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 June 30, 2004
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-30178
VIEW SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 59-2928366
(State of incorporation) (I.R.S. Employer Identification No.)
1100 Wilso Drive
Baltimore, Maryland 21223
(Address of principal executive offices)
(410) 646-3000
(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 [ ]
As of July 26, 2004 View Systems, Inc. had 70,085,352 shares of common stock
outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements...............................................2
Item 2. Management's Discussion and Analysis...............................8
Item 3. Controls and Procedures...........................................12
PART II: OTHER INFORMATION
Item 2. Changes in Securities.............................................12
Item 5. Other Information ................................................13
Item 6. Exhibits and Reports on Form 8-K..................................13
Signatures.................................................................13
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information set forth below with respect to our statements of
operations for the three and six month periods ended June 30, 2004 and 2003 is
unaudited. This financial information, in the opinion of management, includes
all adjustments consisting of normal recurring entries necessary for the fair
presentation of such data. The results of operations for the six month period
ended June 30, 2004 are not necessarily indicative of results to be expected
for any subsequent period.
2
View Systems, Inc.
Consolidated Financial Statements
June 30, 2004
3
View Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
June 30, December 31,
2004 2003
------------- -------------
(unaudited)
Current Assets
Cash $ 19,506 $ 19,899
Accounts Receivable(Net of Allowance of $81,000) 239,852 225,088
Inventory 93,241 93,241
------------- -------------
Total Current Assets 352,599 338,228
------------- -------------
Property & Equipment (Net) 27,203 44,693
------------- -------------
Other Assets
Licenses 1,626,854 1,626,854
Due from Affiliates 98,457 98,457
Deposits 4,819 4,819
------------- -------------
Total Other Assets 1,730,130 1,730,130
------------- -------------
Total Assets $ 2,109,932 $ 2,113,051
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 480,200 $ 648,714
Accrued Expenses 131,717 115,515
Accrued Interest 60,500 55,000
Notes Payable 111,885 131,500
------------- -------------
Total Current Liabilities 784,302 950,729
------------- -------------
Stockholders' Equity
Preferred Stock, Authorized 10,000,000 Shares,
$.01 Par Value, Issued and Outstanding - -
Common Stock, Authorized 100,000,000 Shares,
$.001 Par Value, Issued and Outstanding
69,403,752 and 62,730,619, respectively 69,404 62,730
Additional Paid in Capital 16,406,420 15,604,609
Retained Earnings (Deficit) (15,150,194) (14,505,017)
------------- -------------
Total Stockholders' Equity 1,325,630 1,162,322
------------- -------------
Total Liabilities and Stockholders' Equity $ 2,109,932 $ 2,113,051
============= =============
4
View Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------- --------------
Revenues, Net $ 158,041 $ 146,485 $ 192,394 $ 212,175
Cost of Sales 73,872 67,454 106,198 94,990
------------- ------------- ------------- --------------
Gross Profit (Loss) 84,169 79,031 86,196 117,185
------------- ------------- ------------- --------------
Operating Expenses
Research & Development - 1,342 - 11,432
General & Administrative 325,100 175,821 380,678 285,797
Professional Fees 57,955 (36,595) 82,174 40,469
Salaries & Benefits 106,639 112,021 240,210 243,066
------------- ------------- ------------- --------------
Total Operating Expenses 489,694 251,247 703,062 580,764
------------- ------------- ------------- --------------
Net Operating Income (Loss) (405,525) (172,216) (616,866) (463,579)
------------- ------------- ------------- --------------
Other Income(Expense)
Interest Expense (25,297) (2,957) (28,311) (5,966)
------------- ------------- ------------- --------------
Total Other Income(Expense) (25,297) (2,957) (28,311) (5,966)
------------- ------------- ------------- --------------
Net Income (Loss) $ (430,822) $ (175,173) $ (645,177) $ (469,545)
============= ============= ============= ==============
Net Income (Loss) Per Share $ (0.01) $ (0.00) $ (0.01) $ (0.01)
============= ============= ============= ==============
Weighted Average Shares Outstanding 64,523,490 45,275,619 63,671,982 44,937,195
============= ============= ============= ==============
5
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months
Ended June 30,
---------------------------
2004 2003
------------- -------------
Cash Flows from Operating Activities:
Net Income (Loss) $ (645,177) $ (469,545)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 17,490 119,370
Stock Issued for Services 239,380 -
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (14,764) (67,355)
Inventories - 71,386
Increase (Decrease) in:
Accounts Payable (168,514) (68,079)
Accrued Expenses 32,507 5,500
------------- -------------
Net Cash Provided(Used) by Operating Activities (539,078) (408,723)
Cash Flows from Investing Activities:
Advances (to)/ receipt from related party - 4,500
------------- -------------
Net Cash Provided (Used) by Investing Activities - 4,500
Cash Flows from Financing Activities:
Funds advanced (to) from stockholders 491,685 317,500
Proceeds from stock issuance 47,000 86,550
------------- -------------
Net Cash Provided (Used) by Financing Activities 538,685 404,050
------------- -------------
Increase (Decrease) in Cash (393) (173)
Cash and Cash Equivalents at Beginning of Period 19,899 3,229
------------- -------------
Cash and Cash Equivalents at End of Period $ 19,506 $ 3,056
============= =============
Cash Paid For:
Interest $ - $ -
Income Taxes $ - $ -
Non-Cash Activities:
Stock Issued for Notes Payable and Accrued Interest $ 522,105 $ -
Stock Issued for Services $ 239,380 $ -
6
View Systems, Inc.
Notes to the Consolidated Financial Statements
June 30, 2004
GENERAL
View Systems, Inc. (the Company) has elected to omit substantially all
footnotes to the financial statements for the six months ended June 30, 2004
since there have been no material changes (other than indicated in other
footnotes) to the information previously reported by the Company in their
Annual Report filed on the Form 10-KSB for the twelve months ended December
31, 2003.
UNAUDITED INFORMATION
The information furnished herein was taken from the books and records of the
Company without audit. However, such information reflects all adjustments
which are, in the opinion of management, necessary to properly reflect the
results of the interim period presented. The information presented is not
necessarily indicative of the results from operations expected for the full
fiscal year.
COMMON STOCK
During February 2004, the Company issued 200,000 shares of common stock for
services valued at $52,000.
During February 2004, the Company issued 44,500 shares of common stock for
cash of $10,000.
During March 2004, the Company issued 709,500 shares of common stock for
services valued at $151,980.
During March 2004, the Company issued 200,000 shares of common stock for cash
of $25,000.
During April 2004, the Company issued 33,333 shares of common stock for cash
of $5,000.
During May 2004, the Company issued 27,000 shares of common stock for cash of
$4,000.
During May 2004, the Company issued 31,250 shares of common stock for services
valued at $5,000.
During June 2004, the Company issued 160,000 shares of common stock for
services valued at $30,400.
During June 2004, the Company issued 24,000 shares of common stock for cash of
$3,000.
During June 2004, the Company issued 5,221,050 shares of common stock for
notes payable and accrued interest of $522,105.
7
In this report references to "View Systems," "we," "us," and "our" refer to
View Systems, Inc.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission ("SEC") encourages companies to
disclose forward-looking information so that investors can better understand
future prospects and make informed investment decisions. This report contains
these types of statements. Words such as "may," "will," "expect," "believe,"
"anticipate," "estimate," "project," or "continue" or comparable terminology
used in connection with any discussion of future operating results or
financial performance identify forward-looking statements. You are cautioned
not to place undue reliance on the forward-looking statements, which speak
only as of the date of this report. All forward-looking statements reflect
our present expectation of future events and are subject to a number of
important factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Executive Overview
View Systems develops and manufactures computer software and hardware for
security and surveillance capabilities. Management believes that heightened
attention to terrorism and other security threats will likely continue to
drive growth in the market for security products. During the past year our
revenues were primarily from sales of our VideoMaxx Digital Video product line
and SecureScan Concealed Weapons Detection product lines. While we
experienced a drop in revenues for the first quarter of 2004, revenues
increased 360% in the second quarter of 2004 compared to the first quarter of
2004.
During the second quarter of 2004, sales of our ViewMaxx Digitial Video have
been steady, demonstrating the continuing market growth in closed circuit
television surveillance products. We have entered into new market segments
with this product and are concentrating on local sales and services.
We combined our SecureScan technology with School Technology Management,
Inc.'s attendance program technology and the second phase of testing of the
combined technology produced positive results. These positive results lead
the National Institute of Justice to provide $500,000 to fund further
development of the SecureScan technology. A portion of this funding will go
to the Idaho National Engineering and Environmental Laboratory, a portion to
the further refinement of the sensor circuitry and we will receive a portion.
In addition, $600,000 has been committed by the Department of Energy for a
cooperative research and development agreement related to the SecureScan
technology for new and more sensitive magnetometers at a reduced cost. We
will receive the new technology and this change will result in reduced
manufacturing costs, a wider portal opening size and improved object
recognition ability.
We rely on revenues, private financing and sales of common stock to fund our
operations. While we have increased our revenues during the second quarter of
2004, we have incurred losses for the past two fiscal years and have an
accumulated deficit of $15,150,194 at June 30, 2004. Our auditors have
expressed doubt that we can continue as a going concern based on these
factors. Management believes we will incur operating losses for the near
future while we continue to expand our product line and develop our sales and
marketing channels. Management continues to seek additional funding of up to
$2 million to continue our business plan development during the next twelve
months. However, we can not assure you that we will be successful at
obtaining the necessary funding to continue this development.
For the next twelve months our primary challenge will be to more fully develop
our product line and our sales and distribution network. During the first
quarter of 2004 we entered into a cooperative research and development
agreement with the U.S. Department of Energy's Idaho National Engineering and
Environmental Laboratory ("Idaho Engineering Lab") for our FirstView Wireless
Camera System, a first responder long range video
8
transmission system. During the second quarter of 2004 we set up a complete
manufacturing line in the Baltimore, Maryland facility for building, testing
and further development of the FirstView Wireless Camera product. We sold and
delivered two FirstView units to organizations in Boston, Massachusetts who
were involved with security for the Democratic national convention and we have
received additional orders for this product.
Along with development of our product lines, we must establish a sales and
distribution channel program for the United States. Our emphasis will be on
marketing and sales programs through dealer channels, plus internal direct
sales for our products, where applicable. We intend to build a United States
domestic network of manufacturing representatives and dealers for the sale and
distribution of our products within the 48 states. Our initial focus will be
in the Mid-Atlantic and Northeast regions. In recent months we signed three
new dealers for our products; however, we cannot assure you that we will be
able to develop these sales and distribution channels to a level which will
result in increased revenues or continued profitability. Some of the major
distributors of safety products who have become our dealers and manufacturer
representatives will be adding our products to their GSA schedules.
Another major emphasis for the next twelve months is to continue our
SecureScan manufacturing cost reduction objectives. We reduced manufacturing
costs of the SecureScan product by 25% in the first quarter of 2004. We
intend to select key expensive components of the SecureScan system and replace
them with performance equivalent, less expensive parts. The final phase of
the manufacturing cost reductions will be cost reduction per unit in the
fabrication of the gradiometer sensors. In addition, we anticipate completing
circuitry conversions to fully digital signal processing from digital to
analog and back to digital, along with replacing over-engineered housings in
the SecureScan portals. We also intend to reduce assembly time and testing
times to save additional manufacturing costs.
Liquidity and Capital Resources
For the short term management believes that revenues and additional financing
will provide funds for operations and development of our business plan. For
the long term, management expects that the development of our sales channels
will increase our revenues; however, we will need to continue to raise
additional funds through loans and sales of our common stock, as needed.
Operations - Our cash inflows are not sufficient to fund our day-to-day
operations. Net cash used by operating activities for the six month period
ended June 30, 2004 ("2004 six month period") was $539,078 compared to net
cash used by operating activities of $408,723 for the six month period ended
June 30, 2003 ("2003 six month period").
Financing - Historically, we have financed our operations primarily through
revenues and private financing. We estimate that we will require additional
financing of approximately $500,000 to $1 million to meet our needs for the
next twelve months. Our goal is to use this financing to increase ongoing
operations to self-sustaining levels and increase profits to the magnitude
management feels is achievable. The first phase of our financing plan is to
acquire a $250,000 bridge loan that we will use to continue manufacturing the
FirstView Wireless Camera product in our Baltimore, Maryland facility. The
second phase involves the acquisition of $500,000 in the next six months to
increase sales and manufacturing personnel to support a national sales
channel, lower manufacturing unit costs of the our products and continue
development of an integrated application of the SecureScan technology with
School Technology Management Inc.'s student time and attendance system.
Net cash provided by financing activities for the 2004 six month period was
$538,685 compared to $404,050 for the 2003 six month period. The 2004 six
month period financing activities consisted of advances from shareholders of
$491,685 and $47,000 in proceeds received from sales of common stock. The
2003 six month period financing activities consisted of advances from
shareholders of $317,500 and $86,550 in proceeds received from sales of stock.
9
We intend to use any available cash to develop our products and expand our
sales, marketing and promotional activities. Management believes that it will
be essential to continue to raise additional capital, both internally and
externally, to compete in our markets. We cannot assure you that we will be
able to obtain financing on favorable terms and we may be required to further
reduce expenses and scale back our operations. In addition to accessing the
public and private equity markets, we will pursue bank credit lines and
equipment leases for certain capital expenditures, if necessary.
Commitments and Contingent Liabilities
Our primary commitment is our operating lease for the manufacturing facility
in Baltimore, Maryland. Our rent for this facility is $2,260 per month with
an annual escalator of 3%. Our total current liabilities of $784,302 at June
30, 2004 include accounts payable of $480,200, accrued expenses of $131,717,
accrued interest of $60,500 and notes payable of $111,885.
Off-balance Sheet Arrangements - None.
Results of Operations
The following discussions are based on the consolidated financial statements
of View Systems and its subsidiaries. These charts and discussions summarize
our financial statements for the three and six month periods ended June 30,
2003 and 2004 and should be read in conjunction with the financial statements,
and notes thereto, included with this report at Item I, Part 1, above.
2003 and 2004 Interim Period Summary of Operations
--------------------------------------------------
Six months Six months Three months Three months
ended ended ended ended
June 30,2003 June 30, 2004 June 30, 2003 June 30, 2004
------------- -------------- -------------- -------------
Revenues, net $ 212,175 $ 192,394 $ 146,485 $ 158,041
Cost of sales 94,990 106,198 67,454 73,872
Gross profit 117,185 86,196 79,031 84,169
Total operating
expenses 580,764 703,062 251,247 489,694
Net operating loss (463,579) (616,866) (172,216) (405,525)
Total other
income (expense) (5,966) (28,311) (2,957) (25,297)
Net income (loss) (469,545) (645,177) (175,173) (430,822)
Net income (loss)
per share $ (0.01) $ (0.01) $ (0.00) $ (0.01)
Revenues for the 2004 six month period decreased 9.3% compared to the 2003 six
month period and costs of sales increased 11.8% in the 2004 six month period
compared to the 2003 six month period. As a result of the decreases in
revenues and increases in cost of sales, our gross profit decreased 26.4% for
the 2004 six month period compared to the 2003 six month period
Revenues for the three month period ended June 30, 2004 ("2004 second
quarter") increased 7.9% compared to the three month period ended June 30,
2003 ("2003 second quarter") and costs of sales increased 9.5% in the 2004
10
second quarter compared to the 2003 second quarter. As a result of these
increases our gross profit increased 6.5% in the 2004 second quarter compared
to the 2003 second quarter.
During the 2004 six month period total operating expense increased 21.0%
compared to the 2003 six month period. During the 2004 second quarter total
operating expense increased 94.9% compared to the 2003 second quarter. The
increases for the 2004 periods were primarily the result of a increases in
general and administrative expenses related to common shares issued for
services in the 2004 six month period and increases in professional fees for
technical and business consultants in the same period.
As a result of decreases in our gross profit and increases in our total
operating expenses, our net operating loss increased 33.1% for the 2004 six
month period compared to the 2003 six month period. Increases in gross profit
for the 2004 second quarter were offset by the increases in our total
operating expenses and resulted in our net operating loss increasing 135.5%
for the 2004 second quarter compared to the 2003 second quarter.
Total other expense, which represents interest expense, increased in the 2004
periods primarily due to loans received in those periods.
Our net loss for the 2004 six month period increased 37.4 % in comparison to
our net loss for the 2003 six month period and our net loss for the 2004
second quarter increased 145.9% in comparison to our net loss for the 2003
second quarter. Our net loss per share was $0.01 for the 2004 and 2003 six
month periods and the 2004 second quarter, but was $0.00 for the 2003 second
quarter.
Summary of Balance Sheet
-------------------------
For year ended Quarter ended
December 31, 2003 June 30, 2004
----------------- --------------
Cash $ 19,899 $ 19,506
Total current assets 338,228 352,599
Total assets 2,113,051 2,109,932
Total current liabilities 950,729 784,302
Accumulated deficit (14,505,017) (15,150,194)
Total stockholders equity $ 1,162,322 $ 1,325,630
As of June 30, 2004 we had negative working capital of $431,703. Our total
current assets increased slightly from the year ended December 31, 2003,
primarily due to increases in accounts receivable. At June 30, 2004 we own
property and equipment valued at $27,203 and licenses related to our
technology valued at $1,626,854. Our total current liabilities have decreased
at June 30, 2004, compared to December 31, 2003, primarily due to conversion
of debt of $522,105 into common shares during the 2004 second quarter (See
Part II, Item 2, for further details.)
Factors Affecting Future Performance
Our independent auditors have expressed concern whether we can continue
as a going concern.
We have incurred ongoing operating losses and do not currently have financing
commitments in place to meet expected cash requirements for the next twelve
months. Our net loss for the six month period ended June 30, 2004 was
$645,177 and our net loss for the year ended December 31, 2003 was $2,546,334.
Our accumulated deficit
11
was $15,150,194 at the six month period ended June 30, 2004. We are unable to
fund our day-to-day operations through revenues alone and management believes
we will incur operating losses for the near future while we seek financing
commitments during the next twelve months to fund further development of our
business plan. While we have expanded our product line and expect to
establish new sales channels, we may be unable to increase revenues to the
point that we attain and are able to maintain profitability.
We may need additional external capital and may be unable to raise it.
Based on our current growth plan we believe we may require $500,000 to $1
million additional financing within the next twelve months to remain
competitive in our market. Our success will depend upon our ability to access
equity capital markets and borrow on terms that are financially advantageous
to us. However, we may not be able to obtain additional funds on acceptable
terms. If we fail to obtain funds on acceptable terms, then we might be
forced to delay or abandon some or all of our business plans or may not have
sufficient working capital to develop products, finance acquisitions, or
pursue business opportunities. If we borrow funds, then we could be forced to
use a large portion of our cash reserves, if any, to repay principal and
interest on those funds. If we issue our securities for capital, then the
interests of investors and shareholders will be diluted.
We are currently dependent on the efforts of our resellers for our
continued growth and must expand our sales channels to increase our
revenues.
We are in the process of developing and expanding our sales channels, but we
expect overall sales to remain down as we develop our marketing activities.
If we are unsuccessful in developing sales channels then we may have to
abandon our business plan. We are actively recruiting and adding other
additional resellers and must continue to recruit additional resellers and
find other methods of distribution to increase customers.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer who also acts in the capacity of principal
financial officer has concluded that the disclosures related to the
effectiveness of our disclosure controls and procedures and our internal
control over financial reporting made in our annual report on Form 10-KSB,
filed April 14, 2004, remain accurate.
PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
The following discussion describes all securities sold by View Systems without
registration during the second quarter of 2004 through a recent date, unless
previously reported.
On July 9, 2004 we issued an aggregate of 805,600 common shares to investors
for cash. We issued 100,000 shares to David Hume, 81,600 shares to Guy Parr,
600,000 shares to Donald Koerner, and 24,000 shares to Duane Anderson. We
relied on an exemption from registration for a private transaction not
involving a public distribution provided by Section 4(2) of the Securities
Act.
On June 21, 2004 we issued an aggregate of 5,221,050 common shares to convert
notes payable with accrued interest totaling $522,105. We issued 1,246,440
shares to Compass Equity Partners, 3,039,000 shares to Niki Group and 935,610
shares to First Equity Holdings Corp. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
During the three month period ended June 30, 2004, we issued an aggregate of
84,333 shares to three investors for $12,000 cash. We relied on an exemption
from registration for a private transaction not involving a public
distribution provided by Section 4(2) of the Securities Act.
12
On June 3, 2004 we issued an aggregate of 160,000 shares in consideration for
services valued at $30,400. We issued 100,000 shares to Barry Feldman and
60,000 shares to Liem Nguyen We relied on an exemption from registration for
a private transaction not involving a public distribution provided by Section
4(2) of the Securities Act.
On May 11, 2004 we issued 31,250 common shares valued at approximately $5,000
to InCap Group, Inc. in consideration for services. We relied on an exemption
from registration for a private transaction not involving a public
distribution provided by Section 4(2) of the Securities Act.
ITEM 5: OTHER INFORMATION
In June 2004, our Secretary and Chairman of the Board, William D. Smith,
resigned those positions due to family health problems. Our board of
directors appointed our director, Michael L. Bagnoli, as Secretary of the
company, but Chairman of the Board has not been filled as of the date of this
filing. The office of President remains vacant and our board of directors
intends to fill that position as soon as practicable.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
Part I Exhibits
31.1 Chief Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
Part II Exhibits
3.1 Articles of Incorporation of View Systems, as amended (Incorporated
by reference to exhibit 3.1 to Form 10-QSB filed November 14, 2003)
3.2 By-Laws of View Systems (Incorporated by reference to exhibit 3.2 to
Form 10-QSB filed November 14, 2003)
21.1 Subsidiaries (Incorporated by reference to Form 10-KSB, filed March 31,
2003)
Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIEW SYSTEMS, INC.
/s/ Gunther Than
Date: July 30, 2004 By: __________________________________________
Gunther Than
Chief Executive Officer
Principal Financial Officer
Treasurer and Director
13