| UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 |
| OR |
| [ ] | TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ________________ |
Commission File No.: 0-22693
| InfoTech USA, Inc. |
| (formerly SysComm International Corporation) |
| (Exact name of registrant as specified in its charter) |
| Delaware | 11-2889809 |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 7 Kingsbridge Road, Fairfield, New Jersey 07004 |
| (Address of principal executive offices) (Zip code) |
Registrant's telephone number, including area code: (973) 227-8772
Indicate by check mark (X) 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 [ ]
Indicate by check mark (X) whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares outstanding of each class of our common stock as of August 12, 2003 is as follows:
| Class of Common Stock | Number of Shares |
| Common Stock, par value $.01 per share | 4,895,998 |
INFOTECH USA, INC.
(FORMERLY SYSCOMM
INTERNATIONAL CORPORATION)
TABLE OF CONTENTS
| Item | Description | Page |
| PART I – FINANCIAL INFORMATION |
| 1. | Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets - June 30, 2003 (unaudited) and September 30, 2002 |
3 |
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| Consolidated Condensed Statements of Operations - Three and Nine Months Ended June 30, 2003 and 2002 (unaudited) |
4 |
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| Consolidated Condensed Statement of Stockholders' Equity - Nine Months Ended June 30, 2003 (unaudited) |
5 |
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| Consolidated Condensed Statements of Cash Flows - Nine Months Ended June 30, 2003 and 2002 (unaudited) |
6 |
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| Notes to Consolidated Condensed Financial Statements (unaudited) | 7 | |||
| 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
9 |
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| 3. | Quantitative and Qualitative Disclosures About Market Risk | 13 | ||
| 4. | Controls and Procedures | 13 |
| PART II – OTHER INFORMATION |
| 4. | Submission of Matters to a Vote of Security Holders | 14 | ||
| |
6. |
Exhibits and Reports on Form 8-K |
14 |
|
| SIGNATURE | 15 | |||
| EXHIBITS | 18 | |||
2
PART
I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
| INFOTECH USA, INC. AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED BALANCE SHEETS |
| (In thousands) |
| Assets | |||||
| June 30, 2003 | September 30, 2002 | ||||
| (Unaudited) | |||||
| Current Assets | |||||
| Cash and cash equivalents | $ 1,143 | $ 3,398 | |||
| Accounts receivable (net of allowance for doubtful accounts of | 3,170 | 1,913 | |||
| $124 and $208) | |||||
| Inventories | 26 | 91 | |||
| Note receivable - Parent Company | 1,000 | -- | |||
| Deferred tax assets | 13 | 42 | |||
| Other current assets | 233 | 135 | |||
| Total Current Assets | 5,585 | 5,579 | |||
| Property, equipment and improvements, net | 374 | 524 | |||
| Goodwill, net | 2,154 | 2,154 | |||
| Other assets | 1,910 | 1,500 | |||
| Total Assets | $ 10,023 | $ 9,757 | |||
| Liabilities and Stockholders' Equity | |||||
| Current Liabilities | |||||
| Current maturities of capital lease obligation | $ 21 | $ 21 | |||
| Amounts due to Parent Company | 93 | 127 | |||
| Accounts payable | 583 | 190 | |||
| Accrued expenses and other liabilities | 1,689 | 1,160 | |||
| Total Current Liabilities | 2,386 | 1,498 | |||
| Capital lease obligation | 5 | 21 | |||
| Total Liabilities | 2,391 | 1,519 | |||
| Commitments and Contingencies | |||||
| Stockholders' Equity | |||||
| Preferred shares: | |||||
| Authorized 5,000 shares, no par value; none issued | -- | -- | |||
| Common shares: | |||||
| Authorized 80,000 shares of $.01 par value; 5,757 shares issued; | 58 | 58 | |||
| 4,896 shares outstanding | |||||
| Additional paid-in capital | 6,653 | 6,653 | |||
| Retained earnings | 1,839 | 2,445 | |||
| Treasury stock (861 shares, carried at cost) | (918 | ) | (918 | ) | |
| Total Stockholders' Equity | 7,632 | 8,238 | |||
| Total Liabilities and Stockholders' Equity | $ 10,023 | $ 9,757 | |||
| See the accompanying notes to consolidated condensed financial statements. | 3 |
| INFOTECH USA, INC. AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS |
| (In thousands, except share and per share data) (Unaudited) |
| For the Three Months Ended June 30, |
For the Nine Months Ended June 30, |
||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||
| Revenues: | |||||||||
| Product revenue | $ 3,333 | $ 4,127 | $ 7,653 | $ 18,416 | |||||
| Service revenue | 637 | 668 | 1,731 | 2,225 | |||||
| Total revenues | 3,970 | 4,795 | 9,384 | 20,641 | |||||
| Cost of sales: | |||||||||
| Cost of products sold | 3,004 | 3,412 | 6,619 | 16,206 | |||||
| Cost of services sold | 410 | 419 | 1,077 | 1,193 | |||||
| Total cost of products and services sold | 3,414 | 3,831 | 7,696 | 17,399 | |||||
| Gross profit | 556 | 964 | 1,688 | 3,242 | |||||
| Selling, general and administrative expenses | 658 | 917 | 2,488 | 3,328 | |||||
| Depreciation and amortization | 55 | 68 | 168 | 206 | |||||
| Loss from operations | (157 | ) | (21 | ) | (968 | ) | (292 | ) | |
| Other expense (income) | 9 | -- | 21 | (1 | ) | ||||
| Interest (income) expense | (3 | ) | 45 | (5 | ) | 205 | |||
| Loss before income tax (benefit) expense | (163 | ) | (66 | ) | (984 | ) | (496 | ) | |
| Income tax (benefit) expense | (65 | ) | 6 | (378 | ) | (165 | ) | ||
| Net loss applicable to common stockholders | $ (98 | ) | $ (72 | ) | $ (606 | ) | $ (331 | ) | |
| Net loss per common share – basic | $ (0.02 | ) | $ (0.01 | ) | $ (0.12 | ) | $ (0.07 | ) | |
| Weighted average number of common | |||||||||
| shares outstanding – basic | 4,895,998 | 4,895,998 | 4,895,998 | 4,895,998 | |||||
| See the accompanying notes to consolidated condensed financial statements. | 4 |
| INFOTECH USA, INC. AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY For the Nine Month Period Ended June 30, 2003 |
| (In thousands, except share data) (Unaudited) |
| Preferred Stock | Common Stock | Additional Paid-In |
Retained | Treasury Stock | Total Stockholders' |
||||||||||||||
| Number | Amount | Number | Amount | Capital | Earnings | Number | Amount | Equity | |||||||||||
| |
|
|
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| Balance, October 1, 2002 | – | $ – | 5,757 | $ 58 | $ 6,653 | $ 2,445 | (861 | ) | $ (918 | ) | $ 8,238 | ||||||||
| Net loss | – | – | – | – | – | (606 | ) | – | – | (606 | ) | ||||||||
| Balance, June 30, 2003 | – | $ – | 5,757 | $ 58 | $ 6,653 | $ 1,839 | (861 | ) | $ (918 | ) | $ 7,632 | ||||||||
| See the accompanying notes to consolidated condensed financial statements. | 5 |
| INFOTECH USA, INC. AND SUBSIDIARIES |
| CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS |
| (In thousands) (Unaudited) |
| For the Nine Months Ended June 30, |
|||||
| 2003 | 2002 | ||||
| Cash flows from operating activities | |||||
| Net loss | $ (606 | ) | $ (331 | ) | |
| Adjustments to reconcile net loss to cash (used in) provided by operating activities | |||||
| Depreciation and amortization | 168 | 206 | |||
| Deferred income taxes | (378 | ) | (171 | ) | |
| Change in assets and liabilities: | |||||
| (Increase) decrease in accounts receivable | (1,257 | ) | 6,814 | ||
| Decrease in inventories | 65 | 42 | |||
| (Increase) decrease in other current assets | (116 | ) | 262 | ||
| (Increase) decrease in other assets | (3 | ) | 15 | ||
| Increase (decrease) in accounts payable and accrued expenses | 922 | (4,241 | ) | ||
| Net cash (used in) provided by operating activities | (1,205 | ) | 2,596 | ||
| Cash flows from investing activities | |||||
| Capital expenditures | (18 | ) | (38 | ) | |
| Payments received on notes receivable - other | 18 | 59 | |||
| Notes received for loan to Parent Company | (1,000 | ) | |||
| Proceeds from disposition of property and equipment | -- | 2,440 | |||
| Net cash (used in) provided by investing activities | (1,000 | ) | 2,461 | ||
| Cash flows from financing activities | |||||
| Payments on capital lease obligation and long term debt | (16 | ) | (999 | ) | |
| Net payments on Parent Company line of credit | (34 | ) | (492 | ) | |
| Net cash used in financing activities | (50 | ) | (1,491 | ) | |
| Net (decrease) increase in cash and cash equivalents | (2,255 | ) | 3,566 | ||
| Cash and cash equivalents - beginning of period | 3,398 | 1,811 | |||
| Cash and cash equivalents - end of period | $ 1,143 | $ 5,377 | |||
| See the accompanying notes to consolidated condensed financial statements. | 6 |
| INFOTECH USA, INC. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
|
(In thousands, except share and per share data) (Unaudited) |
In the opinion of management, the accompanying unaudited consolidated condensed financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of InfoTech USA, Inc. (formerly SysComm International Corporation) (the “Company”) and its wholly-owned subsidiaries, as of June 30, 2003, their results of operations for the three and nine months ended June 30, 2003 and 2002, their changes in stockholders’ equity for the nine months ended June 30, 2003 and their cash flows for the nine months ended June 30, 2003 and 2002. Information included in the consolidated condensed balance sheet as of September 30, 2002 has been derived from the audited consolidated balance sheet included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002 (the “10-K”) previously filed with the Securities and Exchange Commission (the “SEC”). Pursuant to the rules and regulations of the SEC, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these consolidated condensed financial statements unless significant changes have taken place since the end of the most recent fiscal year. Accordingly, these unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and the other information in the 10-K.
The consolidated results of operations for the three and nine months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year ending September 30, 2003.
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
| Inventories at June 30, 2003 and September 30, 2002 consist of: | ||||||
| June 30, 2003 |
September 30, 2002 |
|||||
| Finished goods | $ 65 | $ 169 | ||||
| Allowance for excess and obsolescence | (39) |
(78) |
||||
| $ 26 |
$ 91 |
|||||
As further explained in Note 1 to the Company’s audited financial statements included in the 10-K previously filed with the SEC, the Company presents basic net income (loss) per share and, if appropriate, diluted net income per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings per Share”.
Since the Company had net losses for the three and nine months ended June 30, 2003 and 2002, the assumed effects of the exercise of employee stock options for the purchase of 3,660 and 5,070 common shares at June 30, 2003 and 2002, respectively, and warrants for the purchase of 300 common shares at $0.5775 per share outstanding at June 30, 2003 would have been anti-dilutive.
The Company continues to measure compensation cost related to stock options issued to employees using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting For Stock Issued To Employees.” The Company has adopted the disclosure-only provisions of Statement of Financial
7
| INFOTECH USA, INC. AND SUBSIDIARIES |
| NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS |
| (In thousands, except share and per share data) (Unaudited) |
Accounting Standards No. 123 (“SFAS 123”), “Accounting For Stock-Based Compensation.” Accordingly, no earned or unearned compensation cost was recognized in the accompanying consolidated condensed financial statements for the stock options granted by the Company to its employees since all of those options have been granted at exercise prices that equaled or exceeded the market value at the date of grant. The Company's historical net loss and net loss per common share and pro forma net loss and net loss per common share assuming compensation cost had been determined in 2003 and 2002 based on the fair value at the grant date for all awards by the Company consistent with the provisions of SFAS 123 are set forth below:
| Three Months Ended June 30, |
Nine Months Ended June 30, |
|||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||
| Net loss - as reported | $(98 | ) | $(72 | ) | $(606 | ) | $(331 | ) | ||
| Deduct total stock-based employee compensation | ||||||||||
| expense determined under a fair value based | ||||||||||
| method for all awards, net of related tax effects | (23 | ) | (70 | ) | (68 | ) | (121 | ) | ||
| Net loss - pro forma | $(121 | ) | $(142 | ) | $(674 | ) | $(452 | ) | ||
| Net loss per share: | ||||||||||
| Basic - as reported | $(.02 | ) | $(.01 | ) | $(.12 | ) | $(.07 | ) | ||
| Basic - pro forma | $(.02 | ) | $(.03 | ) | $(.14 | ) | $(.09 | ) | ||
On June 27, 2003, the Company loaned $1.0 million to its majority stockholder, Applied Digital Solutions, Inc. (“Applied Digital”). Under the terms of the loan, interest, which accrues at an annual rate of 16%, is due and payable on a monthly basis beginning July 31, 2003. The principal amount of the loan and any unpaid interest is due on or before June 30, 2004. As collateral for the loan, Applied Digital pledged 750,000 shares of common stock of Digital Angel Corporation (“Digital Angel”), a majority-owned subsidiary of Applied Digital. As of June 27, 2003, the market value of the shares of stock of Digital Angel was approximately $2,137,500 based on the closing price of Digital Angel’s common stock.
8
This discussion should be read in conjunction with the accompanying consolidated condensed financial statements and related notes in Item 1 of this report as well as our Annual Report on Form 10-K for the year ended September 30, 2002. Certain statements made in this report may contain forward-looking statements. For a description of risks and uncertainties relating to such forward-looking statements, see the Forward-Looking Statements and Associated Risk section later in this Item.
On June 16, 2003, Scott Silverman resigned as a director. A search committee consisting of two directors is currently in the process of identifying candidates to fill the vacancies that currently exist on our Board of Directors.
On June 27, 2003, we loaned $1.0 million to our majority stockholder, Applied Digital Solutions, Inc. Under the terms of the loan, interest, which accrues at an annual rate of 16%, is due and payable by Applied Digital on a monthly basis beginning July 31, 2003. The loan will provide us with approximately $13,300 per month in interest income. The principal amount of the loan and any unpaid interest is due on or before June 30, 2004. As collateral for the loan, Applied Digital pledged 750,000 shares of common stock of Digital Angel Corporation, a majority-owned subsidiary of Applied Digital. As of June 27, 2003, the market value of the shares of stock of Digital Angel was approximately $2,137,500 based on the closing price of Digital Angel’s common stock, which is traded on the American Exchange under the symbol “DOC”. As of August 12, 2003, the market value of the shares of common stock of Digital Angel held by us as collateral under the loan was approximately $1,575,000.
BUSINESS DESCRIPTION
We are a Delaware corporation incorporated in 1997. Through our two wholly-owned subsidiaries, Information Technology Services, Inc. and InfoTech USA, Inc., we provide professional services in the area of systems integration, information technology procurement and logistics, and technology strategy in the New York City metropolitan area and in New Jersey. We are a full service provider of information technology solutions and products. We specialize in tailoring our approach to the individual customer needs of medium to large size entities. We provide information technology consulting, networking, procurement, deployment, integration, migration and security services and solutions. We also provide on-going system and network maintenance services. We are controlled by our 53% majority stockholder, Applied Digital.
We operate in a highly competitive industry, which in turn places constant pressures on maintaining gross profit margins. Many of our sales are high volume equipment sales, which produce lower than average gross profit margins, but are often accompanied by a service arrangement, which yields higher than average gross profit margins.
9
The following table sets forth, for the periods indicated, the percentage relationship to total revenue of certain items in our consolidated condensed statements of operations.
| Relationship to Revenue | |||||||||
| Three Months Ended June 30, |
Nine Months Ended June 30, |
||||||||
| 2003 % |
2002 % |
2003 % |
2002 % | ||||||
| Product revenue | 84 | .0 | 86 | .1 | 81 | .6 | 89 | .2 | |
| Service revenue | 16 | .0 | 13 | .9 | 18 | .4 | 10 | .8 | |
| | |||||||||
| Total revenues | 100 | .0 | 100 | .0 | 100 | .0 | 100 | .0 | |
| | |||||||||
| Cost of products sold | 75 | .7 | 71 | .2 | 70 | .5 | 78 | .5 | |
| Cost of services sold | 10 | .3 | 8 | .7 | 11 | .5 | 5 | .8 | |
| | |||||||||
| Total cost of products and services sold | 86 | .0 | 79 | .9 | 82 | .0 | 84 | .3 | |
| | |||||||||
| Gross profit | 14 | .0 | 20 | .1 | 18 | .0 | 15 | .7 | |
| Selling, general and administrative expenses | 16 | .6 | 19 | .1 | 26 | .5 | 16 | .1 | |
| Depreciation and amortization | 1 | .4 | 1 | .4 | 1 | .8 | 1 | .0 | |
| | |||||||||
| Loss from operations | (4 | .0) | (0 | .4) | (10 | .3) | (1 | .4) | |
| Other expense (income) | 0 | .2 | 0 | .0 | 0 | .2 | (0 | ||