices. Budgetary, political or other constraints or delays in providing, or the availability of funding through, these grant programs could preclude many of our end-users from being able to purchase our products, which would have an adverse impact on our revenues, results of operations and financial condition.
If we are unable to protect our intellectual property, we may lose a competitive advantage or incur substantial litigation costs to protect our rights.
14
Our success depends both on our internally developed technology and on third party technology. We rely on a variety of trademarks, service marks, and designs to promote our brand names and identity. We also rely on a combination of provisional patents, contractual provisions, confidentiality procedures, trademarks, copyrights, trade secrecy, unfair competition, and other intellectual property laws to protect the proprietary aspects of our products. The steps we take to protect our intellectual property rights may not be adequate to protect our intellectual property and may not prevent our competitors from gaining access to our intellectual property and proprietary information. In addition, we cannot provide assurance that courts will always uphold our intellectual property rights or enforce the contractual arrangements that we have entered into to protect our proprietary technology.
Third parties may infringe or misappropriate our copyrights, trademarks, service marks, patents, and other proprietary rights. Any such infringement or misappropriation could have a material adverse effect on our business, prospects, financial condition, and results of operations. In addition, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear.
We may decide to initiate litigation in order to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of our proprietary rights. Any such litigation could result in substantial expense, may reduce our profits, and may not adequately protect our intellectual property rights. In addition, we may be exposed to future litigation by third parties based on claims that our products or services infringe their intellectual property rights. Any such claim or litigation against us, whether or not successful, could result in substantial costs and harm our reputation. In addition, such claims or litigation could force us to do one or more of the following:
·
cease selling or using any of our products that incorporate the challenged intellectual property, which would adversely affect our revenue;
·
obtain a license from and/or make royalty payments to the holder of the intellectual property right alleged to have been infringed, which license may not be available on reasonable terms, if at all;
·
divert management’s attention from our business;
·
redesign or, in the case of trademark claims, rename our products or services to avoid infringing the intellectual property rights of third parties, which may not be possible and in any event could be costly and time-consuming.
Even if we were to prevail, such claims or litigation could be time-consuming and expensive to prosecute or defend, and could result in the diversion of our management’s time and attention. These expenses and diversion of managerial resources could have a material adverse effect on our business, prospects, financial condition, and results of operations.
Defects in our products could reduce demand for our products and result in a loss of sales, delay in market acceptance and injury to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. Defects in our products may result in a loss of sales, delay in market acceptance, injury to our reputation, increased warranty costs, recalls and costs associated with such recall efforts. In addition, defects in our products could result in personal injuries or death, as well as significant property damage. Any of these events could have a material adverse affect on our revenues, results of operations and financial condition.
Component shortages could result in our inability to produce sufficient volume to adequately sustain customer demand. This could result in a loss of sales, delay in deliveries and injury to our reputation.
Components used in the manufacture of our products may become unavailable or may be discontinued. Delays caused by industry allocations, or obsolescence may take weeks or months to resolve. In some cases, parts obsolescence may require a product re-design to ensure quality replacement parts. These delays could cause significant delays in manufacturing and loss of sales, leading to adverse effects significantly impacting our financial condition.
We depend upon our executive officers and key personnel.
Our performance depends substantially on the performance of our executive officers and other key personnel. Competition for talented personnel is intense, and there is no assurance that we will be able to continue to attract, train, retain or motivate other highly qualified technical and managerial personnel in the future. Our senior management currently defers a
15
large percentage of their annual salaries and there can be no assurance that they will continue to perform services for the company without receiving full compensation. In addition, market conditions may require us to pay higher compensation to qualified management and technical personnel than we currently anticipate. Any inability to attract and retain qualified management and technical personnel in the future could have a material adverse effect on our business, prospects, financial condition, and results of operations.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Act’), beginning with our Annual Report on Form 10-KSB for the fiscal year ending July 31, 2007, we will be required to furnish a report by our management on our internal control over financial reporting. The internal control report must contain (i) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (ii) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (iii) management's assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (iv) a statement that the Company's independent auditors have issued an attestation report on management's assessment of internal control over financial reporting.
In order to achieve compliance with Section 404 of the Act within the prescribed period, beginning in our next fiscal year, we will need to engage in a process to document and evaluate our internal control over financial reporting, which will be both costly and challenging. In this regard, management will need to dedicate internal resources, engage outside consultants and adopt a detailed work plan to (i) assess and document the adequacy of internal control over financial reporting, (ii) take steps to improve control processes where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. We can provide no assurance as to our, or our independent auditors’, conclusions at the prescribed periods with respect to the effectiveness of our internal control over financial reporting under Section 404 of the Act. The re is a risk that neither we nor our independent auditors will be able to conclude at the prescribed period that our internal controls over financial reporting are effective as required by Section 404 of the Act.
During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock co uld drop significantly.
Risks Related to Our Securities
Stock prices of technology companies have declined precipitously at times in the past and the trading price of our common stock is likely to be volatile, which could result in substantial losses to investors.
The trading price of our common stock has fallen significantly over the past few months and could continue to be volatile in response to factors including the following, many of which are beyond our control:
16
·
variations in our operating results;
·
announcements of technological innovations or new services by us or our competitors;
·
changes in expectations of our future financial performance, including financial estimates by securities analysts and investors;
·
our failure to meet analysts’ expectations;
·
changes in operating and stock price performance of other technology companies similar to us;
·
conditions or trends in the technology industry;
·
additions or departures of key personnel; and
·
future sales of our common stock.
Domestic and international stock markets often experience significant price and volume fluctuations that are unrelated to the operating performance of companies with securities trading in those markets. These fluctuations, as well as political events, terrorist attacks, threatened or actual war, and general economic conditions unrelated to our performance, may adversely affect the price of our common stock. In the past, securities holders of other companies often have initiated securities class action litigation against those companies following periods of volatility in the market price of those companies’ securities. If the market price of our stock fluctuates and our stockholders initiate this type of litigation, we could incur substantial costs and experience a diversion of our management’s attention and resources, regardless of the outcome. This could materially and adversely affect our business, prospects, financial condition, and results of operations.
Provisions in our corporate charter and under Delaware law are favorable to our directors.
Pursuant to our certificate of incorporation, members of our management and board of directors will have no liability for violations of their fiduciary duty of care as officers and directors, except in limited circumstances. This means that you may be unable to prevail in a legal action against our officers or directors even if you believe they have breached their fiduciary duty of care. In addition, our certificate of incorporation allows us to indemnify our officers and directors from and against any and all expenses or liabilities arising from or in connection with their serving in such capacities with us. This means that if you were able to enforce an action against our directors or officers, in all likelihood we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be required to pay.
Certain provisions of Delaware General Corporation Law and in our charter, as well as our current stockholder base may prevent or delay a change of control of our company.
Under the Delaware General Corporation Law, which we are subject to, it will be more difficult for a third party to take control of our company and may limit the price some investors are willing to pay for shares of our common stock. Furthermore, our certificate of incorporation authorizes the issuance of preferred stock without a vote or other stockholder approval.
Our common stock is subject to the “penny stock” rules as promulgated under the Exchange Act.
In the event that no exclusion from the definition of “penny stock” under the Securities Exchange Act of 1934, as amended is available, then any broker engaging in a transaction in our company’s common stock will be required to provide its customers with a risk disclosure document, disclosure of market quotations, if any, disclosure of the compensation of the broker-dealer and its sales person in the transaction, and monthly account statements showing the market values of our company’s securities held in the customer’s accounts. The bid and offer quotation and compensation information must be provided prior to effecting the transaction and must be contained on the customer’s confirmation of sale. Certain brokers are less willing to engage in transactions involving “penny stocks” as a result of the additional disclosure requirements described above, which may make it more difficult for holders of our company’s common stock to dispose of their shares.
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ITEM 3. CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed with an objective of ensuring that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission, such as this Quarterly Report on Form 10-QSB, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Disclosure controls also are designed with an objective of ensuring that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, in order to allow timely consideration regarding required disclosures.
The evaluation of our disclosure controls by our principal executive officer and principal financial officer included a review of the controls’ objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report. Our management, including our chief executive officer and president, and our chief financial officer, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on their review and evaluation as of the end of the period covered by this Form 10-QSB, and subject to the inherent limitations described above, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report. They are not aware of any significant changes in our disclosure controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. During the period covered by this Form 10-QSB, there have not been any changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Items 3-5 are not applicable and have been omitted.
ITEM 1. LEGAL PROCEEDINGS.
In September 2005 we arbitrated a dispute with Robert Alcaraz, a former employee. Prior to a final judgment in that matter the parties agreed that a negotiated compromise of this dispute was preferable to continuing the arbitration process. The parties entered into a consulting contract for a one-year period pursuant to which Mr. Alcaraz provided his expertise in evaluating the company’s products. The parties further agreed that 650,000 shares of Aegis common stock (including exercisable options) previously issued to Mr. Alcaraz were cancelled. Aegis further agreed to reissue 800,000 shares of common stock to Mr. Alcaraz for the purchase price of $8,000, subject to the restrictions embodied in Rule 144. In consideration of the new restriction period on the stock, Aegis agreed that, if the closing price of the common stock was less than $.60 per share on the first business day following the restricted period, Mr. Alcaraz is entitled to an additional cash payment from Aegis amo unting to the difference between $.60 per share and the closing price value of the stock, payable within thirty days. On the first business day following the restricted period, the closing price of Aegis’ common stock was $0.05. Mr. Alcaraz has made a demand for approximately $440,000., which the company is unable to pay. If we are unable to agree to an arrangement with Mr. Alcaraz to satisfy this obligation, Mr. Alcaraz can seek entry of judgment for all unpaid wages, consulting fees, arbitration expenses and attorneys’ fees that he sought in the original arbitration.
Other than as described above and in our previously filed Quarterly Reports and Annual Reports, we know of no material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. Other than as described above and in our previously filed Annual Report, there are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
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ITEM 2. CHANGES IN SECURITIES.
On October 27, 2006, we executed definitive agreements for the purchase by institutional, accredited investors for $1,000,000 of principal amount of 6% convertible secured promissory notes of the company, maturing three years from the date of issuance. As of the date of this Quarterly Report, the investors had purchased notes in the amount of $500,000. We filed a Registration Statement on Form SB-2 covering 225% the shares of common stock underlying the notes. We will be obligated to pay liquidated damages to the investors if the Registration Statement is not declared effective within 90 days equal to 2% of the then outstanding amounts under the notes for each thirty day period (or portion thereof). Within two days of the Registration Statement being declared effective, the investors will purchase additional notes in the amount of $500,000. The notes are convertible at the investors’ option into shares of our common stock at a per share conversion price equal to the Applicabl e Percentage (as defined below) multiplied by the average of the lowest three intraday trading prices for the common stock during the twenty trading days prior to the notice of conversion being sent. The Applicable Percentage is equal to (i) 50% as of the closing date, (ii) 55% in the event that the Registration Statement is filed within the required time period and (iii) 60% in the event that the Registration Statement becomes effective within the required time period.
To secure the investors’ obligations under the notes, the company granted the investors a security interest in substantially all of its assets, including without limitation its intellectual property, pursuant to a security agreement and an intellectual property security agreement which were filed as exhibits to a Current Report on Form 8-K filed with the Securities and Exchange Commission on or about November 2, 2006.
In connection with the issuance of the notes, we issued to the investors seven-year common stock purchase warrants to purchase 10,000,000 shares of our common stock. The exercise price of the warrants is $0.10. The warrants do not have registration rights.
The conversion price of the notes and the exercise price of the warrants are subject to adjustment for certain dilution events or in the event of certain capital adjustments or similar transactions, such as a stock split or merger, or, in certain circumstances, the issuance of additional equity securities for consideration less than the respective exercise prices. Subject to certain excepted issuances, the investors have a right of first refusal with respect to any proposed sale of company securities for a period of not less than two years following the effective date of the Registration Statement.
As of the date of the filing of this Current Report on Form 8-K, the Company has received gross proceeds of $500,000 and net proceeds of approximately $418,500, after payment of offering related fees and expenses.
We also agreed with two of the three institutional, accredited investors (the "Old Investors") who purchased an aggregate of $111,000 in principal amount of promissory notes ("Additional Notes") on August 15, 2006 as part of the amendment to and modification of the financing entered into with the company on February 17, 2006 to roll the Additional Notes plus a 20% premium for a total of $133,200 into the notes in consideration of the Old Investors waiving any and all defaults and penalties relating to the Additional Notes. The Additional Notes were due on October 20, 2006. The company will not receive any additional proceeds from the Old Investors as part of this transaction. We paid $37,000 of the Additional Notes to DKR Soundshore Oasis Holding Fund Ltd. and have agreed to pay the remaining $7,000 once the registration statement becomes effective.
The securities sold in this transaction have not been registered under the Securities Act of 1933, as amended (the “Act”) and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Act. The sale of the Warrants to the investors was made pursuant to an exemption from registration requirements under Regulation D and/or Section 4(2) of the Act. The common stock was offered and sold to purchasers whom the company or its authorized agents believe are “accredited investors,” as that term is defined in Rule 501 of Regulation D in reliance upon an exemption from the registration requirements of the Securities Act in a transaction not involving any public offering. Each of the investors represented to Aegis that:
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·
such investor is an “accredited investor;”
·
the shares of common stock were purchased by such investor for its own account, for investment and without any view to the distribution, assignment or resale to others other than pursuant to a registered offering;
·
such investor understood that the shares of common stock issued to the investor have not been registered under the Securities Act of 1933 or any state securities laws; and
·
such investor acknowledged that it may not transfer the shares unless the shares are registered under federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to Aegis, an exemption from such laws is available.
We will arrange for the certificates representing such securities to be legended and subject to stop transfer restrictions. We did not engage in any form of general solicitation or general advertising in connection with these issuances.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)
The following exhibits are attached to this Quarterly Report:
Exhibit Number |
| Description |
|
|
|
31 |
| Certification pursuant to SEC Release No. 33-8238, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32 |
| Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) The company filed one Current Report on Form 8-K during the period ended October 31, 2006.
On August 28, 2006, the company filed a report disclosing that it had entered into an amendment, modification and consent to a subscription agreement dated February 17, 2006 for the private placement of certain promissory notes with accredited investors in the principal aggregate amount of $500,000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| AEGIS ASSESSMENTS, INC. |
Date: December 20, 2006 |
|
|
|
| /s/ David Smith |
|
| Chief Financial Officer |
|
| (Principal Financial Officer and Authorized Officer) |
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EXHIBIT INDEX
Exhibit Number |
| Description |
|
|
|
31 |
| Certification pursuant to SEC Release No. 33-8238, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32 |
| Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |