UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
QUARTERLY REPORT
x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended February 28, 2005
o Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 000-31090
SYSTEMS EVOLUTION INC.
(Exact name of Small Business Issuer as specified in its charter)
Idaho | 82-0291029 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
10777 Westheimer Road, Suite 810
Houston, Texas 77042
(Address of principal executive offices)
713-979-1600
Issuer's telephone number
None
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities and 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.
(1) x Yes o No
(2) x Yes o No
The number of shares of issuer's Common Stock outstanding as of February 28, 2005:
81,011,423 shares
SYSTEMS EVOLUTION INC.
INDEX
QUARTERLY REPORT ON FORM 10-QSB
FOR QUARTERLY PERIOD ENDED February 28, 2005
PART I. FINANCIAL INFORMATION
a. Consolidated Balance Sheets as of February 28, 2005 (Unaudited)
d.Notes to Consolidated Financial Statements (Unaudited)
ITEM 3 - Controls and Procedures
PART II. OTHER INFORMATION
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1 - Unaudited Consolidated Financial Statements
SYSTEMS EVOLUTION, INC.
CONSOLIDATED BALANCE SHEET
February 28, 2005
(Unaudited)
ASSETS | (Restated | ) | ||
Current Assets | ||||
Cash | $ | 61,048 | ||
Accounts receivable, net of allowance for doubtful accounts of $21,125 | 426,092 | |||
Unbilled revenue | 248,854 | |||
Prepaid expenses and other current assets | 63,914 | |||
Total Current Assets | 799,908 | |||
Furniture and equipment, net of accumulated depreciation of $96,875 | 161,290 | |||
Deferred financing cost, net of accumulated amortization of $900,7576 | 4,731,505 | |||
Intangibles, net of accumulated amortization of $602,196 | 3,005,963 | |||
Deposits | 3,040 | |||
TOTAL ASSETS | $ | 8,701,706 | ||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||
Current Liabilities | ||||
Accounts payable | $ | 243,436 | ||
Accrued expenses | 296,729 | |||
Notes payable - related parties | 20,000 | |||
Total Current Liabilities | 560,165 | |||
Convertible note, net | 377,084 | |||
Long-term debt - related parties | 201,194 | |||
Total Liabilities | 1,138,443 | |||
Commitments | - | |||
STOCKHOLDERS' EQUITY | ||||
Common stock, no par value, 750,000,000 shares | ||||
Authorized, 81,011,423 shares issued and outstanding | 15,282,246 | |||
Accumulated deficit | (7,718,983 | ) | ||
Total Stockholders' Equity | 7,563,263 | |||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 8,701,706 |
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended February 28, 2005 and February 29, 2004
Three Months | Nine Months | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
(Restated) | (Restated) | ||||||||||||
Revenues | $ | 1,448,667 | $ | 97,253 | $ | 2,414,308 | $ | 448,209 | |||||
General and administrative | 769,628 | 2,071,894 | 3,023,957 | 2,197,011 | |||||||||
Payroll and related costs | 1,500,352 | 180,229 | 2,965,529 | 605,706 | |||||||||
Operating loss | (821,313 | ) | (2,154,870 | ) | (3,575,178 | ) | (2,354,508 | ) | |||||
Other income(expense) | |||||||||||||
Tax benefit | 4,703 | 4,703 | |||||||||||
Interest expense | (758,609 | ) | - | (1,386,673 | ) | - | |||||||
Net loss | $ | (1,575,219 | ) | $ | (2,154,870 | ) | $ | (4,957,148 | ) | $ | (2,354,508 | ) | |
Basic and diluted loss | |||||||||||||
per share | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.07 | ) | $ | (0.05 | ) | |
Basic and diluted weighted | |||||||||||||
average shares outstanding | 79,481,122 | 46,472,042 | 68,385,086 | 44,265,720 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended February 28, 2005 and February 29, 2004
2005 | 2004 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | (Restated) | ||||||
Net loss | $ | (4,957,148 | ) | $ | (2,354,508 | ) | |
Adjustments to reconcile net loss to net | |||||||
cash used in operating activities: | |||||||
Depreciation and amortization | 1830,980 | 20,125 | |||||
Shares issued for services | 242,050 | 2,020,000 | |||||
Shares issued for bonus | 32,695 | - | |||||
Tax benefit | (4,703 | ) | - | ||||
Stock compensation expense | 1,644,751 | - | |||||
Changes in: | |||||||
Accounts receivable | (78,548 | ) | 64,001 | ||||
Unbilled revenue | (248,854 | ) | - | ||||
Other current assets | (123,661 | ) | - | ||||
Other assets | (58,947 | ) | - | ||||
Accounts payable | 18,523 | ) | 1,305 | ||||
Accrued expenses | 89,571 | (33,674 | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES | (1,613,291 | ) | (282,751 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of equipment | (34,988 | ) | - | ||||
Cash paid for acquisitions, net of $38,154 received | (434,924 | ) | - | ||||
NET CASH USED IN INVESTING ACTIVITIES | (469,912 | ) | - | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Proceeds from notes payable | 237,204 | 275,000 | |||||
Repayment of notes payable | (532,825 | ) | (301,662 | ) | |||
Proceed from convertible notes | 2,825,000 | - | |||||
Proceeds from notes payable - long-term | 1,195 | - | |||||
Repayments of notes payable - long-term | (154,467 | ) | - | ||||
Cash paid for financing costs | (378,468 | ) | - | ||||
Proceed from stockholder receivable | - | 16,422 | |||||
Common stock issued for cash | 124,840 | 284,300 | |||||
Proceeds from exercise of warrants | 2,250 | - | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 2,124,729 | 274,060 | |||||
NET CHANGE IN CASH | 41,526 | (8,691 | ) | ||||
CASH BALANCES: | |||||||
-Beginning of period | 19,522 | 29,670 | |||||
-End of period | $ | 61,048 | $ | 20,979 | |||
NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||
Shares issued for acquisitions | $ | 2,394,000 | $ | - | |||
Notes payable issued for acquisitions | 340,000 | - | |||||
Shares issued to purchase equipment | 52,070 | - | |||||
Shares issued to repay outstanding debt | 31,029 | - | |||||
Warrants issued with notes payable | 2,318,846 | - | |||||
Warrants issued for financing costs | 4,738,395 | - |
SYSTEMS EVOLUTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Systems Evolution Inc. ("SEVI") have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial statements and notes thereto contained in the SEVI's Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2004 as reported in the 10-KSB have been omitted.
Intangibles - Intangibles consists of customer relationships and employment agreements that were acquired in the CMS, Duration and Next Hire acquisitions (see note 3), and are being amortized over three years.
Impairment of Long-Lived Assets - SEVI reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. SEVI assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value.
NOTE 2 - STOCK BASED COMPENSATION
SEVI accounts for stock-based compensation under the intrinsic value method. Under this method, SEVI recognizes no compensation expense for stock options granted when the number of underlying shares is known and exercise price of the option is greater than or equal to the fair market value of the stock on the date of grant. The following table illustrates the effect on net loss and net loss per share if SEVI had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the three and nine months ended February 28, 2005 and February 29, 2004:
Three Months | Nine Months | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
(Restated) | (Restated) | ||||||||||||
Net loss as reported | $ | (1,575,219 | ) | $ | (2,154,870 | ) | $ | (4,957,148 | ) | $ | (2,345,508 | ) | |
Add: stock based compensation determined under | |||||||||||||
intrinsic value-based method | 108,265 | - | 534,751 | - | |||||||||
Less: stock based compensation determined under fair | |||||||||||||
value based method | (374,039 | ) | - | (1,112,617 | ) | - | |||||||
Pro forma net loss | $ | (1,840,933 | ) | $ | (2,154,870 | ) | $ | (5,535,014 | ) | $ | (2,345,508 | ) | |
Basic and diluted net loss | |||||||||||||
per common share: | |||||||||||||
As reported | $ | (0.02 | ) | $ | (0.05 | ) | $ | (0.07 | ) | $ | (0.05 | ) | |
Pro forma | (0.02 | ) | (0.05 | ) | (0.07 | ) | (0.05 | ) |
The weighted average fair value of the stock options granted during 2005 was $0.59. Variables used in the Black-Scholes option-pricing model include (1) 1.5% risk-free interest rate, (2) expected option life is the actual remaining life of the options as of each year end, (3) expected volatility is from 181% to 781% and (4) zero expected dividends.
NOTE 3 - ACQUISITIONS
CMS
Effective July 27, 2004, SEVI acquired all the issued and outstanding shares of Southwest CMS Technology Services, LP and its general partner CMS Associates, LLC ("CMS"), a San Antonio based network integration firm. SEVI paid $10,000 cash, issued a note payable totaling $40,000 and issued an aggregate of 200,000 shares of SEVI's common stock valued at $104,000 to the owners of CMS. As of the effective date, CMS became a wholly-owned subsidiary of SEVI. The acquisition was accounted for using the purchase method of accounting.
The following table summarizes the estimated fair value of the net assets acquired and liabilities assumed at the acquisition date.
Total | ||||
Current assets | $ | 53,596 | ||
Property and equipment | 19,443 | |||
Other assets | 1,643 | |||
Intangibles | 281,196 | |||
Total assets acquired | 355,878 | |||
Current liabilities | 132,519 | |||
Long-term liabilities | 69,359 | |||
Total liabilities acquired | 201,878 | |||
Net assets acquired | $ | 154,000 |
The following are pro forma condensed statements of income for the three month period ended August 31, 2004 and 2003, as though the acquisition had occurred as of the beginning of each period. Other historical financial statements are included in SEVI's report on Form 8-K/A.
Three Months Ended August 31, | |||||||
2004 | 2003 | ||||||
Revenues | $ | 286,468 | $ | 471,461 | |||
Net Income/(Loss) | (1,767,800 | ) | 4,233 | ||||
Loss per share - basic and diluted | $ | (0.03 | ) | $ | 0 |
Duration
Effective September 24, 2004, SEVI acquired all the issued and outstanding shares of Duration Software, Inc. (“Duration”) an Austin based IT consulting firm. SEVI paid the selling stockholders $450,000 cash, issued them $300,000 of SEVI's non-interest bearing notes due February 1, 2007, and 15,000,000 shares of SEVI common stock. valued at $2,250,000. As of the effective date, Duration became a wholly-owned subsidiary of SEVI. The acquisition was accounted for using the purchase method of accounting.
The following table summarizes the estimated fair value of the net assets acquired and liabilities assumed at the acquisition date.
Total | ||||
Current assets | $ | 255,294 | ||
Property and equipment | 26,698 | |||
Intangibles | 3,044,648 | |||
Total assets acquired | 3,326,640 | |||
Current liabilities | 227,546 | |||
Long-term liabilities | 99,094 | |||
Total liabilities acquired | 326,640 | |||
Net assets acquired | $ | 3,000,000 |
The following are pro forma condensed statements of income for the six month period ended November 30, 2004 and 2003, as though the acquisition had occurred on June 1, 2003. Other historical financial statements are included in SEVI's report on Form 8-K/A.
Six Months Ended | |||||||
November 30, | |||||||
2004 | 2003 | ||||||
Revenues | $ | 2,783,190 | $ | 1,943,159 | |||
Net Income/(Loss) | 2,962,948 | (79,809 | ) | ||||
Loss per share - basic and diluted | $ | (0.04 | ) | $ | 0 |
Next Hire
Effective September 23, 2004, SEVI purchased all of the outstanding shares of Next Hire Consultants Inc. (“Next Hire”), a Houston based staffing and permanent placement firm. SEVI issued the shareholders of Next Hire 400,000 shares of SEVI common stock valued at $40,000.
The following table summarizes the estimated fair value of the net assets acquired and liabilities assumed at the acquisition date.
Total | ||||
Current assets | $ | 16,980 | ||
Intangibles | 62,315 | |||
Total assets acquired | 79,295 | |||
Current liabilities | 26,218 | |||
Net assets acquired | $ | 53,077 |
NOTE 4 - CONVERTIBLE NOTES
During September 2004, SEVI issued $1,825,000 in convertible promissory notes pursuant to a private placement. These notes bear interest at 8% per annum from the date of issuance and interest is payable semi-annually. These notes are due August 31, 2007. All or a portion of the unpaid principal balance is convertible into SEVI common stock at $0.05 per share. In connection with these notes, SEVI paid $91,250 cash and granted 7,300,000 warrants with exercise prices ranging from $.05 to $.15 to the investment finder, $155,586 cash and granted 14,600,000 warrants with exercise prices ranging from $.05 to $.15 to the investment banker and $35,000 to the investor's attorney. SEVI also granted these private investors 20 warrants for every dollar loaned for a total of 36,500,000 warrants. The warrants were denominated as Series A, B, C, and D warrants. The following table summarizes each series.
Series | Number of shares | Exercise Price | Expiration |
A | 9,125,000 | $0.06 | 90 days from registration of underlying common shares |
B | 9,125,000 | $0.07 | 180 days from registration of underlying common shares |
C | 9,125,000 | $0.08 | 270 days from registration of underlying common shares |
D | 9,125,000 | $0.15 | August 31, 2009 |
Total | 36,500,000 |
During December 2004 and January 2005, SEVI issued $1,000,000 in convertible promissory notes pursuant to another private placement. These notes bear interest at 8% per annum from the date of issuance and interest is payable monthly. These notes are due January 14, 2007. All or a portion of the unpaid principal balance is convertible into common stock at $0.13 per share. In connection with these notes, SEVI granted 6,975,000 warrants with an exercise price of $.08 to the investment banker. SEVI also granted these private investors 1.5 warrants for every dollar loaned for a total of 1,500,000 warrants. The exercise price of the warrants is $.08 per share.
The notes have been discounted for the relative fair value of the warrants, the offering costs and beneficial conversion feature. As of February 28, 2005, the stock has not been issued to the investors. All discounts will be amortized over the life of the notes. The relative fair values were calculated using the Black-Scholes model. Variables used in the Black-Scholes model include (1) 2.0% risk-free interest rate, (2) expected volatility between 166% and 227% and (3) zero expected dividends.
A summary of the convertible notes at February 28, 2005 is as follows: | ||||
Gross proceeds from notes | $ | 2,825,000 | ||
Less: Relative value of warrants | (1,846,163 | ) | ||
Less: Beneficial conversion feature | (472,683 | ) | ||
Add: Amortization of discounts | 331,603 | |||
Carrying value of note on February 28, 2005 | $ | 837,757 |
NOTE 5 - COMMON STOCK
On June 21, 2004, SEVI re-issued a lost certificate to Mr. Patrick L. Anderson, one of SEVI's directors. Mr. Anderson provided SEVI with: a request for a replacement certificate; a statement that the certificate was not endorsed; affirmation that the security had not been hypothecated, transferred, pledged or otherwise disposed; and an agreement that the original certificate be immediately surrendered if found. The lost certificate, #1000 for 8,563,094 shares, was re-issued as a certificate for 6,463,094 shares to Mr. Anderson. 2,000,000 shares of Mr. Anderson's were returned to SEVI in a transaction previously disclosed in SEVI's 10-KSB for the period ending May 31, 2004. The lost certificate is not considered issued or outstanding in the accompanying financials, but, has not been cancelled by the transfer agent.
During the three months ending August 31, 2004:
· | SEVI issued 2,250,000 shares of common stock to H.C. Wainwright and 1st SB related to the exercise of warrants. The warrants were issued and exercised during the quarter at an exercise price of $.001 per share resulting in $1,110,000 of compensation expense being recorded for the fair value of the warrants. |
· | SEVI issued 200,000 shares of common stock to 8 consultants and 20,000 shares to an employee. SEVI recorded consulting expense totaling $137,000 based on the fair market value on the date issued. |
· | SEVI issued 200,000 shares of common stock as consideration for the acquisition of CMS. See note 3 for details. |
· | SEVI acquired equipment in exchange for 100,000 shares of SEVI's common stock valued at $52,070. |
During the three months ending November 30, 2004:
· | On September 22, 2004, SEVI increased its authorized number of shares of common stock to 750,000,000. |
· | On September 23, 2004, SEVI issued the shareholders of Next Hire 400,000 shares of SEVI common stock. See note 3 for details. |
· | On September 24, 2004, SEVI issued the shareholders of Duration 15,000,000 shares of SEVI common stock. |
· | SEVI issued 7,809,868 shares of common stock for the cashless exercise of SEVI warrants. |
NOTE 6 - RESTATEMENT
The following summarizes the restatement of the consolidated balance sheet and consolidated statement of operations for the related errors due primarily to a unrecorded discounts on convertible notes, unrecorded amortization of deferred financing costs, and write-off of deferred tax assets and liabilities. Additionally, unbilled revenue has been reported separately on the balance sheet.
Balance sheet | ||||||||||
February 28, 2005 | ||||||||||
Previously Reported | Increase (Decrease) | Restated | ||||||||
Cash | $ | 61,048 | $ | 61,048 | ||||||
Accounts receivable | 426,092 | 426,092 | ||||||||
Unbilled revenue | $ | 248,854 | 248,854 | |||||||
Deferred tax asset | 43,059 | (43,059 | ) | - | ||||||
Other current assets | 312,768 | (248,854 | ) | 63,914 | ||||||
Furniture and equipment | 161,290 | 161,290 | ||||||||
Deferred financing cost | 4,606,259 | 125,246 | 4,731,505 | |||||||
Intangibles | 3,005,963 | 3,005,963 | ||||||||
Deposits | 3,040 | 3,040 | ||||||||
Total assets | $ | 8,619,519 | $ | 82,187 | $ | 8,701,706 | ||||
Accounts payable | $ | 243,436 | $ | 243,436 | ||||||
Accrued expenses | 296,729 | 296,729 | ||||||||
Deferred tax liabilities | 47,762 | $ | (47,762 | ) | - | |||||
Note payable - current | 20,000 | 20,000 | ||||||||
Convertible note | 837,757 | (460,673 | ) | 377,084 | ||||||
Note payable - long term | 201,194 | 201,194 | ||||||||
Total liabilities | 1,646,878 | 1,138,443 | ||||||||
Common stock | 14,260,692 | 1,021,554 | 15,282,246 | |||||||
Retained deficit | (7,288,051 | ) | (430,932 | ) | (7,718,983 | ) | ||||
Total equity | 6,972,641 | 590,622 | 7,563,263 | |||||||
Total Liabilities and Equity | $ | 8,619,519 | $ | 82,187 | $ | 8,701,706 |
Statement of Operations | ||||||||||
For the Nine Months Ended | ||||||||||
February 28, 2005 | ||||||||||
Previously Reported | Increase (Decrease) | Restated | ||||||||
Revenues | $ | 2,414,308 | $ | 2,414,308 | ||||||
General and administrative | 3,115,809 | $ | (91,852 | ) | 3,023,957 | |||||
Payroll and related costs | 2,965,529 | 2,965,529 | ||||||||
Tax benefit | - | 4,703 | 4,703 | |||||||
Interest expense | (859,186 | ) | (527,487 | ) | (1,386,673 | ) | ||||
Net loss | $ | (4,526,216 | ) | $ | (430,932 | ) | $ | (4,957,148 | ) | |
Basic and diluted loss per share | $ | (0.07 | ) | $ | (0.07 | ) | ||||
Basic and diluted weighted average shares outstanding | 68,385,086 | 68,385,086 |
ITEM 2 - Management's Discussion and Analysis
FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements that involve risks and uncertainties. We use words such as anticipate, believe, plan, expect, future, intend and similar expressions to identify such forward-looking statements. You should not place too much reliance on these forward-looking statements. Our actual results are likely to differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in this section.
The Company, previously known as Wallace Resources Inc., was organized in the State of Idaho on August 26, 1968. Systems Evolution Inc., our Texas operating company was acquired by the Company on September 9, 2003, and after the acquisition, the Company's current directors and management took control of the Company. We generate revenue from professional services performed for our end-user customers and the end-user customers of our software partners.
Revenue is derived primarily from professional services provided on a time and materials basis, with the remaining revenue provided from fixed fee engagements. For time and material contracts, revenue is recognized and billed by multiplying the number of hours expended by our professionals in the performance of the contract by the established billing rates. For fixed fee projects, revenue is generally recognized using the proportionate performance method. Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. Billings in excess of costs plus earnings are classified as deferred revenues. On many projects we are also reimbursed for out-of-pocket expenses such as airfare, lodging and meals. These reimbursements are included as a component of revenue.
Our revenue and operating results are subject to substantial variations based on our customers' expenditures and the frequency with which we are chosen to perform services for our customers. Revenue from any given customer will vary from period to period.
Our gross margins are affected by trends in the utilization rate of our professionals (defined as the percentage of our professionals' time billed to customers, divided by the total available hours in the respective period), the salaries we pay our consulting professionals, and the average rate we receive from our customers. If a project ends earlier than scheduled or we retain professionals in advance of receiving project assignments, our utilization rate will decline and adversely affect our gross margins.
Recent Developments
The Company entered into a definitive agreement to acquire Southwest CMS Technology Services LP and its general partner CMS Associates, LLC (“CMS”), a San Antonio based network integration firm, on June 10, 2004, and closed the acquisition on July 27, 2004. CMS's primary focus is Microsoft and Novell network integration. In connection with the acquisition of CMS from its two stockholders, the Company paid the selling stockholders $10,000 in cash, and issued them $40,000 aggregate principal amount of our non-interest bearing notes dependent upon the note holders being retained by the Company, and 200,000 shares of our common stock.
The Company entered into a definitive agreement to acquire Duration Software, Inc. (“Duration”), an Austin based business and technology consulting firm, on August 30, 2004, and closed the acquisition on September 24, 2004. Duration's primary focus is on custom applications and integration solutions for government, healthcare, and business. Its core service offerings include: Application Design and Development; Application Integration; Database Design, Development and Integration; and Project Management. In connection with the acquisition of Duration from its five stockholders, the Company paid the selling stockholders $450,000 in cash, and issued them $300,000 aggregate principal amount of our non-interest bearing notes due February 1, 2007, and 15,000,000 shares of our common stock.
The Company entered into a definitive agreement to acquire Next Hire (“Next Hire”) Consultants Inc., a Houston based staffing and permanent placement firm, on July 12, 2004, and closed the acquisition on September 23, 2004. In connection with the acquisition of Next Hire from its stockholder, the Company issued 400,000 shares of our common stock.
Results of Operations for the three month period ending February 28, 2005
Total gross revenue increased from $97,253 for the three month period ended February 29, 2004 to $1,448,667 for the three month period ended February 28, 2005, an increase of 1,390%. The increase in revenue resulted in part from addition of CMS Technology, Duration Software, and Next Hire Consultants.
Net loss from operations decreased from $2,154,870 for the three month period ended February 29, 2004 to $1,575,219 for the three month period ended February 28, 2005.
Operating Expenses
Payroll and related costs make up the majority of our cost of revenue. Total payroll and related costs increased from $180,229 for the three month period ended February 29, 2004 to $1,500,362 for the three month period ended February 28, 2005, an increase of 732%. This increase is attributed to an increase in staff, as well as, the acquisitions of CMS Technology, Duration Software, and Next Hire Consultants.
General and administrative expenses consist of salaries and benefits for sales, executive and administrative employees, training, marketing activities, investor relations, recruiting, non-reimbursable travel costs and expenses and miscellaneous expenses. General and administrative expenses decreased from $2,071,894 for three month period ended February 29, 2004 to $769,628 for the three month period ended February 28, 2005. This decrease is related to hiring a professional management team, including Richard N. Hartmann, Willie A. Jackson, Jr., Rich L. Steinle, Bob C. Johnson, and Sharon E. Mauricio.
Liquidity and Capital Resources
Net cash used by operating activities was ($1,613,291) for the nine month period ended February 28, 2005 compared to ($282,751) used by operating activities for the nine month period ended February 29, 2004.
Net cash provided by financing activities was $2,124,729 for the nine month period ended February 28, 2005 compared to $274,060 for nine month period ended February 29, 2004. This increase was attributed to the acquisition of CMS, Duration Software, and Next Hire Consultants.
On August 31, 2004, the Company executed a Purchase Agreement with certain institutional and accredited investors under which the Company agreed to sell and the purchasers agreed to purchase convertible promissory notes due August 31, 2007 (the "Notes") in the aggregate principal amount of up to $2,500,000 bearing interest at the rate of 8% per annum and convertible into shares of our Common Stock at a conversion price of $0.05 per share. On September 9, 2004, the Company completed the sale of an aggregate of $1,825,000 in Notes and accompanying Warrants under the Purchase Agreement which resulted in net proceeds to the Company of $1,542,417. The Notes are initially convertible into 36,500,000 shares of Common Stock, and an additional 36,500,000 shares of Common Stock are reserved for issuance upon exercise of the Warrants issued to the note holders.
On December 30, 2004, we executed a securities purchase agreement with certain institutional and accredited investors for the sale of 8% Callable Secured Promissory Notes and accompanying Warrants. Under this agreement, on December 30, 2004, we completed the sale of an aggregate of $500,000 of these Notes, which resulted in net proceeds to the Company of $408,148, and on January 14, 2005, completed the sale of an additional $500,000 of these Notes, with net proceeds to the Company of $497,500.
The Company estimates that our requirements for additional capital over the next 15 months will be in the range of $1,000,000. There can be no assurance we will be able to raise this additional required capital on satisfactory terms, or at all. In the event we are unable to obtain such additional capital or to obtain it on acceptable terms or in sufficient amounts, the impact thereof would have a material adverse effect on our business, operating results, financial condition and may affect our ability to carry on as a Company.
Critical Accounting Policies
Consulting revenues are comprised of revenue from professional services fees recognized primarily on a time and materials basis as performed. For fixed fee engagements, revenue is recognized using the proportionate performance method (based on the ratio of hours expended to total estimated hours). Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses are determined. Billings in excess of costs plus earnings are classified as deferred revenues. Our normal payment terms are net 30 days. We record an expense for the expected losses on uncollectible accounts receivable each period based on known facts and circumstances for the respective period.
Deferred Financing Costs
Deferred financing costs relate to the cost incurred in the arrangement of Systems Evolution Inc.'s debt agreement and are being amortized using the straight-line method over the terms of the related debt.
ITEM 3 - Controls and Procedures.
Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer has concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Report on Form 8-K
(a) Exhibits.
Ex | 31 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
Ex | 32 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. |
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ Robert C. Rhodes
Robert C. Rhodes
Chief Executive Officer
/s/ Robert C. Rhodes
Robert C. Rhodes
Chief Financial Officer
Date: October 13, 2005