UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-30178
VIEW SYSTEMS, INC.
______________________________________________________________
(Exact name of small business issuer as specified in its charter)
Nevada 59-2928366
________________________ __________________________________
(State of incorporation) (I.R.S. Employer Identification No.)
1550 Caton Center Drive, Suite E, Baltimore, Maryland 21227
________________________________________________________________
(Address of principal executive offices)
(410) 242-8439
________________________________________________________________
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of July 17, 2006, View Systems, Inc. had 90,702,422 shares of common stock
outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements................................................2
Item 2. Management's Discussion and Analysis or Plan of Operation...........9
Item 3. Controls and Procedures............................................15
PART II: OTHER INFORMATION
Item 4. Other Information..................................................16
Item 6. Exhibits...........................................................16
Signatures..................................................................17
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial information set forth below with respect to our statements of
operations for the three and six month periods ended June 30, 2006 and 2005 is
unaudited. This financial information, in the opinion of management, includes
all adjustments consisting of normal recurring entries necessary for the fair
presentation of such data. The results of operations for the six month period
ended June 30, 2006 are not necessarily indicative of results to be expected
for any subsequent period.
2
View Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
June 30, December 31,
2006 2005
------------- ------------
Current Assets
Cash $ 67,434 $ 8,708
Accounts Receivable (Net of Allowance
of $9,369 and $64,486 as of June 30,
2006 and December 31, 2005) 84,302 280,001
Inventory 156,843 72,012
------------- ------------
Total Current Assets 308,579 360,721
------------- ------------
Property & Equipment (Net) 28,542 18,043
------------- ------------
Other Assets
Licenses 1,676,854 1,626,854
Due from Affiliates 116,875 95,575
Deposits 9,646 7,291
------------- ------------
Total Other Assets 1,803,375 1,729,720
------------- ------------
Total Assets $ 2,140,496 $ 2,108,484
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 483,361 $ 343,430
Accrued Expenses 44,679 43,229
Accrued Interest 90,467 77,000
Accrued Royalties 37,500 75,000
Loans from Shareholder 64,000 64,000
Notes Payable 440,000 110,000
------------- ------------
Total Current Liabilities 1,160,007 712,659
------------- ------------
Stockholders' Equity
Preferred Stock, Authorized 10,000,000 Shares,
$.01 Par Value, Issued and outstanding 7,171,725 71,717 71,717
Common Stock, Authorized 100,000,000 Shares,
$.001 Par Value, Issued and Outstanding 91,837,422 91,838 -
Issued and Outstanding 90,775,752 - 90,776
Additional Paid in Capital 19,413,609 19,293,804
Retained Earnings (Deficit) (18,596,675) (18,060,472)
------------- ------------
Total Stockholders' Equity 980,489 1,395,825
------------- ------------
Total Liabilities and Stockholders' Equity $ 2,140,496 $ 2,108,484
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
View Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the For the
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2006 2005 2006 2005
-------------- ------------- ------------- -------------
Revenues, Net $ 222,403 $ 195,914 $ 624,978 $ 481,556
Cost of Sales 111,457 125,180 318,739 229,508
-------------- ------------- ------------- -------------
Gross Profit (Loss) 110,946 70,734 306,239 252,048
-------------- ------------- ------------- -------------
Operating Expenses
Business Development 73,700 17,617 113,377 32,646
General & Administrative 81,835 25,238 194,747 94,020
Professional Fees 52,137 31,341 103,432 69,856
Salaries & Benefits 211,665 148,812 416,871 234,365
-------------- ------------- ------------- -------------
Total Operating Expenses 419,337 223,008 828,427 430,887
-------------- ------------- ------------- -------------
Net Operating Income (Loss) (308,391) (152,274) (522,188) (178,839)
-------------- ------------- ------------- -------------
Other Income(Expense)
Interest Expense (8,669) (5,538) (14,015) (5,538)
-------------- ------------- ------------- -------------
Total Other Income(Expense) (8,669) (5,538) (14,015) (5,538)
-------------- ------------- ------------- -------------
Net Income (Loss) $ (317,060) $ (157,812) $ (536,203) $ (184,377)
============== ============= ============= =============
Net Income (Loss) Per Share $ (0.00) $ (0.00) $ (0.01) $ (0.00)
============== ============= ============= =============
Weighted Average Shares
Outstanding 91,106,170 76,866,047 91,106,170 76,866,047
============== ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements
4
View Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Additional Retained
Preferred Common Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit)
------------- ----------- ------------- ---------- ------------- -------------
Balance, December 31, 2004 - $ - 76,533,922 $ 76,534 $ 17,119,596 $(15,691,496)
January - March 2005 -
shares issued for cash - - 155,000 155 15,345 -
January - March 2005 -
shares issued in payment
of accounts payable - - 128,000 128 18,872 -
January - March 2005 -
shares issued for services - - 1,805,000 1,805 191,335 -
April - June 2005 -
shares issued for cash - - 2,287,500 2,288 114,713 -
April - June 2005 -
shares issued for services - - 1,242,000 1,242 77,004 -
July - September 2005 -
shares issued for cash - - 612,000 612 55,588 -
July - September 2005 -
shares issued for services - - 150,000 150 37,998 -
July - September 2005 -
shares issued 7,171,725 71,717 - - - -
October - December 2005 -
shares issued for cash - - 953,330 953 122,880 -
October - December 2005 -
shares issued for services - - 6,909,000 6,909 1,540,473 -
Net loss for the year ended
December 31, 2005 - - - - - (2,368,976)
------------- ----------- ------------- ---------- ------------- -------------
Balance, December 31, 2005 7,171,725 71,717 90,775,752 90,776 19,293,804 (18,060,472)
January - March 2006 -
shares issued for cash - - 100,000 100 9,900 -
January - March 2006 -
shares issued for services - - 160,000 160 15,840 -
April - June 2006 -
shares issued for cash - - 60,000 60 5,940 -
April - June 2006 -
shares issued for services - - 1,075,000 1,075 121,125 -
Reclassification of a
receipt of proceeds from a
loan which was previously
reflected as a payment for
stock - - (333,330) (333) (33,000) -
Net loss for the period
ended June 20, 2006 - - - - - (536,203)
------------- ----------- ------------- ---------- ------------- -------------
Balance, June 30, 2006 7,171,725 $ 71,717 91,837,422 $ 91,838 $ 19,413,609 $(18,596,675)
============= =========== ============= ========== ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
5
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
--------------------------------
2006 2005
---------------- ---------------
Cash Flows from Operating Activities:
Net Income (Loss) $ (536,203) $ (184,377)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 6,000 6,400
Adjustment to allowance for doubtful accounts (55,117) -
Stock issued for services 138,200 71,150
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable 250,816 94,370
Inventories (84,831) 35,000
Deposits (2,355) -
Increase (Decrease) in:
Accounts Payable 139,931 (164,898)
Accrued Expenses 1,450 (64,346)
Accrued Interest 13,467 -
Accrued Royalties (37,500) -
---------------- ---------------
Net Cash Provided (Used) by Operating Activities (166,142) (206,701)
Cash Flows from Investing Activities:
Purchases of equipment (16,499) (1,115)
Purchase of licenses (50,000) -
Funds advanced (to) from affiliated entities (21,300) (4,901)
---------------- ---------------
Net Cash Used In Investing Activities (87,799) (6,016)
Cash Flows from Financing Activities:
Fund provided by issuance of notes payable 296,667 -
Proceeds from stock issuance 16,000 132,500
---------------- ---------------
Net Cash Provided by Financing Activities 312,667 132,500
---------------- ---------------
Increase (Decrease) in Cash 58,726 (80,217)
Cash and Cash Equivalents at Beginning of Period 8,708 173,486
---------------- ---------------
Cash and Cash Equivalents at End of Period $ 67,434 $ 93,269
================ ===============
The accompanying notes are an integral part of these consolidated financial statements
6
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
For the Six Months Ended June 30,
--------------------------------
2006 2005
---------------- ---------------
Cash Paid For:
Interest $ - $ 138
Income Taxes $ - $ -
Non-Cash Investing and Financing Activities:
Stock issued in payment of accounts payable $ - $ 19,000
The accompanying notes are an integral part of these consolidated financial statements.
7
View Systems, Inc.
Notes to the Consolidated Financial Statements
June 30, 2006
GENERAL
View Systems, Inc. (the Company) has elected to omit substantially all
footnotes to the financial statements for the six months ended June 30, 2006
since there have been no material changes (other than indicated in other
footnotes) to the information previously reported by the Company in their
Annual Report filed on the Form 10-KSB for the twelve months ended December
31, 2005.
UNAUDITED INFORMATION
The information furnished herein was taken from the books and records of the
Company without audit. However, such information reflects all adjustments
which are, in the opinion of management, necessary to properly reflect the
results of the interim period presented. The information presented is not
necessarily indicative of the results from operations expected for the full
fiscal year.
8
In this report references to "View Systems," "we," "us," and "our" refer to
View Systems, Inc. and its subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission ("SEC") encourages companies to
disclose forward-looking information so that investors can better understand
future prospects and make informed investment decisions. This report contains
these types of statements. Words such as "may," "will," "expect," "believe,"
"anticipate," "estimate," "project," or "continue" or comparable terminology
used in connection with any discussion of future operating results or
financial performance identify forward-looking statements. You are cautioned
not to place undue reliance on the forward-looking statements, which speak
only as of the date of this report. All forward-looking statements reflect
our present expectation of future events and are subject to a number of
important factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EXECUTIVE OVERVIEW
Our product lines are related to visual surveillance, intrusion detection and
physical security. Our principal products include:
.. SecureScan Concealed Weapons Detection System - a walk-through concealed
weapons detector which uses passive magnetic sensing technology and
location algorithms to accurately pinpoint the location, size and number
of threat objects. The control unit for this patented product combines
the magnetic and video information in a manner that allows it to be
stored and displayed for easy recognition and auditory warning. The
software system's architecture allows for easy integration of biometrics
and access control devices.
.. Fingerprint biometric verification systems, magnetic door locks and
central monitoring or video command centers which can be combined with
our principal products.
.. Passport and driver's license verification system for positive
identification in correctional facilities, large government and
commercial office buildings combined with our concealed weapons
detection SecureScan.
.. RADView - a patented integrated neutron and gamma-ray radiation
sub-system which are being integrated into other detection systems.
.. ViewMaxx Digitial Video products - a high-resolution, digital video
recording and real-time monitoring system.
.. Visual First Responder - a lightweight, wireless camera system housed
in a tough, waterproof flashlight body. The camera systems sends
real-time images back to a video monitor at a command post located
outside the exclusion zone or containment area. The Visual First
Responder is able to transmit high quality video in the most difficult
environments. It uses a triple-diversity antenna system that minimizes
signal distortion in urban environments.
Management believes that heightened attention to personal threats, potential
large scale destruction and theft of property in the United States along with
spending by the United States government on Homeland Security will continue to
drive growth in the market for security products.
In June 2006 we previewed our Biometric SecureScan III which includes positive
identification and biometric verification capabilities. The SecureScan III
includes a fingerprint identification and verification system, state-issued
identification scanning device for driver's licenses and passports, and a
visitor badge printing system.
We intend to integrate technology to sense enriched nuclear material into our
SecureScan and our Visual First Responder products. This technology will
allow our products to detect enriched nuclear material that may be used to
build nuclear based explosive devices or for creating radiological disasters.
In addition, this technology will be used in stand alone handheld portable
detectors. This technology is based on existing patents owned by the United
States government and is licensed exclusively to View Systems for the purpose
of commercializing it.
9
For the next twelve months our primary challenge will be to develop our sales
and distribution network into additional regions and markets in the United
States and abroad. We intend to increase sales by offering demonstrations of
our products in specific geographical areas to potential customers or at
region specific trade shows, such as sheriff's conventions, court
administrators' meetings, civil support team, state police shows and dealers
shows. When a demonstration results in a sale of one of our products, then we
attempt to expand that market by contacting other potential customers in the
area, such as, correctional facilities, courthouses and other municipal
buildings. After several sales in a particular geographic area management
will decide whether it is appropriate to open a sales and service office.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred losses for the past two fiscal years and had a net loss of
$317,060 at June 30, 2006. Our revenues from product sales have been
increasing but are not sufficient to cover our operating expenses. Our
auditors have expressed substantial doubt that we can continue as a going
concern unless we obtain financing.
Historically, we have relied on revenues, debt financing and sales of our
common stock to satisfy our cash requirements for working capital. For the
six month period ended June 30, 2006 (the "2006 six month period") we received
cash from revenues of $624,978, proceeds of $296,667 from debt financing and
$16,000 from sales of our common stock. For the six month period ended June
30, 2005 (the "2005 six month period"), we received cash from revenues of
$481,556 and received proceeds of $132,500 from the sale of our common stock.
Management intends to finance our operations with revenue from product sales
and any cash short falls will be addressed through equity or debt financing.
In December 2005 we completed debt financing to fund operations in the short
term. We entered into a subscription agreement, discussed below in
"Commitments and Contingent Liabilities", that provides for the purchase of
convertible promissory notes through $100,000 installments over a five month
period. As of June 30, 2006, we have received funds of $296,667 from this
subscription agreement and we expect to receive an additional approximate
$170,000 under this agreement. We will use this cash for marketing, working
capital, and to enhance our presence in other geographical regions.
At our current revenue levels we will require an additional $500,000 during
the next six months to cover our operating costs of approximately $100,000 per
month. These operating costs include cost of sales, general and
administrative expenses, salaries and benefits and professional fees related
to contracting engineers. We may rely on equity financing to raise additional
funds; however, as of the date of this filing we have approximately 9,000,000
authorized common shares of common stock remaining. Management is taking
steps to increase our authorized common stock within the next 60 days to
provide shares for additional financing.
Management believes revenues will continue to increase but not to the point of
profitability in the short term. We will need to continue to raise additional
capital, both internally and externally, to cover cash shortfalls and to
compete in our markets. We cannot assure you that we will be able to obtain
financing on favorable terms and if we cannot obtain financing, then we may be
required to reduce our expenses and scale back our operations.
COMMITMENTS AND CONTINGENT LIABILITIES
Our base rent for operating leases related to our principal office and
manufacturing facility is approximately $2,870 per month, with an annual rent
escalator of 3%. At December 31, 2005, future minimum payments for operating
leases related to our office and manufacturing facility were $97,646 through
December 31, 2008. We also lease two additional offices. We lease a 1,299
square foot sales, engineering and manufacturing office in the East Point
Business Center in Jacksonville, Florida. This lease has a base rent of
approximately $1,500 with a 4% annual escalator and expires on January 1,
2008. The second sales and engineering office is located in Office World
Plaza in Lomita, California, near Los Angeles. We lease this office for $850
per month and this lease expires February 28, 2007.
10
Our total current liabilities increased to $1,160,007 at June 30, 2006
compared to $712,659 at December 31, 2005. The increase was primarily the
result of notes payable related to the subscription agreement discussed below.
At June 30, 2006, we are in default on a $110,000 note payable to a former
stockholder of Xyros Technology which was due in 1999. We negotiated to repay
the loan as cash flows permit and this debt remains outstanding. We are in
doubt about the intentions, will or ability of the note holder to attempt
collection of this debt.
Subscription Agreement
We entered into a Subscription Agreement, dated December 23, 2005, with three
accredited investors; Starr Consulting, Inc., Active Stealth, LLC, and KCS
Referral Service LLC (the "Subscribers"). We agreed to sale and the
Subscribers agreed to purchase convertible promissory notes and warrants.
However, on January 6, 2006, the Subscribers consented to the removal of the
warrants from the subscription agreement, with the understanding that the
warrants would be reinstated after we increased our authorized common stock
and the shares underlying the warrants would be registered at a later date.
The Subscribers did not receive any other additional consideration for the
removal of the warrants. The Subscribers agreed to purchase up to an
aggregate of $500,000 of 8% promissory notes convertible into shares of our
common stock at a per share conversion price of $0.10. The notes are due and
payable by December 31, 2006. The Subscribers agreed to purchase the
promissory notes over a 5 month period in $100,000 per month installments;
however, other than the contractual agreement there is no guarantee that the
Subscribers will purchase the promissory notes. In March 2006 we terminated
this agreement with KCS Referral Service LLC.
Starr Consulting, Inc. agreed to purchase convertible promissory notes in the
aggregate amount of $166,667, which may be converted into 1,666,667 shares of
our common stock. Active Stealth, LLC and KCS Referral Service LLC each
agreed to purchase convertible promissory notes in the aggregate amount of
$166,666, convertible into 1,666,666 common shares. As of June 30, 2006 ,
Starr Consulting purchased promissory notes valued at $148,334, Active Stealth
purchased promissory notes of $115,000, KCS Referral Service LLC purchased
promissory notes valued at $33,333 and Elite Equity Marketing purchased
promissory notes valued at $66,000 that were originally designated for KCS
Referral Service LLC.
The agreement provides for piggy back registration rights for the shares
underlying the convertible promissory notes. The agreement provides that we
must file a registration statement within 60 days of a request by any
Subscriber and cause the registration statement to become effective within 120
days of that request. We are obligated to maintain the effectiveness of the
registration statement until all the underlying shares have been sold by the
Subscribers. If we fail to obtain or maintain effectiveness of the
registration statement, then we are required to pay liquidated damages in an
amount equal to 2% of the purchase price of the convertible promissory notes
remaining unconverted and the purchase price of the shares issued upon
conversion of the notes owned of record by the holder of the notes for each 30
day period that the registration statement is not effective. We filed a
registration statement on Form SB-2 on February 2, 2006 to register the
underlying shares, but as of the date of this filing, the registration
statement has not been declared effective.
If we fail to issue shares within 10 business days after a request by a
Subscriber, then the Subscriber is entitled to a sum of money, whichever is
greater of either (i) multiplying the outstanding principal amount of the note
designated by the Subscriber by 130%, or (ii) multiplying the number of shares
deliverable upon conversion of the amount of the note's principal and/or
interest at the conversion price that would be in effect on the deemed
conversion date by the highest closing price of the common stock on the
principal market for the period commencing on the deemed conversion date until
the day prior to the receipt of the payment.
OFF-BALANCE SHEET ARRANGEMENTS
None.
11
CRITICAL ACCOUNTING POLICIES
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 amounts reported
in the consolidated financial statements and accompanying notes. Estimates of
particular significance in our financial statements include annual tests for
impairment of our licenses. These estimates could likely be materially
different if events beyond our control, such as changes in government
regulations that affect the usefulness of our licenses or the introduction of
new technologies that compete directly with our licensed technologies affect
the value of our licenses.
We first determine the value of the license using a projected cash-flow
analysis to determine the present value of cash flows. The test is done using
assumptions as to various scenarios of increases and decreases in the revenue
stream and applying a discount rate of 6%. If the value achieved under these
various methods is less than the carrying value of the assets then it is
considered that an impairment has occurred and the asset's carrying value is
adjusted to reflect the impairment.
Management also makes estimates on the useful life of our licenses based on
the following criteria:
.. Whether other assets or group of assets are related to the useful life
of the licenses,
.. Whether any legal, regulatory or contractual provisions will limit the
use of the assets,
.. We evaluate the cost of maintaining the license,
.. We consider the possible effects of obsolescence, and
.. Whether there is maintenance or any other costs associated with the
license.
RESULTS OF OPERATIONS
The following discussions are based on the consolidated financial statements
of View Systems and its subsidiaries. These charts and discussions summarize
our financial statements for the three and six month periods ended June 30,
2006 and 2005 and should be read in conjunction with the financial statements,
and notes thereto, included with this report at Part I, Item 1, above.
Summary Comparison of 2006 and 2005 Period Operations
----------------------------------------------------
Three month period ended Six month period ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Revenues, net $ 222,403 $ 195,914 $ 624,978 $ 481,556
Cost of sales 111,457 125,180 318,739 229,508
Gross profit (loss) 110,946 70,734 306,239 252,048
Total operating expenses 419,337 223,008 828,427 430,887
Net operating loss (308,391) (152,274) (522,188) (178,839)
Total other income
(expense) (8,669) (5,538) (14,015) (5,538)
Net income (loss) (317,060) (157,812) (536,203) (184,377)
Net earnings (loss)
per share $ (0.00) $ (0.00) $ (0.01) $ (0.00)
Revenue is considered earned when the product is shipped to the customer. The
concealed weapons system and the digital video system each require
installation and training. Training is a revenue source separate and apart
from the
12
sale of the product. In those cases revenue is recognized at the completion
of the installation and training. The following chart provides a breakdown of
our sales for the 2006 and 2005 six month periods.
June 30, 2006 June 30, 2005
------------- -------------
Secure Scan $ 291,721 $ 221,970
Digital Video 6,870 38,017
Visual First Responder 302,120 219,691
Service, installation and training $ 24,267 $ 1,878
Our marketing efforts have increased sales of our SecureScan and Visual First
Responder, while sales of our ViewMaxx digital video decreased in the 2006 six
month period when compared to the 2005 comparable period. We had strong sales
of this product in the 2005 six month period, but that level of sales did not
continue in 2006. Service, installation and training revenues increased due
to the sales of our SecureScan and Visual First Responder sales.
Management anticipates that increases in revenues will continue as we develop
our sales and marketing channels and establish local sales and service offices
in geographic areas where we have already completed sales. In addition, the
introduction of our new products that have biometric identification
capabilities and new products the have the capability to sense enriched
nuclear material may also increase our sales.
Our backlog at June 30, 2006, was approximately $382,000 compared to $160,000
at March 31, 2006. Our back log is carried in part by our third party
manufacturers because purchase orders are placed with the manufacturers and
they receive payment when we receive payment from the customer. However, the
delay between the time of the purchase order and shipping of the product
results in a delay of recognition of the revenue from the sale. This delay in
recognition of revenues will continue as part of our results of operations.
Cost of sales includes costs of products sold and shipping costs. Cost of
sales was approximately 47% to 50% of net revenues for the 2006 six month
period and the three month period ended June 30, 2006 (the "2006 second
quarter) and the three month period ended June 30, 2005 (the "2005 second
quarter"). However, cost of sales was 63.9% of net revenues for the 2005
second quarter due to lower economy of scale factors. Management anticipates
that the relative margins for product sales for each product line, assuming
similar quantities sold and similar sourcing of components, should remain
relatively the same during the remainder of 2006.
Total operating expense increased in the 2006 periods compared to the 2005
periods due to increases in all aspects of our operation expenses. Business
development increased as a result of our active efforts to increase business.
General and administrative expenses increased primarily due to increases in
rent from the addition of office space in California and Florida.
Professional fees increased in the 2006 six month period due to an increase in
engineering fees and recognition of the issuance of shares for services in the
2006 periods. We rely on independent contractors to provide services rather
than hiring employees and we issued shares of our common stock for services
under these contracts rather than deplete our cash. Salaries and benefits
expenses increased due to the addition of three employees to our Florida
office. We anticipate total operating expense will continue to increase as we
continue business development, expand our sales channels, and possibly open
regional sales and engineering offices with employees.
Total other expense for the 2006 six month period was related to interest on
loans. Management anticipates interest expense to increase as a result of the
subscription agreement with the Subscribers, described above, and our need to
seek further private financing in the future to cover cash shortfalls.
Management believes net losses will continue in the short term as we expand
our sales channels.
13
FACTORS AFFECTING FUTURE PERFORMANCE
Our independent auditors have expressed substantial doubt whether we can
continue as a going concern.
We have incurred ongoing operating losses and do not currently have financing
commitments in place to meet expected cash requirements for the next twelve
months. We recorded a net loss of $536,203 for the six month period ended
June 30, 2006 and have negative working capital of $851,428. We are unable to
fund our day-to-day operations through revenues alone and management believes
we will incur operating losses for the near future while we expand our sales
channels. While we have expanded our product line and expect to establish new
sales channels, we may be unable to increase revenues to the point that we
attain and are able to maintain profitability. As a result we rely on private
financing to cover cash shortfalls.
We need additional external capital and may be unable to raise it.
Based on our current growth plan we believe we may require approximately
$500,000 in additional financing within the next twelve months to develop our
sales channels. Our success will depend upon our ability to access equity
capital markets and borrow on terms that are financially advantageous to us.
However, we may not be able to obtain additional funds on acceptable terms.
If we fail to obtain funds on acceptable terms, then we might be forced to
delay or abandon some or all of our business plans or may not have sufficient
working capital to develop products, finance acquisitions, or pursue business
opportunities. If we borrow funds, then we could be forced to use a large
portion of our cash, if any, to repay principal and interest on those loans.
If we issue our securities for capital, then the interests of investors and
stockholders will be diluted.
We are currently dependent on the efforts of resellers for our continued
growth and must expand our sales channels to increase our revenues and
further develop our business plans.
We are in the process of developing and expanding our sales channels, but we
expect overall sales to remain down as we develop these sales channels. We are
actively recruiting additional resellers and dealers and have hired
in-house sales personnel for regional and national sales. We must continue to
find other methods of distribution to increase our sales. If we are
unsuccessful in developing sales channels we may have to delay further
development of our business plan.
We may not be able to compete successfully in our market because we have
a small market share and compete with large national and international
companies.
We estimate that we have less than a 1% market share of the surveillance and
weapons detection market. We compete with many companies that have greater
brand name recognition and significantly greater financial, technical,
marketing, and managerial resources. The position of these competitors in the
market may prevent us from capturing more market share. We intend to remain
competitive by increasing our existing business through marketing efforts,
selectively acquiring complementary technologies or businesses and services,
increasing our efficiency, and reducing costs.
Our revenues are dependent in part upon our relationships and alliances
with government agencies and partners.
While we own exclusive licenses for the SecureScan technology, we are
dependent upon the continuation of the ongoing contract between the Department
of Energy and National Institute of Justice for continuations and improvements
to the concealed weapons detection technology. We are also reliant upon the
Department of Energy and National Institute of Justice for continuations and
improvements to the Visual First Responder. If either of these entities
should discontinue its operations or research and development in these areas
we may lose our competitive edge in our market.
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We must successfully introduce new or enhanced products and manage the
costs associated with producing several product lines to be successful.
Our future success depends on our ability to continue to improve our existing
products and to develop new products using the latest technology that can
satisfy customer needs. For example, our short term success will depend on
the continued acceptance of the SecureScan portal and Visual First Responder
product lines. We cannot be certain that we will be successful at producing
multiple product lines and we may find that the cost of production of multiple
product lines inhibits our ability to maintain or improve our gross profit
margins. In addition, the failure of our products to gain or maintain market
acceptance or our failure to successfully manage our cost of production could
adversely affect our financial condition.
Our directors and officers are able to exercise significant influence
over matters requiring stockholder approval.
Currently, our directors and executive officers collectively hold
approximately 58.1% of the voting power of our common and preferred stock
entitled to vote on any matter brought to a vote of the stockholders.
Specifically, Gunther Than, our CEO, holds approximately 56.5 % of the total
voting power as of the date of this report. Pursuant to Nevada law and our
bylaws, the holders of a majority of our voting stock may authorize or take
corporate action with only a notice provided to our stockholders. A
stockholder vote may not be made available to our minority stockholders, and
in any event, a stockholder vote would be controlled by the majority
stockholders. As a result, our minority stockholders may not have the
opportunity to approve or consent to corporate actions or other transactions.
This concentration of ownership may also have the effect of delaying or
preventing a change in control.
Failure to achieve and maintain effective internal controls in accordance
with Section 404 of the Sarbanes-Oxley Act could lead to loss of investor
confidence in our reported financial information.
Pursuant to proposals related to Section 404 of the Sarbanes-Oxley Act of
2002, beginning with our Annual Report on Form 10-KSB for the fiscal year
ending December 31, 2008, we will be required to furnish a report by our
management on our internal control over financial reporting. If we cannot
provide reliable financial reports or prevent fraud, then our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop
significantly.
In order to achieve compliance with Section 404 of the Act within the
prescribed period, we will need to engage in a process to document and
evaluate our internal control over financial reporting, which will be both
costly and challenging. In this regard, management will need to dedicate
internal resources, engage outside consultants and adopt a detailed work plan.
During the course of our testing we may identify deficiencies which we may not
be able to remedy in time to meet the deadline imposed by the Sarbanes-Oxley
Act for compliance with the requirements of Section 404. In addition, if we
fail to achieve and maintain the adequacy of our internal controls, as such
standards are modified, supplemented or amended from time to time, we may not
be able to ensure that we can conclude on an ongoing basis that we have
effective internal controls over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls,
particularly those related to revenue recognition, are necessary for us to
produce reliable financial reports and are important to helping prevent
financial fraud.
ITEM 3. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our filings under the Exchange
Act is recorded, processed, summarized and reported within the periods
specified in the rules and forms of the SEC. This information is accumulated
and communicated to our executive officers to allow timely decisions regarding
required disclosure. Our Chief Executive Officer, who also acts in the
capacity of principal financial officer, evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, he concluded that our disclosure controls
and procedures were effective.
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Also, our Chief Executive Officer determined that there were no changes made
in our internal controls over financial reporting during the second quarter of
2006 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION
We filed a preliminary Schedule 14C information statement on May 2, 2006,
related to increasing our authorized common stock to 250,000,000, ratifying
prior corporate actions and seeking new acquisitions and business
opportunities. Due to SEC regulatory review, we intend to revise the
preliminary Schedule 14C and file a definitive Schedule 14C within the next 30
days.
ITEM 6. EXHIBITS
Part I Exhibits
31.1 Chief Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
Part II Exhibits
3.1 Articles of Incorporation of View Systems, as amended (Incorporated by
reference to exhibit 3.1 to Form 10-QSB, filed November 14, 2003)
3.2 By-Laws of View Systems (Incorporated by reference to exhibit 3.2 to
Form 10-QSB, filed November 14, 2003)
4.1 View Systems, Inc. 2005(b) Professional/Consultant Compensation Plan,
dated November 7, 2005 (Incorporated by reference to exhibit 4.1 to Form
S-8 filed November 8, 2005)
4.2 Subscription Agreement between View Systems, Inc. and Starr Consulting,
Inc., Active Stealth, LLC, and KCS Referral Service LLC, dated December
23, 2005 (Incorporated by reference to exhibit 4.1 of Form 8-K, filed
January 6, 2006)
10.1 View Systems, Inc. 1999 Stock Option Plan (Incorporated by reference to
exhibit 10.16 to Form SB-2 filed January 11, 2000)
10.2 Employment agreement between View Systems and Gunther Than, dated
January 1, 2003 (Incorporated by reference to exhibit 10.3 for Form
10-KSB, filed April 14, 2004)
10.3 Lease agreement between View Systems and MIE Properties, Inc., dated
August 3, 2005 (Incorporated by reference to exhibit 10.2 to Form
10-QSB, filed November 10, 2005)
10.4 Consulting Agreement between View Systems and Business Development
Corporation, dated December 27, 2005 (Incorporated by reference to
exhibit 10.4 to Form SB-2, as amended, filed February 2, 2006)
10.5 Engagement between View Systems and John F. Alexander, dated October 6,
2005 (Incorporated by reference to exhibit 10.5 to Form SB-2, as
amended, filed February 2, 2006)
10.6 Consulting Agreement between View Systems and Elite Equity Marketing,
dated February 6, 2006 (Incorporated by reference to exhibit 10.6 to
Form 10-KSB filed April 17, 2006)
10.7 Lease Agreement between View Systems and Commercial Management
Associates, Inc., dated February 3, 2006
10.8 Lease Agreement between View Systems and Office World, dated February
20, 2006
21.1 Subsidiaries (Incorporated by reference to exhibit 21.1 for Form 10-KSB,
filed March 31, 2003)
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIEW SYSTEMS, INC.
/s/ Gunther Than
Date: August 14, 2006 By:____________________________________________
Gunther Than
Chief Executive Officer, Treasurer, Director
Principal Financial and Accounting Officer
/s/ Michael L. Bagnoli
Date: August 14, 2006 By: __________________________________________
Michael L. Bagnoli
Secretary and Director
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