Exhibit 99.1
ASSETS Restated Restated
Unaudited Audited
9/30/05 12/31/04
----------- -----------
CURRENT ASSETS:
Cash $ 203,724 $ 556,593
Accounts receivable 1,519,526 1,533,969
Prepaid expenses 37,048 186,306
Investment in Century Innovations 108,469 108,469
----------- -----------
TOTAL CURRENT ASSETS $ 1,868,767 $ 2,385,337
Property and Equipment, net of accumulated
depreciation 995,543 681,346
OTHER ASSETS:
Asset held for sale (see notes) - 1,015,014
Website assets, net of amortization 4,520 4,520
Deposits 20,249 25,399
Goodwill 1,692,782 1,692,782
----------- -----------
TOTAL OTHER ASSETS 1,717,551 2,737,715
TOTAL ASSETS $ 4,581,861 $ 5,804,398
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
9/30/05 12/31/04
CURRENT LIABILITIES:
Accounts payable $ 81,211 $ 135,533
Accrued expenses 1,383,272 1,390,880
Notes payable, related party 21,000 60,038
Short term notes payable 265,101 121,742
Convertible debt, net of current portion 867,761 241,111
Derivative liability 888,509 2,408,178
Warrant liability 507,977 1,785,877
Current portion of long-term notes payable - 116,207
----------- -----------
TOTAL CURRENT LIABILITIES $ 4,014,831 $ 6,259,566
LONG-TERM DEBT
Long-term notes payable, net of current portion 278,178 103,548
----------- -----------
TOTAL LONG-TERM DEBT 278,178 103,548
TOTAL LIABILITIES 4,293,009 6,363,114
STOCKHOLDERS' EQUITY:
Common stock:
Common stock, $0.001 par value, 200,000,000
shares authorized; 17,232,290 and 16,257,290
shares issued, 17,111,457 and 16,161,457
outstanding at September 30, 005 and December
31, 2004, respectively 160,825 159,875
Additional paid-in capital-common stock 11,503,345 11,029,295
Preferred stock Series B:
Preferred stock, $0.001 par value, 10,000,000
shares authorized; 508,500 Series B shares
issued and outstanding at December 31, 2004 506 506
Additional paid-in capital-preferred Series B 481,994 481,994
Subscriptions receivable (475,000) (119,063)
Treasury stock, at cost; 95,833 at December 31, 2004 (134,388) (134,388)
Accumulated deficit (11,248,431) (11,976,936)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 288,852 (558,716)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,581,861 $ 5,804,398
=========== ===========
The accompanying notes to the financial statements
should be read in conjunction with the above financial statements.
F-1
Unaudited Unaudited Unaudited Unaudited
FOR THE FOR THE FOR THE FOR THE
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
9/30/05 9/30/04 9/30/04 9/30/05
Restated Restated
-------------- -------------- -------------- --------------
REVENUE $ 2,365,454 $ 2,101,033 $ 6,380,488 $ 6,864,011
COST OF GOODS SOLD 2,127,257 1,663,996 5,091,217 5,718,341
-------------- -------------- -------------- --------------
GROSS PROFIT 238,197 437,037 1,289,271 1,145,670
EXPENSES:
Selling, general and administrative $ 560,697 $ 371,393 $ 1,014,082 $ 1,409,080
Depreciation 44,888 85,646 256,133 131,885
-------------- -------------- -------------- --------------
TOTAL EXPENSES 605,585 457,039 1,270,215 1,540,965
OPERATING INCOME (367,388) (20,002) 19,056 (395,295)
OTHER INCOME (EXPENSE):
Interest income 281 61 466 610
Forgiveness of debt - 54,039 54,039 2,962
Other income 3,000 3,250 5,435 6,382
Interest expense (81,362) (20,697) (68,765) (263,125)
Other Income(Expense) from convertible 228,269 - - 2,863,902
Interest (expense) from convertible (160,725) - - (483,100)
Other income - - 2,699 -
-------------- -------------- -------------- --------------
TOTAL OTHER INCOME (10,537) 36,653 (6,126) 2,127,631
NET INCOME (LOSS) $ (377,925) $ 16,651 $ 12,930 $ 1,732,336
BASIC WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 17,207,290 15,944,790 15,510,066 17,099,415
DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 28,617,290 15,944,790 15,510,066 28,390,550
BASIC NET INCOME PER SHARE $ (0.02) $ 0.001 $ 0.001 $ 0.10
DILUTED NET INCOME PER SHARE $ (0.01) $ 0.001 $ 0.001 $ 0.06
The accompanying notes to the financial statements
should be read in conjunction with the above financial statements.
F-2
Unaudited
For the 9 months ended
9/30/05 9/30/04
Restated
----------------- ----------
Restated
Cash Flows From Operating Activities:
Net income $ 1,732,336 $ 12,930
Adjustments to reconcile net income to net
cash provided by operating activities:
Issued for services - 44,000
Depreciation and amortization 131,885 256,132
(Decrease) in asset held for sale 1,015,014 -
Distribution of asset held for sale (1,003,831) -
(Increase) Decrease in accounts receivable 14,443 (212,093)
Increase in inventory - 1,946
Increase in prepaid expenses 188,295 (46,326)
Increase in deposits 5,150 23,492
Decrease in accounts payable (54,322) (49,595)
Decrease in accrued expenses (7,608) 60,629
----------------- ----------
Net cash used by operating activities $ 2,021,362 $ 91,115
Cash Flows From Investing Activities:
(Increase) Decrease in notes receivable - 167,294
Purchase of property and equipment (485,119) (12,897)
----------------- ----------
Net cash used by investing activities (485,119) 154,397
Cash Flows From Financing Activities:
Increase in notes payable 201,782 (341,121)
Increase (Decrease) in related party payable (39,038) -
Increase (Decrease) in convertible debt 626,650 -
Increase (Decrease) in stock subscriptions 119,063 -
Cash in distributed subsidiary - 10,661
Issuance of common stock - 100,306
Change in warrant liability (1,277,900) -
Change in derivative liability (1,519,669) -
(Decrease) Increase in line of credit - (3,948)
----------------- ----------
Net cash provided by financing activities (1,889,112) (234,102)
----------------- -----------
Net Increase in Cash (352,869) 11,410
Balance, Beginning 556,593 122,891
----------------- ----------
Balance, Ending $ 203,724 $ 134,301
================= ==========
Interest Paid $ 263,125 $ 68,765
Taxes Paid $ - $ -
The accompanying notes to the financial statements
should be read in conjunction with the above financial statements.
F-3
DATASCENSION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - HISTORY AND ORGANIZATION OF THE COMPANY
Datascension, Inc. (formerly known as Nutek, Inc.) was incorporated
in August 1991 under the laws of the State of Nevada as Nutek, Inc.
(the "Company") and is engaged in the market research industry.
Datascension International, Inc. and related assets were purchased
on September 27, 2001 for $2,200,000 using company shares at fair
market value. Datascension International, Inc. is a data solutions
company representing a unique expertise in the collecting, storage,
processing, and interpretation of data. During 2002, Datascension
International, Inc. expanded operations into Costa Rica.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company's policy is to prepare the financial statements on the
accrual basis of accounting. The fiscal year end is December 31.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
maturities of three months or less when purchased.
Net Income Per Share
Basic net income per share is computed using the weighted average
number of shares of common stock outstanding for the period end. The
net income (loss) for the period end is divided by the weighted
average number of shares outstanding for that period to arrive at
net income per share.
Diluted net income per share reflects the potential dilution that
could occur if the securities or other contracts to issue common
stock were exercised or converted into common stock.
In the opinion of management, all adjustments necessary in order to
make the financial position, results of operations and changes in
financial position at September 30, 2005, and for all periods
resented not misleading have been made. The results of operations
for the period ended September 30, 2005 are not necessarily an
indication of operating results to be expected for the full year
ending December 31, 2005.
Convertible Debt Financing and Derivative Liabilities
In accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended ("SFAS 133"), the holder's conversion right provision,
interest rate adjustment provision, liquidated damages clause, cash
premium option, and the redemption option (collectively, the debt
features) contained in the terms governing the Notes are not clearly
and closely related to the characteristics of the Notes.
Accordingly, the features qualified as embedded derivative
instruments at issuance and, because they do not qualify for any
scope exception within SFAS 133, they were required by SFAS 133 to
be accounted for separately from the debt instrument and recorded as
derivative financial instruments.
During the year ended December 31, 2004, we recorded an other
expense item of $2,489,116, of which, $1,639,953 (expense) and
$849,163 (expense) related to the debt features and warrants,
respectively, to reflect the change in fair value of the derivative
liability. During the year ended December 31, 2003, there was no
income or expense items related to convertible debt as there was
none outstanding.
During the nine months ended September 30, 2005, we recorded an
other income item of $2,863,902, of which, $1,529,217 (income) and
$1,334,685 (income) related to the debt features and warrants,
respectively, to reflect the change in fair value of the derivative
liability. During the nine months ended September 30, 2004, there
was no income or expense items related to convertible debt as there
was none outstanding.
At each balance sheet date, we adjust the derivative financial
instruments to their estimated fair value and analyze the
instruments to determine their classification as a liability or
equity. As of December 31, 2004, the estimated fair value of our
derivative liability was $2.41 million, as well as a warrant
liability of $1.79 million. As of December 31, 2003, there was no
asset or liability related to convertible debt. The estimated fair
value of the debt features was determined using the probability
weighted averaged expected cash flows / Lattice Model. The model
uses several assumptions including: historical stock price
volatility (utilizing a rolling 120 day period), risk-free interest
rate (3.50%), remaining maturity, and the closing price of the
Company's common stock to determine estimated fair value of the
derivative asset. In valuing the debt features at December 31, 2004,
the company used the closing price of $0.65 and the exercise price
of $0.30. For the year ended December 31, 2004, due in part to an
increase in the market value of the Company's common stock to $0.65
from $0.40 at issuance, the Company recorded an "other expense" item
on the consolidated statement of operations for the change in fair
value of $1,639,953. At December 31, 2004, the estimated fair value
of the debt features was approximately $2,408,178. For the nine
months ended September 30, 2005, the estimated value of the
company's debt features decreased to $888,509, thus the company
recorded an "other income" item on the consolidated statement of
operations for the change in fair value of the debt features of
$1,529,217 for the nine months ended September 30, 2005.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are made up of the following as of September
30, 2005:
Equipment and machinery $ 472,500
Office equipment 1,068,138
Leasehold improvements 9,959
Accumulated depreciation (555,053)
----------
$ 995,543
The company purchased predictive dialers for a total cost of
$125,000 during the three months ended June 30, 2005.
NOTE 4 - NOTES PAYABLE
NOTES PAYABLE - $1,875,000, NOVEMBER 2004
In November 2004, the Company issued $1,875,000 in principal amount
of Notes to third parties. As part of the financing transaction, the
Company issued warrants to purchase 3,125,000 shares of common stock
at a per share purchase price of $0.30 per share.
The Notes accrue interest at a rate of prime + 3% per annum. The
Notes are due and payable in November 2007. After a thorough review
of the terms of the note and respective covenants, the company has
determined the more conservative method of including the entire debt
as a current liability on the balance sheet. The convertible note
and warrant documents were filed in an 8-K by the Company on
November 23, 2004. The Note was entered into pursuant to the terms
of a subscription agreement between the Company and the Holder,
which was also included in the 8-K filed on November 23, 2004.
Interest payable on this Note shall accrue at the "prime rate"
published in The Wall Street Journal from time to time, plus three
percent (3%). The Interest Rate shall not be less than eight
percent (8%). Interest shall be calculated on a 360 day year.
Interest on the Principal Amount shall be payable monthly,
commencing 120 days from the closing and on the first day of each
consecutive calendar month thereafter (each, a "Repayment Date") and
on the Maturity Date.
Amortizing payments of the outstanding Principal Amount of this Note
shall commence on the first (1st) Repayment Date and shall recur on
each succeeding Repayment Date thereafter until the Principal Amount
has been repaid in full. On each Repayment Date, the Company should
make payments to the Holder in the amount of one- thirty-second
(1/32nd) of the initial Principal Amount (the "Monthly Principal
Amount"), together with any accrued and unpaid interest plus any and
all other amounts which are then owing under this Note that have not
been paid (the Monthly Principal Amount, together with such accrued
and unpaid interest and such other amounts, collectively, the
"Monthly Amount"). Any Principal Amount that remains outstanding on
the Maturity Date shall be due and payable upon maturity.
Following the occurrence and during the continuance of an Event of
Default (as discussed in the Note), the annual interest rate on the
Note shall automatically be increased by two percent (2%) per month
until such Event of Default is cured.
The Holder shall convert into shares of Common Stock all at the
Fixed Conversion Price or the maximum portion of the Monthly Amount
due on each Repayment Date provided that the average closing price
of the Common Stock for the twenty (20) consecutive trading days
immediately preceding such Repayment Date shall be greater than or
equal to 15% above the Fixed Conversion Price ("Conversion
Criterion"). The Monthly Amount due on a Repayment Date that is not
converted shall be paid by the Company (i) in cash at the rate of
104% of such Monthly Amount otherwise due, or (ii) in registered,
unlegended, free- trading Common Stock at an applied conversion rate
equal to eighty-five percent (85%) of the average of the five (5)
lowest closing bid prices for the preceding twenty (20) trading
days.
The Notes also provide for liquidated damages on the occurrence of
several events.
As compensation to the Subscriber, the Company agrees to pay (as
liquidated damages and not as a penalty) $100 per business day after
the Delivery Date for each $10,000 of Note principal amount being
converted of the corresponding Shares which are not timely
delivered.
An additional liquidating damages provision states that if the
Company fails to deliver to the Subscriber such shares issuable upon
conversion of a Note by the Delivery Date and if seven (7) business
days after the Delivery Date the Subscriber purchases shares of
Common Stock to deliver in satisfaction of a sale by such Subscriber
of the Common Stock which the Subscriber was entitled to receive
upon such conversion (a "BUY-IN"), then the Company shall pay in
cash to the Subscriber (in addition to any remedies available to or
elected by the Subscriber) the amount by which (A) the Subscriber's
total purchase price for the shares of Common Stock so purchased
exceeds (B) the aggregate principal and/or interest amount of the
Note for which such conversion was not timely honored, together with
interest thereon at a rate of 15% per annum, accruing until such
amount and any accrued interest thereon is paid in full (which
amount shall be paid as liquidated damages and not as a penalty).
For example, if the Subscriber purchases shares of Common Stock
having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of $10,000 of note principal
and/or interest, the Company shall be required to pay the Subscriber
$1,000, plus interest. The Subscriber shall provide the Company
written notice indicating the amounts payable to the Subscriber in
respect of the Buy-In.
Additionally, if the Company is unable to deliver to the holder of
Registrable Securities, then as Liquidated Damages, an amount equal
to two percent (2%) for each thirty (30) days or part thereof,
thereafter of the Purchase Price of the Notes remaining unconverted
and purchase price of Shares issued upon conversion of the Notes.
The Company must pay the Liquidated Damages in cash or an amount
equal to two hundred percent of such cash Liquidated Damages if paid
in additional shares of registered unlegended free-trading shares of
Common Stock. Such Common Stock shall be valued at a per share value
equal to 85% of the average of the five (5) lowest closing bid
prices of the Common Stock for the twenty (20) trading days
preceding the first day of each thirty (30) day or shorter period
for which Liquidated Damages are payable. As of September 30, 2005,
no liquidating damages have been incurred by the company.
Redemption Option - The Company will have the option of prepaying
the outstanding Principal Amount ("Optional Redemption"), in whole
or in part, by paying to the Holder a sum of money equal to one
hundred twenty percent (120%) of the Principal Amount to be
redeemed, together with accrued but unpaid interest thereon
Debt features. The Holder shall have the right, but not the
obligation, to convert all or any portion of the then aggregate
outstanding Principal Amount of this Note, together with interest
and fees due hereon, into shares of Common Stock.
The $1,875,000 in proceeds from the financing transaction were
allocated to the debt features and to the warrants based upon their
fair values. After the latter allocations, there was $170,061 of
remaining value to be allocated to the Note on the financial
statements.
The debt discount is being accreted using the effective interest
method over the term of the note.
The value of the discount on the converted notes on the books is
being accreted over the term of the note (three years). For the
years ended December 31, 2004 and 2003, the Company accreted $52,300
and $0, respectively, of debt discount related to the Notes. For the
nine months ended September 30, 2005, the Company accreted $457,360
of the debt discount related to these Notes.
WARRANTS ISSUED
The estimated fair value of the 3,125,000 warrants at issuance
(11/11/2004) was $936,714 and has been classified as a derivative
instrument and recorded as a liability on the Company's balance
sheet in accordance with current authoritative guidance. The
estimated fair value of the warrants was determined using the Black-
Scholes option-pricing model with a closing price of $0.40, an
exercise price of $0.30, a 5.0 year term, and a volatility factor of
89%. The model uses several assumptions including: historical stock
price volatility (utilizing a rolling 120 day period), risk-free
interest rate (3.50%), remaining maturity, and the closing price of
the Company's common stock to determine estimated fair value of the
derivative liability. In valuing the warrants at December 31, 2004,
the company used the closing price of $0.65, the exercise price of
$0.30, a 4.88 year remaining term, and a volatility of 116% In
accordance with the provisions of SFAS No. 133, Accounting for
Derivative Instruments, the Company is required to adjust the
carrying value of the instrument to its fair value at each balance
sheet date and recognize any change since the prior balance sheet
date as a component of Other Income (Expense). The warrant
derivative liability at December 31, 2004, had increased to a fair
value of $1,785,877, due in part to an increase in the market value
of the Company's common stock to $0.65 from $0.40 at issuance, which
resulted in an "other expense" item of $849,163 on the Company's
books. For the nine months ended September 30, 2005, the warrant
derivative liability had decreased to a value of $474,525, due in
part to a decrease in the market value of the Company's common stock
to $0.40 from $0.65 at December 31, 2004, which resulted in an
"other income" item of $1,311,352 for the nine months ended
September 30, 2005. The company used a closing price of $0.32, an
exercise price of $0.30, a 4.13 years remaining term, and a 54%
volatility factor.
The recorded value of such warrants can fluctuate significantly
based on fluctuations in the market value of the underlying
securities of the issuer of the warrants, as well as in the
volatility of the stock price during the term used for observation
and the term remaining for the warrants.
In accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended ("SFAS 133"), the debt features provision (collectively,
the features) contained in the terms governing the Notes are not
clearly and closely related to the characteristics of the Notes.
Accordingly, the features qualified as embedded derivative
instruments at issuance and, because they do not qualify for any
scope exception within SFAS 133, they were required by SFAS 133 to
be accounted for separately from the debt instrument and recorded as
derivative financial instruments.
DEBT FEATURES
Pursuant to the terms of the Notes, these notes are convertible at
the option of the holder, at anytime on or prior to maturity. There
is an additional interest rate adjustment feature, a liquidated
damages clause, a cash premium option, as well as the redemption
option. The debt features represents an embedded derivative that is
required to be accounted for apart from the underlying Notes. At
issuance of the Notes (11/11/2004), the debt features had an
estimated initial fair value of $768,225, which was recorded as a
discount to the Notes and a derivative liability on the consolidated
balance sheet. In subsequent periods, if the price of the security
changes, the embedded derivative financial instrument related to the
debt features will be adjusted to the fair value with the
corresponding charge or credit to other expense or income. The
estimated fair value of the debt features was determined using the
probability weighted averaged expected cash flows / Lattice Model
with a closing price of $0.40, an exercise price of $0.30, a 3.0
year term, and a volatility factor of 89%. The model uses several
assumptions including: historical stock price volatility (utilizing
a rolling 120 day period), risk-free interest rate (3.50%),
remaining maturity, and the closing price of the Company's common
stock to determine estimated fair value of the derivative liability.
In valuing the debt features at December 31, 2004, the company used
the closing price of $0.65 and the exercise price of $0.30, 2.88
year remaining term, and a volatility of 116%. For the year ended
December 31, 2004, due in part to an increase in the market value of
the Company's common stock to $0.65 from $0.40 at issuance, the
Company recorded an "other expense" on the consolidated statement of
operations for the change in fair value of the debt features of
approximately $1,639,953. At December 31, 2004, the estimated fair
value of the debt features was approximately $2,408,178. For the
nine months ended September 30, 2005, the estimated value of the
debt features decreased to $868,156, thus the company recorded an
"other income" item on the consolidated statement of operations for
the change in fair value of the debt features related to these notes
of $1,540,022 for the nine months ended September 30, 2005. The
company used a closing price of $0.32, an exercise price of $0.272,
a 2.13 years remaining term, and a 54% volatility factor.
The recorded value of the debt features related to the Notes can
fluctuate significantly based on fluctuations in the fair value of
the Company's common stock, as well as in the volatility of the
stock price during the term used for observation and the term
remaining for the warrants.
Pursuant to the terms of the Notes, the Company has the option of
prepaying the outstanding Principal Amount in whole or in part, by
paying to the Holder a sum of money equal to one hundred twenty
percent (120%) of the Principal Amount to be redeemed, together with
accrued but unpaid interest thereon and any and all other sums due.
Because the terms of the 2004 convertible note require such
classification, the accounting rules required additional convertible
notes and non-employee warrants to also be classified as
liabilities, regardless of the terms of the new notes and / or
warrants. This presumption has been made due to the company no
longer having the control to physical or net share settle subsequent
convertible instruments because it is tainted by the terms of the
2004 convertible notes. Were the 2004 convertible notes to not have
contained those terms or even if the 2004 transaction were not
entered into, it could have altered the treatment of the March 31,
2005 notes and the conversion features of the latter agreement may
have resulted in a different accounting treatment from the liability
classification. The March 31, 2005 note, as well as any subsequent
convertible notes or warrants, will be treated as derivative
liabilities until all such provisions are settled.
NOTES PAYABLE - $125,000, MARCH 2005
In March 2005, the Company issued $125,000 in principal amount of
Notes to third parties. As part of the financing transaction, the
Company issued warrants to purchase 300,000 shares of common stock
at a per share purchase price of $0.50 per share. The Warrants shall
be exercisable until five (5) years after the Issue Date of the
Warrants.
The Notes accrue interest at a rate 12% per annum. The Notes are due
and payable in March 2007. After a thorough review of the terms of
the note and respective covenants, the company has determined the
more conservative method of including the entire debt as a current
liability on the balance sheet.
Interest shall be calculated on the basis of a 360 day year.
Interest on the Principal Amount shall be payable monthly, in
arrears, commencing the first day of the month after 120 days from
the closing and on the first day of each consecutive calendar month
thereafter (each, a "Repayment Date") and on the Maturity Date,
whether by acceleration or otherwise.
Redemption Option - The Company will have the option of prepaying
the outstanding Principal Amount ("Optional Redemption"), in whole
or in part, by paying to the Holder a sum of money equal to one
hundred twenty percent (120%) of the Principal Amount to be
redeemed, together with accrued but unpaid interest thereon
Holder's Conversion Rights. The Holder shall have the right, but not
the obligation, to convert all or any portion of the then aggregate
outstanding Principal Amount of this Note, together with interest
and fees due hereon, into shares of Common Stock.
The $125,000 in proceeds from the financing transaction were
allocated to the conversion option, call option and to the warrants
based upon their fair values. After the latter allocations, the
company allocated $58,667 to the carrying value of the debt. That
debt discount is being accreted using the effective interest method
over the term of the note.
The value of the discount on the converted notes on the books is
being accreted over the term of the note (three years). For the nine
months ended September 30, 2005, the Company accreted $25,740 of the
debt discount related to these Notes.
WARRANTS ISSUED
The estimated fair value of the 300,000 warrants at issuance
(3/31/2005) was $56,785 and has been classified as a derivative
instrument and recorded as a liability on the Company's balance
sheet in accordance with current authoritative guidance. The
estimated fair value of the warrants was determined using the Black-
Scholes option-pricing model. The model uses several assumptions
including: historical stock price volatility (utilizing a rolling
120 day period), risk-free interest rate (3.50%), remaining
maturity, and the closing price of the Company's common stock to
determine estimated fair value of the derivative liability. In
valuing the warrants at March 31, 2005, the company used the closing
price of $0.50, the exercise price of $0.50, a 5 year term, and a
37% volatility factor. In accordance with the provisions of SFAS No.
133, Accounting for Derivative Instruments, the Company is required
to adjust the carrying value of the instrument to its fair value at
each balance sheet date and recognize any change since the prior
balance sheet date as a component of Other Income (Expense). For the
nine months ended September 30, 2005, the warrant liability had
decreased to a value of $33,452, due in part to a decrease in the
market value of the Company's common stock to $0.32 from $0.50 at
March 31, 2005, which resulted in an "other income" item of $23,333.
The company used a closing price of $0.32, an exercise price of
$0.50, a 4.50 year remaining term, and a 54% volatility factor.
The recorded value of such warrants can fluctuate significantly
based on fluctuations in the market value of the underlying
securities of the issuer of the warrants, as well as in the
volatility of the stock price during the term used for observation
and the term remaining for the warrants.
In accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended ("SFAS 133"), the holder's conversion right provision,
interest rate adjustment provision, liquidated damages clause, cash
premium option, and the redemption option (collectively, the debt
features) contained in the terms governing the Notes are not clearly
and closely related to the characteristics of the Notes.
Accordingly, the debt features qualified as embedded derivative
instruments at issuance and, because they do not qualify for any
scope exception within SFAS 133, they were required by SFAS 133 to
be accounted for separately from the debt instrument and recorded as
derivative financial instruments.
DEBT FEATURES
Pursuant to the terms of the Notes, these notes are convertible at
the option of the holder, at anytime on or prior to maturity. There
is an additional interest rate adjustment feature, a liquidated
damages clause, a cash premium option, and the redemption option.
The debt features represents an embedded derivative that is required
to be accounted for apart from the underlying Notes. At issuance of
the Notes (3/31/05), the debt features had an estimated initial fair
value of $9,548, which was recorded as a discount to the Notes and a
derivative liability on the consolidated balance sheet. In
subsequent periods, if the price of the security changes, the
embedded derivative financial instrument related to the debt
features will be adjusted to fair value with the corresponding
charge or credit to other expense or income. The estimated fair
value of the debt features was determined using the probability
weighted averaged expected cash flows / Lattice Model. The model
uses several assumptions including: historical stock price
volatility (utilizing a rolling 120 day period), risk-free interest
rate (3.50%), remaining maturity, and the closing price of the
Company's common stock to determine estimated fair value of the
derivative liability. In valuing the debt features at March 31,
2005, the company used the closing price of $0.50, the exercise
price of $0.50, a 2.0 year term, and a 37% volatility factor. For
the nine months ended September 30, 2005, the estimated value of the
debt features increased to $20,353, thus the company recorded an
"other expense" item on the consolidated statement of operations for
the change in fair value of the debt features of $10,805. The
company used a closing price of $0.32, an exercise price of $0.50, a
1.50 year remaining term, and a 54% volatility factor.
The recorded value of the debt features related to the Notes can
fluctuate significantly based on fluctuations in the fair value of
the Company's common stock, as well as in the volatility of the
stock price during the term used for observation and the term
remaining for the warrants.
The significant fluctuations can create significant income and
expense items on the financial statements of the company.
For the nine months ended September 30, 2005, we recorded an other
income item of $2,863,902, of which $1,540,022 of other income
related to the decrease in value of the debt features on the $1.875
million convertible note, $1,311,352 of other income related to the
decrease in warrant liability related to the warrants granted in
November 2004 to the holder's of the $1.875 million convertible
note, $23,333 of other income item related to the decrease in
warrant liability on the warrants granted to the holders of the
March 2005 $125,000 convertible note, and finally $10,805 of other
expense related to an increase in value of the derivative liability
related to the debt features of the March 2005 $125,000 convertible
note. A tabular reconciliation of this adjustment follows:
For the nine months ended September 30, 2005:
$1,540,022 income, decrease in value of 2004 derivative liability
1,311,352 income, decrease in value of 2004 warrant liability
(10,805) expense, increase in 2005 derivative liability
23,333 income, decrease in value of 2005 warrant liability
----------
$2,863,902 other income related to convertible debt
For the nine months ended September 30, 2005, the company recorded
$483,100 of interest expense related to the accretion of debt
related to the convertible financing.
For the nine months ended September 30, 2005:
$457,360 of interest expense related to accretion of 2004
convertible debt
25,740 of interest expense related to accretion of 2005
convertible debt
--------
$483,100 of interest expense related to convertible debt
NOTES PAYABLE - $200,000, MAY 2005
On May 18, 2005, the company received $200,000 in the form of a
promissory note at 12% per year. The note does not specify a term
for when it is due.
The balance of the carrying value of the convertible debt as of
September 30, 2005 is:
$ 241,111 December 31, 2004 value
457,360 accretion of 2004 convertible debt
58,667 original carrying value on 2005 convertible debt
25,740 accretion of 2005 convertible debt
84,883 interest accrual on loan minus payments of interest
--------
$ 867,761 September 30, 2005 carrying value of debt
The balance of the carrying value of the derivative liability as of
September 30, 2005 is:
$2,408,178 December 31, 2004 value of derivative liability
(1,540,022) income, decrease in value of 2004 derivative liability
9,548 original carrying value on 2005 derivative liability
10,805 expense, increase in 2005 derivative liability
- -----------
$ 888,509 September 30, 2005 value of derivative liability
The balance of the carrying value of the warrant liability as of
September 30, 2005 is:
$ 1,785,877 December 31, 2004 value of warrant liability
(1,311,352) income, decrease in value of 2004 warrant liability
56,785 original carrying value on 2005 warrant liability
23,333 income, decrease in 2005 warrant liability
- -----------
$ 507,977 September 30, 2005 value of warrant liability
NOTE 5 - RECEIVABLE FROM NUTEK OIL - ASSET HELD FOR SALE
On April 14, 2005, DSEN filed a Current Report on Form 8-K, relating
to the conversion of the South Texas Oil Company asset held for sale
into shares in South Texas Oil Company (formerly known as Nutek Oil)
and will be distributing its ownership interest in South Texas Oil
Company to shareholders of DSEN.
The dividend will take the form of a dividend certificate
representing restricted common stock, which will be distributed to
DSEN's beneficial stockholders of record as of the record date of
April 27, 2005.
The stock dividend will be distributed to owners of DSEN's common
stock as of the record date in a ratio of one share of South Texas
Oil Company, for approximately every 18 shares of common stock held
in DSEN.
On December 31, 2004 the company reviewed any need for impairment of
assets per SFAS 144. A loan is considered impaired if it is probable
that the creditor will be unable to collect all amounts due under
the contractual terms of the loan agreement. In evaluating the
impairment of the assets of the company at year end, the company
considered, among other items, (1) materiality of the asset, (2)
previous loss experience, and (3) assets that are not readily
marketable or susceptible to decline in value.
After discussions with the Board and with the management of both
Datascension, and Nutek Oil, it was determined to be in the best
interest of the Company and shareholders for the note to be
converted to stock and distributed to the shareholders.
Pursuant to the previous dividends on August 1, 2001 and January 8,
2004, the company determined it was in the best interest of it's
shareholders to convert the balance of the note into the common
stock of Nutek Oil and distribute the pro rata shares to our
shareholders. This coincides with managements plan to write off any
assets which are attributable to the history of the company which
are non-operational in nature, etc.
As of the December 31, 2004, the value of the loan to be converted
is $1,015,014 and is classified on the balance sheet of the Company
as an Asset Held For Sale.
The stock of Nutek Oil traded over $1.00 during the week of the
conversion to settle the debt owed to Datascension. The stock has
since traded as high as $1.25. Management felt strongly that the
shareholders and company were never at risk of losing the value of
the receivable. When Datascension made the agreement to convert the
receivable into the stock of Nutek Oil, it was agreed to be
converted at the $1,015,014 value of stock. The number of shares
(957,349) was only later determined based on the then average price
of $1.06. Management did not feel there was a risk of shareholders
receiving less than full credit for the value of the note.
NOTE 6 - STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2005, DSEN issued
securities using the exceptions available under the Securities Act
of 1933 including unregistered sales made pursuant to Section 4(2)
of the Securities Act of 1933 as follows:
On March 31, 2005, 500,000 shares of restricted common stock valued
at $.50 per share were issued pursuant to a consulting agreement in
connection with which we are to receive certain investor relations
services. The shares have been issued for a two year contract which
can be cancelled after the first year and 50% of the shares
returned. The issuance of these securities was in a transaction
deemed to be exempt under Section 4(2) of the Securities Act of 1933
as a sale of securities not involving a public offering. We made a
determination that the consultant was a sophisticated investors with
enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On March 31, 2005, 300,000 shares of restricted common stock valued
at $.50 per share were issued pursuant to a consulting agreement in
connection with which we are to receive certain investor relations
services. The shares have been issued for a two year contract which
can be cancelled after the first year and 50% of the shares
returned. The issuance of these securities was in a transaction
deemed to be exempt under Section 4(2) of the Securities Act of 1933
as a sale of securities not involving a public offering. We made a
determination that the consultant was a sophisticated investors with
enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On March 31, 2005, DSEN issued a $125,000 Convertible Debenture,
pursuant to a Securities Purchase Agreement (the "Agreement") to the
Longview Fund LP. In addition, DSEN issued a common stock purchase
warrant to purchase 300,000 post reverse shares of DSEN common stock
at an exercise price of $.50 per share. The issuance of these
securities was in a transaction deemed to be exempt under Section
4(2) of the Securities Act of 1933 as a sale of securities not
involving a public offering. We made a determination that the
investors were sophisticated investors with enough knowledge and
experience in business to evaluate the risks and merits of the
investment as well as accredited investors. (See Note 4)
On March 31, 2005, 50,000 shares of restricted common stock valued
at $.50 per share were issued pursuant to a consulting agreement in
connection with which we are to receive certain investor relations
services. The issuance of these securities was in a transaction
deemed to be exempt under Section 4(2) of the Securities Act of 1933
as a sale of securities not involving a public offering. We made a
determination that the consultant was a sophisticated investors with
enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On March 31, 2005, 100,000 shares of restricted common stock valued
at $.50 per share were issued pursuant to an employee in connection
with his employment agreement which offered the executive a 100,000
share signing bonus. The issuance of these securities was in a
transaction deemed to be exempt under Section 4(2) of the Securities
Act of 1933 as a sale of securities not involving a public offering.
We made a determination that the consultant was a sophisticated
investors with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
All of these transactions were exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of
the exemptions provided under section 4(2) was available because:
- The transfer or issuance did not involve underwriters,
underwriting discounts or commissions;
- The shares were purchased for investment purposes without a view
to distribution;
- A restriction on transfer legend was placed on all certificates
issued;
- The distributions did not involve general solicitation or
advertising; and,
- The distributions were made only to insiders, accredited
investors or investors who were sophisticated enough to evaluate the
risks of the investment. Each shareholder was given access to all
information about our business and the opportunity to ask questions
and receive answers about our business from our management prior to
making any investment decision.
NOTE 7 - RELATED PARTY TRANSACTIONS
As of September 30, 2005, the Company has an outstanding note
payable to Scott Kincer, the Company's COO, in the amount of $9,000.
This payable accrues interest at 1% monthly due on the first day of
each month.
NOTE 8 - FOREIGN OPERATIONS
The company currently operates out of the United States, Costa Rica
and the Dominican Republic. The future plans of the company involve
the slowing growth at the Dominican Republic facility while focusing
on the potential and available growth in Costa Rica. Management does
not feel there is a currency risk or need to assess a foreign
currency translation adjustment or other comprehensive income item
as income and expense items are negotiated in the US dollar. The
Company maintains their accountings records in U.S. dollars and all
payments are made in US dollars. All debts and assets on the books
of the company are valued based on US dollars and are not translated
from a foreign currency amount. The Company currently coordinates
all foreign operations, and supervision activities using part time
employees, consultants and contract labor. Approximately 85% of the
company's workforce is outside of the United States. Currently 100%
of the company's clients are US based companies. Any resulting
foreign exchange fluctuations do not affect the payment of
employees, contract labor or off shore operations.
NOTE 9 - RESTATEMENT OF FINANCIAL STATEMENTS
2003:
The net loss for 2003 was previously reported as $(182,895), while
the 2003 restated loss is $246,533, an increase of $63,638, which is
attributable to the increase in amortization expense of $63,638. The
effect of the restatement to the 2003 balance sheet was a decrease
in the asset value of the intangible assets which had previously not
been amortized correctly. The value of the other assets decreased
$63,638.
2004:
The loss after discontinued operations for 2004 was originally
$4,791,105, while the 2004 restated loss after discontinued
operations is reported as $6,052,366, an increase of $1,261,261.
This is due to an increase in other expenses related to the
convertible debt of $2,489,116, as well as an increase in the
interest expense related to the convertible debt of $52,300, coupled
with a decrease in the beneficial conversion feature debt discount
expense of $1,203,646, a decrease in the loss from discontinued
operations of $63,638, and a decrease in interest expense of
$12,871.
On the 2004 balance sheet, the restatement resulted in the removal
of $2,077,604 of debt discount from the other asset section, an
increase in prepaid expenses of $5,879. The convertible debt in the
liability section of the company's financial statements decreased
from $1,893,750 to $241,111, while there was an increase in the
derivative liability from $0 to $2,408,178, as well as an increase
in the warrant liability from $0 to $1,785,877 and a decrease in
additional paid in capital of $3,300,000.
The basic loss per share increased from the previously reported
$0.19 per share to $0.28 per share for the year ended December 31,
2004, while the diluted loss per share increased from the previously
reported $0.18 per share to $0.26 per share.
2005:
The net income for the nine months September 30, 2005, was
originally $1,095,730, while the nine months September 30, 2005
restated income is reported as $1,732,336, an increase of $636,606.
This is due to an increase in other income related to the
convertible debt of $564,944, as well as a decrease in the interest
expense related to the convertible debt of $47,545, and a decrease
in interest expense of $24,117.
On the September 30, 2005 balance sheet, the restatement resulted
from an increase in prepaid expenses of $18,238. The convertible
debt in the liability section of the company's financial statements
increased from $931,970 to $1,067,761, and while there was an
increase in the derivative liability from $735,921 to $888,509.
The basic income per share increased from the previously reported
$0.06 per share to $0.10 per share for the nine months ended
September 30, 2005, while the diluted income per share increased
from the previously reported $0.04 per share to $0.06 per share.
It is anticipated that the company will restate the December 31,
2004 10KSB, the March 31, 2005 10QSB, the June 30, 2005 10QSB, and
the September 30, 2005 10QSB to reflect the above adjustments.
DATASCENSION INC.
FINANCIAL STATEMENTS
--------------------
December 31, 2004
December 31, 2003
F-1
TABLE OF CONTENTS
-----------------
PAGE
- ----
INDEPENDENT AUDITORS' REPORT:
Independent Auditors Report - 2004 F-3
Independent Auditors Report - 2003 F-4
FINANCIAL STATEMENTS:
Balance Sheets F-5
Statements of Operations F-6
Statement of Changes in Stockholders' Equity F-7
Statements of Cash Flows F-8
NOTES TO FINANCIAL STATEMENTS: F-9
F-2
Larry O'Donnell, CPA, P.C.
Telephone (303)745-4545
2228 South Fraser Street
Unit 1
Aurora, Colorado 80014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Datascension, Inc. formerly Nutek, Inc.
Las Vegas, Nevada
I have audited the accompanying balance sheet of Datascension,
Inc. formerly Nutek, Inc., a Nevada corporation, as of December 31,
2004, and the related statements of loss, changes in
stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these
financial statements based on my audits.
I conducted my audit in accordance with standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall financial statement presentation. I believe that my audit
provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Datascension, Inc. formerly Nutek, Inc., as of December 31,
2004, and the results of its operations and cash flows for the year
then ended in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 17 to the financial statements, the Company has
restated its financial statements for the year ended December 31,
2004 for a correction of error related to the treatment of the
convertible debt.
Larry O'Donnell, CPA, P.C.
March 24, 2005 (except for Note 2, 4, 6, 7, and 17, November 28,
2005)
F-3
Gary V. Campbell, CPA, Ltd.
Certified Public Accountants
7440 West Sahara
Las Vegas, Nevada, 89117
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Nutek, Inc.
Las Vegas, Nevada
We have audited the accompanying consolidated balance sheets of
Nutek, Inc., (a Nevada corporation), as of December 31, 2003, and
the related consolidated statement of income, changes in
stockholders' equity, and cash flows for the year 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 audit.
We conducted our audits in accordance with 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. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant 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 financial statements referred to above present
fairly, in all material respects, the financial position of
Nutek, Inc., as of December 31, 2003, and the results of its
operations and cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States
of America.
As discussed in Note 17 to the financial statements, the Company has
restated its financial statements for the year ended December 31,
2003 for a correction of error related to the amortization of
intangibles.
Gary V. Campbell, CPA, Ltd.
Las Vegas, Nevada
March 30, 2004 (except for Note 2 and 17, November 28, 2005)
F-4
DATASCENSION, INC.
BALANCE SHEETS
AS OF
December 31, 2004 and December 31, 2003
ASSETS
Restated Restated
Audited Audited
12/31/04 12/31/03
CURRENT ASSETS:
Cash $ 556,593 $ 122,891
Accounts receivable 1,533,969 1,087,694
Inventory - 227,997
Accrued income - 11,200
Prepaid expenses 186,306 194,623
Note receivable, related party - 1,250
Investment in Century Innovations 108,469 -
---------- ----------
TOTAL CURRENT ASSETS $2,385,337 $1,645,655
Property and Equipment, net of accumulated
depreciation 681,346 3,374,421
OTHER ASSETS:
Asset held for sale (see notes) 1,015,014 -
Notes receivable, net of current portion - 5,800
Patent rights acquired, net of amortization - 518,761
Long-term investment - 8,000
Website assets, net of amortization 4,520 26,184
Customer lists, net of amortization - 40,278
Patterns/designs, net of amortization - 42,083
Packaging design/artwork, net of amortization - 74,898
Deposits 25,399 51,892
Goodwill 1,692,782 1,692,782
Trademarks - 7,466
Licensing fees - 50,000
---------- ----------
TOTAL OTHER ASSETS 2,737,715 2,518,144
---------- ----------
TOTAL ASSETS $5,804,398 $7,538,220
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 135,533 $ 278,022
Accrued expenses 1,390,880 182,377
Line of credit - 449,650
Accrued contingent liabilities - 338,461
Notes payable, related party 60,038 328,540
Short term notes payable 121,742 -
Convertible debt, net of current portion 241,111 -
Derivative liability 2,408,178 -
Warrant liability 1,785,877 -
Current portion of long-term notes payable 116,207 102,033
---------- ----------
TOTAL CURRENT LIABILITIES $6,259,566 $1,679,083
LONG-TERM DEBT
Long-term notes payable, net of current
portion 103,548 16,565
---------- ----------
TOTAL LONG-TERM DEBT 103,548 16,565
TOTAL LIABILITIES 6,363,114 1,695,648
Noncontrolling interest in
subsidiary of Nutek Oil, Inc. - 311,137
STOCKHOLDERS' EQUITY:
Common stock:
Common stock, $0.001 par value, 200,000,000
shares authorized; 16,257,290 shares issued,
15,298,957 outstanding at December 31, 2004 159,875 150,554
Additional paid-in capital-common stock 11,029,295 10,802,058
Preferred stock Series B:
Preferred stock, $0.001 par value, 10,000,000
shares authorized; 506,400 Series B shares
issued and outstanding at December 31, 2004 506 509
Additional paid-in capital-preferred Series B 481,994 507,992
Subscriptions receivable (119,063) (604,804)
Treasury Stock (134,388) (134,388)
Accumulated deficit (11,976,936) (5,190,486)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (558,716) 5,531,435
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,804,398 $7,538,220
========== ==========
See accompanying notes to financial statements
F-5
DATASCENSION, INC.
STATEMENT OF OPERATIONS
FOR YEARS ENDED
December 31, 2004 and December 31, 2003
Restated Restated
Audited Audited
For the For the
Year ended Year ended
12/31/2004 12/31/ 2003
------------ ------------
REVENUE $ 8,471,440 $ 7,057,087
COST OF GOODS SOLD 7,071,784 4,039,344
------------ ------------
GROSS PROFIT 1,399,656 3,017,743
EXPENSES:
Selling, general and administrative $ 2,430,666 $ 2,633,934
Depreciation and amortization 270,893 340,231
Asset impairment 328,492 -
Contingency accrual - 292,500
Lawsuit liability - 45,000
------------ ------------
TOTAL EXPENSES 3,030,051 3,311,665
OPERATING INCOME (1,630,395) (293,922)
OTHER INCOME (EXPENSE):
Interest income 743 1,898
Forgiveness of debt 55,000 99,274
Other income 11,210 17,352
Interest expense (216,507) (97,728)
Other (Expense), from convertible (2,489,116) -
Interest (expense), from convertible (52,300) -
Minority interest, Nutek Oil, Inc. - 26,593
------------ ------------
TOTAL OTHER INCOME (2,690,970) 47,389
Net Income (loss) $ (4,321,365) $ (246,533)
Discontinued Operations $ (1,731,001) $ -
------------ ------------
Net Income (loss) after
discontinued operations $ (6,052,366) $ (246,533)
------------ ------------
Basic weighted average number
of common shares outstanding 15,671,867 9,617,251*
Diluted weighted average number
of common shares outstanding 16,594,223 9,617,251*
BASIC NET INCOME PER SHARE $ (0.28) $ (0.03)
DISCONTINUED OPERATIONS $ (0.11) $ (0.00)
BASIC NET INCOME PER SHARE ------------ ------------
AFTER DISCONTINUED OPERATIONS $ (0.39) $ (0.03)
DILUTED NET INCOME PER SHARE $ (0.26) $ (0.03)
DISCONTINUED OPERATIONS $ (0.10) $ (0.00)
DILUTED NET INCOME PER SHARE ------------ ------------
AFTER DISCONTINUED OPERATIONS $ (0.36) $ (0.03)
See accompanying notes to financial statements
* = split adjusted
F-6
DATASCENSION Inc.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR YEARS ENDED
December 31, 2004 and December 31, 2003
Audited
Restated
Common Common Additional Preferred Preferred Preferred - Preferred
A
Stock Stock Paid-in Stock Stock Add. Paid Stock
Shares Shares
Shares Amount Capital Series A Series A In Capital Series B
Balances at
12/31/02 8,897,391 88,974 7,555,559 559,508 560 3,021,132 508,500
Sale of Stock 363,889 3,639 113,408 - - - -
Issuance for Settlement of Bonds 168,374 1,684 106,507 - - - -
Issuance for Services 550,473 5,505 192,055 - - - -
Accrual of Preferred Dividends - - - - - - -
Preferred purchases / posted - - - (52,000) (52) (136,358) -
Preferred converted 5,075,080 50,751 2,834,530 (507,508) (508) (2,884,774) -
Change in ownership of Nutek Oil - - - - - - -
Allocation of Minority Interest
In Subsidiary Earnings - - - - - - -
Net Profit for Quarter
Ended December 31, 2003 - - - - - - -
Balance at December 31, 2003 15,055,207 150,552 10,802,059 - - (0) 508,500
Prior period adjustment
Sale of Stock 187,500 1,875 73,125 - - - -
Issuance for Services 12,500 125 6,125 - - - -
Settlement of Series B 50,000 500 25,500 - - - (2,600)
Distribution / Sale of Nutek Oil - - - - - - -
Ownership
Issuances for Services 47,500 475 37,275 - - - -
Issuances for Services 12,500 125 6,125 - - - -
Adjustment for Preferred Converted 395,000 3,950 (3,950) - - - -
Additional shares issued related
to prior contract 110,000 1,100 9,400 - - - -
Additional cost for dialers 52,083 521 7,812 - - - -
Prior quarter investment adjustment 22,500 225 - - - - -
Issuances for Services 12,500 125 6,125
Issuances for Services 300,000 300 59,700
Distribution of Century Innovations
Century no longer consolidated
Write down of assets
Net Loss for Year - - - - - - -
---------- -------- --------- ---------- ---------- ----------- ----------
Balance at December 31, 2004 16,257,290 159,873 11,029,295 - - (0) 505,900
---------- -------- --------- ---------- ---------- ----------- ----------
Preferred Preferred - Non-Controlling
B
Stock Add. Paid Treasury Subscribed Interest Income Total
Series B In Capital Stock Stock In Subsidiary Deficit Equity
Balances at
12/31/02 509 507,992 (134,388) (153,750) 355,782 (4,943,953) 6,298,416
Sale of Stock - - - - - - 117,046
Issuance for Settlement of Bonds - - - - - - 108,190
Issuance for Services - - - - - - 197,560
Accrual of Preferred Dividends - - - - - - -
Preferred purchases / posted - - - - - - (136,410)
Preferred converted - - - - - - (1)
Change in ownership of Nutek Oil - - - - (18,052) - (18,052)
Allocation of Minority Interest
In Subsidiary Earnings - - - - (26,593) - (26,593)
Net Profit for Quarter
Ended December 31, 2003 - - - - - (246,533) (246,533)
----- -------- --------- ---------- ---------- ----------- ----------
Balance at December 31, 2003 509 507,992 (134,388) (153,750) 311,136 (5,190,486) 6,293,623
----- -------- --------- ---------- ---------- ----------- ----------
Removal of Nutek Oil retained earnings 219,709 219,709
Sale of Stock - - - - - - 75,000
Issuance for Services - - - - - - 6,250
Settlement of Series B (3) (25,997) - - - - -
Distribution / Sale of Nutek Oil - - - - (311,136) (83,708) (394,844)
Ownership
Issuances for Services - - - - - - 37,750
Issuances for Services - - - - - - 6,250
Adjustment for Preferred Converted - - - - - - -
Shares issued for prior contract adjustment - - - - - - 10,500
Additional cost for dialers - - - - - - 8,333
Prior quarter investment adjustment - - - - - - 225
Issuances for Services
Issuances for Services
Distribution of Century Innovations (976,221)
Century no longer consolidated 106,137
Write down of assets 153,750
Move receivable to subscribed stock (119,063)
Net Loss for Year - - - - - (6,052,366) (6,052,366)
----- -------- --------- ---------- ---------- ----------- ----------
Balance at December 31, 2004 506 481,994 (134,388) (119,063) 0 (11,976,936)$(558,717)
----- -------- --------- ---------- ---------- ----------- ----------
See accompanying notes to financial statements
F-7
DATASCENSION Inc.
STATEMENT OF CASH FLOWS
FOR YEARS ENDED
December 31, 2004 and December 31, 2003
Restated Restated
Audited Audited
FOR THE YEAR ENDED FOR THE YEAR ENDED
CASH FLOWS FROM OPERATING ACTIVITIES: 12/31/04 12/31/03
------------------ ------------------
Net income $ (6,052,366) $ (246,533)
Adjustments to reconcile net income to net
cash provided by operating activities:
Issued for services 135,333 61,153
Discontinued operations / impairment of assets 1,688,070 -
Impairment of assets 328,492
Non cash expenses associated with convertible debt 2,489,116
Depreciation and amortization 270,893 340,231
Investment in Century Innovations - -
(Decrease) Increase in contingent liabilities (338,461)
Increase in non-controlling interest in subsidiary - (44,645)
Forgiveness of debt (55,000) (62,217)
(Increase) Decrease in accounts receivable (446,275) 206,027
Increase in inventory - (5,108)
Increase in prepaid expenses 8,317 (75,216)
Increase in deposits 26,493 (21,608)
Decrease in accounts payable (142,489) (313,704)
Decrease in accrued expenses 1,208,503 29,024
------------------ ----------------
NET CASH USED BY OPERATING ACTIVITIES $ (879,374) $ (132,596)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in notes receivable 7,050 308,402
Purchase of property and equipment (219,996) (90,290)
Purchase of intangible assets - (23,897)
------------------ ----------------
NET CASH USED BY INVESTING ACTIVITIES (212,946) 194,215
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 222,899 (175,992)
Increase (Decrease) in related party payable (268,502) -
Increase (Decrease) in convertible debt 241,111 -
Issuance of common stock 75,225 117,043
Change in warrant liability 936,714 -
Change in derivative liability 768,225 -
(Decrease) Increase in line of credit (449,650) 75,850
------------------ ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,526,022 16,901
------------------ ----------------
NET INCREASE IN CASH 433,702 78,520
BALANCE, BEGINNING 122,891 44,371
BALANCE, ENDING $ 556,593 $ 122,891
================== ================
INTEREST PAID $ 97,728 $ 20,697
TAXES PAID $ - $ -
See accompanying notes to financial statements
F-8
DATASCENSION, INC.
DATASCENSION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - HISTORY AND ORGANIZATION OF THE COMPANY
Datascension, Inc. (formerly known as Nutek, Inc.) was incorporated
in August 1991 under the laws of the State of Nevada as Nutek, Inc.
(the "Company") and is engaged in the market research industry.
Datascension International, Inc. and related assets were purchased
on September 27, 2001 for $2,200,000 using company shares at fair
market value. Datascension International, Inc. is a premier data
solutions company representing a unique expertise in the collecting,
storage, processing, and interpretation of data. During 2002,
Datascension International, Inc. expanded operations into Costa
Rica.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company's policy is to prepare the financial statements on the
accrual basis of accounting. The fiscal year end is December 31. In
the opinion of management, all adjustments considered necessary for
a fair presentation have been included.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with
maturities of three months or less when purchased.
Investments and Marketable Securities
The Company has adopted FASB No. 115. Equity securities are
classified as available for sale and reported at fair value.
Investments are recorded at the lower of cost or market. Any
reductions in market value below cost are shown as unrealized losses
in the consolidated statement of operations.
Consolidation Policy
The accompanying consolidated financial statements include the
accounts of Datascension, Inc. and Datascension International, Inc.
All significant inter-company balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make
estimates and assumptions which affect the reported amounts of
assets and liabilities as of the date of the financial statements
and revenues and expenses for the period reported. Actual results
may differ from these estimates.
Comprehensive Income
Statements of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130), requires that total comprehensive
income be reported in the financial statements. The Company does not
have any items considered to be other comprehensive income for the
year ended December 31, 2004.
Fixed Assets
Fixed assets are stated at cost. Expenditures that materially
increase the life of the assets are capitalized. Ordinary
maintenance and repairs are charged to expense as incurred. When
assets are sold or otherwise disposed of, the cost and the related
accumulated depreciation and amortization are removed from the
accounts and any resulting gain or loss is recognized at that time.
Depreciation is computed primarily on the straight-line method for
financial statement purposes over the following estimated useful
lives:
Computer equipment 5 years
Furniture and fixtures 7 years
Office equipment 5 years
Equipment and machinery 20 years
All assets are booked at historical purchase price and there is no
variance between book value and the purchase price.
Revenue Recognition
We recognize revenues when survey data is delivered to the client in
accordance with the terms of our agreements. Research products are
delivered within a short period, generally ranging from a few days
to approximately eight weeks. An appropriate deferral is made for
direct costs related to contracts in process, and no revenue is
recognized until delivery of the data has taken place. Billings
rendered in advance of services being performed, as well as customer
deposits received in advance, are recorded as a current liability
included in deferred revenue. We are required to estimate contract
losses, if any, and provide for such losses in the period they are
determined and estimable. We do not believe that there are realistic
alternatives to our revenue recognition policy given the short
period of service delivery and the requirement to deliver completed
surveys to our customers. We do not believe there is significant
risk of recognizing revenue prematurely since our contracts are
standardized, the earnings process is short and no single project
accounts for a significant portion of our revenue.
Intangible Assets
The Company has adopted SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires that goodwill and other indefinite lived
intangible assets are no longer amortized, but reviewed annually, or
sooner if deemed necessary, for impairment. Intangible assets with
finite lives are amortized over the useful life. Under guidance from
SFAS No. 142, management has determined that the assets in the
subsidiaries determined to be discontinued operations should be
impaired. The respective assets have been written down. See Note 13
Discontinued Operations.
Net Income Per Share
Basic net income per share is computed using the weighted average
number of shares of common stock outstanding for the period end. The
net income (loss) for the period end is divided by the weighted
average number of shares outstanding for that period to arrive at
net income per share.
Diluted net income per share reflects the potential dilution that
could occur if the securities or other contracts to issue common
stock were exercised or converted into common stock.
Compensated Absences
The Company has made no accrual for vacation or sick pay because the
Company does not provide for these benefits.
Advertising
Advertising costs are expensed when incurred. Advertising for the
year ended December 31, 2004 amounted to $3,176.
Research and Development
The Company expenses its research and development in the periods
incurred.
Concentrations of Credit Risk
Credit risk represents the accounting loss that would be recognized
at the reporting date if counter parties failed completely to
perform as contracted. Concentrations of credit risk (whether on or
off balance sheet) that arise from financial instruments exist for
groups of customers or counter parties when they have similar
economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in
economic or other conditions described below.
The Company operates in one segment, the market research industry.
100% of the Company's customers are located within the United States
of America.
During the year ended December 31, 2004, the Company had three major
clients, The National Research Group and Roper ASW each account for
about 10% of sales each year and Sandelman & Associates, which
accounts for about 25% of sales each year. Management believes the
loss of one of these key clients would materially affect the
operations of the company in the short term.
Convertible Debt Financing and Derivative Liabilities
In accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended ("SFAS 133"), the holder's conversion right provision,
interest rate adjustment provision, liquidated damages clause, cash
premium option, and the redemption option (collectively, the debt
features) contained in the terms governing the Notes are not clearly
and closely related to the characteristics of the Notes.
Accordingly, the features qualified as embedded derivative
instruments at issuance and, because they do not qualify for any
scope exception within SFAS 133, they were required by SFAS 133 to
be accounted for separately from the debt instrument and recorded as
derivative financial instruments.
During the year ended December 31, 2004, we recorded an other
expense item of $2,489,116, of which, $1,639,953 (expense) and
$849,163 (expense) related to the debt features and warrants,
respectively, to reflect the change in fair value of the derivative
liability. During the year ended December 31, 2003, there was no
income or expense items related to convertible debt as there was
none outstanding.
During the nine months ended September 30, 2005, we recorded an
other income item of $2,863,902, of which, $1,529,217 (income) and
$1,334,685 (income) related to the debt features and warrants,
respectively, to reflect the change in fair value of the derivative
liability. During the nine months ended September 30, 2004, there
was no income or expense items related to convertible debt as there
was none outstanding.
At each balance sheet date, we adjust the derivative financial
instruments to their estimated fair value and analyze the
instruments to determine their classification as a liability or
equity. As of December 31, 2004, the estimated fair value of our
derivative liability was $2.41 million, as well as a warrant
liability of $1.79 million. As of December 31, 2003, there was no
asset or liability related to convertible debt. The estimated fair
value of the debt features was determined using the probability
weighted averaged expected cash flows / Lattice Model. The model
uses several assumptions including: historical stock price
volatility (utilizing a rolling 120 day period), risk-free interest
rate (3.50%), remaining maturity, and the closing price of the
Company's common stock to determine estimated fair value of the
derivative asset. In valuing the debt features at December 31, 2004,
the company used the closing price of $0.65 and the exercise price
of $0.30. For the year ended December 31, 2004, due in part to an
increase in the market value of the Company's common stock to $0.65
from $0.40 at issuance, the Company recorded an "other expense" item
on the consolidated statement of operations for the change in fair
value of $1,639,953. At December 31, 2004, the estimated fair value
of the debt features was approximately $2,408,178. For the nine
months ended September 30, 2005, the estimated value of the
company's debt features decreased to $888,509, thus the company
recorded an "other income" item on the consolidated statement of
operations for the change in fair value of the debt features of
$1,529,217 for the nine months ended September 30, 2005.
Recently Issued Accounting Pronouncements
FASB Interpretation 46R "Consolidation of Variable Interest
Entities", as revised (FIN 46R), requires that variable interest
entities created before December 31, 2003 be consolidated during the
first interim period beginning after December 15, 2003. Management
does not believe this pronouncement will have a material effect on
the financial statements of the company.
In January, 2004 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 (revised 2003)
"Employers' Disclosures about Pensions and Other Postretirement
Benefits", an amendment of FASB Statements No. 87, 88, and 106. The
Statement revises employers' disclosures about pension plans and
other postretirement benefit plans. The statement retains the
disclosure requirements contained in FASB Statement No. 132, which
it replaces, and requires additional annual disclosures about the
assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit
postretirement plans. Statement No. 132R requires us to provide
disclosures in interim periods for pensions and other postretirement
benefits. Management does not believe this pronouncement will have a
material effect on the financial statements of the company.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs an
amendment of ARB No. 43, Chapter 4." This Statement clarifies the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials. This Statement is effective
for inventory costs incurred during fiscal years beginning after
June 15, 2005. Management does not believe this pronouncement will
have a material effect on the financial statements of the company.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real
Estate Time-Sharing Transactions - an amendment of FASB Statements
No. 66 and 67." This Statement references the financial accounting
and reporting guidance for real estate time-sharing transactions
that is provided in AICPA Statement of Position 04-2, "Accounting
for Real Estate Time-Sharing Transactions." This Statement also
states that the guidance for incidental operations and costs
incurred to sell real estate projects does not apply to real estate
time-sharing transactions. This Statement is effective for financial
statements for fiscal years beginning after June 15, 2005.
Management does not believe this pronouncement will have a material
effect on the financial statements of the company.
F-11
(cont)
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29." This
Statement eliminates the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly
as a result of the exchange. This Statement is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company does not expect application of SFAS
No. 153 to have a material affect on its financial statements.
Accounts Receivable
Accounts receivable are stated at the amount management expects to
collect from outstanding balances. Management provides for probable
uncollectible amounts through a charge to earnings and a credit to a
valuation allowance based on its assessment of the current status of
individual accounts. Balances outstanding after management has used
reasonable collection efforts are written off through a charge to
the valuation allowance and a credit to trade accounts receivable.
Changes in the valuation allowance have not been material to the
financial statements.
Stock Based Compensation
The Company applies Accounting Principles Board ("APB") Opinion No.
25,
Accounting for Stock Issued to Employees, and Related
Interpretations, in accounting for stock options issued to
employees. Under APB No. 25, employee compensation cost is
recognized when estimated fair value of the underlying stock on date
of the grant exceeds exercise price of the stock option. For stock
options and warrants issued to non-employees, the Company applies
SFAS No. 123, Accounting for Stock-Based Compensation, which
requires the recognition of compensation cost based upon the fair
value of stock options at the grant date using the Black-Scholes
option pricing model.
The following table represents the effect on net loss and loss per
share if the Company had applied the fair value based method and
recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation",
to stock-based employee compensation for the year ended December 31,
2004 and 2003:
2004 2003
Net loss, as reported $(6,052,366) $ (246,533)
Add: Stock-based employee
compensation expense
included in reported loss,
net of related tax effects -- --
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods
for all awards, net of related tax effects (202,991) --
----------- ----------
Pro forma net loss $(6,255,357) $ (246,533)
Net loss per common share:
Basic loss per share, as reported $(0.39) $ (0.03)
Fully diluted loss per share, as reported $(0.36) $ (0.03)
Basic loss per share, pro forma $(0.40) $ (0.03)
Fully diluted loss per share, pro forma $(0.38) $ (0.03)
F-12
There were no stock options granted for the year ended December 31,
2003. See Note 5 Warrants and Option. For the options granted in
November 2004, the company used the exercise price of $0.30, the
fair market value of $0.40 per share, a 5 year term, and 25%
volatility to determine the value of the options. The latter options
do not vest until January 2005.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment are made up of the following as of December
31, 2004:
Equipment and machinery $ 472,500
Office equipment 690,680
Leasehold improvements 9,959
Accumulated depreciation (491,793)
---------
$ 681,346
NOTE 4 - RECEIVABLE FROM NUTEK OIL - ASSET HELD FOR SALE
On April 14, 2005, DSEN filed a Current Report on Form 8-K, relating
to the conversion of the South Texas Oil Company asset held for sale
into shares in South Texas Oil Company (formerly known as Nutek Oil)
and will be distributing its ownership interest in South Texas Oil
Company to shareholders of DSEN.
The dividend will take the form of a dividend certificate
representing restricted common stock, which will be distributed to
DSEN's beneficial stockholders of record as of the record date of
April 27, 2005.
The stock dividend will be distributed to owners of DSEN's common
stock as of the record date in a ratio of one share of South Texas
Oil Company, for approximately every 18 shares of common stock held
in DSEN.
On December 31, 2004 the company reviewed any need for impairment of
assets per SFAS 144. A loan is considered impaired if it is probable
that the creditor will be unable to collect all amounts due under
the contractual terms of the loan agreement. In evaluating the
impairment of the assets of the company at year end, the company
considered, among other items, (1) materiality of the asset, (2)
previous loss experience, and (3) assets that are not readily
marketable or susceptible to decline in value.
After discussions with the Board and with the management of both
Datascension, and Nutek Oil, it was determined to be in the best
interest of the Company and shareholders for the note to be
converted to stock and distributed to the shareholders.
Pursuant to the previous dividends on August 1, 2001 and January 8,
2004, the company determined it was in the best interest of it's
shareholders to convert the balance of the note into the common
stock of Nutek Oil and distribute the pro rata shares to our
shareholders. This coincides with managements plan to write off any
assets which are attributable to the history of the company which
are non-operational in nature, etc.
As of the December 31, 2004, the value of the loan to be converted
is $1,015,014 and is classified on the balance sheet of the Company
as an Asset Held For Sale.
The stock of Nutek Oil traded over $1.00 during the week of the
conversion to settle the debt owed to Datascension. The stock has
since traded as high as $1.25. Management felt strongly that the
shareholders and company were never at risk of losing the value of
the receivable. When Datascension made the agreement to convert the
receivable into the stock of Nutek Oil, it was agreed to be
converted at the $1,015,014 value of stock. The number of shares
(957,349) was only later determined based on the then average price
of $1.06. Management did not feel there was a risk of shareholders
receiving less than full credit for the value of the note.
NOTE 5 - STOCKHOLDERS' EQUITY
During the fiscal year ended December 31, 2004, the Company issued
securities using the exceptions available under the Securities Act
of 1933 including unregistered sales made pursuant to Section 4(2)
of the Securities Act of 1933 as follows:
On April 20, 2004, 500,000 pre split shares of restricted common
stock valued at $.05 per share were issued pursuant to a consulting
agreement in connection with which we received certain investor
relations services. The issuance of these securities was effected
through a private transaction not involving a public offering and
was exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof.
On April 20, 2004, 2,970,833 pre split shares of restricted common
stock
F-13
(cont)
valued at $.03 per share were issued to sophisticated investors who
indicated that they had such knowledge and experience in financial
matters that they were capable of evaluating the merits and risks
of the investment. The individuals took their shares for investment
purposes without a view to distribution and had access to
information concerning the Company. The issuance of these
securities was effected through a private transaction not involving
a public offering and was exempt from the registration provisions
of the Securities Act pursuant to Section 4(2) thereof.
On June 30, 2004, 750,000 pre split shares of restricted common
stock valued at $.03 per share were issued pursuant to a
consulting agreement in connection with which we received certain
legal services.The issuance of these securities was effected through
a private transaction not involving a public offering and was
exempt from the registration provisions of the Securities Act
pursuant to Section 4(2) thereof.
On September 3, 2004, 1,000,000 pre split shares of restricted
common stock valued at $.05 per share were issued to a note holder
in satisfaction of amounts due. The issuance of these securities was
effected through a private transaction not involving a public
offering and was exempt from the registration provisions of the
Securities Act pursuant to Section 4(2) thereof.
On September 30, 2004, 62,269 pre split shares of restricted common
stock valued at $.06 per share were issued to SRC Bondholders
in satisfaction of amounts due to them. The issuance of these
securities was effected through a private transaction not
involving a public offering and was exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof.
On December 31, 2004, the holders of 39,500 shares of our Series A
convertible preferred stock elected to convert such shares into
3,950,000 shares of our common stock. These shares had originally
been converted from common stock to Series A Preferred stock on
December 27, 2001 at $5.42 per share. These conversions were
the effected through private transactions not involving a public
offering and were exempt in each case from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof.
On November 17, 2004, DSEN issued an aggregate of $1,875,000 in
Convertible Debentures, pursuant to a Securities Purchase Agreement
(the "Agreement") to the following: $350,000 Convertible Debenture
to Alpha Capital Aktiengesellschaft, $525,000 Convertible Debenture
to the Longview Equity Fund LP, $775,000 Convertible Debenture to
the Longview Fund LP., and $225,000 Convertible Debenture to the
Longview International Equity Fund, LP. In addition, issued common
stock purchase warrants to purchase 3,125,000 shares of DSEN
common stock to the above note holders,at an exercise price of $0.30
per share.
On December 31, 2004, 300,000 post split shares of common stock
valued at $.20 per share were issued to four employees in
consideration of terms under their employment agreements, which
granted stock awards of common shares to certain employees.
F-14
(cont)
The issuance of these securities was effected through a private
transaction not involving a public offering and was exempt from the
registration provisions of the Securities Act pursuant to Section
4(2) thereof and/or the federal small issue exception for bonus
shares of reporting companies.
Options / Warrants
On December 31, 2004, four employees were given the option to
purchase additional shares of common stock for $0.30. These options
do not vest until January 2005 and at such time, the company will
recognize a compensation expense for the fair market value of those
options, which is anticipated to be the fair market value of the
common stock minus the exercise price of the respective options. See
Note 2 Stock Based Compensation, Note 7 Convertible Notes, and Note
12 Warrants and Options.
NOTE 6 - NOTES PAYABLE
The Company has entered into agreements for long-term notes payable.
Long-term
notes payable consists of the following at December 31, 2004:
Note payable to a vendor, no specific repayments terms
and no stated interest rate. Secured by assets. $ 40,000
Note payable to a vendor, monthly payments of $348
inclusive of 7% annual interest through September 2006,
secured by equipment. 6,245
Note payable to a vendor, monthly payments
of $7,375 inclusive of 10.83% annual interest through
December 2006, secured by equipment. 158,510
Note payable to a vendor, monthly payments of $906,
inclusive of 12% annual interest through February 2006.
Secured by equipment. 15,000
---------
219,755
Less current portion (116,207)
----------
$ 103,548
Principal maturities are as follows:
Twelve months ended December 31,
2005 $ 4,125
2006 33,893
2007 65,530
--------
$ 103,548
Additionally, the company has the following short term notes payable as of
December 31, 2004.
Dell Financial Services $ 3,467
Public Relations Contract 60,000
Wells Fargo Credit Card 48,577
Advanta Credit Card 9,698
----------
Total 121,742
Convertible debentures consist of the following at December
31, 2004, and December 31, 2003:
2004 2003
8% convertible subordinated debentures,
due in November 2007, convertible
into shares of common stock at 1,875,000 -
any time prior to maturity.
Interest is payable quarterly,
and principal is due at maturity.
--------- -----
1,875,000 -
Less: Discount being accrete (1,652,639) (-)
Plus: Accrued interest 18,750 (-)
--------- -----
Total debt 241,111 -
Less: current portion (0) (-)
--------- -----
Convertible debentures, less current portion $ 241,111 $ -
--------- -----
Included in the above values is $18,750 of accrued interest
related to the
convertible notes as of December 31, 2004.
F-15
NOTE 7 - CONVERTIBLE NOTES PAYABLE AND DEBENTURES
NOTES PAYABLE - $1,875,000, NOVEMBER 2004
In November 2004, the Company issued $1,875,000 in principal amount
of Notes to third parties. As part of the financing transaction, the
Company issued warrants to purchase 3,125,000 shares of common stock
at a per share purchase price of $0.30 per share.
The Notes accrue interest at a rate of prime + 3% per annum. The
Notes are due and payable in November 2007. After a thorough review
of the terms of the note and respective covenants, the company has
determined the more conservative method of including the entire debt
as a current liability on the balance sheet. The convertible note
and warrant documents were filed in an 8-K by the Company on
November 23, 2004. The Note was entered into pursuant to the terms
of a subscription agreement between the Company and the Holder,
which was also included in the 8-K filed on November 23, 2004.
Interest payable on this Note shall accrue at the "prime rate"
published in The Wall Street Journal from time to time, plus three
percent (3%). The Interest Rate shall not be less than eight
percent (8%). Interest shall be calculated on a 360 day year.
Interest on the Principal Amount shall be payable monthly,
commencing 120 days from the closing and on the first day of each
consecutive calendar month thereafter (each, a "Repayment Date") and
on the Maturity Date.
Amortizing payments of the outstanding Principal Amount of this Note
shall commence on the first (1st) Repayment Date and shall recur on
each succeeding Repayment Date thereafter until the Principal Amount
has been repaid in full. On each Repayment Date, the Company should
make payments to the Holder in the amount of one- thirty-second
(1/32nd) of the initial Principal Amount (the "Monthly Principal
Amount"), together with any accrued and unpaid interest plus any and
all other amounts which are then owing under this Note that have not
been paid (the Monthly Principal Amount, together with such accrued
and unpaid interest and such other amounts, collectively, the
"Monthly Amount"). Any Principal Amount that remains outstanding on
the Maturity Date shall be due and payable upon maturity.
Following the occurrence and during the continuance of an Event of
Default (as discussed in the Note), the annual interest rate on the
Note shall automatically be increased by two percent (2%) per month
until such Event of Default is cured.
The Holder shall convert into shares of Common Stock all at the
Fixed Conversion Price or the maximum portion of the Monthly Amount
due on each Repayment Date provided that the average closing price
of the Common Stock for the twenty (20) consecutive trading days
immediately preceding such Repayment Date shall be greater than or
equal to 15% above the Fixed Conversion Price ("Conversion
Criterion"). The Monthly Amount due on a Repayment Date that is not
converted shall be paid by the Company (i) in cash at the rate of
104% of such Monthly Amount otherwise due, or (ii) in registered,
unlegended, free- trading Common Stock at an applied conversion rate
equal to eighty-five percent (85%) of the average of the five (5)
lowest closing bid prices for the preceding twenty (20) trading
days.
The Notes also provide for liquidated damages on the occurrence of
several events.
As compensation to the Subscriber, the Company agrees to pay (as
liquidated damages and not as a penalty) $100 per business day after
the Delivery Date for each $10,000 of Note principal amount being
converted of the corresponding Shares which are not timely
delivered.
An additional liquidating damages provision states that if the
Company fails to deliver to the Subscriber such shares issuable upon
conversion of a Note by the Delivery Date and if seven (7) business
days after the Delivery Date the Subscriber purchases shares of
Common Stock to deliver in satisfaction of a sale by such Subscriber
of the Common Stock which the Subscriber was entitled to receive
upon such conversion (a "BUY-IN"), then the Company shall pay in
cash to the Subscriber (in addition to any remedies available to or
elected by the Subscriber) the amount by which (A) the Subscriber's
total purchase price for the shares of Common Stock so purchased
exceeds (B) the aggregate principal and/or interest amount of the
Note for which such conversion was not timely honored, together with
interest thereon at a rate of 15% per annum, accruing until such
amount and any accrued interest thereon is paid in full (which
amount shall be paid as liquidated damages and not as a penalty).
For example, if the Subscriber purchases shares of Common Stock
having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of $10,000 of note principal
and/or interest, the Company shall be required to pay the Subscriber
$1,000, plus interest. The Subscriber shall provide the Company
written notice indicating the amounts payable to the Subscriber in
respect of the Buy-In.
Additionally, if the Company is unable to deliver to the holder of
Registrable Securities, then as Liquidated Damages, an amount equal
to two percent (2%) for each thirty (30) days or part thereof,
thereafter of the Purchase Price of the Notes remaining unconverted
and purchase price of Shares issued upon conversion of the Notes.
The Company must pay the Liquidated Damages in cash or an amount
equal to two hundred percent of such cash Liquidated Damages if paid
in additional shares of registered unlegended free-trading shares of
Common Stock. Such Common Stock shall be valued at a per share value
equal to 85% of the average of the five (5) lowest closing bid
prices of the Common Stock for the twenty (20) trading days
preceding the first day of each thirty (30) day or shorter period
for which Liquidated Damages are payable. As of September 30, 2005,
no liquidating damages have been incurred by the company.
Redemption Option - The Company will have the option of prepaying
the outstanding Principal Amount ("Optional Redemption"), in whole
or in part, by paying to the Holder a sum of money equal to one
hundred twenty percent (120%) of the Principal Amount to be
redeemed, together with accrued but unpaid interest thereon
Debt features. The Holder shall have the right, but not the
obligation, to convert all or any portion of the then aggregate
outstanding Principal Amount of this Note, together with interest
and fees due hereon, into shares of Common Stock.
The $1,875,000 in proceeds from the financing transaction were
allocated to the debt features and to the warrants based upon their
fair values. After the latter allocations, there was $170,061 of
remaining value to be allocated to the Note on the financial
statements.
The debt discount is being accreted using the effective interest
method over the term of the note.
The value of the discount on the converted notes on the books is
being accreted over the term of the note (three years). For the
years ended December 31, 2004 and 2003, the Company accreted $52,300
and $0, respectively, of debt discount related to the Notes. For the
nine months ended September 30, 2005, the Company accreted $457,360
of the debt discount related to these Notes.
WARRANTS ISSUED
The estimated fair value of the 3,125,000 warrants at issuance
(11/11/2004) was $936,714 and has been classified as a derivative
instrument and recorded as a liability on the Company's balance
sheet in accordance with current authoritative guidance. The
estimated fair value of the warrants was determined using the Black-
Scholes option-pricing model with a closing price of $0.40, an
exercise price of $0.30, a 5.0 year term, and a volatility factor of
89%. The model uses several assumptions including: historical stock
price volatility (utilizing a rolling 120 day period), risk-free
interest rate (3.50%), remaining maturity, and the closing price of
the Company's common stock to determine estimated fair value of the
derivative liability. In valuing the warrants at December 31, 2004,
the company used the closing price of $0.65, the exercise price of
$0.30, a 4.88 year remaining term, and a volatility of 116% In
accordance with the provisions of SFAS No. 133, Accounting for
Derivative Instruments, the Company is required to adjust the
carrying value of the instrument to its fair value at each balance
sheet date and recognize any change since the prior balance sheet
date as a component of Other Income (Expense). The warrant
derivative liability at December 31, 2004, had increased to a fair
value of $1,785,877, due in part to an increase in the market value
of the Company's common stock to $0.65 from $0.40 at issuance, which
resulted in an "other expense" item of $849,163 on the Company's
books. For the nine months ended September 30, 2005, the warrant
derivative liability had decreased to a value of $474,525, due in
part to a decrease in the market value of the Company's common stock
to $0.40 from $0.65 at December 31, 2004, which resulted in an
"other income" item of $1,311,352 for the nine months ended
September 30, 2005. The company used a closing price of $0.32, an
exercise price of $0.30, a 4.13 years remaining term, and a 54%
volatility factor.
The recorded value of such warrants can fluctuate significantly
based on fluctuations in the market value of the underlying
securities of the issuer of the warrants, as well as in the
volatility of the stock price during the term used for observation
and the term remaining for the warrants.
In accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended ("SFAS 133"), the debt features provision (collectively,
the features) contained in the terms governing the Notes are not
clearly and closely related to the characteristics of the Notes.
Accordingly, the features qualified as embedded derivative
instruments at issuance and, because they do not qualify for any
scope exception within SFAS 133, they were required by SFAS 133 to
be accounted for separately from the debt instrument and recorded as
derivative financial instruments.
DEBT FEATURES
Pursuant to the terms of the Notes, these notes are convertible at
the option of the holder, at anytime on or prior to maturity. There
is an additional interest rate adjustment feature, a liquidated
damages clause, a cash premium option, as well as the redemption
option. The debt features represents an embedded derivative that is
required to be accounted for apart from the underlying Notes. At
issuance of the Notes (11/11/2004), the debt features had an
estimated initial fair value of $768,225, which was recorded as a
discount to the Notes and a derivative liability on the consolidated
balance sheet. In subsequent periods, if the price of the security
changes, the embedded derivative financial instrument related to the
debt features will be adjusted to the fair value with the
corresponding charge or credit to other expense or income. The
estimated fair value of the debt features was determined using the
probability weighted averaged expected cash flows / Lattice Model
with a closing price of $0.40, an exercise price of $0.30, a 3.0
year term, and a volatility factor of 89%. The model uses several
assumptions including: historical stock price volatility (utilizing
a rolling 120 day period), risk-free interest rate (3.50%),
remaining maturity, and the closing price of the Company's common
stock to determine estimated fair value of the derivative liability.
In valuing the debt features at December 31, 2004, the company used
the closing price of $0.65 and the exercise price of $0.30, 2.88
year remaining term, and a volatility of 116%. For the year ended
December 31, 2004, due in part to an increase in the market value of
the Company's common stock to $0.65 from $0.40 at issuance, the
Company recorded an "other expense" on the consolidated statement of
operations for the change in fair value of the debt features of
approximately $1,639,953. At December 31, 2004, the estimated fair
value of the debt features was approximately $2,408,178. For the
nine months ended September 30, 2005, the estimated value of the
debt features decreased to $868,156, thus the company recorded an
"other income" item on the consolidated statement of operations for
the change in fair value of the debt features related to these notes
of $1,540,022 for the nine months ended September 30, 2005. The
company used a closing price of $0.32, an exercise price of $0.272,
a 2.13 years remaining term, and a 54% volatility factor.
The recorded value of the debt features related to the Notes can
fluctuate significantly based on fluctuations in the fair value of
the Company's common stock, as well as in the volatility of the
stock price during the term used for observation and the term
remaining for the warrants.
Pursuant to the terms of the Notes, the Company has the option of
prepaying the outstanding Principal Amount in whole or in part, by
paying to the Holder a sum of money equal to one hundred twenty
percent (120%) of the Principal Amount to be redeemed, together with
accrued but unpaid interest thereon and any and all other sums due.
Because the terms of the 2004 convertible note require such
classification, the accounting rules required additional convertible
notes and non-employee warrants to also be classified as
liabilities, regardless of the terms of the new notes and / or
warrants. This presumption has been made due to the company no
longer having the control to physical or net share settle subsequent
convertible instruments because it is tainted by the terms of the
2004 convertible notes. Were the 2004 convertible notes to not have
contained those terms or even if the 2004 transaction were not
entered into, it could have altered the treatment of the March 31,
2005 notes and the conversion features of the latter agreement may
have resulted in a different accounting treatment from the liability
classification. The March 31, 2005 note, as well as any subsequent
convertible notes or warrants, will be treated as derivative
liabilities until all such provisions are settled.
NOTE 8 - INCOME TAXES
Deferred income taxes result from timing differences in the
recognition of
expense for tax and financial statement purposes. Statements of
Financial
Accounting Standards No. 109 "Accounting for Income Taxes", (SFAS
109) requires
deferred tax liabilities or assets at the end of each period to be
determined
using the tax rate expected to be in effect when taxes are actually
paid or
recovered. The sources of those timing differences and the current
tax effect
of each were as follows:
Year
Ended
December 31, 2004
Depreciation and amortization $ 7,768
Net operating loss carry forward 6,365
Valuation allowance (14,133)
--------
$ -
The components of the net deferred tax asset at December 31, 2004
under SFAS
109 are as follows:
Depreciation and amortization $ 1,000,531
Net operating loss carryforward (1,288,138)
Valuation allowance 287,607
-----------
$ -
Reconciliations between the actual tax expense and the amount
computed by applying the U.S. Federal Income Tax rate to income before
taxes are as follows:
Year Percent of
Ended Pretax
December 31, 2004 Income
Expected $ 14,133 34%
Valuation allowance (14,133) (34%)
----------- ------
Actual expense $ - 0%
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company has $135,533 in accounts payable and approximately
$1,390,880 in accrued payroll costs for the operations of the
California, Nevada, Costa Rica, and Dominican Republic location
as of December 31, 2004.
F-17
NOTE 10 - RELATED PARTY TRANSACTIONS
As of December 31, 2004, the Company has an outstanding note payable
to Murray Conradie, the Company's CEO, in the amount of $30,688.
This payable accrues interest at 1% monthly due on the first day of
each month.
As of December 31, 2004, the Company has an outstanding note payable
to Scott Kincer, the Company's COO, in the amount of $29,000. This
payable accrues interest at 1% monthly due on the first day of each
month.
As of December 31, 2004, the Company has an outstanding note payable
to Jason Griffith, the Company's CFO, in the amount of $350. This
payable accrues interest at 1% monthly due on the first day of each
month.
NOTE 11 - CONTINGENCIES AND COMMITMENTS
Leases
The Company is committed under several non-cancelable lease
agreements for office space with various termination dates through
2011.
At December 31, 2004, aggregate future minimum payments under these
leases, are as follows:
Twelve months ended December 31,
2005 $ 152,141
2006 133,259
2007 105,773
2008 105,773
2009 -
Thereafter -
-----------
Total minimum lease payments $ 496,946
NOTE 12 - WARRANTS AND OPTIONS
The Company has adopted FASB No. 123 and will account for stock
issued for services and stock options under the fair value method.
The following table sets forth the options granted in 2004 to each
of the directors and executive officers:
Option/SAR Grants in Last Fiscal Year (Individual Grants):
Number of Percent of total
Securities Options/SARs
Underlying granted to Exercise or
Options/SARS employees in base price Expiration
Name Granted fiscal year ($/Share) date
---------- ---------- -------------- --------- -----------
Murray N. Conradie 540,000 36.4 $0.30 1/1/10
Scott Kincer 540,000 36.4 $0.30 1/1/10
Jason F. Griffith 270,000 18.8 $0.30 1/1/10
Joey Harmon 135,000 9.1 $0.30 1/1/10
F-18
There were no other options granted or exercised by the directors
and executive officers during the year ended December 31, 2004.
Compensation cost for options granted to employees has not been
recognized in the accompanying financial statements. These options
do not vest until January 2005. See Note 2 Stock Based Compensation
for proforma disclosures.
As discussed in Note 7 Convertible Notes, the company issued
3,125,000 warrants
for the purchase of common stock at $0.30 to four (4) different
entities related to a convertible note.
The following is a schedule of the activity relating to the
Company's stock
options and warrants.
Year Ended Year Ended
December 31, 2003 December 31, 2004
-------------- --------------
Weighted Avg. Weighted Avg.
Shares Exercise Shares Exercise
(x 1,000) Price (x1,000) Price
--------- --------- -------- -----------
Options and warrants
outstanding at
beginning of year - $ - - $ -
Granted:
Options - $ - 1,485 $ 0.30
Warrants - $ - 3,125 $ 0.30
Exercised - $ - - $ -
Expired:
Warrants ( - ) $ - - $ -
---- ----- ---- ----
Options and warrants
outstanding and
exercisable at end
of period - $ - 4,610 $ -
==== ====== ==== ===
Weighted average fair
value of options and
warrants granted during
the year $ - $ -
The following table summarizes information about the Company's stock options
and warrants outstanding at December 31, 2004, all of which are exercisable.
Weighted Average
Range of Number Remaining Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ---------------- ----------------- -----------------
$ 0.30 4,610,000 5 years $ 0.30
F-19
NOTE 13 - DISCONTINUED OPERATIONS
Management has determined it is in the best interest of shareholders
to write off all impaired assets and business which conflict with
the core operation of the company, the market research industry.
This write of discontinued operations includes the assets and
activities of SRC International and Kristi & Company. The assets of
Century Innovations have been distributed as well. See Note 14
Investment in Century Innovations.
As a result of receiving the current funding, the plans to spin off
of Datascension International have been put on hold indefinitely.
With the receipt of funding in November, the decision to remove
Century Innovations and write down the impaired assets in the non
operating subsidiaries, the company effectively made the single
focus of the company the call center operation and with the recently
announced changed in management (See Subsequent Event Note) the
company is furthering it's goal as having Datascension International
be the main focus of the company as a whole.
The company has expensed all asset values and costs associated with
these entities as a line item called Discontinued Operations on the
income statement.
The company has stated it plans on focusing on Datascension
International, the call center subsidiary. The expansions currently
are planned for the Costa Rica facilities.
NOTE 14 - INVESTMENT IN CENTURY INNOVATIONS
The Company previously distributed a portion of its ownership to
Datascension shareholders. The Company has additionally distributed
all but 10% of its ownership in Century to Century as Treasury Stock
on the books of Century. It will remain as Treasury Stock on the
books of Century until the effectiveness of a Form 10 registration
to be filed by Century for the shares. Within sixty (60) days of the
Form 10's effectiveness, Century will work with the Company to
distribute the shares to the then current Datascension shareholders.
NOTE 15 - SUBSEQUENT EVENTS
On March 3, 2005, the Company's Chief Executive Officer and Chairman
of the Board, Murray Conradie, announced his resignation from the
Company to focus on the development of Nutek Oil Inc. This change
will take effect on April 1, 2005.
Effective April 1, 2005, Scott Kincer, the Company's current Chief
Operating Officer will be appointed the Chief Executive Officer and
Chairman of the Board. It is not anticipated that Mr. Kincer's
employment contract will be altered or materially affected with this
change.
The Company's Chief Financial Officer and member of the Board of
Directors, Jason Griffith, announced his resignation from the
Company to focus on the development of his CPA firm and Nutek Oil
Inc. He will be transferring control of the recordkeeping for the
Company to the California office as of April 1, 2005.
Both Mr. Conradie and Mr. Griffith will remain as consultants to the
Company.
As of April 1, 2005, the Company's corporate head office are located
at 145 S. State College Blvd, Suite 350, Brea CA 92821. The new
company phone number will be 714-482-9750 and 714-482-9751 (fax).
This address and contact information is the current location for the
Datascension International California office.
F-20
NOTE 16 - FOREIGN OPERATIONS
The company currently operates out of the United States, Costa Rica
and the Dominican Republic. The future plans of the company involve
the slowing growth at the Dominican Republic facility while focusing
on the potential and available growth in Costa Rica. Management does
not feel there is a currency risk or need to assess a foreign
currency translation adjustment or other comprehensive income item
as income and expense items are negotiated in the US dollar. The
Company maintains their accountings records in U.S. dollars and all
payments are made in US dollars. All debts and assets on the books
of the company are valued based on US dollars and are not translated
from a foreign currency amount. The Company currently coordinates
all foreign operations, and supervision activities using part time
employees, consultants and contract labor. Approximately 85% of the
company's workforce is outside of the United States. Currently 100%
of the company's clients are US based companies. Any resulting
foreign exchange fluctuations do not affect the payment of
employees, contract labor or off shore operations.
NOTE 17 - RESTATEMENT OF FINANCIALS
2003
The net loss for 2003 was previously reported as $(182,895), while
the 2003 restated loss is $246,533, an increase of $63,638, which is
attributable to the increase in amortization expense of $63,638. The
effect of the restatement to the 2003 balance sheet was a decrease
in the asset value of the intangible assets which had previously not
been amortized correctly. The value of the other assets decreased
$63,638.
2004
The loss after discontinued operations for 2004 was originally
$4,791,105, while the 2004 restated loss after discontinued
operations is reported as $6,052,366, an increase of $1,261,261.
This is due to an increase in other expenses related to the
convertible debt of $2,489,116, as well as an increase in the
interest expense related to the convertible debt of $52,300, coupled
with a decrease in the beneficial conversion feature debt discount
expense of $1,203,646, a decrease in the loss from discontinued
operations of $63,638, and a decrease in interest expense of
$12,871.
On the 2004 balance sheet, the restatement resulted in the removal
of $2,077,604 of debt discount from the other asset section, an
increase in prepaid expenses of $5,879. The convertible debt in the
liability section of the company's financial statements decreased
from $1,893,750 to $241,111, while there was an increase in the
derivative liability from $0 to $2,408,178, as well as an increase
in the warrant liability from $0 to $1,785,877 and a decrease in
additional paid in capital of $3,300,000.
The basic loss per share increased from the previously reported
$0.19 per share to $0.28 per share for the year ended December 31,
2004, while the diluted loss per share increased from the previously
reported $0.18 per share to $0.26 per share.
It is anticipated that the company will restate the December 31,
2004 10KSB to reflect the above adjustments.