A4S Security gathers debt as well as new contracts

The past year has been a busy one for Loveland-based A4S Security Inc.

The digital video surveillance company not only went public in November, but has been busy launching, selling and improving its technology. The result: a company that is gaining momentum as well as debt.

Founded in 2000 in Kalispell, Mont., A4S initially focused on developing a digital product for the U.S. Air Force that would capture audio, video and data. After finishing work on its government contract, the company adapted the technology it developed for other uses – primarily law enforcement and transportation.

Meeting milestones

The company set up a development team in Loveland in 2003 after President Michael Siemens read about the high-tech layoffs in the area. The next year, the company’s headquarters followed, joining the development team in Loveland.

Although the original intent was to market to law enforcement agencies to equip squad cars with recording systems, it has been the transportation industry that has carried the company. Since its first contract in October 2004, A4S has signed contracts with four additional municipal transit departments throughout the U.S. Many of these contracts have grown.

For example, the company landed a contract to supply 11 units to Greater Cleveland Regional Transit Authority in December. After one of the systems captured a stabbing, aiding the police in the capture and prosecution, the Cleveland Transit Authority ordered an additional 45 units.

In addition to gaining momentum in the transit field, A4S has made progress on the design of its system. It launched a new generation of its ShiftWatch TVS transit product that boasts a more compact design. The Larimer County Sheriff Department helped prove that the A4S system could weather a catastrophic event. The ShiftWatch product withstood a test that replicated an explosion similar to those that occurred in London last summer.

But money is good, too

Despite the company’s successes during the past year, it continues to operate at increasingly large losses. Its stock, which debuted in July at $6, climbed to as high at $6.90 in December, but has since stumbled. As of May 18, the stock was trading around $4.35.

More than half of the $8.3 million raised by the initial public offering has been spent. CFO Jeff McGonegal reported $4.7 million in cash at the end of 2005, but only $3 million as of March 31.

In April, independent auditors expressed apprehension for the company’s financial status. According to a Securities and Exchange Commission filing, the auditors “issued an opinion indicating substantial doubt about (A4S’) ability to continue as a going concern for the year ending Dec. 31, 2006.”

The concern might have to do with the rate at which A4S is burning up its cash.

“We’re currently burning at a rate of approximately $300,000 per month,” McGonegal said during a recent conference call.

If operations continue at the current pace, the cash will be spent by the end of the year.

But company officials are optimistic that the company is on the verge of greatness.

Poised to profit?

“2005 was really a year of transition for us,´ said CEO Tom Marinelli.

The company doubled its staff during 2005 to 30 employees, with most of the new hires in sales, marketing and engineering. It’s these key hirings, according to Marinelli that will help the company become and remain a viable technology entity.

The efforts put into staffing are already showing some payoff.

“We’re currently in active sales communications with over 100 metropolitan transit authorities,” Marinelli said.

In addition to looking forward to pending sales in the transit market, A4S expects to launch its law enforcement product in late summer. The product, which was the company’s original plan after the military contract, has been delayed waiting for industry standards to be set.

The International Association of Chiefs of Police is in the process of drafting digital video standards. Siemens is not only a member of the association, but is also on the board that is drafting the standards. Last year, Siemens had estimated the standards would be ready during the first quarter.

With Siemens assisting in the creation of those standards, A4S should need little rework to its technology.

With more than 22,000 law enforcement agencies in the U.S. as its market, the soon-to-be released product could quickly become the company’s lead revenue generator.

“There is a $4.3 billion opportunity in the law enforcement market,” he said.

By comparison, the transportation market is between $1 billion and $2 billion.

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