As filed with the Securities and Exchange Commission on November 4, 2011


UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 
 FORM 10-K
 
 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 
 [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ________ to ________
 
  Commission File No.:  001-32620
 
 QSGI INC.
 (Exact name of small business issuer as specified in its charter)
 
 Delaware

(State or other jurisdiction of

incorporation or organization)
13-2599131

(I.R.S. Employer

Identification No.)
 
 400 Royal Palm Way, Palm Beach, FL  33480
 (Address of Principal Executive Offices) (Zip Code)
 
 (561) 629-5713
 (Registrant's Telephone Number)
  Securities registered pursuant to Section 12(b) of the Exchange Act:  None
   Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $.01 par value
   Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x
  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
  Indicate by check mark whether the registrant (1) 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 x No o
  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-X ( §229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
  Large accelerated filer [ ]       Accelerated filer [ ]        Non-accelerated filer [ ]       Small Reporting Companyx
  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
  The aggregate market value of the common stock held by non-affiliates of the Registrant as of November 4, 2011 (the business day of the Registrant’s most recently completed third fiscal quarter), was $13,270,362 (221,172,716 shares x $0.06 per share).
 
  
   As filed with the Securities and Exchange Commission on November 4, 2011
 
 
 Number of shares outstanding of the Registrant’s Common stock, as of November 4, 2011, is 221,172,716.
  A description of “Documents Incorporated by Reference” is contained in Item 15 Exhibits and Financial Statements.
   
 
  
 Table Of ContentsItem
Description
PagePart I1.
Business
11A.
Risk Factors
41B.
Unresolved Staff Comments
92.
Property
93.
Legal Proceedings
94.
Submissions of Matters to a Vote of Security Holders
11Part II5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
116.
Selected Financial Data
147.
Management’s Discussion And Analysis of Financial Condition and Results of Operations
147A.
Quantitative and Qualitative Disclosures About Market Risk
178.
Financial Statements and Supplementary Data
179.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
199A(T)
Controls and Procedures
199B.
Other Information
21Part III10.
Directors, Executive Officers and Corporate Governance
2111.
Executive Compensation
2212.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
2713.
Certain Relationships and Related Transactions, and Director Independence
2814.
Principal Accountant Fees and Services
29Part IV15.
Exhibits, Financial Statement Schedules
30Signatures
30Financial Statements and Exhibits
31
 
  
 
  PART I
   Item 1.                                Business
  Forward-Looking Statements And Associated Risk
  The following discussion should be read in conjunction with our audited Financial Statements and Notes thereto included herein.
  Certain statements in this Report constitute “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 the Private Securities Litigation Reform Act of 1995.  We intend that such forward-looking statements be subject to the safe harbors created thereby.
  All such forward-looking information involves risks and uncertainties and may be affected by many factors, some of which are beyond our control.  These factors include:
 ·
Our growth strategies.
 ·
Anticipated trends in our business and demographics.
 ·
Our ability to successfully integrate the business operations of recently acquired companies; and
 ·
Regulatory, competitive or other economic influences.
  Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, among others, the following:  our continued ability to sustain our growth through continuing vendor relationships; the successful consummation and integration of future acquisitions; the ability to hire and retain key personnel; the continued development of our technical, manufacturing, sales, marketing and management capabilities; relationships with and dependence on third-party suppliers; anticipated competition; uncertainties relating to economic conditions where we operate; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; rapid technological developments and obsolescence in the products we sell and the industries in which we operate and compete; existing and potential performance issues with suppliers and customers; governmental export and import policies; global trade policies; worldwide political stability and economic growth; the highly competitive environment in which we operate; potential entry of new, well-capitalized competitors into our markets; and changes in our capital structure and cost of capital.  The words “believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions identify forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
  References
  References in this form 10-K to “we”, “us,” “our,” “the Company,” “WindsorTech,” and “QSGI” mean QSGI INC. and our subsidiaries, unless the context otherwise requires.
   
 
  
 Recent Developments
  On July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009.  These unaudited condensed consolidated financial statements have been prepared assuming that the Company would continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of the filing of the bankruptcy.  The independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.
  The Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations.  This is because the Company received notification from the former owner of Contemporary Computer Services, Inc. (CCSI) that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner.  The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.  The Company also ceased reporting the results of operations of the Data Security and Compliance and the Data Center Maintenance Services segment and is reporting them as discontinued operations.  As part of the plan of bankruptcy, both segments assets were sold.
  On September 15, 2009, an Asset Purchase agreement, by and between SMS Maintenance, LLC. (“Purchaser”) and QualTech Services Group, Inc. (“Seller”), a subsidiary of QSGI INC., whereby Seller agreed to sell to Purchaser and Purchaser agreed to purchase from Seller, the Purchased Assets, including, but not limited to, the Assumed Contracts, and Purchaser agreed to assume from Seller the Assumed Liabilities, all on the terms and conditions set forth in the Purchase Agreement. The Purchaser and Seller agreed that the Cash Purchase Price was equal to $2,450,000. Purchaser agreed to pay Seller an additional $20,000 to partially offset pre-closing payroll expenses of the business.   The asset sale resulted in a gain of approximately $1,400,000.
  On September 24, 2009, the Bankruptcy Court entered an order pursuant to 11 U.S.C. section 105, 363, and 365 of the Bankruptcy Code (A) Approving the sale of substantially all of the assets of the DSC division of QSGI INC. free and clear of all liens, claims, encumbrances and interests; (B) Approving the assumption and assignment of executor contracts and unexpired leases; and (C) Granting related relief.   The asset sale resulted in a loss of approximately $2,140,000.
  On April 14, 2010, QSGI INC, settled its dispute with Victory Park Management, LLC and Victory Park Capital Advisors, LLC (collectively “VPC”) and signed a Settlement Agreement and Mutual Release.  VPC made claims against the Company including pre-petition overstatements of inventory valuation and  post-petition interference with the sale process of the assets. Although the Company disputed all claims, the company (in conjunction with its insurer) settled with VPC after considering the total cost of litigation.  Other than an obligation to pay $150,000 if the Company is ultimately reorganized, the settlement releases the Company from any and all claims VPC may have had against it.  The settlement and all other documents relating to the claim are available under case number 09-23658-EPK that was filed with the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.  A copy of the Order Approving Expedited Amended Joint Motion for Approval of Settlement Agreement between Debtors and Victory Park Management, LLC. Pursuant To Fed.R.B.P. 9019 (D.E. 233) dated May 27, 2010.
 
 In June, 2010, a settlement agreement and mutual release was entered into by and between John Riconda, on one hand, and QSGI INC., on the other to settle asserted claims by both parties against each other.
    
  
 On July 2, 2010, a joint motion for approval of settlement agreement between debtors and John Riconda pursuant to Fed.R.BankR.P. 9019 and Local rule 9013-1 (D) was filed with the United States Bankruptcy Court, Southern District of Florida, West Palm Beach Division to approve the terms of the settlement agreement between Debtors and John Riconda.
 
 On August 11, 2010, Action by Consent in Writing of the Board of Directors increased the membership of the Board of Directors from one (1) person to five (5) persons by the appointment of Benee Scola, William J. Barbera, David J. Meynarez and David K. Waldman as Directors of the Company.
 
 On January 31, 2011, the Board of Directors of QSGI, INC. unanimously approved the Third Amended Plan of Reorganization and Disclosure Statement (the “Plan”) to be filed in the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.  This was filed on February 1, 2011.
 
 On February 2, 2011, the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division issued an order approving the Disclosure Statement, setting hearing on confirmation of Plan, setting hearing on fee applications, setting various deadlines, and describing Plan proponent’s obligations.
 
 On March 21, 2011 the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division had a hearing to consider confirmation of the Debtors’ Third Amended Plan of Reorganization (D.E. # 384) under Chapter 11 of the Bankruptcy Code filed by QSGI, INC., QSGI-CCSI, INC. and QUALTECH SERVICES GROUP, INC., and dated February 1, 2011 and confirmed the Plan.  The debtors are waiting entry of the confirmation order by the Judge.
 
 Effective June 17, 2011 QSGI, Inc. merged with KruseCom, LLC (“KruseCom”), a company that is primarily engaged in Information Technology Data Security and Compliance.   The merger was carried out in accordance with a Share Exchange Agreement dated June 17, 2011 (the “Exchange Agreement”) among KruseCom, a Florida Limited Liability Company formed in October 2009.  The merger contemplated by the Exchange Agreement is part of the Chapter 11 Plan of Reorganization that was approved by the impaired parties and confirmed by the US Bankruptcy Court on May 4, 2011.
 
 The close of the Exchange Agreement transaction (the “Closing”) took place June 17, 2011 (the Closing Date”).  On the Closing Date, pursuant to the terms of the Exchange Agreement, QSGI acquired all of the outstanding ownership interests of KruseCom (the “Interests”) from KruseCom in exchange for 190,000,000 shares of QSGI common stock.
 
  On August 26, 2011, the Company was notified that the Honorable Erik P. Kimball, United States Bankruptcy Judge, Southern District of Florida, entered a final decree to close the chapter 11 case. The signing of this order signifies the Company’s emergence from bankruptcy.
  On September 21, 2011, QSGI Green, Inc. (“QSGI Green”) a newly-formed, wholly-owned subsidiary of the Company completed the transactions contemplated by the Asset Purchase Agreement (the “TGG Agreement”) with The Gasket Guy, Inc (the “Seller” or “TGG”) a Florida Corporation, primarily engaged in the manufacture and installation of refrigeration gaskets throughout the United States.
  On September 26, 2011, QSGI Green (the “Borrower”) entered into a loan agreement (the “Bank Note”) with First City Bank of Commerce (the “Lender”) in the amount of $564,775 to replace the Seller’s existing bank note. The Bank Note bears interest at 7.5% and has a maturity date of September 26, 2015.  The Bank Note is primarily supported by accounts receivable and inventory of QSGI Green. The Bank Note is personally guaranteed by the two previous founding owners of TGG.
  
  
   Plan of Reorganization
  The Plan provides for, among other things, a restructuring of pre-petition debt, as follows (i) distribution of $50,000 and issuance of 10,000,000 common shares in the reorganized debtor for the extinguishment of  unsecured indebtedness; (ii) extinguishment of one $10,159,000 unsecured claim in consideration for the confirmation of a Plan of Reorganization; (iii) issuance of 425,000 common shares for the extinguishment of the redeemable convertible preferred stock; (iv) assumption of one $150,000 contingent secured claim bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after confirmation; (v) assumption of note for bankruptcy legal expenses in the amount of $61,673, bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after Plan confirmation; (vi) the right to issue 3,524,000 common shares in exchange for legal services related to the Plan of reorganization; (vii) issuance of 190,000,000 common shares in consideration for the merger of KruseCom; (viii) reservation of 10,000,000 shares to be issued by the reorganized debtor for working capital; (ix) reservation of 2,250,000 shares to be issued by the reorganized debtor to key third parties.  All outstanding shares of the Company’s common stock will remain issued and outstanding at and after the Effective Date.
  Employees
  As of December 31, 2009, we had 2 employees, both of which are deferring wages.  They are spending their time working on the reorganization effort and emergence from Chapter 11 Bankruptcy.
  Available Information
  Our Internet website address is www.qsgiinc.com.  We make available free of charge through our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
  Item 1A.        Risk Factors
  The following constitute some of the noteworthy risks of an investment in the Company and should be carefully considered by respective investors prior to investing in the Company.  The order of the following risk factors is not intended to be indicative of the relative importance of any described risk nor is the following risk factors intended to be inclusive of all of the risks of an investment in the Company.
  Factors Affecting Future Operating Results
  You should carefully consider the following risk factors, together with all other information contained or incorporated by reference in this filing, before you decide to purchase shares of our stock.  These factors could cause our future results to differ materially from those expressed in or implied by forward-looking statements made by us.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.  The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.
   
   Uncertainty Of Future Financial Results
  Our future financial results are uncertain.  There can be no assurance that we will be profitable, and we may incur losses in the foreseeable future.  Achieving and sustaining profitability depends upon many factors, including our ability to raise capital when needed, the success of our various marketing programs, and the maintenance or reduction of expense levels.
  Fluctuations In Future Quarterly Results
  Our quarterly operating results may fluctuate based on how well we manage our business.  Some of the factors that may affect how well we manage our business include the timing of our delivery of significant orders; our ability to engineer customer solutions in a timely, cost effective manner; our ability to structure our organization to enable achievement of our operating objectives; our ability to meet the needs of our customers and markets; the ability to deliver, in a timely fashion, products for which we have received orders; the length of the sales cycle; the demand for products and services we offer; the introduction or announcements by computer manufacturers relating to the remarketing of new and used equipment; the hiring and training of additional personnel; as well as general business conditions.  If we fail to effectively manage our business, this could adversely affect our results of operations.
  We expect that the size and timing of our sales transactions may vary substantially from quarter to quarter, and we expect such variations to continue in future periods, including the possibility of losses in one or more fiscal quarters.  These fluctuations may be caused by delays in shipping certain computer systems for which we receive orders that we expect to deliver during that quarter.  In addition, our collection periods may fluctuate due to periodic shortages of goods available for shipment, which may result in the delay of payment from customers who will not pay until their entire order is shipped.  Accordingly, it is likely that in one or more future fiscal quarters, our operating results could be below investors’ expectations and, as a result, any future public offering of shares of our Common Stock could be materially adversely affected.
  Industry cycles may strain our management and resources
  Cycles of growth and contraction in our industry may strain our management and resources.  To manage these industry cycles effectively, we must: improve operational and financial systems; train and manage our employee base; successfully integrate operations and employees of businesses we acquire or have acquired; attract, develop, motivate and retain qualified personnel with relevant experience; and adjust spending levels according to prevailing market conditions.  If we cannot manage industry cycles effectively, our business could be seriously harmed.
  We Rely On Merchandise Vendors As Sources For Our Products
  The availability of off-lease and excess inventory computer equipment is unpredictable.  We have no long-term arrangements with our vendors that assure the availability of equipment.  We purchase equipment from many different vendors, and we have no formal commitments with or from any of them.  We cannot assure you that our current vendors will continue to sell equipment to us as they have in the past, or that we will be able to establish new vendor relationships that ensure equipment will be available to us in sufficient quantities and at favorable prices.  If we are unable to obtain sufficient quantities of equipment at favorable prices, our business will be adversely affected.  In addition, we may become obligated to deliver specified types of computer equipment in a short time period and, in some cases, at specified prices.  Because we have no formal relationships with vendors, we may not be able to obtain the required equipment in sufficient quantities in a timely manner, which could adversely affect our ability to fulfill these obligations.
    
   We Are Subject To Risks That Our Inventory May Decline In Value Before We Sell It Or That We May Not Be Able To Sell The Inventory At The Prices We Anticipate
  We purchase and warehouse inventory, most of which is “as-is” or excess inventory of computer equipment.  As a result, we assume inventory risks and price erosion risks for these products. These risks are especially significant because computer equipment generally is characterized by rapid technological change and obsolescence.  These changes affect the market for refurbished or excess inventory equipment.  Our success will depend on our ability to purchase inventory at attractive prices relative to its resale value and our ability to turn our inventory rapidly through sales.  If we pay too much or hold inventory too long, we may be forced to sell our inventory at a discount or at a loss or write down its value, and our business could be materially adversely affected.
  Declining Prices For New Computer Equipment Could Reduce Demand For Our Products
  The cost of new computer equipment has declined dramatically in recent years.  As the price of new computer products declines, consumers may be less likely to purchase refurbished computer equipment unless there is a substantial discount to the price of the new equipment. Accordingly, if we were to sell “as-is” or refurbished equipment directly to end users, we would have to offer the products at a substantial discount to the price of new products.  As prices of new products continue to decrease, our revenue, profit margins and earnings could be adversely affected.  There can be no assurance that we will be able to maintain a sufficient pricing differential between new products and our “as-is” or refurbished products to avoid adversely affecting our revenues, profit margins and earnings.
  If We Need Additional Financing For Unanticipated Working Capital Needs Or To FinanceAcquisitions, We May Not Be Able To Obtain Such Capital, Which Could Adversely Affect Our Ability To Achieve Our Business Objectives
  We believe that cash that may be generated from operations, together with other available cash resources, may not be sufficient to meet our current cash requirements for at least the next 12 months and may need to raise additional funds to finance unanticipated working capital requirements or acquire complementary businesses.  If funds are not available when required for our unanticipated working capital needs or other transactions, our ability to carry out our business plan could be adversely affected, and we may be required to scale back or discontinue our operations to reflect the extent of available funding.
  The Company was unable to meet covenants with its lender in the fourth quarter of 2008, and is considered to be in default of the line-of-credit.  As the Company is in default, the lender has the right to terminate the agreement, causing all amounts to become immediately due and payable.
  We have made acquisitions in the past and may make acquisitions in the future, if advisable, and these acquisitions involve numerous risks.
  Our growth depends upon market growth and our ability to enhance our existing products and services, and to introduce new products and services on a timely basis.  One of the ways to accomplish this is through acquisitions.  Acquisitions involve numerous risks, including, but not limited to, the following:
   
   
 ·
difficulty and increased costs in assimilating employees, including our possible inability to keep and retain key employees of the acquired business;
 ·
disruption of our ongoing business;
 ·
discovery of undisclosed liabilities of the acquired companies and legal disputes with founders or shareholders of acquired companies;
 ·
inability to successfully incorporate acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures;
 ·
inability to commercialize acquired technology;
 ·
the need to take impairment charges or write-downs with respect to acquired assets and
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the failure of the acquired entity to perform as anticipated.
 
  No assurance can be given that our prior acquisitions or our future acquisitions, if any, will be successful or provide the anticipated benefits, or that they will not adversely affect our business, operating results or financial condition.
   If We Experience Problems In Our Distribution Operations, We Could Lose Customers
   In addition to product vendors, we depend on several other third parties over whom we have limited control, including, in particular, Federal Express, United Parcel Service and common carriers for delivery of products to and from our distribution facility and to our customers.  We have no long-term relationships with any of those parties.  We are therefore subject to risks, including risks of employee strikes and inclement weather, which could result in failures by such carriers to deliver products to our customers in a timely manner, which could damage our reputation and name.
   The Industry In Which We Compete In Is Highly Competitive
   We face competition in each area of our business.  Some of our competitors have greater resources and a more established market position than we have.  Our primary competitors include:
  ·
major manufacturers of computer equipment such as, Dell Computer Corporation, Hewlett Packard and IBM, each of which offer “as-is”, refurbished and new equipment through their websites and direct e-mail broadcast campaigns;
  ·
privately and publicly owned businesses such as Redemtech, Intechra and Tech Turn that offer asset management and end-of-life product refurbishment and remarketing services;
  ·
traditional store-based computer retailers, such as Best Buy Co., Inc., and
  ·
online competitors and auction sites, such as e-Bay
  Some competitors have longer operating histories, larger customer or user bases, greater brand name recognition and significantly greater financial, marketing and other resources than we do.  Some of these competitors already have an established brand name and can devote substantially more resources to increasing brand name recognition and product acquisition than we can.  In addition, larger, well-established and well-financed entities may join with online competitors or computer manufacturers or suppliers as the use of the Internet and other online services increases.  Our competitors may be able to secure products from vendors on more favorable terms, fulfill customer orders more efficiently or adopt more aggressive price or inventory availability policies than we can. Traditional store-based retailers also enable customers to see and test products in a manner that is not possible in the wholesale business.  Our product offerings must compete with other new computer equipment and related products offered by our competitors.  That competition may intensify if prices for new computers continue to decrease.
  No Dividends On Common Stock; Issuance Of Preferred Stock
  We do not have a history of paying dividends on our Common Stock, and there can be no assurance that dividends will be paid in the foreseeable future.  We intend to use any earnings, which may be generated to finance the growth of our businesses.  Our Board of Directors has the right to authorize the issuance of preferred stock, without further shareholder approval, the holders of which may have preferences over the holders of the Common Stock as to payment of dividends.
    
   Dependence On Key Individuals
   Our success depends to a significant extent upon the continued contributions of our key management, technical and sales personnel, many of who would be difficult to replace.  The loss of one or more of these employees could harm our business.  Although we have entered into a limited number of employment contracts with certain executive officers, we generally do not have long term employment contracts with our key employees.  Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, finance and managerial personnel.  Competition for qualified personnel is particularly intense in our industry and in our locations.  This makes it difficult to retain our key personnel and to recruit highly qualified personnel.  We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications.  To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees.
   We are organized with a small senior management team.  If we were to lose the services of the one of our management team, our overall operations could be adversely affected.  We consider our key individual as of this filing to be:
  Name
PositionMarc Sherman
Chairman, Chief Executive Officer, Director
  Anti-Takeover Provisions
  Certain provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and Delaware law may be deemed to have an anti-takeover effect. Our certificate of incorporation provides that our Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock with such designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations that the Board of Directors fixes without stockholder approval.  In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law.  In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.  Each of the foregoing provisions may have the effect of rendering more difficult, delaying, discouraging, preventing or rendering more costly an acquisition of the Company or a change in control of the Company.
  Item 1B.                      Unresolved Staff Comments
  None
  Item 2.                                Properties
  None
  Item 3.                                Legal Proceedings
   From time to time, the Company may be party to legal proceedings which arise generally in the ordinary course of business.  The Company may be involved in legal proceedings which may have a material adverse affect on the financial position, results of operations or cash flows of the Company. Therefore estimates of potential impact of legal proceedings on the Company could change in the future depending upon matters in suit and the course of specific litigation.    All prepetition claims were brought forward during the Chapter 11 proceedings.  The liability related to the prepetition claims was considered in the Company’s December 31, 2009 Balance Sheet.
   
    On July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009.  The independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.
   The Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations.  This is because the Company received notification from the former owner of Contemporary Computer Services, Inc. (CCSI) that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner.  The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.  The Company also ceased reporting the results of operations of the Data Security and Compliance and the Data Center Maintenance Services segment and is reporting them as discontinued operations.  As noted below, both segments assets were sold while inside Chapter 11 Bankruptcy.
   On September 15, 2009, an Asset Purchase agreement, by and between SMS Maintenance, LLC. (“Purchaser”) and QualTech Services Group, Inc. (“Seller”), a subsidiary of QSGI INC., whereby Seller agreed to sell to Purchaser and Purchaser agreed to purchase from Seller, the Purchased Assets, including, but not limited to, the Assumed Contracts, and Purchaser agreed to assume from Seller the Assumed Liabilities, all on the terms and conditions set forth in the Purchase Agreement. The Purchaser and Seller agreed that the Cash Purchase Price was equal to $2,450,000. Purchaser agreed to pay Seller an additional $20,000 to partially offset pre-closing payroll expenses of the business.   The asset sale resulted in a gain of approximately $1,400,000.
   On September 24, 2009, the Bankruptcy Court entered an order pursuant to 11 U.S.C. section 105, 363, and 365 of the Bankruptcy Code (A) Approving the sale of substantially all of the assets of the DSC division of QSGI INC. free and clear of all liens, claims, encumbrances and interests; (B) Approving the assumption and assignment of executor contracts and unexpired leases; and (C) Granting related relief.   The asset sale resulted in a loss of approximately $2,140,000.
  On April 14, 2010, QSGI INC, settled its dispute with Victory Park Management, LLC and Victory Park Capital Advisors, LLC (collectively “VPC”) and signed a Settlement Agreement and Mutual Release.  VPC made claims against the Company including pre-petition overstatements of inventory valuation and  post-petition interference with the sale process of the assets. Although the Company disputed all claims, the company (in conjunction with its insurer) settled with VPC after considering the total cost of litigation.  Other than an obligation to pay $150,000 if the Company is ultimately reorganized, the settlement releases the Company from any and all claims VPC may have had against it.  The settlement and all other documents relating to the claim are available under case number 09-23658-EPK that was filed with the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.  A copy of the Order Approving Expedited Amended Joint Motion for Approval of Settlement Agreement between Debtors and Victory Park Management, LLC. Pursuant To Fed.R.B.P. 9019 (D.E. 233) dated May 27, 2010.
 
 In June, 2010, a settlement agreement and mutual release was entered into by and between John Riconda, on one hand, and QSGI INC., on the other to settle asserted claims by both parties against each other.
    
   
 On July 2, 2010, a joint motion for approval of settlement agreement between debtors and John Riconda pursuant to Fed.R.BankR.P. 9019 and Local rule 9013-1 (D) was filed with the United States Bankruptcy Court, Southern District of Florida, West Palm Beach Division to approve the terms of the settlement agreement between Debtors and John Riconda.
 
 On August 11, 2010, Action by Consent in Writing of the Board of Directors increased the membership of the Board of Directors from one (1) person to five (5) persons by the appointment of Benee Scola, William J. Barbera, David J. Meynarez and David K. Waldman as Directors of the Company.
 
 On January 31, 2011, the Board of Directors of QSGI, INC. unanimously approved the Third Amended Plan of Reorganization and Disclosure Statement (the “Plan”) to be filed in the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.  This was filed on February 1, 2011.
 
 On February 2, 2011, the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division issued an order approving the Disclosure Statement, setting hearing on confirmation of Plan, setting hearing on fee applications, setting various deadlines, and describing Plan proponent’s obligations.
 
 On March 21, 2011 the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division had a hearing to consider confirmation of the Debtors’ Third Amended Plan of Reorganization (D.E. # 384) under Chapter 11 of the Bankruptcy Code filed by QSGI, INC., QSGI-CCSI, INC. and QUALTECH SERVICES GROUP, INC., and dated February 1, 2011 and confirmed the Plan.  The debtors are waiting entry of the confirmation order by the Judge.
 
 Effective June 17, 2011 QSGI, Inc. merged with KruseCom, LLC (“KruseCom”), a company that is primarily engaged in Information Technology Data Security and Compliance.   The merger was carried out in accordance with a Share Exchange Agreement dated June 17, 2011 (the “Exchange Agreement”) among KruseCom, a Florida Limited Liability Company formed in October 2009.  The merger contemplated by the Exchange Agreement is part of the Chapter 11 Plan of Reorganization that was approved by the impaired parties and confirmed by the US Bankruptcy Court on May 4, 2011.
 
 The close of the Exchange Agreement transaction (the “Closing”) took place June 17, 2011 (the Closing Date”).  On the Closing Date, pursuant to the terms of the Exchange Agreement, QSGI acquired all of the outstanding ownership interests of KruseCom (the “Interests”) from KruseCom in exchange for 190,000,000 shares of QSGI common stock.
 
  On August 26, 2011, the Company was notified that the Honorable Erik P. Kimball, United States Bankruptcy Judge, Southern District of Florida, entered a final decree to close the chapter 11 case. The signing of this order signifies the Company’s emergence from bankruptcy.
  On September 21, 2011, QSGI Green, Inc. (“QSGI Green”) a newly-formed, wholly-owned subsidiary of the Company completed the transactions contemplated by the Asset Purchase Agreement (the “TGG Agreement”) with The Gasket Guy, Inc (the “Seller” or “TGG”) a Florida Corporation, primarily engaged in the manufacture and installation of refrigeration gaskets throughout the United States.
  On September 26, 2011, QSGI Green (the “Borrower”) entered into a loan agreement (the “Bank Note”) with First City Bank of Commerce (the “Lender”) in the amount of $564,775 to replace the Seller’s existing bank note. The Bank Note bears interest at 7.5% and has a maturity date of September 26, 2015.  The Bank Note is primarily supported by accounts receivable and inventory of QSGI Green. The Bank Note is personally guaranteed by the two previous founding owners of TGG.
    
  
 Plan of Reorganization
  The Plan provides for, among other things, a restructuring of pre-petition debt, as follows (i) distribution of $50,000 and issuance of 10,000,000 common shares in the reorganized debtor for the extinguishment of  unsecured indebtedness; (ii) extinguishment of one $10,159,000 unsecured claim in consideration for the confirmation of a Plan of Reorganization; (iii) issuance of 425,000 common shares for the extinguishment of the redeemable convertible preferred stock; (iv) assumption of one $150,000 contingent secured claim bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after confirmation; (v) assumption of note for bankruptcy legal expenses in the amount of $61,673, bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after Plan confirmation; (vi) the right to issue 3,524,000 common shares in exchange for legal services related to the Plan of reorganization; (vii) issuance of 190,000,000 common shares in consideration for the merger of KruseCom; (viii) reservation of 10,000,000 shares to be issued by the reorganized debtor for working capital; (ix) reservation of 2,250,000 shares to be issued by the reorganized debtor to key third parties.  All outstanding shares of the Company’s common stock will remain issued and outstanding at and after the Effective Date.
  Item 4.Submission of Matters to a Vote of Security Holders
  There were no submissions of matters to a vote of our security holders during the fourth quarter of our fiscal year ended December 31, 2009.  During October 2008, a vote of the majority shareholders was held by proxy vote.  The purpose of the vote was to elect Seth A. Grossman to a three year term beginning October 1, 2008 and to ratify Morison Cogen LLP as the Company's Certified Public Accountant for the year ended December 31, 2008.  The Company received a majority of shareholder votes in favor of electing Seth A. Grossman to a three year term and ratifying Morison Cogen LLP as the Company's Certified Public Accountant.
  PART II
  Item 5. Market for Registrant's Common Equity, Related Stockholder matters and Issuer Purchases of Equity Securities
   Market Information
  The Company’s Common Stock is listed on the Pink Sheets Bulletin Board under the symbol “QSGIQ.”
     
 
 The following table sets forth, for the calendar periods indicated, the high and low sales prices per share for the Company’s Common Stock as reported on the Pink Sheets Bulletin Board.
  Years Ended December 31, 2009

High


LowFirst Quarter

$
0.22


$
0.02Second Quarter


0.27



0.04Third Quarter


0.02



0.0002Fourth Quarter


0.013



0.0005Years Ended December 31, 2008First Quarter

$
0.37


$
0.22Second Quarter


0.30



0.18Third Quarter


0.25



0.16Fourth Quarter


0.24



0.08
  Holders
  As of November 4, 2011, there were approximately 1,800 holders of record of the Company’s Common Stock and the closing price was $0.05.  Because many of the outstanding shares of the Company’s Common Stock are held by brokers and other institutions on behalf of shareholders, the Company is not able to estimate the total number of beneficial shareholders represented by these record holders.
  Dividends
  The Company has paid no cash or stock dividends on its Common Stock to date and does not anticipate paying any dividends on its Common Stock in the foreseeable future.  The Company intends to use any earnings, which may be generated, to finance the growth of the businesses.
  During 2009, the Company paid or accrued a total of $210,610 in dividends on its redeemable convertible preferred stock.  During 2008, the Company paid or accrued a total of $258,000 in dividends on its redeemable convertible preferred stock. The 6% dividend is payable quarterly in cash or additional preferred securities, at the same price as originally issued, at the Company’s option.  The Company did not pay dividends in 2009.  The Company chose to pay all 2008 dividends in cash.
  The Board of Directors has the right to authorize the issuance of preferred stock, without further shareholder approval, the holders of which may have preferences over the holders of the Common Stock as to payment of dividends.
  Securities authorized for issuance under equity compensation plans
  Set forth in the table below is information, as of December 31, 2009, regarding securities authorized for issuance under equity compensation plans:
  Plan Category
Number of Securities to be issued upon exercise of outstanding options, warrants and rights

(a)
Weighted-average exercise price of outstanding options, warrants and rights

(b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

(c)Equity compensation plans approved by security holders
9,332,000
$1.455
4,671,334Equity compensation plans not approved by security holders
3,800,000
$2.177
-Total
13,132,000
$1.664
4,671,334
    
    Equity Compensation Plan not Approved by Security Holders
  The material features of the plan are:
  Option Grant.  Options are granted in the discretion of the Board of Directors.
  Death.  If the option recipient dies, his personal representative and/or beneficiary will have the right (which must be exercised not later than the option expiration date) to exercise the options to the extent they were not exercised at the time of the recipient’s death.
  Non-Transferability of Rights; Designation of Beneficiaries.  Except as provided below, the options cannot not be transferred by the recipient other than by will or the laws of descent and distribution, and, during the lifetime of the recipient, the options can be exercised only by the recipient, except that, during his lifetime, the recipient may transfer the options for no consideration to members of his immediate family or a trust for the benefit of himself and/or members of his immediate family subject to all of the provisions applicable to the options prior to the transfer.
  Withholding.  The Company or any affiliate that employs the recipient has the right to deduct any sums that federal, state or local tax law requires to be withheld with respect to the exercise of the options or as otherwise may be required by such laws.  The Company or any such affiliate may require, as a condition to issuing stock upon the exercise of the options, that the recipient or other person exercising the options pay a sum to cover any such taxes.  In the alternative, the recipient or other person exercising the options may elect to pay such sums to the Company or the affiliate by delivering written notice of that election to the Company's corporate headquarters prior to or concurrently with exercise.  There is no obligation that the recipient be advised of the existence of the tax or the amount that may be withheld.
  Changes in Capital Structure.  If there is any change in the capital structure of the Company, or if there is be any dividend upon the stock of the Company payable in stock or any other dividend payable in stock, or of there is a stock split, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, the maximum aggregate number of shares with respect to which the options may be exercised and the number and the option price of the shares of stock with respect to which the options were granted, will be proportionately adjusted by the Company if, and to the extent, necessary to prevent dilution or enlargement of the rights of the recipient.
  Recent Sales of Unregistered Securities
  The following table lists all unregistered securities sold/issued by us in the last three years pursuant to Item 701 of Regulation S-K.
    
    These shares were issued to the persons listed below in connection with (1)(2)(3) Private Placement Shares, (4) the acquisition, (5) the exercise of stock options, (6) the exercise of stock warrants, (7) shares issued for funding, and (8) acquisition shares.
  Name/Entity/Nature
Date Issued
Note
Number of Persons
Issued For
Number of Common

SharesMichael Sheerr
Jan - 06
1
1
Exercise of Stock Options
100,000John W. Heilshorn
Feb - 06
2
1
Shares Issued for Services
24,000Keith L. Lippert
Feb - 06
2
1
Shares Issued for Services
24,000Whitmer & Worrall, LLC
Mar - 06
2
1
Shares Issued for Services
40,540Michael Sheerr
Mar - 06
1
1
Exercise of Stock Options
250,000Joel Owens
Jun - 06
3
1
Acquisition
2,063,545Victory Park Credit Opportunities Master Fund
Jun - 08
4
1
Shares Issued for Funding
1,875,000John S. Riconda
Jun - 08
5
1
Acquisition
13,500,000Victory Park Credit Opportunities Master Fund
Jun - 08
4
1
Shares Issued for Funding
2,000,000  1.

Represents shares issued in connection with the exercise of common stock options.2.

Represents shares issued for services rendered.3.

Represents shares used in connection with the payment of additional merger consideration that was due in conjunction with the acquisition of Qualtech International Corporation and Affiliate, valued at $1.66 per share.4.

Represents shares issued that were issued as part of the Securities Purchase Agreement between the Company and Victory Park Credit Opportunities Master Fund, Ltd.5.

Represents contingent shares that were part of the acquisition of CCSI Inc. that are being held in escrow to be released as the CCSI Inc. meets certain financial milestones.
  Item 6.
Selected Financial Data
   The Company qualifies as a smaller reporting company and is not required to provide the information required by this item.
   Item 7.
Management’s Discussion And Analysis of Financial Condition and Results of Operations
  The following discussion should be read in conjunction with our audited Financial Statements and Notes thereto included herein.
  Certain statements in this Report constitute “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 the Private Securities Litigation Reform Act of 1995.  We intend that such forward-looking statements be subject to the safe harbors created thereby.
  All such forward-looking information involves risks and uncertainties and may be affected by many factors, some of which are beyond our control.  These factors include:
 ·
Our growth strategies.
 ·
Anticipated trends in our business and demographics.
 ·
Our ability to successfully integrate the business operations of recently acquired companies; and
 ·
Regulatory, competitive or other economic influences.
  Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, among others, the following:  our continued ability to sustain our growth through continuing vendor relationships; the successful consummation and integration of future acquisitions; the ability to hire and retain key personnel; the continued development of our technical, manufacturing, sales, marketing and management capabilities; relationships with and dependence on third-party suppliers; anticipated competition; uncertainties relating to economic conditions where we operate; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; rapid technological developments and obsolescence in the products we sell and the industries in which we operate and compete; existing and potential performance issues with suppliers and customers; governmental export and import policies; global trade policies; worldwide political stability and economic growth; the highly competitive environment in which we operate; potential entry of new, well-capitalized competitors into our markets; and changes in our capital structure and cost of capital.  The words “believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions identify forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
   
   Overview
  We are a technology services and maintenance company.  Our Data Center Maintenance and Hardware services as well as our Data Security and Compliance services are geared towards both the users of enterprise-class hardware (mainframes, midrange processors, large storage, controllers, etc.) as well as the users of business-computing hardware (desktops, laptops, related peripherals and servers).  We use the trade name “QSGI” in order to build cohesion among the various technology services that we offer and build brand recognition and preference through strong cross-marketing opportunities.
  Results of Operations
  From time to time, the Company may be party to legal proceedings which arise generally in the ordinary course of business.  The Company may be involved in legal proceedings which may have a material adverse affect on the financial position, results of operations or cash flows of the Company. Therefore estimates of potential impact of legal proceedings on the Company could change in the future depending upon matters in suit and the course of specific litigation.    All prepetition claims were brought forward during the Chapter 11 proceedings.  The liability related to the prepetition claims was considered in the Company’s December 31, 2009 Balance Sheet.
  On July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009.  The independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.
  The Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations.  This is because the Company received notification from the former owner of Contemporary Computer Services, Inc. (CCSI) that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner.  The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.  The Company also ceased reporting the results of operations of the Data Security and Compliance and the Data Center Maintenance Services segment and is reporting them as discontinued operations.  As noted below, both segments assets were sold while inside Chapter 11 Bankruptcy.
  On September 15, 2009, an Asset Purchase agreement, by and between SMS Maintenance, LLC. (“Purchaser”) and QualTech Services Group, Inc. (“Seller”), a subsidiary of QSGI INC., whereby Seller agreed to sell to Purchaser and Purchaser agreed to purchase from Seller, the Purchased Assets, including, but not limited to, the Assumed Contracts, and Purchaser agreed to assume from Seller the Assumed Liabilities, all on the terms and conditions set forth in the Purchase Agreement. The Purchaser and Seller agreed that the Cash Purchase Price was equal to $2,450,000. Purchaser agreed to pay Seller an additional $20,000 to partially offset pre-closing payroll expenses of the business.   The asset sale resulted in a gain of approximately $1,400,000.
   
    On September 24, 2009, the Bankruptcy Court entered an order pursuant to 11 U.S.C. section 105, 363, and 365 of the Bankruptcy Code (A) Approving the sale of substantially all of the assets of the DSC division of QSGI INC. free and clear of all liens, claims, encumbrances and interests; (B) Approving the assumption and assignment of executor contracts and unexpired leases; and (C) Granting related relief.   The asset sale resulted in a loss of approximately $2,140,000.
  Business Segments
  Since all of the reporting companies have been sold and are reported as discontinued operations, the company will no longer be reporting business segments.
  Item 7A.                      Quantitative and Qualitative Disclosures About Market Risk
  The Company qualifies as a smaller reporting company and is not required to provide the information required by this item.
  Item 8.                                Financial Statements AND Supplementary Data
  Our financial statements included in this Annual Report on Form 10-K are listed in Item 13 and begin immediately after Item 14 on pages F-1 through F-42.
  Critical Accounting Policies
  Management is responsible for the integrity of the financial information presented herein.  The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.  Where necessary, they reflect estimates based on management’s judgment.  When selecting or evaluating accounting alternatives, management focuses on those that produce from among the available alternatives information most useful for decision-making.  Significant accounting policies that are important to the portrayal of the Company’s financial condition and results, which in some cases require management’s judgment, are summarized in the Notes to Financial Statements which are included herein in Item 8.
  The Company believes that the critical accounting policies discussed below involve additional management judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset, liability, revenue and expense amounts.
  The Company recognizes revenue when it is realized or realizable and earned.  The Company provides a limited “DOA Warranty” in connection with some of its product sales.  DOA means “Dead On Arrival” and is a commonly used term in the computer industry.  If provided to our customer, this warranty applies to used computers, disk drives, CD drives or DVD drives that do not power-up when they are received or, in some cases, for a period of up to 60 days from receipt and provides that the covered equipment can be returned for a full refund or replacement product, if available.  The decision whether to provide a refund or replacement product is generally at our option, but in limited circumstances, it may be at the customer’s option.  Based on an internal study by management, we determined that approximately 4% of Company’s sales that are covered under this warranty are returned to the Company.  The Company has alternative methods to sell the returned equipment by tearing it down and selling the working components as parts and the non-working components to metal recyclers.  The alternative sales methods are rarely below the original cost of the equipment.  The Company has not had any significant differences for the years ended December 31, 2009 and 2008.  Therefore, no warranty reserve has been recorded.  Should a reserve be recorded, it would increase both cost of sales and accrued expenses.
   
    The Company provides estimated inventory allowances for excess, slow-moving and obsolete inventory as well as for inventory whose carrying value is in excess of net realizable value.  These reserves are based on current assessments about future demands, market conditions and related management initiatives.  Management continually monitors its inventory valuation, and makes an assessment of its inventory allowance on a quarterly basis.  If market conditions and actual demands are less favorable than those projected by management, additional inventory write-downs may be required, which would be a decrease to our inventory balance and an increase to cost of sales.  The Company had no inventory for sale at December 31, 2009.
  The Company provides an estimated allowance for doubtful accounts and an allowance for sales returns.  The allowance for doubtful accounts is based on management’s assessment about future collectability of accounts receivable on an account by account basis, with a reserve set up accordingly.  If conditions change, additional allowances may be required which would decrease our accounts receivable balance and increase our bad debt expense.  The allowance for sales returns is based on historical data and management’s assessment of how much of a return of product is resalable.  This allowance is reviewed on a quarterly basis and if required, an adjustment is made to increase or decrease the reserve and increase or decrease sales.  The Company had no trade accounts receivable at December 31, 2009.
  The Company accounts for stock-based employee compensation awards using a fair value method and records such expense in the consolidated financial statements in accordance with the provisions of the FASB ASC 718 (formerly, SFAS No. 123R, Share Based Payment) that was issued by the FASB.
  The Company in accordance with the FASB ASC 350 (formerly, SFAS No. 142, Goodwill and Other Intangible Assets), performs impairment tests in the fourth quarter of each year.  As of December 31, 2009, the Company had no remaining assets to subject to the requirements of FASB ASC 350.
  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is provided against net deferred tax assets where the Company determines realization is not currently judged to be more likely than not.
  Impact Of Recently Issued Accounting Standards
  RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
  FASB ASC 820-10 (formerly, SFAS No. 157) establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this standard relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. This standard is effective for fiscal years beginning after November 15, 2007; however, it provides a one-year deferral of the effective date for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. The Company adopted this standard for financial assets and financial liabilities and nonfinancial assets and nonfinancial liabilities disclosed or recognized at fair value on a recurring basis (at least annually) as of January 1, 2008. The Company adopted the standard for nonfinancial assets and nonfinancial liabilities on January 1, 2009. The adoption of this standard in each period did not have a material impact on its financial statements.
    
  
 FASB ASC 805 (formerly, SFAS No. 141R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. This standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This standard was adopted by the Company beginning January 1, 2009 and will change the accounting for business combinations on a prospective basis.
 
 FASB ASC 810-10 (formerly, SFAS No. 160) requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. The standard establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation and expands disclosures in the consolidated financial statements. This standard is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  This standard is not currently applicable to the Company.
 
 FASB ASC 815-10 (formerly, SFAS No. 161) is effective January 1, 2009. This standard requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, this standard requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. This standard is not currently applicable to the Company since the Company does not have derivative instruments or hedging activity.
 
 FASB ASC 350-30 and 275-10 (formerly, FSP FAS 142-3) amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this standard did not have any impact on the Company’s financial statements.
 
 FASB ASC 260-10 (formerly, FSP EITF 03-6-1) provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not currently have any share-based awards that would qualify as participating securities. Therefore, application of this standard is not expected to have an effect on the Company's financial reporting.
 
 FASB ASC 470-20 (formerly, FSP APB 14-1) will be effective for financial statements issued for fiscal years beginning after December 15, 2008. The standard includes guidance that convertible debt instruments that may be settled in cash upon conversion should be separated between the liability and equity components, with each component being accounted for in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. This standard is currently not applicable to the Company since the Company does not have any convertible debt.
 
 FASB ASC 815-10 and 815-40 (formerly, EITF No. 07-5) are effective for financial statements for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The standard addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which is the first part of the scope exception for the purpose of determining whether the instrument is classified as an equity instrument or accounted for as a derivative instrument which would be recognized either as an asset or liability and measured at fair value. The standard shall be applied to outstanding instruments as of the beginning of the fiscal year in which this standard is initially applied. Any debt discount that was recognized when the conversion option was initially bifurcated from the convertible debt instrument shall continue to be amortized. The cumulative effect of the change in accounting principles shall be recognized as an adjustment to the opening balance of retained earnings. The Company adopted this standard as of January 1, 2009, and was not required to reclassify any of its warrants as liabilities.
    
  
 FASB ASC 825-10 (formerly, FSP FAS 107-1 and FSP APB 28-1) requires disclosures about the fair value of financial instruments for interim reporting periods. This standard is effective for interim reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s financial statements.
 
 FASB ASC 820-10 (formerly, FSP FAS 157-4) provides additional guidance for Fair Value Measurements when the volume and level of activity for the asset or liability has significantly decreased. This standard is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on its financial statements.
 
 FASB ASC 320-10 (formerly, FSP FAS 115-2 and FSP FAS 124-2) amends the other-than-temporary impairment guidance for debt and equity securities. This standard is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on its financial statements.
 
 FASB ASC 855-10 (formerly, SFAS No. 165) is effective for interim or annual financial periods ending after June 15, 2009 and establishes general standards of accounting and disclosure of events that occur after the balance sheet but before financial statements are issued.
 
 In June 2009, the FASB issued Accounting Standards Update No. 2009-01, The FASB Accounting Standards Codification,which establishes the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard changes the referencing of financial standards.
 
 As of December 31, 2009, the FASB has issued Accounting Standards Updates (ASU) through No. 2009-17. None of the ASUs have had an impact on the Company’s financial statements.
 
 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
 
 As of December 31, 2009, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.
  Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  None
  Item 9A (T).
Controls and procedures
  Evaluation of Disclosure Controls and Procedures
 
 We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, including, without limitation, those controls and procedures designed to ensure that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosures.
 
   
   On July 2, 2009 the Company filed for protection under Chapter 11 of the United States Bankruptcy Code in order to reorganize its operations.  During this time, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we continued to evaluate the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934).  As of December 31, 2009, based upon this evaluation our management, including our Chief Executive Officer and Chief Financial Officer, management concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective, due to the material weaknesses in internal control over financial reporting described below, at the reasonable assurance level such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.  Although the Company was able to comply with the reporting requirements of the Bankruptcy Court it was not able to comply with the timely periodic reporting requirements of the Securities and Exchange Act of 1934.   In light of the bankruptcy, management believes that  in designing and evaluating the disclosure controls and procedures of the Company,  management cannot provide absolute assurance that the objectives of the control system have been met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
 
 Management's Report on Internal Control Over Financial Reporting
 
 Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
 
 However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that internal controls may become inadequate because of changes in conditions, or the degree of compliance with policies may vary.
 
 On July 2, 2009 the Company filed for protection under Chapter 11 of the United States Bankruptcy Code in order to reorganize its operations.  Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2009.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.  Based on this evaluation, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2009, our internal control over financial reporting was not effective based on those criteria, although the Company has complied with all of the reporting requirements of the Bankruptcy Court.
  No Attestation of Registered Public Accounting Firm
  This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
    
  Item 9B.
Other Information
  None
  Part III
   Item 10.
Directors, Executive Officers, and Corporate Governance
  As of March 1, 2010, Our Directors and Executive Officers are:
  Name
Age
PositionMarc Sherman
47
Chairman, Chief Executive Officer, Director
  Marc Sherman founded QSGI INC. in August 2001 and has served as Chairman and Chief Executive Officer since then.  Mr. Sherman served as a director of and Chief Executive Officer of Intellesale, Inc. (and its predecessor, Universal Commodities Corp.), from December 1994 to July 2001, a company that purchased and sold large volumes of off-lease/off finance excess, used, refurbished and “as-is” computer equipment and related products and provided technology asset management to companies wishing to maximize the value of their computer equipment coming to the end of its useful or book lives.  Prior to 1994, Mr. Sherman served in key positions in various family businesses.  Mr. Sherman has over fifteen years of experience in marketing, operations and executive management.
  None of the Directors or Executive Officers of the Company:
  ·
have been convicted in a criminal proceeding or is the subject of a pending criminal proceeding;
  ·
are subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoined, barred or suspended or otherwise limited in their involvement in any type of business, securities or banking activities; or
   ·
have been found by a court of competent jurisdiction in a civil action, the Commission or the Commodity Futures Trading Commission to have violated federal or state securities or commodities law and the judgment has not been reversed, suspended or vacated.
  Code of Ethics for Staff Members and Directors
  The Company has adopted a Code of Ethics for Staff Members and Directors, which applies to all employees, including our Chief Executive and Chief Financial Officer.  The following is the company’s code of conduct and ethics.
  QSGI INC. Code of Conduct and Ethics
  The staff members and directors of QSGI INC. have held themselves to the highest business and ethical standards in their dealings with each other, clients, vendors, competitors, and shareholders. Those standards are values we hold dear, and they have guided our work over the years.
   
   We believe that only the highest standard of business and ethical conduct is appropriate. Dealing fairly, keeping client confidences, and avoiding conflicts of interest are paramount values in our relationships with our clients and our success as a company.
  With these values in mind, the staff members and directors of QSGI INC. shall always:
  ·
Avoid conflicts and the appearance of conflicts of interest. Our private interests and personal positions shall not interfere with the best interests of our clients or of QSGI INC.
  ·
Not use corporate opportunities or property inappropriately or for personal benefit or gain.
  ·
To the extent permitted by law, maintain the confidentiality of nonpublic information in our possession, and not use this information for personal gain.
  ·
Deal appropriately with our staff members, our clients, vendors, competitors, and shareholders.
  ·
Adhere to all applicable laws, rules, and regulations in all markets and business endeavors. This includes full, fair, accurate, timely, and understandable disclosure in documents we file with the SEC and in our other public communications.
  ·
Encourage staff members to be vigilant and to report any illegal or unethical behavior they observe.  Any waivers of the code for executive officers and directors may be made only by the board or a board committee and must be promptly disclosed to shareholders.
  ·
Live by this Code in order to help our clients succeed.
    Compliance with Section 16(a) of the Exchange Act
  Our directors, officers, and beneficial owners of 10% or more of our securities are in compliance with Section 16(a) of the Exchange Act.
  Item 11.                      Executive Compensation
  Oversight of Executive Compensation Program
  Historically, the Compensation Committee (the “Committee”), composed entirely of independent directors, administers QSGI's executive compensation program.  There were no outside directors as of December 31, 2009 and thus the Committee ceased to exist. The role of the Committee includes establishing and overseeing compensation and benefit programs for our executive officers including the Chief Executive Officer (“CEO”), the other executive officers and other key executives listed in the Summary Compensation Table (the “Named Executives”).  The Committee also evaluates the performance of the CEO and reviews the performance of other Named Executives every year.  The Committee reviews management performance, succession planning and executive development on a regular and ongoing basis with formal reviews conducted at least annually.  Elements of our executive compensation program include: base salary; annual incentive bonus; long-term equity-based incentive awards; and employee benefits and executive perquisites.
  In establishing and overseeing the program, the Committee’s goal is to ensure that we can attract and retain superior management talent critical to our long-term success. To ensure that executive compensation is aligned with the performance of QSGI and the interests of its shareholders, a significant portion of compensation available to executives is linked directly with financial results and other factors that influence shareholder value.
    
  Compensation Philosophy and Objectives
  Historically, the Committee’s policy was to compensate and reward the CEO and other Named executives based on the combination of some or all of the following factors, depending on the executive’s responsibilities: corporate performance, business unit performance and individual performance.  The Committee evaluates corporate performance and business unit performance by reviewing the extent to which QSGI has accomplished strategic business objectives, such as revenue growth, earnings and cash flow.  The Committee also evaluates individual performance by reviewing actual accomplishments.  The Committee determines increases in base salary and annual cash incentive awards based on a combination of actual accomplishments, corporate performance and business unit performance and may recommend cash incentive awards to reward executive officers and other key executives even if corporate performance may not meet expectations.  It was the Committee's belief that it is prudent to provide competitive base salaries and benefits in order to attract and retain the management talent necessary to achieve our strategic long-term objectives.
  Based on these philosophies and objectives, the Committee believes that QSGI's executive compensation program should consist of the following elements:
  •

Base salary,•

Annual cash incentive opportunity,•

Long-term equity-based incentive awards, and•

Benefits and executive perquisites
  Additional details on each element of compensation program are outlined below.
   Base Salaries
   Historically, the base salary takes into account individual duties, responsibilities, scope of control and accountability for each position.  The Committee also considers the competitiveness of the base salary.  The Committee reviews salaries of the CEO and other Named Executives annually and awards increases, as appropriate.  The Committee approved all increases in base salary for the CEO and other Named Executives in advance.
   Annual Incentive Compensation
   Historically, annual incentive compensation bonus awards are available to the CEO and other Named Executives based on achievement of our short-term business objectives, stockholders’ interests as a whole, individual performance which includes long hours, hard work and dedication to the Company's future and its goals.  The Committee reviewed the individual performance, attainment of our short-term business objectives and stockholders' interests as a whole and recommends a bonus based on a combination of these factors and may recommend cash incentive awards to reward the CEO and other Named Executives even if corporate performance may not meet expectations. It is the Committee's belief that it is prudent to provide competitive base salaries and benefits in order to attract and retain the management talent necessary to achieve our strategic long-term objectives.
   Long-Term Equity-Based Incentive Compensation
   Historically, the Committee provided stock incentives to the CEO and other Named Executives that are tied to QSGI's long-term performance in order to link the executive’s interests to those of our shareholders and to encourage stock ownership by executives.
   The 2002 Flexible Stock Plan, which was approved by our shareholders in January 2002, provides for the granting of stock options, performance-based share awards and restricted shares to the CEO and other Named Executives, and other employees. The Committee believes that the stock options, performance-based share awards and restricted shares granted under the Stock Plan provide a significant link between the compensation of the CEO and other Named Executives on the one hand and QSGI's long-term goals and shareholders’ interests on the other.
   
   Since 2002, annual grants of equity-based incentive awards to our CEO and other Named Executives have consisted of stock options.  Such awards are usually made by the Committee at its February meeting. Generally, the CEO and other Named Executives, receive annual grants with an exercise price of the options based on the closing price of the Company's stock on the date the grant.  Details on these equity awards are outlined below.   Stock options are granted at other times during the year only in conjunction with the hiring or promotion of employees and then only as approved by the Committee and pursuant to the terms of the Stock Plan.
  Stock options granted under the Flexible Stock Plan may vest ratably, or over a period of five or ten years.  The term is at the discretion of the Committee.  The number of shares of stock underlying options granted to the CEO and each Named Executives in 2009 and 2008 is shown in the table below.  The number of shares, option exercise prices, and expiration dates relating to all outstanding stock options that are held by the CEO and each of the Named Executives as of December 31, 2009 and 2008, are shown in the table below.  Information relating to options exercised during 2009 and 2008 for the CEO and each Named Executive is shown in the table below.
  Benefits and Executive Perquisites
  Historically, the Committee operated with the belief that attracting and retaining superior management talent requires an executive compensation program that is competitive in all respects with the programs provided in the market place.  In addition to salaries, incentive bonus and stock awards, competitive executive compensation programs include retirement and welfare benefits and reasonable executive perquisites. At QSGI, executive officers participate in the same retirement and welfare benefit plans as all salaried employees. We also provided certain perquisites to executive officers, subject to an annual allowance approved by the Committee. The Committee reviews actual spending on executive perquisites annually.   The Committee was disbanded an all benefits and executive perquisites ceased in as of December 31, 2009.
  Retirement Benefits
  Historically, the Company contributed 3% of an eligible employee's annual compensation to a qualified 401(k) savings plan.  A participant in the plan may elect to contribute additional funds subject to annual limits established under the Internal Revenue Code. Employee and Company matching contributions are fully vested immediately. Participants may receive distribution of their QSGI Savings Plan accounts any time after they cease service with the Company.   Contributions ceased when the Company entered Chapter 11 Bankruptcy protection on July 2, 2009.
  Welfare Benefits
  Historically, all executive officers, including the Named Executives, are eligible for welfare benefits from QSGI including: medical, dental, life insurance, short-term disability, and long-term disability. Executives participate in these plans on the same basis and subject to the same costs, terms and conditions as other salaried employees of the same defined employee class.   These plans ceased as of December 31, 2009.
  Perquisites
  Historically, QSGI provided a taxable allowance for club membership dues of up to $20,000 as a perquisite for the CEO.  These perquisites ceased as of December 31, 2009.
  
 
   Tax Implications of Executive Compensation
   Section 162(m) of the Internal Revenue Code imposes a limit, with certain exceptions, on the amount that a publicly held corporation may deduct in any year for the compensation paid to its five most highly compensated officers. The Committee believes that the annual incentive bonuses paid and the awards and options granted pursuant to the Stock Plan will qualify as “performance-based” compensation and will meet the requirements of the current tax law and Internal Revenue Service regulations so as to preserve the tax deductibility of the executive compensation paid pursuant to such plans.  The Committee attempts to structure executive compensation to preserve tax deductibility and consistent with the overall compensation objectives and philosophy discussed above.
   The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers and the two other most highly compensated officers that was paid by us during the fiscal years ended December 31, 2009 and 2008.
  Summary Compensation TableName and Principal

Position
Year
Salary

($)
Bonus ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation Earnings ($)
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)

All Other Compensation ($)

Total  ($)Marc Sherman (1) (5)
2009
$ 218,042
$         -
$        -
$           -
$         -
$         -

$           -

$  218,042Chairman, CEO and
2008
$ 424,000
$         -
$        -
$ 66,656
$         -
$         -

$ 20,000

$  510,656PresidentSeth A. Grossman(2) (5)
2009
$   65,230
$         -
$        -
$            -
$         -
$         -

$          -

$    65,230President and Chief
2008
$ 339,200
$         -
$        -
$  33,328
$         -
$         -

$          -

$  372,528Operating OfficerEdward L. Cummings(1) (5)
2009
$ 123,715
$         -
$        -
$            -
$         -
$         -

$          -

$  123,715CFO and Treasurer
2008
$ 254,400
$         -
$        -
$  33,328
$         -
$         -

$          -

$  287,728Vivek J. Agarwal(3) (4)
2009
$             -
$         -
$        -
$          -
$         -
$         -

$         -

$         -Sales Representative
2008
$   80,516
$         -
$        -
$          -
$         -
$         -

$         -

$   80,516
 (1)
See “Employment Contracts” below for agreements entered into with executive officers.  Employment ended September 25, 2009.
  (2)
Employment ended March 9, 2009.
  (3)
Two option grants were issued.  The option value was based on the grant date fair value of $1.01 and $1.80 per option share which was derived using the Black-Scholes option pricing model and is not intended to forecast future appreciation of the Company’s common share price.  The Black-Scholes model was used with the following assumptions:  dividend yield of 0%; expected volatility of 88.36%; risk-free interest rate of 4.15%; and expected lives of 1.6 years.
  (4)
Employment ended on October 31, 2008.
  (5)
One option grant was issued for each Officer.  The option value was based on the grant date fair value of $0.16 per option share which was derived using the Black-Scholes option pricing model and is not intended to forecast future appreciation of the Company’s common share price.  The Black-Scholes model was used with the following assumptions:  dividend yield of 0%; expected volatility of 80.61%; risk-free interest rate of 3.01%; and expected lives of 10 years.
  
 
  Grants of Plan-Based Awards
  The following table contains information concerning the grant of Stock Options to the named executive officers during 2009:
 Grants of Plan-Based AwardsName
Grant Date
Estimated Future Payouts Under Non-Equity Incentive Plan Awards

Estimated Future Payouts Under Equity Incentive Plan Awards

All Other Stock Awards: Number of Shares of Stock or Units (#)

All Other Option Awards:  Number of Securities Underlying Options (#)
Exercise or Base Price of Option Awards ($/Sh)Threshold ($)
Target  ($)
Maximum (#)

Threshold

($)
Target ($)
Maximum (#)Marc Sherman
-
$         -
$         -
-

$         -
-
-

$         -

-
$         -Seth A. Grossman(1)
-
$         -
$         -
-

$         -
-
-

$         -

-
$         -Edward L. Cummings(21)
-

$         -
$         -
-

$         -
-
-

$         -

-
$         -
  (1)Employment ended on March 9, 2009
 (2)Employment ended on September 25, 2009
  Outstanding Equity Awards at Fiscal Year-End
  The following table sets forth information with respect to the named executive officers concerning Equity Awards held on December 31, 2009:
  Outstanding Equity Awards at Fiscal Year-EndOption Awards

Stock AwardsName

Number of Securities Underlying unexercised Options (#) Exercisable (1)
Number of Securities Underlying unexercised Options (#)Unexercisable
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)

Option Exercise Price ($)

Option Expiration Date

Exercisable

UnexercisableMarc Sherman

250,000
--
--

$0.026

2011

--

--Marc Sherman

125,000
--
--

$0.026

2012

--

--Marc Sherman

1,000,000
--
--

$2.00

2014

--

--Marc Sherman

500,000
--
--

$1.44

2014

--

--Marc Sherman

500,000
--
--

$1.90

2014

--

--Marc Sherman

1,000,000
--
--

$2.50

2015

--

--Marc Sherman

500,000
--
--

$0.16

2018

--

--Seth A. Grossman

125,000
--
--

$2.13

2013

--

--Seth A. Grossman

100,000
--
--

$2.00

2014

--

--Seth A. Grossman

100,000
--
--

$1.44

2014

--

--Seth A. Grossman

100,000
--
--

$1.90

2014

--

--Seth A. Grossman

3,000,000
--
--

$2.75

2015

--

--Seth A. Grossman

250,000
--
--

$0.16

2018

--

--Edward L. Cummings

250,000
--
--

$0.026

2011

--

--Edward L. Cummings

100,000
--
--

$0.026

2012

--

--Edward L. Cummings

250,000
--
--

$2.00

2014

--

--Edward L. Cummings

250,000
--
--

$1.44

2014

--

--Edward L. Cummings

250,000
--
--

$1.90

2014

--

--Edward L. Cummings

500,000
--
--

$2.50

2015

--

--Edward L. Cummings

250,000
--
--

$0.16

2018
  (1)
All options have vested.
    
  Options Exercises and Stock Vested
  Outstanding Equity Awards at Fiscal Year-EndOption Awards

Stock AwardsName

Number of Shares Acquired on Exercise (#)
Value Realized on Exercise ($)

Exercisable

UnexercisableMarc Sherman

--
--

--

--Seth A. Grossman

--
--

--

--Edward L. Cummings

--
--

--

--Joel L. Owens

--
--

--

--
   Pension Benefits
  None.  Not applicable.
  Nonqualified Deferred Compensation
  None.  Not applicable.
  Compensation Pursuant to Plans
  Other than as disclosed above, the Company has no plans pursuant to which cash or non-cash compensation was paid or distributed during the last fiscal year, or is proposed to be paid or distributed in the future, to the individuals described above.
  Compensation of Directors
  There were no non-employee directors by the end of the second quarter of 2009.
  Compensation Committee Interlocks and Insider Participation
  None.
  Employment Contracts and Termination of Employment, and Change-in-Control Arrangements
  The Company had entered into employment and non-compete agreements with the following officers all of which ended with the filing of Chapter 11 Bankruptcy.
   Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
   Ownership of Equity Securities in the Company
   The following table sets forth information regarding beneficial ownership of the Company’s Common Stock by each director and by each executive officer named in the Summary Compensation Table and by all the directors and executive officers as a group as of December 31, 2009:
  Title of Class
Name and Address of Beneficial Owner
Amount and Nature ofBeneficial Owner(1)
Percent of ClassCommon
Marc Sherman (2)

c/o 400 Royal Palm Way, STE 302

Palm Beach, FL 33480
6,525,800
8.5%Common
All Directors and Executive Officers as a Group (1 Person)
6,525,800
8.5%
 
  
   1.
This table includes presently exercisable stock options.   The following director and executive officer held the number of presently exercisable options (all of which may be exercised at any time):  Marc Sherman –3,875,000;   All directors and executive officers as a group (1 person) – 6,525,800.
 2.
Includes 85,300 shares beneficially owned by Mr. Sherman’s children for whom Mr. Sherman has sole voting and dispositive power.
 
 Set forth in the table below is information, as of March 1, 2010, with respect to persons known to the Company (other than the directors and executive officers shown in the preceding table) to be the beneficial owners of more than five percent of the Company’s issued and outstanding Common Stock:
  Name and Address

Number of Shares Beneficially Owned

Percent Of ClassJohn S. Riconda

c/o CCSI

200 Knickerbocker Avenue

Bohemia, NY  11716

16,500,000

21.6%Pike Capital Partners, LP

275 Madison Avenue

Suite 418

New York, NY  10016

5,555,973

7.3%
  Securities authorized for issuance under equity compensation plans
  This information is presented in Part II, Item 5 – “Market for Common Equity and Related Stockholder Matters” above.
  Item 13                      Certain Relationships and Related Transactions, and Director Independence
  Loans from Principal Stockholders/Executive Officers
  As of December 31, 2009 and 2008, there were no outstanding loans or notes due to or due from principal stockholders or executive officers.
  Sales to Related Party
  The Company had sales to Keystone Memory Group, a customer related to Marc Sherman, Chairman and CEO, who is a principal stockholder of the Company.  Marc Sherman's sister is part owner of Keystone Memory Group.  Mr. Sherman has no business experience with Keystone.
  Sales to Keystone amounted to approximately $98,850 and $47,000 for the years ended December 31, 2009 and 2008, respectively.  Accounts receivable from this customer amounted to $0 at December 31, 2009 and $10,852 at December 31, 2008.
  Keystone primarily sells memory upgrades for Sun, HP, Cisco, Compaq and IBM workstations, servers and personal computers as well as other computer parts. We sell personal computer memory modules to Keystone in bona fide arms-length negotiated transactions at competitive fair market prices.  The products primarily consist of Random Access Memory modules.
  Other Related Party Transaction
  In 2005, the Company signed a 24 month lease for a tractor trailer from Varilease Technology Finance Group, Inc., a company that is owned by one of the former members of the Board of Directors.  The lease is considered an operating lease.  For the years ended December 31, 2009 and 2008, rent expense for this lease amounted to $12,516 and $83,256, respectively.  Accounts payable to this vendor were $12,516 and $2,086 at December 31, 2009 and 2008, respectively.
   
   In November 2007, the Company exercised an option to purchase a portion of the assets from Varilease Technology Finance Group for approximately $35,000.  This purchase reduces the monthly rental by approximately $10,600 per month.
  In October 2008, the Company released a portion of the assets from Varilease Technology Finance Group for $2,086 per month for twenty four months.  This release reduces the monthly rental by approximately $6,500 per month.
  Shares issued to Principal Stockholders/Executive Officers
  Principal Stockholder / Executive Officer
Date Issued

Issued For
Number of Common

SharesMarc Sherman
Oct - 2001

Capital Contribution
5,000,000Jan - 2002

Merger Consideration
1,800,000Dec - 2002

Compensation
500,000
  Item 14.Principal accountant fees and services
  During 2009 and 2008, we paid the following fees, including out of pocket expense reimbursements, to Morison Cogen LLP and RubinBrown LLP:
  2009

Morison Cogen LLP
2008

Morison Cogen LLPAudit Fees

Audit-Related Fees

Tax Fees

Total
$66,000

0

0

$66,000
$17,800 (1)

0

0

$17,800
  (1)  Audit fees consist of fees for the review of the third quarter 2008 and annual audit of the financial statements for 2008.
   QSGI INC.’s Audit Committee approves the engagement of an accountant to render all audit and non-audit services prior to the engagement of the accountant based upon a proposal by the accountant of estimated fees and scope of the engagement. QSGI INC.’s Audit Committee has received the written disclosure and the letter from Morison Cogen LLP required by Independence Standards Board Standard No. 1, as currently in effect, and has discussed with Morison Cogen LLP their independence.
    
  PART IV
  Item 15.                      Exhibits and Financial Statements
  ExhibitsSee List of Exhibits filed as part of this Report on Form 10-K.The financial statements listed below appear immediately after page 51.Report of Independent Registered Public Accounting Firm
F-1 – F-2Financial StatementsBalance Sheet
F-3 – F-4Statement Of Operations
F-5Statement Of Stockholders’ Equity
F-6Statement Of Cash Flows
F-7 – F-8Notes To Financial Statements
F-9 – F-42
  
 
  SIGNATURES
  In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
  QSGI INC.

(Registrant)Dated:           November 4, 2011
By:
/s/Marc ShermanMarc ShermanChairman of the Board, Chief Executive Officer
 
 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
  Signature
Title
Date/s/ Marc Sherman

Marc Sherman
Chairman of the Board, and Chief Executive Officer
November 4, 2011/s/ David Meynarez

David Meynarez
Chief Financial Officer,  & Treasurer
November 4, 2011
 
 
 
  List Of Exhibits
  Exhibit Number
Description2.1
Agreement and Plan of Merger by and between WindsorTech, Inc., Delta States Oil, Inc. and Alfred D. Morgan, Ph. D dated January 29, 2002 (incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 13, 2002 (Commission file number 000-07539)).2.2
Agreement and plan of Merger by and among WindsorTech, Inc., Qualtech International Corporation and Qualtech Service Group, Inc. dated May 1, 2004.2.3***
Addendum to Agreement and Plan of Merger2.4***
Second Addendum to Agreement and Plan of Merger.3.1
Certificate of Amendment of Certificate of Incorporation of WindsorTech, Inc. **3.2
Amended and Restated ByLaws of WindsorTech, Inc. (Incorporated herein reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).3.3
Action by Consent in Writing of a Majority of Stockholders dated May 19, 2004 concerning Amended and Restated By Laws.3.4
Action by Consent in Writing of a Majority of Stockholders dated September 17, 2004 increasing the number of shares of the Corporation4.1
Specimen Common Stock Certificate of WindsorTech, Inc. (Incorporated herein reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).4.2
Form of Stock Purchase Agreements with Barron Partners, L.P., Guerrilla Capital, and Odin Partners et al. dated May 26, 2004.4.3
Form of Registration Rights Agreements with Barron Partners, L.P., Guerrilla Capital, and Odin Partners et al. dated May 26, 2004.4.4
Form of Common Stock Purchase Warrant at $1.50 per share dated May 28, 2004.4.5
Form of Common Stock Purchase Warrant at $3.60 per share dated May 28, 20044.6
Form of Registration Rights Agreement with Joel Owens and Jolene Owens dated May 1, 2004.10.1*
Employment and Non-Compete Agreement – Edward L. Cummings **10.2*
Employment and Non-Compete Agreement – David A. Loppert **10.3*
Employment and Non-Compete Agreement – Carl C. Saracino **10.4*
Employment and Non-Compete Agreement – Michael P. Sheerr **10.5*
Employment and Non-Compete Agreement – Marc Sherman **10.6*
2002 Flexible Stock Plan (Incorporated herein reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on April 16, 2002 (Commission file number 000-07539)).10.7
Promissory Note executed by the Company.  As of April 24, 2002 this note was paid in full (Incorporated herein reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).10.8
Loan Agreement by and among Marc Sherman, Edward L. Cummings, David A. Loppert, Carl C. Saracino, Michael P. Sheerr and WindsorTech, Inc., on and as of April 24, 2002 (Incorporated herein reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).10.9
Lease Agreement (Incorporated herein reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on August 19, 2002 (Commission file number 000-07539)).10.10
Amendment to Loan Agreement by and among Marc Sherman, Edward L. Cummings, David A. Loppert, Carl C. Saracino, Michael P. Sheerr and WindsorTech, Inc., on and as of September 30, 2002 (Incorporated herein reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on November 11, 2002 (Commission file number 000-07539)).    
   10.11
Second Amendment to Loan Agreement by and among Marc Sherman, Edward L. Cummings, David A. Loppert, Carl C. Saracino, Michael P. Sheerr and WindsorTech, Inc., on and as of February 28, 2003 (Incorporated herein reference to Exhibit 10.11 to the Registrant’s Quarterly Report on Form 10-QSB filed with the Commission on May 13, 2003 (Commission file number 000-07539)).10.12
Employment and Non-Compete Agreement – Joel L. Owens10.13**
Third Amendment to Loan Agreement by and among Marc Sherman, Edward L. Cummings, Carl C. Saracino, Michael P. Sheerr and WindsorTech, Inc., on and as of March 29, 2004.12.1***
Statement re computation of ratios.16.1
Letter from Milton Reece, CPA (“Reece”) concurring with the statements made by the Registrant in the Current Report on Form 8-K reporting Reece’s resignation as the Registrant’s principal accountant (incorporated herein by reference to Exhibit 16 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 13, 2002 (Commission file number 000-07539)).31.1***
Chairman and Chief Executive Officer Certification31.2***
President and Chief Operating Officer Certification31.3***
Chief Financial Officer and Treasurer Certification32.1***
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*      Management contract or compensatory plan.**    Incorporated herein by reference to the same numbered exhibit in the Registrant’s Transition Report on Form 10-KSB filed with the Commission on April 1, 2002 (Commission file number 000-07539).***  Attached hereto.There are no other documents required to be filed as an Exhibit as required by Item 601(a) of Regulation S-K.


Contents
  Page
 Report Of Independent Registered Public Accounting Firm
F-1Financial StatementsConsolidated Balance Sheets
F-2 - F-3Consolidated Statements Of Operations
F-4Consolidated Statement Of Stockholders’ Equity (Deficit)
F-5Consolidated Statements Of Cash Flows
F-6 - F-7Notes To Consolidated Financial Statements
F-8 - F-42
 
  
   
 
 
 Report Of Independent Registered Public Accounting Firm
 
 
 Board of Directors and Stockholders
 QSGI INC.
 Palm Beach, Florida
 
 
 We have audited the accompanying consolidated balance sheets of QSGI INC. and subsidiaries (Debtor-In-Possession) as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financing reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
   F-1
  QSGI INC. AND SUBSIDIARIES
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of QSGI INC. and subsidiaries as of December 31, 2009 and 2008 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
 
 The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plans regarding those matters also are described in Note 3.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 /s/ Morison Cogen, LLC
 Bala Cynwyd, Pennsylvania
 November 4, 2011
  
    F-2
  QSGI INC. AND SUBSIDIARIES


(Debtor-In-Possession)
  CONSOLIDATED BALANCE SHEETS
 Page 1 Of 2
 
 AssetsDecember 31,2009


2008Current AssetsCash and cash equivalents

$
31,573


$
192,499Prepaid expenses and other assets


175,631



—Assets of Discontinued Operations - current


—



10,157,676Total Current Assets


207,204



10,350,175Assets of Discontinued Operation  - long term


—



14,965,247Total Assets

$
207,204


$
25,315,422
 
 F-3
 
 
  QSGI INC. AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
  CONSOLIDATED BALANCE SHEETS
 Page 2 Of 2
 
 Liabilities And Stockholders' DeficitDecember 31,


December 31,2009


2008Current LiabilitiesRevolving line of credit

$
—


$
5,351,130Notes Payable - Principal Stockholder


—



10,000,000Accounts payable


—



2,313,640Accrued expenses


—



1,160,172Accrued payroll


—



164,311Liabilities of discontinued operations - current


—



2,377,175Liabilities not subject to compromise - currentAccrued expenses and other liabilities


40,000



—Liabilities subject to compromise - currentRevolving line of credit


2,918,463



—Notes payable - principal stockholder


10,000,000



—Total Current Liabilities


12,958,463



21,366,428Liabilities subject to compromise - long termAccounts payable


4,231,670



—Accrued expenses and other liabilities


1,516,763



—Accrued payroll


1,171,773



—Long-Term Deferred Revenue


—



19,000Deferred Income Taxes


27,300



27,300Total Liabilities


19,905,969



21,412,728Redeemable Convertible Preferred Stock


4,271,472



4,257,910Commitments And Contingencies (Notes 2, 8 And 14)Stockholders' Equity (Deficit)Preferred shares: authorized 5,000,000 in 2009and 2008, $0.01 par value, none issued


—



—Common shares: authorized 95,000,000 in 2009 and 2008,$0.01 par value; 48,797,716 shares issued and outstanding in 2009,and 48,547,716 shares issued and outstanding in 2008 of which10,000,000 shares were contingent acquisition shares held in escrow


387,977



385,477Additional paid-in capital


16,528,977



16,723,724Accumulated deficit


(40,887,191
)


(17,464,397
)Total Stockholders' Equity (Deficit)


(23,970,237
)


(355,196
)Total Liabilities and Stockholders' Equity (Deficit)

$
207,204


$
25,315,442
 
 F-4
 
 
 QSGI INC. AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
  CONSOLIDATED STATEMENTS OF OPERATIONS
 
 For The YearsEnded December 31,2009


2008Interest Expense, Net of interest income (Contractual interest expense of $1,983,062)


1,837,139



1,432,065Loss Before Reorganization Items AndProvision For Income Taxes


(1,837,139
)


(1,432,065
)Reorganization Items:Professional Fees


(160,702
)


—Loss Before Provision For Income Taxes AndDiscontinued Operations


(1,997,841
)


(1,432,065
)Provision For Income Taxes


1,000



5,359Loss Before Discontinued Operations


(1,998,841
)


(1,437,424
)Loss From Discontinued Operations


(21,423,953
)


(4,230,906
)Net loss


(23,422,794
)


(5,668,330
)Accretion To Redemption Value Of Preferred Stock


(13,562
)


(19,225
)Preferred Stock Dividend


(210,617
)


(258,708
)Net Loss Available To Common Stockholders

$
(23,646,973
)

$
(5,946,263
)Loss Per Common Share --Basic & Diluted beforeDiscontinued Operations

$
(0.05
)

$
(0.04
)Loss Per Common Share --Basic & Diluted fromDiscontinued Operations

$
(0.55
)

$
(0.12
)Net Loss Per Common Share - Basic and Diluted

$
(0.60
)

$
(0.16
)Weighted Average Number Of Common SharesOutstanding - Basic and Diluted


38,797,716



34,340,066
 
 F-5
 
  QSGI INC. AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
  CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
 For The Years Ended December 31, 2009 And 2008
 
 
 Additional


Retained


TotalCommon Stock


Paid-In


Earnings


Stockholders'Shares


Amount


Capital


(Deficit)


EquityBalance (Deficit) -January 1, 2008


31,172,716


$
311,727


$
14,134,298


$
(11,796,067
)

$
2,649,958Stock issued for acquisition


3,500,000



35,000



735,000



—



770,000Warrants issued for acquisition


—



—



1,287,878







1,287,878Stock issued for financing


3,875,000



38,750



695,000



—



733,750Stock Option Compensation


—



—



149,481



—



149,481Preferred Stock Dividend


—



—



(258,708
)


—



(258,708
)Accretion To The RedemptionValue Of Preferred Stock


—



—



(19,225
)


—



(19,225
)Net Loss


—



—



—



(5,668,330
)


(5,668,330
)Balance (Deficit) -December 31, 2008


38,547,716



385,477



16,723,724



(17,464,397
)


(355,196
)Stock issued for financing


250,000



2,500



12,500



—



15,000Stock Option Compensation


—



—



16,934



—



16,934Preferred Stock Dividend


—



—



(210,617
)


—



(210,617
)Accretion To The RedemptionValue Of Preferred Stock


—



—



(13,562
)


—



(13,562
)Net Loss


—



—



—



(23,422,794
)


(23,422,794
)Balance (Deficit) -December 31, 2009


38,797,716


$
387,977


$
16,528,977


$
(40,887,191
)

$
(23,970,237
)
 
 F-6
 
 
 QSGI INC. AND SUBSIDIARIES
 (DEBTOR-IN-POSSESSION)
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  For The YearsEnded December 31,2009


2008Cash Flows From Operating ActivitiesLoss before discontinued operations

$
(1,998,841
)

$
(1,437,424
)Adjustments to reconcile net loss to net cash provided by operating activities:Changes in assets and liabilities:Prepaid expenses and other assets


(175,631
)


-Accounts payable and other liabilities


3,263,084



660,000Cash from operating activities – continuing operations


1,088,612



(777,424
)Cash from operating activities – discontinued operations


(1,021,174
)


(797,145
)Net Cash Provided by (Used In) Operating Activities


67,438



(1,574,569
)Cash From Investing ActivitiesCash from investing activities – continuing operationsCash provided by (used in) investing activities – discontinued operations


2,440,534



(44,550
)Net Cash Provided By (Used In) Investing Activities


2,440,534



(44,550
)Cash Flows From Financing ActivitiesPayment for financing costs


(25,614
)


(25,614
)Net amounts paid under revolving lines of credit, net of OID


(2,432,667
)


2,049,868Preferred stock dividends


(210,617
)


(258,708
)Cash provided by (used in) financing activities – continuing operations


(2,668,898
)


1,765,546Cash from financing activities – discontinued operations


-



-Net Cash Provided By (Used In) Financing Activities


(2,668,898
)


1,765,546Net Increase (Decrease) In Cash And Cash Equivalents


(160,926
)


146,427Cash And Cash Equivalents – Beginning Of Period


192,499



127,723Cash And Cash Equivalents – End of Period

$
31,573


$
274,150
  For the YearsEnded December 31,2009


2008Supplemental disclosure of cash flow informationIncome Taxes Paid

$
—


$
63,982Interest Paid


417,984



526,738Supplemental schedule of non-cash financing and investing activitiesStock issued for financing

$
—


$
733,750Stock issued for acquisition


—



770,000Warrants issued for acquisition


—



1,287,878Note issued for acquisition


—



10,000,000Accrued acquisition costs


—



940,559Assets exchanged for debt forgiveness

$
500,000


$
—
  
  F-7
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 December 31, 2009 And 2008
 
 
 
 1.           Basis of Presentation and Business Organization
 
 Bankruptcy
   On July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009.  Since the filing date on July 2, 2009, the Company has operated as a debtor-in-possession and the consolidated financial statements have been prepared in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (FASB ASC) 852-10 “Financial Reporting During Reorganization Proceedings,” which is applicable to companies in Chapter 11, generally does not change the manner in which financial statements are prepared.  However it does require that the financial statements for periods subsequent to the filing of a Chapter 11 case distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items in the statements of operations beginning in the period ending December 31, 2009.  The balance sheet must distinguish pre-petition liabilities subject to compromise from both those pre-petition liabilities that are not subject to compromise and from post-petition liabilities.  Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.  In addition, cash provided by reorganization items, if any, must be disclosed separately in the statement of cash flows.  The Company adopted FASB ASC 852-10 effective on July 2, 2009 and currently segregates those items as outlined above for all reporting periods subsequent to such date.
  Discontinued Operations
   As of April 1 2009, the Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations.  This is because the Company received notification from the former owner of Contemporary Computer Services, Inc. (CCSI) that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner.  The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.  On July 1, 2009 the Company also ceased reporting the results of operations of the Data Security and Compliance and the Data Center Maintenance Services segment and is reporting them as discontinued operations.  As part of the plan of bankruptcy, both segments assets were sold.
   On September 15, 2009, an Asset Purchase agreement, by and between SMS Maintenance, LLC. (“Purchaser”) and QualTech Services Group, Inc. (“Seller”), a subsidiary of QSGI INC., whereby Seller agreed to sell to Purchaser and Purchaser agreed to purchase from Seller, the Purchased Assets, including, but not limited to, the Assumed Contracts, and Purchaser agreed to assume from Seller the Assumed Liabilities, all on the terms and conditions set forth in the Purchase Agreement. The Purchaser and Seller agreed that the Cash Purchase Price was equal to $2,450,000. Purchaser agreed to pay Seller an additional $20,000 to partially offset pre-closing payroll expenses of the business.   The asset sale resulted in a gain of approximately $1,400,000.
    F-8
   On September 24, 2009, the Bankruptcy Court entered an order pursuant to 11 U.S.C. section 105, 363, and 365 of the Bankruptcy Code (A) Approving the sale of substantially all of the assets of the DSC division of QSGI INC. free and clear of all liens, claims, encumbrances and interests; (B) Approving the assumption and assignment of executor contracts and unexpired leases; and (C) Granting related relief.   The asset sale resulted in a loss of approximately $2,140,000.
   The operation of the above mentioned subsidiaries have been reported as discontinued operations for all years presented and the related assets and liabilities reflected as assets and liabilities of discontinued operations at December 31, 2008 (see Note 4).
   Bankruptcy Proceedings Subsequent to December 31, 2009
   On April 14, 2010, QSGI INC, settled its dispute with Victory Park Management, LLC and Victory Park Capital Advisors, LLC (collectively “VPC”) and signed a Settlement Agreement and Mutual Release. VPC made claims against the Company including pre-petition overstatements of inventory valuation and post-petition interference with the sale process of the assets. Although the Company disputed all claims, the company (in conjunction with its insurer) settled with VPC after considering the total cost of litigation. Other than an obligation to pay $150,000 if the Company is ultimately reorganized, the settlement releases the Company from any and all claims VPC may have had against it. The settlement and all other documents relating to the claim are available under case number 09-23658-EPK that was filed with the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.
   In June, 2010, a settlement was reached with the former owner of CCSI whereby the Company shall abandon one-hundred percent (100%) of the capital stock of CCSI, Inc. to   the owner and the owner releases his rights in and to QSGI and shall retain an unsecured claim against QSGI in the amount of $10,159,000, which includes accrued interest of $159,000.
   On January 31, 2011, the Board of Directors of QSGI, INC. unanimously approved the Third Amended Plan of Reorganization and Disclosure Statement (the “Plan”) to be filed in the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.  This was filed on February 1, 2011.
   On February 2, 2011, the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division issued an order approving the Disclosure Statement, setting hearing on confirmation of Plan, setting hearing on fee applications, setting various deadlines, and describing Plan proponent’s obligations.
   On March 21, 2011 the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division had a hearing to consider confirmation of the Debtors’ Third Amended Plan of Reorganization (D.E. # 384) under Chapter 11 of the Bankruptcy Code filed by QSGI, INC., QSGI-CCSI, INC. and QUALTECH SERVICES GROUP, INC., and dated February 1, 2011 and confirmed the Plan.  On May 5, 2011, the Judge entered the order confirming the plan of reorganization.
  
  Plan of Reorganization
   The Plan provides for, among other things, a restructuring of pre-petition debt, as follows (i) distribution of $50,000 and issuance of 10,000,000 common shares in the reorganized debtor for the extinguishment of  unsecured indebtedness; (ii) extinguishment of one $10,159,000 unsecured claim in consideration for the confirmation of a Plan of Reorganization; (iii) issuance of 425,000 common shares for the extinguishment of the redeemable convertible preferred stock; (iv) assumption of one $150,000 contingent secured claim bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after confirmation; (v) assumption of note for bankruptcy legal expenses in the amount of $61,673, bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after Plan confirmation; (vi) the right to issue 3,524,000 common shares in exchange for legal services related to the Plan of reorganization; (vii) issuance of 190,000,000 common shares in consideration for the merger of KruseCom; (viii) reservation of 10,000,000 shares to be issued by the reorganized debtor for working capital; (ix) reservation of 2,250,000 shares to be issued by the reorganized debtor to key third parties.  All outstanding shares of the Company’s common stock will remain issued and outstanding at and after the Effective Date.
   F-9
    2. Summary of Significant Accounting Policies
   Principles Of Consolidation
   The financial statements include the accounts of the Company and its wholly owned subsidiaries.  All significant inter-company accounts and transactions have been eliminated in consolidation.
   Estimates
   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
  Revenue Recognition
 
 For product sales, the Company recognizes revenue at the time products are shipped and title is transferred, which is in accordance with the stated shipping terms.  Revenue is recognized in accordance with these shipping terms so long as a purchase order, electronic, written or phone commitment has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectibility is deemed probable.  If uncertainties exist regarding customer acceptance or collectibility, revenue is recognized when those uncertainties have been resolved.  The Company provides a limited warranty on some of its products.  The Company analyzes its estimated warranty costs and provides an allowance as necessary, based on experience.  At December 31, 2009 and 2008, a warranty reserve was not considered necessary.
   Cash And Cash Equivalents
   The Company considers all liquid instruments purchased with maturity of three months or less to be cash equivalents.
   Concentration of Credit Risk Involving Cash
 
 The Company may have deposits with a financial institution which at times exceed the Federal Deposit Insurance Corporation’s deposit insurance coverage of $250,000.
 
 Accounts Receivable
 
 Accounts receivable are stated at the amount management expects to collect from outstanding balances.  Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts.  Balances which are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.
    F-10
  
 Inventories
 
 Inventories consist primarily of computer hardware, parts and related products, and are valued at the lower of average cost or market.  Substantially all inventory items are finished goods.  The allocated cost of parts disassembled from purchased computer hardware is based on the relative fair value of the disassembled components. The allocation of cost does not exceed the original cost of the computer hardware. The Company closely monitors and analyzes inventory for potential obsolescence and slow-moving items on an item-by-item basis.  Inventory items determined to be obsolete or slow moving are reduced to net realizable value.  Inventory in-transit consists of items of inventory for which the Company has purchased and assumed the risk of loss, but which has not yet been received into stock at the Company’s facility.
 
 Property And Equipment
 
 Property and equipment is stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged of operations as incurred.  Upon retirement or sale, any assets disposed are removed from the accounts and any resulting gain or loss is reflected in the results of operations.
 
 Property, equipment, leasehold improvements, computer hardware and software are depreciated or amortized using the straight-line method over two to five-year periods.  Leasehold improvements are amortized over the life of the lease or the estimated life of the asset, whichever is less.
 Impairment losses on long-lived assets, such as equipment and improvements, are recognized when events or changes in circumstances indicate that the undiscounted cash flows estimated to be generated by such assets are less than their carrying value and, accordingly, all or a portion of such carrying value may not be recoverable.  Impairment losses are then measured by comparing the fair value of assets to their carrying amounts.
 
 Deposits
 
 Deposits principally consist of the lease deposits for the Company’s Data Security and Compliance segment.  These deposits are refundable at the expiration of the lease.  Since the lease terms extend beyond 12 months, the deposits are classified as a long-term asset in other assets on the consolidated balance sheet.
 
 Advertising Costs
 
 Advertising costs are expensed on the first date the advertisement takes place.
 
 Interest Expense
 
 The Company had contractual interest expense obligations in the amount of $1,983,062 for the year ended December 31, 2009.  However, the company only recorded interest expense to the extent that it will be paid during the Chapter 11 proceedings in the amount of $1,837,139.
 
   F-11
  
 Income Taxes
 
 Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is provided against net deferred tax assets where the Company determines realization is not currently judged to be more likely than not.
   Comprehensive Income
  The Company follows FASB ASC 220-10-45 in reporting comprehensive income. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.   Since the Company does not have any items of comprehensive income, the net loss and comprehensive loss are the same.
 
 Loss Per Share
  Basic loss per share is computed on the basis of the weighted average number of common share outstanding. Diluted loss per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of all dilutive potential common shares that were outstanding during the period.
 
  In 2009, the Company excluded 821,199 weighted average common share equivalents related to stock options and 1,911,111 weighted average common share equivalents related to convertible preferred stock because their effect would have been anti-dilutive.
   In 2008, the Company excluded 1,048,175 weighted average common share equivalents related to stock options and 1,911,111 weighted average common share equivalents related to convertible preferred stock because their effect would have been anti-dilutive.
   Originally, there were 13,500,000 contingent acquisition shares outstanding.  Of this amount 3,500,000 were issued in July 2008 as part of the acquisition of Contemporary Computer Services, Inc. and 10,000,000 are being held in escrow to be released based on Contemporary Computer Services, Inc. achieving certain performance milestones or returned to treasury if such milestones are not reached.
  Fair Value Of Financial Instruments
 
 The carrying amounts of financial instruments including cash and cash equivalents, accounts payable and accrued expenses approximate fair value due to the relatively short maturity of these instruments. The carrying value of the notes payable approximates fair value based on the incremental borrowing rates currently available to the Company for financing with similar terms and maturities.
  
 F-12
   Stock-Based Compensation
   The Company follows FASB ASC 718 (formerly SFAS No. 123R) in accounting for Stock-Based compensation.  FASB ASC 718 requires measurement of all employee stock-based compensation awards using a fair value method and the recording of such expense in the consolidated financial statements. In addition the adoption of FASB ASC 718 requires additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements.
  
 RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
 
 
 FASB ASC 820-10 (formerly, SFAS No. 157) establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this standard relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. This standard is effective for fiscal years beginning after November 15, 2007; however, it provides a one-year deferral of the effective date for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. The Company adopted this standard for financial assets and financial liabilities and nonfinancial assets and nonfinancial liabilities disclosed or recognized at fair value on a recurring basis (at least annually) as of January 1, 2008. The Company adopted the standard for nonfinancial assets and nonfinancial liabilities on January 1, 2009. The adoption of this standard in each period did not have a material impact on its financial statements.
 
 FASB ASC 805 (formerly, SFAS No. 141R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. This standard also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This standard was adopted by the Company beginning January 1, 2009 and will change the accounting for business combinations on a prospective basis.
 
 FASB ASC 810-10 (formerly, SFAS No. 160) requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. The standard establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that does not result in deconsolidation and expands disclosures in the consolidated financial statements. This standard is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  This standard is not currently applicable to the Company.
 
 FASB ASC 815-10 (formerly, SFAS No. 161) is effective January 1, 2009. This standard requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, this standard requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. This standard is not currently applicable to the Company since the Company does not have derivative instruments or hedging activity.
 
 FASB ASC 350-30 and 275-10 (formerly, FSP FAS 142-3) amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this standard did not have any impact on the Company’s financial statements.
    F-13
  
 FASB ASC 260-10 (formerly, FSP EITF 03-6-1) provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company does not currently have any share-based awards that would qualify as participating securities. Therefore, application of this standard is not expected to have an effect on the Company's financial reporting.
 
 FASB ASC 470-20 (formerly, FSP APB 14-1) will be effective for financial statements issued for fiscal years beginning after December 15, 2008. The standard includes guidance that convertible debt instruments that may be settled in cash upon conversion should be separated between the liability and equity components, with each component being accounted for in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. This standard is currently not applicable to the Company since the Company does not have any convertible debt.
 
 FASB ASC 815-10 and 815-40 (formerly, EITF No. 07-5) are effective for financial statements for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The standard addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which is the first part of the scope exception for the purpose of determining whether the instrument is classified as an equity instrument or accounted for as a derivative instrument which would be recognized either as an asset or liability and measured at fair value. The standard shall be applied to outstanding instruments as of the beginning of the fiscal year in which this standard is initially applied. Any debt discount that was recognized when the conversion option was initially bifurcated from the convertible debt instrument shall continue to be amortized. The cumulative effect of the change in accounting principles shall be recognized as an adjustment to the opening balance of retained earnings. The Company adopted this standard as of January 1, 2009, and was not required to reclassify any of its warrants as liabilities.
 
 FASB ASC 825-10 (formerly, FSP FAS 107-1 and FSP APB 28-1) requires disclosures about the fair value of financial instruments for interim reporting periods. This standard is effective for interim reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Company’s financial statements.
 
 FASB ASC 820-10 (formerly, FSP FAS 157-4) provides additional guidance for Fair Value Measurements when the volume and level of activity for the asset or liability has significantly decreased. This standard is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on its financial statements.
 
 FASB ASC 320-10 (formerly, FSP FAS 115-2 and FSP FAS 124-2) amends the other-than-temporary impairment guidance for debt and equity securities. This standard is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this standard did not have a material effect on its financial statements.
 
 FASB ASC 855-10 (formerly, SFAS No. 165) is effective for interim or annual financial periods ending after June 15, 2009 and establishes general standards of accounting and disclosure of events that occur after the balance sheet but before financial statements are issued.
   F-14
  
 In June 2009, the FASB issued Accounting Standards Update No. 2009-01, The FASB Accounting Standards Codification,which establishes the Codification as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this standard changes the referencing of financial standards.
 
 As of December 31, 2009, the FASB has issued Accounting Standards Updates (ASU) through No. 2009-17. None of the ASUs have had an impact on the Company’s financial statements.
 
 Recently Issued Accounting Pronouncements Not Yet Adopted
 
 As of December 31, 2009, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.
 
 3. Management's Plans, Liquidity and Going Concern
  The Company was operating under Chapter 11 of the United States Bankruptcy Code at fiscal year-end 2009.  At that time the two secured creditors were working with the Company to remove their claims and provide mutual releases.  The Company settled with the two secured creditors in 2010 which allowed it to move forward and present a Plan of Reorganization to the remaining unsecured creditors.   The plan became effective June 17, 2011 when it merged with KruseCom, LLC by exchanging 190,000,000 shares of the Company for 100% of the units of KruseCom LLC.  The Company then emerged from Chapter 11 Bankruptcy on August 26, 2011.
   Plan of Reorganization
   The Plan provides for, among other things, a restructuring of pre-petition debt, as follows (i) distribution of $50,000 and issuance of 10,000,000 common shares in the reorganized debtor for the extinguishment of  unsecured indebtedness; (ii) extinguishment of one $10,159,000 unsecured claim in consideration for the confirmation of a Plan of Reorganization; (iii) issuance of 425,000 common shares for the extinguishment of the redeemable convertible preferred stock; (iv) assumption of one $150,000 contingent secured claim bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after confirmation; (v) assumption of note for bankruptcy legal expenses in the amount of $61,673, bearing interest at 8% per annum and being paid over 8 installments beginning 120 days after Plan confirmation; (vi) the right to issue 3,524,000 common shares in exchange for legal services related to the Plan of reorganization; (vii) issuance of 190,000,000 common shares in consideration for the merger of KruseCom LLC; (viii) reservation of 10,000,000 shares to be issued by the reorganized debtor for working capital; (ix) reservation of 2,250,000 shares to be issued by the reorganized debtor to key third parties.  All outstanding shares of the Company’s common stock will remain issued and outstanding at and after the Effective Date.
   4.           Discontinued Operations
   As of April 1, 2009, the Company ceased reporting the results of operations of the Network Infrastructure Design and Support Segment separately and is reporting it as discontinued operations.  This is because the Company received notification from the former owner of CCSI that there was an event of default under the Subordinated Secured Convertible Note between the Company and the former owner.  The Event of Default consists of the Company’s failure to make required interest payments pursuant to the Note within ten (10) days of the dates on which such interest payments became due and payable.
    F-15
    During the year ended December 31, 2009, the Company expensed approximately $210,000.  This was the remaining net equity in CCSI of which $1,608,000 were assets and $1,398,000 were liabilities.  This charge was included in the loss from discontinued operations.
   As of July 1, 2009, the Company ceased reporting the results of operations of the Data Security and Compliance and Data Center Maintenance Segment separately and is reporting it as discontinued operations.  This is because on July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009.
   On September 15, 2009, an Asset Purchase agreement, by and between SMS Maintenance, LLC. (“Purchaser”) and QualTech Services Group, Inc. (“Seller”), a subsidiary of QSGI INC., whereby Seller agreed to sell to Purchaser and Purchaser agreed to purchase from Seller, the Purchased Assets, including, but not limited to, the Assumed Contracts, and Purchaser agreed to assume from Seller the Assumed Liabilities, all on the terms and conditions set forth in the Purchase Agreement. The Purchaser and Seller agreed that the Cash Purchase Price was equal to $2,450,000. Purchaser agreed to pay Seller an additional $20,000 to partially offset pre-closing payroll expenses of the business.   The asset sale resulted in a gain of approximately $1,400,000.
   On September 24, 2009, the Bankruptcy Court entered an order pursuant to 11 U.S.C. section 105, 363, and 365 of the Bankruptcy Code (A) Approving the sale of substantially all of the assets of the DSC division of QSGI INC. free and clear of all liens, claims, encumbrances and interests; (B) Approving the assumption and assignment of executor contracts and unexpired leases; and (C) Granting related relief.   The asset sale resulted in a loss of approximately $2,140,000.
   The following summarizes the operating results of QSGI INC.’s discontinued operations.
   2009


2008Revenue

$
13,643,160


$
34,150,900Cost of Sales


14,005,757



26,670,923Selling And Administrative Expenses


6,350,409



10,983,302Depreciation


375,437



727,581Loss on impairment


13,366,601Loss on disposal of assets


968,909



—Net loss from discontinued operations

$
21,423,953


$
4,230,906
 
 
 
 Included in the Consolidated Balance Sheets are the following major classes of assets and liabilities associated with the discontinued operations:
  
 F-16
   December 31, 2009


December 31, 2008Assets of discontinued operations - current:

$
—


$
4,689,376Accounts ReceivableInventory


—



5,144,010Other assets


—



324,290$
—


$
10,157,676Assets of discontinued operations – long term:


—



727,454Property, plant and equipmentGoodwill


—



7,934,627Intangibles, net


—



6,017,968Other assets


—



285,198$
14,965,247Liabilities of discontinued operations – current:Accounts Payable

$
—


$
1,814,530Deferred Revenue


—



385,805Other current liabilities


—



176,840$
—


$
2,377,175
    5.           Business Acquisition
   In July 2008, the Company completed the purchase of all of the outstanding shares of Contemporary Computer Service, Inc. (CCSI).  CCSI provides corporate, government and educational clients with network infrastructure services including network design, implementation and monthly maintenance services on corporations’ network hardware and related infrastructure as well as 24/7 monitoring and diagnostics through its North American Network Operating Center (NOC).  The cost of the acquired entity was $13,191,080 plus an additional stock earn out of up to an additional 10 million shares of common stock based on achieving certain performance milestones.  The $13,191,080 purchase price was financed through a combination of the issuance of 3,500,000 shares of common stock in the Company, valued at $770,000, based upon the average market price for QSGI’s common stock for two days before, the day of and two days after May 7, 2008, the announcement date, senior bank and seller financing in the amount of $10 million dollars, both secured by the assets of the Company.  In connection with the seller financing, the Company issued warrants to purchase 12,000,000 shares of Common Stock at a purchase price of $0.30 per share valued at $1,287,878, based upon the closing price on July 7, 2008, the date immediately prior to the announcement.  The Company also incurred direct acquisition costs of $1,133,202.
   Certain cost of the acquisition was allocated to identifiable intangibles of $5,870,000 and goodwill of $6,445,006.
    F-17
   The identifiable intangibles are comprised of the following:
  
 Identifiable Intangible Asset

Fair Value

Remaining Useful LifeNon-Competition Agreement

$
80,000

6 yearsTrademark/Trade Name


3,030,000

IndefiniteList of Customers


2,760,000

9 yearsTotal

$
5,870,000
 
  The amortizable expense related to the acquisition amounted to $80,664 and $161,108 for the year ended December 31, 2009 and 2008.
   The goodwill and trademark recorded in connection with this acquisition will not be amortized to expense, but will be subject to periodic testing for impairment in accordance with SFAS No 142, Goodwill and Other Intangible Assets, codified in FASB ASC 805.
   The following table summarizes the fair value of the CCSI assets acquired and liabilities assumed as of July 1, 2008:
  
 (Unaudited)Assets acquired:Current assets

$
1,776,826Property, plant and equipment


588,573Intangible assets subject to amortization:Software


2,958Other Assets


62,622Total assets acquired

$
2,430,979Liabilities assumed:Accounts payable and accrued expenses

$
1,382,714Deferred revenue


341,890Notes and loans payable


22,801Total liabilities


1,747,405Net assets acquired

$
683,574
 
  In considering the benefits of the CCSI acquisition, management recognized the strategic complement of CCSI’s trade name, services and customer database.  This complement provides a strong platform for further development of our management services.
   The results of CCSI have been included in the Condensed Consolidated Financial Statements since July 1, 2008.  Unaudited pro-forma results of operations for the twelve months ended December 31, 2008 are included below.  Such pro-forma information assumes that the acquisition had occurred as of January 1, 2008, and revenue is presented in accordance with the Company’s accounting policies.  This summary is not necessarily indicative of what the results of operations would have been had CCSI been a combined entity during such periods, nor does it purport to represent results of operations for any future periods.
    F-18
   Year Ended December 31, 2008Revenue

$
40,122,736Net Loss Available to Common Stockholders


(6,425,036
)Net Loss Per Common Share – Basic and Diluted

$
(0.18
)
 
  6.           Financing Arrangements
   Revolving Line Of Credit
   On June 5, 2008, the Company entered into a Senior Security Purchase Agreement with Victory Park Capital.  This agreement allows the Company to borrow up to $10 million to finance both working capital needs and future acquisitions.  The new facility replaced the Company's $7.5 million asset based working capital facility with Wells Fargo Bank.  The new revolving line of credit agreement provides for borrowings limited to the lesser of $10,000,000 or the borrowing base of 80% of eligible accounts receivable plus 50% of eligible inventory plus 60% of eligible pre-billed service receivables.  The interest rate per annum charged is the greater of prime plus seven percent (7.00%) and twelve percent (12.00%).  As of July 1, 2009, the Company ceased borrowing from Victory Park Capital.  This is because on July 2, 2009, the Company’s Board of Directors authorized the Company to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, which was filed on July 2, 2009.
   As of December 31, 2008, the Company had requested an over advance and as a result was paying interest at fifteen percent (15%) per annum, with all principal and interest due December 1, 2010.  The Company had no availability on the borrowing base at December 31, 2008. In accordance with Emerging Issues task Force (EITF) Issue No. 95-22, the line of credit is classified as a current liability due to the agreement containing a subjective acceleration clause and a lock-box arrangement.
   The Company incurred $486,250 in origination fees paid to Victory Park Capital, including the issuance of 1,125,000 shares of the Company’s common stock.  These fees were recorded as a reduction of the loan proceeds.  The original issue discount will be recognized as interest expense on a straight-line basis over the thirty month term of the financing agreement.  For the year ended December 31, 2009 and December 31, 2008 the Company recognized $476,240 and $130,010 of interest expense related to the original issue discount respectively.  These costs have the effect of making the interest rate approximately 4% higher than the stated rate for thirty months based on anticipated future borrowings.
   The Company also signed a Registration Rights Agreement with Victory Park Capital where upon written request by Victory Park Capital to the Company, the Company within 45 days shall file a registration statement.  This registration statement must be declared effective 90 days from the filing deadline.  The registration statement must remain effective until the underlying securities are sold.  If the filing deadline, the effectiveness deadline, or the continued effectiveness requirement is not met, the Company shall pay Victory Park Capital, in cash, one and one half percent (1.5%) of the aggregate outstanding principal amount of investor notes until such filing failures are cured.  The Registration Rights Agreement does not provide for any limitation as to the maximum potential consideration to be paid.  At December 31, 2009 and 2008, the Company has not recorded any liability for the registration rights payment arrangement as this amount cannot be determined and no demand by Victory Park Capital has been made.
    F-19
   As part of the Amended and Restated Securities Purchase Agreement dated July 10, 2008, 750,000 additional shares were due to Victory Park Capital.  The value of the shares issued was $120,000.  This amount was recorded as additional debt issuance costs in July 2008 and will be recognized as interest expense on a straight -line basis over the thirty month term of the financing agreement.  During the year ended December 31, 2009 and December 31, 2008, the Company recognized $24,000 and $96,000 of interest expense related to the original issue discount, respectively.  Additionally upon the earlier of December 1, 2010 or the date of the voluntary prepayment of all Notes due to Victory Park Capital, if the Company has not issued a total of 2,600,000 shares of common stock to Victory Park Capital, then the Company shall owe Victory Park Capital the result of 2,600,000 shares of common stock minus the number of shares of common stock issued to date multiplied by fifty percent (50%).
  As of December 31, 2008, the Company was not in compliance with the covenants as they were originally set in the Amended and Restated Securities Purchase Agreement.  As a result, the Company signed a Second Amendment to Amended and Restated Securities Purchase Agreement.  This Amendment waived the December 31, 2008 violation and amended the financial covenants.  The amended financial covenants will took effect commencing June 30, 2009.  The new financial covenants that need to be met are as follows:
  Maximum Senior Leverage
4.0 to 1.0Maximum Senior Leverage
10.0 to 1.0Interest Coverage
1.5 to 1.0Fixed Charge Coverage
1.25 to 1.0Capital Expenditures not in excess of $200,000 for any calendar year
  On November 17, 2008, the Company signed a $750,000 Senior Secured Term Note (the “Loan”) with Victory Park Credit Opportunities Master Fund, Ltd. (the “Holder”).  The interest rate on the Note is 20.0% and has a maturity date of April 16, 2009.  The Loan is secured in accordance with that certain Pledge and Security Agreement by and between the Company and the Agent, dated June 5, 2008.  Closing fees and costs were $50,000 plus 2,000,000 shares of Common Stock of the Company that were issued, in accordance with the Security Purchase Agreement between the Company and Agent dated June 5, 2008, as amended and re-stated.
  The Revolving Line of Credit was settled on April 14, 2010 as noted in Subsequent Events.
  7.
Redeemable Convertible Preferred Stock
   In December 2005, the Company completed a private placement with a group of investors for net proceeds of approximately $4,200,000.  The Company received the proceeds in two payments.  The first payment, net of offering costs, of $1,967,220 was received at the time of signing and $2,236,301 was received at the beginning of January 2006.
    F-20
   The preferred securities issued in the private placement consist of 143,333 shares of 6% Series A Preferred Stock with a face value of $30 per share.  The 6% dividend is payable quarterly in cash or additional preferred securities at the Company’s option.  Each Series A Preferred Share is convertible into approximately 13.33 shares of the Company’s common stock.  The Company can require the holders to convert the shares if the Company’s common stock price maintains $2.75 for 20 consecutive business days.  The Company can redeem the preferred securities at any time after December 10, 2007.  Additionally, the holder may demand redemption in cash, for the original $30 per share, at any time after December 10, 2010.  Because these preferred securities are conditionally redeemable, they are classified as temporary equity in the balance sheet.  The Company recorded the preferred stock at fair value as of the date of issuance and have subsequently accreted changed in the redemption value from the date of issuance to the earliest redemption date using the interest method.
   8.           Stockholders’ Equity
  Contingent Common Shares
  As of December 31, 2009, there were 10,000,000 shares held in escrow.  They were contingent shares related to the acquisition of CCSI.  The contingent shares were cancelled on March 3, 2011 in accordance with the settlement agreement between the owner of CCSI and the Company in June 2010.
  Stock Option Grants
  Stock option compensation expense in the amount of $16,934 and $149,481 was recorded in 2009 and 2008, respectively.
  A summary of stock option activity is as follows:
 
 2009


2008Weighted -





Weighted -Average





AverageExercise





ExerciseShares


Price


Shares


PriceOutstanding -January 1


13,324,834


$
1.671



11,369,834


$
1.930Granted


—



—



1,955,000



0.160Exercised


—



—



—



—Forfeited


—



—



—



—Outstanding at December 31


13,324,834


$
1.671



13,324,834


$
1.671Exercisable at December 31


13,324,834


$
1.671



12,532,834


$
1.763
 
  There were no options issued to employees in 2009.  Stock option compensation expense related to options previously issued in the amount of $16,933 was recorded in 2009.  Options amounting to 1,955,000 were issued to employees in 2008 at an exercise price of $0.16.  Stock option compensation expense related to options in the amount of $149,481 was recorded in 2008.
    F-21
   The weighted average per share fair value of the options granted was $0.16 for the year ended December 31, 2008.  The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an option award, with the following assumptions for 2008:  no dividend yield, expected option lives 7.6 years, expected volatility of 81%, and a risk -free interest rate of 3.0% to 3.8%.  In determining the volatility of the Company's options, the Company used the average volatility of the Company's stock.
  The following table summarizes information about the options outstanding at December 31, 2009:
  ExercisableOutstanding Stock Options

Stock OptionsWeighted -Average
Weighted -


Weighted -Range Of

Remaining
Average


AverageExercise

Contractual
Exercise


ExercisePrices
Shares
Life
Price

Shares
Price$ 0.026
1,740,000
2.1
$ 0.026

1,740,000
$ 0.0260.160
1,955,000
6.3
0.160

1,955,000
0.1601.01 to 1.90
2,433,334
4.3
1.676

2,433,334
1.6762.00 to 2.13
2,255,000
4.9
2.007

2,255,000
2.0072.50 to 2.75
4,725,000
5.2
2.659

4,725,000
2.6593.45 to 3.46
216,500
1.0
3.450

216,500
3.45113,324,834



13,324,834
 
 Warrants
  
 In July 2008, the Company issued 12,000,000 warrants with an exercise price of $0.30 as part of the acquisition of Contemporary Computer Services, Inc. (Note 4).  Three million of these warrants are exercisable every six months beginning July, 2010 and expire five years from the date the warrants are exercisable.  A schedule of common stock warrant activity is as follows:
    F-22
  
 A summary of warrant activity is as follows:
 
 2009


2008Weighted -





Weighted -Average





AverageExercise





ExerciseShares


Price


Shares


PriceOutstanding -January 1


12,583,333


$
0.45



583,000


$
3.60Granted


—



—



12,000,000



0.30Exercised


—



—



—



—Expired


583,333



3.60



—



3.60Outstanding at December 31


12,000,000


$
0.30



12,583,333


$
0.45Exercisable at December 31


—



—



583,000


$
3.60
 
 2009


2008ExercisableOutstanding Warrants


WarrantsWeighted -Average


Weighted -





Weighted -Range Of





Remaining


Average





AverageExercise





Contractual


Exercise





ExercisePrices


Shares


Life


Price


Shares


Price$
0.30



12,000,000



5.21


$
0.30



—


$
—Outstanding as of December 31



12,000,000



5.21


$
0.30



—


$
—Exercisable at December 31



—



—



—



—



—
 
 As part of the Plan of Reorganization all outstanding Warrants were cancelled.
    F-23
 
 
 9.           Income Taxes
 
 The expense for income taxes consists of the following:
 
 2009


2008Current

$
1,000


$
5,359Deferred


—



—$
1,000


$
5,359
 
 The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:
 
 2009


2008Deferred Tax AssetsLiabilities and reserves

$
—


$
901,489Net operating loss carryforwards


12,584,801



3,449,912Stock options


84,263



77,660Inventory capitalization


—



306,181Property and equipment


—



29,89912,669,065



4,765,141Valuation allowance


(12,669,065
)


(4,665,299
)—



99,842Deferred Tax LiabilitiesPrepaid expenses


27,300



20,631Patent and trademark


—



8,025Intangibles


—



98,48627,300



127,142Net Deferred Tax Asset (Liability)

$
(27,300
)

$
(27,300
)
 
 The current and long-term components of the net deferred tax liability are as follows:
 
 2009


2008Current deferred tax asset

$
—


$
—Long-term deferred tax liability


(27,300
)


(27,300
)$
(27,300
)

$
(27,300
)
 
 
 
 F-24
 
 
 The reconciliation of the effective tax rate with the statutory federal income tax benefit rate is as follows:
 
 2009


2008Statutory federal rate


34
%


34
%State income taxes, net of federal benefits


5



5Goodwill impairment


—



—Change in valuation allowance


(39
)


(39
)—
%


—
%
 The Company’s ability to utilize the cumulative tax net operating loss carry forward of approximately $32,900,000 at December 31, 2009 against future taxable income will begin to expire on December 31, 2019 and is subject to Section 382 limitations, as defined by Section 382 of the Internal Revenue Code of 1986, of approximately $594,000 per year.  Our net operating loss carry-forward may be subject to significant future limitations, if our cumulative ownership change percentage increases by more than 50% over a three-year period, as defined by Section 382.
 
 The Company adopted the provisions FASB ASC 740.10 which provides guidance for the recognition and measurement of certain tax positions in an enterprise’s financial statements as  of January 1, 2007.  As a result of the implementation of FASB ASC 740.10, the Company recognized a $368,000 increase in the liability for unrecognized tax benefits, $38,000 of which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.  The majority of these unrecognized tax benefits were resolved during 2007, with the reversal of the temporary differences related to the issues.
 
 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
 Balance at January 1, 2008

$
31,500Reductions based on tax positions related to the current year


31,500Balance at January 1, 2009

$
-
 The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.  The liability for accrued expenses included accrued interest of $1,000 at December 31, 2009 and December 31, 2008.
 
 10.           Benefit Plan
 
 The Company has a 401(k) defined contribution benefit plan for all eligible employees.  The Company contributes 3% of eligible employees’ salaries to the plan.
 
 The Company contributed $179,124 and $325,126 to the plan during the years ended December 31, 2009 and 2008, respectively.
    F-25
  
 11.           Commitments And Contingencies
 
 Lease
  All lease agreements were terminated as a result of the filing of the chapter 11 bankruptcy.
  Rent expense and other charges totaled $264,861 and $986,572 for the years ended December 31, 2009 and 2008, respectively.
 
 Environmental
  The Company recycles used equipment that may contain hazardous materials.  The Company contracts with a licensed waste management company for the purpose of recycling or destruction of these materials in accordance with all applicable environmental standards.  Therefore, management believes it is not necessary to record a liability for environmental contingencies in the accompanying consolidated financial statements.
 
 Employment Contracts
  In 2005, the Company entered into employment contracts with three of its executive officers.  Their contracts are initially for three-year terms, and were renewed for an additional term of three years in 2008.  These contracts include “change of control” provisions, under which the employees may terminate their employment within one year after a change in control, and be entitled to receive specified severance payments generally equal to three times their ending average compensation for the proceeding year.  In addition, these employees could also receive these payments if they were involuntarily terminated without cause, even if there is no change in control.
 
 In July, 2009, the Company filed for chapter 11 bankruptcy protection which cancelled the contracts.
 
 Legal Proceedings
  From time to time, the Company may be party to legal proceedings which arise generally in the ordinary course of business.  The Company may be involved in legal proceedings which may have a material adverse affect on the financial position, results of operations or cash flows of the Company. Therefore estimates of potential impact of legal proceedings on the Company could change in the future depending upon matters in suit and the course of specific litigation.    All prepetition claims were brought forward during the Chapter 11 proceedings and were settled with the Company’s common stock.
 
 12.           Related Party Transactions
 
 In 2009 and 2008, the Company had sales to one customer related to one stockholder and officer of the Company.  Sales to this customer for the years ended December 31, 2009 and 2008 amounted to approximately $98,850 and $47,000, respectively.  Accounts receivable from this customer amounted to $0 and $10,852, at December 31, 2009 and 2008, respectively.
   F-26
  
 
 In November 2007, the Company exercised an option to purchase a portion of the assets on lease from Varilease Technology Finance Group for approximately $35,000.  This purchase reduces the monthly rental by approximately $10,600 per month.  Accounts payable to this vendor amounted to $12,516 and $2,086 at December 31, 2009 and 2008, respectively.
 
 
 13.
Subsequent Events
 
 On April 14, 2010, QSGI INC, settled its dispute with Victory Park Management, LLC and Victory Park Capital Advisors, LLC (collectively “VPC”) and signed a Settlement Agreement and Mutual Release.  VPC made claims against the Company including pre-petition overstatements of inventory valuation and  post-petition interference with the sale process of the assets. Although the Company disputed all claims, the company (in conjunction with its insurer) settled with VPC after considering the total cost of litigation.  Other than an obligation to pay $150,000 if the Company is ultimately reorganized, the settlement releases the Company from any and all claims VPC may have had against it.  The settlement and all other documents relating to the claim are available under case number 09-23658-EPK that was filed with the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.  A copy of the Order Approving Expedited Amended Joint Motion for Approval of Settlement Agreement between Debtors and Victory Park Management, LLC. Pursuant To Fed.R.B.P. 9019 (D.E. 233) dated May 27, 2010.
 
 In June, 2010, a settlement agreement and mutual release was entered into by and between John Riconda, on one hand, and QSGI INC., on the other to settle asserted claims by both parties against each other.
 
 On July 2, 2010, a joint motion for approval of settlement agreement between debtors and John Riconda pursuant to Fed.R.BankR.P. 9019 and Local rule 9013-1 (D) was filed with the United States Bankruptcy Court, Southern District of Florida, West Palm Beach Division to approve the terms of the settlement agreement between Debtors and John Riconda.
 
 On August 11, 2010, Action by Consent in Writing of the Board of Directors increased the membership of the Board of Directors from one (1) person to five (5) persons by the appointment of Benee Scola, William J. Barbera, David J. Meynarez and David K. Waldman as Directors of the Company.
 
 On January 31, 2011, the Board of Directors of QSGI, INC. unanimously approved the Third Amended Plan of Reorganization and Disclosure Statement (the “Plan”) to be filed in the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division.  This was filed on February 1, 2011.
 
 On February 2, 2011, the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division issued an order approving the Disclosure Statement, setting hearing on confirmation of Plan, setting hearing on fee applications, setting various deadlines, and describing Plan proponent’s obligations.
 
 On March 21, 2011 the United States Bankruptcy Court Southern District of Florida, West Palm Beach Division had a hearing to consider confirmation of the Debtors’ Third Amended Plan of Reorganization (D.E. # 384) under Chapter 11 of the Bankruptcy Code filed by QSGI, INC., QSGI-CCSI, INC. and QUALTECH SERVICES GROUP, INC., and dated February 1, 2011 and confirmed the Plan.  The debtors are waiting entry of the confirmation order by the Judge.
 
 Effective June 17, 2011 QSGI, Inc. merged with KruseCom, LLC (“KruseCom”), a company that is primarily engaged in Information Technology Data Security and Compliance.   The merger was carried out in accordance with a Share Exchange Agreement dated June 17, 2011 (the “Exchange Agreement”) among KruseCom, a Florida Limited Liability Company formed in October 2009.  The merger contemplated by the Exchange Agreement is part of the Chapter 11 Plan of Reorganization that was approved by the impaired parties and confirmed by the US Bankruptcy Court on May 4, 2011.
    F-27
   
 The close of the Exchange Agreement transaction (the “Closing”) took place June 17, 2011 (the Closing Date”).  On the Closing Date, pursuant to the terms of the Exchange Agreement, QSGI acquired all of the outstanding ownership interests of KruseCom (the “Interests”) from KruseCom in exchange for 190,000,000 shares of QSGI common stock.
  On August 26, 2011, the Company was notified that the Honorable Erik P. Kimball, United States Bankruptcy Judge, Southern District of Florida, entered a final decree to close the chapter 11 case. The signing of this order signifies the Company’s emergence from bankruptcy.
  On September 21, 2011, QSGI Green, Inc. (“QSGI Green”) a newly-formed, wholly-owned subsidiary of the Company completed the transactions contemplated by the Asset Purchase Agreement (the “TGG Agreement”) with The Gasket Guy, Inc (the “Seller” or “TGG”) a Florida Corporation, primarily engaged in the manufacture and installation of refrigeration gaskets throughout the United States.
  On September 26, 2011, QSGI Green (the “Borrower”) entered into a loan agreement (the “Bank Note”) with First City Bank of Commerce (the “Lender”) in the amount of $564,775 to replace the Seller’s existing bank note. The Bank Note bears interest at 7.5% and has a maturity date of September 26, 2015.  The Bank Note is primarily supported by accounts receivable and inventory of QSGI Green. The Bank Note is personally guaranteed by the two previous founding owners of TGG.