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EX-32.1 - EXHIBIT 32.1 - QSGI INC. | ex32-1.htm |
EX-31.1 - EXHIBIT 31.1 - QSGI INC. | ex31-1.htm |
As filed with the Securities and Exchange Commission on October 26, 2011
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File No.: 001-32620
QSGI INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation)
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13-2599131
(I.R.S. Employer
Identification No.)
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400 Royal Palm Way, Suite 302, Palm Beach, FL 33480
(Address of Principal Executive Offices)
(561) 629-5713
(Registrants' Telephone Number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 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 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
Small Reporting Company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of outstanding common shares, par value $.01, of the registrant as of October 26, 2011 was 221,172,716.
QSGI INC.
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TABLE OF CONTENTS
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Item
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Description
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Page
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PART I – FINANCIAL INFORMATION
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1.
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Financial Statements
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Condensed Consolidated Balance Sheets –
June 30, 2009 (unaudited) and December 31, 2008 (audited)
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1
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Condensed Consolidated Statements of Operations –
Three and Six Months Ended June 30, 2009 and 2008 (unaudited)
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3
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Condensed Consolidated Statement of Stockholders’ Equity –
Six Months Ended June 30, 2009 (unaudited)
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4
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Condensed Consolidated Statements of Cash Flows –
Six Months Ended June 30, 2009 and 2008 (unaudited)
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5
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Notes to Condensed Consolidated Financial Statements (unaudited)
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6
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2.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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14
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3.
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Quantitative and Qualitative Disclosures About Market Risk
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23
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4.
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Controls and Procedures
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23
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PART II – OTHER INFORMATION
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1.
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Legal Proceedings
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24
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1A.
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Risk Factors
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24
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2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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24
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3.
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Defaults Upon Senior Securities
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25
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4.
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Submission of Matters to a Vote of Security Holders
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25
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5.
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Other Information
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25
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6.
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Exhibits
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25
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SIGNATURES
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26
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EXHIBITS
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27
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
QSGI INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
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December 31,
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|||||||
2009
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2008
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(unaudited)
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(audited)
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Assets
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Current Assets
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Cash and Cash Equivalents
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$ | 72,129 | $ | 192,499 | ||||
Accounts receivable, net of reserve of $536,827 and $1,070,280 in 2009 and 2008, respectively
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1,529,227 | 2,760,108 | ||||||
Inventories, Net
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1,825,885 | 4,669,766 | ||||||
Prepaid expenses and other assets
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38,096 | 115,998 | ||||||
Assets of Discontinued Operation - current
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1,918,013 | 2,611,824 | ||||||
Total Current Assets
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5,383,350 | 10,350,195 | ||||||
Property and Equipment, Net
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105,666 | 197,798 | ||||||
Goodwill
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1,489,621 | 1,489,621 | ||||||
Assets of Discontinued Operation – long term
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565,732 | 12,671,392 | ||||||
Intangibles, Net
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234,524 | 389,960 | ||||||
Other Assets
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112,382 | 216,476 | ||||||
TOTAL ASSETS
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$ | 7,891,275 | $ | 25,315,442 | ||||
Liabilities And Stockholders’ Deficit
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Current Liabilities
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Revolving line of credit
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$ | 5,477,351 | $ | 5,351,130 | ||||
Notes Payable – Principal Stockholder
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10,000,000 | 10,000,000 | ||||||
Accounts payable
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4,231,670 | 2,313,640 | ||||||
Accrued expenses
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1,318,931 | 1,160,172 | ||||||
Accrued payroll
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1,245,001 | 164,311 | ||||||
Deferred revenue
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13,000 | 101,449 | ||||||
Liabilities of Discontinued Operation
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2,273,730 | 2,089,966 | ||||||
Other liabilities
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364,994 | 185,760 | ||||||
Total Current Liabilities
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24,924,677 | 21,366,428 | ||||||
Long-Term Deferred Revenue
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– | 19,000 | ||||||
Deferred Income Taxes
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27,300 | 27,300 | ||||||
Total Liabilities
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24,075,903 | 21,412,728 | ||||||
Redeemable Convertible Preferred Stock
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4,266,333 | 4,257,910 | ||||||
Stockholders’ Deficit
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Preferred shares: Authorized 5,000,000 shares in 2009
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and 2008, $0.01 par value, none issued
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– | – |
See the accompanying notes to condensed consolidated financial statements.
1
Common shares: authorized 95,000,000 shares in 2009 and 2008, $0.01 par value; 48,797,716 shares issued and outstanding in 2009, of which 10,000,000 shares were contingent acquisition shares held in escrow; 48,547,716 shares issued and outstanding in 2008 of which 10,000,000 shares were contingent acquisition shares held in escrow
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387,977 | 385,477 | ||||||
Additional paid-in capital
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16,615,698 | 16,723,724 | ||||||
Accumulated Deficit
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(38,330,710 | ) | (17,464,397 | ) | ||||
Total Stockholders’ Deficit
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(21,327,035 | ) | (355,196 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
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$ | 7,891,275 | $ | 25,315,442 |
See the accompanying notes to condensed consolidated financial statements.
2
QSGI INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three and Six Months Ended June 30, 2009 and 2008
(Unaudited)
Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2009
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2008
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2009
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2008
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Product Revenue
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$ | 3,414,614 | $ | 4,113,245 | $ | 6,774,404 | $ | 10,388,427 | ||||||||
Service Revenue
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1,148,460 | 1,983,994 | 2,566,984 | 3,914,387 | ||||||||||||
Total Revenue
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4,563,074 | 6,097,239 | 9,341,388 | 14,302,814 | ||||||||||||
Cost Of Products Sold
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5,926,889 | 4,354,773 | 9,372,960 | 10,310,239 | ||||||||||||
Cost Of Services Sold
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638,343 | 683,417 | 1,391,647 | 1,361,853 | ||||||||||||
Total Cost Of Sales
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6,565,232 | 5,038,190 | 10,764,607 | 11,672,092 | ||||||||||||
Gross Profit
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-2,002,158 | 1,059,049 | -1,423,219 | 2,630,722 | ||||||||||||
Selling, General And Administrative Expenses
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2,164,722 | 2,486,812 | 3,802,044 | 4,758,880 | ||||||||||||
Depreciation And Amortization
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93,057 | 208,334 | 194,911 | 315,720 | ||||||||||||
Interest Expense, net
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646,453 | 199,792 | 1,526,797 | 256,442 | ||||||||||||
Loss From Continuing Operations Before Provision For Income Taxes
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-4,906,390 | -1,835,889 | -6,946,971 | -2,700,320 | ||||||||||||
Provision (Benefit) For Income Taxes
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538 | 8,511 | 1,000 | 34,767 | ||||||||||||
Net Loss From Continuing Operations
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-4,906,928 | -1,844,400 | -6,947,971 | -2,735,087 | ||||||||||||
Loss From Discontinued Operation
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13,366,601 | - | 13,918,342 | - | ||||||||||||
Net Loss
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-18,273,529 | -1,844,400 | -20,866,313 | -2,735,087 | ||||||||||||
Preferred Stock Dividends
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63,617 | 64,323 | 126,617 | 128,648 | ||||||||||||
Accretion To Redemption Value of Preferred Stock
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3,433 | 4,769 | 8,422 | 9,468 | ||||||||||||
Net Loss Available to Common Stockholders
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$ | (18,340,579 | ) | $ | (1,913,492 | ) | $ | (21,001,352 | ) | $ | (2,873,203 | ) | ||||
Net Loss Per Common Share – Basic & Diluted from Continuing Operations
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$ | (0.13 | ) | $ | (0.06 | ) | $ | (0.18 | ) | $ | (0.09 | ) |
See the accompanying notes to condensed consolidated financial statements.
3
Net Loss Per Common Share – Basic & Diluted from Discontinued Operations
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$ | (0.34 | ) | $ | 0.00 | $ | (0.36 | ) | $ | (0.09 | ) | |||||
Net Loss Per Common Share – Basic & Diluted
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$ | (0.47 | ) | $ | (0.06 | ) | $ | (0.54 | ) | $ | (0.09 | ) | ||||
Weighted Average Number Of Common Shares Outstanding –Basic and Diluted
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38,797,716 | 31,469,419 | 38,797,716 | 31,321,068 |
See the accompanying notes to condensed consolidated financial statements.
4
QSGI INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
For The Six Months Ended June 30, 2009
(Unaudited)
Additional
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Total
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Common Stock
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Paid-in
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Accumulated
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Stockholders’
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Number
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Amount
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Capital
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Deficit
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Deficit
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Balance (Deficit) - December 31, 2008
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38,547,716 | $ | 385,477 | $ | 16,723,724 | $ | (17,464,397 | ) | $ | (355,196 | ) | |||||||||
Stock Option Compensation
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– | – | 14,513 | – | 14,513 | |||||||||||||||
Stock issued for Financing
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250,000 | 2,500 | 12,500 | 15,000 | ||||||||||||||||
Preferred Stock Dividends
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– | – | (126,617 | ) | – | (126,617 | ) | |||||||||||||
Accretion To Redemption Value Of Preferred Stock
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– | – | (8,422 | ) | – | (8,422 | ) | |||||||||||||
Net Loss
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– | – | – | (20,866,313 | ) | (20,866,313 | ) | |||||||||||||
Balance (Deficit) – June 30, 2009
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38,797,716 | $ | 387,977 | $ | 16,615,698 | $ | (38,330,710 | ) | $ | (21,327,035 | ) |
See the accompanying notes to condensed consolidated financial statements.
5
QSGI INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 2009 and 2008
(Unaudited)
2009
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2008
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Cash Flows From Operating Activities
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Net Loss from continuing operations
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$ | (6,947,971 | ) | $ | (2,735,087 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities:
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Depreciation and amortization
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194,911 | 315,720 | ||||||
Non-cash interest expense
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– | 16,208 | ||||||
Stock option compensation expense
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14,513 | 5,438 | ||||||
Deferred income taxes
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– | – | ||||||
Provision for doubtful accounts, net of recoveries
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– | 194,176 | ||||||
Amortization of original issue discount
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435,311 | – | ||||||
Inventory allowance
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2,120,983 | – | ||||||
Gain on disposition of equipment
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(11,000 | ) | – | |||||
Changes in assets and liabilities:
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Accounts receivable
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1,230,881 | 1,631,119 | ||||||
Inventories
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722,897 | 973,684 | ||||||
Prepaid expenses and other assets
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181,996 | (183,988 | ) | |||||
Accounts payable and other liabilities
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3,229,264 | 436,304 | ||||||
Cash from operating activities – continuing operations
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1,171,785 | 653,574 | ||||||
Cash used in operating activities – discontinued operations
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(1,338,340 | ) | – | |||||
Net Cash (Used In) Provided by Operating Activities
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(166,545 | ) | 653,574 | |||||
Cash Used In Investing Activities
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Purchases of property and equipment
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(20,466 | ) | (71,107 | ) | ||||
Proceeds from sale of equipment
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11,000 | – | ||||||
Cash used in investing activities – continuing operations
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(9,466 | ) | (71,107 | ) | ||||
Cash from investing activities – discontinued operations
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– | – | ||||||
Net Cash Used In Investing Activities
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(9,466 | ) | (71,107 | ) | ||||
Cash Flows From Financing Activities
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Payment for financing costs
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(25,614 | ) | (25,614 | ) | ||||
Net amounts borrowed under current revolving lines of credit, net of OID
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126,221 | 3,339,815 | ||||||
Net amounts borrowed (paid) under previous revolving lines of credit
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– | (3,754,061 | ) | |||||
Preferred stock dividends
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(126,617 | ) | (128,648 | ) | ||||
Cash used in financing activities – continuing operations
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(26,010 | ) | (568,508 | ) | ||||
Cash from financing activities – discontinued operations
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– | – | ||||||
Net Cash Used In Financing Activities
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(26,010 | ) | (568,508 | ) | ||||
Net (Decrease) Increase In Cash And Cash Equivalents
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(202,021 | ) | 13,959 | |||||
Cash And Cash Equivalents – Beginning Of Period
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274,150 | 127,723 | ||||||
Cash And Cash Equivalents – End of Period
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$ | 72,129 | $ | 141,682 | ||||
See the accompanying notes to condensed consolidated financial statements.
6
QSGI INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1.
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Basis of Presentation
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The accompanying unaudited condensed consolidated financial statements of QSGI INC. (“QSGI” or the “Company”) been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations or cash flows have been made. Certain reclassifications have been made for consistent presentation.
The condensed consolidated statement of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2009. These statements should be read in conjunction with the financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.
The Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations. This is because the Company received notification from the former owner of Contemporary Computer Services, Inc. (CCSI) that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner. The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.
On July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009. These unaudited condensed consolidated financial statements have been prepared assuming that the Company would continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of the filing of the bankruptcy. The independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.
On September 15, 2009, an Asset Purchase agreement, by and between SMS Maintenance, LLC. (“Purchaser”) and QualTech Services Group, Inc. (“Seller”), a subsidiary of QSGI INC., whereby Seller agreed to sell to Purchaser and Purchaser agreed to purchase from Seller, the Purchased Assets, including, but not limited to, the Assumed Contracts, and Purchaser agreed to assume from Seller the Assumed Liabilities, all on the terms and conditions set forth in the Purchase Agreement. The Purchaser and Seller agreed that the Cash Purchase Price was equal to $2,450,000. Purchaser agreed to pay Seller an additional $20,000 to partially offset pre-closing payroll expenses of the business. The asset sale resulted in a gain of $1,400,000.
7
On September 24, 2009, the Bankruptcy Court entered an order pursuant to 11 U.S.C. section 105, 363, and 365 of the Bankruptcy Code (A) Approving the sale of substantially all of the assets of the DSC division of QSGI INC. free and clear of all liens, claims, encumbrances and interests; (B) Approving the assumption and assignment of executor contracts and unexpired leases; and (C) Granting related relief. The asset sale resulted in a loss of $2,140,000.
On January 31, 2011, the Board of Directors of QSGI, INC. unanimously approved the Third Amended Plan of Reorganization and Disclosure Statement (the “Plan”) to be filed in the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division. This was filed on February 1, 2011.
On February 2, 2011, the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division issued an order approving the Disclosure Statement, setting hearing on confirmation of Plan, setting hearing on fee applications, setting various deadlines, and describing Plan proponent’s obligations.
On March 21, 2011 the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division had a hearing to consider confirmation of the Debtors’ Third Amended Plan of Reorganization (D.E. # 384) under Chapter 11 of the Bankruptcy Code filed by QSGI, INC., QSGI-CCSI, INC. and QUALTECH SERVICES GROUP, INC., and dated February 1, 2011 and confirmed the Plan. The debtors are waiting entry of the confirmation order by the Judge.
On April 14, 2010, QSGI INC, settled its dispute with Victory Park Management, LLC and Victory Park Capital Advisors, LLC (collectively “VPC”) and signed a Settlement Agreement and Mutual Release. VPC made claims against the Company including pre-petition overstatements of inventory valuation and post-petition interference with the sale process of the assets. Although the Company disputed all claims, the company (in conjunction with its insurer) settled with VPC after considering the total cost of litigation. Other than an obligation to pay $150,000 if the Company is ultimately reorganized, the settlement releases the Company from any and all claims VPC may have had against it. The settlement and all other documents relating to the claim are available under case number 09-23658-EPK that was filed with the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.
In June, 2010, a settlement was reached with the former owner of CCSI whereby the Company shall abandon one-hundred percent (100%) of the capital stock of CCSI, Inc. to the owner and the owner releases his rights in and to QSGI and shall retain an unsecured claim against QSGI in the amount of $10,159,000.
Plan of Reorganization
The Plan provides for, among other things, a restructuring of pre-petition debt, as follows (i) distribution of $50,000 and issuance of 10,000,000 common shares in the reorganized debtor for the extinguishment of unsecured indebtedness; (ii) extinguishment of one $10,159,000 unsecured claim in consideration for the confirmation of a Plan of Reorganization; (iii) issuance of 425,000 common shares for the extinguishment of the redeemable convertible preferred stock; (iv) assumption of one $150,000 contingent secured claim bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after confirmation; (v) assumption of note for bankruptcy legal expenses in the amount of $61,673, bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after Plan confirmation; (vi) the right to issue 3,524,000 common shares in exchange for legal services related to the Plan of reorganization; (vii) issuance of 190,000,000 common shares in consideration for the merger of KruseCom; (viii) reservation of 10,000,000 shares to be issued by the reorganized debtor for working capital; (ix) reservation of 2,250,000 shares to be issued by the reorganized debtor to key third parties. All outstanding shares of the Company’s common stock will remain issued and outstanding at and after the Effective Date.
8
2.
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Summary of Significant Accounting Policies
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Business Organization
The Company is a technology services and maintenance company. The Company’s Data Center Maintenance services as well as our Data Security and Compliance services are geared towards both the users of enterprise-class hardware (mainframes, midrange processors, large storage, controllers, etc.) as well as the users of business-computing hardware (desktops, laptops, related peripherals and servers). The Company uses the trade name “QSGI” in order to build cohesion among the various technology services that they offer and build brand recognition and preference through strong cross-marketing opportunities.
Principles of Consolidation
The financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Segments
Our company operates in two segments that clearly focus our services into easy-to-understand categories for our target customers:
A.
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Data Center Maintenance Services
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The Company provides hardware maintenance services for enterprise-class hardware and associated peripheral products and Data Center consulting to companies throughout the United States. The Company supports its clients' IT hardware needs through the selling of refurbished enterprise-class hardware including mainframe processors, midrange processors and associated peripheral products and replacement parts.
B.
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Data Security and Compliance
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The Company provides data security and regulatory compliance services for end-of-life business-computing Information Technology (IT) assets. The Company offers a variety of solutions to companies whose business computing technologies (desktops, laptops, printers, servers and enterprise storage systems) have come to the end of their life cycle. These services include:
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- Data erasure to Department of Defense standards for hard drives
- Asset Auditing/Life Cycle Management, which allows customers to minimize their overall IT expenditure and maximize their return on investment.
- IT asset remarketing for IT assets with market value
- Environmental compliance (proper recycling or safe disposal) for IT assets
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These services can be custom tailored to meet the customers' needs and implemented at QSGI facilities or at one client location or at multiple client-site locations, through the use of one of the Company's client-site solutions including their mobile audit and erasure truck and their client suitcase server.
9
Across both segments, we purchase excess, used, off-lease and refurbished hardware from a variety of sources including Fortune 1000 companies, as well as leasing and finance companies.
The Company has office and warehouse space in Hightstown, New Jersey, and Eagan, Minnesota, and technical coverage and sales offices in 20 other states including Arkansas, Colorado, Illinois, Indiana, Kansas, Maine, Missouri, Michigan, Nebraska, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Washington DC, Wisconsin and Wyoming.
Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of all dilutive potential common shares that were outstanding during the period.
For the three months ended June 30, 2009 and 2008, the Company excluded weighted average common share equivalents related to stock options of 763,503 and 1,898,479, respectively and weighted average common share equivalents related to redeemable preferred stock of 1,911,111 and 1,911,111, respectively because their effect would be anti-dilutive.
For the six months ended June 30, 2009 and 2008, the Company excluded weighted average common share equivalents related to stock options of 821,199 and 1,922,259, respectively and weighted average common share equivalents related to redeemable preferred stock of 1,911,111 and 1,911,111, respectively because their effect would be anti-dilutive.
At June 30, 2009, there were also 13,500,000 contingent acquisition shares outstanding. Of this amount 3,500,000 were issued in July 2008 as part of the acquisition of Contemporary Computer Services, Inc. and 10,000,000 are being held in escrow to be released based on Contemporary Computer Services, Inc. achieving certain performance milestones or returned to treasury if such milestones are not reached.
Recently Adopted Accounting Pronouncements
In April 2009, the FASB issued FASB Staff Position No. 107-1 (“FSP FAS 107-1”) and APB 28-1 (“APB 28-1”), which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments for interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim reporting periods ending after June 15, 2009. The adoption of this staff position did not have a material impact on the Company’s financial statements.
In April 2009, the FASB issued FASB Staff Position No. 157-4 (“FSP FAS 157-4”), which provides additional guidance in accordance with FASB No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this staff position did not have a material effect on its financial statements.
10
In April 2009, the FASB issued FASB Staff Position No. 115-2 (“FSP FAS 115-2”) and FASB Staff Position No. 124-2 (“FSP FAS 124-2”), which amends the other-than-temporary impairment guidance for debt and equity securities. FSP FAS 115-2 and FSP FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this staff position did not have a material effect on its financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R).
This Statement is a revision to FIN 46(R) and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.
This Statement requires an additional reconsideration event when determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. These requirements will provide more relevant and timely information to users of financial statements.
This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.
The Company is currently evaluating the potential impact the adoption of this Statement will have on its financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification, which establishes the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of SFAS 168 is not expected to have an effect on the Company’s financial reporting.
3.
|
Inventories
|
Inventories at June 30, 2009 and December 31, 2008 consist of:
2009
|
2008
|
|||||||
Finished goods
|
$ | 4,805,072 | $ | 5,732,517 | ||||
Inventory in transit
|
240,796 | 36,249 | ||||||
Allowance for excess and obsolescence
|
(3,219,983 | ) | (1,099,000 | ) | ||||
$ | 1,825,885 | $ | 4,669,766 | |||||
11
4. Financing
On February 24, 2009, the Company signed a Second Amendment to the Amended and Restated Securities Purchase Agreement with Victory Park Credit Opportunities Master Fund, LTD and Victory Park Management, LLC. (collectively “Victory”) which waived a December 31, 2008 covenant violation and amended the financial covenants. The amended financial covenants will take effect commencing June 30, 2009. The new financial covenants that need to be met are as follows:
Maximum Senior Leverage
|
4.0 to 1.0
|
Maximum Senior Leverage
|
10.0 to 1.0
|
Interest Coverage
|
1.5 to 1.0
|
Fixed Charge Coverage
|
1.25 to 1.0
|
Capital Expenditures not in excess of $200,000 for any calendar year
|
In connection with the Second Amendment to the Amended and Restated Securities Purchase Agreement, the Company incurred $10,000 in amendment fees and 250,000 shares of Company common stock. The fair value of the shares was $15,000. This amount was recorded as additional debt ssuance costs and will be recognized as interest expense on a straight-line basis over the remaining twenty one months of the financing agreement.
On March 31, 2009, the Company signed a forbearance agreement and Third Amendment to the Amended and Restated Securities Purchase Agreement with Victory whereby the lender agreed to forbear from exercising certain of their rights and remedies and advanced $850,000 in additional funds and changed the advance rate on Accounts Receivable to a range of 85% to 90% and eligible inventory to 60%. The Company incurred $10,000 in amendment fees and $100,000 in a forbearance fee to be paid in four equal monthly installments beginning October 31, 2009. The $100,000 forbearance fee was recorded as prepaid expense and will be amortized over the two month period of the forbearance agreement.
In accordance with Emerging Issues task Force (EITF) Issue No. 95-22, the line of credit is classified as a current liability due to the agreement containing a subjective acceleration clause and a lock-box arrangement.
5. Segment Information
The Company operates in two business segments: Data Security & Compliance, and Data Center Maintenance. The segments are presented in a manner consistent with how the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management and the focus of the businesses with regards to the types of products and services offered and the target market. Each of our segments is more fully described in Note 2 to our Condensed Consolidated Financial Statements.
As of April 1, 2009, the Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations. This is because the Company received notification from the former owner of CCSI that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner. The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.
12
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
||||||||||||||||
Data Security and Compliance
|
$ | 3,254,002 | $ | 3,800,850 | $ | 6,373,921 | $ | 9,444,686 | ||||||||
Data Center Maintenance & Hardware
|
1,370,279 | 2,447,136 | 3,028,674 | 5,012,250 | ||||||||||||
Intersegment Elimination
|
(61,207 | ) | (150,747 | ) | (61,207 | ) | (154,122 | ) | ||||||||
|
||||||||||||||||
Consolidated Total
|
$ | 4,563,074 | $ | 6,097,239 | $ | 9,341,388 | $ | 14,302,814 | ||||||||
Loss before Provision (Benefit) for Income Taxes
|
||||||||||||||||
Data Security and Compliance
|
$ | (3,779,982 | ) | $ | (1,461,353 | ) | $ | (5,517,521 | ) | $ | (2,509,776 | ) | ||||
Data Center Maintenance & Hardware
|
(1,126,408 | ) | (374,536 | ) | (1,429,450 | ) | (190,544 | ) | ||||||||
|
||||||||||||||||
Consolidated Total
|
$ | (4,906,390 | ) | $ | (1,835,889 | ) | $ | (6,946,971 | ) | $ | (2,700,320 | ) | ||||
6. Business Acquisition
On July 8, 2008, the Company completed of the acquisition of CCSI for $10,600,000 plus an additional stock earn out of up to an additional 10,000,000 shares of common stock based on achieving certain performance milestones. The $10,600,000 purchase price was financed through a combination of the issuance of 3,500,000 shares of common stock in the Company, valued at $595,000, based upon the market price for QSGI's common stock as of July 6, 2008, the date immediately prior to the closing date, senior bank and seller financing in the amount of $10,000,000 dollars, both secured by the assets of the Company. In connection with the seller financing, the Company issued warrants to purchase 12,000,000 shares of Common Stock at a purchase price of $0.30 per share.
7. Discontinued Operation
As of April 1, 2009, the Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations. This is because the Company received notification from the former owner of CCSI that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner. The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.
The following summarizes the operating results of Contemporary Computer Services, Inc. discontinued operations.
Three months ended
June 30, 2009
|
Six months ended
June 30, 2009
|
||||||||
Total Revenue
|
$ | — | $ | 2,598,817 | |||||
Cost of Sales
|
— | 1,915,223 | |||||||
Selling and administrative expenses
|
— | 1,120,303 | |||||||
Depreciation
|
— | 115,032 | |||||||
Net loss from operations before income taxes
|
— | 551,741 | |||||||
Impairment charge
|
$ | 13,366,601 | $ | 13,366,601 | |||||
Loss from discontinued operations
|
$ | 13,366,601 | $ | 13,918,342 |
13
Included in the Consolidated Balance Sheets are the following major classes of assets and liabilities associated with the discontinued operations:
30-Jun-09
|
31-Dec-08
|
|||||||
Assets of discontinued operations:
|
|
|||||||
Current assets
|
$ | 1,918,013 | $ | 2,611,824 | ||||
Net property and equipment
|
496,410 | 529,056 | ||||||
Other assets
|
69,322 | 69,322 | ||||||
Goodwill
|
- | 6,445,006 | ||||||
Intangibles
|
- | 5,628,008 | ||||||
Total Non-Current Assets
|
565,732 | 12,671,392 | ||||||
Other current liabilities
|
$ | 2,273,730 | $ | 2,089,966 | ||||
As of June 30, 2009, the Company determined that the carrying value of goodwill and intangibles associated with the CCSI acquisition were impaired and recorded an impairment charge of $13,366,601. Of this amount $6,445,006 was for goodwill impairment and $6,504,082, net of amortization, was for intangible impairment and $417,513 was for accrued expenses.
8. Stock Options and Warrants
There were no stock options or warrants issued in the first six months of 2009 and no options or warrants expired in the first six months of 2009.
9. Income Taxes
The Company did not record a federal tax benefit for the six months ended June 30, 2009 and 2008 as we recorded a change in the valuation allowance for an amount equal to the tax benefit. The Company recorded a state tax expense for the six months ended June 30, 2009 and 2008. The Company incurs state income taxes in jurisdictions where the Company cannot file a consolidated income tax return.
The Company's policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes in the statement of operations. As of January 1, 2009, the Company had no unrecognized tax benefits, or any tax related interest of penalties. There were no changes in the Company's unrecognized tax benefits during the six months ended June 30, 2009. The Company did not recognize any interest or penalties during 2009 related to unrecognized tax benefits. Tax years from 2005 through 2008 remain subject to examination by major tax jurisdictions.
10. Concentrations Customers
Major Customers
The Company had sales to one customer that accounted for approximately 36% of revenues during the six months ended June 30, 2009 and approximately 12% of accounts receivable balance at June 30, 2009.
14
Major Suppliers
The Company had purchases from one vendor that accounted for approximately 21% of purchases during the six months ended June 30, 2009 and approximately 17% of accounts payable at June 30, 2009.
11. Related Party
The Company had sales to one customer related to one stockholder and officer of the Company. Sales for the six months ended June 30, 2009 amount to approximately $99,000. Accounts receivable from this customer amounted to $-0- at June 30, 2009.
The Company makes monthly payments to Varilease Technology Finance Group owned by one of the Board of Directors for the purchase of an asset. At June 30, 2009, $6,258 was payable to this company.
12.Subsequent Events
On April 14, 2010, QSGI INC, settled its dispute with Victory Park Management, LLC and Victory Park Capital Advisors, LLC (collectively “VPC”) and signed a Settlement Agreement and Mutual Release. VPC made claims against the Company including pre-petition overstatements of inventory valuation and post-petition interference with the sale process of the assets. Although the Company disputed all claims, the company (in conjunction with its insurer) settled with VPC after considering the total cost of litigation. Other than an obligation to pay $150,000 if the Company is ultimately reorganized, the settlement releases the Company from any and all claims VPC may have had against it. The settlement and all other documents relating to the claim are available under case number 09-23658-EPK that was filed with the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division. A copy of the Order Approving Expedited Amended Joint Motion for Approval of Settlement Agreement between Debtors and Victory Park Management, LLC. Pursuant To Fed.R.B.P. 9019 (D.E. 233) dated May 27, 2010.
In June, 2010, a settlement agreement and mutual release was entered into by and between John Riconda, on one hand, and QSGI INC., on the other to settle asserted claims by both parties against each other.
On July 2, 2010, a joint motion for approval of settlement agreement between debtors and John Riconda pursuant to Fed.R.BankR.P. 9019 and Local rule 9013-1 (D) was filed with the United States Bankruptcy Court, Southern District of Florida, West Palm Beach Division to approve the terms of the settlement agreement between Debtors and John Riconda.
On August 11, 2010, Action by Consent in Writing of the Board of Directors increased the membership of the Board of Directors from one (1) person to five (5) persons by the appointment of Benee Scola, William J. Barbera, David J. Meynarez and David K. Waldman as Directors of the Company.
On January 31, 2011, the Board of Directors of QSGI, INC. unanimously approved the Third Amended Plan of Reorganization and Disclosure Statement (the “Plan”) to be filed in the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division. This was filed on February 1, 2011.
On February 2, 2011, the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division issued an order approving the Disclosure Statement, setting hearing on confirmation of Plan, setting hearing on fee applications, setting various deadlines, and describing Plan proponent’s obligations.
On March 21, 2011 the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division had a hearing to consider confirmation of the Debtors’ Third Amended Plan of Reorganization (D.E. # 384) under Chapter 11 of the Bankruptcy Code filed by QSGI, INC., QSGI-CCSI, INC. and QUALTECH SERVICES GROUP, INC., and dated February 1, 2011 and confirmed the Plan. The debtors are waiting entry of the confirmation order by the Judge.
Effective June 17, 2011 QSGI, Inc. merged with KruseCom, LLC (“KruseCom”), a company that is primarily engaged in Information Technology Data Security and Compliance. The merger was carried out in accordance with a Share Exchange Agreement dated June 17, 2011 (the “Exchange Agreement”) among KruseCom, a Florida Limited Liability Company formed in October 2009.. The merger contemplated by the Exchange Agreement is part of the Chapter 11 Plan of Reorganization that was approved by the impaired parties and confirmed by the US Bankruptcy Court on May 4, 2011.
15
The close of the Exchange Agreement transaction (the “Closing”) took place June 17, 2011 (the Closing Date”). On the Closing Date, pursuant to the terms of the Exchange Agreement, QSGI acquired all of the outstanding ownership interests of KruseCom (the “Interests”) from KruseCom in exchange for 190,000,000 shares of QSGI common stock.
On August 26, 2011, the Company was notified that the Honorable Erik P. Kimball, United States Bankruptcy Judge, Southern District of Florida, entered a final decree to close the chapter 11 case. The signing of this order signifies the Company’s emergence from bankruptcy.
On September 21, 2011, QSGI Green, Inc. (“QSGI Green”) a newly-formed, wholly-owned subsidiary of the Company completed the transactions contemplated by the Asset Purchase Agreement (the “TGG Agreement”) with The Gasket Guy, Inc (the “Seller” or “TGG”) a Florida Corporation, primarily engaged in the manufacture and installation of refrigeration gaskets throughout the United States.
On September 26, 2011, QSGI Green (the “Borrower”) entered into a loan agreement (the “Bank Note”) with First City Bank of Commerce (the “Lender”) in the amount of $564,775 to replace the Seller’s existing bank note. The Bank Note bears interest at 7.5% and has a maturity date of September 26, 2015. The Bank Note is primarily supported by accounts receivable and inventory of QSGI Green. The Bank Note is personally guaranteed by the two previous founding owners of TGG.
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
This following discussion should be read in conjunction with the accompanying financial statements and related notes in Item 1 of this report as well as Annual Report on Form 10-K for the year ended December 31, 2008. Certain statements in this Report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created thereby.
All such forward-looking information involves risks and uncertainties and may be affected by many factors, some of which are beyond our control. These factors include:
|
·
|
Our growth strategies.
|
|
·
|
Anticipated trends in our business and demographics.
|
|
·
|
Our ability to successfully integrate the business operations of recently acquired companies; and
|
· Regulatory, competitive or other economic influences.
Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: our continued ability to sustain our growth through continuing vendor relationships; the successful consummation and integration of future acquisitions; the ability to hire and retain key personnel; the continued development of our technical, manufacturing, sales, marketing and management capabilities; relationships with and dependence on third-party suppliers; anticipated competition; uncertainties relating to economic conditions where we operate; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; rapid technological developments and obsolescence in the products we sell and the industries in which we operate and compete; existing and potential performance issues with suppliers and customers; governmental export and import policies; global trade policies; worldwide political stability and economic growth; the highly competitive environment in which we operate; potential entry of new, well-capitalized competitors into our markets; and changes in our capital structure and cost of capital. The words “believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
16
Results of Operations
The following table sets forth our results of operations as a percentage of total revenue for the periods indicated below and is derived from the unaudited Condensed Consolidated Statement of Operations in Part 1, Item 1 of this report.
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
%
|
%
|
%
|
%
|
|||||||||||||
Product Revenue
|
74.8 | 67.5 | 72.5 | 72.6 | ||||||||||||
Service Revenue
|
25.2 | 32.5 | 27.5 | 27.4 | ||||||||||||
Total Revenue
|
100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Cost Of Products Sold
|
129.9 | 71.4 | 100.3 | 72.1 | ||||||||||||
Cost Of Services Sold
|
14.0 | 11.2 | 14.9 | 9.5 | ||||||||||||
Cost Of Products and Services Sold
|
143.9 | 82.6 | 115.2 | 81.6 | ||||||||||||
Gross Profit
|
(43.9 | ) | 17.4 | (15.2 | ) | 18.4 | ||||||||||
Selling, General And Administrative Expenses
|
47.4 | 40.8 | 40.7 | 33.3 | ||||||||||||
Depreciation And Amortization
|
3.8 | 3.4 | 3.8 | 2.2 | ||||||||||||
Interest Expense, net
|
14.2 | 3.3 | 13.2 | 1.8 | ||||||||||||
Loss Before Benefit For Income Taxes
|
(109.3 | ) | (30.1 | ) | (72.9 | ) | (18.9 | ) | ||||||||
Provision (Benefit) For Income Taxes
|
0.0 | 0.1 | 0.0 | 0.2 | ||||||||||||
Net Loss
|
(109.3 | ) | (30.2 | ) | (72.9 | ) | (19.1 | ) |
Quarter Ended June 30, 2009 Compared to Quarter Ended June 30, 2008
Revenue for the quarter ended June 30, 2009 was $4,563,074 compared to revenue of $6,097,239 for the quarter ended June 30, 2008, a $1,534,165 decrease, or 25.2%. Revenue in our Data Security and Compliance segment decreased to $3,254,002 from $3,800,850, a $546,848 decrease, or 14.4%. This was primarily the result of a decrease in our wholesale remarketing revenues as the amount of product we were able to purchase from our suppliers decreased due to tight availability of capital. This also affected our fee based revenue services which fell by 55% to $110,000 for the quarter ended June 30, 2009 from $243,000 for the quarter ended June 30, 2008. This was due to the fact that some of our clients delayed their projects due to economic conditions. Revenue in our Data Center Maintenance segment decreased to $1,370,279 from $2,288,272, a $917,993 decrease, or 40.1%. At the beginning of the first quarter of 2009, we combined the Data Center Maintenance and Data Center Hardware segments to better service our customers needs. The decrease in our Data Center Maintenance segment was the result of a decrease in hardware sales and a corresponding decrease in services due to economic conditions. Sales of hardware usually are bundled with a service contract to give the customer the best deal possible. Our revenues categorized by products and services are as follows:
17
Three Months Ended
|
Three Months Ended
|
|||||||
June 30, 2009
|
June 30, 2008
|
|||||||
Revenue
|
||||||||
Products
|
$ | 3,414,614 | $ | 4,113,245 | ||||
Services
|
1,148,460 | 1,983,994 | ||||||
Total Revenue
|
$ | 4,563,074 | $ | 6,097,239 | ||||
In our industry, the overall management of the computer equipment throughout its life cycle represents a growing burden on companies. Our business has been built to keep companies in compliance with government legislation including HIPAA, Sarbanes-Oxley, the FACT Act, Gramm-Leach-Bliley, the Patriot Act or federal and state EPA regulations. As increasing numbers of computers are replaced or become obsolete, there is a greater source of computer equipment that is available for resale and a potentially greater source of customers needing our services. However, the general economic conditions in the United States market and the tight availability of capital to purchase product and service our customer’s needs during the first six months of 2009 had a detrimental effect on the company as a whole.
Gross profit for the quarter ended June 30, 2009 was ($2,002,158) compared to a gross profit of $1,059,049 for the quarter ended June 30, 2009, a $3,061,207 decrease, or 289.1%. Gross profit for the quarter ended June 30, 2009 decreased over the quarter ended June 30, 2008 as a result of a write-down of inventory of $2,065,983 during the 2009 quarter coupled with a liquidation of inventory to increase cash flow.
Gross margins for the quarter ended June 30, 2009 were (43.9%) compared to 17.4% for the quarter ended June 30, 2008. Gross margins decreased in both our segments as a result of a write-down of inventory and a reduction of some of our slower moving inventory sold at a loss.
Selling, general and administrative expenses for the quarter ended June 30, 2009 were $2,164,723 compared to selling, general and administrative expenses of $2,486,812 for the quarter ended June 30, 2008, a $322,089 decrease, or 13.0%. This decrease was the result of our commitment to reduce Company expenses and includes a severance accrual of approximately $1,000,000 related to an employment agreement.
Depreciation and amortization for the quarter ended June 30, 2009 was $93,057 compared to depreciation and amortization of $208,334 for the quarter ended June 30, 2008, a $115,277 decrease. This decrease was the mainly the result of the completion of the amortization of deferred loan costs associated with changing lenders offset and less intangible asset amortization during the current quarter.
Interest expense for the quarter ended June 30, 2009 was $646,453 compared to interest expense of $199,792 for the quarter ended June 30, 2008, a $446,661 increase, or 223.6%, commensurate with an increase in the rate of interest charged on the Company’s borrowings, increased interest rates and interest related to the acquisition note.
The Company did not record a federal tax benefit for the three months ended June 30, 2009, as we recorded a change in the valuation allowance for an amount equal to the tax benefit. The Company did not record state tax expense for the three months ended June 30, 2009 due to the size of the loss. The Company recorded a federal tax benefit for the three months ended June 30, 2008. The June 30, 2008 benefit was reduced by estimated state tax obligations. We incur state income taxes in jurisdictions where the Company cannot file a consolidated income tax return.
18
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Revenue for the six months ended June 30, 2009 was $9,341,388 compared to revenue of $14,302,814 for the six months ended June 30, 2008, a $4,961,426 decrease, or 34.7%. Revenue in our Data Security and Compliance segment decreased to $6,373,921 from $9,444,686, a $3,070,765 decrease, or 32.5%. This was primarily the result of a decrease in our wholesale remarketing revenues as the amount of product we were able to purchase from our suppliers decreased due to tight availability of capital. Revenue in our Data Center Maintenance segment decreased to $3,028,674 from $5,012,250, a $1,983,576 decrease, or 39.6%. At the beginning of the first quarter of 2009, we combined the Data Center Maintenance and Data Center Hardware segments to better service our customers needs. The decrease in our Data Center Maintenance segment was the result of a decrease in hardware sales and a corresponding decrease in services due to economic conditions. Sales of hardware usually are bundled with a service contract to give the customer the best deal possible. Our revenues categorized by products and services are as follows:
Six Months Ended
|
Six Months Ended
|
|||||||
June 30, 2009
|
June 30, 2008
|
|||||||
Revenue
|
||||||||
Products
|
$ | 6,774,404 | $ | 10,388,427 | ||||
Services
|
2,566,984 | 3,914,387 | ||||||
Total Revenue
|
$ | 9,341,388 | $ | 14,302,814 | ||||
In our industry, the overall management of the computer equipment throughout its life cycle represents a growing burden on companies. Our business has been built to keep companies in compliance with government legislation including HIPAA, Sarbanes-Oxley, the FACT Act, Gramm-Leach-Bliley, the Patriot Act or federal and state EPA regulations. As increasing numbers of computers are replaced or become obsolete, there is a greater source of computer equipment that is available for resale and a potentially greater source of customers needing our services. However, the general economic conditions in the United States market and the tight availability of capital to purchase product and service our customer’s needs during the first six months of 2009 had a detrimental effect on the company as a whole.
Gross profit for the six months ended June 30, 2009 was ($1,423,219) compared to a gross profit of $2,630,722 for the six months ended June 30, 2008, a $4,053,941 decrease, or 154.1%. Gross profit for the six months ended June 30, 2009 decreased over the six months ended June 30, 2008 as a result of a write-down of inventory of during the second quarter and a liquidation of inventory to increase cash flow during the second quarter.
Gross margins for the six months ended June 30, 2009 were (15.2%) compared to 18.4% for the six months ended June 30, 2008. Gross margins decreased in both our segments as a result of a write-down of inventory and a reduction of some of our slower moving inventory sold at a loss.
Selling, general and administrative expenses for the six months ended June 30, 2009 were $3,802,044 compared to selling, general and administrative expenses of $4,758,880 for the six months ended June 30, 2008, a $956,836 decrease, or 20.1%. This decrease was the result of our commitment to reduce Company expenses. It includes a severance accrual of approximately $1,000,000 related to an employment agreement.
Depreciation and amortization for the six months ended June 30, 2009 was $194,911 compared to depreciation and amortization of $315,720 for the six months ended June 30, 2008, a $120,809 increase. This increase was mainly the result of an increase in intangible asset amortization as a result of the acquisition.
Interest expense for the six months ended June 30, 2009 was $1,526,797 compared to interest expense of $256,442 for the six months ended June 30, 2008, a $1,270,355 increase, commensurate with an increase in the rate of interest charged on the Company’s borrowings, the amortization of the original issue discount on the new loan agreement and interest related to the acquisition note.
The Company did not record a federal tax benefit for the six months ended June 30, 2009 as we recorded a change in the valuation allowance for an amount equal to the tax benefit. The Company did not record a state tax expense for the six months ended June 30, 2009. The Company recorded a federal tax benefit for the six months ended June 30, 2008. This benefit was reduced by estimated state tax obligations. We incur state income taxes in jurisdictions where the Company cannot file a consolidated income tax return.
19
Business Segments
We operate in two segments that clearly focus our services into easy-to-understand categories for our target customers: Data Security and Compliance, and Data Center Hardware and Data Center Maintenance. Our “eliminations” category includes all amounts recognized upon consolidation of our subsidiaries such as the elimination of inter-segment revenues, expenses, assets and liabilities. Each of our segments is more fully described in Note 2 to our Condensed Consolidated Financial Statements.
Data Security & Compliance Segment
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue
|
$ | 3,192,795 | $ | 3,800,850 | $ | 6,312,714 | $ | 9,444,686 | ||||||||
Gross Profit
|
(1,591,133 | ) | 266,789 | (1,598,808 | ) | 722,429 | ||||||||||
Selling, General And Administrative Expenses
|
1,464,483 | 1,337,045 | 2,223,383 | 2,694,307 | ||||||||||||
Depreciation And Amortization
|
77,513 | 191,305 | 163,714 | 281,456 | ||||||||||||
Loss Before Benefit For Income Taxes
|
3,779,982 | 1,461,353 | 5,517,521 | 2,509,776 | ||||||||||||
Segment Assets
|
3,727,758 | 6,882,579 | 3,727,758 | 6,882,579 | ||||||||||||
Goodwill
|
– | – | – | – | ||||||||||||
Expenditures for Property and Equipment
|
1,225 | 42,611 | 20,466 | 57,928 | ||||||||||||
Quarter Ended June 30, 2009 Compared to Quarter Ended June 30, 2008
Revenue for the quarter ended June 30, 2009 was $3,192,795 compared to revenue of $3,800,850 for the quarter ended June 30, 2008, a $608,055 decrease, or 16%. This was primarily the result of a decrease in our wholesale remarketing revenues as the amount of product we were able to purchase from our suppliers decreased due to tight availability of capital. This also affected our fee based revenue services which fell by 55% to $110,000 for the quarter ended June 30, 2009 from $243,000 for the quarter ended June 30, 2008. This was due to the fact that some of our clients delayed their projects due to economic conditions.
Gross profit for the quarter ended June 30, 2009 was ($1,591,133) compared to gross profit of $266,789 for the quarter ended June 30, 2008, a $1,857,922 decrease, or 696.4%. Our gross profit decreased as a result of the reduction in revenues, a write-down of inventory during the quarter and a liquidation of inventory to increase cash flow during the second quarter. Gross margins for the quarter ended June 30, 2009 were (49.8%) compared to gross margins of 7.0% for the quarter ended June 30, 2008. Margins decreased due to the liquidation and write-down of inventory.
20
Selling, general and administrative expenses for the quarter ended June 30, 2009 were $1,464,484 compared to selling, general and administrative expenses of $1,337,045 for the quarter ended June 30, 2008, a $127,439 increase, or 9.5%. Expenses increased as a result of a severance accrual of approximately $1,000,000 related to an employment agreement offset by cost reductions that were initiated toward the end of 2008 and continued into the second quarter. Additional expense reductions were completed towards the end of the first quarter of 2009 as we continued our commitment to further reduce costs.
Depreciation and amortization for the quarter ended June 30, 2009 was $77,513 compared to depreciation and amortization of $191,305 for the quarter ended June 30, 2008, an $113,792 decrease. This decrease was the result of loan costs being fully amortized during the quarter.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Revenue for the six months ended June 30, 2009 was $6,312,714 compared to revenue of $9,444,686 for the six months ended June 30, 2008, a $3,131,972 decrease, or 33.2%. This was primarily the result of a decrease in our wholesale remarketing revenues as the amount of available product we were able to purchase from our supplier's decreased and due to tight availability of capital. We also had a decrease in our Data Security and Compliance services revenue as some of our clients delayed their projects due to economic conditions.
Gross profit for the six months ended June 30, 2009 was ($1,598,808) compared to gross profit of $722,429 for the six months ended June 30, 2008, a $2,321,237 decrease. Our gross profit decreased due to a reduction in revenues, a write-down of inventory and a liquidation of inventory to increase cash flow. Gross margins for the six months ended June 30, 2009 were (25.3%) compared to gross margins of 7.7% for the six months ended June 30, 2008. Our gross profit decreased as a result of the reduction in revenues, a write-down of inventory during the quarter and a liquidation of inventory to increase cash flow during the second quarter.
Selling, general and administrative expenses for the six months ended June 30, 2009 were $2,223,383 compared to selling, general and administrative expenses of $2,694,307 for the six months ended June 30, 2008, a $470,924 decrease, or 17.5%. Expenses decreased as a result of cost reductions that were initiated toward the end of 2008. Additional expense reductions were completed towards the end of the first quarter of 2009 that started to be realized during the second quarter of 2009. These reductions were offset by a severance accrual of approximately $1,000,000 related to an employment agreement.
Depreciation and amortization for the six months ended June 30, 2009 was $163,714 compared to depreciation and amortization of $281,456 for the six months ended June 30, 2008, an $117,742 decrease. This decrease was the result of loan costs being fully amortized during the quarter.
21
Data Center Maintenance Segment
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue
|
$ | 1,370,279 | $ | 2,296,389 | $ | 3,028,674 | $ | 4,858,128 | ||||||||
Gross Profit
|
(411,025 | ) | 792,260 | 175,589 | 1,908,293 | |||||||||||
Selling, General And Administrative Expenses
|
700,239 | 1,149,767 | 1,578,661 | 2,064,573 | ||||||||||||
Depreciation And Amortization
|
15,544 | 17,029 | 31,197 | 34,264 | ||||||||||||
Loss Before Provision For Income Taxes
|
1,126,408 | 374,536 | 1,429,450 | 190,544 | ||||||||||||
Segment Assets
|
1,679,772 | 2,784,916 | 1,679,772 | 2,784,916 | ||||||||||||
Goodwill
|
1,489,621 | 1,489,621 | 1,489,621 | 1,489,621 | ||||||||||||
Expenditures for Property and Equipment
|
- | 1,675 | - | 13,179 |
Quarter Ended June 30, 2009 Compared to Quarter Ended June 30, 2008
Revenue for the quarter ended June 30, 2009 was $1,370,279 compared to revenue of $2,296,389 for the quarter ended June 30, 2008, a $926,110 decrease, or 40.3%. At the beginning of the first quarter of 2009, we combined the Data Center Maintenance and Data Center Hardware segments to better service our customers' needs. The decrease in maintenance services was due to tight availability of capital that was needed to provide hardware and services.
Gross profit for the quarter ended June 30, 2009 was $(411,025) compared to gross profit of $792,260 for the quarter ended June 30, 2008, a $1,203,285 decrease, or 151.9%. Our gross profit decreased as we took an inventory reserve of $890,000 and we had a decrease in revenues for the quarter. Gross margins decreased to (30.0%) from 34.5%. Gross margins decreased as a result of the inventory reserve and our selling mainframe product out of this segment with lower margins to support our maintenance customers.
Selling, general and administrative expenses for the quarter ended June 30, 2009 were $700,239 compared to selling, general and administrative expenses of $1,149,767 for the quarter ended June 30, 2008, a $449,528 decrease, or 39.1%. This was the result of careful review of all expenses as we continue our commitment to reduce expenses.
Depreciation and amortization for the quarter ended June 30, 2009 was $15,544 compared to depreciation and amortization of $17,029 for the quarter ended June 30, 2008, a $1,485 decrease. This was the result of increase in intangible assets amortization.
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Revenue for the six months ended June 30, 2009 was $3,028,674 compared to revenue of $4,858,128 for the six months ended June 30, 2008, a $1,829,454 decrease, or 37.6%. At the beginning of the first quarter of 2009, we combined the Data Center Maintenance and Data Center Hardware segments to better service our customers' needs. The decrease in maintenance services was due to tight availability of capital that was needed to provide hardware and services.
Gross profit for the six months ended June 30, 2009 was $175,589 compared to gross profit of $1,908,293 for the six months ended June 30, 2008, a $1,732,704 decrease, or 90.8%. Our gross profit decreased as a result of the decrease in gross profit caused by a decrease in our service revenue during the quarter coupled with additional inventory reserves of $916,000. Gross margins decreased to 5.8% for the six months ended June 30, 2009 from 39.3% for the six months ended June 30, 2008. This decrease was a result of an increase in our inventory reserve plus our selling mainframe product out of this segment with lower margins to support our maintenance customers.
22
Selling, general and administrative expenses for the six months ended June 30, 2009 were $1,578,661 compared to selling, general and administrative expenses of $2,064,573 for the six months ended June 30, 2008, a $485,912 decrease, or 23.5%. This was the result of an increase in the allocation of the corporate overhead charge and an increase in payroll and payroll related expenses due to the combination of our maintenance and hardware companies in January 2009.
Depreciation and amortization for the six months ended June 30, 2009 was $31,197 compared to depreciation and amortization of $34,264 for the six months ended June 30, 2008, a $3,067 decrease. This was the result of increase in intangible assets amortization.
Geographic Areas
We operate primarily in the United States with no assets in foreign countries. However, we sell to and provide data security and compliance services to customers operating in foreign countries. Additionally, we have established multiple foreign partners for our Data Security and Compliance division which allow us to utilize our software to service our client’s needs in more than 90 countries worldwide. All of our purchases and sales are denominated in US dollars. There were no foreign currency transaction gains or losses during the six months ended June 30, 2009 and 2008.
Liquidity and Capital Resources
Net cash used in operating activities in the six months ended June 30, 2009 was $166,545. Net cash provided by operating activities in the six months ended June 30, 2008 was $653,574. Net cash used in operating activities during the six months ended June 30, 2009 was primarily a result of a decrease in accounts receivable, a decrease in inventories, and an increase in accounts payable, accrued payroll and accrued expenses offset by a net loss and cash used in discontinued operations of $1,338,340. Net cash provided by operating activities during the six months ended June 30, 2008 was primarily a result of a decrease in accounts receivable, a decrease in inventories, an increase in accounts payable and accrued expenses offset by a decrease in prepaid expenses and other assets and a net loss. The decrease in our receivables was mainly attributable to the decrease in revenue in our Data Center Hardware segment and at our Data Security and Compliance segment coupled with tighter credit controls resulting in better collections. The decrease in inventories was the result of our selling the inventory to generate cash.
Net cash used in investing activities for the six months ended June 30, 2009 and 2008 was $9,466 and $71,107, respectively. Net cash used in investing activities in the six months ended June 30, 2009 was for the purchase of fixed assets and included the sale of a fixed asset that was fully depreciated. Net cash used in investing activities in the six months ended June 30, 2008 was for the purchase of fixed assets.
Net cash used in financing activities for the six months ended June 30, 2009 was $26,010. Net cash used in financing activities for the six months ended June 30, 2008 was $568,508. Net cash used in financing activities for the six months ended June 30, 2009 was the result of additional borrowings on our revolving line of credit, the payment of financing costs and the payment of dividends offset by borrowings under our current revolving line of credit. Net cash used in financing activities for the six months ended June 30, 2008 was the result of paying off our previous revolving line of credit, the payment of financing costs and the payment of dividends offset by borrowing under our current revolving line of credit.
On March 31, 2009, the Company signed a forbearance agreement and Third Amendment to the Amended and Restated Securities Purchase Agreement with Victory Park Credit Opportunities Master Fund, LTD and Victory Park Management, LLC. (collectively "Victory") whereby Victory agreed to forbear from exercising certain of their rights and remedies and advanced $850,000 in additional funds and changed the advance rate on Accounts Receivable to a range of 85% to 90% and eligible inventory to 60%. The Company incurred $10,000 in amendment fees and $100,000 in forbearance fee. This amount was recorded as additional debt issuance costs in February 2009 and will be recognized as interest expense on a straight -line basis over the remaining twenty one months of the financing agreement. The Company was in compliance with its loan agreement and had borrowed the maximum amount under its borrowing base at March 31, 2009 exclusive of the $850,000.
23
On February 24, 2009, the Company signed a Second Amendment to the Amended and Restated Securities Purchase Agreement with Victory which waived a December 31, 2008 covenant violation and amended the financial covenants. The amended financial covenants will take effect commencing June 30, 2009. The new financial covenants that need to be met are as follows:
Maximum Senior Leverage
|
4.0 to 1.0
|
Maximum Senior Leverage
|
10.0 to 1.0
|
Interest Coverage
|
1.5 to 1.0
|
Fixed Charge Coverage
|
1.25 to 1.0
|
Capital Expenditures not in excess of $200,000 for any calendar year
|
In connection with the Second Amendment to the Amended and Restated Securities Purchase Agreement, the Company incurred $10,000 in amendment fees and 250,000 shares of Company common stock. The fair value of the shares was $15,000. This amount was recorded as additional debt issuance costs and will be recognized as interest expense on a straight-line basis over the remaining twenty one months of the financing agreement.
As of April 1, 2009, the Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations. This is because the Company received notification from the former owner of CCSI that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner. The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.
On July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009. The independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.
We do not have any material commitments for capital expenditures during the next twelve months.
Item 3Quantitative and Qualitative Disclosures About Market Risk
The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of June 30, the Company’s financial instruments were not exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk.
Item 4Controls and Procedures
Evaluation of disclosure controls and procedures
It is the Chief Executive Officer’s and the Chief Financial Officer’s responsibility to ensure that we maintain disclosure controls and procedures designed to provide reasonable assurance that material information, both financial and non-financial, and other information required under the securities laws to be disclosed is identified and communicated to senior management on a timely basis. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly results and an established system of internal controls.
24
Our Disclosure Controls were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the CEO and CFO, do not expect that our Disclosure Controls will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusions of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective, maturing control system, misstatements due to error or fraud may occur and not be detected.
The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Form 10-Q.
Our efforts to strengthen financial and internal controls continue. There have been no significant changes in internal controls, or in other factors, which would significantly affect these controls subsequent to the date of evaluation.
As of June 30, 2009, we evaluated the effectiveness of the design and operation of our Disclosure Controls. The controls evaluation was done under the supervision and with the participation of management, including our CEO and VP - Finance. Based on this evaluation, our CEO and VP - Finance have concluded these controls are effective.
Changes in internal control over financial reporting
During the period covered by this report, there have been no changes in the Company's internal control over financial reporting 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
The Company received notification from the former owner of CCSI that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner. The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.
On July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009. These unaudited condensed consolidated financial statements have been prepared assuming that the Company would continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of the filing of the bankruptcy. The independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.
25
On September 15, 2009, an Asset Purchase agreement, by and between SMS Maintenance, LLC. (“Purchaser”) and QualTech Services Group, Inc. (“Seller”), a subsidiary of QSGI INC., whereby Seller agreed to sell to Purchaser and Purchaser agreed to purchase from Seller, the Purchased Assets, including, but not limited to, the Assumed Contracts, and Purchaser agreed to assume from Seller the Assumed Liabilities, all on the terms and conditions set forth in the Purchase Agreement. The Purchaser and Seller agreed that the Cash Purchase Price was equal to $2,450,000. Purchaser agreed to pay Seller an additional $20,000 to partially offset pre-closing payroll expenses of the business. The asset sale resulted in a gain of $1,400,000.
On September 24, 2009, the Bankruptcy Court entered an order pursuant to 11 U.S.C. section 105, 363, and 365 of the Bankruptcy Code (A) Approving the sale of substantially all of the assets of the DSC division of QSGI INC. free and clear of all liens, claims, encumbrances and interests; (B) Approving the assumption and assignment of executor contracts and unexpired leases; and (C) Granting related relief. The asset sale resulted in a loss of $2,140,000.
On April 14, 2010, QSGI INC, settled its dispute with Victory Park Management, LLC and Victory Park Capital Advisors, LLC (collectively “VPC”) and signed a Settlement Agreement and Mutual Release. VPC made claims against the Company including pre-petition overstatements of inventory valuation and post-petition interference with the sale process of the assets. Although the Company disputed all claims, the company (in conjunction with its insurer) settled with VPC after considering the total cost of litigation. Other than an obligation to pay $150,000 if the Company is ultimately reorganized, the settlement releases the Company from any and all claims VPC may have had against it. The settlement and all other documents relating to the claim are available under case number 09-23658-EPK that was filed with the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.
In June, 2010, a settlement was reached with the former owner of CCSI whereby the Company shall abandon one-hundred percent (100%) of the capital stock of CCSI, Inc. to the owner and the owner releases his rights in and to QSGI and shall retain an unsecured claim against QSGI in the amount of $10,159,000.
Item 1A. Risk Factors
Reference is made to the factors set forth under the "Management Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 of this Form 10-Q and other risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2008, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered sales of equity securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
|
Not applicable.
|
Item 4.Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
26
Item 6. Exhibits
Exhibits
|
|
See List of Exhibits filed as part of this quarterly report on Form 10-Q.
|
|
27
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QSGI INC. Inc.
(Registrant)
|
||
Dated: October 26, 2011
|
By:
|
/s/ Marc Sherman
|
Marc Sherman
|
||
Chairman of the Board and Chief Executive Officer
|
||
28
List Of Exhibits
Exhibit Number
|
Description
|
2.1
|
Agreement and plan of Merger by and among Windsortech, Inc., Qualtech International Corporation and Qualtech Service Group, Inc. dated May 1, 2004.
|
3.1
|
Certificate of Amendment of Certificate of Incorporation of WindsorTech, Inc. **
|
3.2
|
Amended and Restated ByLaws of WindsorTech, Inc. (Incorporated herein reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).
|
3.3
|
Action by Consent in Writing of a Majority of Stockholders dated May 19, 2004 concerning Amended and Restated By Laws.
|
3.4
|
Action by Consent in Writing of a Majority of Stockholders dated September 17, 2004 increasing the number of shares of the Corporation
|
4.1
|
Specimen Common Stock Certificate of WindsorTech, Inc. (Incorporated herein reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).
|
4.2**
|
Form of Stock Purchase Agreements with Barron Partners, L.P., Guerrilla Capital, and Odin Partners et al. dated May 26, 2004.
|
4.3**
|
Form of Registration Rights Agreements with Barron Partners, L.P., Guerrilla Capital, and Odin Partners et al. dated May 26, 2004.
|
4.4**
|
Form of Common Stock Purchase Warrant at $1.50 per share dated May 28, 2004.
|
4.5**
|
Form of Common Stock Purchase Warrant at $3.60 per share dated May 28, 2004
|
4.6
|
Form of Registration Rights Agreement with Joel Owens and Jolene Owens dated May 1, 2004.
|
10.1*
|
Employment and Non-Compete Agreement – Edward L. Cummings **
|
10.2*
|
Employment and Non-Compete Agreement – David A. Loppert **
|
10.3*
|
Employment and Non-Compete Agreement – Carl C. Saracino **
|
10.4*
|
Employment and Non-Compete Agreement – Michael P. Sheerr **
|
10.5*
|
Employment and Non-Compete Agreement – Marc Sherman **
|
10.6*
|
2002 Flexible Stock Plan (Incorporated herein reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on April 16, 2002 (Commission file number 000-07539)).
|
10.7
|
Lease Agreement (Incorporated herein reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).
|
10.8
|
Employment and Non-Compete Agreement – Joel Owens
|
10.9**
|
Employment and Non-Compete Agreement – Seth A. Grossman
|
10.10**
|
Credit Agreement by and among Windsortech, Inc., Qualtech International Corporation, Qualtech Services Corporation and Fifth Third Bank.
|
16.1
|
Letter from Milton Reece, CPA (“Reece”) concurring with the statements made by the Registrant in the Current Report on Form 8-K reporting Reece’s resignation as the Registrant’s principal accountant (incorporated herein by reference to Exhibit 16 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 13, 2002 (Commission file number 000-07539)).
|
29
* Management contract or compensatory plan.
|
|
** Incorporated herein by reference to the same numbered exhibit in the Registrant’s Transition Report on Form 10-KSB filed with the Commission on April 1, 2002 (Commission file number 000-07539).
|
|
*** Attached hereto.
|
|
There are no other documents required to be filed as an Exhibit as required by Item 601 of Regulation S-K.
|
|
30