U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
x
ANNUAL REPORT PURSUANT
SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT
OF
1934. For the fiscal year ended December 31, 2007.
o
TRANSITION REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934. For the transition period from ____________ to
____________
Commission
file number 0-26604
Allied
Security Innovations, Inc.
Formerly
Digital Descriptor Systems, Inc.
(Name
of
small business issuer in its charter)
|
Delaware
|
23-2770048
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
| |
|
|
1709
Route 34, Suite 2, Farmingdale, New Jersey
|
08750
|
|
(Address
of principal executive
offices)
|
(Zip
Code)
|
Registrant's
Telephone number, including area code: (732) 359-0260
Securities
registered under 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Act: Common Stock
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 x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation
S-B is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form10-KSB.
The
issuer had revenues of $4,367,941 for
the
fiscal year ended December 31, 2007.
As
of
February 29, 2008, 1,054,267,741 shares of the issuer's Common Stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
None
Transitional
Small Business Disclosure Format Yes o No x
General
Business Development
Digital
Descriptor Systems, Inc. ("DDSI", the "Company", "us", "we", or "our"), a
Delaware corporation incorporated in 1994, is the successor to Compu-Color,
Inc., an Iowa corporation. The operations of DDSI were started as a division
of
ASI Computer Systems, Inc. of Waterloo, Iowa in 1986. Compu-Color, Inc. was
formed in July 1989 and as of July 1, 1989 purchased the assets of the
Compu-Color division of ASI Computer Systems, Inc.
On
December 19, 2006 a special meeting of the shareholders was held and at the
meeting the shareholders passed a resolution to change the name of the company
from Digital Descriptor Systems, Inc. (“DDSI”) to Applied Security Innovations,
Inc (“ASII”). The shareholders also passed a resolution to authorize a 1 for 500
reverse stock split. Both of these actions were completed on February 5, 2007.
In addition the 2006 Incentive Stock Option Plan adopted by The Board of
Directors on October 12, 2006 was approved by the shareholders. On October
9,
2007 the companies stock began trading on the NASDAQ-over-the-counter market.
Previously, the Company’s common stock traded on Pink Sheets.
On
July
1, 2007 the offices of Allied Security Innovations, Inc. and the Somerset office
of CGM Applied Security Technologies, Inc., the Company’s wholly owned
subsidiary, were combined into a new office located at 1709 Route 34,
Farmingdale, NJ in a 6,000 square foot combination warehouse /office space.
The
reason for this was cost savings and improved operational
efficiencies.
ITEM
1. Description of Business
Our
Business
During
2005 the Company acquired CGM Security Solutions, Inc. as a wholly owned
subsidiary and changed its name to CGM Applied Security Technologies, Inc.
In
conjunction with the acquisition the Company has changed its primary focus
from
the law enforcement market to the security market in general as it believes
that
the potential for revenue is much greater.
Description
of Business of CGM
CGM-AST
is a manufacturer and distributor of indicative and barrier security seals,
security tapes and related packaging security systems, protective security
products for palletized cargo, physical security systems for tractors, trailers
and containers as well as a number of highly specialized authentication
products. Focused primarily on “deterrent technologies”, CGM-AST designs and
develops customized tamper evident devices which when integrated into a security
protocol; provide chain of custody and/or proof of tampering for targeted
assets.
Products
CGM-AST
has Trade Secret protection on its Secure T.R.A.C.®
tape,
Super Seals, Water Gum Tape, developed a Button Memory Seal and Sentry
Sensor®.
It also
has distribution rights on all NAVATECH products and seals, and owns the rights
to the patented ToppClip®
pallet
security device. In addition, CGM-AST provides authentication technology and
products to clients to act as brand protection elements to finished goods.
This
brand protection technology can help manufacturers reduce the incidences of
"knock-offs" that are common in the garment and accessory businesses. CGM-AST’s
core products are: CGM-AST Tapes, Self-Wound Security Tape, Void Labels and
Void
Tape for Bag Closure, SUPERSEALS(R), Custom Coated Products, CGM-AST Conductive
Inks and Membrane Switch Components, EMAPS(R), Locks, Sentry Sensor(R) and
other
representative items.
SUPERSEAL(R)
and self-voiding carton sealing tape known as SECURE T.R.A.C.(R) show a
customized signature if attempts are made at removing them. If cut and resealed,
SUPERSEAL(R) further shows an "opened" legend on the seal's center surface.
With
self-wound void tape, any attempt at resealing is negated by the surface coating
on the tape. An "opened" legend is also left on the tape if removed. Since
the
products are manufactured in-house, CGM-AST controls all features and has the
ability to customize the products to the customer's needs. CGM-AST also offers
converted labels, seals, and money bags. CGM-AST manufactures a variety of
adhesives, graphics and die cut label configurations for companies whose logos
always appear on the tape or label for security purposes. No generic product
can
be substituted for this product since no one makes an identical
product.
Uses
for
this product and technology include such items as:
·
Aircraft
and truck seals
·
Fiber
and
Steel drum seals
·
Motor
Vehicle inspection seals
·
Pharmaceutical
Packaging
·
Box
or container closure seals
·
General
security products
·
Law
Enforcement Agencies
Once
CGM-AST's products are applied to a particular surface, any attempt at removal
will leave a sign in the form of an indelible word or legend on the tape and
a
removable or permanent legend on the enclosure. The EMAPS(R) or Electro-Magnetic
Asset Protection System reflects entry by sending an electronic signals if
cut.
EMAPS(R) products function without the need to identify a cut visually. Both
products, the labels and the scanners, are unique and only manufactured by
CGM-AST.
Production
Process
CGM-AST
purchases processed materials from 6 to 8 key suppliers, including DuPont,
Luminite Corp, Adhesive Research, Sun Chemical, Houghton Chemical and Video
Jet.
For Video Jet, for OEM products, CGM-AST purchases from approximately 15
different companies. CGM-AST has an exclusive distribution relationship in
connection with some of these products, while for other products CGM-AST is
one
of few or many resellers.
Markets
& Customers
The
primary factors behind the need for CGM-AST’s products are: (i) the escalation
of cargo theft and tampering, (ii) the need for enhanced cargo security because
of the fear of terrorism, (iii) damage control of freight and cargo, (iv) the
need for security products, (v) brand protection and authentication requirements
and (vi) governmental and regulatory requirements.
CGM-AST
products are certified by the Customs-Trade Partnership Against Terrorism
("C-TPAT"), a joint initiative between government and business designed to
protect the security of cargo entering the United States while improving the
flow of trade. C-TPAT requires importers to take steps to assess, evolve and
communicate new practices that ensure tighter security of cargo and enhanced
security throughout the entire supply chain. In return, their goods and
conveyances will receive expedited processing into the United States. Many
of
our products are also ISO 17712 compliant, which is a standard for international
shipping and container security.
Principal
Customers
CGM-AST’s
current client base includes over 2000 national and international companies,
including producers of high value items such as perfumes, computers, silicon
chips, jewelry, cash and negotiable documents. The market for tamper evidence
includes flavors, fragrances, foodstuffs and components. CGM-AST’s products are
used by U.S. Government agencies (e.g.: DOD, TSA, DHS, CBP) and Foreign National
Governments, major airlines, pharmaceutical clients for packaging and clinical
trials and multiple suppliers of high end electronics. CGM-AST’s products have
also been recommended by major insurance companies. All elements of the supply
chain, including growers, manufacturers, shippers and retailers are among our
clientele.
Sales
CGM-AST
has three direct salespeople, two independent representatives and 5 distributors
for domestic sales. There are over 12 representative distributors for sales
abroad managed by an in-house Director for International Channel Management.
CGM-AST supplements its sales force with Internet advertising, trade shows,
and
PR benefits including participation and Chairing of educational programs and
committees (e.g.: the International Cargo Security Council (ICSC)) and a variety
of legislators and key accounts targeted by an Executive level PR
campaign,
Competition
Several
other companies manufacture products that are similar to CGM-AST’s self-voiding
label stock. As far as we know those products are limited in scope and do not
adequately address the issues of “needs based tampering by virtue of their
inability to withstand the normal means of breaching adhesive products. However,
new innovations and better sales/marketing by other companies with a
product-solutions market approach could affect our ability to market our
products.
As
both a
manufacturer and converter, CGM-AST delivers finished goods to users in response
to client's individual needs. CGM-AST can modify its products through all phases
of its development to make it user friendly and compatible with the needs of
its
desired application.
CMG-AST
has a unique platform of products, designed and customizable to address client’s
needs against individual threats. There are approximately 12 seal manufacturers
that offer seals and compete with each other over price. CGM-AST sells through
a
"needs based- threat-specific" assessment and determines final product design
on
the basis of functionality.
Industry
Trends
It
is
estimated that losses from cargo theft each year reach 30-50 billion dollars
globally and 12 billion dollars in the US, and that these numbers will continue
to rise. Firgures taken from L.H. Gray entitled Facing the Growing Problem
of
Loss and Theft.
Employees
ASII
employs a total of 18 full time employees, of whom 13 are employed by
CGM.
ASII
develops, assembles, markets and installs computer systems which capture video,
digitally captured images and scanned images, digitize the image, link the
digitized images to text/data and store the image and text on a computer
database which allows for transmitting the image and text by computer or
telecommunication links to remote locations.
Imaging
technology enables computers to record, store and retrieve both textual
information and visual images. The common problem in imaging technology is
how
to record, store, process and retrieve information and images within the same
system. ASII's software programs utilize technology to link the textual
information with the images so that customers can record and retrieve related
text and images. ASII originally developed the software to address the
information retrieval problems of tax assessors. ASII subsequently adapted
the
software for use by law enforcement agencies and management of jail facilities.
ASII's software also addresses different information retrieval needs such as
reproducing line ups and producing housing badges (jails), bar coded wristbands
for identification which facilitates movement within jails and courts and
storing and retrieving hand written and computer generated document images
within arrest records. Heightened sensitivity since 9/11 has caused an increase
in awareness for software and hardware programs related to digital
identification. This awareness is causing more resources to be allocated to
the
development of technologies in this field. ASII has a strong focus on
developing, integrating or reselling products to its client base as well as
new
markets.
While
the
majority of ASII's sales are one time software based sales, ASII does offer
maintenance and support for their products.
Product
and Services
Compu-Capture(R)
ASII's
principal product is the Compu-Capture(R) law enforcement program. This program
combines digitized image and textual information. The system has been developed
primarily for the criminal justice market, including law enforcement, jail
and
correctional facilities.
Information
is entered into the Compu-Capture(R) system at the time a subject is booked
or
enters the facility, including a video image of the subject, a "mug shot".
The
Compu-Capture(R) system reduces the time needed to take and process mug shots
and improves the quality of the mug shot. The booking officer can preview each
mug shot image on the computer screen before processing and storing the image
to
ensure accuracy and clarity. Once an acceptable image is obtained, the booking
officer can store the image through the computer application, along with the
booking record, physical characteristics and other pertinent text
material.
The
information entered into the Compu-Capture(R) system can include names, aliases,
physical characteristics, such as size, hair color, facial scars or physical
deformities, and fingerprint codes.
Once
the
data is entered into the Compu-Capture(R) system, the visual image and textual
material can be utilized in a variety of ways. The officer conducting a search
can assign priorities or values to physical characteristics for the computer's
search of the database of existing subjects. Features that are difficult to
disguise or alter, such as facial scars, can be assigned higher values than
other characteristics such as hair color or facial hair. Mug shots can be
retrieved on the computer screen or printed individually, with or without
textual information, or as part of a computer-generated line-up. The digitized
mug shot and information can be transmitted to remote locations by telephone
line or radio frequency or through computer networks and can be retrieved
rapidly from central and/or remote locations.
The
Compu-Capture(R) system produces images that meet or exceed the suggested
requirements of the Department of Justice National Crime Information Commission
2000 ("NCIC2000"), the standard adopted by Federal Bureau of Investigation
for
the quality of mug shots and their transmission. NCIC2002 does not certify
or
otherwise approve any mug shot systems.
The
Compu-Capture(R) system's technology can also be used in commercial applications
that are unrelated to law enforcement, such as for security or access control,
identification cards with photographs for employee identification, voter
registration cards, and national welfare identification cards, drivers'
licenses, all with or without the use of fingerprints and/or
signatures.
The
following versions of the Compu-Capture(R) offered are as follows:
Compu-Capture(R)
32SQL
Compu-Capture(R)
32 is ASII's stand alone application. This version of the Compu-Capture(R)
product line contains its own database and can function on its own without
integration into law enforcement existing records or a jail management system.
The database allows for the capture of basic demographic information such as
physical characteristics. This information can then be sorted for quick and
easy
retrieval of a particular record or various records with similar
characteristics. The CPC32 can be used on a Personal Computer or networked
together.
Compu-Capture(R)
ActiveX32SQL
Compu-Capture(R)
ActiveX32 is a fully functioning executable product that image-enables (the
process by which a text-based system has images linked to its data records
by
some unique identifier, which eliminates the need to re-key data and/or maintain
multiple databases) any host based records or jail management system without
costly integration. The advantage to this product is it eliminates multiple
databases and duplicate data entry from one system to another.
Compu-Sketch(R)
The
Compu-Sketch(R) product is a composite sketching program that allows an
individual with little to no artistic ability to draw a sketch of a persons
face
as described by the witness. The program contains an interactive witness module
that asks the witness basic questions which are then used to create the
composite face. The application consists of over 40,000 features, that when
combined can create millions of different looking suspects. The user simply
selects a description of each face part from a menu and the system will then
assemble the parts to complete the composite. The user can manipulate each
part
and/or add accessories, such as hats, jewelry and facial hair.
Compu-Scene
The
Compu-Scene program uses a computer aided drafting program to compose drawings
with simple drag-n-drop technology, making accident and crime scene drawings
easy. The user simply draws a room or intersection to scale with the CAD
(Computer Assisted Design) program and then simply drops in the pre-drawn
templates to complete the scene.
Maintenance
and Support
In
addition to the installation of ASII's systems, ASII trains the personnel of
the
system purchaser in the use and operation of the system. ASII provides
maintenance and support for a limited period of time. ASII also offers its
customers' ongoing maintenance and support plus updates of the software, for
an
annual fee.
Marketing
Law
Enforcement Applications
ASII
markets and sells its law enforcement product line through an internal sales
force, an independent dealer network and vendors of compatible software
applications.
ASII
employs one (1) part-time employee in sales, marketing or sales management.
Leads are generated and followed up by the salesmen, who sell directly to the
end user. The employees also work with sales employees of other vendors in
making sales calls and proposals.
Additionally,
ASII markets its Law Enforcement products through vendors of compatible software
applications.
Customers
ASII
maintains a continuing relationship with its customers based upon support
services and periodic upgrades of the Compu-Capture(R) line and Compu-Sketch(R)
software. Although the major revenue-generating event is the initial
installation and any significant expansion of that installation, the annual
sales of maintenance support services, which ASII performs subsequent to the
installation, generates approximately 41% of the installed software license
fee.
ASII
does
not rely on any particular customers or business partners for the majority
of
their sales.
Business
Alliances
Our
business alliance relationships have changed over the years and we generate
very
little of our revenue through our relationships with records management and
jail
management vendors. Since these vendors have written the necessary integration
to use ASII imaging solutions, when a customer is looking to include an imaging
system in their program, the vendor will inform ASII of the customers need.
ASII
is responsible for all marketing and sales efforts of our imaging solution.
ASII
believes a very small portion of its revenue will come through these
relationships. The imaging market has changed tremendously over the past 10
years and is not in our opinion a viable avenue of growth for the
Company.
ASII
supplies to its business partners a SDK (software developers kit), which allows
them to link our software to their software.
Greater
Penetration of Existing Customers
In
addition to seeking new customers, ASII has recently established a marketing
program to focus on the existing customer, which includes over 1,000 agencies.
ASII is hopeful that with addition of the CGM-AST subsidiary that it can now
capitalize and generate increased revenues from its existing customers by
offering them the products of CGM-AST, many of which can be used in the law
enforcement environment.
Seek
Acquisitions and Alliances
ASII
management plans to execute an acquisition strategy. The make-up of the targeted
acquisitions must include products and markets which complement and expand
its
present client base. Profitable, niche companies will be integrated into ASII's
growth through acquisition strategy. ASII plans to use funding derived from
external investors.
On
March
1, 2005, ASII and CGM Applied Security Technologies, Inc. ("CGM-AST Sub"),
acquired substantially all of the assets of CGM Security Solutions, Inc., a
Florida corporation ("CGM"), for (i) $1,500,000 in cash and (ii) a 2.86%
promissory note (the "Note") in the principal amount of $3,500,000, subject
to
adjustment (the "Acquisition"). The assets of CGM-AST were acquired pursuant
to
an Asset Purchase Agreement among ASII, CGM-AST Sub and CGM Security Solutions
dated as of February 25, 2005.
The
principal amount of the three year Note is subject to adjustment based upon
the
average of (i) the gross revenues of CGM-AST Sub for the fiscal year ending
December 31, 2007 and (ii) an independent valuation of CGM-AST Sub based upon
the consolidated audited financial statements of the Company and CGM-AST Sub
for
the fiscal years ended December 31, 2007 and 2006. In addition, the Company
has
granted CGM-AST a secondary security interest in substantially all of its assets
and intellectual property. If the Company is unable to fulfill its obligations
pursuant to the Asset Purchase Agreement and the Note, there is a likelihood
that CGM Security Solutions, Inc. can declare default and attempt to take back
the asset.
In
connection with the Acquisition, the Company entered into a letter agreement
with certain of its investors (the "Investors") which extended the maturity
date
of debt instruments issued on November 30, 2004 until March 1, 2008, and amended
the conversion price of the debt that is held by the Investors to the lower
of
(i) $0.0005 or (ii) 60% of the average of the three lowest intraday trading
prices for the Company's common stock during the 20 trading days before, but
not
including, the conversion date. In addition, the exercise price of the warrants
held by the Investors was amended to $.001 per share. As of April 2008, the
Company is currently in negotiations with the Investors to extend the terms
of
the note.
Sales
by Geographic Area
During
the fiscal year ended December 31, 2007 the percentage of revenues that ASII
received from domestic customers has been approximately 74.7%. Foreign sales
for
2007 were $1,104,302.
Competition
ASII
has
multiple solutions being sold to the Criminal Justice market with its
competitive position varying by product.
ASII's
Compu-Capture(R) system (video imaging mug shot solution) currently has several
competitors, including ImageWare Systems of San Diego, California.
The
Compu-Sketch(R) is a computerized, non-artistic, professional composite system.
Though there is significant competition in this field, ASII believes that the
Compu-Sketch(R) provides an easier system to use plus offers a larger database
than its competitors.
ASII's
Compu-Scene product is packaged with other ASII systems. ASII carries it in
order to provide to its customers a more complete package of
products.
Suppliers
ASII's
hardware is compatible with the IBM AS400 and other mainframe and mini computer
manufacturers. The peripheral equipment used in connection with ASII's system,
such as video equipment, can be provided with a wide range of manufacturers.
As
a result ASII is not dependent on any particular supplier or raw
material.
Government
Regulation or Government Approval
Most
law
enforcement agencies purchasing new or upgraded or expanded systems require
that
the system meet the requirements of NCIC2000, ANSI-NIST standards and standards
issued by the National Crime Information Commission and by the FBI. All ASII
products and solutions were required to meet these requirements.
Research
and Development
ASII
spent $101,687 and $107,024, respectively for the years ended December 31,
2007
and 2006 on research and development. This amount includes amounts spent on
outside sources for assistance with Research & Development projects. None of
these costs have been borne directly by our customers.
Product
Liability Insurance
Although
ASII believes its products are safe, it may be subject to product liability
claims from persons injured through the use of ASII's marketed products or
services. ASII carries no direct product liability insurance, relying instead
on
the coverage maintained by its distributors and manufacturing sources from
which
it obtains product. There is no assurance that this insurance will adequately
cover any liability claims brought against ASII. There also can be no assurance
that ASII will be able to obtain its own liability insurance (should it seek
to
do so) on economically feasible terms. ASII's failure to maintain its own
liability insurance could materially adversely affect its ability to sell its
products in the future. Although no product liability claims have been brought
against ASII to date, if there were any such claims brought against ASII, the
cost of defending against such claims and any damages paid by ASII in connection
with such claims could have a materially adverse impact upon ASII, including
its
financial position, results of operations and cash flows.
Patents,
Trademarks and Licenses
ASII
owns
the proprietary rights to the software used in the Compu-Capture(R) programs.
In
addition, ASII owns the rights to the trademarks "Compu-Capture(R)",
"Compu-Color(R)" and "Compu-Scan(R)", all trademarks have been registered with
the United States Patent and Trademark Office.
ITEM
2. Description of Property
The
Company operates 1709 Route 34, Farmingdale, New Jersey. CGM Applied Security
Technologies operates from two locations. The administrative offices are located
in Farmingdale, NJ and the production facility is located in Staten Island,
NY.
ITEM
3. Legal Proceedings
On
October 16, 2003, in the Court of Common Pleas of Bucks County, Pennsylvania,
a
judgment was entered against the Company by its landlord, BT Lincoln L.P. for
breach of lease in the amount of $184,706. The liability, net of the security
deposit, is included in accrued expenses at December 31, 2007.
ITEM
4. Submission of Matters to a Vote of Securities Holders
PART
II
ITEM
5. Market for Common Equity and Related Shareholder
Matters
ASII's
(formerly DDSI quoted under the symbol “DDSI”) common stock has been quoted on
the OTC Bulletin Board since July 7, 1997 and under the symbol "ASVN" since
February 2007. As of November 4, 1999 ASII's shares traded on the Pink sheets.
ASII returned to trading on the OTC Bulletin Board effective February 23, 2001,
but as of June30, 2003 began trading on the Pink sheets. Under the “ASVN”
symbol, ASII returned to the OTC Bulletin Board in October 2007. The following
table sets forth, the high and low bid prices for the common stock for the
quarters indicated. As of February 1, 2007 there were approximately 3,200
shareholders of record.
| |
|
|
|
|
Calendar
Year 2003
|
|
Low
|
|
High
|
|
|
First
Quarter
|
|
$
|
0.0003
|
|
$
|
0.0032
|
|
|
Second
Quarter
|
|
$
|
0.0004
|
|
$
|
0.005
|
|
|
Third
Quarter
|
|
$
|
0.001
|
|
$
|
0.0026
|
|
|
Fourth
Quarter
|
|
$
|
0.0001
|
|
$
|
0.002
|
|
| |
|
|
|
|
|
|
|
|
Calendar
Year 2004
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.0010
|
|
$
|
0.0055
|
|
|
Second
Quarter
|
|
$
|
0.0015
|
|
$
|
0.0085
|
|
|
Third
Quarter
|
|
$
|
0.0004
|
|
$
|
0.0027
|
|
|
Fourth
Quarter
|
|
$
|
0.0004
|
|
$
|
0.0009
|
|
| |
|
|
|
|
|
|
|
|
Calendar
Year 2006
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.0004
|
|
$
|
0.0026
|
|
|
Second
Quarter
|
|
$
|
0.0011
|
|
$
|
0.0005
|
|
|
Third
Quarter
|
|
$
|
0.0036
|
|
$
|
0.0001
|
|
|
Fourth
Quarter
|
|
$
|
0.0009
|
|
$
|
0.0001
|
|
| |
|
|
|
|
|
|
|
|
Calendar
Year 2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.0001
|
|
$
|
0.0003
|
|
|
Second
Quarter
|
|
$
|
0.0001
|
|
$
|
0.0002
|
|
|
Third
Quarter
|
|
$
|
0.0001
|
|
$
|
0.0001
|
|
|
Fourth
Quarter
|
|
$
|
0.0001
|
|
$
|
0.0001
|
|
As
of
February 1, 2008, 1,054,267,741 shares of the issuer's Common Stock were
outstanding.
We
have
never declared nor paid cash dividends and do not expect to pay dividends in
the
foreseeable future.
Recent
Issuances of Unregistered Securities
During
February 2007, $331,449 of the convertible debentures issued in September 2001,
were converted into 1,906,000 shares of common stock.
During
March 2007, $10,674 of the convertible debentures issued in September 2001,
were
converted into 2,859,000 shares of common stock.
During
March 2007, $15,041 of the convertible debentures issued in September 2001,
were
converted into 5,807,791 shares of common stock
During
April 2007, $5,813 of the convertible debentures issued in September 2001,
were
converted into 2,859,000 shares of common stock.
During
April 2007, $22,457 of the convertible debentures issued in September 2001,
were
converted into 10,380,310 shares of common stock.
During
May 2007, $6,405 of the convertible debentures issued in September 2001 were
converted into 6,671,000 of common stock.
During
May 2007 $10,194 of the convertible debentures issued in September 2001 were
converted in 9,526,792 shares of common stock.
During
June 2007 $3,266 of the convertible debentures issued in September 2001 were
converted into 6,342,040 shares of common stock
During
June 2007 $3,143 of the convertible debentures issued in September 2001 were
converted into 4,820,455 shares of common stock
During
July 2007 $8,270 of the convertible debentures issued in September 2001 were
converted into 19,897,904 shares of common stock
During
July 2007 $915 of the convertible debentures issued in September 2001 were
converted into 2,024,112 shares of common stock.
During
August 2007 $5,838 of the convertible debentures issued in September 2001 were
converted into 35,809,160 shares of common stock.
During
August 2007 $1,510 of the convertible debentures issued in September 2001 were
converted into 12,178,436 shares of common stock.
During
September 2007 $3,347 of the convertible debentures issued in September 2001
were converted into 48,961,300 shares of common stock.
During
September 2007 $1,834 of the convertible debentures issued in September 2001
were converted into 16,420,079 shares of common stock.
During
October 2007 $4,325 of convertible debentures issued in September 2001 were
converted into 71,183,728 shares of common stock.
During
October 2007, $2,254 of convertible debentures issued in September 2001 were
converted into 29,662,740 shares of common stock.
During
November 2007, $7,489 of convertible debentures issued in September 2001 were
converted into 79,632,642 shares of common stock
During
November 2007 $3,406 of convertible debentures issued in September 2001 were
converted into 44,815,403 shares of common stock.
During
December 2007, $16,309 of convertible debentures issued in September 2001 were
converted into 208,996,160 shares of common stock
During
December 2007 $3,837 of convertible debentures issued in September 2001 were
converted into 41,707,820 shares of common stock.
During
January 2006, $2,500 of the convertible debentures issued in September 2001,
were converted into 9,920,635 shares of common stock.
During
January 2006, $1,400 of the convertible debentures issued in September 2001,
were converted into 7,000,000 shares of common stock.
During
February 2006, $3,100 of the convertible debentures issued in September 2001,
were converted into 19,375,000 shares of common stock.
During
February 2006, $2,520 of the convertible debentures issued in September 2001,
were converted into 14,000,000 shares of common stock.
During
March 2006, $3,400 of the convertible debentures issued in September 2001,
were
converted into 28,500,000 shares of common stock.
During
March 2006, $3,000 of the convertible debentures issued in September 2001,
were
converted into 15,000,000 shares of common stock.
During
April 2006, $1,000 of the convertible debentures issued in September 2001,
were
converted into 14,682,540 shares of common stock.
During
April 2006, $1,000 of the convertible debentures issued in September 2001,
were
converted into 15,000,000 shares of common stock.
During
May 2006, $1,000 of the convertible debentures issued in September 2001 were
converted into 15,000,000 of common stock.
During
May 2006, $3,560 of the convertible debentures issued in September 2001 were
converted in 17,800,000 shares of common stock.
During
June 2006 $4,600 of the convertible debentures issued in September 2001 were
converted into 23,000,000 shares of common stock
During
June 2006 $3,500 of the convertible debentures issued in September 2001 were
converted into 17,500,000 shares of common stock.
During
June 2006 the Company issued 50,000,000 shares of stock for services rendered
by
New Equities Publishing for Public Relations.
During
July 2006 $10,163 of the convertible debentures issued in September 2001 were
converted into 48,800,000 shares of common stock
During
July 2006 $11,871 of the convertible debentures issued in September 2001 were
converted into 53,039,211 shares of common stock.
During
August 2006 $29,099.80 of the convertible debentures issued in September 2001
were converted into 221,570,000 shares of common stock.
During
August 2006 $23,106 of the convertible debentures issued in September 2001
were
converted into 178,782,781 shares of common stock.
During
September 2006 $43,586.60 of the convertible debentures issued in September
2001
were converted into 323,760,000 shares of common stock.
During
September 2006 $20, 254 of the convertible debentures issued in September 2001
were converted into 299,410,794 shares of common stock.
During
October 2006 $46,825 of convertible debentures issued in September 2001 were
converted into 470,000,000 shares of common stock.
During
October 2006, $13,172.28 of convertible debentures issued in September 2001
were
converted into 411,587,075 shares of common stock.
During
November 2006, $14,260 of convertible debentures issued in September 2001 were
converted into 401,500,000 shares of common stock
During
November 2006 $16,388.33 of convertible debentures issued in September 2001
were
converted into 401,623,645 shares of common stock.
During
February 2004, the Company issued two convertible debentures for an aggregate
amount of $45,000 with simple interest at 12%. The debentures are due February
2006. Interest shall be paid quarterly commencing March 2004. The holder shall
have the right to convert the principal amount and interest due into common
stock. The conversion price in effect on any Conversion Date shall be the lesser
of (1) $.005 or (2) 40% of the average of the lowest three inter-day sales
prices of the common stock during the twenty Trading Days immediately preceding
the applicable Conversion Date.
On
May 7,
2004, we entered into a Securities Purchase Agreement, with four accredited
investors that provides for the issuance of convertible notes payable up to
an
aggregate face value of $250,000 with simple interest accruing at the annual
rate of 12% and warrants to acquire up to an aggregate 750,000 shares of our
common stock. The convertible notes are due two years from the date of issuance.
Interest payable on the convertible notes shall be paid quarterly commencing
June 30, 2004. The holders shall have the right to convert the principal amount
and interest due under the convertible notes into shares of DDS's common stock.
The conversion price in effect on any conversion date shall be the lesser of
(1)
$.0045 or (2) 40% of the average of the lowest three inter-day sales prices
of
the common stock during the twenty trading days immediately preceding the
applicable conversion date. The warrants have an exercise price of $0.0045
and
expire on May 7, 2009.
On
November 30, 2004, we entered into a Securities Purchase Agreement, with four
accredited investors that provides for the issuance of convertible notes payable
up to an aggregate face value of $3,500,000 with simple interest accruing at
the
annual rate of 12% and warrants to acquire up to an aggregate 6,195,000 shares
of our common stock. The convertible notes are due three years and three months
from the date of issuance. Interest payable on the convertible notes shall
be
paid quarterly commencing December 31, 2004. The holders shall have the right
to
convert the principal amount and interest due under the convertible notes into
shares of DDS's common stock. The conversion price in effect on any conversion
date shall be the lesser of (1) $.0005 or (2) 60% of the average of the lowest
three inter-day sales prices of the common stock during the twenty trading
days
immediately preceding the applicable conversion date. The warrants have an
exercise price of $0.001 and expire on January 31, 2012.
ITEM
6. Management's Discussion and Analysis or Plan of
Operations
Except
for historical matters contained herein, the matters discussed in this Form
10-KSB are forward-looking and are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that these forward-looking statements reflect numerous assumptions, especially
as regarding installation schedules and product mix, and involves risks and
uncertainties which may affect the Company’s business and prospects and cause
actual results to differ materially from these forward-looking statements,
including sufficient funds to finance working capital and other financing
requirements of the Company’s market acceptance of the Company’s products and
competition in the computer industry.
Critical
Accounting Policies
ASII's
critical accounting policies, including the assumptions and judgments underlying
them, are disclosed in the Notes to the Financial Statements. These policies
have been consistently applied in all material respects and address such matters
as revenue recognition and depreciation methods. The preparation of the
financial statements in conformity with generally accepted accounting principles
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 the reported amounts
of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
ASII
derives revenue from the sale of hardware, software, post customer support
(PCS), and other related services. PCS includes telephone support, bug fixes,
and rights to upgrades on a when-and-if-available basis. Other related services
include basic consulting and training. Included with the hardware is software
that is not considered to be incidental. Revenue from transactions with
customers where the software component is not considered to be incidental is
allocated between the hardware and software components based on the relative
fair value of the respective components.
ASII
also
derives revenue from the sale of software without a related hardware component.
Revenue allocable to software components is further allocated to the individual
deliverable elements of the software portion of the arrangement such as PCS
and
other services. In arrangements that include rights to PCS for the software
and/or other services, the software component arrangement fee is allocated
among
each deliverable based on the relative fair value of each of the deliverables
determined using vendor-specific objective evidence, which has been established
by the separate sales of these deliverables.
Plan
of Operations
The
short-term objective of ASII is the following:
·
The
short-term objective of ASII is
to increase the market penetration of the product line of its CGM-AST subsidiary
as the Company believes this is the area where the greatest revenue growth
exists.
·
Additionally,
ASII plans to execute
an acquisition strategy based upon fund availability.
ASII's
long-term objective is as follows:
·
To
seek additional products to sell
into its basic business market - Criminal Justice - so that ASII can generate
sales adequate enough to allow for profits.
ASII
believes that it will not reach profitability in the foreseeable future.
Over
the next twelve months, management is of the opinion that sufficient working
capital will be obtained from operations and external financing to meet ASII's
liabilities and commitments as they become payable. ASII has in the past
successfully relied on private placements of common stock securities, bank
debt,
loans from private investors and the exercise of common stock warrants in
order
to sustain operations. If ASII is unable to obtain additional funding in
the
future, it may be forced to curtail or terminate operations.
ASII
is
doing the following in its effort to reach profitability:
· Cut
costs in areas that add the least value to
ASII.
· Concentrate
on increasing the sales of the CGM product
line.
· Derive
funds through investigating business alliances
with other companies.
· Acquire
and effectively add management support to
profitable companies complementary to its broadened target markets.
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Revenues
for the year ended December 31, 2007 of $4,367,941 decreased $160,592 or
3.55%
from the year ended December 31, 2006. ASII generates its revenues through
software licenses, hardware, post customer support arrangements and other
services. CGM-AST generates its revenue through the manufacturer and distributor
of indicative and barrier security seals, security tapes and related packaging
security systems, protective security products for palletized cargo, physical
security systems for tractors, trailers and containers as well as a number
of
highly specialized authentication products. The decrease revenue is attributed
to the loss of a salesperson for part of the year 2007 and an increase in
open
orders at the end of the year that were scheduled for production in
2008.
Cost
of
revenue for the year ended December 31, 2007 was $1,185,313, a decrease of
$113,657 or 8.75% from the prior year. Cost of revenue sold as a percentage
of
revenue for the year ended December 31, 2007 was 27% of total revenues, versus
29% the year earlier.
Operating
expenses increased $208,943 or 7.6% during the year ended December 31, 2007
versus the year ended December 31, 2006. This increase was primarily
attributable moving the headquarters to Farmingdale New Jersey, an increased
spending on Investor Relations and a one time write-down of obsolete inventory
totaling $150,000.
General
and Administrative expenses for the year ended December 31, 2007 were $2,312,089
versus $2,175,852 for the prior year for an increase of $136,237 or 6%. This
increase was primarily attributable moving the headquarters to Farmingdale
New
Jersey an increased spending on Investor Relations and a one time write-down
of
obsolete inventory totaling $150,000.
Sales
and
Marketing expenses for the year ended December 31, 2007 were $541,587 versus
$463,544 for the prior year for an increase of $78,043 or 17%. This increase
was
primarily attributable to the company increasing its advertising budget,
increase in presence at trade events which in turn increased travel expenses,
and instituting a commission program for sales personal and the reclassification
of some expense from general and administrative.
Research
and development for the year ended December 31, 2007 was $101,687 compared
to
$107,024 for the same period prior year for a decrease of $5,337 or 5%. This
decrease is attributable to controls on spending.
The
net
(loss) for ASII increased 274% or $(11,915,663) for the year ended December
31,
2007 to $(16,265,544) from $(4,349,881) for the year ended December 31, 2006.
This was due to the items discussed above.
Net
cash
provided by operating activities for the year ended December 31, 2007 and
2006
was $74,963 and $129,511 respectively. The decrease in cash provided by
operating activities in the year ended December 31, 2007 of $(54,548) was
due in
part to expenditures for infrastructure necessary to move the headquarters
to
Farmingdale, New Jersey.
Net
cash
used in investing activities was $(73,054) and $(20,603) for the years ended
December 31, 2007 and 2006, respectively. The increase in cash used in investing
activities in the year ended December 31, 2007 of $(52,451) was due in part
to
purchase equipment for the new headquarters in Farmingdale, New
Jersey.
Net
cash
(used in) financing activities was $(8,000) and $(12,000) for the years ended
December 31, 2007 and 2006, respectively.
Liquidity
and Capital Resources
ASII's
revenues have been insufficient to cover the cost of revenues and operating
expenses. Therefore, ASII has been dependent on private placements of its common
stock and issuance of convertible notes in order to sustain operations. In
addition, there can be no assurances that the proceeds from private or other
capital will continue to be available, or that revenues will increase to meet
ASII's cash needs, or that a sufficient amount of ASII's common stock or other
securities can or will be sold or that any common stock purchase
options/warrants will be exercised to fund the operating needs of
ASII.
Over
the
next twelve months, management is of the opinion that sufficient working capital
will be obtained from operations and external financing to meet ASII's
liabilities and commitments as they become payable. ASII has in the past relied
on private placements of common stock securities, and loans from private
investors to sustain operations. However, if ASII is unable to obtain additional
funding in the future, it may be forced to curtail or terminate
operations.
At
December 31, 2007, ASII had assets of $5,995,957 compared $6,033,224 on December
31, 2006 a decrease of $37,267 and shareholder deficit of $(28,213,749) on
December 31, 2007 compared to shareholder deficit of $(12,779,283) on December
31, 2006, an increase of ($15,434,466). This increase in shareholder deficit
for
the year ended December 31, 2007 resulted from the net loss for the year ended
December 31, 2007.
As
of
December 31, 2007, ASII negative working capital was $(32,087,467), a change
from negative working capital of $(11,855,140) at December 31, 2006. The
decrease in negative working capital was primarily a result of an increase
in
the fair market value of the derivative liabilities and an increase in
convertible debentures and note payable reclassified to current
liabilities.
Recent
Developments
On
March
1, 2005, ASII and its wholly-owned subsidiary, CGM-AST acquired substantially
all of the assets of CGM Security Solutions, Inc., a Florida corporation
("CGM"), for (i) $1,500,000 in cash and (ii) a 2.86% promissory note (the
"Note") in the principal amount of $3,500,000, subject to adjustment (the
"Acquisition"). The assets of CGM were acquired pursuant to an Asset Purchase
Agreement among ASII, CGM-AST Sub and CGM Security Solutions dated as of
February 25, 2006.
The
principal amount of the three year Note is subject to adjustment based upon
the
average of (i) the gross revenues of CGM-AST Sub for the fiscal year ended
December 31, 2007 and (ii) an independent valuation of CGM-AST based upon the
consolidated audited financial statements of the Company and CGM-AST for the
fiscal years ended December 31, 2007 and 2006. In addition, the Company has
granted CGM Security Solutions, Inc. a secondary security interest in
substantially all of its assets and intellectual property. If the Company is
unable to fulfill its obligations pursuant to the Asset Purchase Agreement
and
the Note, there is a likelihood that CGM Security Solutions, Inc. can declare
default and attempt to take back the asset.
In
connection with the Acquisition, the Company entered into a letter agreement
with certain of its investors (the "Investors") which extended the maturity
date
of debt instruments issued on November 30, 2004 until March 1, 2008, and amended
the conversion price of the debt that is held by the Investors to the lower
of
(i) $0.0005 or (ii) 60% of the average of the three lowest intraday trading
prices for the Company's common stock during the 20 trading days before, but
not
including, the conversion date. In addition, the exercise price of the warrants
held by the Investors was amended to $.001 per share.
On
December 19, 2006 a special meeting of the shareholders was held and at the
meeting the shareholders passed a resolution to change the name of the Company
from Digital Descriptor Systems, Inc. to Applied Security Innovations, Inc.
The
shareholders also passed a resolution to authorize a 1 for 500 reverse stock
split. Both of these events took place on February 5, 2007. In addition the
2006
Incentive Stock Option Plan adopted by The Board of Directors on October 12,
2006 was approved by the shareholders.
ITEM
7. Financial Statements
The
report of the independent registered public accounting firm and financial
statements are set forth in this report beginning on Page F-1.
ITEM
8A (T). CONTROLS AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Management
of the Company has evaluated, with the participation of the Chief Executive
Officer and Chief Financial Officer of the Company, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the fiscal year covered by this Annual Report on Form
10-KSB. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer of the Company have concluded that the Company's disclosure
controls and procedures as of the end of the fiscal year covered by this Annual
Report on Form 10-KSB are effective to provide reasonable assurance that
information required to be disclosed by the Company in the reports that it
files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that the information required to be
disclosed in the reports is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.
MANAGEMENT'S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting as of December 31, 2007 based on the criteria set forth in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
criteria set forth in Internal Control -- Integrated Framework, our management
concluded that our internal control over financial reporting was effective
as of
December 31, 2007.
This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management's report in this Annual
Report. Our registered public accounting firm will be required to attest to
our
management's assessment of internal control over financial reporting beginning
with our Annual Report for the year ended December 31, 2008.
CHANGES
IN INTERNAL CONTROLS
Management
of the Company has also evaluated, with the participation of the Chief Executive
Officer and Chief Financial Officer of the Company, any change in the Company's
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the fiscal year covered
by this Annual Report on Form 10-KSB. There was no change in the Company's
internal control over financial reporting identified in that evaluation that
occurred during the fiscal year covered by this Annual Report on Form 10-KSB
that has materially affected, or is reasonably likely to materially affect,
the
Company's internal control over financial reporting.
ITEM
9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with
Section 16(a) of the Exchange Act
Set
forth
below is certain information regarding our directors and executive officers.
Our
Board of Directors is comprised of five directors. There are no family
relationships between any of our directors or executive officers. Each of our
directors is elected to serve until our next annual meeting of our stockholders
and until his successor is elected and qualified or until such director's
earlier death, removal or termination.
|
Name
|
|
Age
|
|
Position
with Company
|
|
Anthony
Shupin
|
|
53
|
|
Director,
Chief Executive Officer, President
|
|
Michael
Pellegrino
|
|
57
|
|
Senior
Vice President, CFO and Director
|
|
Robert
Gowell
|
|
38
|
|
Director
|
|
Vincent
Moreno
|
|
63
|
|
Director
|
|
Erik
Hoffer
|
|
62
|
|
Executive
Vice President and Director
|
Anthony
Shupin became CEO and President of ASII in October 2003. In November of 2004,
he
also assumed the position of Chairman of the Board of ASII. His affiliation
with
ASII began as a member of the Board of Directors in January 2002. His experience
includes over 20 years of executive management, sales and marketing management
and project and program management with technology computing, aerospace and
professional services companies. Prior to ASII, Mr. Shupin served in several
capacities in the Technology and Management Consulting field. He founded T
Shupin and Associates, a management consulting firm focused on assisting clients
in the areas of Sales and Marketing, New Business Start-Up, Operational Analysis
and Business/Technology Synchronization. At Deloitte Consulting, he directed
activities as a Business Development Executive in the Communications and Media
practice. Mr. Shupin's background also includes a role as Director of
International Business Development at the world's first commercial satellite
aerospace Company.
A
graduate of Colby College, Waterville, Maine, Mr. Shupin has extended his
education at Rutgers University, Cook College in Geographic Information Systems
and Remote Sensing training.
Michael
Pellegrino became Senior Vice President & CFO in February 2006. He
originally joined ASII in 1995 as Vice President & Chief Financial Officer.
In March 2002, he was appointed President, Chief Executive Officer and Chief
Financial Officer, Secretary and a Director of ASII. From 1984 to 1995, Mr.
Pellegrino was Vice President and CFO of Software Shop Systems, Inc. From 1979
to 1984, he was a regional controller for Capital Cities/ABS and from 1972
to
1979 as Director of Financial Systems for ADP. Mr. Pellegrino has a Bachelors
degree in accounting from MSU and a Masters in Finance from Rutgers
University.
Robert
Gowell has been a director of the Company since 2001. He was the Company's
Co-Chairman and Chief Executive Officer from January 2002 until June 2002.
He is
a retired Deputy U.S. Marshal who has worked out of the New York and
Pennsylvania offices from 1991 to 2001. He earned his B.S. in Management and
Finance from the City University of New York. He is currently working on his
MBA
at Kutztown University.
Vincent
Moreno has been a director of the Company since January 2002. Mr. Moreno
provides ASII with over 30 years of experience from a technical and business
environment, with the past 23 years at the executive management level. Since
2002, Mr. Moreno has been doing consulting work for various software development
firms. From 1998- 2002, he was President and General Manager of PayPlus
Software, Inc., a provider of payroll software to the Professional Employer
Organization marketplace. He served as Vice President of Operations at ASII
from
1996 to 1998. From 1989 to 1995, he served as President and CEO of Mainstem
Corporation, a national provider of software services.
Erik
Hoffer was appointed as Executive Vice President and a director of the Company
and President of CGM-AST in March 2006. Prior to joining the Company, Mr. Hoffer
has been the president and chief executive officer of CGM Security Solutions,
which he created in 1977. Prior to starting CGM Security Solutions, Mr. Hoffer
was the national sales manager of Lamart Corporation from 1972-1977. For the
past 37 years, Mr. Hoffer has designed and patented a number of theft control,
authentication, barrier and theft detection products. He holds many patents
and
a considerable amount on corporate trade secrets in manufacturing these
products. He is considered an expert in the areas of adhesive coating,
conductive inks and cargo security science. For the past four 4 years, Mr.
Hoffer has been the chairman of educational events for the National Cargo
Security Council and previously the co-chairman of the NCSC GMATS program.
Mr.
Hoffer received a B.S. in industrial psychology from Northeastern University.
He
also holds an associates degree in transportation and traffic
management.
Code
of Ethics
The
Company has not formally adopted a written code of ethics that governs all
of
our officers, directors and finance and accounting employees. The draft code
of
ethics is filed herewith as Exhibit 14.1
Section
16 Beneficial Ownership Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires ASII's directors and
executive officers, and persons who own more than 10% of a registered class
of
ASII's equity securities to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common
Stock
and other equity securities of ASII. Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish ASII with copies of
all
Section
16(a) forms they file.
To
ASII's
knowledge, based solely on its review of the copies of such reports furnished
to
ASII and written representations that no other reports were required during
the
fiscal year ended December 31, 2002, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with, except that the following individuals have filed their
Form
3s late: Anthony Shupin, Vincent Moreno and Erik Hoffer and the following
individuals have filed their Form 4s late: Michael Pellegrino and Robert
Gowell.
ITEM
10. Executive Compensation
The
following table sets forth information concerning the total compensation that
we
have paid or that has accrued on behalf of our Chief Executive Officer and
other
executive officers with annual compensation exceeding $100,000 during fiscal
2007and 2006.
| |
|
|
|
|
|
|
|
|
|
Long
Term Compensation
|
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
Awards
|
|
Payouts
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Securities
|
|
|
|
|
|
|
Name
and
|
|
|
|
|
|
|
|
Annual
|
|
Restricted
|
|
Underlying
|
|
|
|
Other
|
|
|
Principal
|
|
|
|
|
|
|
|
Compen-
|
|
Stock
|
|
Options/
|
|
LTIP
|
|
Compen-
|
|
|
|
|
Year
|
|
Salary
|
|
Bonus
|
|
sation($)
|
|
Award($)
|
|
Sar
(#)
|
|
Payouts($)
|
|
sation
($)
|
|
|
Anthony
Shupin
|
|
|
2007
|
|
$
|
215,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
President
& CEO
|
|
|
2006
|
|
$
|
198,539
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
J
|
|
|
2007
|
|
$
|
174,022
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Pellegrino*
|
|
|
2006
|
|
$
|
148,077
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Appointment
of Principal Officers; Compensatory Arrangements of Certain
Officers.
Effective
November 13, 2006 the Company granted to each of Anthony Shupin, its President
and Chief Executive Officer and Michael Pellegrino, its Chief Financial Officer,
10,000 shares of newly created Series A Preferred Stock ("A Preferred") as
recognition for services.
The
shares will vest in five equal monthly installments and will be issued at the
discretion of Mr. Shupin and Mr. Pellegrino. The shares have not been issued
as
of December 31, 2007. Each share of A Preferred is convertible into 240,000
shares of common stock of the Company starting three years from the date of
issuance, provided that the closing bid price of the Company's common stock
is
then $2.00 per share. The shares of A Preferred may be voted with the Company's
common stock on an as converted basis on any matters that the common stock
is
entitled to vote on as a class.
Unconverted
shares of A Preferred will automatically cease to exist, and all rights
associated therewith will be terminated upon the earlier of (i) that person's
termination of employment with the Company for any reason, or (ii) five years
from the date of issuance.
On
November 13, 2006, the Company filed with the Secretary of State of Delaware
a
Certificate of Designation of Preferences, Rights and Limitations of Series
A
Preferred Stock.
Options/SAR
Grants in Last Fiscal Year
|
Name
|
|
Number
of
Securities
Underlying
Options/SARS
Granted
|
|
%
of Total
Options/SARS
Granted
to Employees
in
Fiscal
Year
|
|
Exercise
or Base
Price
($/Sh)
|
|
|
|
|
Michael
J. Pellegrino, CFO
|
|
|
0
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
Anthony
Shupin, President & CEO
|
|
|
0
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Aggregated
Option/SAR Exercises
None
exercised
Employment
Agreements
Anthony
R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was
re-appointed as Chairman, President and Chief Executive Officer effective
February, 2005. On February 25, 2005, ASII entered into a five-year employment
agreement with Mr. Shupin, which entitled him to a base salary of $215,000
per
year, which may at the Board of Directors discretion adjust his base salary
(but
not below $215,000 per year). Mr. Shupin is also entitled to participate in
the
Annual Management Bonus Plan. As a participant in the Annual Management Bonus
Plan, Mr. Shupin will be eligible to receive bonuses, based on performance,
in
any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall
participate in the Management Equity Incentive Plan. As a participant in the
Management Equity Plan, Mr. Shupin will be eligible to receive options, which
vest over a period of time from the date of the option's issue, to purchase
common shares of ASII. The Company may grant Mr. Shupin, following the first
anniversary of the date hereof and at the sole discretion of the Board of
Directors, options to purchase common shares of the Company (subject to the
vesting and the satisfaction of the other terms and conditions of such options).
Mr. Shupin will be entitled to 25 vacations days per year at such times as
may
be mutually agreed with the Board of Directors. ASII will provide Mr. Shupin
a
monthly car allowance of Six Hundred Dollars ($600.00) along with related car
expenses.
Michael
J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino
was appointed as Senior Vice President and Chief Financial Officer effective
February 25, 2005. On February 25, 2005, ASII entered into a five-year
employment agreement with Mr. Pellegrino, which entitled him to a base salary
of
$175,000 per year which may at the Board of Directors discretion adjust his
base
salary (but not below $175,000 per year). Mr. Pellegrino is also entitled to
participate in the Annual Management Bonus Plan. As a participant in the Annual
Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses,
based
on performance, in any amount from 10% to 200% of the Base Salary. In addition,
Mr. Pellegrino shall participate in the Management Equity Incentive Plan. As
a
participant in the Management Equity Incentive Plan, Mr. Pellegrino will be
eligible to receive options, which vest over a period of time from the date
of
the option's issue, to purchase common shares of ASII. ASII may also grant
to
the Employee, following the first anniversary of the date of the Agreement
and
at the sole discretion of the Board of Directors, options to purchase common
shares of the Company (subject to the vesting and the satisfaction of the other
terms and conditions of such options). Mr. Pellegrino will be entitled to 25
vacation days per year at such times as may be mutually agreed with the Board
of
Directors. ASII shall also furnish Mr. Pellegrino with monthly car allowance
of
Six Hundred Dollars ($600.00) and related car expenses.
ASII
has
an employment agreement with Erik Hoffer, pursuant to which Mr. Hoffer will
be
employed as Executive Vice President of the Company for an initial term of
three
years, which may be extended, and President of CGM-AST Sub for an initial term
of one year, which may be renewed for successive one-year terms. Pursuant to
the
Employment Agreement, Mr. Hoffer will receive a base salary of $200,000, a
bonus
of 5% of the gross margin sales increase over the prior year's gross margin
sales of CGM-AST products and customary benefits and
reimbursements.
Employee
and Director Stock Option Plans
ASII
adopted the 2006 Stock Incentive Plan, (the "Plan") in order to attract and
retain qualified personnel. This plan was adopted by the Board of Directors
on
October 12, 2006 and approved by the shareholders on December 19, 2006. The
Board of Directors has initially reserved 2,500,000 shares of Common Stock
for
issuance under the 2006 Incentive Plan. Under the Plan, options may be granted
which are intended to qualify as Incentive Stock Options, (ISO’s) under Section
422 of the Internal Revenue Code of 1986 (the “Code”) or which are not
(Non_ISO’s) intended to qualify as Incentive Stock Options there
under.
The
2006
Incentive Plan and the right of participants to make purchases there under
are
intended to qualify as an “employee stock purchase plan” under Section 423 of
the internal Revenue Code of 1986, as amended (the “Code”). The 2006Incentive
Plan is not a qualified deferred compensation plan under Sections 401(a) of
the
Internal Revenue Code and is not subject to the provisions of the Employee
Retirement Income Security Act of 1974 (”ERISA”)
The
number of shares reversed for issuance under the 2006 Incentive Plan accounts
for the 1 for 500 reverse stock split.
Compensation
of Directors
Outside
Directors receive compensation of $500 for each meeting attended for their
services as members of the Board of Directors. Directors will receive
reimbursement for expenses in attending directors meetings where
applicable.
The
following table lists stock ownership of our common stock as of December 31,
2007. The information includes beneficial ownership by (i) holders of more
than
5% of our common stock, (ii) each of our current directors and executive
officers and (iii) all of our directors and executive officers as a group.
The
information is determined in accordance with Rule 13d-3 promulgated under the
Exchange Act based upon information furnished by the persons listed or contained
in filings made by them with the Commission. Except as noted below, to our
knowledge, each person named in the table has sole voting and investment power
with respect to all shares of our common stock beneficially owned by
them.
Percentage
of beneficial ownership is based upon 681,599,825 shares of common stock
outstanding at December 31, 2007, together with securities exercisable or
convertible into shares of common stock within 60 days of December 31, 2007
for
each stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting
or
investment power with respect to securities. Shares of common stock that are
currently exercisable or exercisable within 60 days of December 31, 2007 are
deemed to be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage ownership
of
any other person.
Name
and Address
of
Beneficial Owner
|
|
Title
|
|
Beneficial
Ownership
of
Common Stock
No.
of Shares
|
|
Percent
of Class
|
|
|
Anthony
R. Shupin
|
|
|
Chairman,
CEO and
|
|
|
15,000,000
|
|
|
*
|
|
|
1709
Route 34 Suite 2
|
|
|
President
|
|
|
|
|
|
|
|
|
Farmingdale,
NJ 07727
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Michael
Pellegrino
1709
Route 34 Suite 2
Farmingdale,
NJ 07727
|
|
|
Senior
Vice President,
Chief
Financial Officer
&
Director
|
|
|
15,000,000
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Gowell
|
|
|
Director
|
|
|
96,300
|
|
|
*
|
|
|
1709
Route 34 Suite 2
|
|
|
|
|
|
|
|
|
|
|
|
Farmingdale,
NJ 07727
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Vincent
Moreno
|
|
|
Director
|
|
|
0
|
|
|
*
|
|
|
1709
Route 34 Suite 2
|
|
|
|
|
|
|
|
|
|
|
|
Farmingdale,
NJ 07727
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Erik
Hoffer
1709
Route 34 Suite 2
Farmingdale,
NJ 07727
|
|
|
Executive
Vice
President
and Director
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Officers & Directors
|
|
|
|
|
|
|
|
|
|
|
|
As
a Group
|
|
|
|
|
|
30,096,300
|
|
|
*
|
|
*
less
than 1%
There
are
no arrangements known to ASII that at a later date may result in a change in
control of ASII.
ITEM
12. Certain Relationships and Related Transaction
ITEM
13. Exhibits
|
31.1
|
Certification
by Chief Executive Officer pursuant to Sarbanes-Oxley
|
| |
Section
302
|
| |
|
|
31.2
|
Certification
by Chief Financial Officer pursuant to Sarbanes-Oxley
|
| |
Section
302
|
| |
|
|
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C.
|
| |
Section
1350
|
| |
|
|
32.2
|
Certification
by Chief Financial Officer pursuant to 18 U.S.C.
|
| |
Section
1350
|
ITEM
14. Principal Accountant Fees and Services
Audit
Fees. The aggregate fees billed by Bagell Joseph and Levine, our independent
registered public accounting firm, for professional services rendered for the
audit of the Company's annual financial statements for the last two fiscal
years
and for the reviews of the financial statements included in the Company's
Quarterly reports on Form 10-QSB during the last two fiscal years 2007 and
2006
were $111,475 and $79,858, respectively.
Audit-Related
Fees. The Company did not engage its principal accountants to provide assurance
or related services during the last two fiscal years.
Tax
Fees.
The aggregate fees billed by the Company's principal accountants for tax
compliance, tax advice and tax planning services rendered to the Company during
the last two fiscal years 2007 and 2006 were 7,000 and $5,000,
respectively.
All
Other
Fees. The Company did not engage its principal accountants to render services
to
the Company during the last two fiscal years, other than as reported
above.
Signatures
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| |
|
|
| |
Allied
Security Innovations Inc.
|
|
|
|
| |
By: |
/s/
Anthony Shupin |
| |
Anthony
Shupin, Chairman, President, and
Chief
Executive Officer
|
| |
|
| |
Dated:
April 14, 2008
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
Signature
Title Date
|
By:
/s/ Anthony Shupin
Anthony
Shupin
|
Chairman,
President, and Chief,
Executive
Officer
|
| |
|
| |
|
|
By:
/s/ Michael Pellegrino
|
Senior
Vice President and Chief
Financial
Officer, Director
|
| |
|
| |
|
|
By:
|
Executive
Vice President and
|
| |
|
| |
|
|
By:
/s/ Vincent Moreno
|
Director
|
| |
|
| |
|
|
By:
|
Director
|
Allied
Security Innovations, Inc. and Subsidiary
Formerly
Digital Descriptor Systems, Inc.
Table
of Contents
| |
|
Page(s)
|
|
December
31, 2007
|
|
|
| |
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
1
|
| |
|
|
|
Audited
Consolidated Financial Statements:
|
|
|
| |
|
|
|
Balance
Sheets as of December 31, 2007 and 2006
|
|
2
|
| |
|
|
|
Statements
of Operations for the Years Ended December 31, 2007 and December
31,
2006
|
|
3
|
| |
|
|
|
Statement
of Stockholders' Deficit for the Years Ended December 31, 2007
and
December 31,2006
|
|
4
|
| |
|
|
|
Statements
of Cash Flows for the Years Ended December 31, 2007 and December
31,
2006
|
|
5-6
|
| |
|
|
|
Notes
to Consolidated Financial Statements
|
|
7-22
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
Allied
Security Innovations, Inc. and Subsidiary
Formerly
Digital Descriptor Systems, Inc.
1709
Route 34 South
Farmingdale,
New Jersey 07727
We
have
audited the accompanying consolidated balance sheets of Allied Security
Innovations, Inc. and Subsidiary (the “Company”) as of December 31, 2007 and
2006, and the related consolidated statements of operations, changes in
stockholders’ deficit and cash flows for each of the years in the two-year
period ended December 31, 2007. These consolidated financial statements are
the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Allied Security Innovations,
Inc., as of December 31, 2007 and 2006, and the results of its operations
and
its cash flows for each of the years in the two-year period ended December
31,
2007 in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern. As discussed in Note 12 to the
consolidated financial statements, the Company did not generate sufficient
cash
flows from revenues during the year ended December 31, 2007, to fund its
operations. Also at December 31, 2007, the Company had negative net working
capital of $32,087,467. These matters raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plan in regard to
these matters is also described in Note 12. The consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
Bagell,
Josephs, Levine & Company, L.L.C.
Marlton,
NJ 08053
April
14,
2008
|
ALLIED
SECURITY INNOVATIONS, INC AND SUBSIDIARY
|
|
|
FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
DECEMBER
31, 2007 AND 2006
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
386,628
|
|
$
|
392,719
|
|
|
Accounts
receivable, net of allowance
|
|
|
406,655
|
|
|
559,151
|
|
|
Inventory
|
|
|
665,435
|
|
|
538,365
|
|
|
Other
Current Assets
|
|
|
8,241
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
1,466,959
|
|
|
1,490,235
|
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net of
|
|
|
|
|
|
|
|
|
accumulated
depreciation
|
|
|
306,237
|
|
|
317,956
|
|
| |
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
14,626
|
|
|
1,730
|
|
|
Goodwill
|
|
|
4,054,998
|
|
|
4,054,998
|
|
|
Intangible
assets, net of
|
|
|
|
|
|
|
|
|
accumulated
amortization
|
|
|
153,137
|
|
|
168,305
|
|
| |
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
4,222,761
|
|
|
4,225,033
|
|
| |
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
5,995,957
|
|
$
|
6,033,224
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
133,113
|
|
$
|
115,560
|
|
|
Accrued
expenses
|
|
|
297,934
|
|
|
356,570
|
|
|
Accrued
payroll expenses
|
|
|
93,856
|
|
|
32,174
|
|
|
Accrued
interest
|
|
|
1,447,753
|
|
|
1,441,438
|
|
|
Deferred
income
|
|
|
60,577
|
|
|
134,395
|
|
|
Convertible
debentures current
|
|
|
5,122,832
|
|
|
3,500,000
|
|
|
Note
payable
|
|
|
3,500,000
|
|
|
-
|
|
|
Derivative
liabilities
|
|
|
22,898,360
|
|
|
7,765,238
|
|
| |
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
33,554,425
|
|
|
13,345,375
|
|
| |
|
|
|
|
|
|
|
|
Note
payable
|
|
|
-
|
|
|
3,500,000
|
|
|
Convertible
debentures
|
|
|
655,281
|
|
|
1,967,132
|
|
| |
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
34,209,706
|
|
|
18,812,507
|
|
| |
|
|
|
|
|
|
|
|
Stockholders'
deficit:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 1,000,000 shares
|
|
|
|
|
|
|
|
|
authorized,
-0- issued and outstanding
|
|
|
-
|
|
|
-
|
|
|
Common
stock, par value $.001; authorized 9,999,000,000 shares;
|
|
|
|
|
|
|
|
|
681,599,825
and 19,137,612 issued and outstanding at December 31,
|
|
|
|
|
|
|
|
|
2007
and 2006, respectively.
|
|
|
681,600
|
|
|
19,138
|
|
|
Additional
paid-in capital
|
|
|
18,864,882
|
|
|
18,696,266
|
|
|
Accumulated
deficit
|
|
|
(47,760,231
|
)
|
|
(31,494,687
|
)
|
| |
|
|
|
|
|
|
|
|
Total
Stockholders' Deficit
|
|
|
(28,213,749
|
)
|
|
(12,779,283
|
)
|
| |
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Deficit
|
|
$
|
5,995,957
|
|
$
|
6,033,224
|
|
|
The
accompanying notes are an integral part of these consolidated
financial
statements.
|
|
|
ALLIED
SECURITY INNOVATIONS, INC AND SUBSIDIARY
|
|
|
FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
INCOME
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
4,367,941
|
|
$
|
4,528,533
|
|
|
Cost
of Revenue
|
|
|
1,185,313
|
|
|
1,298,970
|
|
| |
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
3,182,628
|
|
|
3,229,563
|
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,312,089
|
|
|
2,175,852
|
|
|
Sales
and marketing
|
|
|
541,587
|
|
|
463,544
|
|
|
Research
|
|
|
101,687
|
|
|
107,024
|
|
| |
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
2,955,363
|
|
|
2,746,420
|
|
| |
|
|
|
|
|
|
|
|
INCOME
BEFORE OTHER EXPENSE
|
|
|
227,265
|
|
|
483,143
|
|
| |
|
|
|
|
|
|
|
|
OTHER
EXPENSE
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(1,121,707
|
)
|
|
(2,374,253
|
)
|
|
Amortization
of deferred financing cost
|
|
|
-
|
|
|
(264,438
|
)
|
|
Amortization
of debt discount
|
|
|
(135,840
|
)
|
|
(1,187,147
|
)
|
|
Change
in fair market value of derivative liability
|
|
|
(15,133,122
|
)
|
|
(896,046
|
)
|
|
Depreciation
and amortization
|
|
|
(102,140
|
)
|
|
(99,866
|
)
|
|
Other
income and expenses
|
|
|
-
|
|
|
(11,274
|
)
|
| |
|
|
|
|
|
|
|
|
Total
Other Expense
|
|
|
(16,492,809
|
)
|
|
(4,833,024
|
)
|
| |
|
|
|
|
|
|
|
|
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
(16,265,544
|
)
|
|
(4,349,881
|
)
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
NET
LOSS APPLICABLE TO COMMON SHARES
|
|
$
|
(16,265,544
|
)
|
$
|
(4,349,881
|
)
|
| |
|
|
|
|
|
|
|
|
NET
LOSS PER BASIC AND DILUTED SHARES
|
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
| |
|
|
|
|
|
|
|
|
Weighted
average shares of common stock
|
|
|
|
|
|
|
|
|
outstanding,
basic and diluted
|
|
|
147,082,908
|
|
|
15,446,559
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
ALLIED
SECURITY INNOVATIONS, INC AND SUBSIDIARY
|
|
|
FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
|
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT
|
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
| |
|
Common
Stock
|
|
|
|
Additional
Paid
|
|
Accumulated
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
in
Capital
|
|
Deficit
|
|
Deficit
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
3,267,568,040
|
|
$
|
3,267,568
|
|
$
|
13,530,761
|
|
$
|
(27,144,806
|
)
|
$
|
(10,346,477
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of accrued interest related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debentures to common stock
|
|
|
6,301,237,973
|
|
|
6,301,238
|
|
|
(4,384,163
|
)
|
|
-
|
|
|
1,917,075
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,349,881
|
)
|
|
(4,349,881
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retroactive
common stock reverse split, 1/500
|
|
|
(9,549,668,401
|
)
|
|
(9,549,668
|
)
|
|
9,549,668
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
19,137,612
|
|
|
19,138
|
|
|
18,696,266
|
|
|
(31,494,687
|
)
|
|
(12,779,283
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued in conversion of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
convertible
debentures
|
|
|
662,462,213
|
|
|
662,462
|
|
|
(520,120
|
)
|
|
-
|
|
|
142,342
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Discount in conjunction with issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
convertible debentures
|
|
|
-
|
|
|
-
|
|
|
243,246
|
|
|
-
|
|
|
243,246
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
interest in conjunction with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
of convertible debentures
|
|
|
-
|
|
|
-
|
|
|
445,490
|
|
|
-
|
|
|
445,490
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(16,265,544
|
)
|
|
(16,265,544
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
681,599,825
|
|
$
|
681,600
|
|
$
|
18,864,882
|
|
$
|
(47,760,231
|
)
|
$
|
(28,213,749
|
)
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
ALLIED
SECURITY INNOVATIONS, INC AND SUBSIDIARY
|
|
|
FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
| |
|
2007
|
|
2006
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(16,265,544
|
)
|
$
|
(4,349,881
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
102,140
|
|
|
99,866
|
|
|
Gain
on sale of equipment
|
|
|
(2,200
|
)
|
|
264,438
|
|
|
Amortization
of debt discount
|
|
|
135,840
|
|
|
1,187,147
|
|
|
Beneficial
interest
|
|
|
445,490
|
|
|
1,917,074
|
|
|
Change
in fair market value of derivative liability
|
|
|
15,133,122
|
|
|
896,046
|
|
|
Bad
debt expense
|
|
|
76,333
|
|
|
65,795
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
76,163
|
|
|
(13,523
|
)
|
|
Inventory
|
|
|
(127,070
|
)
|
|
(124,214
|
)
|
|
Prepaid
expenses, deposits and other assets
|
|
|
(21,137
|
)
|
|
4,266
|
|
|
Accounts
payable
|
|
|
17,553
|
|
|
(109,437
|
)
|
|
Accrued
expenses
|
|
|
3,046
|
|
|
7,550
|
|
|
Accrued
interest
|
|
|
575,045
|
|
|
355,452
|
|
|
Deferred
Income
|
|
|
(73,818
|
)
|
|
(71,068
|
)
|
| |
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
|
74,963
|
|
|
129,511
|
|
| |
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(75,254
|
)
|
|
(20,603
|
)
|
|
Proceeds
from sale of equipment
|
|
|
2,200
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
(73,054
|
)
|
|
(20,603
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Payment
of convertible debentures
|
|
|
(8,000
|
)
|
|
(12,000
|
)
|
| |
|
|
|
|
|
|
|
|
Net
Cash used in Financing Activities
|
|
|
(8,000
|
)
|
|
(12,000
|
)
|
| |
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash
|
|
|
(6,091
|
)
|
|
96,908
|
|
|
Cash
at Beginning of Year
|
|
|
392,719
|
|
|
295,811
|
|
| |
|
|
|
|
|
|
|
|
Cash
at End of Year
|
|
$
|
386,628
|
|
$
|
392,719
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
ALLIED
SECURITY INNOVATIONS, INC AND SUBSIDIARY
|
|
|
FORMERLY
DIGITAL DESCRIPTOR SYSTEMS, INC.
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
(CONTINUED)
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
| |
|
|
|
|
|
|
Cash
Paid For:
|
|
|
|
|
|
|
Interest
Expense
|
|
$
|
-
|
|
$
|
-
|
|
|
Income
Taxes
|
|
$
|
-
|
|
$
|
-
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing
|
|
|
|
|
|
|
|
|
and
Financing Activities:
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Common
stock issued in conversion of
|
|
|
|
|
|
|
|
|
convertible
debentures
|
|
$
|
142,342
|
|
$
|
310,124
|
|
| |
|
|
|
|
|
|
|
|
Debt
Discount in conjunction with issuance
|
|
|
|
|
|
|
|
|
of
convertible debentures
|
|
$
|
243,246
|
|
$
|
6,301,238
|
|
| |
|
|
|
|
|
|
|
|
Beneficial
interest in conjunction with
|
|
|
|
|
|
|
|
|
issuance
of convertible debentures
|
|
$
|
445,490
|
|
$
|
6,301,238
|
|
| |
|
|
|
|
|
|
|
|
Convertible
debentures issued in conversion of
|
|
|
|
|
|
|
|
|
accrued
interest
|
|
$
|
568,730
|
|
$
|
536,546
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Allied
Security Innovations, Inc. and Subsidiary
Formerly
Digital Descriptor Systems, Inc.
Notes
to the Consolidated Financial Statements
For
the Years Ended December 31, 2007 and December 31, 2006
Note
1 - Description of Business
On
December 19, 2006 a special meeting of the shareholders was held and at the
meeting the shareholders passed a resolution to change the name of the company
from Digital Descriptor Systems, Inc. (“ASII”) to Allied Security Innovations,
Inc. The shareholders also passed a resolution to authorize a 1 for 500 reverse
stock split. Both of these actions were completed on February 5, 2007. In
addition the 2006 Incentive Stock Option Plan adopted by The Board of Directors
on October 12, 2006 was approved by the shareholders. On October 9, 2007
the
companies stock began trading on the NADAQ-over-the-counter market. Previously,
the Company’s common stock traded on Pink Sheets.
On
July
1, 2007 the offices of Allied Security Innovations, Inc. and the Somerset
office
of CGM Applied Security Technologies, Inc., the Company’s wholly owned
subsidiary, were combined into a new office located at 1709 Route 34,
Farmingdale, NJ in a 6,000 square foot combination warehouse /office space.
The
reason for this was cost savings and improved operational
efficiencies.
Allied
Security Innovations, Inc., incorporated in Delaware in 1994, develops,
assembles and markets computer installations consisting of hardware and
software, which capture video and scanned images, link the digitized images
to
test and store the images and text on a computer database and transmit this
information to remote locations. The principal product of the Company is
the
Compu-Capture ® Law Enforcement Program, which is marketed to law enforcement
agencies and prison facilities and generates the majority of the Company's
revenues. Substantially all of the Company's revenues are derived from
governmental agencies in the United States.
CGM-AST
is a manufacturer and distributor of indicative and barrier security seals,
security tapes and related packaging security systems, protective security
products for palletized cargo, physical security systems for tractors, trailers
and containers as well as a number of highly specialized authentication
products.
Note
2 - Summary of Significant Accounting Policies
Significant
accounting policies followed by the Company in the preparation of the
accompanying consolidated financial statements are summarized
below:
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles 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 d
consolidated financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Revenue
Recognition
The
Company derives revenue from the sale of hardware, software, post customer
support, and other related services. Post customer support includes telephone
support, bug fixes, and rights to upgrades. Other related services include
basic
training. The CGM-AST subsidiary derives its’ revenue from the sale of its tape,
labels and other security devices.
The
Company recognizes revenue upon delivery of the product to the end-user,
when
the fee is determinable and collectability is probable. Revenue allocable
to
post customer support is recognized on a straight-line basis over the period
which the service is to be provided. Revenue collected for future services
is
recorded as deferred income and totaled $60,577 for the year ended December
31,
2007. Revenue allocable to other services is recognized as the services are
provided. The CGM-AST subsidiary recognizes it revenue upon shipment of the
product to the customer.
Software
Development Costs
All
costs
incurred in the research and development of new software products and costs
incurred prior to the establishment of a technologically feasible product
are
expensed as incurred. Research and development of software costs were $101,687
and $107,024, respectively, for the years ended December 31, 2007 and
2006.
Cash
and Cash Equivalents
For
the
purpose of the statement of cash flows, cash and cash equivalents include
time
deposits, certificates of deposits, restricted cash, and all highly liquid
debt
instruments with original maturities or three months or less.
Accounts
Receivable
Accounts
receivable are uncollateralized customer obligations due under normal trade
terms requiring payment within 30 days from the invoice date. No interest
is
charged on any past due accounts. Accounts receivable are stated at the amount
billed to the customer. Accounts receivable, net of allowance was $406,655
and
$559,151 at
December 31, 2007 and 2006.
The
carrying amount of accounts receivable is reduced by a valuation allowance
that
reflects management's best estimate of the amount that will not be collected.
Management reviews all accounts receivable balances that exceed 90 days from
invoice date and based on assessment of current creditworthiness, estimates
the
portion, if any that will not be collected. The allowance for doubtful accounts
is $89,062 and $118,055 at December 31, 2007 and 2006.
Fixed
Assets
Fixed
assets are stated at cost. Depreciation is computed primarily using the
straight-line method over the estimated useful life of the assets.
|
Machinery
and equipment
|
7
years
|
|
Furniture
and fixtures
|
7
years
|
|
Computers
|
3
years
|
|
Leasehold
improvements
|
39
years
|
Income
Taxes
The
Company provides for income taxes under the liability method. Deferred income
taxes reflect the net tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Such differences result from differences
in the timing of recognition by the Company of net operating loss carry
forwards, certain expenses, and differences in the depreciable lives and
depreciation methods for certain assets.
Accounting
for Stock Options
The
Company determines stock-based compensation expense under Financial Accounting
Standards Board issued Statement No. 123R (SFAS 123R), "Accounting for
Stock-Based Compensation". The effect of applying SFAS 123R to the Company's
stock-based awards results in net loss and net loss per common share that
are
disclosed in Note 8.
Net
Loss Per Common Share
Basic
loss per share is calculated by dividing the net loss by the weighted average
common shares outstanding for the period. Diluted loss per share is calculated
by dividing the net loss by the weighted average common shares outstanding
of
the period plus the dilutive effect of common stock equivalents. Common stock
equivalents were not included in the computation of diluted earnings per
share
when the Company reported a loss because to do so would be antidilutive for
the
periods presented.
Concentration
of Credit Risk
Financial
instruments which potentially subject the Company to a concentration of credit
risk principally consist of cash and accounts receivable. Concentration of
credit risk, with respect to accounts receivable, is limited due to the
Company's credit evaluation process. The Company does not require collateral
from its customers. The Company sells its principal products to end users
and
distributors principally in the United States.
The
Company maintains cash and cash equivalents in various financial institutions
that, in the aggregate, exceed the limit insured by the Federal Deposit
Insurance Corporation (FDIC). The FDIC insures cash deposits up to $100,000
per
bank. Any amounts over $100,000 represent an uninsured risk to the
Company.
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include the accounts of the Company and
its
wholly owned subsidiary CGM Security Solutions, Inc. All inter-company
accounts have been eliminated.
Inventory
Inventories
consist principally of inks, adhesives, film and finished goods held in the
Company’s warehouse. Inventory is stated at the lower of cost or market,
utilizing the first-in, first-out method. The cost of finished goods includes
the cost of raw materials, packaging supplies, direct and indirect labor
and
other indirect manufacturing costs. On a quarterly basis, management reviews
inventory for unsalable or obsolete inventory. Obsolete or unsalable inventory
write-offs have been immaterial to the financial statements.
Advertising
The
Company’s policy is to expense the costs of advertising as incurred. The Company
had $32,324 and $35,588 for the years ended December 31, 2007 and 2006
respectively.
Fair
Value of Financial Instruments
The
carrying amount reported in the consolidated balance sheet for cash and cash
equivalents, accounts payable and accrued expenses approximates fair value
because of the immediate or short-term maturity of these financial instruments.
The carrying amount reported for the convertible debentures and notes
payable approximates fair value because, in general, the interest on the
underlying instruments fluctuates with market rates.
Goodwill
and Other Intangible Assets
In
June
2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142
“Goodwill and Other Intangible Assets”. This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets
and
supersedes APB Opinion No. 17, “Intangible Assets”. It addresses how intangible
assets that are acquired individually or with a group of other assets (but
not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This Statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. Goodwill was acquired upon
the
purchase of its wholly-owned subsidiary of CGM Security Solutions, Inc. totaling
$4,054,998 (see footnote 11).
In
addition, the Company has acquired licenses, which are included as other
intangible assets. The licenses are being amortized over a period of 15 years
based on the expected benefits to be consumed or otherwise used up. Goodwill
and
other intangible assets are tested annually for impairment in the fourth
quarter, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss
is
recognized to the extent that the carrying amount exceeds the asset’s fair
value. The Company assesses the recoverability of its goodwill and other
intangible assets by comparing the projected undiscounted net cash flows
associated with the related asset, over their remaining lives, in comparison
to
their respective carrying amounts. Impairment, if any, is based on the excess
of
the carrying amount over the fair value of those assets.
Derivative
Instruments
The
Company has an outstanding convertible debt instrument that contains
free-standing and embedded derivative features. The Company accounts for
these
derivatives in accordance with SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” ,
and
EITF Issue No. 00-19, “Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company's Own Stock” .
In
accordance with the provisions of SFAS No. 133 and EITF Issue No. 00-19,
the
embedded derivatives are required to be bifurcated from the debt instrument
and
recorded as a liability at fair value on the consolidated balance sheet.
Changes
in the fair value of the derivatives are recorded at each reporting period
and
recorded in net gain (loss) on derivative, a separate component of the other
income (expense). As of December 31, 2007, the fair value of derivatives
was
$22,898,360, an increase of $15,133,122 from December 31, 2006. The Company
had
a net loss on all derivatives of $15,133,122 for the year ended December
31,
2007.
Earnings
(Loss) Per Share of Common Stock
Historical
net income (loss) per common share is computed using the weighted average
number
of common shares outstanding. Diluted earnings per share (EPS) include
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants. Common stock equivalents
were not included in the computation of diluted earnings per share at December
31, 2007 and 2006 when the Company reported a loss because to do so would
be
anti-dilutive for periods presented. The Company has incurred losses since
inception as a result of funding its research and development, including
the
development of its intellectual property portfolio, which is key to its core
products.
The
following is a reconciliation of the computation for basic and diluted EPS:
|
|
|
December
31, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(16,265,544
|
)
|
$
|
(4,349,881
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding (Basic)
|
|
|
147,082,908
|
|
|
15,446,559
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common stock Equivalents:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
-
|
|
|
-
|
|
|
Warrants
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding (Diluted)
|
|
|
147,082,908
|
|
|
15,446,559
|
|
Limitations
Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial statement. These estimates
are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Reclassifications
Certain
amounts for the years ended December 31, 2006 have been reclassified to conform
to the presentation of the December 31, 2007 amounts. The reclassifications
had
no effect on net income for the years ended December 31, 2006.
Note
3 - Impact of Recent Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain
Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and
140.” SFAS No. 155 resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, “Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets,” and permits fair value remeasurement
for any hybrid financial instrument that contains an embedded derivative
that
otherwise would require bifurcation, clarifies which interest-only strips
and
principal-only strips are not subject to the requirements of SFAS No. 133,
establishes a requirement to evaluate interests in securitized financial
assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination
are
not embedded derivatives and amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of the first
fiscal
year that begins after September 15, 2006. The adoption of SFAS
No. 155 did not have a material impact on the Company’s financial position,
results of operations, or cash flows.
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140.” SFAS
No. 156 requires an entity to recognize a servicing asset or liability each
time it undertakes an obligation to service a financial asset by entering
into a
servicing contract under a transfer of the servicer’s financial assets that
meets the requirements for sale accounting, a transfer of the servicer’s
financial assets to a qualified special-purpose entity in a guaranteed mortgage
securitization in which the transferor retains all of the resulting securities
and classifies them as either available-for-sale or trading securities in
accordance with SFAS No. 115, “Accounting for Certain Investments in Debt
and Equity Securities” and an acquisition or assumption of an obligation to
service a financial asset that does not relate to financial assets of the
servicer or its consolidated affiliates. Additionally, SFAS No. 156
requires all separately recognized servicing assets and servicing liabilities
to
be initially measured at fair value, permits an entity to choose either the
use
of an amortization or fair value method for subsequent measurements, permits
at
initial adoption a one-time reclassification of available-for-sale securities
to
trading securities by entities with recognized servicing rights and requires
separate presentation of servicing assets and liabilities subsequently measured
at fair value and additional disclosures for all separately recognized servicing
assets and liabilities. SFAS No. 156 is effective for transactions entered
into after the beginning of the first fiscal year that begins after
September 15, 2006. The adoption of SFAS No. 156 did not have a
material impact on the Company’s financial position, results of operations, or
cash flows.
In
June
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes” which defines the threshold for recognizing the
benefits of tax return positions in the financial statement as
“more-likely-than-not” to be sustained by the taxing authority. FIN 48 also
prescribes a method for computing the tax benefit positions to be recognized
in
the financial statements. In addition, FIN 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The
adoption of FIN 48 did not have a material impact on the Company’s financial
position, results of operations, or cash flows.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair
Value Measurements,(“FAS
157”). This Standard defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. FAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The adoption of FAS 157 is not expected
to
have a material impact on the Company’s financial position, results of
operations or cash flows.
The
FASB
also issued in September 2006 Statement of Financial Accounting Standards
No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans — an
amendment of FASB Statement No. 87, 88, 106 and 132(R),
(“FAS
158”) .
This
Standard requires recognition of the funded status of a benefit plan in the
statement of financial position. The Standard also requires recognition in
other
comprehensive income certain gains and losses that arise during the period
but
are deferred under pension accounting rules, as well as modifies the timing
of
reporting and adds certain disclosures. FAS 158 provides recognition and
disclosure elements to be effective as of the end of the fiscal year after
December 15, 2006 and measurement elements to be effective for fiscal years
ending after December 15, 2008. The adoption of FAS 158 is not expected to
have a material impact on the Company’s financial position, results of
operations or cash flows.
Also
in
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 108, Quantifying Financial Misstatements (SAB
108), which expresses the Staff’s views regarding the process of quantifying
financial statement misstatements. Registrants are required to quantify the
impact of correcting all misstatements, including both the carryover and
reversing effects of prior year misstatements, on the current year financial
statements. The financial statements would require adjustment when either
approach results in quantifying a misstatement that is material, after
considering all relevant quantitative and qualitative factors. SAB 108 is
effective for financial statements covering the first fiscal year ending
after
November 15, 2006. The
adoption of SAB 108 did not have a material impact on the Company’s financial
position, results of operations or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Liabilities, including an amendment
of FASB Statement No. 115”. SFAS
No.
159 permits entities to choose, at specified election dates, to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and losses
shall be reported on items for which the fair value option has been elected
in
earnings at each subsequent reporting date. SFAS No. 159 is effective for
fiscal
years beginning after November 15, 2007. Early adoption is permitted as of
the
beginning of a fiscal year that begins on or before November 15, 2007, provided
the entity also elects to apply the provisions of SFAS No. 157 “Fair
Value Measurements.” The
Company is currently assessing the impact that SFAS 159 will have on its
financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business
Combinations” and
SFAS
No. 160, “Non
controlling Interests in Consolidated Financial Statements - an amendment
to ARB
No. 51.” SFAS
Nos.
141R and 160 require most identifiable assets, liabilities, non controlling
interests, and goodwill acquired in a business combination to be recorded
at
“full fair value” and require non controlling interests (previously referred to
as minority interests) to be reported as a component of equity, which changes
the accounting for transactions with non controlling interest holders. Both
statements are effective for periods beginning on or after December 15,
2008, and early adoption is prohibited. Accordingly, SFAS No. 141R will be
applied by the Company to business combinations occurring on or after
January 1, 2009. SFAS No. 160 will be applied prospectively to all non
controlling interests, including any that arose before the effective date.
The
adoption of SFAS No. 160 is not expected to have any impact on the
Company’s consolidated financial position and results of operations.
Note
4 - Intangible Assets
Intangible
assets consist of the following at December 31, 2007 and 2006:
| |
|
2007
|
|
2006
|
|
|
Licenses
|
|
$
|
222,076
|
|
$
|
222,076
|
|
|
Accumulated
amortization
|
|
|
68,939
|
|
|
53,771
|
|
|
Total
|
|
$
|
153,137
|
|
$
|
168,305
|
|
Licenses
are being amortized over its estimated useful life of 15 years. Amortization
expense for the years ended December 31, 2007 and 2006 was $15,168
respectively.
The
Licenses are amortized using the straight-line method over the useful life
of 15
years. Amortization expense for the years ended December 31, 2007 and 2006
is
15,168 and 15,168, respectively
The
following is a listing of the estimated amortization expense for the next
five
years:
|
Year
ended December 31,
|
|
|
|
|
2008
|
|
$
|
15,168
|
|
|
2009
|
|
|
15,168
|
|
|
2010
|
|
|
15,168
|
|
|
2011
|
|
|
15,168
|
|
|
2012
|
|
|
15,168
|
|
Based
on
the results of its most recent annual impairment tests, the Company determined
that no impairment of the licenses existed as of December 31, 2007 or 2006.
However, future impairment tests could result in a charge to
earnings
Note
5- Property and Equipment
Fixed
assets consist of the following at December 31, 2007 and 2006:
|
|
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Furniture
and Fixtures
|
|
$
|
71,367
|
|
$
|
48,522
|
|
|
Leasehold
Improvements
|
|
|
159,607 |
|
|
136,257
|
|
|
Computers
|
|
|
209,179 |
|
|
185,119
|
|
|
Machinery
and Equipment
|
|
|
753,209 |
|
|
810,051
|
|
| |
|
|
1,193,362
|
|
|
1,179,949
|
|
|
Less:
Accumulated depreciation
|
|
|
(887,125 |
) |
|
(861,993
|
)
|
|
Net
|
|
|
306,237 |
|
|
317,955
|
|
Depreciation
expense for the years ended December 31, 2007 and 2006 was $86,972 and $84,698,
respectively.
Note
6 - Convertible Debentures
Based
on the guidance in SFAS133 and EITF00-19, the Company concluded that the
conversion features of its convertible debentures were required to be accounted
for as derivatives. The imbedded derivative feature was bi-furcated and the
fair
market value was determined using a convertible bond valuation model. The
derivative instruments are recorded at fair market value with changes in
value
recognized during the period of change.
During
May 2001, the Company issued three convertible notes for an aggregate amount
of
$20,000. The debentures are collateralized by substantially all of the Company's
assets. The debentures accrue interest at the rate of 10% per
annum.
The
holders have the right to convert the principal amount plus accrued interest
into shares of the Company's common stock. The conversion price in effect
on any
Conversion Date shall be an amount equal to 40% of the mean average price
of the
common stock for the ten trading days prior to notice of
conversion.
We
recorded a derivative liability related to this convertible debenture. The
initial fair market value of the conversion option in the amount of $4,992
was
recorded as a debt discount and is being amortized over the stated maturities
of
the notes using the effective interest method. The fair market value of the
conversion feature is also shown as a derivative liability on the company’s
balance sheet and is being adjusted to fair market value each reporting period
with the change being reported as “other income and expenses” in the statement
of operations.
During
September 2001, the Company issued two convertible debentures for an aggregate
amount of $400,000. The debentures are collateralized by substantially all
of
the company's assets. These debentures are in default as they were due on
September 30, 2002. The debentures accrue interest at the rate of 12% per
annum.
A late fee equal to 15% of the accrued and unpaid interest is also assessed
during the default period. Interest on the debentures was not paid quarterly
and
accordingly accrued interest and late fees payable related to the notes is
included in the accompanying consolidated financial statements.
The
holders have the right to convert the principal amount plus accrued interest
into shares of the Company's common stock at anytime after issuance. The
conversion price in effect on any Conversion Date shall be the lesser of
$.08
per share or 40% of the average of the lowest three inter-day sales prices
during the ten trading days immediately preceding the applicable Conversion
Date.
The
Company also issued common stock purchase warrants for the right to purchase
800,000 shares of common stock (1,600 shares after stock split in February
2007)
of the Company at an exercise price per share equal to the lesser of $.36
or the
average of the lowest three closing sales prices for the common stock during
the
twenty Trading Days immediately prior to exercise. The estimated fair value
of
the warrants of $48,000 was allocated to paid-in capital. This resulting
debt
discount plus $90,000 of financing charges were amortized on a straight-line
basis over the term of the debentures, and were fully amortized at December
31,
2002.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $59,407 was recorded as a debt discount and is being amortized over the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
During
2004, $10,500 of the debenture was converted into 35,000,000 shares of common
stock (70,000 shares after stock split in February 2007).
In
December 2001 the Company issued three convertible debentures for an aggregate
amount of $500,000. The debentures are collateralized by substantially all
of
the Company's assets. The debentures are in default as they were due December
31, 2002. Interest accrues at the rate of 12% per annum through maturity,
and
increased to 15% per annum during the default period. Quarterly interest
payments were not made, and accordingly accrued interest payable related
to the
notes is included in the accompanying consolidated financial
statements.
The
holders have the right to convert the principal amount plus accrued interest
into shares of the Company's common stock at any time. The conversion price
in
effect on any Conversion Date shall be the lesser of $.043 per share or 40%
of
the average of the lowest three inter-day sales prices during the twenty
Trading
Days immediately preceding the applicable Conversion Date.
The
Company also issued common stock purchase warrants for the right to purchase
1,500,000 shares of common stock (3,000 shares after stock split in February
2007) of the Company at an exercise price per share equal to the lesser of
$.02
or the average of the lowest three inter-day sales prices during the twenty
Trading Days immediately prior to exercise. The estimated fair value of the
warrants of $90,000 was allocated to paid-in capital. This resulting debt
discount plus $77,500 of financing charges were amortized on a straight-line
basis over the term of the debentures, and were fully amortized at December
31,
2002.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $ 388,800 was recorded as a debt discount and is being amortized over
the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
September 2002, a 12% convertible promissory note for $75,000 was issued
to two
investors. The debentures are collateralized by substantially all of the
company's assets. The debentures are in default as they were due in August
2003.
The debentures accrue interest at the rate of 12% per annum. A late fee equal
to
15% of the accrued and unpaid interest is also assessed during the default
period. Quarterly interest on the debentures was not paid and accordingly
accrued interest and late fees payable related to the notes is included in
the
accompanying consolidated financial statements.
The
holders have the right to convert the principal amount plus unpaid accrued
interest into shares of the Company's common stock at any time through
repayment. The conversion price is equal to fifty percent of the average
of the
lowest three (i) inter-day trading prices, or (ii) if the common stock is
traded
on the OTC Bulletin Board or Pink Sheets, the prices asked by any person
or
entity acting as a market maker in the common stock during the twenty trading
days immediately preceding the relevant date upon which a conversion is
effected.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $ 59,430 was recorded as a debt discount and is being amortized over the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
September 2002, the Company issued secured convertible debentures in the
aggregate principal amount of $100,000. The debentures are collateralized
by
substantially all of the company's assets. The debentures are in default
as they
were due on September 30, 2003. The debentures accrue interest at the rate
of
12% per annum. A late fee equal to 15% of the accrued and unpaid interest
is
also assessed during the default period. Quarterly interest on the debentures
was not paid, and accordingly accrued interest and late fees payable related
to
the notes is included in the accompanying consolidated financial
statements.
The
holders have the right to convert the principal amount and interest due under
the debentures into shares of common stock. The conversion price in effect
on
any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average
of the lowest three inter-day sales prices of the common stock during the
twenty
Trading Days immediately preceding the applicable conversion date.
The
Company also issued common stock purchase warrants for the right to purchase
300,000 shares of common stock (600 shares after stock split in February
2007)
of the Company at an exercise price per share equal to $.01. The estimated
fair
value of the warrants was zero. Debt issuance costs of $27,500 were also
amortized on a straight-line basis over the term of the debentures and were
fully amortized at December 31, 2003.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $ 79,190 was recorded as a debt discount and is being amortized over the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
January, 2003 the Company issued three convertible debentures for an aggregate
amount of $250,000, with simple interest accruing at the annual rate of 10%.
The
debentures are collateralized by substantially all of the company's assets.
These debentures are in default as they were due January 10, 2004. Quarterly
interest was not paid and accordingly accrued interest is included in the
consolidated financial statements.
The
holders have the right to convert the principal amount and interest due under
the debentures into shares of common stock. The conversion price in effect
on
any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average
of the lowest three inter-day sales prices of the common stock during the
twenty
Trading Days immediately preceding the applicable Conversion Date.
The
Company also issued common stock purchase warrants for the right to purchase
750,000 shares of common stock of the Company (1,500 shares after stock split
in
February 2007) at an exercise price per share equal to $0.01. The estimated
fair
value of the warrants was zero. Financing costs incurred of $56,750 were
fully
amortized at December 31, 2003.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $ 92,225 was recorded as a debt discount and is being amortized over the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
February, 2003, the Company issued three convertible debentures for an aggregate
amount of $125,000, with simple interest accruing at the annual rate of 10%.
The
debentures are collateralized by substantially all of the Company's assets.
The
debentures are in default as they were due February 27, 2004. Quarterly interest
due was not paid and accordingly accrued interest is included in the
consolidated financial statements.
The
holders have the right to convert the principal amount and interest due under
the debentures into shares of common stock. The conversion price in effect
on
any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average
of the lowest three inter-day sales prices of the common stock during the
twenty
Trading Days immediately preceding the applicable Conversion Date.
The
Company also issued common stock purchase warrants for the right to purchase
375,000 shares of common stock (750 shares after stock split in February
2007)
of the Company at an exercise price per share equal to $0.01. The estimated
fair
value of the warrants was zero. Debt issuance costs of $10,843 were also
amortized on a straight-line basis over the term of the debentures. Amortization
expense during 2004 was $24,307 and the costs were fully amortized as of
December 31, 2004.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $ 47,850 was recorded as a debt discount and is being amortized over the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
April,
2003, The Company issued three convertible debentures for an aggregate amount
of
$125,000, with simple interest accruing at the annual rate of 10%. The
debentures are collateralized by substantially all of the company's assets.
The
debentures are in default as they were due September 30, 2004. Quarterly
interest was not paid and accordingly accrued interest is included in the
consolidated financial statements.
The
holders have the right to convert the principal amount and interest due under
the debentures into shares of common stock. The conversion price in effect
on
any Conversion Date shall be the lesser of (1) $0.005 or (2) 40% of the average
of the lowest three inter-day sales prices of the common stock during the
twenty
Trading Days immediately preceding the applicable Conversion Date.
The
Company also issued common stock purchase warrants for the right to purchase
375,000 shares of common stock (750 shares after stock split in February
2007)
of the Company at an exercise price per share equal to $0.01. The estimated
fair
value of the warrants was zero. Debt issuance costs of $20,844 were also
amortized on a straight-line basis over the term of the debentures. Amortization
expense during 2004 was $38,591 and the costs were fully amortized as of
December 31, 2004.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $ 68,250 was recorded as a debt discount and is being amortized over the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
October, 2003, the Company issued two convertible debentures for an aggregate
amount of $165,000, with simple interest accruing at the annual rate of 12%.
The
debentures are collateralized by substantially all of the company's assets.
The
debentures are in default as they were due October 1, 2004. Quarterly interest
was not paid and accordingly accrued interest is included in the consolidated
financial statements.
The
holders have the right to convert the principal amount and interest due under
the debentures into shares of the Company's common stock. The conversion
price
in effect on any Conversion Date shall be the lesser of (1) $.005 or (2)
40% of
the average of the lowest three inter-day sales prices of the common stock
during the twenty Trading Days immediately preceding the applicable Conversion
Date.
The
debenture holders also received warrants to purchase 1,505,000 shares (3,010
shares after stock split in February 2007) at an exercise price of $0.01
per
share. The estimated fair value of the warrants was zero. Amortization expense
during 2004 was $147,469 and the costs were fully amortized as of December31,
2004.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $ 326,733 was recorded as a debt discount and is being amortized over
the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
November, 2003, the Company issued two convertible debentures for an aggregate
amount of $45,000, with simple interest accruing at the annual rate of 10%.
The
debentures are in default as they were due November 27, 2004. Quarterly interest
was not paid and accordingly accrued interest is included in the consolidated
financial statements.
The
holders have the right to convert the principal amount and interest due under
the debentures into shares of the Company's common stock. The conversion
price
in effect on any Conversion Date shall be the lesser of (1) $.005 or (2)
40% of
the average of the lowest three inter-day sales prices of the common stock
during the twenty Trading Days immediately preceding the applicable Conversion
Date.
The
Company also issued common stock purchase warrants for the right to purchase
315,000 shares of common stock of the Company(630 shares after stock split
in
February 2007) at an exercise price per share equal to $0.01. The estimated
fair
value of the warrants was zero. Amortization expense during 2004 was $47,469
and
the costs were fully amortized as of December 31, 2004.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $ 72,572 was recorded as a debt discount and is being amortized over the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
December, 2003, the Company issued three convertible debentures for an aggregate
amount of $45,000, with simple interest accruing at the annual rate of 12%.
The
debentures are collateralized by substantially all of the company's assets.
These debentures are in default as they were due by December 3, 2004. Quarterly
interest was not paid and accordingly accrued interest is included in the
consolidated financial statements.
The
holders have the right to convert the principal amount and interest due under
the debentures into shares of the Company's common stock. The conversion
price
in effect on any Conversion Date shall be the lesser of (1) $.005 or (2)
40% of
the average of the lowest three inter-day sales prices of the common stock
during the twenty Trading Days immediately preceding the applicable Conversion
Date.
The
Company also issued common stock purchase warrants for the right to purchase
750,000 shares of common stock of the Company (1,500 shares after stock split
in
February 2007) at an exercise price per share equal to $0.01. The estimated
fair
value of the warrants was zero. Amortization expense during 2004 was $42,349
and
the costs were fully amortized as of December 31, 2004.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $ 72,527 was recorded as a debt discount and is being amortized over the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
November, 2004, the Company issued four convertible debentures for an aggregate
amount of $3,500,000, with simple interest accruing at the annual rate of
12%.
The debentures are collateralized by substantially all of the Company's assets.
These debentures were due in November, 2005. Quarterly interest was not paid
and
accordingly accrued interest is included in the consolidated financial
statements.
The
holders have the right to convert the principal amount and interest due under
the debentures into shares of the Company's common stock. The conversion
price
in effect on any conversion date shall be the lesser of (1) $.0005 or (2)
67% of
the average of the lowest three inter-day sales prices of the common stock
during the twenty trading days immediately preceding the applicable conversion
date. In addition the debenture holders also received warrants to purchase
10,500,000 shares at an exercise price of $0.005 per share anytime before
November 30, 2009. The estimated fair value of the warrants, $5,250, was
also
recorded as a debt discount. The total debt discount is being amortized on
a
straight line basis which approximates the effective interest method over
the
life of the note.
Additional
costs of $391,569 with the issuance of the convertible debentures were recorded
as deferred financing cost and are being amortized on a straight-line basis
which approximates the effective interest method, over the term of the
debentures. In September 2005, $513,431 was repaid on convertible debentures
from the proceeds of this debenture.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $2,519,300 was recorded as a debt discount and is being amortized over
the
stated maturities of the notes using the effective interest method. The fair
market value of the conversion feature is also shown as a derivative liability
on the Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
October of 2005 the Company converted $643,340 of accrued interest into four
convertible debentures; with simple interest accruing at the annual rate
of 2%.
The debentures are collateralized by substantially all of the company's assets.
These debentures are due in October, 2008. Quarterly interest is accrued
interest and is included in the consolidated financial statements.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $97,402 was recorded as debt discount and is being amortized over the
stated
maturities of the notes using the effective interest method. The fair market
value of the conversion feature is also shown as a derivative liability on
the
Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
December of 2006 the Company converted $536,546 of accrued interest into
four
convertible debentures; with simple interest accruing at the annual rate
of 2%.
The debentures are collateralized by substantially all of the Company's assets.
These debentures are due December 2009. Quarterly interest is accrued interest
and is included in the consolidated financial statements.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $310,124 was recorded as debt discount and is being amortized over the
stated
maturities of the notes using the effective interest method. The fair market
value of the conversion feature is also shown as a derivative liability on
the
Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
In
December of 2007 the Company converted $568,730 of accrued interest into
four
convertible debentures; with simple interest accruing at the annual rate
of 2%.
The debentures are collateralized by substantially all of the Company's assets.
These debentures are due December 2010. Quarterly interest is accrued interest
and is included in the consolidated financial statements.
In
addition, we recorded a derivative liability related to this convertible
debenture. The initial fair market value of the conversion option in the
amount
of $243,246 was recorded as debt discount and is being amortized over the
stated
maturities of the notes using the effective interest method. The fair market
value of the conversion feature is also shown as a derivative liability on
the
Company’s balance sheet and is being adjusted to fair market value each
reporting period with the change being reported as “other income and expenses”
in the statement of operations.
Note
7 - Income Taxes
At
December 31, 2007, the Company had federal net operating loss carry forwards
of
approximately $32,700,000 to offset future federal taxable income expiring
in
various years through 2027. The Company also has state net operating loss
carry
forwards in various states, which approximate the federal amount to offset
future state taxable income expiring in various years, generally 7 to 10
years
following the year the loss was incurred.
The
timing and extent in which the Company can utilize future tax deductions
in any
year may be limited by provisions of the Internal Revenue Code regarding
changes
in ownership of corporations due to certain ownership changes of the
Company.
The
differences between income tax provisions in the financial statements and
the
tax expense (benefit) computed at the U.S. Federal Statutory rate are as
follows:
| |
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Tax
provision at the U. S. Federal Statutory rate
|
|
|
34
|
%
|
|
34
|
%
|
|
Valuation
allowance
|
|
|
(34
|
)%
|
|
(34
|
)%
|
| |
|
|
|
|
|
|
|
|
Effective
tax rates
|
|
|
--
|
%
|
|
--
|
|
The
tax
effects of temporary differences that give rise to significant portions of
deferred tax assets at December 31, 2007 and December 31, 2006 follows:
| |
|
2007
|
|
2006
|
|
|
Deferred
tax asset
|
|
|
|
|
|
|
Net
approximate operating loss carry forward
|
|
$
|
11,118,000
|
|
$
|
5,748,000
|
|
|
Bad
debt reserves
|
|
|
-- |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
11,118,000
|
|
|
5,748,000
|
|
|
Valuation
allowance
|
|
|
(11,118,000
|
)
|
|
(5,748,000
|
)
|
| |
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
--
|
|
$
|
--
|
|
Note
8 - Commitments and Contingencies
Operating
Lease
CGM-AST
leases two facilities, one in Somerset NJ and the other in Staten Island,
New
York under non-cancelable lease agreements that end in December 2007 and
December 2008, respectively.
On
July
1, 2007 the offices of Allied Security Innovations, Inc. and the Somerset
office
of CGM-AST Applied Security Technologies, Inc. were combined into a new office
located at 1709 Route 34, Farmingdale, NJ in a 6,000 square foot combination
warehouse /office space. The reason for this was cost savings and improved
operational efficiencies.
The
new
lease is a five year lease that ends in May 2012.
Employment
Agreements
Anthony
R. Shupin, Chairman, President and Chief Executive Officer. Mr. Shupin was
re-appointed as Chairman, President and Chief Executive Officer effective
February, 2005. On February 25, 2005, ASII entered into a five-year employment
agreement with Mr. Shupin, which entitled him to a base salary of $227,900
per
year, which may at the Board of Directors discretion adjust his base salary
(but
not below $215,000 per year). Mr. Shupin is also entitled to participate
in the
Annual Management Bonus Plan. As a participant in the Annual Management Bonus
Plan, Mr. Shupin will be eligible to receive bonuses, based on performance,
in
any amount from 10% to 200% of the Base Salary. In addition, Mr. Shupin shall
participate in the Management Equity Incentive Plan. As a participant in
the
Management Equity Plan, Mr. Shupin will be eligible to receive options, which
vest over a period of time from the date of the option's issue, to purchase
common shares of ASII. The Company may grant Mr. Shupin, following the first
anniversary of the date hereof and at the sole discretion of the Board of
Directors, options to purchase common shares of the Company (subject to the
vesting and the satisfaction of the other terms and conditions of such options).
Mr. Shupin will be entitled to 25 vacations days per year at such times as
may
be mutually agreed with the Board of Directors. ASII will provide Mr. Shupin
a
monthly car allowance of One Thousand Dollars ($1,000) along with related
car
expenses.
Michael
J. Pellegrino, Senior Vice President and Chief Financial Officer. Mr. Pellegrino
was appointed as Senior Vice President and Chief Financial Officer effective
February 25, 2005. On February 25, 2005, ASII entered into a five-year
employment agreement with Mr. Pellegrino, which entitled him to a base salary
of
$185,500 per year which may at the Board of Directors discretion adjust his
base
salary (but not below $175,000 per year). Mr. Pellegrino is also entitled
to
participate in the Annual Management Bonus Plan. As a participant in the
Annual
Management Bonus Plan, Mr. Pellegrino will be eligible to receive bonuses,
based
on performance, in any amount from 10% to 200% of the Base Salary. In addition,
Mr. Pellegrino shall participate in the Management Equity Incentive Plan.
As a
participant in the Management Equity Incentive Plan, Mr. Pellegrino will
be
eligible to receive options, which vest over a period of time from the date
of
the option's issue, to purchase common shares of ASII. ASII may also grant
to
the Employee, following the first anniversary of the date of the Agreement
and
at the sole discretion of the Board of Directors, options to purchase common
shares of the Company (subject to the vesting and the satisfaction of the
other
terms and conditions of such options). Mr. Pellegrino will be entitled to
25
vacation days per year at such times as may be mutually agreed with the Board
of
Directors. ASII shall also furnish Mr. Pellegrino with monthly car allowance
of
One Thousand Dollars ($1,000) and related car expenses.
ASII
has
an employment agreement with Erik Hoffer, pursuant to which Mr. Hoffer will
be
employed as Executive Vice President of the Company for an initial term of
three
years, which may be extended, and President of CGM-AST Sub for an initial
term
of one year, which may be renewed for successive one-year terms. Pursuant
to the
Employment Agreement, Mr. Hoffer will receive a base salary of $200,000,
a bonus
of 5% of the gross margin sales increase over the prior year's gross margin
sales of CGM-AST products and customary benefits and
reimbursements.
Note
9 - Stock Option and Other Plans
Effective
November 13, 2006, Allied Security Innovations, Inc. ("ASII") granted to
each of
Anthony Shupin, its President and Chief Executive Officer and Michael
Pellegrino, its Chief Financial Officer, 10,000 shares of newly created Series
A
Preferred Stock ("A Preferred") as recognition for services.
The
shares will vest in five equal monthly installments and will be issued at
the
discretion of Mr. Shupin and Mr. Pellegrino. These share have not been issued
as
of December 31, 2007. Each share of A Preferred is convertible into 480 shares
of common stock of the Company starting three years from the date of issuance,
provided that the closing bid price of the Company's common stock is then
$2.00
per share. The shares of A Preferred may be voted with the Company's common
stock on an as converted basis on any matters that the common stock is entitled
to vote on as a class.
Unconverted
shares of A Preferred will automatically cease to exist, and all rights
associated therewith will be terminated upon the earlier of (i) that person's
termination of employment with the Company for any reason, or (ii) five years
from the date of issuance.
On
November 13, 2006, the Company filed with the Secretary of State of Delaware
a
Certificate of Designation of Preferences, Rights and Limitations of Series
A
Preferred Stock.
The
Company maintains the 1994 Restated Stock Option Plan (the 1994 Plan) pursuant
to which the Company reserved 5,000,000 shares of common stock. The options
granted have a term of ten years and are issued at or above the fair market
value of the underlying shares on the grant date. The Company also maintains
the
1996 Director Option Plan (the Director Plan) pursuant to which the Company
reserved 200,000 shares of common stock. Options granted under the Director
Plan
are issued at or above the fair market value of the underlying shares on
the
grant date. A portion of the first option vests at the six-month anniversary
of
the date of the grant and continues over a four-year period. Subsequent options
vest on the first anniversary of the grant date. The options expire ten years
from the date of the grant or 90 days after termination of employment, whichever
comes first.
The
following is a summary of option activity under all plans:
|
|
|
1994
Plan
|
|
1996
Director Plan
|
|
Nonqualified
|
|
Total
Number of Options
|
|
Weighted
Average Exercise Price
|
|
|
Outstanding
at December 31, 2006
|
|
|
33,000
|
|
|
--
|
|
|
--
|
|
|
33,000
|
|
$
|
.10
- $.365
|
|
|
Outstanding
at December 31, 2007
|
|
|
33,000
|
|
|
|
|
|
|
|
|
33,000
|
|
$
|
.10-.365
|
|
Note
10 - Contingency
There
were two holders of convertible notes dated December 31, 2001 who could
potentially seek similar damages from the Company. Should they seek these
damages, the Company could incur an additional expense of $71,668. Management
feels however, that the likelihood that the other holders will seek the damages
is remote, and therefore, no provision for this expense has been made in
the
accompanying consolidated financial statements.
On
October 16, 2003, a judgment was entered against the Company by its landlord,
BT
Lincoln L.P. for breach of lease in the amount of $184,706.
On
September 1, 2005, the Company acquired substantially all of the assets of
CGM
Security Solutions, Inc., a Florida corporation ("CGM"), for (i) $1,500,000
in
cash and (ii) a 2.86% promissory note (the "Note") in the principal amount
of
$3,500,000, subject to adjustment (the "Acquisition"). The assets of CGM-AST
were acquired pursuant to an Asset Purchase Agreement among the Company and
CGM-AST dated as of February 25, 2005. In connection with the acquisition,
the
Company and CGM-AST each entered into an employment agreement with Erik Hoffer
(the "Employment Agreement"). CGM-AST is a manufacturer and distributor of
barrier security seals, security tapes and related packaging security systems,
protective security products for palletized cargo, physical security systems
for
tractors, trailers and containers.
The
principal amount of the Note is subject to adjustment based upon the average
of
(i) the gross revenues of CGM-AST for the fiscal year ending December 31,
2007
and (ii) an independent valuation of CGM-AST Sub based upon the consolidated
audited consolidated financial statements of the Company and CGM-AST Sub
for the
fiscal years ending December 31, 2006 and 2007. In addition, the Company
has
granted CGM-AST a secondary security interest in substantially all of its
assets
and intellectual property.
In
connection with the Acquisition, the Company entered into a letter agreement
with certain of its investors (the "Investors") which extended the maturity
date
of debt instruments issued on November 30, 2004 until September 1, 2008,
and
amended the conversion price of the debt that is held by the Investors
to the
lower of (i) $0.0005 or (ii) 40% of the average of the three lowest intraday
trading prices for the Company's common stock during the 20 trading days
before,
but not including, the conversion date. In addition, the exercise price
of the
warrants held by the Investors was amended to $.001 per
share.
Note
12 - Going Concern
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which contemplates continuation of the Company as a going concern. The
Company
has sustained operating losses and has accumulated large deficits for the
year
ended December 31, 2007. These factors raise substantial doubt about its
ability
to continue as a going concern.
Management
has formulated and is in the process of implementing its business plan
intended
to develop steady revenues and income, as well as reducing expenses in
the areas
of operations. This plan includes the following management
objectives:
·
Soliciting new customers in the U.S.
·
Expanding sales in the international market
·
Expanding sales through E-commerce
·
Adding new distributor both in the U.S and internationally
·
The introduction of new products into the market
Presently,
the Company cannot ascertain the eventual success of management’s plan with any
degree of certainty. Each objective is contingent upon a number of factors
and
the Company does not represent that any or all of these objectives will
occur.
The accompanying consolidated financial statements do not include any
adjustments that might result from the eventual outcome of the risks and
uncertainties described above.
On
or
about April 10, 2008, Mr. Hoffer voluntarily resigned from CGM-AST.