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| November 14, 2006 |
| QSGI Reports 20% Increase in Gross Profit for the Third Quarter
Double Digit Revenue Growth within Data Security & Compliance and Data Center Maintenance |
| HIGHTSTOWN, NJ—November 14, 2006—QSGI, Inc. (NYSE Arca: QGI)today reported financial results for the third quarter ended September 30, 2006. |
| Third Quarter 2006 Financial Highlights (year-over-year): |
| Total revenue increased 7% to $9.4 million |
- Data Security & Compliance revenue increased 10% to $5.0 million
- Data Center Maintenance revenue rose 41% to $1.3 million
- Data Center Hardware revenue decreased 20% to $3.0 million
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| Gross profit increased 20% to $2.3 million, versus $1.9 million in the third quarter of 2005 as every division demonstrated improvements in gross profit |
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- 6 new Data Security & Compliance clients
- 15 additional contracts from new or existing Data Center Maintenance clients, amounting to incremental annual revenue of more than $1.8 million
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- Gross Profit Margins increased to 24% from 22% - Data Security & Compliance gross margin was 12% - Data Center Maintenance gross margin was 68% - Data Center Hardware gross margin was 25%
- SG&A was $2.3 million, versus $2.2 million for the same period last year
- Net loss available to common shareholders was $226,138, or $(0.01) per share, versus a net loss of $393,840 in the prior year
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“We continue to generate solid year-over-year revenue growth and gross margin improvement, and we are particularly encouraged by the progress within the Data Center Maintenance and the Data Security & Compliance divisions. Demand for our security and maintenance services continues to remain robust, and we are seeing increased traction in these areas owing to our leadership in the space,” said Marc Sherman, chairman and chief executive officer of QSGI.
“Our Data Center Maintenance division posted sequential quarterly revenue growth of 15% over the second quarter, again generating strong gross profit margins of 68%. This division continues to gain market share and wide-spread recognition as an effective alternative for mainframe and related data center maintenance services. Our Data Center Maintenance revenue and gross margins will continue to expand as recently-announced service contracts ramp up and as we add new customers within close geographic proximity.
Mr. Sherman continued, “Revenue within Data Security & Compliance increased 10%, driven by growth within our higher margin auditing and erasure services as well as by our re-marketing operations. In addition, we have begun to see increasing interest in our client-site services, fueled by our mobile data erasure facility and our mid-volume server ‘suitcase’ solution – both offering fast, flexible, deployable options free from any data security risk while technology assets are in transit. These client-site solutions have become the industry standard for best practices in data security and regulatory compliance and are expected to drive revenue growth, along with improved profitability, during the remainder of this year and into 2007. Based on the current revenue run-rate and anticipated contract wins, we see continued double digit revenue growth in 2007, with pre-tax earnings in the range of $4 million to $6 million.” |
| New client and channel partners signed during the quarter: |
- 5 new Data Security & Compliance clients
- Additional contracts from new or existing Data Center Maintenance clients amounting to incremental annual revenue of more than $400,000
- Year To Date, additional contracts from new or existing Data Center Maintenance clients amounting to incremental annual revenue of more than $2.9 million
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Total revenue for the third quarter of 2006 rose to $9.4 million, as compared with $8.7 million for the same period in 2005, reflecting a 10% increase in revenue from the company’s Data Security & Compliance division, a 41% rise in the Data Center Maintenance division, and a 20% decrease in the Data Center Hardware division. Operating profit in this division improved during the third quarter as gross margins improved to 25.4% from 18.7% in 2005. Net loss available to common stockholders for the third quarter of 2006 was $226,138, or $(0.01) per share, compared to net loss of $393,840, or $(0.01) per share, for the same period in 2005.
Conference Call
QSGI will host a conference call at 10:00 a.m. Eastern today, November 14, 2006. During the call, Marc Sherman, chairman and chief executive officer, Seth Grossman, president and chief operating officer, and Ed Cummings, chief financial officer, will discuss the Company’s quarterly performance and financial results. The telephone number for the conference call is 888-527-1593. A live webcast of the call will also be available on the company's website, www.QSGI.com. To listen to the live call online, please visit the site at least 10 minutes early to register, download and install any necessary audio software.
The webcast will be archived on the site, and investors will be able to access an encore recording of the conference call for one week by calling 800-642-1687, conference ID #3203585. The encore recording will be available two hours after the conference call has concluded. |
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CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) |
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September 30, |
December 31, |
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2006 |
2005 |
| Assets |
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| Current Assets |
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| Cash and cash equivalents |
$ 100%,859 |
$ 153,794 |
| Accounts receivable, net of reserve of $636,483 in 2006 and $80,000 in 2005 |
5,802,430 |
7,014,129 |
| Inventories |
5,616,782 |
4,136,304 |
| Prepaid expenses, income taxes and other assets |
220,421 |
227,352 |
| Deferred income taxes |
72,095 |
155,668 |
| Total Current Assets |
12,295,587 |
11,687,247 |
| Property and Equipment, Net |
447,762 |
605,887 |
| Goodwill |
6,644,403 |
3,212,314 |
| Intangibles, Net |
2,634,748 |
2,872,240 |
| Other Assets |
167,025 |
116,225 |
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$22,189,525 |
$18,493,913 |
| Liabilities And Stockholders’ Equity |
| Current Liabilities |
|
|
| Revolving lines of credit |
$ 2,921,500 |
$ 3,631,500 |
| Accounts payable |
521,133 |
2,254,136 |
| Accrued expenses |
370,748 |
279,090 |
| Deferred revenue |
1,098,282 |
404,540 |
| Accrued payroll and other liabilities |
559,017 |
293,500 |
| Total Current Liabilities |
5,470,680 |
6,862,766 |
| Deferred Income Taxes |
16,156 |
280,318 |
| Total Liabilities |
5,486,836 |
7,143,084 |
| Redeemable Convertible Preferred Stock |
4,216,217 |
1,967,220 |
| Stockholders’ Equity |
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| Preferred shares: authorized 5,000,000 shares in 2006 and 2005, $0.01 par value, none issued |
-- |
-- |
| Common shares: authorized 95,000,000 shares in 2006 and 55,000,000 shares in 2005, $0.01 par value; 31,172,716 shares issued and outstanding in 2006 and 28,670,631 shares issued and outstanding in 2005 |
311,727 |
286,706 |
| Additional paid-in capital |
14,455,412 |
11,093,881 |
| Retained earnings (deficit) |
(2,280,667) |
(1,996,978) |
| Total Stockholders’ Equity |
12,486,472 |
9,383,609 |
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$22,189,525 |
$ 18,493,913 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three and Nine Months Ended September 30, 2006 and 2005
(Unaudited) |
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2006 |
2005 |
2006 |
2005 |
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| Product Revenue |
$7,964,854 |
$7,785,407 |
$ 30,002,721 |
$22,408,922 |
| Service Revenue |
1,400,856 |
961,994 |
3,838,453 |
2,602,594 |
| Total Revenue |
9,365,710 |
8,747,401 |
33,841,174 |
25,011,516 |
| Cost Of Products Sold |
6,610,560 |
6,478,213 |
25,067,620 |
18,655,068 |
| Cost Of Services Sold |
492,994 |
385,817 |
1,282,739 |
966,620 |
| Total Cost Of Sales |
7,103,554 |
6,864,030 |
26,350,359 |
19,621,688 |
| Gross Profit |
2,262,156 |
1,883,371 |
7,490,815 |
5,389,828 |
| Selling, General And Administrative Expenses |
2,312,095 |
2,163,978 |
7,203,007 |
6,548,050 |
| Depreciation And Amortization |
174,752 |
165,269 |
516,432 |
466,212 |
| Interest Expense, net |
56,481 |
63,868 |
156,264
|
91,168 |
| Loss Before Benefit For Income Taxes |
(281,172) |
(509,744) |
(384,888) |
(1,715,602) |
| Benefit For Income Taxes |
(123,652) |
(115,904)
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(101,199) |
(491,294) |
| Net Loss |
(157,520)
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(393,840) |
(283,689)
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(1,224,308) |
| Preferred Stock Dividends |
64,323 |
-- |
191,359 |
-- |
| Accretion To Redemption Value of Preferred Stock |
4,295 |
-- |
12,695 |
-- |
| Net Loss Available to Common Stockholders |
$ (226,138) |
$ (393,840)
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$ (487,743)
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$ (1,224,308) |
| Loss Per Common Share - Basic |
$ (0.01)
|
$ (0.01) |
$ (0.02) |
$ (0.04) |
| Loss Per Common Share - Diluted |
$ 0.01 |
$ (0.01) |
$ (0.02) |
$ (0.04) |
| Weighted Average Common Shares Outstanding -Basic |
31,172,716
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28,581,383
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29,774,939 |
27,978,920 |
| Weighted Average Common Shares Outstanding -Diluted |
31,172,716 |
28,581,383 |
29,774,939
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27,978,920 |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 2006 and 2005
(Unaudited) |
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2006 |
2005 |
| Cash Flows From Operating Activities |
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| Net Loss |
$ (283,689) |
$ (1,224,308) |
| Adjustments to reconcile net loss to net cash used in operating activities:
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| Depreciation and amortization |
516,432 |
466,212 |
| Stock option compensation expense |
13,229
|
19,000 |
| Deferred income taxes |
(180,588) |
(566,535) |
| Common Shares issued for services |
161,687 |
-- |
| Allowance for doubtful accounts |
556,483 |
-- |
| Changes in assets and liabilities: |
|
|
| Accounts receivable |
655,216 |
(661,779) |
| Inventories |
(1,480,478)
|
(1,441,699) |
| Prepaid expenses and other current assets |
(64,464) |
(109,844) |
| Accounts payable and accrued expenses |
(682,086) |
218,654 |
| Net Cash Used In Operating Activities |
(788,258) |
(3,300,299) |
| Cash Used In Investing Activities |
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| Payments for Qualtech acquisition, net of cash acquired |
-- |
(86,520) |
| Purchases of property and equipment |
(100,220)
|
(308,338) |
| Net Cash Used In Investing Activities |
(100,220)
|
(394,858) |
| Cash Flows From Financing Activities |
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| Proceeds from the issuance of redeemable preferred stock |
2,236,301 |
-- |
| Proceeds from the exercise of options and warrants |
9,100 |
2,609,808 |
| Other financing fees |
-- |
(41,562) |
| Stock issuance costs |
(25,499) |
-- |
| Preferred stock dividends |
(191,359)
|
-- |
| Net amounts paid on notes payable |
-- |
(856,666) |
| Net amounts (paid) borrowed under revolving lines of credit |
(710,000) |
1,679,000 |
| Net Cash Provided By Financing Activities |
1,318,543
|
3,390,580 |
| Net Increase (Decrease) In Cash And Cash Equivalents |
430,065
|
(304,577) |
| Cash And Cash Equivalents - Beginning Of Period |
153,794
|
844,939 |
| Cash And Cash Equivalents - End of Period |
$ 100%,859
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$ 540,362 |
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| About QSGI |
QSGI is the only data security and regulatory compliance provider offering a full suite of end-of-life and other life-cycle services for a Fortune 1000 corporation’s and government client’s entire information technology (IT) platform. QSGI offsets its clients’ expenses through its value-added remarketing program. Prior to resale, the company utilizes its proprietary Department of Defense (DOD) level certified data sweep to eliminate otherwise recoverable data. QSGI reduces its clients' potential liability by ensuring regulatory and environmental compliance for IT products. QSGI also maintains and provides services on enterprise-class hardware, including mainframes, midrange servers, tape storage products and disk storage products. Given the sensitive nature of the company’s client relationships, it does not provide the names of its clients.
Statements about QSGI’s future expectations, including future revenues and earnings, and all other statements in this press release other than historical facts are ‘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 as that term is defined in the Private Litigation Reform Act of 1995. QSGI intends that such forward-looking statements involve risks and uncertainties and are subject to change at any time, and QSGI’s actual results could differ materially from expected results. QSGI undertakes no obligation to update forward-looking statements to reflect subsequently occurring events or circumstances |
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