SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2008. | |
¨ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period _____________ to ______________. |
Commission File Number 333-133936
VISUAL MANAGEMENT SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada | 68-0634458 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
1000 Industrial Way North, Suite C
Toms River, New Jersey 08755
(Address of principal executive offices)
(732) 281-1355
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ¨
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 “accelerated filer, large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of August 14, 2008, there were 8,255,500 shares of the registrant’s common stock outstanding.
VISUAL MANAGEMENT SYSTEMS , INC. AND SUBSIDIARIES
Explanatory Note
This Amendment on Form 10-Q/A amends our Quarterly Report on Form 10-Q for the three months ended June 30, 2008 (the “Original Form 10-Q”) as initially filed with the Securities and Exchange Commission on August 14, 2008 to (i) expand certain disclosures in the notes to our consolidated financial statements and (ii) revise the disclosure set forth in Item 4 – Controls and Procedures as a result of comments received from the Staff of the Division of Corporation Finance of the Securities and Exchange Commission.
This Amendment does not affect any other section of the Original Form 10-Q not otherwise discussed herein and continues to speak as of the date of original filing
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Item 1. FINANCIAL STATEMENTS
Visual Management Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2008 | December 31, 2007 | ||||||
(unaudited) | (audited) | ||||||
Assets | |||||||
Current assets | |||||||
Cash | $ | 26,870 | $ | 707,025 | |||
Accounts receivable, net | 204,865 | 296,447 | |||||
Inventory | 595,299 | 605,724 | |||||
Prepaid expenses | 15,885 | 23,931 | |||||
Total current assets | 842,919 | 1,633,127 | |||||
Property and equipment - net | 690,996 | 682,285 | |||||
Capitalized software | 64,000 | - | |||||
Deposits and other assets | 88,426 | 102,308 | |||||
Investment in joint venture | 5,000 | - | |||||
Software assets-net | 1,555,553 | - | |||||
Deferred financing costs-net | 1,486,744 | 1,851,091 | |||||
Total Assets | $ | 4,733,638 | $ | 4,268,811 | |||
Liabilities and Stockholders' Deficit | |||||||
Current liabilities | |||||||
Accounts payable | $ | 1,112,702 | $ | 780,521 | |||
Accrued expenses and other current liabilities | 1,340,448 | 627,445 | |||||
Customer deposits | 234,130 | 137,160 | |||||
Sales tax payable | 87,161 | 38,727 | |||||
Bank line of credit | 49,981 | 49,981 | |||||
Short term notes payable | 555,892 | - | |||||
Current portion of long-term debt | 97,696 | 347,539 | |||||
Current portion of obligations under capital leases | 54,617 | 30,700 | |||||
Current portion of convertible notes payable | 1,458,333 | 208,333 | |||||
Total current liabilities | 4,990,960 | 2,220,406 | |||||
Convertible notes payable - net of current portion | 3,262,334 | 2,818,334 | |||||
Long-term debt - net of current portion | 284,380 | 346,509 | |||||
Obligations under capital leases - net of current portion | 83,768 | 37,179 | |||||
Commitments and contingencies | |||||||
Stockholders' deficit | |||||||
Preferred stock | 1 | 1 | |||||
Common stock | 8,039 | 7,379 | |||||
Additional paid-in-capital | 12,958,251 | 12,030,155 | |||||
Accumulated deficit | (16,704,095 | ) | (13,041,152 | ) | |||
Treasury stock, at cost | (150,000 | ) | (150,000 | ) | |||
Total stockholders' deficit | (3,887,804 | ) | (1,153,617 | ) | |||
Total Liabilities and Stockholder's Deficit | $ | 4,733,638 | $ | 4,268,811 |
The accompanying notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
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Condensed Consolidated Statements of Operations
For the Six and Three Months Ended June 30, 2008 and 2007
(Unaudited)
Six Months Ended June 30 | Three Months Ended June 30 | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Revenues - net | $ | 3,212,825 | $ | 2,598,709 | $ | 1,635,516 | $ | 1,438,272 | |||||
Cost of revenues | 1,653,496 | 1,349,740 | 810,383 | 785,525 | |||||||||
Gross profit | 1,559,329 | 1,248,969 | 825,133 | 652,747 | |||||||||
Operating expenses | 4,924,933 | 3,150,374 | 2,195,571 | 1,607,296 | |||||||||
Loss from operations | (3,365,604 | ) | (1,901,405 | ) | (1,370,438 | ) | (954,549 | ) | |||||
Other (income) expenses | |||||||||||||
Debt conversion expense | - | 590,044 | - | - | |||||||||
Interest income | - | (52 | ) | - | (3 | ) | |||||||
Interest expense | 297,034 | 171,626 | 157,031 | 42,455 | |||||||||
Miscellaneous loss (income) | 305 | - | - | (26,013 | ) | ||||||||
Net loss | $ | (3,662,943 | ) | $ | (2,663,023 | ) | $ | (1,527,469 | ) | $ | (970,988 | ) | |
Per share data - basic and fully diluted | $ | (0.47 | ) | $ | (0.43 | ) | $ | (0.19 | ) | $ | (0.15 | ) | |
Weighted average number of common | |||||||||||||
shares outstanding | 7,732,971 | 6,163,191 | 8,023,575 | 6,389,292 |
The accompanying notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
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Visual Management Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
2008 | 2007 | ||||||
Cash flows from operating activities | |||||||
Net loss | $ | (3,662,943 | ) | $ | (2,663,023 | ) | |
Adjustments to reconcile net loss to net cash used by operating activities | |||||||
Depreciation and amortization | 484,597 | 50,251 | |||||
Non-cash interest expense | 173,451 | 142,724 | |||||
Payment of stock for services | 721,425 | - | |||||
Stock-based compensation | 207,331 | 467,552 | |||||
Debt conversion expense | - | 590,044 | |||||
Loss on disposition of assets | 305 | - | |||||
(Increase) decrease in operating assets | |||||||
Accounts receivable | 91,582 | 159,535 | |||||
Inventory | 69,538 | (119,185 | ) | ||||
Prepaid expenses and other assets | 8,046 | 14,257 | |||||
Deposits and other assets | 13,883 | (48,458 | ) | ||||
Increase (decrease) in operating liabilities | |||||||
Bank Overdraft | - | 9,689 | |||||
Accounts payable | 332,181 | 502,382 | |||||
Accrued expenses and other current liabilities | 713,003 | 3,005 | |||||
Sales tax payable | 48,434 | 26,656 | |||||
Customer deposits | 96,970 | 159,837 | |||||
Net cash used by operating activities | (702,197 | ) | (704,734 | ) | |||
Cash flows from investing activities | |||||||
Purchases of property and equipment | (54,043 | ) | (53,885 | ) | |||
Capitalized software | (64,000 | ) | - | ||||
Proceeds from disposition of assets | 11,143 | - | |||||
Investment in joint venture | (5,000 | ) | - | ||||
Net cash used by investing activities | (111,900 | ) | (53,885 | ) | |||
Cash flows from financing activities | |||||||
Repayment of capital leases | (24,885 | ) | (5,764 | ) | |||
Repayment of short term notes | (68,000 | ) | - | ||||
Proceeds from convertible notes payable (net of $12,500 issuance costs) | - | 112,500 | |||||
Proceeds from the sale of common stock | - | 871,230 | |||||
Proceeds from short term notes payable (net of $15,200 of issuance costs) | 288,800 | - | |||||
Repurchase of stock into treasury | - | (150,000 | ) | ||||
Principal repayments of long-term debt | (61,973 | ) | (63,989 | ) | |||
Repayment of loans payable - stockholders | - | (6,321 | ) | ||||
Net cash provided by financing activities | 133,942 | 757,656 | |||||
Change in cash | (680,155 | ) | (963 | ) | |||
Cash | |||||||
Beginning of period | 707,025 | 963 | |||||
End of period | $ | 26,870 | $ | - | |||
Supplemental Disclosure of Cash Flow Information | |||||||
Issuance of a short term note to refinance existing long term note | 267,192 | - | |||||
Issuance of convertible note for IDS Acquisition | 1,544,000 | - | |||||
for acquisition of software assets and net working capital | |||||||
Issuance of note payable for IDS Acquisition | 42,000 | - | |||||
Increase in inventory due to IDS asset acquisition | 20,123 | - | |||||
Increase in assets under capitalized leases | 95,391 | - | |||||
Cash paid for interest | 89,921 | 29,002 | |||||
Increase in inventory for reclassification from fixed assets | 38,990 | - |
The accompanying notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
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Visual Management Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2008
1. Basis of Presentation and Nature of Business Operations
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and Item 310 of Regulation S-B of the Securities and Exchange Commission (the “Commission”) and include the results of Visual Management Systems, Inc., formerly known as Wildon Productions, and Visual Management Systems Holding, Inc., Visual Management Systems LLC and Intelligent Product Development Group, LLC formerly known as Visual Management Systems PDG, LLC, its wholly-owned subsidiaries (the “Subsidiaries”), which are collectively referred to as the “Company”. Accordingly, certain information and footnote disclosures required in the unaudited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the Company’s consolidated financial position as of June 30, 2008 and the results of its operations for the three and six month periods ended June 30, 2008 and 2007, and are not necessarily indicative of results that may be expected for the entire year. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report for the year ended December 31, 2007 on Form 10-K.
The Company delivers protective technology solutions and remote management loss prevention surveillance systems and provides on-site consultations regarding its products. The Company also sells, installs, upgrades and services Digital Video Recording Systems. The Company is New Jersey-based and began operations in June 2003.
Summary of significant accounting policies
Debt instruments and the features/instruments contained therein:
Deferred financing costs are amortized over the term of the associated debt instrument. The Company evaluates the terms of the debt instruments to determine if any embedded derivatives or beneficial conversion features exist. The Company allocates the aggregate proceeds of the notes payable between the warrants and the notes based on their relative fair values. The fair value of the warrants issued to note holders or placement agents are calculated utilizing the Black-Scholes option-pricing model.
Intangible assets.
Intangible assets acquired by the Company have been valued using the income method, based on future economic benefits expected on a net present value basis. Values assigned to intangible assets are being amortized over the estimated useful lives of the respective intangible assets. Values assigned to intangible assets acquired and their useful lives will be reviewed no less frequently then on an annual basis to determine if there has been any impairment to the then carrying value of the assets or if a change in amortization period is required, as prescribed by SFAS 142. Values assigned to goodwill will not be amortized, however periodic reviews will be conducted to determine if the carrying value of the goodwill exceeds its then measured fair value in order to determine if a goodwill impairment loss needs to be recognized.
Capitalized Software Development Costs
Capitalization of computer software development costs begins upon the establishment of technological feasibility, as defined in SFAS 86. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized computer software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenue, estimated economic life and changes in software and hardware technology. At June 30, 2008, the Company has capitalized approximately $64,000 of software development costs relating to new products. There was no software development cost capitalized during the same period in 2007.
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Amortization is provided on a product-by-product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenue for a product bears to the total of current and anticipated future gross revenue for that product, or (b) the straight-line method over the remaining estimated economic life of the product. Amortization will start when (a) the product is available for general release to customers and (b) all research and development activities relating to the other components of the product are completed. At June 30, 2008, the Hybrid DVR software products under development were not yet generally available to customers and as a result, there were no amortization charges for the three or six months ending June 30, 2008 for those products.
The Company performs reviews of the recoverability of such capitalized software development costs at each balance sheet date. At the time a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, the capitalized cost of each software product is then valued at the lower of its remaining unamortized costs or net realizable value.
2. Going Concern
The accompanying financial statements have been prepared assuming the Company is a going concern, which assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company suffered recurring losses from operations, a recurring deficiency of cash from operations, including a cash deficiency of $702,197 from operations for the six months ended June 30, 2008 as compared to a cash deficiency from operations of $704,734 for the same period in 2007.
These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount of liabilities that might be necessary should the Company be unable to continue in existence. Continuation of the Company as a going concern is dependent upon achieving profitable operations in the long-term and raising additional capital to support existing operations for at least the next twelve months. Management is currently considering a number of means for raising additional capital, including a private offering of securities and other strategic alternatives to raise funds.
Without the money to fund its business plan the Company’s competitive position may never mature to a point where its business plan will be attainable, including its plan as it relates to the Company’s investment in the assets of Intelligent Digital Systems, LLC, and a substantial retrenchment of management’s plans may be necessary. If the Company is unsuccessful in raising funds or curtailing expenses, the Company may be required to cease operations or file for bankruptcy.
3. Inventory
Inventory, which consists of digital video recorders and related components, security cameras and related installation materials, is stated at the lower of cost or market value. Cost is computed on the first-in, first-out method. The Company reviews inventory for slow moving and obsolete inventory during each reporting period to determine if a reserve is required. Based on the review conducted as of June 30, 2008, management does not believe any reserve is required.
4. Acquisition of IDS Assets
On April 3, 2008, the Company purchased substantially all the assets of Intelligent Digital Systems, LLC. (“IDS”). The assets consist of the current TechEye software (“DVR Software”) and computer software in development relating to the TrueHybrid hybrid NVR/DVR technology (“Hybrid DVR Software”). The Company is currently investigating patent protection for a number of the processes included in the DVR software and Hybrid DVR Software. The assets purchased included three trademarks, which the Company does not currently plan to use and therefore assigned no value to them. The Company has included the results of the IDS operations that were purchased by the Company since the date of acquisition. These results have not been material.
Under the terms of the agreement, the Company purchased accounts receivable of $3,185 and inventory of $20,123 as well as the DVR Software and Hybrid DVR Software.
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The amount of $1,562,692 was assigned to intangible assets. The intangible assets consist of the DVR Software and Hybrid DVR Software and are being amortized over their estimated useful lives of 1 and 5 years respectively.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition:
Accounts Receivable | $ | 3,185 | ||
Inventory | 20,123 | |||
DVR Software | 28,555 | |||
Hybrid DVR Software | 1,534,137 | |||
Total | $ | 1,586,000 |
The intangible software assets were valued using the income method, using the company's best estimates of future cash flows from the sales of the products including the software, a 40% tax rate and discount rates between 15 and 20%.
Amortization of $7,139 was charged to cost of good sold during the quarter ending June 30, 2008 for the DVR Software. The balance of $21,416 will be amortized in equal amounts over the next three quarters.
Amortization associated with the Hybrid DVR Software is not expected to begin until the fourth quarter of 2008, when products containing the software are commercially available. As a result, future amortization is expected to be:
$ | 7,139 | |||
Quarter ending December 31, 2008 | $ | 83,846 | ||
2009 | $ | 313,966 | ||
2010 | $ | 306,827 | ||
2011 | $ | 306,827 | ||
2012 | $ | 306,827 | ||
2013 | $ | 230,121 | ||
Total | $ | 1,555,553 |
In exchange for IDS’ assets the Company issued to IDS an unsecured convertible note in the principal amount of $1.544 million, bearing no interest until April 3, 2011, its maturity date, and cash totaling $42,000 payable over a total of seven months. If not converted, or paid within 30 days of maturity, then from and after the maturity date, the convertible note will bear annual interest at 12%. The convertible note is convertible at the discretion of IDS into shares of common stock after May 31, 2010, or upon the approval of a majority in interest of the holders of the then outstanding 5% secured convertible debentures, or any securities issued on conversion thereof, at a conversion price of $1.15 per share. The Company has agreed to provide its best efforts towards registering the shares issuable upon the conversion of the note for public resale.
The Company owns 50% of the joint venture and does not have operating control over the venture. As a result, the Company has recorded it's investment in the joint venture at $5,000 using the equity method.
5. Equity Based Compensation, Common Stock
Issuance of Equity Compensation to Mercom Capital Group, LLC.
In April 2008 the Company issued 22,500 shares of common stock to Mercom Capital Group, LLC. (“Mercom”), with a fair market value of $22,725 as compensation in connection with the October 2007 agreement wherein Mercom would provide investor relations services to the Company. Per the terms of that agreement Mercom shall be issued 120,000 shares. 30,000 shares were issued in 2007 and the remaining 90,000 shares will be vested monthly and issued quarterly through October 2008. In June 2008, The Company accrued an additional $8,700 for the issuance of 15,000 shares to reflect the costs of this agreement through June 30, 2008. Excluding these shares the Company has issued a total of 45,000 shares to Mercom in 2008.
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6. Commitments and Contingencies
Commitments and Contingencies.
In September 2007 the Company issued a promissory note with a principal value of $250,000, an annual interest rate of 8% and a maturity date of January 4, 2008 to an individual lender. In June 2008, the holder of the note assigned it to a pension plan formed for the benefit of a member of our Board of Directors which agreed to exchange the note for a new note in the principal amount of $267,192, which bears interest at a rate of ten percent per annum and becomes due on December 10, 2008 and options to acquire 20,000 shares of our common stock at a price of $0.40 per share.
In connection with the Company’s July 2007 Private Placement, the Company agreed to use its best efforts to file a shelf registration statement (the “Resale Registration Statement”) with the SEC covering the resale of all shares issuable upon the conversion of the Series A Convertible Preferred Stock and the exercise of the warrants issued in connection with the private placement on or before the date which is sixty (60) days after the date of the final closing of the private placement. The Company is obligated to maintain the effectiveness of the Resale Registration Statement from its effective date through and until forty-eight (48) months after the effective date. In the event the Resale Registration Statement was not filed with the SEC on or prior to the date which is sixty (60) days after the date of the final closing of the private placement or declared effective within 120 days after the date of the final closing of the private placement, the number of shares of common stock issuable upon conversion of the Series A Convertible Preferred Stock will be increased, subject to the limit described below, by two percent (2%) for each month (or portion thereof) that the Resale Registration Statement is not so filed or effective.
The aggregate increase in the number of shares issuable upon the conversion of the Series A Convertible Preferred Stock by reason of the failure to timely file the Resale Registration Statement, respond to SEC comments or have the Resale Registration Statement declared effective shall in no event exceed twenty percent (20%).
As of June 30, 2008, the Company’s management concluded that as a result of the policies of the Securities and Exchange Commission, the Company is precluded at this time from registering all the shares that are issuable to investors who participated in its July Private Placement, and as of June 30, 2008 the Company’s estimate was that it was likely its registration statement would not be declared effective prior to August 8, 2008, the date on which the shares of Company common stock underlying the Series A Convertible Preferred Stock may be sold without registration pursuant to the provisions of SEC Rule 144. As such the Company elected to file its registration statement only as to those shares underlying the warrants issued to investors in connection with the July Private Placement, and on June 30, 2008 the Company accrued an expense in the amount of $223,993 to reflect the remaining expense it expects to incur as a result of this provision, and its termination as of August 8, 2008 due to the effects of SEC Rule 144.
On November 30, 2007, the Company entered into a securities purchase agreement with three affiliated institutional investors for the sale of original issue discount 5% secured convertible debentures and common stock purchase warrants. This transaction is referred to as the Company’s November 2007 Private Placement. In this transaction, the Company issued an aggregate of $3.75 million principal amount of debentures at an original issue discount of 20% and warrants to purchase an aggregate of 11,250,000 shares of its common stock. The warrants expire in November 2014 and had an initial exercise price of $1.15 per share, subject to adjustment, including full ratchet anti-dilution protection. In consideration of amendments to and waivers of certain terms of the existing agreements governing the investment in the Company by the institutional investors, the Company has agreed in principle to modify the exercise price of the warrants to $0.40 per share.
Since January 1, 2008, the Company has been required to make quarterly payments of interest under the convertible debentures issued in the November 2007 Private Placement. Monthly principal payments in the aggregate of $208,333 begin in December 2008. The Company has the right to pay interest and monthly principal payments in cash, or upon notice to the holders and compliance with certain equity conditions, including having a currently effective registration statement covering the shares of common stock issuable upon conversion of the debentures, the Company can pay all or a portion of any such payment in common stock valued at a price equal to the lesser of the then effective conversion price (initially $0.50) or 85% of the average of the volume weighted average price, or VWAP, per share as reported by Bloomberg L.P. for common stock for the 10 consecutive trading days immediately prior to the applicable payment date. If the holders of the debentures voluntarily elect to convert all or a portion of the debentures into common stock, the conversion price will be $.50, subject to adjustment including full-ratchet anti-dilution protection. This could result in substantial dilution to existing stockholders.
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The Company’s ability to make payments of principal and interest required under the terms of the debentures will depend on the Company’s financial condition and resources available at the time that the payments become due. The Company did not timely pay the $15,625 and $46,875 of interest payments due under the Company’s convertible debentures on January 1, 2008 and April 1, 2008, respectively; however, all such amounts were paid in May 2008. The Company has with the approval of its institutional investors elected to pay the $46,875 in interest due on July 1, 2008 in restricted stock to be issued to the institutional investors, at a per share purchase price equal to 80% of the average of the VWAPs for the 20 Trading Days immediately prior to the date of issuance. The date of this issuance and the number of shares to be distributed have not yet been determined.
7. Issuance and Repricing of Stock Options
In January 2008, the Company issued to an investor relations firm, options to purchase 18,000 shares of the Company’s common stock with an exercise price of $3.00 and a five year life and the options vest over a 6 month period. These options were issued pursuant to an agreement executed during 2007.
In June 2008, the Company issued to employees, options to purchase 458,500 shares of the Company’s common stock with an exercise price of $0.40, a ten year life and these options vest 50% after one year and the balance after two years.
In June 2008, the Company issued to each member of its Board of Directors, options to purchase 5,000 shares (a cumulative total of 25,000 shares) of the Company’s common stock with an exercise price of $0.40 and a ten year life. These options vest 50% after one year and the balance after two years.
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In June 2008, the Company issued to a member of the Board of Directors, options to purchase 20,000 shares of the Company’s common stock in exchange for refinancing a $250,000 note. These options have an exercise price of $0.40, a ten year life and vested upon issuance.
In June 2008, the compensation committee of the Company’s board of directors determined that the existing employee options should be repriced to current market values in order to be provide appropriate incentives to employees. As a result, the existing employee options were repriced from $2.50 to $0.40, which was the closing price of the Company’s common stock on the day preceding the committee’s action. A total of 880,000 options were repriced. In connection with the repricing, the Company recorded an additional $37,292 of stock based compensation.
Exercise of Warrants
In August 2008, Brooksghire Securities Inc., (“Brookshire”) the Company’s placement agent for the July Private Placement, exercised warrants to acquire 52,280 shares of the Company’s common stock pursuant to the warrants cashless exercise provisions which resulted in a total of 34,095 shares being issued to Brookshire, with no net proceeds to the Company
Execution of Strategic Alliance Agreement
In July 2008, the Company entered into a Strategic Alliance Agreement with Glenwood Capital, Inc. (“Glenwood”) for their provision of investor relations services. On August 5, 2008, the Company issued 100,000 restricted shares of its common stock as compensation to Glenwood. The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, in making such issuance. The Company’s agreement with Glenwood contemplates a payment of $25,000 to be made to Glenwood by the Company upon the first anniversary of execution of the agreement, as additional compensation for their services.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report and concluded that due to inadequate implementation of disclosure controls and procedures and deficiencies in our information technology systems, our controls and procedures were not effective as of the date of the evaluation. Disclosure controls and procedures are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Since March 31, 2008, we have taken steps to improve our disclosure controls and procedures, including the implementation of more formal written policies and procedures with respect to disclosure matters, including the circulation of written disclosure checklists to members of management that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to those responsible for preparing the reports. We expect to have these policies, procedures and checklists fully implemented during the quarter ending September 30, 2008.
Internal Control over Financial Reporting After assessing our internal control over financial reporting as of December 31, 2007, our management identified a number of material weaknesses in our internal control over financial reporting and concluded that as a result of these material weaknesses, our internal control over financial reporting was not effective as of such date. These material weaknesses included:
• | misunderstandings of certain applications of Generally Accepted Accounting Principles (GAAP) and poor oversight and management of accounting staff and technology by our former Chief Financial Officer; | |
• | deficiencies in our information technology relating to inventory control, revenue recognition, financial forecasting and the management of inter-company transactions; | |
• | a lack of uniformity in accounting policies across subsidiaries which allowed and increased the number of undetected discrepancies in inter-company transactions; | |
• | the lack of a formal documented closing process for period ends; and | |
• | the lack of a formal process for developing comparisons to recent period results or forward looking financial forecasts. |
Since December 31, 2007, we have taken the following steps to remediate our material weaknesses:
· | In April 2008, we engaged an independent consultant to assist management in the preparation of our financial statements and periodic reports. We incurred an expense of approximately $82,000 in connection with this engagement. |
· | In February 2008, we replaced our Chief Financial Officer with an Interim Chief Financial Officer and reorganized our accounting department. |
· | During the quarter ended March 31, 2008, we developed and implemented processes for the entry and maintenance of financial records and taking more frequent physical inventory. |
· | We have utilized the services of Withum, Smith & Brown Global Assurance to evaluate our internal controls over financial reporting and assist us with developing effective internal controls over financial reporting. The total cost for these services is expected to be approximately $80,000. |
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· | We have utilized the services of Withum, Smith & Brown, P.C. to assist us in the preparation of our financial statements. Our utilization of outside firms has been curtailed due to financial reasons. Total expense incurred for these services was approximately $51,000 for the six months ended June 30, 2008. |
· | We have continued to train and educate staff as to applicable accounting policies. |
· | We have identified the accounting software package which we plan to obtain and implement to improve our financial reporting system. |
· | In June 2008, we hired J.D Gardner as our Chief Financial Officer in replacement of our Interim Chief Financial Officer. |
As a result of the steps described above, we believe that we have remediated the material weaknesses in our internal control over financial reporting identified above other than the deficiencies in our information technology and inventory control. To remediate these material weaknesses, we plan to obtain and implement the accounting software package discussed above during the quarter ending March 31, 2009, to the extent that financial resources are available at that time. The estimated cost of obtaining and implementing this software is approximately $200,000.
Changes in Internal Control over Financial Reporting. During the quarter ended June 30, 2008, the changes in our internal control over financial reporting that have materially affected, or are reasonably likely to affect, our internal control over financial reporting are as follows:
· | During the quarter ended June 30, 2008, we implemented a formal closing process for period ends and developed comparisons to recent period results and forward looking forecasts |
· | We engaged an independent consultant to assist management in the preparation of our financial statements and periodic reports; and |
· | We hired J.D. Gardner as our Chief Financial Officer in replacement of our Interim Chief Financial Officer. |
Management will continue to scrutinize the steps we have detailed above to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. If upon further evaluation the steps detailed above prove too slow or insufficient in their totality to meet that goal, we will develop a new plan which includes changes necessary to ensure that we comply with all relevant Commission rules and forms.
Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
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PART II – OTHER INFORMATION
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Item 6. Exhibits
Exhibit No. | Exhibits | |
2.2 | Asset Purchase Agreement dated as of April 3, 2008 among Visual Management Systems, Inc., Intelligent Digital Systems, LLC, IDS Patent Holdings, LC and Jay Edmond Russ (1) | |
4.4 | Unsecured Convertible Promissory Note dated April 3, 2008 issued to Intelligent Digital Systems, LLC (1) | |
10.14 | Consulting Agreement dated as of April 3, 208 between Visual Management Systems, LLC and Jay Edmond Russ (1) | |
10.15 | Operating Agreement of IDS Patent Holding LLC as of April 2, 2008 (1) | |
10.16 | Exclusive Patent and Trade Secret License Agreement effective as of April 2, 2008 between Visual Management Systems, Inc. and IDS Patent Holding Company, LLC (1) | |
10.17 | Registration Rights Agreement dated as of April 2, 2008 between Visual Management Systems, Inc. and Intelligent Digital Systems, LLC (1) | |
10.18 | Promissory Note in the Principal Amount of $267,191.78 dated June 20, 2008 issued to the Russ and Russ Defined Benefit Pension Plan (2) | |
10.19 | Employment Agreement dated as of June 10, 2008 betwene Visual Management Systems, Inc. and James D. Gardner (2) | |
10.20 | Deferred Compensation Plan of Registrant (2) | |
31.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (refiled herewith) | |
31.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (refiled herewith) | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (refiled herewith) | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (refiled herewith) | |
99.2 | Pro forma condensed financial statements giving effect to the acquisition by Visual Management Systems, Inc. of substantially all of the assets of Intelligent Digital Systems, LLC(3) |
(1) | Incorporated by reference to similarly numbered exhibit to the Company’s Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2008 |
(2) | Incorporated by reference to similarly numbered exhibit to Amendment Number 2 to the Company’s Registratuion Statement on Form S-1 filed with the Securities and Exchange Commission on July 18, 2008 |
(3) | Incorporated by reference to similarly numbered exhibit to the Company’s Report on Form 8-K/A filed with the Securities and Exchange Commission on August 27, 2008 |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Visual Management Systems, Inc. | |||
(Registrant) | |||
By: | /s/ Jason Gonzalez | ||
Jason Gonzalez | |||
President and Chief Executive Officer | |||
Dated: August 27, 2008 | |||
By: | /s/ J.D. Gardner | ||
J.D. Gardner | |||
Chief Financial Officer | |||
Dated: August 27, 2008 |
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EXHIBIT INDEX
Exhibit No. | Exhibits | |
2.2 | Asset Purchase Agreement dated as of April 3, 2008 among Visual Management Systems, Inc., Intelligent Digital Systems, LLC, IDS Patent Holdings, LC and Jay Edmond Russ (1) | |
4.4 | Unsecured Convertible Promissory Note dated April 3, 2008 issued to Intelligent Digital Systems, LLC (1) | |
10.14 | Consulting Agreement dated as of April 3, 208 between Visual Management Systems, LLC and Jay Edmond Russ (1) | |
10.15 | Operating Agreement of IDS Patent Holding LLC as of April 2, 2008 (1) | |
10.16 | Exclusive Patent and Trade Secret License Agreement effective as of April 2, 2008 between Visual Management Systems, Inc. and IDS Patent Holding Company, LLC | |
10.17 | Registration Rights Agreement dated as of April 2, 2008 between Visual Management Systems, Inc. and Intelligent Digital Systems, LLC (1) | |
10.18 | Promissory Note in the Principal Amount of $267,191.78 dated June 20, 2008 issued to the Russ and Russ Defined Benefit Pension Plan (2) | |
10.19 | Employmnt Agreement dated as of June 10, 2008 betwene Visual Management Systems, Inc. and James D. Gardner (2) | |
10.20 | Deferred Compensation Plan of Registrant (2) | |
10.21 | Registration Rights Agreement issued to purchasers of shares of common stock issued to affiliates of Kuhns Brothers Securities pursuant to warrants to purchase common stock issued by the Company. | |
31.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (refiled herewith) | |
31.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (refiled herewith) | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (refiled herewith) | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (refiled herewith) | |
99.2 | Pro forma condensed financial statements giving effect to the acquisition by Visual Management Systems, Inc. of substantially all of the assets of Intelligent Digital Systems, LLC(3) |
(1) | Incorporated by reference to similarly numbered exhibit to the Company’s Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2008 |
(2) | Incorporated by reference to similarly numbered exhibit to Amendment Number 2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 18, 2008 |
(3) | Incorporated by reference to similarly numbered exhibit to the Company’s Report on Form 8-K/A filed with the Securities and Exchange Commission on August 27, 2008 |
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