QSGI Reports Second Quarter Financial Results

HIGHTSTOWN, N.J., and PALM BEACH, Fla., Aug. 14 /PRNewswire-FirstCall/ --
QSGI Inc. (OTC Bulletin Board: QSGI), the most comprehensive provider of
information technology services to help corporations better manage IT assets,
data center maintenance expenses, and ensure best practices for data security
and regulatory compliance, today reported financial results for the three
months ending June 30, 2008.
Recent Developments:
-- 16% increase in services revenue, reflecting additional business from
existing accounts as well as 4 new data center maintenance customers and 3 new
end-user data security & compliance customers
-- Signed on first customer through newly-formed strategic alliance with
IBM Global Financing (IGF) for on-site auditing and data erasure services
-- Completed acquisition of Contemporary Computer Services, Inc. (CCSI) in
July 2008
-- Secured $10 million senior credit facility from Victory Park Capital to
replace existing $7.5 million asset based working capital facility
Marc Sherman, chairman and chief executive officer of QSGI, commented,
"The events of the second quarter have strengthened the foundation from which
our transition into a full service, nationwide data center maintenance and IT
services organization was launched earlier this year. The transition is well
underway with the acquisition of CCSI and the winding down of our data center
hardware business, which continued to negatively impact our overall results
during the second quarter. At the same time we have begun to de-emphasize our
OEM wholesale remarketing of distributed computing equipment (desktops,
notebooks, servers) and instead focus our sales efforts on the higher margin
end-user auditing and erasure services. As a result, our lower margin product
revenues were down substantially, offset by a 16% increase in services
revenue, which includes both our data center maintenance and end-user data
security and compliance services. This shift will become even more apparent
as we begin to recognize revenues from our CCSI acquisition. Overall, our
strategic initiatives have been orchestrated to maximize new business
opportunities, increase efficiencies, improve margins and ensure sustained
profitability."
"CCSI's exemplary team of professionals and impressive customer base
consisting of corporate, educational and government entities are fertile
ground for providing our full range of services which now include a network
operating center (NOC) for performance management and fault management
services that are done remotely from a central location. CCSI, now operating
through a wholly-owned subsidiary of QSGI since completing the acquisition in
early July, has already signed [four] new customer agreements across its
service offerings, with more in the pipeline. CCSI generated approximately
$13.7 million in revenue in 2007, up from $11.0 million in 2006 and generated
EBITDA of approximately $2.1 million in 2007. As we continue to gain critical
mass in the market place, we are finding that more and more of our business is
being derived from customer referrals and contract expansions from existing
customers. This appears to be a trend among both QSGI's and CCSI's customers.
We view this as validation of the quality of our services and an indication of
customer satisfaction. We plan to build upon this strong foundation in the
months and years ahead."
"Our recent alliance with IBM Global Financing (IGF) for on-site auditing
and data erasure services has already resulted in a large new customer and
based upon indications from IBM we continue to be hopeful it will expand in
scope. A pilot program with IGF was initiated in April 2008 under which IGF
will offer its customers QSGI's on-site data audit and erasure services for
enterprise storage systems within data centers and in the corporate
environment. We continue to work hard to ensure success with our pilot and we
collectively feel this program will be a winner for both QSGI and IBM. We
have more opportunities with IBM's sales force then ever and some of these are
large in scope and overall program term. New laws now being enforced, such as
the state of Connecticut, which recently implemented new rules with respect to
data erasure and disposal, further validate our services. Importantly, we
believe that IBM's strong brand recognition will shorten the selling cycle for
these services."
Mr. Sherman concluded, "Even in a challenging economic environment, the
value proposition that QSGI offers can benefit companies seeking to cut
expenses for needed IT services. With our expanded product offerings,
recurring revenue streams, and new alliance with IGF, the foundation is now
built for solid performance and steady growth in financial performance."
Total revenue for the second quarter of 2008 was $6.1 million, as compared
with $9.7 million for the same period in 2007. The decline in revenue
reflects a decrease in IT product remarketing revenue to $4.1 million from
$8.0 million for the same period last year, offset by a 16% increase in
services revenue to $2.0 million from $1.7 million for the same period last
year. The decline in product revenue was primarily related to the Data Center
Hardware division, reflecting the anti-competitive change in business practice
instituted by a major OEM that affected QSGI and the entire industry, as
previously disclosed, coupled with a decline in wholesale remarketing revenue
within the Data Security and Compliance division. Gross profit for the
company was $1.1 million, compared to gross profit of $2.5 million in the
second quarter of 2007. The decline in gross profit reflects QSGI's
de-emphasis of its wholesale remarketing revenue, a sharp decline in the Data
Center Hardware division and non-cash expenses associated with conservatively
increasing reserves on inventory by $230,000. Selling, general and
administrative expenses were $2.5 million versus $2.4 million for the same
period last year, which included $215,000 relating to fees paid to our former
lender, and to consultants and attorneys associated with our prior lender.
Net loss available to common stockholders for the second quarter of 2008 was
$1.9 million or $0.06 per share, compared to a net loss of $145,000, or $0.00
per share, for the same period in 2007.
Conference Call
QSGI will host a conference call at 11 a.m. Eastern Time, today, August
14, 2008. 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 (201) 689-8054. 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
(201) 612-7415 and entering account #286, ID #294038. The encore recording
will be available two hours after the conference call has concluded.
About QSGI
QSGI provides a full suite of information technology services to help
corporations and governmental agencies better manage hardware assets, reduce
maintenance expenses, build best practices for data security and assure
regulatory compliance. With a focus on the entire range of IT platforms --
from mainframes, midrange servers and PC, to network infrastructure and
enterprise storage hardware, the services offered by QSGI are specifically
designed to reduce total cost of ownership for IT assets and maximize the
clients' return on their IT investment.
For enterprise class hardware in the data center, QSGI offers hardware
maintenance services, hardware environment planning and consultation,
refurbished whole systems, parts, features, upgrades and add-ons.
Additionally, for desktop IT assets, servers and SAN products, QSGI offers a
range of end-of-life services that include: automated asset auditing,
Department of Defense (DOD) level data destruction, documentation for
regulatory compliance, hardware refurbishment with worldwide remarketing or
proper IT asset recycling.
Additionally, through its acquisition of Contemporary Computer Services,
Inc. (CCSI), an enterprise class IT services provider with an extensive list
of corporate, educational, and government customers, QSGI also performs
network design, implementation, and monthly maintenance services on
corporations' networking infrastructure as well as 24/7 IT monitoring and
diagnostics through its North American Network Operating Center (NOC).
Given the sensitive nature of the company's client relationships, it does
not provide the names of its clients. Additional information about the
company is available at www.qsgi.com.
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.
(tables follow)

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

June 30, Dec. 31,
2008 2007
Assets

Current Assets
Cash and cash equivalents $141,682 $127,723
Accounts receivable, net of reserve of
$1,070,280 and $955,599 in 2008 and
2007, respectively 2,028,068 3,853,362
Inventories 5,604,347 6,578,031
Prepaid expenses and other assets 134,213 163,553
Total Current Assets 7,908,310 10,722,669
Property and Equipment, Net 260,575 286,766
Goodwill 1,489,621 1,489,621
Intangibles, Net 389,822 470,348
Other Assets 549,113 448,066

$10,597,441 $13,417,470

Liabilities And Stockholders' Equity (Deficit)
Current Liabilities
Revolving line of credit, net of original
issue discount $3,142,273 $3,754,061
Accounts payable 1,934,054 1,109,940
Accrued expenses 614,922 654,461
Accrued payroll 78,564 88,818
Deferred revenue 269,352 439,865
Other liabilities 259,229 311,610
Total Current Liabilities 6,298,394 6,358,755

Long-Term Deferred Revenue 27,650 142,772
Deferred Income Taxes 27,300 27,300
Total Liabilities 6,353,344 6,528,827

Redeemable Convertible Preferred Stock 4,248,154 4,238,685

Stockholders' Equity (Deficit)
Preferred shares: Authorized 5,000,000 shares in
2008 and 2007, $0.01 par value, none issued - -
Common shares: authorized 95,000,000 shares in
2008 and 2007, $0.01 par value; 45,797,716
shares issued and outstanding in 2008, of which
13,500,000 shares were contingent acquisition
shares held in escrow; 31,172,716 shares
issued and outstanding in 2007 322,977 311,727
Additional paid-in capital 14,204,120 14,134,298
Retained earnings (deficit) (14,531,154) (11,796,067)
Total Stockholders' Equity (Deficit) (4,057) 2,649,958

$10,597,441 $13,417,470

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007

Product Revenue $4,113,245 $7,951,514 $10,388,427 $15,906,683
Service Revenue 1,983,994 1,713,675 3,914,387 3,152,673
Total Revenue 6,097,239 9,665,189 14,302,814 19,059,356

Cost Of Products Sold 4,354,773 6,538,501 10,310,239 12,712,657
Cost Of Services Sold 683,417 633,072 1,361,853 1,176,001
Total Cost Of Sales 5,038,190 7,171,573 11,672,092 13,888,658

Gross Profit 1,059,049 2,493,616 2,630,722 5,170,698

Selling, General And
Administrative Expenses 2,486,812 2,378,407 4,758,880 4,993,303

Depreciation And
Amortization 208,334 167,709 315,720 339,717

Interest Expense, net 199,792 43,353 256,442 131,192

Loss Before Provision
(Benefit) For Income
Taxes (1,835,889) (95,853) (2,700,320) (293,514)

Provision (Benefit) For
Income Taxes 8,511 (19,294) 34,767 (78,113)

Net Loss (1,844,400) (76,559) (2,735,087) (215,401)

Preferred Stock Dividends 64,323 64,323 128,648 127,939

Accretion To Redemption
Value of Preferred Stock 4,769 4,493 9,468 8,918

Net Loss Available to
Common Stockholders $(1,913,492) $(145,375) $(2,873,203) $(352,258)

Net Loss Per Common Share -
Basic $(0.06) $0.00 $(0.09) $(0.01)
Net Loss Per Common Share -
Diluted $(0.06) $0.00 $(0.09) $(0.01)

Weighted Average Number Of
Common Shares Outstanding
-Basic 31,469,419 31,172,716 31,321,068 31,172,716
Weighted Average Number Of
Common Shares Outstanding
-Diluted 31,469,419 31,172,716 31,321,068 31,172,716

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Six Months Ended June 30, 2008 and 2007
(Unaudited)

2008 2007

Cash Flows From Operating Activities
Net Loss $(2,735,087) $(215,401)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 315,720 339,717
Non-cash interest expense 16,208
Stock option compensation expense 5,438 7,300
Deferred income taxes - (99,170)
Provision for doubtful accounts 194,176 (11,212)
Changes in assets and liabilities:
Accounts receivable 1,631,119 1,551,129
Inventories 973,684 (2,509,350)
Prepaid expenses and other assets (183,988) 103,347
Accounts payable and accrued
expenses 436,304 (454,471)
Net Cash Provided by (Used in) Operating Activities 653,574 (1,288,111)

Cash Used In Investing Activities
Purchases of property and equipment (71,107) (85,649)
Net Cash Used In Investing Activities (71,107) (85,649)

Cash Flows From Financing Activities
Payment for financing costs (25,614) (142,827)
Net amounts borrowed under current revolving
lines of credit, net of OID 3,339,815 -
Net amounts borrowed (paid) under previous
revolving lines of credit (3,754,061) 1,872,345
Preferred stock dividends (128,648) (127,939)
Net Cash Provided By (Used In) Financing Activities (568,508) 1,601,579

Net Increase In Cash And Cash Equivalents 13,959 227,819

Cash And Cash Equivalents - Beginning Of Period 127,723 632,948
Cash And Cash Equivalents - End of Period $141,682 $860,767

SOURCE QSGI Inc.

IR Contact, David K. Waldman, or Klea K. Theoharis, both of Crescendo
Communications, LLC for QSGI Inc., +1-212-671-1020, qsgi@crescendo-ir.com