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COMCAM INTERNATIONAL INC - 10-Q/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this quarterly report contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include but are not limited to those discussed in the subsection entitled Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition below. The following discussion should be read in conjunction with our financial statements and notes thereto included in this report. Our fiscal year end is December 31. All information presented herein is based on the six month period ended June 30, 2011. Discussion and Analysis Our financial condition and results of operations depend primarily on revenue generated from the sale of our products and specialized services in addition to our ability to realize additional debt or equity financing. We can provide no assurance that revenue going forward will provide sufficient cash flows to sustain our operations though revenue approximating that required to sustain operations is anticipated in fiscal year 2011. Further, although we have no commitments for financing we remain in the process of procuring additional equity financing as we seek to redress any shortfall in cash flows to sustain operations while seeking to expand our business. Business We have two operating divisions. One focuses on product development, manufacturing and sales world-wide while the other focuses on the integration of command and control systems for correctional facilities across the United States. Our product division has developed a video fusion platform that adds next generation, real-time interactive command-and-control capabilities to legacy security systems for greater performance at lower cost. The platform seamlessly integrates a suite of analytics, including third-party security solutions - access control, biometrics, radio frequency identification (RFID), chemical detection and seismic detection - to improve real-time decision-making for critical events over any wireless network. Our products have been deployed with the Department of Defense, Immigration & Customs Enforcement, and many other law enforcement and intelligence agencies in addition to businesses across a wide range of industries. On our own, or working with prime government contractors like DRS, Motorola, and Siemens, our products are deployed in such diverse locales as the John F. Kennedy International Airport, isolated sections of the Texas-Mexico border, and remote mountain passes in Afghanistan. Our systems division acts as the general contractor or plays a key support role to leading government integrators. Our focus to date has been on installing and integrating security systems in juvenile to super-maximum security correctional facilities. We enable our clients to reach further operational excellence by providing a complete range of security integration services. In the past three years we have completed more than 15 security integration projects, with the largest topping $4.2M. We have the skill set and the resources to successfully complete projects in the $10M-$15M range. 12 -------------------------------------------------------------------------------- Business Development Strategy We are pursuing numerous new domestic and international sales opportunities intended to increase revenue by leveraging our product and systems divisions to provide turn-key solutions across a spectrum of applications within the security industry. While expanding marketing efforts to reach new customers we continue to focus on offering our services as an original equipment manufacturer (OEM) for strategic resellers, in order to serve as a research and development partner, and to develop a network of dealers, resellers and system integrators with differing targeted market expertise. Meanwhile we continue to service existing customers with our products and services. Product Division We intend to leverage pilot installations on the US/Mexico border, the Port of Philadelphia, and with Immigration and Customs Enforcement to focus on closing new proposals and contracts with the Department of Homeland Security. The key to this line of business is a value added reseller (VAR) agreement signed with DRS in 2010 offering an off-the-shelf advanced thermal tracking solution to be bundled with our microserver and software algorithms which addresses a major US initiative to fight border drug trafficking. We are also focused on transforming non-recurring engineering contracts that utilize our hardware and software designs into opportunities to develop a recurring royalty model. Our near term intention is to take advantage of certain installations that utilize our cloud computing platform which allows franchise operators and large retail chains to improve remote operations management. We also intend to develop a program to monetize our patents related to the integration of live video and analytics through a web portal used to make real time command and control decisions. Systems Division We are focused on pursuing new contracts related to the incremental integration of security measures utilized by correctional facilities. Our business has been limited in the past by an inability to secure performance bonds at a reasonable cost. We have recently overcome this limitation and going forward we are confident in our ability to procure new contracts. In addition, we have expanded our highly profitable long-term maintenance agreement program to existing and future integration customers with a goal of establishing a recurring revenue stream from this business unit. Mergers and Acquisitions We intend to continue to seek out the acquisition of companies and products that add synergistic distribution partners and broader application integration. Our intention is to target companies with intellectual properties in biometric algorithms, RFID sensors, and prison perimeter offerings. In April 2011, the Company entered into a letter of intent to acquire distribution rights from 1st Choice Security Solutions ("1st Choice"), an OEM supplier of ultra-long range RFID technology. The distribution rights will allow us to distribute Protrac iD products in North and South America. As of June 30, 2011, we had paid $42,734 to 1st Choice. We expect to finalize the distribution rights purchase by September 30, 2011, with an additional $70,000 cash outlay and the issuance 200,000 shares of common stock. 13 -------------------------------------------------------------------------------- Business Development Risks Our business development strategy is prone to significant risks and uncertainties which can have an immediate impact on efforts to realize net cash flow and deter future prospects of revenue growth. We have a limited history of generating revenue which cannot be viewed as an indication of continued growth and a historical record of incurring losses. Should we be unable to consistently generate revenue and reduce or stabilize expenses on a consolidated basis to the point where we can realize net cash flow, such failure will have an immediate impact on our ability to continue our business operations. Our financial condition and results of operations going forward will continue to depend primarily on revenue generated from the sale of specialized services and our ability to realize additional debt or equity financing. We can provide no assurance that future revenue will provide sufficient cash flow to sustain operations although the achievement of this milestone is anticipated in the near term. Further, we have no immediate commitments for additional financing though management is committed to procuring the capital required to develop our business. Results of Operations During the six month period ended June 30, 2011, we were engaged in (i) developing our Internet Protocol remote control platform cameras, micro servers, associated software, and unique end-to-end network solutions, (ii) providing turnkey system design and installation, maintenance contracts, and field support technicians to correctional facilities, (iii) completing debt financing arrangements, (iv) securing a performance bond, (v) performing due diligence and entering into a letter of intent with 1st Choice, and (vi) satisfying continuous public disclosure requirements. Revenue Revenue for the three months ended June 30, 2011, increased to $993,570 from $550,984 for the three months ended June 30, 2010, an increase of 80%. Revenue for the six months ended June 30, 2011, increased to $2,375,101 from $1,498,524 for the six months ended June 30, 2010, an increase of 58%. The increase in revenue over the comparable period is due to the procurement of new contracts by our systems division. We expect to continue to increase revenues in future periods through the sale of services to correction facilities and video products. Cost of revenue for the three months ended June 30, 2011, was $681,168 compared to $375,499 for the three months ended June 30, 2010, an increase of 81%. Cost of revenue for the six months ended June 30, 2011, was $1,731,498 compared to $966,728 for the six months ended June 30, 2010, an increase of 79%. The increase in the cost of revenue in the current period can be attributed to the increase in revenue over the comparative period and increasing costs for materials. We expect the cost of revenue to increase in future periods along with increases in revenue. Gross profit for the three months ended June 30, 2011, increased to $312,402 from $175,485 for the three months ended June 30, 2010, an increase of 78%. Gross profit for the six months ended June 30, 2011, increased to $643,603 from $531,796 for the six months ended June 30, 2010, an increase of 21%. The increase in gross profit over the comparable periods is primarily attributable to the increase in revenue over the comparative periods, while opposed by increasing materials costs. We expect that gross profit will continue to increase in correlation with anticipated increases in revenue over future periods. 14 -------------------------------------------------------------------------------- Expenses Operating expenses for the three months ended June 30, 2011, decreased to $730,365 from $938,813 for the three months ended June 30, 2010, a decrease of 22%. Operating expenses for the six months ended June 30, 2011, increased to $1,570,443 from $1,553,821 for the six months ended June 30, 2010, an increase of 1%. The decrease in operating expenses over the comparative three month periods is primarily attributable to our implementation of cost-cutting activities and operational efficiencies. The increase in operating expenses over the comparative six month periods is primarily attributable to the increase in general and administrative expenses. We expect that operating expenses will remain relatively constant in the near term as management continues to evaluate prospective operating efficiencies. Depreciation and amortization expenses for the six months ended June 30, 2011 and 2010 were $121,571 and $210,925, respectively. The decrease in depreciation and amortization expenses over the respective periods can be attributed to a decrease in the amortization of intangible assets. Other Income (Expense) Interest income for the three months ended June 30, 2011 was $251 as compared to $151 for the three months ended June 30, 2010. Interest income for the six months ended June 30, 2011 was $606 as compared to $570 for the six months ended June 30, 2010. Interest expense for the three months ended June 30, 2011 was $35,873 as compared to $26,266 for the three months ended June 30, 2010. Interest expense for the six months ended June 30, 2011 was $61,346 as compared to $53,937 for the six months ended June 30, 2010. The increase in interest expense over the comparable three and six month periods can be attributed to outstanding debt obligations. We expect that interest expense will continue to increase as debt obligations mature. Net Loss Net loss for the three months ended June 30, 2011, was $445,585 as compared to a net loss of $775,718 for the three months ended June 30, 2010, a decrease of 43%. Net loss for the six months ended June 30, 2011, was $999,580 as compared to a net loss of $1,061,667 for the six months ended June 30, 2010, a decrease of 6%. The decrease in net loss over the comparable periods can be primarily attributed to decreases in losses from operations during the current three and six month periods. We expect to transition to net income in the near term with anticipated increases in revenue and consistency in operating expenses. Income Tax Expense (Benefit) We have an income tax benefit resulting from net operating losses to offset any future operating profit. The net operating loss carry forwards at December 31, 2010, was approximately $6,195,000. These losses will begin to expire in the year 2019. The amount of net operating loss carry forwards that can be used in any one year can be limited by significant changes in the ownership of the Company and by the applicable tax laws which are in effect at the time such carry forwards are utilized. Some states do not allow us to file consolidated income tax returns and offset our net operating loss carryforwards against Pinnacle's taxable income. When applicable, we record income taxes payable and income tax expense for these states. Impact of Inflation We believe that inflation has had a negligible effect on operations over the past three years and that we can offset any inflationary pressures by improving operating efficiencies. 15 -------------------------------------------------------------------------------- Capital Expenditures We made no significant capital expenditures on property or equipment for the six months ended June 30, 2011 or 2010. Liquidity and Capital Resources At June 30, 2011 we had a working capital deficit of $232,925. At June 30, 2011 we had current assets of $1,491,475 that consisted of cash totaling $558,616, accounts receivable of $767,395, estimated earnings in excess of billings on uncompleted contracts of $155,668 and prepaid expenses of $9,796. Our total assets of $2,191,805 included current assets as well as intangible assets of $393,467, property and equipment of $132,677 and other assets of $174,186. At June 30, 2011 we had current liabilities of $1,724,400 that consisted of accounts payable of $571,459, accrued expenses of $101,492, excess billings on uncompleted contracts of $136,449, a line of credit of $50,000 and the current portion of long-term debt of $865,000. Total liabilities of $2,105,018 include current liabilities as well as long-term debt of $221,018 and accrued expenses of $159,600. Total stockholders' equity was $86,787 as of June 30, 2011. Cash flows used in operations were $335,064 for the six months ended June 30, 2011 as compared to $382,246 for the six months ended June 30, 2010. The difference in cash flows used in operations over the comparative periods can be primarily attributed to a decrease in net losses, an adjustment to net losses from stock, option, and warrant compensation expenses, and an increase in accounts payable. We expect to realize cash flows provided by operating activities with an anticipated transition to net income in the near term. Cash flows used in investing activities were $43,063 for the six months ended June 30, 2011 as compared to $12,695 for the six months ended June 30, 2010. Cash flows used in investing activities in the current period are related to amounts paid to acquire the distribution rights of Protrac iD in addition to the purchase of property and equipment. We expect to continue to use cash flows in investing activities in future periods. Cash flows provided by financing activities were $419,250 for the six months ended June 30, 2011 as compared to $499,103 for the six months ended June 30, 2010. Cash flows provided by financing activities for the current period are attributable to the issuance of common stock for cash and debt instruments offset by payments on long-term debt. We expect to continue to have cash flow provided by financing activities. We had certain long-term debt obligations as of June 30, 2011: † Unsecured note payable to Global Convertible Megatrend, Ltd. ("Global Megatrend") in the amount of $176,568 bearing interest at 7.5% and due in December 2012. The note may be converted to our common shares, at the option of the holder, based on certain terms related to outstanding shares and per share prices. Accrued interest at June 30, 2011 was $10,123. † Secured note payable to Paul Higbee in the amount of $465,000 bearing interest at 8%, due on March 31, 2012. Accrued interest at June 30, 2011 was $47,217. 16 -------------------------------------------------------------------------------- † Secured promissory note payable to Doug Bartek in the amount of $400,000 bearing interest at 18%, with a final payment of $472,000 on February 25, 2012. The obligation is secured by the stock of our wholly owned subsidiary, Pinnacle. Accrued interest at June 30, 2011 was $24,658, and an unamortized discount of $5,550 at June 30, 2011. † Unsecured note payable to Bayberry Capital, Inc., in the amount of $50,000 bearing interest at 12% and due in October 2012. The note may be converted to our common shares, at the option of the holder, based on certain terms related to outstanding shares and per share prices. Accrued interest at June 30, 2011 was $1,491. We have a 2010 Benefit Plan registered under Form S-8 pursuant to which we can issue or option shares of our common stock to employees, directors, officers, consultants or advisors on the terms and conditions set forth therein. As of June 30, 2011 we had granted 885,000 stock options for a two year term at an exercise price of $0.50 a share under the Benefit Plan. Our current assets are sufficient to maintain operations but insufficient to return to product research, development or manufacture over the next twelve (12) months. We need a minimum of $3,000,000 in debt or equity financing to fund these product related activities, expand our marketing efforts or raise our performance bond capacity, all of which are integral to our business success. Unfortunately, we have no commitments or arrangements for this financing, though management is actively pursuing acceptable arrangements for prospective debt or equity placements. Our inability to obtain financing would have a material adverse affect on our business operations. We have a $100,000 line of credit with a bank which had a balance due of $50,000 at June 30, 2011. Accrued interest at June 30, 2011 was $13. We have no commitments for future capital expenditures that were material at June 30, 2011. We have no defined benefit plan or contractual commitment with any of our officers or directors. We have no current plans for the purchase or sale of any plant or equipment. We hired several former employees of 1st Choice during July 2011. We do not expect to pay cash dividends in the foreseeable future. Off-Balance Sheet Arrangements As of June 30, 2011 we have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to stockholders. 17 -------------------------------------------------------------------------------- Going Concern Our auditors have expressed an opinion as to our ability to continue as a going concern as a result of an accumulated deficit of $7,638,342 as of December 31, 2010 and a working capital deficit. Our ability to continue as a going concern remains dependent on an ability to realize net income and/or obtaining financing from outside sources. Management's plan to address our ability to continue as a going concern includes (i) increases in revenue; (ii) decreases in general and administrative costs; (iii) financing from private placement sources; and (iv) converting outstanding debt to equity. Although we believe that we will be able to remain a going concern, through the methods discussed above, there can be no assurances that such methods will prove successful. Critical Accounting Policies In Note 1 to the audited financial statements for the years ended December 31, 2010 and 2009, included in our Form 10-K, we discussed those accounting policies that are considered to be significant in determining the results of operations and our financial position. We believe that the accounting principles utilized by us conform to accounting principles generally accepted in the United States. The preparation of financial statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate estimates. Our estimates are based on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions. Revenue Recognition We generate revenues from product sales, consulting, installation of security systems, and support and maintenance contracts. Our revenue recognition policy is as follows: † Development and Delivery of Security Systems - Profits on long-term contracts are recorded primarily using the percentage of completion method for individual contracts. Estimated percentage of completion is determined on the basis of total costs expended as a percentage of total estimated costs. As our long-term contracts extend over one or more years, revisions in cost and profit estimates are reflected in the accounting period that the revisions become known. Due to the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. o Contract costs include all direct materials, labor, and other costs. General and administrative costs are charged to expense as incurred. At the time a loss on a contract is expected, the entire amount of the estimated loss is recognized. o The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues earned in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues earned. º Support and Maintenance Revenue - Revenue from support and maintenance agreements is recognized ratably over the term of the agreement, which in most instances is one year. º Service Revenue - Revenue from system upgrades is recognized as the services are performed. Revenue from training and development services is recognized as the services are performed. º Product Sales Revenue - Revenue from product sales is recognized at the time the product is shipped and invoiced and collectibility is reasonably assured. We believe that revenue should be recognized at the time of shipment as title passes to the customer at the time of shipment. 18 -------------------------------------------------------------------------------- º Consulting Revenue - Revenues from consulting services are recognized when a consulting agreement is executed that establishes the amount and scope of service to be provided, the consulting services have been performed, and we have no additional rescission, refund, or customer satisfaction requirements, and collectibility of the amount billed is reasonably assured. Forward-Looking Statements and Factors That May Affect Future Results and Financial Condition The statements contained in the section titled Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this current report, with the exception of historical facts, are forward-looking statements. Forward-looking statements reflect our current expectations and beliefs regarding our future results of operations, performance, and achievements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These statements include, but are not limited to, statements concerning: † our anticipated financial performance; † the sufficiency of existing capital resources; † our ability to raise additional capital to fund cash requirements; † uncertainties related to our business; † increases in revenues; † the volatility of the stock market and; † general economic conditions. We wish to caution readers that our operating results are subject to various risks and uncertainties that could cause our actual results to differ materially from those discussed or anticipated including the factors set forth in the section entitled Risk Factors included elsewhere in this report. We also wish to advise readers not to place any undue reliance on the forward-looking statements contained in this report, which reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update or revise these forward-looking statements to reflect new events or circumstances or any changes in our beliefs or expectations, other than as required by law. Stock-Based Compensation We have adopted Accounting Standards Codification Topic ("ASC") 718, Share-Based-Payment, which addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. We account for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with ASC 505. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services. 19 -------------------------------------------------------------------------------- Recent Accounting Pronouncements Please see Note 9 to our consolidated financial statements for recent accounting pronouncements. |