UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
Commission File Number: 1-13427
STRATESEC INCORPORATED
Delaware 22-2817302
--------------------------------- ------------------------
State of Incorporation IRS Employer Identification No.
14360 Sullyfield Circle
Suite B
Chantilly, Virginia 20151
(703) 961-5683
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.01
par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
15,392,550 shares of STRATESEC INCORPORATED Common Stock, par value $.01 per
share, were outstanding as of March 31, 2003.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...........................................3
Balance Sheets as of March 31, 2003 (unaudited) and December 31,
2002...............................................................3
Statements of Operations for the three months ended
March 31, 2003 (unaudited) and 2002 (unaudited)....................5
Statement of Shareholders' Deficit for the year ended
December 31, 2002, and three months ended March 31, 2003 ...........6
Statements of Cash Flows for the three months ended
March 31, 2003 (unaudited)..and 2002 (unaudited)...................7
Notes to Financial Statements........................................9
Item 2. Management's Discussion and Analysis or Plan of Operations......11
Item 3. Controls and Procedures.........................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceeding ...........................................15
Item 2. Changes in Securities and Use of Proceeds ..................15
Item 3. Defaults Upon Senior Securities ............................15
Item 4. Submission of Matters to a Vote of Security Holders ........15
Item 5. Other Information ..........................................15
Item 6. Exhibits and Reports on Form 8-K ...........................15
Signature..........................................................16
Certification......................................................17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STRATESEC INCORPORATED
BALANCE SHEETS
PART I. FINANCIAL INFORMATION
March 31, December 31,
2003 2002
------------------- -------------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 44,077 $ --
Accounts receivable, net of allowance for doubtful
accounts of $442,866 and $467,477 in 2002 221,273 227,399
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,568 104,184
Inventory 480 --
Other current assets 1,739 --
-------- --------
Total current assets 271,137 331,583
-------- --------
Property and equipment 59,751 57,542
Other assets 15,280 29,227
-------- --------
Total assets $346,168 $418,352
======== ========
(continued)
The accompanying notes are an integral part of these statements.
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STRATESEC INCORPORATED
BALANCE SHEETS-CONTINUED
March 31, December 31,
2003 2002
------------------- ----------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Bank overdraft $ -- $ 12,052
Accounts payable 1,759,681 1,691,642
Accrued expenses 925,045 1,047,161
Income taxes payable 1,568,328 1,568,328
Line of credit 7,643,168 8,627,484
Billings in excess of costs and estimated earnings
on uncompleted contracts 10,141 95,136
----------- -----------
Total current liabilities 11,906,363 13,041,803
Commitments and contingencies (see notes 2, 5 and 8)
Shareholders' deficit
Common stock, $0.01 par value per share; authorized 20,000,000 shares;
15,401,471 issued and 15,392,550 outstanding shares as of March 31, 2003
and 10,401,471 shares issued, 8,392,550 outstanding
as of December 31, 2002 154,015 104,015
Treasury stock, 8,921 as of March 31, 2003
and 2,008,921 shares at December 31, 2002, at cost (18,533) (212,088)
Additional paid-in capital (25,870,145) 24,363,700
Accumulated deficit (37,566,342) (36,879,078)
------------------- -------------------
Total shareholders' deficit (11,560,715) (12,623,451)
------------------- -------------------
Total liabilities and shareholders' deficit $ 346,168 $ 418,352
=================== ===================
The accompanying notes are an integral part of these statements.
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STRATESEC INCORPORATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2003 2002
---------------- ----------------
Revenues $ 473,830 $ 646,922
Cost of earned revenues 465,503 583,831
------------ ------------
Gross profit 8,327 63,091
Selling, general and administrative expenses 499,612 1,070,842
------------ ------------
Operating income (loss) (491,285) (1,007,751)
Other income (expense)
Interest and financing fees (195,979) (308,875)
------------ ------------
Other income -- 29,438
Total other expense (195,979) (338,313)
------------ ------------
Net loss $ (687,264) $ (1,346,064)
============ ============
Basic and diluted net loss per
common share $ (0.05) $ (0.13)
============ ============
Weighted average common shares outstanding 14,960,377 10,392,550
============ ============
The accompanying notes are an integral part of these statements.
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STRATESEC INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the quarter ended March 31, 2003
Common Stock Treasury Stock Total
--------------------------- --------------------------- Additional Shareholders'
Shares Amount Shares Amount Paid-in Capital Deficit Deficit
------------- ------------- -------------- ------------ -------------- ---------------- --------------
Balance January 1, 2003 10,401,471 $ 104,015 (2,008,921) $ (212,088) $ 24,363,700 $(36,879,078) $(12,623,451)
Debt to equity conversion 5,000,000 50,000 2,000,000 193,555 1,506,445 -- 1,750,000
Net loss -- -- -- -- -- (687,264) (687,264)
----------- ------------ ------------ ---------- ------------ ------------ ------------
Balance March 31, 2003 15,401,471 $ 154,015 (8,921) $ (18,533) $ 25,870,145 $(37,566,342) $(11,560,715)
=========== ============ ============ ========== ============ ============ ============
The accompanying notes are an integral part of these statements.
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STRATESEC INCORPORATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------------- ------------------
Cash flows from operating activities
Net loss $ (687,264) $(1,346,064)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization 9,347 52,690
Provision for bad debts (24,611)
Changes in operating assets and liabilities:
Accounts receivable 30,737 (159,095)
Costs and estimated earnings in excess
of billings on uncompleted contracts 100,616 384,363
Inventory (480) (43,412)
Other current assets (1,739) 170
Accounts payable 68,039 (500,271)
Accrued expenses and other (122,116) 408,199
Billings in excess of costs and estimted
earnings on uncompleted contracts (84,995) (107,000)
----------- -----------
Net cash used by operating activities (712,466) (1,310,420)
----------- -----------
Cash flows from investing activities
Decrease in deposits 13,947 --
Acquisition of property and equipment (11,556) (3,280)
----------- -----------
Net cash used by investing activities 2,391 (3,280)
----------- -----------
Cash flows from financing activities
Proceeds from line of credit 766,204 1,195,050
Bank overdraft (12,052) --
----------- -----------
Net cash provided by financing activities 754,152 1,178,439
----------- -----------
(continued)
The accompanying notes are an integral part of these statements.
- 7 -
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
(Unaudited)
Three Months Ended
March 31,
2003 2002
------------ ------------
Net increase (decrease) in cash and cash equivalents 44,077 $(135,801)
Cash and cash equivalents at beginning of period -- 238,201
--------- ---------
December 31, 2002 and 2001
Cash and cash equivalents at end of period $ 44,077 $ 102,400
========= =========
March 31, 2003 and 2002
Supplemental disclosure of cash flow information:
Cash paid for Interest expense $ 195,979 $ 338,476
========= =========
Non cash financing activity:
In January 2003, E.S. Bankest reduced the line of credit
by $1,750,000 in exchange for 7 million shares of
common stock
The accompanying notes are an integral part of these statements.
- 8 -
STRATESEC INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE-MONTHS ENDED
MARCH 31, 2003 AND 2002 (UNAUDITED)
1. BASIS OF PRESENTATION
The Balance Sheet as of March 31, 2003, the Statements of Operations for the
three-month periods ended March 31, 2003 and March 31, 2002, and the Statements
of Cash Flows for the three-month periods ended March 31, 2003 and March 31,
2002, have been prepared without audit. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations, changes in stockholders' deficit and cash flows at March 31, 2003,
and for the periods ended March 31, 2003 and 2002, have been recorded. All
adjustments recorded were of a normal recurring nature.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statement presentation. In the opinion of management, such
unaudited interim information reflects all necessary adjustments, consisting of
only normal recurring adjustments, necessary to present the Company's financial
position and results of operations for the periods presented. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for a full fiscal year. These statements should be read in
conjunction with the financial statements and related notes included in the
Company's Form 10-KSB for the year ended December 31, 2002.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and reported amounts of revenue and expenses during
the period. Actual results could differ from those estimates.
2. COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS AND BILLINGS IN EXCESS
OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Cost and estimated earnings in excess of billings on uncompleted contracts, as
well as the related billings in excess of costs and estimated earnings on
uncompleted contracts, represent revenue recognized on long-term fixed-price
contracts based on the percentage-of-completion method less the related billings
to date. Revenue recognized in excess of billing is included in the asset
balance and billings in excess of recognized revenue is included in the
liability balance.
- 9 -
3. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of common
shares outstanding during the three month periods ended March 31, 2003 and March
31, 2002. During these periods options were not included in the calculation of
diluted earnings per share. The Company incurred net losses for the three month
periods ended March 31, 2003 and March 31, 2002, therefore, all potential common
shares are antidilutive and not included in the calculation of diluted loss per
share.
4. FACTORING AGREEMENT
During 2002, the Company's factoring agreement with E. S. Bankest, LLC
("Bankest") was converted to a lower interest rate. The amount outstanding at
March 31, 2003 is due on demand with interest (computed as a discount on amounts
factored and the duration that the factored amount is unpaid) due monthly.
Discounts range from 2.5% - 4.5%. This line-of-credit is secured by accounts
receivable. The interest rate on the amounts advanced over the amount of
receivables factored at March 31, 2003 was prime rate plus 2%.
On January 27, 2003, Bankest converted $1,750,000 due under the agreement to
7,000,000 shares of common stock with a $.01 par value.
Interest and discount fees related to the factoring agreement, which
approximated interest paid, aggregated $195,979 for the three months ended March
31, 2003 and $308,575 for the three months ended March 31, 2002.
- 10 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This item should be read in conjunction with the unaudited financial statements
and the notes thereto of the Company contained in item 1 of this report.
OVERVIEW
The Company is a single-source provider of comprehensive, technology based
security solutions for medium and large commercial and government facilities in
the United States and abroad. The Company offers a broad range of services,
including: (i) consulting and planning; (ii) engineering and design; (iii)
systems integration; and (iv) maintenance and technical support.
The following plan addresses management's approach to improving the financial
condition of the Company.
Sales remained slow through the first quarter, averaging slightly less than
$200,000 per month. The slow ramp-up in sales is due to the Company's shift from
commercial targets to infrastructure and government targets. The sales pipeline
is beginning to improve and the Company expects the first new major awards in
the third quarter. The Company projects sales per month of approximately $.5
million by the end of the fourth quarter.
To achieve this improvement will require the Company to win at least one of the
three major bids that it currently has identified. As of May 15, 2003 there is
one major project with an estimated value of approximately $3.5 million on which
the Company has been informed that it is the vendor of choice, and there is
another major project with an estimated value of approximately $3 million over
three years, for which the Company has been selected, and which may ramp up
revenue over the next twelve months. The Company is also on a team responding to
a major Air Force procurement intended to upgrade security for the Air Force
worldwide. There can be no assurance, however, that the Company will be awarded
any of these contracts or that if they are awarded they will be funded in the
full anticipated amount.
The Company is in the process of adding additional products such as cameras and
sensors to the GSA schedule, for sales to the federal government. The Company
has its headquarters in the Washington Metropolitan Area and is specifically
targeting government sales. Consequently, the Company expects business with the
federal government to grow over the next 12 months. The Company tracks
significant government procurements. Recently, these procurements have begun to
move forward.
The Company is currently funding its Virginia and Georgia operations and the
execution of new projects with cash generated by operations and a receivables
factoring agreement with E.S. Bankest, LLC ("Bankest"). The formal terms of the
agreement provide for Bankest to procure the Company's accounts receivables in
exchange for a fee. While there is no formal commitment, Bankest has verbally
agreed to provide an over-advance (i.e., provide additional funds) to fund
critical operating cash needs.
- 11 -
The Company has also implemented the following initiatives to reduce its
overhead expenses in an effort to achieve desired break-even revenue of
approximately $400,000 per month:
o Reduced full-time and temporary corporate staff
o Reduced executive management
o Completed the closure of the California and Texas offices, in January
2003 and October 2002, respectively.
The Company continues to explore opportunities for mergers and acquisitions in
order to expedite the improvement in sales and expansion of the customer base.
The Company presently owes the U.S. government $1,346,136 in income taxes,
interest and penalties, which have been accrued as of December 31, 2002. The
Company has submitted an Offer-in-Compromise to the Internal Revenue Service to
settle the entire debt for $25,000. The Company feels that given its
circumstances, it is a reasonable offer, and in the Company's opinion, will be
accepted by the Internal Revenue Service (IRS).
In addition, the Company owes the State of Virginia approximately $222,192 in
income tax, interest and penalties. The Company also owes $150,858 in sales tax.
Both amounts have been accrued as of December 31, 2002. The Company has
submitted an Offer-in-Compromise to settle the entire debt for $10,000. The
Company feels that given its circumstances, it is a reasonable offer and, in the
Company's opinion, the State of Virginia will accept it.
Should the IRS or the State of Virginia not accept the Company's offers, there
would be a material adverse effect on the Company.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002
Revenue decreased by 27% from approximately $.6 million in 2002 to approximately
$.5 million in 2003. The change was due to a decrease in revenue as a result of
the closure of the California operations. California operations accounted for
approximately 50% of revenues in 2002. In the comparable period in 2002,
revenues without including California would have been approximately $.3 million.
Cost of earned revenues decreased approximately $.1 million from 2002 to 2003,
but increased as a percentage of revenue in 2003 as compared to 2002. Gross
margin decreased from 10% in 2002 to 2% in 2003. The gross margin was adversely
affected by the costs associated with the completion of a large commercial
contract.
Selling, general and administrative expenses decreased by 55% from approximately
$1.1 million in 2002 to approximately $.5 million in 2003. The reduction
resulted from the closure of the California and Texas offices and a reduction in
corporate staff.
- 12 -
Interest expense and financing fees decreased from approximately $ .4 million in
2002 to approximately $.2 million in 2003. The decrease was due to a decreased
interest rate on the line of credit.
Net loss decreased from approximately $1.3 million in 2002 to approximately $
..69 in 2003. This decrease in net loss was primarily due to the decrease in SG&A
costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred operating losses of approximately $5.5 million in 2002 and
$6.8 million in 2001 and net losses of more than $7 million during each of those
years. As of March 31, 2003, the Company had limited cash, a working capital
deficit of approximately $12 million, and a stockholders' deficit of
approximately $11.6 million. In connection with their audit of the Company's
2002 financial statements, the Company's independent public accountants
indicated that these matters raise substantial doubt about its ability to
continue as a going concern.
On January 27, 2003, $1,750,000 of debt with Bankest was converted to equity by
the issuance of 7,000,000 shares of common stock with a par value of $.01, to
Bankest.
The Company's principal capital requirement is additional working capital. The
Company currently is funding its working capital requirements with cash
generated by operations and a receivables factoring facility with Bankest. The
formal terms of the agreement provide for Bankest to procure the Company's
accounts receivables in exchange for a fee. While there is no formal commitment,
Bankest has verbally agreed to provide an over-advance (i.e., provide additional
funds) to fund critical operating cash needs. At times amounts available to the
Company under this facility have been insufficient for the Company to fund its
cash needs on a timely basis.
Should the lender be unwilling or unable to provide funding to the Company,
there would likely be material adverse consequences to the Company's operations
because it would not have sufficient working capital to fund projects and
conduct its business.
The Company has limited options to obtain working capital from sources other
than Bankest due to the low level of cash being generated from operations and
the high level of debt owed to Bankest as compared to the assets of the Company.
FORWARD LOOKING STATEMENTS
When used in this Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, and in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are subject to certain risks and uncertainties, that
could cause actual results to differ materially from historical results and
those presently anticipated or projected. The Company wishes to caution readers
- 13 -
not to place undue reliance on any forward-looking statements, which speak only
as of the date made. The Company wishes to advise readers that various factors
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from any opinions or
statements expressed with respect to future periods in any current statements.
These factors include, but are not limited to, the following: the Company's lack
of revenues and history of losses; uncertainties related to the Company's
limited capital resources; uncertainties relating to the Company's success in
being awarded new contracts and its ability to perform those contracts
profitably; the Company's lack of service and product diversification; the
Company's dependence on collaborative relationships with larger partners in
bidding on and performing contracts; and competition. The Company does not
undertake, and specifically declines any obligation, to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
ITEM 3. CONTROLS AND PROCEDURES
As of a date within 90 days of the filing date of this report, based on an
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13A-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934) the
chief executive and financial officer of the Company has concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in its Exchange Act reports
is recorded, processed, summarized and reported within the applicable time
periods specified by the SEC's rules and forms.
There were no significant changes in the Company's internal controls or in any
other factors that could significantly affect those controls subsequent to the
date of the most recent evaluation of the Company's internal controls by the
Company, including any corrective actions with regard to any significant
deficiencies or material weaknesses.
- 14 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On January 27, 2003, the Company issued 7,000,000 shares of its common stock to
designees of E. S. Bankest LLC, its principal lender, in exchange for
cancellation of $1,750,000 owed by the Company to E.S. Bankest. The transaction
was exempt from registration under the Securities Act of 1933 (the "Act")
pursuant to Section 4(2) of the Act because it did not involve a public
offering.
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 and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Description
----------- -------------------
10 Agreements dated January 27, 2003, between STRATESEC Incorporated and
E.S. Bankest LLC.
11 Calculation of Net Income per share
99 Certification of filing by officers
(b) The 8-K filed on January 23, 2003 stating that the Company had entered into
an agreement on January 9, 2003 with Certified Security Integrators, Inc. to
purchase certain assets and assume certain liabilities relating to the Company's
California operations is hereby incorporated by reference.
- 15 -
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STRATESEC INCORPORATED
/s/ BARRY MCDANIEL
-------------------------------
Barry McDaniel
President and Chief Executive Officer
- 16 -
CERTIFICATION
I, Barry McDaniel, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stratesec, Inc.;
2. Based on my knowledge, this quarterly 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, no misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 the quarterly 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-14 and 15d-14) for the registrant and have:
A. designed such disclosure controls and procedures 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 quarterly report is being prepared.
B. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
C. presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
A. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls.
B. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actins with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003
/s/ Barry McDaniel
-----------------------------------
President/Chief Executive Officer
- 17 -