UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended October 31, 2004
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the
transition period from __________ to _____________
Commission file number 000-50213
AEGIS ASSESSMENTS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 72-1525702
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
7975 N. Hayden Road, Suite D-363, Scottsdale, AZ 85258
(Address of principal executive offices)
480.778.9140
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No []
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's common equity outstanding as of
December 10, 2004 was approximately 23,927,718 shares of common stock, par value
$.001.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
INDEX TO FORM 10-QSB FILING
FOR THE QUARTER ENDED OCTOBER 31, 2004
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
Page
Item 1. Financial Statements.......................................................................1
Balance Sheet as of October 31, 2004.................................................1
Statements of Operations
for the Three Month Periods
Ended October 31, 2004 and October 31, 2003.....................................2
Statements of Cash Flows
for the Three month periods ended October 31,
2004 and October 31, 2003.......................................................3
Notes to the Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis......................................................12
Item 3. Controls and Procedures.................................................................28
PART II
OTHER INFORMATION
Item 1. Legal Proceedings .......................................................................29
Item 2. Changes in Securities ...................................................................29
Item 6. Exhibits and Reports on Form 8-K.........................................................30
SIGNATURES
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Aegis Assessments, Inc.
(A Development Stage Company)
Condensed Balance Sheet
October 31, 2004
(Unaudited)
-----------
Assets
Current Assets
Cash $ 211,912
Accounts Receivable 12,545
Inventory 360,988
------------------------------
Total Current Assets 585,445
Property and equipment, net of accumulated
depreciation of $34,380 254,451
Other Assets 14,616
------------------------------
Total Assets $ 854,512
==============================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable $ 75,292
Accrued Payroll 42,556
Deferred Revenue 350,000
------------------------------
Total Current Liabilities 467,848
Series A 8% convertible preferred stock $.001 par
value; 200,000 shares authorized.
Shareholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized for issuance in one or more series.
Common stock, $.001 par value; 100,000,000 shares
authorized; 18,797,278 shares issued and outstanding
at October 31, 2004 18,799
Additional paid-in capital 11,502,809
Stock subscription receivable - related party (67,500)
Deficit accumulated during the development stage (11,067,444)
------------------------------
Total shareholders' equity 386,664
------------------------------
Total liabilities and shareholders' equity 854,512
==============================
The accompanying notes are an integral part of the condensed financial statements
1
Aegis Assessments, Inc.
(A Development Stage Company)
Condensed Statements of Operations
(Unaudited)
-----------
For the period from
For the three For the three January 16,2002
months ended months ended (inception) to
October 31,2004 October 31,2003 October 31,2004
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
Revenue $ - - $ - - $ 12,545
Cost of equipment sold - - - - 3,600
General and administrative expenses - other $ 542,900 $ 394,740 10,788,524
Consulting fees - related party - - 53,588 287,065
--------------------- --------------------- ---------------------
Loss before provision for income taxes (542,900) (448,328) $ (11,066,644)
Provision for income taxes -- 800
--------------------- --------------------- ---------------------
Net loss $ (542,900) $ (448,328) $ (11,067,444)
===================== ===================== =====================
Net loss available to common shareholders
per common share - basic and diluted $ (0.03) $ (0.04) $ (0.89)
Weighted average common shares - basic
--------------------- --------------------- ---------------------
and diluted 18,638,207 12,071,658 12,501,282
===================== ===================== =====================
The accompanying notes are an integral part of the condensed financial statements
2
Aegis Assessments, Inc.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
-----------
For the period
from
For the three For the three January 16,2002
months ended months ended (inception) to
October 31,2004 October 31,2003 October 31,2004
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(542,900) $(448,328) $(11,067,444)
Adjustments to reconcile net
loss to net cash used in operating
activities:
Non-cash items included in the net
loss:
Depreciation 16,387 1342 34,380
Amortization and expenses related to
stock and stock options 212,330 8,228,560
The intrinsic value of non-
detachable
conversion rights of the Series A
8%
preferred stock 9,800
Issuance of stock for payment of interest 1,184 3,266
Increase in Assets
Accounts Receivable (12,545)
Inventory (164,588) (360,988)
Increase in Other Assets (9,250) (14,616)
Increase in Liabilities:
Accrued payroll 26,137 (11,238) 42,556
Accounts payable 21,978 14,244 75,292
Accrued interest - officers (1,906)
Deferred Revenue 350,000
Note Payable (2,333) -
-----------------------------------------------------
Net cash used in operating activities (645,319) (241,622) (2,711,739)
(continued)
The accompanying notes are an integral part of the condensed financial statements
3
Aegis Assessments, Inc.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
For the period from
For the three For the three January 16,2002
months ended months ended (inception) to
October 31,2004 October 31,2003 October 31,2004
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
Cash flows used in investing activities:
Payments to acquire property $(30,475) $(18,536) $(288,831)
and equipment
Net cash flows used in investing
activities (30,475) (18,536) (288,831)
Cash flows provided by financing
activities:
Proceeds from issuance of preferred
stock - 90,100
Proceeds from issuance of common
stock - related party 22,500
Proceeds from issuance of common stock 278,891 374,500 2,498,893
Proceeds from exercise of warrants 111,238 46,250 556,989
Proceeds from issuance of debenture - 17,000
Proceeds from notes payable and
advances - related parties 583 17,000
Stock subscription receivable - 10,000
----------------------------------------------------
Net cash provided financing activities 390,129 421,333 3,212,482
Net increase in cash and cash equivalents (285,665) 161,175 211,912
Cash and cash equivalents, beginning of 497,577 32,932 -
period
----------------------------------------------------
Cash and cash equivalents, end of period $211,912 $194,107 $211,912
====================================================
Exercise of options applied against
notes $17,000 $17,000
===================================
Payment of accounts payable with stock $12,025 $12,025
===================================
Conversion of preferred stock to common
stock $27,500 $27,500
===================================
Issuance of common stock for services $8,095,206
===================
Issuance of common stock for note -
related party $67,500
===================
The accompanying notes are an integral part of the condensed financial statements
4
Aegis Assessments, Inc.
(A Development Stage Company)
Notes to Financial Statements (unaudited)
As of October 31, 2004 and 2003, For The Three Months Ended October 31,
2004 and October 31, 2003, and For The Period January 16, 2002 (inception)
Through October 31, 2004.
1. Basis of Presentation
The accompanying unaudited condensed financial statements include all
adjustments that management believes are necessary for a fair presentation of
the Company's financial position at October 31, 2004 and results of operations
for the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States ("US GAAP") have been
condensed or omitted.
Results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. The accompanying
condensed financial statements should be read in conjunction with our audited
financial statements and footnotes as of and for the year ended July 31, 2004,
included in our Annual Report on Form 10-KSB.
2. Summary of Significant Accounting Policies
New Accounting Pronouncements
In November 2004, the Financial Accounting Standard board issued FAS 151
- -"Inventory Costs--an amendment of ARB No. 43, Chapter 4." This Statement amends
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This Statement requires that those items
be recognized as current-period charges in all cases. In addition, this
Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
adoption of FAS 151 is not expected to have a material impact on the Company.
Development Stage Operations
Aegis Assessments, Inc. is a development stage company and has limited
operating history with insignificant revenues. The Company was incorporated
under the laws of the State of Delaware on January 16, 2002. As of July 31, 2004
the Company completed development of its core product, a specialized emergency
response and communication systems for law enforcement agencies at all levels,
the U.S. Department of Defense, and select commercial firms. The Company refers
to this product as the "Aegis SafetyNet RadioBridge, or "RadioBridge," system.
The Company is now engaged in producing the systems and establishing sales
distribution channels.
5
Initial Production and Sales Activity
In May 2004, the Company received its first purchase order for the Aegis
SafetyNet Radio Bridge system and began production. The initial $2.4 million
purchase order was accompanied by a progress payment of $350,000 against the
first units. As of July 31, 2004, the Company had delivered 12 units to the
distributor. The progress payment was recorded as deferred revenue. At the time
the progress payment was received, the Company anticipated significant
involvement in the distributor's resale activities and therefore did not
anticipate recording revenue related to the units until they were sold to
end-users. The Company has now been informed by the distributor, JAD Corporation
of America, that JAD Corporation's marketing efforts to date have not resulted
in sales to end-users. JAD Corporation has also expressed to the Company its
dissatisfaction with the arrangement and its desire to conclude the relationship
should the matters not be settled. The Company, therefore, does not anticipate
any future revenues from JAD Corporation.
An additional Radio Bridge was sold to the U.S. government for evaluation
in June 2004. The sale was recorded and the receivable remains outstanding at
October 31, 2004. Because the Company expects collection of this receivable, it
does not believe an allowance for doubtful accounts is necessary at October 31,
2004.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reported periods. Management bases its estimates and
assumptions on historical experience and on various other assumptions that it
believes are reasonable under the circumstances. However, future events are
subject to change and the best estimates and assumptions routinely require
adjustment. US GAAP requires management to make estimates and judgments in
several areas including those related to the capitalization of development costs
of the Company's software, the valuation of the recoverability of those costs,
and the fair value of stock-based compensation. Actual results in these
particular areas could differ from those estimates.
Costs of Promotional Materials
The cost of promotional materials is expensed as incurred, and includes
such items as the cost to produce a corporate capabilities video. The Company
did not incur any promotional costs in the fiscal quarter ended October 31,
2004.
6
Income Taxes
The Company accounts for income taxes under the asset and liability method,
whereby, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period the enactment occurs. A valuation allowance is provided for certain
deferred tax assets if it is more likely than not that the Company will not
realize tax assets through future operations. As of October 31, 2004, the
Company has provided a 100% valuation allowance for the deferred tax asset,
since management has not been able to determine that the realization of that
asset is more likely than not.
Basic and Diluted Loss Per Share
The basic loss per common share is computed by dividing the net loss
available to common shareholders by the weighted average number of common shares
outstanding. Diluted loss per common share is computed in the same way as basic
loss per common share except that the denominator is increased to include the
number of additional common shares that would be outstanding if all potential
common shares had been issued and if the additional common shares were dilutive.
As of October 31, 2004, the Company had 5,018,200 outstanding stock options, and
warrants for the purchase of 619,416 shares of common stock. The options and
warrants would have an anti-dilutive effect and, therefore, are not included in
diluted loss per share.
Property, Plant and Equipment
Property and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized, and minor replacements, maintenance,
and repairs are charged to expense as incurred. When property and equipment are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in the
results of operations for the respective period. Depreciation is provided over
the estimated useful lives of the related assets using the straight-line method
for financial statement purposes. The Company uses other depreciation methods,
generally accelerated depreciation, for tax purposes where appropriate. The
estimated useful lives for significant property and equipment categories are as
follows:
Office equipment 3 years
Shop equipment 5 years
Office furniture 7 years
Product Demonstration Equipment 5 years
7
Stock-Based Compensation
The Company accounts for its two stock option plans and other stock-based
employee compensation using the intrinsic value method and related
interpretations, as described more fully in the Company's annual report on Form
10-KSB for the year ended July 31, 2004. Accordingly, compensation expense is
recorded on the date of grant only to the extent the current market price of the
underlying stock exceeds the option exercise price.
Had compensation expense been determined based on the fair values at dates
of grant for its stock options under the fair value approach, net loss and net
loss per share would have been reported as indicated in the pro forma results
below:
Three MonthsEnded
October 31,
2004 2003
---------- -----------
Net loss, as reported $(542,900) $(448,328)
Add: Stock-based compensation
expense
included in
reporting net loss - -
Deduct: Stock based employee
compensation
expense determined under fair
value based - (19,024)
method
---------- -----------
Pro forma
net loss $(542,900) (467,352)
Net loss per share, as
reported (0.03) (0.04)
Net loss per share,
pro forma (0.03) (0.04)
The fair value under FAS 123 for options
granted were estimated at the
date of grant using a Black-Scholes option pricing
model with the following
weighted-average assumptions:
Expected life
(years) N/A 2.5
Interest
rate N/A 1.40%
Volatility N/A 75%
Research And Development And Software Development
Research and development costs are charged to expense as incurred. The
costs incurred for the development of computer software that will be sold,
leased, or otherwise marketed are capitalized when technological feasibility has
been established. These capitalized costs will be subject to an ongoing
assessment of recoverability based on anticipated future revenues and changes in
hardware and software technologies. Costs that will be capitalized include
direct labor and related overhead. Amortization of capitalized software
development costs will begin when the product is available for general release.
No computer software costs are currently capitalized.
8
3. Related Party Transactions
In September 2004, a member of the board of directors exercised his option
to acquire 20,000 shares for $.30 per share.
On September 14, 2004, Ken Edge resigned as officer and director. Under
terms of the Company's stock option plan, options held by employees expire if
not exercised prior to termination of employment. Mr. Edge did not exercise his
option and his 1.2 million options expired on September 14, 2004 and were
returned to the plan to be eligible for re-grant.
4. Stock Transactions
Common Stock
In July 2003, through a private placement the Company authorized 300,000
equity units, each of which consisted of one share of the Company's common
stock, one warrant to acquire one share of the Company's common stock at $.50
per share, with an exercise period that expires six months after the purchase,
and one warrant to acquire one share of the Company's common stock at $1.50 per
share, with an exercise period that expires 18 months after purchase. As of
October 31, 2004 a total of 254,667 of the units were sold for a total of
$$382,000, and 221,667 of the warrants were exercised for a total of $110,834.
No units were sold and no warrants were exercised during the quarter ended
October 31, 2004. During the quarter ended October 31, 2003, 249,667 of the
units were sold for a total of $374,500 and 92,500 of the warrants were
exercised for a total of $46,250.
In October 2003, through a private placement the Company authorized the
sale of 2,000,000 equity units for $1.50 per unit. Each unit consists of one
share of common stock and one warrant to purchase a share of common stock for
$.50, with an exercise period that expires six months after the unit is
purchased. No units were sold prior to October 31, 2003. As of October 31, 2004
the Company had sold 1,263,727 units for a total of $1,895,591, and 892,313 of
the warrants were exercised for a total of $446,157. Of these amounts, 181,927
of the units were sold and 222,447 of the warrants were exercised during the
quarter ended October 31, 2004.
5. Lease Agreements
In October 2003, the Company entered into a lease agreement for an
industrial building. The lease has an initial term of eighteen months with an
option to extend the lease for an additional six-month term thereafter. The
monthly payment under the lease is $2,250. Upon execution of the lease the
Company paid the first and last months lease payment and a security deposit of
$7,000. The facility is used for product research and development.
9
On March 1, 2004 the Company moved its corporate headquarters to
Scottsdale, Arizona. The Company signed a three-year lease calling for monthly
payments of $4,963.13 beginning March 1, 2004.
6. Commitments and Contingencies
Financial Results, Liquidity and Management's Plan (Unaudited)
The Company has incurred net losses since its inception in January 2002 and
has no established sources of revenue. Despite its negative cash flows from
operations the Company has been able to obtain additional operating capital
through private funding sources. Management's plans include the continued
development of the Company's SafetyNet products and a client awareness program
that it believes will enhance its ability to generate revenues from the sale of
the Company's products. The Company has relied upon equity funding and loans
from shareholders since inception.
During the quarter ended October 31, 2004, the Company financed its
operations through private equity funding. No assurances can be given that the
Company can obtain sufficient working capital through the sale of the Company's
securities and borrowing, or that the sale of the SafetyNet products will
generate sufficient revenues in the future to sustain ongoing operations. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
Preferred Stock
From November 2002 through January 2003, the Company sold 18,020 shares of
its Series A Preferred Stock (the "preferred stock"). A question arose as to the
propriety of the Company's reliance upon a section of the Securities Act of 1933
that the preferred stock was exempt from registration. The potential consequence
of the shares not being subject to the exemption created a right of rescission
for each investor amounting to the total of their investment. As of October 31,
2003 all the preferred shareholders had exercised their right to convert their
preferred shares into common shares. It is possible that their right of
rescission may survive the conversion. However, no provision for this
contingency has been made in the accompanying financial statements.
Litigation
In September 2003, the Company filed a complaint in California Superior
Court against two former officers of the Company and a related company (the
"defendants"), alleging fraud, deceit, conspiracy, breach of contract and
seeking rescission of agreements made in April and August 2002 and the return of
the cancelled stock certificates representing 1,000,000 cancelled shares of the
Company's common stock. In a preliminary ruling, the court ordered that the
disputed stock certificates be held at two brokerage firms until the matter is
resolved. If the Company prevails in this action, the stock will be considered
cancelled. Until the court resolves this matter, the shares are included in
common shares outstanding although the Company's position is that the stock has
been validly cancelled. The defendants filed an amended cross complaint alleging
conversion, breach of duty to transfer securities, breach of contract,
defamation, and unfair business practices.
10
The Company intends to vigorously prosecute its complaint and defend the
cross-complaint. In the event of an unfavorable outcome of the defense against
the cross-complaint, the award of damages to defendants could be material. The
Company does not have director and officer insurance or some other form of
insurance covering the period that gave rise to these events. The Company
believes that the merits of its case are substantial and that the Company will
prevail in the matter. If the Company prevails in the pending litigation, there
is the potential of a contingent gain of an amount not to exceed $10,000
7. Subsequent Events
In October 2003, the Company authorized through a private placement the
sale of 2,000,000 equity units for $1.50 per unit. Each unit consists of one
share of common stock and one warrant to purchase a share of common stock for
$.50, with an exercise period that expires six months after the unit is
purchased. As of December 8, 2004 the Company has sold 1,279,969 units for a
total of $1,919,955. In addition, shareholders have exercised 998,396 warrants
for a total of $499,199.
On November 1, 2004 the Company announced its intention to change its
fiscal year end from July 31 to June 30, effective December 31, 2004.
In November 2004, the Company authorized through a private placement the
sale of 2,000,000 equity units for $1.00 per unit. Each unit consists of one
share of common stock and one warrant to purchase a share of common stock for
$.50, with an exercise period that expires six months after the unit is
purchased. As of December 8, 2004 the Company has sold 22,000 units for a total
of $22,000. No warrants have been exercised to date.
On November 23, 2004, the Company entered into a private placement of the
Company's common stock. Under terms of the agreement the Company sold five
million shares of common stock in exchange for $5 million in U.S. Treasury
Bonds. A security agreement covering the bonds was subsequently granted another
party incidental to a separate equity swap transaction. Accordingly, the bonds
may not be sold or exchanged during the term of the security agreement. However,
the bonds may serve as collateral for other borrowing, subject to the terms of
the security agreement.
On November 23, 2004, the Company entered into an equity swap transaction
with Cogent Capital Corporation. Under the terms of the agreement, the Company
paid Cogent $50,000 in cash, and agreed to pay an amount equal to the interest
on $5 million, at LIBOR plus 1.25%, for the next 24 months. In addition, the
Company agreed to pay Cogent an amount equal to any decrease in value of four
million shares of its common stock below $1.00 per share, which was a 20%
discount to its fair market value at the date of the agreement. Cogent agreed to
pay the Company an amount equal to any increase in value of four million shares
of Aegis' common stock above $1.00 per share. The agreement is for 24 months,
and the settlement between the Company and Cogent is to be paid in cash at the
termination of the agreement. The Company also received from Cogent a call
option on four million shares of Aegis' common stock. The option is callable on
November 23, 2006, for the market price on that date.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
For a description of our significant accounting policies and an
understanding of the significant factors that influenced our performance during
the three months ended October 31, 2004, this "Management's Discussion and
Analysis" should be read in conjunction with the Financial Statements, including
the related notes, appearing in Item 1 of this Quarterly Report. The preparation
of this Quarterly Report on Form 10-QSB requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results reported in the
future will not differ from those estimates or that revisions of these estimates
may not become necessary in the future.
Forward Looking Statements
This portion of this Quarterly Report on Form 10-QSB, includes statements
that constitute "forward-looking statements." These forward-looking statements
are often characterized by the terms "may," "believes," "projects," "expects,"
or "anticipates," and do not reflect historical facts. Specific forward-looking
statements contained in this portion of the Quarterly Report include, but are
not limited to the Company's (i) expectation that the private placement and
related transactions will facilitate its attempt to obtain a listing of its
common stock on the American Stock Exchange; (ii) expectation that it will begin
generating revenues from the sale of its products rather than equity or debt
financings; (iii) plan to allocate any funds it receives to expanding production
capabilities, establishing a distribution channel for products, hiring
additional personnel for a sales ramp-up, and meeting requirements to secure
acceptance for listing its stock on the American Stock Exchange; (iv) belief
that its client awareness program will enhance its ability to generate revenues
from the sale of its products; and (v) belief that as a result of developments
with the Department of Homeland Security, it will be easier to sell RadioBridge
units to state and municipal public safety agencies.
12
Forward-looking statements involve risks, uncertainties and other factors,
which may cause our actual results, performance or achievements to be materially
different from those expressed or implied by such forward-looking statements.
Factors and risks that could affect our results and achievements and cause them
to materially differ from those contained in the forward-looking statements
include, but are not limited to (i) market acceptance of our products; (ii)
establishment and expansion of our direct and indirect distribution channels;
(iii) attracting and retaining the endorsement of key opinion-leaders in the law
enforcement, fire, rescue and other emergency response communities; (iv) the
level of product technology and price competition for our products; (v) the
degree and rate of growth of the markets in which we compete and the
accompanying demand for our products; (vi) potential delays in international and
domestic orders; (vii) risks associated with rapid technological change and
execution and implementation risks of new technology; (viii) new product
introduction risks; (ix) ramping manufacturing production to meet demand; (x)
future potential litigation resulting from alleged product related injuries;
(xi) potential fluctuations in quarterly operating results; (xii) financial and
budgetary constraints of prospects and customers; (xiii) fluctuations in
component pricing; (xiv) adoption of new or changes in accounting policies and
practices, including pronouncements promulgated by standard setting bodies; (xv)
changes in legislation and governmental regulation; (xvi) publicity that may
adversely impact our business and/or industry; and (xvii) the other risks and
uncertainties set forth below under those identified in the section below titled
"Risk Factors," as well as other factors that we are currently unable to
identify or quantify, but may exist in the future.
In addition, the foregoing factors may affect generally our business,
results of operations and financial position. Forward-looking statements speak
only as of the date the statement was made. We do not undertake and specifically
decline any obligation to update any forward-looking statements.
Executive Overview
Through our SafetyNet(TM) line of products, we supply wireless security
solutions to public safety agencies and commercial end users for homeland
security and life safety applications. Our current product is the SafetyNet
RadioBridge(TM) , which allows most two-way radios to be interconnected
regardless of the radio's frequency, modulation or encryption scheme. We have
also modified and improved the technologies that comprised our Wireless Life
Safety System and now anticipate marketing products using that technology under
the name "SafetyNet Guardian(TM) System," which allows video transmissions and
voice communications from the stairwells inside buildings for commercial safety
applications. We are changing the name of these related products because we
believe there may be some confusion on the part of end-users if we identify our
product as a "wireless life safety system." We came to this conclusion because
our initial marketing research, including discussions with fire safety officials
and commercial building engineers, indicated that many potential customers
thought our system was meant to replace, rather than augment, existing life
safety systems.
Since the filing of our Annual Report, we have consummated significant
transactions involving the private placement of our common stock in exchange for
United States Treasury Bonds and an equity swap arrangement. We expect these
transactions to facilitate our attempt to obtain a listing of our common stock
on the American Stock Exchange. Additionally, we believe that the Treasury Bonds
will serve as collateral for future borrowings. During our first quarter, we
engaged in discussions with out current national distributor concerning certain
disagreements and the renegotiation of our arrangement. We also entered into an
agreement with our first international distributor. These and other matters are
described in greater detail below under Recent Developments.
13
Recent Developments
Private Placement and Equity Swap Arrangement. On November 23, 2003, we
completed a private placement of 5,000,000 shares of our common stock to four
accredited investors. This transaction was facilitated by Cogent Capital Corp.
The private placement was the first in a series of related concurrent
transactions that are intended to facilitate our efforts to obtain a listing for
our common stock on the American Stock Exchange.
We issued the 5,000,000 shares of common stock in exchange for $5,000,000
of United States Treasury Note and stripped interest security (the "Bonds"). The
Bonds serve as collateral in an equity swap transaction with Cogent, as
described below. Accordingly, the Bonds are being held in escrow pending release
of the Bonds upon expiration of the security interest. While the Bonds are held
in escrow and subject to Cogent's security interest, we may borrow against the
value of the Bonds provided the lender is willing to take a subordinate position
to Cogent's security interest.
As part of this transaction, we acquired from Cogent a call option that
will allow us to repurchase up to 80% of the shares of common stock sold in the
private placement at the then-current market price. The option expires on
November 25, 2006 and may only be exercised on the expiration date. If we
exercise the call option, we can use the Bonds to pay the purchase price for the
shares of common stock that we repurchase.
Also as part of this transaction, we entered into an equity swap
arrangement with Cogent under which we and Cogent will exchange certain defined
cash flows. Under this arrangement, each month we will pay Cogent a defined
amount of cash equal to LIBOR + 1.25%. Currently, this approximately equates the
interest we are receiving on the Bonds. However, this amount may fluctuate as
LIBOR changes and may be less than, or exceed the amount we receive in interest
on the Bonds.
Additionally, under this arrangement, at the end of two years either (a) if
the then-current market price of our common stock is greater than $1.00 per
share, Cogent will pay to us the difference between the market price and $1.00
per share, multiplied by 4,000,000 shares; or (b) if the then-current market
price is less than $1.00 per share, we will pay Cogent the difference between
$1.00 per share and the market price, multiplied by 4,000,000 shares. Any
required payment resulting from an increase or decrease in our stock price will
be made with the Bonds or bonds similar to the Bonds. The settlement of this
arrangement will occur sooner than two years if we register the shares issued in
the private placement for resale under applicable securities laws prior to the
end of the two-year period. Cogent's security interest in the Bonds will
terminate and the Bonds will be released to us upon settlement of this equity
swap arrangement.
14
We paid a premium of $50,000 to Cogent in connection with this transaction.
Disagreement with Distributor. In May 2004, we entered into an exclusive
distribution agreement with JAD Corporation of America to serve as our domestic
distributor based on JAD's representations to us that it had sufficient
resources, manpower and expertise to market the SafetyNet RadioBridge
nationally. Certain disagreements have arisen between us and JAD. JAD's
marketing efforts to date have not resulted in sales to end-users. Over the
course of the last few months we have had discussions with JAD about reducing
the territory covered by the distribution agreement and amending other
provisions of that agreement. JAD has expressed its dissatisfaction with the
arrangement and its desire to potentially conclude its relationship with us
should these matters not be settled. We are in discussions with JAD concerning
our disagreements. In the interim, to mitigate any adverse consequences that may
result from a termination of our relationship with JAD and to preserve for our
stockholders the progress we have made with the Radio Bridge product, we have
begun negotiating agreements with new dealers and potential distributors of the
RadioBridge. We are establishing a network of distributors and dealers in order
to access existing distribution channels for commercial applications of the
RadioBridge and to provide our end-users with customer support.
Panama Distributor. On November 22, 2004, we entered into an agreement with
Fortis Networks, Inc. pursuant to which Fortis became our exclusive distributor
in Panama and non-exclusive distributor in Central America. Fortis has already
begun marketing efforts in Panama and has purchased a demonstrator RadioBridge
for use in its marketing efforts. Recent Trends in Homeland Security Funding.
The Department of Homeland Security, or DHS, has recently adopted new measures
to expedite the flow of funds to equip, train and prepare first responders and
local law enforcement to prevent incidents and to be ready should one occur. On
December 3, 2004, the DHS announced the recipients of $1.66 billion in grants to
states and an additional $855 million in grants to urban areas to fund first
responders and support state and local resources necessary to prevent, respond
and recover from acts of terrorism and other disasters. The DHS also announced
the implementation of a national strategy for homeland security that includes
shared responsibility and accountability in equipping first responders with the
resources they need to protect American citizens.
As a result of the foregoing developments, we believe that it will be
easier for us to sell RadioBridge units to state and municipal public safety
agencies. Because state and local governments may now have up to 120 days to
draw down funds in advance of purchase and investments, as compared to the three
to five days allowed previously, even small localities may now have the buying
power to purchase our products.
Results of Operations
We have incurred losses since our inception in 2002 and have relied on the
sale of our equity securities and on loans from our officers to fund our
operations. Until very recently, we did not generate any revenues from
operations. However, we have recently begun taking purchase orders for our
RadioBridge product. We did not record any revenue during the three-month period
ended October 31, 2004 nor did we record any revenue during the three-month
period ended October 31, 2003.
15
Our general and administrative expenses other than for related parties for
the three-month period ended October 3, 2004 were $542,900, as compared to
$394,740 for the comparable period during the prior year. There were no general
and administrative expenses resulting from dealings with related parties in the
three-month period ended October 31, 2004, as compared to $53,588 for the
comparable period in the prior year. Our operating expenses have increased as a
result of the costs of developing our products, hiring additional employees and
contracting with outside consultants. Now that we have a finished product ready
for delivery to end-users, our marketing activities have increased
significantly, and we are incurring increased marketing costs, including costs
associated with demonstrating our products to public safety agencies and
government officials, major law enforcement officials, fire department
officials, federal agencies, the United States Army, and potential commercial
channel partners, including distributors, dealers and independent sales
representatives. We have also incurred increased costs associated with the
design, preparation, and printing of marketing and product informational
material, courier costs and mailing costs. Moreover, we continue to incur legal
and accounting expenses and other expenses incidental to our reporting
obligations as a public company and to the increase in our requirements for
transactional legal and accounting services.
Our loss before provision for income taxes was $542,900 for the three-month
period ended October 31, 2004, as compared to $448,328 for the same period for
the prior year. Our net loss for the three-month period ended October 31, 2004
after provision for income taxes was $542,900, as compared to $448,328 for the
comparable period for the prior year. The increase was the result of an increase
in the number of employees and consultants, as well as increased office and
operating expenses.
Liquidity and Capital Resources
At October 31, 2004, we had $211,912 in cash, as compared with $194,107 in
cash during the equivalent period ended October 31, 2003. The increase is due to
the sale of our equity in private placement transactions. In July 2003, we
issued equity units in a private placement, each of which consisted of one share
of the Company's common stock, one warrant to acquire one share of the Company's
common stock at $.50 per share, with an exercise period that expires six months
after the purchase, and one warrant to acquire one share of the Company's common
stock at $1.50 per share, with an exercise period that expires 18 months after
purchase. As of October 31, 2004, a total of 254,667 equity units of the July
2003 equity offering were sold and 221,667 of the $.50 warrants were exercised
for total proceeds of $492,834. In addition, 79,667 of the $.50 warrants had
expired leaving a total of 301,334 warrants outstanding. All the remaining
warrants have an exercise price of $1.50.
16
In October 2003, we authorized the sale of 2,000,000 equity units in a
private placement for $1.50 per unit. Each unit consists of one share of common
stock and one warrant to purchase a share of common stock for $.50, with an
exercise period that expires six months after the unit is purchased. No units
were sold prior to October 31, 2003. As of October 31, 2004, we had sold
1,263,727 units of the October 2003 equity offering and 892,313 of the warrants
were exercised for total proceeds of $2,341,748. As of October 31, 2004, 53,332
of the warrants had expired leaving 318,082 outstanding.
At October 31, 2004 we had accrued payroll liability of $42,556, as
compared with $16,419 at July 31, 2004. The amount of accrued payroll changes
due to fluctuations caused by the timing of payroll disbursements. Accounts
payable and accrued expenses totaled $75,292 at October 31, 2004, as compared to
$53,315 at July 31, 2004. This increase was due to an increase in operating
activity.
On October 31, 2004 we had inventory and production in progress of
$360,988, as compared with $196,400 in inventory on July 31, 2004. The increase
is attributable to ramping up our production activities in anticipation of
future sales activities.
We held property and equipment at October 31, 2004, which was valued, net
of depreciation of $34,380, at $254,451, as compared with $17,993 and $240,363
at July 31, 2004 respectively. The increase is attributed to the acquisition of
components for our demonstration product models, as well as the acquisition of
computer equipment, office equipment, and other assets necessary and incidental
to our operations. Our total assets at October 31, 2004 were $854,512, as
compared with $961,501 at July 31, 2004.
We have the ability to borrow against the U.S. Treasury Bonds that we
received subsequent to the end of the quarter in the private placement discussed
under Recent Developments. However, a lender that uses the Bonds as collateral
must agree to take a subordinate position to Cogent, which currently has a first
position security interest on the Bonds. In November 2004, we borrowed $80,000
from one of our existing shareholders using the Bonds as collateral.
We believe we have sufficient funds currently available to satisfy our cash
requirements for the next three months. Our goal is to raise an additional
$3,000,000 in equity financing during the next six months. We plan to allocate
any funds we receive to expanding our production capabilities, establishing a
distribution channel for our products, hiring additional personnel for our sales
ramp-up, and meeting requirements to secure acceptance for listing our stock on
the American Stock Exchange. We also anticipate revenues from the sale of
RadioBridges during the next 12 months; however, it is difficult to project a
sales timeline because we believe significant sales will depend on establishing
a dealer network and customer support infrastructure to support such sales.
Going Concern
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States applicable to a going concern
that contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. Our general business strategy
is unproven, and we have just begun to record revenues. To date, we have relied
solely on loans from shareholders and officers and the sale of our equity
securities to fund our operations. We have incurred losses since our inception
and we continue to incur legal, accounting, and other business and
administrative expenses. Our auditor has therefore recognized that there is
substantial doubt about our ability to continue as a going concern.
17
Risk Factors
An investment in our common stock involves a substantial degree of risk.
Before making an investment decision, you should give careful consideration to
the following risk factors in addition to the other information contained in
this report. The following risk factors, however, may not reflect all of the
risks associated with our business or an investment in our common stock only if
you can afford to lose your entire investment.
Risks Related to Our Business
We have a limited operating history and there is no assurance that our
company will achieve profitability.
Until recently, we have had no significant operations or revenues with
which to generate profits or greater liquidity. Although we have recently
entered into a distribution agreement that is expected to provide some amount of
revenues, we have not yet generated a sufficient amount of operating revenue to
sustain our projected operations. We have a very limited current operating
history on which investors can evaluate our potential for future success. Our
ability to generate revenue is uncertain and we may never achieve profitability.
Potential investors should evaluate our company in light of the expenses,
delays, uncertainties, and complications typically encountered by early-stage
businesses, many of which will be beyond our control. These risks include:
o lack of sufficient capital,
o unproven business model,
o marketing difficulties,
o competition, and
o uncertain market acceptance of our products and services.
As a result of our limited operating history, our plan for growth, and the
competitive nature of the markets in which we may compete, our historical
financial data are of limited value in anticipating future revenue, capital
requirements, and operating expenses. Our planned capital requirements and
expense levels will be based in part on our expectations concerning capital
investments and future revenue, which are difficult to forecast accurately due
to our current stage of development. We may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenue. Our product
development, marketing and general administrative expenses may increase
significantly if we begin to increase our sales and expand operations. To the
extent that these expenses precede or are not rapidly followed by a
corresponding and commensurate increase in revenue or additional sources of
financing, our business, operating results, and financial condition may be
materially and adversely affected.
18
We may need significant infusions of additional capital.
To date, we have relied exclusively on outside financing to obtain the
funding necessary to operate the business. Based upon our current cash reserves
and forecasted operations, we may need to obtain additional outside funding in
the future in order to further satisfy our cash requirements. Our need for
additional capital to finance our business strategy, operations, and growth will
be greater should, among other things, revenue or expense estimates prove to be
incorrect. We cannot predict the timing or amount of our capital requirements at
this time. If we fail to arrange for sufficient capital on a timely basis in the
future, we may be required to reduce the scope of our business activities until
we can obtain adequate financing. We may not be able to obtain additional
financing in sufficient amounts or on acceptable terms when needed, which could
adversely affect our operating results and prospects. Debt financing must be
repaid regardless of whether or not we generate profits or cash flows from our
business activities. Equity financing may result in dilution to existing
shareholders and may involve securities that have rights, preferences, or
privileges that are senior to our common stock.
Failure to achieve and maintain effective internal controls in accordance
with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect
on our business and stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with
our Annual Report on Form 10-KSB for the fiscal year ending June 30, 2006, we
will be required to furnish a report by our management on our internal control
over financial reporting. The internal control report must contain (i) a
statement of management's responsibility for establishing and maintaining
adequate internal control over financial reporting, (ii) a statement identifying
the framework used by management to conduct the required evaluation of the
effectiveness of our internal control over financial reporting, (iii)
management's assessment of the effectiveness of our internal control over
financial reporting as of the end of our most recent fiscal year, including a
statement as to whether or not internal control over financial reporting is
effective, and (iv) a statement that the Company's independent auditors have
issued an attestation report on management's assessment of internal control over
financial reporting.
In order to achieve compliance with Section 404 of the Act within the
prescribed period, we will need to engage in a process to document and evaluate
our internal control over financial reporting, which will be both costly and
challenging. In this regard, management will need to dedicate internal
resources, engage outside consultants and adopt a detailed work plan to (i)
assess and document the adequacy of internal control over financial reporting,
(ii) take steps to improve control processes where appropriate, (iii) validate
through testing that controls are functioning as documented and (iv) implement a
continuous reporting and improvement process for internal control over financial
reporting. We can provide no assurance as to our, or our independent
auditors', conclusions at June 30, 2006 with respect to the effectiveness
of our internal control over financial reporting under Section 404 of the Act.
There is a risk that neither we nor our independent auditors will be able to
conclude at June 30, 2006 that our internal controls over financial reporting
are effective as required by Section 404 of the Act.
19
During the course of our testing we may identify deficiencies which we may
not be able to remediate in time to meet the deadline imposed by the
Sarbanes-Oxley Act for compliance with the requirements of Section 404. In
addition, if we fail to achieve and maintain the adequacy of our internal
controls, as such standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls,
particularly those related to revenue recognition, are necessary for us to
produce reliable financial reports and are important to helping prevent
financial fraud. If we cannot provide reliable financial reports or prevent
fraud, our business and operating results could be harmed, investors could lose
confidence in our reported financial information, and the trading price of our
stock could drop significantly.
We may face significant competition, including from companies with greater
resources, which could adversely affect our revenues, results of operations and
financial condition.
There are existing companies that offer or have the ability to develop
products and services that will compete with those that we currently offer or
may offer in the future. These include large, well-recognized companies that
have substantial resources and established relationships in the markets in which
we compete. Their greater financial, technical, marketing, and sales resources
may permit them to react more quickly to emerging technologies and changes in
customer requirements or to devote greater resources to the development,
promotion, and sale of competing products and services. Emerging companies also
may develop and offer products and services that compete with those that we
offer. Increased competitive pressure could lead to reduced market share, as
well as lower prices and reduced margins for our products, which would adversely
affect our results of operations and financial condition. We cannot assure you
that we will be able to compete successfully in the future.
We depend materially upon acceptance of our products by specific agencies
and markets and if these agencies and markets do not purchase or are not
receptive to our products, our revenues will be adversely affected and we may
not be able to expand into other markets.
Our business and results of operations will be materially and adversely
affected if a substantial number of law enforcement, fire, rescue, other
emergency response and public safety agencies, as well as commercial end users
for homeland security and life safety applications, do not purchase our
SafetyNet products. In addition, we may not be able to expand sales of our
products into other markets if our products are not widely accepted by these
agencies or markets. This also would have an adverse affect on our business and
results of operations.
20
Our growth prospects will be diminished if our SafetyNet products are not
widely accepted.
We have generated minimal revenue to date from the sale of our SafetyNet
products. Until recently, our funding came primarily from the sale of our equity
and debt securities. However, we expect to generate greater revenues from the
sale of our SafetyNet products. We expect to depend on sales of these products,
primarily the SafetyNet Radio Bridge, for the foreseeable future. A decrease in
the prices of or demand for these product lines, or their failure to achieve
broad market acceptance, would significantly harm our growth prospects,
operating results and financial condition.
If we are unable to manage our projected growth, our growth prospects may
be limited and our future profitability may be adversely affected.
We expect our business to grow in the near future. Rapid expansion may
strain our current managerial, financial, operational, and other resources. If
we are unable to manage our growth, our business, operating results, and
financial condition could be adversely affected. We will need to continually
improve our operations and our financial, accounting, and other internal control
systems in order to manage our growth effectively. Any failure to do so may lead
to inefficiencies and redundancies, and result in reduced growth prospects and
profitability.
We may face personal injury and other liability claims that could harm our
reputation and adversely affect our sales and financial condition.
Our products will be depended upon in emergency, rescue and public safety
situations that may involve physical harm or even death to individuals, as well
as potential loss or damage to real and personal property. Our products may be
associated with these injuries or other losses. A person who sustains injuries,
the survivors of a person killed, the owner of damaged or destroyed property in
a situation involving the use of our products, or the owner of a facility at
which such injury, death or loss occurred may bring legal action against us to
recover damages on the basis of theories including personal injury, wrongful
death, negligent design, dangerous product or inadequate warning. We may also be
subject to lawsuits involving allegations of misuse of our products. If
successful, such claims could have a material adverse effect on our operating
results and financial condition. Significant litigation could also result in a
diversion of management's attention and resources, negative publicity and an
award of monetary damages in excess of our insurance coverage.
Our future success will depend on our ability to expand sales through
distributors, dealers, and independent sales representatives and our inability
to take advantage of our existing distribution network or recruit new
distributors, dealers, or independent sales representatives would negatively
affect our sales.
21
Our distribution strategy is to pursue sales through multiple channels with
an emphasis on independent distributors, dealers, and sales representatives. We
have a dispute with JAD Corporation of America, our first distributor. JAD has
expressed its dissatisfaction with the arrangement and its desire to potentially
conclude its relationship with us. We are in discussions with JAD concerning our
disagreements. Although we are now negotiating agreements with new potential
dealers and distributors, and have entered into a distribution agreement for
Central America, our distributor's inability to successfully sell our products
or our inability to retain other distributors, dealers, and sales
representatives who can successfully sell our products would adversely affect
our sales. In addition, if we do not competitively price our products, meet the
requirements of our current distributor or end-users, provide adequate marketing
support, or comply with the terms of our distribution arrangement, our
distributor may fail to aggressively market our products or may terminate its
relationships with us. These developments would likely have a material adverse
effect on our sales. Our reliance on others to sell our products also makes it
more difficult to predict our revenues, cash flow and operating results.
We expend significant resources in anticipation of a sale due to our
lengthy sales cycle and may receive no revenue in return.
Generally, law enforcement, fire, rescue, other emergency response and
public safety agencies, as well as commercial end users for homeland security
and life safety applications consider a wide range of issues before committing
to purchase our products, including product benefits, training costs, the cost
to use our products in addition to or in place of other products, product
reliability and budget constraints. The length of our sales cycle may range from
a few weeks to as long as several years. We may incur substantial selling costs
and expend significant effort in connection with the evaluation of our products
by potential customers before they place an order. If these potential customers
do not purchase our products, we will have expended significant resources and
received no revenue in return. This could adversely affect our operating results
and financial condition.
Many of our end-users are subject to budgetary and political constraints
that may delay or prevent sales.
Many of our end-user customers currently are military, government agencies
or entities or para-military or quasi-government entities or agencies. These
entities and agencies often do not set their own budgets and therefore have
little control over the amount of money they can spend. In addition, these
entities and agencies experience political pressure that may dictate the manner
in which they spend money. As a result, even if an entity or agency wants to
acquire our products, it may be unable to purchase them due to budgetary or
political constraints. Some orders also may be canceled or substantially delayed
due to budgetary, political or other scheduling delays that frequently occur in
connection with the acquisition of products by such entities or agencies.
22
Many of our end-users rely on state and federal grants to obtain the
necessary funding to purchase our products, the delay or unavailability of which
could adversely affect our sales and results of operations.
The Department of Homeland Security currently awards funding grants for the
purchase of communications equipment that provides interoperability to first
responders. These funds are granted through the State Homeland Security Grant
Program, the Urban Area Security Initiative, and other grants administered by
the Office of Domestic Preparedness, the Federal Emergency Management Agency,
and the Transportation Security Administration. Other Federal agency programs
include Department of Justice grants for counter-terrorism and general-purpose
law enforcement activities through the Office of Community Oriented Policing
Services, which distributes funding through a wide range of programs, both as
grants and cooperative agreements. Additionally, many grants are administered
directly through state agencies and administrative offices. Budgetary, political
or other constraints or delays in providing or the availability of funding
through these grant programs could preclude many of our end-users from being
able to purchase our products, which would have an adverse impact on our
revenues, results of operations and financial condition.
If we are unable to protect our intellectual property, we may lose a
competitive advantage or incur substantial litigation costs to protect our
rights.
Our success depends both on our internally developed technology and our
third party technology. We rely on a variety of trademarks, service marks, and
designs to promote our brand names and identity. We also rely on a combination
of provisional patents, contractual provisions, confidentiality procedures,
trademarks, copyrights, trade secrecy, unfair competition, and other
intellectual property laws to protect the proprietary aspects of our products.
The steps we take to protect our intellectual property rights may not be
adequate to protect our intellectual property and may not prevent our
competitors from gaining access to our intellectual property and proprietary
information. In addition, we cannot provide assurance that courts will always
uphold our intellectual property rights or enforce the contractual arrangements
that we have entered into to protect our proprietary technology.
Third parties may infringe or misappropriate our copyrights, trademarks,
service marks, trade dress, and other proprietary rights. Any such infringement
or misappropriation could have a material adverse effect on our business,
prospects, financial condition, and results of operations. In addition, the
relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear.
We may decide to initiate litigation in order to enforce our intellectual
property rights, to protect our trade secrets, or to determine the validity and
scope of our proprietary rights. Any such litigation could result in substantial
expense, may reduce our profits, and may not adequately protect our intellectual
property rights. In addition, we may be exposed to future litigation by third
parties based on claims that our products or services infringe their
intellectual property rights. Any such claim or litigation against us, whether
or not successful, could result in substantial costs and harm our reputation. In
addition, such claims or litigation could force us to do one or more of the
following:
23
o cease selling or using any of our products that incorporate the challenged
intellectual property, which would adversely affect our revenue;
o obtain a license from and/or make royalty payments to the holder of the
intellectual property right alleged to have been infringed, which license
may not be available on reasonable terms, if at all;
o divert management's attention from our business;
o redesign or, in the case of trademark claims, rename our products or
services to avoid infringing the intellectual property rights of third
parties, which may not be possible and in any event could be costly and
time-consuming.
o Even if we were to prevail, such claims or litigation could be
time-consuming and expensive to prosecute or defend, and could result in
the diversion of our management's time and attention. These expenses and
diversion of managerial resources could have a material adverse effect on
our business, prospects, financial condition, and results of operations.
Defects in our products could reduce demand for our products and result in
a loss of sales, delay in market acceptance and injury to our reputation.
Complex components and assemblies used in our products may contain
undetected defects that are subsequently discovered at any point in the life of
the product. Defects in our products may result in a loss of sales, delay in
market acceptance, injury to our reputation, increased warranty costs, recalls
and costs associated with such recall efforts. In addition, defects in our
products could result in personal injuries or death, as well as significant
property damage. Any of these events could have a material adverse affect on our
revenues, results of operations and financial condition.
Component shortages could result in our inability to produce sufficient
volume to adequately sustain customer demand. This could result in a loss of
sales, delay in deliveries and injury to our reputation.
Components used in the manufacture of our products may become unavailable
or may be discontinued. Delays caused by industry allocations, or obsolescence
may take weeks or months to resolve. In some cases, parts obsolescence may
require a product re-design to ensure quality replacement parts. These delays
could cause significant delays in manufacturing and loss of sales, leading to
adverse effects significantly impacting our financial condition.
24
Our revenues and operating results may fluctuate unexpectedly from quarter
to quarter, which may cause our stock price to decline.
Our revenues and operating results may vary significantly in the future due
to various factors, including, but not limited to increased sales, increased raw
material expenses, changes in our operating expenses, market acceptance of our
products and services, regulatory changes that may affect the marketability of
our products, and budgetary cycles of our targeted customer base. As a result of
these and other factors, we believe that period-to-period comparisons of our
operating results may not be meaningful in the short term and that you should
not rely upon our performance in a particular period as indicating of our
performance in any future period.
We depend upon our executive officers and key personnel.
Our performance depends substantially on the performance of our executive
officers and other key personnel. The success of our business in the future will
depend on our ability to attract, train, retain and motivate high quality
personnel, especially highly qualified technical and managerial personnel. The
loss of services of any executive officers or key personnel could have a
material adverse effect on our business, revenues, results of operations or
financial condition. We maintain key person life insurance on the lives of our
CEO and President.
Competition for talented personnel is intense, and there is no assurance
that we will be able to continue to attract, train, retain or motivate other
highly qualified technical and managerial personnel in the future. In addition,
market conditions may require us to pay higher compensation to qualified
management and technical personnel than we currently anticipate. Any inability
to attract and retain qualified management and technical personnel in the future
could have a material adverse effect on our business, prospects, financial
condition, and results of operations.
We may face risks as we expand our business into international markets.
We currently are exploring opportunities to offer our products in foreign
markets. We have limited experience in developing and marketing our services
internationally, and we may not be able to successfully execute our business
model in markets outside the United States. We will face a number of risks
inherent in doing business in international markets, including the following:
o changing regulatory requirements;
o fluctuations in the exchange rate for the United States dollar;
o the availability of export licenses;
o unexpected changes in regulatory requirements;
o potentially adverse tax consequences;
o political and economic instability;
o changes in diplomatic and trade relationships;
25
o difficulties in staffing and managing foreign operations, tariffs and other
trade barriers;
o complex foreign laws and treaties;
o changing economic conditions;
o difficulty of collecting foreign account receivables;
o exposure to different legal standards, particularly with respect to
intellectual property and distribution of products;
In addition, we would be subject to the Foreign Corrupt Practices Act,
which prohibits us from making payments to government officials and others in
order to influence the granting of contracts we may be seeking. Our non-U.S.
competitors are not subject to this law and this may give them a competitive
advantage over us.
To the extent that international operations represent a significant portion
of our business in the future, our business could suffer if any of these risks
occur.
Risks Related to Our Securities
Stock prices of technology companies have declined precipitously at times
in the past and the trading price of our common stock is likely to be volatile,
which could result in substantial losses to investors.
The trading price of our common stock has risen and fallen significantly
over the past few months and could continue to be volatile in response to
factors including the following, many of which are beyond our control:
o variations in our operating results;
o announcements of technological innovations or new services by us or our
competitors;
o changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
o our failure to meet analysts' expectations;
o changes in operating and stock price performance of other technology
companies similar to us;
o conditions or trends in the technology industry;
o additions or departures of key personnel; and
o future sales of our common stock.
Domestic and international stock markets often experience significant price
and volume fluctuations that are unrelated to the operating performance of
companies with securities trading in those markets. These fluctuations, as well
as political events, terrorist attacks, threatened or actual war, and general
economic conditions unrelated to our performance, may adversely affect the price
of our common stock. In the past, securities holders of other companies often
have initiated securities class action litigation against those companies
following periods of volatility in the market price of those companies'
securities. If the market price of our stock fluctuates and our stockholders
initiate this type of litigation, we could incur substantial costs and
experience a diversion of our management's attention and resources, regardless
of the outcome. This could materially and adversely affect our business,
prospects, financial condition, and results of operations.
26
Provisions in our corporate charter and under Delaware law are favorable to
our directors.
Pursuant to our certificate of incorporation, members of our management and
board of directors will have no liability for violations of their fiduciary duty
of care as officers and directors, except in limited circumstances. This means
that you may be unable to prevail in a legal action against our officers or
directors even if you believe they have breached their fiduciary duty of care.
In addition, our certificate of incorporation allows us to indemnify our
officers and directors from and against any and all expenses or liabilities
arising from or in connection with their serving in such capacities with us.
This means that if you were able to enforce an action against our directors or
officers, in all likelihood we would be required to pay any expenses they
incurred in defending the lawsuit and any judgment or settlement they otherwise
would be required to pay.
Certain provisions of Delaware General Corporation Law and in our charter,
as well as our current stockholder base may prevent or delay a change of control
of our company.
Under the Delaware General Corporation Law, which we are subject to, it
will be more difficult for a third party to take control of our company and may
limit the price some investors are willing to pay for shares of our common
stock. Furthermore, our certificate of incorporation authorizes the issuance of
preferred stock without a vote or other stockholder approval. Finally, a
majority of our outstanding common stock is held by insiders. Without a
disparate stockholder base or a fluid aggregation of stockholders, it will be
more difficult for a third-party to acquire our company without the consent of
the insiders.
Our common stock may be subject to the "penny stock" rules as promulgated
under the Exchange Act.
In the event that no exclusion from the definition of "penny stock" under
the Securities Exchange Act of 1934, as amended is available, then any broker
engaging in a transaction in our company's common stock will be required to
provide its customers with a risk disclosure document, disclosure of market
quotations, if any, disclosure of the compensation of the broker-dealer and its
sales person in the transaction, and monthly account statements showing the
market values of our company's securities held in the customer's accounts. The
bid and offer quotation and compensation information must be provided prior to
effecting the transaction and must be contained on the customer's confirmation
of sale. Certain brokers are less willing to engage in transactions involving
"penny stocks" as a result of the additional disclosure requirements described
above, which may make it more difficult for holders of our company's common
stock to dispose of their shares.
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ITEM 3. CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed with an objective of
ensuring that information required to be disclosed in our periodic reports filed
with the Securities and Exchange Commission, such as this Quarterly Report on
Form 10-QSB, is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission. Disclosure controls
also are designed with an objective of ensuring that such information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, in order to allow timely consideration
regarding required disclosures.
The evaluation of our disclosure controls by our principal executive
officer and principal financial officer included a review of the controls'
objectives and design, the operation of the controls, and the effect of the
controls on the information presented in this Quarterly Report. Our management,
including our chief executive officer, chief operating officer and chief
financial officer, does not expect that disclosure controls can or will prevent
or detect all errors and all fraud, if any. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Also, projections of any
evaluation of the disclosure controls and procedures to future periods are
subject to the risk that the disclosure controls and procedures may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Based on their review and evaluation as of the end of the period covered by
this Form 10-QSB, and subject to the inherent limitations described above, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective as of the end
of the period covered by this report. They are not aware of any significant
changes in our disclosure controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses. During the period covered by this Form 10-QSB, there have not been
any changes in our internal control over financial reporting that have
materially affected, or that are reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
Items 3-5 are not applicable and have been omitted.
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ITEM 1. LEGAL PROCEEDINGS.
Other than as described in our previously filed Annual Report, we know of
no material, active or pending legal proceedings against us, nor are we involved
as a plaintiff in any material proceedings or pending litigation. Other than as
described in our previously filed Annual Report, there are no proceedings in
which any of our directors, officers or affiliates, or any registered or
beneficial shareholder, is an adverse party or has a material interest adverse
to our interest.
ITEM 2. CHANGES IN SECURITIES.
We are continuing to raise funds for operations through a private placement
of our equity securities. Proceeds from the issuance of 181,927 shares of common
stock during the three month period ended October 31, 2004 totaled $272,890.50,
with an additional $111,238.50 in proceeds raised from the exercise of 222,447
warrants.
The common stock was offered and sold in a private placement, pursuant to
the provisions of Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D. The common stock was offered and sold to purchasers whom the
company or its authorized agents believe are "accredited investors," as that
term is defined in Rule 501 of Regulation D in reliance upon an exemption from
the registration requirements of the Securities Act in a transaction not
involving any public offering. Each of the investors represented to Aegis that:
o such investor is an "accredited investor";
o the shares of common stock were purchased by such investor for its own
account, for investment and without any view to the distribution,
assignment or resale to others other than pursuant to a registered
offering;
o such investor understood that the shares of common stock issued to the
investor have not been registered under the Securities Act of 1933 or any
state securities laws; and
o such investor acknowledged that it may not transfer the shares unless the
shares are registered under Federal and applicable state securities laws or
unless, in the opinion of counsel satisfactory to Aegis, an exemption from
such laws is available.
We will arrange for the certificates representing such securities to be
legended and subject to stop transfer restrictions. We did not engage in any
form of general solicitation or general advertising in connection with these
issuances.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are attached to this Quarterly Report:
Exhibit
Number Description
- ------ -----------
31 Certification pursuant to SEC Release No. 33-8238,
as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) On September 21, 2004, the Registrant filed a Current Report on Form 8-K
specifying that effective September 16, 2004, David A. Smith, the company's
Chief Financial Officer, was appointed to the company's Board of Directors;
that H. Kenneth Edge resigned as a director and as the company's President;
and that the company's Chief Operating Officer, Richard Reincke, was
appointed as the company's new President.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AEGIS ASSESSMENTS, INC.
Date: December 16, 2004 /s/ David Smith
-------------------------------------------
Chief Financial Officer
(Principal Financial Officer and Authorized
Officer)
30
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
31 Certification pursuant to SEC Release No.
33-8238, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
31