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 September 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 October 20, 2004 View Systems, Inc. had 72,917,102 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..........................................13
PART II: OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......14
Item 5. Other Information................................................14
Item 6. Exhibits ........................................................14
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 and nine month periods ended September 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 nine
month period ended September 30, 2004 are not necessarily indicative of
results to be expected for any subsequent period.
2
View Systems, Inc.
Consolidated Financial Statements
September 30, 2004
3
View Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
September 30, December 31,
2004 2003
------------- -------------
(unaudited)
Current Assets
Cash $ 99,879 $ 19,899
Accounts Receivable(Net of Allowance of $81,000) 259,285 225,088
Inventory 93,241 93,241
------------- -------------
Total Current Assets 452,405 338,228
------------- -------------
Property & Equipment (Net) 21,003 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 $ 2,203,538 $ 2,113,051
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 366,091 $ 648,714
Accrued Expenses 56,489 115,515
Accrued Interest 63,250 55,000
Notes Payable 211,885 131,500
------------- -------------
Total Current Liabilities 697,715 950,729
------------- -------------
Stockholders' Equity
Preferred Stock, Authorized 10,000,000
Shares, $.01 Par Value, Issued and
Outstanding 0 - -
Common Stock, Authorized 100,000,000
Shares, $.001 Par Value, Issued and
Outstanding 72,529,102 and 62,730,619,
respectively 72,530 62,730
Additional Paid in Capital 16,726,218 15,604,609
Retained Earnings (Deficit) (15,292,925) (14,505,017)
------------- -------------
Total Stockholders' Equity 1,505,823 1,162,322
------------- -------------
Total Liabilities and Stockholders' Equity $ 2,203,538 $ 2,113,051
============= =============
4
View Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues, Net $ 188,029 $ 239,734 $ 380,423 $ 451,909
Cost of Sales 32,765 132,770 138,963 227,760
------------- ------------- ------------- -------------
Gross Profit (Loss) 155,264 106,964 241,460 224,149
------------- ------------- ------------- -------------
Operating Expenses
Research & Development - 13,745 - 25,177
General & Administrative 184,259 171,188 564,937 449,206
Professional Fees 11,972 27,622 94,146 68,091
Salaries & Benefits 98,806 423,532 339,016 666,598
------------- ------------- ------------- -------------
Total Operating Expenses 295,037 622,342 998,099 1,209,072
------------- ------------- ------------- -------------
Net Operating Income (Loss) (139,773) (515,378) (756,639) (984,923)
------------- ------------- ------------- -------------
Other Income(Expense)
Interest Expense (2,958) - (31,269) -
------------- ------------- ------------- -------------
Total Other Income
(Expense) (2,958) - (31,269) -
------------- ------------- ------------- -------------
Net Income (Loss) $ (142,731) $ (515,378) $ (787,908) $ (984,923)
============= ============= ============= =============
Net Income (Loss) Per Share $ (0.00) $ (0.01) $ (0.01) $ (0.02)
============= ============= ============= =============
Weighted Average
Shares Outstanding 70,341,359 46,132,270 65,895,908 45,828,321
============= ============= ============= =============
5
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months
Ended September 30,
---------------------------
2004 2003
------------- -------------
Cash Flows from Operating Activities:
Net Income (Loss) $ (787,908) $ (984,923)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 23,690 179,055
Stock Issued for Services 348,804 261,500
Loss on Settlement of Debt 3,750 -
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (34,197) (165,331)
Inventories - 171,326
Increase (Decrease) in:
Accounts Payable (106,373) (185,166)
Accrued Expenses (39,971) 8,250
------------- -------------
Net Cash Provided(Used) by Operating Activities (592,205) (715,289)
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 591,685 472,820
Proceeds from stock issuance 80,500 308,550
------------- -------------
Net Cash Provided (Used) by Financing Activities 672,185 781,370
------------- -------------
Increase (Decrease) in Cash 79,980 70,581
Cash and Cash Equivalents at Beginning of Period 19,899 3,229
------------- -------------
Cash and Cash Equivalents at End of Period $ 99,879 $ 73,810
============= =============
Cash Paid For:
Interest $ - $ -
Income Taxes $ - $ -
Non-Cash Activities:
Stock Issued for Notes Payable and Accrued Interest $ 522,105 $ 959,613
Stock Issued for Services $ 348,804 $ -
Reduction in Notes Payable Due to Renegotiations $ - $ 164,450
Stock Issued for Settlement of Accounts Payable $ 180,000 $ -
6
View Systems, Inc.
Notes to the Consolidated Financial Statements
September 30, 2004
GENERAL
View Systems, Inc. (the Company) has elected to omit substantially all
footnotes to the financial statements for the nine months ended September 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.
During July 2004, the Company issued 50,000 shares of common stock for cash
of $10,000.
7
View Systems, Inc.
Notes to the Consolidated Financial Statements
September 30, 2004
COMMON STOCK (Continued)
During July 2004, the Company issued 781,600 shares of common stock for
services valued at $109,424.
During September 2004, the Company issued 293,750 shares of common stock for
cash of $23,500.
During September 2004, the Company issued 2,000,000 shares of common stock
valued at $180,000 for the settlement of accounts payable.
8
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, Inc. designs and manufactures computer software and hardware
systems for security and surveillance applications. Our principal products
include VideoMaxx Digital Video surveillance products, SecureScan Concealed
Weapons Detection products. In the 2004 second quarter we launched our
newest product, Visual First Responder, formerly referred to as the FirstView
Wireless Camera System. The First Responder is a long range video
transmission system used by first responders at a hazardous site. We also
offer biometric verification systems, magnetic door locks and central
monitoring or video command centers which can be combined with our principal
products.
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. During the third quarter of 2004 the sales of
ViewMaxx products doubled compared to the sales of this product line in the
2004 second quarter. We continue to demonstrate our SecureScan portal to
various potential markets and have accelerated the production of our
SecureScan portals in order to meet current invoices and to allow for the
marketing of a new lease/rental program.
We rely on revenues, advances and sales of common stock to fund our
operations. While we experienced a drop in revenues for the first quarter of
2004, revenues increased significantly in the second quarter of 2004 and
continued to increase in the third quarter of 2004. Even though revenues
have improved in the recent quarter, we have incurred losses for the past two
fiscal years and have an accumulated deficit of $15,292,925 at September 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.
During the next six months our goal is to continue development of our sales
and distribution channels for the United States market. Our emphasis will be
on marketing and sales programs through dealer channels, plus internal direct
sales for our products, where applicable. We intend to demonstrate our
products to:
. schools, courthouses, and commercial buildings,
. correctional facilities,
. sporting venues,
. security contractors, nationwide and international tier one security
providers, Hazmat crews, fire crews, police, National Guard teams, and
. GSA contractors who play a major role in Homeland Security.
In addition, our goal is to enter into partnering arrangements with other
providers of security products, which management believes will increase our
overall market exposure. 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 profitability.
Liquidity and Capital Resources
For the short term, management believes that revenues, advances and sales of
our common stock will provide funds for operations and further development of
our business plan. For the long term, management expects that the
development of our sales and distribution 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.
While our revenues are increasing, we are unable to satisfy our operating
expenses. Net cash used by operating activities for the nine month period
ended September 30, 2004 ("2004 nine month period") was $592,205 compared to
net cash used by operating activities of $715,289 for the nine month period
ended September 30, 2003 ("2003 nine month period").
Financing - For the 2004 nine month period net cash provided by financing
activities was $672,185 compared to $781,370 for the 2003 nine month period.
The 2004 nine month period financing activities consisted of advances from
shareholders of $591,685 and $80,500 in proceeds received from sales of
common stock. The 2003 nine month period financing activities consisted of
advances from shareholders of $472,820 and $308,550 in proceeds received from
sales of stock.
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 First
Responder product. The second phase involves the acquisition of $500,000 in
the next nine 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.
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 commitments include our operating lease and total current
liabilities. Our rent for the manufacturing facility in Baltimore, Maryland
is $2,260 per month with an annual escalator of 3%. We recorded total
current liabilities of $697,715 at September 30, 2004, which included
accounts payable of $366,091, accrued expenses of $56,489, accrued interest
of $63,250 and notes payable of $211,885.
Off-balance Sheet Arrangements - None.
10
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 nine month periods ended September
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.
Summary of 2003 and 2004 Interim Period Operations
---------------------------------------------------
Nine months Nine months Three months Three months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2004 2003 2004
------------- ------------- -------------- -------------
Revenues, net $ 451,909 $ 380,423 $ 239,734 $ 188,029
Cost of sales 227,760 138,963 132,770 32,765
Gross profit 224,149 241,460 106,964 155,264
Total operating expenses 1,209,072 998,099 622,342 295,037
Net operating loss (984,923) (756,639) (515,378) (139,773)
Total other income (expense) - (31,269) - (2,958)
Net income (loss) (984,923) (787,908) (515,378) (142,731)
Net income (loss) per share $ (0.02) $ (0.01) $ (0.01) $ (0.00)
Revenues for the 2004 nine month period decreased 15.8% compared to the 2003
nine month period, but costs of sales also decreased 39.0% in the 2004 nine
month period compared to the 2003 nine month period. As a result of the
increased revenues and decreased cost of sales, our gross profit improved 7.7
% for the 2004 nine month period compared to the 2003 nine month period
Revenues for the three month period ended September 30, 2004 ("2004 third
quarter") decreased 21.6% compared to the three month period ended September
30, 2003 ("2003 third quarter"), but costs of sales decreased 75.3% in the
2004 third quarter compared to the 2003 third quarter. Primarily as a result
of decreases in cost of sales in the 2004 third quarter, our gross profit
increased 45.2% in the 2004 third quarter compared to the 2003 third quarter.
During the 2004 nine month period total operating expense decreased 17.4%
compared to the 2003 nine month period. For the 2004 third quarter total
operating expense decreased 52.6% compared to the 2003 third quarter. The
decreases for the 2004 periods were primarily the result of a decreases in
salaries and benefits and the lack of research and development expenses.
With increases in our gross profit and decreases in our total operating
expenses, our net operating loss decreased 23.2% for the 2004 nine month
period compared to the 2003 nine month period and decreased 72.9% for the
2004 third quarter compared to the 2003 third quarter.
We recorded total other expense in the 2004 periods primarily related to
interest expense on loans received in those periods.
11
Our net loss for the 2004 nine month period decreased 20.0% in comparison to
our net loss for the 2003 nine month period and our net loss for the 2004
third quarter decreased 72.3% in comparison to our net loss for the 2003
third quarter. Our net loss per share was $0.01 for the 2004 nine month
period compared to $0.02 for the 2003 nine month period and $0 for the 2004
third quarter compared to $0.01 for the 2003 third quarter.
Summary of Balance Sheet
--------------------------
For year ended Three months
ended ended
December 31, 2003 Sept. 30, 2004
----------------- ----------------
Cash $ 19,899 $ 99,879
Total current assets 338,228 452,405
Total assets 2,113,051 2,203,538
Total current liabilities 950,729 697,715
Accumulated deficit (14,505,017) (15,292,925)
Total stockholders equity $ 1,162,322 $ 1,505,823
At September 30, 2004 our total current assets increased slightly from the
year ended December 31, 2003, primarily due to increases in cash and accounts
receivable. At September 30, 2004 we owned property and equipment valued at
$21,003 and licenses related to our technology valued at $1,626,854.
Our total current liabilities have decreased at September 30, 2004 compared
to December 31, 2003, primarily due to a reduction in accounts payable of
$282,623.
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. 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.
13
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.
We may not be able to compete successfully in our market because we
have a small market share and compete with large national and
international companies.
We estimate that we have less than a 1% market share of the surveillance and
weapons detection market. We compete with many companies that have greater
brand name recognition and significantly greater financial, technical,
marketing, and managerial resources. The position of these competitors in
the market may prevent us from capturing more market share. We intend to
remain competitive by increasing our existing business through marketing
efforts, selectively acquiring complementary technologies or businesses and
services, increasing our efficiency and reducing costs.
Our revenues are dependent in part upon our relationships and alliances
with government agencies and partners.
While we own exclusive licenses for the SecureScan technology, we are
dependent upon the continuation of the ongoing contract between the
Department of Energy and National Institute of Justice for continuations and
improvements to the concealed weapons detection technology. We are also
reliant upon School Technology Management for the continued integration of
our SecureScan technology with its Comprehensive Attendance/Security System
for use in educational facilities. If either of these entities should
discontinue its operations or research and development we may lose our
competitive edge in our market.
We must successfully introduce new or enhanced products and manage the
costs associated with producing several product lines to be successful.
Our future success depends on our ability to continue to improve our existing
products and to develop new products using the latest technology that can
satisfy customer needs. For example, our short term success will depend on
the continued acceptance of the VideoMaxx product line and the SecureScan
portal product line. We intend to invest a significant amount of our
financial resources for the development of the Visual First Responder product
line. We cannot be certain that we will be successful at producing multiple
product lines and we may find that the cost of production of multiple product
lines inhibits our ability to maintain or improve our gross profit margins.
In addition, the failure of our products to gain or maintain market
acceptance or our failure to successfully manage our cost of production could
adversely affect our financial condition.
We would be harmed if we were unable to use our manufacturing facility.
We assemble and manufacture our products at our facility located in
Baltimore, Maryland. If we were unable to continue manufacturing at this
location due to fire, prolonged power shortage or other natural disaster,
then we would be unable to supply products to our 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.
13
PART II: OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Securities
The following discussion describes securities sold by View Systems without
registration during the third quarter of 2004 not previously reported.
In August and September of 2004 our board of directors authorized the
issuance of an aggregate of 343,750 common shares to five purchasers for
$33,500 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.
On September 24, 2004 our board of directors authorized the issuance of
2,000,000 common shares to Lesniak & Associates as settlement of a default
judgment against View Systems, Inc. The 2,000,000 shares were valued at
approximately $180,000. 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 6. EXHIBITS
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)
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: November 12, 2004 By:____________________________________________
Gunther Than
Chief Executive Officer, Treasurer, Director
and Principal Financial Officer
14