PARITZ & COMPANY, P.A.
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| XL GENERATION AG |
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| FINANCIAL STATEMENTS |
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| REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM |
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| YEAR ENDED DECEMBER 31, 2004 |
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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
Board of Directors
XL Generation AG
We have audited the accompanying balance sheet of XL Generation AG as of and the
related statements of operations, stockholders' deficiency 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 audit in accordance with auditing 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 XL Generation AG as of December
31, 2004, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that XL
Generation AG will continue as a going concern. As shown in the consolidated
financial statements, XL Generation AG incurred net losses of $2,104,854 in
fiscal 2004 and has a working capital deficiency of $2,018,232 and a
stockholders' deficiency of $2,016,464 as of December 31, 2004. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Hackensack, New Jersey
October 18, 2005
XL GENERATION AG
BALANCE SHEET
DECEMBER 31, 2004
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ASSETS
CURRENT ASSETS:
Cash $ 434,194
Due from stockholder 416,047
Prepaid expenses and sundry current assets 49,355
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TOTAL CURRENT ASSETS 899,596
OFFICE EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF $1,136 1,768
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TOTAL ASSETS $ 901,364
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Note payable - stockholder $ 489,220
- supplier (see Note 8) 2,352,333
Accrued expenses 76,275
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TOTAL CURRENT LIABILITIES 2,917,828
STOCKHOLDERS' DEFICIENCY (2,016,464)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 901,364
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See notes to financial statements
XL GENERATION AG
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
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REVENUE:
Product sales $ 1,348,919
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COSTS AND EXPENSES:
Cost of sales 1,676,785
Selling, general and administrative 913,952
Research and development 123,315
Write-off of advances to related party 539,357
Interest, net 50,468
Foreign exchange loss 11,870
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TOTAL COSTS AND EXPENSES 3,315,747
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NET LOSS $(1,966,828)
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Basic and diluted loss per share $ (28.55)
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Weighted average shares outstanding $ 50,000
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See notes to financial statements
XL GENERATION AG
STATEMENT OF STOCKHOLDERS' DEFICIENCY
YEAR ENDED DECEMBER 31, 2004
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Accumulated
---Common Stock--- Other Total
Shares Accumulated Comprehensive Comprehensive
Amount Deficit Loss Total Loss
BALANCE - JANUARY 2004 -- $ -- $ -- $ -- $ -- $ --
Sales of common stock 100 88,390 -- -- 88,390 --
Net loss -- (1,966,828) -- (1,966,828) (1,966,828)
Other comprehensive loss:
Financial statement translation -- -- (138,026) (138,026) (138,026)
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BALANCE - DECEMBER 31, 2004 100 $ 88,390 $(1,966,828) $ (138,026) $(2,016,464) $(2,104,854)
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See notes to financial statements
XL GENERATION AG
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
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OPERATING ACTIVITIES:
Net loss $(1,966,828)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,136
Changes in operating assets and liabilities:
Prepaid expenses (49,355)
Accrued expenses 76,275
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NET CASH USED IN OPERATING ACTIVITIES (1,938,772)
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INVESTING ACTIVITIES:
Acquisition of office equipment (2,903)
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NET CASH USED IN INVESTING ACTIVITIES (2,903)
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FINANCING ACTIVITIES:
Proceeds from sale of common stock 88,390
Proceeds from stockholder loans 489,220
Proceeds from loans from related party 2,352,333
Advances to stockholder (416,047)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 2,513,896
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EFFECT OF EXCHANGE RATE ON CASH (138,027)
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INCREASE IN CASH AND CASH - END OF YEAR $ 434,194
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See notes to financial statements
XL GENERATION AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
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1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
XL Generation AG (the "Company") or ("XLG") was incorporated in 1991, and
was inactive until March 2004 when it was granted the exclusive worldwide
right to manufacture, promote and sell XL Turf products. XL Turf is an
artificial pitch used primarily in soccer stadiums and indoor recreational
facilities.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities not exceeding three months to be cash equivalents.
OFFICE EQUIPMENT
Office equipment is stated at cost. Depreciation is computed using the
straight-line method over the three-year estimated life of the equipment.
REPAIRS AND MAINTENANCE
Maintenance and repairs and minor renewals are expensed as incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
REVENUE RECOGNITION
The Company recognizes revenue when it is realized or realizable and
earned. The Company considers revenue realized or realizable and earned
when persuasive evidence of an arrangement exists, the product has been
shipped or the services have been provided to the customer, the sales
price is fixed or determinable and collectibility is reasonably assured.
The Company reduces revenue for estimated customer returns, rotations and
sales rebates when such amounts are estimable. When not estimable, The
Company defers revenue until the product is sold to the end customer. As
part of its product sales price, the Company provides support, which is
generally utilized by the customer shortly after the sale.
INCOME TAXES
The asset and liability approach is used to account for income taxes by
recognizing deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and
the tax bases of assets and liabilities. The Company records a valuation
allowance to reduce the deferred tax assets to the amount that is more
likely than not to be realized.
LOSS PER COMMON SHARE
The basic net loss per common share is computed by dividing the net loss
by the weighted average number of common shares outstanding.
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1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
USE OF ESTIMATES
In preparing financial statements, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities in
the balance sheet and revenue and expenses in the statement of operations.
Actual results could differ from those estimates.
FOREIGN CURRENCY
For the Company's international operations, the local currency is
designated as the functional currency. Accordingly, assets and liabilities
are translated into U.S. Dollars at year-end exchange rtes and revenues
and expenses are translated at average exchange rates prevailing during
the year. Currency translation adjustments from local functional currency
countries resulting from fluctuations in exchange rates are recorded in
other comprehensive income.
DEFERRED INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109) which requires that
deferred tax assets and liabilities be recognized for future tax
consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. In addition, SFAS 109 requires recognition of future tax
benefits, such as carryforwards, to the extent that realization of such
benefits is more likely than not and that a valuation allowance be
provided when it is more likely than not that some portion of the deferred
tax asset will not be realized.
2 GOING CONCERN
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and
settlement of liabilities and commitments in the normal course of business
for the foreseeable future. Since inception in March 2004, the Company has
accumulated losses aggregating $2,104,854, has a negative working capital
of $2,018,232 and a stockholders' deficiency of $2,016,464 as of December
31, 2004, all of which raise substantial doubt about the Company's ability
to continue as a going concern.
Management's plan for the Company's continued existence including selling
additional stock or borrowing additional funds to pay overhead expenses
while current marketing efforts continue to raise its sales volume.
The Company's future success is dependent upon its ability to achieve
profitable operations, generate cash from operating activities and obtain
additional financing. There is no assurance that the Company will be able
to generate sufficient cash from operations, sell additional shares of
common stock or borrow additional funds.
The Company's inability to obtain additional cash could have a material
adverse effect on its financial position, results of operations and its
ability to continue in existence. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
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3 ACCRUED EXPENSES
As of December 31, 2004, accrued expenses consist of the following:
Accrued interest $23,999
Accrued operating expenses 52,276
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$76,275
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4 NOTES PAYABLE
During 2004 the Company received a total of $2,352,333 for an unsecured
demand note payable from SOREVE, a former parent company of its French
distributor. The note balance at December 31, 2004 is $2,352,333. The note
bears interest at a rate based upon a percentage of sales pursuant to a
related sales agreement.
In March 2004 the Company received $173,100 for an unsecured demand note
payable from Xx. Xxxxxx Xxxxxx, a 10% stockholder and a current board
member. During the year, Xx. Xxxxxx continued to support the Company with
additional funds through payments of overheads in the Head Office. The
total note balance at December 31, 2004 was $489,220.
5 CAPITAL STOCK
The total number of shares of capital stock which the Company has the
authority to issue is 100,000 shares. 50,000 are fully paid-up.
6 INCOME TAXES
Income taxes are not due, since the Company has incurred a loss since
inception. The Company has deductible net operating losses of
approximately $2,100,000 at December 31, 2004. These expire twenty years
after incurred. Components of deferred tax assets and liabilities are as
follows:
Deferred tax asset $ 792,000
Valuation allowance (792,000)
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Net deferred tax asset $ -
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The Company has recorded a full valuation allowance against its deferred
tax asset since, in its opinion, it is more likely than not that such
deferred tax asset will not be recognized.
7 RELATED PARTY TRANSACTIONS
In March 2004 the Company received an advance of $135,236 (CHD 153,000) by
Xx. Xxxxxx Xxxxxx, a 10% stockholder of the Company. In addition, Xx.
Xxxxxx advanced further payments during the year to cover general
overheads and running costs of the Zug office. The balance as of December
31, 2004 was $489,220 (CHF 553,478.97).
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8 SUBSEQUENT EVENTS
In January 2005 the Company entered into an exclusive license agreement
with WKF.5 Limited, a Malta incorporated entity. That grants the Company
the exclusive right to manufacture and sell XL products and products using
XL Pad technology. The Company will pay WKF.5 Limited a fee equal to 5% of
the Company's gross sales of these products. As compensation, the Company
will pay a one-time fee of approximately $416,000 (CAD 470,695.14) to
enter into this agreement. The cost will be expensed during the first
quarter of 2005.
In June 2005 the Company entered into an agreement with Terevi/Soreve to
convert the loan granted to the Company during 2004 into preference shares
of the Company. The preference shares will be convertible to XL Generation
International Inc. Common stock once traded on the OTCBB exchange.
In June 2005 the Company signed with Cygni Systems Inc. ("Cygni") whereby
Cygni would acquire all shares in the Company for new issued common shares
in Cygni. Xxxxx would also change its name to XL Generation International
Inc. On August 19, 2005 the transaction was executed, whereby Cygni
acquired 100% of the shares in the Company in exchange for the issuance of
15,000,000 new common shares of Cygni.
