Filed On 12/9/05 10:43am ET ˇ SEC File 0-50506 ˇ Accession Number 1000096-5-691
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
12/09/05 Assuretec Holdings Inc 10SB12G/A 5:151 1000096
Amendment to Registration of Securities of a Small-Business Issuer ˇ Form 10-SB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10SB12G/A Amendment No. 1 117 486K
2: EX-2.1 Certification of Designation of Rights 15 55K
3: EX-10.1 Lease 17 79K
4: EX-10.2 Letter 1 6K
5: EX-23.1 Consents of Experts and Counsel 1 6K
FORM 10-SB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
Amendment No. 1 to Form 10-SB
-----------
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(g) of
The Securities Exchange Act of 1934
Commission File Number: 000-50506
----------
AssureTec Holdings Inc.
-----------------------
(Name of Small Business Issuer in its Charter)
Delaware
--------
(State or other jurisdiction of incorporation or organization)
20-0007441
----------
(I.R.S. Employer Identification No.)
200 Perimeter Road
Manchester, NH
--------------
(Address of principal executive offices)
03103
-----
(Zip Code)
Issuer's telephone number:
--------------------------
(603) 641-8443
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
------------
(Title of Each Class)
TABLE OF CONTENTS
PART I........................................................................1
ITEM 1 DESCRIPTION OF OUR BUSINESS.................................1
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............20
ITEM 3 DESCRIPTION OF PROPERTY....................................27
ITEM 4 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................27
ITEM 5 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS............................................33
ITEM 6 EXECUTIVE COMPENSATION.....................................36
ITEM 7 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............43
ITEM 8 DESCRIPTION OF SECURITIES..................................45
PART II......................................................................48
ITEM 1 MARKET PRICE FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................48
ITEM 2 LEGAL PROCEEDINGS..........................................49
ITEM 3 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................49
ITEM 4 RECENT SALES OF UNREGISTERED SECURITIES....................50
ITEM 5 INDEMNIFICATION OF DIRECTORS AND OFFICERS..................56
PART F/S ...........................................................57
INDEX TO FINANCIAL STATEMENTS...........................................57
PART III..................................................................III-1
ITEM 1 INDEX AND DESCRIPTION OF EXHIBITS.......................III-1
-i-
PART I
Under the Private Securities Litigation Reform Act of 1995, companies are
provided with a "safe harbor" for making forward-looking statements about the
potential risks and rewards of their strategies. Forward-looking statements
often include the words "believe," "expect," "anticipate," "intend," "plan,"
"estimate" or similar expressions. In this registration, forward-looking
statements also include:
o statements about our business plans;
o statements about the potential for the development, regulatory
approval and public acceptance of new services;
o estimates of future financial performance;
o predictions of national or international economic, political or market
conditions;
o statements regarding other factors that could affect our future
operations or financial position; and
o other statements that are not matters of historical fact.
These statements may be found under "Management's Discussion and Analysis,"
"Plan of Operations" and "Description of Business" as well as in this Amendment
1 to Form 10-SB generally. Our ability to achieve our goals depends on many
known and unknown risks and uncertainties, including changes in general economic
and business conditions. These factors could cause our actual performance and
results to differ materially from those described or implied in forward-looking
statements.
These forward-looking statements speak only as of the date of this
Amendment 1 to Form 10-SB. We believe it is in the best interests of our
investors to use forward-looking statements in discussing future events.
However, we are not required to, and you should not rely on us to, revise or
update these statements or any factors that may affect actual results, whether
as a result of new information, future events or otherwise.
ITEM 1 DESCRIPTION OF OUR BUSINESS
a. Organization of AssureTec Holdings
AssureTec Holdings, Inc. ("AssureTec Holdings", "Holdings" or "the
Company"- formerly named Tech Ventures, Inc.) was formed as a Delaware
corporation on June 12, 2002 by Element 21 Golf Company ("Element 21"- formerly
named BRL Holdings, Inc.), a publicly traded company quoted on the
Over-the-Counter Bulletin Board (the "OTCBB") under the symbol EGLF. Element 21
acquired all the common stock of AssureTec Systems, Inc., a privately held
company engaged in security solutions for identification documents ("AssureTec
Systems" or "Systems") in November 2001. On April 1, 2002, Element 21 exchanged
2,852,000 of the shares of Systems common stock that it had received in the
-1-
acquisition of Systems for 5,704,000 shares of Element 21 common stock, from
substantially all the founders and consultants from whom Element 21's interest
in Systems was originally acquired. In addition, options to acquire 4,750,000
shares of Element 21 common stock then held by these individuals were cancelled.
As a result of these transactions and the issuance of additional shares of
Systems common stock to employees upon the exercise of stock options, Element
21's ownership of Systems decreased to 34.2% of the outstanding shares of
Systems' common stock. Element 21 undertook this latter transaction because
Systems, a development stage company, is in a entirely different industry that
requires a different management focus, a different business and strategic focus,
different operating characteristics, a different investment profile, different
sources of capital, and a different identity. It is our understanding that
Element 21 did not believe it could focus its financial and management resources
properly on its own business and still be able to generate sufficient capital to
support Systems as a wholly owned subsidiary.
After Holdings was formed by Element 21, Element 21 contributed to Holdings
all the Systems common stock owned by Element 21. At the time of the formation
of Holdings, these 2,716,900 shares of Systems common stock represented a 34.2%
ownership of Systems by Holdings. Element 21 also contributed into Holdings
stock ownership it held in three corporations, Biorelease Technologies, Inc.,
IJAM Inc, and Advanced Conductor Technologies, all of which were inactive and
carried by Element 21 at no value. A total of 5,433,800 shares of Holdings
common stock were issued to Element 21 Golf in consideration for the
contribution of Element 21's investment in Systems along with the other three
zero value entities contributed by Element 21. Since its formation, Holdings'
only material asset has been its investment in Systems.
Systems, a development stage company, was formed as a Delaware corporation
in October 2001. Systems' business is the selling of technology that identifies
and authenticates documents that are used to enable its customers to recognize
and validate a large variety of travel documents automatically. (See - The
Business of AssureTec Systems, Inc.).
In March 2004, Holdings acquired the remaining outstanding common stock of
Systems by issuing to each holder of the common stock of Systems two shares of
Holdings common stock in exchange for one share of Systems common stock (the
"Systems Exchange"). Since that date, Systems has been a wholly owned subsidiary
of Holdings. Immediately after the Systems Exchange, Holdings effected a
1-for-31 reverse split of Holdings common stock and securities convertible into
Holdings common stock. As part of the Systems Exchange, Holdings also issued one
share of Holdings Preferred Stock in exchange for each outstanding share of
Preferred Stock of Systems (a total of 601 shares).
In April 2004, Holdings commenced a private offering of its Series A-2
Preferred Stock, pursuant to which it issued 25.2 shares of Series A-2 Preferred
Stock to officers of the Company and of its subsidiary for gross proceeds of
$67,800 in cash and in satisfaction of a total of $184,200 of debt. The shares
-2-
of Series A-2 Preferred Stock were later cancelled, upon approval of the Series
A-2 holders, and exchanged for a total of 252 shares of Series A-1 Preferred
Stock.
Between May 2004 and November 2005 the Company issued an additional 3,560
shares of Series A-1 Preferred Stock for aggregate proceeds of $3.2 million
pursuant to one private placement. As of November 15, 2005, there were a total
of 4,161 shares of Series A-1 Preferred Stock outstanding.
On September 1, 2005 Holdings initiated a private placement to accredited
investors only of up to $1 million of debentures with warrants to purchase
common stock. These debentures have a six month term and bear interest at 12%
annually. For each $3.00 of debentures purchased, Holdings issued one warrant to
purchase one share of Holdings common stock at $6.00 per share for a period of
one year from the date of investment or upon an initial public offering by
Holdings, whichever occurs earlier. This private offering raised gross proceeds
of $1.125 million and net proceeds of approximately $1.035 million and in
October 2005, the Company issued warrants to acquire 375,667 shares of Common
Stock.
On September 15, 2005 Holdings commenced a private offering to accredited
investors only of up to 1,250,000 shares of Holdings common stock. Pursuant to
this private offering, the Company is offering units for gross proceeds of
$12.00 per unit. Each unit is comprised of two shares of common stock at $6.00
per share with one warrant to acquire one share of common stock at $6.00 per
share, for each two shares of common stock purchased. The warrants issued in
this offering are exercisable for a period of one year from the date of
investment or upon an initial public offering by Holdings, whichever occurs
earlier. As of October 31, 2005, a total of 333,333 shares have been sold, and
166,667 warrants have been granted, pursuant to this offering raising gross
proceeds of $2.0 million, of which $1.125 million was applied to retire the
September 1, 2005 debentures.
AssureTec Holdings has no operations except for the activities of AssureTec
Systems, Inc. and, therefore, the following discussion of products, markets and
business opportunities relates solely to AssureTec Systems, Inc.
The financial information has been prepared using the historical records of
both AssureTec Holdings, Inc. and AssureTec Systems, Inc. The operations of
AssureTec Holdings, Inc. are limited and consist primarily of certain management
costs, such as compensation and third party management and accounting services.
Historical references to the Company's operations primarily consist of those
transactions executed by AssureTec Systems, Inc. in the development of its
integrated identity document management applications.
Element 21 intends to effect a spin-off of Element 21's interest in
Holdings (the "Holdings Spin-Off") pursuant to an exemption from registration
under the Securities Act of 1933, as amended (the "Act"). The Holdings Spin-Off
will be pro-rata to Element 21 stockholders of records as of October 4, 2002,
excluding, in accordance with the consent of such stockholders, shares held by
-3-
stockholders who received shares of Element 21 common stock as of October 3,
2002, in connection with the acquisition by Element 21 of Systems.
b. The Business of AssureTec Systems, Inc.
AssureTec Systems is a development stage company that is a provider of
technology that enables security solutions to automatically recognize, manage
and authenticate identification documents. With its shipment in early 2004 of
hardware and software to be used at the international airport in Santiago,
Chile, AssureTec Systems commenced entry into this document security field as an
integrated solution provider combining its proprietary hardware and software
product lines - i-Dentify(TM) Reader/Authenticator and AssureID(TM) Software and
Knowledge Base, respectively. These products, combined with biometrics and
associated integration software provided by others, provide a cost-effective and
automated answer to an essential security question--"What is the risk of entry
associated with this identity as presented?"
In addition to the Chilean government, we have sold our products and
services either for production usage or pilot testing for several end-users
including the U.S. Transportation Security Agency, U.S. Department of State,
Ministry of Immigration of Australia, and multiple U.S. state and Canadian
provincial motor vehicle departments. Systems has generated revenues of
approximately $9,700, $290,000 and $767,000 in fiscal years ended June 30, 2003,
2004 and 2005, respectively. We are continuing to develop our business by
aggressively targeting end users and major systems integrators and value-add
resellers serving our target markets as described further below under "Target
Markets" and "Marketing Strategy."
Government-issued ID documents come in various sizes, colors and quality
levels. Unlike the field of telecommunications in which all manufacturers agree
in advance on conventions and standards so as to enable network services and
solutions, the world of passports and government-issued ID documents has few
standards. Countries issuing approximately 60% of the most widely used passports
subscribe to International Civil Aviation Organization ("ICAO") standards
developed by the airline industry almost 10 years ago. But even these "ICAO
standard" passports are quite often issued and printed "off spec." In addition,
national identity cards, drivers' licenses, and visas represent over a thousand
additional types of government issued ID documents worldwide.
Since the terrorist events of September 11, 2001 in the United States,
almost every government is struggling with increasing the security of its issued
documents in order to strengthen its borders and protect critical
infrastructure. New biometric and smart card solutions are proposed and tested
every day. Absent a cooperative effort to replace every issued identity document
by virtually every government in the world, identity documents that are already
issued in multiple formats and pursuant to multiple standards will be in
circulation for another twenty to thirty years. Additionally, when new smart
card and enhanced passport systems are placed in service, they will add to a
growing list of disparate documents that a border agent or facilities control
agent must monitor and evaluate.
-4-
We sell our identity document authentication products and services
primarily through domestic and international resellers, distributors and systems
integrators into three target markets: border management, travel, and access
control.
We maintain a web site describing our products and services in detail
(http://www.assuretec.com).
Targeted Market Segments
The lack of worldwide standards for over 192 countries(1) results in
identification documents coming in various sizes, colors, quality levels, and
varying significantly in security features. Absent a cooperative effort to
replace all identity documents throughout the world, documents that are already
in use are likely to be in circulation for up to thirty years. By enabling
effective authentication methods to existing documents already in circulation,
we immediately add value and significance to the automated authentication and
security industry.
Public concern and new pending legislation that is affecting border
management and travel security is stimulating demand for improved security
operations with methods in place to protect the public's privacy. Based upon
published data, management believes that aggregate worldwide revenues for the
automated authentication and security industry could approximate $10 billion by
2008(2).
The following points relate to market opportunities, where our technology
could be specifically applied:
1) The Government Accounting Office (GAO) reports that in 2002, there
were about 440 million primary inspections conducted at the 330
primary land, air and sea entry points, by 4,775 inspectors(3) of
which 279 million inspections were of foreign nationals(4). In
addition, management estimates there are over several thousand
secondary land, air and sea entry points.
2) Commercial air travel use exceeded 1.5 billion passengers at over
5,000 public and 13,000 private airports(5).
-------------------------
(1) www.countrywatch.com
(2) GAO, Brookings Institution, HISA, IATA, Lehman Brothers
(3) "Protecting the American Homeland; A Preliminary Analysis" 2002 Pg 32 and
ibid Report to Congressional Committees pg30
(4) ibid Report to Congressional Committees pg 54
(5) Department of Transportation Statistics December 2002
-5-
3) There are 4.6 million commercial buildings, 500 skyscrapers, 12,000
chemical facilities and 300 major arenas and stadiums in the United
States(6).
4) There are over 50,000 bank branches across the United States(7) and
over 500,000 branches around the world that need time-effective, proof
of identification in opening a bank account or for transferring large
sums of money.
Market Advantages
We have established a market presence and preferred partnering status with
large integrators including Lockheed Martin Corporation, Unisys Corporation, and
Science Applications International Corporation (SAIC) along with specialty niche
providers for the United States and international border markets. Our
relationship with Unisys Corporation in providing security solutions to the
government of Chile significantly strengthens our visibility.
Several companies, with competing identification document reading devices,
have approached us for licensing opportunities. We expect to focus on the
integration of our software with a variety of devices being developed for the
growing commercial and governmental markets, thereby becoming the industry
standard for authentication and document classification devices. Additionally,
we expect to license or develop biometric and external database management
capability and to offer security solutions tailored to specific markets such as
transportation, banking, automated public access applications, and restricted
goods purchases including chemicals and firearms. Recently, we announced a
strategic alliance with Digimarc Corporation to provide solutions to state and
province driver's license issuing authorities to authenticate "breeder
documents" used to get new licenses.
Common Customer Need
We believe that we meet, in whole or in part, several common customer
requirements across all of our markets, which include our ability to:
(i) quickly and effectively identify and read any identification document
types issued by a myriad of organizations;
(ii) facilitate the correlation of biometric markers (facial, fingerprints,
etc.) and other security information between the document and its
presenter;
(iii) assess the risk that the document presented is unaltered, contains
the appropriate characteristics, and shows not to be expired;
-----------------------
(6) "Protecting the American Homeland; A Preliminary Analysis" 2002 pg 47 & pg
55
(7) "Bank Geographic Structure" The Conference of State Bank Supervisors;
www.pacb.org/pacb_h11.htm
-6-
(iv) maintain throughput at control point; and
(v) preserve and protect established personal privacy and security
protocols.
Our security products and services are designed to incorporate these goals
into market-driven solutions.
Our Platform and Management System
We have developed an integrated identity document management platform that
can automatically identify and validate many identity document types being
presented, regardless of whether the document has been printed according to ICAO
standards.
Furthermore, our platform includes a proprietary document specifications
library that ascertains the degree to which security features and known document
characteristics are present or absent in any document being presented, whether
ICAO standard or not. This capability enables a higher level of automation, with
a higher degree of public access and security risk management, to a border,
passenger check-in terminal, sensitive facility, or other control point.
As a subset of this document management software product, we offer document
authentication management for each document type supported. The software
utilizes a weighted risk-scoring scheme for each security feature confirmed, or
absent, based on the individual requirements of a particular access point.
Once a document that is already enrolled in our data library has been
recognized by our automated identity document management system, predetermined
protocols are applied according to the specific requirements of the local
control point. These rules and protocols drive the level of data extraction and
enable further analyses including: biometrics, document security feature
analysis (authentication), matching to watch lists, stolen document lists,
passenger manifests, and the like.
Because of its ability to recognize virtually any travel document in
circulation, our automated identity document management system can be deployed
immediately in public transportation or other infrastructure applications,
including existing airline, travel, and facility control systems, without
waiting for enrollment under new document issuance. For example, its proprietary
software can be programmed to develop transportation manifests automatically,
prioritize baggage handling, and integrate with security watch lists. The
software can work across networks of large facilities to deliver higher levels
of confidence as to the identity of those persons within the facility.
Comparison with Competitive Technologies
Competitive ID document automated reader technology is constrained by
reading limited areas of single document types. On the other hand, because of
its omni-font capability and advanced pattern matching, our i-Dentify(TM)
document management system reads the entire document, enabling it to extract
substantially more data from a travel document than that contained in the
machine-readable portion of the document. Further, the technology can be applied
to any travel document types in its library.
-7-
Our ability to recognize a large number of different document types is a
direct result of our patent-pending technology that recognizes any document
registered in its proprietary document library. By using our proprietary reader
to register issued document standards, we achieve a high level of sensitivity
and resolution by controlling image quality and lighting uniformity. This
maximizes the amount of information being read.
The resulting document library knowledge base has been built by registering
both ICAO and non-ICAO documents in its knowledge base, thus ensuring a broad
and high level of document classification and authentication. Also, the
machine-readable portion of the document is the least secure and easiest portion
for a forger to modify.
Our ability to read and extract data from the secure portion of a document
while matching the data to that contained in the machine-readable portion
enables the processing of a significantly higher percentage of travel documents
with higher levels of security and automation.
The automated manner used by the system to extract data permits automation
of a control point with only limited manual clerical intervention. Our high
level of automation allows inspectors to be "face to face," evaluating human
behavior, rather than "heads-down," interacting with a keyboard.
Processing time is another significant advantage of our document management
software. We use our proprietary knowledge-based software hierarchy to process
only the images and information necessary to identify a particular document and
complete the processing protocol. This makes the system faster and keeps lines
moving.
We believe our performance advantages will allow us to capture
substantial market share.
Marketing Strategy
Target end-users of our products and services include security
management firms and solution providers, corporate trustees of facility
security, domestic government agencies, U.S. Department of Homeland Security,
U.S. Transportation Security Agency, U.S. Department of State, U.S. Customs,
state departments of motor vehicles, and comparable organizations in foreign
countries. Some of the end-users currently using our products and services
either in production usage or pilot testing include the Chilean government, U.S.
Transportation Security Agency, U.S. Department of State, Ministry of
Immigration of Australia, and multiple U.S. state and Canadian provincial motor
vehicle departments. There is no assurance that any of these entities will
continue to be end-users or that we will secure new end-users.
-8-
Our marketing approach seeks to generate product "pull," through our
program of accessing and influencing high-level agency and government
specifiers, as described below.
We distribute our products primarily through reseller and systems
integrator channels that have significant leadership positions in each targeted
market segment. For U.S. government applications such as borders and
transportation, we intend to create market "push" through relations with large
government integrators such as: Northrop-Grumman, Lockheed Martin, Unisys, CSC,
SAIC, and comparable integrators located overseas. We currently have reseller
agreements with, or purchase orders from, Lockheed Martin, Unisys, SAIC, Bearing
Point, Digimarc and other systems integrators, however, there is no assurance
that we will be able to maintain these working relationships or establish any
additional relationships.
"Pull" is created by regular publication and presentation of projects by
our founders and product managers before domestic and international industry
forums, supplemented by personal visits to government specifiers. We expect that
this "Pull" combined with the marketing efforts of the leading integrators will
carry our products into these government channels.
End users routinely conduct pilot programs to evaluate new technologies. We
have products and services currently being used in several pilot programs,
including international travel applications, banking applications, and border
management applications, however, there is no assurance that these pilots will
progress from pilot testing into fully-deployed programs. We expect our
technology will be a participant in several additional pilot programs both
domestically and overseas, although there is no assurance that this will occur.
Specific Products and Services
We offer an integrated solution that consists of an identity document
manager software platform, a proprietary document library that can be "trained"
to recognize almost any document to enable operation without manual
intervention, and a proprietary, full color, digital document reader. Our
integrated solution offers competitive security solutions without disrupting the
efficient flow of people and products. Appropriate privacy protection for all
citizens is enabled as a matter of design.
The i-DentifyTM Document Reader is the basis of our family of advanced ID
Reader/Authenticator products. Current models have the capability of reading and
authenticating passports and other travel documents regardless of which set of
government standards or to which Travel Document standards they conform, as well
as providing the capability of reading and authenticating driver's licenses and
state-issued ID cards. The product is capable of being programmed to read and
authenticate virtually any document that can be placed in a 3" x 5" viewing
window.
i-DentifyTM products incorporate patented and patent-pending technologies
to inspect and analyze a document, enable biometrics, link the presenter to that
-9-
document, and enable a search against relevant databases or "watch" lists to
derive an ultimate risk assessment "score". Most often, these processes happen
in a matter of seconds, in a manner that minimizes invasion of an individual's
privacy.
The AssureID(TM) Software and Document Library Knowledge Base is designed
to be a software platform that will serve as an enterprise-wide central document
authentication and analysis solution.
Our ability to recognize a large number of different document types is a
direct result of our patented(8) and patent-pending technology that recognizes
any document registered in its proprietary document library (see Proprietary
Information following). By using our proprietary reader to register issued
document standards, we achieve the highest level of sensitivity and resolution
by controlling image quality and lighting uniformity. This maximizes the amount
of information being read.
The resulting document library knowledge base has been built by registering
both ICAO and non-ICAO documents in its knowledge base, thus ensuring the
broadest and highest level of document classification and authentication. We
currently do not support other document readers, but we may in the future modify
our software to enable licensing of our software to other competitive reader
manufacturers.
As a subset to the overall platform, we offer rules-based document
authentication management for each document type supported, along with a
weighted risk-scoring scheme for each security feature confirmed or found absent
based on the requirements of a particular control or access point.
The i-DentifyTM Reader/Authenticator and AssureID(TM) Software and Document
Library Knowledge Base platform is designed to permit easy integration into
existing systems, centralized management of multiple clients, and as a secure
node, to link to disparate, trust-authority databases.
We offer Maintenance Services for its i-DentifyTM Readers and Subscription
Services for our AssureID(TM) Software and Document Library Knowledge Base to
insure end-users stay current with the latest software revisions and updates to
the Library Knowledge Base of documents. While these services are optional, we
believe that the majority of our customers will opt for these services, however,
we cannot provide any assurances that our customers will purchase post-contract
support from us.
Competition
Currently, the market for ID document readers is fragmented, without a
dominant player. The competitive field is comprised of low profile divisions of
large corporations or small companies. Both lack any real differentiating
competitive advantage. We believe that our patent pending intellectual property
and advanced technology platform, including its ability to read an entire
-----------------
8 The Company was issued patent #6,785,405 B2 on August 31, 2004 entitled
Apparatus and Method for Document Reading and Authentication with 22
approved claims.
-10-
document and process a document quickly with its omni-font capability and
advanced pattern matching against any document registered in its proprietary
document library knowledge base, will allow it to dominate the market,
effectively creating a barrier to entry for competing solutions that can meet
the demanding throughput and forensic requirements of the emerging applications;
however, there is no assurance that other companies will not develop competing
solutions.
We believe that companies such as Canadian Bank Note (Canada), AIT Corp
(Canada, now affiliated with 3M), Imaging Automation (9), Bundesdruckerei
(Germany), OCE (Germany), Dynjab (Australia), Rochfort-Thompson (U.K.), Smiths
Heimann Biometrics and DataStrip (U.K./U.S.) have only some of the necessary
components of the technology necessary to deliver a competitive solution. These
companies currently occupy an ancillary place in the overall security market.
Although there is no assurance, they may, in fact, represent a strategic source
of funding (revenue or equity) as they seek to enhance their product
capabilities and gain access to our platform technology.
The market's evolution towards a better definition of its needs and
required solutions is influencing the strategic direction of several of the
players. 3M acquired AIT in 2002 to access its reader technology and passport
issuance position. Identix acquired Visionics, forming a half-billion dollar
biometrics enterprise. Viisage acquired Imaging Automation. Companies such as
Intellicheck, IDLogix and others are trying to adapt existing products
originally developed for underage screening applications to the general document
reader/authenticator market. Numerous biometrics companies such as Viisage,
BioKey, Identix and others are looking for broader ways to deliver their limited
biometrics offerings.
Proprietary Information
We have been granted one patent (US Patent 6,785,405 B2, "Apparatus and
Method for Document Reading and Authentication" issued on August 31, 2004) and
we have applied for four additional U.S. patents in the fields of document
automation, security and authentication, respectively. Each of these remaining
patent applications has been petitioned for accelerated review based on its
application to counter-terrorism activities. There is no assurance that these
remaining patent applications will ever be issued or, if issued, that our
business will not be challenged by a competitor as infringing on its respective
issued patent. Our intellectual property includes our web site, web site
organization, our domain name, and the name, "AssureTec Systems, Inc."
Effects of Existing or Probable Government Regulation
Currently, we are not subject to direct federal, state or local regulation
other than regulations applicable to businesses generally or directly applicable
to privacy regulation. However, as we begin to establish an installed base and
our systems become more widely employed, of which there is no assurance, it is
possible that a number of laws and regulations may become applicable along with
other laws and regulations which will be adopted with respect to ID document
management.
--------------
9 In September 2004, subsequent to the original date of filing this Form
10SB, Viisage acquired Imaging Automation.
-11
We are not certain how our business operations and liability may be
affected by the application of existing laws governing issues such as property
ownership, copyrights, encryption and other intellectual property issues,
taxation, libel, qualification to do business, and personal privacy. The vast
majority of these laws were adopted prior to the events of September 11, 2001 in
New York and Washington, D.C. As a result, they do not contemplate or address
the unique issues of ID document management and related technologies. Changes in
laws intended to address these issues could create uncertainty in the
marketplace. This uncertainty could reduce demand for our services; increase the
cost of doing business as a result of litigation costs, and/or increase service
delivery costs.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") imposes a wide
variety of new regulatory requirements on publicly held companies and their
insiders. Many of these requirements will affect us. For example:
o Our chief executive officer and principal financial officer must now
certify the accuracy of all our periodic reports that contain
financial statements;
o At a later date, our periodic reports must disclose our conclusions
about the effectiveness of our disclosure controls and procedures; and
o On and after July 30, 2002, we may not make any loan to any director
or executive officer, and we may not materially modify any loans that
existed prior to that date.
The Sarbanes-Oxley Act has required us to review our current procedures and
policies to determine whether they comply with the Sarbanes-Oxley Act and the
new regulations promulgated thereunder. We will continue to monitor our
compliance with all future regulations that are adopted under the Sarbanes-Oxley
Act.
Penny Stock
If traded, our common stock would likely be a "penny stock" as defined in
Rule 3a51-1 of the Securities and Exchange Commission. Penny stocks are stocks:
o with a price of less than five dollars per share;
o that are not traded on a "recognized" national exchange;
o whose prices are not quoted on the NASDAQ automated quotation system;
or in issuers with net tangible assets less than $2,000,000, if the
issuer has been in continuous operation for at least three years, or
$5,000,000, if in continuous operation for less than three years, or
with average revenues of less than $6,000,000 for the last three
years.
Section 15(g) of the Exchange Act and Rule 15g-2 of the Securities and
Exchange Commission require broker/dealers dealing in penny stocks to provide
potential investors with a document disclosing the risks of penny stocks and to
-12-
obtain a manually signed and dated written receipt of the document before making
any transaction in a penny stock for the investor's account. You are urged to
obtain and read this disclosure carefully before purchasing any of our shares.
Rule 15g-9 of the Securities and Exchange Commission requires
broker/dealers in penny stocks to approve the account of any investor for
transactions in these stocks before selling any penny stock to that investor.
This procedure requires the broker/dealer to:
o get information about the investor's financial situation, investment
experience and investment goals;
o reasonably determine, based on that information, that transactions in
penny stocks are suitable for the investor and that the investor can
evaluate the risks of penny stock transactions;
o provide the investor with a written statement setting forth the basis
on which the broker/dealer made his or her determination; and
o receive a signed and dated copy of the statement from the investor,
confirming that it accurately reflects the investor's financial
situation, investment experience and investment goals.
Compliance with these requirements may make it harder for our stockholders
to resell their shares.
Reports to Security Holders
We are required to file periodic reports with the SEC pursuant to the
requirements of the Securities Exchange Act of 1934. These reports include,
among others, a Quarterly Report on Form 10-QSB within 45 days after the end of
each of the first three quarters of the Company's fiscal year, and an Annual
Report on Form 10-KSB within 90 days after the end of the Company's fiscal year.
You may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC at (http://www.sec.gov).
Section 14(a) of the Exchange Act requires all companies with securities
registered pursuant to Section 12(g) of the Exchange Act to comply with the
rules and regulations of the Securities and Exchange Commission regarding proxy
solicitations, as outlined in Regulation 14A. Matters submitted to stockholders
of our Company at a special or annual meeting thereof or pursuant to a written
consent will require our Company to provide our stockholders with the
information outlined in Schedules 14A or 14C of Regulation 14; preliminary
copies of this information must be submitted to the Securities and Exchange
Commission at least 10 days prior to the date that definitive copies of this
information are forwarded to our stockholders.
-13-
Small Business Issuer
The integrated disclosure system for small business issuers adopted by the
Securities and Exchange Commission in Release No. 34-30968 and effective as of
August 13, 1992, substantially modified the information and financial
requirements of a "Small Business Issuer," defined to be an issuer that has
revenues of less than $25,000,000; is a U.S. or Canadian issuer; is not an
investment company; and if a majority-owned subsidiary, the parent is also a
small business issuer; provided, however, an entity is not a small business
issuer if it has a public float (the aggregate market value of the issuer's
outstanding securities held by non-affiliates) of $25,000,000 or more. We are
deemed to be a "small business issuer."
Cost of Environmental Compliance
We do not believe that the production and use of our products represents
any significant environmental impact or risk since its products are constructed
of readily available commercial components.
Sources and Availability of Raw Materials
We currently outsource our manufacturing of hardware instrumentation to a
private company, Jewell Instruments, located approximately one mile from our
facilities in Manchester, New Hampshire. The Company has qualified an additional
manufacturer, EPE Corporation of Manchester, New Hampshire, but is not currently
using its services. Camera components, lenses and associated circuit boards are
available from at least two suppliers and we believe this will result in no
significant risk of supply interruption. Current principal suppliers include:
Pixelink of Ottawa, Canada; Sunex Inc. of Carlsbad, CA; Optical Devices/Miyakawa
Corp. of Tokyo, Japan; and Abbyy Software House of Fremont, CA.
Research and Development
Costs incurred prior to technological feasibility of our technology
products are expensed as research and development costs. From inception to June
30, 2005 the Company and its subsidiary have incurred approximately $5.8 million
in research and development costs. We have not capitalized any research and
development costs to date.
Employees
At June 30, 2005, we employed 14 full-time employees.
Risk Factors
Our business is subject to many risk factors; including the following
(references to "our," "we" and words of similar meaning in these Risk Factors
refer to the Company and to AssureTec Systems):
-14-
From our inception, we have recognized revenue of approximately $1 million
and have had significant losses to date and we might not be able to achieve
meaningful revenues or earnings in the future. AssureTec Systems has been
operational since October of 2001 and has achieved revenues well short of those
necessary to allow the Company to break even. The consolidated development stage
loss from inception is in excess of $12 million.
We have limited assets, working capital and negative shareholders' equity,
and we might not be able to continue in operation without the infusion of
additional capital. We have very limited assets; negative working capital and
limited financial resources. We continue in business by raising capital from
investors and soliciting advances from affiliated parties. We cannot be certain
that such capital and advances will be available to the Company when we need
them and under terms favorable to the Company. Our financial condition may not
improve.
Our independent auditors' report indicates a substantial doubt about our
ability to continue as a going concern which means that an investment in our
shares is extremely risky. Our auditors' report (see page F-1) indicates that
there is substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. If our business fails, the value of any capitalized
items would be adjusted to reflect a distressed market value. We currently have
no cash reserves and rely on cash from capital raised from investors. There is
no assurance these funds will continue to be available, however, we have
operated in this manner since our inception. Now that we have begun to ship
product, it is more likely outside investment capital can be found, but there
can be no assurance that outside financing will be available to us. In any
event, we cannot continue without continuing additional capital from affiliates
or outside investment capital.
We expect to continue to incur losses at least through fiscal year end June
2006 and we may not ever operate profitably. We have incurred losses since
inception through June 30, 2005 of approximately $12 million. During that
period, the Company has generated just over $1 million in revenues. We expect,
but cannot be sure, that our revenues will increase during the next several
fiscal years. Unless revenues in excess of $2 million annually can be generated,
we will continue to run a deficit. There is no assurance that we will reach
these annual revenues or can we be assured that we can operate profitably.
Because we need to raise additional funds and these funds might not be
available to us when we need them, we might need to change our business plan,
sell or merge our business, or face bankruptcy. From its inception in October
2001 through June 30, 2005, we have raised a total of $2.9 million from
unaffiliated investors. Further, as of this date, affiliates of Dr. Reeves have
invested $958,000 in equity of the Company and have advanced the Company an
additional $557,374. AssureTec Systems' employees have voluntarily agreed to
defer $3.5 million in unpaid salaries and related compensation expenses, of
which $2.2 million was converted in December 2004, into 769,000 options to
purchase a like number of shares of Common Stock in the Company. Without this
invested capital, these advances and employee deferrals, we could not have
-15-
continued in business. See "Certain Relationships And Related Transactions"
beginning at page 43. We will require additional capital to provide tooling for
manufacturing certain hardware products and will need to spend money for travel
and collateral materials in order to develop cash flow. Additional capital might
not be available to us on favorable terms when required, or at all. In addition,
our issuance of equity or equity-related securities will dilute the ownership
interest of existing stockholders and our issuance of debt securities could
increase the risk that we may not survive.
We cannot be certain that our products will continue to operate as planned.
Currently we have produced approximately 265 hardware units and multiple
releases of development software, which have been released to about a dozen
integrators and smaller developers in the U.S. and in Europe. We have delivered
60 units of the i-DentifyTM reader authenticator to a reseller in Chile and
delivered 90 units to a reseller as part of a pilot for the Transportation
Security Administration, both of whom reported that both hardware and software
operated as planned. Notwithstanding the foregoing, we have too few of our
products in service to allow us to be certain that our products will operate as
planned. If our products do not meet customers' needs and expectations, we will
lose customers and our business could fail.
Our chief executive officer, who is also our sole director (10), has
majority control over our common stock and is a major creditor, which will allow
him to have significant influence over our affairs. After consummation of the
reverse stock split by Holdings and the Systems Exchange, R.T. Robertson
Consultants, Inc. ("RTRC') and Robertson Financial Advisors, LLC, ("Advisors")
each controlled by Dr. Reeves, our CEO, owns a combined 958 shares of AssureTec
Holdings' Series A-1 Preferred Stock. (The "Holdings Preferred"). Each share of
the Holdings Preferred, which is described in greater detail in "Description of
Securities" beginning on page 45, is convertible into 322.58 shares of our
common stock and, as a result, as of June 30, 2005 these two entities
beneficially owned approximately 309,032 shares, or approximately 16.2% of our
common stock. In addition, (i) the Holdings Preferred is entitled to vote on an
"as converted" basis on all matters in which the common stock is entitled to
vote, and (ii) the holders of our Preferred Stock are entitled to elect three of
up to seven directors of AssureTec Holdings. RTRC is 90% owned by Dr. Reeves'
wife, Dr. Reeves is Advisors' Managing Director and controlling member and,
therefore, Dr. Reeves is deemed to beneficially own the shares of stock owned by
RTRC and Advisors. Taking into account the shares owned by Dr. Reeves directly,
along with the shares owned by RTRC and Advisors, Dr. Reeves beneficially owns
511,365 shares, or approximately 26.8% of our common stock. As a result, Dr.
Reeves can exercise substantial control of the affairs of AssureTec Holdings.
Dr. Reeves and his affiliates have also made advances to AssureTec Systems
and, therefore, his interest as a creditor may be different from the interests
of the other stockholders. For example, Dr. Reeves may desire to cause us to use
our funds to repay these advances under terms that may cause us to divert funds
away from operations at critical times, or that may cause us to fail. Dr. Reeves
-------------------
10 As of the date of this Amended Form 10SB, Dr. Reeves is the Company's sole
director.
-16-
could use his existing control and his position as creditor to acquire more of
our shares which would give him even more control. Any such actions by Dr.
Reeves would not require shareholder approval. As of June 30, 2005 the Company
owed Dr. Reeves' affiliates approximately $557,374 exclusive of $126,972 in
unpaid interest on advances.
We might not succeed in establishing our technologies in the marketplace,
which would adversely affect customer acceptance and our revenues. The market
for document automation and authentication products is new since September 11,
2001. Although we believe our products and technologies will be integrated into
new U.S. exit/entry border technologies and other document automation and
authentication technologies in the U.S. and around the world, this is a new,
untested market. We cannot offer assurances that we will have the capital and
technological advantage to compete with larger and better financed companies in
this developing market nor can we offer assurances that the market for automated
identity document authentication will ever develop.
We must enter into strategic relationships with integrators of our
technology, and if we fail to develop, maintain or enhance these relationships,
we might not be able to attract and retain customers, generate adequate market
exposure, build our AssureTec Systems brand, or enhance our sales and marketing
capabilities. We believe that our ability to attract customers, generate
interest in our hardware and software products, facilitate broad market
acceptance of our services and of the AssureTec Systems brand, and to enhance
our sales and marketing capabilities depends on our ability to develop and
maintain strategic relationships with related product integrators that can
deliver product solutions to customers in diverse product areas. If we are
unsuccessful in developing or maintaining these relationships, or if these
relationships do not assist us in attracting or retaining customers, it will be
difficult to grow our business. At the present time, we rely on these
integrators to adapt our software development kit to specific applications in
border control applications facilities access control systems, and public
transportation solutions.
The success of our business depends on selling our products and services to
a large number of government and commercial integrators and we have no current
relationships or arrangements with these integrators. We believe that our
reliance on unaffiliated companies to integrate our products into products
developed by these respective companies for specific market applications as our
primary marketing strategy will enable us to develop a customer base more
quickly and cost effectively than the employment of traditional marketing
methods involving sizable development, a sales staff, and advertising to sell
products directly to end users. There can be no assurance that this belief or
strategy is correct. As a new company with new technology applications, we lack
historic recognition in the market. Our success depends, in large part, on
attracting a large number of application integrators that advertise in the
traditional media and that have existing end user relationships and product
support. Our success is also dependent, in large part, upon ensuring that these
customers remain loyal long-term customers to the integrators, resulting in a
continuing flow of our product into theirs. Furthermore, we may be required to
-17-
incur higher and more sustained advertising and promotional expenditures than we
currently anticipate in order to create direct market demand for our products.
As a result, we might not be able to achieve or sustain profitability.
Competition from traditional providers of border passport readers could
result in price reductions and decreased demand for our automated document
authenticator technology that could cause our business to fail. The market for
document readers is competitive. Although we believe our shorter processing
speed and ability to read and automatically authenticate identification
documents will provide additional value to our potential target market,
traditional and established document reader companies may lower their prices to
compete with us. Competition is expected to intensify in the future, which also
could result in price reductions, fewer customer orders and reduced gross
margins. We currently compete with, or may in the future compete with, a variety
of companies located in the United States, Canada and Europe that provide a part
of what our products provide. Many of these companies are established and have
greater financial, technical, marketing and other resources than we do.
Additionally, many of these organizations have proven operating histories, which
we lack. Although we expect to compete on the basis of the quality and
uniqueness of our product and services and, to a lesser extent, on the basis of
price, this strategy may not be successful.
We might not be able to adequately protect or enforce our intellectual
property rights due to our lack of funds and if we failed to protect our rights,
we could lose market recognition, which would reduce our sales. Our intellectual
property includes one patent and four patent applications covering the process
of identifying documents and validating the existence or absence of securities
features to determine a document's validity. Any encroachment upon our
proprietary information, the unauthorized use of our trademark, the use of a
similar name by a competing company, or a lawsuit initiated against us for our
infringement upon another company's proprietary information or improper use of
existing trademarks could affect our ability to create brand name recognition,
cause customer confusion, and/or have a detrimental effect on our business.
Litigation or proceedings before the U.S. Patent and Trademark Office or the
European Patent Office might be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets and domain name, and
to determine the validity and scope of the proprietary rights of others. Any
litigation or adverse proceeding could result in substantial costs and diversion
of resources and could seriously harm our business and operating results. If and
when we develop markets in Europe and Asia and other places internationally, the
laws of many countries do not protect our proprietary rights to as great an
extent as the laws of the United States.
It is possible that third parties might claim infringement by us with
respect to past, current or future technologies, although we do not expect any
such claims. We expect that participants in our markets will increasingly be
subject to infringement claims as the number of services and competitors in our
industry segment grows. Any claim, whether meritorious or not, could be
time-consuming, result in costly litigation, and could cause service upgrade
delays or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements might not be available on terms acceptable to us
or at all.
-18-
Our systems and operations, and those of our customers, are vulnerable to
natural disasters and other unexpected problems, which could reduce customer
satisfaction and reduce our sales. Substantially all of our computer and
hardware and our systems infrastructure are housed at our facility in
Manchester, New Hampshire. Our systems and operations are vulnerable to damage
or interruption from fire, flood, power loss, telecommunications failure and
similar events. In addition, our servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions that could lead to
interruptions, delays, loss of data or the inability to sell and support our
network of software products and customer support. Currently, we do not have
fully redundant systems or a formal disaster recovery plan and do not carry
business interruption insurance to compensate for losses that could occur. Our
customers also face these risks. We depend on the efficient operation of
Internet connections from customers to our systems. These connections, in turn,
depend on the efficient operation of web browsers, Internet service providers
and Internet backbone service providers, all of which have had periodic
operational problems or outages. Any system delays or failure or loss of data,
whatever the cause, could reduce customer satisfaction with our applications and
services together with the number of visits to our website and also could harm
our sales of ID document services and data base libraries. A significant barrier
to online communications is the secure transmission of confidential information
over public networks, and our failure to prevent security breaches could harm
our business. The service providers rely on encryption and authentication
technology to effect secure transmission of confidential information. Advances
in computer capabilities, new discoveries in the field of cryptography, or other
developments might result in a compromise or breach of the technology used by
the service providers to protect customer data. Any compromise of their security
could harm our reputation and expose us to a risk of loss or to litigation and
possible liability and, therefore, result in harm to our business. In addition,
a person who is able to circumvent security measures could misappropriate
proprietary information or cause interruptions in our operations. To date, we
have had no security breaches.
The loss of the services of key employees could have a negative impact on
our business or cause it to fail. At June 30, 2005, the Company had 14
employees, several of whom have not been paid their full compensation for many
months. Any one or all employees could decide to leave us before we can assure
the employees' long-term services, which may not happen. If we lose the services
of these key employees who have spent many months developing our products and
technology, our business could be harmed seriously. In addition, we may not be
able to attract new, skilled employees.
If the market for automated document authentication fails to gain
widespread acceptance, our business could fail. The market for ID document
authentication is in its infancy. If this market does not gain widespread
acceptance, our business could fail. Our success will depend on our ability to
engage both end users and product integrators, who have established existing
customer bases in our targeted markets of borders, travel and transportation and
facilities access control. In addition, a large proportion of our early
customers might begin using our products because they are new and different
rather than because they believe our products represent the best long-term
solution. These early customers may use our products only once or twice and then
return to more traditional solutions.
-19-
We may not be able to respond to rapid technological changes to serve our
customers and meet their expectations and we may lose customers as a result. As
the document authentication and automation industry evolves, we will need to
license leading technologies useful in our business, enhance our existing
services, develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective customers, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. We might not be able to successfully implement
new technologies, proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards. If we are unable to do so,
it could adversely impact our ability to build the AssureTec Systems brand and
to attract and retain customers.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read together with our financial statements and related
notes included elsewhere in this Amendment 1 to Form 10-SB. This Amendment 1 to
Form 10-SB, including the following discussion, contains trend analysis and
other forward-looking statements within the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Any statements in this
Amendment 1 to Report on Form 10-SB that are not statements of historical facts
are forward-looking statements. These forward-looking statements are based on a
number of assumptions and involve risks and uncertainties. Actual results may
differ materially from those set forth in such forward-looking statements as a
result of factors set forth elsewhere in this Amendment 1 to Form 10-SB,
including under "Risk Factors."
Overview
We develop integrated identity document management applications for use in
government and commercial security applications. Our proprietary document
management platform automatically reads, records and authenticates
identification documents, such as passports, visas or driver's licenses, through
our proprietary database software thereby reducing the risk of human error in
detecting falsified or tampered forms of identification. We are considered to be
a development stage enterprise, as we have not generated significant revenues
since our inception. We are subject to a number of risks similar to those of
other companies in an early stage of development. Principal among these risks
are dependencies on key individuals, competition from other substitute products
and larger companies, the successful development and marketing of our products
and the need to obtain adequate financing necessary to fund our future
operations.
-20-
Our historical results of operations have been prepared using the
historical accounting records of AssureTec Holdings and our wholly owned
subsidiary AssureTec Systems. Although our ownership of AssureTec Systems was
less than 50% prior to March 31, 2004 (the date of the Systems Exchange) we
consolidated the results of these two entities because the two companies shared
common management and control. The operations of AssureTec Holdings are limited
and consist primarily of certain management costs, such as compensation and
third party management and accounting services. Historical references to our
operations primarily consist of those transactions executed by AssureTec Systems
in the development of our integrated identity document management applications.
Our historical results of operations and financial condition do not include
any adjustments relating to the recoverability of assets or the classification
of liabilities that might be necessary should we be unable to continue as a
going concern. Our independent auditors' report for the fiscal year ended June
30, 2003 indicates that there is substantial doubt about our ability to continue
as a going concern.
Plan of Operation
Since our inception on October 2, 2001, our operations have been primarily
funded through:
(i) cash payments made on our behalf by RTRC and Advisors, corporations
owned and controlled by our chief executive officer and his family,
(ii) the voluntary deferral of employee salaries and wages and consultant
fees and
(iii) the raising of $2,878,000 from unaffiliated investors as of June 30,
2005.
Currently, without further salary deferrals and stock for services, our
cash expenses, on an annualized basis, are expected to run at an annual level of
$2.5 million. We believe that we will require at least approximately $3,000,000
to fund our operating plan through fiscal year 2006.
We currently have limited cash and working capital. Our plan of operations
is highly dependent on our ability to raise significant additional capital.
Without this capital, it is unlikely we will be able to execute our operating
plan or continue as a going concern. We intend to attempt to raise this capital
from individual investors and other private equity sources, and we also may seek
funding from industrial partners. At the present time, we have no commitments
from any sources.
We intend to use the proceeds of any financing transactions primarily to
market our existing technology products and enhance our sales and marketing
capabilities. We believe our success, if any, in these endeavors will be highly
determinative of our ability to become profitable. As part of our strategy, we
will continue to attempt to attract and develop strategic partnerships with
related security product integrators. In September 2003, we initiated the sale
-21-
of our technology products through a strategic partner to the government of
Chile. In late 2004 and early 2005 we delivered units to our reseller in the
U.S. who won the pilot for the Transportation Worker Identity Credential
program. We recently announced a development relationship with Digimarc
Corporation for applications related to the recently passed federal "Real ID
Act" which requires the states to issue more secure drivers' licenses. We
believe that strategic partnerships like these will allow us to better
distribute our technology in the United States and worldwide.
On September 1, 2005, we initiated a private placement to accredited
investors of debentures with warrants to purchase common stock. These debentures
have a six month term and bear interest at 12% annually and are to be repaid at
the rate of one dollar of debenture for each two dollars raised in a subsequent
offering. For each $3.00 of debentures purchased, Holdings issued one warrant to
purchase one share of Holdings common stock at $6.00 per share for a period of
one year from the date of investment or upon an initial public offering by
Holdings, whichever occurs earlier. This private offering raised gross proceeds
of $1.125 million and net proceeds of approximately $1.035 million and in
October 2005, the Company issued warrants to acquire 375,667 shares of Common
Stock.
On September 15, 2005, we commenced a private offering to accredited
investors of up to 1,250,000 shares of Holdings common stock. Pursuant to this
private offering, the Company is offering units for gross proceeds of $12.00 per
unit. Each unit is comprised of two shares of common stock at $6.00 per share
with one warrant to acquire one share of common stock at $6.00 per share, for
each two shares of common stock purchased. The warrants issued in this offering
are exercisable for a period of one year from the date of investment or upon an
initial public offering by Holdings, whichever occurs earlier. As of October 31,
2005, a total of 333,333 shares have been sold, and 166,667 warrants have been
granted, pursuant to this offering raising gross proceeds of $2.0 million, of
which $1.125 million was applied to retire the September 1, 2005 debentures.
We will use the balance of new proceeds from these offerings, if any, after
retiring the debenture, primarily to strengthen our sales and marketing efforts
and to better position us for another private placement or a public offering. We
believe that this additional outside financing will be available to us; however,
there can be no assurance that we will obtain this additional financing in an
amount sufficient to meet our future needs.
We plan to continue our development and enhancement of our technology
products during the next twelve months. If we are successful in obtaining
additional financing, we will need to hire additional employees, primarily in
the areas of marketing, sales, finance, administration, engineering and quality
assurance. This will require us to purchase additional computer equipment;
however, any such purchases are not expected to be significant.
-22
Critical Accounting Policies
Our accounting policies are fully described in Note 2 to our consolidated
financial statements. The following describes the application of accounting
principles that have significant impact on our consolidated financial
statements:
Going Concern Assumption - The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
assets or the amounts and classification of liabilities that might be necessary
should we be unable to continue as a going concern. If the consolidated
financial statements were prepared on liquidation basis, the carrying value of
our assets and liabilities would be adjusted to net realizable amounts. In
addition, the classification of the assets and liabilities would be adjusted to
reflect the liquidation basis of accounting.
Deferred Compensation - Our employees and management have been voluntarily
deferring a portion of their earned compensation since our inception. At
December 2004 the employees converted $2.2 Million of their deferred
compensation owed as of June 30, 2004 into stock options to acquire common stock
of the Company. This $2.2 million of deferred compensation was converted into
approximately 769,000 fully vested options exercisable at a price of $0.50 for a
period of 7 years. We have expensed these obligations and the corresponding
employment taxes associated with these deferred wages and salaries.
Revenue Recognition - Revenue is recognized upon shipment to the customer
(which constitutes delivery), provided that persuasive evidence of an
arrangement exists, the fee is fixed or determinable, and collection is
reasonably assured. To the extent that one or more of these conditions are not
met, which has occurred in the past, revenue is deferred until such time as all
four criteria are met. Revenue from sales to integrators, value-added resellers
and distributors is recognized on a "sell-through" basis, that is, when these
parties report to us that resale of the product to the ultimate end customer has
occurred.
In general, we require an upfront deposit for significant customer
purchases. If we receive a payment from a customer prior to meeting all of the
revenue recognition criteria, the payment is recorded as deferred revenue. Our
current arrangements with third party integrators, value-added resellers and
distributors do not provide for any rights of return, price-protection or other
contingencies. Our general credit terms require complete payment within 30 days
of shipment.
We record a provision for estimated sales returns and allowances on product
sales in the same period as the related revenue is recorded. These estimates are
based on known and estimated factors.
To date, we have not established vendor specific objective evidence
("VSOE") of fair value for our software, products and services. For sales where
maintenance is the only undelivered element, we recognize the total sale ratably
over the term of the embedded maintenance period. We believe that we will
-23-
establish VSOE of fair value for maintenance; however, the exact timing is
uncertain. Once VSOE of fair value for maintenance and other services is
established, we will utilize the residual method of accounting as permitted by
Statement of Position 98-9, "Modification of SOP 97-2, `Software Revenue
Recognition,' With Respect to Certain Transactions," and defer the VSOE of
maintenance and recognize the residual amount of the total sale as software and
product revenue in the period in which the arrangement exists, the software and
products are delivered and the fee is collectible. Maintenance revenue will then
be recognized ratably over the maintenance period.
Deferred Income Taxes -We account for income taxes and deferred tax assets
and liabilities in accordance with SFAS No. 109, "Accounting for Income Taxes."
Because we project future operating losses in the near term, we have provided a
full valuation allowance against the deferred tax assets created by these
losses.
Stock-based Compensation - As part of our compensation programs offered to
our employees, we grant stock options. We grant stock options to employees based
on their fair value at the grant date. As allowed under SFAS No. 123,
"Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," we have adopted the
disclosure-only requirements of these accounting standards. Accordingly, we do
not recognize stock-based compensation expense for stock options granted to
employees at their fair value. We record stock-based compensation when we issue
common stock in lieu of cash compensation for services rendered to us or if we
issue options to purchase common stock to non-employees. Stock-based
compensation is recorded based on the fair value of the services received. See
Notes 2 and 8 to our consolidated financial statements for the impact on
earnings had we fully adopted SFAS 123 and 148.
Off-Balance Sheet Arrangements - With the exception of our facility lease,
we do not have off-balance sheet arrangements, financings or other relationships
with unconsolidated entities known as "special purpose entities."
Results of Operations - Three Months Ended September 30, 2003 and 2002
Net revenues for the three months ended September 30, 2003 and 2002 were
$7,500 and $0, respectively. The revenues of $7,500 in the quarter ended
September 30, 2003 resulted from the sale and shipment of hardware and software
to a potential distributor. We had no sales in 2002.
Cost of revenues for the three months ended September 30, 2003 and 2002 was
$4,300 and $0, respectively. This cost represented the cost of the hardware we
shipped in connection with our net sales and related third-party software.
Selling, general and administrative expenses for the three months ended
September 30, 2003 increased $155,813, or approximately 66%, to $392,198 from
$236,385 in the comparable period in 2002. This increase was due primarily to
-24-
increased spending in the areas of selling expenses and sales consultants as we
began marketing and selling our products in fiscal 2004. The increase was also
attributable to an increase in personnel in selling, general and administrative
capacities.
Engineering, research and development expenses for the three month period
ended September 30, 2003 increased $146,866 or approximately 97% to $297,657
from $150,791 in the comparable period in 2002. The increase of engineering,
research and development expense consisted primarily of additional staffing
salaries and related personnel costs.
Interest expense increased $26,400 for the three months ended September 30,
2003 compared to $0 for the three months ended September 30, 2002. This increase
was primarily attributable to the accrual of interest on related party
obligations due to RTRC, and interest on deferred employee compensation. Imputed
interest rates vary from 3% to 5%.
For the three months ended September 30, 2003 and 2002 net loss was
$735,555, or $4.20 per share (basic and diluted), and $409,676, or $2.34 per
share (basic and diluted), respectively. The increase in net loss of $325,879
was primarily attributed to increased staffing and related costs associated with
the increase of personnel during the Company's development stage.
Years Ended June 30, 2003 and 2002
In 2003, we recorded $9,747 in the initial sale of our technology products
to two unrelated parties. Cost of revenues of $6,557 was recorded in connection
with the company's initial sales and represented the cost of the hardware,
software and other related costs. We had no sales in 2002.
Selling, general and administrative expenses consist primarily of salaries
and wages of executive management, finance, marketing, sales and administrative
personnel, office and occupancy costs, legal, accounting and other professional
services. Selling, general and administrative expenses increased approximately
182% or $692,647 in 2003 to $1,072,384 from $379,737 in 2002. The increase in
selling, general and administrative expenses was primarily attributable to an
increase in personnel costs and associated overhead as additional employees and
consultants were hired to expand our operations. In addition, the results of
2002 only include nine months of operations since we were formed on October 2,
2001.
Engineering, research and development expenses consist primarily of
salaries and wages of engineers, quality control technicians and external
development consultants. Engineering, research and development expenses
increased approximately 285%, or $1,066,342, in 2003 to $1,440,027 from $373,685
in 2002. The majority of our operations and costs have been incurred in the
development of our technology products. The increase in engineering and research
and development expenses was attributable to the necessary costs of developing
-25-
our integrated identity document management applications. In addition, the
results of 2002 only include nine months of operations as we were not formed
until October 2, 2001.
We record stock-based compensation when we issue common stock or options to
purchase common stock to non-employees or in lieu of cash compensation for
services rendered. In 2002, the Company's subsidiary, AssureTec Systems, issued
215,638 shares of its common stock to unrelated third parties in lieu of cash
compensation. We recorded $123,744 in connection with the issuance of these
shares of common stock based on the fair value of the services we received. In
March 2004, the shares of the subsidiary's stock were exchanged for shares of
the Company. In 2002, the Company's subsidiary, AssureTec Systems issued options
to purchase 100,000 (6,452 post split) shares of its common stock to a
non-employee at $0.001 per s