This
decrease was primarily attributable to a decrease in finance and investor
relations costs (approximately $800,000), charges for penalties relating to the
lack of filing required registration statements, as required by certain
agreements, and other general and administrative expenses (approximately
$1,300,000), and a decrease in wage related costs due to reduced headcount
(approximately $1,800,000).
Interest
Expense
Interest
expense for the nine months ended September 30, 2009 increased to approximately
$1,007,360, from about $449,890 in the nine months ended September 30, 2008.
The increase of approximately $557,480 was primarily the result of (i)
additional interest due to repricing of warrants relating to debt of
approximately $290,000 and (ii) interest on amounts relating to late payments
of approximately $200,000, (iii) interest relating to the beneficial conversion
feature of convertible debt of $41,500 and (iv) higher original issue discount
amortization, totaling approximately $30,000.
Net Loss
As
a result of the items discussed above there was a net loss of approximately
$2,663,020 for the nine months ended September 30, 2009 compared with a net
loss of approximately $4,785,050 for the nine months ended September 30, 2008.
Net loss applicable to stockholders for the nine months ended September 30,
2009 was approximately $7,607,030 as a result of a deemed dividend relating to
a beneficial conversion feature on convertible preferred stock issued during
the period of approximately $4,944,010. Net loss applicable to stockholders
during the nine months ended September 30, 2008 was approximately $4,785,050 as
there were no deemed dividends during that period.
Results
of Operations for the Three Months Ended September 30, 2009 and 2008
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 decreased approximately $1,220,860, or 69% to about $559,010 during
the three months ended September 30, 2009, from approximately $1,779,870 during
the same period in the prior year. The decrease in revenues reflects the impact
of the economy on the Companys sales efforts and a reduction in the Companys
sales force.
Cost of
Goods Sold
Total
cost of goods sold decreased approximately $819,360, or 72% to approximately
$313,140 for the three months ended September 30, 2009, from approximately
$1,132,500 during the same period in the prior year. This decrease was
primarily due to decreased material and labor costs and lower revenues as
compared to the same period in 2008.
As
a result of the changes described above in revenues and cost of goods sold,
gross profit for the three months ended September 30, 2009, decreased to
approximately $245,880 from approximately $647,370 for the three months ended
September 30, 2008, and gross profit as a percentage increased to 44.0% for the
three months ended September 30, 2009 compared with 36.4% for the three months
ended September 30, 2008. The increase in gross profit margin for the three
months ended September 30, 2009 is primarily the result of higher margin jobs
completed in the current period.
Operating
Expenses
Operating
expenses decreased approximately $923,450 to approximately $746,230 for the
three months ended September 30, 2009, from approximately $1,669,680 for the
three months ended September 30, 2008.
This
decrease was primarily attributable to a decreased wage related items due to
lower headcount (approximately $600,000), charges for penalties relating to the
lack of filing required registration statements, as required by certain
agreements (approximately $100,000), and a decrease in other general and
administrative costs (approximately $200,000).
Interest
Expense
Interest
expense for the three months ended September 30, 2009 increased to
approximately $268,630, from about $152,850 in the three months ended September
30, 2008. The increase of $115,780 was primarily the result of (i) additional
interest due to beneficial conversion of convertible debt of approximately
$41,500 and (ii) interest on amounts relating to late payments (approximately
$90,000).
Net Loss
As
a result of the items discussed above there was a net loss of approximately
$774,010 for the three months ended September 30, 2009 compared with a net loss
of approximately $1,122,110 for the three months ended September 30, 2008. Net
loss applicable to
16
stockholders for the three months ended September 30,
2009 was approximately $1,966,580 as a result of a deemed dividend relating to
a beneficial conversion feature on convertible preferred stock issued during
the period of approximately $500,000 and $1,192,570 of a deemed dividend
relating to conversions of convertible preferred stock during the three months
ended September 30, 2009. Net loss applicable to common during the three months
ended September 30, 2008 was approximately $1,122,110 as there were no deemed
dividends during that period.
Liquidity
and Capital Resources
The
Companys financial statements are prepared on a going concern basis, which
assumes that the Company will realize assets and discharge liabilities in the
normal course of business. At September 30, 2009, the Company had cash of
approximately $11,220, a working capital deficit of approximately $10,471,360,
stockholders deficit of approximately $8,686,520, and an outstanding balance
of long term debt of approximately $120,430 net of current maturities. In
comparison, at December 31, 2008, the Company had cash and equivalents of
approximately $16,000, a working capital deficit of approximately $9,478,000,
an outstanding balance of long term debt of approximately $234,000, net of
current maturities. The Companys financial condition as of September 30, 2009
raises doubt as to the Companys ability to continue the Companys normal
business operations as a going concern. If the Company is unable to put into
effect certain plans, the Company may be required to restructure, file for
bankruptcy or cease operations.
Cash
Flows from Operating Activities
Net
cash used by operating activities was approximately $355,180 for the nine
months ended September 30, 2009 compared to cash used by operations of
approximately $732,540 for the nine months ended September 30, 2008. Cash used
during the nine months ended September 30, 2009 was primarily the result of the
operating loss (net of non-cash operating expenses of approximately $1,653,600)
and a reduction in customer deposits ($122,110) offset by decreases in
receivables of approximately $38,310, inventory of approximately $197,690 and
prepaid expenses of approximately $144,200 and decreases in accrued expenses
totaling approximately $342,900. For the nine months ended September 30, 2008,
cash used in operations of approximately $732,540 was primarily a result of the
operating loss incurred during the quarter offset by non cash operating
expenses of approximately $2,152,690, decreases in receivables of approximately
$12,410, inventory of approximately $87,150 and increases in prepaid expenses
and deposits of approximately $79,610, increases in accounts payable and
accrued expenses totaling approximately $1,667,800 and increases in customer
deposits and sales tax payable of approximately $211,820.
Cash
Flows from Investing Activities
Net
cash generated from investing activities was approximately $3,700 in the nine
months ended September 30, 2009 as a result of proceeds from asset sales, as compared
to cash used by investing activities of $185,170 during the nine months ended
September 30, 2008 which represented equipment purchases and capitalized
software costs net of proceeds from an asset disposition.
Cash
Flows from Financing Activities
Net
cash generated from financing activities was approximately $346,500 for the
nine months ended September 30, 2009. The cash generated by financing
activities for the current period was a result of the issuance of convertible
preferred stock and convertible notes netting aggregate proceeds of
approximately $466,540 offset by payments of approximately $116,700 on
outstanding loans and capital leases. During the nine months ended September
30, 2008, cash generated from financing activities of approximately $409,690
was primarily the result of proceeds from short term notes of $480,260 offset
by payments of approximately $195,500 on outstanding loans and capital leases
Cash
decreased from $16,186 at December 31, 2008 to $11,222 at September 30, 2009.
I
tem 3.
Quantitative
and Qualitative Disclosure About Market Risk
The
Company believes that the Companys business operations are not exposed to
market risk relating to interest rate, foreign currency exchange risk or
commodity price risk.
I
tem 4.
Controls
and Procedures
Evaluation
of disclosure controls and procedures
As
required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this Report on Form 10-Q, the Company carried out an evaluation of
the effectiveness of the design and operation of the Companys disclosure
controls and procedures. This evaluation was carried out under the supervision
of and with the participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial Officer. Disclosure
controls and procedures are controls and other procedures that are designed to
provide reasonable assurance that information required to be disclosed in the
Companys 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 Commissions 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 the Companys reports filed under the Exchange Act is
accumulated and
17
communicated to management, including the Companys
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
The
evaluation made by the Companys Chief Executive Officer and Chief Financial
Officer of the Companys disclosure controls and procedures included a review
of the controls objectives and design, the Companys implementation, and the
effect of the controls on the information generated for use in this quarterly
report and previous reports to the Commission. In the course of the evaluation,
the Company sought to identify data errors, control problems or acts of fraud
and to confirm that appropriate corrective action, including process
improvements, were being undertaken. The overall goals of these various
evaluation activities are to monitor the Companys disclosure controls and
procedures and to make modifications as necessary. The Companys intent in this
regard is that the disclosure controls and procedures will be maintained as
dynamic systems that change (including with improvements and corrections) as
conditions warrant. Based on their evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective as of September 30, 2009.
Managements
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
(GAAP). Internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the Companys transactions and
dispositions of the Companys assets; (2) provide reasonable assurance that the
Companys transactions are recorded as necessary to permit preparation of the
Companys financial statements in accordance with GAAP, and that receipts and
expenditures are being made only in accordance with authorizations of the
Companys management and directors; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Companys assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projection of any evaluation of
effectiveness to future periods is subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
has evaluated the effectiveness of internal control over financial reporting as
of December 31, 2008 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
A
material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Companys annual or interim
financial statements will not be prevented or detected on a timely basis.
Based
on their evaluation, the Companys Chief Executive Officer and Chief Financial
Officer identified a number of material weaknesses in the Companys internal
control over financial reporting. These material weaknesses included:
|
|
-
|
A lack of sufficient resources and an insufficient
level of monitoring and oversight, which restricts the Companys ability to
gather, analyze and report information relative to the financial statement
assertions in a timely manner.
|
|
|
-
|
The limited size of the accounting department makes
it impracticable to achieve an appropriate segregation of duties and to
implement the formal documented closing and reporting calendar and checklists
in a timely manner on a consistent basis.
|
|
|
-
|
There are no formal cash flow forecasts, business
plans, and organizational structure documents to guide the employees in
critical decision-making processes.
|
|
|
-
|
Material weaknesses identified in the past including
deficiencies in information technology have not been fully remediated.
|
As
a result of the material weaknesses described above, the Company concluded
that, as of December 31, 2008, the Companys internal control over financial
reporting was not effective.
Remediation
of Material Weaknesses
The
Company intends to take action to hire additional staff, implement stronger
financial reporting systems and software and develop the adequate policies and
procedures with said enhanced staff to ensure all noted material weaknesses are
addressed and resolved. However, due to cash flow constraints, the timing of
implementing the above has not yet been determined, and may not be possible.
The
Companys management does not expect that the Companys disclosure controls or
the Companys 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
18
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.
Changes
in Internal Control over Financial Reporting
During
the quarter ended September 30, 2009, no changes were made that impacted
internal control over financial reporting due to cash flow constraints.
Sobel
& Co., LLC was not required to and did not perform a review of the
Companys internal controls over financial reporting.
19
P
ART II OTHER INFORMATION
I
tem 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
In
July and August 2009, the Company issued to unaffiliated individual investors,
convertible notes with an aggregate principal value of $41,500, an interest
rate of 12% per annum, and a conversion price of $.01 per share of Visual
Management Systems, Inc. common stock. The convertible notes mature on various
dates throughout January 2010. The Company relied upon the exemption provided
by Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
thereunder in connection with the transaction detailed above.
During
July, October and November of 2009, 28 shares of Series A Convertible Preferred
Stock were converted into common stock. These shares were converted at
$0.005 per share and resulted in the issuance of 14,000,000 shares of the
Companys common stock. During October of 2009, one share of Series B
Convertible Preferred Stock was converted into common stock. These shares were
converted at $0.005 per share and resulted in the issuance of 200,000
shares of the Companys common stock. The Company relied upon the exemptions
provided by Section 3(a)(9) of the Securities Act of 1933,as amended, in
connection with making such issuances.
I
tem 3.
Defaults
Upon Senior Securities
On
the first day of each month since December 1, 2008 the Companys monthly
redemptions of principal for the debentures have become due. Each of these
monthly redemption amounts totals $208,333 and each has not been paid by the
Company. Additional redemption payments will also come due on the first day of
each calendar month until May 2011.
Quarterly
interest payments owed by the Company to the holders of the debentures in the
amount of $46,875 also came due on October 1, 2008 January 1, 2009, April 1,
2009 and July 1, 2009, October 1, 2009 and were also not paid by the Company.
In
August 2009, the Company entered into an Amendment and Waiver Agreement with
each of the holders of the November 2007 debentures pursuant to which:
-
The Companys default for past incidents of non-payment of interest and
principal on the debentures was waived.
-
The total outstanding principal balance of the Debentures, was increased from
$3,750,000 to $4,083,742, representing the inclusion of accrued interest.
-
The conversion price of the Debentures was adjusted to $0.10 per share of the
Companys common stock. After January 1, 2010 the conversion price shall be the
lesser of $0.10 or 80% of the lowest daily volume weighted average price during
the 20 Trading Days immediately prior to the applicable Conversion Date, but in
no case less than $0.00625.
-
The conversion price of warrants issued to the holders of the Debentures at the
time of their original investment was adjusted to $0.12 per share.
The
Company has made no payments to the holders of the Debentures since execution
of the August 2009 Amendment and Waiver Agreement, and remains in communication
with the holders towards the goal of obtaining a more long term solution to the
Companys non-payment.
The
Company has not made a series of scheduled payments of amounts due to
Intelligent Digital Systems, LLC (IDS) as part of the Companys purchase of
substantially all of IDSs assets in April 2008, nor has the Company made a
series of payments due as part of a related consulting agreement between the Company
and IDSs sole member Jay Russ, a former member of the Companys board of
directors. The Company is currently past due on $24,000 in payments owed to
IDS, and past due to Jay Russ for consulting fees as of June 30, 2009 of
$62,500.
Non-payment
of these amounts may be considered default events under the relevant agreements
between the Company and IDS and the consulting agreement with Mr. Russ. As a
result of default, IDS and Mr. Russ have commenced litigation against the
Company seeking payment of the entire $1,544,000 principal amount of the note
issued to IDS as primary compensation for its assets and all accrued and unpaid
interest thereon, as well as payment of the aggregate $ 287,500 remaining due
under the consulting agreement.
20
On
June 10, 2008, the Company issued a promissory note (the Note) in the
principal amount of $267,192, with an interest rate of 10% per annum, to a
pension plan formed for the benefit of Jay Russ. Pursuant to its terms, the
Note came became due on December 10, 2008, but was not paid by the Company. Mr.
Russ suit against the Company also includes claims demanding payment of this
amount.
I
tem 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
|
S
IGNATURES
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
|
|
|
Chief Executive Officer
|
Dated: November 23, 2009
|
|
|
|
|
|
|
By:
|
/s/ J.D. Gardner
|
|
|
|
|
|
J.D. Gardner
|
|
|
Chief Financial Officer
|
Dated: November 23, 2009
|
|
|
21