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EX-32.2 - EXHIBIT 32.1 - QSGI INC.ex32-1.htm
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EX-12.1 - EXHIBIT 12.1 - QSGI INC.ex12-1.htm
EX-31.1 - EXHIBIT 31.1 - QSGI INC.ex31-1.htm
 
As filed with the Securities and Exchange Commission on February 15, 2012



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010

[  ] TRANSITION 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 small business issuer as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
13-2599131
(I.R.S. Employer
Identification No.)

400 Royal Palm Way, Palm Beach, FL  33480
(Address of Principal Executive Offices) (Zip Code)

(561) 629-5713
(Registrant's Telephone Number)
 
Securities registered pursuant to Section 12(b) of the Exchange Act:  None
 
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $.01 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o  No x
 
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 preceding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X ( §229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [ ]
Accelerated filer [ ]
 Non-accelerated filer [ ]
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 aggregate market value of the common stock held by non-affiliates of the Registrant as of June 30, 2010 (the business day of the Registrant’s most recently completed second fiscal quarter), was less than $300,000 (38,797,716 shares x less than $0.01 per share).
 
 
 
 

 
 
As filed with the Securities and Exchange Commission on February 15, 2012


 
Number of shares outstanding of the Registrant’s Common stock, as of February 14, 2012, is 231,597,819.
 
A description of “Documents Incorporated by Reference” is contained in Item 15 Exhibits and Financial Statements.
 
 

 

 
 

 


 
Table Of Contents

     
Item
Description
Page
     
 
Part I
 
     
1.
Business
1A.
Risk Factors
1B.
Unresolved Staff Comments
2.
Property
3.
Legal Proceedings
4.
Submissions of Matters to a Vote of Security Holders
     
 
Part II
 
     
5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
6.
Selected Financial Data
7.
Management’s Discussion And Analysis of Financial Condition and Results of Operations
7A.
Quantitative and Qualitative Disclosures About Market Risk
8.
Financial Statements and Supplementary Data
9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
9A(T)
Controls and Procedures
9B.
Other Information
 
Part III
 
     
10.
Directors, Executive Officers and Corporate Governance
11.
Executive Compensation
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13.
Certain Relationships and Related Transactions, and Director Independence
14.
Principal Accountant Fees and Services
 
Part IV
 
15.
Exhibits, Financial Statement Schedules
     
     
     
 
Signatures
 
Financial Statements and Exhibits
     

 

 
 
 

 

 
PART I
 
 
Item 1.                                Business
 
Forward-Looking Statements And Associated Risk
 
The following discussion should be read in conjunction with our audited Financial Statements and Notes thereto included herein.
 
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.
 
References
 
References in this form 10-K to “we”, “us,” “our,” “the Company,” and “QSGI” mean QSGI INC. and our subsidiaries, unless the context otherwise requires.
 
 

 
1

 
 

Recent Developments
 
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, 2009 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.
 
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.  The Company also ceased reporting the results of operations of the Data Security and Compliance and the Data Center Maintenance Services segment and is reporting them as discontinued operations.  As part of the plan of bankruptcy, both segments’ assets were sold.
 
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 approximately $1,400,000 and is reported as discontinued operations.
 
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 approximately $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. Upon settlement, the Company recognized a gain of $2,918,463 related to the early extinguishment of this liability. 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 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, which includes accrued interest of $159,000. Accordingly, as of June 30, 2010, the Company has reclassified this balance as accrued expenses and other liabilities under the caption Liabilities Subject to Compromise—Long-term in the accompanying condensed consolidated balance sheets. In accordance with the settlement agreement, 10,000,000 contingent acquisition shares held in escrow were released and reflected as Treasury Stock on the balance sheet. On March 3, 2011, the shares in Treasury Stock were cancelled.

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.  
 
 
 
 
2

 
 
 
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. During August 2010, the Company granted 1,250,000 options for common stock as compensation to its Board of Directors. In August 2010, the Company issued options to purchase 1,250,000 shares of common stock at a purchase price of $.09 per share to members of the board of directors. Using the Black-Scholes Option Pricing Formula, the options were valued at $112,480, fair value, vesting in annual equal installments of 416,670 beginning on the grant date over the next three years.

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.

The close of the Exchange Agreement transaction (the “Closing”) took place June17, 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.  The share exchange was accounted for as a “reverse acquisition”, since the KruseCom shareholders own a majority of the outstanding shares of the company’s common stock immediately following the share exchange.
 

 
3

 
 
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.

On November 4, 2011 and pursuant to the Registrant’s Plan of Reorganization, a distribution of $50,000 and 10,000,000 common shares was to be distributed to Allowed General Unsecured Claim holders to extinguish all unsecured indebtedness.  Additionally, 425,000 common shares are to be distributed for the extinguishment of $4,271,472 in redeemable convertible preferred stock.  All distributions were to occur no later than 180 days after Plan Confirmation.  The distribution was completed on November 4, 2011, thus increasing the total outstanding shares of the Registrant from 221,172,716 to 231,597,819.

 
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.
 

 
 
4

 
 
 
Employees
 
As of December 31, 2010, we had 2 employees, both of which are deferring wages.  They are spending their time working on the reorganization effort and emergence from Chapter 11 Bankruptcy.
 
Available Information
 
Our Internet website address is www.qsgiinc.com.  We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
 
 
Item 1A.                      Risk Factors
 
The following constitute some of the noteworthy risks of an investment in the Company and should be carefully considered by respective investors prior to investing in the Company.  The order of the following risk factors is not intended to be indicative of the relative importance of any described risk nor is the following risk factors intended to be inclusive of all of the risks of an investment in the Company.
 
Factors Affecting Future Operating Results
 
You should carefully consider the following risk factors, together with all other information contained or incorporated by reference in this filing, before you decide to purchase shares of our stock.  These factors could cause our future results to differ materially from those expressed in or implied by forward-looking statements made by us.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.  The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.
 
Uncertainty Of Future Financial Results
 
Our future financial results are uncertain.  There can be no assurance that we will be profitable, and we may incur losses in the foreseeable future.  Achieving and sustaining profitability depends upon many factors, including our ability to raise capital when needed, the success of our various marketing programs, and the maintenance or reduction of expense levels.
 
Fluctuations In Future Quarterly Results
 
Our quarterly operating results may fluctuate based on how well we manage our business.  Some of the factors that may affect how well we manage our business include the timing of our delivery of significant orders; our ability to engineer customer solutions in a timely, cost effective manner; our ability to structure our organization to enable achievement of our operating objectives; our ability to meet the needs of our customers and markets; the ability to deliver, in a timely fashion, products for which we have received orders; the length of the sales cycle; the demand for products and services we offer; the introduction or announcements by computer manufacturers relating to the remarketing of new and used equipment; the hiring and training of additional personnel; as well as general business conditions.  If we fail to effectively manage our business, this could adversely affect our results of operations.
 
We expect that the size and timing of our sales transactions may vary substantially from quarter to quarter, and we expect such variations to continue in future periods, including the possibility of losses in one or more fiscal quarters.  These fluctuations may be caused by delays in shipping certain computer systems for which we receive orders that we expect to deliver during that quarter.  In addition, our collection periods may fluctuate due to periodic shortages of goods available for shipment, which may result in the delay of payment from customers who will not pay until their entire order is shipped.  Accordingly, it is likely that in one or more future fiscal quarters, our operating results could be below investors’ expectations and, as a result, any future public offering of shares of our Common Stock could be materially adversely affected.
 
 
 
 
5

 
 
 
 
Industry cycles may strain our management and resources
 
Cycles of growth and contraction in our industry may strain our management and resources.  To manage these industry cycles effectively, we must: improve operational and financial systems; train and manage our employee base; successfully integrate operations and employees of businesses we acquire or have acquired; attract, develop, motivate and retain qualified personnel with relevant experience; and adjust spending levels according to prevailing market conditions.  If we cannot manage industry cycles effectively, our business could be seriously harmed.
 
We Rely On Merchandise Vendors As Sources For Our Products
 
The availability of off-lease and excess inventory computer equipment is unpredictable.  We have no long-term arrangements with our vendors that assure the availability of equipment.  We purchase equipment from many different vendors, and we have no formal commitments with or from any of them.  We cannot assure you that our current vendors will continue to sell equipment to us as they have in the past, or that we will be able to establish new vendor relationships that ensure equipment will be available to us in sufficient quantities and at favorable prices.  If we are unable to obtain sufficient quantities of equipment at favorable prices, our business will be adversely affected.  In addition, we may become obligated to deliver specified types of computer equipment in a short time period and, in some cases, at specified prices.  Because we have no formal relationships with vendors, we may not be able to obtain the required equipment in sufficient quantities in a timely manner, which could adversely affect our ability to fulfill these obligations.
 
We Are Subject To Risks That Our Inventory May Decline In Value Before We Sell It Or That We May Not Be Able To Sell The Inventory At The Prices We Anticipate
 
We purchase and warehouse inventory, most of which is “as-is” or excess inventory of computer equipment.  As a result, we assume inventory risks and price erosion risks for these products. These risks are especially significant because computer equipment generally is characterized by rapid technological change and obsolescence.  These changes affect the market for refurbished or excess inventory equipment.  Our success will depend on our ability to purchase inventory at attractive prices relative to its resale value and our ability to turn our inventory rapidly through sales.  If we pay too much or hold inventory too long, we may be forced to sell our inventory at a discount or at a loss or write down its value, and our business could be materially adversely affected.
 
Declining Prices For New Computer Equipment Could Reduce Demand For Our Products
 
The cost of new computer equipment has declined dramatically in recent years.  As the price of new computer products declines, consumers may be less likely to purchase refurbished computer equipment unless there is a substantial discount to the price of the new equipment. Accordingly, if we were to sell “as-is” or refurbished equipment directly to end users, we would have to offer the products at a substantial discount to the price of new products.  As prices of new products continue to decrease, our revenue, profit margins and earnings could be adversely affected.  There can be no assurance that we will be able to maintain a sufficient pricing differential between new products and our “as-is” or refurbished products to avoid adversely affecting our revenues, profit margins and earnings.
 
 
 
 
6

 
 
 
If We Need Additional Financing For Unanticipated Working Capital Needs Or To Finance Acquisitions, We May Not Be Able To Obtain Such Capital, Which Could Adversely Affect Our Ability To Achieve Our Business Objectives
 
We believe that cash that may be generated from operations, together with other available cash resources, may not be sufficient to meet our current cash requirements for at least the next 12 months and may need to raise additional funds to finance unanticipated working capital requirements or acquire complementary businesses.  If funds are not available when required for our unanticipated working capital needs or other transactions, our ability to carry out our business plan could be adversely affected, and we may be required to scale back or discontinue our operations to reflect the extent of available funding.  
 
The Company was unable to meet covenants with its lender in the fourth quarter of 2008, and is considered to be in default of the line-of-credit.  As the Company is in default, the lender has the right to terminate the agreement, causing all amounts to become immediately due and payable.
 
We have made acquisitions in the past and may make acquisitions in the future, if advisable, and these acquisitions involve numerous risks.
 
Our growth depends upon market growth and our ability to enhance our existing products and services, and to introduce new products and services on a timely basis.  One of the ways to accomplish this is through acquisitions.  Acquisitions involve numerous risks, including, but not limited to, the following:

·  
difficulty and increased costs in assimilating employees, including our possible inability to keep and retain key employees of the acquired business;
·  
disruption of our ongoing business;
·  
discovery of undisclosed liabilities of the acquired companies and legal disputes with founders or shareholders of acquired companies;
·  
inability to successfully incorporate acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures;
·  
inability to commercialize acquired technology;
·  
the need to take impairment charges or write-downs with respect to acquired assets and
·  
the failure of the acquired entity to perform as anticipated.
 
No assurance can be given that our prior acquisitions or our future acquisitions, if any, will be successful or provide the anticipated benefits, or that they will not adversely affect our business, operating results or financial condition.   
 
If We Experience Problems In Our Distribution Operations, We Could Lose Customers
 
In addition to product vendors, we depend on several other third parties over whom we have limited control, including, in particular, Federal Express, United Parcel Service and common carriers for delivery of products to and from our distribution facility and to our customers.  We have no long-term relationships with any of those parties.  We are therefore subject to risks, including risks of employee strikes and inclement weather, which could result in failures by such carriers to deliver products to our customers in a timely manner, which could damage our reputation and name.
 
The Industry In Which We Compete In Is Highly Competitive
 
We face competition in each area of our business.  Some of our competitors have greater resources and a more established market position than we have.  Our primary competitors include:
 
 
 
 
7

 
 
 
·  
major manufacturers of computer equipment such as, Dell Computer Corporation, Hewlett Packard and IBM, each of which offer “as-is”, refurbished and new equipment through their websites and direct e-mail broadcast campaigns;
 
·  
privately and publicly owned businesses such as Redemtech, Intechra and Tech Turn that offer asset management and end-of-life product refurbishment and remarketing services;
 
·  
traditional store-based computer retailers, such as Best Buy Co., Inc., and
 
·  
online competitors and auction sites, such as e-Bay
 
Some competitors have longer operating histories, larger customer or user bases, greater brand name recognition and significantly greater financial, marketing and other resources than we do.  Some of these competitors already have an established brand name and can devote substantially more resources to increasing brand name recognition and product acquisition than we can.  In addition, larger, well-established and well-financed entities may join with online competitors or computer manufacturers or suppliers as the use of the Internet and other online services increases.  Our competitors may be able to secure products from vendors on more favorable terms, fulfill customer orders more efficiently or adopt more aggressive price or inventory availability policies than we can. Traditional store-based retailers also enable customers to see and test products in a manner that is not possible in the wholesale business.  Our product offerings must compete with other new computer equipment and related products offered by our competitors.  That competition may intensify if prices for new computers continue to decrease.
 
No Dividends On Common Stock; Issuance Of Preferred Stock
 
We do not have a history of paying dividends on our Common Stock, and there can be no assurance that dividends will be paid in the foreseeable future.  We intend to use any earnings, which may be generated to finance the growth of our businesses.  Our Board of Directors has the right to authorize the issuance of preferred stock, without further shareholder approval, the holders of which may have preferences over the holders of the Common Stock as to payment of dividends.
 
Dependence On Key Individuals
 
Our success depends to a significant extent upon the continued contributions of our key management, technical and sales personnel, many of who would be difficult to replace.  The loss of one or more of these employees could harm our business.  Although we have entered into a limited number of employment contracts with certain executive officers, we generally do not have long term employment contracts with our key employees.  Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, finance and managerial personnel.  Competition for qualified personnel is particularly intense in our industry and in our locations.  This makes it difficult to retain our key personnel and to recruit highly qualified personnel.  We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications.  To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees.
 
We are organized with a small senior management team.  If we were to lose the services of the one of our management team, our overall operations could be adversely affected.  We consider our key individual as of this filing to be:
 
Name
Position
Marc Sherman                                            
Chairman, Chief Executive Officer, Director
David Meynarez                                            
Chief Financial Officer & Treasurer
 
 
 
 
8

 
 
 
Anti-Takeover Provisions
 
Certain provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and Delaware law may be deemed to have an anti-takeover effect. Our certificate of incorporation provides that our Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock with such designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations that the Board of Directors fixes without stockholder approval.  In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law.  In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.  Each of the foregoing provisions may have the effect of rendering more difficult, delaying, discouraging, preventing or rendering more costly an acquisition of the Company or a change in control of the Company.
 
 
Item 1B.                      Unresolved Staff Comments
 
None
 
Item 2.                                Properties
 
None
 
 
Item 3.                                Legal Proceedings
 
From time to time, the Company may be party to legal proceedings which arise generally in the ordinary course of business.  The Company may be involved in legal proceedings which may have a material adverse affect on the financial position, results of operations or cash flows of the Company. Therefore estimates of potential impact of legal proceedings on the Company could change in the future depending upon matters in suit and the course of specific litigation.    All prepetition claims were brought forward during the Chapter 11 proceedings.  The liability related to the prepetition claims was considered in the Company’s December 31, 2010 Balance Sheet.
 
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. Upon settlement, the Company recognized a gain of $2,918,463 related to the early extinguishment of this liability. 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 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, which includes accrued interest of $159,000. Accordingly, as of June 30, 2010, the Company has reclassified this balance as accrued expenses and other liabilities under the caption Liabilities Subject to Compromise—Long-term in the accompanying condensed consolidated balance sheets. In accordance with the settlement agreement, 10,000,000 contingent acquisition shares held in escrow were released and reflected as Treasury Stock on the balance sheet. On March 3, 2011, the shares in Treasury Stock were cancelled.
 
 
 
 
9

 
 
 

 
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 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.

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 November 4, 2011 and pursuant to the Registrant’s Plan of Reorganization, a distribution of $50,000 and 10,000,000 common shares was to be distributed to Allowed General Unsecured Claim holders to extinguish all unsecured indebtedness.  Additionally, 425,000 common shares are to be distributed for the extinguishment of $4,271,472 in redeemable convertible preferred stock.  All distributions were to occur no later than 180 days after Plan Confirmation.  The distribution was completed on November 4, 2011, thus increasing the total outstanding shares of the Registrant from 221,172,716 to 231,597,819.

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.
 

 
10

 
 
 
Item 4.Submission of Matters to a Vote of Security Holders
 
There were no submissions of matters to a vote of our security holders during 2010 and the fourth quarter of our fiscal year ended December 31, 2010.  During October 2008, a vote of the majority shareholders was held by proxy vote.
 

 
PART II
 
Item 5. Market for Registrant's Common Equity, Related Stockholder matters and Issuer Purchases of Equity Securities
 
Market Information
 
The Company’s Common Stock is listed on the Pink Sheets Bulletin Board under the symbol “QSGI.”

The following table sets forth, for the calendar periods indicated, the high and low sales prices per share for the Company’s Common Stock as reported on the Pink Sheets Bulletin Board.
 
Years Ended December 31, 2011
 
High
   
Low
 
             
First Quarter
  $ 0.4500     $ 0.0820  
Second Quarter
    0.2700       0.1800  
Third Quarter
    0.2298       0.1000  
Fourth Quarter
    0.0900       0.0340  
                 
Years Ended December 31, 2010
               
                 
First Quarter
  $ 0.0065     $ 0.0001  
Second Quarter
    0.0015       0.0002  
Third Quarter
    0.1900       0.0001  
Fourth Quarter
    0.3000       0.0601  
                 
Years Ended December 31, 2009
               
                 
First Quarter
  $ 0.2200     $ 0.0200  
Second Quarter
    0.2700       0.0400  
Third Quarter
    0.0200       0.0002  
Fourth Quarter
    0.0130       0.0005  
 
 
 
11

 

 
 
Holders
 
As of February 14, 2012, there were approximately 1,800 holders of record of the Company’s Common Stock and the closing price was $.04. Because many of the outstanding shares of the Company’s Common Stock are held by brokers and other institutions on behalf of shareholders, the Company is not able to estimate the total number of beneficial shareholders represented by these record holders.
 
Dividends
 
The Company has paid no cash or stock dividends on its Common Stock to date and does not anticipate paying any dividends on its Common Stock in the foreseeable future.  The Company intends to use any earnings, which may be generated, to finance the growth of the businesses.
 
During 2010, the Company has paid no cash or stock dividends on its redeemable preferred stock. During 2009, the Company paid or accrued a total of $210,610 in dividends on its redeemable convertible preferred stock.
 
The Board of Directors has the right to authorize the issuance of preferred stock, without further shareholder approval, the holders of which may have preferences over the holders of the Common Stock as to payment of dividends.
 
Securities authorized for issuance under equity compensation plans
 
Set forth in the table below is information, as of December 31, 2010, regarding securities authorized for issuance under equity compensation plans:
 
Plan Category
Number of Securities to be issued upon exercise of outstanding options, warrants and rights
(a)
Weighted-average exercise price of outstanding options, warrants and rights
(b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
       
Equity compensation plans approved by security holders
7,928,334
$1.517
4,671,334
       
Equity compensation plans not approved by security holders
  6,300,000
$1.499
0
       
       
       
Total
14,228,334
$1.508
4,671,334
 
Equity Compensation Plan not Approved by Security Holders
 
The material features of the plan are:
 
 
 
 
12

 
 
 
Option Grant.  Options are granted in the discretion of the Board of Directors.
 
Death.  If the option recipient dies, his personal representative and/or beneficiary will have the right (which must be exercised not later than the option expiration date) to exercise the options to the extent they were not exercised at the time of the recipient’s death.
 
Non-Transferability of Rights; Designation of Beneficiaries.  Except as provided below, the options cannot not be transferred by the recipient other than by will or the laws of descent and distribution, and, during the lifetime of the recipient, the options can be exercised only by the recipient, except that, during his lifetime, the recipient may transfer the options for no consideration to members of his immediate family or a trust for the benefit of himself and/or members of his immediate family subject to all of the provisions applicable to the options prior to the transfer.
 
Withholding. The Company or any affiliate that employs the recipient has the right to deduct any sums that federal, state or local tax law requires to be withheld with respect to the exercise of the options or as otherwise may be required by such laws.  The Company or any such affiliate may require, as a condition to issuing stock upon the exercise of the options, that the recipient or other person exercising the options pay a sum to cover any such taxes.  In the alternative, the recipient or other person exercising the options may elect to pay such sums to the Company or the affiliate by delivering written notice of that election to the Company's corporate headquarters prior to or concurrently with exercise.  There is no obligation that the recipient be advised of the existence of the tax or the amount that may be withheld.
 
Changes in Capital Structure.  If there is any change in the capital structure of the Company, or if there is be any dividend upon the stock of the Company payable in stock or any other dividend payable in stock, or of there is a stock split, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, the maximum aggregate number of shares with respect to which the options may be exercised and the number and the option price of the shares of stock with respect to which the options were granted, will be proportionately adjusted by the Company if, and to the extent, necessary to prevent dilution or enlargement of the rights of the recipient.
 
Recent Sales of Unregistered Securities
 
The following table lists all unregistered securities sold/issued by us in the last three years pursuant to Item 701 of Regulation S-K.
 
These shares were issued to the persons listed below in connection with (1)(2)(3) Private Placement Shares, (4) the acquisition, (5) the exercise of stock options, (6) the exercise of stock warrants, (7) shares issued for funding, and (8) acquisition shares.
 
Name/Entity/Nature
Date Issued
Note
 
Number of Persons
Issued For
Number of Common
Shares
Victory Park Credit Opportunities Master Fund
 
Jun - 08
 
1
 
1
 
Shares Issued for Funding
 
1,875,000
John S. Riconda
Jun - 08
2
1
Acquisition
13,500,000
Victory Park Credit Opportunities Master Fund
Jun - 08
1
1
Shares Issued for Funding
2,000,000
       
1.
 
Represents shares issued that were issued as part of the Securities Purchase Agreement between the Company and Victory Park Credit Opportunities Master Fund, Ltd.
 
2.
 
Represents contingent shares that were part of the acquisition of CCSI Inc. that are being held in escrow to be released as the CCSI Inc. meets certain financial milestones. Originally, there were 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 were being held in escrow until June 2010 settlement at which time the shares were returned to the Company as Treasury Stock
 
 
 
 
13

 
 
 
 
Selected Financial Data
 
The Company qualifies as a smaller reporting company and is not required to provide the information required by this item.
 
Management’s Discussion And Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with our audited Financial Statements and Notes thereto included herein.
 
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.
 
Overview
 
We are a technology services and maintenance company.  Our Data Center Maintenance and Hardware 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).  We use the trade name “QSGI” in order to build cohesion among the various technology services that we offer and build brand recognition and preference through strong cross-marketing opportunities.
 
 
 
14

 
 
Results of Operations
 
From time to time, the Company may be party to legal proceedings which arise generally in the ordinary course of business.  The Company may be involved in legal proceedings which may have a material adverse affect on the financial position, results of operations or cash flows of the Company. Therefore estimates of potential impact of legal proceedings on the Company could change in the future depending upon matters in suit and the course of specific litigation.    All prepetition claims were brought forward during the Chapter 11 proceedings.  The liability related to the prepetition claims was considered in the Company’s December 31, 2009 Balance Sheet.
 
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, 2009 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.
 
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. Upon settlement, the Company recognized a gain of $2,918,463 related to the early extinguishment of this liability. 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 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, which includes accrued interest of $159,000. Accordingly, as of June 30, 2010, the Company has reclassified this balance as accrued expenses and other liabilities under the caption Liabilities Subject to Compromise—Long-term in the accompanying condensed consolidated balance sheets. In accordance with the settlement agreement, 10,000,000 contingent acquisition shares held in escrow were released and reflected as Treasury Stock on the balance sheet. On March 3, 2011, the shares in Treasury Stock were cancelled.

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.  



 
15

 
 
Business Segments
 
Since all of the reporting companies have been sold and are reported as discontinued operations, the company will no longer be reporting business segments.
 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
The Company qualifies as a smaller reporting company and is not required to provide the information required by this item.
 
 Item 8.   Financial Statements AND Supplementary Data
 
Our financial statements included in this Annual Report on Form 10-K are listed in Item 13 and begin immediately after Item 14 on pages F-1 through F-42.
 
Critical Accounting Policies
 
Management is responsible for the integrity of the financial information presented herein.  The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  Where necessary, they reflect estimates based on management’s judgment.  When selecting or evaluating accounting alternatives, management focuses on those that produce from among the available alternatives information most useful for decision-making.  Significant accounting policies that are important to the portrayal of the Company’s financial condition and results, which in some cases require management’s judgment, are summarized in the Notes to Financial Statements which are included herein in Item 8.
 
The Company believes that the critical accounting policies discussed below involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset, liability, revenue and expense amounts.
 
The Company recognizes revenue when it is realized or realizable and earned.  The Company provides a limited “DOA Warranty” in connection with some of its product sales.  DOA means “Dead On Arrival” and is a commonly used term in the computer industry.  If provided to our customer, this warranty applies to used computers, disk drives, CD drives or DVD drives that do not power-up when they are received or, in some cases, for a period of up to 60 days from receipt and provides that the covered equipment can be returned for a full refund or replacement product, if available.  The decision whether to provide a refund or replacement product is generally at our option, but in limited circumstances, it may be at the customer’s option.  Based on an internal study by management, we determined that approximately 4% of Company’s sales that are covered under this warranty are returned to the Company.  The Company has alternative methods to sell the returned equipment by tearing it down and selling the working components as parts and the non-working components to metal recyclers.  The alternative sales methods are rarely below the original cost of the equipment.  The Company has not had any significant differences for the years ended December 31, 2010 and 2009.  Therefore, no warranty reserve has been recorded.  Should a reserve be recorded, it would increase both cost of sales and accrued expenses.
 
 
 
 
16

 
 
 
The Company provides estimated inventory allowances for excess, slow-moving and obsolete inventory as well as for inventory whose carrying value is in excess of net realizable value.  These reserves are based on current assessments about future demands, market conditions and related management initiatives.  Management continually monitors its inventory valuation, and makes an assessment of its inventory allowance on a quarterly basis.  If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required, which would be a decrease to our inventory balance and an increase to cost of sales.  The Company had no inventory for sale at December 31, 2010 and 2009.
 
The Company provides an estimated allowance for doubtful accounts and an allowance for sales returns.  The allowance for doubtful accounts is based on management’s assessment about future collectability of accounts receivable on an account by account basis, with a reserve set up accordingly.  If conditions change, additional allowances may be required which would decrease our accounts receivable balance and increase our bad debt expense.  The allowance for sales returns is based on historical data and management’s assessment of how much of a return of product is resalable.  This allowance is reviewed on a quarterly basis and if required, an adjustment is made to increase or decrease the reserve and increase or decrease sales.  The Company had no trade accounts receivable at December 31, 2010 and 2009.
 
The Company accounts for stock-based employee compensation awards using a fair value method and records such expense in the consolidated financial statements in accordance with the provisions of the FASB ASC 718 (formerly, SFAS No. 123R, Share Based Payment) that was issued by the FASB.
 
The Company in accordance with the FASB ASC 350 (formerly, SFAS No. 142, Goodwill and Other Intangible Assets), performs impairment tests in the fourth quarter of each year.  As of December 31, 2010 and 2009, the Company had no remaining assets to subject to the requirements of FASB ASC 350.
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is provided against net deferred tax assets where the Company determines realization is not currently judged to be more likely than not.
 
 
Impact Of Recently Issued Accounting Standards
 
 
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
 
As of December 31, 2010 and for the year then ended, there were no recently adopted accounting pronouncements that had a material effect on the Company’s financial statements.
 
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
 
As of December 31, 2010, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.
.
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None
 

 
17

 
 
 
Item 9A (T).
Controls and procedures
 
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, including, without limitation, those controls and procedures designed to ensure that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosures.  
 
On July 2, 2009 the Company filed for protection under Chapter 11 of the United States Bankruptcy Code in order to reorganize its operations.  During this time, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we continued to evaluate the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934).  As of December 31, 2010, based upon this evaluation our management, including our Chief Executive Officer and Chief Financial Officer, management concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective, due to the material weaknesses in internal control over financial reporting described below, at the reasonable assurance level such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.  Although the Company was able to comply with the reporting requirements of the Bankruptcy Court it was not able to comply with the timely periodic reporting requirements of the Securities and Exchange Act of 1934.   In light of the bankruptcy, management believes that  in designing and evaluating the disclosure controls and procedures of the Company,  management cannot provide absolute assurance that the objectives of the control system have been met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
 
Management's Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. 
 
However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that internal controls may become inadequate because of changes in conditions, or the degree of compliance with policies may vary.   
 
On July 2, 2009 the Company filed for protection under Chapter 11 of the United States Bankruptcy Code in order to reorganize its operations.  Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2010.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.  Based on this evaluation, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2010, our internal control over financial reporting was not effective based on those criteria, although the Company has complied with all of the reporting requirements of the Bankruptcy Court.
 
 
 
 
18

 
 
No Attestation of Registered Public Accounting Firm
 
 
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
 

 
Other Information
 
None

 
Part III
 
 
Directors, Executive Officers, and Corporate Governance
 
 
As of December 31, 2010, Our Directors and Executive Officers are:
 
Name
Age
Position
Marc Sherman                                       
47
Chairman, Chief Executive Officer, Director
David J. Meynarez
 
Chief Financial Officer, Director
Benee Scola
 
Director
William J. Barbera
 
Director
David K. Waldman
 
Director
     
 
Marc Sherman founded QSGI INC. in August 2001 and has served as Chairman and Chief Executive Officer since then.  Mr. Sherman served as a director of and Chief Executive Officer of Intellesale, Inc. (and its predecessor, Universal Commodities Corp.), from December 1994 to July 2001, a company that purchased and sold large volumes of off-lease/off finance excess, used, refurbished and “as-is” computer equipment and related products and provided technology asset management to companies wishing to maximize the value of their computer equipment coming to the end of its useful or book lives.  Prior to 1994, Mr. Sherman served in key positions in various family businesses.  Mr. Sherman has over fifteen years of experience in marketing, operations and executive management.
 
 
Mr. David J. Meynarez is a CPA, and has served as Chief Financial Officer of KruseCom, LLC since 2009. Over the past 15 years, he has held a variety of accounting, financial and operational positions in both large multibillion dollar publicly traded companies as well as small entrepreneurial startups, participated in numerous M&A transactions from due diligence to integration and capital expansion projects for capacity increases and cost mitigation, worked with and helped implement large ERP and small accounting packages and worked at companies in technology, heavy building materials and energy industries. He started his career in public accounting at Deloitte and Touche and earned both a bachelors and masters degree in accounting from Florida Atlantic University. There is no family relationship between Mr. Meynarez and any other officer or director of the Company.
 
 
Ms. Benee Scola is the president and founder of Benee Scola and Company, realtors in Harvey Cedars, Long Beach Island, NJ. Her company was established in 1995 and is the consistent leader in the market it serves and represents high net worth individuals. Since 1987, she has been a top producing real estate broker in Long Beach Island, NJ and is a successful real estate investor. In October, 2009, her company was the presenting sponsor of the ANNIKA Foundations first fund raising golf tournament in Bedminster, NJ. She was a Board of Trustee member in 2007 and 2008 for the non-profit Long Beach Island Foundation for the Arts and Sciences in Loveladies, NJ, headed the Foundation’s marketing and membership committees and was elected to serve as an executive board member. She also was elected and served on the Borough Council of Surf City, NJ. There is no family relationship between Ms. Scola and any other officer or director of the Company and her company is not a parent, subsidiary, or other affiliate of the Company.
 
 
 
19

 
 
Mr. William J. Barbera is a CPA, licensed in Pennsylvania, who founded his firm, Barbera & Associates, PC and has been in public practice for 20 years. He is a graduate of St. Joseph’s University in Philadelphia, Pa. and was a Board member of Access Services, a $ 24M nonprofit organization, helping mentally and physically handicapped for 6 years and was a member of their Audit committee. He has a diversified career in both corporate management and public practice. He enjoys helping small business entrepreneurs with their start-up phase and then providing the business counsel that helps them grow their businesses. His clients range from start-up to $ 20M in sales. In addition to accounting services; he specializes in tax strategies, planning and preparation. His clients include manufactures, service providers, medical & dental practices, professional athletes and many other corporate and personal clients. There is no family relationship between Mr. Barbara and any other officer or director of the Company and his company is not a parent, subsidiary, or other affiliate of the Company.
 
Mr. David K. Waldman is the president and founder of Crescendo Communications, LLC, a leading NYC based investor relations firm. He has a long and successful track record working with publicly traded companies of all sizes and across a wide range of industries, including telecommunications, technology, industrial, financial, medical, and business services. He has built a reputation as a leading expert on communications best practices and has developed an extensive network on Wall Street. He has provided communications counsel to senior members of management across a wide range of issues, including M&A, management changes, earnings surprises, crisis communications, Reg-FD disclosure, etc. Prior to founding Crescendo Communications, Mr. Waldman served as vice president at a leading New York City based investor relations firm, as well as two other premier investor relations firms. Mr. Waldman also brings in-house IR experience having handled the investor relations for a multi-billion dollar satellite telecommunications company. He has a B.S. in Communications and Political Science from Northwestern University. There is no family relationship between Mr. Waldman and any other officer or director of the Company and his company is not a parent, subsidiary, or other affiliate of the Company.
 
None of the Directors or Executive Officers of the Company:
 
·  
have been convicted in a criminal proceeding or is the subject of a pending criminal proceeding;
 
·  
are subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoined, barred or suspended or otherwise limited in their involvement in any type of business, securities or banking activities; or
 
·  
have been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated federal or state securities or commodities law and the judgment has not been reversed, suspended or vacated.
 
Code of Ethics for Staff Members and Directors
 
The Company has adopted a Code of Ethics for Staff Members and Directors, which applies to all employees, including our Chief Executive and Chief Financial Officer.  The following is the company’s code of conduct and ethics.
 
 
 
 
20

 
 
 
QSGI INC. Code of Conduct and Ethics
 
The staff members and directors of QSGI INC. have held themselves to the highest business and ethical standards in their dealings with each other, clients, vendors, competitors, and shareholders. Those standards are values we hold dear, and they have guided our work over the years.
 
We believe that only the highest standard of business and ethical conduct is appropriate. Dealing fairly, keeping client confidences, and avoiding conflicts of interest are paramount values in our relationships with our clients and our success as a company.
 
With these values in mind, the staff members and directors of QSGI INC. shall always:
 
·  
Avoid conflicts and the appearance of conflicts of interest. Our private interests and personal positions shall not interfere with the best interests of our clients or of QSGI INC.
 
·  
Not use corporate opportunities or property inappropriately or for personal benefit or gain.
 
·  
To the extent permitted by law, maintain the confidentiality of nonpublic information in our possession, and not use this information for personal gain.
 
·  
Deal appropriately with our staff members, our clients, vendors, competitors, and shareholders.
 
·  
Adhere to all applicable laws, rules, and regulations in all markets and business endeavors. This includes full, fair, accurate, timely, and understandable disclosure in documents we file with the SEC and in our other public communications.
 
·  
Encourage staff members to be vigilant and to report any illegal or unethical behavior they observe.  Any waivers of the code for executive officers and directors may be made only by the board or a board committee and must be promptly disclosed to shareholders.
 
·  
Live by this Code in order to help our clients succeed.
 
 
 
Compliance with Section 16(a) of the Exchange Act
 
Our directors, officers, and beneficial owners of 10% or more of our securities are in compliance with Section 16(a) of the Exchange Act.
 
Item 11.                      Executive Compensation
 
Oversight of Executive Compensation Program
 
            Historically, the Compensation Committee (the “Committee”), composed entirely of independent directors, administers QSGI's executive compensation program.  There were no outside directors as of December 31, 2009 and thus the Committee ceased to exist. On August 11, 2010, the membership of the Board of Directors increased 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. The Board of Directors assumed the responsibilities of the Committee. The role of the Committee includes establishing and overseeing compensation and benefit programs for our executive officers including the Chief Executive Officer (“CEO”), the other executive officers and other key executives listed in the Summary Compensation Table (the “Named Executives”).  The Committee also evaluates the performance of the CEO and reviews the performance of other Named Executives every year.  The Committee reviews management performance, succession planning and executive development on a regular and ongoing basis with formal reviews conducted at least annually.  Elements of our executive compensation program include: base salary; annual incentive bonus; long-term equity-based incentive awards; and employee benefits and executive perquisites.
 
 
 
 
21

 
 
 
In establishing and overseeing the program, the Committee’s goal is to ensure that we can attract and retain superior management talent critical to our long-term success. To ensure that executive compensation is aligned with the performance of QSGI and the interests of its shareholders, a significant portion of compensation available to executives is linked directly with financial results and other factors that influence shareholder value.
 
Compensation Philosophy and Objectives
 
Historically, the Committee’s policy was to compensate and reward the CEO and other Named executives based on the combination of some or all of the following factors, depending on the executive’s responsibilities: corporate performance, business unit performance and individual performance.  The Committee evaluates corporate performance and business unit performance by reviewing the extent to which QSGI has accomplished strategic business objectives, such as revenue growth, earnings and cash flow.  The Committee also evaluates individual performance by reviewing actual accomplishments.  The Committee determines increases in base salary and annual cash incentive awards based on a combination of actual accomplishments, corporate performance and business unit performance and may recommend cash incentive awards to reward executive officers and other key executives even if corporate performance may not meet expectations.  It was the Committee's belief that it is prudent to provide competitive base salaries and benefits in order to attract and retain the management talent necessary to achieve our strategic long-term objectives.
 
Based on these philosophies and objectives, the Committee believes that QSGI's executive compensation program should consist of the following elements:
 
 
 
Base salary,
       
 
 
Annual cash incentive opportunity,
       
 
 
Long-term equity-based incentive awards, and
       
 
 
Benefits and executive perquisites
 
Additional details on each element of compensation program are outlined below.
 
Base Salaries
 
Historically, the base salary takes into account individual duties, responsibilities, scope of control and accountability for each position.  The Committee also considers the competitiveness of the base salary.  The Committee reviews salaries of the CEO and other Named Executives annually and awards increases, as appropriate.  The Committee approved all increases in base salary for the CEO and other Named Executives in advance.
 
Annual Incentive Compensation
 
Historically, annual incentive compensation bonus awards are available to the CEO and other Named Executives based on achievement of our short-term business objectives, stockholders’ interests as a whole, individual performance which includes long hours, hard work and dedication to the Company's future and its goals.  The Committee reviewed the individual performance, attainment of our short-term business objectives and stockholders' interests as a whole and recommends a bonus based on a combination of these factors and may recommend cash incentive awards to reward the CEO and other Named Executives even if corporate performance may not meet expectations. It is the Committee's belief that it is prudent to provide competitive base salaries and benefits in order to attract and retain the management talent necessary to achieve our strategic long-term objectives.
 
 
 
22

 
 
 
Long-Term Equity-Based Incentive Compensation
 
Historically, the Committee provided stock incentives to the CEO and other Named Executives that are tied to QSGI's long-term performance in order to link the executive’s interests to those of our shareholders and to encourage stock ownership by executives.
 
The 2002 Flexible Stock Plan, which was approved by our shareholders in January 2002, provides for the granting of stock options, performance-based share awards and restricted shares to the CEO and other Named Executives, and other employees. The Committee believes that the stock options, performance-based share awards and restricted shares granted under the Stock Plan provide a significant link between the compensation of the CEO and other Named Executives on the one hand and QSGI's long-term goals and shareholders’ interests on the other.
 
Since 2002, annual grants of equity-based incentive awards to our CEO and other Named Executives have consisted of stock options.  Such awards are usually made by the Committee at its February meeting. Generally, the CEO and other Named Executives, receive annual grants with an exercise price of the options based on the closing price of the Company's stock on the date the grant.  Details on these equity awards are outlined below.   Stock options are granted at other times during the year only in conjunction with the hiring or promotion of employees and then only as approved by the Committee and pursuant to the terms of the Stock Plan.
 
Stock options granted under the Flexible Stock Plan may vest ratably, or over a period of five or ten years.  The term is at the discretion of the Committee.  The number of shares of stock underlying options granted to the CEO and each Named Executives in 2010 and 2009 is shown in the table below.  The number of shares, option exercise prices, and expiration dates relating to all outstanding stock options that are held by the CEO and each of the Named Executives as of December 31, 2010 and 2009, are shown in the table below.  Information relating to options exercised during 2009 and 2008 for the CEO and each Named Executive is shown in the table below.
 
   Benefits and Executive Perquisites
 
Historically, the Committee operated with the belief that attracting and retaining superior management talent requires an executive compensation program that is competitive in all respects with the programs provided in the market place.  In addition to salaries, incentive bonus and stock awards, competitive executive compensation programs include retirement and welfare benefits and reasonable executive perquisites. At QSGI, executive officers participate in the same retirement and welfare benefit plans as all salaried employees. We also provided certain perquisites to executive officers, subject to an annual allowance approved by the Committee. The Committee reviews actual spending on executive perquisites annually.   The Committee was disbanded an all benefits and executive perquisites ceased in as of December 31, 2009 until the Board of Directors assumed the responsibilities of the Committee in August 2010.     
 
Retirement Benefits
 
Historically, the Company contributed 3% of an eligible employee's annual compensation to a qualified 401(k) savings plan.  A participant in the plan may elect to contribute additional funds subject to annual limits established under the Internal Revenue Code. Employee and Company matching contributions are fully vested immediately. Participants may receive distribution of their QSGI Savings Plan accounts any time after they cease service with the Company.   Contributions ceased when the Company entered Chapter 11 Bankruptcy protection on July 2, 2009.
 
     Welfare Benefits
 
Historically, all executive officers, including the Named Executives, are eligible for welfare benefits from QSGI including: medical, dental, life insurance, short-term disability, and long-term disability. Executives participate in these plans on the same basis and subject to the same costs, terms and conditions as other salaried employees of the same defined employee class.   These plans ceased as of December 31, 2009.
 
 
 
23

 
 
 
 
     Perquisites
 
Historically, QSGI provided a taxable allowance for club membership dues of up to $20,000 as a perquisite for the CEO.  These perquisites ceased as of December 31, 2009.
 
 
Tax Implications of Executive Compensation
 
Section 162(m) of the Internal Revenue Code imposes a limit, with certain exceptions, on the amount that a publicly held corporation may deduct in any year for the compensation paid to its five most highly compensated officers. The Committee believes that the annual incentive bonuses paid and the awards and options granted pursuant to the Stock Plan will qualify as “performance-based” compensation and will meet the requirements of the current tax law and Internal Revenue Service regulations so as to preserve the tax deductibility of the executive compensation paid pursuant to such plans.  The Committee attempts to structure executive compensation to preserve tax deductibility and consistent with the overall compensation objectives and philosophy discussed above.
 
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers and the two other most highly compensated officers that was paid by us during the fiscal years ended December 31, 2010 and 2009.
 
Summary Compensation Table
Name and Principal
Position
Year
Salary
($)
Bonus ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation Earnings ($)
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)
 
All Other Compensation ($)
 
Total  ($)
                       
Marc Sherman (1) (3)
2010
$   42,000
$         -
$        -
$ 22,496
$         -
$         -
 
$             -
 
$    64,996
Chairman, CEO and
2009
$ 218,042
$         -
$        -
$           -
$         -
$         -
 
$          -
 
 $  218,042
President
                     
                       
Dave Meynarez (3)
2010
$   42,000
$         -
$        -
$  22,496
$         -
$         -
 
$          -
 
$    64,996
    CFO and Treasurer
2009
$             -
$         -
$        -
$            -
$         -
$         -
 
$          -
 
$    65,230
                       
Seth A. Grossman(2) (3)
2010
$             -
$         -
$        -
$            -
$         -
$         -
 
$          -
 
$              -
    President and Chief
2009
$   65,230
$         -
$        -
$            -
$         -
$         -
 
$          -
 
$    65,230
    Operating Officer
                     
                       
Edward L. Cummings(1) (3)
2010
$             -
$         -
$        -
$            -
$         -
$         -
 
$          -
 
$              -
CFO and Treasurer
2009
        $ 123,715
$         -
$        -
$            -
$         -
$         -
 
$          -
 
 $  123,715
                       
                       
(1)  
See “Employment Contracts” below for agreements entered into with executive officers.  Employment ended September 25, 2009.
(2)  
Employment ended March 9, 2009.
(3)  
In 2009, one option grant was issued for each Officer.  The option value was based on the grant date fair value of $0.16 per option share which was derived using the Black-Scholes option pricing model and is not intended to forecast future appreciation of the Company’s common share price.  The Black-Scholes model was used with the following assumptions:  dividend yield of 0%; expected volatility of 444.73%; risk-free interest rate of 0.78%; and expected lives of 10 years. In 2010, The option value was based on the grant date fair value of $0.09 per option share which was derived using the Black-Scholes model with the following assumptions: 0% dividend yield, expected volatility, based on the Company’s historical volatility of 444% in 2010, risk-free interest rate of .78% in and expected option life of three years.

 
 
24

 

 
 
Grants of Plan-Based Awards
 
The following table contains information concerning the grant of Stock Options to the named executive officers during 2010:
 
     
Grants of Plan-Based Awards
   
 
 
Name
Grant Date
Estimated Future Payouts Under Non-Equity Incentive Plan Awards
 
Estimated Future Payouts Under Equity Incentive Plan Awards
 
All Other Stock Awards: Number of Shares of Stock or Units (#)
 
All Other Option Awards:  Number of Securities Underlying Options (#)
Exercise or Base Price of Option Awards ($/Sh)
 
Threshold ($)
Target  ($)
Maximum (#)
 
Threshold
($)
Target ($)
Maximum (#)
   
 
Marc Sherman
08/11/10
$         -
$         -
-
 
$         -
-
-
 
$         -
 
250,000
$         .09
 
David Meynarez
08/11/10
$         -
$         -
-
 
$         -
-
-
 
$         -
 
 
250,000
$         .09
 
 
 
Outstanding Equity Awards at Fiscal Year-End
 
The following table sets forth information with respect to the named executive officers concerning Equity Awards held on December 31, 2010:
 
Outstanding Equity Awards at Fiscal Year-End
   
Option Awards
 
Stock Awards
Name
 
Number of Securities
Underlying unexercised
Options (#)
Exercisable (1)
Number of Securities
Underlying unexercised
Options (#) Unexercisable
Equity Incentive Plan
Awards: Number of Securities
Underlying Unexercised
Unearned Options (#)
 
Option Exercise Price ($)
 
Option Expiration Date
 
Exercisable
 
Unexercisable
Marc Sherman
 
 
 
 
250,000
 
 
 
--
 
 
 
--
 
$0.026
 
2011
 
 
 
--
 
 
 
 
--
Marc Sherman
 
125,000
--
--
 
$0.026
 
2012
 
--
 
--
Marc Sherman
 
1,000,000
--
--
 
$2.00
 
2014
 
--
 
--
Marc Sherman
 
500,000
--
--
 
$1.44
 
2014
 
--
 
--
Marc Sherman
 
500,000
--
--
 
$1.90
 
2014
 
--
 
--
Marc Sherman
 
1,000,000
--
--
 
$2.50
 
2015
 
--
 
--
Marc Sherman
 
500,000
--
--
 
$0.16
 
2018
 
--
 
--
Marc Sherman
 
250,000
--
--
 
$0.09
 
2013
 
--
 
--
Dave Meynarez
 
250,000
--
--
 
$0.09
 
2013
 
--
 
--
Benee Scola
 
250,000
--
--
 
$0.09
 
2013
 
--
 
--
William J. Barbera
 
250,000
--
--
 
$0.09
 
2013
 
--
 
--
David K. Waldman
 
250,000
--
--
 
$0.09
 
2013
 
--
 
--
Seth A. Grossman
 
125,000
--
--
 
$2.13
 
2013
 
--
 
--
Seth A. Grossman
 
100,000
--
--
 
$2.00
 
2014
 
--
 
--
Seth A. Grossman
 
100,000
--
--
 
$1.44
 
2014
 
--
 
--
Seth A. Grossman
 
100,000
--
--
 
$1.90
 
2014
 
--
 
--
Seth A. Grossman
 
3,000,000
--
--
 
$2.75
 
2015
 
--
 
--
Seth A. Grossman
 
250,000
--
--
 
$0.16
 
2018
 
--
 
--
Edward L. Cummings
 
250,000
--
--
 
$0.026
 
2011
 
--
 
--
Edward L. Cummings
 
100,000
--
--
 
$0.026
 
2012
 
--
 
--
Edward L. Cummings
 
250,000
--
--
 
$2.00
 
2014
 
--
 
--
Edward L. Cummings
 
250,000
--
--
 
$1.44
 
2014
 
--
 
--
Edward L. Cummings
 
250,000
--
--
 
$1.90
 
2014
 
--
 
--
Edward L. Cummings
 
500,000
--
--
 
$2.50
 
2015
 
--
 
--
Edward L. Cummings
 
250,000
--
--
 
$0.16
 
2018
       
 
(1)  
All options have vested.
 
 
 
 
25

 
 
 
Options Exercises and Stock Vested
 
 
None.
 
               
 
Pension Benefits
 
None.  Not applicable.
 
 
Nonqualified Deferred Compensation
 
None.  Not applicable.
 
 
Compensation Pursuant to Plans
 
Other than as disclosed above, the Company has no plans pursuant to which cash or non-cash compensation was paid or distributed during the last fiscal year, or is proposed to be paid or distributed in the future, to the individuals described above.
 
 
Compensation of Directors
 
During August 2010, the Company granted 1,250,000 options for common stock as compensation to its Board of Directors. In August 2010, the Company issued options to purchase 1,250,000 shares of common stock at a purchase price of $.09 per share to members of the board of directors. Using the Black-Scholes Option Pricing Formula, the options were valued at $112,480, fair value, vesting in annual equal installments of 416,670 beginning on the grant date over the next three years. The expense is being recognized based on vesting terms over a three-year period.  For the year ending December 31, 2010, the Company recognized $12,650 of expense. The options are still outstanding as of December 31, 2010.
 
 
Compensation Committee Interlocks and Insider Participation
 
None.
 
 
Employment Contracts and Termination of Employment, and Change-in-Control Arrangements
 
None
 
 
 
 
26

 
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Ownership of Equity Securities in the Company
 
The following table sets forth information regarding beneficial ownership of the Company’s Common Stock by each director and by each executive officer named in the Summary Compensation Table and by all the directors and executive officers as a group as of December 31, 2010:
 
Title of Class
Name and Address of Beneficial Owner
Amount and Nature of Beneficial Owner(1)
 
Percent of Class
       
Common
Marc Sherman (2)
c/o 400 Royal Palm Way, STE 302
Palm Beach, FL 33480
6,775,800
11.01%
Common
Dave Meynarez
c/o 400 Royal Palm Way, STE 302
Palm Beach, FL 33480
250,000
0.00%
Common
All Directors and Executive Officers as a Group (5 Persons)
7,775,800
12.64%

 
1.  
This table includes presently exercisable stock options.   The following director and executive officer held the number of presently exercisable options (all of which may be exercised at any time):  Marc Sherman –3,875,000;   All directors and executive officers as a group (5 person) – 7,775,800.
2.  
Includes 85,300 shares beneficially owned by Mr. Sherman’s children for whom Mr. Sherman has sole voting and dispositive power.

 

 
 
Securities authorized for issuance under equity compensation plans
 
This information is presented in Part II, Item 5 – “Market for Common Equity and Related Stockholder Matters” above.
 
 
Item 13                      Certain Relationships and Related Transactions, and Director Independence
 
Loans from Principal Stockholders/Executive Officers
 
As of December 31, 2010 and 2009, there were no outstanding loans or notes due to or due from principal stockholders or executive officers.
 
Sales to Related Party
 
During 2009, the Company had sales to Keystone Memory Group, a customer related to Marc Sherman, Chairman and CEO, who is a principal stockholder of the Company.  Marc Sherman's sister is part owner of Keystone Memory Group.  Mr. Sherman has no business experience with Keystone. The Company did not have sales to any related parties during 2010.
 
Sales to Keystone amounted to approximately $0 and $98,850 for the years ended December 31, 2010 and 2009, respectively.  Accounts receivable from this customer amounted to $0 at December 31, 2010 and 2009.
 
Keystone primarily sells memory upgrades for Sun, HP, Cisco, Compaq and IBM workstations, servers and personal computers as well as other computer parts. We sell personal computer memory modules to Keystone in bona fide arms-length negotiated transactions at competitive fair market prices.  The products primarily consist of Random Access Memory modules.
 
Shares issued to Principal Stockholders/Executive Officers
 
Principal Stockholder / Executive Officers
Date Issued
 
Issued For
Number of Common
Shares
Marc Sherman
Oct - 2001
 
Capital Contribution
5,000,000
 
Jan - 2002
 
Merger Consideration
1,800,000
 
Dec - 2002
 
Compensation
500,000
 
Aug - 2010
 
Compensation
250,000
David Meynarez
Aug - 2010
 
Compensation
250,000
         
         
 
 
 
27

 
 
 
Item 14.Principal accountant fees and services
 
During 2010 and 2009, we paid the following fees, including out of pocket expense reimbursements, to Morison Cogen LLP and RubinBrown LLP:
 
2010
Morison Cogen LLP
2009
Morison Cogen LLP
 
Audit Fees
Audit-Related Fees
Tax Fees
Total
$0
0
0
$0
                $66,000 (1)
0
0
$66,000
 
 
(1)  Fees consist of fees for the reviews of the 2010 and 2009 and annual audit of the financial statements for 2010 and 2011.
 
QSGI INC.’s Audit Committee approves the engagement of an accountant to render all audit and non-audit services prior to the engagement of the accountant based upon a proposal by the accountant of estimated fees and scope of the engagement. QSGI INC.’s Audit Committee has received the written disclosure and the letter from Morison Cogen LLP required by Independence Standards Board Standard No. 1, as currently in effect, and has discussed with Morison Cogen LLP their independence.

 
PART IV
 
Item 15.                      Exhibits and Financial Statements
 
Exhibits
 
See List of Exhibits filed as part of this Report on Form 10-K.
 
The financial statements listed below appear immediately after page 51.
     
Report of Independent Registered Public Accounting Firm
 
Financial Statements
   
Balance Sheet
 
Statement Of Operations
 
Statement Of Stockholders’ Equity
 
Statement Of Cash Flows
 
Notes To Financial Statements
 
 

 
28

 
 
 
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
QSGI INC.
(Registrant)
 
Dated:           February 15, 2012
By:
/s/ Marc Sherman
   
Marc Sherman
   
Chairman of the Board, Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
Signature
Title
Date
/s/ Marc Sherman
Marc Sherman
Chairman of the Board, and Chief Executive Officer
February  15, 2012
     
/s/ David Meynarez
David Meynarez
Chief Financial Officer,  & Treasurer
February  15, 2012
     
     


 
29

 
 
List Of Exhibits
 
Exhibit Number
Description
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)).
   
12.1** Statement Re Computation of Ratios
   
   
   
   
*
Management contract or compensatory plan.
**
Attached hereto.
 
There are no other documents required to be filed as an Exhibit as required by Item 601 of Regulation S-K.
   
   
   
   
   
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 





QSGI INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 and 2009













 
 

 

Contents

Page

   
Report Of Independent Registered Public Accounting Firm
   
Financial Statements
 
   
Consolidated Balance Sheets
   
Consolidated Statements Of Operations
   
Consolidated Statement Of Stockholders’ Equity (Deficit)
   
Consolidated Statements Of Cash Flows
   
Notes To Consolidated Financial Statements



 
 

 
 
QSGI INC. AND SUBSIDIARIES

 

Report Of Independent Registered Public Accounting Firm


Board of Directors and Stockholders
QSGI INC.
Palm Beach, Florida

We have audited the accompanying consolidated balance sheets of QSGI INC. and subsidiaries (Debtor-In-Possession) as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financing reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of QSGI INC. and subsidiaries as of December 31, 2010 and 2009 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plans regarding those matters also are described in Note 3.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


/s/ Morison Cogen LLP
Bala Cynwyd, Pennsylvania
February 15, 2012
 

 

The accompanying notes are an integral part of these consolidated financial statements. 
 Page F-3
 
 
 
 

 

QSGI INC. AND SUBSIDIARIES

(Debtor-In -Possession)
CONSOLIDATED BALANCE SHEETS
 
 
Assets
 
             
   
December 31,
 
   
2010
   
2009
 
Current Assets
           
Cash and cash equivalents
  $ 29,926     $ 31,573  
Prepaid expenses and other assets
    92,197       175,631  
Total Current Assets
    122,123       207,204  
                 
Total Assets
  $ 122,123     $ 207,204  
                 
Liabilities And Stockholders' Deficit
 
                 
Current Liabilities
               
Liabilities not subject to compromise - current
               
Accrued expenses and other liabilities
  $     $ 40,000  
Liabilities subject to compromise - current
               
Revolving line of credit
          2,918,463  
Notes payable - principal stockholder
          10,000,000  
Total Current Liabilities
          12,958,463  
                 
Liabilities subject to compromise - long term
               
Accounts payable
    4,231,670       4,231,670  
Accrued expenses and other liabilities
    11,573,769       1,516,763  
Accrued payroll
    1,171,773       1,171,773  
                 
Deferred Income Taxes
    27,300       27,300  
                 
Total Liabilities
    17,004,512       19,905,969  
                 
Redeemable Convertible Preferred Stock
    4,271,472       4,271,472  
                 
Commitments And Contingencies (Notes 2 And 10)
               
                 
Stockholders' Equity (Deficit)
               
Preferred shares: authorized 5,000,000 in 2010
               
and 2009, $0.01 par value, none issued
           
Common shares: authorized 95,000,000 in 2010 and 2009, $0.01 par value; 38,797,716 shares issued and outstanding in 2010 and 48,797,716 in 2009 of which 10,000,000 shares were contingent acquisition shares held in escrow
    387,977       387,977  
Additional paid-in capital
    16,580,282       16,528,977  
Accumulated deficit
    (38,122,120 )     (40,887,191 )
Treasury Stock, at cost: 10,000,000 shares in 2010 
     —        —  
Total Stockholders' Equity (Deficit)
    (21,153,861 )     (23,970,237 )
                 
Total Liabilities and Stockholders' Equity (Deficit)
  $ 122,123     $ 207,204  
 

The accompanying notes are an integral part of these consolidated financial statements. 
 Page F-4
 
 
 
 

 

QSGI INC. AND SUBSIDIARIES

(Debtor-In -Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
   
For The Years
 
   
Ended December 31,
 
   
2010
   
2009
 
             
Stock Option Compensation
  $ 51,303     $ 16,934  
Interest (Income) Expense, net (2010 and 2009, contractual interest expense  of $314,100 and $1,983,062, respectively)
    (1,666 )     1,837,139  
Other Income—(Gain) on Early Extinguishment of Debt
    (2,918,463 )      
                 
Income (Loss) Before Reorganization Items and
               
     Provision For Income Taxes
    2,868,826       (1,854,073 )
Reorganization Items:
               
     Professional Fees
    103,755       160,702  
Income (Loss) Before Provision For Income Taxes
               
     And Discontinued Operations
    2,765,071       (2,014,775 )
Provision For Income Taxes
          1,000  
                 
Income (Loss) Before Discontinued Operations
    2,765,071       (2,015,775 )
                 
Loss From Discontinued Operations
          (21,407,019 )
                 
Net Income (loss)
    2,765,071       (23,422,794 )
                 
Accretion To Redemption Value Of Preferred Stock
          (13,562 )
                 
Preferred Stock Dividend
          (210,617 )
                 
Net Income (Loss) Available To Common Stockholders
  $ 2,765,071     $ (23,646,973 )
                 
Income (Loss) Per Common Share --Basic & Diluted
               
     before Discontinued Operations
  $ 0.07     $ (0.05 )
Income (Loss) Per Common Share --Basic & Diluted
               
     from Discontinued Operations
  $ -     $ (0.55 )
Net Income (Loss) Per Common Share - Basic and Diluted
  $ 0.07     $ (0.60 )
                 
Weighted Average Number Of Common Shares
               
Outstanding - Basic
    38,797,716       38,797,716  
                 
Weighted Average Number Of Common Shares
               
Outstanding - Diluted
    39,594,364       38,797,716  
 
 

The accompanying notes are an integral part of these consolidated financial statements. 
 Page F-5
 
 
 
 

 

QSGI INC. AND SUBSIDIARIES

(Debtor-In -Possession)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For The Years Ended December 31, 2010 and 2009

 
               
Additional
   
Retained
   
Total
 
   
Common Stock
   
Paid-In
   
Earnings
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
(Deficit)
   
Equity
 
Balance (Deficit) -
                             
December 31, 2008
    38,547,716     $ 385,477     $ 16,723,724     $ (17,464,397 )   $ (355,196 )
                                         
Stock issued for financing
    250,000       2,500       12,500             15,000  
                                         
Stock Option Compensation
                16,934             16,934  
                                         
Preferred Stock Dividend
                (210,617 )           (210,617 )
                                         
Accretion To The Redemption
                                 
Value Of Preferred Stock
                (13,562 )           (13,562 )
                                         
Net Loss
                      (23,422,794 )     (23,422,794 )
                                         
Balance (Deficit) -
                                       
December 31, 2009
    38,797,716       387,977       16,528,979       (40,887,191 )     (23,970,235 )
                                         
Stock Option Compensation
                38,653             38,653  
                                         
Net Income
                      2,777,721       2,777,721  
                                         
Balance (Deficit) -
                                       
December 31, 2010
    38,797,716     $ 387,977     $ 16,567,632     $ (38,109,470 )   $ (21,153,861 )









The accompanying notes are an integral part of these consolidated financial statements. 
 Page F-6
 


 
 

 

QSGI INC. AND SUBSIDIARIES

(Debtor-In -Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
   
For The Years
 
   
Ended December 31,
 
   
2010
   
2009
 
Cash Flows From Operating Activities
           
Income (Loss) before discontinued operations
  $ 2,765,071     $ (2,015,775 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
Gain on Early Extinguishment of Debt
    (2,918,463 )     -  
Stock Option Compensation
    51,303       16,934  
Changes in assets and liabilities:
               
     Prepaid expenses and other assets
    83,434       (175,631 )
     Accounts payable and other liabilities
    17,008       3,263,084  
         Cash from operating activities – continuing operations
    (1,647 )     1,088,612  
         Cash from operating activities – discontinued operations
    -       (1,021,174 )
Net Cash (Used In) Provided by Operating Activities
    (1,647 )     67,438  
                 
Cash From Investing Activities
               
Cash provided by investing activities – discontinued operations
    -       2,440,534  
Net Cash Provided By Investing Activities
    -       2,440,534  
                 
Cash Flows From Financing Activities
               
Payment for financing costs
    -       (25,614 )
Net amounts paid under revolving lines of credit, net of OID
    -       (2,432,667 )
Preferred stock dividends
    -       (210,617 )
Cash used in financing activities – continuing operations
    -       (2,668,898 )
Cash from financing activities – discontinued operations
    -       -  
Net Cash Used In Financing Activities
    -       (2,668,898 )
                 
Net Decrease In Cash And Cash Equivalents
    (1,647 )     (160,926 )
                 
Cash And Cash Equivalents – Beginning Of Year
    31,573       192,499  
Cash And Cash Equivalents – End of Year
  $ 29,926     $ 31,573  
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements. 
 Page F-7
 
 
 
 

 
 
 
 
QSGI INC. AND SUBSIDIARIES

 
 
   
For the Years
 
   
Ended December 31,
 
   
2010
   
2009
 
             
Supplemental disclosure of cash flow information
           
Interest Paid
  $     $ 417,984  
                 
Supplemental schedule of non-cash financing and investing activities
               
Assets exchanged for debt forgiveness
  $     $ 500,000  
 
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.
 Page F-8
 
 
 
 

 


 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010 and 2009



1.   Basis of Presentation and Business Organization

Bankruptcy
 
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.  Since the filing date on July 2, 2009, the Company has operated as a debtor-in-possession and the consolidated financial statements have been prepared in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (FASB ASC) 852-10 “Financial Reporting During Reorganization Proceedings,” which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared.  However it does require that the financial statements for periods subsequent to the filing of a Chapter 11 case distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the period ending December 31, 2009.  The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities.  Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.  In addition, cash provided by reorganization items, if any, must be disclosed separately in the statement of cash flows.  The Company adopted FASB ASC 852-10 effective on July 2, 2009 and currently segregates those items as outlined above for all reporting periods subsequent to such date.
 
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. Upon settlement, the Company recognized a gain of $2,918,463 related to the early extinguishment of this liability. 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 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, which includes accrued interest of $159,000 and cancellation of 12,000,000 warrants. Accordingly, as of June 30, 2010, the Company has reclassified this balance as accrued expenses and other liabilities under the caption Liabilities Subject to Compromise—Long-term in the accompanying condensed consolidated balance sheets. In accordance with the settlement agreement, 10,000,000 contingent acquisition shares held in escrow were released and reflected as Treasury Stock on the December 31, 2010 balance sheet. On March 3, 2011, the shares in Treasury Stock were cancelled.
 
 
 
 
F-9

 
 
 
 
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.
 
Discontinued Operations
 
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 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 1, 2009 the Company also ceased reporting the results of operations of the Data Security and Compliance and the Data Center Maintenance Services segment and is reporting them as discontinued operations.  As part of the plan of bankruptcy, both segments assets were sold.
 
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 approximately $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 approximately $2,140,000.
 
The operation of the above mentioned subsidiaries have been reported as discontinued operations for all years presented and the related assets and liabilities reflected as assets and liabilities of discontinued operations at December 31, 2010 and 2009 (see Note 4).
 
Bankruptcy Proceedings Subsequent to December 31, 2010
 
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. 
 
 
 
 
F-10

 
 
 
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.  On May 5, 2011, the Judge entered the order confirming the plan of reorganization.
 
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.
 
The close of the Exchange Agreement transaction (the “Closing”) took place June17, 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.  The share exchange was accounted for as a “reverse acquisition”, since the KruseCom shareholders own a majority of the outstanding shares of the company’s common stock immediately following the share exchange.
 
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.
 
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.
 
2. Summary of Significant Accounting Policies
 
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.
 
 
 
 
F-11

 
 
 
 
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.
 
Revenue Recognition
 
For product sales, the Company recognizes revenue at the time products are shipped and title is transferred, which is in accordance with the stated shipping terms.  Revenue is recognized in accordance with these shipping terms so long as a purchase order, electronic, written or phone commitment has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectibility is deemed probable.  If uncertainties exist regarding customer acceptance or collectibility, revenue is recognized when those uncertainties have been resolved.  The Company provides a limited warranty on some of its products.  The Company analyzes its estimated warranty costs and provides an allowance as necessary, based on experience.  At December 31, 2010 and 2009, a warranty reserve was not considered necessary.
 
Cash And Cash Equivalents
 
The Company considers all liquid instruments purchased with maturity of three months or less to be cash equivalents.
 
Concentration of Credit Risk Involving Cash
 
The Company may have deposits with a financial institution which at times exceed the Federal Deposit Insurance Corporation’s deposit insurance coverage of $250,000.
 
Accounts Receivable
 
Accounts receivable are stated at the amount management expects to collect from outstanding balances.  Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts.  Balances which are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.
 
 

 
F-12

 
 
 
Inventories
 
Inventories consist primarily of computer hardware, parts and related products, and are valued at the lower of average cost or market.  Substantially all inventory items are finished goods.  The allocated cost of parts disassembled from purchased computer hardware is based on the relative fair value of the disassembled components. The allocation of cost does not exceed the original cost of the computer hardware. The Company closely monitors and analyzes inventory for potential obsolescence and slow-moving items on an item-by-item basis.  Inventory items determined to be obsolete or slow moving are reduced to net realizable value.  Inventory in-transit consists of items of inventory for which the Company has purchased and assumed the risk of loss, but which has not yet been received into stock at the Company’s facility.
 
Property And Equipment
 
Property and equipment is stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged of operations as incurred.  Upon retirement or sale, any assets disposed are removed from the accounts and any resulting gain or loss is reflected in the results of operations.

Property, equipment, leasehold improvements, computer hardware and software are depreciated or amortized using the straight-line method over two to five-year periods.  Leasehold improvements are amortized over the life of the lease or the estimated life of the asset, whichever is less.

Impairment losses on long-lived assets, such as equipment and improvements, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable.  Impairment losses are then measured by comparing the fair value of assets to their carrying amounts.
 
Advertising Costs
 
Advertising costs are expensed on the first date the advertisement takes place.  

Interest Expense
 
The Company had contractual interest expense obligations in the amount of $314,100 and $1,983,062 for the years ended December 31, 2010 and 2009, respectively.  However, the company only recorded interest expense to the extent that it will be paid during the Chapter 11 proceedings in the amount of $1,837,139 for the year ending December 31, 2009.
 
Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is provided against net deferred tax assets where the Company determines realization is not currently judged to be more likely than not.
 
 
 
 
 
F-13

 
 

 
Comprehensive Income

The Company follows FASB ASC 220-10-45 in reporting comprehensive income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.   Since the Company does not have any items of comprehensive income, the net loss and comprehensive loss are the same.

Income (Loss) Per Share
 
The Company follows Financial Accounting Standards Codification (“FASB-ASC”) 260, “Earnings per share”, resulting in the presentation of basic and diluted earnings per share. Because the Company reported a net loss in 2009 common stock equivalents including stock options and warrants were anti-dilutive, therefore, the amounts reported for basic and dilutive loss per share were the same.

In 2010, the Company included 796,648 weighted average common share equivalents related to stock options because their exercise price was lower than the average market price of the common shares and therefore their effect would have been dilutive. The Company also excluded 1,911,111 weighted average common share equivalents related to convertible preferred stock because the exercise price was greater than the average market price of the common shares and therefore their effect would have been anti-dilutive.

In, 2009, the Company excluded 821,199 weighted average common share equivalents related to stock options and 1,911,111 weighted average common share equivalents related to convertible preferred stock because their effect would have been anti-dilutive, since there was a net loss for the year.
Originally, there were 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 were being held in escrow until June 2010 settlement at which time the shares were returned to the Company as Treasury Stock (Note 1).

Fair Value Of Financial Instruments
 
The carrying amounts of financial instruments including cash and cash equivalents, accounts payable and accrued expenses approximate fair value due to the relatively short maturity of these instruments. The carrying value of the notes payable approximates fair value based on the incremental borrowing rates currently available to the Company for financing with similar terms and maturities.

Stock-Based Compensation

The Company follows FASB ASC 718 (formerly SFAS No. 123R) in accounting for Stock-Based compensation.  FASB ASC 718 requires measurement of all employee stock-based compensation awards using a fair value method and the recording of such expense in the consolidated financial statements. In addition the adoption of FASB ASC 718 requires additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements.




 
F-14

 

 
Recently Adopted Accounting Pronouncements

As of December 31, 2010 and for the year then ended, there were no recently adopted accounting pronouncements that had a material effect on the Company’s financial statements.

Reclassifications

Certain reclassifications were made to the 2009 financial statements in order to conform to the 2010 financial statements presentation.

Recently Issued Accounting Pronouncements Not Yet Adopted

As of December 31, 2010, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.

3.  Management's Plans, Liquidity and Going Concern
 
The Company was operating under Chapter 11 of the United States Bankruptcy Code as of year-end 2010 and 2009.  As of December 31, 2009, the two secured creditors were working with the Company to remove their claims and provide mutual releases.  The Company settled with the two secured creditors in 2010 which allowed it to move forward and present a Plan of Reorganization to the remaining unsecured creditors (Note 1).   The plan became effective June 17, 2011 when it merged with KruseCom, LLC by exchanging 190,000,000 shares of the Company for 100% of the units of KruseCom, LLC.  The Company then emerged from Chapter 11 Bankruptcy on August 26, 2011 (Note 1).
 
4.   Discontinued Operations
 
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.
 
 During the year ended December 31, 2010, there was no activity associated with the Network Infrastructure Design and Support Segment. During the year ended December 31, 2009, the Company expensed approximately $210,000.  This was the remaining net equity in CCSI of which $1,608,000 were assets and $1,398,000 were liabilities.  This charge was included in the loss from discontinued operations.
 
As of July 1, 2009, the Company ceased reporting the results of operations of the Data Security and Compliance and Data Center Maintenance Segment separately and is reporting it as discontinued operations.  This is because 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. During the year ended December 31, 2010, there was no activity associated with the Data Security and Compliance and Data Center Maintenance Segment.
 
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 approximately $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 approximately $1,400,000. During the year ended December 31, 2010, there was no activity associated with Seller. The results of operations of Seller for the year ended December 31, 2009 have been classified as discontinued operations.
 
 
 
 
F-15

 
 
 
 
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 approximately $2,140,000. During the year ended December 31, 2010, there was no activity associated with DSC division of QSGI INC. The results of operations of DSC division of QSGI INC. for the year ended December 31, 2009 have been classified as discontinued operations.
 
The following summarizes the operating results of QSGI INC.’s discontinued operations.
 
    2010     2009  
                 
Revenue    $ -     $ 13,643,160  
Cost of Sales      -       14,005,757  
Selling And Administrative Expenses      -       6,333,475  
Depreciation      -       375,437  
Loss on impairment      -       13,366,601  
Loss on disposal of assets      -       968,909  
Net loss from discontinued operations    $ -       21,407,019  
 
5.   Financing Arrangements
 
Revolving Line Of Credit
 
On June 5, 2008, the Company entered into a Senior Security Purchase Agreement with Victory Park Capital.  As of July 1, 2009, the Company ceased borrowing from Victory Park Capital.  This is because 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.
 
As of January 1, 2009, the Company had requested an over advance and as a result was paying interest at fifteen percent (15%) per annum, with all principal and interest due December 1, 2010.
 
The Company incurred $486,250 in origination fees paid to Victory Park Capital, including the issuance of 1,125,000 shares of the Company’s common stock.  These fees were recorded as a reduction of the loan proceeds.  The original issue discount will be recognized as interest expense on a straight-line basis over the thirty month term of the financing agreement.  For the year ended December 31, 2010 and 2009, the Company recognized $0 and $476,240 of interest expense related to the original issue discount respectively.  These costs have the effect of making the interest rate approximately 4% higher than the stated rate for thirty months based on anticipated future borrowings.
 
 
 
 
F-16

 
 
 
The Company also signed a Registration Rights Agreement with Victory Park Capital where upon written request by Victory Park Capital to the Company, the Company within 45 days shall file a registration statement.  This registration statement must be declared effective 90 days from the filing deadline.  The registration statement must remain effective until the underlying securities are sold.  If the filing deadline, the effectiveness deadline, or the continued effectiveness requirement is not met, the Company shall pay Victory Park Capital, in cash, one and one half percent (1.5%) of the aggregate outstanding principal amount of investor notes until such filing failures are cured.  The Registration Rights Agreement does not provide for any limitation as to the maximum potential consideration to be paid.  At December 31, 2010 and 2009, the Company has not recorded any liability for the registration rights payment arrangement as this amount cannot be determined and no demand by Victory Park Capital has been made.
 
As part of the Amended and Restated Securities Purchase Agreement dated July 10, 2008, 750,000 additional shares were due to Victory Park Capital.  The value of the shares issued was $120,000.  This amount was recorded as additional debt issuance costs in July 2008 and will be recognized as interest expense on a straight -line basis over the thirty month term of the financing agreement.  During the year ended December 31, 2010 and December 31, 2009, the Company recognized $0 and $24,000 of interest expense related to the original issue discount, respectively.  Additionally upon the earlier of December 1, 2010 or the date of the voluntary prepayment of all Notes due to Victory Park Capital, if the Company has not issued a total of 2,600,000 shares of common stock to Victory Park Capital, then the Company shall owe Victory Park Capital the result of 2,600,000 shares of common stock minus the number of shares of common stock issued to date multiplied by fifty percent (50%).
 
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. Upon settlement, the Company recognized a gain of $2,918,463 related to the early extinguishment of this liability. 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.
 
6.  Redeemable Convertible Preferred Stock
 
In December 2005, the Company completed a private placement with a group of investors for net proceeds of approximately $4,200,000.  The Company received the proceeds in two payments.  The first payment, net of offering costs, of $1,967,220 was received at the time of signing and $2,236,301 was received at the beginning of January 2006.
 
 
 
 
F-17

 
 
 
 
The preferred securities issued in the private placement consist of 143,333 shares of 6% Series A Preferred Stock with a face value of $30 per share.  The 6% dividend is payable quarterly in cash or additional preferred securities at the Company’s option.  Each Series A Preferred Share is convertible into approximately 13.33 shares of the Company’s common stock.  The Company can require the holders to convert the shares if the Company’s common stock price maintains $2.75 for 20 consecutive business days.  The Company can redeem the preferred securities at any time after December 10, 2007.  Additionally, the holder may demand redemption in cash, for the original $30 per share, at any time after December 10, 2010.  Because these preferred securities are conditionally redeemable, they are classified as temporary equity in the balance sheet.  The Company recorded the preferred stock at fair value as of the date of issuance and have subsequently accreted changed in the redemption value from the date of issuance to the earliest redemption date using the interest method.
 
7. Stockholders’ Equity
 
Contingent Common Shares
 
As of December 31, 2010, there were 10,000,000 shares held in escrow.  They were contingent shares related to the acquisition of CCSI.  The contingent shares were cancelled on March 3, 2011 in accordance with the settlement agreement between the owner of CCSI and the Company in June 2010 at which time the shares were returned to the Company as Treasury Stock (Note 1).
 
Stock Option Grants
 
Stock option compensation expense in the amount of $51,303 and $16,934 was recorded in 2010 and 2009, respectively.
 
 
 
 
F-18

 
 
 
A summary of stock option activity is as follows:

   
2010
   
2009
 
         
Weighted -
         
Weighted -
 
         
Average
         
Average
 
         
Exercise
         
Exercise
 
   
Shares
   
Price
   
Shares
   
Price
 
                         
Outstanding -
                       
   January 1
    13,324,834     $ 1.671       13,324,834     $ 1.671  
Granted
    1,250,000       .09              
Exercised
                       
Forfeited
    346,500       2.141              
                                 
Outstanding at December 31
    14,228,334     $ 1.508       13,324,834     $ 1.671  
                                 
Exercisable at December 31
    14,228,334     $ 1.508       13,324,834     $ 1.671  
 
There were no options issued to employees in 2009.   During August 2010, the Company granted 1,250,000 options for common stock as compensation to its Board of Directors. In August 2010, the Company issued options to purchase 1,250,000 shares of common stock at a purchase price of $.09 per share to members of the board of directors. Using the Black-Scholes Option Pricing Formula, the options were valued at $112,480, fair value, vesting in monthly equal installments of 416,670 beginning on the grant date over the next three years. The expense is being recognized based on vesting terms over a three-year period.  For the year ending December 31, 2010, the Company recognized $12,650 of expense. The options are still outstanding as of December 31, 2010.
 
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award, with the following assumptions for 2010: 0% dividend yield, expected volatility, based on the Company’s historical volatility of 444% in 2010, risk-free interest rate of .78% in and expected option life of three years.
 
As of December 31, 2010, there was $152,780 of unrecognized compensation expense related to non-vested market-based share awards that is expected to be recognized through August 2013.
 
 

 
F-19

 
 
 
The following table summarizes information about the options outstanding at December 31, 2010:
 
       
     
Exercisable
 
Outstanding Stock Options
 
Stock Options
             
   
Weighted -
       
   
Average
Weighted -
   
Weighted -
Range Of
 
Remaining
Average
   
Average
Exercise
 
Contractual
Exercise
   
Exercise
Prices
Shares
Life
Price
 
Shares
Price
             
$ 0.026
1,740,000
1.1
$0.026
 
1,740,000
$ 0.026
   0.09
1,250,000
2.6
   0.09
 
1,250,000
   0.09
   0.16
1,955,000
5.3
0.16
 
1,955,000
0.16
   1.01 to 1.90
2,303,334
3.6
1.684
 
2,303,334
1.684
   2.00 to 2.13
2,255,000
3.9
2.007
 
2,255,000
2.007
   2.50 to 2.75
4,725,000
4.2
2.659
 
4,725,000
2.659
             
 
14,228,334
     
14,228,334
 

Warrants
 
In July 2008, the Company issued 12,000,000 warrants with an exercise price of $0.30 as part of the acquisition of Contemporary Computer Services, Inc. (Note 4).  Three million of these warrants are exercisable every six months beginning July, 2010 and expire five years from the date the warrants are exercisable.  A schedule of common stock warrant activity is as follows:
 
 
 
 
 
F-20

 

 
A summary of warrant activity is as follows:

   
2010
   
2009
 
         
Weighted -
         
Weighted -
 
         
Average
         
Average
 
         
Exercise
         
Exercise
 
   
Shares
   
Price
   
Shares
   
Price
 
                         
Outstanding -
                       
   January 1
    12,000,000     $ 0.30       12,583,333     $ 0.45  
Granted
    —12,000,000             —12,000,000        
Exercised
                       
Expired/Cancelled
    (12,000,000 )     (0.30 )     583,333       3.60  
                                 
Outstanding at December 31
        $       12,000,000     $ 0.30  
                                 
Exercisable at December 31
        $       12,000,000     $ 0.30  
 
As part of the settlement agreement with John Riconda all outstanding warrants were cancelled (Note 1).
 
 
 
 
 

 
 
F-21

 


8.  Income Taxes

The expense for income taxes consists of the following:

   
2010
   
2009
 
             
Current
  $     $ 1,000  
Deferred
      —         —  
                 
    $     $ 1,000  

The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:

   
2010
   
2009
 
Deferred Tax Assets
           
Liabilities and reserves
  $  — 901,489     $  — 901,489  
Net operating loss carryforwards
    12,624,616 1258401       12,584,801 1258401  
Stock options
    104,272       84,263  
      12,728,888       12,669,065  
Valuation allowance
    (12,728,888 )     (12,669,065 )
        —         —  
                 
Deferred Tax Liabilities
               
Prepaid expenses
    27,300       27,300  
      27,300       27,300  
                 
Net Deferred Tax Asset (Liability)
  $ (27,300 )   $ (27,300 )

The current and long-term components of the net deferred tax liability are as follows:

   
2010
   
2009
 
             
Current deferred tax asset
  $     $  
Long-term deferred tax liability
    (27,300 )     (27,300 )
                 
    $ (27,300 )   $ (27,300 )
 
 
 
 
 
 
F-22

 
 

 
The reconciliation of the effective tax rate with the statutory federal income tax benefit rate is as follows:
 
    2010     2009  
             
 Statutory federal rate     34 %     34 %
 State income taxes, net of federal benefits     5       5  
 Goodwill impairment     -       -  
 Change in valuation allowance     (39 )     (39 )
      - %     - %
 
The Company’s ability to utilize the cumulative tax net operating loss carry forward of approximately $33,000,000 at December 31, 2010 against future taxable income will begin to expire on December 31, 2019 and is subject to Section 382 limitations, as defined by Section 382 of the Internal Revenue Code of 1986, of approximately $594,000 per year.  Our net operating loss carry-forward may be subject to significant future limitations, if our cumulative ownership change percentage increases by more than 50% over a three-year period, as defined by Section 382.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.  The liability for accrued expenses included accrued interest of $1,000 at December 31, 2009. There are no unrecognized tax benefits as of December 31, 2010 and no income tax expense has been included in accompanying consolidated statement of operations for the year ending December 31, 2010. Tax years from 2006 through 2009 remain subject to examination by major tax jurisdictions.

9.  Benefit Plan

The Company has a 401(k) defined contribution benefit plan for all eligible employees.  The Company contributes 3% of eligible employees’ salaries to the plan.

No contributions were made to the plan during 2010. The Company contributed $179,124 to the plan during the year ended December 31, 2009.

10.  Commitments And Contingencies

Lease
 
All lease agreements were terminated as a result of the filing of the chapter 11 bankruptcy. Accordingly, there is no rent expense for the year ended 2010. Rent expense and other charges totaled $264,861 for the year ended December 31, 2009.
 
Environmental
 
The Company recycles used equipment that may contain hazardous materials.  The Company contracts with a licensed waste management company for the purpose of recycling or destruction of these materials in accordance with all applicable environmental standards.  Therefore, management believes it is not necessary to record a liability for environmental contingencies in the accompanying consolidated financial statements.
 
 
 
 
F-23

 
 
 
Employment Contracts
 
In July, 2009, the Company filed for chapter 11 bankruptcy protection which cancelled the contracts.

Legal Proceedings
 
From time to time, the Company may be party to legal proceedings which arise generally in the ordinary course of business.  The Company may be involved in legal proceedings which may have a material adverse affect on the financial position, results of operations or cash flows of the Company. Therefore estimates of potential impact of legal proceedings on the Company could change in the future depending upon matters in suit and the course of specific litigation.    All prepetition claims were brought forward during the Chapter 11 proceedings and were settled with the Company’s common stock.

11.  Related Party Transactions

In 2009, the Company had sales to one customer related to one stockholder and officer of the Company.  Sales to this customer for the years ended December 31, 2010 and 2009 amounted to approximately $0 and $98,850, respectively.
 
In November 2007, the Company exercised an option to purchase a portion of the assets on lease from Varilease Technology Finance Group for approximately $35,000.  This purchase reduces the monthly rental by approximately $10,600 per month.  Accounts payable to this vendor amounted to $12,516 at December 31, 2010 and 2009.
 
12.  Subsequent Events
 
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. The Agreement provides for (1) the purchase of $412,500 of operating assets, customer lists and all operating agreements formerly used by the Seller to manufacture and install its products and generate sales, (2) the purchase of $1 million of existing accounts receivable, (3) the conversion of $565,000 of the Seller’s existing bank note (4) the issuance of a $412,500 Seller’s note bearing interest at 7.5% and maturing December 5, 2016 with minimum EBITDA thresholds and subordinated to the Bank Note noted below and (5) an earn-out based on EBITDA milestones and multiples over a five-year period to be paid in the Company’s stock or cash with a maximum of $25 million total payout. The Seller additionally signed non-competition agreements, non-disclosure agreements and five year employment agreements with the Company.

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.
 
 
 
 
 
F-24

 
 

 
On November 4, 2011 and pursuant to the Registrant’s Plan of Reorganization, a distribution of $50,000 and 10,000,000 common shares was to be distributed to Allowed General Unsecured Claim holders to extinguish all unsecured indebtedness. Additionally, 425,000 common shares are to be distributed for the extinguishment of $4,216,000 in redeemable convertible preferred stock. All distributions were to occur no later than 180 days after Plan Confirmation. The distribution was completed on November 4, 2011, thus increasing the total outstanding shares of the Registrant from 221,172,716 to 231,597,819.
 
 
 
 
 
 
 
 
 F-25