FORM 1O-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-28863
MARKLAND TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 84-1334434
(State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification No.)
#207 - 54 DANBURY ROAD
RIDGEFIELD, CT 06877
(Address of principal executive offices and zip code)
(203)894-9700
(Registrant's telephone number, including area code)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
NOT APPLICABLE
APPLICABLE ONLY TO CORPORATE ISSUERS
At May 15, 2003, there were 320,334,405 shares of Common Stock, $0.001
par value, and 5,395 shares of Series C 5% Cumulative Preferred Stock, $0.001
par value, of the registrant issued and outstanding.
Transitional Small Business Disclosure Format (Check one): Yes No x
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
MARCH 31, 2003
Page Nos.
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PART I - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS 1
At March 31, 2003 (Unaudited) and June 30, 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 2
For the Nine Months Ended March 31, 2003 and 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 3
For the Three Months Ended March 31, 2003 and 2002
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
DEFICIENCY (Unaudited) 4
For the Nine Months Ended March 31, 2003
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 7 - 8
For the Nine Months Ended March 31, 2003 and 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 9 - 26
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS 27
ITEM 3 - CONTROLS AND PROCEDURES 33
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEDURES 34
ITEM 6 - EXHIBITS AND REPORTS ON 8-K 34
SIGNATURES 37
CERTIFICATIONS 38
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
At March 31, At June 30,
2003 2002
------------ -----------
(Unaudited)
CURRENT ASSETS:
Cash $ 19,929 $ 4,911
Accounts Receivable 158,287 -
Advance on purchase of ASI 15,000 -
Prepaid expenses and other current assets - 21,750
------------ ------------
TOTAL CURRENT ASSETS 193,216 26,661
------------ ------------
OTHER ASSETS:
Intangible assets - ERGO, net of amortization of $33,334 366,666 -
Technology rights (Acoustic Core) 1,300,000 -
------------ ------------
TOTAL OTHER ASSETS 1,666,666 -
------------ ------------
TOTAL ASSETS $ 1,859,882 $ 26,661
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 111,218 $ 95,348
Accrued expenses and other current liabilities 196,705 -
Note payable - James LLC - 1,367,027
Secured line of credit - Market LLC - 4,171,437
Liabilities from discontinued operations 1,298,711 1,298,713
Obligation under Ergo purchase agreement 287,780 -
------------ ------------
TOTAL CURRENT LIABILITIES 1,894,414 6,932,525
SECURED CONVERTIBLE PROMISSORY NOTE, less debt discount
of $94,917 at March 31, 2003 405,083 -
------------ ------------
TOTAL LIABILITIES 2,299,497 6,932,525
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Series B convertible preferred stock - $.0001 par
value; 10 authorized and -0- issued and
outstanding at March 31, 2003 and June 30, 2002 Series C 5% cumulative - -
convertible preferred stock -
$.0001 par value; 8,000 and -0- authorized at March 31, 2003 and June 30,
2002, respectively; 5,395 and -0- issued and outstanding at March 31,
2003 and June 30, 2002, respectively; liquidation
preference of $5,395,000 1 -
Series D 5% cumulative convertible preferred stock - $.0001 par value; 16,000
and -0- authorized at March 31, 2003 and June 30, 2002, respectively;
-0- issued and outstanding at March 31,
2003 and June 30, 2002 - -
Common stock - $.0001 par value; 500,000,000
authorized at March 31, 2003 and June 30, 2002;
320,334,405 and 299,909,179 shares
issued and outstanding at March 31, 2003 and
June 30, 2002, respectively 32,033 29,990
Additional paid-in capital 10,789,718 -
Unearned compensation (2,232,301)
Accumulated deficit (9,029,066) (6,935,854)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIENCY (439,615) (6,905,864)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'DEFICIENCY $ 1,859,882 $ 26,661
============ ============
See accompanying notes to condensed consolidated financial statements.
1
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
-------------- --------------
REVENUES $ 322,451 $ --
COST OF REVENUES 85,798 --
-------------- --------------
GROSS PROFIT 236,653 --
-------------- --------------
OPERATING EXPENSES:
Selling, general and administrative 643,193 --
Compensatory element of stock issuances for
selling, general and administrative fees 1,480,468 --
Depreciation and amortization 33,334 --
-------------- --------------
TOTAL OPERATING EXPENSES 2,156,995 --
-------------- --------------
OPERATING LOSS FROM CONTINUING OPERATIONS (1,920,342) --
-------------- --------------
OTHER EXPENSES, NET:
Interest expense 198,120 402,903
Other expense (income) (25,250) (102,765)
-------------- --------------
TOTAL OTHER EXPENSES, NET (172,870) (300,138)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS (2,093,212) (300,138)
LOSS FROM DISCONTINUED OPERATIONS -- (1,916,365)
-------------- --------------
NET LOSS (2,093,212) (2,216,503)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 320,882 --
PREFERRED STOCK DIVIDEND 81,007 --
-------------- --------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (2,495,101) $ (2,216,503)
============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (0.01) $ (0.00)
Loss from discontinued operations -- (0.01)
-------------- --------------
Net loss applicable to common stockholders $ (0.01) $ (0.01)
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 302,641,622 299,909,713
============== ==============
See accompanying notes to condensed consolidated financial statements.
2
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
-------------- --------------
REVENUES $ 322,451 $ --
COST OF REVENUES 85,798 --
-------------- --------------
GROSS PROFIT 236,653 --
-------------- --------------
OPERATING EXPENSES:
Selling, general and administrative 475,641 --
Compensatory element of stock issuances for
selling, general and administrative fees 1,476,468 --
Depreciation and amortization 33,334 --
-------------- --------------
TOTAL OPERATING EXPENSES 1,985,443 --
-------------- --------------
OPERATING LOSS FROM CONTINUING OPERATIONS (1,748,790) --
-------------- --------------
OTHER EXPENSES, NET:
Interest expense 28,334 107,470
Other expense (income) 403 (100,356)
-------------- --------------
TOTAL OTHER EXPENSES, NET (28,737) (7,114)
-------------- --------------
LOSS FROM CONTINUING OPERATIONS (1,777,527) (7,114)
LOSS FROM DISCONTINUED OPERATIONS -- (698,797)
-------------- --------------
NET LOSS (1,777,527) (705,911)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 272,502 --
PREFERRED STOCK DIVIDEND 65,018 --
-------------- --------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (2,115,047) $ (705,911)
============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations $ (0.01) $ (0.00)
Loss from discontinued operations -- (0.00)
-------------- --------------
Net loss applicable to common stockholders $ (0.01) $ (0.00)
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 308,106,511 299,909,713
============== ==============
See accompanying notes to condensed consolidated financial statements.
3
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED MARCH 31, 2003
Series C Convertible
Common Stock Preferred Stock
-------------------------------- -------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
Balance - June 30, 2002 299,909,179 $ 29,990 -- $ --
Stock cancelled in connection with
December 9, 2002 exchange agreement (269,918,261) (26,992) -- --
Stock issued in connection with
December 9, 2002 exchange agreement 269,918,261 26,992 -- --
Conversion of promissory notes and
interest into Series C Convertible
Preferred stock -- -- 5,225 1
Stock issued for directors'
compensation 400,000 40 -- --
Stock issued in connection with
private placement 6,800,000 680 -- --
Value assigned to beneficial
conversion feature of convertible
debt -- -- -- --
Preferred stock dividend -- -- -- --
Preferred stock dividend - beneficial
conversion feature -- -- -- --
Value allocated to Preferred stock -
beneficial conversion feature
dividend -- -- -- --
Stock issued in connection with
consulting agreement 80,000 8 -- --
Stock issued in connection with
consulting agreements 7,951,706 795 -- --
Stock issued in connection with
employment agreements 5,193,520 520 -- --
Sale of 170 shares of Series C
Convertible Preferred Stock -- -- 170 --
Net loss -- -- -- --
------------- ------------- ------------- -------------
Balance - March 31, 2003 320,334,405 $ 32,033 5,395 $ 1
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
4
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED MARCH 31, 2003
Additional
Unearned Paid-in
Compensation Capital
------------- -------------
Balance - June 30, 2002 $ -- $ --
Stock cancelled in connection with
December 9, 2002 exchange agreement -- 26,992
Stock issued in connection with
December 9, 2002 exchange agreement -- 1,273,008
Conversion of promissory notes and
interest into Series C Convertible
Preferred stock -- 5,224,999
Stock issued for directors'
compensation -- 3,960
Stock issued in connection with
private placement -- 339,320
Value assigned to beneficial
conversion feature of convertible
debt -- 125,000
Preferred stock dividend -- (81,007)
Preferred stock dividend - beneficial
conversion feature -- (320,882)
Value allocated to Preferred stock -
beneficial conversion feature
dividend -- 320,882
Stock issued in connection with
consulting agreement (7,600) 15,192
Stock issued in connection with
consulting agreements (1,445,673) 2,290,937
Stock issued in connection with
employment agreements (779,028) 1,401,317
Sale of 170 shares of Series C
Convertible Preferred Stock -- 170,000
Net loss -- --
------------- -------------
Balance - March 31, 2003 $ (2,232,301) $ 10,789,718
============= =============
See accompanying notes to condensed consolidated financial statements.
5
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED MARCH 31, 2003
Total
Accumulated Stockholders'
Deficit Deficiency
------------ ------------
Balance - June 30, 2002 $(6,935,854) $(6,905,864)
Stock cancelled in connection with
December 9, 2002 exchange agreement -- --
Stock issued in connection with
December 9, 2002 exchange agreement -- 1,300,000
Conversion of promissory notes and interest
into Series C Convertible Preferred stock -- 5,225,000
Stock issued for director's compensation -- 4,000
Stock issued in connection with private
placement -- 340,000
Value assigned to beneficial conversion
feature of convertible debt -- 125,000
Preferred stock dividend -- (81,007)
Preferred stock dividend - beneficial
conversion feature -- (320,882)
Value allocated to Preferred stock - beneficial
conversion feature dividend -- 320,882
Stock issued in connection with
consulting agreement -- 7,600
Stock issued in connection with
consulting agreements -- 846,059
Stock issued in connection with
employment agreements -- 622,809
Sale of 170 shares of Series C
convertible preferred stock -- 170,000
Net loss (2,093,212) (2,093,212)
------------ ------------
Balance - March 31, 2003 $(9,029,066) $ (439,615)
============ ============
See accompanying notes to condensed consolidated financial statements.
6
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,093,212) $(2,216,503)
Loss from discontinued operations - 1,916,365
------------ ------------
Loss from continuing operations (2,093,212) (300,138)
Adjustment to reconcile net loss to net
cash used in operating activities:
Amortization 33,334 -
Compensatory element of stock issuances 1,480,468 -
Changes in operating assets and liabilities:
Accounts receivable (158,287) -
Prepaid expenses and other current assets 21,750 -
Advances on purchase of ASI (15,000) -
Accounts payable (49,143) -
Accrued expenses and other current
liabilities 408,828 300,138
------------ ------------
NET CASH USED BY CONTINUING OPERATIONS (371,262) -
NET CASH USED BY DISCONTINUED OPERATIONS - (1,731,091)
------------ ------------
NET CASH USED IN OPERATING
ACTIVITIES (371,262) -
------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Purchases of property and equipment - (4,387)
Payments on acquisition of intangible assets
- Ergo (112,220) -
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (112,220) (4,387)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Secured line of credit - 747,625
Repayment of note payable - James LLC (11,500) -
Proceeds from sale of common stock in
private placement 340,000 -
Proceeds from sale of Series C 5%
Convertible Preferred Stock 170,000 -
------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 498,500 747,625
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 15,018 (987,853)
CASH AND CASH EQUIVALENTS - BEGINNING 4,911 173,567
------------ ------------
CASH AND CASH EQUIVALENTS - ENDING $ 19,929 $ (814,286)
============ ============
See accompanying notes to condensed consolidated financial statements.
7
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- -------------------------------------------------
2003 2002
------------ ------------
Cash paid during the periods for:
Interest $ - $ -
============ ============
Taxes $ - $ -
============ ============
Non-cash investing and financing activities:
Conversion of notes payable and
accrued interest into preferred
stock $ 5,225,000 $ -
============ ============
Acquisition of technology rights by
issuance of common stock $ 1,300,000 $ -
============ ============
Deemed dividend preferred stock -
beneficial conversion feature $ 320,882 $ -
============ ============
Dividends on preferred stock $ 81,007 $ -
============ ============
Payable on purchase of Ergo $ 287,780 $ -
============ ============
See accompanying notes to condensed consolidated financial statements.
8
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF COMPANY,BASIS OF PRESENTATION AND GOING CONCERN
Markland Technologies, Inc. ("Markland" or the "Company"), previously known as
Quest Net, was incorporated in Colorado in November 1995, under the name "A.P.
Sales Inc." In December 1998, A.P. Sales dissolved as a Colorado corporation,
redomiciled in Florida and changed its name to Quest Net Corp.
In March of 2000, the Company acquired CWTel, Inc., a Florida-based
telecommunication corporation. On November 11, 2001, CWTel filed a voluntary
bankruptcy petition under Chapter 7 in the State of Florida. On March 11, 2002,
a final decree was issued, the trustee discharged and the case closed.
On March 15, 2001, the Company acquired all of the outstanding capital stock of
Vidikron of America, Inc. ("Vidikron"). As a result of this acquisition, the
sole stockholder of Vidikron, Market LLC, controlled a majority of the common
stock of the Company and, accordingly, the transaction was accounted for as a
reverse acquisition as a recapitalization of Vidikron, pursuant to which
Vidikron was treated as the continuing entity. Vidikron became a wholly-owned
subsidiary of the Company. Subsequently, Quest Net changed its name to Markland
Technologies, Inc. and Vidikron adopted the year-end of Quest Net.
On May 28, 2002, the Company received a notice of default from Market LLC
relating to a loan and security agreement and a related secured convertible
revolving credit note due to the Company's failure to make payments of principal
and interest due under the note. In addition, as a result of the defaults under
the note, Market LLC declared all outstanding principal and interest under the
note, totaling $4,213,300, to be immediately due and payable. In June of 2002,
all of the shares of the Vidikron subsidiary, including all of its operating
assets and liabilities, were transferred to Market LLC in partial satisfaction
of the indebtedness due Market LLC of $50,000. As a result, the Company had no
active business following such event. The assets and liabilities and operating
results of Vidikron have been treated as a discontinued operation in the
accompanying consolidated financial statements. The consolidated financial
statements for the period ended March 31, 2002 have been restated, where
applicable, to reflect Vidikron as a discontinued operation.
On November 21, 2002, Secured Technology, Inc. ("STI") was incorporated as a
Delaware C corporation and is a wholly-owned subsidiary of Markland
Technologies, Inc.
9
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF COMPANY,BASIS OF PRESENTATION AND GOING CONCERN
(continued)
On December 9, 2002, the Company, Eurotech Ltd. ("Eurotech"), ipPartners, Inc.
("ipPartners"), Market LLC and James LLC, entered into an exchange agreement. On
December 19, 2002, the transactions contemplated by the exchange agreement were
consummated. Pursuant to the agreement, Eurotech transferred to the Company
certain rights to Eurotech's Acoustic Core technology, relating to illicit
materials detection, and certain cryptology technology. 90% of the Company's
issued and outstanding common stock held by Market LLC and James LLC, the
holders of 100% of the issued and outstanding common stock of the Company, was
retired. The Company issued 239,927,344 shares of common stock, representing
approximately eighty percent (80%) of its outstanding common stock, to Eurotech,
and 29,990,917 shares of common stock, representing approximately ten percent
(10%) of its outstanding common stock, to ipPartners. As a result of this
transaction, a change of control occurred and the Company became an 80%-owned
subsidiary of Eurotech (see Note 3).
In January of 2003, the Company acquired all of the common stock of Ergo
Systems, Inc. ("Ergo"), a provider of security logistic support and related
product development services (see Note 3).
As a result of the technology acquired from Eurotech in December of 2002, and
the acquisition of Ergo in January of 2003, Markland Technologies, Inc. plans to
build a comprehensive offering of integrated security technologies and services
to provide tools necessary to protect personnel, data and infrastructure assets
as part of Homeland Security.
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. However, for the nine months ended March 31, 2003, the Company
incurred a net loss of $2,093,212 and had a working capital deficiency of
$1,701,200. The Company has limited finances and requires additional funding in
order to market and license its products. There is no assurance that the Company
can reverse its operating losses, or that it can raise additional capital to
allow it to continue its planned operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
These unaudited condensed consolidated financial statements do not include any
adjustments relating to the recoverability of recorded asset amounts that might
be necessary as a result of the above uncertainty.
In December of 2002, the Company received proceeds of $340,000 from a private
equity financing of 6,800,000 shares of the Company's common stock.
During February 2003, the Company sold an additional 170 shares of Series C
Preferred Stock to James LLC for $170,000.
10
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF COMPANY,BASIS OF PRESENTATION AND GOING CONCERN
(continued)
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted in accordance with such rules and regulations. The
information furnished in the interim condensed financial statements includes
normal recurring adjustments and reflects all adjustments, which, in the opinion
of management, are necessary for a fair presentation of such financial
statements. Although management believes the disclosures and information
presented are adequate to make the information not misleading, it is suggested
that these interim condensed financial statements be read in conjunction with
the Company's most recent audited financial statements and notes thereto
included in its June 30, 2002 Annual Report on Form 10-KSB. Operating results
for the nine months ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2003.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Consolidation Policy
- --------------------
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its majority-owned subsidiary, Secured
Technology, Inc. ("STI") and its wholly-owned subsidiary Ergo Systems, Inc. All
significant inter-company balances and transactions have been eliminated.
Research and Development
- ------------------------
Research and development expenditures are charged to expense as incurred, unless
they are reimbursed under specific contracts. The Company capitalizes costs
related to acquired technologies that have achieved technological feasibility
and have alternative uses. Acquired technologies, which are in-process at the
date of acquisition or have no alternative uses are expensed as research and
development costs.
11
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loss Per Share
- --------------
Basic net loss per common share has been computed based on the weighted average
number of shares of common stock outstanding during the periods presented.
Common stock equivalents, consisting of convertible notes and Series C 5%
Cumulative Convertible Preferred Stock, discussed in the notes to the condensed
consolidated financial statements, were not included in the calculation of the
diluted loss per share because their inclusion would have had the effect of
decreasing the loss per share otherwise computed.
At March 31, 2003, as permitted under Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", which amended SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and related interpretation including
Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation, an interpretation of APB
No. 25." No stock-based employee compensation cost is reflected in operations,
as there are no options outstanding.
During the nine months ended March 31, 2003 and 2002, there were no proforma
stock-based employee compensation adjustments to be deducted or added back to
net loss as reported. Accordingly, the net loss per share as reported has not
been adjusted.
Capitalized Software Development Costs
- --------------------------------------
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
Company's computer software is generally based upon achievement of a detail
program design free of high risk development issues and the completion of
research and development on the product hardware in which it is to be used. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized computer software development costs requires
considerable judgment by management with respect to certain external factors,
including, but not limited to, technological feasibility, anticipated future
gross revenue, estimated economic life and changes in software and hardware
technology.
12
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capitalized Software Development Costs (Continued)
- --------------------------------------
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is provided on a product by product basis. The annual amortization
is the greater of the amount computed using (a) the ratio that current gross
revenue for a product bear to the total of current and anticipated future gross
revenue for that product, or (b) the straight-line method over the remaining
estimated economic life of the product.
The Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software net realizable value, any remaining capitalized
amounts are written off.
Revenue Recognition
- -------------------
The Company recognizes revenues at the time services are performed related to
border security logistic support.
Reclassifications
- -----------------
Certain prior year balances have been reclassified to conform to the current
year presentation.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria in APB No. 30
("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual and infrequent that meet the criteria for classification as an
extraordinary item. The Company adopted SFAS No. 145 in the first quarter of
fiscal 2003. The adoption of the standard did not have a material impact on the
Company's financial position or results of operations.
13
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of Recently Issued Accounting Standards (Continued)
- ----------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including certain costs incurred in a restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. These costs include lease, costs to
consolidate facilities or relocate employees, and certain termination benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement. A fundamental conclusion reached by the FASB in
this statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
SFAS No. 146 also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of the standard did not have a material impact on the financial
position or results of operations.
14
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of Recently Issued Accounting Standards (Continued)
- ----------------------------------------------
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (" FIN 45"). FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The Company adopted FIN 45 as
of December 31, 2002 and during the quarter ended March 31, 2003. The adoption
of this standard did not have a material impact on the Company's financial
position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition.
NOTE 3 - TECHNOLOGY ACQUISITION AND CHANGE IN CONTROL
On December 9, 2002, in connection with the Exchange Agreement dated as of
December 9, 2002, by and among Eurotech, the Company, Crypto.com, Inc.,
("Crypto" - a wholly-owned subsidiary of Eurotech), STI, ipPartners, Market LLC
and James LLC (the "Exchange"), Eurotech and Crypto agreed to license and
transfer certain intellectual property to a newly-formed subsidiary of the
Company, STI, in exchange for 239,927,344 shares of the Company's newly issued
common stock (the "Exchange Shares"). The Exchange Shares constitute 80% of the
Company's outstanding common stock making the Company a majority-owned
subsidiary of Eurotech. In addition, as part of the agreement, ipPartners was
issued 29,990,917 shares of common stock in exchange for their forgiveness and
discharge of certain obligations owed to ipPartners with respect to the property
transferred to STI. Eurotech is a development-stage, Washington, D.C.-based,
technology company, whose common stock is registered under the Exchange Act.
Prior to the Exchange, Market LLC and James LLC controlled the Company.
15
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - TECHNOLOGY ACQUISITION AND CHANGE IN CONTROL (Continued)
In connection with the Exchange, on December 9, 2002, the Company, Market LLC
and James LLC agreed to a recapitalization of the Company, whereby $5,225,000 in
stated value of new series of preferred stock, designated Series C Cumulative
Convertible Preferred Stock (the "Series C Preferred"), as issued by the
Company, in exchange for $5,225,000 of convertible promissory notes, inclusive
of accrued interest, as well as, for the agreement by James LLC and Market LLC
to collectively surrender 269,918,261 shares of the Company's common stock prior
to the consummation of the above Exchange agreement between the Company and
Eurotech, among others.
The rights licensed from Eurotech in the Exchange consist of certain proprietary
technology known as Acoustic Core used to detect illicit substances, and certain
cryptology technology held by Eurotech's subsidiary, Crypto. Since Eurotech
owned 80% of the common stock of the Company, the technology acquired from
Eurotech was recorded by the Company at Eurotech's carrying value of
$1,300,000.The Company will begin to amortize this asset when it is placed into
service.
Acquisition of Ergo Systems, Inc.
- ---------------------------------
On January 14th, 2003, the Company completed the acquisition of Ergo, a Virginia
corporation from Ocean Data Equipment Corporation, a Delaware corporation
("ODEC"). The Company agreed to pay ODEC $400,000 dollars in cash, payable
without interest over a period of one year. This purchase price was later
modified to require $50,000 due at closing, $150,000 due upon the completion of
Phase I research efforts as they relate to the advancement of Acoustic Core
technology in the inspection of cargo containers (of which $62,000 has been
advanced to ODEC as of March 31, 2003), $100,000 due upon completion on Phase 2
research efforts as they relate to cargo inspection, and a final payment of
$100,000 due upon completion of Phase 3 research efforts as they relate to cargo
inspection.
The funds for this acquisition are expected to come from operating capital and
future earnings. The purchase price was determined through arms-length
negotiations, and was based on estimated future earnings from the contract.
Ergo's assets consist of a US Government General Services Administration
contract to provide border security logistic support and product development
services to the United States Government and related unpatented technology. The
Company will continue to provide these support services to five US Border ports
of entry in the states of California, Texas, Michigan and New York. The
government contract is renewable annually, unless cancelled by either party.
The purchase price of $400,000 was allocated entirely to this contract. The
contract is being amortized over a three-year period commencing with the date of
the acquisition, January 14, 2003. Amortization expense related to the contract
for the period ended March 31, 2003 was $33,334. No proforma financials have
been included as separate financial information for this business are not
available at this time.
16
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - TECHNOLOGY ACQUISITION AND CHANGE IN CONTROL (Continued)
Agreement to Acquire ASI Technology Corporation Assets
- ------------------------------------------------------
On March 19, 2003, the Company and ASI Technology Corporation, a Nevada
corporation, ("ASI") entered into a Technology Purchase Agreement (the
"Agreement"). Under the Agreement, ASI agreed to sell and the Company agreed to
purchase certain assets relating to ASI's gas plasma antenna technology,
including patents, patent applications, equipment, government contract rights
and other intellectual property rights. The closing of the transaction will
occur on the earlier of the date the last of the government contracts are
assigned to Markland or ninety days after the date of the Agreement (June 17,
2003). Under an interim arrangement, the Company will receive revenues from
these contracts billed for periods after April 1, 2003 and will be obligated for
all related costs. Markland has agreed to use its best efforts to manage and
administer the contracts during this period prior to closing and to pay ASI a
fee of $2,500 per month for administrative support.
In consideration, the Company agreed to pay ASI $1,150,000 dollars. $150,000 in
cash, $10,000 of which was paid on execution of the Agreement and $10,000 of
which is payable every thirty days following the date of execution of the
Agreement until the closing, at which time the remaining balance is due and
payable. In addition to the cash payment, the Company is required to issue to
ASI, on closing, $1,000,000 worth of the Company's common stock at the then
current market price. In the event that the Company fails to register such stock
on behalf of ASI or if a registration statement for the shares is delayed, the
Company will have to issue an additional $150,000 of stock to ASI.
In connection with the Agreement, ASI and the Company entered into a
registration rights agreement entitling ASI to include its shares of the
Company's common stock in future registration statements filed by the Company
under the Securities Act of 1933 in connection with public offerings of the
Company's common stock.
Also in connection with the Agreement, ASI and the Company entered into a
sublicense agreement pursuant to which ASI has sublicensed to the Company the
right to develop and sell products to certain government, military and homeland
security customers in the United States and Canada using the Company's plasma
sterilization and decontamination technology.
The closing of the sale of the plasma antenna technology is subject to a number
of conditions and the Agreement may be terminated prior to closing under certain
circumstances.
As of March 31, 2003, the Company has paid an advance of $15,000 with respect to
above purchase agreement.
17
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - SECURED LINE OF CREDIT
On May 28, 2002, the Company received a notice of default from its secured
lender, Market LLC, relating to a loan and security agreement and a related
secured convertible revolving credit note due to the Company's failure to make
payments of principal and interest due under the note (See Note 3). As
settlement for this default, on June 4, 2002, the Company entered into a Debt
Restructuring Agreement, whereby the Company agreed to transfer legal title to
the Vidikron shares to the lender in partial satisfaction of the indebtedness in
the amount of $50,000.
In addition, on June 4, 2002, the Company entered into an Amended Secured
Convertible Revolving Credit Note Agreement, whereby the Company could borrow up
to $4,500,000. Interest under this agreement accrued at the annual interest rate
of 6% per annum. The maturity date of this amended note was December 31, 2002
and was secured by various liens on the Company's assets. The balance
outstanding at the date of this agreement was $4,163,300.
On December 9, 2002, as part of the Company's recapitalization, in accordance
with the Exchange Agreement entered between the Company and Market LLC ,
$3,812,000 representing principal and accrued interest under this line of credit
was converted into 3,812 shares of the Company's newly issued Series C
Cumulative Convertible Preferred Stock (see Note 6).
On December 10, 2002, the Company entered into a Restated and Amended Secured
Convertible Revolving Credit Note Agreement for $500,000. Interest under this
note accrues at the annual interest rate of 6% per annum. The principal and
accrued interest under this note is due on June 30, 2004, however, may be
prepaid by the Company at any time without penalty. As of March 31, 2003,
approximately $9,250 of interest has been accrued on this note and is included
in accrued expenses on the condensed consolidated balance sheet.
The note may be converted at any time, in whole or in part, into shares of the
Company's common stock. The total number of shares of common stock issuable upon
conversion will be determined by dividing the principal amount of this note
being converted by 80% of the closing bid price of the common stock based on the
average of the five trading days immediately preceding the date of conversion.
The value of the beneficial conversion feature of $125,000 is being amortized as
interest expense over the period ending June 30, 2004. Amortization of this debt
discount for the period ended March 31, 2003 was $30,083.
18
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - SECURED LINE OF CREDIT (Continued)
New Equity Line
- ---------------
On March 27, 2003, Markland entered into a Private Equity Credit Agreement with
Market LLC. Markland agreed to issue and sell to Market LLC up to $10,000,000
worth of its common stock over the next three years. Prior to any sales, the
Company is required to file a registration statement with the Securities and
Exchange Commission, relating to the shares to be issued, and to have such
registration statement declared effective.
After the registration statement is declared effective, Markland will be able to
put shares to Market LLC according to the terms outlined in the agreement. The
minimum put amount is $1,000,000 over the life of the agreement and $25,000 per
put. Failure to satisfy the minimum put requirement over the life of the Private
Equity Credit Agreement will result in a charge to Markland.
Shares will be issued to Market LLC, in connection with each put, at 92% of the
average of the closing bid prices for the lowest (3) three (not necessarily
consecutive) trading days during the (10) trading day period immediately
following the put date. Under certain conditions, the Company will be required
to issue additional shares and/or accrue financial penalties.
NOTE 5 - NOTES PAYABLE
At June 30, 2002, notes payable consisted of a convertible note payable of
$1,367,027, due to James LLC, which bore interest at 8% per annum. Principal and
any accrued interest were due on December 31, 2002. The note payable was
convertible into shares of common stock of the Company at a conversion price for
each share of common stock equal to the current market price on the date of
notice of conversion.
On December 9, 2002, in accordance with the Exchange Agreement between the
Company and James LLC, $1,413,000, including accrued interest of $45,973, was
converted into 1,413 shares of the Company's newly issued Series C Cumulative
Convertible Preferred Stock (see Note 6). As of December 31, 2002, there is no
principal or interest remaining outstanding under the above note.
On December 4, 2002, the Company entered into a note payable agreement with
Market LLC for the principal amount of $11,500. Principal, together with
interest, which accrues at the rate of 10% per annum, were both due upon demand.
This note was paid-off in full on March 6, 2003.
19
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' DEFICIENCY
Preferred Stock
- ---------------
The Company is authorized to issue five million shares of $.0001 par value
preferred stock which may be issued in series with such designations,
preferences, stated values, rights, qualifications or limitations as determined
by the Board of Directors.
Series A Preferred Stock
- ------------------------
On February 25, 2000, the Company entered into a Stock Purchase Agreement,
effective March 1, 2000 to purchase CWTel, Inc. from Charles Wainer for the sum
of $1,200,000. Of the purchase price $200,000 was paid at closing, $700,000 was
paid by the issuance of 360,000 shares of the Company's restricted common stock
and $300,000 was to be paid in three equal payments at 90 days, 180 days, and
270 days from closing. These payments were represented by a promissory note in
the amount of $300,000, which have been included in the liabilities from
discontinued operations at March 31, 2003 and collateralized by 30,000 shares of
preferred stock with a face value of $10 per share to be issued pursuant to the
stock purchase agreement.
Series B Preferred Stock
- ------------------------
On March 16, 2001, the Company issued 10 shares of its Series B convertible
preferred stock to Market LLC in connection with the acquisition of Vidikron.
The preferred stock was convertible into approximately 85% of the Company's
outstanding common stock, on a non-diluted basis upon the effectiveness of a
reverse stock split of the Company's outstanding common stock. The reverse stock
split was effective June 21, 2001. The automatic conversion resulted in the
Company's issuance of an aggregate of 254,911,356 shares of the Company's common
stock to Market LLC on that date. As of March 31, 2003, there are no shares of
Series B Preferred Stock issued and outstanding.
20
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' DEFICIENCY (Continued)
Series C Cumulative Convertible Preferred Stock
- -----------------------------------------------
On December 9, 2002, the Company entered into an Exchange Agreement, among the
Company and Market LLC and James LLC who agreed to exchange a note payable in
the amount of $3,812,000 and $1,413,000, respectively ($5,225,000 in value) of
convertible promissory notes, inclusive of accrued interest for 5,225 shares
(8,000 authorized, $.0001 par value, $1,000 stated value) of the Company's newly
issued Series C Cumulative Convertible Preferred Stock, ("Series C Preferred
Stock").
The aggregate purchase price of the Series C Preferred Stock of $5,225,000 was
allocated to the Series C Preferred Stock with a par value of $1.00 and the
balance of $5,224,999 was allocated to additional paid in capital. The holders
of the Series C Preferred Stock are entitled to receive dividends on each share
of preferred stock, which shall accrue on a daily basis at the rate of 5% per
annum on the sum of the liquidation preference plus all accumulated and unpaid
dividends thereon. These dividends shall accrue whether or not they have been
declared or there are legally available funds with which to pay them, and at the
option of the holders are payable either in cash or in unrestricted common
stock.
During February 2003, the Company sold an additional 170 shares of Series C
Preferred Stock to James LLC for $170,000.
The Series C Preferred Stock is redeemable at any time by the Company, and
cannot be converted by the holders without written permission for a period of 6
months following the issuance of the shares and then only 10% may be converted
per month thereafter. The Series C Preferred Stock is convertible at the option
of the holder at a conversion price ranging from 65% to 80% of the common
stock's market price at the time of the conversion, subject to an adjustment
pursuant to any stock split. The amount of the associated discount is dependent
upon the market price at the time of the conversion.
As of the date of issuance in accordance with EITF 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," the Company calculated that as of the date of
issuance there was a beneficial conversion feature in the amount of $1,367,821.
In accordance, with the EITF, the Company has recorded deemed dividends of
$320,882, for the nine months ended March 31, 2003, relating to the accretion of
these beneficial conversion features on the Series C Preferred Stock. The deemed
dividends increase the loss applicable to common stockholders in the calculation
of basic and diluted net loss per common share and are included in stockholders'
deficiency as a charge to accumulated deficit and a credit to additional paid-in
capital. As the Series C Preferred Stock is convertible in stages over a period
of 16 months, the Company will record the accrual of the deemed dividend of the
beneficial conversion feature over this same period.
21
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' DEFICIENCY (Continued)
Series C Cumulative Convertible Preferred Stock (Continued)
- -----------------------------------------------
In addition, the Company has determined that the maximum potential exposure
under the beneficial conversion feature using the assumptions that the fair
market value is $.15 at the date of conversion and accordingly a conversion
price at 65% of market value should be used, amounts to approximately
$2,800,000.
The Preferred Stock includes a liquidation preference of $1,000 per share. For
the nine months ended March 31, 2003, dividends of $81,007 were accrued for the
Series C Preferred Stock.
The holders are not subject to any limitations on the number of conversions of
Series C Preferred Stock or subsequent sales of the corresponding common stock
that they can effect, other than a prohibition on any holder having a beneficial
ownership of more than 9.999% of the outstanding shares of the Company's common
stock.
Series D Convertible Preferred Stock
- ------------------------------------
On March 27, 2003, the Company entered into an agreement with Eurotech, its
majority stockholder, to exchange 100 million shares of the Company's common
stock held by Eurotech for shares of Series D Convertible Preferred Stock of
Markland having a liquidation value of $16 million. The transaction has not
closed and is expected to close during the quarter ending June 30, 2003.
The Preferred Stock is convertible into shares of the Company's common stock at
a variable percentage of the then current market price, subject to certain
adjustments. If the market price of Markland common stock is less than or equal
to $0.05, it is convertible at 80% of the market price. If the market price is
greater than $0.05, but less than or equal to $0.10, at 75% of the market value.
If the market price is greater than $0.10, but less than or equal to $0.15, at
70% of the market price. And if the market price is greater than $0.15, at 65%
of the market price.
Markland can redeem the Series D Preferred according to the following schedule.
During the first 180 days after the closing it can be redeemed at 120% of the
stated value and accrued dividends. From 181 days until 270 days it can be
redeemed for 125% of the stated value and dividends. From 271 days and ending
360 days after the closing it can be redeemed for 135% of the stated value and
dividends.
22
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' DEFICIENCY (Continued)
Common Stock
- ------------
- - Private Placement of Common Stock
---------------------------------
In December 2002, the Company entered into a private equity-financing agreement
with two investors in order to raise $340,000 of new capital to finance
operations. In exchange for the capital, the investors received an aggregate of
6,800,000 shares of the Company's common stock.
- - Directors' Compensation
-----------------------
In December 2002, in connection with their prior services performed on behalf of
the Company, two of the Company's former directors were issued an aggregate of
400,000 shares of its common stock, which shares are to be included in the next
filed registration statement. Included in the Statement of Operations for the
nine months ended March 31, 2003 is a charge to compensation expense in the
amount of $4,000 to record the issuance of these shares.
23
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - STOCKHOLDERS' DEFICIENCY (Continued)
Net Loss Per Share
- ------------------
Securities that could potentially dilute basic earnings per share ("EPS") in the
future, and that were not included in the computation of diluted EPS because to
do so would have been anti-dilutive for the periods presented, consist of the
following:
Assumed Average
Market Price
At March 31, at March 31,
2003 2003 ($.30)
----------- -----------
Convertible notes payable
(Converted at 80% of market) $ 500,000 2,083,000
Series C Cumulative Convertible
5% Preferred Stock (Converted
at 80% of market) 5,476,007 22,817,000
----------- -----------
Total as of March 31, 2003 $5,976,007 24,900,000
=========== ===========
Subsequent commitments after
March 31, 2003:
Common shares potentially
issuable to management,
directors and a consultant
pursuant to compensation
agreements 16 million
===========
NOTE 7 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Business Risks
- --------------
The Company requires additional funds to commercialize its technologies and
continue research and development efforts. No assurances can be given that the
Company can complete development of any technology not yet completely developed
or that, with respect to any technology that is fully developed, products
incorporating the technology can be manufactured on a large scale or at a
feasible cost. Further, no assurance can be given that any technology will
receive market acceptance. The Company is subject to all of the risks inherent
in the establishment of a new enterprise and the marketing and manufacturing of
a new product, many of which are beyond the control of the Company.
24
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
New Compensation Agreements
- ---------------------------
Effective January of 2003, the Company entered into four one-year compensation
agreements with two officers and two consultants to the Company, which provide
for aggregate monthly remuneration of $47,500.
In addition, these agreements provide for the issuance of 6.01% of the Company's
outstanding common stock in three installments, 50% of the shares were issued on
or about March 21, 2003, 25% of the shares on or about July 1, 2003 and 25% of
the shares on or about October 1, 2003. If necessary, an additional issuance
will occur on December 31, 2003, so that the total amount of shares issued up to
December 31, 2003 will equal 6.01% of the outstanding common stock as of
December 31, 2003. Based on 310 million common shares outstanding, a total of
approximately 19,000,000 shares of common stock would be issuable under these
compensation agreements, of which 9,345,226 were issued during the quarter ended
March 31, 2003. The amount charged to operations related to these agreements for
the three months ended March 31, 2003 was $1,401,785.
During the months of February and March 2003, the Company entered into four new
one-year consulting agreements, which provide for aggregate monthly remuneration
of $3,000. In connection with those agreements, the Company issued 3,800,000
shares of restricted common stock. The shares were valued at $890,000 of which
$67,083 was charged to operations as of March 31, 2003.
During December 2002 and amended on January 18, 2003, the Company entered into a
consulting agreement for six months with an option to renew for an additional
six months for services relating to corporate communications. The agreement
provides for monthly fees of $7,000, plus expenses, and 20,000 shares of the
Company's common stock.
25
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - DISCONTINUED OPERATIONS
The Company has treated the disposition of CWTel in March 2002 and Vidikron in
May 2002 as discontinued operations. The following unaudited information
summarizes the operating results and liabilities of the discontinued operations
included in the condensed consolidated financial statements:
Three Months Ended Nine Months Ended
--------------------------------------
March 31, 2002
--------------------------------------
Revenues $ 496,235 $ 1,706,197
Cost of Sales 452,072 1,271,787
----------- -----------
Gross Profit 44,163 434,410
----------- -----------
Operating Expenses:
Selling, general and administrative 485,271 1,577,658
Depreciation and amortization 257,689 773,117
----------- -----------
Total Operating Expenses 742,960 2,350,775
----------- -----------
Loss from Discontinued Operations $ (698,797) $(1,916,365)
=========== ===========
At March 31, 2003 At June 30, 2002
----------- -----------
Assets from discontinued operations $ -- $ --
=========== ===========
Liabilities from discontinued
Operations (a) $ 1,298,713 $ 1,298,713
=========== ===========
(a) Substantially represents liabilities of CWTel. The Company is currently
determining which of the liabilities were discharged in the CWTel bankruptcy.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statements Regarding Forward-Looking Statements
- ----------------------------------------------------------
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and the
related notes included in this Form 10-QSB. This quarterly report on Form 10-QSB
contains many forward-looking statements, which involve risks and uncertainties,
such as our plans, objective, expectations and intentions. You can identify
these statements by our use of words such as "may," "expect," "believe,"
"anticipate," "intend," "could,", "estimate," "continue," "plans," or their
negatives or cognates. Some of these statements include discussions regarding
our future business strategy and our ability to generate revenue, income and
cash flow. We wish to caution the reader that all forward-looking statements
contained in this Form 10-QSB are only estimates and predictions. Our actual
results could differ materially from those anticipated as a result of risk
facing us or actual events differing from the assumptions underlying such
forward looking statements. Some factors that may affect our results are
discussed in this section and elsewhere this Form 10-QSB.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained in this Quarterly Report on Form 10-QSB. We will not update
these forward-looking statements unless the securities laws and regulations
require us to do so.
Business Overview
- -----------------
Markland has assembled a blend of innovative technology assets, which form
unique products and services directed towards providing integrated solutions to
the Homeland Security marketplace. The company is focused on providing certain
emerging technology services to address the country's needs to protect borders,
infrastructure assets and personnel. Our mission is to build world-class
integrated solutions for border and cargo security through the further
development of our emerging technologies and the acquisition of revenue
producing assets. In addition, we manage comprehensive engineering and
scientific development programs designed to identify products and processes that
have unique or superior characteristics for use in Homeland Security. Our
portfolio of emerging technologies includes: (a) technology for the automatic
detection of explosives and illicit materials, and (b) cryptographic systems for
secure communications.
Border Maintenance
Due to the acquisition of Ergo during January 2003, Markland has ongoing
contracts in the area of border security with the INS to implement maintenance
and evolutionary design enhancements to the Dedicated Commuter Lane (DCL)
systems installed at San Ysidro, CA; Otay Mesa, CA; El Paso, TX; Detroit, MI;
and Buffalo, NY. These systems are part of a larger U.S. Customs and INS
initiative to increase security, reduce wait times, improve data accuracy, and
improve overall efficiencies at all border crossings for both freight and
passengers by creating and implementing a "trusted traveler" concept of traffic
flow.
The DCL employs automatic vehicle identification (AVI) technology, which allows
participants to pass through the border crossing more efficiently. Participants
run a card through a swipe card reader, which instantaneously sends patron
information, including a photograph, to the Inspector's screen for clearance.
The gate rises and allows the patron through. The whole process takes about 30
seconds. The DCL software also controls a variety of security subsystems,
including video surveillance, gates, and tire shredders.
27
Force Protection
Markland is presently engaged in the design of system wide enhancements
including the Vehicle Stopping System (VSS). The VSS is being installed and
tested to address the increasing risks of un-authorized and illegal entry into
the country. The VSS is designed to safely capture individuals who are trying to
cross through border entries without authorization, "port runners". Port runners
constitute a threat to border integrity and capturing them with minimal danger
and threat to United States INS and Customs Border Patrol agents has become a
priority. The Vehicle Stopping System is capable of stopping a vehicle
attempting to gain illegal entry at speeds up to and exceeding 65 miles per hour
safely; and without personal injury to occupants and United States government
border personnel.
Acousticore
Markland and its parent Eurotech, Ltd. are now engaged in a project with the
United States Air Force via a Co-Operative Research and Development Agreement
(CRADA) to utilize its proprietary Acoustic Core(TM) technology to inspect
cargo. The concepts presently being designed and tested for use in the cargo
area combine acoustics and gas vapor trace sensing technologies.
Markland is also involved in the design and testing of a product named
APTIS(TM). The APTIS Screening Portal is designed to perform primary screening
of humans for the detection of concealed weapon threats. The device incorporates
multi-sensor data fusion techniques, conventional metal detection technology,
and Acoustic Core based detection of non-metallic threats.
Gas Plasma Technology
Markland has also agreed to acquire gas plasma technology assets from ASI
Technology Inc. and a license for plasma sterilization and decontamination. The
assets include three ongoing government contracts and five issued patents with
demonstrated applications in the fields of Ballistic Missile Defense and Phased
Array Radar.
The patented technology is based on atmospheric pressure plasmas or room
temperature plasmas known as cold plasmas. Cold plasma can destroy deadly
microbes lodged on the skin, weapons, medical instruments or clothing. Research
has evidenced that plasma can rapidly break down complex chemicals found in
nerve gas and deadly biological agents such as anthrax.
In addition, Markland is currently under contract work to determine the
potential of Plasma Antennas to revolutionize present day radar antenna. The
design further provides the opportunity to construct an antenna that can be
compact and dynamically reconfigured for frequency, direction, bandwidth, gain
and beamwidth. Plasma antenna technology will enable antennas to be designed
that are efficient, low in weight and smaller in size than traditional solid
wire antennas. The plasma antenna's advantages over conventional metal elements
are most obvious in military applications where stealth and electronic warfare
are primary concerns. Other important military factors are weight, size and the
ability to reconfigure.
Plasma antenna technology has commercial applications in telemetry, broad-band
communications, ground penetrating radar, navigation, weather radar, wind shear
detection and collision avoidance, high-speed data (for example Internet)
communication spread spectrum communication, and cellular radiation protection.
Illicit Vapor Detection
Markland has signed a marketing agreement with Osprey Data System for the
exclusive right to sell their illicit material detection system to specific
clients. Markland believes this technology can be helpful in reducing the threat
posed by the millions of cargo containers imported onto our shores yearly.
28
Cryptology
The Company's cryptology assets in the form of cryptographic algorithms and
software are under development for telecommunications and commercial encryption
applications. The technology has successfully demonstrated its double-cipher,
keyless transmission encryption system. The Company plans to actively work on
the commercialization of the cryptology assets.
Potential Technology Purchases
- ------------------------------
Markland is pursuing the purchase of revenue producing assets as part of its
growth strategy to provide comprehensive solutions to the Department of Homeland
Security. Markland has signed a non-binding letter of intent with BioDentity, a
leader in the biometrics industry for their facial recognition system.
Markland is currently in discussion to acquire a company that manufactures and
sells a device for harmful vapor detection.
No assurances can be given that the Company can complete development of any
technology not yet completely developed or that, with respect to any technology
that is fully developed, products incorporating the technology can be
manufactured on a large scale or at a feasible cost. Further, no assurance can
be given that any technology will receive market acceptance. The Company is
subject to all of the risks inherent in the establishment of a new enterprise
and the marketing and manufacturing of a new product, many of which are beyond
the control of the Company.
Change of Control
- -----------------
On or about December 9, 2002:
Markland Technologies, Inc. (the "Company"); Eurotech Ltd., a District of
Columbia corporation; ip Partners, Inc., a Rhode Island corporation, Market LLC,
a Cayman Island limited liability company; James LLC, a Cayman Island limited
liability company and others entered into an exchange agreement;
Markland Technologies, Inc.; Market LLC, a Cayman Island limited liability
company and James LLC, a Cayman Island limited liability company entered into a
separate exchange agreement and the Markland Board of Directors appointed
Kenneth P. Ducey, Robert Tarini and Delmar R. Kintner to serve on the board,
Lawrence Shatsoff resigned as Director and President, and David E. Danovitch
resigned as director of Markland. Delmar R. Kintner was appointed President of
Markland and Kenneth P. Ducey, Jr. was appointed Executive Vice President and
Secretary. Messrs. Shatsoff and Danovitch did not resign because of any
disagreement with Markland on any matter.
On December 19, 2002:
Markland consummated the transactions contemplated by the above referenced
agreements:
Eurotech transferred to Markland certain rights to Eurotech's Acoustic Core(TM)
technology, relating to illicit materials detection, and certain cryptology
technology;
90% of the Markland issued and outstanding common stock held by Markland LLC and
James LLC, the holders of 100% of the issued and outstanding common stock of
Markland, was retired;
Markland issued 239,927,344 shares of common stock, representing approximately
eighty percent (80%) of its outstanding common stock, to Eurotech, and
29,990,917 shares of common stock, representing approximately ten percent (10%)
of its outstanding common stock, to ipPartners and Markland issued $5.25 million
in stated value of a new series of preferred stock, designated Series C
Cumulative Convertible Preferred Stock, to Market LLC and James LLC in exchange
for $5.25 million of convertible promissory notes held by Market LLC and James
29
LLC. The Series C preferred stock accrues dividends at the rate of 5% per year,
payable in cash or common stock at the option of the holder, is redeemable at
any time by the Company, and cannot be converted prior to 6 months after
issuance without the Company's consent. The Series C preferred stock is
convertible into common stock at the option of the holder, at a conversion price
ranging from 65% to 80% of the common stock's market price at the time of
conversion.
On March 27, 2003, the Company entered into an agreement with Eurotech, Ltd.,
its majority shareholder, to exchange 100 million shares of the Company's common
stock for shares of Series D Convertible Preferred Stock of Markland having a
liquidation value of $16 million. This agreement has not yet closed.
The preferred stock is convertible into shares of the Company's common stock at
a variable percentage of the then current market price, subject to certain
adjustments. If the market price of Markland common stock is less than or equal
to $0.05, it is convertible at 80% of the market price. If the market price is
greater than $0.05, but less than or equal to $0.10, at 75% of the market value.
If the market price is greater than $0.10, but less than or equal to $0.15, at
70% of the market price. And if the market price is greater than $0.15, at 65%
of the market price.
Ergo Systems Acquisition
- ------------------------
On January 14th, 2003, Markland completed the acquisition of Ergo Systems, Inc.,
a Virginia corporation from Ocean Data Equipment Corporation, a Delaware
corporation, for $400,000.00, payable without interest over a period of one
year. The funds for this acquisition are expected to come from operating capital
and future earnings. The purchase price was determined through arms-length
negotiations, and was based on Ergo's estimated future earnings. Robert Tarini,
the Chairman of the Board of Directors of Markland, is also the President of
Ocean Data Equipment Corporation.
Ergo's only asset is a US government General Services Administration multi-year
contract to provide border security logistic support and product development
services to the United States Government. Markland will continue to provide
these support services to five US border ports of entry in the states of
California, Texas, Michigan and New York. The contract has historically
generated revenues of approximately $2 million annually and Markland anticipates
that the contract will generate not less than $2 million dollars of gross
revenue in 2003.
ASI Acquisition
- ---------------
On March 19, 2003, Markland entered into a Technology Purchase Agreement (the
"Agreement") with ASI corporation. Under the Agreement, ASI agreed to sell and
the Company agreed to purchase certain assets relating to ASI's gas plasma
antenna technology, including patents, patent applications, equipment,
government contract rights and other intellectual property rights. The closing
of the transaction will occur on the earlier of the date the last of the
government contracts are assigned to Markland or ninety days after the date of
the Agreement (June 17, 2003). Under an interim arrangement, the Company will
receive revenues from these contracts billed for periods after April 1, 2003 and
will be obligated for all related costs Markland has agreed to use its best
efforts to manage and administer the contracts during this period prior to
closing and to pay ASI a fee of $2,500 per month for administrative support.
In consideration, Markland agreed to pay ASI $1,150,000 dollars. $150,000 in
cash, $10,000 of which was paid on execution of the Agreement and $10,000 of
which is payable every thirty days following the date of execution of the
Agreement until the closing, at which time the remaining balance is due and
payable. In addition to the cash payment, Markland is required to issue to ASI,
on closing, $1,000,000 dollars worth of Markland common stock at the then
current market price. In the event that Markland fails to register such stock on
behalf of ASI, Markland will have to issue an additional $150,000 of stock to
ASI.
30
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO NINE MONTHS ENDED MARCH
31, 2002
REVENUES
We had $322,451 in revenues for the nine months ended March 31, 2003, compared
to no revenues for the same period in 2002. This increase was the result of
revenues generated from the contract we succeeded to as a result of our
acquisition of Ergo. Revenues for the nine months ended March 31, 2002 do not
reflect revenues generated by discontinued operations. See "Note 8 -
Discontinued Operations" to our condensed consolidated financial statements
above, incorporated herein by reference, for the revenue information relating to
our discontinued operations.
OPERATING EXPENSES
Operating expenses from continuing operations for the nine months ending March
31, 2003 were $2,156,995, compared to no operating expenses for the same period
in 2002. Operating expenses for the nine months ended March 31, 2002 do not
reflect operating expenses incurred in connection with our discontinued
operations. See "Note 8 - Discontinued Operations" to our condensed consolidated
financial statements above, incorporated herein by reference, for the operating
expenses information relating to our discontinued operations.
INTEREST EXPENSES
Interest expense in the nine months ending March 31, 2003 was $198,120, compared
to $402,903 in the same period of 2002. This decrease is due primarily to the
restructuring and conversion of debt incurred in connection with our
discontinued operations.
NET LOSS
As a result of the above factors, we had a net loss of $2,495,101 or $0.01 per
share, from continuing operations for the nine month period ended March 31,
2003, compared to a net loss of $2,216,503, or $0.01 per share for the same
period in 2002. Net losses from discontinued operations totaled $1,916,365 for
the nine month period ended March 31, 2002.
FISCAL YEARS ENDED JUNE 30, 2002 AND 2001
Financial information for these periods has been classified as discontinued
operations and is not presented. See "Note 8 - Discontinued Operations" to our
condensed consolidated financial statements above for detailed financial
information relating to our discontinued operations.
Liquidity and Capital Resources
- -------------------------------
On December 10, 2002, the Company entered into a Restated and Amended Secured
Convertible Revolving Credit Note Agreement for $500,000. Interest under this
note accrues at the annual interest rate of 6% per annum, calculated on the
basis of a 360-day year and actual number of days elapsed. The principal and
accrued interest under this note is due on June 30, 2004, however, IT may be
prepaid by the Company at any time without penalty..
31
The note may be converted at any time, in whole or in part, into shares of the
Company's common stock. The total number of shares of common stock issuable upon
conversion will be determined by dividing the principal amount of this note
being converted by 80% of the closing bid price of the common stock based on the
average of the five trading days immediately preceding the date of conversion.
In December of 2002 the company completed a private placement of 6,800,000
shares of the company's common stock for $.05 per share. The net proceeds of
$340,000 will be used by the Company to fund its ongoing operations. These
shares were offered and sold in reliance upon the exemption from registration
provided by Rule 506 promulgated under Section 4(2) of the Securities Act of
1933 (the "Securities Act").
On February 14, 2003, Markland sold 170 shares of Series C convertible Preferred
shares to Market, LLC. The net proceeds of $170,000 will be used by the Company
to fund its ongoing operations. These shares were offered and sold in reliance
upon the exemption from registration provided by Rule 506 promulgated under
Section 4(2) of the Securities Act
On March 27, 2003 Markland Technologies, Inc. entered into a Private Equity
Credit Agreement with Market LLC ("Market"). Markland agreed to issue and sell
to Market LLC between $1,000,000 and $10,000,000 dollars worth of its common
stock over the next three years. Prior to any sales, the Company is required to
file a registration statement with the Securities and Exchange Commission,
relating to the shares to be issued, and to have such registration statement
declared effective.
After the registration statement is declared effective, Markland will be able to
put shares to Market according to the terms outlined in the agreement. The
minimum put amount is $1,000,000 dollars over the life of the agreement and
$25,000 per put. Failure to satisfy the minimum put requirement over the life of
the Private Equity Credit Agreement will result in a charge to Markland. The
maximum put amount is $10,000,000 over the life of the agreement and the lesser
of $500,000 dollars or an amount in dollars equal to the value in dollars of
250% of the average daily volume for the twenty trading days immediately
preceding the put.
Ergo Systems has generated $322,451 of Revenues for the first three months of
2003.
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. However, for the nine months ended March 31, 2003, the Company
incurred a net loss of $2,093,212 and had a working capital deficiency of
$1,701,200. The Company has limited finances and requires additional funding in
order to market and license its products. There is no assurance that the Company
can reverse its operating losses, or that it can raise additional capital to
allow it to continue its planned operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Recently Issued Accounting Standards
- ------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 requires that gains and losses from extinguishment of debt be
classified as extraordinary items only if they meet the criteria in APB No. 30
("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual and infrequent that meet the criteria for classification as an
extraordinary item. The Company adopted SFAS No. 145 in the first quarter of
fiscal 2003. The adoption of the standard did not have a material impact on the
Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including certain costs incurred in a restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
32
recognized when the liability is incurred. These costs include lease, costs to
consolidate facilities or relocate employees, and certain termination benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement. A fundamental conclusion reached by the FASB in
this statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
SFAS No. 146 also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
adoption of the standard did not have a material impact on the financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (" FIN 45"). FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The Company adopted FIN 45 as
of December 31, 2002 and during the quarter ended March 31, 2003. The adoption
of this standard did not have a material impact on the Company's financial
position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company is currently
evaluating the effect that the adoption of FIN 46 will have on its results of
operations and financial condition.
Change of Auditor
- -----------------
Effective January 23, 2003, the Board of Directors of Markland dismissed Sherb &
Co., LLP from serving as the Company's independent auditor for the year ending
June 30, 2003.
On January 24, 2003, Marcum & Kliegman LLP ("MKLLP") was engaged as the
Company's new independent auditor. During the two most recent fiscal years and
the interim period preceding their engagement, the company has not consulted
with MKLLP regarding either: (1) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, and either
a written report or oral advice was provided to the Company by MKLLP that
MKLLPconcluded was an important factor considered by the Company in reaching a
decision as to the accounting, auditing, or financial reporting issue; or (ii)
any matter that was either the subject of a "disagreement" or a reportable
event, as those terms are used in Item 304(a)(1)(iv) of Regulation S-B and the
related instructions to Item 304 of Regulation S-B.
ITEM 3. CONTROLS AND PROCEDURES
Kenneth P. Ducey, Jr., our Executive Vice President and Chief Financial Officer,
has evaluated our disclosure controls and procedures within 90 days of the
filing of this report. These controls and procedures are designed to ensure that
all of the information required to be disclosed by us in our periodic reports
filed with the Securities and Exchange Commission is recorded, processed,
summarized and reported within the time periods specified by the commission and
that the information is communicated to the Chief Executive Officer and Chief
Financial Officer on a timely basis. Based on his evaluation, the Executive Vice
President and Chief Financial Officer concluded that our disclosure controls and
procedures were suitable and effective.
Subsequent to the date of his evaluation, there have been no significant changes
in our internal controls or in other factors that could significantly affect the
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
33
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The information required under this item is incorporated by reference to Part 1,
Item 2. "Management's Discussion and Analysis or Plan of Operation" and
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources."
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
The following is a list of exhibits filed as part of this Form 10-QSB.
3.1 Articles of Amendment to the Articles of Incorporation of Quest Net Corp.,
filed with the Florida Secretary of State on April 4, 2001, incorporated by
reference to Exhibit 3.1 to Quest Net Corp.'s Current Report on Form 8-K, filed
with the Securities and Exchange Commission on April 10, 2001.
3.2 Articles of Amendment to the Articles of Incorporation of Quest Net Corp.,
filed with the Florida Secretary of State on April 4, 2001, incorporated by
reference to Exhibit 3.3 to Markland Technologies, Inc.'s Annual Report on Form
10-KSB, filed with the Securities and Exchange Commission on October 15, 2001.
3.3 Articles of Amendment to the Articles of Incorporation of Quest Net Corp.,
filed with the Florida Secretary of State on June 21, 2001, incorporated by
reference to Exhibit 3.4 to Markland Technologies, Inc.'s Annual Report on Form
10-KSB, filed with the Securities and Exchange Commission on October 15, 2001
3.4 Certificate of Designations of Rights and Preferences of the Series C
Cumulative Convertible Preferred Stock of Markland Technologies, Inc., filed
with the Florida Secretary of State on December 12, 2002, incorporated by
reference to Exhibit 3.5 to Markland Technologies, Inc.'s Current Report on Form
8-K, filed with the Securities and Exchange Commission on December 20, 2002.
4.1 Form of common stock certificate of the Company incorporated by reference to
Exhibit 4.1 to Markland Technologies, Inc.'s Quarterly Report on Form 10-QSB for
the quarter ended December 31, 2002, filed with the Securities and Exchange
Commission on February 14, 2003.
4.2 Certificate of Designations of Rights and Preferences of the Series C
Cumulative Convertible Preferred Stock of Markland Technologies, Inc., filed
with the Florida Secretary of State on December 12, 2002, incorporated by
reference to Exhibit 3.5 to Markland Technologies, Inc.'s Current Report on Form
8-K, filed with the Securities and Exchange Commission on December 20, 2002.
10.1 Stock Purchase Agreement made as of, December 9, 2002, between Ocean Data
Equipment Corporation, a Delaware Corporation; Ergo Systems, a Virginia
Corporation; Markland Technologies, Inc., a Florida Corporation and Security
Technology Inc., a Delaware Corporation, incorporated by reference to Exhibit
10.1 to Markland Technologies, Inc.'s Current Report on Form 8-K, filed with the
Securities and Exchange Commission on January 28, 2003.
34
10.2 Restated and Amended Convertible Revolving Credit Note Agreement, dated as
of December 10, 2002, between Markland Technologies, Inc. and Market LLC
incorporated by reference to Exhibit 10.2 to Markland Technologies, Inc.'s
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2002, filed
with the Securities and Exchange Commission on February 14, 2003.
10.3 Textual description of Employment Agreements incorporated by reference to
Exhibit 10.3 to Markland Technologies, Inc.'s Quarterly Report on Form 10-QSB
for the quarter ended December 31, 2002, filed with the Securities and Exchange
Commission on February 14, 2003..
10.4 Exchange Agreement, dated as of December 9, 2002, among Markland
Technologies, Inc., Market LLC and James LLC, incorporated by reference to
Exhibit 10.4 to Markland Technologies, Inc.'s Current Report on Form 8-K, filed
with the Securities and Exchange Commission on December 20, 2002.
10.5 Exchange Agreement, dated as of December 9, 2002, by and among Eurotech
Ltd., Crypto.com, Inc., Markland Technologies, Inc., Security Technology, Inc.,
ipPartners, Inc., Markland LLC and James LLC, incorporated by reference to
Exhibit 10.5 to Markland Technologies, Inc.'s Current Report on Form 8-K, filed
with the Securities and Exchange Commission on December 20, 2002.
10.6 First Amendment to Exchange Agreement, dated as of December 9, 2002, by and
among Eurotech Ltd., Crypto.com, Inc., Markland Technologies, Inc., Security
Technology, Inc., ipPartners, Inc., Markland LLC and James LLC, dated as of
December 19, 2002 incorporated by reference to Exhibit 10.6 to Markland
Technologies, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended
December 31, 2002, filed with the Securities and Exchange Commission on February
14, 2003.
10.7 Stock Purchase Agreement made as of December 9,2002 by and between Ocean
Data Equipment Corporation, and its subsidiary Ergo Systems, and Markland
Technologies, Inc. and its subsidiary Security Technology Inc. incorporated by
reference to Exhibit 10.1 to Markland Technologies, Inc.'s Current Report on
Form 8-K, filed with the Securities and Exchange Commission on February 12,
2003.
10.8 Letter from Sherb & Co., LLP to the Commission, dated March 12, 2003,
concerning change in certifying accountant incorporated by reference to Exhibit
16.1 to Markland Technologies, Inc.'s Current Report on Form 8-K, filed with the
Securities and Exchange Commission on March 17, 2003.
10.9 Technology Purchase Agreement dated the 19th day of March, 2003 by and
between ASI Technology Corporation and Markland Technologies, Inc. incorporated
by reference to Exhibit 10.1 to Markland Technologies, Inc.'s Current Report on
Form 8-K, filed with the Securities and Exchange Commission on April 4, 2003.
99.1* Certification of Kenneth P. Ducey, Director, Executive Vice President,
Secretary and Chief Financial Officer (Principal Financial Officer).
99.2* Certification of Delmar R. Kintner, Director, President and Chief
Executive Officer (Principal Executive Officer).
* Filed herewith
35
(b) Reports on Form 8-K
-------------------
On February 12, 2003, the Company filed a Current Report on Form 8-K/A to
disclose the following items:
Item 2. Acquisition or Disposition of Assets.
Item 4. Changes in Registrant's Certifying Accountant.
On March 17, 2003, the Company filed a Currnt Report on Form 8-K/A to disclose
the following items:
Item 4. Changes in the Registrant's Certifying Accountant.
On April 4, 2003, the Company filed a Current Report on Form 8-K to disclose the
following items:
Item 2. Acquisition or Disposition of Assets
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Markland Technologies, Inc.
(Registrant)
Dated : May 20, 2003
/s/ Kenneth P. Ducey, Jr.
- ----------------------------------
Kenneth P. Ducey, Jr.
Director, Executive Vice President,
Secretary and Chief Financial Officer
Date May 20, 2003
/s/ Delmar R. Kintner
- ----------------------------------
Delmar R. Kintner
Director, President and Chief Executive Officer
37
CERTIFICATIONS
--------------
I, Kenneth P. Ducey, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Markland
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date May 20, 2003
/s/ Kenneth P. Ducey, Jr.
- ------------------------
Director, Executive Vice President, Secretary
and Chief Financial Officer (Principal Financial Officer)
38
CERTIFICATIONS
--------------
I, Delmar R. Kintner, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Markland
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date May 20, 2003
/s/ Delmar R. Kintner
- -----------------------------------------------
Director, President and Chief Executive Officer (Principal Executive Officer)
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EXHIBIT INDEX
3.1 Articles of Amendment to the Articles of Incorporation of Quest Net Corp.,
filed with the Florida Secretary of State on April 4, 2001, incorporated by
reference to Exhibit 3.1 to Quest Net Corp.'s Current Report on Form 8-K, filed
with the Securities and Exchange Commission on April 10, 2001.
3.2 Articles of Amendment to the Articles of Incorporation of Quest Net Corp.,
filed with the Florida Secretary of State on April 4, 2001, incorporated by
reference to Exhibit 3.3 to Markland Technologies, Inc.'s Annual Report on Form
10-KSB, filed with the Securities and Exchange Commission on October 15, 2001.
3.3 Articles of Amendment to the Articles of Incorporation of Quest Net Corp.,
filed with the Florida Secretary of State on June 21, 2001, incorporated by
reference to Exhibit 3.4 to Markland Technologies, Inc.'s Annual Report on Form
10-KSB, filed with the Securities and Exchange Commission on October 15, 2001
3.4 Certificate of Designations of Rights and Preferences of the Series C
Cumulative Convertible Preferred Stock of Markland Technologies, Inc., filed
with the Florida Secretary of State on December 12, 2002, incorporated by
reference to Exhibit 3.5 to Markland Technologies, Inc.'s Current Report on Form
8-K, filed with the Securities and Exchange Commission on December 20, 2002.
4.1 Form of common stock certificate of the Company incorporated by reference to
Exhibit 4.1 to Markland Technologies, Inc.'s Quarterly Report on Form 10-QSB for
the quarter ended December 31, 2002, filed with the Securities and Exchange
Commission on February 14, 2003.
4.2 Certificate of Designations of Rights and Preferences of the Series C
Cumulative Convertible Preferred Stock of Markland Technologies, Inc., filed
with the Florida Secretary of State on December 12, 2002, incorporated by
reference to Exhibit 3.5 to Markland Technologies, Inc.'s Current Report on Form
8-K, filed with the Securities and Exchange Commission on December 20, 2002.
10.1 Stock Purchase Agreement made as of, December 9, 2002, between Ocean Data
Equipment Corporation, a Delaware Corporation; Ergo Systems, a Virginia
Corporation; Markland Technologies, Inc., a Florida Corporation and Security
Technology Inc., a Delaware Corporation, incorporated by reference to Exhibit
10.1 to Markland Technologies, Inc.'s Current Report on Form 8-K, filed with the
Securities and Exchange Commission on January 28, 2003.
10.2 Restated and Amended Convertible Revolving Credit Note Agreement, dated as
of December 10, 2002, between Markland Technologies, Inc. and Market LLC
incorporated by reference to Exhibit 10.2 to Markland Technologies, Inc.'s
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2002, filed
with the Securities and Exchange Commission on February 14, 2003.
10.3 Textual description of Employment Agreements incorporated by reference to
Exhibit 10.3 to Markland Technologies, Inc.'s Quarterly Report on Form 10-QSB
for the quarter ended December 31, 2002, filed with the Securities and Exchange
Commission on February 14, 2003..
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10.4 Exchange Agreement, dated as of December 9, 2002, among Markland
Technologies, Inc., Market LLC and James LLC, incorporated by reference to
Exhibit 10.4 to Markland Technologies, Inc.'s Current Report on Form 8-K, filed
with the Securities and Exchange Commission on December 20, 2002.
10.5 Exchange Agreement, dated as of December 9, 2002, by and among Eurotech
Ltd., Crypto.com, Inc., Markland Technologies, Inc., Security Technology, Inc.,
ipPartners, Inc., Markland LLC and James LLC, incorporated by reference to
Exhibit 10.5 to Markland Technologies, Inc.'s Current Report on Form 8-K, filed
with the Securities and Exchange Commission on December 20, 2002.
10.6 First Amendment to Exchange Agreement, dated as of December 9, 2002, by and
among Eurotech Ltd., Crypto.com, Inc., Markland Technologies, Inc., Security
Technology, Inc., ipPartners, Inc., Markland LLC and James LLC, dated as of
December 19, 2002 incorporated by reference to Exhibit 10.6 to Markland
Technologies, Inc.'s Quarterly Report on Form 10-QSB for the quarter ended
December 31, 2002, filed with the Securities and Exchange Commission on February
14, 2003.
10.7 Stock Purchase Agreement made as of December 9,2002 by and between Ocean
Data Equipment Corporation, and its subsidiary Ergo Systems, and Markland
Technologies, Inc. and its subsidiary Security Technology Inc. incorporated by
reference to Exhibit 10.1 to Markland Technologies, Inc.'s Current Report on
Form 8-K, filed with the Securities and Exchange Commission on February 12,
2003.
10.8 Letter from Sherb & Co., LLP to the Commission, dated March 12, 2003,
concerning change in certifying accountant incorporated by reference to Exhibit
16.1 to Markland Technologies, Inc.'s Current Report on Form 8-K, filed with the
Securities and Exchange Commission on March 17, 2003.
10.9 Technology Purchase Agreement dated the 19th day of March, 2003 by and
between ASI Technology Corporation and Markland Technologies, Inc. incorporated
by reference to Exhibit 10.1 to Markland Technologies, Inc.'s Current Report on
Form 8-K, filed with the Securities and Exchange Commission on April 4, 2003.
99.1* Certification of Kenneth P. Ducey, Director, Executive Vice President,
Secretary and Chief Financial Officer (Principal Financial Officer).
99.2* Certification of Delmar R. Kintner, Director, President and Chief
Executive Officer (Principal Executive Officer).
* Filed herewith
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