##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended:March 31, 2006
 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: 000-50373
 SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
  Delaware
    
    90-0182158(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3130 Fairview Park Drive, Suite 400,Falls Church, Virginia
    
    22042(Address of principal executive offices)
    
    (Zip Code)
 703-564-2967
  þ o
  o o þ
  o þ




---



##### 



TABLE OF CONTENTS
 PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005
    
    
    2Consolidated Statements of Operations and Comprehensive Income (Loss) for the fiscal
quarter ended March 31, 2006 and March 31, 2005
    
    
    3Consolidated Statement of Stockholders Equity for the fiscal quarter ended
March 31, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the fiscal quarters ended
March 31, 2006 and March 31, 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 6. Exhibits
    
    
    22




---



##### 



March
    
    
    December31, 2006
    
    
    31, 2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,635
    
    
    $
    7,652Receivables
    
    
    14,698
    
    
    
    16,959Inventories
    
    
    499
    
    
    
    557Prepaid expenses & Other current assets
    
    
    799
    
    
    
    513Total current assets
    
    
    23,631
    
    
    
    25,681Property and equipment, net
    
    
    7,632
    
    
    
    7,597Goodwill
    
    
    15,272
    
    
    
    15,222Investments in joint ventures
    
    
    871
    
    
    
    746Deferred tax asset
    
    
    78
    
    
    
    77Other assets
    
    
    79
    
    
    
    81TOTAL ASSETS
    
    $
    47,563
    
    
    $
    49,404LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,559
    
    
    $
    8,426Line of credit
    
    
    376
    
    
    
    Accrued expenses
    
    
    2,147
    
    
    
    2,006Deferred revenues
    
    
    512
    
    
    
    376Income taxes payable
    
    
    
    
    
    
    156Deferred income taxes
    
    
    281
    
    
    
    426Current portion of long-term debt
    
    
    337
    
    
    
    332Total current liabilities
    
    
    10,212
    
    
    
    11,722Long-term liabilities:Long term debt, less current portion
    
    
    2,505
    
    
    
    2,482TOTAL LIABILITIES
    
    
    12,717
    
    
    
    14,204Commitments
and contingencies (Note 10)Minority interest
    
    
    96
    
    
    
    103Stockholders equity:Preferred stock, $0.0001 par value; 20,000,000 shares
authorized, none issued
    
    
    
    
    
    
    Common stock, $0.0001 par value; 80,000,000 shares authorized,
44,072,200 issued and outstanding
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    79,977
    
    
    
    79,866Accumulated deficit
    
    
    (45,771
    )
    
    
    (45,264
    )Accumulated other comprehensive income
    
    
    540
    
    
    
    491Total stockholders equity
    
    
    34,750
    
    
    
    35,097TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    47,563
    
    
    $
    49,404
  2




---



##### 



Three months endedMarch 31,2006
    
    
    2005Revenues
    
    $
    13,632
    
    
    $
    2,542Cost of revenues
    
    
    12,026
    
    
    
    2,148Gross profit
    
    
    1,606
    
    
    
    394Operating expenses
    
    
    2,448
    
    
    
    2,293Loss from operations
    
    
    (842
    )
    
    
    (1,899
    )Total non-operating income (expense), net
    
    
    183
    
    
    
    174Loss before provision for income taxes
    
    
    (659
    )
    
    
    (1,725
    )Income tax benefit
    
    
    146
    
    
    
    Loss before minority interest
    
    
    (513
    )
    
    
    (1,725
    )Minority interest (income) expense
    
    
    (6
    )
    
    
    20Net Loss
    
    
    (507
    )
    
    
    (1,745
    )Weighted average common shares outstanding:Basic and diluted
    
    
    44,072,200
    
    
    
    38,970,430Loss per share:Basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.04
    )Net Loss
    
    
    (507
    )
    
    
    (1,745
    )Foreign currency translation adjustments
    
    
    49
    
    
    
    69Unrealized gain on available for sale securities
    
    
    0
    
    
    
    (23
    )Total comprehensive loss
    
    $
    (458
    )
    
    $
    (1,699
    )
  3




---



##### 



AccumulatedOtherComprehensiveCommon Stock
    
    
    
    
    
    Accumulated
    
    IncomeShares
    
    Amount
    
    APIC
    
    Deficit
    
    (Loss)
    
    TotalBalance as of December 31, 2005
    
    
    44,072,200
    
    
    $
    4
    
    
    $
    79,866
    
    
    $
    (45,264
    )
    
    $
    491
    
    
    $
    35,097Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (507
    )
    
    
    
    
    
    $
    (507
    )Option Issuances
    
    
    
    
    
    
    
    
    
    $
    111
    
    
    
    
    
    
    
    
    
    
    $
    111Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    49
    
    
    $
    49Balance as of March 31, 2006
    
    
    44,072,200
    
    
    $
    4
    
    
    $
    79,977
    
    
    $
    (45,771
    )
    
    $
    540
    
    
    $
    34,750
  4




---



##### 



Three Months Ended March 31,2006
    
    
    2005Cash flows from operating activitiesNet loss
    
    $
    (507
    )
    
    $
    (1,745
    )Adjustments to reconcile net loss to net
cash used in operating activitiesStock options issued to employees
    
    
    112
    
    
    
    752Depreciation
    
    
    233
    
    
    
    69Amortization of investment bond premium
    
    
    
    
    
    
    42Deferred income taxes
    
    
    (146
    )
    
    
    7Earnings in joint ventures
    
    
    (127
    )
    
    
    Minority interest
    
    
    (6
    )
    
    
    20(Gain) Loss on disposal of equipment
    
    
    
    
    
    
    2Realized loss on the sale of bonds
    
    
    
    
    
    
    (1
    )Decrease (increase) in balance sheet itemsReceivables
    
    
    2,263
    
    
    
    629Accounts payable
    
    
    (1,868
    )
    
    
    (467
    )Provision for contract losses
    
    
    
    
    
    
    (148
    )Other balance sheet changes
    
    
    (158
    )
    
    
    128Net cash (used in) provided by operations
    
    
    (204
    )
    
    
    (712
    )Cash flows from investing activitiesMaturities of available for sale investments,net
    
    
    
    
    
    
    3,548Acquisitions, net of cash received
    
    
    
    
    
    
    (7,168
    )Purchase of property and equipment
    
    
    (140
    )
    
    
    (299
    )Proceeds from the sale of equipment
    
    
    1
    
    
    
    Investments in joint ventures,net
    
    
    3
    
    
    
    6Net cash used in investing activities
    
    
    (136
    )
    
    
    (3,913
    )Cash flows from financing activitiesIssuance (Repayment) of debt, net
    
    
    (97
    )
    
    
    (557
    )Net (repayments) borrowings on lines of credit
    
    
    376
    
    
    
    Advances and accrued interest from related parties, net
    
    
    
    
    
    
    (3
    )Proceeds for the exercise of stock options
    
    
    
    
    
    
    4Net cash provided by (used in) financing activities
    
    
    279
    
    
    
    (556
    )Currency Impact on Cash and cash equivalents
    
    
    44
    
    
    
    126Net (decrease) increase in cash and cash equivalents
    
    
    (17
    )
    
    
    (5,055
    )Cash and cash equivalents at beginning of period
    
    
    7,652
    
    
    
    5,667Cash and cash equivalents at end of period
    
    $
    7,635
    
    
    $
    612
  
 5




---



##### 



1. BASIS OF PRESENTATION
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization and Nature of Business
   Revenue Recognition
   6




---



##### 



Inventory Valuation
  Income Taxes
   Earnings (Loss) Per Share
   7




---



##### 



Impairment of Long-Lived Assets
  Foreign Currency Translation
  3. RECEIVABLES (000s)
  March
    
    
    December31, 2006
    
    
    31, 2005ReceivablesBilled receivables
    
    $
    11,224
    
    
    $
    14,465Unbilled receivables
    
    
    3,196
    
    
    
    2,268Holdbacks
    
    
    214
    
    
    
    184Other
    
    
    64
    
    
    
    42Total Receivables
    
    $
    14,698
    
    
    $
    16,959
  4. INVENTORIES (000s)
  March
    
    
    December31, 2006
    
    
    31, 2005InventoriesRaw materials, net of reserve
    
    $
    473
    
    
    $
    330Work in process
    
    
    17
    
    
    
    217Finished goods
    
    
    9
    
    
    
    10Total Inventories
    
    $
    499
    
    
    $
    557
 8




---



##### 



5. PROPERTY AND EQUIPMENT (000s)
 March
    
    
    December31, 2006
    
    
    31, 2005Property & EquipmentLand
    
    $
    860
    
    
    $
    860Buildings and Improvements
    
    
    4,858
    
    
    
    4,786Furniture & fixtures
    
    
    51
    
    
    
    51Manufacturing Equipment
    
    
    2,117
    
    
    
    2,094Tools & Equipment
    
    
    435
    
    
    
    383Office Equipment
    
    
    680
    
    
    
    633Vehicles
    
    
    374
    
    
    
    311Investment Property
    
    
    221
    
    
    
    221Total
    
    $
    9,596
    
    
    $
    9,339Accumulated Depreciation
    
    
    (1,964
    )
    
    
    (1,742
    )Property & Equipment, net
    
    $
    7,632
    
    
    $
    7,597
 6. BORROWINGS AND LINES OF CREDIT
   Bank of America Facility
  CIBC Facility
  9




---



##### 



Magna Credit Facility
  7. RELATED-PARTY TRANSACTIONS
 Transactions related to Coast Engine and Equipment Company
  8. STOCK-BASED COMPENSATION
   Number of Shares
    
    Option PriceOutstanding 12/31/2005
    
    
    5,837,800
    
    
    
    1.28 - 1.95Granted
    
    
    1,016,230
    
    
    
    0.00 - 1.55Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Outstanding 3/31/2006
    
    
    6,854,030
    
    
    
    0.00 - 1.95
  Options Exercisable & OutstandingWeighted AverageExercise Price
    
    Shares Outstanding
    
    Remaining Life(yrs)0.00 - 1.55
    
    
    1,016,230
    
    
    
    2.21.28
    
    
    13,750
    
    
    
    2.21.40
    
    
    588,850
    
    
    
    1.11.65
    
    
    1,811,500
    
    
    
    2.51.95
    
    
    3,423,700
    
    
    
    0.5Total
Options Outstanding
    
    
    6,854,030
 10




---



##### 



9. SEGMENT INFORMATION
   Three months endedMarch 31,2006
    
    2005Security SolutionsTotal revenue
    
    $
    1,051
    
    
    $
    1,393Operating (loss)income
    
    
    (320
    )
    
    
    (222
    )Industrial and OffshoreTotal revenue
    
    
    886
    
    
    
    781Operating income
    
    
    (586
    )
    
    
    (354
    )Repair and OverhaulTotal revenue
    
    
    797
    
    
    
    111Operating income
    
    
    201
    
    
    
    12Engineering ConsultingTotal revenue
    
    
    3,354
    
    
    
    257Operating income
    
    
    (80
    )
    
    
    56Procurement ServicesTotal revenue
    
    
    7,544
    
    
    
    Operating income
    
    
    947
    
    
    
    HeadquartersTotal revenue
    
    
    
    
    
    
    Operating (loss)income
    
    
    (1,004
    )
    
    
    (1,391
    )TotalTotal revenue
    
    $
    13,632
    
    
    $
    2,542Operating (loss)income
    
    $
    (842
    )
    
    $
    (1,899
    )
 10. COMMITMENTS AND CONTINGENCIES
 Legal Matters
  11. SUBSEQUENT EVENTS
 M&M Valuation
  11




---



##### 



Change In the Companys Certifying Accountant
  Board of Directors
  Augenbaum Decision
   ITEM 2. MANAGEMENTS DISCUSSION AND ANAYLYIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  FORWARD-LOOKING STATEMENTS
  12




---



##### 



DESCRIPTION OF THE COMPANY
       CRITICAL ACCOUNTING POLICIES
  13




---



##### 



Revenue Recognition
     Net Operating Loss Carryforwards
  14




---



##### 



Impairment of Long-Lived Assets
  Off Balance Sheet Risk
  COMPARISON OF THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
  FISCAL QUARTER ENDED MARCH 31, 2006 COMPARED TO FISCAL QUARTER ENDED MARCH 31, 2005
 Consolidated
Overview (000s)
  For the quarter ended March 31,2006
    
    
    2005Revenues
    
    $
    13,632
    
    
    
    100.0
    %
    
    $
    2,542
    
    
    
    100.0
    %Cost of revenue
    
    
    12,026
    
    
    
    88.2
    %
    
    
    2,148
    
    
    
    84.5
    %Gross profit
    
    $
    1,606
    
    
    
    11.8
    %
    
    $
    394
    
    
    
    15.5
    %
   15




---



##### 



Security
Solutions (000s)
  For the quarter ended March 31,2006
    
    
    2005Revenue
    
    $
    1,051
    
    
    
    100.0
    %
    
    $
    1,394
    
    
    
    100.0
    %Cost of revenue
    
    
    1,212
    
    
    
    115.3
    %
    
    
    1,217
    
    
    
    87.3
    %Gross profit
    
    $
    (161
    )
    
    
    (15.3
    %)
    
    $
    177
    
    
    
    12.7
    %
  Industrial and Offshore Segment (000s)
  For the quarter ended March 31,2006
    
    
    2005Revenue
    
    $
    886
    
    
    
    100.0
    %
    
    $
    781
    
    
    
    100.0
    %Cost of revenue
    
    
    808
    
    
    
    91.2
    %
    
    
    744
    
    
    
    95.3
    %Gross profit
    
    $
    78
    
    
    
    8.8
    %
    
    $
    37
    
    
    
    4.7
    %
  Repair and Overhaul Segment (000s)
  16




---



##### 



For the quarter ended March 31,2006
    
    
    2005Revenue
    
    $
    797
    
    
    
    100.0
    %
    
    $
    110
    
    
    
    100.0
    %Cost of revenue
    
    
    478
    
    
    
    60.0
    %
    
    
    65
    
    
    
    59.1
    %Gross profit
    
    $
    319
    
    
    
    40.0
    %
    
    $
    45
    
    
    
    40.9
    %
  Engineering Services Segment (000s)
  For the quarter ended March 31,2006
    
    
    2005Revenue
    
    $
    3,354
    
    
    
    100.0
    %
    
    $
    257
    
    
    
    100.0
    %Cost of revenue
    
    
    3,085
    
    
    
    92.0
    %
    
    
    121
    
    
    
    47.2
    %Gross profit
    
    $
    269
    
    
    
    8.0
    %
    
    $
    136
    
    
    
    52.8
    %
  Procurement Services Segment (000s)
  17




---



##### 



For the quarter ended March 31,2006
    
    
    2005Revenue
    
    $
    7,544
    
    
    
    100.0
    %
    
    
    N/A
    
    
    
    N/ACost of revenue
    
    
    6,442
    
    
    
    85.4
    %
    
    
    N/A
    
    
    
    N/AGross profit
    
    $
    1,102
    
    
    
    14.6
    %
    
    
    N/A
    
    
    
    N/A
  Operating Expenses (000s)
 March 31, 2006
    
    
    March 31, 2005
    
    
    IncreaseSelling, General & Administrative
    
    $
    2,448
    
    
    $
    2,293
    
    
    
    6.8
    %
  Other Income
  Liquidity and Capital Resources
    Contractual Obligations and Commitments (000s)
  18




---



##### 



Total
    
    Current
    
    1-3 Years
    
    3-5 Years
    
    5+ YearsOperating Leases
    
    
    2,963
    
    
    
    533
    
    
    
    1,242
    
    
    
    1,047
    
    
    
    141Capital Leases
    
    
    742
    
    
    
    220
    
    
    
    360
    
    
    
    162
    
    
    
    Mortgages Payable
    
    
    2,100
    
    
    
    117
    
    
    
    237
    
    
    
    126
    
    
    
    1,620Total
    
    
    5,805
    
    
    
    870
    
    
    
    1,839
    
    
    
    1,335
    
    
    
    1,761
 19




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
   Foreign Exchange Risk
   20




---



##### 



ITEM 4. CONTROLS AND PROCEDURES
   21




---



##### 



PART
II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS
  ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description2.1
    
    Agreement and Plan of Merger among Silva Bay
International, Inc., SSS Acquisition Company and
Spectrum Sciences & Software, Inc., dated April 2, 2003
(previously filed in registration statement on Form
10-SB File No. 1-31710, filed with the Securities and
Exchange Commission on August 11, 2003).2.2
    
    Stock Purchase and Sale Agreement, dated as of January
28, 2005, by and among Spectrum Sciences & Software
Holdings Corp., Coast Engine and Equipment Co., Inc.,
Louis T. Rogers and Marilyn G. Rogers (previously filed
on Form 8-K, filed with the Securities and Exchange
Commission on March 3, 2005).2.3
    
    Share Purchase Agreement, dated as of February 1, 2005,
by and among Spectrum Sciences & Software Holdings
Corp., EnerNorth Industries Inc. and M&M Engineering
Limited (previously filed on Form 8-K, filed with the
Securities and Exchange Commission on February 7, 2005).2.4
    
    Letter Agreement, dated as of February 2, 2005, by and
between Spectrum Sciences & Software Holdings Corp. and
EnerNorth Industries Inc. (previously filed on Form 8-K,
filed with the Securities and Exchange Commission on
February 7, 2005).2.5
    
    Agreement and Plan of Merger, dated as of April 14,
2005, by and among Spectrum Sciences & Software Holdings
Corp., Horne Acquisition LLC, Horne Engineering
Services, Inc., Darryl K. Horne, Charlene M. Horne and
Michael M. Megless (previously filed on Form 8-K, filed
with the Securities and Exchange Commission on March 17,
2005).2.6
    
    Amendment and Waiver Agreement, dated as of May 11,
2005, by and among Spectrum Sciences & Software Holdings
Corp., Horne Acquisition LLC, Horne Engineering
Services, Inc., Darryl K. Horne, Charlene M. Horne and
Michael M. Megless (previously filed on Form 8-K, filed
with the Securities and Exchange Commission on March 17,
2005).3.1
    
    Certificate of Incorporation, filed August 28, 1998
(previously filed in registration statement on Form
10-SB File No. 1-31710, filed with the Securities and
Exchange Commission on June 10, 2003).3.2
    
    Certificate of Renewal and Revival, filed March 24, 2003
(previously filed in registration statement on Form
10-SB File No. 1-31710, filed with the Securities and
Exchange Commission on June 10, 2003).
 22




---



##### 



3.3
    
    Certificate of Amendment of Certificate of
Incorporation, filed April 8, 2003 (previously filed in
registration statement on Form 10-SB File No. 1-31710,
filed with the Securities and Exchange Commission on
June 10, 2003).3.4
    
    Certificate of Merger filed with the Delaware Secretary
of State (previously filed in registration statement on
Form 10-SB File No. 1-31710, filed with the Securities
and Exchange Commission on June 10, 2003).3.5
    
    Articles of Merger filed with the Florida Secretary of
State (previously filed in registration statement on
Form 10-SB File No. 1-31710, filed with the Securities
and Exchange Commission on June 10, 2003).3.6
    
    Amended and Restated Bylaws of Spectrum Sciences &
Software Holdings Corp., as amended (previously filed on
Form 10-Q, filed with the Securities and Exchange
Commission on November 14, 2005).4.1
    
    Specimen Certificate of Common Stock (previously filed
in registration statement on Form 10-SB File No.
1-31710, filed with the Securities and Exchange
Commission on June 10, 2003).4.2
    
    Registration Rights Agreement, dated as of May 11, 2005,
by and among Spectrum Sciences & Software Holdings
Corp., Darryl K. Horne, Charlene M. Horne and Michael M.
Megless (previously filed on Form 8-K, filed with the
Securities and Exchange Commission on May 17, 2005).
 Exhibit Number
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002*31.2
    
    Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002*32.1
    
    Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002**32.2
    
    Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002**
 
 *
    
    Filed herewith.**
    
    Furnished herewith. 23




---



##### 



SIGNATURES
  SPECTRUM SCIENCES & SOFTWARE HOLDINGS CORP.
 By :
    
    /s/ Darryl K. HorneDarryl K. HornePresident and Chief Executive OfficerBy :
    
    /s/ Michael M. MeglessMichael M. MeglessChief Financial Officer
 24