SideChannel, Inc. - Quarter Report: 2008 June (Form 10-Q)
U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended June 30, 2008
000-28745
(Commission
File No.)
______________
NATIONAL SCIENTIFIC
CORPORATION
(Name of
Registrant as Specified in its Charter)
______________
|
Texas
|
|
86-0837077
|
|
(State
of Incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
8361 E. Evans Road, Suite
106
Scottsdale, AZ 85260-3617
(Address
of Principal Executive Offices)
(480) 948-8324
(Issuers
Telephone Number, Including Area Code)
Securities
registered under Section 12(b) of the Exchange Act:
Preferred Stock, $0.10 par
value
Securities
registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par
value
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. Yes þ No o
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 o | Accelerated filer o |
Non-accelerated
filer
o
|
Smaller reporting company þ |
Indicate
by check mark if the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
There
were 132,207,913 shares of Common Stock, par value $.01 per share, outstanding
at August 8, 2008.
FORM 10-Q
TABLE OF CONTENTS
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| Item 3. |
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23
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| Item 1A. | Risk Factors |
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Exhibit
31 - Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act
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Exhibit
32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act
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| Item 1. |
Financial
Statements
|
Condensed Balance
Sheets
|
June
30,
|
September
30,
|
|||||||
|
2008
|
2007
|
|||||||
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ASSETS
|
(Unaudited)
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(Audited)
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||||||
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Current
Assets:
|
||||||||
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Cash
and cash equivalents
|
$ | 2,355 | $ | 85,887 | ||||
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Trade
receivables
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105,976 | 6,216 | ||||||
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Inventory
|
6,638 | 22,900 | ||||||
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Other
assets
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11,604 | 68 | ||||||
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Total
current assets
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126,573 | 115,071 | ||||||
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Property
and equipment, net
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311 | 622 | ||||||
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Deposits
|
2,340 | 2,340 | ||||||
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Deferred
financing costs, net
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11,200 | 14,800 | ||||||
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Total
assets
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$ | 140,424 | $ | 132,833 | ||||
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LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
||||||||
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Current
Liabilities:
|
||||||||
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Accounts
payable – related
parties
|
$ | 129 | $ | 419 | ||||
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Accounts
payable – other
|
168,855 | 195,004 | ||||||
|
Accrued
expenses
|
1,068,290 | 883,400 | ||||||
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Due
to factors
|
81,700 | 2,602 | ||||||
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Notes
payable - related party
|
143,181 | 161,300 | ||||||
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Notes
payable – other
|
35,375 | 80,875 | ||||||
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Total
current liabilities
|
1,497,530 | 1,323,600 | ||||||
|
Notes
payable, less current portion, net of discount and beneficial conversion
feature of $28,715 at June 30, 2008 and $37,945 at September 30,
2007
|
146,285 | 137,055 | ||||||
|
Total
liabilities
|
1,643,815 | 1,460,655 | ||||||
|
Commitments
and contingencies
|
– | – | ||||||
|
Shareholders’
deficit:
|
||||||||
|
Preferred
stock, par value $0.10; 4,000,000 shares authorized, none issued and
outstanding
|
– | – | ||||||
|
Common
stock, par value $0.01; 187,000,000 shares authorized, and shares issued
and outstanding of 122,082,913 at June 30, 2008 and 121,995,835 at
September 30, 2007
|
1,220,830 | 1,219,959 | ||||||
|
Additional
paid-in capital
|
22,715,368 | 22,693,696 | ||||||
|
Accumulated
deficit
|
(25,439,589 | ) | (25,241,477 | ) | ||||
|
Total
shareholders’ deficit
|
(1,503,391 | ) | (1,327,822 | ) | ||||
|
Total
liabilities and shareholder’s deficit
|
$ | 140,424 | $ | 132,833 | ||||
The
accompanying notes are an integral part of these condensed financial
statements.
Condensed Statements of
Operations
(Unaudited)
|
Three
months ended
|
Nine
months ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Revenue
|
$
|
158,749
|
$
|
216,372
|
$
|
530,504
|
$
|
401,088
|
||||||||
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Cost
of revenue
|
81,976
|
109,456
|
288,449
|
202,941
|
||||||||||||
|
Gross
profit
|
76,773
|
106,916
|
242,055
|
198,147
|
||||||||||||
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Costs
and expenses
|
||||||||||||||||
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Salaries
and benefits
|
70,156
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60,110
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207,449
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193,961
|
||||||||||||
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Research
and development
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42,706
|
43,693
|
127,414
|
127,980
|
||||||||||||
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Stock
compensation
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8,225
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7,336
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22,544
|
15,267
|
||||||||||||
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Other
|
47,574
|
54,287
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146,335
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123,560
|
||||||||||||
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Total
costs and expenses
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168,661
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165,426
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503,742
|
460,768
|
||||||||||||
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Loss
from operations
|
(91,888
|
)
|
(58,510
|
)
|
(261,687
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)
|
(262,621
|
)
|
||||||||
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Other
income (expense)
|
||||||||||||||||
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Other
income
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133,197
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–
|
133,197
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25,740
|
||||||||||||
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Interest
expense
|
(21,402
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)
|
(25,006
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)
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(66,022
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)
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(143,619
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)
|
||||||||
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Amortization
of deferred financing costs
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(1,200
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)
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(1,200
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)
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(3,600
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)
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(3,600
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)
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||||||||
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110,595
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(26,206
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)
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63,575
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(121,479
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)
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|||||||||||
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Income (loss)
before income taxes
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18,707
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(84,716
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)
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(198,112
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)
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(384,100
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)
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|||||||||
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Income
tax expense
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–
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–
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–
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–
|
||||||||||||
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Net
income (loss)
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$
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18,707
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$
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(84,716
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)
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$
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(198,112
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)
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$
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(384,100
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)
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|||||
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Net
income (loss) per common share, basic and diluted
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$
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(0.00
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)
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$
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(0.00
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)
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$
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(0.00
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)
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$
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(0.00
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)
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||||
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Weighted
average number of shares outstanding
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122,310,935
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111,706,611
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121,364,762
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104,299,409
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||||||||||||
The
accompanying notes are an integral part of these condensed financial
statements.
Condensed Statements of Cash
Flows
(Unaudited)
|
Nine
months ended
|
||||||||
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June
30,
|
||||||||
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2008
|
2007
|
|||||||
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Cash
flows from operating activities:
|
||||||||
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Net
loss
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$
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(198,112
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)
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$
|
(384,100
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)
|
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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||||||||
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Depreciation
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311
|
311
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||||||
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Stock
issued for services
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2,000
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3,000
|
||||||
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Stock
options issued for services
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12,319
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5,794
|
||||||
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Stock
issued to cure default of note payable
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–
|
66,000
|
||||||
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Warrant
expense
|
8,224
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7,344
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||||||
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Amortization
of deferred financing costs
|
3,600
|
3,600
|
||||||
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Amortization
of debt discount
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7,740
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7,740
|
||||||
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Amortization
of beneficial conversion feature
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1,490
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1,490
|
||||||
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Unclaimed
note payable
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(43,250
|
)
|
–
|
|||||
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Changes
in assets and liabilities:
|
||||||||
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Decrease
(increase) in inventory
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16,262
|
(4,769
|
)
|
|||||
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Decrease
(increase) in receivables
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(99,760
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)
|
20,951
|
|||||
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Decrease
(increase) in other assets and deposits
|
(11,536
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)
|
(3,251
|
)
|
||||
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Increase
in accounts payable and accrued expenses
|
158,451
|
203,028
|
||||||
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Net
cash used in operating activities
|
(142,261
|
)
|
(72,862
|
)
|
||||
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Cash
flows from financing activities:
|
||||||||
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Increase
in notes payable
|
–
|
20,725
|
||||||
|
Repayment
of notes payable
|
(20,369
|
)
|
(13,025
|
)
|
||||
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Net
proceeds from factors
|
79,098
|
(76,490
|
)
|
|||||
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Proceeds
from issuance of common stock
|
–
|
109,800
|
||||||
| Net cash provided by financing activities |
58,729
|
41,010
|
||||||
|
Net
decrease in cash and cash equivalents
|
(83,532
|
)
|
(31,852
|
)
|
||||
|
Cash
and cash equivalents, beginning of period
|
85,887
|
43,899
|
||||||
|
Cash
and cash equivalents, end of period
|
$
|
2,355
|
$
|
12,047
|
||||
|
Supplementary
Disclosure of Cash Flow Information:
|
||||||||
|
Cash
paid for interest
|
$
|
14,585
|
$
|
19,522
|
||||
|
Conversion
of accounts payable and accrued expenses to equity
|
$
|
5,000
|
$
|
127,680
|
||||
|
Conversion
of notes payable and accrued expenses to equity
|
$
|
–
|
$
|
60,200
|
||||
The
accompanying notes are an integral part of these condensed financial
statements.
Condensed Statement of Changes in
Shareholders’ Deficit
For
the Nine months Ended June 30, 2008
(Unaudited)
|
Common
Stock
|
||||||||||||||||||||
|
Number
of Shares
|
Par
Value
|
Additional
Paid-In Capital
|
Accumulated
Deficit
|
Total
|
||||||||||||||||
|
Balance
at September 30, 2007
|
121,995,835 | $ | 1,219,959 | $ | 22,693,696 | $ | (25,241,477 | ) | $ | (1,327,822 | ) | |||||||||
|
Stock
issued for services
|
||||||||||||||||||||
|
Price
per share
|
||||||||||||||||||||
|
$0.0288
|
34,722 | 347 | 653 | – | 1,000 | |||||||||||||||
|
$0.0191
|
52,356 | 524 | 476 | – | 1,000 | |||||||||||||||
|
Stock
options granted
|
– | – | 12,319 | – | 12,319 | |||||||||||||||
|
Warrants
extended by one year - fair value
|
– | – | 9,099 | – | 9,099 | |||||||||||||||
|
Warrants
expired
|
– | – | (875 | ) | – | (875 | ) | |||||||||||||
|
Stock
issued in exchange of accrued expenses for
|
||||||||||||||||||||
|
$0.0200
|
250,000 | 2,500 | 2,500 | – | 5,000 | |||||||||||||||
|
Stock
returned to treasury
|
(250,000 | ) | (2,500 | ) | (2,500 | ) | – | (5,000 | ) | |||||||||||
|
Net
loss for the nine months ended June 30, 2008
|
– | – | – | (198,112 | ) | (198,112 | ) | |||||||||||||
|
Balance
at June 30, 2008
|
122,082,913 | $ | 1,220,830 | $ | 22,715,368 | $ | (25,439,589 | ) | $ | (1,503,391 | ) | |||||||||
The
accompanying notes are an integral part of these condensed financial
statements.
NOTES TO FINANCIAL
STATEMENTS
June 30, 2008
(Unaudited)
| 1. |
Summary of Significant
Accounting Policies and Use of
Estimates
|
Nature
of Business
Our
primary business involves the research, development, manufacture, and sale of
hardware and software computer based products and devices that span a range of
industries. The majority of our products are mobile computers configured as
digital video recording devices with location determining and tracking
capabilities. These devices typically use small powerful mobile computers, in
conjunction with equally small portable radios to establish, record and report
the physical location of people and objects to which these devices are attached.
Our location technologies typically use Global Positioning System (GPS)
technology to determine position. They also use small computers in conjunction
with video cameras and other sensors to record incidents on mobile systems,
especially school buses. We also have other products that use non-GPS technology
to establish and then report position. We refer to our location-determining
devices as our location tracking products, or as location tools
products.
Our
primary customer focus for these location-tracking products is the safety
market, related in many cases to the safety of school age children. Our products
and services help our customers keep better track of their children. Our
products are also used to keep track of adults, and as well to track and monitor
physical assets, such as equipment or vehicles. Our location tracking products
are often sold as an integrated system, by using them in conjunction with
software that displays maps and other pertinent information.
Prior to
2002 we developed electronic component products, some of which are used in radio
equipment, and some of which have other applications in the electronics field,
such as in the memory systems of personal computers. Many of these electronic
component products have been issued U.S. patents. We focused extensively on
developing these products and patenting them from 1996 through early 2002, with
the objective of licensing these products to other electronic companies. In
early 2002, due to market conditions, our focus shifted away from further
development of our electronic component products, but we continue to explore
licensing opportunities for our component products.
Since
2002, we began to focus on applications of electronic devices in the location
tools market. From 2002 through 2005, we were primarily engaged in product
development and market research and testing. During fiscal year 2005, the
Company increased its focus on its Travado IBUS™, a location product that
entered the market in March 2005. Starting from the last two quarters of fiscal
year 2005 we have generally seen a steady increase in the sales of our Travado
IBUS. During fiscal year 2007 and the first nine months of fiscal year 2008 our
sales have consisted entirely of Travado IBUS™ products.
Basis
of Presentation
The
accompanying financial statements have been prepared by National Scientific
Corporation (“NSC” or the “Company” or “We”), without audit, and reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods. The statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements reflect all adjustments (of a normal and
recurring nature) that are necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim
periods.
These
financial statements should be read in conjunction with the financial statements
and notes included in the Company’s annual report on Form 10-KSB for the fiscal
year ended September 30, 2007 and the Company’s quarterly reports on Form 10-QSB
for the periods ended December 31, 2007 and March 31, 2008.
The
results of operations for the nine months ended June 30, 2008 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Going
Concern
The
financial statements have been prepared on the basis that the Company will
continue as a going concern, which assumes that adequate sources of financing
will be obtained as required and that our assets will be realized and
liabilities settled in the ordinary course of business. Accordingly, the
financial statements do not include any adjustments related to the
recoverability of assets and classification of assets and liabilities that might
be necessary should we be unable to continue as a going concern.
The
Company’s ability to continue as a going concern is contingent upon its ability
to attain profitable operations and secure financing. There can be no assurance
that additional financing will be available to us when needed or, if available,
that it can be obtained on commercially reasonable terms. If we are not able to
continue as a going concern, we would likely be unable to realize the carrying
value of our assets reflected in the balances set out in our financial
statements. Our auditors have expressed substantial doubt about the Company’s
ability to continue as a going concern.
We
continue to focus our efforts on improving overall liquidity through identifying
new business opportunities within the areas of our core competencies of wireless
security systems, reducing operating expenses, and limiting cash commitments for
future capital investments and new asset development. We have continued to
restrict new capital investment and new asset development, limiting projects to
those representing the best opportunities we can find for near term revenue
growth in the transportation sector. Additionally, we continue to evaluate
operating expenses in an effort to reduce or eliminate costs not required for us
to operate effectively. We may elect to negotiate with some of our
creditors to reduce or restructure our debt obligations, for example with our
larger Note holders, although we cannot be sure of the outcomes of such
negotiations. We also in the past have chosen to compensate some consultants and
some staff using equity, and also to reduce our debt by allowing staff to
convert any accrued back pay to equity, and we are likely to continue this
practice in the near term to improve liquidity.
The sale
or issue of additional equity would likely have a dilutive effect on existing
shareholders, if it were to occur. No assurance can be given that we
will be able to obtain a new source of capital on terms that are acceptable to
us. If we are unable to obtain new capital, we may be forced to subject
ourselves to bankruptcy, reorganization, liquidation, dissolution or similar
proceeding.
Use
of Estimates
In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Revenue
Recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
the sales price is fixed or determinable, collection is reasonably assured and
delivery of products has occurred or services have been rendered. Accordingly,
the Company recognizes revenues upon shipment of product to
customers.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts
receivables, other receivables, accounts payable and accrued liabilities and
notes payable. Unless otherwise noted, it is management’s opinion that the
Company is not exposed to significant interest, currency or credit risks arising
from these financial instruments. The fair value of these financial instruments
approximates their carrying values due to their short duration, unless otherwise
noted or their market interest rate.
Earnings
per Share
Statement
of Financial Accounting Standards No. 128, “Earnings per Share,” (“SFAS 128”)
provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of the Company
calculated using the treasury stock method.
Stock-Based
Compensation
Effective
October 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123R”), using the modified prospective transition method and
therefore the Company has not restated its results for prior periods. Under this
method, compensation cost recognized in the nine months ended June 30, 2008 and
2007 include compensation cost for all share-based payments, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R.
All stock based compensation awards were fully vested as of October 1,
2006.
We
estimate fair value using the Black-Scholes option-pricing model. Assumptions
used to estimate the compensation expense are determined as
follows:
|
•
|
Expected
term is determined using a weighted average of the contractual term and
vesting period of the award;
|
|
•
|
Expected
volatility is measured using the average of historical daily changes in
the market price of the Company’s common stock over the period equal to
their expected term;
|
|
•
|
Risk-free
interest rate is equivalent to the implied yield on U.S. Treasury bills
with a remaining maturity equal to the expected term of the awards;
and
|
|
•
|
Forfeitures
are based on the history of cancellations of similar awards granted by the
Company and management’s analysis of potential
forfeitures.
|
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. We do not expect SFAS No. 157
will have a material effect on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”), which is effective for
fiscal years beginning after November 15, 2007. This Statement permits entities
to choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. The Company is currently evaluating the
impact of SFAS 159 on its financial statements, but does not expect this new
accounting pronouncement to have a material impact.
In June
2007, the FASB ratified EITF 06-11 “Accounting for the Income Tax Benefits of
Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 provides
that tax benefits associated with dividends on share-based payment awards be
recorded as a component of additional paid-in capital. EITF 06-11 is effective,
on a prospective basis, for fiscal years beginning after December 15, 2007. We
do not expect EITF 06-11 will have a material impact on our financial
statements.
In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS
160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
guidance will become effective for the fiscal year beginning after December 15,
2008. The Company does not expect SFAS 160 will have a material
impact on our financial statements.
In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
SFAS 141 (Revised) establishes principles and requirements for how the acquirer
of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
guidance will become effective for the fiscal year beginning after December 15,
2008. The Company does not expect this new accounting pronouncement to have a
material impact on our financial statements.
In
March 2008, the FASB issued FASB Statement No. 161 “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires companies
with derivative instruments to disclose information that should enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under FASB Statement No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” and how derivative instruments and related hedged items
affect a company’s financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We do not expect SFAS 161
will have a material impact on our financial statements.
In May
2008, the Financial Accounting Standards Board (FASB) issued Statements of
Financial Standards No. 162 (SFAS 162), “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities.
Prior to
the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute
of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69
(SAS 69), “The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles.” SAS 69 has been criticized because it is directed to the
auditor rather than the entity. SFAS 162 addresses these issues by establishing
that the GAAP hierarchy should be directed to entities because it is the entity
(not its auditor) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP.
SFAS 162
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles.”
The Company does not expect SFAS 162 to have a material effect on its
consolidated financial statements.
| 2. |
Stock-Based
Compensation
|
The
Company accounts for stock-based compensation utilizing the fair value
recognition provisions of SFAS 123R.
As of
June 30, 2008, the Company has the following stock-based compensation
plan:
Stock
Options
Our board
of directors adopted the 2000 Stock Option Plan effective January 1, 2001. Our
stockholders formally approved the 2000 Stock Option Plan on February 14,
2001.
Under the
2000 Stock Option Plan, the purchase price must be at least 100% of the fair
market value of our common stock (if the option is an incentive stock option),
or at least 25% of the fair market value of our common stock at the time the
option is granted (if the option is a nonqualified grant), or such higher price
as may be determined by the Board of Directors at the time of grant. If however,
an incentive stock option is granted to an individual who would, immediately
before the grant, directly or indirectly own more than 10% of the total combined
voting power of all our classes of stock, the purchase price of the shares of
common stock covered by such incentive stock option may not be less than 110% of
the fair market value of such shares on the day the incentive stock option is
granted. As the price of the Company’s common stock is currently quoted on the
OTC Bulletin Board, the fair market value of the common stock underlying options
granted under the 2000 Stock Option Plan shall be the last closing sale price of
the common stock on the day the options are granted. If there is no market price
for the common stock, then our Board of Directors may, after taking all relevant
facts into consideration, determine the fair market value of our common
stock.
Prior to
October 1, 2006, the Company accounted for share-based payments under the
recognition and measurement provisions of APB 25, and related Interpretations,
as permitted by SFAS 123. In accordance with APB 25, no compensation cost was
required to be recognized for options granted that had an exercise price equal
to the market value of the underlying common stock on the date of
grant. On October 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123R. All stock based compensation awards were
fully vested as of October 1, 2006; therefore, the results for prior periods
have not been restated.
As of
June 30, 2008, we have granted options to purchase an aggregate of 5,271,756
shares of our common stock, under the plan, leaving a balance of 1,728,244
available for grant. Also as of June 30, 2008, 5,271,756 options are exercisable
and 5,271,756 are vested. We have reserved the right to issue a total of
7,000,000 shares of our common stock for issuance under the 2000 Stock Option
Plan.
During
the nine months ended June 30, 2008, the following options were
granted:
On
October 9, 2007, 20,000 options were granted to Greg Szabo, a director, for
board services. The weighted average grant date fair value of these options was
$0.008. Stock based compensation of $158 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.0212
and vested immediately.
On
November 14, 2007, 225,000 options were granted to Graham Clark, a director. The
compensation committee as an incentive to retain key staff members approved this
grant. The weighted average grant date fair value of these options was
$0.016. Stock based compensation of $3,579 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.03 and
vested immediately.
On
November 14, 2007, 100,000 options were granted to Greg Szabo, a director. The
compensation committee approved this grant. The weighted average grant date fair
value of these options was $0.016. Stock based compensation of $1,591
was recognized in the financial statements using the Black-Scholes option
pricing model value on the grant date. The options have a life of ten years, an
exercise price of $0.03 and vested immediately.
On
November 14, 2007, 100,000 options were granted to Michael Grollman, a director.
The compensation committee as an incentive to retain key staff members approved
this grant. The weighted average grant date fair value of these options was
$0.016. Stock based compensation of $1,591 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.03 and
vested immediately. Also, on November 14, 2007, in lieu of taking a larger
grant, 450,000 options granted to Michael Grollman on December 1, 2000 at an
exercise price of $1.84 were canceled and exchanged for 450,000 options having
an exercise price of $0.03.The incremental cost of the modified award recognized
in the financial statements was $4,785.
On
January 14, 2008, 20,000 options were granted to Greg Szabo, a director, for
board services. The weighted average grant date fair value of these options was
$0.0189. Stock based compensation of $379 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.019
and vested immediately.
On April
11, 2008, 20,000 options were granted to Greg Szabo, a director, for board
services. The weighted average grant date fair value of these options was
$0.0118. Stock based compensation of $236 was recognized in the
financial statements using the Black-Scholes option pricing model value on the
grant date. The options have a life of ten years, an exercise price of $0.016
and vested immediately.
During
the nine months ended June 30, 2008, no options were exercised.
As
required by SFAS 123R, the fair value of each grant is estimated on the date of
the grant using the Black-Scholes option pricing method with the following
assumptions to value options for the nine months ended June 30, 2008 and
2007:
|
2008
|
2007
|
|||
|
Risk
- free interest rate
|
2.66%
to 4.23%
|
4.46%
to 5.03%
|
||
|
Expected
life (years)
|
5
|
5
|
||
|
Expected
volatility
|
116.0%
to 126.6%
|
91.4%
to 184.8%
|
||
|
Expected
dividends
|
None
|
None
|
||
|
Forfeitures
assumed
|
None
|
None
|
||
|
Weighted
average grant date fair value
|
$0.0157
|
$0.0280
|
The
following table summarizes the stock option activity during the first nine
months of fiscal year 2008:
|
Weighted
|
Weighted
Average
|
||||||||||||||
|
Number
|
Average
|
Remaining
|
Aggregate
|
||||||||||||
|
of
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||
|
Shares
|
Price
|
Term
(1)
|
Value
(2)
|
||||||||||||
|
Options
Outstanding, September 30, 2007
|
4,786,756
|
$
|
0.74
|
6.16
|
|||||||||||
|
Granted
|
935,000
|
0.03
|
|||||||||||||
|
Exercised
|
–
|
–
|
|||||||||||||
|
Forfeited
or expired
|
(450,000
|
)
|
1.84
|
||||||||||||
|
Options
Outstanding, June 30, 2008
|
5,271,756
|
$
|
0.43
|
5.97
|
$
|
–
|
|||||||||
|
Options
Exercisable June 30, 2008
|
5,271,756
|
$
|
0.43
|
5.97
|
$
|
–
|
|||||||||
| ____________ | |||||||||||||||
|
(1)
|
Remaining contractual term is
presented in years
|
|
(2)
|
The
aggregate intrinsic value is calculated as the difference between the
exercise price of the underlying awards and the closing price of our
common stock as of June 30, 2008, for those awards that have an exercise
price currently below the closing price as of June 30, 2008. Awards with
an exercise price above the closing price of $0.015 as of June 30, 2008
are considered to have no intrinsic
value.
|
Warrants
During
the nine months ended June 30, 2008, no awards were granted, no share purchase
warrants were exercised, and no warrants were forfeited.
On June
24, 2008, three year warrants previously issued to purchase 135,000 shares of
common stock with an exercise price of $0.062 expired.
On June
25, 2008, our board of directors resolved to instruct management to extend the
expiration date of 2,550,000 warrants previously set to expire on June 30, 2008,
by twelve months. The warrants, issued to purchase 2,550,000 shares
of common stock exercisable at prices ranging from $0.35 to $0.75 per share were
issued between July 2003 and March 2004 in connection with the June
2003 Private Placement Memorandum. The fair value of these warrants,
on June 30, 2008, determined to be $9,099 was expensed as stock based
compensation.
The
following assumptions were utilized to value warrants during the nine months
ended June 30, 2008 and 2007:
|
2008
|
2007
|
|||
|
Risk
- free interest rate
|
2.36%
|
4.60%
to 4.91%
|
||
|
Expected
life (years)
|
1
|
2
to 5
|
||
|
Expected
volatility
|
228.0%
|
83.5%
to 184.8%
|
||
|
Expected
dividends
|
None
|
None
|
||
|
Forfeitures
assumed
|
None
|
None
|
||
|
Weighted
average grant date fair value
|
$0.0037
|
$0.0147
|
The
following table summarizes the warrant activity during the first nine months of
fiscal year 2008:
|
Weighted
|
Weighted
Average
|
||||||||||||
|
Number
|
Average
|
Remaining
|
Aggregate
|
||||||||||
|
of
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||
|
Shares
|
Price
|
Term
(1)
|
Value
(2)
|
||||||||||
|
Warrants
Outstanding, September 30, 2007
|
17,714,197
|
$
|
0.17
|
1.56
|
|||||||||
|
Granted
|
–
|
–
|
–
|
||||||||||
|
Exercised
|
–
|
–
|
–
|
||||||||||
|
Expired
|
(135,000)
|
–
|
–
|
||||||||||
|
Warrants
Outstanding, June 30, 2008
|
17,579,197
|
$
|
0.18
|
1.18
|
$
|
–
|
|||||||
|
____________
|
|||||||||||||
|
(1)
|
Remaining contractual term is
presented in years
|
|
(2)
|
The
aggregate intrinsic value is calculated as the difference between the
exercise price of the underlying awards and the closing price of our
common stock as of June 30, 2008, for those awards that have an exercise
price currently below the closing price as of June 30, 2008. Awards with
an exercise price above the closing price as of June 30, 2008 of $0.015
are considered to have no intrinsic
value.
|
| 3. |
Trade
Receivables
|
Trade
Receivables of $105,976 at June 30, 2008 included factored invoices totaling
$102,125. Trade Receivables of $6,216 at September 30, 2007 included factored
invoices totaling $2,602. There were no reserves for doubtful accounts at June
30, 2008 and September 30, 2007, as all amounts were deemed
collectible.
| 4. |
Inventory
|
Inventories,
primarily purchased parts and finished goods, are stated at the lower of cost or
market values. Cost is determined on a FIFO (first-in, first-out) basis. There
were no reserves at June 30, 2008 and September 30, 2007.
| 5. |
Accrued
Expenses
|
Accrued
expenses consisted of the following at June 30, 2008 and September 30, 2007:
|
June
30, 2008
(Unaudited)
|
September
30, 2007
(Audited)
|
|||||||
|
Salaries
and vacation pay - current management and staff
|
$
|
764,286
|
$
|
575,727
|
||||
|
Salaries
and vacation pay - former employee
|
29,375
|
29,375
|
||||||
|
Payroll
taxes for accrued back pay
|
58,565
|
40,781
|
||||||
|
Interest
|
198,442
|
156,271
|
||||||
|
Employee
stock retainage pool
|
–
|
50,250
|
||||||
|
Other
liabilities
|
17,622
|
30,996
|
||||||
|
$
|
1,068,290
|
$
|
883,400
|
|||||
| 6. |
Notes Payable and Long-Term
Debt
|
As of
June 30, 2008 and September 30, 2007, long-term debt consisted of the following
notes payable:
|
June
30, 2008
(Unaudited)
|
September
30, 2007
(Audited)
|
|||||||
|
Non-interest
bearing note payable, due on demand; unsecured;
|
||||||||
|
repayment
may be made by the Company with either cash or its
|
||||||||
|
restricted
common stock or a combination of cash and stock
|
$
|
–
|
$
|
43,250
|
||||
|
8%
note payable to a related party; unsecured; principal and
|
||||||||
|
interest
due on demand
|
143,181
|
161,300
|
||||||
|
12%
note payable; secured; due on demand
|
11,625
|
11,625
|
||||||
|
12%
note payable; secured; due on demand
|
20,000
|
20,000
|
||||||
|
8%
note payable; unsecured; principal payable in full in November
2010;
|
||||||||
|
with
semi-annual interest payments in May and November
|
175,000
|
175,000
|
||||||
|
6%
note payable; unsecured; due on demand with 30 days prior
notice
|
3,750
|
6,000
|
||||||
|
353,556
|
417,175
|
|||||||
|
Less:
|
||||||||
|
Current
portion of long term debt
|
(178,556
|
)
|
(242,175
|
)
|
||||
|
Discount
|
(24,080
|
)
|
(31,820
|
)
|
||||
|
Beneficial
conversion feature
|
(4,635
|
)
|
(6,125
|
)
|
||||
|
Long-term
debt, net of current portion
|
$
|
146,285
|
$
|
137,055
|
||||
The
aggregate maturities of long-term debt were as follows:
|
June
30, 2008
(Unaudited)
|
September
30, 2007
(Audited)
|
|||||||
|
2008
|
$
|
178,556
|
$
|
242,175
|
||||
|
2009
|
–
|
–
|
||||||
|
2010
|
175,000
|
175,000
|
||||||
|
$
|
353,556
|
$
|
417,175
|
|||||
| 7. |
Earnings Per
Share
|
Statement
of Financial Accounting Standards No. 128, “Earnings per Share,” provides for
the calculation of Basic and Diluted earnings per share. Basic income (loss) per
share includes no dilution and is computed by dividing income (loss) available
to common shareholders by the weighted average number of common shares
outstanding for the period.
The
following table reconciles weighted average shares outstanding to amounts used
to calculate basic and diluted earnings per share for the three and nine months
ended June 30, 2008 and 2007.
|
Three
months ended
|
Nine
months ended
|
|||||||||||||||
|
June
30,
|
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Net
income (loss)
|
$
|
18,707
|
$
|
(84,716
|
)
|
$
|
(198,112
|
)
|
$
|
(384,100
|
)
|
|||||
|
Weighted
average shares:
|
||||||||||||||||
|
Average
shares outstanding
|
122,310,935
|
111,706,611
|
121,364,762
|
104,299,409
|
||||||||||||
|
Effect
of diluted shares
|
–
|
–
|
–
|
–
|
||||||||||||
|
Average
shares outstanding adjusted for dilutive effect
|
122,310,935
|
111,706,611
|
121,364,762
|
104,299,409
|
||||||||||||
|
Income
(loss) per share - basic
|
$
|
0.00
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
|||||
|
Income
(loss) per share - diluted
|
$
|
0.00
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
|||||
Incremental
common shares (not included in denominator of diluted earnings per share because
of their anti-dilutive nature):
|
June
30, 2008
|
June
30, 2007
|
|||||||
|
Options
|
5,271,756 | 4,216,756 | ||||||
|
Warrants
|
17,579,197 | 17,714,197 | ||||||
|
Potential
common equivalents
|
22,850,953 | 21,930,953 | ||||||
| 8. |
Subsequent
Events
|
None.
| Item 2. |
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
|
SAFE
HARBOR STATEMENT
Statements
contained herein that are not historical fact may be forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We use words and
phrases such as “should be,” “will be,” “believes,” “expects,” “anticipates,”
“plans,” “intends,” “may” and similar expressions to identify forward-looking
statements. Forward-looking statements are made based upon our belief as of the
date that such statements are made. These forward-looking statements are based
largely on our current expectations and are subject to a number of risks and
uncertainties, many of which are beyond our control. You should not place undue
reliance on these forward-looking statements, which apply only as of the date of
such documents. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, including the
risks faced by us described above and elsewhere in this report. This report
should be read in conjunction with the financial statements and other
information included in the Company’s annual report on Form 10-KSB for the
fiscal year ended September 30, 2007, which is incorporated herein by
reference and the Company’s quarterly reports on Form 10-QSB for the
periods ended December 31, 2007 and March 31, 2008.
General
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 financial statements. Except for the
historical information contained herein, the matters set forth in this report
are forward-looking statements.
Overview
Our
primary business involves the research, development, manufacture, and sale of
hardware and software computer based products and devices that span a range of
industries. The majority of our products are mobile computers configured as
digital video recording devices with location-determining and tracking
capabilities. These devices typically use small powerful mobile computers, in
conjunction with equally small portable radios to establish, record and report
the physical location of people and objects to which these devices are attached.
Our location technologies typically use Global Positioning System (GPS)
technology to determine position. They also use small computers in conjunction
with video cameras and other sensors to record incidents on mobile systems,
especially school buses. We also have other products that use non-GPS technology
to establish and then report position. We refer to our location-determining
devices as our location tracking products, or as location tools
products.
Our
primary customer focus for these location-tracking products is the safety
market, related in many cases to the safety of school age children. Our products
and services help our customers keep better track of their children. Our
products are also used to keep track of adults, and as well to track and monitor
physical assets, such as equipment or vehicles. Our location tracking products
are often sold as an integrated system, by using them in conjunction with
software that screen displays maps and other pertinent information.
Prior to
2002 we developed electronic component products, some of which are used in radio
equipment, and some of which have other applications in the electronics field,
such as in the memory systems of personal computers. Many of these electronic
component products have been issued U.S. patents. We focused extensively on
developing these products and patenting them from 1996 through early 2002, with
the objective of licensing these products to other electronic companies. In
early 2002, due to market conditions, our focus shifted away from further
development of our electronic component products, but we continue to explore
licensing opportunities for our component products.
Since
2002, we began to focus on applications of electronic devices in the location
tools market. From 2002 through 2005, we were primarily engaged in product
development and market research and testing. During fiscal year 2005, the
Company increased its focus on its Travado IBUS™, a location product that
entered the market in March 2005. Starting from the last two quarters of fiscal
year 2005, we have generally seen a steady increase in the sales of our Travado
IBUS. During fiscal year 2007 and the first nine months of fiscal year 2008 our
sales have consisted entirely of Travado IBUS™ products.
Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
Revenue
Revenue
decreased 26.6% to $158,749 for the three months ended June 30, 2008, from
$216,372 for the three months ended June 30, 2007. This decrease in revenue was
the result of a 23% decrease in unit shipments of Travado IBUS™ systems and a
4.7 % reduction in average sales unit price due to using indirect distribution
channels. The primary reason for this change in revenue was that we had a single
large contract in Washington State that was being fulfilled in 2007 and we did
not have a single large project in 2008. Putting aside the impact of this single
large project from the prior year, revenue from other customers improved by
approximately 42% from approximately $111,512 in the three months ended June 30,
2007 to $158,749 in the three months ended June 30, 2008.
Gross
Profit
Gross
profit decreased to $76,773 for the three months ended June 30, 2008 from
$106,916 for the three months ended June 30, 2007 and the gross profit margin
decreased to 48.4% from 49.4% in the respective periods. The decrease in gross
profit and gross profit margin during the three months ended June 30, 2008 was
primarily due to reduced sales volume and reduced average selling price caused
by the change in sales channel mix.
Salaries
and Benefits
Salaries
and benefits, of administration and marketing personnel increased to $70,156 for
the three months ended June 30, 2008 from $60,110 for the three months ended
June 30, 2007. The increase resulted primarily from higher payroll taxes in the
quarter to June 30, 2008.
Research
and Development
Research
and development expenditures of $42,706 for the three months ended June 30, 2008
remained almost flat compared to $43,693 for the three months ended June 30,
2007. The Company will continue to explore innovative ways to take its
technology expertise and products to market, across its entire portfolio of
semiconductor and location electronics related devices.
Stock
Compensation
Stock
compensation for the three months ended June 30, 2008 of $8,225 remained almost
flat compared to $7,336 for the three months ended June 30, 2007.
Other
Expenses
Other
expenses decreased to $47,574 in the three months ended June 30, 2008 from
$54,287 in the three months ended June 30, 2007. The decrease resulted primarily
from decreases of approximately $26,900 in factors’ fees, delivery costs,
accountant fees, filing fees, selling and marketing expenses and warranty and
system upgrade expenses offset by increases of approximately $20,200 in board
fees, insurance costs, shareholders’ meeting expenses, and travel
expenses.
Other
Income
Other
income, during the three months ended June 30, 2008, reflects a gain on
extinguishment of liabilities of $133,197. This relates to the extinguishment of
amounts previously considered to be owed by the Company.
Interest
Expense
Interest expense decreased to $21,402
during the three months ended June 30, 2008 from $25,006 during the three months
ended June 30, 2007. The
decrease is mainly attributable to a reduction in interest rates as a result of
reduced prime rates.
Amortization
of Deferred Financing Costs
Amortization
of deferred financing costs for the three months ended June 30, 2008 and 2007
and remained flat at $1,200.
Nine
Months Ended June 30, 2008 Compared to Nine Months Ended June 30,
2007
Revenue
Revenue
increased 32.3% to $530,504 for the nine months ended June 30, 2008, from
$401,088 for the nine months ended June 30, 2007. The increased revenue resulted
primarily from a 44.2% increase in unit sales of Travado IBUS™ products, offset
by an 8.3% decrease in the average unit sales price. The decreased average unit
sales price reflects the impact on price of the sales mix between distributors
and direct sales to end-user customers. The percentage of direct unit sales to
end- customers decreased to 48.4%, of total sales, during the nine months ended
June 30, 2008, from 85.8% of total sales, for the nine months ended June 30,
2007. Sales to end-user customers would typically have a higher unit sales price
than sales to distributors.
Gross
Profit
Gross
profit increased to $242,055 for the nine months ended June 30, 2008 from
$198,147 for the nine months ended June 30, 2007. The higher gross profit
dollars are attributable to the higher sales volume. However, gross profit
margin decreased to 45.6% from 49.4% in the respective periods. The decrease in
gross profit margin during the nine months ended June 30, 2008 was primarily due
to reduced average selling price caused by the change in sales channel
mix.
Salaries
and Benefits
Salaries
and benefits, of administration and marketing personnel increased to $207,449
for the nine months ended June 30, 2008 from $193,961 for the nine months ended
June 30, 2007. The increase resulted primarily from higher payroll taxes in the
nine months ended June 30, 2008.
Research
and Development
Research
and development expenditures for the nine months ended June 30, 2008 and 2007
remained flat at approximately $127,000. The Company will continue to explore
innovative ways to take its technology expertise and products to market, across
its entire portfolio of semiconductor and location electronics related
devices.
19
Stock
Compensation
Stock
compensation increased to $22,544 for the nine months ended June 30, 2008 from
$15,267 for the nine months ended June 30, 2007. The increase in the nine months
ended June 30, 2008 is mainly attributable to the fair value of option awards
used as incentives to retain key staff and board members.
Other
Expenses
Other
expenses increased to $146,335 in the nine months ended June 30, 2008 from
$123,560 in the nine months ended June 30, 2007. The increase resulted primarily
from increases of approximately $38,300 in insurance costs, shareholders’
meeting expenses, accountant fees, legal costs, warranty and system upgrade
expenses offset by decreases of approximately $15,600 in factors’ fees, selling
expenses, travel and rent.
Other
Income
Other
income, during the nine months ended June 30, 2008, reflects a gain on
extinguishment of liabilities of $133,197. This relates to the extinguishment of
amounts previously considered to be owed by the Company. Other income of $25,740
in the nine months ended June 30, 2007 consisted primarily of the extinguishment
of an unclaimed accrued expense related to a fully amortized
investment.
Interest
Expense
Interest
expense decreased to $66,022 during the nine months ended June 30, 2008 from
$143,619 during the nine months ended June 30, 2007, primarily because interest
expense during the nine months ended June 30, 2007 included a one time charge of
$66,000 representing the value of stock issued to settle a dispute regarding the
timing of interest payments on a note and approximately $10,000 of beneficial
conversion feature expense not incurred in the first nine months of fiscal year
2008.
Amortization
of Deferred Financing Costs
Amortization
of deferred financing costs for the nine months ended June 30, 2008 and 2007
remained flat at $3,600.
Unclaimed
Note and Trade Payables
Unclaimed
note and trade payables reflect gains on extinguishment of liabilities of
$77,947 during the nine months ended June 30, 2008. This relates to the
extinguishment of amounts previously considered to be owed by the
Company.
Prior
Years Accruals Not Required
Prior years accruals not required of
$55,250 during the nine months ended June 30, 2008, reflects the extinguishment
of the Stock Retainage Program balance, accumulated with the return to treasury
of shares issued to former employees. The Company does not intend to use the
program to issue shares to retain its employees.
We have
financed our operations primarily through the sale of common stock and warrants
in the public and private market, and to a very limited extent and only just
recently, through the sale of our products. The Company has recently initiated
product-marketing efforts after several years of research and development and
has not yet reached break even in terms of both cash flow and
profitability.
As of
June 30, 2008, the Company had cash and cash equivalents of $2,355, total
current assets of $126,573 and total liabilities of $1,643,815 including notes
payable of $355,556 gross of debt discount and beneficial conversion feature,
accounts payable of $168,984, accrued expenses of $1,068,290 and amounts due to
factors of $81,700. The accounts payables total of $168,984 included invoices of
approximately $38,000 aged over three years. The accrued expenses total of
$1,068,290 included $764,286 of unpaid wages and vacation pay.
Cash used
in operating activities during the nine months ended June 30, 2008 of $142,261
represents a $69,399 increase from the amount used in operating activities
during the nine months ended June 30, 2007. The increase was primarily due to
changes in accounts receivable and increases in accounts payable and accrued
expenses during the nine months ended June 30, 2008 compared to the nine months
ended June 30, 2007, offset by the net loss of $198,112 in the nine months ended
June 30, 2008 compared to the net loss of $384,100 the nine months ended June
30, 2007.
Cash used
in financing activities during the nine months ended June 30, 2008 of $58,729
represents a $17,719 increase from the amount provided by financing activities
during the nine months ended June 30, 2007. Financing activities during the nine
months ended June 30, 2008 included the repayment of notes payable of $20,369
offset by net proceeds from factors of $79,098. Financing activities during the
nine months ended June 30, 2007 included the receipt of proceeds from notes
payable of $20,725 and net proceeds from the issuance of common stock of
$109,800, offset by the repayment of notes payable of $13,025 and net proceeds
from factors of $76,490.
We
believe that our current cash position as of June 30, 2008, including cash funds
arising from the exercise of outstanding options, from equity placement sales
and other capital raising efforts, loans from officers, product sales, and
continued aggressive expense management to be sufficient to continue operations
for the next twelve months. We also believe that we may be able to reduce
outstanding liabilities through negotiations with our creditors, or possibly
negotiate to extend the payment schedule for these debts. In the event these
approaches do not provide us with adequate working capital, we may be required
to further curtail or reduce our development activities, seek alternative
funding sources, or seek protection under reorganization laws. The Company’s
ability to continue as a going concern is contingent upon its ability to attain
profitable operations and secure financing. There can be no assurance that
additional financing will be available to us when needed or, if available, that
it can be obtained on commercially reasonable terms. If we are not able to
continue as a going concern, we would likely be unable to realize the carrying
value of our assets reflected in the balances set out in our financial
statements. Our auditors have expressed substantial doubt about the Company’s
ability to continue as a going concern.
Other
Subsequent Events
Subsequent
to June 30, 2008, several key projects were successfully completed. We launched
two new product lines which will take advantage of our growing indirect
distribution channels. These new products focus directly on improved
reliability, improved margin and ease of use. They are also a direct substitute
for the existing DVR’s already in the market and as such offer us significant
growth potential. The technology employed has a very positive impact on
reliability and also allows us to be very price competitive.
As of the
date of this report, the company had a backlog of orders for its DVR systems of
approximately $204,000. The Company has noted in the past few years that sales
in the September-ending quarter for its products tend to be stronger than in the
June-ending quarter. This is typically due to government fiscal year-end
effects, and on imminent business that is likely to arise from the good current
sales pipeline being generated from the new products. The company therefore, has
reason to believe that the current quarter would continue to support that
seasonal up-trend, although management believes there is still significant
uncertainty on any final results for the current quarter.
In order
to support this trend and allow for possible growth in revenues, the Company is
exploring various avenues for possible new debt and debt consolidation over the
course of the next several months of up to $500,000 although no firm decisions
in this area have been made by its board, and there is no assurance that such
financing would be available on acceptable terms. Part of this effort may
include an expansion of the conversion of employee back pay debt to a
significant amount of restricted company common stock, at then-current market
prices, which has previously been authorized by its board. Also,
early payoff of some large notes to creditors outside of the Company may be
considered, as would licensing to third parties of some of the Company’s IBUS
technology, if a fair price can be established.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Not
required under Regulation S-K for “smaller reporting
companies.”
| Item 4T. |
Controls and
Procedures
|
(a)
Evaluation of Disclosure Controls and Procedures
Disclosure
controls and procedures are designed with an objective of ensuring that
information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q,
is recorded, processed, summarized and reported within the time period specified
by the Securities and Exchange Commission. Disclosure controls also are designed
with an objective of ensuring that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Acting
Chief Financial Officer, in order to allow timely consideration regarding
required disclosures.
(b)
Management’s Report on Internal Control over Financial Reporting
The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including its Chief Executive Officer
and Acting Chief Financial Officer, of the effectiveness, as of June 30, 2008,
of the design and operation of the Company’s disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that
evaluation, the Chief Executive Officer and Acting Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are
effective.
(c)
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting during the
quarter ended June 30, 2008 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
| Item 1. |
Legal
Proceedings
|
The
Company is involved in legal actions in the ordinary course of its business,
including those outlined in the Company’s annual report on Form 10-KSB for the
fiscal year ended September 30, 2007. Although the outcome of any such legal
actions cannot be predicted, in the opinion of management, there are no legal
proceedings pending or asserted against or involving the Company the net outcome
of which are likely to have a material adverse effect upon the financial
position or results of operations of the Company.
| Item 1A. |
Risk
Factors
|
Carefully
consider the risk factors set forth in the Annual Report on Form 10-KSB for the
fiscal year ended September 30, 2007 that could materially affect our business,
financial condition or future results. The risk factors set forth in our Annual
Report on Form 10-KSB for the fiscal year ended September 30, 2007 have not
materially changed.
| Item 2. |
Unregistered Sale of
Equity Securities and Use of
Proceeds
|
None.
| 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
|
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
13
|
Form
10-KSB Annual Report For The Fiscal Year Ended September 30, 2007 (1)
|
|
|
31
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
32
|
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley
Act
|
____________
|
(1)
|
Filed
on or around December 31, 2007, on Form
10-KSB.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
NATIONAL SCIENTIFIC
CORPORATION
|
||
|
|
|
|
|
|
Date:
August 14, 2008
|
By:
|
/s/
Michael A. Grollman
|
|
|
|
Michael
A. Grollman
Director,
Chief Executive Officer, Acting Chief
Financial
Officer and Chairman
|
||
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Graham L. Clark
|
|
|
Graham
L. Clark
Director,
President, and Secretary
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Gregory Szabo
|
|
|
Gregory
Szabo
Director
|
|
24