EXHIBIT 99.2
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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1
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND 2006
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ASSETS 2007 2006
Current assets
Cash $ 113,993 $ 45,974
Accounts receivable 209,492 510,210
Inventory 527,507 133,088
Prepaid expenses 8,894 5,292
----------- -----------
Total current assets 859,888 694,565
Property and equipment - net 366,384 267,670
Equipment under capital leases - net 26,022 --
Deposits 14,259 12,253
Intangible assets - net 5,338 4,446
----------- -----------
$ 1,271,889 $ 978,933
=========== ===========
LIABILITIES AND STOCKHOLDER' DEFICIT
Current liabilities
Accounts payable $ 799,703 $ 120,268
Accrued expenses and other current liabilities 320,241 68,479
Sales tax payable 34,141 36,469
Current portion of long-term debt 91,607 58,615
Current portion of obligations under capital leases 18,532 --
----------- -----------
Total current liabilities 1,264,224 283,831
Long-term debt - net of current portion 280,181 286,599
Obligations under capital leases - net of current portion 6,341 --
Loans payable - stockholders 6,000 66,956
Stockholders' deficit
Common stock, $.01 par value; 50,000,000 shares authorized,
10,105,000 and 9,790,000 shares issued and outstanding at
December 31, 2006 and 2005, respectively 6,251 2,501
Additional paid-in-capital 2,289,484 399,821
Accumulated deficit (2,580,593) (60,776)
----------- -----------
Total stockholders' deficit (284,858) (341,546)
----------- -----------
$ 1,271,889 $ 978,933
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2
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2007 AND 2005
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2007 2006
Revenues - net $ 1,546,887 $ 1,195,590
Cost of revenues 691,971 434,850
----------- -----------
Gross Margin 854,916 760,741
----------- -----------
Operating expenses (including stock-based compensation or ($164,803
and $77,321 for 2007 and 2006, respectively) 1,626,310 581,403
----------- -----------
Loss from operations (771,394) 179,338
Other (income expenses 129
Interest income (49)
Interest expense 171 (28)
Miscellaneous (income) expense 25,915 17,197
----------- -----------
26,135 17,169
----------- -----------
Net loss $ (797,529) $ 162,196
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3
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED MARCH 31, 2007 AND 2006
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2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(797,529) $ 162,196
Adjustments to reconcile net loss to net cash used by operating
activities
Depreciation and amortization 25,915 17,197
Stock-based compensation 164,803 77,321
Change in deferred revenue 4,031
(increase) decrease in operating assets
Accounts receivable (174,226) (164,661)
Inventory (243,259) (29,633)
Prepaid expenses and other assets 5,363 (4,788)
Increase (decrease) in operating liabilities
Accounts payable 12,166 (127,337)
Accrued expenses and other current liabilities 301,861 43,540
Sales tax payable 4,950 194
--------- ---------
Net cash used by operating activities (695,925) (25,972)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (71,545) (9,312)
Payment of security deposit 16,425 --
--------- ---------
Net cash used by investing activities (55,120) (9,312)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital leases (2,040) (13,303)
Proceeds from convertible notes payable -- --
Proceeds from long-term debt, net of deferred financing
costs of $5,338 in 2005 83,658
Principal repayments of long-term debt -- --
Proceeds from loans payable - stockholders -- 49,521
Repayment of loans payable - stockholders (4,943) --
Proceeds from sale of common stock 871,058 --
--------- ---------
Net cash provided by financing activities 864,075 70,355
--------- ---------
Decrease in cash 113,030 35,072
CASH
Beginning of year 963 10,903
--------- ---------
End of year $ 113,993 $ 45,974
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VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed by Visual Management Systems Holding,
Inc. ("VMS Holdings") and its wholly-owned subsidiaries, Visual Management
Systems, LLC ("VMS, LLC") and Visual Management Systems PDG, LLC ("PDG"),
collectively the "Company" in the preparation of the accompanying consolidated
financial statements are summarized below:
NATURE OF BUSINESS OPERATIONS
The Company delivers protective technology solutions and remote management loss
prevention surveillance systems and provides on-site consultations regarding its
products. The Company also sells, installs, upgrades and services Digital Video
Recording Systems. The Company is New Jersey-based and began operations in June
2003.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Visual Management
Systems Holding, Inc. and its wholly owned subsidiaries, Visual Management
Systems, LLC and Visual Management Systems PDG, LLC collectively the "Company."
All inter-company transactions and balances have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash balances and trade receivables. The
Company invests its excess cash in highly liquid investments. The Company's
customer base is principally comprised of financial institutions. The Company
does not require collateral from its customers.
ACCOUNTS RECEIVABLE AND CREDIT POLICY
Accounts receivable are uncollateralized customer obligations due under normal
trade terms, ordinarily requiring payment within 30 days from the invoice date.
Interest is not charged on unpaid receivables with invoice dates over 30 days
old.
Accounts Receivable are stated in the amount billed to the customer. Payments of
accounts receivable are allocated to the specific invoices identified on the
customer's remittance advice or, if unspecified, are applied to the earliest
unpaid invoices.
Management believes all accounts receivable to be fully collectible and,
therefore, has not recorded an allowance as of March 31, 2007.
INVENTORY
Inventory, which consists of digital video recorders, security cameras and
related installation materials, is stated at the lower of cost or market value.
Cost is computed on the first-in, first-out method.
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VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation charges with respect to
property and equipment have been made by the Company using accelerated methods
based on the following estimated useful lives:
ESTIMATED
CLASSIFICATION LIFE (YEARS)
-------------- ------------
Computer hardware and software 5 - 7
Furniture and fixtures 7
Machinery and equipment 5 - 7
Vehicles 5
Expenditures for repairs and maintenance are charged to operations as incurred.
Expenditures for betterments and major renewals are capitalized and, therefore,
are included in property and equipment.
REVENUE RECOGNITION
The Company generates revenues from the sale and installation of remote
management loss prevention systems. Revenue is recognized at the time of the
installation. Amounts billed in advance of the period which service is rendered
are recorded as a liability under "Deferred revenue."
ADVERTISING
Advertising costs are expensed as incurred and approximated $14,127 and $3,617
for the quarters ended March 31, 2007 and 2007 respectively.
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the differences
between financial and income tax reporting bases of assets and liabilities based
on enacted tax rates and laws. The deferred income tax provision or benefit
generally reflects the net change in deferred income tax assets and liabilities
during the year. The current income tax provision reflects the tax consequences
of revenues and expenses currently taxable or deductible on the Company's income
tax return for the period reported.
6
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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PROPERTY AND EQUIPMENT
The major classifications of property and equipment at March 31, 2007 are as
follows:
2007 2006
Computer hardware and software 81,405 85,123
Furniture and fixtures 44,248 68,886
Machinery and equipment 102,592 35,495
Vehicles 277,911 165,441
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Total cost 506,156 351,956
Accumulated depreciation (139,772) (84,286)
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Property and equipment - net 366,384 267,670
------- -------
Depreciation included as a charge to operations amounted to $20,649 and $16,675
for the quarters ended March 31, 2007 and 2006 respectively.
EQUIPMENT UNDER CAPITAL LEASES
Equipment under capital leases at March 31 are as follows:
2007 2006
Computer hardware and software 17,587 9,587
Machinery and equipment 28,661 28,661
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Total cost 46,248 38,248
Accumulated amortization (20,226) (6,448)
------- -------
Equipment under capital leases - net 26,022 31,800
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Amortization included as a charge to operations amounted to $2,000 and $ -0- for
the quarter ended March 31, 2007 and 2006 respectively.
INTANGIBLE ASSETS
Intangible assets at March 31, are as follows:
Gross
Amortization Carrying Accumulated
Period Amount Amortization Net
------ ------ ------------ ---
2006
Deferred financing costs 7 years $ 5,338 $ -0- $ 5,338
2006
Deferred financing costs 7 years $32,206 $ 700.00 $31,506
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VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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Amortization expense amounted to $ -0- and $700.00 for the quarters ended March
31, 2007 and 2006 respectively.
Estimated future amortization expense within the next five years ending December
31 and thereafter are as follows:
2007 $ 1,067.50
2008 1,067.50
2009 1,067.50
2010 1,067.50
2011 1,067.00
---- ------------
$ 5,338.00
In 2006, the Company incurred $27,640 related to branding of the Company's
technology and product. This asset has an indefinite and useful life and,
accordingly, is not amortized and will be tested at least annually for
impairment.
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VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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CONVERTIBLE DEBT
In September 2005, the Company issued $50,000 of 8% convertible notes dues on
March 15, 2008. Interest is payable semi-annually in March and September. The
notes are convertible by the holder into shares of the Company's common stock
and warrants to purchase the Company's common stock at any time at a conversion
price of $2.50 per share, which is subject to adjustment based on the provisions
of the agreement. The proceeds were primarily used for general corporate
purposes.
In March 2006, the Company issued $50,00 of 8% convertible notes due on March
15, 2008. Interest is payable semi-annually in March and September. The notes
are convertible by the holder into shares of the Company's common stock and
warrants to purchase the Company's common stock at any time at a conversion
price of $2.50 per share, which is subject to adjustment based on the provisions
of the agreement. The proceeds were primarily used for general corporate
purposes.
In March 2006, the Company issued $25,000 of 8% convertible notes due on March
15, 2008. Interest is payable semi-annually in March and September. The notes
are convertible by the holder into shares of the Company's common stock and
warrants to purchase the Company's common stock at any time at a conversion
price of $2.50 per share, which is subject to adjustment based on the provisions
of the agreement. The proceeds were primarily used for general corporate
purposes.
In September 2006, the Company issued $50,000 of 8% convertible notes due on
March 15, 2008. Interest is payable semi-annually in March and September. The
notes are convertible by the holder into shares of the Company's common stock
and warrants to purchase the Company's common stock at any time at a conversion
price of $2.50 per share, which is subject to adjustment based on the provisions
of the agreement. The proceeds were primarily used for general corporate
purposes.
In March 2006, the Company issued $50,000 of 8% convertible notes due on March
15, 2008. Interest is payable semi-annually in March and September. The notes
are convertible by the holder into shares of the Company's common stock and
warrants to purchase the Company's common stock at any time at a conversion
price of $2.50 per share, which is subject to adjustment based on the provisions
of the agreement. The proceeds were primarily used for general corporate
purposes.
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VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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In March 2006, the Company issued $150,000 of 8% convertible notes due on March
15, 2008. Interest is payable semi-annually in March and September. The notes
are convertible by the holder into shares of the Company's common stock and
warrants to purchase the Company's common stock at any time at a conversion
price of $2.50 per share, which is subject to adjustment based on the provisions
of the agreement. The proceeds were primarily used for general corporate
purposes.
During the first quarter 2007, the Company induced conversion of all outstanding
warrants into common stock through a tow-for-one conversion offering.
In accordance with FAS-84, INDUCED CONVERSIONS OF CONVERTIBLE DEBT, the
conversion of notes to common stock during the years ended December 31, 2006 and
2005 resulted in $264,990 and $58,890, respectively, of debt conversion expense.
LONG-TERM DEBT
Long-term debt at March 31 is as follows:
2007 2006
Term loans payable, collateralized by vehicles, due in monthly
installments ranging from $404 - $612, including interest at
fixed rates ranging from 3.90% - 8.69% and maturing through
November, 2012 $ 201,101 $ 207,700
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Term loan payable - due in monthly installments of $794 including
interest at a fixed rate of 8.61% and maturing October 2013. The
loan is secured by the personal guarantee of the majority stock-
holder. 50,000 50,000
Small Business Association term loan due in monthly installments
of $2,282 including interest at a fixed rate of 7.23% and maturing
January 2012. 120,687 116,661
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371,788 374,361
Less: current portion 91,607 76,094
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Long-term debt - net of current portion $ 280,181 $ 298,267
---------- ----------
Aggregate maturities of long-term debt of the Company due within the next five
years ending December 31 and thereafter, are as follows:
2007 $ 76,094
2008 77,809
2009 80,060
2010 59,586
2011 49,892
Thereafter 28,347
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$371,788
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OBLIGATIONS UNDER CAPITAL LEASES
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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Obligations under capital leases at March 31 are as follows:
2007 2006
Equipment leases - monthly payments ranging from $83 - $282,
Including interest between 15.33% - 19.03% and maturing through
June 2010. $24,873 $30,356
Less: current portion 18,532 18,143
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Obligations under capital leases - net of current portion $ 6,341 $12,213
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COMMITMENTS AND CONTINGENCIES
The Company conducts its operations from two facilities in New Jersey, New York,
Virginia and Ohio with leases expiring on January 31, 2009, April 30, 2010,
November 30, 2009 and November 30, 2007 respectively. Rent expense for the 3
months ended March 31, 2007 and 2006 respectively was $25,142 and $28,181
respectively.
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VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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Minimum future rental payments under non-cancelable operating leases as of March
31, 2007 are approximately:
2007 $144,356
2008 116,797
2009 73,342
2010 18,035
2011 --
--------
$352,530
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INCOME TAXES
Income tax benefit is summarized as follows for the years ended December 31:
2006 2005
Federal and state - current $ -- $ --
------------ -----------
Deferred -- --
Benefit from net operating loss carryforwards -- --
Provision for income taxes -- --
------------ -----------
$ -- $ --
------------ -----------
2006 2005
Deferred income tax assets $ 169,600 $ 53,600
Valuation allowance (169,000) (53,600)
------------ -----------
Deferred income tax assets - net $ -- $ --
------------ -----------
The principal temporary difference that gives rise to deferred income tax assets
is net operating loss carryforwards.
At December 31, 2006 and 2005, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $424,000 and
$134,000, respectively expiring through 2012.
STOCK OPTION PLAN
The Company maintains a non-qualified stock option plan (the "Plan") that
provides for the awarding of stock options to selected employees and
non-employees. Options granted under the Plan become vested 50% one year from
the date of grant and in full two years from the date of grant. Options are
exercisable immediately upon vesting. No shares are reserved for the Plan and
all shares are expected to be issued from authorized shares not yet outstanding,
or from Treasury Stock, if available.
The Company estimated the fair value of each option award on the date of grant
using the BSM valuation model. Assumptions about stock-price volatility have
been estimated by management based upon the implied volatilities of publicly
traded companies within the industry. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. Forfeitures were estimated as management's best
approximation.
The following table presents the weighted-average assumptions used to estimate
the fair values of the stock options granted in the periods presented:
12
VISUAL MANAGEMENT SYSTEMS HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007 AND 2006
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Dec 31, 2005 Dec 31, 2006 Mar 31, 2007
------------ ------------ ------------
Risk-free interest rate 2.97% 4.90% 5.03%
Expected volatility 150% 150% 150%
Expected life (in years) 10 10 10
Weighted-average estimated fair value of options granted during $0.44 $1.59 1.62
the year
The following table summarizes the activity under the Plan:
OPTIONS OUTSTANDING
---------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AGGREGATE
NUMBER OF EXERCISE REMAINING INTRINSIC
SHARES PRICE TERM (YRS.) VALUE
--------- -------- ----------- ----------
<c> <s> <s> <s> <s>
Balance, January 1, 2005 -- $ -- -- $ --
Granted 1,410,000 1.25
Exercised -- --
Lapsed -- --
Balance, December 31, 2005 1,410,000 1.25 9.50 618,567
--------- ----
Granted 440,000 1.25
Exercised -- --
Lapsed -- --
--------- ----
Balance, December 31, 2006 1,850,000 1.25 8.75 1,318,427
--------- ----
Granted 156,500 1.25
Exercised -- -- 8.75
Lapsed -- --
Balance, March 31, 2007 2,006,500 1.25 8.75 1,429,959
========= ====
SUBSEQUENT EVENT
Subsequent to December 31, 2006 the Company entered into negotiations with a
venture capital group for the private placement of an undetermined number of
shares of Company stock. The transaction could raise up to $5,000,000 in capital
for the Company and is expected to be completed within one year.
13