Item 1.
Business
(a)
Business Development
Visual Management Systems, Inc. was incorporated in the State of Nevada in March 2004. Our company was originally named Wildon Productions, Inc. 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 name to Visual Management Systems, Inc. and affected a 1-for-7 reverse stock split of our common stock in connection with our acquisition of Visual Management Systems Holding, Inc. described below. From incorporation until our acquisition of Visual Management Systems Holding, Inc., we were an exploration stage company primarily engaged in the acquisition and exploration of mineral properties. Upon the completion of the acquisition, we succeeded to the business of Visual Management Systems Holding, Inc., that of a security integrator focusing primarily on video products and relocated our principal executive offices to those of Visual Management Systems Holding, Inc. at 1000 Industrial Way North, Suite C, Toms River, New Jersey 08755. The telephone number at our principal executive offices is (732) 281-1355.
On April 3, 2008, we 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. See “Item 3. Legal Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.” Since this purchase the focus of our business has switched from integrating and installing surveillance video systems, to designing and manufacturing surveillance video systems for resale by others, but our original business line persists as a portion of our current business.
In February 2010 our management proposed to our Board of Directors that we change our name from Visual Management Systems, Inc. to Intelligent Product Development Group, Inc. The Board approved the proposal, and we will be submitting the matter to a shareholder vote in the near future.
(b)
Overview of Business
We provide electronic security solutions to businesses, governmental entities and individuals through the design, manufacture, sale and installation of digital surveillance systems that enable users to proactively manage their businesses, and secure their homes or campuses with easy video data retrieval and live viewing from anywhere in the world. Our management believes that there is a lucrative and underserved market for electronic security technology through the use of digital recording and video transmission to remote locations and corporate offices.
We design, manufacture and sell digital, hybrid and network video recording devices (“DVRs, HVRs and NVRs”) to end-user and
reseller customers. We currently manufacture and sell several lines of products. Our principal lines are the “TrueHybrid” enterprise digital, hybrid and network video recorder, the “Flex TH” plug and play wireless video recorder, and the legacy “Virtual Manager” line of DVRs. We also resell cameras and surveillance system accessories.
We currently conduct our operations through three subsidiary entities, Visual Management Systems, LLC, which provides our protective technology solutions and remote management surveillance systems, Intelligent Product Development Group, LLC, which designs, manufactures and sells our DVRs and NVRs, and VMS Financial Services, LLC, which has been formed to provide equipment leasing services to our customers, but which has thus far engaged in very limited operations.
Video Surveillance Systems
Our primary business is the design, manufacture and sale of CCTV surveillance systems to resellers. We also sell these surveillance systems and provide installation services directly to end-users. Our surveillance systems enable end-users to manage their business through data retrieval and view their businesses live from anywhere in the world. The primary components that we use in our video surveillance systems include:
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Digital, Hybrid and Network Video Recorders: Our enterprise DVR, NVR and Hybrid product lines are comprised of custom configurations of surveillance hardware and software systems based on our proprietary, wholly owned TrueHybrid Surveillance Platform. These system display from 4-128 different sources depending on hardware configuration. We also continue to resell and service DVRs based on our former principal suppliers product line.
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Wireless Video Recorders: Our Flex TH line of plug and play, wireless NVR products are based on a refinement of our proprietary TrueHybrid technology, and are capable of accepting between 2 and 6 channels of wireless IP video, while installation that only involves supplying power to the unit.
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Surveillance Cameras: We use a variety of cameras in the traditional video surveillance systems we sell directly to customers, and supply a similar selection of cameras to our dealer and distribution customers when required. Cameras can be either IP or analog, and are configured to serve a multitude of different applications, such as indoor/outdoor, low light/IR, wireless or wired etc. Our Flex TH line uses wireless IP cameras exclusively, which we currently source from a small number of preferred providers.
Digital Video Recorders, Network Video Recorders
Since their introduction in 1995, DVRs have been overtaking time-lapsed VCRs as the primary recording mechanism in commercial surveillance, and more recently NVRs and Internet Protocol (IP) based cameras have begun to replace analog systems and cameras due to the potential for superior image quality and the ability to transmit images via the Internet over long distances.
DVR and NVR systems have historically been available as software systems or hardware systems. Software based DVRs and NVRs are simply software programs which run on personal computers. They are cost effective and operate on readily available, easily serviced PC-platform computers; however, image quality often suffers and digital video recording places a significant strain on a computers resources. This strain can cause premature failure of primary computer components and can cause other parts of the computer to function slowly or cease functioning. Software DVRs and NVRs are generally not suitable for business class security applications.
“Firmware” or “solid state” systems are also computer based but are essentially multiplexers with hard disk drives built in for recording. Generally, these hardware based DVRs are built for the sole purpose of providing video surveillance and are effective; however, hardware based systems generally have two significant short-comings: inflexibility and service. Generally, there is little or no room for modifying or expanding the system. As for serviceability, hardware based systems, like a stereo or television set, have no user serviceable parts. For repair, the equipment must be returned to the manufacturer. Inasmuch as a significant amount of DVR manufacturing takes place in Asia, repairs frequently result in several weeks of “down-time” for users.
Given the relative strengths and weaknesses of software based and hardware based DVRs and NVRs, we believe that the best choice for consumers is a DVR or NVR which incorporates both types of technologies. We use hardware-based video capture cards in our DVRs and Hybrid Recorders which process video from analog cameras, and a software based platform for the dedicated NVRs which utilize no analog video. The result is a dedicated security computer. The use of removable hard disk drives for storage flexibility and components that are readily available, inexpensive and easy to service provides a PC-based security system that can grow with a business.
We build our DVRs and NVRs to very specific standards. Each DVR or NVR is built from tested, proven components and is driven by Microsoft Windows® software and is customized to perform optimally based on a system designed by our staff. All of our custom-built DVRs and NVRs offer record-on-motion capabilities as well as continuous, alarm-triggered or combination settings. Data is easy to retrieve by date and time and can be reviewed at user-controlled speeds and with up to sixteen simultaneous feeds on screen at once. Live video can be viewed via central monitoring software which supports up to 100 simultaneous feeds.
Standard features of our DVRs and NVRs include:
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Live remote viewing
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Motion and frames per camera are addressable per camera
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Access to recorded data by date and hour
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Alarm notification by e-mail, phone or IP-alert
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All functions are username and password protected
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Video motion sensor and built-in motion detector mode
Sales and Marketing
We market and sell our surveillance systems through a small inside sales force, and a larger network of independent dealers and distributors. We are always looking for opportunities with new dealers, and plan to evaluate the market for our products throughout 2010 to determine the best distribution opportunities.
We use various methods to market and sell our products and services, including direct sales efforts, personal consultations, sponsorships, attendance at exhibitions and trade shows, advertisements in industry journals, public relations and direct mail solicitation. Business is also obtained through competitive bid processes and referrals.
Our pricing strategies are based upon gross margin targets calculated to cover parts and manufacturing/other labor, software development costs, and a profit margin.
Service
A strong service and maintenance capability is an important element in maintaining good customer relations and low attrition, and is an important revenue generating activity for us.
For our installed systems we offer one and three year service contracts as well as paid extensions of existing service contracts and takeover programs for equipment formerly serviced by other companies which no longer provide service to a particular client. Service is typically provided by our staff or subcontracted through partner companies such as dealers of our DVR and NVR products or structured cabling companies.
For our products resold by dealers or distributors, we warranty and service our enterprise products in a fashion similar to our installed products, and service manufacturers warranties and provide technical support for our self-installed systems.
Suppliers
We acquire the components for our video surveillance systems and DVRs and NVRs through various suppliers, including Ingram Micro, UDP and PurePower. We choose not to align ourselves with any one supplier so that we can recommend the best solutions for our customers. Substantially all of the components that we use are readily available from multiple sources.
Market
We believe that the multi-billion dollar market for video surveillance systems and other protective technologies is growing rapidly due to a number of factors, including:
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many existing security and surveillance systems are becoming technologically obsolete and inadequate;
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insurance providers and governing bodies began mandating surveillance in certain environments and situations;
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since the tragic events of September 11, 2001, security is among the highest concerns of Americans at home and work;
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widespread coverage of kidnappings, robberies and other crimes appear daily on television, in newspapers and in all types of news media;
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economic downturns often result in increased property crime, the threat of which is a major driving factor in customer interest in our products and services;
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technological advancements provide the opportunity to increase the scope and efficacy of many routine security tasks.
We believe that the market for video surveillance systems is highly fragmented among a small number of larger providers and a broad array of small companies. We believe that the small to mid-size business market, and the residential market are underserved and plan to exploit opportunities in these sectors.
Competition
The security industry is highly competitive. We compete on a local and regional level with a small number of major firms and many smaller companies in the installed surveillance system space, and nationally in the direct to distributor space. We compete primarily on the design, features and reliability of our products and the quality of our service. Certain of our competitors have greater name recognition and financial resources than us. We may also face competition from potential new entrants into the security industry or increased competition from existing competitors that may attempt to develop the ability to offer the full range of services that we offer. We believe that competition is based primarily on the ability to deliver solutions that meet a client’s requirements at a competitive price compared to the professional grade security industry. Our competitors in the installed system space include Vector Security, American Sentry Guard, ADT Security Services, Ltd. (a division of Tyco International) and Sonitrol, Inc. Our competitors in the direct to dealer space include Aventura, Bosch, Milestone and others. There can be no assurance that we will be able to compete successfully in the future against existing or potential competitors who are larger or better capitalized.
Product Development
Product development is an ongoing process for our company. We continuously attempt to develop new product lines, learn different disciplines and integrate products and programs into our offerings to add new value for our customers.
We experiment with new hardware and software technologies regularly. We sample systems to integrate with our existing products as well as new stand-alone technologies. Our newest DVR and NVR ventures include enterprise grade systems capable of capturing and recording at 4000 CIF and streaming at 2000 CIF, and adaptation of NVR technology to small scale residential use. We are energetically expanding into the IP space based on customer interest in improved image quality and flexibility. We believe that our company is breaking new ground in providing professional quality wireless NVR technology to small business and residential users.
Our near-term future plans include the release of an all new engine for our main product line with markedly superior performance, replacement of our client/server based remote viewer with a web based platform and additional layers of integration with third-party products and services. With the implementation and use of the products and services that we provide there are a multitude of potential support services available for sale. These include, but are not limited to virtual guard tours, mystery shoppers, loss prevention observation reporting, risk management and mitigation, facilities insurance programs, two-way access patrols, video alarm verification, off-hours facility monitoring, etc.
To further our product development efforts, we are actively seeking companies, technologies and patents we can acquire and adopt to strengthen our offerings and complete our product suites. Acquisition efforts are focused on installation capacity, product lines, software development and copyrighted or patented technology that can have an immediate impact on revenues and profit growth.
In connection with the purchase of substantially all the assets of IDS (the “Asset Purchase”), we entered into a joint venture with IDS to obtain approval of certain patent applications formerly held by IDS that are relevant to our industry which have been assigned to the joint venture. The joint venture has granted us 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 us has a 50% interest in the joint venture. Due to a breakdown in the relationship between us and the former management of IDS, we are not currently prosecuting the patent applications and the full value of this investment may never be realized. See “Item 3. Legal Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Customers
We have a wide range of customers. They include small, medium and large-sized businesses, residences, office buildings, manufacturing, warehousing and other classes of commercial operations, and distributors and dealers of various descriptions. Our customers are individuals, private and public companies and government entities. We typically classify customers as corporations, individuals or government as described below.
Corporate Clients
We serve several corporate clients. Corporate clients are departmentalized and usually represent much larger contracts based on a large number of smaller jobs, or a single or a few larger facilities. We receive a majority of our revenues from medium sized corporate clients.
As this middle level client is the core for our business model, we continue to enhance marketing programs in this sector. We offer incentives for referrals to other businesses in the group and plan to remain innovative as we proceed. Our corporate clients include:
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El Rancho Foods
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Briad Group (TGI Friday restaurants)
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Penn State University
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Clearview Cinemas
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KCP Foods US (Sarku Japan restaurants)
Individuals
We service many types of “individual” customers. Some individuals request residential service, but most own a single location or a small business. To date, we have experienced limited demand for our installed systems in residential applications due to increased costs of installation.
We believe that successful development of a lean residential NVR system based on our TrueHybrid technology platform utilizing easy to install wireless cameras will allow us to further penetrate this market. The Flex TH product is in current roll out, and we believe it will provide previously unavailable surveillance options to cost sensitive residential users.
Government
In 2009 we had a limited number of governmental customers. Most were on a smaller scale and represented existing relationships which were leveraged to add new equipment or which required service to maintain existing equipment.
Employees
As of April 14, 2010, we had approximately 20 employees. We believe that our relationship with our employees is satisfactory and we have not suffered any labor problems since inception.
Item 1(A)
Risk Factors
We have a limited operating history, which limits the information available to you to evaluate our business, and we continue to experience operating losses.
We began our operations in June 2003. We incurred net losses of $4,116,683 and $7,938,798 during the years ended December 31, 2009 and 2008, respectively. The losses were attributable, in part, to a substantial decrease in revenue due to the downturn in the larger economy, and the reduction in our sales staff combined with an established overhead cost base which could not be reduced at the same rate that revenues declined and non-cash charges attributable to conversions of debt to equity. There is limited operating and financial information to evaluate our historical performance and our future prospects and our independent registered public accounting firm has modified their opinion on our financial statements for the year ended December 31, 2009 with a note regarding our ability to continue as a going concern. We face the risks and difficulties of a growth company including the uncertainties of market acceptance, competition, cost increases and delays in achieving business objectives. There can be no assurance that we will succeed in addressing any or all of these risks or that we will achieve future profitability and the failure to do so would have a material adverse effect on our business, financial condition and operating results.
We have limited liquid resources and are in default of certain obligations.
As noted above, our independent registered public accounting firm has modified their opinion on our financial statements for the year ended December 31, 2009 with a qualification which raises substantial doubt about our ability to continue as a going concern. Our ability to continue in business depends upon the continued cooperation of our creditors, our ability to generate cash flow to meet our continuing obligations on a timely basis and our ability to obtain additional financing. Current liabilities at December 31, 2009 were approximately $11.3 million and current assets were approximately $0.2 million. The difference of approximately $11.1 million is a working capital deficit, which is primarily the result of current debt obligations and amounts due vendors. At December 31, 2009, we were delinquent with respect to approximately $3,200,000 of scheduled payments due under outstanding promissory notes and debentures, and the holders of these instruments have the right to demand payment of an aggregate of approximately $7,200,000 At December 31, 2009 we were also delinquent approximately $76,000 in federal payroll taxes, approximately $35,000 in state payroll taxes, approximately $145,000 in state sales taxes and approximately $87,000 in obligations to our employee retirement accounts, exclusive of estimated penalties and interest, which have been accrued. We can give no assurance that we will raise sufficient capital to eliminate our working capital deficit or that our creditors will not seek to enforce their remedies against us, which include the imposition of insolvency proceedings. See “Item 3. Legal Proceedings.”
The current general economic downturn has resulted in reduced demand for our products and services and, if this downturn continues it may substantially impact our ability to achieve our business plan, or remain in business.
The current downturn in the general economy has resulted in frequent delays in the decision of prospective customers to make initial evaluations of, or investments in, our products. Small to medium retailers represent a substantial portion of our business, and they have been especially hard hit by the situation in the larger economy, which imperils their continuing operations. Larger customers with better prospects for surviving a long term economic decline are also delaying their decision making, in an attempt to reduce costs until economic activity picks
up in order to maintain profitability. Though we have made efforts to ensure our ability to stay in business by altering our target customers and reducing costs via staff reductions and other austerity measures, there is no guarantee that we will be able to survive a long term recession which completely negates the ability of our traditional target customers to make infrastructure investments.
Our future growth will be harmed if we are unsuccessful in developing and maintaining good relationships with manufacturers and suppliers.
We rely on third party manufacturers and suppliers for certain components of our products and systems, and to extend us credit. Risks associated with our dependence upon third party manufacturing relationships include: (i) reduced control over delivery schedules; (ii) lack of quality assurance; (iii) poor manufacturing yields and high costs; (iv) potential lack of adequate capacity during periods of excess demand; and (v) potential misappropriation of our intellectual property.
We do not know if we will be able to maintain third party manufacturing and supply contracts on favorable terms, if at all, or that our current or future third party manufacturers and suppliers will meet our requirements for quality, quantity or timeliness. Our failure to identify, establish, expand and maintain good relationships with quality marketing and distribution entities could have a material and adverse effect on our business.
Our access to the financing we rely on to stay in business has been severely limited by the decline in the availability of credit in the larger economy.
As part of our business model we rely on access to financing from traditional financial institutions and vendor lines of credit. The recent decline in the availability of credit - caused by the difficulties facing the world banking system in its entirety - has severely limited our ability to properly manage our cash flows. In 2009 we had essentially no access to credit. As a result we have been forced to adjust our relationship with several vendors, and in some cases cease doing business with them completely. We have accumulated substantial balances with some suppliers of credit. In some cases lawsuits have been filed against us by vendors seeking immediate payment, and in many cases resolution of those lawsuits will require additional spending of our limited cash resources.
Our future growth is largely dependent upon our ability to achieve our new business plan and develop new technologies that achieve market acceptance with acceptable margins.
Our future growth rate depends upon a number of factors, including our ability to successfully pursue our new business plan of surveillance software designer and manufacturer. To do this we must identify emerging technological trends in our target end-markets; develop and maintain competitive products; enhance existing products by adding innovative features that differentiate our products from those of our competitors; and develop, manufacture and bring products to market quickly and cost-effectively. Our ability to develop new products based on technological innovation can affect our competitive position and requires the investment of significant resources. These development efforts divert resources from other potential investments in our businesses, and they may not lead to the development of new technologies or products
on a timely basis or that meet the needs of our customers as fully as competitive offerings. In addition, the markets for our products may not develop or grow as management anticipates. The failure of our technologies or products to gain market acceptance or their obsolescence due to more attractive offerings by competitors could significantly reduce our revenues and adversely affect our business, operations and financial results.
We face intense competition from other providers of similar products and services.
We face intense competition in the markets in which we operate. Companies competing with us may introduce products that are competitively priced, that have increased performance or functionality or that incorporate technological advances not yet developed or implemented by us. Certain present and potential competitors have financial, marketing, research, and manufacturing resources substantially greater than ours.
In order to compete effectively in this environment, we must continually develop and market new and enhanced products at competitive prices and must have the resources available to invest in significant research and development activities. The failure to do so could have a material adverse effect on our business operations and financial results.
The market value of our common stock may be adversely affected by our financing activities, or by our inability to meet our business plan because we are unable to obtain financing.
If we are unable to generate on our own the necessary funds for the further development and growth of our business, we may be required to seek additional capital. This will depend on a number of factors, including, but not limited to: (i) our ability to successfully market our products and services; (ii) the growth and size of the security industry; (iii) the market acceptance of our products and services; and (iv) our ability to manage and sustain the growth of our business. In 2009 our shareholders and our Board of Directors increased the authorized shares of our common stock from Fifty Million (50,000,000) to One Billion (1,000,000,000), and we issued shares of Series B Convertible Preferred Stock with an initial conversion price of $.005 per share. If we need to raise additional capital, it may not be available on acceptable terms, or at all. Our failure to obtain required capital would have a material adverse effect on our business. If we issue additional equity securities in the future, you could experience further dilution or a reduction in priority of your securities.
Changes in legislation or governmental regulations or policies can have a significant impact on our financial condition, results of operations and cash flows.
We operate in regulated industries. Our operations are subject to regulation by a number of federal agencies with respect to safety of operations and equipment and financial responsibility. Intrastate operations in the United States are subject to regulation by state regulatory authorities. Our Company and our employees are subject to various U.S. federal, state and local laws and regulations, including many related to consumer protection. Most states in which we operate have licensing laws covering the monitored security services industry. Our business relies heavily upon wireline telephone service to communicate signals, and wireline telephone companies are regulated by both the federal and state
governments. Changes in laws or regulations could require us to change the way we operate, which could increase costs or otherwise disrupt operations. In addition, failure to comply with any applicable laws or regulations could result in substantial fines or revocation of our operating permits and licenses. If laws and regulations changed or we failed to comply, our financial condition, results of operations and cash flows could be materially and adversely affected.
We could face product liability claims relating to products we manufacture or install. These claims could result in significant costs and liabilities and reduce our profitability.
We face exposure to product liability claims in the event that any of our products results in personal injury or property damage. In the event that any of our products prove to be defective, we may be required to recall or redesign such products, which could result in significant unexpected costs. Any insurance we maintain may not be available on terms acceptable to us or such coverage may not be adequate for liabilities actually incurred. Any claim or product recall could result in adverse publicity against us, which could adversely affect our financial condition, results of operations and cash flows.
We depend on our manufacturers, some of which are our sole source for specific products, and our business and reputation would be seriously harmed if these manufacturers fail to supply us with the products we require and alternative sources are not available.
We have relationships with a number of manufacturers for a supply of certain of our products. Our success depends in part on whether our manufacturers are able to fill the orders we place with them and in a timely manner. If any of our manufacturers fail to satisfactorily perform their contractual obligations or fill purchase orders we place with them, we may be required to pursue replacement manufacturer relationships. If we are unable to find replacements on a timely basis, or at all, we may be forced to either temporarily or permanently discontinue the sale of certain products and associated services, which could expose us to legal liability, loss of reputation and risk of loss or reduced profit. Although we continually evaluate our relationships with manufacturers and plan for contingencies if a problem should arise with a manufacturer, finding new manufacturers that offer a similar type of product would be a complicated and time consuming process and we cannot assure you that if we ever need to find a new manufacturer for certain of our products we would be able to do so on a completely seamless basis, or at all. Our business, results of operation and reputation would be adversely impacted if we are unable to provide our products to our customers in a timely manner.
The failure of our systems could result in a material adverse effect.
Our operations are dependent upon our ability to support a complex network infrastructure and avoid damage from fires, earthquakes, floods, hurricanes, power losses, war, terrorist acts, telecommunications failures and similar natural or manmade events. The occurrence of a natural disaster, intentional or unintentional human error or actions, or other unanticipated problem could cause interruptions in the services provided by us. Any damage or failure that causes interruptions in the service provided by us could have a material adverse effect on our business, operating results and financial condition.
Our product offerings involve a lengthy sales cycle and we may not anticipate sales levels appropriately, which could impair our profitability.
Some of our products and services are designed for medium to large commercial facilities desiring to protect valuable assets and/or prevent intrusion. Given the nature of our products and the customers that purchase them, sales cycles can be lengthy as customers conduct intensive investigations and deliberate between competing technologies and providers. For these and other reasons, the sales cycle associated with some of our products and services is typically lengthy and subject to a number of significant risks over which we have little or no control.
If we do not protect our proprietary technology and intellectual property rights against infringement or misappropriation and defend against third party assertions that we have infringed on their intellectual property rights, we may lose our competitive advantage, which could impair our ability to grow our revenues.
We do not have patent protection with respect to any of our products or systems. As a result, other parties may attempt to copy aspects of our systems or to obtain or use information that is proprietary. The scope of any intellectual property rights that we have is uncertain and is not sufficient to prevent infringement claims against us or claims that we have violated the intellectual property rights of third parties. While we know of no basis for any claims of this type, the existence of and ownership of intellectual property can be difficult to verify and we have not made an exhaustive search of all patent filings. If any of our proprietary rights are misappropriated or we are forced to defend our intellectual property rights, we will have to incur substantial costs. We may not have the financial resources to prosecute any infringement claims that we may have or defend against any infringement claims that are brought against us, or choose to defend such claims. Even if we do, defending or prosecuting our intellectual property rights will divert valuable working capital and management’s attention from business and operational issues.
If we infringe the rights of others we could be prevented from selling products or forced to pay damages.
If our products, methods, processes, and other technologies are found to infringe the proprietary rights of other parties, we could be required to pay damages, or we may be required to cease using the technology or to license rights from the prevailing party. Any prevailing party may be unwilling to offer us a license on commercially acceptable terms.
Our business may subject us to risks related to nationwide or international operations.
If we offer our products and services on a national, or even international, basis, distribution would be subject to a variety of associated risks, any of which could seriously harm our business, financial condition and results of operations.
These risks include:
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greater difficulty in collecting accounts receivable;
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satisfying import or export licensing and product certification requirements;
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taxes, tariffs, duties, price controls or other restrictions on out-of-state companies, foreign currencies or trade barriers imposed by states or foreign countries;
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potential adverse tax consequences, including restrictions on repatriation of earnings;
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fluctuations in currency exchange rates;
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seasonal reductions in business activity in some parts of the country or the world;
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unexpected changes in local, state, federal or international regulatory requirements;
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burdens of complying with a wide variety of state and foreign laws;
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difficulties and costs of staffing and managing national and foreign operations;
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different regulatory and political climates and/or political instability;
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the impact of economic recessions in and outside of the United States; and
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limited ability to enforce agreements, intellectual property and other rights in foreign territories.
The market price of our common stock may fluctuate significantly in response to factors, some of which are beyond our control, such as product liability claims or other litigation; the announcement of new products or product enhancements by us or our competitors; developments concerning intellectual property rights and regulatory approvals; quarterly variations in our competitors’ results of operations; changes in earnings estimates or recommendations by securities analysts; developments in our industry; and general market conditions and other factors, including factors unrelated to our own operating performance.
As a public company, we will incur substantial expenses.
We are publicly-traded and, accordingly, subject to the information and reporting requirements of the U.S. securities laws. The U.S. securities laws require, among other things, review, audit, and public reporting of our financial results, business activities, and other matters. Recent SEC regulation, including regulation enacted as a result of the Sarbanes-Oxley Act of 2002, has also substantially increased the accounting, legal, and other costs related to becoming and remaining an SEC reporting company. The public company costs of preparing and filing annual and quarterly reports, and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be higher than they would be if we were privately-held. In addition, we will incur substantial expenses in connection with the preparation of Registration Statements and related documents with respect to the registration of shares issued in our offerings. These increased costs may be material and may include the hiring of additional employees and/or the retention of additional advisors and professionals. Our failure to comply with the
federal securities laws could result in private or governmental legal action against us and/or our officers and directors, which could have a detrimental effect on our business and finances, the value of our stock, and the ability of stockholders to resell their stock.
Only a portion of our management has significant experience in public company matters.
Only a portion of our management team has had previous significant public company management experience or responsibilities, which could impair our ability to comply with legal and regulatory requirements such as the Sarbanes-Oxley Act of 2002 and applicable federal securities laws including filing required reports and other information required on a timely basis. We cannot give assurance that our management will be able to implement and affect programs and policies in an effective and timely manner that adequately respond to increased legal, regulatory compliance and reporting requirements imposed by such laws and regulations. Our failure to comply with such laws and regulations could lead to the imposition of fines and penalties and further result in the deterioration of our business.
Our compliance with the Sarbanes-Oxley Act and SEC rules concerning internal controls may be time consuming, difficult and costly.
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the adoption of the Sarbanes-Oxley Act of 2002. We may need to hire additional financial reporting, internal controls and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. If we are delayed in complying or unable to comply with Sarbanes-Oxley’s internal control requirements, we may experience delay in obtaining the independent accountant certifications that the Sarbanes-Oxley Act requires smaller publicly traded companies commencing for fiscal years ending on or after June 15, 2010, to obtain or may not be able to obtain those certifications at all.
Our common stock may be considered a “penny stock” and may be difficult to sell.
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market or exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock has been below $5.00 per share and therefore may be designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell the common stock and may affect the ability of investors to sell their shares.
Our common stock is thinly traded on the OTC Bulletin Board, and we cannot give assurance that our common stock will become liquid or that it will be listed on a securities exchange.
Our common stock is quoted on the OTC Bulletin Board, which provides significantly less liquidity than a securities exchange (such as the American or New York Stock Exchange) or an automated quotation system (such as the NASDAQ National Market or NASDAQ Capital Market). We cannot give assurance that we will be able to meet the listing standards of any stock exchange, such as the American Stock Exchange or the Nasdaq National Market, or that we will be able to maintain any such listing. Such exchanges require companies to meet
certain initial listing criteria including certain minimum bid prices per share. We may not be able to achieve or maintain such minimum bid prices or may be required to effect a reverse stock split to achieve such minimum bid prices. Our common stock is currently quoted on the OTC Bulletin Board. Until our common stock is listed on an exchange, we expect that it will continue to be quoted on the OTC Bulletin Board. In this venue, however, an investor may find it difficult to obtain accurate quotations of our common stock and may experience a lack of buyers to purchase such stock or a lack of market makers to support the stock price. In addition, if we failed to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our common stock to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity. This would make it more difficult for us to raise additional capital.
Our shareholders are subject to the risk of significant dilution.
As of December 31, 2009, we had 129,262,526 shares of common stock outstanding. As a result of our convertible preferred and convertible debt securities that have not converted at December 31, 2009, up to an additional 241 million shares are issuable upon conversion, and an additional 20,000,000 shares of common stock are issuable at exercise prices between $.005-.013 under outstanding warrants. In August 2009 we entered into a waiver with the holders of our 5% convertible secured debentures adjusting their conversion price from $0.40 per share to $0.10 per share. After January 1, 2010 the conversion price of the debentures is 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. Issuances of common stock upon the conversion of our convertible preferred stock and convertible debt and the exercise of our warrants will significantly dilute the interest of holders of our common stock. In addition, sales of these shares could depress the market price of our common stock.
We do not anticipate paying dividends in the foreseeable future, and the lack of dividends may have a negative effect on the stock price.
We currently intend to retain our future earnings to support operations and to finance expansion and, therefore, do not anticipate paying any cash dividends on our capital stock in the foreseeable future.
Item 2.
Item 2.
Properties
Our corporate headquarters are located in Toms River, New Jersey under a lease for approximately 4,500 square feet at ($12 per square foot per year) of office space expiring in January, 2011. We also maintain a technology facility in Centerville, Ohio that is currently a month to month lease at $520 per month.
We believe that our facilities are adequate and suitable for our current operations. To the extent that other space is required, we believe that such space is readily available.
Item 3.
Item 3.
Legal Proceedings
On March 27, 2009, we were served with a summons and a complaint in which we, our CEO Jason Gonzalez, our current Board members Robert Moe, Martin McFeely, Michael Ryan and Col. Jack Jacobs (ret.), and our former CFO Howard Herman were named as defendants in a suit filed by Mr. Jay Russ, IDS and the Russ & Russ PC Defined Benefit Pension Plan. In the complaint, which was filed in the United States District Court for the Eastern District of New York, the plaintiffs allege, among other things, misrepresentation, securities fraud and breach of duty by the defendants, pertaining to, among other things, our restatement of financial results for the periods ended August 31, 2007 and September 30, 2007, and the Asset Purchase. The Complaint also asserts claims regarding non-payment of amounts allegedly due to the plaintiffs pursuant to agreements entered into in connection with the Asset Purchase and the issuance of a note to Russ and Russ PC Defined Benefit Pension Plan. We believe that the plaintiffs’ claims regarding misrepresentation, securities fraud and breach of duty are entirely without merit and are vigorously defending against them. The plaintiffs seek compensatory and punitive damages in a number of their claims. If the plaintiffs succeed in any of their claims and obtain a judgment against us, payment of that judgment would have a material adverse effect on our financial condition and results of operations. The filing of this lawsuit, substantial reduces the likelihood of us ever receiving any return on our investment in our joint venture with IDS.
On January 2, 2010, in response to our motion, the Court in this matter issued an Order dismissing the securities claims in the Complaint on the grounds that the note issued to IDS was not a security. This also invalidated the jurisdiction of the Complaint as no federal subject matter remained, but Plaintiff was granted leave to amend to plead diversity jurisdiction. At the same time the Court ruled on Plaintiff’s motion to attach our and the named individual defendant’s New York assets. The Court denied the attachment of the individual defendant’s assets on the grounds that plaintiffs had not established the required probability of success, but granted the attachment against our assets on the grounds that a judgment on the claims for non-payment was probable. On April 9, 2009, that attachment was issued against our New York assets. It is our position that the attachment of our New York assets is not material to us, because we have no New York assets.
We have been named as the defendant in a number of lawsuits pertaining to vendor lines of credit which have gone beyond permitted amounts and terms. These suits seek judgment ranging in value from approximately $4,000 to $200,000. Only the largest of these individual lawsuits represents a substantial risk to our ongoing operations, but taken in whole they are likely to have a material adverse effect on our financial conditions and results of operations.
We are the Defendant in a lawsuit filed in New Hampshire by PC Connection, our former vendor. The complaint seeks approximately $30,000. The case is pending.
We are the Defendant in a lawsuit filed in California by Northern Video, our former vendor. The complaint seeks approximately $67,000. The case is pending.
We are the Defendant in a lawsuit filed in New Jersey by American Express, our former provider of charge card services. The complaint seeks approximately $80,000. The case is pending.
We are the Defendant in a lawsuit filed in New Jersey by Anixter, our former vendor. The complaint seeks approximately $120,000. The case is pending.
We are the Defendant in a lawsuit filed in New Jersey by CIT, our former provider of credit for the purchase of business management software. The complaint seeks approximately $120,000. The case is pending.
We are the Defendant in a lawsuit filed in New Jersey by ACIC, our former bonding company for government contract work for the East Brunswick, NJ Board of Education, Pleasantville, NJ Public Schools, and Raritan Valley Community College. The complaint seeks approximately $200,000. The case is pending.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is quoted on the OTC Bulletin Board under the symbol VMSY.OB. Prior to July 17, 2007, there was no trading in our common stock. The last sale price of our common stock on April 14, 2010 was $0.01. As of April 14, 2009, there were approximately 200 holders of record of our common stock.
We have not paid any dividends on our common stock and do not anticipate paying dividends in the foreseeable future. The terms of our 5% secured convertible debentures issued in November 2007 prohibit the payment of dividends.
The following table sets forth information with respect to the trading price of our common stock as reported by the OTC Bulletin Board during the years ended December 31, 2009 and 2008:
Issuance of Unregistered Equity Securities
Between July and December 2009 we issued an aggregate of $415,546 of 12% Convertible Notes. We relied upon the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, in connection with such issuances.
We issued an aggregate 61,400 shares of common stock at various times during the year ended December 31, 2009 upon the conversion of an aggregate 19 shares of our Series B Convertible Preferred Stock. In addition, during the year ended December 31, 2009 we issued an aggregate 43,800,000 shares of common stock upon the conversion of 87.6 shares of Series A Preferred Stock and an aggregate 12,650,000 shares of common stock upon the conversion of $126,500 of 12% Convertible Notes. We relied upon the exemption provided by Section 3(a)(9) of the Securities Act of 1933, as amended, in connection with such issuances.
Item 6.
Item 6.
Selected Financial Data
Not applicable, as we are a smaller reporting company
Item 7.
Item 7.
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. 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.
On April 3, 2008, we purchased substantially all the assets of 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 agreed to pay 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 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 a conversion price of $1.15 per share, which has subsequently been adjusted to $0.10 per share. We have agreed to register the shares issuable upon the conversion of the note for public resale.
In connection with the Asset Purchase, we entered into a four year consulting agreement with Jay Edmond Russ, the principal shareholder of IDS who served on our Board of Directors from the closing of the purchase in April 2008 until his resignation in December 2008, which requires us to pay Mr. Russ $75,000 per year for consulting services. See “Item 3. Legal Proceedings.”
In February 2010 our management proposed to our Board of Directors that we change our name from Visual Management Systems, Inc. to Intelligent Product Development Group, Inc. The Board approved the proposal, and we will be submitting the matter to a shareholder vote in the near future.
Results of Operations for the Years Ended December 31, 2009 and 2008
Net Revenues
Net revenues decreased approximately 3.8 million, or 60% to approximately $2.6 million during the year ended December 31, 2009 from approximately $6.4 million during the year ended December 31, 2008. The decrease is due to a reduction in our sales and marketing budget and manpower, and a reduced demand for our products and services resulting from the generalized slowdown in the economy.
Cost of Goods Sold
Total cost of goods sold decreased approximately $2.2 million, or 60% to approximately $1.4 million for the year ended December 31, 2009, from approximately $3.6 million during the year ended December 31, 2008. This decrease was primarily due to reduced revenues.
As a result, gross profit for the year ended December 31, 2009 decreased by about $1.6 million from $2.8 million to $1.2 million and gross profit as a percentage of revenue increased from 44.2% to 44.9% for the year ended December 31, 2009, as a result of improved material and labor costs as a percentage of revenue.
Operating Expenses
Operating expenses decreased approximately $5.3 million to $3.7 million for the year ended December 31, 2009, from approximately $9.0 million for the year ended December 31, 2008.
This decrease was primarily attributable to (i) wages and wage related costs decreased by approximately $2 million due to reduced headcount, (ii) investor relations costs decreased by approximately $0.8 million, (iii) other general and administrative costs such as rent, telecom, office and insurance decreased by approximately $0.7 million, (iv) liquidated damages expenses decreased by approximately $0.4 million and stock based compensation decreased by approximately $0.3 million and (v) software amortization as a result of an impairment of approximately $0.6 million in 2008 that did not recur in 2009 and (vii) auto and other expenses decreased by approximately $0.5 million.
Interest Expense
Interest expense for the year ended December 31, 2009 decreased by approximately $0.1 million to approximately $1.7 million, from approximately $1.8 million in the year ended December 31, 2008. The decrease was primarily the result of decreased interest on loans in default of approximately $0.8 million offset by increases due to (i) increased beneficial conversion features on convertible debt (approximately $0.4 million), (ii) increased interest expense due to the repricing of warrants issued to debt holders (approximately $0.2 million) and (iii) increased interest expense due to late payments to vendors and government agencies (approximately $0.1 million).
Income Tax Expense (Benefit)
We recorded a provision for federal, state and local income tax of approximately $5,000 and $4,000 for the years ended December 31, 2009 and 2008, respectively. This amount has been included in operating expenses for 2009 due to its insignificant size.
Net Income (Loss)
As a result of the items discussed above there was a net loss of approximately $4.1 million for the year ended December 31, 2009 compared with a net loss of approximately $7.9 million for the year ended December 31, 2008. In addition we recorded a deemed dividend on the issuance of preferred stock of approximately $5.4 million in 2009, which made the net loss applicable to common stockholders of approximately $9.5 million for the year ended December 31, 2009 as compared to approximately $7.9 million loss for the same period in 2008.
Liquidity and Capital Resources
General.
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 December 31, 2009, we had cash of $24,884, a working capital deficit of approximately $11.1 million, stockholders’ deficit of approximately $9.7 million, and an outstanding long term portion balance of approximately $0.1 million of debt. In comparison, at December 31, 2008, we had cash and equivalents of $16,186, a working capital deficit of approximately $9.5 million, and an outstanding long term portion balance for other debt of approximately $0.2 million. Our financial condition as of December 31, 2009, raises doubt as to our ability to continue our normal business operations as a going concern. Accordingly, our independent registered public accounting firm has modified their opinion on our financial statements for the year ended December 31, 2009, with a comment which raises substantial doubt about our ability to continue as a going concern.
Cash increased from $16,186 at December 31, 2008 to $24,884 at December 31, 2009, primarily as a result of approximately (i) $470,000 of cash used for operations, (ii) $11,500 of cash proceeds from sale of assets, (iii) repayment of short term notes and a bank line of credit of $34,000, (iv) repayment of $81,370 of long term debt and shareholder loan of $29,600, and (v) capital lease repayments of $7,330. This was offset by (i) proceeds form the sale of convertible preferred stock of approximately $429,190, (ii) proceeds from the issuance of short term convertible notes of $176,350, and (iii) net proceeds from a shareholder loan of $14,410.
Our continuation of existence is dependent upon the continued cooperation of our creditors, our ability to generate sufficient cash flow to meet our continuing obligations on a timely basis and fund our operating and capital needs, and our ability to obtain additional financing or implement other plans as may be necessary. If we are not able to raise additional capital or put into effect certain plans, we may be required to restructure, file for bankruptcy or cease operations.
Commitments and Contingencies.
Chase Loan
We are a party to a $50,000 term loan agreement with JPMorgan Chase Bank, N.A. which provides for interest at a rate of 8.5% per annum and which is payable in equal monthly installments through October 2013. As of December 31, 2009, $31,651 was outstanding under the loan agreement compared to $37,662 at December 31, 2008.
Chase Line of Credit
We are a party to a $50,000 line of credit with JPMorgan Chase Bank, N.A. which as of December 31, 2009 provided for interest at a rate of 4.75% per annum and which is payable in variable monthly installments. As of December 31, 2009, the outstanding balance on the line of credit was $45,283, which automatically renews every year until paid in full. At December 31, 2008, the outstanding balance was $49,981.
Auto Loans
We had $185,415 in principal balance on auto loans outstanding as of December 31, 2009, as compared to $297,324 at December 31, 2008. These loans, which bear interest at rates ranging from 3.9% to 8.69%, mature at various dates through November 2012.
Capital Leases
We entered into capital leases in the ordinary course of business for office equipment and computer software, and other equipment. The outstanding amount due for leased equipment as of December 31, 2009 was $105,889 as compared to $123,712 at December 31, 2008.
Loan from Former Chief Operating Officer
In 2008 Caroline Gonzalez our former Chief Operating Officer, and the wife of our Chief Executive Officer loaned us $97,420 via extension of lines of credit on personal credit cards issued to her by traditional unsecured consumer credit providers. Since the date of the loan we have been making monthly payments pursuant to the relevant card terms, which include interest rates ranging from 9.49% to 27.99%. As of December 31, 2009 the outstanding balance on these accounts was $63,111 as compared to $80,361 at December 31, 2008.
Original Issue Discount Notes
Between April and September 2008, we issued a series of original issue discount notes to individual investors. These notes totaled $499,450 in face value, and yielded net proceeds to us of $414,950 after fees paid to consultants and placement agents. $99,450 in total face value of the OID Notes was retired via payments to the holders made in June 2008 and October 2008. $250,000 in total face value of the OID notes was retired via conversion into $229,046 of 12% one-year convertible notes (which included accrued and unpaid interest) and cash payments of $29,500. The remaining $150,000 in total face value of OID notes remain unpaid, and are past due. At December 31, 2008, the face value of these notes was $400,000 and an unamortized discount of $15,167.
November 2007 Debentures
On November 30, 2007, we entered into a securities purchase agreement with three affiliated institutional investors for the sale of original issue discount 5% senior secured convertible debentures and common stock purchase warrants. We refer to this transaction as our November 2007 Private Placement. In this transaction, we 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 our common stock. The warrants expire in November 2014 and initially had an exercise price of $1.15 per share, subject to adjustment, including full ratchet anti-dilution protection.
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:
- 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;
- 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;
- 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;
- 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:
- Our 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 Company’s 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.
- 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.
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.
IDS Asset Purchase Convertible Note
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 December 31, 2009, $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. See “Item 3. Legal Proceedings.”
Promissory Note
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 Company’s 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. See “Item 3. Legal Proceedings.”
Recent Financing Activity
Equity Financing
Throughout 2009, we issued 500 shares of Series B Convertible Preferred Stock to accredited investors for an aggregate purchase price of $500,000. We received net proceeds of $429,188 as a result of the offering. Each Series B convertible preferred share bears a stated value of $1,000 and is convertible into shares of our common stock at a rate of $0.005 per share. As part of the offering placement agents received 14,583 shares of our common stock, and warrants to purchase 6,830,000 shares of our common stock at a range of exercise prices from $0.04 to $0.12, with those exercise prices determined by the then market of price of our common stock on the date of closing. As a result of the issuance we accrued a deemed dividend of approximately $500,000.
Debt Financing
We issued a total of $415,546 of 12% Convertible Notes throughout 2009. Each 12% Convertible Note is convertible into shares of our common stock at a rate of $0.01 per share. The issuance of the 12% Convertible Notes took place as follows:
•
between July through December, we issued an aggregate of $106,500 of 12% Convertible Notes to a number of investors. We received net proceeds of $96,350, as a result of the offering. As part of the offering placement agents received warrants to purchase 50,000 shares of our common stock at an exercise price of $0.04, determined by the then market price of our common stock on the date of closing.
•
between August and November 2009, we issued $229,046 of 12% Convertible Notes in exchange for Original Discount Notes previously issued by us in 2008 with aggregate principal plus accrued and unpaid interest of $229,046.
•
during the fourth quarter of 2009, we issued $80,000 of 12% Convertible Notes for investment banking services.
Item 8.
Item 8.
Financial Statements and Supplementary Data
The financial statements called for by this item are set forth herein commencing on page of this report.
Item 9.
Item 9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A.
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 Annual Report on Form 10-K, 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 of and with the participation of our management, including our 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 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 Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
The evaluation made by our Chief Executive Officer and Chief Financial Officer of our disclosure controls and procedures included a review of the controls’ objectives and design, our implementation, and the effect of the controls on the information generated for use in this annual report and previous reports to the Commission. In the course of the evaluation, we 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 our disclosure controls and procedures and to make modifications as necessary. Our 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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2009.
Management’s 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 generally accepted accounting principles (“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 our transactions and dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded
as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our 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 our annual or interim financial statements will not be prevented or detected on a timely basis.
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer identified a number of material weaknesses in our internal control over financial reporting. These material weaknesses included:
-
A lack of sufficient resources and an insufficient level of monitoring and oversight, which restricts our 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.
-
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, we have concluded that, as of December 31, 2009, our internal control over financial reporting was not effective.
Remediation of Material Weaknesses
We intend 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 our cash flow constraints, the timing of implementing the above has not yet been determined, and may not be possible.
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.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2009, except that due to cash flow constraints, the size of the accounting department was reduced and as a result, the formal monthly closing schedules could not be followed.
Sobel & Company was not required to and did not perform a review of our internal controls over financial reporting.
Item 10.
Item 10.
Directors, Executive Officers, and Corporate Governance
The following table sets forth information regarding the members of our Board of Directors and our executive officers. The directors listed below will serve until the next annual meeting of the Company’s stockholders.
Jason Gonzalez is our founder and has been involved in the security industry for five years. Prior to launching Visual Management Systems, Inc. he served as Chief Operating Officer for Infinite Sales, Inc., a wholly owned subsidiary of Freedom Systems, Inc., a leading distributor of DVRs in the United States. Mr. Jason Gonzalez was at Freedom Systems, Inc. from February 2002 until August 2003. Before his appointment to Chief Operating Officer, Mr. Gonzalez served in various capacities for Freedom Systems, Inc. in sales and sales management. Prior thereto he was employed by Merrill Lynch as a vetting manager in ML Direct technology banking. He also worked for Olde, and William R. Hough & Co. as a registered representative, general and municipal securities principal. Mr. Gonzalez graduated from Embry-Riddle Aeronautical University where he earned a BS in Aviation Business Administration. He completed an additional 20 credits in Aeronautical Science and Aerospace Engineering. Mr. Gonzalez is a graduate of the SIA Securities Industry Institute. Mr. Gonzalez and Caroline Gonzalez are husband and wife.
Michael Ryan joined our Board of Directors in July 2007 and has spent over 20 years in the security industry. He owns and operates Fire Code Services, a New Jersey based fire protection systems and services business. Fire Code Services provides fire safety equipment to skyscrapers throughout New York City and New Jersey.
Colonel Jack Jacobs U.S. Army (Retired), who joined our Board of Directors in July 2007, earned the Medal of Honor for exceptional heroism on the battlefields of Vietnam. He also holds three Bronze Stars and two Silver Stars. Colonel Jacobs served on the faculty of the U.S. Military Academy at West Point and the National War College in Washington, D.C. After retirement, he founded and was chief operating officer of Auto Finance Group. He has served as a managing director of Bankers Trust Co. and later co-founded an investment management business for Lehman Brothers. He is a member of the Council on Foreign Relations and is a director of the Medal of Honor Foundation. Colonel Jacobs currently serves as a military analyst for NBC/MSNBC.
Martin McFeely, who joined our Board of Directors in July 2007, has served as Chief Financial Officer of Quick Service Management, the parent company of El Rancho Foods, which operates approximately 89 Taco Bell and other franchises.
Robert Moe, who joined our Board of Directors in July 2007, is the founder and chief executive officer of RAM Capital Corp., an investment banking firm specializing in providing industry specific financial and operational advisory services to companies seeking to implement and finance high growth strategies.
William Malenbaum, who joined our board in January 2009, has more than 50 years of accounting experience with concentrations in cost accounting and credit management as well as sales and sales management. Mr. Malenbaum is retired, but has remained active in a variety of consulting capacities since 2000.
James (J.D.) Gardner, was appointed as our Chief Financial Officer in June 2008. From April 2008 until his appointment as Chief Financial Officer, he served as a consultant to our finance and accounting department. From May 2005 to February 2008, Mr. Gardner served as
Chief Financial Officer and Chief Operating Officer of Amedia Networks, Inc., a publicly held company engaged in developing next generation ultra broadband switched Ethernet home gateways and home networking solutions for voice video and data services. From January 2005 through May 2005, Mr. Gardner served as Chief Operating Officer of dotPhoto, a private company engaged in on-line photo processing and wireless application development for cellular telephones. From January 2002 through April 2004, Mr. Gardner served as Chief Executive Officer of Comstar Interactive, a private company engaged in the wireless credit card processing field. He has also held the position of Chief Financial Officer of BellSouth Wireless Data (renamed Cingular Interactive (May 1999 through November 2001), and as chief financial officer of BellSouth Mobile Data (November 1995 through May 1999) and chief financial officer of RAM/BSE Communications L.P. from 1991 through 1995, with all companies involved in the provision of wireless packet data networks and services, principally in the US and Europe. Mr. Gardner also held several other senior executive positions at BellSouth and AT&T in the areas of Financial Management, Domestic and International corporate finance, issuing debt and equity and the related rating agency and investment banking interfaces, shareholder relations and a number of other treasury, accounting and finance positions.
W. Geoffrey Martin was hired to serve as our General Counsel in November 2007, and became our Chief Operating Officer in November 2009. Mr. Martin is admitted to the bar of the State of Illinois, and as in-house counsel in the State of New Jersey and from January 2006 until his hiring, operated his own law firm specializing in commercial litigation. Mr. Martin received his Juris Doctorate from the University of Illinois in 2005, and graduated from the University of Illinois in May 1999. Mr. Martin has extensive financial services experience and served as a financial product designer for US Bancorp in 2002 and as both a project manager for financial software development and as an Assistant Vice President for business development and marketing for Merrill Lynch from June 1999 until September 2001.
Jonathan Bergman joined Visual Management Systems, Inc. in September 2003 as Vice President-Marketing and Sales. From 2001 to August 2003, he served in various capacities for Freedom Systems, Inc, including Loss Prevention Consultant, Area Manager and Regional Manager. From 1996 to 2001, Mr. Bergman served as a General Manager and the Director of Food and Beverage Operations for Inn America Hospitality. Prior thereto he owned and operated Advantage Building Maintenance, a general building services contractor. Mr. Bergman attended NY City Technical College and Florida International University and earned his AS in Business Management and his BS in Hospitality/Business Management.
Our Audit Committee consists of Michael Ryan and Marty McFeely. Our Board of Directors has assigned Mr. McFeely as the Audit Committee’s financial expert. Mr. McFeely is not considered independent under the rules of the American Stock Exchange.
We have adopted a code of conduct that applies to all of our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer, and other senior financial advisors. Our Code of Conduct is posted at www.vmscctv.com..
Item 11.
Item 11.
Executive Compensation
Executive Compensation
The following table sets forth information concerning the annual and long-term compensation for services in all capacities to Visual Management Systems, Inc. for the years ended December 31, 2009 and 2008 of the Chief Executive Officer and each other executive officer whose total annual contracted-for compensation for the year ended December 31, 2009 exceeded $100,000 (the “named executive officers”). No other executive officer’s contracted-for annual salary and bonus for the year ended December 31, 2009 exceeded $100,000.
(1)
The Chief Executive Officer and each other executive officer have agreed to defer receipt of their full salary until Visual Management Systems, Inc.’s financial performance improves. The sums detailed in the Salary column for 2009 represent the actual amounts paid in compensation to each officer. Salaries accrued but not paid for 2009 are as follows: Mr. Gonzalez $93,793; Mr. Bergman $60,018; Mr. Martin $47,966; and Mr. Gardner $3,577. The sums detailed in the Salary column for 2008 represent the actual amounts paid in compensation to each officer. Salaries accrued but not paid for 2008 are as follows: Mr. Gonzalez $56,793; Mr. Bergman $28,154; Mr. Martin $30,099; and Mr. Gardner 18,207.
(2)
On June 12, 2008, the purchase price of Mr. Bergman’s option to purchase 225,000 shares of Visual Management Systems, Inc. common stock was adjusted from $1.25 to $0.40. The fair value of the re-priced options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: dividend yield of 0%; expected volatility of
120%; risk free rate of return of 4.1%; and expected life of 10 years. The difference in the weighted average fair value of these options was $0.05 per share.
(3)
On June 12, 2008, Mr. Martin was granted an option to purchase 125,000 shares of Visual Management Systems, Inc. common stock. Options with respect to 62,500 shares vested on the one year anniversary of the date of grant and options with respect to the remaining 62,500 shares are scheduled to vest on the two year anniversary of the date of grant. The options have a term of ten years and an exercise price of $0.40 per share. The fair value of the options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: dividend yield of 0%; expected volatility of 120%; risk free rate of return of 4.1%; and expected life of 10 years. The weighted average fair value of these options was $0.38 per share.
(4)
On June 12, 2008, Mr. Gardner was granted an option to purchase 125,000 shares of Visual Management Systems, Inc. common stock. Options with respect to 62,500 shares vested on the one year anniversary of the date of grant and options with respect to the remaining 62,500 shares are scheduled to vest on the two year anniversary of the date of grant. The options have a term of ten years and an exercise price of $0.40 per share. The fair value of the options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: dividend yield of 0%; expected volatility of 120%; risk free rate of return of 4.1%; and expected life of 10 years. The weighted average fair value of these options was $0.38 per share.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information about all equity compensation awards held by the named executive officers as of December 31, 2009.
OUTSTANDING EQUITY AWARDS
(1)
Reflects date that options to purchase shares of Visual Management Systems, Inc. were issued or reissued to adjust the exercise price of a previous issuance.
(2)
Mr. Bergman was issued options to acquire 225,000 shares of our common stock having an exercise price of $2.50 per share in exchange for the options to acquire Visual Management Systems Holding, Inc.
common stock upon the completion of our acquisition of Visual Management Systems Holding, Inc. On June 12, 2008, the purchase price of Mr. Bergman’s option to purchase 225,000 shares of our common stock was adjusted from $2.50 to $0.40. The fair value of the re-priced options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: dividend yield of 0%; expected volatility of 120%; risk free rate of return of 4.1%; and expected life of 10 years. The difference in the weighted average fair value of these options was $0.05 per share
(3)
On June 5, 2008, Mr. Martin was granted an option to purchase 125,000 shares of Visual Management Systems, Inc. common stock. Options with respect to 62,500 shares vest on the one year anniversary of the date of grant and options with respect to the remaining 62,500 shares are scheduled to vest on the two year anniversary of the date of grant. The options have a term of ten years and an exercise price of $0.40 per share. The fair value of the options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: dividend yield of 0%; expected volatility of 120%; risk free rate of return of 4.1%; and expected life of 10 years. The weighted average fair value of these options was $0.38 per share.
(4)
On June 5, 2008, Mr. Gardner was granted an option to purchase 125,000 shares of Visual Management Systems, Inc. common stock. Options with respect to 62,500 shares vest on the one year anniversary of the date of grant and options with respect to the remaining 62,500 shares are scheduled to vest on the two year anniversary of the date of grant. The options ha\ve a term of ten years and an exercise price of $0.40 per share. The fair value of the options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used: dividend yield of 0%; expected volatility of 120%; risk free rate of return of 4.1%; and expected life of 10 years. The weighted average fair value of these options was $0.38 per share.
Securities Authorized for Issuance under Equity Compensation Plans
We adopted an Equity Incentive Plan in connection with our acquisition of Visual Management Systems Holding, Inc. Following is a summary of the material terms of our Equity Incentive Plan.
The purpose of the plan is to allow our employees, directors and consultants to participate in our growth and to generate an increased incentive for these persons to contribute to our future success and prosperity and to focus on its growth. Employees, directors and consultants are all eligible to receive awards under the plan. The plan is administered by the Compensation Committee of our Board of Directors. The Compensation Committee is authorized to grant:
•
Incentive stock options within the meaning of Section 422 of the Internal Revenue Code
•
Nonqualified stock options
•
Stock appreciation rights
•
Restricted stock grants
•
Deferred stock awards
•
Other stock based awards to employees of our Company and our subsidiaries and other persons and entities who, in the opinion of the Board of Directors, are in a position to make a significant contribution to the success of our Company and our subsidiaries.
The Compensation Committee has the power to determine the terms of any awards granted under our Equity Incentive Plan, including the exercise price, the number of shares subject to the award and conditions of exercise. Awards granted under our Equity Incentive Plan are generally not transferable. The exercise price of all incentive stock options granted under our Equity Incentive Plan must be at least equal to the fair market value of the shares of common stock on the date of the grant. A total of 2,088,126 shares of our common stock have been reserved for issuance under our Equity Incentive Plan.
As of December 31, 2009, the number of stock options outstanding under our Equity Incentive Plan, the weighted-average exercise price of outstanding stock options, and the number of securities remaining available for issuance, was as follows:
EQUITY COMPENSATION PLAN TABLE
Executive Officer Employment Agreements
Due to our financial situation affecting the Company, all executive officers have been notified that their current employment agreements
which expired between March and April 2010 have not been extended, and that said officers shall be retained as at-will employees at their current pay and benefit level subject to negotiation of new employment agreements expected to occur before the end of May 2010.
Director Compensation
We did not pay any of our directors any compensation for serving as directors during 2009.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the number of shares of our common stock beneficially owned on April 13, 2010, by each person who we know to beneficially own 5% or more of the 146,112,526 shares of our currently outstanding common stock, each of our directors and executive officers, and all of our directors and executive officers, as a group. Except as indicated in the notes to the table, each of such stockholders maintains a business address at our headquarters at 1000 Industrial Way North, Suite C, Toms River, New Jersey 08755:
of convertible preferred stock owned by the named individual.
(4) Does not include 650,052,079 shares of our common stock acquirable upon the conversion of debentures (assuming the minimum conversion price) and exercise of warrants held by the stockholder or its affiliates as described in the paragraph below, all of which are subject to conversion or exercise caps. Pursuant to the terms of the debentures and warrants referred to in the paragraph below, the number of shares of our common stock that may be acquired by the stockholder upon any conversion of the debentures is limited, to the extent necessary, to ensure that following such conversion, the number of shares of our common stock then beneficially owned by the stockholder and any other person or entities whose beneficial ownership of common stock would be aggregated with the stockholder for purposes of the Exchange Act does not exceed 9.99% of the total number of shares of our common stock then outstanding. All of the Warrants held by the stockholder also include similar caps on the stockholder’s right to acquire shares of our common stock upon exercise of such warrants. Accordingly, in light of the beneficial ownership cap, the aforementioned entities are entitled to acquire in the aggregate 14,596,641 shares of our common stock.
This stockholder and its affiliates hold the following securities: (i) $3,587,159 principal amount original issue discount 5% secured convertible debenture acquired by Enable Growth Partners LP (“EGP”), an affiliate of Enable Opportunity Partners LP (“EOP”) and Pierce Diversified Strategy Master Fund LLC, ena. (“Pierce”), on November 30, 2007; (ii) an immediately exercisable warrant to purchase 9,882,000 shares of our common stock at $0.12 per share held by EGP; (iii) $398,573 principal amount original issue discount 5% secured convertible debenture acquired by EOP, an affiliate of EGP and Pierce, on November 30, 2007; (iv) an immediately exercisable warrant to purchase 1,098,000 shares of our common stock at $0.12 per share held by EOP; (v) $98,010 principal amount original issue discount 5% convertible debenture acquired by Pierce, an affiliate of EOP and EGP, on November 30, 2007; and (vi) an immediately exercisable warrant to purchase 270,000 shares of our common stock at $0.12 per share held by Pierce. Brendan O’Neil is the Chief Investment Officer of each of EGP, EOP and Pierce and, as such, has the power to direct the vote and disposition of these shares. Mr. O’Neil disclaims beneficial ownership of these shares.
Each of EGP, EOP and Pierce may be contacted at One Ferry Building Ste. 225, San Francisco, California.
(5) Less than one percent.
Item 13.
Item 13.
Certain Relationships and Related Transactions
In 2008 Caroline Gonzalez our former Chief Operating Officer, and the wife of our Chief Executive Officer loaned us $97,420 via extension of lines of credit on personal credit cards issued to her by traditional unsecured consumer credit providers. Since the date of the loan we have been making monthly payments pursuant to the relevant card terms, which include interest rates ranging from 9.49% to 27.99%. As of December 31, 2009 the outstanding balance on these accounts was $63,111.
Under the terms of our Audit Committee Charter, any proposed transaction between us and a related party is subject to review and approval of the Audit Committee.
Marty McFeely, a member of our board of directors, is Chief Financial Officer of El Rancho Foods, a customer of ours. For the years ending December 31, 2009 and December 31, 2008 El Rancho Foods accounted for company revenue of $165,149 and $72,145 respectively.
Each of Michael Ryan, Col. Jack Jacobs, William Malenbaum and Robert Moe qualifies as an independent director under the standards of the American Stock Exchange. Jason Gonzalez and Marty McFeely are not considered independent under the same standard.
The following table sets forth the details of the purchases of shares of our Series B Convertible Preferred Stock made by our officers and members of our board of directors as part of our 2009 offering.
(1)
Includes purchases by Caroline Gonzalez, our former Chief Operating Officer, and the wife of our Chief Executive Officer Jason Gonzalez
(2)
Includes purchases by Elizabeth May, the wife of our director Michael Ryan
Item 14.
Item 14.
Principal Accounting Fees and Services
The following table sets forth the aggregate fees billed to us by Sobel & Co. LLC, our independent auditors for 2009 and 2008.
Audit fees represent amounts billed for professional services rendered for the audit of our annual financial statements and the reviews of our financial statements included in our Forms 10-Q and Forms 8-K filed during the year ended December 31, 2009 and 2008. Before Sobel & Co. LLC was engaged by us to render its audit services, the engagement was approved by the Audit Committee of our Board of Directors.
We did not incur any fees associated with non-audit services to Sobel & Co., LLC relating to the years ended December 31, 2009 and December 31, 2008.
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
Reference is made to the Index of Exhibits beginning on page E-1 herein.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 2010
/s/ William Malenbaum
Name:
William Malenbaum
Title:
Director
Visual Management Systems, Inc. and Subsidiaries
Consolidated Financial Statements
Contents
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the Years Ended December 31, 2009 and 2008
Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2009 and 2008
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009 and 2008
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders
Visual Management Systems, Inc. and Subsidiaries
Toms River, New Jersey
We have audited the accompanying consolidated balance sheets of Visual Management Systems Inc. and Subsidiaries (the “Company”), as of December 31, 2009 and 2008, and the related consolidated statements of operations and stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Visual Management Systems, Inc. and Subsidiaries at December 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations; the Company has experienced a deficiency of cash from operations and lacks sufficient liquidity to continue its operations. These matters raise substantial doubt as to the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
April 15, 2010
Livingston, New Jersey
Visual Management Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2009 and 2008
See report of independent registered public accounting firm and notes to consolidated financial statements.
Visual Management Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31, 2009 and 2008
See report of independent registered public accounting firm and notes to consolidated financial statements.
Visual Management Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholder’s Equity (Deficiency)
See report of independent registered public accounting firm and notes to consolidated financial statements.
Visual Management Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31, 2009 and 2008
See report of independent registered public accounting firm and notes to consolidated financial statements.
See report of independent registered public accounting firm and notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation and Description of Business Operations
The accompanying consolidated financial statements have been prepared in accordance with the requirements of Form 10-K 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”.
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.
On July 17, 2007, Visual Management Systems, Inc. (formerly Wildon Productions Inc.) acquired all of the outstanding capital stock of Visual Management Systems Holding, Inc. in connection with the merger of its wholly-owned subsidiary with and into Visual Management Systems Holding, Inc. In connection with the merger, Wildon Productions Inc. changed its name to Visual Management Systems, Inc., effected a 1 for 7 reverse stock split (which has been reflected throughout the financial statements and notes thereto) and the former shareholders of Visual Management Systems Holding, Inc. received shares of common stock representing approximately 76.5% of Visual Management Systems, Inc.’s outstanding common stock after giving effect to the merger and the cancellation of 476,428 shares of common stock that were surrendered by a shareholder for cancellation at or about the time of the merger. The transaction described above was accounted for as a reverse merger (recapitalization) with Visual Management Systems Holding, Inc. being deemed the accounting acquirer and Visual Management Systems, Inc. (formerly Wildon Productions Inc.) being deemed the legal acquirer. Accordingly, the historical financial information presented in the financial statements is that of Visual Management Systems Holding, Inc. and its subsidiaries for periods prior to the merger and of the consolidated entities from the date of the merger and thereafter. The basis of the assets and liabilities of Visual Management Systems Holding, Inc., the accounting acquirer, has been carried over in the recapitalization, and the financial statements have been adjusted to give effect to any difference in the par value of the issuer’s and the accounting acquirer’s stock with an offset to additional paid in capital.
Note 2. Going Concern and Management’s Plan
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred significant operating losses for the past several years, the majority of which are related to the funding of expansion of the business at the expense of short term profitability. These losses have produced operating cash flow deficiencies, and negative working capital. As indicated in the accompanying consolidated financial statements, as of and for the year ended December 31, 2009 and 2008, the Company had cash balances of $24,884 and $16,186, incurred a loss from operations of approximately $2.5 million and $6.2 million and a net loss applicable to common stockholders of approximately $9.5 million and $7.9 million, respectively. The Company may
incur additional losses for the foreseeable future and will likely need to raise additional funds in order to realize its business plan. These conditions raise substantial doubt about the Company’s ability to continue as a going concern as currently conceived. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company funded its operations during 2009 with the proceeds of the various financings it pursued during the year. These included the issuance of Series B Convertible Preferred Stock yielding net proceeds of $429,188 and the issuance of convertible notes yielding net proceeds of $176,350.
The Company’s ability to continue in business depends upon the continued cooperation of our creditors, our ability to generate cash flow to meet our continuing obligations on a timely basis, our ability to further reduce costs and our ability to obtain additional financing. Current liabilities at December 31, 2009 were approximately $11.3 million and current assets were approximately $0.2 million. The difference of approximately $11.1 million is a working capital deficit, which is primarily the result of current debt obligations and amounts due vendors. At December 31, 2009, the Company was delinquent with respect to approximately $3,200,000 of scheduled payments due under outstanding promissory notes and debentures, and the holders of these instruments have the right to demand payment of an aggregate of approximately $7,200,000. At December 31, 2009 the Company was also delinquent approximately $76,000 in federal payroll taxes, approximately $35,000 in state payroll taxes, approximately $145,000 in state sales taxes and approximately $87,000 in obligations to employee retirement accounts. Management can give no assurance that the Company will raise sufficient capital to eliminate our working capital deficit or that our creditors or any government entity will not seek to enforce their remedies against us, which include the imposition of insolvency proceedings. See “Note 16. Legal Proceedings.”
The Company’s future operations pursuant it to its ongoing business plan are dependent upon management’s ability to either generate sufficient cash flow in excess of the items necessary to maintain operations as detailed above or find sources of additional capital. The Company needs to raise additional further financing to continue to develop its proprietary technology, and re-establish and grow its sales force. Without the money to fund these components of the business the Company’s competitive position may never mature to a point where the business plan will be attainable, and further retrenchment of management’s plans may be necessary. If the Company is unsuccessful in obtaining such profitability, raising funds or additionally curtailing expenses, the Company may be required to cease operations or file for bankruptcy.
Note 3. Significant Accounting Principles
Significant accounting policies followed by Visual Management Systems, Inc. and its wholly-owned subsidiaries in the preparation of the accompanying consolidated financial statements are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of Visual Management Systems, Inc. and its wholly owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include those that relate to the software, potential litigation and the estimated forfeitures of stock based compensation. It is reasonably possible that these estimates will change in the near term and such changes may be material.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance on accounting standards codification and the hierarchy of generally accepted accounting principles.” The FASB Accounting Standards Codification™ (“Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the Securities Exchange Commission (“SEC”) issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. The FASB authoritative guidance is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with the Company’s quarter ending September 30, 2009, all references made by it to GAAP in its consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it does not have an impact on the Company’s financial position, results of operations and cash flows.
In January 2010, the FASB issued accounting standards update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)-Improving Disclosures about Fair Value Measurements (ASU No. 2010-06). ASU No. 2010-06 requires: (1) fair value disclosures of assets and liabilities by class; (2) disclosures about significant transfers in and out of Levels 1 and 2 on the fair value hierarchy, in addition to Level 3; (3) purchases, sales, issuances and settlements be disclosed on gross basis on the reconciliation of beginning and ending balances of Level 3 assets and liabilities; and (4) disclosures about valuation methods and inputs used to measure the fair value of Level 2 assets and liabilities. ASU No. 2010-06 becomes effective for the first financial reporting period beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements of Level 3 assets and liabilities which will be effective for fiscal years beginning after December 15, 2010. We are currently assessing what impact, if any, ASU No. 2010-06 will have on our fair value disclosures; however, we do not expect the adoption of the guidance provided in this codification update to have any material impact on our consolidated financial statements.
In October 2009, the Financial Accounting Standards Board issued Accounting Standards Update 2009-13, “Revenue Recognition (Topic 605) Multiple- Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 amends existing accounting guidance for separating consideration in multiple-deliverable arrangements. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor specific evidence is not available, or estimated selling price if neither vendor-specific evidence nor third-party evidence is available. ASU 2009-13 eliminates residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the “relative selling price method.” The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. ASU 2009-13 requires that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a stand-alone basis. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. We have not yet determined the impact of the adoption of ASU 2009-13 on our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements
Net Income (Loss) Per Share
ASC Topic 260 (formerly Statement of Financial Accounting Standards (SFAS) No. 128) “Earnings Per Share” requires presentation of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. These potentially dilutive securities were not included in the calculation of loss per share for the years ended December 31, 2009 and 2008, because the Company incurred a loss during such periods and thus their effect would have been anti-dilutive. Accordingly, basic and diluted loss per share is the same for year ended December 31, 2009 and 2008. Potentially dilutive securities consisted of outstanding warrants and stock options to acquire an aggregate of 20,024,963 and 14,553,463 shares of common stock, convertible preferred stock of 211,621,457 and 3,262,500, and convertible debt of 85,182,020 and 10,714,130, at December 31, 2009 and 2008, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash balances and trade receivables. Throughout the year the Company maintains cash balances in excess of insured limits. The Company does not require collateral from its customers.
Property and Equipment
Property and equipment are stated at cost. Depreciation charges with respect to property and equipment have been made by the Company using straight line and declining balances based on the following estimated useful lives:
Estimated Classification Life (Years)
Computer hardware and software 5 - 7
Furniture and fixtures 7
Machinery and equipment 5 - 7
Vehicles 5
Leasehold improvements - Shorter of useful life or life of lease
Expenditures for repairs and maintenance are charged to operations as incurred. Expenditures for betterments and major renewals greater than $1,000 are capitalized and, therefore, are included in property and equipment.
Intangible Assets
Intangible assets acquired by the Company in connection with its acquisition of certain assets of Intelligent Digital Systems, LLC (“IDS”) 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, by FASB ASC 350-35-28. The company performed a review of the fair value of the intangible assets at year end 2009 and determined no adjustments were required to reflect fair value at December 31, 2009.
The fair value hierarchy defines three levels of fair value measurement as follows:
Level 1: Valuations based on quoted prices (unadjusted) in an active market that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in inactive markets; or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated with observable market data.
Level 3: Valuations based on unobservable inputs are used when little or no market is available. The fair value hierarchy gives lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considers counterparty credit risk (or other parties such as counterparty in a swap) in its assessment of fair value
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:
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%.
Capitalized Software Development Costs
Capitalization of computer software development costs begins upon the establishment of technological feasibility, as defined in FASB ASC 985-20-25. 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 December 31, 2009, the Company has capitalized approximately $180,000 of software development costs relating to new products, which was all capitalized during 2008, none in 2009.
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. The Company determined that the Hybrid DVR software products under development were generally available to customers and as a result, amortization charges began during the first quarter of 2009. During 2009, amortization charges totaled approximately $36,000 and were charged to cost of goods sold. There were no amortization charges during 2008.
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.
Revenue Recognition
The Company generates revenues from the sale and installation of remote management loss prevention systems, and the distribution of equipment relevant to that business. Revenue is recognized at the time of the installation or for distributed products, when products have been shipped, risk of loss and title to the product transfers to the customer, the selling price is fixed and determinable and collectability is reasonably assured.
Warranty Reserve
The Company’s products are warranted against defects for twelve months following sale. The product manufacturer’s warranty is for the same 12 months. The Company reserves only for service costs incurred when performing warranty work. Costs incurred for warranty work is expensed in the period that the work is performed. Reserves for potential warranty claims are booked at the end of each quarter and based on the number of return calls to a customer for warranty work. The reserve is based on several factors including historical sales levels and the Company’s estimate of repair costs. Warranty reserves are made for a quarter, as that is the longest length of time it takes to effect repairs to items under warranty.
Advertising
Advertising costs are expensed as incurred and approximated $0 and $30,600 for the years ended December 31, 2009 and 2008 respectively.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes pursuant to FASB ASC 740 Accounting for Income Taxes (Prior authoritative literature FASB SFAS No. 109, Accounting for Income Taxes (“SFAS 109”)), which requires the recognition of deferred tax assets and liabilities for both the expected future tax impact of differences between the financial statement and tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. FASB ASC 740 (SFAS 109) additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. We have reported net operating losses for consecutive years, and do not have projected taxable income in the near future. This significant evidence causes our management to believe a full valuation allowance should be recorded against the deferred tax assets.
Equity Based Compensation
Share-based compensation is accounted for using the fair value method in accordance with the Accounting Standards Codification (“ASC”) Topic 718 (formerly SFAS 123R) “Compensation - Stock Compensation”. Under these provisions, we recognize share-based compensation net of an estimated forfeiture rate; therefore, we only recognize compensation cost for those shares expected to vest over the requisite service period of the award (i.e., the period in which the share-based compensation is earned). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model based on the underlying common stock closing price as of the date of grant, the expected term, expected stock price volatility, and expected risk-free interest rates.
Calculating share-based compensation expense requires the input of highly subjective assumptions which include the expected term of the share-based awards, expected stock price volatility, and expected pre-vesting option forfeitures. We estimate the expected life of options granted based on historical experience which we believe is representative of future behavior. We estimate the volatility of the price of our common stock at the date of grant based on historical volatility of the price of our common stock for a period equal to the expected term of the awards. We have used historical volatility due to the limited number of options traded on our common stock to support the use of an implied volatility or a combination of both historical and implied volatility.
The assumptions used in calculating the fair value of share-based awards represent our best estimates; however, these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our share-based awards that are granted, exercised and cancelled. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period.
Note 4. Accounts Receivable
Accounts receivable are uncollateralized customer obligations due under normal trade terms, ordinarily requiring payment within 30 days from the invoice date. Interest is not charged on unpaid receivables with invoice dates over 30 days old, though we are permitted under the terms of our existing contracts and invoices to do so.
Accounts receivable are stated in the amount billed to the customer. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
Trade receivables are presented on the balance sheet as outstanding amounts net of any allowance for bad debts. The Company maintains an allowance for doubtful receivables based primarily on historical loss experience. Additional amounts are provided through charges to income, as management feels necessary, after evaluation of receivables and current economic conditions. Amounts which are considered to be uncollectible are charged off and recoveries of amounts previously charged off are credited to the allowance upon recovery.
The Company established an allowance account for amounts deemed uncollectible and for anticipated credits. Such allowance amounted to $4,657 at December 31, 2009 and $ 58,302 at December 31, 2008.
Note 5. Inventory
Inventory, which consists of digital video recorders, 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. Currently the Company has no inventory reserve. It purchases the majority of its inventory for specific jobs, maintain approximately two months of inventory at any one time, and turn inventory six times a year. Operationally the Company does not allow its inventory to become obsolete, and in the rare case that an item becomes slightly aged, it has the ability to rework the item to realize a sale.
The Company’s inventory consisted of a total of approximately $46,460, (approximately $20,000 of raw materials and $26,460 of finished goods) at December 31, 2009, as compared to a total of $340,650, ($73,000 of raw materials and $267,650 of finished goods) at December 31, 2008.
Note 6. Property and Equipment
The major classifications of the Company’s property and equipment at December 31, 2009 and December 31, 2008 are as follow:
Note 7. Capitalized Leases
Future minimum lease payments under non-cancelable capital lease obligations at December 31, 2009 were as follows. All equipment leases are currently in default.
Note 8. Deferred Financing Costs
Costs associated with debt financing arrangements are capitalized and on a straight line basis over the life of the respective debt.
The following represents the Company’s deferred financing costs:
Deferred financing cost additions of approximately $12,000 and $27,000 in 2009 and 2008 respectively, were for the costs associated with the issuance of debt, and are being amortized over a 12 month period.
Estimated future amortization expense for deferred financing costs over the next five years are estimated as follows:
Note 9. Income Taxes
The federal and state components of the provision for income taxes are as follows for December 31, 2009 and 2008:
Deferred income tax liabilities are taxes the Company expects to pay in future periods. Similarly, deferred income tax assets are recorded for expected reductions in taxes payable in future periods. Deferred income taxes arise because of differences in the book and tax basis of certain assets and liabilities.
Deferred income tax liabilities and assets consist of the following as of December 31, 2009 and 2008 :
The company’s effective tax rate differs from the expected federal income tax rate as follows:
The Company has net operating loss carryforwards of approximately $11.9 million. These losses will begin to expire in 2024. Internal Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carryforwards when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater that 50 percentage point change in ownership occurs. In July 2007, the Company completed a reverse merger and in November 2007, as a result of the completion of the Company’s private placement transaction, the investors in the private placement as a group, upon conversion, would become the beneficial owners of approximately 50% of the Company’s outstanding shares, after consideration of the conversion of convertible promissory notes issued to those investors in conjunction with the transaction. Accordingly, the actual utilization of net operating loss carryforwards and other deferred tax assets for tax purposes will be limited annually under code section 382 to a percentage of the fair market value of the Company at the date of this ownership change, and this effect will reduce the amount of these loss carryforwards which the Company will be able to utilize to offset against future taxable income. A valuation allowance has been provided against the net deferred tax assets available due to the uncertainty of the Company’s ability to generate long-term taxable income. The Company expects to reduce its valuation allowance if and when it believes that it is more likely than not that it will be realized.
The Company accounts for income taxes under the provisions of ASC 740 (SFAS No. 109, “Accounting for Income Taxes”), which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. At the date of adoption, and as of December 31, 2009, the Company does not have a liability for unrecognized tax benefits. The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company has filed its 2008 Federal tax return but has not filed its 2008 state tax returns. The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2009, the Company has no accrued interest or penalties related to uncertain tax positions. We have reviewed our corporate tax returns in an effort to search for tax positions that (on a more likely than not basis) would not be sustained if the Company were to undergo a tax audit. Based on the aforementioned procedures, the Company has concluded that there are no tax positions that (on a more likely than not basis) would be sustained under a tax audit.
Note 10. Stockholder’s Equity
Issuance of Equity Compensation to J.H. Darbie and Co., Inc.
In January 2009, the Company issued 150,000 shares of common stock to J.H. Darbie and Co., Inc. with a fair market value of $28,500 based on the closing price of the Company’s stock on the date of share issuance, as compensation for consulting services relating to an Investment Banking Agreement between the Company and J.H. Darbie, Co. Inc. That agreement terminated on February 28, 2009.
Issuance of Equity Compensation to John Whitman
In February 2009, the Company issued 140,000 shares of the common stock to John Whitman, pursuant to the Company’s Equity Incentive Plan, with a fair market value of $5,600 based on the closing price of the Company’s stock on the date of share issuance, as compensation for management consulting services rendered to the Company pursuant to an Agreement between the Company and John Whitman.
Exercise of Warrants
Between May and July 2009 the Company issued 190,166 shares of its common stock to former holders of original issue discount notes originally issued by the Company in March 2007. The shares were issued as the result of the cashless exercise of warrants to purchase 200,000 shares of the Company’s common stock, issued to the holders as additional consideration for purchase of the notes.
Conversion of Preferred Stock
Between May and December 2009 holders of shares of the Company’s Series A Convertible Preferred Stock converted 87.6 shares of the Series A Preferred Stock into 43,800,000 shares of the Company’s common stock. In connection with these conversions the Company recorded a deemed dividend of approximately $1,798,000. In addition, upon conversion, holders of the Series A shares were entitled to receive 109,500 shares of the Company’s common stock in consideration of penalty provisions of the registration rights agreement under which the Series A shares were issued. The Company accrued an expense of approximately $6,500 as a result of the issuance relating to the penalty provisions.
Between April and December 2009 holders of shares of the Company’s Series B Convertible Preferred Stock converted 307 shares of the Series B Preferred Stock into 61,400,000 shares of the Company’s common stock. In connection with these conversions the Company recorded a deemed dividend of approximately $3,100,000.
Issuance of Equity Compensation to Finders for Issuance of Series B Convertible Preferred Stock
Between April and June 2009, The Company issued 14,583 shares of the Company’s common stock, to finders in connection with the Company’s offering of Series B Convertible Preferred Stock.
Conversion of Convertible Notes.
Between October and December 2009, the Company issued 12,650,000 shares of the Company’s common stock upon the conversion of an aggregate of $126,500 worth of 12% Convertible Notes.
Note 11. Warrants
Issuance of Warrants to Finders for Issuance of Series B Convertible Preferred Stock
Between April and June 2009, The Company issued warrants to purchase 6,830,000 shares of the Company’s Common Stock at a range of exercise prices from $.04 to $0.13 per share, to finders in connection with the Company’s offering of Series B Convertible Preferred Stock.
Issuance of Warrants to Finders for Issuance of Convertible Notes
Between April and June 2009, The Company issued warrants to purchase 50,000 shares of the Company’s Common Stock at $.04 per share, to finders in connection with the Company’s offering of 12% Convertible Notes.
Exercise of Warrants
Between May and July 2009 the Company issued 190,166 shares of its common stock to former holders of original issue discount notes originally issued by the Company in March 2007. The shares were issued as the result of the cashless exercise of warrants to purchase 200,000 shares of the Company’s common stock, issued to the holders as additional consideration for purchase of the notes.
Summary
The following table presents the Company’s 2009 and 2008 activity involving warrants to purchase shares of the common stock of the corporation.
Note 12. Stock Options
Visual Management System Equity Incentive Plan
The Company adopted an Equity Incentive Plan (the “Plan”) in connection with its acquisition of Visual Management Systems Holding, Inc.
Options granted under the Plan become vested 50% one year from the date of grant and in full two years from the date of grant. Options are exercisable immediately upon vesting. No shares are reserved for the Plan and all shares are expected to be issued from authorized shares not yet outstanding, or from Treasury Stock, if available.
The Company estimated the fair value of each option award on the date of grant using the Black Scholes valuation model. Assumptions about stock-price volatility have been estimated by management based upon the implied volatilities of other publicly traded companies within the industry. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Forfeitures were estimated as management’s best approximation.
The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted in 2008. There were no grants in 2009.
Summary
The following table presents the Company’s 2009 and 2008 activity involving options to purchase shares of the common stock of the corporation. There were no grants in 2009.
The aggregate intrinsic value of outstanding and exercisable options to purchase shares at December 31, 2009 was $0.
The Company recognized compensation expense from the vesting of stock options of $79,303 and $388,489 for the years ended December 31, 2009 and 2008 respectively. The Company’s future compensation expense from these stock options is expected to be $26,530.
Note 13. Financing Activity
Equity Financing
Throughout 2009, the Company issued 500 shares of Series B Convertible Preferred Stock to accredited investors for an aggregate purchase price of $500,000. The Company received net proceeds of $429,188 as a result of the offering. Each Series B convertible preferred share bears a stated value of $1,000 and is convertible into shares of our common stock at a rate of $0.005 per share. As part of the offering placement agents received 14,583 shares of the Company’s common stock, and warrants to purchase 6,830,000 shares of the Company’s common stock at a range of exercise prices from $0.04 to $0.12, with those exercise prices determined by the then market of price of our common stock on the date of closing. As a result of the issuance the Company accrued a deemed dividend of approximately $500,000.
Debt Financing
Throughout 2009, the Company issued an aggregate of $186,500 worth of 12% Convertible Notes. The Company received net proceeds of $176,350, as a result of the offering. Each 12% Convertible Note is convertible into shares of the Company’s common stock at a rate of $0.01 per share. As part of the offering placement agents received warrants to purchase 50,000 shares of our common stock at an exercise price of $0.04, determined by the then market of price of the common stock on the date of closing.
Between August and November 2009, the Company issued $229,046 worth of 12% Convertible Notes in exchange for Original Discount Notes previously issued by it in 2008 with aggregate principal plus accrued and unpaid interest of $229,046.
Note 14. Commitments and Contingencies
Office Leases
As of December 31, 2009, the Company’s corporate headquarters are located in Toms River, New Jersey under a lease for approximately 4,500 square feet of office space expiring in January, 2011. Under the terms of the leases the Company pays monthly rent of approximately $4,083 per month. The Company records rent on a straight line basis.
The minimum annual rent under non-cancelable leases for the periods subsequent to December 31, 2009, are as follows:
Credit Facility
The Company had borrowings under the credit facilities listed below as of December 31, 2009 and 2008, respectively
On October 4, 2006, the Company entered into a Business Creditlink agreement with JP Morgan Chase under which the Company was provided with a $50,000 line of credit. During the fourth quarter of 2006,the Company drew $50,000 for general corporate purposes. No additional funds may be drawn against this facility.
Borrowings under the credit facilty are secured by all of the Company’s assets and is personally guaranteed by the Company’s CEO.
Chase Loan
The Company is party to a $50,000 term loan agreement with JPMorgan Chase Bank, N.A. which provides for interest at a rate of 8.61% per annum and which is payable in equal monthly installments through October 2013. As of December 31, 2009 and 2008, $31,651 and $37,662, respectively, was outstanding under the loan agreement.
Auto Loans
The Company had $185,415 and $295,673 in principal balance on auto loans outstanding as of December 31, 2009 and 2008, respectively. These loans, which bear interest at rates ranging from 3.9% to 8.69%, mature at various dates through November 2012.
Leased Equipment
The Company enters into operating leases in the ordinary course of business for office and other equipment. The current outstanding value of leased equipment is $12,886
Loan from Former Chief Operating Officer
In 2008 Caroline Gonzalez the Company’s former Chief Operating Officer, and the wife of our Chief Executive Officer loaned the Company $97,420 via extension of lines of credit on personal credit cards issued to her by traditional unsecured consumer credit providers. Since the date of the loan the Company has been making monthly payments pursuant to the relevant card terms, which include interest rates ranging from 9.49% to 27.99%. As of December 31, 2009 the outstanding balance on these accounts was $63,111.
Original Issue Discount Notes
Between April and September 2008, the Company issued a series of original issue discount notes to individual investors. These notes totaled $499,450 in face value, and yielded net proceeds to us of $414,950 after fees paid to consultants and placement agents. $99,450 in total face value of the OID Notes was retired via payments to the holders made in June 2008 and October 2008. $250,000 in total face value of the OID notes was retired via conversion into $229,046 of 12% one-year convertible notes (which included accrued and unpaid interest) and cash payments of $29,500. The remaining $150,000 in total face value of OID notes remain unpaid, and are past due.
November 2007 Debentures
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% senior secured convertible debentures and common stock purchase warrants (the “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 initially had an exercise price of $1.15 per share, subject to adjustment, including full ratchet anti-dilution protection.
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. The Company has also been required to make monthly principal payments in the aggregate of $208,333 since November 2008. On August 28, 2008, the Company entered into an Amendment and Waiver Agreement with each of the holders of these debentures pursuant to which the debenture holders have:
- waived the Company’s 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;
- 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;
- waived certain provisions of the agreement pursuant to which the debentures were issued which restrict the Company’s ability to issue common stock and securities convertible into or exercisable for common stock;
- 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 the Company does 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 the Company 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, the Company agreed to issue shares of its 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. The Company 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, the Company entered into an additional Amendment and Waiver Agreement with each of the holders of the debentures pursuant to which:
- The Company’s 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 Company’s 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.
- 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.
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 the Company to the holders of the debentures in the amount of $51,000 also have come due and were also not paid by the Company 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 Company 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. The Company continues to communicate with the holders and are seeking a resolution to the Company’s non-payment situation.
IDS Asset Purchase Convertible Note
In connection with the April 3, 2008 purchase of substantially all the assets of IDS (the “Asset Purchase”), the Company 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 the Company’s common stock after May 31, 2010, or upon the approval of a majority in interest of the holders of the Company’s then outstanding 5% secured convertible debentures, or any securities issued on conversion thereof, at an initial conversion price of $1.15 per share which has subsequently been adjusted to $0.10 per share. The Company has agreed to register the shares issuable upon the conversion of the note for public resale.
As of December 31, 2009, $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. See “Note 17. Legal Proceedings.”
Promissory Note
On June 10, 2008, the Company issued a promissory note in the principal amount of $267,192 (the “New Note”) 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, the Company issued to Mr. Russ options to acquire 20,000 shares of the
our common stock under the Company’s Equity Incentive plan at an exercise price of $0.40 per share. The Company has not paid the holder of the note. IDS and its principal shareholder instituted an action seeking to collect the past due amount. See “Note 17. Legal Proceedings.”
A summary of our contractual obligations as of December 31, 2009 is as follows
Unpaid Tax Liability
At December 31, 2009 the Company was also delinquent approximately $76,000 in federal payroll taxes, approximately $35,000 in state payroll taxes, approximately $145,000 in state sales taxes and approximately $87,000 in obligations to employee retirement accounts, exclusive of estimated penalty and interest, which has been accrued.
Note 15. Related Party Transactions
See “Note 14. Commitments and Contingencies: Loan from Former Chief Operating Officer”
Marty McFeely a member of the Company’s Board of Directors, is also Chief Financial Officer of El Rancho foods, a customer of the Company’s Sales to El Rancho amounted to approximately $165,149 and $72,145 in 2009 and 2008, respectively.
The following table sets forth the details of the purchases of shares of the Company’s Series B Convertible Preferred Stock made by the Company’s officers and members of the Company’s board of directors as part of its 2009 offering.
(1)
Includes purchases by Caroline Gonzalez, the Company’s former Chief Operating Officer, and the wife of its Chief Executive officer Jason Gonzalez
(2)
Includes purchases by Elizabeth May, the wife of the Company’s director Michael Ryan
Note 16. Legal Proceedings
On March 27, 2009, the Company was served with a summons and a complaint in which the Company, its CEO Jason Gonzalez, its current Board members Robert Moe, Martin McFeely, Michael Ryan and Col. Jack Jacobs (ret.), and its former CFO Howard Herman were named as defendants in a suit filed by Mr. Russ, IDS and the Russ & Russ PC Defined Benefit Pension Plan. In the complaint, which was filed in the United States District Court for the Eastern District of New York, the plaintiffs allege, among other things, misrepresentation, securities fraud and
breach of duty by the defendants, pertaining to, among other things, the Company’s restatement of our financial results for the periods ended August 31, 2007 and September 30, 2007, and the Asset Purchase. The Complaint also asserts claims regarding non-payment of amounts allegedly due to the Plaintiffs pursuant to agreements entered into in connection with the Asset Purchase and the issuance of a note to Russ and Russ PC Defined Benefit Pension Plan. The Company believes that the Plaintiffs’ claims regarding misrepresentation, securities fraud and breach of duty are entirely without merit and intend to vigorously defend against them. The plaintiffs seek compensatory and punitive damages in a number of their claims. If the plaintiffs succeed in any of their claims and obtain a judgment against the Company, payment of that judgment would have a material adverse effect on the Company’s financial condition and results of operations. The filing of this lawsuit substantially reduces the likelihood of the Company ever receiving any return on its investment in its joint venture with IDS.
On January 2, 2010, in response to the Company’s motion, the Court in this matter issued an Order dismissing the securities claims in the Complaint on the grounds that the note issued to IDS was not a security. This also invalidated the jurisdiction of the Complaint as no federal subject matter remained, but Plaintiff was granted leave to amend to plead diversity jurisdiction. At the same time the Court ruled on Plaintiff’s motion to attach our and the named individual defendant’s New York assets. The Court denied the attachment of the individual defendant’s assets on the grounds that plaintiffs had not established the required probability of success but granted the attachment against the Company on the grounds that a judgment on the claims for non-payment was probable. On April 9, 2009 that attachment was issued against our New York Assets. It is the Company’s position that the attachment of its New York assets is not material to us, because the Company has no New York assets.
The Company has been named as the defendant in a number of lawsuits pertaining to vendor lines of credit which have gone beyond permitted amounts and terms. These suits seek judgment ranging in value from approximately $4,000 to $200,000. Only the largest of these individual lawsuits represents a substantial risk to the Company’s ongoing operations, but taken in whole they are likely to have a material adverse effect on its financial conditions and results of operations.
The Company are the Defendant in a lawsuit filed in New Hampshire by PC Connection, its former vendor. The complaint seeks approximately $30,000. The case is pending.
The Company are the Defendant in a lawsuit filed in California by Northern Video, its former vendor. The complaint seeks approximately $67,000. The case is pending.
The Company are the Defendant in a lawsuit filed in New Jersey by American Express, its former provider of charge card services. The complaint seeks approximately $80,000. The case is pending.
The Company are the Defendant in a lawsuit filed in New Jersey by Anixter, its former vendor. The complaint seeks approximately $120,000. The case is pending.
The Company are the Defendant in a lawsuit filed in New Jersey by CIT, its former provider of credit for the purchase of business management software. The complaint seeks approximately $120,000. The case is pending.
The Company are the Defendant in a lawsuit filed in New Jersey by ACIC, its former bonding company for government contract work for the East Brunswick, NJ Board of Education, Pleasantville, NJ Public Schools, and Raritan Valley Community College. The complaint seeks approximately $200,000. The case is pending.
Note 17. Subsequent Events
Issuance of Convertible Notes.
Between January 1, 2010 and thru April 13, 2010, the Company issued an aggregate of $105,500 worth of 12% Convertible Notes. Each 12% One-Year Convertible Note is convertible into shares of our common stock at a rate of $0.01 per share.
Conversion of Convertible Notes.
Between January 1, 2010 and thru April 13, 2010, an aggregate of approximately $130,000 of the 12% Convertible Note holders converted into 13.05 million shares of the company’s common stock.
Conversion of Convertible Preferred B
Between January 1, 2010 and thru April 13, 2010, holders of the Company’s Convertible Preferred B converted 19 shares into 3.8 million shares of the company’s common stock.
INDEX OF EXHIBITS
Exhibit No.
Exhibits
2.1
Agreement of Merger and Plan of Reorganization among the Registrant, VMS Acquisition Corp. and Visual Management Systems Holdings, Inc. (1)
2.2
Asset Purchase Agreement dated as of April 3, 2008 among Visual Management Systems, Inc, Intelligent Digital Systems, LLC, IDS Patent Holding, LLC and Jay Edmond Russ (8)
3.1
Amended and Restated Certificate of Incorporation of the Registrant. (2)
3.1.1
Certificate of Amendment to the Company’s Amended and Restated Certificate of Incorporation (9)
3.1.2
Certificate of Designation creating Class B Convertible Preferred Stock (9)
3.2
By-laws of Registrant. (3)
4.1
Equity Incentive Plan. (2)
4.2
Form of Warrants to purchase shares of Common Stock at a price of $3.50 per share. (2)
4.3
Form of Warrants issued to Placement Agent (and sub-agents) to purchase shares of Common Stock at a price of $2.50 per share. (5)
4.4
Form of Convertible Notes issued by Visual Management Systems Holding, Inc. in the aggregate principal amount of $150,000. (4)
4.5
Form of Warrant issued by Visual Management Systems Holding, Inc. with respect to an aggregate 200,000 shares of Visual Management Systems Holding, Inc. Common Stock. (4)
4.6
Securities Purchase Agreement by and among the Company and the investors identified therein, dated as of November 28, 2007. (5)
4.7
Form of 5% Secured Debenture. (5)
4.8
Form of Common Stock Purchase Warrant. (5)
4.9
Registration Rights Agreement executed by the Company and for the benefit of the holders of the 5% Secured Debentures. (5)
4.10
Form of Placement Agent Warrant. (5)
4.11
Unsecured Convertible Promissory Note dated April 3, 2008 issued to Intelligent Digital Systems, LLC. (8)
4.12
Form of 12% Convertible Note (10)
10.2
Placement Agent Agreement by and among the Placement Agent named therein, the Company and Visual Management Systems Holding, Inc. (2)
E-1
10.3
Form of Lock Up Agreement between the Registrant and executive officers and certain stockholders. (2)
10.4
Form of Private Placement Subscription Agreement. (2)
10.5
Employment Agreement dated as of January 1, 2007 between Visual Management Systems, Inc. and Jason Gonzalez. (4)
10.6
Employment Agreement dated as of January 1, 2007 between Visual Management Systems, Inc. and Howard Herman. (4)
10.7
Employment Agreement dated as of January 1, 2007 between Visual Management Systems, Inc. and Caroline Gonzalez. (4)
10.8
Employment Agreement dated as of January 1, 2007 between Visual Management Systems, Inc. and Jonathan Bergman. (4)
10.9
Employment Agreement dated as of January 1, 2007 between Visual Management Systems, Inc. and Kevin Sangirardi. (4)
10.10
Security Agreement dated November 30, 2007 executed by the Company and its subsidiaries for the benefit of the holders of the 5% Secured Debentures. (5)
10.11
Subsidiary Guaranty executed by the subsidiaries of the Company for the benefit of the holders of the 5% Secured Debentures. (5)
10.12
Letter of Intent between Visual Management Systems, Inc. and Intelligent Data Systems, LLC (6)
10.13
Placement Agent Agreement between the Company and Kuhns Brothers, Inc. (8)
10.14
Consulting Agreement dated as of April 3, 2008 between Visual Management Systems, Inc. and Jay Edmond Russ(8)
10.15
Operating Agreement of IDS Patent Holding, LLC effective as of April 2, 2008(8)
10.16
Exclusive Patent and Trade Secret License Agreement effective as of April 2, 2008 between Visual Management Systems, Inc. and IDS Paten Holding, LLC. (8)
10.17
Registration Rights Agreement dated as of April 2, 2008 between Visual Management Systems, Inc. and Intelligent Digital Systems, LLC. (8)
10.18
Promissory Note dated issued to the Russ & Russ P.C. Defined Benefit Plan (11)
10.19
Employment Agreement dated as of June 10, 2008 between Visual Management Systems, Inc. and James D. Gardner (11)
10.20
Deferred Compensation Plan of Registrant (11)
10.21
Amendment and Waiver Agreement dated as of August 29, 2008 between the Registrant and holders of its 5% Secured Convertible Debentures (12)
10.22
Amendment and Waiver Agreement dated as of August 2009 between the Registrant and holders of its 5% Secured Convertible Debentures (10)
E-2
21.1
Subsidiaries of issuer. (7)
24.1
Power of Attorney (included on signature page).
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.
(1)
Incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2007
(2)
Incorporated by reference to similarly numbered exhibit to the Registrant’s Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2007.
(3)
Incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on May 9, 2006.
(4)
Incorporated by reference to similarly numbered exhibit to the Registrant’s Report on Form 8-K/A filed with the Securities and Exchange Commission on April 14, 2008
(5)
Incorporated by reference to similarly numbered exhibit to the Registrant’s Report on Form 8-K filed with the Securities and Exchange Commission on December 5, 2007.
(6)
Incorporated by reference to similarly numbered exhibit to the Registrant’s Report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2008.
(7)
Incorporated by reference to similarly numbered exhibit to the Registrant’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on December 21, 2007.
(8)
Incorporated by reference to similarly numbered exhibit to the Registrant’s Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2008.
(9)
Incorporated by reference to similarly numbered exhibit to the Registrant’s Report on Form 8-K, filed with the Securities and Exchange Commission on March 31, 2009.
(10)
Incorporated by reference to similarly numbered exhibit to the Registrant’s Report on Form 10-Q for the Quarter ended June 30, 2009, filed with the Securities and Exchange Commission on August 19, 2009.
(11)
Incorporated by reference to similarly numbered exhibit to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on July 18, 2008.
(12)
Incorporated by reference to similarly numbered exhibit to the Registrant’s Report on Form 8-K, filed with the Securities and Exchange Commission on August 29, 2008
E-3