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 March 31, 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 May 12, 2004 View Systems, Inc. had 64,082,702 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..........................9
Item 3. Controls and Procedures......................................12
PART II: OTHER INFORMATION
Item 2. Changes in Securities........................................13
Item 5. Other Information............................................13
Item 6. Exhibits and Reports on Form 8-K.............................13
Signatures............................................................14
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information set forth below with respect to our statements of
operations for the three month periods ended March 31, 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 three month
period ended March 31, 2004 are not necessarily indicative of results to be
expected for any subsequent period.
2
View Systems, Inc.
Consolidated Financial Statements
March 31, 2004
3
View Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
-------
March 31, December 31,
2004 2003
------------ -------------
Current Assets
Cash $ 6,922 $ 19,899
Accounts Receivable(Net of Allowance of $81,000) 157,241 225,088
Inventory 93,241 93,241
------------ -------------
Total Current Assets 257,404 338,228
------------ -------------
Property & Equipment (Net) 33,403 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 $ 2,020,937 $ 2,113,051
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts Payable $ 607,887 $ 648,714
Accrued Expenses 102,947 115,515
Accrued Interest 57,750 55,000
Notes Payable 269,385 131,500
------------ -------------
Total Current Liabilities 1,037,969 950,729
------------ -------------
Stockholders' Equity
Common Stock, Authorized 50,000,000 Shares,
$.001 Par Value, Issued and Outstanding
64,021,452 and 62,730,619, respectively 64,021 62,730
Additional Paid in Capital 15,638,318 15,604,609
Retained Earnings (Deficit) (14,719,371) (14,505,017)
------------ -------------
Total Stockholders' Equity 982,968 1,162,322
------------ -------------
Total Liabilities and Stockholders' Equity $ 2,020,937 $ 2,113,051
============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
View Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months
Ended March 31,
---------------------------
2004 2003
------------- -------------
Revenues, Net $ 34,353 $ 65,690
Cost of Sales 32,326 27,536
------------- -------------
Gross Profit (Loss) 2,027 38,154
------------- -------------
Operating Expenses
Research & Development - 10,090
General & Administrative 55,578 111,318
Professional Fees 24,219 77,064
Salaries & Benefits 133,571 131,045
------------- -------------
Total Operating Expenses 213,368 329,517
------------- -------------
Net Operating Income (Loss) (211,341) (291,363)
------------- -------------
Other Income(Expense)
Loss on Sale of Assets - -
Interest Expense (3,014) (3,009)
Bad Debt - -
Valuation/Impairment Loss - -
------------- -------------
Total Other Income(Expense) (3,014) (3,009)
------------- -------------
Net Income (Loss) $ (214,355) $ (294,372)
============= =============
Net Income (Loss) Per Share $ (0.00) $ (0.01)
============= =============
Weighted Average Shares Outstanding 63,376,036 44,937,195
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
5
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months
Ended March 31,
---------------------------
2004 2003
------------- -------------
Cash Flows from Operating Activities:
Net Income (Loss) $ (214,355) $ (294,372)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 11,290 59,685
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable 67,847 27,656
Inventories - 14,278
Increase (Decrease) in:
Accounts Payable (40,827) (15,745)
Accrued Expenses (9,818) 2,750
------------- -------------
Net Cash Provided(Used) by Operating Activities (185,863) (205,748)
Cash Flows from Investing Activities:
Purchase of property and equipment - -
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 137,886 125,000
Proceeds from stock issuance 35,000 86,550
Principal Payments on Notes Payable - -
------------- -------------
Net Cash Provided (Used) by Financing Activities 172,886 211,550
------------- -------------
Increase (Decrease) in Cash (12,977) 10,302
Cash and Cash Equivalents at Beginning of Period 19,899 3,229
------------- -------------
Cash and Cash Equivalents at End of Period $ 6,922 $ 13,531
============= =============
Cash Paid For:
Interest $ 264 $ 3,009
Income Taxes $ - $ -
Non-Cash Investing and Financing Activities:
Stock Issued in payment for Note Payable $ - $ -
The accompanying notes are an integral part of these
consolidated financial statements.
7
View Systems, Inc.
Notes to the Consolidated Financial Statements
March 31, 2004
GENERAL
View Systems, Inc. (the Company) has elected to omit substantially all
footnotes to the financial statements for the three months ended March 31,
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.
8
In this report references to "View Systems," "we," "us," and "our" refer to
View Systems, Inc.
FORWARD LOOKING STATEMENTS
This quarterly report contains certain forward looking statements that involve
risks and uncertainties, such as statements of View System's plans and
expectations. Any statements contained in this report that are not statements
of historical fact may be deemed to be forward looking statements. Without
limiting the foregoing, words such as "may," "expect," "believe,"
"anticipate," "estimate" or "continue" or comparable terminology are intended
to identify forward-looking statements. These statements by their nature
involve substantial risks and uncertainties, and actual results may differ
materially depending on a variety of factors, many of which are not within
View Systems's control. These factors include, but are not limited to,
economic conditions generally and in the industry which View Systems
participates; competition within View Systems's chosen market and failure by
View Systems to successfully develop business relationships.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Executive Overview
View Systems designs and develops computer software and hardware used in
conjunction with weapons detection and surveillance capabilities. We have
received increased product inquiries over the last six months of the 2003 year
and we are also signing new dealers. In addition, our ViewMaxx Digitial Video
sales have been revitalized in the last two quarters, demonstrating the
continuing market growth in closed circuit television surveillance products.
During the first quarter of 2004 we entered into a Cooperative Research and
Development Agreement with the Idaho National Laboratory for our FirstView
Wireless Camera System, a first responder long range video transmission
system. We believe that heightened attention to terrorist and other security
threats may continue to drive growth in the market for security products.
Our revenues are primarily from sales of our VideoMaxx and SecureScan
Concealed Weapons Detection System. We have incurred losses for the past two
fiscal years and have an accumulated deficit of $14,719,371 at March 31, 2004.
We rely on revenues, private financing and sales of common stock to provide
additional funding. Management believes we will incur operating losses for
the near future. However, management expects projected sales revenues and
anticipated equity infusions and advances from management to be sufficient to
provide funding to sustain operations through 2004.
For the 2004 second quarter our primary challenge will be to more fully
develop our product line and our sales and distribution network. Our emphasis
will be on marketing and sales programs through high-end dealer channels, plus
internal direct sales for our products, where applicable.
Our plan is to develop a sales and distribution channel program for the United
States. We expect 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. For international sales, we have engaged one group, RVP
Associates, for international business development with the intent that the
international sales and distribution channel will parallel the United States
program only through foreign sales channels. However, we cannot assure that
we will be able to develop these sales and distribution channels to a level
which will result in increased revenues.
Our second major emphasis for the 2004 second quarter and the remainder of the
2004 year is to continue our SecureScan manufacturing cost reduction
objectives. We will continue implementation of the three-phase initiative
toward the reduction of the manufacturing costs of the SecureScan product,
which we began in the last half of 2003. We have completed the first phase of
this plan by reducing manufacturing costs of the SecureScan product by 25%.
The second phase will be implemented over the next six months of the 2004
year. We intend to select key expensive components of the SecureScan system
and replace them with performance equivalent, less
9
expensive parts. The final phase of the manufacturing cost reductions will be
a $1,600 cost reduction per unit in the fabrication of the gradiometer sensors
alone which we believe can be accomplished. In addition, we anticipate
completing circuitry conversions to fully digital signal processing from
present digital to analog, back to digital and vice versa along with replacing
over-engineered housings in the portal. We also expect to reduce assembly
time and testing times to save additional manufacturing costs.
Our manufacturing and marketing objectives for FirstView, which is based on
the hazmat cam, a lightweight wireless camera system that emergency response
teams carry into ground zero, include:
.. Set up a complete manufacturing line in the Baltimore, Maryland
facility for building, testing and further development of the hazmat
camera product.
.. Create comprehensive manufacturing ability with a bill of materials and
vendor supply source list for ongoing engineering support and
production.
.. Establish the necessary manufacturing process to sustain output levels
of 8 to 10 systems per month.
Liquidity and Capital Resources
For the short term management believes that revenues and additional equity
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 three month period
ended March 31, 2004 ("2004 first quarter") was $185,863 compared to net cash
used by operating activities of $205,748 for the three month period ended
March 31, 2003 ("2003 first quarter").
Financing - We have financed our operations primarily through private equity
financing. We expect to rely on external financing of $1 to $3 million to
meet our needs in the short term, increase ongoing operations to
self-sustaining levels, and increase profits to the magnitude management feels
is achievable. The first phase will be a $500,000 bridge financing to be
completed in the 2004 second quarter that we intend to use to expand our
marketing and sales programs and to set up manufacturing capabilities for
FirstView in our Baltimore, Maryland facility. The second phase is to acquire
$1 million in the third quarter 2004 to increase sales and manufacturing
personnel to support development of a national sales channel model, lower
manufacturing unit costs of the SecureScan products and implement an
application integrating SecureScan with School Technology Management's Student
Time and Attendance System. The third phase of funding will be used to expand
our dealer network through the remainder of 2004 and introduce additional cost
reductions of the newest products into the 2005 calendar year.
Net cash provided by financing activities for the 2004 first quarter was
$172,886; consisting of advances from shareholders of $137,886 and $35,000
proceeds received from sales of stock. In comparison, net cash provided by
financing activities for the 2003 first quarter were $125,000 from advances
and $86,550 proceeds from sales of common stock.
We intend to use any available cash to expand our sales, marketing and
promotional activities for the SecureScan portals and to continue our product
development efforts. We believe that it will be essential to continue to
raise additional capital, both internally and externally, to compete in this
industry. We cannot assure 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.
10
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 $1,037,969 at
March 31, 2004 include accounts payable of $607,887, accrued expenses of
$102,947, accrued interest of $57,750 and notes payable of $269,385.
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 month periods ended March 31, 2004 and
2003 and should be read in conjunction with the financial statements, and
notes thereto, included with this report at Item I, Part 1, above.
Comparison of 2003 and 2004 First Quarter Summary of Operations
-----------------------------------------------------------------
Quarter ended Quarter ended
March 31, 2004 March 31, 2003
--------------- ---------------
Revenues, net $ 34,353 $ 65,690
Cost of sales 32,326 27,536
Gross profit 2,027 38,154
Total operating expenses 213,368 329,517
Net operating loss (211,341) (291,363)
Total other expense (3,014) (3,009)
Net income (loss) (214,355) (294,372)
Net income (loss) per share $ 0.00 $ (0.01)
Revenues for the 2004 first quarter decreased 47.7% compared to the 2003 first
quarter, but costs of sales increased 17.3% in the 2004 first quarter
compared to the 2003 first quarter. As a result of the reduction in revenues,
coupled with the increase in cost of sales, our gross profit decreased 94.7%
for the 2004 first quarter compared to the 2003 first quarter.
During the 2004 first quarter total operating expense decreased 35.2% compared
to the 2003 first quarter. The decrease was primarily the result of a 50.0%
decrease in general and administrative expenses and a 68.6% decrease in
professional fees for technical and business consultants. The reductions in
total operating expenses resulted in a 27.5% decrease in our net operating
loss.
Our net loss for the 2004 quarter decreased 27.8 % in comparison to our net
loss for the 2003 first quarter. Our net loss per share was $0.00 for the
2004 first quarter compared to a net loss per share of $0.01 for the 2003
first quarter.
11
Summary of Balance Sheet
--------------------------
Quarter ended For year ended
March 31, 2004 December 31, 2003
--------------- ----------------
Cash $ 6,922 $ 19,899
Total current assets 257,404 338,228
Total assets 2,020,937 2,113,051
Total current liabilities 1,037,969 950,729
Accumulated deficit (14,719,371) (14,505,017)
Total stockholders equity $ 982,968 $ 1,162,322
As of March 31, 2004 we had negative working capital of $780,565 and our total
current assets decreased due to reductions in cash and accounts receivable.
We own property and equipment valued at $33,403 and licenses related to our
technology valued at $1,626,854. Our total current liabilities have increased
as of March 31, 2004 compared to December 31, 2003.
Factors Affecting Future Performance
We may need additional external capital and may be unable to raise it.
Based on our current growth plan we believe we may require $1 to $3 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. 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. If we are unsuccessful in developing
sales channels we may have to abandon our business plan.
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.
12
PART II: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
The following discussion describes all securities sold by View Systems without
registration during the first quarter of 2004 through a recent date.
In February and March of 2004 we issued an aggregate of 902,000 restricted
common shares as compensation pursuant to employment agreements. We issued
100,000 shares to Paul Scaccio, 100,000 shares to Barry Feldman, 102,000
shares to David Johansen and 600,000 shares to Gunther Than. 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.
Starting on August 6, 2003 we have conducted a Regulation D Rule 505 offering
for an aggregate offering amount of $1,500,000. During the first quarter of
2004 and through April 22, 2004 we issued an aggregate of 518,833 common
shares to accredited investors for approximately $58,000. We relied on an
exemption from the registration requirements of the Securities Act of 1933 for
a limited offering provided by Section 3(b) and Regulation D.
On March 11, 2004 we issued 31,250 shares 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.
In connection with each of these isolated issuance's of our securities, we
believe that each purchaser:
.. was aware that the securities had not been registered under federal
securities laws;
.. acquired the securities for his/her/its own account for investment
purposes and not with a view to or for resale in connection with any
distribution for purposes of the federal securities laws;
.. understood that the securities would need to be indefinitely held unless
registered or an exemption from registration applied to a proposed
disposition; and
.. was aware that the certificate representing the securities would bear a
legend restricting their transfer.
ITEM 5: OTHER INFORMATION
On April 30, 2004 Barry Feldman resigned as our President, Chief Operating
Officer and Director to pursue other interests. We have not filled these
vacancies as of the date of this filing.
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)
10.1 Employment agreement between View Systems and Gunther Than, dated
January 1, 2003 (Incorporated by reference to exhibit 10.3 for Form
10-KSB, filed April 14, 2004)
21.1 Subsidiaries (Incorporated by reference to Form 10-KSB, filed March 31,
2003)
13
Reports on Form 8-K
On March 2, 2004 we filed a current report on Form 8-K, dated February 24,
2004, under Item 4 related to the engagement of our independent auditor. On
March 3, 2004 we filed an amendment to this report related to the resignation
of our former auditor.
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: May 13, 2004 By: ______________________________________
Gunther Than
Chief Executive Officer
Principal Financial Officer
Treasurer and Director
14