Friday, August 15, 2008 4:38:05 AM
10-Q Quarterly Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission File Number: 0-25658
SECURED DIGITAL APPLICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1357927
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 PARK AVENUE, 10TH FLOOR, NEW YORK, NY 10169
(Address of principal executive offices) (Zip Code)
(212) 551 1747
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.
[X] Yes [ ] No
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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check Smaller reporting company [X] if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The number of shares outstanding of the registrant's common stock as of August 14, 2008: 142,726,314 shares of common stock, par value $0.00001 per share.
1
FORM 10-Q
2ND QUARTER
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed consolidated balance sheets at June 30, 2008
(Unaudited) and December 31, 2007 (Audited) 4 - 5
Condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2008 and 2007 (Unaudited) 6 - 7
Condensed consolidated statements of cash flows for the six months periods ended June 30, 2008 and 2007 (Unaudited) 8
Notes to condensed consolidated financial statements (Unaudited) 9 - 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 - 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 4(T). CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 1A. RISK FACTORS 19
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS 19
SIGNATURES 20
2
SAFE HARBOR STATEMENT
This quarterly report on Form 10-Q and the documents incorporated herein by reference, contain or may contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Information is provided that is based upon beliefs of, and information currently available to, the management of Secured Digital Applications, Inc. (the "Company"), as well as estimates and assumptions made by the Company's management. The Company is including this cautionary statement in this Form 10-Q to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by or on behalf of us. Statements that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "may," "should," "anticipates," "estimates," "expects," "future," "intends," "hopes," "plans," "projects" or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results of the Company to vary materially from historical results or from any future results expressed or implied in such forward-looking statements. For a discussion identifying risk factors and other important factors that could cause actual results to differ materially from those anticipated, see the Company's Annual Report on Form 10-K for the year ended December 31, 2007, as amended.
These factors include, among others, the following: the inability of the Company to successfully implement its business plans, the cancellation or postponement of contracts that the Company has entered into in connection with its business, the inability to obtain services provided by other companies or service providers, the inability of the Company to raise capital on a timely basis, the inability of the Company to meet certain covenants contained in trade financing agreements, existing and future government regulations, changes and fluctuation in foreign currency exchange rates, the failure to retain qualified personnel, competitive pressures and potentially adverse tax and cash flow consequences resulting from operations in multiple countries with different laws and regulations, and the general economic and business conditions in Malaysia, China, the United States and the other countries in which we do business, primarily in Asia. The Company does not undertake to update, revise or correct any forward-looking statements.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 AND DECEMBER 31, 2007
June 30, December 31,
2008 2007
---------------- -------------------
(Unaudited)
ASSETS
Current assets:
Cash $ 26,123 $ 40,385
Trade and other accounts receivable 11,050,766 8,902,465
less allowance for doubtful accounts of $28,178 and $27,699, respectively
Prepaid expenses 20,106 18,539
---------------- -------------------
Total current assets 11,096,995 8,961,389
Property and equipment, net 3,331,608 3,718,150
Trademark 15,343 --
Goodwill 471,260 471,260
---------------- -------------------
$ 14,915,206 $ 13,150,799
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 36,250 $ 35,634
Accounts payable 546,022 531,133
Accrued expenses 146,901 209,877
Amount due to an affiliated company 66,017 23,668
Amount due to a director 8,786 88,632
Income tax payable 190,321 47,151
---------------- -------------------
Total current liabilities 994,297 936,095
Deferred tax 644,716 461,525
---------------- -------------------
Total liabilities 1,639,013 1,397,620
---------------- -------------------
(continued)
4
SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, 2008 AND DECEMBER 31, 2007
June 30, December 31,
2008 2007
---------------- -------------------
(Unaudited)
Minority interest 443,801 218,016
---------------- -------------------
Commitments
Stockholders' equity:
Series B convertible preferred stock, $0.10 par value; 10,000 10,000
1,000,000 shares authorized; 100,000 shares issued and outstanding,
liquidation preference $2,500,000
Common stock, $0.00001 par value: 1,434 1,375
350,000,000 shares authorized; 145,352,094 shares issued and
142,476,314 shares outstanding in 2008 and 143,172,594 shares
issued and 137,796,814 shares outstanding in 2007
Additional paid-in capital 8,104,213 7,665,244
Options 26,136 73,561
Warrants 975,337 953,643
Common treasury stock - at cost, 2,875,780 shares in 2008 and 5,375,780
shares in 2007 -- --
Deferred compensation (239,250) --
Retained earnings 3,417,694 2,280,005
Accumulated other comprehensive income 536,828 551,335
---------------- -------------------
Total stockholders' equity 12,832,392 11,535,163
---------------- -------------------
Total liabilities and stockholders' equity $ 14,915,206 $ 13,150,799
================ ===================
See notes to condensed consolidated financial statements
5
SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
Three months ended June 30, Six months ended June 30,
2008 2007 2008 2007
---------- ---------- ---------- ----------
Revenues :
Services :
Related Parties $ 768,443 $ 558,228 $ 1,613,253 $ 860,110
Others 13,941,319 10,451,982 27,605,870 20,520,902
---------- ---------- ---------- ----------
14,709,762 11,010,210 29,219,123 21,381,012
---------- ---------- ---------- ----------
Cost of revenues :
Services :
Related Parties 230,534 167,469 483,977 258,033
Others (includes a related party of
$5,996,339, $4,383,252, $12,001,675 and
$8,475,822, respectively.) 13,277,296 9,952,718 26,290,757 19,542,329
---------- ---------- ---------- ----------
13,507,830 10,120,187 26,774,734 19,800,362
---------- ---------- ---------- ----------
Gross profit 1,201,932 890,023 2,444,389 1,580,650
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 11,079 3,240 26,748 7,124
General and administrative:
Related parties 37,465 36,973 74,892 73,808
Others 524,914 386,419 1,006,098 785,737
---------- ---------- ---------- ----------
Total operating expenses 573,458 426,632 1,107,738 866,669
---------- ---------- ---------- ----------
Income from operations 628,474 463,391 1,336,651 713,981
---------- ---------- ---------- ----------
Other income (expense):
Gain (loss) on foreign currency transactions (10,910) (1,134) 164,463 109,818
Purchase preacquisition income (13,928) -- (13,928) --
Previously deferred gain on sale of
technology,related parties -- 30,459 -- 55,749
Other income 3,378 2,615 3,378 5,178
---------- ---------- ---------- ----------
(21,460) 31,940 153,913 170,745
---------- ---------- ---------- ----------
Income before provision for income taxes and
minority interest 607,014 495,331 1,490,564 884,726
Provision for income taxes (146,203) (153,388) (321,246) (216,897)
---------- ---------- ---------- ----------
Income before minority interest 460,811 341,943 1,169,318 667,829
Minority interest (22,579) (7,571) (31,630) (13,692)
---------- ---------- ---------- ----------
Income from continuing operations 438,232 334,372 1,137,688 654,137
---------- ---------- ---------- ----------
Discontinued operations:
Loss from discontinued operation - net of
minority interest and income taxes -- (8,583) -- (17,248)
Gain on disposal of discontinued
subsidiaries -- 22,984 -- 22,984
---------- ---------- ---------- ----------
Income from discontinued operations -- 14,401 -- 5,736
---------- ---------- ---------- ----------
Net income $ 438,232 $ 348,773 $ 1,137,688 $ 659,873
========== ========== ========== ==========
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SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
Three months ended June 30, Six months ended June 30,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net income $ 438,232 $ 348,773 $ 1,137,688 $ 659,873
Other comprehensive income:
Foreign currency translation adjustments (24,508) (565) (14,507) 57,786
----------- ----------- ----------- -----------
Comprehensive income $ 413,724 $ 348,208 $ 1,123,181 $ 717,659
=========== =========== =========== ===========
Net income per common share:
Basic ** $ * $ * $ 0.01 $ *
=========== =========== =========== ===========
Diluted ** $ * $ * $ 0.01 $ *
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 141,902,138 130,807,803 140,154,951 130,026,288
=========== =========== =========== ===========
Diluted 165,351,336 154,817,144 163,206,980 154,923,321
=========== =========== =========== ===========
* Less than $0.01 per share.
**Net income per common share for discontinued operations is less than $0.01 per
share and not presented separately.
7
SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
Six months ended June 30,
2008 2007
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Change in operating assets and liabilities of continuing
operations $ 48,665 $ 43,319
Change in operating assets and liabilities of discontinued
operations -- (184)
--------- ---------
Net cash provided by operating activities 48,665 43,135
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (9,165) (6,274)
Purchase of trademark (15,343) --
--------- ---------
Net cash used in investing activities (24,508) (6,274)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuances of shares of common stock 109,000 --
Proceeds from advances from affiliated company 41,981 70,098
Proceeds from advances from a director -- 4,567
Repayments of loans from a director (81,175) --
--------- ---------
Net cash provided by financing activities 69,806 74,665
--------- ---------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
- continuing activities (108,225) (103,240)
- discontinued activities -- 661
--------- ---------
Net (decrease) increase in cash (14,262) 8,947
Cash, beginning of period 40,385 7,644
--------- ---------
Cash, end of period $ 26,123 $ 16,591
========= =========
See notes to condensed consolidated financial statements
8
SECURED DIGITAL APPLICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Secured Digital Applications, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with Item 10-1 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the United States Securities and Exchange Commission (the "SEC").
NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 ("SFAS 160"). SFAS 160 requires companies with non-controlling interests to disclose such interests clearly as a portion of equity but separate from the parent's equity. The non-controlling interest's portion of net income must also be clearly presented on the income statement. SFAS 160 is effective for financial statements issued for fiscals years beginning after December 15, 2008 and will be adopted by the Company in the first quarter of fiscal year 2009. The Company does not expect that the adoption of SFAS 160 will have a material impact on our financial condition or results of operation.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (revised 2007) ("SFAS 141(R)"). SFAS 141(R) applies the acquisition method of accounting for business combinations established in SFAS 141 to all acquisitions where the acquirer gains a controlling interest, regardless of whether consideration was exchanged. Consistent with SFAS 141, SFAS 141(R) requires the acquirer to fair value the assets and liabilities of the acquiree and record goodwill on bargain purchases, with main difference the application to all acquisitions where control is achieved. SFAS 141(R) is effective for financial statements issued for fiscal years beginning after December 15, 2008 and will be adopted by the Company in the first quarter of fiscal year 2009. The Company does not expect that the adoption of SFAS 141(R) will have a material impact on our financial condition or results of operation.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, - an amendment of FASB Statement No. 133 ("FAS 161"). FAS 161 requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. The objective of the guidance is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. FAS 161 is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact FAS 161 will have on the Company's consolidated financial statements, but it currently does not expect the effect to be material.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP. The FASB believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of SFAS No. 162 is not expected to have a material impact on the Company's financial statements.
9
NOTE 3: NET INCOME PER COMMON SHARE
The Company computes earnings per share in accordance with the provisions of SFAS No. 128, Earnings per Share ("SFAS 128"). Under the provisions of SFAS 128, basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted net income per share reflects the potential dilution that could occur from common stock issuable through stock based compensation including stock options, restricted stock awards, warrants and other convertible securities. The calculation of basic and diluted earnings per share is as follows (in thousands, except per-share amounts):
Three Months Ended Six Months Ended
(Unaudited) June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------- ------- --------- -------
Net income $ 438 $ 349 $ 1,138 $ 660
======= ======= ========= =======
Weighted average shares outstanding - basic 141,902 130,808 140,155 130,026
======= ======= ========= =======
Net income per share - basic $ * $ * $ 0.01 $ *
======= ======= ========= =======
Weighted average shares outstanding - basic 141,902 130,808 140,155 130,026
Common stock issuable to consultant 1,247 4,009 667 4,622
Convertible preferred stock 20,000 20,000 20,000 20,000
Dilutive stock options and warrants 2,202 -- 2,385 275
------- ------- -------------- -------
Weighted average shares outstanding - diluted 165,351 154,817 163,207 154,923
======= ======= ========= =======
Net income per share - diluted $ * $ * $ 0.01 $ *
======= ======= ========= =======
* Less than $.01 per share
** Net income per common share for discontinued operations is less than $.01 per
share and not presented separately.
There are options to purchase 460,000 shares of the Company's common stock at each of the three and six months ended June 30, 2008 and options to purchase 3,080,000 shares of the Company's common stock at each of the three and six months ended June 30, 2007 that were excluded from the calculation of earnings per share as their issuance prices were in excess of the average market price for the period. For the three months ended June 30, 2008 and 2007, 4,600,000 and 10,900,000 warrants were excluded in the calculation of earnings per share as their issuance prices were in excess of the average market price for the period. For each of the six months ended June 30, 2008 and 2007, 4,600,000 warrants were excluded in the calculation of earnings per share as their issuance prices were in excess of the average market price for the period.
10
NOTE 4: DISPOSAL OF SUBSIDIARIES
On June 27, 2007, the Company sold its wholly-owned subsidiary, DigitalApps Technologies Sdn Bhd ("DAT"), which included DAT's 55%-owned subsidiary, Ispec Sdn Bhd ("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.
Results of discontinued operations are as follows for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
-------------- -------------- -------------- ---------------
Revenue $ -- $ -- $ -- $ --
Cost of revenues -- -- -- --
-------------- -------------- -------------- ---------------
Gross profit -- -- -- --
Operating expenses -- 8,583 -- 17,248
-------------- -------------- -------------- ---------------
Loss from operations -- (8,583) -- (17,248)
Other income -- -- -- --
-------------- -------------- -------------- ---------------
Loss before tax -- (8,583) -- (17,248)
Income tax -- -- -- --
-------------- -------------- -------------- ---------------
Loss from discontinued operations $ -- $ (8,583) $ -- $ (17,248)
============== ============== ============== ===============
NOTE 5: RELATED PARTY TRANSACTIONS
LSH ASSET HOLDINGS SDN BHD ("LSH"):
LSH, a company owned by Patrick Lim, the Company's Chief Executive Officer, and his wife, billed the Company management fees totaling $30,000 for each of the three months ended June 30, 2008 and 2007 and $60,000 for each of the six months ended June 30, 2008 and 2007. LSH also billed the Company's Malaysian principal operating subsidiary, DigitalApps Sdn Bhd ("DASB"), $7,465 and $6,973 for the three months ended June 30, 2008 and 2007 and $14,892 and $13,808 for the six months ended June 30, 2008 and 2007, for administrative and clerical charges. LSH also made short term advances to the Company from time to time for working capital purposes. At June 30, 2008 and December 31, 2007, the amount due to LSH was $66,017 and $23,668, respectively. This amount is unsecured, bears no interest, has no fixed terms of repayment, and is recorded in the financial statements as "Amount due to an affiliated company."
CHIEF EXECUTIVE OFFICER
As of June 30, 2008 and December 31, 2007, the Company owed Patrick Lim, the Company's Chief Executive Officer, $8,786 and $88,632, respectively, for short-term cash advances made to the Company from time to time for working capital purposes. The amount owing to the Chief Executive Officer is unsecured, bears no interest, has no fixed terms of repayment and is recorded in the financial statements as "Amount due to a director."
MY ARCHITECT ("MYA")
Mustaffar bin Yacob, a minority shareholder of one of the Company's Malaysian subsidiary, Perwimas Telecommunications Sdn Bhd ("PTSB"), is a principal partner of MYA. The Company received payment from consulting contracts that it entered into with MYA amounting $768,443 and $1,613,253, for the three and six months ended June 30, 2008 and $558,228 and $860,110 for the three and six months ended June 30, 2007. The terms of repayment for the amount due from MYA are similar to terms accorded to the Company's other existing customers. At June 30, 2008 and December 31, 2007, there was no balance owed to the Company by MYA.
ULTIMATE SERIES SDN BHD ("USSB")
USSB is wholly-owned by Mustaffar bin Yacob. During the three and six months ended June 30, 2008 and 2007, the Company incurred fees of $5,996,339, $12,001,675, $4,383,252 and $8,475,822, respectively, for sub-contractor work that it entered into with USSB. The terms of repayment for the amount due to USSB by the Company are similar to terms accorded to the Company's other existing suppliers. At June 30, 2008 and December 31, 2007, there was no balance owed to USSB.
11
NOTE 6: STOCKHOLDERS' EQUITY
COMMON STOCK
The Company issued from its treasury stock 100,000 shares of common stock on each of June 13, 2007 and October 22, 2007 to a consultant pursuant to a compensation agreement dated May 1, 2007, under which the Company is to issue an aggregate of 400,000 shares of its common stock to the consultant for services to be rendered to the Company for the 12-month period ended April 30, 2008. The Company recognized compensation expense of $6,358 for the three months ended June 30, 2008 related to this compensation agreement.
The Company issued from its treasury stock 250,000 shares of common stock on each of October 17, 2007, February 20, 2008, April 18, 2008 and July 14, 2008 to a consultant pursuant to a compensation agreement dated August 20, 2007, under which the Company is to issue an aggregate of 1,000,000 shares of its common stock to the consultant for services to be rendered to the Company for the 12-month period ending August 19, 2008. The Company recognized compensation expense of $32,233 for the three months ended June 30, 2008 related to this compensation agreement.
On March 5, 2008, the Company issued 1,679,500 shares of common stock to Patrick Lim, the Company's Chief Executive Officer, upon the exercise of warrants. The Company received proceeds totaling $109,000 from Mr. Lim's warrant exercise.
On April 17, 2008, the Company issued 500,000 shares of common stock to Mr. Lim for achieving a compounded growth in group revenues of at least 15% percent pursuant to a Stock Award Agreement dated October 21, 2006. The total consideration amount of $86,500 is based on the market value of $0.173 per share on the date of grant.
On April 21, 2008, the Company issued from its treasury stock 2,000,000 shares of common stock to a consultant pursuant to a compensation agreement dated April 18, 2008, under which the Company is to issue an aggregate of 2,000,000 shares of its common stock to the consultant for services to be rendered for the 12-month period ending April 17, 2009. The total consideration amount of $300,000 is based on the market value of $0.15 per share on the date of issuance.
NOTE 7: SIGNIFICANT CONCENTRATIONS
Two customers accounted for the following revenue for the three and six months ended June 30, 2008 and 2007:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------- ----------------- ----------------- -----------------
Customer 1 51% 49% 51% 49%
Customer 2 44% 46% 44% 47%
----------------- ----------------- ----------------- -----------------
Total 95% 95% 95% 96%
================= ================= ================= =================
At June 30, 2008 and 2007, two customers accounted for substantially all of the trade accounts receivable.
Three suppliers (including USSB - see Note 5) accounted for substantially all cost of revenues during the six months ended June 30, 2008 and 2007. The Company is not dependent upon one supplier to provide the services that it requires but made a strategic decision to engage the services of only a small number of suppliers after taking into consideration the quality of service and competitive pricing being offered. Should the need arise, the Company believes that it could utilize alternative suppliers for the services that it requires.
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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." "Company," "we," "us" or "our") is a provider of mobile communication and information technology consulting services. Our strategy is to provide business services to our customers in a manner that is both superior in quality and more cost efficient than the customer can provide for themselves. Our services are focused in the areas of multimedia production, information technology and computing consulting services, smarthome, biometric security and Bluetooth, GPS and RFID-enabled applications. As a supplier and consultant, we rely on a combination of current technologies to provide high-quality products and services at competitive prices.
The Company has provided outsourced information technology and multimedia content production services since 2000. We began to provide services in security applications, particularly biometric security applications, during 2003. We continue to seek to add to our holdings with acquisitions that meet our management's criteria for inclusion in the group of SDA companies. In general, we continue to seek out regional businesses with strong management willing to remain in considerable positions of responsibility as minority equity holders. We also seek businesses that are operating at a profit or near break-even and which provide a superior opportunity for high rates of growth after integration into the SDA group of companies. In considering potential acquisitions, SDA evaluates such factors as:
- the "fit" of the potential acquisition among SDA's existing subsidiaries, in particular whether the acquisition is complementary to SDA's existing operating subsidiaries;
- the capabilities of existing management and the willingness of existing management to continue with the enterprise as employees and minority equity holders;
- whether the enterprise provides, in management's view, a superior potential for growth and profitability after acquisition;
- whether the enterprise, in management's view, can be successfully and beneficially integrated with SDA's existing business processes;
- the terms under which existing management is prepared to convey a majority interest to SDA; and
- the demonstrated ability of existing management to operate the enterprise profitably.
Since 2000, we have succeeded in financing our acquisitions primarily with internally generated funds and with issuances of our securities. This strategy has permitted the Company to maintain a low debt to equity ratio. There can be no assurance, however, that we will be able to continue to pay for acquisitions with internally generated funds and it is likely that we will require additional funding, which may result in the issuance of additional equity or debt. There also can be no assurance that we will be able to identify, acquire or integrate businesses into the SDA group of companies.
SDA's core line of business is 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.
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries.
Reorganization of Operating Subsidiaries
On May 20, 2008, the Company sold its wholly-owned subsidiary company, China Sea Trade Inc. ("CST") to a third party and recognized a gain on sale of $1,928. CST was operating at a loss and did not meet the Company's criteria for return on investment. The effect of the sale of CST is not material and, therefore, the operating results of CST were not presented separately as discontinued operations.
For the three and six months ended June 30, 2008 and 2007, the Company's revenue was generated primarily from the following activities:
- Designing, producing, hosting and distribution of interactive multimedia content, websites, programs and applications;
- Developing and producing e-commerce programs and Internet-based security applications and solutions; and
- Providing project consulting services on broadband communication and networking systems for property development projects.
13
We continue to pursue opportunities to provide technical consulting and technical services to commercial businesses. Further, we continue to seek opportunities to combine the Company's expertise in supply chain management solutions with wireless technologies like Bluetooth, RFID and GPS tracking systems and biometric security systems for the retailing, logistics and warehousing, telecommunication, transportation, healthcare, security and manufacturing industries.
In November 2007, the Company acquired the right to the source code for the Bluetooth cell integration, cell management and proximity marketing software. Since acquiring the right, the Company has utilized the source code to develop a host of applications for the retailing, logistics and warehousing, telecommunication, transportation, healthcare, security and manufacturing industries.
Operations During 2008
The Company's principal operations during 2008 included multimedia production, information technology and computing services, sales of smarthome, biometric security and Bluetooth, GPS and RFID-enabled applications. We marketed hardware, software and consulting services to a number of companies in the public and private sectors. Our hardware products included the EyStar SmartHome Management System, biometric systems and Internet-based cameras. SDA sells its products in connection with consulting contracts that are awarded to the Company. We presently provide these services principally to customers in Southeast Asia.
The Company managed to establish a toehold in China when it secured its first contract during December 2007, valued at $2.825 million, to install and maintain a real-time GPS fleet tracking management system for 1,100 trucks owned by a leading operator in Guangdong Province. The installation is scheduled to begin in the third quarter of 2008.
Negotiations are underway in Australia with channel partners whom will market the Company's products and services and secure contracts on our behalf under the Company's established trademarks. Our primary goal is to offer our Bluetooth and RFID-enabled applications for the mining, healthcare, public utilities and entertainment industries. We anticipate contracts to be executed in the third and fourth quarter of 2008.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements, included elsewhere in this quarterly report on Form 10-Q.
The following table sets forth certain operating data for the Company and its subsidiaries for the periods as indicated below.
Six Months Ended June 30,
(Unaudited) 2008 2007
--------------- ---------------
Revenues $29,219,123 $21,381,012
Gross profit 2,444,389 1,580,650
Sales and marketing 26,748 7,124
General and administrative 1,080,990 859,545
Gain on disposal of assets-related parties -- 55,749
Income from continuing operations 1,137,688 654,137
Income from discontinued operations -- 5,736
Net income 1,137,688 659,873
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2008 TO THE THREE MONTHS ENDED
JUNE 30, 2007
Revenue
Total revenue increased by $3,699,552 or 34% to $14,709,762 for the three months ended June 30, 2008 as compared to $11,010,210 for the three months ended June 30, 2007.
The increase in total revenue for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 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 2003. In the three months ended June 30, 2008, two customers accounted for 51% and 44% of total revenue. In the three months ended June 30, 2007, the same two customers accounted for 49% and 46% of total revenue.
14
Gross Profit
Gross profit increased to $1,201,932 for the three months ended June 30, 2008 compared to $890,023 for the three months ended June 30, 2007. Gross profit margin increased to 8.2% in the quarter ended June 30, 2008 versus 8.1% in the quarter ended June 30, 2007.
The increase in gross profit was due to higher revenue, particularly consulting revenue, which has a higher margin than production work. As a result of higher revenue, cost of revenues increased by $3,387,643 or 33%, to $13,507,830 for the three months ended June 30, 2008 from $10,120,187 for the three months ended June 30, 2007. The increase in cost of revenues was primarily due to the Company requiring additional external resources in order to fulfill the higher demand for the Company's services. 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 $7,839, or 242%, to $11,079 for the three months ended June 30, 2008 compared to $3,240 for the three months ended June 30, 2007, primarily as a result of an increase in travel expenses.
General and administrative expenses
General and administrative expenses involving non-related parties increased by $138,495, or 36%, to $524,914 for the three months ended June 30, 2008 as compared to $386,419 for the three months ended June 30, 2007.
The increase was primarily attributable to an increase in depreciation of tangible assets, salaries, stock compensation and professional and auditing fees. For the three months ended June 30, 2008, 44% of the total general and administrative expenses of $524,914 was for depreciation of tangible assets, 1% was for consulting fees and 15% was for employee payroll. Another 19% was for fees for professional and auditing services, 1% was for investor relations expenses, 11% was for both employee and stock compensation expenses and approximately 9% was for rent, utilities, general office supplies, communications and corporate insurance expenses. For the three months ended June 30, 2007, 19% of the total general and administrative expenses of $386,419 was for depreciation of tangible assets, 5% was for consulting fees and 10% was for employee payroll. Another 13% was for fees for professional and auditing services, 4% was for investor relations expenses, 8% was for compensation expenses and approximately 41% was for rent, utilities, general office supplies, communications and corporate insurance expenses.
General and administrative expenses - related parties for the three months ended June 30, 2008 and 2007 were $37,465 and $36,973, respectively. General and administrative expenses - related parties included management fees and administrative expenses payable by the Company to LSH, a company owned by Mr. Lim and his wife. For the three months ended June 30, 2008, LSH billed the Company's Malaysian subsidiary, DASB, $7,465 and $6,973 for the three months ended June 30, 2008 and 2007, respectively, for administration and clerical fees. The Company also incurred management fees of $30,000 for each of the three months ended June 30, 2008 and 2007. The management fees were charged on the basis of time spent for the administration and management services provided to the Company.
Gain on disposal of assets - related parties
For the three months ended June 30, 2007, the Company included recognition of a previously deferred gain of $30,459, related to an amount the Company received from its long-term receivable, related party. The receivable balance and total deferred gain was $0 as of December 31, 2007. 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 reduced to $54,473, as of June 30, 2007. This amount was fully settled as of December 31, 2007.
15
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2008 TO THE SIX MONTHS ENDED
JUNE 30, 2007
Revenue
Total revenue increased by $7,838,111, or 37%, to $29,219,123 for the six months ended June 30, 2008, as compared to $21,381,012 for the six months ended June 30, 2007.
The increase in total revenue 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 a result of increased sub-contract work from the clients of the Company's two major customers. Revenue for project consulting services was generated from four project consulting contracts that the Company secured in 2001, 2002 and 2003. In the six months ended June 30, 2008, two customers accounted for 51% and 44% of total revenue. In the six months ended June 30, 2007, the same two customers accounted for 49% and 47% of total revenue.
Gross Profit
Gross profit increased to $2,444,389 for the six months ended June 30, 2008, compared to $1,580,650 for the six months ended June 30, 2007, an increase of $863,739 or 55%. Gross profit margin increased to 8.4% for the six months ended June 30, 2008 versus 7.4% for the six months ended June 30, 2007.
The increase in gross profit for the six months ended June 30, 2008 was due to higher revenue, particularly consulting revenue, which has a much higher margin than production work. As a result of higher revenue, cost of revenues increased by $6,974,372, or 35%, to $26,774,734 for the six months ended June 30, 2008 from $19,800,362 for the six months ended June 30, 2007. The increase in cost of revenue was primarily due to the Company requiring additional external resources in order to fulfill the higher demand for the Company's services. 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 $19,624, or 275%, to $26,748 for the six months ended June 30, 2008 from $7,124 for the six months ended June 30, 2007, primarily as a result of an increase in travel expenses.
General and administrative expenses
General and administrative expenses involving non-related parties increased by $220,361, or 28%, to $1,006,098 for the six months ended June 30, 2008, as compared to $785,737 for the six months ended June 30, 2007.
The increase was primarily attributable to an increase in depreciation of tangible assets, salaries, professional and auditing fees and investor relations. For the six months ended June 30, 2008, 46% of the total general and administrative expenses of $1,006,098 was for depreciation of tangible assets, 1% was for consulting fees and 15% was for employee payroll. Another 18% was for fees for professional and auditing services, 2% was for investor relations expenses, 9% was for both employee and stock compensation expenses and approximately 9% was for rent, utilities, general office supplies, communications and corporate insurance expenses. For the six months ended June 30, 2007, 18% of the total general and administrative expenses of $785,737 was for depreciation of tangible assets, 10% was for consulting fees and 13% was for employee payroll. Another 13% was for fees for professional and auditing services, 2% was for investor relations expenses, 20% was for compensation expenses and approximately 24% was for rent, utilities, general office supplies, communications and corporate insurance expenses.
General and administrative expenses - related parties for the six months ended June 30, 2008 and 2007 were $74,892 and $73,808, respectively. General and administrative expenses - related parties included management fees and administrative expenses payable by the Company to LSH, a company owned by Mr. Lim and his wife. For the six months ended June 30, 2008, LSH billed the Company's Malaysian subsidiary, DASB, $14,892 and $13,808 for the six months ended June 30, 2008 and 2007, respectively, for administration and clerical fees. The Company also incurred management fees of $60,000 for each of the six months ended June 30, 2008 and 2007. The management fees were charged on the basis of time spent for the administration and management services provided to the Company.
Gain on disposal of assets - related parties
For the six months ended June 30, 2007, the Company included recognition of a previously deferred gain of $55,749, related to an amount the Company received from its long-term receivable, related party. The receivable balance and total deferred gain was $0 as of December 31, 2007. 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 reduced to $54,473, as of June 30, 2007. This amount was fully settled as of December 31, 2007.
16
Liquidity and Capital Resources
As of June 30, 2008, the Company had cash of $26,123.
For the six months ended June 30, 2008, operations were primarily funded from internally generated funds and working capital advanced from time to time by Mr.
Lim. These advances bear no interest and have no fixed terms of repayment.
As of June 30, 2008, the Company owed Mr. Lim $8,786 for short-term cash advances made to subsidiaries of the Company for working capital purposes from time to time. Additionally, at June 30, 2008, the amount owed to a company in which Mr. Lim has a financial interest was $66,017. This amount was for short-term cash advances made to the Company and its subsidiaries for working capital purposes from time to time and for management and administrative fees. These amounts are unsecured, bear no interest and have no fixed terms of repayment.
The cash generated from operating activities for the six months ended June 30, 2008 was $48,665 and was primarily the result of income and non-cash expenses for the period offset by an increase in accounts receivable.
Cash used in investing activities of $24,508 for the six months ended June 30, 2008 was primarily attributable to the purchase of computer software and equipment totaling $9,165 and the acquisition of a trademark totaling $15,343. The Company will continue to develop its products and services under the brand name "EyStar." EyStar is a well established and recognized brand name in Asia.
Cash generated from financing activities during the six months ended June 30, 2008 of $69,806 resulted from proceeds received from the issuance of shares of the Company's common stock totaling $109,000, repayment to a director for short-term cash advances made to subsidiaries of the Company totaling $81,175 and advances from an affiliate totaling $41,981.
The Company expects to expand into new businesses that include provision of Bluetooth, RFID, GPS, outsourced business support and supply chain management services. The Company expects to incur further expenses to acquire technologies that are synergistic to the new businesses and will help the Company to rollout the new businesses in the shortest time possible. The Company estimates that it will require $2 million to finance the set-up cost of its new businesses in 2008. The Company also expects that it will require a further $5 million to finance both the working capital and additional capital expenditures of its new businesses in 2009.
In addition to internally generated funds and anticipated continued financial support from Mr. Lim, the Company may seek to raise funds from equity or debt financing for its future growth, expansion and working capital requirements.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet transactions that are expected to have a material effect on the Company's financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to smaller reporting companies.
ITEM 4(T). CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, based on their evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that (i) our disclosure controls and procedures are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of June 30, 2008.
This 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 SEC that permit the Company to provide only management's report in this report.
(c) Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2008, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of our business we are periodically threatened with or named as a defendant in legal proceedings. As of the end of the period for which this report is filed, there are no pending legal proceedings to which we are a party or to which our property is subject that management believes to be material to our business, results of operations or financial condition.
ITEM 1A. RISK FACTORS
The Company's business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause the Company's actual results to vary materially from recent results or from the Company's anticipated future results. For a discussion identifying risk factors and other important factors that could cause actual results to differ materially from those anticipated, see the Company's Annual Report on Form 10-K for the year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company signed a compensation agreement with a consultant on August 20, 2007 under which the Company agreed to issue an aggregate of 1,000,000 shares of its common stock to the consultant for services to be rendered for the 12-month period ended July 14, 2008. On April 18, 2008, the Company issued 250,000 shares of common stock to the consultant pursuant to this agreement for aggregate consideration in the form of services rendered by the consultant equal to $32,250.
The Company signed a compensation agreement with a consultant on April 18, 2008 under which the Company agreed to issue 2,000,000 shares of its common stock to a consultant for services to be rendered for the 12-month period ending April 17, 2009. On April 21, 2008, the Company issued 2,000,000 shares of common stock to the consultant pursuant to this agreement for aggregate consideration in the form of services to be rendered by the consultant equal to $300,000..
The Company relied upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder for the issuances of these securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certification by Chief Executive Officer pursuant to Rule 13A-14 or 15D-14 of the Securities Exchange Act of 1934
31.2 Certification by Chief Accounting Officer pursuant to Rule 13A-14 or 15D-14 of the Securities Exchange Act of 1934
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. 1350
32.2 Certification by Chief Accounting Officer pursuant to 18 U.S.C. 1350
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Secured Digital Applications, Inc.
(registrant)
Dated: August 14, 2008 By: /s/ Patrick Soon-Hock Lim
--------------------------------
Patrick Soon-Hock Lim
Chairman and Chief Executive Officer
Dated: August 14, 2008 By: /s/ Kelvin Choon-Huat Ng
--------------------------------
Kelvin Choon-Huat Ng
Chief Accounting Officer
20
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Patrick Soon-Hock Lim, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Secured Digital Applications, Inc (this "Report").;
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d) Disclosed in this Report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2008
/s/ Patrick Soon-Hock Lim
-------------------------------------
Patrick Soon-Hock Lim
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kelvin Choon-Huat Ng, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Secured Digital Applications, Inc. (this "Report");
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report.
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d) Disclosed in this Report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2008 /s/ Kelvin Choon-Huat Ng
----------------------------------
Kelvin Choon-Huat Ng
Chief Accounting Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Secured Digital Applications, Inc. (the "Company") on Form 10-Q for the quarterly period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Patrick Soon-Hock Lim, Chief Executive Officer (principal executive officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Patrick Soon-Hock Lim
Patrick Soon-Hock Lim
Chief Executive Officer
August 14, 2008
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Secured Digital Applications, Inc. (the "Company") on Form 10-Q for the quarterly period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kelvin Choon-Huat Ng, Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Kelvin Choon-Huat Ng
Kelvin Choon-Huat Ng
Chief Accounting Officer
August 14, 2008
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________
Commission File Number: 0-25658
SECURED DIGITAL APPLICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1357927
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
230 PARK AVENUE, 10TH FLOOR, NEW YORK, NY 10169
(Address of principal executive offices) (Zip Code)
(212) 551 1747
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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.
[X] Yes [ ] No
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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check Smaller reporting company [X] if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The number of shares outstanding of the registrant's common stock as of August 14, 2008: 142,726,314 shares of common stock, par value $0.00001 per share.
1
FORM 10-Q
2ND QUARTER
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed consolidated balance sheets at June 30, 2008
(Unaudited) and December 31, 2007 (Audited) 4 - 5
Condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2008 and 2007 (Unaudited) 6 - 7
Condensed consolidated statements of cash flows for the six months periods ended June 30, 2008 and 2007 (Unaudited) 8
Notes to condensed consolidated financial statements (Unaudited) 9 - 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 - 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 4(T). CONTROLS AND PROCEDURES 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 1A. RISK FACTORS 19
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS 19
SIGNATURES 20
2
SAFE HARBOR STATEMENT
This quarterly report on Form 10-Q and the documents incorporated herein by reference, contain or may contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Information is provided that is based upon beliefs of, and information currently available to, the management of Secured Digital Applications, Inc. (the "Company"), as well as estimates and assumptions made by the Company's management. The Company is including this cautionary statement in this Form 10-Q to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by or on behalf of us. Statements that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "may," "should," "anticipates," "estimates," "expects," "future," "intends," "hopes," "plans," "projects" or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause actual results of the Company to vary materially from historical results or from any future results expressed or implied in such forward-looking statements. For a discussion identifying risk factors and other important factors that could cause actual results to differ materially from those anticipated, see the Company's Annual Report on Form 10-K for the year ended December 31, 2007, as amended.
These factors include, among others, the following: the inability of the Company to successfully implement its business plans, the cancellation or postponement of contracts that the Company has entered into in connection with its business, the inability to obtain services provided by other companies or service providers, the inability of the Company to raise capital on a timely basis, the inability of the Company to meet certain covenants contained in trade financing agreements, existing and future government regulations, changes and fluctuation in foreign currency exchange rates, the failure to retain qualified personnel, competitive pressures and potentially adverse tax and cash flow consequences resulting from operations in multiple countries with different laws and regulations, and the general economic and business conditions in Malaysia, China, the United States and the other countries in which we do business, primarily in Asia. The Company does not undertake to update, revise or correct any forward-looking statements.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 AND DECEMBER 31, 2007
June 30, December 31,
2008 2007
---------------- -------------------
(Unaudited)
ASSETS
Current assets:
Cash $ 26,123 $ 40,385
Trade and other accounts receivable 11,050,766 8,902,465
less allowance for doubtful accounts of $28,178 and $27,699, respectively
Prepaid expenses 20,106 18,539
---------------- -------------------
Total current assets 11,096,995 8,961,389
Property and equipment, net 3,331,608 3,718,150
Trademark 15,343 --
Goodwill 471,260 471,260
---------------- -------------------
$ 14,915,206 $ 13,150,799
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 36,250 $ 35,634
Accounts payable 546,022 531,133
Accrued expenses 146,901 209,877
Amount due to an affiliated company 66,017 23,668
Amount due to a director 8,786 88,632
Income tax payable 190,321 47,151
---------------- -------------------
Total current liabilities 994,297 936,095
Deferred tax 644,716 461,525
---------------- -------------------
Total liabilities 1,639,013 1,397,620
---------------- -------------------
(continued)
4
SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, 2008 AND DECEMBER 31, 2007
June 30, December 31,
2008 2007
---------------- -------------------
(Unaudited)
Minority interest 443,801 218,016
---------------- -------------------
Commitments
Stockholders' equity:
Series B convertible preferred stock, $0.10 par value; 10,000 10,000
1,000,000 shares authorized; 100,000 shares issued and outstanding,
liquidation preference $2,500,000
Common stock, $0.00001 par value: 1,434 1,375
350,000,000 shares authorized; 145,352,094 shares issued and
142,476,314 shares outstanding in 2008 and 143,172,594 shares
issued and 137,796,814 shares outstanding in 2007
Additional paid-in capital 8,104,213 7,665,244
Options 26,136 73,561
Warrants 975,337 953,643
Common treasury stock - at cost, 2,875,780 shares in 2008 and 5,375,780
shares in 2007 -- --
Deferred compensation (239,250) --
Retained earnings 3,417,694 2,280,005
Accumulated other comprehensive income 536,828 551,335
---------------- -------------------
Total stockholders' equity 12,832,392 11,535,163
---------------- -------------------
Total liabilities and stockholders' equity $ 14,915,206 $ 13,150,799
================ ===================
See notes to condensed consolidated financial statements
5
SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
Three months ended June 30, Six months ended June 30,
2008 2007 2008 2007
---------- ---------- ---------- ----------
Revenues :
Services :
Related Parties $ 768,443 $ 558,228 $ 1,613,253 $ 860,110
Others 13,941,319 10,451,982 27,605,870 20,520,902
---------- ---------- ---------- ----------
14,709,762 11,010,210 29,219,123 21,381,012
---------- ---------- ---------- ----------
Cost of revenues :
Services :
Related Parties 230,534 167,469 483,977 258,033
Others (includes a related party of
$5,996,339, $4,383,252, $12,001,675 and
$8,475,822, respectively.) 13,277,296 9,952,718 26,290,757 19,542,329
---------- ---------- ---------- ----------
13,507,830 10,120,187 26,774,734 19,800,362
---------- ---------- ---------- ----------
Gross profit 1,201,932 890,023 2,444,389 1,580,650
---------- ---------- ---------- ----------
Operating expenses:
Sales and marketing 11,079 3,240 26,748 7,124
General and administrative:
Related parties 37,465 36,973 74,892 73,808
Others 524,914 386,419 1,006,098 785,737
---------- ---------- ---------- ----------
Total operating expenses 573,458 426,632 1,107,738 866,669
---------- ---------- ---------- ----------
Income from operations 628,474 463,391 1,336,651 713,981
---------- ---------- ---------- ----------
Other income (expense):
Gain (loss) on foreign currency transactions (10,910) (1,134) 164,463 109,818
Purchase preacquisition income (13,928) -- (13,928) --
Previously deferred gain on sale of
technology,related parties -- 30,459 -- 55,749
Other income 3,378 2,615 3,378 5,178
---------- ---------- ---------- ----------
(21,460) 31,940 153,913 170,745
---------- ---------- ---------- ----------
Income before provision for income taxes and
minority interest 607,014 495,331 1,490,564 884,726
Provision for income taxes (146,203) (153,388) (321,246) (216,897)
---------- ---------- ---------- ----------
Income before minority interest 460,811 341,943 1,169,318 667,829
Minority interest (22,579) (7,571) (31,630) (13,692)
---------- ---------- ---------- ----------
Income from continuing operations 438,232 334,372 1,137,688 654,137
---------- ---------- ---------- ----------
Discontinued operations:
Loss from discontinued operation - net of
minority interest and income taxes -- (8,583) -- (17,248)
Gain on disposal of discontinued
subsidiaries -- 22,984 -- 22,984
---------- ---------- ---------- ----------
Income from discontinued operations -- 14,401 -- 5,736
---------- ---------- ---------- ----------
Net income $ 438,232 $ 348,773 $ 1,137,688 $ 659,873
========== ========== ========== ==========
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SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
Three months ended June 30, Six months ended June 30,
2008 2007 2008 2007
----------- ----------- ----------- -----------
Net income $ 438,232 $ 348,773 $ 1,137,688 $ 659,873
Other comprehensive income:
Foreign currency translation adjustments (24,508) (565) (14,507) 57,786
----------- ----------- ----------- -----------
Comprehensive income $ 413,724 $ 348,208 $ 1,123,181 $ 717,659
=========== =========== =========== ===========
Net income per common share:
Basic ** $ * $ * $ 0.01 $ *
=========== =========== =========== ===========
Diluted ** $ * $ * $ 0.01 $ *
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 141,902,138 130,807,803 140,154,951 130,026,288
=========== =========== =========== ===========
Diluted 165,351,336 154,817,144 163,206,980 154,923,321
=========== =========== =========== ===========
* Less than $0.01 per share.
**Net income per common share for discontinued operations is less than $0.01 per
share and not presented separately.
7
SECURED DIGITAL APPLICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)
Six months ended June 30,
2008 2007
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Change in operating assets and liabilities of continuing
operations $ 48,665 $ 43,319
Change in operating assets and liabilities of discontinued
operations -- (184)
--------- ---------
Net cash provided by operating activities 48,665 43,135
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (9,165) (6,274)
Purchase of trademark (15,343) --
--------- ---------
Net cash used in investing activities (24,508) (6,274)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuances of shares of common stock 109,000 --
Proceeds from advances from affiliated company 41,981 70,098
Proceeds from advances from a director -- 4,567
Repayments of loans from a director (81,175) --
--------- ---------
Net cash provided by financing activities 69,806 74,665
--------- ---------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
- continuing activities (108,225) (103,240)
- discontinued activities -- 661
--------- ---------
Net (decrease) increase in cash (14,262) 8,947
Cash, beginning of period 40,385 7,644
--------- ---------
Cash, end of period $ 26,123 $ 16,591
========= =========
See notes to condensed consolidated financial statements
8
SECURED DIGITAL APPLICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Secured Digital Applications, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with Item 10-1 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the United States Securities and Exchange Commission (the "SEC").
NOTE 2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 ("SFAS 160"). SFAS 160 requires companies with non-controlling interests to disclose such interests clearly as a portion of equity but separate from the parent's equity. The non-controlling interest's portion of net income must also be clearly presented on the income statement. SFAS 160 is effective for financial statements issued for fiscals years beginning after December 15, 2008 and will be adopted by the Company in the first quarter of fiscal year 2009. The Company does not expect that the adoption of SFAS 160 will have a material impact on our financial condition or results of operation.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (revised 2007) ("SFAS 141(R)"). SFAS 141(R) applies the acquisition method of accounting for business combinations established in SFAS 141 to all acquisitions where the acquirer gains a controlling interest, regardless of whether consideration was exchanged. Consistent with SFAS 141, SFAS 141(R) requires the acquirer to fair value the assets and liabilities of the acquiree and record goodwill on bargain purchases, with main difference the application to all acquisitions where control is achieved. SFAS 141(R) is effective for financial statements issued for fiscal years beginning after December 15, 2008 and will be adopted by the Company in the first quarter of fiscal year 2009. The Company does not expect that the adoption of SFAS 141(R) will have a material impact on our financial condition or results of operation.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, - an amendment of FASB Statement No. 133 ("FAS 161"). FAS 161 requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. The objective of the guidance is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. FAS 161 is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact FAS 161 will have on the Company's consolidated financial statements, but it currently does not expect the effect to be material.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles ("SFAS No. 162"). SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP. The FASB believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of SFAS No. 162 is not expected to have a material impact on the Company's financial statements.
9
NOTE 3: NET INCOME PER COMMON SHARE
The Company computes earnings per share in accordance with the provisions of SFAS No. 128, Earnings per Share ("SFAS 128"). Under the provisions of SFAS 128, basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted net income per share reflects the potential dilution that could occur from common stock issuable through stock based compensation including stock options, restricted stock awards, warrants and other convertible securities. The calculation of basic and diluted earnings per share is as follows (in thousands, except per-share amounts):
Three Months Ended Six Months Ended
(Unaudited) June 30, June 30, June 30, June 30,
2008 2007 2008 2007
------- ------- --------- -------
Net income $ 438 $ 349 $ 1,138 $ 660
======= ======= ========= =======
Weighted average shares outstanding - basic 141,902 130,808 140,155 130,026
======= ======= ========= =======
Net income per share - basic $ * $ * $ 0.01 $ *
======= ======= ========= =======
Weighted average shares outstanding - basic 141,902 130,808 140,155 130,026
Common stock issuable to consultant 1,247 4,009 667 4,622
Convertible preferred stock 20,000 20,000 20,000 20,000
Dilutive stock options and warrants 2,202 -- 2,385 275
------- ------- -------------- -------
Weighted average shares outstanding - diluted 165,351 154,817 163,207 154,923
======= ======= ========= =======
Net income per share - diluted $ * $ * $ 0.01 $ *
======= ======= ========= =======
* Less than $.01 per share
** Net income per common share for discontinued operations is less than $.01 per
share and not presented separately.
There are options to purchase 460,000 shares of the Company's common stock at each of the three and six months ended June 30, 2008 and options to purchase 3,080,000 shares of the Company's common stock at each of the three and six months ended June 30, 2007 that were excluded from the calculation of earnings per share as their issuance prices were in excess of the average market price for the period. For the three months ended June 30, 2008 and 2007, 4,600,000 and 10,900,000 warrants were excluded in the calculation of earnings per share as their issuance prices were in excess of the average market price for the period. For each of the six months ended June 30, 2008 and 2007, 4,600,000 warrants were excluded in the calculation of earnings per share as their issuance prices were in excess of the average market price for the period.
10
NOTE 4: DISPOSAL OF SUBSIDIARIES
On June 27, 2007, the Company sold its wholly-owned subsidiary, DigitalApps Technologies Sdn Bhd ("DAT"), which included DAT's 55%-owned subsidiary, Ispec Sdn Bhd ("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.
Results of discontinued operations are as follows for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
-------------- -------------- -------------- ---------------
Revenue $ -- $ -- $ -- $ --
Cost of revenues -- -- -- --
-------------- -------------- -------------- ---------------
Gross profit -- -- -- --
Operating expenses -- 8,583 -- 17,248
-------------- -------------- -------------- ---------------
Loss from operations -- (8,583) -- (17,248)
Other income -- -- -- --
-------------- -------------- -------------- ---------------
Loss before tax -- (8,583) -- (17,248)
Income tax -- -- -- --
-------------- -------------- -------------- ---------------
Loss from discontinued operations $ -- $ (8,583) $ -- $ (17,248)
============== ============== ============== ===============
NOTE 5: RELATED PARTY TRANSACTIONS
LSH ASSET HOLDINGS SDN BHD ("LSH"):
LSH, a company owned by Patrick Lim, the Company's Chief Executive Officer, and his wife, billed the Company management fees totaling $30,000 for each of the three months ended June 30, 2008 and 2007 and $60,000 for each of the six months ended June 30, 2008 and 2007. LSH also billed the Company's Malaysian principal operating subsidiary, DigitalApps Sdn Bhd ("DASB"), $7,465 and $6,973 for the three months ended June 30, 2008 and 2007 and $14,892 and $13,808 for the six months ended June 30, 2008 and 2007, for administrative and clerical charges. LSH also made short term advances to the Company from time to time for working capital purposes. At June 30, 2008 and December 31, 2007, the amount due to LSH was $66,017 and $23,668, respectively. This amount is unsecured, bears no interest, has no fixed terms of repayment, and is recorded in the financial statements as "Amount due to an affiliated company."
CHIEF EXECUTIVE OFFICER
As of June 30, 2008 and December 31, 2007, the Company owed Patrick Lim, the Company's Chief Executive Officer, $8,786 and $88,632, respectively, for short-term cash advances made to the Company from time to time for working capital purposes. The amount owing to the Chief Executive Officer is unsecured, bears no interest, has no fixed terms of repayment and is recorded in the financial statements as "Amount due to a director."
MY ARCHITECT ("MYA")
Mustaffar bin Yacob, a minority shareholder of one of the Company's Malaysian subsidiary, Perwimas Telecommunications Sdn Bhd ("PTSB"), is a principal partner of MYA. The Company received payment from consulting contracts that it entered into with MYA amounting $768,443 and $1,613,253, for the three and six months ended June 30, 2008 and $558,228 and $860,110 for the three and six months ended June 30, 2007. The terms of repayment for the amount due from MYA are similar to terms accorded to the Company's other existing customers. At June 30, 2008 and December 31, 2007, there was no balance owed to the Company by MYA.
ULTIMATE SERIES SDN BHD ("USSB")
USSB is wholly-owned by Mustaffar bin Yacob. During the three and six months ended June 30, 2008 and 2007, the Company incurred fees of $5,996,339, $12,001,675, $4,383,252 and $8,475,822, respectively, for sub-contractor work that it entered into with USSB. The terms of repayment for the amount due to USSB by the Company are similar to terms accorded to the Company's other existing suppliers. At June 30, 2008 and December 31, 2007, there was no balance owed to USSB.
11
NOTE 6: STOCKHOLDERS' EQUITY
COMMON STOCK
The Company issued from its treasury stock 100,000 shares of common stock on each of June 13, 2007 and October 22, 2007 to a consultant pursuant to a compensation agreement dated May 1, 2007, under which the Company is to issue an aggregate of 400,000 shares of its common stock to the consultant for services to be rendered to the Company for the 12-month period ended April 30, 2008. The Company recognized compensation expense of $6,358 for the three months ended June 30, 2008 related to this compensation agreement.
The Company issued from its treasury stock 250,000 shares of common stock on each of October 17, 2007, February 20, 2008, April 18, 2008 and July 14, 2008 to a consultant pursuant to a compensation agreement dated August 20, 2007, under which the Company is to issue an aggregate of 1,000,000 shares of its common stock to the consultant for services to be rendered to the Company for the 12-month period ending August 19, 2008. The Company recognized compensation expense of $32,233 for the three months ended June 30, 2008 related to this compensation agreement.
On March 5, 2008, the Company issued 1,679,500 shares of common stock to Patrick Lim, the Company's Chief Executive Officer, upon the exercise of warrants. The Company received proceeds totaling $109,000 from Mr. Lim's warrant exercise.
On April 17, 2008, the Company issued 500,000 shares of common stock to Mr. Lim for achieving a compounded growth in group revenues of at least 15% percent pursuant to a Stock Award Agreement dated October 21, 2006. The total consideration amount of $86,500 is based on the market value of $0.173 per share on the date of grant.
On April 21, 2008, the Company issued from its treasury stock 2,000,000 shares of common stock to a consultant pursuant to a compensation agreement dated April 18, 2008, under which the Company is to issue an aggregate of 2,000,000 shares of its common stock to the consultant for services to be rendered for the 12-month period ending April 17, 2009. The total consideration amount of $300,000 is based on the market value of $0.15 per share on the date of issuance.
NOTE 7: SIGNIFICANT CONCENTRATIONS
Two customers accounted for the following revenue for the three and six months ended June 30, 2008 and 2007:
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------- ----------------- ----------------- -----------------
Customer 1 51% 49% 51% 49%
Customer 2 44% 46% 44% 47%
----------------- ----------------- ----------------- -----------------
Total 95% 95% 95% 96%
================= ================= ================= =================
At June 30, 2008 and 2007, two customers accounted for substantially all of the trade accounts receivable.
Three suppliers (including USSB - see Note 5) accounted for substantially all cost of revenues during the six months ended June 30, 2008 and 2007. The Company is not dependent upon one supplier to provide the services that it requires but made a strategic decision to engage the services of only a small number of suppliers after taking into consideration the quality of service and competitive pricing being offered. Should the need arise, the Company believes that it could utilize alternative suppliers for the services that it requires.
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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." "Company," "we," "us" or "our") is a provider of mobile communication and information technology consulting services. Our strategy is to provide business services to our customers in a manner that is both superior in quality and more cost efficient than the customer can provide for themselves. Our services are focused in the areas of multimedia production, information technology and computing consulting services, smarthome, biometric security and Bluetooth, GPS and RFID-enabled applications. As a supplier and consultant, we rely on a combination of current technologies to provide high-quality products and services at competitive prices.
The Company has provided outsourced information technology and multimedia content production services since 2000. We began to provide services in security applications, particularly biometric security applications, during 2003. We continue to seek to add to our holdings with acquisitions that meet our management's criteria for inclusion in the group of SDA companies. In general, we continue to seek out regional businesses with strong management willing to remain in considerable positions of responsibility as minority equity holders. We also seek businesses that are operating at a profit or near break-even and which provide a superior opportunity for high rates of growth after integration into the SDA group of companies. In considering potential acquisitions, SDA evaluates such factors as:
- the "fit" of the potential acquisition among SDA's existing subsidiaries, in particular whether the acquisition is complementary to SDA's existing operating subsidiaries;
- the capabilities of existing management and the willingness of existing management to continue with the enterprise as employees and minority equity holders;
- whether the enterprise provides, in management's view, a superior potential for growth and profitability after acquisition;
- whether the enterprise, in management's view, can be successfully and beneficially integrated with SDA's existing business processes;
- the terms under which existing management is prepared to convey a majority interest to SDA; and
- the demonstrated ability of existing management to operate the enterprise profitably.
Since 2000, we have succeeded in financing our acquisitions primarily with internally generated funds and with issuances of our securities. This strategy has permitted the Company to maintain a low debt to equity ratio. There can be no assurance, however, that we will be able to continue to pay for acquisitions with internally generated funds and it is likely that we will require additional funding, which may result in the issuance of additional equity or debt. There also can be no assurance that we will be able to identify, acquire or integrate businesses into the SDA group of companies.
SDA's core line of business is 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.
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries.
Reorganization of Operating Subsidiaries
On May 20, 2008, the Company sold its wholly-owned subsidiary company, China Sea Trade Inc. ("CST") to a third party and recognized a gain on sale of $1,928. CST was operating at a loss and did not meet the Company's criteria for return on investment. The effect of the sale of CST is not material and, therefore, the operating results of CST were not presented separately as discontinued operations.
For the three and six months ended June 30, 2008 and 2007, the Company's revenue was generated primarily from the following activities:
- Designing, producing, hosting and distribution of interactive multimedia content, websites, programs and applications;
- Developing and producing e-commerce programs and Internet-based security applications and solutions; and
- Providing project consulting services on broadband communication and networking systems for property development projects.
13
We continue to pursue opportunities to provide technical consulting and technical services to commercial businesses. Further, we continue to seek opportunities to combine the Company's expertise in supply chain management solutions with wireless technologies like Bluetooth, RFID and GPS tracking systems and biometric security systems for the retailing, logistics and warehousing, telecommunication, transportation, healthcare, security and manufacturing industries.
In November 2007, the Company acquired the right to the source code for the Bluetooth cell integration, cell management and proximity marketing software. Since acquiring the right, the Company has utilized the source code to develop a host of applications for the retailing, logistics and warehousing, telecommunication, transportation, healthcare, security and manufacturing industries.
Operations During 2008
The Company's principal operations during 2008 included multimedia production, information technology and computing services, sales of smarthome, biometric security and Bluetooth, GPS and RFID-enabled applications. We marketed hardware, software and consulting services to a number of companies in the public and private sectors. Our hardware products included the EyStar SmartHome Management System, biometric systems and Internet-based cameras. SDA sells its products in connection with consulting contracts that are awarded to the Company. We presently provide these services principally to customers in Southeast Asia.
The Company managed to establish a toehold in China when it secured its first contract during December 2007, valued at $2.825 million, to install and maintain a real-time GPS fleet tracking management system for 1,100 trucks owned by a leading operator in Guangdong Province. The installation is scheduled to begin in the third quarter of 2008.
Negotiations are underway in Australia with channel partners whom will market the Company's products and services and secure contracts on our behalf under the Company's established trademarks. Our primary goal is to offer our Bluetooth and RFID-enabled applications for the mining, healthcare, public utilities and entertainment industries. We anticipate contracts to be executed in the third and fourth quarter of 2008.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements, included elsewhere in this quarterly report on Form 10-Q.
The following table sets forth certain operating data for the Company and its subsidiaries for the periods as indicated below.
Six Months Ended June 30,
(Unaudited) 2008 2007
--------------- ---------------
Revenues $29,219,123 $21,381,012
Gross profit 2,444,389 1,580,650
Sales and marketing 26,748 7,124
General and administrative 1,080,990 859,545
Gain on disposal of assets-related parties -- 55,749
Income from continuing operations 1,137,688 654,137
Income from discontinued operations -- 5,736
Net income 1,137,688 659,873
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2008 TO THE THREE MONTHS ENDED
JUNE 30, 2007
Revenue
Total revenue increased by $3,699,552 or 34% to $14,709,762 for the three months ended June 30, 2008 as compared to $11,010,210 for the three months ended June 30, 2007.
The increase in total revenue for the three months ended June 30, 2008 as compared to the three months ended June 30, 2007 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 2003. In the three months ended June 30, 2008, two customers accounted for 51% and 44% of total revenue. In the three months ended June 30, 2007, the same two customers accounted for 49% and 46% of total revenue.
14
Gross Profit
Gross profit increased to $1,201,932 for the three months ended June 30, 2008 compared to $890,023 for the three months ended June 30, 2007. Gross profit margin increased to 8.2% in the quarter ended June 30, 2008 versus 8.1% in the quarter ended June 30, 2007.
The increase in gross profit was due to higher revenue, particularly consulting revenue, which has a higher margin than production work. As a result of higher revenue, cost of revenues increased by $3,387,643 or 33%, to $13,507,830 for the three months ended June 30, 2008 from $10,120,187 for the three months ended June 30, 2007. The increase in cost of revenues was primarily due to the Company requiring additional external resources in order to fulfill the higher demand for the Company's services. 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 $7,839, or 242%, to $11,079 for the three months ended June 30, 2008 compared to $3,240 for the three months ended June 30, 2007, primarily as a result of an increase in travel expenses.
General and administrative expenses
General and administrative expenses involving non-related parties increased by $138,495, or 36%, to $524,914 for the three months ended June 30, 2008 as compared to $386,419 for the three months ended June 30, 2007.
The increase was primarily attributable to an increase in depreciation of tangible assets, salaries, stock compensation and professional and auditing fees. For the three months ended June 30, 2008, 44% of the total general and administrative expenses of $524,914 was for depreciation of tangible assets, 1% was for consulting fees and 15% was for employee payroll. Another 19% was for fees for professional and auditing services, 1% was for investor relations expenses, 11% was for both employee and stock compensation expenses and approximately 9% was for rent, utilities, general office supplies, communications and corporate insurance expenses. For the three months ended June 30, 2007, 19% of the total general and administrative expenses of $386,419 was for depreciation of tangible assets, 5% was for consulting fees and 10% was for employee payroll. Another 13% was for fees for professional and auditing services, 4% was for investor relations expenses, 8% was for compensation expenses and approximately 41% was for rent, utilities, general office supplies, communications and corporate insurance expenses.
General and administrative expenses - related parties for the three months ended June 30, 2008 and 2007 were $37,465 and $36,973, respectively. General and administrative expenses - related parties included management fees and administrative expenses payable by the Company to LSH, a company owned by Mr. Lim and his wife. For the three months ended June 30, 2008, LSH billed the Company's Malaysian subsidiary, DASB, $7,465 and $6,973 for the three months ended June 30, 2008 and 2007, respectively, for administration and clerical fees. The Company also incurred management fees of $30,000 for each of the three months ended June 30, 2008 and 2007. The management fees were charged on the basis of time spent for the administration and management services provided to the Company.
Gain on disposal of assets - related parties
For the three months ended June 30, 2007, the Company included recognition of a previously deferred gain of $30,459, related to an amount the Company received from its long-term receivable, related party. The receivable balance and total deferred gain was $0 as of December 31, 2007. 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 reduced to $54,473, as of June 30, 2007. This amount was fully settled as of December 31, 2007.
15
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2008 TO THE SIX MONTHS ENDED
JUNE 30, 2007
Revenue
Total revenue increased by $7,838,111, or 37%, to $29,219,123 for the six months ended June 30, 2008, as compared to $21,381,012 for the six months ended June 30, 2007.
The increase in total revenue 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 a result of increased sub-contract work from the clients of the Company's two major customers. Revenue for project consulting services was generated from four project consulting contracts that the Company secured in 2001, 2002 and 2003. In the six months ended June 30, 2008, two customers accounted for 51% and 44% of total revenue. In the six months ended June 30, 2007, the same two customers accounted for 49% and 47% of total revenue.
Gross Profit
Gross profit increased to $2,444,389 for the six months ended June 30, 2008, compared to $1,580,650 for the six months ended June 30, 2007, an increase of $863,739 or 55%. Gross profit margin increased to 8.4% for the six months ended June 30, 2008 versus 7.4% for the six months ended June 30, 2007.
The increase in gross profit for the six months ended June 30, 2008 was due to higher revenue, particularly consulting revenue, which has a much higher margin than production work. As a result of higher revenue, cost of revenues increased by $6,974,372, or 35%, to $26,774,734 for the six months ended June 30, 2008 from $19,800,362 for the six months ended June 30, 2007. The increase in cost of revenue was primarily due to the Company requiring additional external resources in order to fulfill the higher demand for the Company's services. 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 $19,624, or 275%, to $26,748 for the six months ended June 30, 2008 from $7,124 for the six months ended June 30, 2007, primarily as a result of an increase in travel expenses.
General and administrative expenses
General and administrative expenses involving non-related parties increased by $220,361, or 28%, to $1,006,098 for the six months ended June 30, 2008, as compared to $785,737 for the six months ended June 30, 2007.
The increase was primarily attributable to an increase in depreciation of tangible assets, salaries, professional and auditing fees and investor relations. For the six months ended June 30, 2008, 46% of the total general and administrative expenses of $1,006,098 was for depreciation of tangible assets, 1% was for consulting fees and 15% was for employee payroll. Another 18% was for fees for professional and auditing services, 2% was for investor relations expenses, 9% was for both employee and stock compensation expenses and approximately 9% was for rent, utilities, general office supplies, communications and corporate insurance expenses. For the six months ended June 30, 2007, 18% of the total general and administrative expenses of $785,737 was for depreciation of tangible assets, 10% was for consulting fees and 13% was for employee payroll. Another 13% was for fees for professional and auditing services, 2% was for investor relations expenses, 20% was for compensation expenses and approximately 24% was for rent, utilities, general office supplies, communications and corporate insurance expenses.
General and administrative expenses - related parties for the six months ended June 30, 2008 and 2007 were $74,892 and $73,808, respectively. General and administrative expenses - related parties included management fees and administrative expenses payable by the Company to LSH, a company owned by Mr. Lim and his wife. For the six months ended June 30, 2008, LSH billed the Company's Malaysian subsidiary, DASB, $14,892 and $13,808 for the six months ended June 30, 2008 and 2007, respectively, for administration and clerical fees. The Company also incurred management fees of $60,000 for each of the six months ended June 30, 2008 and 2007. The management fees were charged on the basis of time spent for the administration and management services provided to the Company.
Gain on disposal of assets - related parties
For the six months ended June 30, 2007, the Company included recognition of a previously deferred gain of $55,749, related to an amount the Company received from its long-term receivable, related party. The receivable balance and total deferred gain was $0 as of December 31, 2007. 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 reduced to $54,473, as of June 30, 2007. This amount was fully settled as of December 31, 2007.
16
Liquidity and Capital Resources
As of June 30, 2008, the Company had cash of $26,123.
For the six months ended June 30, 2008, operations were primarily funded from internally generated funds and working capital advanced from time to time by Mr.
Lim. These advances bear no interest and have no fixed terms of repayment.
As of June 30, 2008, the Company owed Mr. Lim $8,786 for short-term cash advances made to subsidiaries of the Company for working capital purposes from time to time. Additionally, at June 30, 2008, the amount owed to a company in which Mr. Lim has a financial interest was $66,017. This amount was for short-term cash advances made to the Company and its subsidiaries for working capital purposes from time to time and for management and administrative fees. These amounts are unsecured, bear no interest and have no fixed terms of repayment.
The cash generated from operating activities for the six months ended June 30, 2008 was $48,665 and was primarily the result of income and non-cash expenses for the period offset by an increase in accounts receivable.
Cash used in investing activities of $24,508 for the six months ended June 30, 2008 was primarily attributable to the purchase of computer software and equipment totaling $9,165 and the acquisition of a trademark totaling $15,343. The Company will continue to develop its products and services under the brand name "EyStar." EyStar is a well established and recognized brand name in Asia.
Cash generated from financing activities during the six months ended June 30, 2008 of $69,806 resulted from proceeds received from the issuance of shares of the Company's common stock totaling $109,000, repayment to a director for short-term cash advances made to subsidiaries of the Company totaling $81,175 and advances from an affiliate totaling $41,981.
The Company expects to expand into new businesses that include provision of Bluetooth, RFID, GPS, outsourced business support and supply chain management services. The Company expects to incur further expenses to acquire technologies that are synergistic to the new businesses and will help the Company to rollout the new businesses in the shortest time possible. The Company estimates that it will require $2 million to finance the set-up cost of its new businesses in 2008. The Company also expects that it will require a further $5 million to finance both the working capital and additional capital expenditures of its new businesses in 2009.
In addition to internally generated funds and anticipated continued financial support from Mr. Lim, the Company may seek to raise funds from equity or debt financing for its future growth, expansion and working capital requirements.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet transactions that are expected to have a material effect on the Company's financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to smaller reporting companies.
ITEM 4(T). CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, based on their evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that (i) our disclosure controls and procedures are effective for ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of June 30, 2008.
This 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 SEC that permit the Company to provide only management's report in this report.
(c) Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2008, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of our business we are periodically threatened with or named as a defendant in legal proceedings. As of the end of the period for which this report is filed, there are no pending legal proceedings to which we are a party or to which our property is subject that management believes to be material to our business, results of operations or financial condition.
ITEM 1A. RISK FACTORS
The Company's business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause the Company's actual results to vary materially from recent results or from the Company's anticipated future results. For a discussion identifying risk factors and other important factors that could cause actual results to differ materially from those anticipated, see the Company's Annual Report on Form 10-K for the year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company signed a compensation agreement with a consultant on August 20, 2007 under which the Company agreed to issue an aggregate of 1,000,000 shares of its common stock to the consultant for services to be rendered for the 12-month period ended July 14, 2008. On April 18, 2008, the Company issued 250,000 shares of common stock to the consultant pursuant to this agreement for aggregate consideration in the form of services rendered by the consultant equal to $32,250.
The Company signed a compensation agreement with a consultant on April 18, 2008 under which the Company agreed to issue 2,000,000 shares of its common stock to a consultant for services to be rendered for the 12-month period ending April 17, 2009. On April 21, 2008, the Company issued 2,000,000 shares of common stock to the consultant pursuant to this agreement for aggregate consideration in the form of services to be rendered by the consultant equal to $300,000..
The Company relied upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder for the issuances of these securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certification by Chief Executive Officer pursuant to Rule 13A-14 or 15D-14 of the Securities Exchange Act of 1934
31.2 Certification by Chief Accounting Officer pursuant to Rule 13A-14 or 15D-14 of the Securities Exchange Act of 1934
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. 1350
32.2 Certification by Chief Accounting Officer pursuant to 18 U.S.C. 1350
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Secured Digital Applications, Inc.
(registrant)
Dated: August 14, 2008 By: /s/ Patrick Soon-Hock Lim
--------------------------------
Patrick Soon-Hock Lim
Chairman and Chief Executive Officer
Dated: August 14, 2008 By: /s/ Kelvin Choon-Huat Ng
--------------------------------
Kelvin Choon-Huat Ng
Chief Accounting Officer
20
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Patrick Soon-Hock Lim, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Secured Digital Applications, Inc (this "Report").;
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d) Disclosed in this Report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2008
/s/ Patrick Soon-Hock Lim
-------------------------------------
Patrick Soon-Hock Lim
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kelvin Choon-Huat Ng, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Secured Digital Applications, Inc. (this "Report");
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report.
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
d) Disclosed in this Report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 14, 2008 /s/ Kelvin Choon-Huat Ng
----------------------------------
Kelvin Choon-Huat Ng
Chief Accounting Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Secured Digital Applications, Inc. (the "Company") on Form 10-Q for the quarterly period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Patrick Soon-Hock Lim, Chief Executive Officer (principal executive officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Patrick Soon-Hock Lim
Patrick Soon-Hock Lim
Chief Executive Officer
August 14, 2008
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Secured Digital Applications, Inc. (the "Company") on Form 10-Q for the quarterly period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kelvin Choon-Huat Ng, Chief Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Kelvin Choon-Huat Ng
Kelvin Choon-Huat Ng
Chief Accounting Officer
August 14, 2008
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