VIEW SYSTEMS INC - Quarter Report: 2017 September (Form 10-Q)

View Systems, Inc. and Subsidiaries (the "Company") designs, develops and sells computer software and hardware used in conjunction with surveillance capabilities.  The technology utilizes the compression and decompression of digital inputs.  In March 2002, the Company acquired Milestone Technology, Inc., which has developed a concealed weapons detection portal.  In July 2009, the Company acquired FibreXpress, Inc., which is a company that specializes in developing and selling equipment and components for the fiber optic and communication cable industries.  During the second quarter of 2017, the Company established a new business line in the Erectile Dysfunction Medical market by opening one clinic within its' Medical Therapeutics subsidiary.

 

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The Company has three main products, namely the concealed weapons detection system, the visual first responder system and the Viewmaxx digital video system.  In all cases revenue is considered earned when the product is shipped to the customer, installed (if necessary) and accepted by the customer as a completed sale.  The concealed weapons detection system and the digital video system each require installation and training.  The customer can engage us for installation and training, which is a revenue source separate and apart from the sale of the product.  In those cases revenue is recognized at the completion of the installation and training and acceptance by the customer.  However, the customer can also self-install or can engage another firm to provide installation and training.  Each product has an unconditional 30 day warranty, during which time the product can be returned for a complete refund.  Customers can purchase extended warranties, which provide for replacement or repair of the unit beyond the period provided by the unconditional warranty.  Warranties can be purchased for various periods but generally they are for one year period that begins after any other warranties expire.  The revenue from warranties is recognized on a straight line basis over the period covered by the warranty.  Prior to the issuance of financial statements management reviews any returns subsequent to the end of the accounting period which are from sales recognized during the accounting period, and makes appropriate adjustments as necessary.  Product prices are fixed or determinable and products are only shipped when collectability is reasonably assured.  For our Medical Business, service revenue is considered earned when the service is provided.

Inventories stated at the lower of cost or market.  Cost is determined by the first-in-first-out method (FIFO).  As of September  30, 2017 and December 31, 2016 the Company's inventory consisted of  unassembled parts of the product.

Property and equipment is recorded at cost and depreciated over their useful lives, using the straight-line and accelerated depreciation methods.  Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts, and the resulting gain or loss is included in the results of operations.  The useful lives of property and equipment for purposes of computing depreciation are as follows:

Equipment 5-7 years

Software tools 3 years

Repairs and maintenance charges which do not increase the useful lives of assets are charged to operations as incurred.  Depreciation expense for the periods ended September 30, 2017 and 2016 amounted to $600 and $600, respectively.

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Income taxes are recorded under the assets and liabilities method whereby deferred tax assets and liabilities are recognized for the future tax consequences, measured by enacted tax rates, attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carry forwards.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the rate change becomes effective.  Valuation allowances are recorded for deferred tax assets when it is more likely than not that such deferred tax assets will not be realized.

The Company files income tax returns in the U.S. federal jurisdictions, and in various state jurisdictions.  The Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years prior to 2010.  TheCompany policy is to recognize interest related to unrecognized tax benefits as income tax expense.  The Company believes that it has appropriate support for the income tax positions it takes and expects to take on its tax returns, and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

Research and development costs are expensed as incurred.

Advertising costs are charged to operations as incurred.  Advertising costs for the nine months ended September 30, 2017 and 2016 were $3,322 and $125, respectively.

Nonmonetary transactions are accounted for in accordance with ASC 845 " Nonmonetary Transactions" which requires the transfer or distribution of a nonmonetary asset or liability to be based generally, on the fair value of the asset or liability that is received or surrendered, whichever is more clearly evident.

For most financial instruments, including cash, accounts receivable, accounts payable and accruals, management believes that the carrying amount approximates fair value, as the majority of these instruments are short-term in nature.

The Company accounts for share-based compensation at fair value.  Share-based compensation cost for stock options granted to employees, board members and service providers is determined at the grant date using an option pricing model that uses level 3 unobservable inputs.  The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period.

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The Company has incurred and continues to incur, losses from operations.  For the periods ended September 30, 2017 and 2016, the Company incurred net losses of $149,248 and $158,180, respectively.  In addition, certain notes payable have come due and the note holders are demanding payment.

Management is very actively working to cure these situations and has implemented major plans to for the future growth and development of the Company.  Management is in the process of renegotiating more favorable repayment terms on the notes payable and the Company anticipates that these negotiations will result in extended payment plans.

Historically, the Company has financed its operations primarily through private financing.  It is management's intention to finance operations during the remainder of 2017 primarily through increased sales although there will still be a need for additional equity financing.  In addition, management is actively seeking out mergers and acquisitions which would be beneficial to the future growth of the Company.  There can be no assurance, however, that this financing will be successful and the Company may be required to further reduce expenses and scale back operations.

As described in Note 4, the Company is currently in default on a $50,000 loan from a stockholder.

The consolidated financial statements presented above and the accompanying Notes have been prepared on a going concern basis, which contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustments to reflect possible future effects on the recoverability  and classification of assets, or the amounts and classification of liabilities that may result from the outcome of any extraordinary regulatory action, which would affect our ability to continue as a going concern.

Due to the conditions and events discussed above, there is substantial doubt about the Company's ability to continue as a going concern.

In February 2016, the FASB issued new guidance on the accounting for leases, which supersedes previous lease guidance.  Under this guidance, for all leases with terms in excess of one year, including operating leases, the Company will be required to recognize on its balance sheet a lease liability and a right-of-use asset representing its right to use the underlying asset for the lease term.  The new guidance retains a distinction between finance leases and operating leases and the classification criteria is substantially similar to previous guidance.  Additionally, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed.  The Company is currently evaluating the impact of this guidance on its consolidated balance sheets.  This guidance is effective for interim and annual reporting periods beginning after December 15, 2018 with early adoption permitted.

In May 2014, the FASB issued guidance on the recognition of revenues which provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes most existing revenue recognition guidance.  The main principle under this guidance is that an entity should recognize revenue at the amount it expects to be entitled to in exchange for the transfer of goods or services to customers.  The Company is currently evaluating the impact of this guidance on its consolidated balance sheets and statement of operations.  This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016.

 

 

Notes payable as of September 30, 2017 and December 31, 2016 consists of the following:

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               For income tax purposes the Company has net operating loss carry forwards of $28,105,000 as of December 31, 2016 that may be used to offset future taxable income.  In the instance of future corporate acquisitions, the net operating losses may be used to offset the future taxable income of a qualifying subsidiary corporation which meets IRS regulations governing such situations.  The losses have accumulated since 1998 and they will start to expire in 2018.  IRS regulations also provide that significant changes in ownership (greater than 50%) could result in the expiration of some of the net operating loss carry forwards.  As of  the date of this report the Company has not made an analysis of the changes in ownership to determine if any of these losses have expired.

Net income tax benefit is not recognized at this time because there is no reasonable expectation that the benefit will be realized in the future. Due to continuous losses from operations the Company has assigned a full valuation allowance against its deferred tax assets.

In July 2005 the Company issued 7,171,725 shares of Series A Preferred Stock in payment of services.  The issuance had been previously authorized by the Board of Directors.  Each share of Series A Preferred Stock has a liquidation preference, in the event of liquidation of the Company, of $0.001 per share before any payment or distribution is made to the holders of common stock.

During 2008 the Board of Directors approved a reverse split of the stock in which one new share of preferred stock was issued in exchange for each 80 shares of stock outstanding.  Accordingly, the total issued of preferred stock was adjusted from 7,171,725 shares to 89,647 shares.  The par value and the total authorized shares did not change.

Effective in 2010 the initial issuance of  Series A Preferred can be converted into common stock in the ratio of 15:1.  During 2011 the Board of Directors authorized the issuance of an additional 1,400,000 shares of Series A Preferred Stock in payment of a loan from a shareholder in the amount of $64,000 and also in payment of services in the amount of $34,000. These additional shares can be converted to common stock beginning in 2013. Each share is entitled to fifteen votes and shall be entitled to vote on any matters brought to a vote on the common stock shareholder.

During 2012 the Board of Directors authorized the issuance of an additional 1,500,000 shares of Series A Preferred Stock in payment of deferred compensation and current compensation in the amount of $161,463.

During 2013 the Board of Directors authorized the issuance of an additional 500,000 shares of Series A Preferred Stock in payment of professional services in the amount of $225,000.

During 2014 the Board of Directors authorized the issuance of an additional 2,000,000 shares of Series A Preferred Stock in payment of deferred and current compensation in the amount of $480,000.

During 2015 an owner of preferred stock elected to convert 1,400,000 shares of his preferred stock into 21,000,000 shares of the Company's common stock.

During 2015 the Board of Directors authorized the issuance of an additional 1,000,000 shares of Series A Preferred Stock in payment of deferred compensation of $37,500 and current compensation of $37,500.

During 2016 an owner of preferred stock elected to convert 500,000 shares of preferred stock into 7,500,000 shares of the Company's common stock.

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In 2015 the Company leased 1,500 sq. ft. of office space under a non-cancellable lease at 1900 Lansdowne Road, Baltimore Maryland with a monthly rent of $1,595 for a period of 3 years.  Effective July 31, 2016 the lease was terminated by mutual agreement with the landlord.  In 2017, the Company leased office space at 6 Park Center Court, Owings Mills, Baltimore, Maryland for use as its' Medical Clinic and Corporate Office.  The monthly rent of $2,037 is through September 2017 and is renewable, automatically for one year terms.  Rent expense was $10,776 and $12,485 for the periods ended September 30, 2017 and 2016, respectively.

On April 2, 2010 the Company adopted its 2010 Equity Incentive Plan.  Reserved for equity issuances under the Equity Incentive Plan are 50,000,000 shares of our common stock.  During 2011 14,116,433 shares of common stock were issued under the provisions of the 2010 Equity Incentive Plan for which $92,065 of expenses were recognized.

On June 1, 2010 the Company adopted its 2010 Service Provider Stock Compensation Plan.  Reserved for equity issuances under the Service Provider Stock Compensation Plan are 50,000,000 shares of our common stock.  No equity issuances were made during the reporting period from the 2010 Service Provider Stock Compensation Plan.

During the period ended September 30, 2016 the Company issued the following compensatory shares outside of its existing Stock Option and Restricted Share Plans at the discretion of the Board of Directors:

For the nine month period ended September 30, 2016 the Board authorized the issuance of 7,000,000 shares of common stock in payment of interest expense amounting to $16,800.

Independent contractors and consultants' expense was based on the estimated value of services rendered or the value of the common stock issued, if more reliably determined.

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Certain stockholders made cash advances to the Company to help with short-term working capital needs.  The net proceeds from stockholders with unstructured payment plans amounted to $44,771 and $26,505 for the periods ended September 30, 2017 and 2016, respectively.  The total balance due on unstructured loans from stockholders amounted to $635,979 as of September 30, 2017 and $591,208 at December 31, 2016.  Loans from stockholders made with repayment terms are described in Note 4 above.

10.      ISSUABLE COMMON STOCK

             As of September 30, 2017 and December 31, 2016 740,000 shares of the authorized shares of common stock amounting to $16,000, had not been issued.

11.  CONTINGENT LIABILITY

             Effective January 1, 2015 the Board of Directors authorized a new employment contract with Gunther Than, CEO of View Systems, Inc.  That employment contract provides that in the event of a change in control of the Board of Directors or a buyout or takeover or substantial change of management structure Mr. Than will receive a minimum of three year's salary plus 4.8 million shares of unrestricted stock of the equivalent in cash at Mr. Than's direction.  Mr. Than's current base salary is $120,000 per annum.

12.  OPERATING SEGMENTS

             The Company operates in two segments:  (1) the design, development and sale of computer software and hardware used in conjunction with surveillance capabilities and (2) a newly established business line in the Erectile Dysfunction Medical field.  The following table details net revenue and income before income taxes by segment:

Revenues

                                                                $   9,679           $    7,180                                                                                                                                                                                       $  42,095              $  51,320

Loss Before Taxes

                                                                 $ (43,610)        $(50,908)                                                                                                                                                                                   $(149,248)           $(153,180)

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