Exhibit 99.2.
Clarity Communication Systems, Inc. | |||
September 30, | December 31, | ||
ASSETS | 2007 | 2006 | |
CURRENT ASSETS | |||
Cash and cash equivalents | $ 199,537 | $ 1,547,831 | |
Accounts receivable | 274,524 | 734,014 | |
Prepaid expenses and other current assets | 74,925 | 107,802 | |
Total current assets | 548,986 | 2,389,647 | |
PROPERTY AND EQUIPMENT, NET | 231,118 | 245,425 | |
INTANGIBLE ASSETS, net of accumulated amortization | 72,500 | 95,000 | |
TOTAL ASSETS | $ 852,604 | $ 2,730,072 | |
Clarity Communication Systems, Inc. | |||
BALANCE SHEETS - CONTINUED | |||
September 30, | December 31, | ||
LIABILITIES AND STOCKHOLDER (DEFICIT) EQUITY | 2007 | 2006 | |
CURRENT LIABILITIES | |||
Accounts payable | $ 172,543 | $ 82,280 | |
Accrued expenses | 350,635 | 302,505 | |
Deferred revenue and other accrued liabilities | 350,191 | 611,976 | |
Note and accrued interest payable to sole stockholder | 2,074,712 | 2,000,000 | |
Total current liabilities | 2,948,081 | 2,996,761 | |
Total liabilities | 2,948,081 | 2,996,761 | |
STOCKHOLDER (DEFICIT) EQUITY | |||
Common stock, $1.00 par value; 1,000 shares | |||
authorized, issued and outstanding | 1,000 | 1,000 | |
Additional paid-in capital | 9,000 | 9,000 | |
Retained (deficit) earnings | (2,105,477) | (276,689) | |
Total stockholder (deficit) equity | (2,095,477) | (266,689) | |
TOTAL LIABILITIES AND | |||
STOCKHOLDER (DEFICIT) EQUITY | $ 852,604 | $ 2,730,072 | |
Clarity Communication Systems, Inc. | ||
Nine Months Ended September 30, 2007 | ||
Net sales | $ 2,852,911 | |
Operating expenses | ||
Cost of sales | 1,180,516 | |
Development | 2,330,075 | |
Selling and marketing | 269,185 | |
General and administrative | 930,088 | |
Total operating expenses | 4,709,864 | |
Net operating income | (1,856,953) | |
Other income (expense) | ||
Interest income (expense), net | (58,578) | |
Other income (expense), net | 91,806 | |
Other income, net | 33,228 | |
NET INCOME | $ (1,823,725) | |
Clarity Communication Systems, Inc. | |||||||
Nine Months Ended September 30, 2007 | |||||||
Additional | Total | ||||||
Common | paid-in | Retained | stockholder | ||||
stock | capital | (deficit) earnings | (deficit) equity | ||||
Balance at January 1, 2007 | $ 1,000 | $ 9,000 | $ (276,689) | $ (266,689) | |||
Stockholder distributions | - | - | (5,063) | (5,063) | |||
Net income | (1,823,725) | (1,823,725) | |||||
Balance at September 30, 2007 | $ 1,000 | $ 9,000 | $ (2,105,477) | $ (2,095,477) | |||
Clarity Communication Systems, Inc. | |
Nine Months Ended September 30, 2007 | |
Cash flows from operating activities | |
Net income | $ (1,823,725) |
Adjustments to reconcile net income to net cash used in operating activities | |
Depreciation and amortization | 36,807 |
Changes in assets and liabilities | 443,687 |
Net cash used in operating activities | (1,343,231) |
Cash flows from investing activities | |
Purchases of property and equipment | - |
Net cash used in investing activities | - |
Cash flows from financing activities | |
Distributions to stockholder | (5,063) |
Other financing activities | - |
Net cash used in financing activities | (5,063) |
Net decrease in cash and cash equivalents | (1,348,294) |
Cash and cash equivalents at beginning of year | 1,547,831 |
Cash and cash equivalents at end of year | $ 199,537 |
Supplemental disclosures of cash flow information | |
Cash paid during the year for | |
Income taxes | $ - |
Interest | - |
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
NOTE A - DESCRIPTION OF BUSINESS
Clarity Communication Systems, Inc. (“Clarity” or the “Company”) develops communications products within wireless communication systems. The Company provides solutions to OEMs and wireless operators on a contract basis and also develops unique products, including Push-to-Talk and/or location-based solutions. Its products and services are typically client applications downloaded onto wireless handsets, as well as the infrastructure to support such applications in certain circumstances. The Company has historically marketed its products and services to cellular and wireless telecommunications service providers and OEM’s located primarily in the United States.
NOTE B – REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. Based upon unaudited information, the Company has sustained substantial losses in the nine months ending September 30, 2007, of $1.8 million and has negative working capital and a retained deficit $2.4 million and $2.1 million, respectively, as of September 30, 2007. In addition, the Company has used, rather than provided, cash in its operations.
The Company continues to seek alternative financing solutions and is evaluating strategic alternatives, including the potential sale of the Company.
In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, to maintain present financing, and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Interest income is earned on the certificates of deposit for the benefit of the Company.
Concentration of Credit Risk
One customer (a Fortune 500 company in the telecommunications industry) accounted for 100% of accounts receivable as of December 31, 2006. Sales to three customers (Alcatel-Lucent Technologies, Autodesk, and Lockheed Martin) accounted for nearly 100% of total revenue during 2006.
Accounts Receivable
The majority of the Company’s accounts receivable is due from companies in the telecommunications industry. Credit is extended based on evaluation of a customers’ financial condition and, generally, collateral is not required. Accounts receivable are typically due within 30 days or 45 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms, are considered past due. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The allowance could be materially different if economic conditions change or actual results deviate from historical trends. As of September 30, 2007 and December 31, 2006, accounts receivable were fully collectible and no allowance for doubtful accounts was required.
Revenue recognition
The Company recognizes revenue for contract product development arrangements when certain performance milestones are achieved, as determined by the buyer.
Certain of the Company’s customer arrangements encompass multiple deliverables. Accounting for these arrangements is in accordance with Emerging Issues Task Force (“EITF”) No. 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). If the deliverables meet the criteria in EITF 00-21, the deliverables are separated into separate units of accounting, and revenue is allocated to the deliverables based on their relative fair values. The criteria specified in EITF 00-21 are that the delivered item has value to the customer on a stand-alone basis, there is objective and reliable evidence of the fair value of the undelivered item, and if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. Applicable revenue recognition criteria is considered separately for each separate unit of accounting.
Management applies judgment to ensure appropriate application of EITF 00-21, including value allocation among multiple deliverables, determination of whether undelivered elements are essential to the functionality of delivered elements and timing of revenue recognition, among others. For those arrangements where the deliverables do not qualify as a separate unit of accounting, revenue from all deliverables is treated as one accounting unit and recognized over the term of the arrangement.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation, and are depreciated over the estimated useful lives of the assets using both straight line and accelerated methods. The accelerated method used is the double declining balance method. Software is amortized over 3 years utilizing the straight-line method. Leasehold improvements are amortized using the straight-line method over the shorter of the useful life of the asset or the term of the lease. The useful lives assigned to property and equipment for the purpose of computing depreciation follow:
Automobiles | 5 years | |
Office equipment | 3 to 5 years | |
Furniture and fixtures | 5 years | |
Leasehold improvements | Life of lease |
Expenditures for major additions improvements are capitalized while maintenance and repairs are expensed as incurred.
Long-Lived Assets and Long-Lived Assets to Be Disposed Of
In accordance with FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews its long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Income Taxes
The Company, with the consent of its stockholder, has elected, under the Internal Revenue Code, to be taxed as an S-Corporation. The stockholder of an S-Corporation is taxed on the Company’s taxable income. Therefore, no provision or liability for Federal income taxes has been included in the Company’s financial statements.
Advertising Costs
Advertising costs are charged to expense in the period incurred.
Use of Estimates
The preparation of consolidated 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.
Fair Value of Financial Instruments
Cash and cash equivalents are reported at their fair values in the balance sheets. The carrying amounts reported in the balance sheets for accounts receivable, accounts payable, and accrued expenses approximate their fair values due to the short-term nature of these financial instruments. Notes payable have an interest rate that approximates current market values; therefore, the carrying value approximate fair value.
New Accounting Pronouncements
In February 2007, the Financial Accounting Standards board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159. “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting that can occur when related assets and liabilities are recorded on different bases. This statement is effective for the Company beginning January 1, 2008. The Company does not expect SFAS 159 to have a material impact on the financial statements.
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). This statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP") and expands disclosure related to the use of fair value measures in financial statements. SFAS 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We plan to adopt the provisions of SFAS 157 on January 1, 2008. We are evaluating the potential impact of SFAS 157, but at this time do not anticipate that it will have an impact on the financial statements when adopted.
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment as of September 30 is as follows:
2007 | ||
Property and Equipment | $ 819,421 | |
Less accumulated depreciation and amortization | (588,303) | |
Net property and equipment | $ 231,118 |
NOTE E – NOTE PAYABLE TO SOLE STOCKHOLDER
On December 31, 2006, the Company received $2,000,000 of debt financing in the form of a note with its sole stockholder. Interest is stated at 4.7% per annum and the note and accrued interest is due upon demand. There are no financial covenants or collateral associated with this note.
NOTE F – SUBSEQUENT EVENT
On November 13, 2007, the Company and ISCO International, Inc. (“ISCO”), entered into a Plan of Merger, pursuant to which ISCO would acquire the Company (the “Merger”).
Pursuant to the Merger Agreement, ISCO would issue up to an aggregate of 40.0 million shares of ISCO common stock (closing common stock price was $0.24 as of November 13, 2007) in exchange for all of the Company’s stock. Of the total number of shares ISCO may issue in the merger, 20.0 million shares would be issuable upon closing (subject to adjustment if the amount of total liabilities on Clarity’s closing balance sheet, subject to certain exceptions, exceeds $1.5 million), 2.5 million shares would be issuable on each of the first and second anniversaries of closing (subject any indemnification claims pursuant to the Merger Agreement) and 3.75 million shares would be issuable on each of the first dates on which ISCO’s equity market capitalization first equals or exceeds $125,000,000, $175,000,000, $225,000,000 and $275,000,000 within the three year period after closing of the Merger for at least 40 of the 45 consecutive trading days ISCO’s market capitalization equals such thresholds.
In the event the Merger is completed, the participants in the Phantom Stock Plan are eligible to receive benefits. The sole stockholder would receive approximately 65% of the shares issued in connection with the Merger while the Phantom Stock Plan participants would receive approximately 35% of the shares issued in connection with the Merger.
During 2007, the Company entered into a credit line arrangement with American Chartered Bank. The first draw on this credit line took place during October 2007. As of November 30, 2007, approximately $0.6 million had been drawn on this credit line.