Exhibit 99.2
Audited Financial Statements of Channel Access, Inc.
For The Fiscal Years Ending December 31, 2005 And 2004
Board of Directors
Channel Access, Inc.
Orem, Utah
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying balance sheet of Channel Access, Inc. as of
December 31, 2005 and 2004, and the related statements of operations,
stockholder's equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 audit provides 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 Channel Access, Inc. as of
December 31, 2005 and 2004 and the results of its operations, stockholder's
equity and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
December 7, 2006
CHANNEL ACCESS, INC.
BALANCE SHEET
(in dollars)
December 31, December 31,
2005 2004
-------- --------
ASSETS
CURRENT ASSETS
Cash $ 8,273 $ 13,048
Accounts receivable 134,303 149,678
Prepaid expenses 600 850
-------- --------
TOTAL CURRENT ASSETS 143,176 163,576
-------- --------
PROPERTY AND EQUIPMENT
Property and equipment, net 34,772 68,402
-------- --------
TOTAL PROPERTY AND EQUIPMENT 34,772 68,402
-------- --------
TOTAL ASSETS $177,948 $231,978
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 52,657 $ 36,459
Accrued liabilities 3,905 1,487
Deferred tax liablity 3,349 4,229
Distribution payable 29,608 --
-------- --------
TOTAL CURRENT LIABILITIES 89,519 42,175
-------- --------
COMMITMENTS AND CONTINGENCIES -- --
-------- --------
STOCKHOLDER'S EQUITY
Common stock, no par, 10,000,000 shares
authorized; 1,000 shares issued
and outstanding, respectively 52,430 52,430
Retained earnings 35,999 137,373
-------- --------
TOTAL STOCKHOLDER'S EQUITY 88,429 189,803
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $177,948 $231,978
======== ========
CHANNEL ACCESS, INC.
STATEMENT OF OPERATIONS
(in dollars)
Year Ended
--------------------------
December 31, December 31, November 18, November 19 to
2005 2004 2005 December 31, 2005
----------- ----------- ----------- -----------
REVENUES $ 1,175,743 $ 920,297 $ 1,105,187 $ 70,556
COST OF GOODS SOLD 461,941 326,794 423,414 38,527
----------- ----------- ----------- -----------
GROSS PROFIT 713,802 593,503 681,773 32,029
----------- ----------- ----------- -----------
EXPENSES
Depreciation 17,032 12,932 15,613 1,419
General and administrative 45,426 23,905 40,406 5,020
Marketing 234,088 61,528 227,856 6,232
Payroll 110,355 60,004 95,047 15,308
Sales 180,956 75,032 164,432 16,524
----------- ----------- ----------- -----------
TOTAL EXPENSES 587,857 233,401 543,354 44,503
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 125,945 360,102 138,419 (12,474)
OTHER INCOME (EXPENSES)
Gain on equipment distributions 273 -- -- 273
Miscellaneous income (expense) (89) -- (89) --
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 184 -- (89) 273
(EXPENSES)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 126,129 360,102 138,330 (12,201)
PROVISION FOR INCOME TAXES (880) 4,229 -- (880)
----------- ----------- ----------- -----------
NET INCOME $ 127,009 $ 355,873 $ 138,330 $ (11,321)
=========== =========== =========== ===========
BASIC AND DILUTED NET INCOME PER
COMMON SHARE $ 127.01 $ 355.87
=========== ===========
WEIGHTED AVERAGE NUMBER OF BASIC
AND DILUTED COMMON STOCK
SHARES OUTSTANDING 1,000 1,000
=========== ===========
CHANNEL ACCESS, INC.
STATEMENT OF SHAREHOLDERS EQUITY
(in dollars)
Common Stock Total
--------------------- Retained Stockholders'
Shares Amount Earnings Equity
--------- --------- --------- ---------
Balance April 14, 2004 -- $ -- $ -- $ --
Initial investment 1,000 52,430 -- 52,430
Distributions -- -- (218,500) (218,500)
Net income for year
ended December 31, 2004 -- -- 355,873 355,873
--------- --------- --------- ---------
Balance, December 31, 2004 1,000 52,430 137,373 189,803
Distributions -- -- (228,383) (228,383)
Net income for year ended
December 31, 2005 -- -- 127,009 127,009
--------- --------- --------- ---------
Balance, December 31, 2005 1,000 $ 52,430 $ 35,999 $ 88,429
========= ========= ========= =========
CHANNEL ACCESS, INC.
STATEMENT OF CASH FLOWS
(in dollars)
Year Ended
--------------------------
December 31, December 31,
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 127,009 $ 355,873
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation 17,032 12,293
Decrease (increase) in:
Receivables 15,375 (149,678)
Other assets 250 (850)
Increase (decrease) in:
Accounts payable 16,198 36,460
Accrued payables 2,418 1,487
Deferred taxes (880) 4,229
Distribution payable 29,608 --
--------- ---------
Net cash used by operating activities 207,010 259,814
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment 16,598 (80,696)
Distributions of property (29,002) --
Distributions made (199,381) (218,500)
--------- ---------
Net cash used by investing activities (211,785) (299,196)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 52,430
--------- ---------
Net cash provided by financing activities -- 52,430
--------- ---------
NET INCREASE (DECREASE) IN CASH (4,775) 13,048
CASH - Beginning of period 13,048 --
--------- ---------
CASH - End of period $ 8,273 $ 13,048
========= =========
SUPPLEMENTAL CASHFLOW DISCLOSURES
Interest expense paid $ -- $ --
========= =========
Income taxes paid $ -- $ --
========= =========
CHANNEL ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Channel Access, Inc. (hereinafter "the Company") was incorporated in April 2004
in the State of Utah and is engaged in the sales of software products primarily
to resellers. On November 18, 2005, the Company was acquired by Detto
Technologies, Inc. (See Note 8.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to
assist in understanding the Company's financial statements. The financial
statements and notes are representations of the Company's management, which is
responsible for their integrity and objectivity. These accounting policies
conform to accounting principles generally accepted in the United States of
America, and have been consistently applied in the preparation of the financial
statements.
Accounting Method
The Company uses the accrual method of accounting in accordance with accounting
principles generally accepted in the United States of America.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts, return reserve and warranty reserve of 5%. A receivable is
considered past due if payments have not been received by the Company for 60
days. The Company does not accrue interest on past due invoices.
The following is a summary of the Company's accounts receivable balances at
December 31, 2005 and 2004:
2005 2004
--------- ---------
Accounts receivable $ 141,372 $ 157,556
Allowance for doubtful accounts and reserves (7,069) (7,878)
--------- ---------
$ 134,303 $ 149,678
========= ==========
Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses for the years
ended December 31, 2005 and 2004 were approximately $234,000 and $62,000,
respectively.
Basic and Diluted Earnings Per Share
Statement of Financial Accounting Standards No.128, "Earnings Per Share"
(hereinafter "SFAS No. 128"), requires the reporting of basic and diluted
earnings/loss per share. Basic earnings per share is calculated by dividing net
earnings by the weighted average number of outstanding common shares during the
year. For the years ended December 31, 2005 and 2004 there were no outstanding
options, warrants or convertible securities. Accordingly, basic and diluted net
earnings per share are the same.
Cash and Cash Equivalents
For purposes of its statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or less to
be cash equivalents. The Company maintains its cash in bank accounts, which may
at times exceed federal insured limits and in money market accounts that are not
federally insured.
Concentrations
For the year ended December 31, 2005, the Company had one product which
represented 72% of revenues, for the year ended December 31, 2004, the Company
had one product which represented 93% of revenues.
Cost of Sales
Cost of sales consists of product cost, rebates, royalties and shipping charges.
Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (hereinafter "SFAS No. 133") as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
These statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the consolidated balance sheet
and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
During the years ended December 31, 2005 and 2004, the Company has not engaged
in any transactions that would be considered derivative instruments or hedging
activities.
Fair Value of Financial Instruments
The Company's financial instruments as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," include cash, accounts receivable, accounts payable and accrued
expenses and short-term borrowings. All instruments are accounted for on a
historical cost basis, which, due to the short maturity of these financial
instruments, approximates fair value at December 31, 2005 and 2004.
Inventory
Inventory consists of packaged software finished goods primarily consisting of
CD ROMS and packaging, which is usually built on demand for the client.
Therefore the value of the inventory at any point in time is immaterial and is
not valued as an asset.
Federal Income Taxes
Income taxes are provided based upon the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (hereinafter "SFAS No. 109"). Under this approach, deferred income taxes
are recorded to reflect the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting
amounts at each year-end. A valuation allowance is recorded against deferred tax
assets if management does not believe the Company has met the "more likely than
not" standard imposed by SFAS No. 109 to allow recognition of such an asset. The
Company, prior to November 18, 2005 was an "S" Corporation for federal income
tax purposes, and accordingly there is no tax allocation prior to that date in
the Company's financial statements.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, "Fair Value Measurements" which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. Where applicable, SFAS No. 157 simplifies and codifies related
guidance within GAAP and does not require any new fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. Earlier
adoption is encouraged. The Company does not expect the adoption of SFAS No. 157
to have a significant effect on its financial position or results of operation
In June 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109", which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company does
not expect the adoption of FIN 48 to have a material impact on its financial
reporting, and the Company is currently evaluating the impact, if any, the
adoption of FIN 48 will have on its disclosure requirements.
In March 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 156, "Accounting for Servicing of Financial
Assets--an amendment of FASB Statement No. 140." This statement requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in any of the following situations: a transfer of the
servicer's financial assets that meets the requirements for sale accounting; a
transfer of the servicer's financial assets to a qualifying special-purpose
entity in a guaranteed mortgage securitization in which the transferor retains
all of the resulting securities and classifies them as either available-for-sale
securities or trading securities; or an acquisition or assumption of an
obligation to service a financial asset that does not relate to financial assets
of the servicer or its consolidated affiliates. The statement also requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable, and permits an entity to choose either
the amortization or fair value method for subsequent measurement of each class
of servicing assets and liabilities. The statement further permits, at its
initial adoption, a one-time reclassification of available for sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available for sale securities under
Statement 115, provided that the available for sale securities are identified in
some manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value and requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. This statement is effective for
fiscal years beginning after September 15, 2006, with early adoption permitted
as of the beginning of an entity's fiscal year. Management believes the adoption
of this statement will have no immediate impact on the Company's financial
condition or results of operations.
In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections," (hereinafter "SFAS No. 154") which replaces Accounting Principles
Board Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion
No. 28". SFAS No. 154 requires that changes in accounting principle be applied
retrospectively to prior period financial statements and is effective for fiscal
years beginning after December 15, 2005. Management does not expect SFAS No. 154
to have an immediate material impact on the Company's financial position,
results of operations, or cash flows.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153 (hereinafter "SFAS No. 153"). This
statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions," is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that opinion,
however, included certain exceptions to that principle. SFAS No. 153 amends APB
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a generalexception 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 financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges incurred during fiscal
years beginning after the date of this statement is issued. Management believes
the adoption of this statement will not have a material impact on the financial
statements of the Company.
In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payments" (hereinafter "SFAS No. 123 (R)"). This statement replaces FASB
Statement No. 123, "Accounting for Stock-Based Compensation", and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123 (R)
establishes standards for the accounting for share-based payment transactions in
which an entity exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This statement covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based award, share
appreciation rights and employee share purchase plans. SFAS No. 123 (R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the fair value of the award on the
grant date ( with limited exceptions). That cost will be recognized in the
entity's financial statements over the period during which the employee is
required to provide services in exchange for the award. Through December 31,
2004, the Company has reported employment related stock options in accordance
with APB 25 (see Note 9). The issuance of options in 2005 would be the first
issuances potentially affected by SFAS No. 123 (R). The company issued no
options in 2005 and therefore there was no effect upon the financial statements
for 2005.
Revenue Recognition
The Company recognizes revenue for product sales when there is a mutually
executed sales contract, the products are shipped and title passes to customers,
the contract price and terms are fixed, and collectibility is reasonably
assured.
The Company sells products through retailers who have a right of return. The
Company only recognizes revenue when the reseller has sold the product to the
end user.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
NOTE 3 - PROPERTY AND EQUIPMENT
The Company's equipment and non-inventorial software are carried at cost less an
allowance for depreciation, which is recorded using the straight-line method
over an estimated useful life of three to seven years.
Property and equipment consisted of the following at December 31, 2005 and 2004:
2005 2004
-------- --------
Company Automobile $ 54,163 $ 70,762
Computers & Equipment 10,572 10,572
Less: Accumulated depreciation (29,963) (12,932)
-------- --------
$ 34,772 $ 68,402
======== ========
Depreciation expense for the years ended December 31, 2005 and 2004 was $17,032
and $12,932, respectively.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company, prior to November 18, 2005, had no related party transactions
during the years ended December 31, 2005 and 2004. As part of the acquisition of
the Company by Detto Technologies, Inc., the Company advanced $8,500 under the
associated payment programs on behalf of Detto. This advance was settled under
subsequent negotiations to be part of the earn-out agreement with the Company's
sole officer.
NOTE 5 - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of no par value common
stock. All shares have equal voting rights, are non-assessable and have one vote
per share. Voting rights are not cumulative and therefore, the holders of more
then 50% of the common stock could, if they choose to do so, elect all of the
directors of the Company.
The Company did not issue shares of its common stock during the year ended
December 31, 2005.
In April of 2004, the Company issued 1,000 shares of common stock for
consideration of $52,430.
NOTE 6 - FEDERAL INCOME TAXES
The Company upon origination elected to be taxed as an "S" Corporation under the
Federal Internal Revenue Code. On November 18, 2005, the Company was acquired by
Detto Technologies, Inc. a non-qualifying shareholder, and the "S" Corporation
status was automatically cancelled. Components of taxable income are as follows:
2005 2004
--------- ---------
Income from operations $ 125,249 $ 355,873
Income prior to November 18, 2005 (138,330) (355,873)
--------- ---------
Taxable income (loss) $ (3,081) $ --
========= =========
Income (loss) reported for financial
purposes $ (13,081) $ 355,873
Temporary differences 2,200 (10,573)
Permanent differences -- (139,223)
--------- ---------
Taxable income (loss) $ (10,881) $ 206,077
========= =========
The Company's shareholder received or was credited for "S" Corporation
distributions of $141,000 and $171,070 for the tax years ended December 31, 2005
and 2004, respectively.
Deferred taxes: 2005 2004
------- -------
Temporary difference in depreciation at $ (748) $ 3,595
34% effective tax rate
State tax at 6% (132) 634
Prior period balance 4,229 --
------- -------
Balance of deferred taxes $ 3,349 $ 4,229
======= =======
The Company's net operating loss for the non-"S" Corporation period was
approximately $13,000 in 2005.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has a lease on a facility in Orem, Utah for which it pays $600 per
month. The lease ends July 31, 2006
The approximate future rental payments due under the Company's lease agreements
are as follows:
Years Ending:
December 31, 2006 $4,200
Loss Contingencies
The Company is subject from time to time to litigation, claims and suits arising
in the ordinary course of business. At December 31, 2005, the Company was not a
party to litigation, claims or suits that would have a material effect on these
financial statements.
NOTE 8 - ACQUISITION BY DETTO TECHNOLOGIES, INC.
On November 18, 2005, the Company entered into a combined purchase agreement
with Detto Technologies, Inc. wherein one hundred percent of the Company's
outstanding common stock was acquired by Detto. This agreement resulted in Detto
acquiring both White Canyon, Inc. and Channel Access, Inc. from their respective
sole shareholders.
As part of this acquisition, the Company's sole shareholder received 600,000
shares of Detto's common stock under a vesting agreement, a promissory note for
$900,000 and an employment agreement. The stock is to be placed in an escrow
account and be distributed over a vesting period of the next 24 months. The
promissory note bears an interest rate of 3% and is convertible into common
stock upon notice based upon a ten day floating average. The employment
agreement was for period of one year with an automatic renewal clause for an
additional year, with an annual base salary of $55,000 with additional income
for a 20% earn-out clause, valued at $169,365. The agreement contains a
non-compete provision.
The above agreement, which could be rescinded by the Company's sole shareholder
if the promissory note is not paid by March 17, 2006, was subsequently amended
(See Note 9.)
NOTE 9 - SUBSEQUENT EVENTS
Modification of Purchase Agreement with Detto Technologies, Inc.
On May 3, 2006, the Company modified its agreements previously reached in
November 18, 2005. Detto reduced its total cash commitment by $500,000 and
increased the total number of common stock in the shared purchase agreement by
2,000,000 shares. This removed any rights that White Canyon, Inc. or Channel
Access, Inc. and their respective former sole shareholders had to rescind the
acquisition agreement. In addition, the modified agreement called for the annual
base salary of the employment agreement to increase to $72,000 annual base
salary, with additional income for a 30% earn-out clause through December 31,
2007.
Subsequent Lease
In July 2006, the Company's new parent, Detto Technologies, Inc. entered into a
new two year lease for the partial benefit of Channel Access, Inc. The lease
calls for monthly base rent of $1,500 per month and an annual three percent
increase on the anniversary date of the lease. The Company is not a named party
to the lease, but will be allocated its fair share based upon operations.