<PAGE> 1
EXHIBIT 99.02
PANOPTICON, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors ......................................... 2
Balance Sheets ......................................................... 3
Statements of Operations ............................................... 4
Statements of Net Capital Deficiency ................................... 5
Statements of Cash Flows ............................................... 6
Notes to Financial Statements .......................................... 7
</TABLE>
<PAGE> 2
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Panopticon, Inc.
We have audited the accompanying balance sheets of Panopticon, Inc. (a
development stage company) as of December 31, 1998 and 1999, and the related
statements of operations, cash flows, and net capital deficiency for the period
from inception (May 15, 1998) to December 31, 1998, the year ended December 31,
1999 and the period from inception (May 15, 1998) to December 31, 1999. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 Panopticon, Inc. at December
31, 1998 and 1999, and the results of its operations and its cash flows for the
period from inception (May 15, 1998) to December 31, 1998, the year ended
December 31, 1999, and the period from inception (May 15, 1998) to December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that
Panopticon will continue as a going concern. As more fully described in Note 1,
the Company has incurred recurring operating losses and has a working capital
and net capital deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
San Jose, California
October 12, 2000
<PAGE> 3
PANOPTICON, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1999 2000
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ........................ $ 5,654 $ 321,141 $ 73,260
Prepaid expenses and other current assets ........ 113 11,009 548
--------- ----------- -----------
Total current assets ..................... 5,767 332,150 73,808
--------- ----------- -----------
Property and equipment, net ........................ 536 26,472 189,440
Other assets ....................................... 2,413 314,712 39,872
--------- ----------- -----------
Total assets ............................. $ 8,716 $ 673,334 $ 303,120
========= =========== ===========
LIABILITIES AND NET CAPITAL DEFICIENCY
Current liabilities:
Notes payable to stockholders .................... $ -- $ -- $ 250,000
Accounts payable ................................. 2,616 116,587 363,031
Accrued liabilities .............................. -- 63,838 266,573
Current portion of long-term debt ................ -- 625,000 --
--------- ----------- -----------
Total current liabilities ................ 2,616 805,425 879,604
Long-term debt, net of current portion ............. 52,450 220,000 --
--------- ----------- -----------
Total liabilities ........................ 55,066 1,025,425 879,604
--------- ----------- -----------
Commitments (Note 5)
Stockholders' equity (net capital deficiency):
Series A Convertible Preferred Stock: no par
value; 2,500,000 shares authorized; 2,220,759
shares issued and outstanding at June 30, 2000
(unaudited) (liquidation value $1,477,386 at
June 30, 2000) (unaudited) .................... -- -- 1,477,386
Common Stock: no par value; 10,000,000 shares
authorized; 4,000,000, 4,472,000 and 5,318,362
shares issued and outstanding at December 31,
1998 and 1999 and June 30, 2000 (unaudited),
respectively .................................. 140,000 156,520 310,951
Additional paid-in capital ....................... -- 350,626 1,504,475
Deferred stock-based compensation ................ -- (4,481) (422,569)
Deficit accumulated during the development
stage ............................................ (186,350) (854,756) (3,446,727)
--------- ----------- -----------
Total net capital deficiency ............. (46,350) (352,091) (576,484)
--------- ----------- -----------
Total liabilities and net capital
deficiency ............................. $ 8,716 $ 673,334 $ 303,120
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
PANOPTICON, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
INCEPTION, INCEPTION,
MAY 15, 1998, MAY 15, 1998,
THROUGH YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING EXPENSES:
Research and development .............................. $ 15,318 $ 180,952 $ 196,270
Sales and marketing ................................... 10,552 141,082 151,634
General and administrative ............................ 160,480 328,467 488,947
--------- ----------- ---------
Total operating expenses ...................... 186,350 650,501 836,851
--------- ----------- ---------
Loss from operations .................................... (186,350) (650,501) (836,851)
Interest income ......................................... -- 2,480 2,480
Interest expense ........................................ -- (20,385) (20,385)
--------- ----------- ---------
Net loss ................................................ $(186,350) $ (668,406) $(854,756)
Series A Convertible Preferred Stock deemed non-cash
dividend .............................................. -- -- --
--------- ----------- ---------
Net loss applicable to common stockholders .............. $(186,350) $ (668,406) $(854,756)
========= =========== =========
Net loss per share -- basic and diluted ................. $ (4.17) $ (0.37) $ (1.00)
========= =========== =========
Shares used in per share calculation -- basic and
diluted ............................................... 44,681 1,818,845 856,212
========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION,
MAY 15, 1998,
SIX MONTHS SIX MONTHS THROUGH
ENDED ENDED JUNE 30,
JUNE 30, 1999 JUNE 30, 2000 2000
------------- ------------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
OPERATING EXPENSES:
Research and development .............................. $ 9,649 $ 1,244,980 $ 1,441,250
Sales and marketing ................................... 147,909 229,622 381,256
General and administrative ............................ 13,776 269,730 758,677
----------- ----------- -----------
Total operating expenses ...................... 171,334 1,744,332 2,581,183
----------- ----------- -----------
Loss from operations .................................... (171,334) (1,744,332) (2,581,183)
Interest income ......................................... -- 827 3,307
Interest expense ........................................ (7,954) (329,356) (349,741)
----------- ----------- -----------
Net loss ................................................ (179,288) (2,072,861) (2,927,617)
Series A Convertible Preferred Stock deemed non-cash
dividend .............................................. -- (519,110) (519,110)
----------- ----------- -----------
Net loss applicable to common stockholders .............. $ (179,288) $(2,591,971) $(3,446,727)
=========== =========== ===========
Net loss per share -- basic and diluted ................. $ (0.12) $ (0.55) $ (2.68)
=========== =========== ===========
Shares used in per share calculation -- basic and
diluted ............................................... 1,465,000 4,677,357 1,286,613
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
PANOPTICON, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF NET CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at inception .............................. -- $ -- -- $ --
Issuance of Common Stock to founders in
exchange for services at $0.035 per share ....... -- -- 4,000,000 140,000
Net loss .......................................... -- -- -- --
--------- ---------- ---------- ---------
Balance at December 31, 1998 ...................... -- -- 4,000,000 140,000
Issuance of Common Stock at $0.035 per share ...... -- -- 430,000 15,050
Exercise of options at $0.035 per share ........... -- -- 42,000 1,470
Purchase of warrants for cash ..................... -- -- -- --
Issuance of warrants to purchase Common Stock ..... -- -- -- --
Issuance of convertible debt with beneficial
conversion feature .............................. -- -- -- --
Value of options granted to non employees ......... -- -- -- --
Deferred stock-based compensation ................. -- -- -- --
Amortization of deferred stock-based
compensation .................................... -- -- -- --
Net loss .......................................... -- -- -- --
--------- ---------- ---------- ---------
Balance at December 31, 1999 ...................... -- -- 4,472,000 156,520
Issuance of Series A Convertible Preferred
Stock, net at $0.75 per share (unaudited) ....... 1,007,178 755,382 -- --
Conversion of convertible debt into Series A
Convertible Preferred Stock at $0.59 per
share (unaudited) ............................... 1,213,581 722,004 -- --
Deemed non-cash dividend on Series A
Convertible Preferred Stock (unaudited) ......... -- -- -- --
Deferred stock-based compensation (unaudited) ..... -- -- -- --
Amortization of deferred stock-based
compensation (unaudited) ........................ -- -- -- --
Value of options granted to non employees
(unaudited) ..................................... -- -- -- --
Conversion of convertible debt into Common
Stock at $0.14 per share (unaudited) ............ -- -- 1,050,343 150,000
Issuance of Common Stock from exercise of
warrants at $0.035 per share (unaudited) ........ -- -- 10,000 350
Issuance of Common Stock at $0.08 per share
(unaudited) ..................................... -- -- 236,019 19,831
Repurchase of Common Stock at $0.035 per share
(unaudited) ..................................... -- -- (450,000) (15,750)
Net loss (unaudited) .............................. -- -- -- --
--------- ---------- ---------- ---------
Balance at June 30, 2000 (unaudited) .............. 2,220,759 $1,477,386 5,318,362 $ 310,951
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DEFERRED DURING THE TOTAL NET
PAID-IN STOCK-BASED DEVELOPMENT CAPITAL
CAPITAL COMPENSATION STAGE DEFICIENCY
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Balance at inception .............................. $ -- $ -- $ -- $ --
Issuance of Common Stock to founders in
exchange for services at $0.035 per share ....... -- -- -- 140,000
Net loss .......................................... -- -- (186,350) (186,350)
---------- --------- ----------- -----------
Balance at December 31, 1998 ...................... -- -- (186,350) (46,350)
Issuance of Common Stock at $0.035 per share ...... -- -- -- 15,050
Exercise of options at $0.035 per share ........... -- -- -- 1,470
Purchase of warrants for cash ..................... 100 -- -- 100
Issuance of warrants to purchase Common Stock ..... 62,606 -- -- 62,606
Issuance of convertible debt with beneficial
conversion feature .............................. 270,441 -- -- 270,441
Value of options granted to non employees ......... 9,229 -- -- 9,229
Deferred stock-based compensation ................. 8,250 (8,250) -- --
Amortization of deferred stock-based
compensation .................................... -- 3,769 -- 3,769
Net loss .......................................... -- -- (668,406) (668,406)
---------- --------- ----------- -----------
Balance at December 31, 1999 ...................... 350,626 (4,481) (854,756) (352,091)
Issuance of Series A Convertible Preferred
Stock, net at $0.75 per share (unaudited) ....... -- -- -- 755,382
Conversion of convertible debt into Series A
Convertible Preferred Stock at $0.59 per
share (unaudited) ............................... -- -- -- 722,004
Deemed non-cash dividend on Series A
Convertible Preferred Stock (unaudited) ......... 519,110 -- (519,110) --
Deferred stock-based compensation (unaudited) ..... 624,659 (624,659) -- --
Amortization of deferred stock-based
compensation (unaudited) ........................ -- 206,571 -- 206,571
Value of options granted to non employees
(unaudited) ..................................... 10,080 -- -- 10,080
Conversion of convertible debt into Common
Stock at $0.14 per share (unaudited) ............ -- -- -- 150,000
Issuance of Common Stock from exercise of
warrants at $0.035 per share (unaudited) ........ -- -- -- 350
Issuance of Common Stock at $0.08 per share
(unaudited) ..................................... -- -- -- 19,831
Repurchase of Common Stock at $0.035 per share
(unaudited) ..................................... -- -- -- (15,750)
Net loss (unaudited) .............................. -- -- (2,072,861) (2,072,861)
---------- --------- ----------- -----------
Balance at June 30, 2000 (unaudited) .............. $1,504,475 $(422,569) $(3,446,727) $ (576,484)
========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
PANOPTICON, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
INCEPTION, INCEPTION,
MAY 15, 1998, MAY 15, 1998,
THROUGH YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1999
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $(186,350) $(668,406) $(854,756)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................. -- 1,151 1,151
Amortization of deferred stock-based
compensation expense ......................... -- 3,769 3,769
Value of options granted to non employees ...... -- 9,229 9,229
Value of warrants issued to purchase
Preferred Stock .............................. -- 62,606 62,606
Issuance of Common Stock for services .......... 140,000 -- 140,000
Deemed non-cash interest on convertible
debt with beneficial conversion feature ...... -- 270,441 270,441
Series A Preferred Stock deemed non-cash
dividend ..................................... -- -- --
Changes in current assets and liabilities:
Prepaid expenses and other current
assets ..................................... (113) (10,896) (11,009)
Accounts payable ............................. 2,616 113,971 116,587
Accrued liabilities .......................... -- 63,838 63,838
Changes in other assets ...................... (2,413) (312,299) (314,712)
--------- --------- ---------
Net cash used in operating activities ..... (46,260) (466,596) (512,856)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ (536) (27,087) (27,623)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock ............ -- 16,520 16,520
Proceeds from purchase of warrants ................ -- 100 100
Net proceeds from issuance of Preferred Stock ..... -- -- --
Repurchase of Common Stock ........................ -- -- --
Net proceeds from issuance of debt ................ -- -- --
Net proceeds from issuance of convertible debt .... 52,450 792,550 845,000
--------- --------- ---------
Net cash provided by financing activities . 52,450 809,170 861,620
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ....................................... 5,654 315,487 321,141
Cash and cash equivalents at beginning of period .... -- 5,654 --
--------- --------- ---------
Cash and cash equivalents at end of period .......... $ 5,654 $ 321,141 $ 321,141
========= ========= =========
NON CASH ACTIVITIES:
Conversion of convertible debt into
Preferred Stock ................................. $ -- $ -- $ --
========= ========= =========
Conversion of convertible debt into Common
Stock ........................................... $ -- $ -- $ --
========= ========= =========
Deferred stock-based compensation ................. $ -- $ 8,250 $ 8,250
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION,
MAY 15, 1998,
SIX MONTHS SIX MONTHS THROUGH
ENDED ENDED JUNE 30,
JUNE 30, 1999 JUNE 30, 2000 2000
------------- ------------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $(179,288) $(2,591,971) $(3,446,727)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................. -- 10,527 11,678
Amortization of deferred stock-based
compensation expense ......................... 1,361 206,571 210,340
Value of options granted to non employees ...... -- 10,080 19,309
Value of warrants issued to purchase
Preferred Stock .............................. -- -- 62,606
Issuance of Common Stock for services .......... -- -- 140,000
Deemed non-cash interest on convertible
debt with beneficial conversion feature ...... -- -- 270,441
Series A Preferred Stock deemed non-cash
dividend ..................................... -- 519,110 519,110
Changes in current assets and liabilities:
Prepaid expenses and other current
assets ..................................... 113 10,462 (547)
Accounts payable ............................. 14,014 246,444 363,031
Accrued liabilities .......................... 19,624 229,738 293,576
Changes in other assets ...................... 1,743 274,840 (39,872)
--------- ----------- -----------
Net cash used in operating activities ..... (142,433) (1,084,199) (1,597,055)
--------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ -- (173,495) (201,118)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock ............ 1,400 20,181 36,701
Proceeds from purchase of warrants ................ -- -- 100
Net proceeds from issuance of Preferred Stock ..... -- 755,382 755,382
Repurchase of Common Stock ........................ -- (15,750) (15,750)
Net proceeds from issuance of debt ................ -- 250,000 250,000
Net proceeds from issuance of convertible debt .... 167,550 -- 845,000
--------- ----------- -----------
Net cash provided by financing activities . 168,950 1,009,813 1,871,433
--------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents ....................................... 26,517 (247,881) 73,260
Cash and cash equivalents at beginning of period .... 5,654 321,141 --
--------- ----------- -----------
Cash and cash equivalents at end of period .......... $ 32,171 $ 73,260 $ 73,260
========= =========== ===========
NON CASH ACTIVITIES:
Conversion of convertible debt into
Preferred Stock ................................. $ -- $ 722,004 $ 722,004
========= =========== ===========
Conversion of convertible debt into Common
Stock ........................................... $ -- $ 150,000 $ 150,000
========= =========== ===========
Deferred stock-based compensation ................. $ 8,250 $ 624,659 $ 632,909
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
PANOPTICON, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
AND 1999 IS UNAUDITED)
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Panopticon, Inc. (the "Company") was incorporated on May 15, 1998 as a
California corporation. The Company develops real-time recommendation technology
and software to facilitate the personalization of on-line product promotions.
The Company is considered to be in the development stage; no product revenue has
been generated through June 30, 2000. Prior to generating significant revenues,
the Company must complete the development of its software and successfully
introduce its services into the market. The Company is subject to the risks
associated with companies in the development stage, including reliance on key
employees, the potential inability to successfully develop and market its
products and services, competition from alternative channels and from large
companies, and potential inability to secure adequate funding to finance future
growth. The Company has incurred net operating losses since inception.
BASIS OF PRESENTATION
As of December 31, 1999, the Company had an accumulated deficit of
$854,756 ($3,446,727 at June 30, 2000), negative working capital and a net
capital deficiency. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management expects to merge the Company
(see Note 11) or to obtain additional working capital through debt or equity
financing in order to fund its future operations and product development. These
financial statements have been prepared assuming that the Company will continue
as a going concern and do not include any adjustments that might result from the
outcome of this uncertainty.
INTERIM FINANCIAL INFORMATION
The interim financial information at June 30, 2000 and for the six-month
period ended June 30, 2000 and 1999 is unaudited but, in the opinion of
management, includes all adjustments consisting only of normal adjustments
considered necessary for a fair presentation of the financial position and
results of operations for the interim period. The results of operations for the
six-month period ended June 30, 2000 are not necessarily indicative of the
results to be expected for the full fiscal year.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Effective May 15, 1998 (date of inception), the Company adopted the
provisions the AcSEC Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition", as amended by AcSEC Statement of Position 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2", and AcSEC Statement of Position
98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions." SOP 97-2 prescribes the accounting for sales of the
Company's software licenses, annual software maintenance and technical support,
and certain professional services. Under SOP 97-2, license revenue is recognized
upon delivery of the software provided that (i) a license agreement has been
executed with the customer, (ii) the Company has no remaining obligations to the
customer, (iii) the fees for products are fixed and determinable, and (iv)
collection of the license fee is considered probable. Maintenance revenues are
recognized ratably over the maintenance period, which is generally one year.
Fees for professional services are recognized as services are performed. For the
period from inception to June 30, 2000, the Company has earned no revenue.
<PAGE> 8
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents. At December 31, 1998 and 1999 and June 30, 2000, virtually all of
the Company's cash was held in an interest bearing demand deposit money market
account. The fair value is equal to the carrying value at December 31, 1998 and
1999 and June 30, 2000.
RESEARCH AND DEVELOPMENT
Research and development costs, including direct and allocated expenses,
are charged to operations as incurred.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents.
SOFTWARE DEVELOPMENT COSTS
The Company has incurred costs in developing software and technology for
resale. The Company applies the provisions of Statement of Financial Accounting
Standard No. 86 ("SFAS No. 86"), "Accounting for the Costs of Computer Software
to Be Sold, Leased or Otherwise Marketed" and since the Company's product has
not established technological feasibility, all costs incurred internally for
creating the product have been charged to expense as research and development.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful life of the related assets, generally three to five years. Gains and
losses from the disposal of property and equipment are taken into income in the
year of disposition. Repairs and maintenance costs are expensed as incurred.
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences
between the financial statements and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expenses have not been material.
NET LOSS PER SHARE
Basic and diluted net loss per share are presented in conformity with
the Statement of Financial Accounting Standard No. 128 ("SFAS No. 128"),
"Earnings Per Share", for all periods presented. In accordance with SFAS No.
128, basic and diluted net loss per share has been computed by dividing net loss
available to common stockholders by the weighted average number of vested common
shares outstanding for the period. Diluted net loss per share is computed giving
effect to all dilutive potential common stock, including options, non-vested
common stock and preferred shares. Options, non-vested common stock and
preferred shares were not included in the computation of diluted net loss per
share in the periods reported because the effect would be antidilutive.
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
PERIOD FROM PERIOD FROM PERIOD FROM
INCEPTION, INCEPTION, INCEPTION,
MAY 15, 1998, MAY 15, 1998, MAY 15, 1998,
THROUGH YEAR ENDED THROUGH SIX MONTHS SIX MONTHS THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED ENDED JUNE 30,
1998 1999 1999 JUNE 30, 1999 JUNE 30, 2000 2000
------------ ------------ ------------ ------------- ------------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net loss applicable
to common stockholders ..... $ (186,350) $ (668,406) $ (854,756) $ (179,288) $(2,591,971) $(3,446,727)
=========== =========== =========== =========== =========== ===========
Shares used in computing
historical basic and
diluted net loss per
share applicable to
common stockholders
(denominator):
Weighted average
shares outstanding ..... 153,192 4,210,500 2,622,872 4,006,667 5,319,574 3,000,367
Less shares subject
to repurchase .......... (108,511) (2,391,655) (1,766,660) (2,541,667) (642,217) (1,713,754)
----------- ----------- ----------- ----------- ----------- -----------
Denominator for pro
forma basic and
diluted net loss
per share .............. 44,681 1,818,845 856,212 1,465,000 4,677,357 1,286,613
=========== =========== =========== =========== =========== ===========
Basic and diluted net
loss per share ............. $ (4.17) $ (0.37) $ (1.00) $ (0.12) $ (0.55) $ (2.68)
=========== =========== =========== =========== =========== ===========
</TABLE>
Weighted average antidilutive securities which are excluded in the
diluted net loss per share calculation for the periods are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
FROM INCEPTION, FROM INCEPTION, FROM INCEPTION,
MAY 15, 1998, MAY 15, 1998, MAY 15, 1998,
THROUGH YEAR ENDED THROUGH SIX MONTHS SIX MONTHS THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED JUNE 30, ENDED JUNE 30, JUNE 30,
1998 1999 1999 1999 2000 2000
-------------- ----------- --------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Non vested Common Stock ................. 108,511 2,391,655 1,766,660 2,541,667 642,217 1,713,754
Common Stock options .................... -- 20,000 12,308 -- 478,167 121,922
Series A Convertible Preferred Stock .... -- -- -- -- 727,000 169,200
Series A Preferred Warrants ............. -- -- -- -- 46,140 10,856
Common Stock warrants ................... -- 5,000 3,077 -- 23,333 7,843
--------- --------- --------- --------- --------- ---------
108,511 2,416,655 1,782,045 2,541,667 1,916,857 2,023,575
========= ========= ========= ========= ========= =========
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements
in accordance with provisions of Accounting Principles Board Opinion No. 25
("APB Opinion No. 25"), "Accounting for Stock Issued to Employees," and complies
with the disclosure provisions of Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation."
Accordingly, the Company recognizes no compensation expense for stock options
granted to employees with an exercise price equal or in excess of fair value of
the shares on the date of grant.
Grants of stock options and warrants to non-employees are accounted for
in accordance with SFAS No. 123 and related interpretations. Stock awards are
valued using the Black-Scholes option pricing model and are expensed over the
period of service provided.
OTHER ASSETS
Other assets consist primarily of deposits associated with operating
leases.
COMPREHENSIVE INCOME
Effective May 15, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standard No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
comprehensive income (loss). The Company's comprehensive net loss was the same
as its net loss for the period from inception to December 31, 1998, the year
ended December 31, 1999 and the six months ended June 30, 2000.
<PAGE> 10
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS No. 133"), "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and hedging activities. SFAS
No. 133, as amended, is effective for all fiscal quarters beginning after June
15, 2000. As the Company does not currently engage in any such activity, SFAS
No. 133 is not expected to have any effect on the Company's results of
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
SEC Staff Accounting Bulletin No 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," as amended by SAB 101A and 101B. SAB 101 provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. SAB 101 is effective for years beginning after December
15, 1999 and is required to be reported beginning in the quarter ended December
31, 2000. SAB 101 is not expected to have a significant effect on the Company's
results of operations, financial position or cash flows.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB Opinion No. 25". FIN 44 clarifies certain elements of APB
Opinion No. 25 and, among other issues, this interpretation clarifies: the
definition of employee for purposes of applying APB Opinion No. 25, the criteria
for determining whether a plan qualifies as non-compensatory, the accounting
consequences of various modifications to the terms of a previously fixed stock
option award, and the accounting for an exchange of stock compensation in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
in FIN 44 cover specific events that have occurred after either December 15,
1998 or January 12, 2000. The Company does not believe that the adoption of this
interpretation will have a material impact on the Company's results of
operations, financial position or cash flows.
NOTE 2 -- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1998 1999 2000
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Computer equipment and software ..... $ -- $ -- $ 145,936
Office equipment .................... 536 -- 4,985
Furniture and fixtures .............. -- -- 17,584
Building improvements ............... -- 27,623 32,613
--------- --------- ---------
536 27,623 201,118
Less: Accumulated depreciation ........ -- (1,151) (11,678)
--------- --------- ---------
$ 536 $ 26,472 $ 189,440
========= ========= =========
</TABLE>
Depreciation expense for the period from inception, May 15, 1998,
through December 31, 1998, the year ended December 31, 1999 and the six months
ended June 30, 2000 was $0, $1,151 and $11,678, respectively.
NOTE 3 -- DEBT:
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30
1998 1999 2000
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Convertible subordinated promissory notes,
8%, due February 2004 ........................ $ 52,450 $ 845,000 $ --
Promissory note, 6%, due December 2000 ......... -- -- 250,000
--------- --------- ---------
52,450 845,000 250,000
Less: Current portion due December 2000 ........ -- (625,000) (250,000)
--------- --------- ---------
Long-term portion .............................. $ 52,450 $ 220,000 $ --
========= ========= =========
</TABLE>
<PAGE> 11
CONVERTIBLE SUBORDINATED PROMISSORY NOTES
The Company had convertible subordinated promissory notes payable to the
founders of the Company and subsequent investors. At December 31, 1998 and 1999
and June 30, 2000, the Company had borrowings outstanding under these
arrangements of $52,450, $845,000 and $0, respectively, and owed interest of
$2,400, $24,000 and $0, respectively. The promissory notes and their related
interest were converted into 1,231,581 shares of Series A Convertible Preferred
Stock and 1,050,343 shares of Common Stock during the six-month period ended
June 30, 2000.
PROMISSORY NOTE
At June 30, 2000, the Company had $250,000 outstanding and due under an
unsecured promissory note with Selby Venture Partners, a stockholder. The note
is payable on demand any time after December 13, 2000. The carrying value of the
note approximates its fair value.
NOTE 4 -- BENEFICIAL CONVERSION FEATURE ON CONVERTIBLE DEBT:
The Company issued convertible subordinated promissory notes of $845,000
in 1999. The notes provided for their conversion into shares of the Company's
capital stock upon the consummation of a future equity financing of at least
$1,000,000 at discounts from the stock's fair value ranging from 15% to 40%.
These conversion features are deemed to be beneficial conversion features under
Emerging Issues Task Force Consensus 98-5 ("EITF 98-5"), "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios." Accordingly, the difference between the note per
share conversion price and the deemed fair value per share of the Company's
Common Stock at the date of issuance of the notes - $270,441 (intrinsic value)
was allocated to additional paid-in capital. This amount was recorded as a
deferred interest charge as of December 31, 1999 because the conversion feature
was not exercisable until the consummation of the future equity financing, an
event beyond the control of the note holders. The amount was recorded as a
charge to interest expense in the six months ended June 30, 2000 upon the
successful completion of the Company's Preferred Stock financing at which time
the notes were converted into shares of the Company's Preferred and Common
stock.
NOTE 5 -- COMMITMENTS:
LEASES
The Company leases office space and a copier under noncancelable
operating leases with expiration dates in August 2002 and April 2004,
respectively. Rent expense for the period from inception, May 15, 1998, through
December 31, 1998, the year ended December 31, 1999 and the six months ended
June 30, 2000, was $6,314, $54,317, and $95,607, respectively.
Future minimum lease payments under noncancelable operating leases are
as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
(unaudited)
<S> <C> <C>
YEARS ENDED DECEMBER 31,
2000 ..................................... $145,755 $ 73,288
2001 ..................................... 146,575 146,575
2002 ..................................... 98,537 98,537
2003 ..................................... 2,460 2,460
2004 ..................................... 820 820
-------- --------
Total minimum lease payments ..... $394,147 $321,680
======== ========
</TABLE>
NOTE 6 -- INCOME TAXES:
Due to operating losses and the Company's inability to recognize an
income tax benefit from these losses, there is no provision for income taxes for
1999 and 1998. The difference between the provision for income taxes and the
amount computed by applying the federal statutory income tax rate (34%) to
income before taxes is explained below:
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION,
MAY 15,
1998, THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- -----------
<S> <C> <C>
Tax (benefit) at federal statutory rate ..... $ (63,000) $(227,000)
Nondeductible stock compensation ............ 49,000) --
Loss for which no tax benefit is
currently recognizable .................... 14,000 227,000
--------- ---------
Tax provision (benefit) ..................... $-- $--
========= =========
</TABLE>
Significant components of the Company's deferred tax assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
--------- ---------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards ..... $ 17,000 $ 300,000
Less: Valuation allowance .............. (17,000) (300,000)
--------- ---------
Net deferred tax assets ................ $-- $--
========= =========
</TABLE>
Statement of Financial Accounting Standard No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which includes the
Company's historical operating performance and the reported cumulative net
losses in all prior years, the Company has provided a full valuation allowance
against its net deferred tax assets.
The valuation allowance increased by $283,000 and $17,000 during the
year ended December 31, 1999 and the period from inception, May 15, 1998,
through December 31, 1998, respectively.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $800,000 each. The net operating loss will
expire at various dates beginning in 2005 through 2019, if not utilized.
Utilization of the net operating loss and tax credit carryforwards may
be subject to substantial annual limitations due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of net operating loss
carryforwards before utilization.
NOTE 7 -- CONVERTIBLE PREFERRED STOCK:
Convertible Preferred Stock at June 30, 2000 consists of the following:
<TABLE>
<CAPTION>
PROCEEDS
SHARES NET OF
-------------------------- LIQUIDATION ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT COSTS
------ ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
A ...... 2,500,000 2,220,759 $1,477,386 $1,477,386
</TABLE>
The holders of Series A Convertible Preferred Stock have various rights
and preferences as follows:
VOTING
Each share of Series A Convertible Preferred Stock entitles its holders
to voting rights equal to an equivalent number of shares of Common Stock into
which each share is convertible on the record date of the vote and may vote
together as one class with the Common Stock.
Holders of Series A Convertible Preferred Stock, voting as a separate
class, have the right to elect one member of the Company's Board of Directors;
and holders of Common Stock, voting as a separate class, have the right to elect
the remaining members of the Company's Board of Directors.
<PAGE> 13
DIVIDENDS
Holders of Series A Convertible Preferred Stock are entitled to receive
noncumulative dividends at the per annum rate of $0.06 per share, when and if
declared by the Board of Directors prior and in preference to payment of any
dividend (other than dividends payable solely in Common Stock of the Company)
with respect to Common Stock. No dividends on Series A Convertible Preferred
Stock or Common Stock have been declared by the Board from inception through
June 30, 2000.
LIQUIDATION
In the event of any liquidation, dissolution, sale, merger, or winding
up of the Company, either voluntary or involuntary, the holders of Series A
Convertible Preferred Stock are entitled to receive an amount of $0.75 per
share, plus any declared but unpaid dividends prior to and in preference to any
distribution to the holders of Common Stock. Should the Company's legally
available assets be insufficient to satisfy the liquidation preferences, the
funds will be distributed ratably among the holders of Series A Convertible
Preferred Stock. Any assets and funds remaining after satisfaction of the
liquidation preferences will be distributed ratably among the holders of Common
Stock.
CONVERSION
Each share of Series A Convertible Preferred Stock is convertible, at
the option of the holder into Common Stock, according to a conversion ratio
(subject to adjustment for dilution). Alternatively, each share of Series A
Convertible Preferred Stock automatically converts into the number of shares of
Common Stock into which such shares are convertible at the then effective
conversion ratio upon: (1) the closing of a public offering of Common Stock at a
per share price of at least $3.00 per share with gross proceeds of at least
$5,000,000 or (2) the consent of the holders of at least a majority of the
outstanding shares of Series A Convertible Preferred Stock.
The conversion ratio as of June 30, 2000 was 1:1.
The Company has reserved 2,500,000 shares of Common Stock for the
conversion of Series A Convertible Preferred Stock.
NOTE 8 -- COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the
Company to issue 10,000,000 shares of no par value Common Stock and 2,500,000
share of no par value Series A Convertible Preferred Stock. A portion of the
shares sold are subject to rights of repurchase by the Company, which rights of
repurchase generally lapse over a four year period from the earlier of grant
date or employee hire date, as applicable. At June 30, 2000, 642,217 shares of
Common Stock were subject to rights of repurchase by the Company.
WARRANTS AND OPTIONS FOR COMMON STOCK ISSUED TO CONSULTANTS AND NON-EMPLOYEES
During the year ended December 31, 1999, the Company issued a warrant to
a consultant for the purchase of 100,000 shares of the Company's Common Stock at
a price of $0.035 per share in return for services received. The fair value of
the warrant was determined using the Black-Scholes method and the following
assumptions: expected life 5 years, exercise price $0.035, deemed fair value of
Common Stock on date of grant $0.40, expected dividend yield of 0%, risk free
rate of 6%, and expected volatility of 0.60 to be $36,068.
During the year ended December 31, 1999, the Company issued warrants to
a non-employee for the purchase of 40,000 shares of the Company's Common Stock
at a price of $0.10 per share in return for services received. The fair value of
each warrant was determined using the Black-Scholes method and the following
assumptions: expected life 3 years, exercise price $0.10, deemed fair value of
Common Stock on date of grant $0.40, expected dividend yield of 0%, risk free
rate of 6%, and expected volatility of 0.60 to be $12,213.
<PAGE> 14
During the year ended December 31, 1999, and the six months ended June
30, 2000, the Company recorded compensation expense of $9,229 and $10,080,
respectively, for fair value of options issued to non-employees calculated using
the Black-Scholes pricing model.
The unvested warrant or option shares held by consultants have been and
will be marked-to-market using the estimates of fair value at the end of each
accounting period pursuant to the FASB's Emerging Issues Task Force Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
COMMON STOCK RESERVED FOR ISSUANCE
Shares of the Company's Common Stock have been reserved for issuance as
of December 31, 1999 and June 30, 2000 as follows:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, JUNE 30,
1999 2000
----------- ---------
(unaudited)
<S> <C> <C>
Unvested Common Stock ....................... 2,000,694 1,110,233
Common Stock warrants ....................... 20,000 40,000
Common Stock options ........................ 928,000 542,000
Series A Convertible Preferred Stock ........ -- 279,241
Preferred Stock warrants .................... -- 122,646
</TABLE>
NOTE 9 -- STOCK OPTION PLANS:
In 1999 the Company adopted the 1999 Stock Plan (the "Plan"). The Plan
provides for the granting of stock options to employees, directors and
consultants of the Company. Options granted under the Plan may be either
incentive stock options or nonqualified stock options. Incentive stock options
("ISO") may be granted only to Company employees. Nonqualified stock options
("NSO") may be granted to Company employees, directors and consultants. The
Company has reserved 1,000,000 shares of Common Stock for issuance under the
Plan.
Options under the Plan may be granted for periods of up to ten years and
at prices no less than 100% of the estimated fair value of the shares on the
date of grant as determined by the Company's Board of Directors, provided,
however, that (i) the exercise price of an ISO and NSO shall not be less than
100% and 85% of the estimated fair value of the shares on the date of grant,
respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% or
greater shareholder shall not be less than 110% of the estimated fair value of
the shares on the date of grant, respectively. Options are exercisable only upon
vesting. To date, options granted generally vest over five years.
During the year ended 1999 and the six months ended June 30, 2000, the
Company recorded $8,250 and $624,659, respectively, of deferred stock
compensation for the excess of the deemed fair market value over the exercise
price at the date of grant related to certain options granted to employees and
directors in those years. Such compensation expense is being recognized ratably
over the period in which the underlying options vest.
Pro forma information regarding net income is required by SFAS No. 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of that Statement. The fair value of these options
was estimated at the date of grant using the Black-Scholes method and the
following assumptions: expected life of the option 4 years, risk free interest
rate of 6%, dividend yield of 0% and expected volatility of 0.60. For the period
from inception, May 15, 1998, to December 31, 1998, the year ended December 31,
1999 and the six months ended June 30, 2000, the effect of the SFAS No. 123
calculation on reported net loss and net loss per share was not material.
The following table summarizes activities under the Plan:
<PAGE> 15
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
SHARES AVAILABLE WEIGHTED-AVERAGE
FOR GRANT NUMBER OF SHARES EXERCISE PRICE
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1998 ............. -- -- $--
Authorized ............................. 1,000,000 --
Granted ................................ (72,000) 72,000 0.035
Exercised .............................. -- (42,000) 0.035
---------- ---------- ------
Balance at December 31, 1999 ............. 928,000 30,000 0.035
Authorized (unaudited) ................. 450,000 -- --
Granted (unaudited) .................... (1,036,000) 1,036,000 0.061
Exercised (unaudited) .................. -- -- --
Canceled (unaudited) ................... 200,000 (200,000) 0.035
---------- ---------- ------
Balance at June 30, 2000 (unaudited) ..... 542,000 866,000 $0.037
========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT
JUNE 30, 2000
-------------------------
WEIGHTED OPTIONS EXERCISABLE AT
AVERAGE JUNE 30, 2000
REMAINING -----------------------
EXERCISE NUMBER CONTRACTUAL NUMBER EXERCISE
PRICE OF SHARES LIFE OUTSTANDING PRICE
-------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C>
$0.035 ..... 446,500 9.5 years 38,749 $ 0.035
$0.100 ..... 419,500 9.6 years 938 $ 0.100
-------- --------
866,000 39,687
======== ========
</TABLE>
All options granted in the period from inception, May 15, 1998, to
December 31, 1998, the year ended December 31, 1999 and the six months ended
June 30, 2000 were granted with an exercise price below the deemed fair value of
the Company's Common Stock on the date of grant. The weighted-average fair value
of options granted in the period from inception, May 15, 1998, to December 31,
1998, the year ended December 31, 1999 and the six months ended June 30, 2000
were $0, $0.17 and $0.78, respectively.
NOTE 10 -- EMPLOYEE BENEFIT PLANS:
The Company sponsors a 401(k) defined contribution plan covering all
employees. Matching contributions by the Company for the period from inception,
May 15, 1998, through December 31, 1998, the year ended December 31, 1999 and
the six months ended June 30, 2000 were $0, $0 and $3,269, respectively.
NOTE 11-- SUBSEQUENT EVENTS (UNAUDITED):
MERGER WITH BROADBASE SOFTWARE, INC.
On July 7, 2000, the Company entered into a definitive agreement to be
acquired by Broadbase Software, Inc. ("Broadbase"). Under the terms of the
definitive agreement, Broadbase issued approximately 3,180,000 shares of its
common stock, options and warrants in exchange for all outstanding shares of
common and preferred stock, options and warrants of the Company. The transaction
was accounted for by Broadbase as a purchase. The acquisition closed on
September 15, 2000.
REPURCHASE OF COMMON STOCK
On May 15, 2000, the Company repurchased a total of 450,000 shares of
unvested Common Stock from three of the five founders at $0.035 per share, the
amount of the original exercise price.
WARRANTS FOR COMMON STOCK ISSUED TO A CONSULTANT AND A NON-EMPLOYEE
On July 5, 2000, the Company issued a warrant to a consultant for the
purchase of 120,000 shares of the Company's Common Stock at a price of $2.00 per
share in return for services received. The fair value of the warrant was
determined using the Black-Scholes method and the following assumptions:
expected life 5 years, exercise price $2.00, deemed fair value on date of grant
$11.15, expected dividend yield of 0%, risk free rate of 6%, and expected
volatility of 0.60 to be $1,125,627 .
On July 5, 2000, the Company issued a warrant to a non-employee for the
purchase of 100,000 shares of the Company's Common Stock at a price of $2.00 per
share in return for services received. The fair value of the warrant was
determined using the Black-Scholes method and the following assumptions:
expected life 3 months, exercise price $2.00, deemed fair value on date of grant
$11.15, expected dividend yield of 0%, risk free rate of 6%, and expected
volatility of 0.60 to be $915,804.
<PAGE> 16
On September 1, 2000, the Company issued a warrant to a consultant for
the purchase of 20,000 shares of the Company's Common Stock at a price of $2.00
per share in return for services received. The fair value of the warrant was
determined using the Black-Scholes method and the following assumptions:
expected life 5 years, exercise price $2.00, deemed fair value on date of grant
$7.65, expected dividend yield of 0%, risk free rate of 6%, and expected
volatility of 0.60 to be $122,029.
WARRANTS FOR SERIES A CONVERTIBLE PREFERRED STOCK ISSUED TO CONSULTANTS AND
NON-EMPLOYEES
On April 12, 2000, the Company issued a warrant to a non-employee for
the purchase of 62,795 shares of the Company's Series A Convertible Preferred
Stock at a price of $0.75 per share in return for services received. The fair
value of the warrant was determined using the Black-Scholes method and the
following assumptions: expected life 5 years, exercise price $0.75, deemed fair
value of the Preferred Stock on date of grant $0.75, expected dividend yield of
0%, risk free rate of 6%, and expected volatility of 0.60 to be $26,707.
On June 2, 2000, the Company issued warrants to consultants for the
purchase of 19,851 shares of the Company's Series A Convertible Preferred Stock
at a price of $0.75 per share in return for services received. The fair value of
the warrant was determined using the Black-Scholes method and the following
assumptions: expected life 5 years, exercise price $0.75, deemed fair value of
the Preferred Stock on date of grant $7.50, expected dividend yield of 0%, risk
free rate of 6%, and expected volatility of 0.60 to be $132,828.
On June 2, 2000, the Company issued a warrant to a non-employee for the
purchase of 40,000 shares of the Company's Series A Convertible Preferred Stock
at a price of $0.675 per share in return for services received. The fair value
of the warrant was determined using the Black-Scholes method and the following
assumptions: expected life 5 years, exercise price $0.675, deemed fair value of
the Preferred Stock on date of grant $7.50, expected dividend yield of 0%, risk
free rate of 6%, and expected volatility of 0.60 to be $269,923.
The unvested warrant or option shares held by consultants have been and
will be marked-to-market using the estimates of fair value at the end of each
accounting period pursuant to the FASB's Emerging Issues Task Force Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services."
SERIES A CONVERTIBLE PREFERRED STOCK DIVIDEND
In April 2000 and June 2000, the Company issued 1,375,153 and 845,606
shares respectively of Series A Convertible Preferred Stock in exchange for
$755,382 of cash and the retirement of $722,004 of convertible promissory notes,
including accrued interest, for a total issuance price of $1,477,386 (see Note
7). The difference between the deemed fair value of the preferred stock and the
actual issuance price has been recorded as a deemed dividend totaling $519,110
in the six months ended June 30, 2000.
