================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: December 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 ______________
COMMISSION FILE NUMBER 000-28863
----------------------------
MARKLAND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 84-1334434
(State or other jurisdiction of (IRS Employer
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to filed such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
As of January 30, 2004, there were 7,840,019 shares of common stock,
$0.0001 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
December 31, 2003
(UNAUDITED)
Page Nos.
---------
PART I - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) 1
At December 31, 2003
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 2
For the Six Months Ended December 31, 2003 and 2002
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 3
For the Three Months Ended December 31, 2003 and 2002
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED) 4 - 7
For the Six Months Ended December 31, 2003
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 8 - 9
For the Six Months Ended December 31, 2003 and 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 10 - 23
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF 24
OPERATIONS
ITEM 3 - CONTROLS AND PROCEDURES 32
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 33
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEDURES 33
ITEM 6 - EXHIBITS AND REPORTS ON 8-K 35
SIGNATURES 36
PART I FINANCIAL INFORMATION
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31, 2003
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash $ 118,977
Accounts receivable (including $337,461 due from related party) 1,763,210
Prepaid expenses and other current assets 152,734
-------------
TOTAL CURRENT ASSETS 2,034,921
-------------
OTHER ASSETS:
Property and Equipment, net of accumulated depreciation of $72,771 51,212
Intangible assets - ERGO, net of amortization of $133,336 266,664
Intangible assets - ASI, net of amortization of $83,333 916,667
Technology rights (Acoustic Core) 1,300,000
Intangible assets - STR 6,314,037
-------------
TOTAL OTHER ASSETS 8,848,580
-------------
TOTAL ASSETS $ 10,883,501
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable (including $478,506 due to related party) $ 1,704,673
Accrued expenses and other current liabilities 251,235
Secured Convertible Promissory Note, less debt discount of $41,666 458,334
Note payable - Current 410,674
-------------
TOTAL CURRENT LIABILITIES 2,824,916
Note payable - net of current (related party) 1,197,769
-------------
TOTAL LIABILITIES 4,022,685
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Series A redeemable convertible preferred stock - no par value;
30,000 authorized, issued and outstanding 300,000
Series C 5% cumulative convertible preferred stock -
$.0001 par value; 8,000 authorized; 4,825 issued and
outstanding; liquidation preference of $4,825,000 1
Series D 5% cumulative convertible preferred stock -
$.0001 par value; 40,000 authorized; 16,790 issued and
outstanding; liquidation preference of $16,790,000 2
Common stock - $.0001 par value; 500,000,000 authorized;
7,357,703 shares issued and outstanding 737
Additional paid-in capital 20,981,657
Unearned compensation (3,097,201)
Compensatory stock to be issued 187,500
Accumulated deficit (11,511,880)
-------------
TOTAL STOCKHOLDERS' EQUITY 6,860,816
-------------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 10,883,501
=============
See accompanying notes to condensed consolidated financial statements.
1
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
REVENUES (including $225,210 of revenue from related parties) $ 3,563,495 $ --
COST OF REVENUES (Including $192,934 of costs 2,329,581 --
incurred to a related party) ------------ ------------
GROSS PROFIT 1,233,914 --
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 1,126,966 171,552
Compensatory element of stock issuances for
selling, general and administrative fees 1,539,142 --
Amortization of intangible assets 150,001 --
Depreciation and amortization 9,222 --
------------ ------------
TOTAL OPERATING EXPENSES 2,825,331 171,552
------------ ------------
OPERATING LOSS (1,591,417) (171,552)
------------ ------------
OTHER EXPENSES, NET:
Interest expense 147,728 169,786
Other expense (income) -- (25,653)
------------ ------------
TOTAL OTHER EXPENSES, NET 147,728 144,133
------------ ------------
NET LOSS (1,739,145) (315,685)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 186,250 48,380
PREFERRED STOCK DIVIDEND - SERIES C 130,540 15,989
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(2,055,935) $ (380,054)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.32) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 5,463,757 4,999,857
============ ============
See accompanying notes to condensed consolidated financial statements.
2
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
2003 2002
------------ ------------
REVENUES (including $116,618 of revenue from related parties) $ 3,256,771 $ --
COST OF REVENUES (Including $78,321 of costs
Incurred to a related party) 2,072,625 --
------------ ------------
GROSS PROFIT 1,184,146 --
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 629,154 125,156
Compensatory element of stock issuances for
selling, general and administrative fees 1,137,162 --
Amortization of intangible assets 116,667 --
Depreciation and amortization 9,222 --
------------ ------------
TOTAL OPERATING EXPENSES 1,892,205 125,156
------------ ------------
OPERATING LOSS (708,059) (125,156)
------------ ------------
OTHER EXPENSES, NET:
Interest expense 119,150 63,354
Other expense (income) -- (8,453)
------------ ------------
TOTAL OTHER EXPENSES, NET 119,150 54,901
------------ ------------
NET LOSS (827,209) (180,057)
DEEMED DIVIDEND TO PREFERRED STOCKHOLDERS 96,250 48,380
PREFERRED STOCK DIVIDEND - SERIES C 64,851 15,989
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (988,310) $ (244,426)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.18) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 6,156,120 4,999,857
OUTSTANDING ============ ============
See accompanying notes to condensed consolidated financial statements.
3
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Series A Convertible
Common Stock Preferred Stock
------------------------ ------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
(1)
Balance - July 1, 2003 3,671,573 $ 367 30,000 $ 300,000
Issuance of Series D convertible
preferred stock -- -- -- --
Preferred stock dividend - beneficial
conversion feature - Series D -- -- -- --
Preferred stock dividend - beneficial
conversion feature - Series D -- -- -- --
Conversion of Series C convertible
preferred stock into common stock 208,333 21 -- --
Stock issued in connection with
settlement of liabilities to a
related party 750,000 75 -- --
Stock issued in connection with
consulting agreement 1,000 -- -- --
Stock issued in connection with
acquisition of ASI assets 283,333 28 -- --
Stock issued in connection with
consulting agreements 30,000 3 -- --
Additional stock issued in connection
with employee/consulting agreements 801,350 81 -- --
Variable accounting adjustment of prior/
Unearned compensation -- -- -- --
Preferred stock dividend - Series C
($12.50 per share) -- -- -- --
Stock issued in connection with
consulting agreement 60,826 7 -- --
Stock issued in connection with
employment agreement 11,509 1 -- --
Acquisition of Science and Technology
Research Corporation, Inc. 1,539,779 154 -- --
Amortization of employment/ and
consulting agreements -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
Balance - December 31, 2003 7,357,703 $ 737 30,000 $ 300,000
========== ========== ========== ==========
(1) Share amounts have been restated to reflect the 1-for-60 reverse stock split
effected on October 27, 2003.
See accompanying notes to condensed consolidated financial statements.
4
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Series C Convertible Series D Convertible
Preferred Stock Preferred Stock
---------------------- ---------------------
Shares Amount Shares Amount
-------- -------- -------- --------
Balance - July 1, 2003 5,395 $ 1 16,430 $ 2
Issuance of Series D convertible
preferred stock -- -- 745 --
Preferred stock dividend - beneficial
conversion feature - Series D -- -- -- --
Preferred stock dividend - beneficial
conversion feature - Series D -- -- -- --
Conversion of Series C convertible
preferred stock into common stock (570) -- -- --
Stock issued in connection with
settlement of liabilities to a
related party -- -- -- --
Stock issued in connection with
consulting agreement -- -- -- --
Stock issued in connection with
acquisition of ASI assets -- -- -- --
Stock issued in connection with
consulting agreements -- -- -- --
Additional stock issued in connection
with employee/consulting agreements -- -- -- --
Variable accounting adjustment of prior unearned
compensation -- -- -- --
Preferred stock dividend - Series C
($12.50 per share) -- -- -- --
Stock issued in connection with
consulting agreement -- -- -- --
Stock issued in connection with
employment agreement -- -- -- --
Acquisition of Science and Technology
Research Corporation, Inc. -- -- -- --
Amortization of employment/ and consulting
agreements -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
Balance - December 31, 2003 4,825 $ 1 17,175 $ 2
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
5
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Additional Compensatory
Unearned Paid-in Stock
Compensation Capital to be Issued
------------- ------------- ------------
Balance - July 1, 2003 $ (4,381,379) $ 13,900,104 $ --
Issuance of Series D convertible
preferred stock -- 745,000 --
Preferred stock dividend - beneficial
conversion feature - Series D -- 186,250 --
Preferred stock dividend - beneficial
conversion feature - Series D -- (186,250) --
Conversion of Series C convertible
preferred stock into common stock -- (21) --
Stock issued in connection with
settlement of liabilities to a
related party -- 449,925 --
Stock issued in connection with
consulting agreement (11,400) 11,400 --
Stock issued in connection with
acquisition of ASI assets -- 849,972 --
Stock issued in connection with
consulting agreements (123,000) 122,996 --
Additional stock issued in connection
with employee/consulting agreements -- (81) --
Variable accounting adjustment of
prior unearned compensation 273,633 (273,633) --
Preferred stock dividend - Series C
($12.50 per share) -- (130,541) --
Stock issued in connection with
consulting agreements (350,000) 173,894 187,500
Stock issued in connection with
employment agreements -- 32,796 --
Acquisition of Science and Technology
Research Corporation, Inc. -- 5,099,846 --
Amortization of employment/and
consulting agreements 401,980 -- --
Net loss -- -- --
------------- ------------- ------------
Balance - September 30, 2003 $ (3,097,201) $ 20,981,657 $ 187,500
============= ============= ============
See accompanying notes to condensed consolidated financial statements.
6
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Total
Accumulated Stockholders'
Deficit Equity
------------ ------------
Balance - July 1, 2003 $ (9,772,735) $ 46,360
Issuance of Series D convertible
preferred stock -- 745,000
Preferred stock dividend - beneficial
conversion feature - Series D -- 186,250
Preferred stock dividend - beneficial
conversion feature - Series D -- (186,250)
Conversion of Series C convertible
preferred stock into common stock -- --
Stock issued in connection with
settlement of liabilities to a
related party -- 450,000
Stock issued in connection with
consulting agreement -- --
Stock issued in connection with
acquisition of ASI assets -- 850,000
Stock issued in connection with
consulting agreements -- --
Additional stock issued in connection
with employee/consulting agreements -- --
Variable accounting adjustment of
prior unearned compensation -- (130,541)
Preferred stock dividend - Series C
($12.50 per share) -- 11,400
Stock issued in connection with
consulting agreement -- 32,797
Stock issued in connection with
employment agreement -- --
Acquisition of Science and Technology
Research Corporation, Inc. -- 5,100,000
Amortization of employment/and
consulting agreements -- 1,494,867
Net loss (1,739,145) (1,739,145)
------------- -------------
Balance - September 30, 2003 $(10,566,286) $ 7,806,717
============= =============
See accompanying notes to condensed consolidated financial statements.
7
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
For the Six Months Ended
December 31,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,739,145) $ (315,685)
Adjustment to reconcile net loss to net
cash used in operating activities:
Amortization of intangible assets 150,001 --
Amortization of debt discount 41,668 --
Compensatory stock issuances 1,539,142 4,000
Depreciation 2,255 --
Changes in operating assets and liabilities:
Accounts Receivable (1,448,988) --
Prepaid expenses and other current assets
assets 25,454 21,750
Accounts payable and accrued expenses 545,299 249,655
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (884,314) (40,280)
------------ ------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of ASI Assets (85,000) --
Purchase of STR (784,170) --
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (869,170) --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on note payable -premium
financing (17,004) --
Proceeds from Note Payable - Bayview 1,400,000 --
Repayments to Note Payable - Bayview (261,000) --
Proceeds from sale of preferred stock 745,000 --
Proceeds from sale of common stock in
private placement -- 340,000
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,866,996 340,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 113,512 299,720
CASH - BEGINNING 5,465 4,911
------------ ------------
CASH - ENDING $ 118,977 $ 304,631
============ ============
See accompanying notes to condensed consolidated financial statements.
8
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- -------------------------------------------------
2003 2002
------------ ------------
Cash paid during the years for:
Interest $ -- $ --
============ ============
Taxes $ -- $ --
============ ============
Non-cash investing and financing activities:
Conversion of notes payable and
accrued interest into preferred
stock $ -- $ 5,225,000
============ ============
Conversion of accounts payable into common
stock $ 450,000 $ --
============ ============
Acquisition of ASI assets by issuance of
common stock $ 850,000 $ --
============ ============
Acquisition of technology rights by
issuance of common stock $ -- $ 1,300,000
============ ============
Acquisition of STR by issuance of common
stock $ 5,100,000 $ --
============ ============
Promissory note issued as part of STR
acquisition $ 375,000 $ --
============ ============
Deemed dividend preferred stock -
beneficial conversion feature $ 186,250 $ 48,380
============ ============
Dividends on preferred stock $ 273,633 $ 15,989
============ ============
See accompanying notes to condensed consolidated financial statements.
9
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed consolidated financial statements of
Markland Technologies, Inc. and Subsidiaries (the "Company") have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information, without being audited, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included. Operation results for
the six months and thru months ended December 31, 2003 are not necessarily
indicative of the result that may be expected for the year ending June 30, 2004.
The unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes included in
the Company's 10-KSB for the year ended June 30, 2003 filed with the Securities
and Exchange Commission.
In December 2002, Markland purchased an acoustic core technology (`Acoustic
Core"), in January 2003, Markland purchased the assets of Ergo Systems, Inc.
("Ergo"), in September 2003, Markland purchased the intangible assets of ASI
Technology Corporation ("ASI") and in October 2003, Markland completed a
business combination with Science and Technology Research Corporation, Inc.
("STR"). As a result of these transactions, Markland began to provide end-to-end
solutions to the Department of Homeland Security ("DHS"). Markland's principal
end customer is the United States Government.
The accompanying 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. The
Company has incurred net losses of $1,739,145 and $315,685 for the six months
ended December 31, 2003 and 2002, respectively. Additionally, the Company had a
working capital deficiency of $789,995 at December 31, 2003. 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.
The Company's ability to continue as a going concern remains dependent upon the
ability to obtain additional financing or through the generation of positive
cash flows from continuing operations. These 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.
10
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. REVERSE STOCK SPLIT / LOSS PER SHARE
------------------------------------
Share amounts and per share data have been restated to reflect a 1 for 60
reverse stock split effective as of October 27, 2003.
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 a secured convertible promissory note,
Series A and D Convertible preferred stock and Series C 5% Cumulative
Convertible preferred stock, discussed in the notes to 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 December 31, 2003, as permitted under 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.
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
----------------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003. The adoption of SFAS No. 149, which became effective
for contracts entered into or modified after June 30, 2003, did not have any
impact on the Company's' financial position, results of operations or cash
flows.
11
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
----------------------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and, otherwise, is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did
not have any impact on the Company's consolidated results of operations,
financial condition or cash flows.
In January 2003, the FASB issued Interpretation Number 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). This interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements," provides
guidance for identifying a controlling interest in a variable interest entity
("VIE") established by means other than voting interests. FIN No. 46 also
requires consolidation of a VIE by an enterprise that holds such a controlling
interest. In December 2003, the FASB completed its deliberations regarding the
proposed modification to FIN No. 46 and issued Interpretation Number 46(R),
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51"
("FIN No. 46(R)"). The decisions reached included a deferral of the effective
date and provisions for additional scope exceptions for certain types of
variable interests. Application of FIN No. 46(R) is required in financial
statements of public entities that have interests in VIEs or potential VIEs
commonly referred to as special-purpose entities for periods ending after
December 15, 2003. Application by public entities (other than small business
issuers) for all other types of entities is required in financial statements for
periods ending after December 15, 2004. The adoption of FIN No. 46(R) is not
expected to have an impact on the Company's consolidated financial position,
results of operations or cash flows.
12
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACQUISITIONS
PURCHASE OF INTANGIBLE ASSETS OF ASI TECHNOLOGY CORPORATION
-----------------------------------------------------------
On March 19, 2003, the Company and ASI Technology Corporation, a Nevada
corporation, ("ASI") closed its 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 Chief Executive Officer of the Company was a
significant employee of ASI during the two years prior to this agreement. Under
an interim arrangement, the Company had received revenues from these contracts
billed for periods after April 1, 2003 and was obligated for all related costs.
Markland had 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. These fees amounted to $15,000 as of December
31, 2003. The closing of this transaction occurred on September 30, 2003.
In consideration, the Company paid $150,000 in cash of which $65,000 was paid by
June 30, 2003 and $85,000 was paid by December 31, 2003. In addition to the cash
payment, the Company issued to ASI, on closing, 283,333 shares of its common
stock valued at $850,000.
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. 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 worth of common
stock to ASI.
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. Markland has agreed to pay ASI
$5,000 per month for these rights for a period of 24 months, of which $30,000
has been paid to ASI under this agreement and is included in selling, general
and administrative expenses for the six months ended December 31, 2003.
13
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACQUISITIONS - Continue
PURCHASE OF SCIENCE AND TECHNOLOGY RESEARCH, Inc.
-------------------------------------------------
On October 27, 2003, the Company completed the acquisition of 100% of the common
stock of Science and Technology Research Corporation, Inc., a Maryland
corporation ("STR"), by its subsidiary, Security Technology, Inc., a Delaware
Corporation ("STI"), through a merger of STI with newly formed STR Acquisition
Corporation, a Maryland Corporation. STR is a producer of the U.S. Navy's
Shipboard Automatic Chemical Agent Detection and Alarm System (ACADA). The Navy
deploys the "man-portable" point detection system to detect all classic nerve
and blister agents as well as other chemical warfare agent (CWA) vapors.The
Company acquired STR for the reason that it has a contract with United States
Navy and it can potential generate revenues for this contract in excess of $35
million.
The purchase price for the STR totaled $6,475,000 and consisted of $900,000 in
cash, which was paid in October 2003, 1,539,779 shares of common stock valued at
$5,100,000, a promissory note of $375,000 and acquisition costs of $100,000. The
promissory note bears no interest. Holders of the shares of common
stock were granted piggy-back registration rights. The promissory note is
collateralized by all of the assets of STR and 40% of the Common Stock of STR
held by the Company. The promissory note is payable on or about as follows:
March 25, 2004 $ 93,750
May 24, 2004 125,000
July 23, 2004 78,125
October 26, 2004 78,125
---------
$375,000
=========
14
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACQUISITIONS - Continue
PURCHASE OF SCIENCE AND TECHNOLOGY RESEARCH, Inc. - Continue
-------------------------------------------------
A summary of the allocation of the aggregate consideration for the merger to the
fair value of the assets acquired and liabilities assumed is as follows:
Cash $ 900,000
Promissory note 375,000
Common Stock (a) 5,100,000
Acquisition costs 100,000
-----------
Total Purchase Price $6,475,000
-----------
Fair value of net assets acquired:
Current assets $ 326,427
Property and equipment 53,467
Liabilities assumed:
Accounts payable & accrued expenses 218,931
Fair value of identifiable net assets acquires 160,963
-----------
Intangibles 6,314,037
Total Purchase Price 6,475,000
-----------
(a) 1,539,779 shares of common stock based upon the average closing price
ten days after 10/8/03 ($4.254 per share). The company has currently
hired an independent firm to perform an independent valuation of the
above transaction.
The results of operations of STR have been included in the Company's condensed
consolidated Statements of operations commencing October 1, 2003. Proforma
financial information has not have been included as financial information for
STR not available at this time. The Company has not completed its 8-K audit or
STR and is considered late.
The Company funded the cash portion of the acquisition from a loan provided by
Bayview Capital, LLC, ("Bayview"). Robert Tarini, Markland's Chairmanis
affiliated with Bayview. The entire amount of the loan provided by Bayview was
$1,400,000.
15
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. AMORTIZATION OF INTANGIBLE ASSETS
---------------------------------
The purchase price of $400,000 related to the January 2003 acquisition of Ergo
was allocated entirely to a contract with the United States Government. 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 six months ended December 31,2003 was $66,668.
The intangible assets acquired from ASI on September 30, 2003 totaled
$1,000,000. These assets are being amortized over a three-year period commencing
October 1,2003.Amortization expense related to this contract for the six months
ended December 31,2003 was $83,333.
Future amortization expense related to the above-acquired intangible assets is
as follows:
Years Ending
June 30, Amount
---------------- -----------
2004 (6 months) $ 233,335
2005 466,669
2006 399,993
2007 83,334
-----------
$1,183,331
===========
The intangible assets entitled "Acoustic Core" which has a carrying value of
$1,300,000 are not available for commercial sale as of December 31, 2003.
Accordingly, no amortization expense has been recorded through December 31,
2003.
16
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SECURED LINE OF CREDIT
----------------------
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
December 31, 2003, approximately $15,000 of interest has been accrued on this
note and is included in accrued expenses on the 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 six months ended December 31, 2003 was $41,668.
7. NEW EQUITY LINE
---------------
On September 10, 2003, Markland entered into a Private Equity Credit Agreement
with Brittany Capital Management, Ltd. ("Brittany"). Markland agreed to issue
and sell to Brittany 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 would be able
to put shares to Brittany 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 Brittany, 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.
There can be no assurances that the Company will receive any proceeds from this
agreement. As of December 31, 2003 the Company has not drawn down on this equity
line.
17
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. NOTES PAYABLE
-------------
Note Payable - NPAI
- -------------------
In December 2003, the Company renewed the Directors and Officers Life Insurance
Policy, for one year effective December 9, 2003 through December 9, 2004. The
Company is amortizing such amount into selling, general and administrative
expense on a straight-line basis. At December 31 2003, the total un-amortized
premiums included in "prepaid insurance" in the accompanying consolidated
balance sheet amounted to $40,976.
Note Payable - Bayview
- ----------------------
On September 4, 2003, the Company signed a term sheet with Bay View Capital,
LLC, a related party, and received in October, 2003 a $1,400,000
bridge-financing loan of which the Company immediately reaid 211,000. The
proceeds from this loan were used by the Company to fund the acquisition of STR
(Note 6). The loan agreement provides for the Company to make 24 monthly
payments of principal and interest. Principal is calculated on a monthly basis
using a "Cash Flow Recapture Mechanism" as defined in the agreement. Interest is
payable at a rate of 12% per annum payable monthly in arrears. The note requires
monthly payments in the amount equal to twenty five percent of the gross revenue
of STR for the immediately preceding calendar month. The entire principal amount
together with any unpaid interest is payable in full on October 27, 2005. If the
monthly payments relating to the gross monthly revenues are not paid there is a
5% percent penalty and the interest will change to 18% for the reminder of the
loan. The note is secured by, among other things, a security interest in all
assets of the Company. The balance due Bay View Capital at December 31, 2003 was
$1,197,769 and is currently classified as a long term liability.
9. STOCKHOLDERS'EQUITY
---------------------------------
Preferred Stock
- ---------------
Series B Convertible Preferred Stock
- ------------------------------------
On September 4, 2003, the Company's board of directors approved a resolution to
cancel its Series B convertible preferred stock.
18
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
---------------------------------
Series C 5% Cumulative Redeemable Convertible Preferred Stock
- -------------------------------------------------------------
During July 2003, 570 shares of Series C 5% Cumulative Redeemable Preferred
Stock were converted into 208,333 shares of the Company's common stock.
As of December 31, 2003, accumulated dividends of $273,633 were accrued
for the Series C Preferred Stock.
Series D Redeemable Convertible Preferred Stock
- -----------------------------------------------
During the six months ended December 31,2003, the Company sold to a third party
745 shares of Series D Preferred Stock for gross proceeds of $745,000. The
Company has determined that as of the date of issuance there was a beneficial
conversion feature in the aggregate amount of $186,250. The Company recorded
this deemed dividend of $186,250 during the six months ended December 31, 2003,
relating to the accretion of these beneficial conversion features on the Series
D Preferred Stock. The deemed dividends increases the loss applicable to common
shareholders in the calculation of basic and diluted net loss per common share
and is included in stockholders' equity as a charge to additional paid-in
capital and a credit to additional paid-in capital. The Series D Preferred Stock
is convertible immediately.
Reverse Stock Split
- -------------------
On September 4, 2003, the Company's board of directors approved a resolution to
effect a one-for-sixty reverse stock split. As a result, each sixty shares of
common stock was converted automatically into one share of common stock. To
avoid the issuance of fractional shares of common stock, each fractional share
resulting from the reverse split was rounded up to a whole share. The reverse
stock split did not reduce the 500,000,000 shares of common stock that the
Company is authorized to issue. The resolution, which impacts shareholders of
record as of September 5, 2003 became effective on October 27, 2003.
Common Stock Issuances
- ----------------------
In July 2003, the Company entered into a consulting agreement with Emerging
Concepts, a California entity, whereby the Company issued to them 25,000 shares
of its common stock in exchange for consulting services which will be provided
for a period of one year commencing on July 7 2003 and expiring on July 7 2004,
unless terminated by either party, as defined in the agreement.
19
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. STOCKHOLDERS' (DEFICIENCY) EQUITY (Continued)
----------------------------------
Common Stock Issuances - continue
- ----------------------
On July 24, 2003, the Company entered into an Agreement (the "Agreement") with
Syqwest, Inc., a Rhode Island corporation, and related party, formerly known as
Ocean Data Equipment Corporation ("Syqwest"). Under this Agreement, Syqwest
agreed to receive 750,000 shares of the Company's restricted common stock as
full consideration for $450,000 of unpaid services, which were performed by
Syqwest in connection with the research efforts as it relates to the Vehicle
Stopping Technology. Pursuant to the Agreement, the Company has the right at any
time by written notice to repurchase from Syqwest these 750,000 shares of
restricted common stock at a purchase price of $0.60 per share. Based on this
redemption right and the restriction on the sale of such securities, the Company
has valued these shares at the redemption price of $450,000.
During September and October 2003, the Company issued to a consultant a bonus of
5,000 shares of common stock valued at $20,500. These shares were issued for
enhanced media and corporate communications programs between June and December
2003. In Addition, the Company issued 1,000 shares of it common stock valued at
$11,400, as part of the consultants quarterly compensation.
In November 2003, the Company entered into an agreement with MarketShare
Recovery, Stuart Siller, and George Martin to perform certain services with
regard to investor relations for the Company. In consideration for these
services, the Company agreed to issue a cumulative total of 90,908 shares of its
common stock of which 22,727 shares were issue valued at $62,500 during the
quarter ended December 31, 2003.
In November 2003, the Company entered into an agreement with Research Works to
prepare an equity research report. In consideration for these services, the
Company issued Research Works a total of 37,099 shares valued at $100,000.
During the six months ended December 31, 2003 the Company also awarded three
non-officer employees of the company a total of 11,509 shares valued at $34,020
for services rendered during the period.
20
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. 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, consists of the
following:
Shares Issuable
at Assumed
At Average Market
December 31, Price at December 31,
2003 2003 ($2.46)
------------ -------------------
Convertible notes payable
(Converted at 80% of market) $ 500,000 254,065
Series A Redeemable Convertible
Preferred stock $ 30,000 10,000
Series C 5% Cumulative Redeemable Convertible
preferred stock plus accrued dividends
(converted at 80% of market) $ 5,103,027 2,590,570
Series D Redeemable Convertible preferred
stock (converted at 80% of market) $17,175,000 8,727,133
------------ ------------
Total as of December 31, 2003 $22,808,027 11,581,768
============ ============
21
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. COMPENSATION AND CONSULTING AGREEMENTS
--------------------------------------
Effective January 2003, the Company entered into a one-year compensation
agreement with an officer and three three-year agreements with an officer and
two consultants to the Company, which provide for aggregate monthly remuneration
of $47,500.
One of these agreements provide for the issuance of 1.67% 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 1.67% of
the outstanding common stock as of December 31, 2003.
The three three-year compensation agreements provide in total for the issuance
of 5.01% of the Company's outstanding common stock in four installments on a
fully diluted basis based upon certain performance criteria being met.
The amount charged to operations related to this agreement for the six months
ended December 31, 2003 amounted to approximately $914,000.
The Company has also entered into a one year consulting agreement with the
former President and principal of the acquired company STR ("Consultant"). In
consideration for the consulting services to be rendered by Consultant, the
Company shall pay to Consultant the sum of $285,000 (the "FEE"). The Fee shall
be payable as follows: $61,250 shall be payable on March 15, 2004, a second
payment in the amount of $81,500, shall be due May 15, 2004, a third payment in
the amount of $51,125 shall be on July 15, 2004, the fourth and final payment in
the amount of $91,125, shall be on October 15, 2004.
12. LITIGATION
----------
The Quest Net Corp. and CWTel, Inc. were named defendants in a lawsuit filed in
the Circuit Court in Broward County, Florida. The lawsuit alleges the Company
has failed to pay a promissory note dated September 8, 2000 in the amount of
$66,672 and issued a check as payment on the note that was returned due to
insufficient funds. As of August 15, 2003 there has been no active litigation
activity on the case for approximately twenty months. There have been some
sporadic settlement discussions but no agreement has been reached at this time.
No estimate can be given as to the ultimate loss which would be suffered by the
Company should it lose this lawsuit.
The Company is also subject to various matters of litigation during its normal
course of operations. Management believes that the eventual outcome of these
matters will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
22
MARKLAND TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. SUBSEQUENT EVENT
-----------------
Subsequent to the end of the quarter, on January 30, 2004, James, LLC issued
Markland a conversion notice on $200,000 worth of Series C Preferred Stock, plus
accrued interest. Markland issued James, LLC 158,126 shares of common stock to
comply with this conversion as per their agreement.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Form 10-QSB, which are not historical facts
constitute forward-looking statements and are made under the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve substantial risks and uncertainties. You can
identify these statements by forward-looking words such as "may", "will",
"expect", "anticipate", "believe", "estimate", "continue", and similar words.
You should read statements that contain these words carefully. All
forward-looking statements included in this Form 10-QSB are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Each forward-looking statement should be read
in conjunction with the financial statements and notes thereto in Part I, Item
1, of this quarterly report and with the information contained in Item 2
together with Management's Discussion and Analysis or Plan of Operation
contained in our annual report on Form 10-KSB for the year ended June 30, 2003,
including, but not limited to, the section therein entitled "Risk Factors."
BASIS OF PRESENTATION
The accompanying un-audited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information, without being
audited, pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary to make the financial statements not misleading have been included.
Operating results for the three months ended December 31, 2003 are not
necessarily indicative of the result that may be expected for the year ending
June 30, 2004. The un-audited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and footnotes
included in to the Company's Annual Report on Form 10-KSB for the year ended
June 30, 2003.
BUSINESS HISTORY
Markland Technologies is the successor to a company known as A. P. Sales Inc.,
incorporated in Colorado in 1995. In November 1998, A. P. Sales was dissolved as
a Colorado corporation, re-domiciled in Florida under the name Quest Net
Corporation. In March 2001, Quest Net acquired CWTel, Inc., a Florida
corporation. CWTel filed a voluntary bankruptcy petition in November 2001 and
was issued a final decree in March 2002. In May 2001, Quest Net acquired all of
the outstanding stock of Vidikron of America, Inc., a Delaware corporation. As a
result, Vidikron's sole stockholder, Market LLC, a Cayman Islands limited
liability company, became Quest Net's majority stockholder and Vidikron became a
wholly owned subsidiary of Quest Net. This transaction was accounted for as a
reverse acquisition and recapitalization of Vidikron, pursuant to which Vidikron
24
was treated as the continuing entity. Quest Net subsequently changed its name to
Markland Technologies, Inc. In order to cure a default in our obligations to
Market LLC, we transferred all of our interest in Vidikron to Market, LLC in
June 2002. As a result, we are no longer engaged in Vidikron's business and
treated this as a discontinued operation.
In December 2002, Markland Technologies Inc. acquired the rights to develop,
manufacture and distribute products related to acoustic signature analysis and
cryptography technologies from Eurotech, Ltd. in exchange for 3,998,789 shares
of Markland Technologies Inc. common stock.
In January 2003, Markland Technologies acquired Ergo Systems, Inc., a company in
the business of providing border security logistic support and product
development services to the United States government. This acquisition provided
Markland Technologies with contracts with the Department of Homeland Security to
maintain, integrate, and implement design enhancements to border security
systems installed at five US ports of entry for a purchase price of $400,000.
In March 2003, we entered into an Asset Purchase Agreement with ASI Technology
Corporation. We acquired intellectual property assets, which included: nine
issued and pending United States patents related to gas plasma antenna
technology for a purchase price of $150,000 in cash and 283,333 shares of our
common stock.
In October 2003, we completed the acquisition of Science and Technology Research
Inc a company based in Virginia that manufactures ACADA portable chemical
detection units for use by the United States Navy under a contract with
potential revenue of over $35 million. Total purchase price for the acquisition
was $5.1 Million in stock and $1.275 Million in cash.
On October 27, 2003, we completed a 1-for-60 reverse split of our common stock.
As a result, we now have 500,000,000 shares of our common stock authorized and
as of February 4, 2004 approximately 8,000,000 shares of our common stock
outstanding.
BUSINESS OVERVIEW
The company is divided into three business areas: Chemical Detectors, Border
Security and Advanced Technologies. We focus on providing products, services,
and emerging technology to protect our country's borders, infrastructure assets
and personnel. Our mission is to build world-class integrated solutions for
border systems and threat detection through the expansion of our existing
contracts, development of our emerging technologies, and the acquisition of
revenue producing assets. Our primary sources of operating revenue are ACADA
chemical detection systems, border security logistics products and services, and
SBIR funded research programs in the development of gas plasma antenna
technology.
25
CHEMICAL DETECTORS
In October 2003, we acquired Science and Technology Research Corporation,
("STR"), a chemical detector manufacturer, as part of our ongoing business
strategy of creating an integrated portfolio of Homeland Security solutions. STR
is the sole producer of the U.S. Navy's Shipboard Automatic Chemical Agent
Detection and Alarm System (ACADA). We believe that we are well positioned to
capture additional sales in the United States and foreign markets. STR has an
active contract with the US Navy to produce up to $37 Million worth of ACADA
product. To date STR has produced approximately $12 Million worth of product on
this contract, and we expect that the company will get additional orders on this
contract. STR is presently working on the design of a next generation chemical
detector product, which will also operate utilizing Ion Mobility Spectography
(IMS) cell technology and provide networked wireless communication capability.
The Company has not completed its 8-K audit or STR and is considered late.
On December 23, 2003 the US Navy signed a license agreement with us to transfer
certain chemical detection technology intellectual property rights to us. We
believe the license will allow us to further expand the applications for the
chemical detection technology, and market the technology to non-defense
customers such as foreign governments and commercial entities. We expect STR
will continue to manufacture the ACADA unit for the US Navy and simultaneously
pursue opportunities in the Department of Homeland Security as well as foreign
military sales.
BORDER SECURITY
We acquired Ergo Systems in January 2003. This acquisition provided us with
contracts with the Department of Homeland Security to maintain, integrate, and
implement design enhancements to border security systems installed at five US
ports of entry. These systems are part of a larger Department of Homeland
Security 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. We believe that our experience in integrating solutions will be
attractive to the Department of Homeland Security as it confronts the various
issues of protecting our borders. Computer Science Corporation ("CSC") entered
into an agreement with Markland to subcontract a portion of their border
maintenance services. This contract was signed during the last week of the
quarter, and therefore will not have an impact on this financial report.
Markland expects to report positive results from this contract in the future.
CSC was awarded an eighty eight million dollar contract to further develop and
secure systems at the land borders of our country, and is one of three potential
contractors for the US VISIT program. We believe that we could benefit by
receiving subcontract revenues from that contract.
26
ADVANCED TECHNOLOGIES
Via research and development as well as intellectual property acquisitions,
Markland Technologies has established a portfolio of advanced and emerging
technologies, which it intends to commercialize and utilize within its own
proprietary products or license out for the purpose of revenue generation. These
advanced technologies and intellectual property are as follows: 1) Gas plasma
antenna, 2) Vehicle Stopping System, 3) Acoustic Core(TM) signature analysis, 4)
APTIS (TM) human screening portal, 5) cryptography software. Gas Plasma Antenna
Gas Plasma Antenna
We acquired gas plasma technology assets from ASI Technology Inc. and a
sub-license for plasma sterilization and decontamination in August 2003. The
assets include three ongoing funded SBIR government contracts and nine issued
and pending United States patents related to gas plasma antenna technology with
demonstrated applications in the fields of ballistic missile defense, phased
array radar, and forward deployed decontamination. We are developing the plasma
technology for military and commercial applications. However, we cannot predict
when these products will be ready for commercial or military use.
Vehicle Stopping System
Under a funded government contract we developed a Vehicle Stopping System to
address the increasing risks of unauthorized and illegal entry into the United
States. Our Vehicle Stopping System is designed to safely capture vehicles that
are trying to gain entry without authorization. The Vehicle Stopping System was
successfully tested in June 2003 at the San Ysidro, CA Port of Entry. As a
result, we expect to market the Vehicle Stopping System to the Department of
Homeland Security as well as DOD and local traffic and highway authorities.
Acoustic Core (TM)
We have completed a project with the United States Air Force via a Co-Operative
Research and Development Agreement to utilize our proprietary Acoustic Core (TM)
technology to inspect cargo. The Acoustic Core (TM) technology utilizes
acoustics sensing and signature analysis technologies to detect illicit
materials. While this contract does not generate revenue for us, we expect to
develop the technology into commercially viable products. However, we cannot
predict when these products will be ready for commercial or military use.
27
APTIS (TM)
We are involved in the design and testing of APTIS (TM), which is an acoustic
screening portal that is intended to be used to facilitate screening humans for
concealed metallic and non-metallic weapons such as ceramic knives and plastic
guns. Although we continue to develop this prototype, we cannot predict when it
will be ready for commercial use.
Management Team
In November of 2003, Markland added key personnel to its corporate management
team, and appointed Robert Tarini as the Chief Executive Officer, replacing Del
Kintner whom took the position of President, Advanced Technology Division. We
also added Michael Curran as Chief Technology Officer.
Potential Future Acquisitions
We are pursuing the purchase of revenue producing assets as part of our growth
strategy to provide comprehensive solutions to the Department of Homeland
Security and the US and foreign militaries. No assurances can be given that we
can complete an acquisition of revenue producing assets.
RESULTS OF OPERATIONS
Although we have increased quarterly revenues significantly and believe that we
can maintain and potentially increase these revenues within the fiscal year, we
have substantial general and administrative expenses, as well as research and
development expenses. Cash flow from our operating revenues and margins from
sales of products and services have not yet to date been sufficient to offset
these costs. We may incur additional operating losses during fiscal 2004 as we
attempt to expand the businesses we operate through additional sales and
marketing efforts, and we anticipate that we may need to raise additional
capital to meet these anticipated operating costs.
As a result of our need for capital and our net losses to date, our independent
auditors have noted in their report on our financial statements doubt about our
ability to continue as a going concern. We will need to generate additional
operating cash flows and to achieve profitability in future periods.
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2002
We had no operations and no revenues in the quarter ended December 31, 2002. As
a result, a comparison to the three months ended December 31, 2002 would not be
meaningful and has not been provided.
28
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003.
REVENUE: Revenue for the three months ended December 31, 2003 was $3,256,771. Of
our revenues, approximately $2,898,009 was from sales of ACADA chemical detector
units and services provided by our STR subsidiary. Approximately $279,297 of
revenues was derived from border security products and services provided by our
Ergo Systems subsidiary. Approximately $79,465 of revenues was derived from
funded SBIR research performed for the US military for gas plasma antenna
technology.
COST OF SALES: Cost of sales for the three months ended December 31, 2003 was
$2,072,625. Gross profits for the three months ended December 31, 2003 was
$1,184,146. We had a gross profit margin of 36.4% for the three months ended
December 31, 2003.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses for the three months ended December 31, 2003 was $629,154. Selling,
general and administrative expenses was primarily composed of payments to
employees , consultants and vendors.
INTEREST AND FINANCING: Interest and financing expense for the three months
ended December 31, 2003 was $119,150. - Interest and financing expense was from
our Loan by Bay View Capital LLC, our Notes Payable and the outstanding shares
of Preferred Stock.
COMPENSATORY ELEMENT OF STOCK ISSUANCES FOR SELLING, GENERAL AND ADMINISTRATIVE
FEES: Compensatory element of stock issuances for selling, general and
administrative fees for the three months ended December 31, 2003 was $1,137,162.
NET LOSS: For the three months ended December 31,2003 we incurred a net loss of
$827,209. This net loss was primarily due to the compensatory element of stock
issuances for selling, general and administrative fees for the three months
ended December 31, 2003 of $1,137,162.
PREFERRED STOCK DIVIDENDS: For the three months ended December 31,2003 we
incurred costs due to preferred stock dividends of $161,101.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: For the three months ended December
31,2003 we incurred a net loss applicable to common stockholders of $988,310.
29
SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2002
We had no operations and no revenues for the six months ended December 31, 2002.
As a result, a comparison to the six months ended December 31, 2002 would not be
meaningful and has not been provided
FOR THE SIX MONTHS ENDED DECEMBER 31, 2003.
REVENUE: Revenue for the six months ended December 31, 2003 was $3,563,495. Of
our revenues, approximately $2,898,009 was from sales of ACADA chemical detector
units and services provided by our STR subsidiary. Approximately $440,276 of
revenues was derived from border security products and services provided by our
Ergo Systems subsidiary. Approximately $225,210 of revenues was derived from
funded SBIR research performed for the US military for gas plasma antenna
technology.
COST OF SALES: Cost of sales for the six months ended December 31, 2003 was
$2,329,581. Gross profits for the six months ended December 31,2003 was
$1,233,914. We had a gross profit margin of 34.6 % for the six months ended
December 31,2003.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses for the six months ended December 31, 2003 was $1,126,966. Selling,
general and administrative expenses was primarily composed of payments to
employees , consultants and vendors.
INTEREST AND FINANCING: Interest and financing expense for the six months ended
December 31, 2003 was $147,728. - Interest and financing expense was from our
Loan by Bay View Capital LLC, our Notes Payable and the outstanding shares of
Preferred Stock.
COMPENSATORY ELEMENT OF STOCK ISSUANCES FOR SELLING, GENERAL AND ADMINISTRATIVE
FEES: Compensatory element of stock issuances for selling, general and
administrative fees for the six months ended December 31, 2003 was $1,539,142.
NET LOSS: For the six months ended December 31,2003 we incurred a net loss of
$1,739,145. This net loss was primarily due to the compensatory element of stock
issuances for selling, general and administrative fees for the six months ended
December 31, 2003 of $1,539,142.
30
PREFERRED STOCK DIVIDENDS: For the six months ended December 31,2003 we incurred
costs due to preferred stock dividends of $316,790.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS: For the six months ended December
31,2003 we incurred a net loss applicable to common stockholders of $2,055,935.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended December 31, 2003, we experienced negative cash
flow from operating activities. As of December 31, 2003, we had $118,977 in
cash. Our revenues in the future may not be sufficient to finance our ongoing
activities.
During the six months ended December 31, 2003, we financed our company primarily
from free cash flow generated by our sales of products and services and through
the sale of preferred stock. During the six months ended December 31, 2003, we
raised $745,000 from the sale of 745 shares of Series D Preferred Stock. We
believe that required investment capital will be available to us, but there can
be no assurance that we will be able to raise funds on terms acceptable to us,
or at all. We have the ability to adjust the level of research and development
and selling and administrative expenses based on the availability of resources.
However, reductions in expenditures could delay development and adversely affect
our ability to generate future revenues.
The Series D preferred stock converts into common stock at a conversion price
ranging from 65% to 80% of the market price of our common stock at the time of
conversion. 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 $3.00, it is convertible at 80% of the market price. If the
market price is greater than $3.00, but less than or equal to $6.00, at 75% of
the market value. If the market price is greater than $6.00, but less than or
equal to $9.00, at 70% of the market price. And if the market price is greater
than $9.00, 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.
On September 4, 2003, we received a loan from Bay View Capital, LLC, a related
party, in the amount of $1,400,000. We primarily used the money to fund the
acquisition of Science and Technology Research, Inc. and to pay corporate debts.
We are required to make 24 monthly payments of principal and interest. The
interest on the note is 12% per annum and is secured substantially by all of our
assets.
31
Any equity-based source of additional funds could be dilutive to existing equity
holders, and the dilution could be material. The lack of sufficient funds from
operations or additional capital could force us to curtail or scale back
operations and would therefore have an adverse effect on our business. Other
than cash and cash equivalents, we have no unused sources of liquidity at this
time. We expect that we may incur additional operating losses as a result of
expenditures for research and development and marketing costs for our Homeland
Security products and technologies. The timing and amounts of these expenditures
and the extent of our possible operating losses will depend on many factors,
some of which are beyond our control. Accordingly, there can be no assurance
that our current expectations regarding required financial resources will prove
to be accurate. We anticipate that the commercialization of our technologies may
require increased operating costs, however, we cannot currently estimate the
amounts of such costs.
GOING CONCERN
For the six months ended December 31, 2003, we incurred a net loss from
continuing operations of $1,739,145 and had a working capital deficiency of
$789,995. We have limited financial resources and may require additional funding
in order to market and license our products. There is no assurance that we can
reverse our operating losses, or that we can raise additional capital to allow
us to continue our planned operations. These factors raise doubt about our
ability to continue as a going concern. If we continue to operate our business
at the present level we expect that our revenues may not be sufficient to
finance our ongoing activities.
ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our President and Chief Executive
Officer and Executive Vice President and Chief Financial Officer, has evaluated
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Our disclosure controls and procedures are the
controls and other procedures that we designed to ensure that we record,
process, summarize and report the information we must disclose in reports that
we file or submit under the Securities Exchange Act of 1934, as amended, within
the time periods specified in the SEC's rules and forms. Based upon that
evaluation, our President and Chief Executive Officer and Executive Vice
President and Chief Financial Officer concluded that our disclosure controls and
procedures were reasonably effective.
During the three month period ended December 31, 2003, there were no changes in
our internal control over financial reporting that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
32
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A complaint against Quest Net Corp., and CWTel, Inc., predecessor entities of
Markland, was filed in circuit court in Broward County, Florida. The plaintiffs
allege that we failed to pay a promissory note dated September 8, 2000 in the
amount of $66,672 and issued a check as payment on the note that was returned
due to insufficient funds. There have been sporadic settlement discussions but
no agreement has been reached.
ITEM 2. CHANGES IN SECURITIES
The shares of common stock listed below reflect our 1-for-60 reverse stock split
in October 2003.
In October 2003, Markland issued to ECON Investor Relations a bonus of Five
Thousand Shares for work performed during the previous quarter outside of the
scope of ECON's contract. These shares were issued for enhanced media and
corporate communications programs between June and December, 2003. The Media
Campaign is to target specific homeland security media and trade publications in
TV, print, radio, and internet. We issued these shares in reliance upon the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended, for transactions by an issuer not involving any public
offering.
In October 2003, Markland entered into a Merger Agreement with Science and
Technology Research, ("STR"). Pursuant to the agreement, STR is entitled to
$5,100,000 worth of restricted Markland Common Stock based on the average volume
weighted closing price ten days after the Agreement closing date. This amounts
to a price of $3.31, or 1,539,779 shares of common stock; these shares were
issued to George Yang. George Yang owned 100% of the common stock of STR. We
issued these shares in reliance upon the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933, as amended, for transactions by an
issuer not involving any public offering.
In November 2003, Markland entered into an agreement with MarketShare Recovery,
Stuart Siller, and George Martin to perform certain services with regard to
investor relations for Markland. MarketShare will provide us with access to
active investors and a channel to communicate with new or existing shareholders,
as well as an editorial write up, and coverage on MarketShare's web site. In
consideration for these services, Markland agreed to issue a cumulative total of
90,908 shares of common stock, in four equal quarterly installments. As of
December 31, 2003 the Company issued 22,727 shares to these above individuals.
We issued these shares in reliance upon the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933, as amended, for transactions by
an issuer not involving any public offering.
33
In November 2003, Markland entered into an agreement with Research Works to
prepare an equity research report. Markland had no editorial control over this
research report. In consideration for these services, Markland agreed to issue
Research Works a total of 37,099 shares. We issued these shares in reliance upon
the exemption from registration afforded by Section 4(2) of the Securities Act
of 1933, as amended, for transactions by an issuer not involving any public
offering.
Markland also awarded two non-officer employees of the company a total of 11,508
shares as part of their employment contracts with the company.. We issued these
shares in reliance upon the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933, as amended, for transactions by an issuer not
involving any public offering.
We issued an aggregate of 385 shares of our Series D Preferred Stock to James,
LLC. for gross proceeds of $385,000 in the quarter ended December 31, 2003.
Specifically, we issued 122 shares of Series D Preferred Stock on October 1,
2003, 103 shares of Series D Preferred Stock on November 3, 2003, 160 shares of
Series D Preferred Stock on December 1, 2003. During the present quarter,
Markland has issued an additional 277 shares of Series D Preferred Stock to
James, LLC. We issued these shares in reliance upon the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended,
for transactions by an issuer not involving any public offering.
The Series D preferred stock converts into common stock at a conversion price
ranging from 65% to 80% of the market price of our common stock at the time of
conversion. 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 $3.00, it is convertible at 80% of the market price. If the
market price is greater than $3.00, but less than or equal to $6.00, at 75% of
the market value. If the market price is greater than $6.00, but less than or
equal to $9.00, at 70% of the market price. And if the market price is greater
than $9.00, 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.
Subsequent to the end of the quarter, on January 30, 2004, James, LLC issued
Markland a conversion notice on $200,000 worth of Series C Preferred Stock, plus
accrued interest. Markland issued James, LLC 158,126 shares of common stock to
comply with this conversion as per their agreement.
We issued these shares in reliance upon the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933, as amended, for transactions by
an issuer not involving any public offering.
34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item No. Description
-------- -----------
3.1 Articles of Merger between Quest Net Corp. and Parputt
Enterprises, Inc. (filed as Exhibit 1.2 to our current
report on Form 8-K filed with the SEC on March 20, 2000 and
incorporated herein by reference).
3.2 Articles of Incorporation of Quest Net Corp. (filed as
Exhibit 1.3 to our current report on Form 8-K filed with the
SEC on March 20, 2000 and incorporated herein by reference).
3.2 Articles of Amendment to the Articles of Incorporation of
Quest Net Corp. (filed as Exhibit 3.1 to our current report
on Form 8-K filed with the SEC on April 10, 2001, and
incorporated herein by reference)
3.2 Articles of Amendment to the Articles of Incorporation of
Quest Net Corp. (filed as Exhibit 3.3 to our annual report
on Form 10-KSB filed with the SEC on October 15, 2001 and
incorporated herein by reference)
3.3 Articles of Amendment to the Articles of Incorporation of
Quest Net Corp. (filed as Exhibit 3.4 to our annual report
on Form 10-KSB filed with the SEC on October 15, 2001 and
incorporated herein by reference)
3.4 Certificate of Designations of Rights and Preferences of the
Series C Cumulative Convertible Preferred Stock (filed as
Exhibit 3.5 to our current report on Form 8-K filed with the
SEC on December 20, 2002 and incorporated herein by
reference)
3.5 Amended and Restated By-laws (filed as Exhibit 1.4 to our
current report on Form 8-K filed with the SEC on March 20,
2000 and incorporated herein by reference)
4.1 Form of common stock certificate (filed as Exhibit 4.1 to
our quarterly report on Form 10-QSB filed with the SEC on
February 14, 2003 and incorporated herein by reference)
10.1 Amended and Restated Exchange Agreement dated July 24, 2003
between Syqwest, Inc. and us (filed as Exhibit 10.1 to our
current report on Form 8-K filed with the SEC on July 30,
2003 and incorporated herein by reference)
10.2 Private Equity Credit Agreement dated September 10, 2003
between Brittany Capital Management Limited and us (filed as
Exhibit 10.16 to our annual report on Form 10-KSB filed with
the SEC on October 14, 2003 and incorporated herein by
reference)
10.3 Registration Rights Agreement dated September 10, 2003
between Brittany Capital Management Limited and us (filed as
Exhibit 10.17 to our annual report on Form 10-KSB filed with
the SEC on October 14, 2003 and incorporated herein by
reference)
10.4 Consulting Agreement with Emerging Concepts dated July 7,
2003
31.1 Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1 Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section
1350
(b) REPORTS ON FORM 8-K
A current report on Form 8-K was filed on July 30, 2003 to report Items
1 and 7.
35
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Markland Technologies, Inc.
Date: February 23, 2004 By: /s/ Robert Tarini
---------------------------------
Robert Tarini
Chairman, Director, President and
Chief Executive Officer
36
8 of 7
EXHIBIT INDEX
-------------
Item No. Description
-------- -----------
3.1 Articles of Merger between Quest Net Corp. and Parputt
Enterprises, Inc. (filed as Exhibit 1.2 to our current
report on Form 8-K filed with the SEC on March 20, 2000 and
incorporated herein by reference).
3.2 Articles of Incorporation of Quest Net Corp. (filed as
Exhibit 1.3 to our current report on Form 8-K filed with the
SEC on March 20, 2000 and incorporated herein by reference).
3.2 Articles of Amendment to the Articles of Incorporation of
Quest Net Corp. (filed as Exhibit 3.1 to our current report
on Form 8-K filed with the SEC on April 10, 2001, and
incorporated herein by reference)
3.2 Articles of Amendment to the Articles of Incorporation of
Quest Net Corp. (filed as Exhibit 3.3 to our annual report
on Form 10-KSB filed with the SEC on October 15, 2001 and
incorporated herein by reference)
3.3 Articles of Amendment to the Articles of Incorporation of
Quest Net Corp. (filed as Exhibit 3.4 to our annual report
on Form 10-KSB filed with the SEC on October 15, 2001 and
incorporated herein by reference)
3.4 Certificate of Designations of Rights and Preferences of the
Series C Cumulative Convertible Preferred Stock (filed as
Exhibit 3.5 to our current report on Form 8-K filed with the
SEC on December 20, 2002 and incorporated herein by
reference)
3.5 Amended and Restated By-laws (filed as Exhibit 1.4 to our
current report on Form 8-K filed with the SEC on March 20,
2000 and incorporated herein by reference)
4.1 Form of common stock certificate (filed as Exhibit 4.1 to
our quarterly report on Form 10-QSB filed with the SEC on
February 14, 2003 and incorporated herein by reference)
10.1 Amended and Restated Exchange Agreement dated July 24, 2003
between Syqwest, Inc. and us (filed as Exhibit 10.1 to our
current report on Form 8-K filed with the SEC on July 30,
2003 and incorporated herein by reference)
10.2 Private Equity Credit Agreement dated September 10, 2003
between Brittany Capital Management Limited and us (filed as
Exhibit 10.16 to our annual report on Form 10-KSB filed with
the SEC on October 14, 2003 and incorporated herein by
reference)
10.3 Registration Rights Agreement dated September 10, 2003
between Brittany Capital Management Limited and us (filed as
Exhibit 10.17 to our annual report on Form 10-KSB filed with
the SEC on October 14, 2003 and incorporated herein by
reference)
10.4 Consulting Agreement with Emerging Concepts dated July 7,
2003
31.1 Certification of Chief Executive Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certification of Chief Financial Officer of Periodic Report
Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1 Certification by Chief Executive Officer and Chief Financial
Officer of Periodic Report Pursuant to 18 U.S.C. Section
1350