QSGI INC. - FORM 10-Q - October 28, 2011

Attached files

file	filename
EX-31.1 - QSGI INC.	ex31-1.htm
EX-32.1 - QSGI INC.	ex32-1.htm

As filed with the Securities and Exchange Commission on October 28, 2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ________________

Commission File No.: 001-32620

QSGI INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation)

13-2599131

(I.R.S. Employer

Identification No.)

400 Royal Palm Way, Suite 302, Palm Beach, FL 33480

(Address of Principal Executive Offices)

(561) 629-5713

(Registrants' Telephone Number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o Accelerated filer o Non- accelerated filer o

Small Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of outstanding common shares, par value $.01, of the registrant as of October 26, 2011 was 221,172,716.

QSGI INC.

TABLE OF CONTENTS

Item	Description	Page

PART I – FINANCIAL INFORMATION

1.	Financial Statements
	Condensed Consolidated Balance Sheets – September 30, 2009 (unaudited) and December 31, 2008 (audited)		1
	Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)		3
	Condensed Consolidated Statement of Stockholders’ Equity – Nine Months Ended September 30, 2009 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2009 and 2008 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
3.	Quantitative and Qualitative Disclosures About Market Risk	14
4.	Controls and Procedures	15

PART II – OTHER INFORMATION

1.	Legal Proceedings	15
1A.	Risk Factors	16
2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
3.	Defaults Upon Senior Securities	16
4.	Submission of Matters to a Vote of Security Holders	16
5.	Other Information	16
6.	Exhibits	17

SIGNATURES		18

EXHIBITS		19

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

QSGI INC.

(Debtor-in-Posession)

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,		December 31,
	2009		2008
	(unaudited)		(audited)
Assets

Current Assets
Cash and Cash Equivalents	$	98,534	$	192,499
Prepaid expenses and other assets		229,210		–
Assets of Discontinued Operation - current		–		10,157,676
Total Current Assets		327,744		10,350,195
Assets of Discontinued Operation – long term		–		14,965,247

TOTAL ASSETS	$	327,744	$	25,315,442

Liabilities And Stockholders’ Deficit
Current Liabilities
Revolving line of credit	$	–	$	5,351,130
Notes Payable – Principal Stockholder		–		10,000,000
Accounts payable		–		2,313,640
Accrued expenses and other liabilities		–		1,160,172
Accrued payroll		–		164,311
Liabilities of Discontinued Operation – current		–		2,377,175
Liabilities not subject to compromise – current:
- Accrued expenses and other liabilities		93,593		–
Liabilities subject to compromise – current:
- Revolving line of credit		2,918,463		–
- Notes Payable – Principal Stockholder		10,000,000		–

Total Current Liabilities		13,012,056		21,366,428

Liabilities subject to compromise – Long term:
- Accounts payable		4,231,670		–
- Accrued expenses and other liabilities		1,538,398		–
- Accrued payroll		1,171,773		–
Deferred Revenue – Long term		–		19,000
Deferred Income Taxes		27,300		27,300
Total Liabilities		19,986,336		21,412,728

Redeemable Convertible Preferred Stock		4,271,472		4,257,910

Stockholders’ Deficit
Preferred shares: Authorized 5,000,000 shares in 2009
and 2008, $0.01 par value, none issued		–		–

See the accompanying notes to condensed consolidated financial statements.

Common shares: authorized 95,000,000 shares in 2009 and 2008, $0.01 par value; 48,797,716 shares issued and outstanding in 2009, of which 10,000,000 shares were contingent acquisition shares held in escrow; 48,547,716 shares issued and outstanding in 2008 of which 10,000,000 shares were contingent acquisition shares held in escrow		387,977			385,477
Additional paid-in capital		16,528,977			16,723,724
Accumulated Deficit		(40,841,879	)		(17,464,397	)
Total Stockholders’ Deficit		(23,924,925	)		(355,196	)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	327,744		$	25,315,442

QSGI INC.

(Debtor-in-Possession)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For The Three and Nine Months Ended September 30, 2009 and 2008

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008


Interest Expense, net		310,342			465,251			1,837,139			721,693

Loss Before Reorganization Items and Provision (Benefit) For Income Taxes		-310,342			-465,251			-1,837,139			-721,693
Reorganization Items:		-115,390			-			-115,390			-
Professional Fees		-115,390			-			-115,390			-
Loss Before Provision (Benefit) For Income Taxes and Discontinued Operations		-425,732			-465,251			-1,952,529			-721,693
Provision (Benefit) For Income Taxes		-			-3,737			1,000			31,030

Loss Before Discontinued Operations		-425,732			-461,514			-1,953,529			-752,723

Loss From Discontinued Operations		2,085,437			1,992,451			21,423,953			4,436,329

Net Loss		-2,511,169			-2,453,965			-23,377,482			-5,189,052

Preferred Stock Dividends		84,000			65,030			210,617			193,678

Accretion To Redemption Value of Preferred Stock		5,140			4,842			13,562			14,310

Loss Available to Common Stockholders	$	(2,600,309	)	$	(2,523,837	)	$	(23,601,661	)	$	(5,397,039	)

Loss Per Common Share – Basic & Diluted before Discontinued Operations	$	(0.01	)	$	(0.01	)	$	(0.06	)	$	(0.02	)
Loss Per Common Share – Basic & Diluted from Discontinued Operations	$	(0.06	)	$	(0.06	)	$	(0.55	)	$	(0.14	)
Loss Per Common Share – Basic & Diluted	$	(0.07	)	$	(0.07	)	$	(0.61	)	$	(0.16	)
Weighted Average Number Of Common Shares Outstanding –Basic and Diluted		38,797,716			36,506,955			38,797,716			33,292,242

See the accompanying notes to condensed consolidated financial statements.

QSGI INC.

(Debtor-in-Possession)

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

For The Nine Months Ended September 30, 2009

(Unaudited)

					Additional						Total
	Common Stock				Paid-in			Accumulated			Stockholders’
	Number		Amount		Capital			Deficit			Deficit

Balance (Deficit) - December 31, 2008		38,547,716	$	385,477	$	16,723,724		$	(17,464,397	)	$	(355,196	)

Stock Option Compensation		–		–		16,933			–			16,933

Stock issued for Financing		250,000		2,500		12,500						15,000

Preferred Stock Dividends		–		–		(210,617	)		–			(210,617	)

Accretion To Redemption Value Of Preferred Stock		–		–		(13,563	)		–			(13,563	)

Net Loss		–		–		–			(23,377,482	)		(23,377,482	)

Balance (Deficit) – September 30, 2009		38,797,716	$	387,977	$	16,528,977		$	(40,841,879	)	$	(23,924,925	)

See the accompanying notes to condensed consolidated financial statements.

QSGI INC.

(Debtor-in-Possession)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Nine Months Ended September 30, 2009 and 2008

(Unaudited)

	2009			2008
Cash Flows From Operating Activities
Loss before discontinued operations	$	(1,953,529	)	$	(752,723	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Changes in assets and liabilities:
Prepaid expenses and other assets		229,000			–
Accounts payable and other liabilities		3,284,718			1,651,545
Cash from operating activities – continuing operations		1,570,467			929,852
Cash from operating activities – discontinued operations		(1,425,790	)		(291,869	)
Net Cash Provided by (Used In) Operating Activities		134,399			637,983

Cash Provided by (Used In) Investing Activities
Cash from investing activities – continuing operations		–			–
Cash from investing activities – discontinued operations		2,440,534			(42,612	)
Net Cash Provided by (Used In) Investing Activities		2,440,534			(42,612	)

Cash Flows From Financing Activities
Payment for financing costs		(25,614	)		(25,614	)
Net amounts paid under revolving lines of credit, net of OID		(2,432,667	)		(68,592	)
Preferred stock dividends		(210,617	)		(193,678	)
Cash used in financing activities – continuing operations		(2,668,898	)		(287,884	)
Cash from financing activities – discontinued operations
Net Cash Used In Financing Activities		(2,668,898	)		(287,884	)

Net Increase (decrease) In Cash And Cash Equivalents		(93,965	)		307,487

Cash And Cash Equivalents – Beginning Of Period		192,499			127,723
Cash And Cash Equivalents – End of Period	$	98,534		$	435,210

See the accompanying notes to condensed consolidated financial statements.

QSGI INC.

(Debtor-in-Possession)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For The Nine Months Ended September 30, 2009 and 2008

(Unaudited)


	2009		2008

Supplemental disclosure of cash flow information
Income Taxes Paid	$	—	$	63,982
Interest Paid		417,984		526,738

Supplemental schedule of non-cash financing and investing activities
Stock issued for financing	$	—	$	733,750
Stock issued for acquisition				770,000
Warrants issued for acquisition				1,287,878
Note issued for acquisition				10,000,000
Accrued acquisition costs				940,559
Assets exchanged for debt forgivness		500,000

See the accompanying notes to condensed consolidated financial statements.

QSGI INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.	Basis of Presentation and Business Organization

The accompanying unaudited condensed consolidated financial statements of QSGI INC. (“QSGI” or the “Company”) been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X under the Securities Exchange Act of 1934. Accordingly they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations or cash flows have been made. Certain reclassifications have been made for consistent presentation.

The condensed consolidated statement of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2009. These statements should be read in conjunction with the financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

On July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009. These unaudited condensed consolidated financial statements have been prepared assuming that the Company would continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of the filing of the bankruptcy. The independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.

The Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations. This is because the Company received notification from the former owner of Contemporary Computer Services, Inc. (CCSI) that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner. The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable. The Company also ceased reporting the results of operations of the Data Security and Compliance and the Data Center Maintenance Services segment and is reporting them as discontinued operations. As part of the plan of bankruptcy, both segments assets were sold.

On September 15, 2009, an Asset Purchase agreement, by and between SMS Maintenance, LLC. (“Purchaser”) and QualTech Services Group, Inc. (“Seller”), a subsidiary of QSGI INC., whereby Seller agreed to sell to Purchaser and Purchaser agreed to purchase from Seller, the Purchased Assets, including, but not limited to, the Assumed Contracts, and Purchaser agreed to assume from Seller the Assumed Liabilities, all on the terms and conditions set forth in the Purchase Agreement. The Purchaser and Seller agreed that the Cash Purchase Price was equal to $2,450,000. Purchaser agreed to pay Seller an additional $20,000 to partially offset pre-closing payroll expenses of the business. The asset sale resulted in a gain of $1,400,000.

On September 24, 2009, the Bankruptcy Court entered an order pursuant to 11 U.S.C. section 105, 363, and 365 of the Bankruptcy Code (A) Approving the sale of substantially all of the assets of the DSC division of QSGI INC. free and clear of all liens, claims, encumbrances and interests; (B) Approving the assumption and assignment of executor contracts and unexpired leases; and (C) Granting related relief. The asset sale resulted in a loss of $2,140,000.

On April 14, 2010, QSGI INC, settled its dispute with Victory Park Management, LLC and Victory Park Capital Advisors, LLC (collectively “VPC”) and signed a Settlement Agreement and Mutual Release. VPC made claims against the Company including pre-petition overstatements of inventory valuation and post-petition interference with the sale process of the assets. Although the Company disputed all claims, the company (in conjunction with its insurer) settled with VPC after considering the total cost of litigation. Other than an obligation to pay $150,000 if the Company is ultimately reorganized, the settlement releases the Company from any and all claims VPC may have had against it. The settlement and all other documents relating to the claim are available under case number 09-23658-EPK that was filed with the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.

In June, 2010, a settlement was reached with the former owner of CCSI whereby the Company shall abandon one-hundred percent (100%) of the capital stock of CCSI, Inc. to the owner and the owner releases his rights in and to QSGI and shall retain an unsecured claim against QSGI in the amount of $10,159,000, which includes accrued interest of $159,000.

On January 31, 2011, the Board of Directors of QSGI, INC. unanimously approved the Third Amended Plan of Reorganization and Disclosure Statement (the “Plan”) to be filed in the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division. This was filed on February 1, 2011.

On February 2, 2011, the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division issued an order approving the Disclosure Statement, setting hearing on confirmation of Plan, setting hearing on fee applications, setting various deadlines, and describing Plan proponent’s obligations.

On March 21, 2011 the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division had a hearing to consider confirmation of the Debtors’ Third Amended Plan of Reorganization (D.E. # 384) under Chapter 11 of the Bankruptcy Code filed by QSGI, INC., QSGI-CCSI, INC. and QUALTECH SERVICES GROUP, INC., and dated February 1, 2011 and confirmed the Plan. On May 5, 2011, the Judge entered the order confirming the plan of reorganization.

Plan of Reorganization

The Plan provides for, among other things, a restructuring of pre-petition debt, as follows (i) distribution of $50,000 and issuance of 10,000,000 common shares in the reorganized debtor for the extinguishment of unsecured indebtedness; (ii) extinguishment of one $10,159,000 unsecured claim in consideration for the confirmation of a Plan of Reorganization; (iii) issuance of 425,000 common shares for the extinguishment of the redeemable convertible preferred stock; (iv) assumption of one $150,000 contingent secured claim bearing interest at 8% per annum and being paid over 8 installments

beginning 120 days after confirmation; (v) assumption of note for bankruptcy legal expenses in the amount of $61,673, bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after Plan confirmation; (vi) the right to issue 3,524,000 common shares in exchange for legal services related to the Plan of reorganization; (vii) issuance of 190,000,000 common shares in consideration for the merger of KruseCom; (viii) reservation of 10,000,000 shares to be issued by the reorganized debtor for working capital; (ix) reservation of 2,250,000 shares to be issued by the reorganized debtor to key third parties. All outstanding shares of the Company’s common stock will remain issued and outstanding at and after the Effective Date.

2.	Summary of Significant Accounting Policies

Principles of Consolidation

The financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Estimates

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of all dilutive potential common shares that were outstanding during the period.

For the three months ended September 30, 2009 and 2008, the Company excluded weighted average common share equivalents related to stock options of 763,503 and 941,571, respectively and weighted average common share equivalents related to redeemable preferred stock of 1,911,111 and 1,911,111, respectively because their effect would be anti-dilutive.

For the nine months ended September 30, 2009 and 2008, the Company excluded weighted average common share equivalents related to stock options of 821,199 and 960,267, respectively and weighted average common share equivalents related to redeemable preferred stock of 1,911,111 and 1,911,111, respectively because their effect would be anti-dilutive.

At September 30, 2009, there were also 13,500,000 contingent acquisition shares outstanding. Of this amount 3,500,000 were issued in July 2008 as part of the acquisition of Contemporary Computer Services, Inc. and 10,000,000 are being held in escrow to be released based on Contemporary Computer Services, Inc. achieving certain performance milestones or returned to treasury if such milestones are not reached.

Recently Adopted Accounting Pronouncements

FASB ASC 820-10 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this standard relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. This standard is effective for fiscal years beginning after November 15, 2007; however, it provides a one-year deferral of the effective date for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. The Company adopted this standard for financial assets and financial liabilities and nonfinancial assets and nonfinancial liabilities disclosed or recognized at fair value on a recurring basis (at least annually) as of January 1, 2008. The Company adopted the standard for nonfinancial assets and nonfinancial liabilities on January 1, 2009. The adoption of this standard in each period did not have a material impact on its financial statements.

FASB ASC 805 establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. This standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This standard was adopted by the Company beginning January 1, 2009 and will change the accounting for business combinations on a prospective basis.

FASB ASC 810-10 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. The standard establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation and expands disclosures in the consolidated financial statements. This standard is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. This standard is not currently applicable to the Company.

FASB ASC 350-30 and 275-10 amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this standard did not have any impact on the Company’s financial statements.

FASB ASC 260-10 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not currently have any share-based awards that would qualify as participating securities. Therefore, application of this standard is not expected to have an effect on the Company's financial reporting.

FASB ASC 825-10 requires disclosures about the fair value of financial instruments for interim reporting periods. This standard is effective for interim reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s financial statements.

FASB ASC 820-10 provides additional guidance for Fair Value Measurements when the volume and level of activity for the asset or liability has significantly decreased. This standard is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on its financial statements.

FASB ASC 320-10 amends the other-than-temporary impairment guidance for debt and equity securities. This standard is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on its financial statements.

As of September 30, 2009, the FASB has issued Accounting Standards Updates (ASU) through No. 2009-12. None of the ASUs have had an impact on the Company’s financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

As of September 30, 2009, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.

3. Business Acquisition

On July 8, 2008, the Company completed of the acquisition of CCSI for $10,600,000 plus an additional stock earn out of up to an additional 10,000,000 shares of common stock based on achieving certain performance milestones. The $10,600,000 purchase price was financed through a combination of the issuance of 3,500,000 shares of common stock in the Company, valued at $595,000, based upon the market price for QSGI's common stock as of July 6, 2008, the date immediately prior to the closing date, senior bank and seller financing in the amount of $10,000,000 dollars, both secured by the assets of the Company. In connection with the seller financing, the Company issued warrants to purchase 12,000,000 shares of Common Stock at a purchase price of $0.30 per share.

4. Discontinued Operation

As of April 1, 2009, the Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations. This is because the Company received notification from the former owner of CCSI that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner. The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.

During the quarter ended September 30, 2009, the Company expensed approximately $210,000. This was the remaining net equity in CCSI of which $1,608,000 were assets and $1,398,000 were liabilities. This charge was included in the loss from discontinued operations.

As of July 1, 2009, the Company ceased reporting the results of operations of the Data Security and Compliance and Data Center Maintenance Segment separately and is reporting it as discontinued operations. This is because on July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009.

The following summarizes the operating results of QSGI INC.’s discontinued operations.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008

Revenue	$	1,641,748	$	8,629,317	$	13,643,160	$	22,932,131
Cost of Sales		1,264,720		6,938,120		14,005,757		18,610,212
Selling And Administrative Expenses		1,428,062		3,482,461		6,350,409		8,241,341
Depreciation		65,494		201,187		375,437		516,907
Loss on impairment		—		—		13,366,601		—
Loss on disposal of assets		968,909		—		968,909		—
Net loss from discontinued operations		2,085,437		1,992,451		21,423,953		4,436,329

Included in the Consolidated Balance Sheets are the following major classes of assets and liabilities associated with the discontinued operations:

	September 30, 2009			December 31, 2008

Assets of discontinued operations - current: Accounts Receivable	$	—		$	4,689,376
Inventory		—			5,144,010
Other assets		—			324,290
	$	—		$	10,157,676
Assets of discontinued operations – long term: Property, plant and equipment		—			727,454
Goodwill		—			7,934,627
Intangibles, net		—			6,017,968
Other assets		—			285,198
				$	14,965,247
Liabilities of discontinued operations – current:			a
Accounts Payable	$	—		$	1,814,530
Deferred Revenue		—			385,805
Other current liabilities		—			176,840
	$	—		$	2,377,175

5. Financing Arrangements

Revolving Line Of Credit

On June 5, 2008, the Company entered into a Senior Security Purchase Agreement with Victory Park Capital. This agreement allows the Company to borrow up to $10 million to finance both working capital needs and future acquisitions. The revolving line of credit agreement provides for borrowings limited to the lesser of $10,000,000 or the borrowing base of 80% of eligible accounts receivable plus 50% of eligible inventory plus 60% of eligible pre-billed service receivables. The interest rate per annum charged is the greater of prime plus seven percent (7.00%) and twelve percent (12.00%) with a default rate of fifteen percent (15.00%). As of September 30, 2009, the Company owed Victory Park capital $2,918,463 and during the quarter ended September 30, 2009, was paying a default interest rate of percent (15.00%) with all principal and interest due December 1, 2010. As of December 31, 2008, the Company owed Victory Park capital $5,351,130 and was paying a default interest rate of fifteen percent (15.00%), with all principal and interest due December 1, 2010. The Company had no availability on the borrowing base at December 31, 2008. In accordance with Emerging Issues task Force (EITF) Issue No. 95-22, the line of credit is classified as a current liability due to the agreement containing a subjective acceleration clause and a lock-box arrangement.

In July 2008, the Company completed the purchase of all of the outstanding shares of Contemporary Computer Service, Inc. (CCSI). As part of the acquisition, the seller financed $10,000,000. At September 30, 2009, the company owed $10,000,000 at a default interest rate of fifteen percent (15.00%) and at December 31, 2008, the company owed $10,000,000 at an interest rate of ten percent (10%). All principal and interest is due December 31, 2011 or when converted into common stock.

6. Stock Options and Warrants

There were no stock options or warrants issued in the first nine months of 2009 and no options or warrants expired in the first nine months of 2009.

7. Income Taxes

The Company did not record a federal tax benefit for the nine months ended September 30, 2009 and 2008 as we recorded a change in the valuation allowance for an amount equal to the tax benefit. The Company recorded no state tax expense for the nine months ended September 20, 2009 and a state tax expense for the nine months ended September 30, 2008. The Company incurs state income taxes in jurisdictions where the Company cannot file a consolidated income tax return.

The Company's policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes in the statement of operations. As of January 1, 2009, the Company had no unrecognized tax benefits, or any tax related interest of penalties. There were no changes in the Company's unrecognized tax benefits during the nine months ended September 30, 2009. The Company did not recognize any interest or penalties during 2009 related to unrecognized tax benefits. Tax years from 2005 through 2008 remain subject to examination by major tax jurisdictions.

8. Subsequent Events

In June, 2010, a settlement agreement and mutual release was entered into by and between John Riconda, on one hand, and QSGI INC., on the other to settle asserted claims by both parties against each other.

On July 2, 2010, a joint motion for approval of settlement agreement between debtors and John Riconda pursuant to Fed.R.BankR.P. 9019 and Local rule 9013-1 (D) was filed with the United States Bankruptcy Court, Southern District of Florida, West Palm Beach Division to approve the terms of the settlement agreement between Debtors and John Riconda.

On August 11, 2010, Action by Consent in Writing of the Board of Directors increased the membership of the Board of Directors from one (1) person to five (5) persons by the appointment of Benee Scola, William J. Barbera, David J. Meynarez and David K. Waldman as Directors of the Company.

On March 21, 2011 the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division had a hearing to consider confirmation of the Debtors’ Third Amended Plan of Reorganization (D.E. # 384) under Chapter 11 of the Bankruptcy Code filed by QSGI, INC., QSGI-CCSI, INC. and QUALTECH SERVICES GROUP, INC., and dated February 1, 2011 and confirmed the Plan. The debtors are waiting entry of the confirmation order by the Judge.

Effective June 17, 2011 QSGI, Inc. merged with KruseCom, LLC (“KruseCom”), a company that is primarily engaged in Information Technology Data Security and Compliance. The merger was carried out in accordance with a Share Exchange Agreement dated June 17, 2011 (the “Exchange Agreement”) among KruseCom, a Florida Limited Liability Company formed in October 2009. The merger contemplated by the Exchange Agreement is part of the Chapter 11 Plan of Reorganization that was approved by the impaired parties and confirmed by the US Bankruptcy Court on May 4, 2011.

The close of the Exchange Agreement transaction (the “Closing”) took place June 17, 2011 (the Closing Date”). On the Closing Date, pursuant to the terms of the Exchange Agreement, QSGI acquired all of the outstanding ownership interests of KruseCom (the “Interests”) from KruseCom in exchange for 190,000,000 shares of QSGI common stock.

On August 26, 2011, the Company was notified that the Honorable Erik P. Kimball, United States Bankruptcy Judge, Southern District of Florida, entered a final decree to close the chapter 11 case. The signing of this order signifies the Company’s emergence from bankruptcy.

On September 21, 2011, QSGI Green, Inc. (“QSGI Green”) a newly-formed, wholly-owned subsidiary of the Company completed the transactions contemplated by the Asset Purchase Agreement (the “TGG Agreement”) with The Gasket Guy, Inc (the “Seller” or “TGG”) a Florida Corporation, primarily engaged in the manufacture and installation of refrigeration gaskets throughout the United States.

On September 26, 2011, QSGI Green (the “Borrower”) entered into a loan agreement (the “Bank Note”) with First City Bank of Commerce (the “Lender”) in the amount of $564,775 to replace the Seller’s existing bank note. The Bank Note bears interest at 7.5% and has a maturity date of September 26, 2015. The Bank Note is primarily supported by accounts receivable and inventory of QSGI Green. The Bank Note is personally guaranteed by the two previous founding owners of TGG.

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

This following discussion should be read in conjunction with the accompanying financial statements and related notes in Item 1 of this report as well as Annual Report on Form 10-K for the year ended December 31, 2008. Certain statements in this Report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created thereby.

All such forward-looking information involves risks and uncertainties and may be affected by many factors, some of which are beyond our control. These factors include:

Our growth strategies.

Anticipated trends in our business and demographics.

Our ability to successfully integrate the business operations of recently acquired companies; and

· Regulatory, competitive or other economic influences.

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: our continued ability to sustain our growth through continuing vendor relationships; the successful consummation and integration of future acquisitions; the ability to hire and retain key personnel; the continued development of our technical, manufacturing, sales, marketing and management capabilities; relationships with and dependence on third-party suppliers; anticipated competition; uncertainties relating to economic conditions where we operate; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; rapid technological developments and obsolescence in the products we sell and the industries in which we operate and compete; existing and potential performance issues with suppliers and customers; governmental export and import policies; global trade policies; worldwide political stability and economic growth; the highly competitive environment in which we operate; potential entry of new, well-capitalized competitors into our markets; and changes in our capital structure and cost of capital. The words “believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

Results of Operations

The Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations. This is because the Company received notification from the former owner of Contemporary Computer Services, Inc. (CCSI) that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner. The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable. The Company also ceased reporting the results of operations of the Data Security and Compliance and the Data Center Maintenance Services segment. As part of the plan of bankruptcy, both segments assets were sold.

Business Segments

Since all of the reporting companies have been sold and are reported as discontinued operations, the company will no longer be reporting business segments.

Item 3Quantitative and Qualitative Disclosures About Market Risk

The Company does not engage in transactions in derivative financial instruments or derivative commodity instruments. As of September 30, the Company’s financial instruments were not exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk.

Item 4Controls and Procedures

Evaluation of disclosure controls and procedures

It is the Chief Executive Officer’s and the Chief Financial Officer’s responsibility to ensure that we maintain disclosure controls and procedures designed to provide reasonable assurance that material information, both financial and non-financial, and other information required under the securities laws to be disclosed is identified and communicated to senior management on a timely basis. Our disclosure controls and procedures include mandatory communication of material events, automated accounting processing and reporting, management review of monthly results and an established system of internal controls.

Our Disclosure Controls were designed to provide reasonable assurance that the controls and procedures would meet their objectives. Our management, including the CEO and CFO, do not expect that our Disclosure Controls will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the designed control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusions of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective, maturing control system, misstatements due to error or fraud may occur and not be detected.

The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Form 10-Q.

Our efforts to strengthen financial and internal controls continue. There have been no significant changes in internal controls, or in other factors, which would significantly affect these controls subsequent to the date of evaluation.

As of September 30, 2009, we evaluated the effectiveness of the design and operation of our Disclosure Controls. The controls evaluation was done under the supervision and with the participation of management, including our CEO and VP - Finance. Based on this evaluation, our CEO and VP - Finance have concluded these controls are effective.

Changes in internal control over financial reporting

During the period covered by this report, there have been no changes in the Company's internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company received notification from the former owner of CCSI that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner. The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.

On March 21, 2011 the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division had a hearing to consider confirmation of the Debtors’ Third Amended Plan of Reorganization (D.E. # 384) under Chapter 11 of the Bankruptcy Code filed by QSGI, INC., QSGI-CCSI, INC. and QUALTECH SERVICES GROUP, INC., and dated February 1, 2011 and confirmed the Plan. The debtors are waiting entry of the confirmation order by the Judge.

Item 1A. Risk Factors

Reference is made to the factors set forth under the "Management Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 of this Form 10-Q and other risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2008, which are incorporated herein by reference. There have not been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 2. Unregistered sales of equity securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4.Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibits
	See List of Exhibits filed as part of this quarterly report on Form 10-Q.

SIGNATURE

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	QSGI INC. Inc. (Registrant)
Dated: October 28, 2011	By:	/s/ Marc Sherman
		Marc Sherman
		Chairman of the Board and Chief Executive Officer

List Of Exhibits

Exhibit Number	Description

2.1	Agreement and plan of Merger by and among Windsortech, Inc., Qualtech International Corporation and Qualtech Service Group, Inc. dated May 1, 2004.
3.1	Certificate of Amendment of Certificate of Incorporation of WindsorTech, Inc. **
3.2	Amended and Restated ByLaws of WindsorTech, Inc. (Incorporated herein reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).
3.3	Action by Consent in Writing of a Majority of Stockholders dated May 19, 2004 concerning Amended and Restated By Laws.
3.4	Action by Consent in Writing of a Majority of Stockholders dated September 17, 2004 increasing the number of shares of the Corporation
4.1	Specimen Common Stock Certificate of WindsorTech, Inc. (Incorporated herein reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).
4.2**	Form of Stock Purchase Agreements with Barron Partners, L.P., Guerrilla Capital, and Odin Partners et al. dated May 26, 2004.
4.3**	Form of Registration Rights Agreements with Barron Partners, L.P., Guerrilla Capital, and Odin Partners et al. dated May 26, 2004.
4.4**	Form of Common Stock Purchase Warrant at $1.50 per share dated May 28, 2004.
4.5**	Form of Common Stock Purchase Warrant at $3.60 per share dated May 28, 2004
4.6	Form of Registration Rights Agreement with Joel Owens and Jolene Owens dated May 1, 2004.
10.1*	Employment and Non-Compete Agreement – Edward L. Cummings **
10.2*	Employment and Non-Compete Agreement – David A. Loppert **
10.3*	Employment and Non-Compete Agreement – Carl C. Saracino **
10.4*	Employment and Non-Compete Agreement – Michael P. Sheerr **
10.5*	Employment and Non-Compete Agreement – Marc Sherman **
10.6*	2002 Flexible Stock Plan (Incorporated herein reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on April 16, 2002 (Commission file number 000-07539)).
10.7	Lease Agreement (Incorporated herein reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).
10.8	Employment and Non-Compete Agreement – Joel Owens
10.9**	Employment and Non-Compete Agreement – Seth A. Grossman
10.10**	Credit Agreement by and among Windsortech, Inc., Qualtech International Corporation, Qualtech Services Corporation and Fifth Third Bank.
16.1	Letter from Milton Reece, CPA (“Reece”) concurring with the statements made by the Registrant in the Current Report on Form 8-K reporting Reece’s resignation as the Registrant’s principal accountant (incorporated herein by reference to Exhibit 16 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 13, 2002 (Commission file number 000-07539)).

31.1***	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1***	Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract or compensatory plan.
** Incorporated herein by reference to the same numbered exhibit in the Registrant’s Transition Report on Form 10-KSB filed with the Commission on April 1, 2002 (Commission file number 000-07539).
*** Attached hereto.

There are no other documents required to be filed as an Exhibit as required by Item 601 of Regulation S-K.

Attached files

QSGI INC. Reports

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