And lets not forget the report that came out today,
2005
Annual Report
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes, included herein. Certain statements contained herein may constitute forward-looking statements, as discussed at the beginning of Part I of this Annual Report on Form 10-KSB. Our actual results could differ materially from the results anticipated in these statements as a result of a variety of factors, including those discussed in our filings with the Securities and Exchange Commission and as discussed in the section under the heading "Forward Looking Statements" in this Report.
RESULT OF OPERATIONS
Net sales decreased 27% from $950,656 in fiscal year 2003 to $695,389 in 2004. The decline in data sales due to economic factors and lack of working capital, was partially offset by $177,000 in sales by the Company's newly formed Security Division.
Gross profit amounted to $207,766 in fiscal 2004 versus $544,768 in 2003. Gross profit margin decreased to 30% in 2004 from 57% in 2003. The fiscal year 2004 gross profit margin was more representative of the Company's typical gross margin as the fiscal 2003 gross margin benefited from a the completion of a major, non-recurring contract that called for the Company to provide labor only, which resulted in a significantly higher gross margin. Additionally, the gross margin on sales of the Company's newly formed Security Division was only 3% as this represented the Company's first effort in this new market.
Selling, general and administrative expenses increased approximately 376% to $3,815,393 for the year ended June 30, 2004, from $801,127 for the year ended June 30, 2003. The increase is primarily related to $2,772,665 of non-cash charges for consulting expenses and officer's compensation related to the granting of common stock and options to certain individuals. Additionally, as a result of the Company's efforts to become current in its public reporting requirements, professional fees were $308,784 in fiscal 2004 versus $4,319 in fiscal 2003.
Interest expense amounted to $427,254 in 2004 versus $363,643 in 2003. Interest expensed increased in 2004 due to the beneficial conversion feature of $83,000 related to a note payable to a related party.
Depreciation and amortization included in selling, general and administrative expenses, was $5,360 in 2004 and $1,440 in 2003.
The Company had a net loss of $2,200,599 in 2004 compared to a net loss of $492,495 in 2003.
The net loss applicable to common shareholders was $2,326,072 in 2004 and $636,627 in 2003 primarily due to the dividends declared on convertible preferred stock.
LIQUIDITY AND FINANCIAL CONDITION AS OF JUNE 30, 2004
The Company has current assets of $93,165 (including $3,920 in cash) compared with current liabilities of $4,486,259, resulting in a working capital deficit of $4,393,094 as of June 30, 2004. This compares with current assets of $185,197 in 2003 and a working capital deficit of $6,366,781. Current liabilities decreased mainly due to the settlement of the Company's obligation with its asset-based lender. The Company's working capital is clearly not sufficient to meet the Company's current liquidity needs. The Company has relied upon cash flow generated from operations, loans from third party lenders, and private sales of equity securities to sustain itself during the year.
The Company's cash balance at June 30, 2003 decreased $7,968 from $11,888 to $3,920 as of June 30, 2004. The decrease was the result of a combination of cash used for repayment of loans totaling $327,572, investing activities totaling $28,721 and negative cash flows from operations totaling $489,140, offset by direct cash proceeds from shareholder loans and advances from the Company's asset-based lender totaling $477,465; indirect loan proceeds (paid directly to vendors and creditors) of $115,125 and proceeds from common stock sales totaling $360,000. Operating activities for the year ended June 30, 2004 exclusive of changes in current assets and liabilities required $1,080,651, offset by a decrease in receivables and other current assets of $84,064, and an increase in accounts payable and accrued liabilities of $507,447.
The Company's capital resources include private stock sales and loans and advances from principal shareholders. During the year ended June 30, 2004, the Company borrowed $264,000 under the terms of its convertible loan agreements with Augustine. In December 2003, Augustine converted $174,000 of loan principal, including $75,000 borrowed during fiscal 2003, into shares of common stock. These agreements provide for additional borrowings of $251,000, all of which may be converted to common stock. Additionally, during the year ended June 30, 2004, the Company borrowed approximately $125,000 from an existing shareholder, of which approximately $115,000 was paid directly to the Company's vendors and creditors.
During the fiscal year ended June 30, 2002, the Company decided to self-insure against its liability risks. There have been no claims against the Company with respect to any insurable risks. In February 2004, the Company purchased property and general liability insurance.
The Company is currently implementing a business plan that it believes will strengthen the balance sheet, increase revenue and return it to profitability. The plan involves a series of initiatives. The Company is seeking to restructure its liabilities by negotiating with secured and unsecured creditors and vendors for forgiveness of certain outstanding debt, or to exchange debt for equity. Through the end of fiscal 2004, the Company has settled a total of approximately $2 million in exchange for cash payments of approximately $37,000 and new equity issuances valued at $472,000, resulting in a gain of approximately $1.5 million. The Company continues to seek settlements of outstanding debt.
In the fourth quarter of fiscal 2004, the Company received an opinion from its counsel that pursuant to applicable commercial law, certain of its trade obligations are statutorily unenforceable after periods of four or six years, as applicable, from the date of their incurrence. Based on this representation, the Company believes that it is remote that creditors would prevail in any collection action and accordingly, has written off $230,597 of accounts payable which amount is shown as a gain on write-off of statutorily unenforceable liabilities for the year ended June 30, 2004. For subsequent periods, the Company will record any additional write-offs during the quarter in which the statutory period is exceeded.
The Company is actively engaged in raising capital through private investors. This will provide additional working capital and allow it to increase revenue and pursue more profitable projects. In order to facilitate this process, in April 2004 the Company's CEO, a major shareholder, contributed six million shares of the Company's common stock to its treasury for no consideration. During fiscal 2004, the Company raised $360,000 through sales of common stock. The Company has expanded into the security business which it believes will complement and enhance its current product offerings and greatly expand its customer base. The Company may also pursue strategic acquisitions that provide it with growth and vertical integration within this new area. The Company may benefit from additional liabilities becoming statutorily barred from collection.
If management is not successful in implementing the initiatives discussed in the preceding paragraphs, it could result in the severe curtailment of the Company's operations and/or the seizure of its assets and/or its being forced into bankruptcy. There is no assurance that the Company will be successful in accomplishing its objectives. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
