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Form 10-Q for SECURED DIGITAL APPLICATIONS INC
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14-Nov-2007
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING ANALYSIS OF THE OPERATIONS AND FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, OF THE COMPANY CONTAINED ELSEWHERE IN THIS FORM 10-Q.
The following is management's discussion and analysis of certain significant factors affecting our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements. Except for the historical information contained herein, the matters set forth in this report are forward-looking statements.
OVERVIEW
Secured Digital Applications, Inc. ("SDA" or the "Company") is a provider of subcontracted business services. These include media production, which develops content for various technologies, including television, the Internet and free-standing displays. We also provide information technology services in such areas as biometric technology and security systems. We are in the process of developing a broad platform of outsourced core business services that will be offered to companies in the United States, Asia and Australia including digital document management, accounts receivable and payables management, bookkeeping, purchasing services and also Radio Frequency Identification (RFID) applications including inventory, asset and personnel tracking. We anticipate that we will begin offering those services in late 2007 or early 2008. We generate revenue through our majority- and wholly-owned subsidiary companies located in the United States and Malaysia.
Since SDA became a publicly held company through a reverse acquisition in 1999, the Company has evolved in its operations. We expanded our initial lines of business as a broadband communications operator and Internet content provider by acquiring majority interests in regional companies that are believed to have superior potential for growth and profitability as a member of the SDA group of companies. Acquisitions have been made based on management's criteria including acquisition costs, growth potential and compatibility with SDA's existing subsidiaries. During this acquisition process, we developed a centralized management and support structure provided by our home office in Petaling Jaya, Malaysia to support our operating subsidiaries and the ability of potential acquisitions to benefit from our management structure became a significant consideration in making acquisitions.
Reorganization of Operating Subsidiaries
During the third quarter of 2006, the Company determined that it was in the best interests of the business and our shareholders to restructure our operating subsidiaries. The intent of the reorganization was to improve administrative efficiency and profit margins as well as to dispose of certain assets or subsidiaries that did not meet management's criteria for continued inclusion in the SDA group of companies. In particular, we determined that our subsidiaries involved in the developing business of secured shipping and in the established business of operating retail computer outlets did not meet the Company's criteria for profitability and/or fit within the Company's organization. Under the reorganization plan, substantially all of the assets and liabilities of our principal operating subsidiary, Secured Digital Applications (M) Sdn Bhd ("SDAM"), were transferred to a newly created subsidiary, DigitalApps Sdn Bhd ("DASB"). DASB thus became our principal operating subsidiary with substantially the same assets and liabilities as the former SDAM.
Through reorganization, we reduced the number of operating subsidiaries and disposed of the companies associated with our Gallant IT operations, which operated retail computer stores in metropolitan Kuala Lumpur. We also disposed of the companies through which we had been seeking to develop a secured shipping business.
In connection with the reorganization, we incorporated a new subsidiary, DASB, which will act as the principal holding company for the Company's four operating subsidiaries: Perwimas Telecommunications Sdn Bhd ("PTSB"); DigitalApps Technologies Sdn Bhd ("DAT") (formerly Secured Shipping Sdn Bhd ("SSSB")); Digital Image ID Sdn Bhd ("DID"); and DigitalsApps Media Sdn Bhd ("DAM"). DAT owns 55% of Ispec Sdn Bhd ("ISS") (formerly Innospective Sdn Bhd). DID owns 100% of Digital Kiosk Technologies Sdn Bhd ("DKT") (formerly Century Jubilee Sdn Bhd ("CJSB")), a newly incorporated subsidiary. The assets and liabilities of Gallant Service Centre Sdn Bhd ("GSC"), through which we owned a majority interest in the Gallant group of companies, and Armor Multi Systems Sdn Bhd ("AMS") and Armor Multi Services Sdn Bhd ("AMSSB"), were sold to a third party.
On June 27, 2007, the Company sold its wholly-owned subsidiary, DAT, which included its 55%-owned subsidiary, ISS, to a third party and recognized a gain on disposal of $22,984. Both DAT and ISS were operating at a loss and did not meet the Company's criteria for return on investment. The Company determined that it was in its best interest to dispose of DAT and ISS to allow its available resources and infrastructure to be better utilized in the Company's core businesses that include BPO (as defined below) services and systems integration of RFID enabled tracking applications.
SDA's present core line of business is outsourced media production and information technology applications, which account for the majority of our revenue. Our operating subsidiaries offer products in diverse lines of business including the development of Internet content, digital security and biometric products. We conduct our principal operations in Malaysia. Our subsidiaries as of September 30, 2007 are the following companies:
- DASB is a wholly-owned Malaysian subsidiary that designs, develops and produces multimedia content and provides consulting services for website development, network engineering and project management in IT related projects. In addition to its activities as a multimedia developer and IT consultant, DASB provides centralized management and back-office support to SDA's other subsidiaries from its office in Petaling Jaya, Malaysia.
- Perwimas Telecommunications Sdn Bhd ("PTSB"), a 95%-owned Malaysian subsidiary of DASB, provides broadband and application services under licenses granted by the government of Malaysia.
- Digital Image ID Sdn Bhd ("DID") (f/k/a Vista Positive Sdn Bhd), DASB's wholly-owned subsidiary, from the date of acquisition on July 5, 2006.
- Digital Kiosk Technologies Sdn Bhd ("DKT") (f/k/a Century Jubilee Sdn Bhd), DID's wholly-owned subsidiary, from the date of acquisition on September 4, 2006.
- DigitalApps Media Sdn Bhd ("DAM"), DASB's wholly-owed subsidiary, from the date of incorporation on July 7, 2006.
- China Sea Trade Company, Inc. ("CST") (f/k/a Eystar Media, Inc.), is a wholly-owned subsidiary of SDA Worldwide, Inc., organized under Delaware law. CST offers consulting and management services to regional firms in Asia seeking to develop markets in the United States. CST began operations in early 2006 and has not generated any revenue to date.
- SDA Worldwide, Inc. ("SDAW") (f/k/a SDA America, Inc.), a wholly-owned subsidiary, organized under Delaware law. The company was originally formed as a wholly-owned corporation used as a special vehicle to secure a $6.5 million funding from Laurus Master Fund Ltd. through a private placement of securities consisting of convertible preferred stock of SDAW. As a result of the early retirement of the Laurus investment, management determined to use the corporation as the vehicle to develop the company's international trade consulting business in the United States. SDAW operated as a joint venture between September 5, 2005, and October 3, 2007 when the Company re-purchased the 20% of SDAW that it did not own from its joint venture partner. SDAW began operations in 2005 and has not generated any revenue to date.
In addition, as part of the reorganization, we increased our equity interest in PTSB from 86% to 95% by purchasing minority interests held by two of our directors, Wan Abdul Razak and Mustaffar Yacob, for aggregate consideration of approximately $154,000.
The accompanying consolidated financial statements include the accounts of Secured Digital Applications, Inc. and its subsidiaries.
For the three months and nine months ended September 30, 2007 and 2006, the Company's revenue was generated primarily from the following activities:
1. Designing, producing, hosting and distributing interactive multimedia content, websites, programs and applications.
2. Developing and producing e-commerce programs and Internet-based security applications and solutions.
3. Providing project consulting services on broadband communications and networking systems for property development projects.
Significant Business Developments and Plan of Operation
We are in the process of introducing a business process outsourcing (BPO) service to companies in the United States, Asia and Australia. Significant effort has been devoted to the technical development of our outsourced business process services, primarily in the integration of software and information systems that we obtain through licenses with third parties. We licensed or acquired technologies from various sources and utilized the technologies to develop our integrated online financial accounting and Radio Frequency Identification (RFID) tracking BPO service. Our integrated BPO service is marketed as EyStar Station.
Eystar Station provides a single point of entry, through a graphical user interface available on the Internet, into a customer's most significant business operations, including custom tailored financial reports, work in progress, inventory, accounts payable and receivable, expenses, and source documents. Eystar Station consists of a web-based financial accounting BPO suite integrated with RFID enabled tracking applications that include inventory, document and people tracking.
RFID is a proven technology that uses radio waves to identify individual items at specific locations. Many enterprises are presently seeking ways to mobilize and automate their field force operations with RFID, in areas such as asset management, maintenance, repair, manufacturing, item tracking, delivery scheduling, customer billing data collection, and work order management.
The purpose of an RFID system is to enable data to be transmitted by a mobile device, called a tag, which is read by an RFID reader and processed according to the needs of a particular application. The data transmitted by the tag may provide identification or location information, or specifics about the product tagged, such as price, color, date of purchase, etc.
The Company has developed a number of integrated financial accounting and RFID tracking applications that include:
o Financial accounting + inventory tracking
o Financial accounting + document tracking
o Financial accounting + people tracking
o Financial accounting + inventory + document + people tracking
The Company intends to launch its nano chip RFID embedded paper during the fourth quarter of 2007. This versatile security identification paper can be tracked through the Internet.
Our BPO service will combine the technology available through the Eystar Station with labor performed at competitive rates at our work center in Petaling Jaya, Malaysia.
We plan to continue to devote the bulk of our resources to core operations in Asia, particularly Malaysia, as management believes that the growth of Asian economies has been favorable and is likely to continue. The Company continues to review potential acquisitions in Asia, primarily of regional companies in Malaysia, Thailand, and the People's Republic of China, in an effort to add operations that will meet management's standards and provide superior opportunities for growth after acquisition.
The Company anticipates that it will continue to seek the rights to new products and services through contractual arrangements or through the acquisition of other business entities that provide compatible products or services. The Company expects to continue to market its products and services through a sales force and through its Internet websites located at www.digitalapps.net and www.eystar.com.
Strategic Contractual Relationships
The Company seeks to enter strategic agreements, both formal and informal, with other providers of goods or services that are compatible with the Company's existing businesses. Such arrangements include license agreements, requirements contracts and service agreements. The Company may also seek to acquire business enterprises that offer goods and services that are of benefit to the Company and its shareholders. We cannot forecast whether these strategic relationships will generate any revenue in 2007.
On October 27, 2007, the Company entered into a Supply Agreement (the "Supply Agreement") with Collier Consulting Inc. of Memphis, Tennessee, USA ("Collier") pursuant to which the Company agreed to sell to Collier and Collier agreed to purchase from the Company units of the Company's EyStar GPS Personal and Vehicle Tracker (the "Product") for a total purchase price of $16,000,000. The Supply Agreement provides that Collier will satisfy its aggregate purchase obligation in increments over a period of 10 months following the execution date of the Supply Agreement upon a mutually agreeable time frame.
The pocket-size EyStar GPS operates under the worldwide GSM/GPRS network and uses a high sensitivity GPS receiver for near-indoor tracking featuring quad-bands (850/900/1800/1900 MHz). It can be used as an emergency cellular phone with speed dialing for two-way voice communication, and to place a silent call to an emergency number or police using a digital voice and text to report location, date and time. Any navigation or Google Earth map can be used for the tracking.
The EyStar GPS can operate in both SMS and GPRS modes. This gives EyStar GPS the ability to transmit its position as a text message or it can be monitored in real-time via the Internet. The EyStar GPS has a unique Geo-Fence feature that can trigger an alert when the device enters or exits a pre-defined area. In addition to using the EyStar GPS to track individual vehicles, other potential uses include fleet management, and the tracking of school children or personal assets. The EyStar GPS has a built-in capability where normal GPS is unable to do so. It is well-suited for location-based service providers and system integrators interested in providing affordable personal vehicle monitoring services to a broad range of subscribers. It is compatible with all automobiles, domestic and import, presently represented in the United States.
Results of Operations
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes thereto.
The following table sets forth certain operating data for the Company and its
subsidiaries for the periods as indicated below.
Nine Months Ended September 30,
2007 2006
----------------- -----------------
Revenues $ 33,199,082 $ 25,641,488
Gross profit 2,625,958 1,500,345
Sales and marketing 29,255 15,242
General and administrative 1,416,039 1,487,896
Gain on disposal of assets-related parties 84,547 66,356
Income from continuing operations 1,053,014 204,161
Income from discontinued operations 5,749 304,807
Net income 1,058,763 508,968
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2007 TO THE THREE MONTHS ENDED SEPTEMBER 30, 2006
REVENUES
Revenues increased by $2,179,557, or 23%, to $11,818,070 for the three months ended September 30, 2007 ("2007") as compared to $9,638,513 for the three months ended September 30, 2006 ("2006").
The increase in total revenue in 2007 as compared to 2006 was mainly due to an increase in fees earned from the production of multimedia programs and business contracts. The increase in revenue from the production of multimedia programs was the result of sub-contract work from the Company's two major customers. Revenue for project consulting services was generated from contracts that the Company secured in 2001 through 2004. In 2007, two customers accounted for 48% and 45% of total revenue, respectively. In 2006, the same two customers accounted for 49% and 48% of total revenue, respectively.
GROSS PROFIT
Gross profit increased to $1,045,308 in 2007 compared to $876,705 in 2006.
The gross profit percentage was 8.8% in 2007 and 9.1% in 2006. The Company is striving to improve its quality of services and efficiency with the objective to increase its gross profit percentage. The outsourcing of content production work enabled the Company to develop a team of contractors that will assist the Company in producing multimedia content and applications that are crucial to its future business operation.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased by $10,491 or 90%, to $22,131 in 2007 compared to $11,640 in 2006, primarily as a result of an increase in travel expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses relating to non-related parties increased to $519,583 in 2007 compared to $381,154 in 2006. The increase was primarily attributable to an increase in compensation expenses, investor relation expenses, employee payroll and depreciation.
In 2007, general and administrative expenses consisted of the following: 14% was for depreciation of tangible assets, 17% was for employee payroll, 8% was for fees for professional and auditing services, 5% was for investor relation expenses, 46% was for compensation expenses and 10% was for rent, utilities, general office supplies, communications and corporate insurance expenses. For 2006, 5% was for depreciation of tangible assets, 12% was for employee payroll, 35% was for fees for professional and auditing services, 3% was for investor relation expenses, 15% was for compensation expenses and 30% was for rent, utilities, general office supplies, communications and corporate insurance expenses.
General and administrative expenses - related parties in 2007 and 2006 were $36,911 and $36,519, respectively. These expenses included management fees and administrative expenses payable by the Company to a company in which Mr. Patrick Lim, the Chairman and Chief Executive Officer of the Company, has a financial interest. In 2007 and 2006, the related company, LSH Assets Holdings Sdn Bhd ("LSH"), billed the Company's Malaysian subsidiaries, DASB and SDAM, administrative expenses of $6,911, 0, $6,519 and $0, respectively, for administration and clerical fees incurred by LSH on behalf of DASB and SDAM. The Company also incurred management fees of $30,000 each for 2007 and 2006. The management fee was charged on the basis of time spent for the administration and management services provided to the Company.
PREVIOUSLY DEFERRED GAIN ON SALE OF TECHNOLOGY - RELATED PARTY
In 2007 and 2006, the Company included recognition of a previously deferred gain of $28,798 and $22,002, respectively, related to a similar amount the Company received from its long-term receivable - related party. Each of the receivable balance and total deferred gain was $108,247 as of December 31, 2006. These amounts arose in the year ended December 31, 1998 when the Company sold assets used in the operations of a subsidiary to a related company. Due to the uncertainty of collection of the related receivable, a related gain on the sale of the assets was deferred and is to be recognized only after all costs have been recovered and to the extent the receivable is collected. During the year ended December 31, 2002, payments received by the Company exceeded all remaining costs. As a result, the Company's long-term receivable - related party and deferred gain balances were each reduced to $25,954, as of September 30, 2007.
WRITE-OFF OF OLD VENDOR PAYABLES
The Company wrote off vendor payables totaling $35,512 in 2007. The amounts owed were at least three years old and management determined that such amounts were no longer owed.
INCOME TAXES
Income taxes represent the provision for the Company's Malaysian operations and are net of any available net operating losses. There was no provision for the Company's United States operations as such entities sustained taxable losses.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2007 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2006
REVENUES
Revenues increased by $7,557,594, or 29%, to $33,199,082 for the nine months ended September 30, 2007 ("2007") as compared to $25,641,488 for the nine months ended September 30, 2006 ("2006").
The increase in total revenue in 2007 as compared to 2006 was mainly due to an increase in fees earned from the production of multimedia programs and business contracts. The increase in revenue from the production of multimedia programs was the result of sub-contract work from the Company's two major customers. Revenue for project consulting services was generated from contracts that the Company secured in 2001 through 2004. In 2007, two customers accounted for 48% and 47% of total revenue, respectively. In 2006, the same two customers each accounted for 49% of total revenue.
GROSS PROFIT
Gross profit increased to $2,625,958 for the nine months ended September 30, 2007 compared to $1,500,345 during the comparable period in 2006. The gross profit percentage increased to 7.9% in 2007 from 5.9% in 2006. The increase in gross profit percentage in 2007 was due to higher revenue, particularly consulting revenue, which has a higher margin than production work and incurring reduced subcontractor costs. The Company is striving to improve its quality of services and efficiency with the objective to increase its gross profit percentage. The outsourcing of content production work enabled the Company to develop a team of contractors that will assist the Company in producing multimedia content and applications that are crucial to its future business operation.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased by $14,013, or 92%, to $29,255 for the nine months ended September 30, 2007 compared to $15,242 in the comparable period of 2006, primarily as a result of an increase in travel expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses relating to non-related parties decreased to $1,305,320 in 2007 compared to $1,378,395 in 2006. The decrease was primarily attributable to a decrease in legal and professional fees, utilities, general office supplies and communications expenses. In 2007, general and administrative expenses consisted of the following: 17% was for depreciation of tangible assets, 6% was for consulting fees, 14% was for employee payroll, 11% was for fees for professional and auditing services, 3% was for investor relation expenses, 40% was for compensation expenses and 9% was for rent, utilities, general office supplies, communications and corporate insurance expenses. For 2006, 11% was for depreciation of tangible assets, 9% was for employee payroll, 27% was for fees for professional and auditing services, 1% was for investor relation expenses, 36% was for compensation expenses and 16% was for rent, utilities, general office supplies, communications and corporate insurance expenses.
General and administrative expenses - related parties for the nine months ended September 30, 2007 and 2006 were $110,719 and $109,501, respectively. These expenses included management fees and administrative expenses payable by the Company to LSH. In 2007 and 2006, LSH billed the Company's Malaysian subsidiaries, DASB and SDAM, administrative expenses of $20,719, 0, $19,501 and $0 for administration and clerical fees incurred by LSH on behalf of DASB and SDAM. The Company also incurred management fees of $90,000 each for 2007 and 2006. The management fee was charged on the basis of time spent for the administration and management services provided to the Company.
PREVIOUSLY DEFERRED GAIN ON SALE OF TECHNOLOGY - RELATED PARTY
The gain represents the recognition of a previously deferred gain of $84,547 and $66,356 for 2007 and 2006, respectively, related to a similar amount the Company received from its long-term receivable - related party. Each of the receivable balance and total deferred gain was $108,247, as of December 31, 2006. This amount arose in the year ended December 31, 1998 when the Company sold assets used in the operations of a subsidiary to a related company. Due to the uncertainty of collection of the related receivable, the related gain on the sale of the assets was deferred and is to be recognized only after all costs have been recovered and as payments are received. During the year ended December 31, 2002, payments received by the Company exceeded all remaining costs. As a result of cash payments received, the Company's long-term receivable - related party and deferred gain balances were each reduced to $25,954, as of September 30, 2007.
WRITE-OFF OF OLD VENDOR PAYABLES
The Company wrote off vendor payables totaling $35,512 in 2007. The amounts owed were at least three years old and management determined that such amounts were no longer owed.
INCOME TAXES
Income taxes represent the provision for the Company's Malaysian operations and are net of any available net operating losses. There was no provision for the Company's United States operations as such entities sustained taxable losses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2007, the Company had net cash of $54,248.
In 2007, operations were funded primarily from internally generated funds and working capital advanced from time to time by the principal shareholder, director and officer of the Company. These advances bear no interest and have no fixed terms of repayment.
As of September 30, 2007, the Company owed Patrick Lim, the Company's principal shareholder, Chief Executive Officer and Chairman, $77,924. Additionally, as of September 30, 2007, the Company owed an affiliated company in which Mr. Lim has a financial interest, $121,901 for management fees and short-term cash advances made to a subsidiary of the Company for working capital purposes from time to time. These amounts are unsecured, bear no interest and have no fixed terms of repayment.
Net cash provided by operating activities was $8,945 in 2007 and was primarily the result of income and non-cash expenses.
Net cash used in investing activities totaled $6,543 in 2007 and was for the purchase of equipment.
Net cash provided by financing activities totaled $170,643 in 2007 and was due to the advances from an affiliated company totaling $103,590 and advances from the Company's principal shareholder of $67,053.
In July 2007, the Company entered into two separate agreements with an investor in private placements to sell 540,000 and 460,000 shares of its common stock at $.065 and $.07 per share for total consideration of $67,300. The closing dates for the private placements were August 10, 2007 and August 30, 2007, respectively.
For the fourth quarter of 2007, the Company will continue expanding into new businesses that include provision of outsourced business services and RFID enabled tracking solutions and supply chain management services. The Company . . .
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