10-Q 1 f10q0611_somerset.htm QUARTERLY REPORT f10q0611_somerset.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______to______.

  Commission File Number: 0-10854
 
SOMERSET INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
 
 DELAWARE
 13-2795675
(State or other jurisdiction of incorporation or organization)                 
(I.R.S. Employer Identification No.)
                                                                                           
 
90 Washington Valley Road, Bedminster, NJ  07021
(Address of Principal Executive Offices) (Zip Code)

(908) 719-8909
(Registrant's Telephone No., including area code)

N/A
 (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o No x  
(See Note 1B – Basis of Presentation in Notes To Financial Statements)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer o
Accelerated Filer o     
Non-Accelerated Filer o (Do not check if a smaller reporting company)
Smaller 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
 
As of August 19, 2011, there were 23,348,655 shares of the registrant’s Common Stock, par value $.001 per share, outstanding.
 
 
 

 
 
SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 
INDEX TO FORM 10-Q
(See Note 1B – Basis of Presentation in Notes To Financial Statements)
June 30, 2011

PART I-- FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
Item 3
Quantitative and Qualitative Disclosures About Market Risk
16
Item 4.
Controls and Procedures
16
     
PART II-- OTHER INFORMATION
 
   
Item 1
Legal Proceedings
17
Item 1A.
Risk Factors
17
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17
Item 3.
Defaults Upon Senior Securities
17
Item 4.
(Removed & Reserved)
17
Item 5.
Other Information
17
Item 6.
Exhibits
17
     
SIGNATURE
18
 
 
 

 
 
PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements.
  
SOMERSET INTERNATIONAL GROUP, INC.
FINANCIAL STATEMENTS
(See Note 1B – Basis of Presentation in Notes To Financial Statements)
 
AS OF JUNE 30, 2011
 
SOMERSET INTERNATIONAL GROUP, INC.
Financial Statements Table of Contents
 
FINANCIAL STATEMENTS    
Page #
   
Balance Sheet  
2
   
Statement of Operations
3
   
Statement of Cash Flow
4
   
Notes to the Financial Statements      
5
 
 
 
1

 
 
SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(SEE NOTE 1B – BASIS OF PRESENTATION)
JUNE 30, 2011 AND DECEMBER 31, 2010



   
June 30,
 2011
   
December 31, 2010
 
   
(Unaudited)
   
(Unaudited)
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 41,392     $ 34,726  
Accounts receivable, net
    394,590       446,158  
Inventories
    516,154       599,858  
Prepaid expenses
    3,624       4,208  
Other current asset
    9,554       9,554  
Total Current Assets
    965,314       1,094,504  
                 
Property and equipment, net
    79,838       92,251  
                 
Other Assets:
               
Deposits
    7,120       7,120  
Deferred financing costs, net
    --       19,138  
Customer lists, net
    131,486       428,683  
Goodwill
    2,200,355       2,200,355  
 Total other assets
    2,338,961       2,655,296  
TOTAL ASSETS
  $ 3,384,113     $ 3,842,051  
                 
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
               
                 
Current Liabilities:
               
Accounts payable and accrued expenses
  $ 1,695,293     $ 1,770,036  
Promissory notes payable - current
    1,425,225       1,448,116  
Dutchess promissory notes payable - current
    3,875,920       3,875,920  
Accrued interest payable
    1,722,915       1,364,882  
Deferred revenue
    232,269       241,416  
Total Current Liabilities
    8,951,622       8,700,370  
                 
TOTAL LIABILITIES
    8,951,622       8,700,370  
                 
Stockholders’ (Deficit):
               
Common Stock, 200,000,000 shares authorized, $.001 par value, 23,348,655 shares issued and outstanding in 2011 and 2010
    23,349       23,349  
Capital in excess of par value
    31,367,243       31,367,243  
Accumulated deficit
    (36,958,958 )     (36,248,911 )
Total stockholders’ (deficit)
    (5,567,509 )     (4,858,319 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT )
  $ 3,384,113     $ 3,842,051  
 

The Notes to the Consolidated Financial Statements are an integral part of these statements.
 
 
2

 
 
SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
(SEE NOTE 1B – BASIS OF PRESENTATION)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
 
   
Three Months Ending
June 30,
   
Six Months Ending
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenues
                       
Equipment sales
  $ 91,496     $ 429,497     $ 280,081     $ 742,321  
Installation and service revenues
    217,815       87,278       289,960       200,687  
Contract revenues
    460,762       419,649       880,339       855,276  
Total revenues
    770,073       936,424       1,450,380       1,798,284  
                                 
Costs of goods sold
                               
Material cost of systems sold
    68,857       220,578       210,370       360,370  
Install and service costs
    178,541       215,344       385,378       401,963  
Engineering and development
    29,080       27,349       57,514       57,311  
Total costs of goods sold
    276,478       463,271       653,262       819,644  
                                 
Gross margin
    493,595       473,153       797,118       978,640  
                                 
Selling, general, and administrative expenses
                               
Selling, general and administrative expense
    395,547       503,326       832,233       1,015,746  
Depreciation expense
    6,545       6,545       13,090       14,096  
Amortization expense 
    148,637       173,269       315,673       346,538  
Total selling, general, and administrative expenses
    550,729       683,140       1,160,996       1,376,380  
                                 
Loss from operations
    (57,134 )     (209,987 )     (363,878 )     (397,740 )
                                 
Other Income (Expense)
                               
Interest (expense)
    (197,198 )     (207,682 )     (366,259 )     (369,419 )
Other (expense)
    8,719       (17 )     25,006       2,435  
Total other income (expense)
    (188,479 )     (207,699 )     (341,253 )     (366,984 )
                                 
Loss before income taxes
    (245,613 )     (417,686 )     (705,131 )     (764,724 )
                                 
Provision for (benefit from) income taxes
    175       451       4,139       2,031  
                                 
Net Loss
  $ (245,788 )   $ (418,137 )   $ (709,270 )   $ (766,755 )
                                 
Basic and diluted net loss per common share
  $ (0.01 )   $ (0.02 )   $ (0.03 )   $ (0.03 )
                                 
Weighted Average Number of Common Shares
    23,348,655       23,348,655       23,348,655       23,348,655  
 
The Notes to the Consolidated Financial Statements are an integral part of these statements.

 
3

 
 
SOMERSET INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
(SEE NOTE 1B – BASIS OF PRESENTATION)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010
   
2011
   
2010
 
Cash Flows From Operating Activities:
           
Net (Loss)
  $ (709,270 )   $ (766,755 )
Adjustments to reconcile net loss to net cash used by operating activities:
               
Depreciation
    13,090       14,096  
Amortization
    315,673       346,538  
                 
Changes in operating assets and liabilities:
               
Accounts receivable
    51,568       (12,811 )
Inventories
    83,704       (46,709 )
Other current assets
    --       (100 )
Accounts payable and accrued expenses
    (74,743 )     168,782  
Prepaid expense
    1,184       (23,892 )
Accrued interest payable
    358,033       312,334  
Deferred revenue
    (9,147 )     (7,648 )
     Net Cash Provided (Used) by Operating Activities
    30,092       (16,165 )
                 
Cash Flows From Investing Activities:
               
Purchase of equipment
    (535 )     (410 )
Disposal of equipment
    --       1,300  
     Net Cash Used by Investing Activities
    (535 )     890  
                 
Cash Flows From Financing Activities:
               
Proceeds from issuance of stock
    --       --  
Proceeds from issuance of promissory notes
    --       --  
Payment of promissory notes payable
    (22,891 )     (15,121 )
     Net Cash Provided (Used) by Financing Activities
    (22,891 )     (15,121 )
                 
Net Change in Cash  and cash equivalents
    6,666       (30,396 )
Cash and cash equivalents at Beginning of the Period
  $ 34,726     $ 43,633  
Cash and cash equivalents at End of the Period
  $ 41,392     $ 13,237  
                 
Cash paid for interest
  $ 41,367     $ 53,300  
Cash paid for taxes
  $ 4,139     $ 2,031  
 
The Notes to the Consolidated Financial Statements are an integral part of these statements.
 
 
4

 
 
Note 1.  Business and Basis of Presentation

A.           Nature of the Business
 
Somerset International Group, Inc. (the “Company”) is in the business of acquiring profitable or near term profitable private small and medium sized businesses that provide proprietary security products and solutions for people and enterprises – from personal safety to information security – and maximizing the profitability of our acquired entities and to act as a holding company for such entities.

Our executive office is located at 90 Washington Valley Road, Bedminster, New Jersey, 07021.

Customers are located primarily in the northeastern United States.

B.           Basis of Presentation
 
The unaudited consolidated financial statements included herein have not been reviewed by the Company’s independent registered public accounting firm.  Therefore, these financial statements have not been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Also, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The unaudited interim consolidated financial statements as of June 30, 2011 reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are considered necessary for a fair presentation of its financial position as of June 30, 2011 and the results of its consolidated operations and its consolidated cash flows for the periods ended June 30, 2011 and 2010.

The Unaudited Consolidated Statements of Operations for the periods ended June 30, 2011 and 2010 are not necessarily indicative of results for the full year.
 
The unaudited consolidated financial statements should be read in conjunction with the unaudited financial statements of the Company and the notes thereto as of and for the year ended December 31, 2010 as included in the Company’s Form 10-K filed with the Commission on March 31, 2011.
 
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern.  This contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Currently, the Company does not have significant cash or other material assets, nor does it have operations or a source of revenue which is adequate to cover its administrative costs for a period in excess of one year and allow it to continue as a going concern.  Management is actively involved in exploring additional business opportunities which they believe will allow the Company to increase shareholder’s value and allow it to continue as a going concern. The Company will require financing to fund its current operations and will require additional financing to acquire or develop other business opportunities.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 

 
5

 
 
Note 2.  Significant Accounting Policies
 
A.  
Cash and cash equivalents
 
Cash and cash equivalents include cash on hand and in the bank, as well as all short-term securities held for the primary purpose of general liquidity.  Such securities normally mature within three months from the date of acquisition.

B.  
Accounts Receivables
 
Accounts receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date.  Accounts receivables are stated at the amount billed to the customer.  Interest is not billed or accrued.  Accounts receivables in excess of 90 days old are considered delinquent.  Payments to accounts receivables are allocated to the specific invoices identified on the customers remittance advice or, if unspecified, are applied to the oldest invoice.  The Company has an allowance for doubtful accounts of approximately $31,000 and $31,000 as of June 30, 2011 and December 31, 2010, respectively, based on its historical collectability.

C.  
Property and  Equipment
 
Property, equipment, and leasehold improvements are stated at cost.  Depreciation is provided on a straight-line method over the estimated useful lives of the assets ranging from two-seven years.  Leasehold improvements are depreciated over the lesser of their useful lives or the term of the lease.  Expenditures for maintenance and repairs are charged to expense as incurred.

D.           Concentration of Credit Risk:

The Company maintains its cash in bank deposit accounts at high credit quality financial institutions. The balances, at times, may exceed federally insured limits.

Currently, Secure System, Inc. has five customers which accounted for all of their revenues. Meadowlands has approximately 450 accounts and Fire Control has approximately 300 accounts which accounted for all of their revenues.  While our goal is to diversify Secure’s and Fire Control’s customer base, Secure expects to continue to depend upon a relatively small number of customers for a significant percentage of its revenues for the foreseeable future. Significant reductions in sales to any of our customers may have a material adverse effect on us by reducing our revenues and our gross margins.

E.           Use of Estimates:
 
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures including the disclosure of contingent assets and liabilities.  Accordingly, actual results could differ from those estimates.  Such estimates include the fair value estimates related to the net tangible and identifiable assets of acquired companies and the estimated fair value of reporting units used when evaluating Goodwill for impairment.

F.           Income Taxes:
 
Deferred income tax assets and liabilities are recognized for the differences between financial and income tax reporting basis of assets and liabilities based on enacted tax rates and laws. The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible on the Company’s various income tax returns for the year reported. The Company’s deferred tax items are net operating loss carryforwards, other items, and related deferred tax assets and have been offset by a valuation allowance for the same amount.
 
 
6

 
 
G.           Fair Value of Financial Instruments:
 
The carrying amounts of cash, accounts receivable, accounts payable, promissory notes payable, and stockholder note payable approximate fair value because of the terms of these financial instruments.

H.  
Reclassifications:
 
Certain reclassifications were made to the 2010 financial statements in order to conform to the 2011 financial statement presentation.  Such reclassifications had no effect on the prior reported net loss.

I.            Principles of Consolidation:
 
The consolidated financial statements include the operations of Somerset International Group, Inc., its wholly owned subsidiaries Fire Control Electrical Systems, Inc. and Secure System, Inc., and Secure System Inc.’s wholly owned subsidiaries Meadowlands Electronics Inc., and Vanwell Electronics Inc.  All significant intercompany accounts and transactions have been eliminated in consolidation.

J.            Stock Based Compensation and Stock Sales:
 
Stock and warrants issued for employee compensation services have been determined based on the value of the instrument issued at date of issuance for such services.  In addition, during 2009 the Company issued warrants as part of certain debt financings and sales of common stock.  The value of these warrants has been included in additional paid in capital as part of the value of the overall stock sale.
 
K.           Revenue Recognition:
 
Installation, subscription and maintenance revenues include installation of equipment and testing at customer sites, fees for leased wireless equipment, and fees for equipment maintenance. These revenues are recognized as the services are performed, or ratably over time in the case of fees that may be billed quarterly or semi-annually in advance. Revenues related to pre-billed services are deferred until the service is provided and thereby earned. Equipment revenue is recognized when the equipment is delivered to the customer. The Company recognizes revenue only when persuasive evidence of an arrangement exists, when delivery of merchandise has occurred or services have been rendered, the fee is established and is determinable and collection is reasonably assured.

The Company has three separate and distinct revenue streams – equipment sales, installation and maintenance.

The description of each stream is as follows:

    · Equipment:
The pricing for an equipment sale is generally established through a customer purchase order and is a separate stand-alone arrangement.  Revenue is recognized for equipment sales upon the delivery of the equipment, which is the date on which customer becomes responsible for the payment of the equipment.
 
 
7

 
 
·  
Installation:
Installation services are a separate stand-alone arrangement consisting of final connections of the equipment and individual testing of the equipment pieces.  Such services occur after electrical work has been contracted and supervised by the customer, and completed by an outside third party.  Installation services, when performed by the Company, are separately negotiated with the customer, and are recognized upon completion of the service by the Company.

·  
Maintenance:
These are separately priced contracts that are entered into with a customer typically after the installation services are performed.  Maintenance services are not bundled into any other service.  These maintenance services are recognized as revenues as the services are performed.  These services are billed at the end of the month after the service is provided or if provided through a contractual arrangement then pre-billed for the defined periods, i.e. quarterly, semi-annual, or annual. Deferred Revenue on the Company’s balance sheet represents amounts billed to customers for maintenance to be performed in future periods.

L.            Inventory:
 
Inventory consists primarily of parts and work in process products held for sale. Inventory, at year end, is stated at the lower of cost or market, with cost being determined on a first in/first out basis.
 
In accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 270 (formerly APB 28), one of the Company’s subsidiaries uses estimated gross profit rates to determine cost of goods sold during interim periods.  This is different from the method used at annual inventory dates.  The other subsidiaries perform physical inventory counts when calculating quarter-end values.  Historically this has not resulted in any material adjustment to the cost of goods sold.

M.          Loss Per Share:
 
The Company computes net loss per share under the provisions of FASB ASC 260 (formerly SFAS No. 128, “Earnings per Share”), and utilizes guidance provided by SEC Staff Accounting Bulletin No. 98 (SAB 98). Under the provisions of FASB ASC 260   and SAB 98, basic loss per share is computed by dividing the Company’s net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share excludes potential common shares if the effect is anti-dilutive. Diluted earnings per share are determined in the same manner as basic earnings per share except that the number of shares is increased assuming exercise of dilutive stock options and warrants using the treasury stock method. As the Company had a net loss, the impact of the assumed exercise of the stock options and warrants is anti-dilutive and as such, these amounts have been excluded from the calculation of diluted loss per share. For the periods ended June 30, 2011 and 2010, 4,208,505 of common stock equivalent shares were excluded from the computation of diluted net loss per share after considering ownership limitations of certain warrants and conversion features.

 
8

 
 
N.           Advertising Costs:
 
Advertising costs are treated as period costs and expenses as incurred and are included in operating expenses in the accompanying consolidated statements of income.

O.           Goodwill and Intangible Assets:
 
Goodwill and intangible assets result primarily from acquisitions accounted for under the purchase method. In accordance with Professional Standards, goodwill and intangible assets with indefinite lives are not amortized but are subject to impairment by applying a fair value based test. Intangible assets with finite useful lives related to software, customer lists, covenant not to compete and other intangibles are being amortized on a straight-line basis over the estimated useful life of the related asset, generally three to seven years.  As of June 30, 2011, no impairment charge was necessary.
 
In accordance with Professional Standards, the Company reviews the carrying value of goodwill and intangible assets with indefinite lives annually or on an interim basis in certain circumstances as required. The Company measures impairment losses by comparing carrying value to fair value. The impairment test compares the carrying amount of the reporting unit to its fair value.  Discounted cash flows are utilized to determine the fair value of the assets being evaluated.  The impairment test in 2011 and 2010 supported the carrying value of goodwill, and as such, no write-down in the carrying value of goodwill was recorded.
 
In accordance with Professional Standards, long-lived assets used in operations are reviewed for impairment whenever events or change circumstances indicate that carrying amounts may not be recoverable. For long-1ived assets to be held used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between carrying amount and fair value.
 
Note 3.  Recent Accounting Pronouncements
 
In January 2010, the Financial Accounting Standards Board (FASB) issued Update 2010-06, "Fair Value Measurements and Disclosures (Topic 820):  Improving Disclosures about Fair Value Measurements", which is effective for annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuance and settlements in the rollforward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010.  This update modifies current professional standards to require certain disclosures as follows:
 
 
The amounts of significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for those transfers.

Information in the reconciliation of fair value measurements using significant unobservable inputs (Level 3) about purchases, sales, issuance and settlements (that is, on a gross basis rather than as one net number).

Fair value measurement disclosures for each class of assets and liabilities.

Description of valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements that fall into either Level 2 or Level 3.
 
 
9

 
 
In October 2009, FASB issued Update No. 2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements which is effective for fiscal years beginning on or after June 15, 2010 which requires certain disclosures regarding multiple deliverable revenue arrangements as well as addressing the accounting for multiple deliverable arrangements to enable reporting entities to account for product and services separately rather than a combined unit.  The Company is currently evaluating the impact of this pronouncement.
 
 
In October 2009, FASB issued Update No. 2009-14, "Software: Certain Revenue Arrangements That Include Software Elements”, which is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  The update impacts the recognition of revenue arrangements that include both tangible products and software elements and related disclosures.  The Company is currently evaluating the impact of this pronouncement.

In October 2009, FASB issued Update No. 2009-15, "Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”, which amends current professional standards regarding share-lending arrangements that have been terminated as a result of counterparty default prior to December 15, 2009.  The Company is currently evaluating the impact of this pronouncement

Note 4.  Commitments and Contingencies
 
The Company has entered into an employment agreement with the President and CEO that became effective January 6, 2004. The employment agreement has a term of five years. In the event of termination of employment without cause, the agreement provides that the Company shall pay severance equaling the greater of the balance of the term of the agreement or one year’s salary.  On August 29, 2008, the Board of Directors, with the approval of a majority of the shareholders of the Company entered into an amendment to extend the employment agreement dated January 6, 2004 for an additional 3 years from January 6, 2009.  On January 6, 2009, the President and CEO signed an additional agreement, in which he agreed to permanently waive the fiscal 2009 salary increase provided for in his employment agreement. The additional agreement is for the period of January 6, 2009 through January 5, 2010.  On January 6, 2010, Mr. Adiletta signed an additional agreement, in which he agreed to permanently waive the 2010 salary increase provided for in his employment agreement. The additional agreement is for the period of January 6, 2010 through January 5, 2011.  On January 6, 2011, Mr. Adiletta signed an additional agreement, in which he agreed to permanently waive the 2011 salary increase provided for in his employment agreement. The additional agreement is for the period of January 6, 2011 through January 5, 2012.  The President and CEO’s compensation for the year ended December 31, 2010 was $366,000.

Secure leases its facility on a month to month basis at a monthly rent of $4,500.

Meadowlands and Fire Control are co-located and lease their facility through a two year lease that terminates on February 28, 2013, at a monthly rent of $3,750.

On September 4, 2008, Keith Kesheneff and Kathryn Kesheneff filed suit in Superior Court in New Jersey against the Company claiming that they are owed $355,000 for a purchase price adjustment note issued by the Company.  The Company filed an answer, with counterclaims, on October 27, 2008, generally contesting all claims.  In February 2011, the Court granted partial summary judgment to the plaintiffs.  The Company continues past settlement efforts in order to settle this dispute.
 
 
10

 
 
On June 26, 2009, the Company filed suit in the United States District Court for the District of New Jersey against TSG Capital Partners, LLC and others seeking to recover $105,000 in financing fees paid by the Company, plus damages for fraud, counsel fees, and interest.  The Company has served its complaint and is pursuing its claims.

On August 6, 2009, the holders of three promissory notes convertible into the Company’s common stock obtained judgments against the Company in the Superior Court of New Jersey totaling $157,636.31, plus costs of $720.00.

On January 19, 2010, the holders of promissory note convertible into the Company’s common stock filed suit against the Company demanding payment of the principal amount of $175,000.00, plus accrued interest, and counsel fees.  The matter proceeded to trial in July 2011.  While the Company expects an adverse determination, as of this date, the Company has not received notice of an Order of Judgment.  Plaintiff has requested a judgment in the amount of $426,179.70.

In the normal course of business, the Company is subject to various proceedings and claims, the resolution of which will not, in management's opinion, have a material adverse effect on the Company's financial position or results of operations.

Note 5.  Unregistered Sale of Equity Securities

None.

Note 6.  Dutchess Debentures

Substantially all principal payments due under the terms of the Dutchess Debentures during 2011 and 2010 are in arrears.  No payments of interest on these debentures have been made during 2011 and only partial payments during 2010.

On December 1, 2010, the Company received a notice of default from Dutchess Private Equities Fund requiring payment in full of outstanding obligations.  The Company is attempting to resolve these outstanding obligations with Dutchess Private Equities Fund.  There is no assurance that the Company will be successful in these attempts.

Note 7.  Equity Incentive Plan

On August 29, 2008, the Board of Directors, with the approval of a majority of the shareholders of the Company, adopted the 2008 Equity Incentive Plan (the “Plan”) which will be administered by a compensation committee (the “Committee”) appointed by the Board.

There have been 100,000 shares issued under the Plan.
 
Note 8. Subsequent Events
 
None.
 
 
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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
General

The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.
 
Overview

Somerset International Group, Inc. (the “Company”) is in the business of acquiring profitable or near term profitable private small and medium sized businesses that provide proprietary security products and solutions for people and enterprises – from personal safety to information security – and maximizing the profitability of our acquired entities and to act as a holding company for such entities.
 
 
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Results of Operations

Revenues
 
Revenues of $770,703 and $1,450,380, for the three and six months ended June 30, 2011, respectively, decreased by $166,351 and $347,904 over revenues of $936,424 and $1,798,284 for the three and six months ended June 30, 2010.  Equipment Sales decreased $338,001 for the three months ended June 30, 2011 versus the same period in 2010 and decreased by $462,240 for the six months ended June 30, 2011.  Installation and Service revenues increased by $130,537 and $89,273, respectively, for the three months and six months ended June 30, 2011 versus the same periods in 2010.  Contract revenues increased $41,113 and $25,063, respectively, for the three and six months ended June 30, 2011 versus the same periods in 2010. 

 Costs of Goods Sold
 
Costs of Goods Sold of $276,478 and $653,262 for the three and six months ended June 30, 2011, respectively, decreased by $186,793 and $166,382 over Cost of Goods Sold of $463,271 and $819,644 for the three and six months ended June 30, 2010. The decrease for the three months ending June 30, 2011 versus the same period in 2010 was primarily attributable to a decrease in cost systems sold of $151,721 and a decrease in installation and service costs of $36,803.  The decrease for the six months ending June 30, 2011 versus the same period in 2010 was primarily attributable to a decrease in cost systems sold of $150,000 and a decrease in installation and service costs of $16,585.

Gross Margin

Gross Margin of $493,595 and $797,118, respectively, for the three and six months ended June 30, 2011 increased by $20,442 and decreased by $181,522 over Gross Margin of $473,153 and $978,640, respectively, for the three and six months ended June 30, 2010. This was a direct result of the decreases in Revenues and decreases in the Cost of Goods Sold described above.

Selling, General, and Administrative Expenses (“SG&A”)

SG&A expenses of $395,547 and $832,233 for the three and six months ended June 30, 2011, respectively, decreased by $107,779 and $183,513, respectively, over SG&A expenses of $503,326 and $1,015,746 for the three and six months ended June 30, 2010. This was primarily attributable to decrease in Payroll of $85,537 and $154,910, and Legal and Professional Fees of $15,045 and $22,185, respectively, for the three and six months ended June 30, 2011 versus the same period in 2010.

Other Income (Expense)
 
Other Expense of $188,479 and $341,253 for the three and six months ended June 30, 2011 decreased by $19,220 and $25,731, respectively, over Other Expense of $207,699 and $366,984  for the three and six months ended June 30, 2010. This is primarily attributable to the decreased interest expense on the capital leases for service vehicles and an increase in other income of $8,736 and $22,571 for the three and six months ended June 30, 2011 versus the same periods in 2010.
 
 
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Net (Loss)

Net Loss attributable to common stockholders of $245,788 and $709,270 for the three and six months ended June 30, 2011 decreased by $172,349 and $57,485, respectively, over the Net Loss of $418,137 and $766,755 for the three and six months ended June 30, 2010. This was a direct result of the changes in Gross Margin described above and the decreases in the Selling, General, and Administrative expenses described above.

Liquidity and Capital Resources:

We are currently financing our operations primarily through cash generated by financing activities in the form of promissory notes, convertible debentures, and equity investments. We financed our business acquisitions through the issuance of redeemable preferred stock, cash generated from promissory notes, and convertible debentures.

We completed the Secure merger by obtaining a short term bridge financing of $504,000. Pursuant to the terms of the offering, we had a minimum raise of $500,000 and a maximum raise of $700,000. As of March 11, 2005, we raised the minimum of $500,000 and these proceeds were distributed to Secure as part of that transaction. Each of the investors in this financing received nine (6) month notes with a twelve (12%) percent annual interest rate. For each dollar invested, an investor received a note for a dollar repayable in full nine months from the date of the note and one share of our common stock. In addition, the notes are convertible, at the option of the holder, into shares of common stock at the price of $0.25 per share.  Consequentially, we issued a total of 504,000 shares to these investors. Such notes were due and payable September 11, 2005. We had requested a ninety day extension on such notes and we received approval from all of the noteholders. Although the ninety day extension had passed as of March 28, 2006, none of the noteholders has declared a default and we intend to repay any unconverted notes through the proceeds of additional financings.  As of March 31, 2007, $430,000 of principal amount and all related accrued interest to date has been retired through cash payments due of $180,000 and the balance converted to common stock in accordance with the terms of the private placement.

We completed the Meadowlands acquisition by using a portion of the proceeds of the five year Convertible Debenture that we issued with gross proceeds of $2,700,000.  Pursuant to this Debenture, we are required to make mandatory interest only payments to the Investor in the amount of 1/12th of the Interest due on the outstanding balance of the Debenture each month for the first nine months after closing on the acquisition.  Pursuant to this Debenture, we also are required to make mandatory principal payments to the Investor throughout the life of the Debenture.  For months 7 thru 12, we must pay $15,000 per month, for months 13 thru 18 we must pay $35,000 per month, for months 19 thru 24 we must pay $45,000, for month 25 thru month 35 we must pay $75,000 per month and on month 36 all amounts then current will be due payable.

We completed the Fire Control acquisition by using a portion of the proceeds of the five year Convertible Debenture that we issued with gross proceeds of $1,350,000.  Pursuant to this Debenture, we are required to make mandatory interest only payments to the Investor in the amount of 1/12th of the Interest due on the outstanding balance of the Debenture each month for the first two months after closing on the acquisition.  The first payment is due within thirty (30) days of Closing.  Pursuant to this Debenture, we also are required to make mandatory principal payments to the Investor throughout the life of the Debenture.  For months 3 thru 9, we must pay $8,000 per month, for months 10 thru 15 we must pay $15,000 per month, for months 16 thru 21 we must pay $20,000, for month 22 thru month 30 we must pay $30,000 per month, for month 31 thru month 35 we must pay $40,000 per month and on month 36 all amounts then current will be due payable.
  
At June 30, 2011, the Company had negative working capital of approximately $7,986,308.
 
 
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We plan to establish a source of revenues sufficient to cover our operating costs by acquiring additional companies that are generating positive cash flows from operating activities either at acquisition or projected to do so in the future , thereby furthering the objective of becoming profitable and generating positive cash flow from operating activities on a consolidated basis.  The funds needed to continue operations over the next twelve months will be raised from accredited investors and/or institutional investors as in the previous financings. During this period, the Company will attempt to reduce or defer expenses until the capital is available.

Our need for capital may change dramatically as a result of any additional business acquisition or combination transaction.  There can be no assurance that we will identify any additional suitable business, product, technology or opportunity in the future.  Further, even if we locate a suitable target, there can be no assurance that we would be successful in consummating any acquisition or business consolidation on favorable terms or that we will be able to profitably manage the business, product, or technology, if acquired, or otherwise engaged.  The Company intends to acquire cash flow positive companies of such size or number that will allow it to continue as a going concern.  If we are unable to obtain debt and/or equity financing on reasonable terms, we could be forced to delay or scale back our plans for expansion. Consequently, there is substantial doubt about our ability to continue to operate as a going concern.

Management intends to ask pertinent questions of the proposed candidates or opportunities in the course of its diligence phase.  Management will rely heavily on a business plan, financial statements and projections, and management’s views of the future.  Unless something comes to management’s attention as a result of its review of the proposed candidate’s audited financial statements, which causes management to have serious concerns on the viability or integrity of the financial records and business projections, which would result in a disqualification of such candidate, a transaction would be approved by the Board of Directors.  When a transaction requires shareholder approval, a shareholder meeting must be held and a shareholder vote taken.  A proxy statement would be mailed to shareholders informing them of the meeting and requesting their vote.  However, in lieu of holding a meeting, a majority of shareholders may sign a Shareholder’s Resolution approving of such transaction.  If a meeting is not held, an information statement must be mailed to all of its shareholder’s informing them of the action taken by the majority shareholders.
 
Off-balance Sheet Arrangements
 
We have no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, including stock issued for services and or compensation and related disclosure on contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.  Critical accounting policies are defined as those that are reflective of significant judgments, estimates, and uncertainties and potentially result in materially different results under different assumptions and conditions.

We have established an allowance for doubtful accounts for accounts receivable.  We analyzed the ability to collect accounts that are large, none of which are currently past due.  Management will evaluate the adequacy of the subsidiaries’ allowance on a periodic basis.

We write down inventory for estimated excess or obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

We account for our goodwill and intangible assets pursuant to FASB ASC 350 (formerly SFAS No. 142, Goodwill and Other Intangible Assets.) Under FASB ASC 350, intangibles with definite lives continue to be amortized on a straight-line basis over the lesser of their estimated useful lives or contractual terms. Goodwill and intangibles with indefinite lives are evaluated at least annually for impairment by comparing the asset’s estimated fair value with its carrying value, based on cash flow methodology.

There are 12,950,000 warrants for common stock issued and outstanding.  At June 30, 2011, fair value associated with the outstanding warrants is not significant.  The holders of the majority of such warrants are subject to ownership limitations and the warrants are not freely transferable.  Common stock equivalents are reflected net of such limitations.
 
Recent Accounting Pronouncements
 
In January 2010, the Financial Accounting Standards Board (FASB) issued Update 2010-06, "Fair Value Measurements and Disclosures (Topic 820):  Improving Disclosures about Fair Value Measurements", which is effective for annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuance and settlements in the rollforward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010.  This update modifies current professional standards to require certain disclosures as follows:
 
The amounts of significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for those transfers.

Information in the reconciliation of fair value measurements using significant unobservable inputs (Level 3) about purchases, sales, issuance and settlements (that is, on a gross basis rather than as one net number).

Fair value measurement disclosures for each class of assets and liabilities.
 
 
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Description of valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements that fall into either Level 2 or Level 3.

In October 2009, FASB issued Update No. 2009-13, "Revenue Recognition: Multiple-Deliverable Revenue Arrangements which is effective for fiscal years beginning on or after June 15, 2010 which requires certain disclosures regarding multiple deliverable revenue arrangements as well as addressing the accounting for multiple deliverable arrangements to enable reporting entities to account for product and services separately rather than a combined unit.  The Company is currently evaluating the impact of this pronouncement.
 
In October 2009, FASB issued Update No. 2009-14, "Software: Certain Revenue Arrangements That Include Software Elements”, which is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  The update impacts the recognition of revenue arrangements that include both tangible products and software elements and related disclosures.  The Company is currently evaluating the impact of this pronouncement.

In October 2009, FASB issued Update No. 2009-15, "Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing”, which amends current professional standards regarding share-lending arrangements that have been terminated as a result of counterparty default prior to December 15, 2009.  The Company is currently evaluating the impact of this pronouncement
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Not applicable because we are a smaller reporting company.
 
Item 4.    Controls and Procedures Evaluation of Disclosure
 
Controls and Procedures
 
The Company's management evaluated, with the participation of its President, the effectiveness of the design/operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the SEC Act of 1934) as of June 30, 2011. Based on such evaluation, the President of the Company concluded that its disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and regulations of the Securities and Exchange Commission and is not operating in an effective manner.
 
As reported in the Company’s unaudited Form 10-K for the year ended December 31, 2010, the Company performed an assessment of the effectiveness of its controls and procedures and disclosed several material weaknesses related to that assessment.
 
Changes in Internal Controls
 
There were no changes in internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the SEC Act of 1934) that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
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PART II - OTHER INFORMATION
 
Item 1.  Legal Proceedings.

On September 4, 2008, Keith Kesheneff and Kathryn Kesheneff filed suit in Superior Court in New Jersey against the Company claiming that they are owed $355,000 for a purchase price adjustment note issued by the Company.  The Company filed an answer, with counterclaims, on October 27, 2008, generally contesting all claims.  In February 2011, the Court granted partial summary judgment to the plaintiffs.  The Company continues past settlement efforts in order to settle this dispute.

On June 26, 2009, the Company filed suit in the United States District Court for the District of New Jersey against TSG Capital Partners, LLC and others seeking to recover $105,000 in financing fees paid by the Company, plus damages for fraud, counsel fees, and interest.  The Company has served its complaint and is pursuing its claims.

On August 6, 2009, the holders of three promissory notes convertible into the Company’s common stock obtained judgments against the Company in the Superior Court of New Jersey totaling $157,636.31, plus costs of $720.00.

On January 19, 2010, the holders of promissory note convertible into the Company’s common stock filed suit against the Company demanding payment of the principal amount of $175,000.00, plus accrued interest, and counsel fees.  The matter proceeded to trial in July 2011.  While the Company expects an adverse determination, as of this date, the Company has not received notice of an Order of Judgment.  Plaintiff has requested a judgment in the amount of $426,179.70.

In the normal course of business, the Company is subject to various proceedings and claims, the resolution of which will not, in management's opinion, have a material adverse effect on the Company's financial position or results of operations.
 
Item 1A. Risk Factors

Not required to be provided by smaller reporting companies.  
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.  Defaults Upon Senior Securities

On December 1, 2010, the Company received a notice of default from Dutchess Private Equities Fund requiring payment in full of outstanding obligations.  The Company is attempting to resolve these outstanding obligations with Dutchess Private Equities Fund.  There is no assurance that the Company will be successful in these attempts.
 
Item 4. (Removed & Reserved).
  
 
Item 5.  Other Information.

None.
 
Item 6. Exhibits.

(a)           Exhibits:
 
31.1 Certifications of Chief Executive Officer and Chief Financial Officer as adopted pursuant to Section 302 of Sarbanes Oxley Act of 2002
 
32.1 Certifications of Chief Executive Officer and Chief Financial Officer as adopted pursuant to Section 906 of Sarbanes Oxley Act of 2002
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

  
 
SOMERSET INTERNATIONAL GROUP, INC.
   
Date: August 22, 2011
By:
/s/ John X. Adiletta
 
John X. Adiletta,
 
Chief Executive Officer
 
Chief Financial Officer
 
(Duly Authorized Officer and Principal Financial Officer)
 
 

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