EX-99.2 9 ex99-2.txt EXHIBIT 99.2 EXHIBIT 99.2 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- 1
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------------------------------------- ASSETS 2007 2006 Current assets Cash $ 113,993 $ 45,974 Accounts receivable 209,492 510,210 Inventory 527,507 133,088 Prepaid expenses 8,894 5,292 ----------- ----------- Total current assets 859,888 694,565 Property and equipment - net 366,384 267,670 Equipment under capital leases - net 26,022 -- Deposits 14,259 12,253 Intangible assets - net 5,338 4,446 ----------- ----------- $ 1,271,889 $ 978,933 =========== =========== LIABILITIES AND STOCKHOLDER' DEFICIT Current liabilities Accounts payable $ 799,703 $ 120,268 Accrued expenses and other current liabilities 320,241 68,479 Sales tax payable 34,141 36,469 Current portion of long-term debt 91,607 58,615 Current portion of obligations under capital leases 18,532 -- ----------- ----------- Total current liabilities 1,264,224 283,831 Long-term debt - net of current portion 280,181 286,599 Obligations under capital leases - net of current portion 6,341 -- Loans payable - stockholders 6,000 66,956 Stockholders' deficit Common stock, $.01 par value; 50,000,000 shares authorized, 10,105,000 and 9,790,000 shares issued and outstanding at December 31, 2006 and 2005, respectively 6,251 2,501 Additional paid-in-capital 2,289,484 399,821 Accumulated deficit (2,580,593) (60,776) ----------- ----------- Total stockholders' deficit (284,858) (341,546) ----------- ----------- $ 1,271,889 $ 978,933 =========== ===========
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VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS QUARTER ENDED MARCH 31, 2007 AND 2005 ----------------------------------------------------------------------------------------------------- 2007 2006 Revenues - net $ 1,546,887 $ 1,195,590 Cost of revenues 691,971 434,850 ----------- ----------- Gross Margin 854,916 760,741 ----------- ----------- Operating expenses (including stock-based compensation or ($164,803 and $77,321 for 2007 and 2006, respectively) 1,626,310 581,403 ----------- ----------- Loss from operations (771,394) 179,338 Other (income expenses 129 Interest income (49) Interest expense 171 (28) Miscellaneous (income) expense 25,915 17,197 ----------- ----------- 26,135 17,169 ----------- ----------- Net loss $ (797,529) $ 162,196 =========== ===========
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VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS QUARTER ENDED MARCH 31, 2007 AND 2006 ----------------------------------------------------------------------------------------------- 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(797,529) $ 162,196 Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 25,915 17,197 Stock-based compensation 164,803 77,321 Change in deferred revenue 4,031 (increase) decrease in operating assets Accounts receivable (174,226) (164,661) Inventory (243,259) (29,633) Prepaid expenses and other assets 5,363 (4,788) Increase (decrease) in operating liabilities Accounts payable 12,166 (127,337) Accrued expenses and other current liabilities 301,861 43,540 Sales tax payable 4,950 194 --------- --------- Net cash used by operating activities (695,925) (25,972) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (71,545) (9,312) Payment of security deposit 16,425 -- --------- --------- Net cash used by investing activities (55,120) (9,312) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of capital leases (2,040) (13,303) Proceeds from convertible notes payable -- -- Proceeds from long-term debt, net of deferred financing costs of $5,338 in 2005 83,658 Principal repayments of long-term debt -- -- Proceeds from loans payable - stockholders -- 49,521 Repayment of loans payable - stockholders (4,943) -- Proceeds from sale of common stock 871,058 -- --------- --------- Net cash provided by financing activities 864,075 70,355 --------- --------- Decrease in cash 113,030 35,072 CASH Beginning of year 963 10,903 --------- --------- End of year $ 113,993 $ 45,974 ========= =========
4 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed by Visual Management Systems Holding, Inc. ("VMS Holdings") and its wholly-owned subsidiaries, Visual Management Systems, LLC ("VMS, LLC") and Visual Management Systems PDG, LLC ("PDG"), collectively the "Company" in the preparation of the accompanying consolidated financial statements are summarized below: NATURE OF BUSINESS OPERATIONS 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. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Visual Management Systems Holding, Inc. and its wholly owned subsidiaries, Visual Management Systems, LLC and Visual Management Systems PDG, LLC collectively the "Company." 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 disclosure 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. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash balances and trade receivables. The Company invests its excess cash in highly liquid investments. The Company's customer base is principally comprised of financial institutions. The Company does not require collateral from its customers. ACCOUNTS RECEIVABLE AND CREDIT POLICY 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. 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. Management believes all accounts receivable to be fully collectible and, therefore, has not recorded an allowance as of March 31, 2007. 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. 5 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- 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 accelerated methods 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 Expenditures for repairs and maintenance are charged to operations as incurred. Expenditures for betterments and major renewals are capitalized and, therefore, are included in property and equipment. REVENUE RECOGNITION The Company generates revenues from the sale and installation of remote management loss prevention systems. Revenue is recognized at the time of the installation. Amounts billed in advance of the period which service is rendered are recorded as a liability under "Deferred revenue." ADVERTISING Advertising costs are expensed as incurred and approximated $14,127 and $3,617 for the quarters ended March 31, 2007 and 2007 respectively. INCOME TAXES Deferred income tax assets and liabilities are recognized for the differences between financial and income tax reporting bases of assets and liabilities based on enacted tax rates and laws. The deferred income tax provision or benefit generally reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax consequences of revenues and expenses currently taxable or deductible on the Company's income tax return for the period reported. 6 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT The major classifications of property and equipment at March 31, 2007 are as follows: 2007 2006 Computer hardware and software 81,405 85,123 Furniture and fixtures 44,248 68,886 Machinery and equipment 102,592 35,495 Vehicles 277,911 165,441 ------- ------- Total cost 506,156 351,956 Accumulated depreciation (139,772) (84,286) ------- ------- Property and equipment - net 366,384 267,670 ------- ------- Depreciation included as a charge to operations amounted to $20,649 and $16,675 for the quarters ended March 31, 2007 and 2006 respectively. EQUIPMENT UNDER CAPITAL LEASES Equipment under capital leases at March 31 are as follows: 2007 2006 Computer hardware and software 17,587 9,587 Machinery and equipment 28,661 28,661 ------- ------- Total cost 46,248 38,248 Accumulated amortization (20,226) (6,448) ------- ------- Equipment under capital leases - net 26,022 31,800 ------- ------- Amortization included as a charge to operations amounted to $2,000 and $ -0- for the quarter ended March 31, 2007 and 2006 respectively. INTANGIBLE ASSETS Intangible assets at March 31, are as follows: Gross Amortization Carrying Accumulated Period Amount Amortization Net ------ ------ ------------ --- 2006 Deferred financing costs 7 years $ 5,338 $ -0- $ 5,338 2006 Deferred financing costs 7 years $32,206 $ 700.00 $31,506 7 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- Amortization expense amounted to $ -0- and $700.00 for the quarters ended March 31, 2007 and 2006 respectively. Estimated future amortization expense within the next five years ending December 31 and thereafter are as follows: 2007 $ 1,067.50 2008 1,067.50 2009 1,067.50 2010 1,067.50 2011 1,067.00 ---- ------------ $ 5,338.00 In 2006, the Company incurred $27,640 related to branding of the Company's technology and product. This asset has an indefinite and useful life and, accordingly, is not amortized and will be tested at least annually for impairment. 8 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- CONVERTIBLE DEBT In September 2005, the Company issued $50,000 of 8% convertible notes dues on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock and warrants to purchase the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. In March 2006, the Company issued $50,00 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock and warrants to purchase the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. In March 2006, the Company issued $25,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock and warrants to purchase the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. In September 2006, the Company issued $50,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock and warrants to purchase the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. In March 2006, the Company issued $50,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock and warrants to purchase the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. 9 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- In March 2006, the Company issued $150,000 of 8% convertible notes due on March 15, 2008. Interest is payable semi-annually in March and September. The notes are convertible by the holder into shares of the Company's common stock and warrants to purchase the Company's common stock at any time at a conversion price of $2.50 per share, which is subject to adjustment based on the provisions of the agreement. The proceeds were primarily used for general corporate purposes. During the first quarter 2007, the Company induced conversion of all outstanding warrants into common stock through a tow-for-one conversion offering. In accordance with FAS-84, INDUCED CONVERSIONS OF CONVERTIBLE DEBT, the conversion of notes to common stock during the years ended December 31, 2006 and 2005 resulted in $264,990 and $58,890, respectively, of debt conversion expense. LONG-TERM DEBT Long-term debt at March 31 is as follows:
2007 2006 Term loans payable, collateralized by vehicles, due in monthly installments ranging from $404 - $612, including interest at fixed rates ranging from 3.90% - 8.69% and maturing through November, 2012 $ 201,101 $ 207,700 ---------- ---------- Term loan payable - due in monthly installments of $794 including interest at a fixed rate of 8.61% and maturing October 2013. The loan is secured by the personal guarantee of the majority stock- holder. 50,000 50,000 Small Business Association term loan due in monthly installments of $2,282 including interest at a fixed rate of 7.23% and maturing January 2012. 120,687 116,661 ---------- ---------- 371,788 374,361 Less: current portion 91,607 76,094 ---------- ---------- Long-term debt - net of current portion $ 280,181 $ 298,267 ---------- ----------
Aggregate maturities of long-term debt of the Company due within the next five years ending December 31 and thereafter, are as follows: 2007 $ 76,094 2008 77,809 2009 80,060 2010 59,586 2011 49,892 Thereafter 28,347 -------- $371,788 -------- 10 OBLIGATIONS UNDER CAPITAL LEASES VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- Obligations under capital leases at March 31 are as follows:
2007 2006 Equipment leases - monthly payments ranging from $83 - $282, Including interest between 15.33% - 19.03% and maturing through June 2010. $24,873 $30,356 Less: current portion 18,532 18,143 ------- ------- Obligations under capital leases - net of current portion $ 6,341 $12,213 ------- -------
COMMITMENTS AND CONTINGENCIES The Company conducts its operations from two facilities in New Jersey, New York, Virginia and Ohio with leases expiring on January 31, 2009, April 30, 2010, November 30, 2009 and November 30, 2007 respectively. Rent expense for the 3 months ended March 31, 2007 and 2006 respectively was $25,142 and $28,181 respectively. 11 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 -------------------------------------------------------------------------------- Minimum future rental payments under non-cancelable operating leases as of March 31, 2007 are approximately: 2007 $144,356 2008 116,797 2009 73,342 2010 18,035 2011 -- -------- $352,530 -------- INCOME TAXES Income tax benefit is summarized as follows for the years ended December 31: 2006 2005 Federal and state - current $ -- $ -- ------------ ----------- Deferred -- -- Benefit from net operating loss carryforwards -- -- Provision for income taxes -- -- ------------ ----------- $ -- $ -- ------------ ----------- 2006 2005 Deferred income tax assets $ 169,600 $ 53,600 Valuation allowance (169,000) (53,600) ------------ ----------- Deferred income tax assets - net $ -- $ -- ------------ ----------- The principal temporary difference that gives rise to deferred income tax assets is net operating loss carryforwards. At December 31, 2006 and 2005, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $424,000 and $134,000, respectively expiring through 2012. STOCK OPTION PLAN The Company maintains a non-qualified stock option plan (the "Plan") that provides for the awarding of stock options to selected employees and non-employees. 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 BSM valuation model. Assumptions about stock-price volatility have been estimated by management based upon the implied volatilities of 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 the periods presented: 12 VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2007 AND 2006 --------------------------------------------------------------------------------
Dec 31, 2005 Dec 31, 2006 Mar 31, 2007 ------------ ------------ ------------ Risk-free interest rate 2.97% 4.90% 5.03% Expected volatility 150% 150% 150% Expected life (in years) 10 10 10 Weighted-average estimated fair value of options granted during $0.44 $1.59 1.62 the year
The following table summarizes the activity under the Plan:
OPTIONS OUTSTANDING --------------------------------------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AGGREGATE NUMBER OF EXERCISE REMAINING INTRINSIC SHARES PRICE TERM (YRS.) VALUE --------- -------- ----------- ---------- Balance, January 1, 2005 -- $ -- -- $ -- Granted 1,410,000 1.25 Exercised -- -- Lapsed -- -- Balance, December 31, 2005 1,410,000 1.25 9.50 618,567 --------- ---- Granted 440,000 1.25 Exercised -- -- Lapsed -- -- --------- ---- Balance, December 31, 2006 1,850,000 1.25 8.75 1,318,427 --------- ---- Granted 156,500 1.25 Exercised -- -- 8.75 Lapsed -- -- Balance, March 31, 2007 2,006,500 1.25 8.75 1,429,959 ========= ====
SUBSEQUENT EVENT Subsequent to December 31, 2006 the Company entered into negotiations with a venture capital group for the private placement of an undetermined number of shares of Company stock. The transaction could raise up to $5,000,000 in capital for the Company and is expected to be completed within one year. 13