UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2008. | |
o | 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 (State or other jurisdiction of incorporation or organization) | 68-0634458 (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 o
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 o
Accelerated filer o
Non-accelerated filer o (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 o No x
As of May 15, 2008, there were 8,023,905 shares of the registrant’s common stock outstanding.
VISUAL MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information | Page No. | ||
Item 1. | Financial Statements | ||
Condensed Consolidated Balance Sheet (Unaudited) as of March 31, 2008 and December 31, 2007 | 3 | ||
Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2008 and 2007 | 4 | ||
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2008 and 2007 | 5 | ||
Notes to Condensed Consolidated Financial Statements | 6 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 11 | |
Item 4. | Controls and Procedures | 11 | |
PART II. Other Information | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 14 | |
Item 3. | Defaults upon Senior Securities | 14 | |
Item 5. | Other Information | 14 | |
Item 6. | Exhibits | 14 | |
SIGNATURES | 15 |
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PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Visual Management Systems, Inc. and Subsidiaries | ||||||||
Condensed Consolidated Balance Sheets | ||||||||
March 31, 2008 | December 31, 2007 | |||||||
Assets | (unaudited) | (audited) | ||||||
Current assets | ||||||||
Cash | $ | 111,567 | $ | 707,025 | ||||
Accounts receivable, net | 195,912 | 296,447 | ||||||
Inventory | 587,606 | 605,724 | ||||||
Prepaid expenses | 5,190 | 23,931 | ||||||
Total current assets | 900,275 | 1,633,127 | ||||||
Property and equipment - net | 726,786 | 682,285 | ||||||
Deposits and other assets | 90,808 | 102,308 | ||||||
Intangible assets - net | 1,659,727 | 1,851,091 | ||||||
Total Assets | $ | 3,377,596 | $ | 4,268,811 | ||||
Liabilities and Stockholders' Deficit | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 705,074 | $ | 780,521 | ||||
Accrued expenses and other current liabilities | 973,096 | 627,445 | ||||||
Customer deposits | 236,041 | 137,160 | ||||||
Sales tax payable | 78,236 | 38,727 | ||||||
Bank line of credit | 49,981 | 49,981 | ||||||
Current portion of long-term debt | 346,278 | 347,539 | ||||||
Current portion of obligations under capital leases | 53,811 | 30,700 | ||||||
Convertible notes payable | 833,333 | 208,333 | ||||||
Total current liabilities | 3,275,850 | 2,220,406 | ||||||
Convertible notes payable | ||||||||
(net of current maturities and unamortized discount of $648,333) | $ | 2,268,334 | 2,818,334 | |||||
Long-term debt - net of current portion | 306,696 | 346,509 | ||||||
Obligations under capital leases - net of current portion | 100,554 | 37,179 | ||||||
Commitments and contingencies | ||||||||
Stockholders' deficit | ||||||||
Preferred stock | 1 | 1 | ||||||
Common stock | 8,002 | 7,379 | ||||||
Additional paid-in-capital | 12,744,785 | 12,030,155 | ||||||
Accumulated deficit | (15,176,626 | ) | (13,041,152 | ) | ||||
Treasury stock, at cost | (150,000 | ) | (150,000 | ) | ||||
Total stockholders' deficit | (2,573,838 | ) | (1,153,617 | ) | ||||
Total Liabilities and Stockholder's Deficit | $ | 3,377,596 | $ | 4,268,811 | ||||
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 Operations | ||||||||
For the Three Months Ended March 31, 2008 and 2007 (unaudited) | ||||||||
2008 | 2007 | |||||||
Revenues - net | $ | 1,577,309 | $ | 1,160,437 | ||||
Cost of revenues | 843,113 | 564,215 | ||||||
Gross profit | 734,196 | 596,222 | ||||||
Operating expenses | 2,729,362 | 1,543,078 | ||||||
Loss from operations | (1,995,166 | ) | (946,856 | ) | ||||
Other (income) expenses | ||||||||
Debt conversion expense | - | 590,044 | ||||||
Interest income | - | (49 | ) | |||||
Interest expense | 140,003 | 129,171 | ||||||
Miscellaneous income | 305 | 26,013 | ||||||
Net loss | $ | (2,135,474 | ) | $ | (1,692,035 | ) | ||
Per share data - basic and fully diluted | $ | (0.29 | ) | $ | (0.29 | ) | ||
Weighted average number of common | ||||||||
shares outstanding | 7,442,367 | 5,934,577 | ||||||
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 Three Months Ended March 31, 2008 and 2007 (unaudited) | ||||||||
2008 | 2007 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (2,135,474 | ) | $ | (1,692,035 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities | ||||||||
Depreciation and amortization | 242,797 | 26,412 | ||||||
Non-cash interest expense | 75,000 | 129,000 | ||||||
Payment of stock for services | 690,000 | - | ||||||
Stock-based compensation | 25,253 | 207,740 | ||||||
Debt conversion expense | - | 590,044 | ||||||
Loss on disposition of assets | 305 | - | ||||||
(Increase) decrease in operating assets | ||||||||
Accounts receivable | 100,535 | 22,338 | ||||||
Inventory | 18,118 | (44,852 | ) | |||||
Prepaid expenses and other assets | 18,741 | 5,364 | ||||||
Deposits and other assets | 11,500 | (17,240 | ) | |||||
Increase (decrease) in operating liabilities | ||||||||
Accounts payable | (75,447 | ) | (118,384 | ) | ||||
Accrued expenses and other current liabilities | 345,651 | 46,543 | ||||||
Sales tax payable | 39,509 | 11,610 | ||||||
Customer deposits | 98,881 | 54,032 | ||||||
Net cash used by operating activities | (544,631 | ) | (779,428 | ) | ||||
Cash flows from investing activities | ||||||||
Purchases of property and equipment | (11,991 | ) | (12,177 | ) | ||||
Proceeds from disposition of assets | 11,143 | - | ||||||
Net cash used by investing activities | (848 | ) | (12,177 | ) | ||||
Cash flows from financing activities | ||||||||
Repayment of capital leases | (8,905 | ) | (3,647 | ) | ||||
Proceeds from convertible notes payable (net of $12,500 issuance costs) | - | 112,500 | ||||||
Proceeds from the sale of common stock | - | 871,230 | ||||||
Repurchase of stock into treasury | - | (150,000 | ) | |||||
Principal repayments of long-term debt | (41,074 | ) | (7,879 | ) | ||||
Proceeds from loans payable - stockholders | (4,943 | ) | ||||||
Net cash provided by financing activities | (49,979 | ) | 817,261 | |||||
Change in cash | (595,458 | ) | 25,656 | |||||
Cash | ||||||||
Beginning of period | 707,025 | 963 | ||||||
End of period | $ | 111,567 | $ | 26,219 | ||||
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 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. The statements are subject to possible adjustments in connection with the annual audit of the Company’s accounts for the year ending December 31, 2008. 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 March 31, 2008 and the results of its operations for the three month periods ended March 31, 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, and 8-K/A, wherein the March 31, 2007 information has been restated.
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.
Recent Transactions
Acquisition of Assets of Intelligent Digital Systems, LLC. On April 3, 2008, the Company purchased substantially all the assets of Intelligent Digital Systems, LLC. (“IDS”). IDS is the developer and manufacturer of the TechEye Digital Video (DVR) Recording Technology. In exchange for IDS’ assets the Comapny 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.
In connection with the transaction, the Company entered into a joint venture with IDS to obtain approval of certain patent applications formerly held by IDS that are relevant to the surveillance industry which have been assigned to the joint venture. The joint venture has granted the Company an exclusive license to use the technology which is the subject of the patent applications in the manufacture, distribution, integration and installation of digital video surveillance devices for the security industry. If the patents are ultimately issued, the joint venture will seek to promote and market the technology underlying the patent applications, and will pursue claims against any parties potentially infringing on the protected technology. Each of IDS and and the Company has a 50% interest in the joint venture.
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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 approximately $545,000 from operations for the three months ended March 31, 2008.
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’s plans to achieve profitability include, obtaining new customers and putting into effect the a reduction of expenses.
3. Equity Based Compensation, Common Stock and Options
Issuance of Stock Options to L.G. Zangani, LLC.
In January 2008 the Company issued 18,000 5-year options to purchase shares of the common stock of the Company with an exercise price of $3.00, to L.G. Zangani, LLC, as partial compensation for consummation of an agreement wherein L.G. Zangani, LLC would provide investor relations services to the Company. The fair market value of these options upon issuance was $20,218.
Issuance of Equity Compensation to Mirador Consulting, Inc.
In March 2008 the Company issued 600,000 shares of common stock to Mirador Consulting, Inc. (“Mirador”), with a fair market value of $672,000 as compensation for modification of the September 2007 Strategic Alliance Agreement wherein Mirador would provide investor relations and other services to the Company. Per the terms of that agreement Mirador, was issued 600,000 shares in exchange for extending the agreement for a period of one year and for Mirador to waive the monthly cash fee.
Issuance of Equity Compensation to Mercom Capital Group, LLC.
In January 2008 the Company issued 22,500 shares of common stock to Mercom Capital Group, LLC. (“Mercom”), with a fair market value of $18,000 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, the first such issuance beginning in January of 2008.
3. Commitments and Contingencies
Commitments and Contingencies.
In September 2007 we issued a promissory note in the principal amount of $250,000 which provided for interest at a rate of 8% per annum and a maturity date of January 4, 2008 to an individual lender. As of the date of filing of this Report, the note remains past due and unpaid. We are currently in discussions with the holder of the note regarding potential payment or extension of the Note.
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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 Company is required to use its best efforts to respond to any SEC comments to the Resale Registration Statement on or prior to the date which is twenty (20) business days from the date such comments are received. In the event that the Company fails to respond to such comments within twenty (20) business days, 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 a response to the comments to such shelf registration statement has not been submitted to the SEC.
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 March 31, 2007 the Company’s estimate was that it was likely its registration statement would be declared effective by late May. As such on April 25, 2008 we accrued an expense in the amount of $73,150 to reflect the additional expense we expect to incur as a result of this provision.
Since January 1, 2008, The Company has been required to make quarterly payments of interest under the convertible debentures issued in our November 2007 Private Placement. Monthly principal payments in the aggregate of $208,333 begin in November 2008. We have 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, we 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 our 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 our existing stockholders.
Our ability to make payments of principal and interest required under the terms of the debentures will depend on our financial condition and resources available at the time that the payments become due. We did not timely pay the $15,625 and $46,875 of interest payments due under our convertible debentures on January 1, 2008 and April 1, 2008, respectively; however, all such amounts were paid in May 2008.
In connection with The Company's November 2007 Private Placement, The Company also entered into a registration rights agreement dated November 29, 2007, with the institutional investors, pursuant to which The Company agreed to file a registration statement covering the resale of the shares of common stock that may be issued to such investors upon the conversion of the debentures, payment in kind, and the exercise of the related warrants. The Company also agreed to maintain the effectiveness of the registration statement (subject to certain limitations) for a period of time until the holders can sell the underlying common stock without volume restrictions under Rule 144(k) of the Securities Act of 1933, or the “Securities Act.” If the registration statement was not declared effective by March 30, 2008, or if The Company fails to maintain the effectiveness of the registration statement, or if This Company fails to respond in writing to comments made by the Commission in respect of the resale registration statement within 15 calendar days after receipt of those comments, The Company are required to pay to each investor, as partial liquidated damages, cash equal to 2% of the aggregate purchase price paid by such investor for any securities purchased in our November 2007 Private Placement and then held by such investor, and will be required to pay to such investor such amount for each subsequent 30-day period, up to a maximum aggregate liquidated damages amount of 20% of the aggregate purchase price paid by such investor in the November 2007 Private Placement. The Company's registration statement was not declared effective by April 30, 2008 and The Company did not respond to Commission comments regarding the registration statement within 15 days after receipt, and The Company is therefore in violation of this term of the registration rights agreement, and the liquidated damages detailed above are currently accruing. The Company has accrued an expense in the amount of $120,000 ($60,000 during the three months ended March 31, 2008), to reflect the additional expense The Company expect to incur as a result of this provision.
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4. Subsequent Event
Acquisition of Intelligent Digital Systems, LLC.
On April 3, 2008, the Company purchased substantially all the assets of Intelligent Digital Systems, LLC. (“IDS”). IDS is the developer and manufacturer of the TechEye Digital Video (DVR) Recording Technology. In exchange for IDS’ assets we 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.
In connection with the transaction, the Company entered into a joint venture with IDS to obtain approval of certain patent applications formerly held by IDS that are relevant to the security industry which have been assigned to the joint venture. The joint venture has granted the Company an exclusive license to use the technology which is the subject of the patent applications in the manufacture, distribution, integration and installation of digital video surveillance devices for the security industry. If the patents are ultimately issued, the joint venture will seek to promote and market the technology underlying the patent applications, and will pursue claims against any parties potentially infringing on the protected technology. Each of IDS and the Company has a 50% interest in the joint venture
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
On July 17, 2007, we acquired all of the outstanding capital stock of Visual Management Systems Holding, Inc., a New Jersey corporation, in connection with the merger of our wholly owned subsidiary with and into Visual Management Systems Holding, Inc. In connection with the merger, we changed our corporate name from Wildon Productions, Inc. to Visual Management Systems, Inc. and the former stockholders of Visual Management Systems Holding, Inc. received shares of our common stock representing approximately 76.5% of our outstanding common stock after giving effect to the merger. In addition, our board of directors was reconstituted at the effective time of the merger with designees of Visual Management Systems Holding, Inc. replacing our then current board of directors. Further, at the effective time of the merger, we abandoned our prior business plan and the operations of Visual Management Systems Holding, Inc. acquired as a result of the merger became our sole line of business. The merger transaction was therefore accounted for as a reverse acquisition with Visual Management Systems Holding, Inc. as the acquiring party and Visual Management Systems, Inc. (formerly Wildon Productions, Inc. ) as the acquired party. Accordingly, when we refer to our business and financial information relating to periods prior to the merger, we are referring to the business and financial information of Visual Management Systems Holding, Inc., unless the context otherwise requires.
Simultaneously with the merger, we completed the initial closing of a private placement of investment units consisting of shares of Series A Convertible Preferred Stock and common stock purchase warrants, which we sometimes refer to in this Report as our October 2007 Private Placement. We issued a total of 616 investment units representing a total of 616 shares of Series A convertible preferred stock and warrants to acquire 616,000 shares of our common stock in the October 2007 Private Placement, which was completed on October 25, 2007. On November 30, 2007, we completed a private placement of $3.75 million aggregate principal amount of 5% secured convertible debentures and warrants to acquire 11,250,000 shares of our common stock to three affiliated institutional investors.
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Results of Operations for the Quarters Ended March 31, 2008 and 2007
The following discussion and analysis should be read in conjunction with the financial statements, including the notes thereto and other information presented in this report.
Net Revenues
Net revenues increased approximately $417,000, or 36% to approximately $1.577 million during the three months ended March 31, 2008 from approximately $1.160 million during the three months ended March 31, 2007. The increase in revenues reflects increased sales efforts, primarily through an increase in the number of sales staff we employ.
Cost of Goods Sold
Total cost of goods sold increased approximately $279,000, or 49% to approximately $843,000 for the three months ended March 31, 2008, from approximately $564,000 during the three months ended March 31, 2007. This increase was primarily due to increased revenues.
As a result of the changes described above in revenues and cost of goods sold, gross profit for the three months ended March 31, 2008 increased to approximately $734,000 from approximately $596,000 for the three months ended March 31, 2007, and gross profit as a percentage decreased to 47% for the three months ended March 31, 2008 compared with 51% for the three months ended March 31, 2007.
Operating Expenses
Operating expenses increased approximately $1.2 million to $2.7 million for the three months ended March 31, 2008, from approximately $1.5 million for the three months ended March 31, 2007.
This increase was primarily attributable an increase in employee related expenses of approximately $300,000 and an increase of stock for services of approximately $700,000, and an increase in the accrual for late filing penalties of approximately $70,000,
Debt Conversion Expense
Debt conversion expense for the three months ended March 31, 2008 decreased to zero, from approximately $590,000 for the three months ended March 31, 2007, as the Company did not convert any debt in 2008.
Interest Expense
Interest expense for the three months ended March 31, 2008 increased to approximately $140,000, from approximately $129,000 in the three months ended March 31, 2007. The increase was primarily the result of (i) higher original issue discount amortization, totaling approximately $75,000 and (ii) interest on bridge loans and convertible debt of approximately $60,000 offset by $125,000 of interest expense in the first quarter of 2007 associated with a beneficial conversion feature on convertible debt.
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Net Income (Loss)
As a result of the items discussed above there was a net loss of approximately $2.1 million for the three months ended March 31, 2008 compared with a net loss of approximately $1.7 million for the three months ended March 31, 2007.
Liquidity and Capital Resources
General. Expansion of our operations required increased expenditures for marketing and personnel. We encountered legal, accounting, filing and other professional costs associated with our reverse acquisition transaction completed in July 2007. We did not receive all of the anticipated benefits of the private placement offering that we conducted in connection with our reverse acquisition transaction as the offering was not fully subscribed as of final closing on October 25, 2007. This situation adversely impacted our liquidity. To address this situation in a pro-active manner we conducted a private offering of 5% secured debentures in November 2007 and implemented a reduction in force (RIF) initiative effective November 16, 2007, pursuant to which we restructured certain departmental responsibilities and the allocation of assets. This restructuring consolidated certain job responsibilities which resulted in the elimination of various support and clerical positions representing approximately 20% of our work force. Management believes these actions, along with other cost cutting measures will allow us to achieve a positive cash flow position in 2008 and that the realignment of certain departmental responsibilities will increase our competitiveness.
Our financial statements are prepared on a going concern basis, which assumes that we will realize our assets and discharge our liabilities in the normal course of business. At March 31, 2008, we had cash of $111,567, a working capital deficit of $2,375,575, stockholders’ deficit of $2,573,838, and an outstanding balance of long term debt of $306,696 net of current maturities, plus $2,268,334 of convertible debt net of current maturities, and obligations under capital leases net of current maturities of $100,554. In comparison, at December 31, 2007, we had cash and equivalents of approximately $707,025, a working capital deficit of approximately $587,279, $2,818,334 of convertible debt net of current maturities, and an outstanding balance of long term debt of $346,509, net of current maturities. Our financial condition as of March 31, 2008 raises doubt as to our ability to continue our normal business operations as a going concern. If we are unable to put into effect certain plans, we may be required to restructure, file for bankruptcy or cease operations.
Cash Flows from Operating Activities.
Net cash used by operating activities was $544,631 for the three months ended March 31, 2008 and $779,428 for the three months ended March 31, 2007. Cash used during the three months ended March 31, 2008 was primarily the result of the operating loss described above offset by decreases in accounts receivable and inventory of $118,000 and increases in current liabilities of approximately $483,000. For the three months ended March 31, 2007, cash used in operations was primarily a result of the operating loss incurred during the quarter.
Cash Flows from Investing Activities.
Net cash used in investing activities was $848 in the three months ended March 31, 2008 and $12,177 for the three month period ended March 31, 2007 representing purchases of property and equipment net of proceeds received from an asset disposition in the three months ended March 31, 2008, as compared to 12,177 of equipment purchases for the corresponding period in 2007.
Cash Flows from Financing Activities.
Net cash provided by financing activities was a negative $49,979 for the three months ended March 31, 2008 and $817,261 for the three month period ended March 31, 2007. The negative cash from financing activities was a result of repayment of loan and capital lease obligations during the three months ended March 31, 2008. For the three months ended March 31, 2007, the cash provided by financing activities was primarily the result of $871,230 from the issuance of common stock and $112,500 net proceeds from convertible debt offset by $150,000 for the repurchase of stock into treasury.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We believe that our business operations are not exposed to market risk relating to interest rate, foreign currency exchange risk or commodity price risk.
Item 4. Controls and Procedures
As of the end of the period covered by this Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, who concluded that 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.
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In November 2007 our management and the Audit Committee of our Board of Directors determined it was necessary to restate our Consolidated Statements of Operations for the three and six month periods ended August 31, 2007 due to the inclusion of inter-company sales in such items. Because of the required restatement of the Consolidated Statements of Operations, our Chief Executive Officer and Chief Financial Officer concluded that as of August 31, 2007, our disclosure controls and procedures were not effective based upon our misinterpretation of inter-company sales and revenues.
In April 2008, in conjunction with the audit of the Company’s financial statements as of and for the end of the year ended December 31, 2007, our management and the Audit Committee of our Board of Directors determined that it was necessary to again restate our financial statements for the three and six months ended August 31, 2007 and the three and nine months ended September 30, 2007, as well as the pro forma financial statements submitted with our Form 8K/A filed with the SEC on January 31, 2008, due to deficiencies in our accounting practices relating to revenue recognition , inventory, cost of goods sold and equity.
These failures resulted from:
• | 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 recent period results or forward looking financial forecasts. |
We have taken steps to improve our disclosure controls and procedures, including the replacement of our Chief Financial Officer, the hiring of in-house legal counsel, continued utilization of the oversight of an outside accounting firm in the preparation of our financial statements, retaining additional experienced independent accounting consultants, reorganizing our accounting department, obtaining and implementing new policies for the entry and maintenance of financial records, the development of processes for taking more frequent physical inventory, and obtaining approval from our Board of Directors to substantially upgrade our accounting software. In addition, we have engaged Withum Smith & Brown Global Assurance to evaluate our internal controls over financial reporting and assist us in developing internal controls which will enable us to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Other than the changes described above, there have been no other changes in our disclosure controls and procedures that have materially affected, or are reasonably likely to materially affect, our disclosure controls and procedures.
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.
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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
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In January 2008, we issued five year options to acquire 18,000 shares of our common stock at an exercise price of $3.00 per share to L.G. Zangani, LLC as partial compensation under an agreement pursuant to which L.G. Zangani provides investor relations services. We relied upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, in making such issuance.
In March 2008, we issued 600,000 shares of common stock to Mirador Consulting, Inc. as compensation for modification of our Strategic Alliance Agreement pursuant to which Mirador Consulting provides investor relations and other services to us. We relied upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, in making such issuance.
In January 2008, we issued 22,500 shares of common stock to Mercom Capital, LLC as compensation under a strategic alliance agreement pursuant to which Mercom provides investor relations services to us. We relied upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, in making such issuance.
Item 3. Defaults Upon Senior Securities
In September 2007 we issued a promissory note in the principal amount of $250,000 which provided for interest at a rate of 8% per annum and a maturity date of January 4, 2008 to an individual lender. As of the date of filing of this Report, the note remains past due and unpaid. We are currently in discussions with the holder of the note regarding potential payment or extension of the Note.
We did not timely pay the $15,625 and $46,875 of interest payments due under our convertible debentures on January 1, 2008 and April 1, 2008, respectively; however, all such amounts were paid in May 2008.
Item 6. Exhibits
Exhibit No. | Exhibits | |
31.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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: May 20, 2008 | |||
By: | /s/ Frank Schmid | ||
Frank Schmid | |||
Interim Chief Financial Officer | |||
Dated: May 20, 2008 |
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EXHIBIT INDEX
Exhibit No. | Exhibits | |
31.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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