Cost of Goods Sold
Total
cost of goods sold decreased approximately $190,000, or 47% to approximately
$216,000 for the three months ended March 31, 2010, from approximately $406,000
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 2009.
As
a result of the changes described above in revenues and cost of goods sold,
gross profit for the three months ended March 31, 2010, decreased to
approximately $225,000 from approximately $445,000 for the three months ended
September 30, 2008, and gross profit as a percentage decreased to 51% for the three
months ended March 31, 2010 compared with 52% for the same period in the prior
year. The decrease in gross profit margin for the three months ended March 31,
2010 is primarily the result of slightly lower margin jobs completed in the
current period.
Operating Expenses
Operating
expenses decreased approximately $303,000 to approximately $616,000 for the
three months ended March 31, 2010, from approximately $919,000 for the three
months ended March 31, 2009.
This
decrease was primarily attributable to a decreased wage related items due to
lower headcount (approximately $200,000), decreased finance and investor
relations costs ($120,000), decreases in depreciation and other costs of
$90,000, offset by an increase in charges for late registration penalties of
about $110,000.
Interest Expense
Interest
expense for the three months ended March 31, 2010 increased to approximately
$454,000, from about $207,000 in the three months ended March 31, 2009. The
increase of $247,000 was primarily the result of (i) additional interest due to
beneficial conversion of convertible debt of approximately $120,000 and (ii)
interest on amounts relating to late payments (approximately $120,000), and
increased interest due to late payment of payroll and other of about $7,000
Net Loss
As
a result of the items discussed above there was a net loss of approximately
$845,000 for the three months ended March 31, 2010 compared with a net loss of
approximately $681,000 for the three months ended March 31, 2009.
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 March 31, 2010, the Company had cash of
approximately $60,000, a working capital deficit of approximately $11.6
million, stockholders deficit of approximately $10.4 million, and an
outstanding balance of long term debt of approximately $94,000 net of current maturities.
In comparison, at December 31, 2009, the Company had cash and equivalents of
approximately $24,900, a working capital deficit of approximately $11.1
million, an outstanding balance of long term debt of approximately $102,000,
net of current maturities. The Companys financial condition as of March 31,
2010 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 $63,000 for the three
months ended March 31, 2010 compared to cash generated from operations of
approximately $38,400 for the three months ended March 31, 2009. Cash used
during the three months ended March 31, 2010 was primarily the result of the
operating loss (net of non-cash operating expenses of approximately $446,000)
and a reduction in accounts payable ($41,000) offset by decreases in
receivables of approximately $31,000, inventory of approximately $51,000 and
prepaid expenses and deposits of approximately $38,000 and increases in
customer deposits of approximately $96,130, accrued expenses totaling
approximately $377,000 and sales tax payable of approximately $23,490. For the
three months ended March 31, 2009, cash generated by operations of
approximately $38,400 was primarily a result of the operating loss incurred
during the quarter offset by non cash operating expenses of approximately
$528,780, increases in receivables of approximately $15,700, inventory of
approximately $52,200 and increases in prepaid expenses and deposits of
approximately $54,900, increases in accounts payable and accrued expenses
totaling approximately $57,000 and net increases in customer deposits and sales
tax payable of approximately $10,900.
Cash Flows from Investing Activities
There
was not any cash used for or generated from investing activities in the three
months ended March 31, 2010 or March 31, 2009.
Cash Flows from Financing Activities
Net
cash generated from financing activities was approximately $98,290 for the
three months ended March 31, 2010. The cash generated by financing activities
for the current period was a result of the issuance of convertible notes
netting aggregate proceeds of approximately $124,160 offset by payments of
approximately $25,870 on outstanding loans and capital leases. During the three
months
13
ended March
31, 2009, cash used for financing activities of approximately $29,270 was
primarily the result of payments on outstanding loans and capital leases
Cash
increased from $24,884 at December 31, 2009 to $59,985 at March 31, 2010.
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 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 March 31, 2010.
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, 2009 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.
14
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:
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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.
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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.
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There are no
formal cash flow forecasts, business plans, and organizational structure
documents to guide the employees in critical decision-making processes.
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Material
weaknesses identified in the past including deficiencies in information
technology have not been fully remediated.
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As
a result of the material weaknesses described above, the Company concluded
that, as of December 31, 2009, 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 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 March 31, 2010, 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.
15
P
ART II
OTHER INFORMATION
I
tem 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Between
January and May, 2010, the Company issued to unaffiliated individual investors,
convertible notes with an aggregate principal value of $235,500, 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 through May 2011. 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.
I
tem 3. Defaults
Upon Senior Securities
Since
January 1, 2008, we have been required to make quarterly payments of interest
under the convertible debentures issued in our November 2007 Private Placement.
None of such payments have been made since August 2008. We have also been
required to make monthly principal payments in the aggregate of $208,333 since
November 2008. None of such payments have been made. On August 28, 2008, we
entered into an Amendment and Waiver Agreement with each of the holders of
these debentures pursuant to which the debenture holders have:
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waived our compliance with the provisions of the debentures which require us to
have a registration statement covering the shares issuable upon the conversion
of the debentures declared effective under the Securities Act of 1933 and
maintain the effectiveness of such registration statement;
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waived the anti-dilution provisions of the debentures which, as a result of
prior transactions, would have otherwise resulted in an adjustment to the
conversion price of the debentures to $.40 per share;
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waived certain provisions of the agreement pursuant to which the debentures
were issued which restrict our ability to issue common stock and securities
convertible into or exercisable for common stock;
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waived all registration rights previously granted to the debenture holders with
respect to the shares issuable upon the conversion of the debentures and
exercise of the warrants issued to the debenture holders in connection with the
transaction, provided that we do not fail to satisfy the current public
information requirements under Rule 144(c) of the Securities Act of 1933 for a
period of three (3) consecutive trading days or more. In the event of such a
public information failure we will be required to file a registration statement
covering the shares issuable upon the debentures and warrants and will be
subject to monetary penalties if it fails to obtain and maintain the
effectiveness of the registration statement.
In
consideration of the waivers and in lieu of (i) $250,000 of liquidated damages
that the debenture holders alleged were owed as a result of the our failure to
register the shares underlying the debentures and warrants for public resale
and (ii) $46,875 of accrued and unpaid interest owed to the debenture holders,
we agreed to issue shares of our common stock valued at $296,875 (based upon a
per share price equal to 80% of the average of the value weighted average price
of the common stock for the 20 trading days prior to the date of the amendment
and waiver) to the debenture holders pro-rata according to their percentage
ownership of the debentures. We agreed to register the new shares for resale
under the Securities Act of 1933, as amended.
The
exercise price of the warrants was also adjusted to $.40 per share.
In
August 2009, we entered into an additional Amendment and Waiver Agreement with
each of the holders of the debentures pursuant to which:
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Our default for past incidents of non-payment of interest and principal on the
debentures was waived.
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The total outstanding principal balance of the debentures was increased from
$3,750,000 to $4,083,742, representing the inclusion of accrued interest.
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The conversion price of the debentures was adjusted to $0.10 per share of the
Companys common stock. As of January 1, 2010 the conversion price became 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.
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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.
16
Since
entering into this agreement monthly redemptions of principal for the
debentures have became due. Each of these monthly redemption amounts totals
$208,333 and has not been paid by us. Additional redemption payments will also
come due on the first day of each calendar month through May 2010, a date upon
which the entire principal balance of the debentures will have come due.
Quarterly
interest payments owed by us subsequent to the waiver agreement to the holders
of the debentures in the amount of approximately $51,000 also have come due and
were also not paid by us except for those payments in stock pursuant to a
Waiver and Amendment, and a payment in May 2008 of $62,500.
Non-payment
of these amounts, and the failure to file an appropriate registration statement
may be considered default events under the relevant agreements between us and
the holders of the debentures, but no formal notice of default or request for
remedies in the case of default have been issued to the us by the holders. As a
result of default, the holders have the right to demand payment of
approximately $5,300,000 (representing 130% of the principal amount of the
debentures currently outstanding), as well as all accrued and unpaid interest.
We continue to communicate with the holders and are seeking a resolution to the
non-payment situation.
In
connection with the April 3, 2008 purchase of substantially all the assets of
IDS, we issued to IDS an unsecured convertible note in the principal amount of
$1.54 million, bearing no interest until April 3, 2011. 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 our common stock after May
31, 2010, or upon the approval of a majority in interest of the holders of our
then outstanding 5% secured convertible debentures, or any securities issued on
conversion thereof, at an initial conversion price of $1.15 per share. We have
agreed to register the shares issuable upon the conversion of the note for
public resale.
As
of March 31, 2010, $24,000 of payments were past due under the note issued to
IDS. In April 2009, IDS and its principal shareholder instituted an action
seeking to collect the entire $1,544,000 due under the note as well as $206,250
remaining due under the consulting agreement entered into in connection with
the asset purchase.
On
June 10, 2008, we issued a promissory note (the New Note) in the principal
amount of $267,192 to the Russ & Russ PC Defined Benefit Pension Plan - a
pension plan formed for the benefit of Mr. Russ - in exchange for the surrender
of a promissory note in the principal amount of $250,000 (the Old Note) which
was issued by us to an individual lender in October 2007 and assigned to the
pension plan before the exchange. At the time of the exchange, accrued and
unpaid interest under the Old Note, which was past due, was $17,192. The New
Note provided for interest at a rate of 10% per annum and became due on
December 10, 2008. As further consideration for entering into the exchange
transaction, we issued to Mr. Russ options to acquire 20,000 shares of the our
common stock under the Companys Equity Incentive plan at an exercise price of
$0.40 per share. We have not paid the holder of the note. IDS, its principal
shareholder and the holder of the New Note have instituted an action seeking to
collect the past due amount.
I
tem 6. Exhibits
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Exhibit No.
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Exhibits
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31.1
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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31.2
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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32.1
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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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32.2
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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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17
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.
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Visual
Management Systems, Inc.
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(Registrant)
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By:
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/s/
Jason Gonzalez
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Jason
Gonzalez
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Chief
Executive Officer
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Dated: May
20, 2010
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By:
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/s/
J.D. Gardner
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J.D. Gardner
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Chief
Financial Officer
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Dated: May
20, 2010
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18