UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB {X} Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended July 31, 2005 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 1-8690 DataMetrics Corporation -------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-3545701 -------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1717 Diplomacy Row Orlando, Florida 32809 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (407) 251-4577 ---------------------------------------------------- (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 file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |_| No |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X| Common Stock. $.01 Par Value -- 10,177,146 shares as of May 1, 2006. Index to Form 10-QSB Page No. Part I - Financial Information -------- Item 1. Financial Statements (unaudited): Consolidated Balance Sheet as of July 31, 2005 3 Consolidated Statements of Operations for the three Months Ended July 31, 2005 and July 31, 2004 4 Consolidated Statements of Operations for the nine Months Ended July 31, 2005 and July 31, 2004 Consolidated Statements of Cash Flows for the nine Months Ended July 31, 2005 and July 31, 2004 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Results of Operations 8-9 Liquidity and Capital Resources 10 Item 3. Controls and Procedures 11 Part II - Other Information Item 1. Legal Proceedings 12 Item 2. Unregistered Sales of Equity Securities and uses of funds. 12 Item 3. Defaults upon Senior Securities 12 Item 4. Submission of matters to a vote of security holders. 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Certifications 14-18 page 2 of 18 DATAMETRICS CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except share data) July 31, 2005 -------- ASSETS Current Assets Cash $ 114 Accounts receivable, net of allowance for doubtful accounts of $0 209 Inventory, net of allowance for obsolete inventory of $6,006 953 Other Current Assets 90 -------- Total current assets 1,366 Property and Equipment Building and improvements 1,117 Furniture, Fixtures and computer equipment 1,201 Land 420 Machinery and equipment 548 -------- Total Property and Equipment 3,286 Less Accumulated Depreciation (2,000) -------- Net Property and Equipment 1,286 Total Assets $ 2,652 ======== LIABILITIES AND STOCKHOLDERS DEFICIT Current Liabilities Notes Payable $ 879 Accounts Payable 852 Accrued Expenses 834 Deferred Revenue 8 Warranty Reserve 40 Current maturities of LT Debt 3,103 -------- Total Current Liabilities 5,716 Long-Term Liabilities Long-Term Debt 688 -------- Total Liabilities 6,404 Stockholders deficit: 4% Cumulative Preferred Stock, $.01 par value ($940,485 aggregate liquidation preference); 40,000,000 Authorized; 892,656 issued and outstanding 9 Common Stock, $.01 par value; 800,000,000 shares Authorized; 32,113,000 issued and outstanding 321 Additional Paid In Capital 58,142 Accumulated Deficit (62,224) -------- Total Stockholders Deficit (3,752) Total Liabilities and Stockholders Deficit $ 2,652 ======== - -------------------------------------------------------------------------------- The accompanying "Notes to Consolidated Financial Statements"form an integral part of these statements. - -------------------------------------------------------------------------------- page 3 of 18 DATAMETRICS CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share data) Three Months Ended Nine Months Ended July 31, July 31, July 31, July 31, 2005 2004 2005 2004 --------- ------------------------------ ----------- Sales $ 725 $ 1,252 $ 1,718 $ 3,287 Cost of Sales 498 780 1,303 2,537 --------- ------------------------------ ----------- Gross Profit $ 227 $ 472 $ 415 $ 750 --------------------------------------------------------------------- Selling, General and Administrative Personnel and Related Costs $ 236 $ 292 $ 820 $ 844 Other 138 63 305 238 --------------------------------------------------------------------- Total Selling, General and Administrative $ 374 $ 355 $ 1,125 $ 1,082 --------------------------------------------------------------------- Income (Loss) from Operations $ (147) $ 117 $ (710) $ (332) Other income and expense (117) (107) (343) (316) --------- ------------------------------ ----------- Net Income (Loss) $ (264) $ 10 $ (1,053) $ (648) ========= ============================== =========== Loss per share of common stock; basic and diluted $(0.008) $ 0.000 $ (0.033) $ (0.020) ========= ============================== =========== Weighted avg. no. of shares outstanding basic and diluted 32,113 32,113 32,113 32,113 ========= ============================== =========== The accompanying "Notes to Consolidated Financial Statements" form an integral part of these statements. page 4 of 18 DATAMETRICS CORPORATION AND SUBSIDIARY CONSOLIDATED CASH FLOWS STATEMENTS (unaudited) (in thousands, except per share data) For the Nine Months Ended July 31 July 31 2005 2004 --------------------------------- Cash Flows from Operating Activities: Net Loss (1,053) (648) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation Expense 40 42 Amortization of Refinancing Costs 155 154 Expenses Paid from Preferred Stock Proceeds -- 50 Allowance for Bad debts -- (25) Changes in assets and liabilities: Accounts receivable 458 (186) Inventories (456) 105 Prepaid expenses and other current assets (50) (37) Accounts Payable 58 (151) Accrued Expenses 167 20 Other Current Liabilities -- 18 Deferred Revenue (137) (228) --------------------------------- Net cash provided by (used in) operating activities (818) (886) Cash Flows from Investing Activities: Capital expenditures for property and equipment (8) -- --------------------------------- Net cash provided by (used in ) investing activities (8) -- Cash Flows from Financing Activities: Proceeds from issuance of preferred stock -- 844 Proceeds from loan payable 879 -- Payments on loan payable (30) (34) --------------------------------- Net cash provided by (used in) financing activities 849 810 Net increase (decrease) in cash 23 (76) Cash at the beginning of the period 91 110 --------------------------------- Cash at the end of the period 114 34 ================================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for Interest, net: 80 123 The accompanying "Notes to Consolidated Financial Statements" form an integral part of these statements. page 5 of 18 DATAMETRICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 2005 (Unaudited) 1. The consolidated financial statements include the accounts of DataMetrics Corporation and its wholly owned subsidiary (collectively, the "Company"). The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission relating to interim financial statements. These condensed financial statements do not include all disclosures provided in the company's annual financial statements. The condensed financial statements should be read in conjunction with the financial statements and notes thereto for the year ended October 31, 2004 contained in the company's Form 10-KSB filed with the Securities and Exchange Commission. All adjustments of a normal recurring nature, which, in the opinion of management, are necessary to present a fair statement of results for the periods have been made. Results of operations are not necessarily indicative of the results to be expected for the full year. 2. INVENTORIES Stockroom inventories consist primarily of materials used by the Company for existing and anticipated contracts and materials and finished assemblies which are held to satisfy spare parts requirements of the Company's customers. Those parts not expected to be sold within one year are classified as a non-current asset and fully reserved. The Company evaluates all inventories for obsolescence on a periodic basis and records estimated reserves accordingly. Inventories as of July 31, 2005 consist of the following: (in thousands) -------------- Inventories Parts and sub-assemblies 521 Work in Process 432 Obsolete Inventory 6,006 ------------- Total Inventory 6,959 Reserve for Obsolete Inventory (6,006) -------------- Net Inventory 953 3. NOTES PAYABLE Bridge Loans with interest payable at 12%, principal and interest due in July 2005, and collateralized by all assets of the Company. The note holders' rights to collateral are subordinate to the rights of the other holders of long term debt. 4. DEBT STRUCTURE / SUBSEQUENT EVENTS In anticipation of the reorganization described in the definitive information statement on Schedule 14C filed with the Securities and Exchange Commission on March 2, 2006, the Company borrowed $879,342 during the fiscal year ended October 31, 2005 to sustain operations. These borrowings accrue interest at rates of 10% and 12%. Many of these loans had maturity dates in 2005 and the Company was unable to repay these loans by the stated maturity date. However, as described in Schedule 14C, the loans were repaid or converted into equity in December 2005. page 6 of 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This report contains certain statements of a forward-looking nature relating to future events or the future performance of the Company. Prospective investors are cautioned that such statements are only predictions and those actual events or results may differ materially. MANAGEMENT FOCUS The Company designs, develops, and manufactures computers and computer peripheral equipment for military, industrial and commercial applications where reliable operation of the equipment in challenging environments is imperative. The systems and equipment are qualified for use in airborne, shipboard, and ground based applications. The Company's product lines include a broad range of computers, computer workstations, servers, printers, plotters and monitors. The Company offers military specified and ruggedized versions of flat panel monitors and other peripheral equipment (including computers, printers, keyboards and trackballs) encased in shock, vibration and temperature resistant chassis. The chassis produced by the Company are used in conjunction with its product by the military to house this sensitive ruggedized equipment. The Navy P3 Orion, Air Force AWACS and Army Fire-Finder programs all require rugged rack enclosures to protect the equipment from shock, vibration and other damage which may be experienced in a harsh operating environment. DataMetrics continues to increase its presence in the military arena including United States Air Force avionics and ground-based systems as well as United States Army system diagnostics. DataMetrics' equipment is designed and qualified for use as part of commercial airlines cockpit systems. For the nine months ended July 31, 2005, the Company experienced slower than expected receipt of orders. Many of the military programs from which the Company anticipates generating its revenue have been rescheduled and military priorities have been reconsidered to account for short, medium, and long-term needs. The Company expects to see an increase in order activity in the following quarters and attributes the delay in orders due to a focus on budget spending for troops and munitions in the war effort in Afghanistan and Iraq. The following phases in this war and projected increase in overall military / defense spending will likely entail more sophisticated surveillance techniques and equipment, which will require data processing and peripheral equipment much like we currently supply for the AWACS, P3 Orions aircraft and the armed forces. page 7 of 18 RESULTS OF OPERATIONS Three Month Period Ended July 31, 2005 Compared To Three Month Period Ended July 31, 2004 Sales for the quarter ended July 31, 2005 were $725,000 a decrease of $527,000 or 42%, compared with sales of $1,252,000 in the same period in the prior fiscal year. The decrease in sales for the three months ended July 31, 2005 is attributable mainly to slower than anticipated receipt of orders. Cost of sales for the quarter ended July 31, 2005 was $498,000 (69% of sales), a decrease of $282,000 or 36%, compared with $780,000 (62% of sales) for the same period in the prior fiscal year. Cost of sales as a percentage of Sales increased due to increase in material and labor costs that were not passed on to customers. Selling, general and administrative ("SG&A") expenses for the quarter ended July 31, 2005 were $374,000 (52% of sales) an increase of $19,000, or 5%, compared with $355,000 (28% of sales) for the same period in the prior fiscal year. While SG&A increased modestly, SG&A as a percentage of sales increased due largely to the relatively fixed nature of the components of selling, general, and administrative expenses coupled with the substantial reduction of sales for the period. Interest expense amounted to $127,809 for the quarter ended July 31, 2005 compared with net interest expense of $107,000 for the same period in the prior year. The increase in interest expense reflects the additional borrowing required in 2005. The net loss for the quarter ended July 31, 2005 amounted to $264,000, compared with a net income of $10,000 for the same period in the prior year. The loss for the current period is attributable to significant decrease in sales and the fixed nature of selling, general & administrative expenses. Nine Month Period Ended July 31, 2005 Compared To Nine Month Period Ended July 31, 2004 Sales for the nine months ended July 31, 2005 were $1,718,000 a decrease of $1,569,000 or 48%, compared with sales of $3,287,000 in the same period in the prior fiscal year. The decrease in sales is attributable mainly to slower than anticipated receipt of orders from the U.S. Government and major Defense Contractors. Cost of sales for the nine months ended July 31, 2005 was $1,303,000 (76% of sales), a decrease of $1,234,000 or 37%, compared with $2,537,000 (77% of sales) for the same period in the prior fiscal year. Cost of sales decreased compared to the same period in the prior fiscal year because of the decrease in sales. Selling, general and administrative ("SG&A") expenses for the nine months ended July 31, 2005 were $1,125,000 (65% of sales) an increase of $43,000, or 4%, compared with $1,082,000 (33% of sales) for the same period in the prior fiscal year. Interest expense amounted to $371,218 for the nine months ended July 31, 2005 compared with net interest expense of $333,000 for the same period in the prior year reflecting the additional borrowing required in 2005. page 8 of 18 The net loss for the nine months ended July 31, 2005 amounted to $1,053,000 an increase in losses of $405,000 compared with a net loss of $648,000 for the same period in the prior year. The increased loss for the current period is attributable to significantly lower sales in the period and relatively fixed obligations for selling, general and administrative expenses. Management has determined that, based on the Company's historical losses from recurring operations, the Company will not recognize its net deferred tax assets at July 31, 2005. Ultimate recognition of these tax assets is dependent, to some extent, on future revenue levels and margins. It is the intention of management to assess the appropriate level for the valuation allowance each quarter. page 9 of 18 LIQUIDITY AND CAPITAL RESOURCES The Company continues to have substantial debt that was due in 2005 and 2004. Although the Company has generated much of the cash flow through equity transactions to sustain current operations, the debt obligations of previous periods have not been met. As a result, additional capital and a significant restructuring were required to meet its prior period debt obligations. The details of the restructuring are described with the filing of the definitive information statement on Schedule 14C as filed with the Securities and Exchange Commission on March 2, 2006. This includes a description of the reverse stock split that occurred on April 11, 2006. On April 11, 2006, the Company elected to effect a Stock combination through a reverse stock split. Details of the split are described in the above referenced Schedule 14C. FORWARD LOOKING STATEMENTS - CAUTIONARY FACTORS Except for the historical information and statements contained in this report, the matters set forth in this report are "forward-looking statements" that involve uncertainties and risks. Some are discussed at appropriate points in this report and the Company's other SEC filings. Others are included in the fact that the Company has been engaged in supplying equipment and services to the U.S. government defense programs which are subject to special risks, including dependence on government appropriations, contract termination without cause, contract re-negotiations and the intense competition for available defense business. page 10 of 18 Item 3. CONTROLS AND PROCEDURES (a) Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive and financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) or Rule 15d-15(e) under the U.S. Securities Exchange Act of 1934, as amended) within 90 days of the filing date of this quarterly report and, based on their evaluation, our principal executive and financial officer have concluded that these controls and procedures are working now and our current period reports will be filed on time once we have finished filing the backlog of delinquent reports. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Control Over Financial Reporting. There were no significant changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) or Rule 15d-15(d) that occurred during the period covered by this quarterly report, or to our knowledge in other factors, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. page 11 of 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is, from time to time, the subject of litigation, claims and assessments arising out of matters occurring during the normal operation of the Company's business. In the opinion of management, the liability, if any, under such current litigation, claims and assessments, that are material, have been properly accrued. Item 2. Unregistered Sales of Equity Securities and Uses of Proceeds. None Item 3. Defaults upon Senior Securities Effective July 31, 2005, the Company was in default on certain secured indebtedness owed to various parties in the amount of approximately $3,400,000. However, all Company obligations were paid or converted to common stock as part of the restructuring of the Company's capital structure on December 31, 2005 as more fully described in the definitive information statement on Schedule 14C filed with the Securities and Exchange Commission on March 2, 2006. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits (a) Exhibits: 31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 page 12 of 18 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Form 10-QSB to be signed on its behalf by its duly authorized representatives. DATAMETRICS CORPORATION ------------------------ /s/ Daniel Bertram Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Name Title Date - ------------------- ----------------------- ----------- /s/ Daniel Bertram Chief Executive Officer May 1, 2006 - ------------------- Daniel Bertram /s/ Rafik Moursalien Controller May 1, 2006 - ------------------- Rafik Moursalien page 13 of 18