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EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - SOMERSET INTERNATIONAL GROUP,INC. | f10q0909ex32i_somerset.htm |
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - SOMERSET INTERNATIONAL GROUP,INC. | f10q0909ex31i_somerset.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE QUARTER ENDED SEPTEMBER 30, 2009
COMMISSION
FILE NO. 0-10854
SOMERSET INTERNATIONAL GROUP,
INC.
(Exact
name of Registrant as specified in its charter)
DELAWARE
|
13-2795675
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification No.)
|
90
Washington Valley Road, Bedminster, NJ 07921
(Address
of Principal Executive Offices)
Registrant's
Telephone No., including area code: (908) 719-8909
Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“the
Exchange Act”) during the preceding 12 months (or for such shorter period that
the registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No o
(See Note
1B – Basis of Presentation in Notes To Financial Statements)
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
One):
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non-Accelerated
Filer o
|
Smaller
Reporting Company x
|
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes o No x
Indicate
the number of shares outstanding of each of the issuer's classes of Common
Stock:
As of
November 16, 2009, there were 23,348,655 shares of the registrant’s Common
Stock, par value $.001 per share, outstanding.
SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO
FORM 10-Q
(See Note
1B – Basis of Presentation)
September
30, 2009
Part
I - Financial Information
|
Page
|
Item
1. Financial Statements:
|
|
Consolidated
Balance Sheets – September 30, 2009 (Unaudited) and December 31,
2008
|
3
|
Unaudited
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2009 and 2008
|
4
|
Unaudited
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2009 and 2008
|
5
|
Notes
to the Consolidated Financial Statements (unaudited)
|
6 -
12
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
13
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
|
17
|
Item
4. Controls and Procedures
|
18
|
Part
II - Other Information:
|
|
Item
1. Legal Proceedings
|
18
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
18
|
Item
3. Defaults Upon Senior Securities
|
18
|
Item
4. Submission of Matters to a Vote of Security Holders
|
18
|
Item
5. Other Information
|
18
|
Item
6. Exhibits
|
18
|
Signatures
|
19
|
-2-
SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(SEE
NOTE 1B – BASIS OF PRESENTATION)
SEPTEMBER
30, 2009 AND DECEMBER 31, 2008
September
30,
2009
|
December
31, 2008
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 16,911 | $ | 65,732 | ||||
Accounts
receivable, net
|
533,389 | 645,233 | ||||||
Inventories
|
705,806 | 488,156 | ||||||
Prepaid
expenses
|
79,386 | 4,209 | ||||||
Other
current asset
|
10,365 | 10,444 | ||||||
Total
Current Assets
|
1,345,857 | 1,213,774 | ||||||
Property
and equipment, net
|
87,188 | 115,873 | ||||||
Other
Assets:
|
||||||||
Deposits
|
7,119 | 9,825 | ||||||
Deferred
financing costs, net
|
141,259 | 215,000 | ||||||
Customer
lists, net
|
1,173,088 | 1,619,185 | ||||||
Distribution
agreements, net
|
-- | 52,928 | ||||||
Goodwill
|
2,200,355 | 2,200,355 | ||||||
Total
other assets
|
3,521,821 | 4,097,293 | ||||||
TOTAL
ASSETS
|
$ | 4,954,866 | $ | 5,426,940 | ||||
LIABILITIES
AND STOCKHOLDERS’ (DEFICIT)
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 1,622,866 | $ | 1,264,356 | ||||
Promissory
notes payable - current
|
1,433,751 | 1,360,561 | ||||||
Dutchess
promissory notes payable - current
|
3,870,600 | 1,023,000 | ||||||
Accrued
interest payable
|
697,827 | 276,865 | ||||||
Deferred
revenue
|
213,899 | 268,081 | ||||||
Total
Current Liabilities
|
7,838,943 | 4,192,863 | ||||||
Dutchess
promissory notes payable – non-current
|
-- | 2,853,407 | ||||||
Promissory
notes – non-current
|
26,913 | 40,499 | ||||||
TOTAL
LIABILITIES
|
7,865,856 | 7,086,769 | ||||||
Stockholders’
(Deficit):
|
||||||||
Common
Stock, 200,000,000 shares authorized, $.001 par value, 23,348,655 and
23,333,655 shares issued and outstanding in 2009 and 2008,
respectively
|
23,348 | 23,334 | ||||||
Capital
in excess of par value
|
31,367,243 | 31,366,808 | ||||||
Accumulated
deficit
|
(34,301,581 | ) | (33,049,971 | ) | ||||
Total
stockholders’ (deficit)
|
(2,910,990 | ) | (1,659,829 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ (DEFICIT )
|
$ | 4,954,866 | $ | 5,426,940 |
The Notes
to the Consolidated Financial Statements are an integral part of these
statements.
-3-
SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
(SEE
NOTE 1B – BASIS OF PRESENTATION)
UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Three
Months Ending
September
30,
|
Nine
Months Ending
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
||||||||||||||||
Equipment
sales
|
$ | 399,195 | $ | 359,153 | $ | 1,156,132 | $ | 1,168,472 | ||||||||
Installation
and service revenues
|
131,925 | 466,403 | 645,756 | 1,097,937 | ||||||||||||
Contract
revenues
|
496,613 | 312,062 | 1,329,861 | 1,396,142 | ||||||||||||
Total
revenues
|
1,027,733 | 1,137,618 | 3,131,749 | 3,662,551 | ||||||||||||
Costs
of goods sold
|
||||||||||||||||
Material
cost of systems sold
|
236,375 | 262,823 | 641,523 | 967,112 | ||||||||||||
Install
and service costs
|
202,512 | 274,934 | 565,201 | 748,483 | ||||||||||||
Engineering
and development
|
27,866 | 32,520 | 88,666 | 104,046 | ||||||||||||
Total
costs of goods sold
|
466,753 | 570,277 | 1,295,390 | 1,819,641 | ||||||||||||
Gross
margin
|
560,980 | 567,341 | 1,836,359 | 1,842,910 | ||||||||||||
Selling,
general, and administrative expenses
|
||||||||||||||||
Selling,
general and administrative expense
|
554,854 | 587,973 | 1,951,037 | 2,281,846 | ||||||||||||
Depreciation
expense
|
9,421 | 11,847 | 31,139 | 26,893 | ||||||||||||
Amortization
expense
|
184,855 | 185,225 | 572,765 | 568,418 | ||||||||||||
Total
selling, general, and administrative expenses
|
749,130 | 785,045 | 2,554,941 | 2,877,157 | ||||||||||||
Loss
from operations
|
(188,150 | ) | (217,704 | ) | (718,582 | ) | (1,034,247 | ) | ||||||||
Other
Income (Expense)
|
||||||||||||||||
Interest
(expense)
|
(157,742 | ) | (145,061 | ) | (525,952 | ) | (430,593 | ) | ||||||||
Other
(expense)
|
-- | (478 | ) | 18 | (978 | ) | ||||||||||
Total
other income (expense)
|
(157,742 | ) | (145,539 | ) | (525,934 | ) | (431,571 | ) | ||||||||
Loss
before income taxes
|
(345,892 | ) | (363,243 | ) | (1,244,516 | ) | (1,465,818 | ) | ||||||||
Provision
for (benefit from) income taxes
|
2,639 | 6,426 | 7,094 | 6,685 | ||||||||||||
Net
Loss
|
$ | (348,531 | ) | $ | (369,669 | ) | $ | (1,251,610 | ) | $ | (1,472,503 | ) | ||||
Basic
and diluted net loss per common share
|
$ | (0.02 | ) | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.06 | ) | ||||
Weighted
Average Number of Common Shares
|
23,348,655 | 23,069,253 | 23,348,545 | 23,062,226 |
The Notes
to the Consolidated Financial Statements are an integral part of these
statements.
-4-
SOMERSET
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
(SEE
NOTE 1B – BASIS OF PRESENTATION)
UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
2009
|
2008
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
(Loss)
|
$ | (1,251,610 | ) | $ | (1,472,503 | ) | ||
Adjustments
to reconcile net loss to net cash used by operating
activities:
|
||||||||
Depreciation
|
31,139 | 26,893 | ||||||
Amortization
|
572,765 | 568,418 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
111,844 | 70,413 | ||||||
Inventories
|
(217,650 | ) | 24,915 | |||||
Other
current assets
|
79 | 11,284 | ||||||
Accounts
payable and accrued expenses
|
358,501 | 646,486 | ||||||
Prepaid
expense
|
(75,177 | ) | 3,216 | |||||
Deposits
|
2,706 | -- | ||||||
Accrued
interest payable
|
420,962 | 55,636 | ||||||
Deferred
revenue
|
(54,168 | ) | (25,778 | ) | ||||
Net
Cash Provided (Used) by Operating Activities
|
(100,609 | ) | (91,020 | ) | ||||
Cash
Flows From Investing Activities:
|
||||||||
Purchase
of equipment
|
(2,454 | ) | (2,971 | ) | ||||
Proceeds
from sale of fixed assets
|
-- | 7,806 | ||||||
Net
Cash Used by Investing Activities
|
(2,454 | ) | 4,835 | |||||
Cash
Flows From Financing Activities:
|
||||||||
Payment
of Dutchess debenture
|
-- | (176,152 | ) | |||||
Proceeds
from issuance stock
|
450 | 2,249 | ||||||
Proceeds
from issuance of promissory notes
|
80,000 | 50,000 | ||||||
Proceeds
from shareholder loan
|
-- | 50,000 | ||||||
Payment
of promissory notes payable
|
(26,207 | ) | (110,760 | ) | ||||
Net
Cash Provided (Used) by Financing Activities
|
54,243 | (184,663 | ) | |||||
Net
Change in Cash and cash equivalents
|
(48,821 | ) | (270,848 | ) | ||||
Cash
and cash equivalents at Beginning of the Period
|
$ | 65,732 | $ | 350,110 | ||||
Cash
and cash equivalents at End of the Period
|
$ | 16,911 | $ | 79,262 | ||||
Cash
paid for interest
|
$ | 112,588 | $ | 374,957 | ||||
Cash
paid for taxes
|
$ | 7,094 | $ | 6,426 | ||||
Non
Cash Investing & Financing Activities:
|
||||||||
Promissory
note obligation incurred upon acquisition of
equipment
|
$ | -- | $ | 80,430 | ||||
The Notes
to the Consolidated Financial Statements are an integral part of these
statements.
-5-
Note
1. Business and Basis of Presentation
A. Nature of the
Business
Somerset
International Group, Inc. (the “Company”) is in the business of acquiring
profitable or near term profitable private small and medium sized businesses
that provide proprietary security products and solutions for people and
enterprises – from personal safety to information security – and maximizing the
profitability of our acquired entities and to act as a holding company for such
entities.
Our executive office is located at 90
Washington Valley Road, Bedminster, New Jersey, 07921.
Customers are located primarily in the
northeastern United States.
B.
Basis of
Presentation
The unaudited consolidated financial
statements included herein have not been reviewed by the Company’s independent
registered public accounting firm. Therefore, these financial
statements have not been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Also, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. The unaudited interim
consolidated financial statements as of September 30, 2009 reflects all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are considered necessary for a fair presentation of its financial
position as of September 30, 2009 and the results of its consolidated operations
and its consolidated cash flows for the periods ended September 30, 2009 and
2008.
The Unaudited Consolidated Statements
of Operations for the periods ended September 30, 2009 and 2008 are not
necessarily indicative of results for the full year.
The unaudited consolidated financial
statements should be read in conjunction with the audited financial statements
of the Company and the notes thereto as of and for the year ended December 31,
2008 as included in the Company’s Form 10-K filed with the Commission on March
31, 2009.
The accompanying financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate continuation of the Company
as a going concern. This contemplates the realization of assets and
the liquidation of liabilities in the normal course of business. Currently, the
Company does not have significant cash or other material assets, nor does it
have operations or a source of revenue which is adequate to cover its
administrative costs for a period in excess of one year and allow it to continue
as a going concern. Management is actively involved in exploring
additional business opportunities which they believe will allow the Company to
increase shareholder’s value and allow it to continue as a going concern. The
Company will require financing to fund its current operations and will require
additional financing to acquire or develop other business
opportunities. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
-6-
Note
2. Significant Accounting Policies
A.
Cash and cash
equivalents
Cash and
cash equivalents include cash on hand and in the bank, as well as all short-term
securities held for the primary purpose of general liquidity. Such
securities normally mature within three months from the date of
acquisition.
B.
Accounts
Receivables
Accounts
receivables are uncollateralized customer obligations due under normal trade
terms requiring payment within 30 days from the invoice
date. Accounts receivables are stated at the amount billed to the
customer. Interest is not billed or accrued. Accounts
receivables in excess of 90 days old are considered
delinquent. Payments to accounts receivables are allocated to the
specific invoices identified on the customers remittance advice or, if
unspecified, are applied to the oldest invoice. The Company has an
allowance for doubtful accounts of approximately $31,000 and $41,000 as of
September 30, 2009 and December 31, 2008, respectively, based on its historical
collectability.
C.
Property
and Equipment
Property,
equipment, and leasehold improvements are stated at
cost. Depreciation is provided on a straight-line method over the
estimated useful lives of the assets ranging from two-seven
years. Leasehold improvements are depreciated over the lesser of
their useful lives or the term of the lease. Expenditures for
maintenance and repairs are charged to expense as incurred.
D.
Concentration of Credit
Risk:
The Company maintains its cash in bank
deposit accounts at high credit quality financial institutions. The
balances, at times, may exceed federally insured limits.
Currently,
Secure System, Inc. has five customers which accounted for all of their
revenues. Meadowlands has approximately 950 accounts and Fire Control has
approximately 360 accounts which accounted for all of their
revenues. While our goal is to diversify Secure’s and Fire Control’s
customer base, Secure expects to continue to depend upon a relatively small
number of customers for a significant percentage of its revenues for the
foreseeable future. Significant reductions in sales to any of our customers may
have a material adverse effect on us by reducing our revenues and our gross
margins.
E.
Use of
Estimates:
The preparation of financial statements
in conformity with United States generally accepted accounting principles
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures including the disclosure of contingent assets
and liabilities. Accordingly, actual results could differ from those
estimates. Such estimates include the fair value estimates related to
the net tangible and identifiable assets of acquired companies and the estimated
fair value of reporting units used when evaluating Goodwill for
impairment.
F.
Income
Taxes:
Deferred income tax assets and
liabilities are recognized for the differences between financial and income tax
reporting basis of assets and liabilities based on enacted tax rates and laws.
The deferred income tax provision or benefit generally reflects the net change
in deferred income tax assets and liabilities during the year. The current
income tax provision reflects the tax consequences of revenues and expenses
currently taxable or deductible on the Company’s various income tax returns for
the year reported. The Company’s deferred tax items are net operating loss
carryforwards, other items, and related deferred tax assets and have been offset
by a valuation allowance for the same amount.
-7-
G.
Fair Value
of Financial Instruments:
The carrying amounts of cash, accounts
receivable, accounts payable, promissory notes payable, and stockholder note
payable approximate fair value because of the terms of these financial
instruments.
H.
Reclassifications:
Certain reclassifications were made to
the 2008 financial statements in order to conform to the 2009 financial
statement presentation. Such reclassifications had no effect on the
prior reported net loss.
I.
Principles
of Consolidation:
The consolidated financial statements
include the operations of Somerset International Group, Inc., its wholly owned
subsidiaries Fire Control Security Systems, Inc. and Secure System, Inc., and
Secure System Inc.’s wholly owned subsidiaries Meadowlands Electronics Inc., and
Vanwell Electronics Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
J. Stock Based Compensation and
Stock Sales:
Stock and warrants issued for employee
compensation services have been determined based on the value of the instrument
issued at date of issuance for such services. In addition, during
2009 and 2008 the Company issued warrants as part of certain debt financings and
sales of common stock. The value of these warrants has been included
in additional paid in capital as part of the value of the overall stock
sale.
K.
Revenue
Recognition:
Installation,
subscription and maintenance revenues include installation of equipment and
testing at customer sites, fees for leased wireless equipment, and fees for
equipment maintenance. These revenues are recognized as the services are
performed, or ratably over time in the case of fees that may be billed quarterly
or semi-annually in advance. Revenues related to pre-billed services are
deferred until the service is provided and thereby earned. Equipment revenue is
recognized when the equipment is delivered to the customer. The Company
recognizes revenue only when persuasive evidence of an arrangement exists, when
delivery of merchandise has occurred or services have been rendered, the fee is
established and is determinable and collection is reasonably
assured.
The
Company has three separate and distinct revenue streams – equipment sales,
installation and maintenance.
The
description of each stream is as follows:
· Equipment:
The
pricing for an equipment sale is generally established through a customer
purchase order and is a separate stand-alone arrangement. Revenue is
recognized for equipment sales upon the delivery of the equipment, which is the
date on which customer becomes responsible for the payment of the
equipment.
-8-
·
|
Installation:
|
Installation
services are a separate stand-alone arrangement consisting of final connections
of the equipment and individual testing of the equipment pieces. Such
services occur after electrical work has been contracted and supervised by the
customer, and completed by an outside third party. Installation
services, when performed by the Company, are separately negotiated with the
customer, and are recognized upon completion of the service by the
Company.
·
|
Maintenance:
|
These are
separately priced contracts that are entered into with a customer typically
after the installation services are performed. Maintenance services
are not bundled into any other service. These maintenance services
are recognized as revenues as the services are performed. These
services are billed at the end of the month after the service is provided or if
provided through a contractual arrangement then pre-billed for the defined
periods, i.e. quarterly, semi-annual, or annual. Deferred Revenue on the
Company’s balance sheet represents amounts billed to customers for maintenance
to be performed in future periods.
L.
Inventory:
Inventory consists primarily of parts
and work in process products held for sale. Inventory, at year end, is stated at
the lower of cost or market, with cost being determined on a first in/first out
basis.
In accordance with Financial Accounting
Standards Board Accounting Standards Codification (“FASB ASC”) 270 (formerly APB
28), one of the Company’s subsidiaries uses estimated gross profit rates to
determine cost of goods sold during interim periods. This is
different from the method used at annual inventory dates. The other
subsidiaries perform physical inventory counts when calculating quarter-end
values. Historically this has not resulted in any material adjustment
to the cost of goods sold.
M. Loss Per
Share:
The Company computes net loss per share
under the provisions of FASB ASC 260 (formerly SFAS No. 128, “Earnings per
Share”), and utilizes guidance provided by SEC Staff Accounting Bulletin No. 98
(SAB 98). Under the provisions of FASB ASC 260 and SAB 98,
basic loss per share is computed by dividing the Company’s net loss for the
period by the weighted-average number of shares of common stock outstanding
during the period. Diluted net loss per share excludes potential common shares
if the effect is anti-dilutive. Diluted earnings per share are determined in the
same manner as basic earnings per share except that the number of shares is
increased assuming exercise of dilutive stock options and warrants using the
treasury stock method. As the Company had a net loss, the impact of the assumed
exercise of the stock options and warrants is anti-dilutive and as such, these
amounts have been excluded from the calculation of diluted loss per share. For
the periods ended September 30, 2009 and 2008, 4,234,753 and 3,299,374 of common
stock equivalent shares, respectively, were excluded from the computation of
diluted net loss per share after considering ownership limitations of certain
warrants and conversion features.
N. Goodwill and Intangible
Assets:
Goodwill
and intangible assets result primarily from acquisitions accounted for under the
purchase method. In accordance with FASB ASC 350 (formerly Statement of
Financial Accounting Standards (“SFAS") No. 142, "Goodwill and Other Intangible
Assets") goodwill and intangible assets with indefinite lives are not amortized
but are subject to impairment by applying a fair value based test. Intangible
assets with finite useful lives related to software, customer lists, covenant
not to compete and other intangibles are being amortized on a straight-line
basis over the estimated useful life of the related asset, generally three to
seven years. As of June 30, 2009, no impairment charge was
necessary.
-9-
In accordance with FASB ASC 350, the
Company reviews the carrying value of goodwill and intangible assets with
indefinite lives annually or on an interim basis in certain circumstances as
required. The Company measures impairment losses by comparing carrying value to
fair value. The impairment test compares the carrying amount of the reporting
unit to its fair value. Discounted cash flows are utilized to
determine the fair value of the assets being evaluated. The
impairment test performed in 2008 and 2007 supported the carrying value of
goodwill, and as such, no write-down in the carrying value of goodwill was
recorded.
In accordance with FASB ASC 360
(formerly SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets"), long-lived assets used in operations are reviewed for impairment
whenever events or change circumstances indicate that carrying amounts may not
be recoverable. For long-1ived assets to be held used, the Company recognizes an
impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between carrying amount and fair value.
Note
3. Recent Accounting Pronouncements
In March 2008, the FASB issued FASB ASC
815 (formerly Statement of Financial Accounting Standard No. 161), “Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133”), which is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after November 15,
2008. Early application is encouraged. FASB ASC 815
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. The Statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting
designation. In addition, the standard requires tabular disclosure of
fair value of derivative instruments and their gains and loss, requires
disclosure regarding credit risk related contingent features of the Company’s
derivative instruments and requires cross referencing within the footnote
disclosures regarding information about derivative
instruments. The Company concluded that this pronouncement did
not have a significant impact on its financial condition or results of
operations.
In
December 2007, the FASB issued FASB ASC 810 (formerly Statement of Financial
Accounting Standard No. 160 , “Non-Controlling Interests in Consolidated
Financial Statements, An Amendment of Accounting Research Bulletin No. 51”),
which is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Early application is
not permitted before that date. FASB ASC 810 changes the
terminology of minority interests, which will now be known as non-controlling
interest and requires that non-controlling interests be clearly identified
within stockholders’ equity as a separate component from the parent company’s
equity and net income or loss attributable to non-controlling interests be
clearly identified and presented on the face of the consolidated statement of
operations. In addition, the standard requires adequate disclosure
between interests of the parent company and interests of the non-controlling
equity holders. This pronouncement did not have a significant
impact on its financial condition or results of operations.
-10-
In
December 2007, the FASB revised FASB ASC 805 (formerly Statement of Financial
Accounting Standard No. 141 , “Business Combinations”), which is effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Early application is not permitted before that
date. FASB ASC 805 requires assets and liabilities
recorded in a business combination to be recorded at fair value and replaces the
cost-allocation process under the prior standard. In addition, FASB
ASC 805 requires separate recognition of acquisition costs and requires
recognition of contractual contingencies at fair value as of the acquisition
date. Further, the revised standard requires capitalization of
research and development assets and requires fair value recognition of
contingent consideration as of the acquisition date. The
Company had no business combinations and therefore there has been no impact
related to this pronouncement.
In May
2009, the FASB issued FASB ASC 805 (formerly SFAS No. 165, Subsequent Events),
which provides guidance on events that occur after the balance sheet date but
prior to the issuance of the financial statements. FASB ASC 805 distinguishes
events requiring recognition in the financial statements and those that may
require disclosure in the financial statements. Furthermore, FASB ASC 805
requires disclosure of the date through which subsequent events were
evaluated. FASB ASC 805 is effective for interim and annual periods
after June 15, 2009. The Company adopted SFAS No. 805 effective June 30, 2009,
and has included the required disclosure in Note 8 “Subsequent Events” of these
financial statements.
In June
2009, the FASB issued FASB ASC 105 (formerly SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of the FASB Statement No. 162.”). FASB ASC 105
stipulates the FASB Accounting Standards Codification is the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. FASB ASC 105 is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The implementation of this
standard did not have a material impact on our consolidated financial position
and result of operations.
Note
4. Commitments and Contingencies
The Company has entered into an
employment agreement with the President and CEO that became effective January 6,
2004. The employment agreement had a term of five years. In the event of
termination of employment without cause, the agreement provides that the Company
shall pay severance equaling the greater of the balance of the term of the
agreement or one year’s salary. On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company
entered into an amendment to extend the employment agreement dated January 6,
2004 for an additional 3 years from January 6, 2009. On January 6,
2009, the President and CEO signed an additional agreement, in which he agreed
to permanently waive the fiscal 2009 salary increase provided for in his
employment agreement. The additional agreement is for the period of January 6,
2009 though January 5, 2010.
Secure leases its facility on a year to
year basis at a monthly rent of $4,821.
Meadowlands leased its facility through
a three year lease that terminated on February 28, 2009, at a monthly rent of
$3,450. Effective March 1, 2009, it relocated its facilities to those
occupied by Fire Control.
Fire
Control leases its facility through a three year lease that expires December 31,
2010 at a monthly rent of $4,800.
-11-
In the
normal course of business, the Company is subject to various proceedings and
claims, the resolution of which will not, in management's opinion, have a
material adverse affect on the Company's financial position or results of
operations.
Note
5. Unregistered Sale of Equity Securities
In January 2009, the Company entered
into a convertible promissory note with an accredited investor for $30,000
bearing an interest rate of 15% per annum and with a conversion rate of $.25 per
share. In accordance with the note the Company issued the investor 15,000 shares
of the Company’s common stock valued at $450. Such shares were issued
pursuant to an exemption from registration at Section 4(2) of the Securities Act
of 1933 and are restricted in accordance with Rule 144 of the Securities Act of
1933. This note was due July 1, 2009.
In January 2009, the Company entered
into a convertible promissory note with an accredited investor for $50,000
bearing interest of 15% per annum and with a conversion rate of $.25 per share.
In accordance with the note the Company issued the investor a warrant to
purchase 25,000 shares of the Company’s common stock which is exercisable at
$.001 per share. This note was due April 26, 2009.
The failure to pay any principal or
interest due under these convertible promissory notes within ten days of the due
date is considered an “event of default”. As such, the rate of
interest on all unpaid principal is automatically increased to the default rate
of 20% per annum which is retroactive to the issue dates of these convertible
promissory notes.
The debt discount related to the
conversion feature and warrants associated with these convertible promissory
notes are insignificant to these financial statements.
Note 6.
Dutchess Debentures
Substantially
all principal payments due under the terms of the Dutchess Debentures during
2009 are in arrears. Partial payments of interest on these debentures
have been made during 2009. The failure to pay any principal or
interest due under these debentures within ten days of the due date is
considered an “event of default”.
Note
7. Equity Incentive Plan
On August 29, 2008, the Board of
Directors, with the approval of a majority of the shareholders of the Company,
adopted the 2008 Equity Incentive Plan (the “Plan”) which will be administered
by a compensation committee (the “Committee”) appointed by the
Board.
On April
2, 2009, in accordance with the Plan, two employees were issued a total of
175,000 shares under the Plan. The shares vest over three years, have
an exercise period of seven years, and were issued at an exercise price of
$0.015 per share.
Note
8. Subsequent Events
The Company adopted FASB ASC 805
(formerly SFAS no. 165, Subsequent Events) effective June 30, 2009, and has
evaluated subsequent events through November 16, 2009, which is the date these
financial statements were available to be issued, and has determined that there
are no events requiring recognition or disclosure in these financial
statements.
-12-
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
(SEE
NOTE 1B – BASIS OF PRESENTATION)
Item
2.
General
The
information contained in Item 2 contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results may
materially differ from those projected in the forward-looking statements as a
result of certain risks and uncertainties set forth in this report. Although
management believes that the assumptions made and expectations reflected in the
forward-looking statements are reasonable, there is no assurance that the
underlying assumptions will, in fact, prove to be correct or that actual results
will not be different from expectations expressed in this report.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues
and expenses, including stock issued for services and or compensation and
related disclosure on contingent assets and liabilities at the date of our
financial statements. Actual results may differ from these estimates under
different assumptions and conditions. Critical accounting policies
are defined as those that are reflective of significant judgments, estimates,
and uncertainties and potentially result in materially different results under
different assumptions and conditions.
We have
established an allowance for doubtful accounts for accounts
receivable. We analyzed the ability to collect accounts that are
large, none of which are currently past due. Management will evaluate
the adequacy of the subsidiaries’ allowance on a periodic basis.
We
write down inventory for estimated excess or obsolete inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
We
account for our goodwill and intangible assets pursuant to FASB ASC 350
(formerly SFAS No. 142, Goodwill and Other Intangible Assets.) Under FASB ASC
350, intangibles with definite lives continue to be amortized on a straight-line
basis over the lesser of their estimated useful lives or contractual terms.
Goodwill and intangibles with indefinite lives are evaluated at least annually
for impairment by comparing the asset’s estimated fair value with its carrying
value, based on cash flow methodology.
There are
13,075,000 warrants for common stock issued and outstanding. At
September 30, 2009, fair value associated with the outstanding warrants is not
significant. The holders of the majority of such warrants are subject
to ownership limitations and the warrants are not freely
transferable. Common stock equivalents are reflected net of such
limitations.
-13-
Results
of Operations
Revenues
Revenues
of $1,027,733 and $3,131,749, for the three and nine months ended September 30,
2009, respectively, decreased by $109,885 and $530,802 over revenues of
$1,137,618 and $3,662,551 for the three and nine months ended September 30,
2008. Equipment Sales and Installation revenues decreased by $294,436
and $464,521, respectively, for the three months and nine months ended September
30, 2009 versus the same periods in 2008, and Contract revenues increased by
$184,551 and decreased by $66,281, respectively, the three months and nine
months ended September 30, 2009 versus the same periods in
2008.
Costs
of Goods Sold
Costs of
Goods Sold of $466,753 and $1,295,390 for the three and nine months ended
September 30, 2009, respectively, decreased by $103,254 and $524,251 over Cost
of Goods Sold of $570,277 and $1,819,641 for the three and nine months ended
September 30, 2008. This was primarily attributable to a decrease in cost of
systems sold of $26,448 and $325,589, respectively, as well as a decrease in the
installation and service costs of $72,422 and $183,282, respectively, for the
three and nine months ended September 30, 2009 and 2008.
Gross
Margin
Gross
Margin of $560,980 and $1,836,359, respectively, for the three and nine months
ended September 30, 2009 decreased by $6,361 and $6,551 over Gross Margin of
$567,341 and $1,842,910, respectively, for the three and nine months ended
September 30, 2008. This was a direct result of the decreases in Revenues and
the Cost of Goods Sold described above.
Selling,
General, and Administrative Expenses (“SG&A”)
SG&A
expenses of $554,854 and $1,951,037 for the three and nine months ended
September 30, 2009, respectively, decreased by $33,119 and $330,809,
respectively, over SG&A expenses of $587,973 and $2,281,846 for the three
and nine months ended September 30, 2008. This was primarily attributable to
decrease in Payroll of $139,811 and $529,333, respectively, for the three and
nine months ended September 30, 2009 and offset by non-material increases in
other categories.
Other
Income (Expense)
Other
Expense of $157,742 and $525,934 for the three and nine months ended September
30, 2009 increased by $12,203 and $94,363, respectively, over Other Expense of
$145,539 and $431,571 for the three and nine months ended September 30, 2008.
This is primarily attributable to the interest expense on the Dutchess
convertible debentures issued in June 2007 and November 2007.
Net
(Loss)
Net Loss
attributable to common stockholders of $348,531 and $1,251,610 for the three and
nine months ended September 30, 2009 decreased by $21,138 and $220,893,
respectively, over the Net Loss of $369,669 and $1,472,503 for the three and
nine months ended September 30, 2008. This was a direct result of the decrease
in Gross Margin described above and the decreases in the Selling, General, and
Administrative expenses described above.
-14-
Liquidity
and Capital Resources:
We
are currently financing our operations primarily through cash generated by
financing activities in the form of promissory notes, convertible debentures,
and equity investments. We financed our business acquisitions through the
issuance of redeemable preferred stock, cash generated from promissory notes,
and convertible debentures.
We
completed the Secure merger by obtaining a short term bridge financing of
$504,000. Pursuant to the terms of the offering, we had a minimum raise of
$500,000 and a maximum raise of $700,000. As of March 11, 2005, we raised the
minimum of $500,000 and these proceeds were distributed to Secure as part of
that transaction. Each of the investors in this financing received nine (6)
month notes with a twelve (12%) percent annual interest rate. For each dollar
invested, an investor received a note for a dollar repayable in full nine months
from the date of the note and one share of our common stock. In addition, the
notes are convertible, at the option of the holder, into shares of common stock
at the price of $0.25 per share. Consequentially, we issued a total
of 504,000 shares to these investors. Such notes were due and payable September
11, 2005. We had requested a ninety day extension on such notes and we received
approval from all of the noteholders. Although the ninety day extension had
passed as of March 28, 2006, none of the noteholders has declared a default and
we intend to repay any unconverted notes through the proceeds of additional
financings. As of March 31, 2007, $430,000 of principal amount and
all related accrued interest to date has been retired through cash payments due
of $180,000 and the balance converted to common stock in accordance with the
terms of the private placement.
We
completed the Meadowlands acquisition by using a portion of the proceeds of the
five year Convertible Debenture that we issued with gross proceeds of
$2,700,000. Pursuant to this Debenture, we are required to make
mandatory interest only payments to the Investor in the amount of 1/12th of the
Interest due on the outstanding balance of the Debenture each month for the
first nine months after closing on the acquisition. Pursuant to this
Debenture, we also are required to make mandatory principal payments to the
Investor throughout the life of the Debenture. For months 7 thru 12,
we must pay $15,000 per month, for months 13 thru 18 we must pay $35,000 per
month, for months 19 thru 24 we must pay $45,000, for month 25 thru month 35 we
must pay $75,000 per month and on month 36 all amounts then current will be due
payable.
We
completed the Fire Control acquisition by using a portion of the proceeds of the
five year Convertible Debenture that we issued with gross proceeds of
$1,350,000. Pursuant to this Debenture, we are required to make
mandatory interest only payments to the Investor in the amount of 1/12th of the
Interest due on the outstanding balance of the Debenture each month for the
first two months after closing on the acquisition. The first payment
is due within thirty (30) days of Closing. Pursuant to this
Debenture, we also are required to make mandatory principal payments to the
Investor throughout the life of the Debenture. For months 3 thru 9,
we must pay $8,000 per month, for months 10 thru 15 we must pay $15,000 per
month, for months 16 thru 21 we must pay $20,000, for month 22 thru month 30 we
must pay $30,000 per month, for month 31 thru month 35 we must pay $40,000 per
month and on month 36 all amounts then current will be due payable.
At
September 30, 2009, the Company had negative working capital of approximately
$6,493,100.
-15-
We plan
to establish a source of revenues sufficient to cover our operating costs by
acquiring additional companies that are generating positive cash flows from
operating activities either at acquisition or projected to do so in the future ,
thereby furthering the objective of becoming profitable and generating positive
cash flow from operating activities on a consolidated basis. The
funds needed to continue operations over the next twelve months will be raised
from accredited investors and/or institutional investors as in the previous
financings. During this period, the Company will attempt to reduce or defer
expenses until the capital is available.
Our need
for capital may change dramatically as a result of any additional business
acquisition or combination transaction. There can be no assurance
that we will identify any additional suitable business, product, technology or
opportunity in the future. Further, even if we locate a suitable
target, there can be no assurance that we would be successful in consummating
any acquisition or business consolidation on favorable terms or that we will be
able to profitably manage the business, product, or technology, if acquired, or
otherwise engaged. The Company intends to acquire cash flow positive
companies of such size or number that will allow it to continue as a going
concern. If we are unable to obtain debt and/or equity financing on
reasonable terms, we could be forced to delay or scale back our plans for
expansion. Consequently, there is substantial doubt about our ability to
continue to operate as a going concern.
Management
intends to ask pertinent questions of the proposed candidates or opportunities
in the course of its diligence phase. Management will rely heavily on
a business plan, financial statements and projections, and management’s views of
the future. Unless something comes to management’s attention as a
result of its review of the proposed candidate’s audited financial statements,
which causes management to have serious concerns on the viability or integrity
of the financial records and business projections, which would result in a
disqualification of such candidate, a transaction would be approved by the Board
of Directors. When a transaction requires shareholder approval, a
shareholder meeting must be held and a shareholder vote taken. A
proxy statement would be mailed to shareholders informing them of the meeting
and requesting their vote. However, in lieu of holding a meeting, a
majority of shareholders may sign a Shareholder’s Resolution approving of such
transaction. If a meeting is not held, an information statement must
be mailed to all of its shareholder’s informing them of the action taken by the
majority shareholders.
Recent
Accounting Pronouncements
In March 2008, the FASB issued FASB ASC
815 (formerly Statement of Financial Accounting Standard No. 161, “Disclosures
about Derivative Instruments and Hedging Activities—an amendment of FASB
Statement No. 133”), which is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after November 15,
2008. Early application is encouraged. FASB ASC 815 changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. The Statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting
designation. In addition, the standard requires tabular disclosure of
fair value of derivative instruments and their gains and loss, requires
disclosure regarding credit risk related contingent features of the Company’s
derivative instruments and requires cross referencing within the footnote
disclosures regarding information about derivative
instruments. The Company concluded that this pronouncement did
not have a significant impact on its financial condition or results of
operations.
-16-
In
December 2007, the FASB issued FASB ASC 810 (formerly Statement of Financial
Accounting Standard No. 160 , “Non-Controlling Interests in Consolidated
Financial Statements, An Amendment of Accounting Research Bulletin No. 51”),
which is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Early application is
not permitted before that date. FASB ASC 810 changes the
terminology of minority interests, which will now be known as non-controlling
interest and requires that non-controlling interests be clearly identified
within stockholders’ equity as a separate component from the parent company’s
equity and net income or loss attributable to non-controlling interests be
clearly identified and presented on the face of the consolidated statement of
operations. In addition, the standard requires adequate disclosure
between interests of the parent company and interests of the non-controlling
equity holders. This pronouncement did not have a significant
impact on its financial condition or results of operations.
In
December 2007, the FASB revised FASB ASC 855 (formerly Statement of Financial
Accounting Standard No. 141, “Business Combinations”), which is effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Early application is not permitted before that
date. FASB ASC 855 requires assets and liabilities recorded in a
business combination to be recorded at fair value and replaces the
cost-allocation process under the prior standard. In addition, FASB
ASC 855 requires separate recognition of acquisition costs and requires
recognition of contractual contingencies at fair value as of the acquisition
date. Further, the revised standard requires capitalization of
research and development assets and requires fair value recognition of
contingent consideration as of the acquisition date. The
Company had no business combinations and therefore there has been no impact
related to this pronouncement.
In May
2009, the FASB issued FASB ASC 805 (formerly SFAS No. 165, Subsequent Events),
which provides guidance on events that occur after the balance sheet date but
prior to the issuance of the financial statements. FASB ASC 805 distinguishes
events requiring recognition in the financial statements and those that may
require disclosure in the financial statements. Furthermore, FASB ASC 805
requires disclosure of the date through which subsequent events were
evaluated. FASB ASC 805 is effective for interim and annual periods
after June 15, 2009. The Company adopted FASB ASC 805 effective June 30, 2009,
and has included the required disclosure in Note 8 “Subsequent Events” of these
financial statements.
In June
2009, the FASB issued FASB ASB 105 (formerly SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of the FASB Statement No. 162.”. FASB ASB
105 stipulates the FASB Accounting Standards Codification is the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. FASB ASC 105 is effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The implementation of this
standard is not expected to have a material impact on our consolidated financial
position and result of operations.
Item
3.
Quantitative
and Qualitative Disclosures About Market Risk
Not
required for smaller reporting companies.
-17-
Item
4.
Controls
and Procedures
The
Company's management evaluated, with the participation of its President, the
effectiveness of the design/operation of its disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the SEC Act of 1934) as of
March 31, 2009. Based on such evaluation, the President of the Company concluded
that its disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the rules and
regulations of the Securities and Exchange Commission and is not operating in an
effective manner.
As reported in the Company’s Form 10-K
for the year ended December 31, 2008, the Company performed an assessment of the
effectiveness of its controls and procedures and disclosed several material
weaknesses related to that assessment.
There were no changes in internal
control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f)
under the SEC Act of 1934) that occurred during the Company’s last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
On
September 4, 2008, Keith Kesheneff and Kathryn Kesheneff filed suit in Superior
Court in New Jersey against the Company claiming that they are owed $355,000 for
failure to pay a purchase price adjustment note issued by the
Company. The Company filed an answer, with counterclaims, on October
27, 2008, generally contesting all claims.
In
January 2009, the holders of two promissory notes convertible into the Company’s
common stock filed suit in the Superior Court of New Jersey. Each
party claims to be owed $20,000 in principal, approximately $11,400 of accrued
interest through December 31, 2008, and counsel fees. The Company is
attempting to negotiate forbearance agreements.
In
January 2009, the holder of a promissory note convertible into the Company’s
common stock filed suit in the Superior Court of New Jersey. The
party claims to be owed $54,000 in principal, approximately $30,900 of accrued
interest through December 31, 2008, and counsel fees. The Company is
attempting to negotiate a forbearance agreement.
In the
normal course of business, the Company is subject to various proceedings and
claims, the resolution of which will not, in management's opinion, have a
material adverse affect on the Company's financial position or results of
operations.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
3. Defaults Upon Senior Securities
There
have been no notices of default provided to the Company, except as described in
Item 1 above.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information.
None.
Item
6. Exhibits.
(a) Exhibits:
31.1
Certification pursuant to Section 302 of Sarbanes Oxley Act of
2002.
32.1
Certification pursuant to Section 906 of Sarbanes Oxley Act of
2002.
-18-
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
SOMERSET
INTERNATIONAL GROUP, INC.
|
||
(Registrant)
|
||
Date:
November 16, 2009
|
By:
|
/s/
John X. Adiletta
|
John
X. Adiletta,
|
||
Chief
Executive Officer
|
||
Chief
Financial Officer
|
-19-