UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
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, 2006
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 April 19, 2006:
187,922,760 shares
SYSTEMS EVOLUTION INC.
INDEX
QUARTERLY REPORT ON FORM 10-QSB
FOR QUARTERLY PERIOD ENDED February 28, 2006
PART I. FINANCIAL INFORMATION
ITEM 1 - Unaudited Consolidated Financial Statements
| a. | Consolidated Balance Sheet as of February 28, 2006 (Unaudited) |
b. Consolidated Statements of Operations for the Three And Nine Months Ended February 28, 2006 and 2005 (Unaudited)
c. Consolidated Statements of Cash Flows for the Nine Months Ended February 28, 2006 and 2005 (Unaudited)
d. Notes to Consolidated Financial Statements (Unaudited)
ITEM 2 - Management's Discussion and Analysis
ITEM 3 - Controls and Procedures
PART II. OTHER INFORMATION
ITEM 6 - Exhibits
SIGNATURES
EXHIBIT 31 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
PART I. FINANCIAL INFORMATION- OUR OUTSIDE AUDITORS HAVE NOT COMPLETED THEIR REVIEW OF THESE FINANCIAL STATEMENTS
ITEM 1 - Unaudited Consolidated Financial Statements
SYSTEMS EVOLUTION, INC.
CONSOLIDATED BALANCE SHEET
February 28, 2006
(Unaudited)
| ASSETS | |||
| Current Assets | |||
| Cash | $ | 6,404 | |
| Accounts receivable, net of allowance for doubtful accounts of $17,211 | 560,825 | ||
| Unbilled revenue | 223,479 | ||
| Prepaid expenses and other current assets | 18,537 | ||
| Total Current Assets | 809,245 | ||
| Deferred financing cost, net of $2,879,387 accumulated amortization | 2,752,876 | ||
| Other assets | 10,639 | ||
| Furniture and equipment, net of accumulated depreciation of $178,224 | 99,308 | ||
| Goodwill | 1,231,648 | ||
| Intangibles, net of $1,098,824 amortization and $91,150 impairment | 1,122,537 | ||
| TOTAL ASSETS | $ | 6,026,253 | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | |||
| Current Liabilities | |||
| Accounts payable | $ | 605,523 | |
| Accrued expenses | 597,969 | ||
| Notes payable | 57,419 | ||
| Total Current Liabilities | 1,260,911 | ||
| Deferred rents | 19,546 | ||
| Convertible note, net | 1,517,543 | ||
| Long-term debt - related parties | 131,509 | ||
| Total Liabilities | 2,929,509 | ||
| STOCKHOLDERS' EQUITY | |||
Common stock, no par value, 750,000,000 shares authorized, 187,922,760 shares issued and outstanding | 16,263,858 | ||
| Accumulated deficit | (13,167,114) | ||
| Total Stockholders' Equity | 3,096,744 | ||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 6,026,253 | |
SYSTEMS EVOLUTION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended February 28, 2006 and 2005
| Three Months | Nine Months | ||||||||
| 2006 | 2005 | 2006 | 2005 | ||||||
| Revenues | $ | 1,116,754 | $ | 1,448,667 | $ | 3,521,743 | $ | 2,414,308 | |
| Cost of Goods Sold | 298,591 | 349,792 | 1,216,459 | 863,267 | |||||
| Gross Profit | 818,163 | 1,098,875 | 2,305,284 | 1,551,041 | |||||
| Operating Expenses: | |||||||||
| Payroll and related costs | 847,706 | 1,500,352 | 2,747,981 | 2,965,529 | |||||
| General, administrative, and selling | 157,447 | 551,775 | 637,109 | 1,460,073 | |||||
| Depreciation & amortization | 194,997 | 258,850 | 584,989 | 540,010 | |||||
| Operating loss | (381,987) | (1,212,102) | (1,664,795) | (3,414,571) | |||||
| Interest expense | (920,513) | (363,258) | (2,699,663) | (1,386,673) | |||||
| Other Income | 6 | 141 | 15,937 | 6,792 | |||||
| Other costs | (1,343) | - | (10,116) | (162,696) | |||||
| Net loss | $ | (1,303,837 | $ | (1,575,219) | $ | (4,358,637) | $ | (4,957,148) | |
| Basic and diluted loss per share | $ | (0.01) | $ | ($0.02) | $ | (0.03) | $ | (0.07) | |
| Basic and diluted weighted | |||||||||
| average shares outstanding | 101,015,247 | 67,239,771 | 93,593,484 | 65,888,643 | |||||
SYSTEMS EVOLUTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended February 28, 2006 and 2005
| 2006 | 2005 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
| Net loss | $ | (4,358,949) | $ | (4,526,216) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
| Depreciation and amortization | 583,032 | 1,015,350 | |||||
| Amortization of discount on notes payable | 908,775 | - | |||||
| Amortization of deferred financing costs | 1,483,972 | - | |||||
| Shares issued for services | 312,059 | 242,050 | |||||
| Stock options and warrant expense | - | - | |||||
| Shares issued for bonus | - | 32,695 | |||||
| Stock compensation expense | - | 1,644,751 | |||||
| Bad debt expense | - | - | |||||
| Gain on sale of fixed assets | - | - | |||||
| Changes in: | |||||||
| Accounts receivable | (241,214) | (78,548) | |||||
| Prepaid expenses and other current assets | 306,105 | (372,515) | |||||
| Other assets | (1,668) | (58,947) | |||||
| Accounts payable | 329,821 | (416,401) | |||||
| Unearned service revenue | (15,509) | - | |||||
| Accrued expenses | 375,024 | 89,571 | |||||
| NET CASH USED IN OPERATING ACTIVITIES | (318,552) | (2,428,210) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
| Purchase of CMS | - | - | |||||
| Purchase of Duration Software | - | - | |||||
| Purchase of equipment | (2,500) | (33,461) | |||||
| NET CASH USED IN INVESTING ACTIVITIES | (2,500) | (33,461) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
| Proceeds from notes payable and long-term debt | 3,940 | 238,399 | |||||
| Payments notes payable and long-term debt | (10,000) | (687,292) | |||||
| Proceeds from convertible note | 250,000 | 2,825,000 | |||||
| Deferred rent | 17,456 | - | |||||
| Deferred financing cost | - | - | |||||
| Common stock issued for cash | - | 124,840 | |||||
| Proceeds from exercise of warrants | - | 2,250 | |||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 261,396 | 2,503,197 | |||||
| NET CHANGE IN CASH | $ | (59,656) | $ | 41,526 | |||
| - Cash, beginning of period | 66,060 | 19,522 | |||||
| - Cash, end of period | $ | 6,404 | $ | 20,979 | |||
| SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||
| Interest paid | $ | 3,792 | $ | 26,677 | |||
| Taxes paid | $ | 4,039 | $ | 7,679 | |||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||
| Common stock issued for acquisition of CMS | - | 104,000 | |||||
| Common stock issued for acquisition of Duration | - | 2,250,000 | |||||
| Common stock issued for acquisition of Next Hire | - | 40,000 | |||||
| Common stock issued for computer equipment | - | 52,070 | |||||
| Common stock issued for debt | 175,400 | 31,029 | |||||
| Discount of notes payable | 250,000 | - | |||||
SYSTEMS EVOLUTION INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2006
(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 2005 as reported in the 10-KSB have been omitted.
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.
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.
31.1 Certification of Chief Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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.
Systems Evolution Inc.
Dated: April 19, 2006
/s/ Robert C. Rhodes
Robert C. Rhodes
Chief Executive Officer
Chief Financial Officer