UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REVISED
SCHEDULE 14C
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[ ] Definitive Information Statement
Togs for Tykes, Inc.
(Name of Registrant As Specified In Its Charter)
Commission File Number: 000-49620
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g)and 0-11.
Title of each class of securities to which transaction
applies: Aggregate number of securities to which
------------------------------
transaction applies:
---------------------------------------
Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
--------------------------------
--------------------------------------------
Proposed maximum aggregate value of transaction:
----------------------------
Total fee paid:
--------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
Amount Previously Paid:
--------------------------------------
Form, Schedule or Registration Statement No.:
-------------------------------
Filing Party:
-------------------------------------------
Date Filed:
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1
Togs for Tykes, Inc.
1030 Wooster, Suite 4
Los Angeles, CA 90035
NOTICE OF ACTION TAKEN BY WRITTEN CONSENT OF MAJORITY SHAREHOLDERS
Dear Shareholders:
We are writing to advise you that Togs for Tykes, Inc. will (i) change its name
to Biogentech Corp.; and (ii) increase the authorized number of shares of common
stock, $.001 par value per share, from 20,000,000 to 50,000,000. These actions
were approved on March 24, 2003, by unanimous approval of our Board of
Directors. In addition, shareholders holding a majority of our outstanding
common stock approved those actions by written consent in lieu of a meeting on
March 24, 2003, in accordance with the relevant sections of Nevada Revised
Statutes. Those actions will not be effective until we amend our Articles of
Incorporation by filing Articles of Amendment to our Articles of Incorporation
with the Nevada Secretary of State. We intend to file the Articles of Amendment
twenty days after this Amended Information Statement is first mailed to our
shareholders.
Our purpose in changing our name was to reflect the fact that we intend to
acquire a currently privately held Nevada corporation named Biogentec
Incorporated by merging it with and into our wholly-owned subsidiary, Togs for
Tykes Acquisition Corporation, a Nevada corporation. We have included the
financial statements of Biogentec Incorporated as an exhibit to this Amended
Information Statement. We believe that the acquisition will increase the total
value of the corporation to our investors and better position us to take
advantage of possible future financings and acquisition opportunities, and other
corporate purposes as the board of directors determines in its discretion to be
in the best interest of the corporation. To facilitate the acquisition of
Biogentec Incorporated, we are increasing the number of authorized shares of
common stock. We need the additional authorized shares in order to effectuate
the one-for-one exchange with the shareholders of Biogentec Incorporated. We
also believe that such an increase will enable us to promptly take advantage of
future favorable opportunities that may present themselves without the delay and
expense associated with holding a special meeting of stockholders.
No action is required by you. The accompanying Amended Information Statement is
furnished only to inform our shareholders of the action described above before
it takes effect in accordance with Rule 14c-2 promulgated under the Securities
Act of 1934. This Amended Information Statement is being mailed to you on or
about June ___, 2003.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
By order of the Board of Directors,
Becky Bauer
President
Los Angeles, California
May ___, 2003
2
Togs for Tykes, Inc.
1030 Wooster, Suite 4
Los Angeles, CA 90035
AMENDED INFORMATION STATEMENT REGARDING ACTION TAKEN BY WRITTEN CONSENT OF
MAJORITY OF SHAREHOLDERS
We are furnishing this Amended Shareholder Information Statement to you to
provide you with information and a description of an action taken by written
consent of a majority of our shareholders on March 24, 2003, in accordance with
the relevant Sections of the Nevada Revised Statutes. This action was taken by
two shareholders who own in excess of the required majority of our outstanding
common stock necessary for the adoption of the action.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
This Amended Information Statement is being mailed on or about June ___, 2003 to
shareholders of record on March 24, 2003. The Amended Information Statement is
being delivered only to inform you of the corporate action described herein
before it takes effect in accordance with Rule 14c-2 promulgated under the
Securities Exchange Act of 1934.
We have asked brokers and other custodians, nominees and fiduciaries to forward
this Amended Information Statement to the beneficial owners of the common stock
held of record by such persons and will reimburse such persons for out-of-pocket
expenses incurred in forwarding such material.
THIS IS NOT A NOTICE OF A MEETING OF STOCKHOLDERS AND NO STOCKHOLDERS' MEETING
WILL BE HELD TO CONSIDER ANY MATTER DESCRIBED HEREIN.
GENERAL
On March 24, 2003, our Board of Directors unanimously approved, subject to
shareholder approval, the following actions:
an amendment to our Articles of Incorporation to change our corporate name to
Biogentech Corp.; and an amendment to our Articles of Incorporation to increase
the authorized number of shares of common stock, $.001 par value per share, from
20,000,000 to 50,000,000.
On March 24, 2003, two shareholders who own in excess of the required majority
of our outstanding common stock necessary for the adoption of the action,
approved those actions taken by written consent. The full text of the proposed
amendments to the Articles of Incorporation is attached hereto as Exhibit A and
Exhibit B.
PURPOSE OF CHANGE IN NAME OF THE CORPORATION
We intend to acquire a currently privately held Nevada corporation named
Biogentec Incorporated ("Biogentec") by merging (the "Merger") Biogentec with
and into our wholly-owned subsidiary, Togs for Tykes Acquisition Corporation, a
Nevada corporation. Biogentec will be the surviving corporation. We have
included the financial statements of Biogentec Incorporated as an exhibit to
this Amended Information Statement. If and when the Merger closes, on the day of
such closing, we will issue a report on Form 8-K that contains full disclosure
about the combined entities including audited financial statements, pro forma
financial statements and full narrative disclosure similar to the disclosure
found in a registration statement. Because the acquisition will be made by our
subsidiary, our stockholders do not have the right to vote on the acquisition.
3
PURPOSE AND APPROVAL OF AMENDMENT TO OUR ARTICLES OF INCORPORATION TO INCREASE
AUTHORIZED SHARES OF COMMON STOCK
Our Articles of Incorporation currently authorize the issuance of 20,000,000
shares of common stock, par value $.001 per share, and 5,000,000 shares of
preferred stock, par value $.001 per share. Our board has unanimously adopted
and a majority of our common stock entitled to vote on such matters approved, an
amendment to our Articles of Incorporation to increase the number of authorized
shares of our common stock from 20,000,000 shares to 50,000,000 shares, par
value $.001 per share.
The purpose of increasing the number of authorized shares of common stock is to
provide additional authorized shares which will be issued to consummate the
Merger, fulfill possible future financings, and for acquisitions and such other
corporate purposes as the board of directors determines in its sole and absolute
discretion. These corporate purposes may include future stock splits, stock
dividends or other distributions, future financings, acquisitions and stock
options and other equity benefits. The increase in the number of authorized
shares of common stock would enable us to promptly take advantage of market
conditions and the availability of favorable opportunities without the delay and
expense associated with holding a special meeting of stockholders.
After filing the amendment, the board of directors is authorized to issue any of
the additional shares of common stock at such times, to such persons and for
such consideration as it may determine in its discretion, except as may
otherwise be required by applicable law or the rules of any exchange on which
the common stock may be listed. When and if they are issued, these additional
shares of common stock would have the same rights and privileges as the
presently issued and outstanding shares of common stock.
The issuance of any additional shares of common stock would also have the effect
of diluting the equity interests of existing stockholders and the earnings per
share of existing shares of common stock. Such dilution may be substantial,
depending upon the amount of shares issued.
The newly authorized shares of common stock will have voting and other rights
identical to those of the currently authorized shares of common stock. The
amendment to increase the number of authorized shares will have no effect on the
legal rights of the holders of the existing shares of common stock.
PROCEDURE FOR APPROVAL OF AMENDMENTS TO OUR ARTICLES OF INCORPORATION; VOTE
REQUIRED
The Nevada Revised Statutes require that, in order for us to amend our Articles
of Incorporation, such amendment must be approved by our Board of Directors and
approved by a majority of the outstanding shares entitled to vote. The Nevada
Revised Statutes also provide that any action which may be taken at a meeting of
the shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of a majority of the outstanding shares entitled to vote.
On March 24, 2003, the record date for determination of the shareholders
entitled to receive this Amended Information Statement, there were 5,532,000
shares of common stock outstanding. The holders of common stock are entitled to
one vote for each share held of record on all matters submitted to a vote of our
shareholders. We needed the affirmative vote of at least a majority of the
outstanding shares of our common stock to approve the name change. Our board of
directors, by its unanimous written consent, adopted resolutions approving
amendments to our Articles of Incorporation to effect the name change and
increase the number of authorized shares of common stock. By Action of Written
Consent, dated March 24, 2003, holders representing 5,500,000 shares of our
issued and outstanding common stock or 81.34% of the shares of the outstanding
common stock approved the name change and the increase the number of authorized
shares of common stock.
4
EFFECTIVE DATE OF AMENDMENT
The amendments to our Articles of Incorporation will become effective upon the
filing with the Nevada Secretary of State. The Articles of Amendment are
attached hereto as Exhibit A and Exhibit B. We intend to file the Articles of
Amendment twenty days after this Amended Information Statement is first mailed
to shareholders.
EFFECT ON CERTIFICATES EVIDENCING SHARES OF COMPANY STOCK
The change in the name of Togs for Tykes, Inc., to Bigentec Incorporated will be
reflected in its stock records by book-entry in our records. For those
shareholders that hold physical certificates, please do not destroy or send to
us your common stock certificates. Those certificates will remain valid for the
number of shares held by you after taking into account the reverse stock split,
and should be carefully preserved by you.
DISSENTERS' RIGHTS
Under Nevada law, a stockholder is entitled to dissent from, and obtain payment
for the fair value of his or her shares (i) in the event of consummation of a
plan of merger or plan of exchange in which the Nevada corporation is a
constituent entity, and (ii) any corporate action taken pursuant to a vote of
the stockholders to the extent that the articles of incorporation, by-laws or a
resolution of the board of directors provides that voting or non-voting
stockholders are entitled to dissent and obtain payment for their shares. The
Nevada Revised Statutes do not provide for dissenters' right of appraisal in
connection with (i) the name change or (ii) the increase in the number of shares
of authorized common stock.
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
No director, executive officer, nominee for election as a director, associate of
any director, executive officer or nominee or any other person has any
substantial interest, direct or indirect, by security holdings or otherwise, in
(i) the proposed name change or (ii) the increase in number of shares of
authorized common stock, which is not shared by all other shareholders of the
Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 24, 2003, by each person or entity
known by us to be the beneficial owner of more than 5% of the outstanding shares
of common stock, each of our directors and named executive officers, and all of
our directors and executive officers as a group.
=============== =========================== ==================================== ================
Title of Class Name of Beneficial Owner Amount of Beneficial Owner Percent of Class
--------------- --------------------------- ------------------------------------ ----------------
Common Stock Becky Bauer, president, 3,000,000 shares 54.23%
secretary, director
--------------- --------------------------- ------------------------------------ ----------------
Common Stock Brook Messick, secretary, 1,500,000 shares 27.11%
treasurer, director
--------------- --------------------------- ------------------------------------ ----------------
Common Stock All directors and named executive 81.34%
officers as a group
=============== =========================== ==================================== ================
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. In accordance with Securities and Exchange
Commission rules, shares of our common stock which may be acquired upon exercise
5
of stock options or warrants which are currently exercisable or which become
exercisable within 60 days of the date of the table are deemed beneficially
owned by the optionees. Subject to community property laws, where applicable,
the persons or entities named in the table above have sole voting and investment
power with respect to all shares of our common stock indicated as beneficially
owned by them.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned in the City of Los Angeles, on May ___, 2003.
Togs for Tykes, Inc.,
a Nevada corporation
By: /s/ Becky Bauer
--------------------------------------------
Becky Bauer
Its: president and a director
6
Exhibit A
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION OF
TOGS FOR TYKES, INC.,
a Nevada corporation
Pursuant to the provisions of the Nevada Revised Statutes, Togs For Tykes,
Inc., a Nevada corporation, adopts the following amendment to its Articles
of Incorporation.
1. The undersigned hereby certifies that on the 24th day of March 2003, a
Special Meeting of the Board of Directors was duly held and convened at which
there was present a quorum of the Board of Directors acting throughout all
proceedings, and at which time the following resolution was duly adopted by the
Board of Directors:
RESOLVED, that the Secretary of the corporation is hereby ordered and
directed to obtain at least a majority of the voting power of the
outstanding stock of the corporation for the following purpose:
To amend Article FOURTH of the corporation's Articles of Incorporation
to provide that the total number of shares of capital stock which this
corporation shall have authority to issue is increased from twenty-five
million (25,000,000) to fifty-five million (55,000,000) with a par
value of $.001 per share.
2. Pursuant to the provisions of the Nevada Revised Statutes, a majority of
Togs For Tykes, Inc.'s shares entitled to vote, voted in favor of the adoption
of the Amendment to Article FOURTH of the Articles of Incorporation as follows:
"4. AUTHORIZED SHARES:
THE AGGREGATE NUMBER OF SHARES WHICH THE CORPORATION SHALL HAVE
AUTHORITY TO ISSUE SHALL CONSIST OF 50,000,000 SHARES OF COMMON STOCK HAVING A
$.001 PAR VALUE AND 5,000,000 SHARES OF PREFERRED STOCK HAVING A $.001 PAR
VALUE. THE COMMON STOCK OF THE COMPANY MAY BE ISSUED FROM TIME TO TIME WITHOUT
PRIOR APPROVAL BY THE STOCKHOLDERS. THE COMMON STOCK MAY BE ISSUED FOR SUCH
CONSIDERATION AS MAY BE FIXED FROM TIME TO TIME BY THE BOARD OF DIRECTORS. THE
BOARD OF DIRECTORS MAY ISSUE SUCH SHARE OF COMMON STOCK IN ONE MORE SERIES, WITH
SUCH VOTING POWERS, DESIGNATIONS, PREFERENCES AND RIGHTS OR QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF AS SHALL BE STATED IN THE RESOLUTION OR
RESOLUTIONS.
THE PREFERRED AUTHORIZED MAY BE ISSUED FROM TIME TO TIME IN ONE OR
MORE SERIES. THE BOARD OF DIRECTORS IS AUTHORIZED TO DETERMINE OR ALTER ANY OR
ALL RIGHTS OR PREFERENCES, PRIVILEGES AND RESTRICTIONS GRANTED TO OR IMPOSED
UPON ANY WHOLLY UNISSUED SERIES OF PREFERRED STOCK, AND TO FIX, ALTER OR REDUCE
(BUT NOT BELOW THE NUMBER OUTSTANDING) THE NUMBER OF SHARES COMPRISED ANY SUCH
SERIES AND THE DESIGNATION THEREOF, OR ANY OF THEM, AND TO PROVIDE FOR THE
RIGHTS AND TERMS OF REDEMPTION OF CONVERSION OF THE SHARES OF ANY SERIES."
In witness whereof, the undersigned being the President and Secretary
of Togs For Tykes, Inc., a Nevada corporation, hereunto affixes their signatures
this 24th day of March 2003.
Togs For Tykes, Inc. Togs For Tykes, Inc.
/s/ Becky Bauer /s/ Brook Messick
----------------------------- -----------------------------
By: Becky Bauer, President By: Brook Messick, Secretary
7
Exhibit B
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION OF
TOGS FOR TYKES, INC.,
a Nevada corporation
Pursuant to the provisions of the Nevada Revised Statutes, Togs for Tykes,
Inc., a Nevada corporation, adopts the following amendment to its
Articles of Incorporation.
1. The undersigned hereby certifies that on the 24th day of March 2003, a
Special Meeting of the Board of Directors was duly held and convened at which
there was present a quorum of the Board of Directors acting throughout all
proceedings, and at which time the following resolution was duly adopted by the
Board of Directors:
RESOLVED, that the Secretary of the corporation is hereby ordered and
directed to obtain at least a majority of the voting power of the
outstanding stock of the corporation for the following purpose:
To amend Article I of the corporation's Articles of Incorporation to
provide that the name of the corporation shall be changed from Togs
for Tykes, Inc. to Biogentech Corp.
----------------
2. Pursuant to the provisions of the Nevada Revised Statutes, a majority of
Togs for Tykes, Inc.'s shares entitled to vote, voted in favor of the adoption
of the Amendment to Article I of the Articles of Incorporation as follows:
"1. Name of corporation: Biogentech Corp."
----------------
In witness whereof, the undersigned being the President and Secretary
of Togs for Tykes, Inc., a Nevada corporation, hereunto affix their signatures
this 24th day of March 2003.
Togs for Tykes, Inc.
By: /s/ Becky Bauer
--------------------------------------
Becky Bauer, President
By: /s/ Brook Messick
--------------------------------------
Brook Messick, Secretary
8
Exhibit C
BIOGENTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2002,
THE PERIOD FROM INCEPTION (NOVEMBER 21, 2000)
TO MARCH 31, 2001
AND THE NINE MONTHS ENDED
DECEMBER 31, 2002 AND 2001 (UNAUDITED)
CONTENTS
Page
Independent Auditors' Report 1
Financial Statements:
Balance Sheets 2
Statements of Operations 3
Statement of Stockholders' Equity (Deficit) 4-6
Statements of Cash Flows 7 - 12
Notes to Financial Statements 13 - 38
9
INDEPENDENT AUDITORS' REPORT
Board of Directors
BioGentec, Inc.
Irvine, California
We have audited the accompanying balance sheets of BioGentec, Inc. (A
Development Stage Company) as of March 31, 2002 and 2001, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
year ended March 31, 2002 and the period from inception (November 21, 2000) to
March 31, 2001. 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 of America. Those standards require that we plan and
perform the audits 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 BioGentec, Inc. as of March 31,
2002 and 2001, and the results of its operations and its cash flows for the year
ended March 31, 2002 and the period from inception (November 21, 2000) to March
31, 2001, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has losses from operations, has not generated
significant revenue, and has a working capital deficiency. These factors raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
February 23, 2003
10
BIOGENTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
March 31, December 31,
-------------------------------------------------------------------------------------
2002 2002 2001
-------------------------------------------------------------------------------- --------------- --------------
(unaudited)
Current assets:
Cash and cash equivalents $ - $ 7,097 $ 90,766
Restricted cash 100,000 - -
Prepaid expenses and other current assets - 27,900 -
Inventory 6,000 250 2,400
-------------- --------------- --------------
Total current assets 106,000 35,247 93,166
Property and equipment, net of accumulated
depreciation of $23,768, $14,886, and $2,021 62,353 67,735 51,279
Website development costs, net of accumulated
amortization of $13,250, $6,500, and $-0- 16,400 23,150 12,100
Patents, net of accumulated amortization of $-0- 3,850,000 2,246,005 2,222,744
-------------- --------------- --------------
$ 4,034,753 $ 2,372,137 $ 2,379,289
============== =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 111,056 $ 102,261 $ 40,500
Bank overdraft 9,912 - -
Contract payable - current - 2,259,533 135,000
Due to related parties 33,642 271,254 56,250
-------------- --------------- --------------
Total current liabilities 154,610 2,633,048 231,750
Contract payable, net of discount - - 2,071,422
-------------- --------------- --------------
Total liabilities 154,610 2,633,048 2,303,172
-------------- --------------- --------------
Commitments and contingencies - - -
Stockholders' equity (deficit):
Common stock, $.001 par value; 25,000,000 shares
authorized; 19,716,208, 16,965,708, and 16,492,000
shares issued and outstanding 19,716 16,966 16,492
Additional paid-in capital 6,593,062 1,005,492 254,489
Deferred compensation - (60,108) -
Deficit accumulated during the development stage (2,732,635) (1,223,261) (194,864)
-------------- --------------- --------------
Total stockholders' equity (deficit) 3,880,143 (260,911) 76,117
-------------- --------------- --------------
$ 4,034,753 $ 2,372,137 $ 2,379,289
============== =============== ==============
The accompanying notes are an integral part of the financial statements.
11
BIOGENTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
Nine months ended Year From inception Cumulative from
December 31, ended (November 21, 2000) inception
------------------------------- March 31, to March 31, (November 21, 2000)
2002 2001 2002 2001 to December 31, 2002
-------------- --------------- --------------- ---------------- -------------------
(unaudited) (unaudited)
Net sales $ - $ - $ - $ - $ -
Cost of sales 7,323 2,150 2,150 3,850 13,323
-------------- -------------- -------------- --------------- ---------------
Gross loss (7,323) (2,150) (2,150) (3,850) (13,323)
-------------- -------------- -------------- --------------- ---------------
Operating expenses:
Professional fees 572,630 221,215 325,495 36,440 934,565
Salary and wages 401,348 245,758 323,575 58,250 783,173
Rent expense 102,041 22,056 33,784 11,689 147,514
Marketing and promotion 21,550 2,216 9,866 - 31,416
Depreciation and amortization 15,632 13,508 19,365 2,021 37,018
Other operating expenses 295,761 79,990 183,490 30,463 509,714
-------------- -------------- -------------- --------------- ---------------
Total operating expenses 1,408,962 584,743 895,575 138,863 2,443,400
-------------- -------------- -------------- --------------- ---------------
Loss from operations (1,416,285) (586,893) (897,725) (142,713) (2,456,723)
Interest expense (93,089) (96,083) (130,672) (52,151) (275,912)
-------------- -------------- -------------- --------------- ---------------
Loss before provision for income taxes (1,509,374) (682,976) (1,028,397) (194,864) (2,732,635)
Provision for income taxes - - - - -
-------------- -------------- -------------- --------------- ---------------
Net loss $ (1,509,374) $ (682,976) $ (1,028,397) $ (194,864) $ -
============== ============== ============== =============== ===============
(2,732,635)
Loss per common share -
basic and diluted $ (0.09) $ (0.04) $ (0.06) $ (0.01) $ (0.16)
============== ============== ============== =============== ===============
Number of weighted average shares -
basic and diluted 17,128,920 16,688,353 16,743,619 16,342,646 16,805,115
============== ============== ============== =============== ===============
The accompanying notes are an integral part of the financial statements.
12
BIOGENTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Period from
Nine months ended Year inception Cumulative from
December 31, ended (November 21, inception
-------------------------- March 31, 2000) to November 21, 2000
2002 2001 2002 March 31, 2001 to December 31, 2002
----------- -------------- ----------- ---------------- --------------------
(unaudited) (unaudited)
Cash flows provided by (used for) operating activities:
Net loss $ (1,509,374) $ (682,976) $(1,028,397) $ (194,864) $ (2,732,635)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 15,632 13,508 19,365 2,021 37,018
Issuance of common stock for services 36,000 228,358 261,358 10,000 307,358
Exercise of stock options for services 26,961 - - - 26,961
Issuance of stock options for services 350,000 32,000 32,000 - 382,000
Capital contribution - bonus (related party) 50,000 - - - 50,000
Amortization of prepaid advertising 11,700 - 3,900 - 15,600
Deferred compensation 60,108 (58,358) (60,108) - -
Beneficial conversion feature expense 50,000 - - - 50,000
Amortization of discount 93,089 95,000 128,111 52,428 273,628
Impairment expense 55,832 - - - 55,832
Changes in assets and liabilities:
(Increase) decrease in assets:
Inventory (5,750) 2,150 2,150 3,850 250
Prepaid expenses and other current assets 16,200 (16,200) (16,200) - -
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 8,795 28,366 61,761 40,500 111,056
Due to related parties 310,030 156,250 215,494 56,250 581,774
------------- ----------- ----------- --------------- ------------------
Net cash used for operating activities (430,777) (201,902) (380,566) (29,815) (841,158)
------------- ----------- ----------- --------------- ------------------
Cash flows used for investing activities:
Purchase of property and equipment (3,500) (9,571) (19,571) (37,000) (60,071)
Increase in patent costs (1,450) (20,893) (23,261) - (24,711)
Increase in restricted cash (100,000) - - - (100,000)
(Increase) decrease in website development costs - - (1,040) (12,100) (13,140)
------------- ----------- ----------- --------------- ------------------
Net cash used for investing activities (104,950) (30,464) (43,872) (49,100) (197,922)
------------- ----------- ---------- --------------- ------------------
Cash flows provided by (used for) financing activities:
Increase in bank overdraft 9,912 - - - 9,912
Payment on contract (11,000) (74,500) (75,000) (75,000) (161,000)
Proceeds from note payable 50,000 50,000 50,000 - 100,000
Sale of common stock 187,000 139,500 204,500 182,000 573,500
Contributed capital 292,718 83,987 211,269 62,681 566,668
Payments on notes payable - (6,100) (50,000) - (50,000)
Net cash provided by financing activities 528,630 192,887 340,769 169,681 1,039,080
------------- ----------- ----------- --------------- ------------------
Net increase (decrease) in cash and cash equivalents (7,097) (39,479) (83,669) 90,766 -
Cash and cash equivalents, beginning of period 7,097 90,766 90,766 - -
------------ ----------- ----------- --------------- ------------------
Cash and cash equivalents, end of period $ - $ 51,287 $ 7,097 $ 90,766 $ -
============ =========== =========== =============== ==================
Cash paid during the year for:
Interest expense $ - $ - $ - $ - $ -
============ =========== =========== =============== ==================
Income taxes $ - $ - $ - $ - $ -
============ =========== =========== =============== ==================
The accompanying notes are an integral part of the financial statements.
13
BIOGENTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
NON-CASH FINANCING ACTIVITY:
For the Period from Inception (November 21, 2000) to March 31, 2001
-------------------------------------------------------------------
The Company issued 16,300,000 shares of its common stock at par, as
founder's shares, for property and equipment, totaling $16,300, upon
formation of the Company.
The Company issued a note payable as consideration for the purchase of
patents and inventory valued at $2,222,744 and $6,250, respectively. The
Company recorded a $1,701,006 discount on note payable relating to the
issuance of the note. Amortization of the discount resulted in the Company
recording $52,428 of interest expense.
The Company issued 10,000 shares of its common stock for consulting services
totaling $10,000, which represented the fair market value on the date of
issuance.
During the period from inception (November 21, 2000) to March 31, 2001, R&R,
a shareholder of the Company, advanced the Company cash and also paid
certain expenses directly on behalf of the Company totaling $62,681. The
Company has recorded these transactions as a contribution to capital as of
March 31, 2001.
For the Year Ended March 31, 2002
---------------------------------
The Company issued 6,750 shares of its common stock valued at $6,750 for
telephone equipment, which represented the fair market value on the date of
issuance.
The Company issued 17,000 shares of its common stock valued at $17,000 for
website development costs, which represented the fair market value on the
date of issuance.
The Company issued 45,000 shares of its common stock valued at $45,000 for
legal and consulting services provided, which represented the fair market
value on the date of issuance.
The Company issued 216,358 shares of its common stock valued at $1.00 per
share or $216,358 as consideration for past and future consulting services
provided by a related party, which represented the fair market value on the
date of issuance. This resulted in the Company recording $60,108 of deferred
compensation as of March 31, 2002.
The Company issued 15,600 shares of its common stock valued at $15,600 for
prepaid advertising expense, which represents the fair market value on the
date of issuance. As of March 31, 2002, $3,900 of the prepaid advertising
had been expensed.
The Company recorded interest expense totaling $128,111 relating to the
discount on note payable.
During January 2002, the Company issued 1,000 shares of its common stock for
property and equipment with a fair value of $3,000.
The accompanying notes are an integral part of the financial statements.
14
BIOGENTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
NON-CASH FINANCING ACTIVITY, CONTINUED:
For the Year Ended March 31, 2002, Continued
--------------------------------------------
The Company issued 64,000 options to officers of the Company, to purchase
its common stock at $0.50 per share for services rendered totaling $32,000.
The Company's common stock had a fair market value of $1.00 per share on the
date of issuance.
During the year ended March 31, 2002, R&R advanced the Company cash and also
paid certain expenses directly on behalf of the Company totaling $211,269.
The Company has recorded these transactions as a contribution to capital as
of March 31, 2002.
For the Nine Months Ended December 31, 2002 (Unaudited)
-------------------------------------------------------
The Company issued 18,000 shares of its common stock valued at $36,000 for
consulting services provided, which represented the fair market value on the
date of issuance.
During the period from April 1, 2002 to December 31, 2002, R&R advanced the
Company cash and also paid certain expenses directly on behalf of the
Company totaling $292,718 (unaudited). The Company has recorded these
transactions as a contribution to capital as of December 31, 2002.
On May 5, 2002, a related party transferred 25,000 shares of the Company's
common stock valued at $50,000 to an employee of the Company as a bonus. The
fair market value on the date of issuance was $2.00 per share. The Company
has recorded this transaction as a contribution to capital and salary
expense as of December 31, 2002.
During September 2002, a shareholder loaned the Company $50,000, which was
convertible into 50,000 shares of the Company's common stock. The fair
market value of the common stock was $2.00 per share, therefore, the Company
recorded a $50,000 expense relating to this note. Subsequently, on December
31, 2002, the note holder converted the $50,000 promissory note into 50,000
shares of the Company's common stock
During the year ended March 31, 2001, the Company issued 216,358 shares of
its common stock valued at $1.00 per share or $216,358 as consideration for
past and future consulting services provided by a related party. The Company
recognized $60,108 of deferred compensation expense relating to these
services during the nine months ended December 31, 2002.
During the year ended March 31, 2001, the Company issued 15,600 shares of
its common stock valued at $15,600 for prepaid advertising expense. The
Company recognized $11,700 of advertising expense relating to the issuance
during the nine months ended December 31, 2002.
The Company recorded interest expense totaling $93,089 relating to the
discount on a note payable.
The accompanying notes are an integral part of the financial statements.
15
BIOGENTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
NON-CASH FINANCING ACTIVITY, CONTINUED:
For the Nine Months Ended December 31, 2002 (Unaudited), Continued
-------------------------------------------------------------------
Three employees exercised 574,000 stock options as consideration for the
forgiveness of $574,602 of accrued salaries to these three employees.
On December 19, 2002, the Company issued 2,000,000 shares of its common
stock valued at $4,000,000 in lie of payment in full under the contract
payable totaling $2,341,622.
16
BIOGENTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 2002,
THE PERIOD FROM NOVEMBER 21, 2000 (INCEPTION) TO MARCH 31, 2001
AND THE NINE MONTHS ENDED
DECEMBER 31, 2002 AND 2001 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
BioGentec, Inc. (the "Company") is currently a development
stage enterprise under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 7. The Company was
incorporated under the laws of the State of Nevada on November
21, 2000 as St. Petka, Inc. On May 4, 2001, the Company
formally changed its name to BioGentec, Inc. The Company
presently has its corporate headquarters located in Irvine,
California.
The accompanying unaudited interim financial statements for
the nine months ended December 31, 2002 and 2001 and
cumulative from inception (November 21, 2000) to December 31,
2002 have been prepared by the Company, in accordance with
accounting principles generally accepted in the United States
of America pursuant to Regulation S-B of the Securities and
Exchange Commission. Certain information and footnote
disclosures normally included in audited financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed
or omitted. Accordingly, these interim financial statements
should be read in conjunction with the Company's audited
financial statements and related notes as contained in this
report for the fiscal year ended March 31, 2002 and the period
from inception (November 21, 2000) to March 31, 2001. In the
opinion of management, the interim financial statements
reflect all adjustments, including normal recurring
adjustments, necessary for fair presentation of the interim
periods presented. The results of operations for the nine
months ended December 31, 2002 are not necessarily indicative
of results of operations to be expected for the fiscal year
ended March 31, 2003.
LINE OF BUSINESS:
The Company is a patented biotechnology company that has
purchased the rights to market Immun-Eeze, a dietary
supplement, which is a natural alternative to over-the-counter
and prescription medications. Immun-Eeze is effective in
alleviating allergies and their accompanying symptoms.
Immun-Eeze has been reformulated (the reformulation is
included in the patent) and will be marketed under the name
Alleratin.
17
BIOGENTEC, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED MARCH 31, 2002,
THE PERIOD FROM NOVEMBER 21, 2000 (INCEPTION) TO MARCH 31, 2001
AND THE NINE MONTHS ENDED
DECEMBER 31, 2002 AND 2001 (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash
equivalents.
BANK OVERDRAFT:
The Company maintains overdraft positions at certain banks.
Such overdraft positions are included in current liabilities.
CONCENTRATION OF CREDIT RISK:
The Company places its cash in what it believes to be credit
worthy financial institutions and, at times, these deposits
may exceed the FDIC $100,000 insurance limit. The Company has
not experienced any losses in such accounts.
INVENTORY:
Inventory, consisting primarily of sample products used for
marketing purposes, is carried at the lower of cost or market
utilizing the first-in, first-out method.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method based upon the estimated useful lives, currently five years
over the various classes of assets. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations.
18
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
WEBSITE DEVELOPMENT COSTS:
Website development costs are for the development of the
Company's Internet website. These costs have been capitalized
when acquired and installed, and will be amortized over three
years once placed in service. The Company accounts for these
costs in accordance with EITF 00-2, "Accounting for Website
Development Costs," which specifies the appropriate accounting
for costs incurred in connection with the development and
maintenance of websites.
PATENT COSTS:
Patent costs are carried at cost less accumulated
amortization, which is calculated on a straight-line basis,
over the estimated economic life of the patent (see Note 3).
Amortization will begin upon the rollout of the Company's
Immun-Eeze products. In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," the Company evaluates
intangible assets and other long-lived assets (including
patent costs) for impairment, at least on an annual basis and
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable from its estimated
future cash flows. Recoverability of intangible assets and
other long-lived assets is measured by comparing their net
book value to the related projected undiscounted cash flows
from these assets, considering a number of factors including
past operating results, budgets, economic projections, market
trends and product development cycles. If the net book value
of the asset exceeds the related undiscounted cash flows, the
asset is considered impaired, and a second test is performed
to measure the amount of impairment loss. As of December 31,
2002 and March 31, 2002 and 2001, the Company recognized an
impairment expense of $55,832 and $-0-, respectively, which is
included in other operating expenses.
INCOME TAXES:
Income taxes are provided for based on the asset and liability
method of accounting pursuant to SFAS No. 109, "Accounting for
Income Taxes." Deferred income taxes, if any, are recorded to
reflect the tax consequences on future years of differences
between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end.
19
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION:
The Company will recognize revenue from product sales when
shipment of product to the customer has been made, which is
when title passes. The Company will estimate and record
provisions for rebates, sales returns and allowances in the
period the sale is recorded. Shipping and handling charges are
included in gross sales, with the related costs included in
selling, general and administrative expenses.
ADVERTISING COSTS:
Advertising costs are expensed as incurred and included in
operating expenses. For the year ended March 31, 2002 and for
the period from inception (November 21, 2000) to March 31,
2001, advertising costs were $9,866 and $-0-, respectively.
For the nine months ended December 31, 2002, advertising costs
were $21,550 (unuadited).
RESEARCH AND DEVELOPMENT COSTS:
The Company incurs costs in the research and development of a
dietary supplement, Alleratin. All costs relating to phases I
and II clinical trials were incurred before acquisition of the
patents. Phase III and other research and development costs
are charged to expense as incurred. As of December 31, 2002
and March 31, 2002, the Company incurred $17,500 (unaudited)
and $6,470, respectively, in research and development
expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash
equivalents, restricted cash, prepaid expenses and other
current assets, inventory, accounts payable and accrued
expenses, bank overdraft, and due to related parties. The
carrying amounts of these assets and liabilities approximate
their fair value due to the highly liquid nature of these
short-term instruments. The amounts owed for long-term debt,
including contract payable, also approximate fair value
because current interest rates and terms offered to the
Company are at current market rates.
20
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
STOCK-BASED COMPENSATION:
The Company accounts for stock-based employee compensation
arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost is
recognized over the vesting period based on the excess, if
any, on the date of grant of the fair value of the Company's
shares over the employee's exercise price. When the exercise
price of the option is less than the fair value price of the
underlying shares on the grant date, deferred stock
compensation is recognized and amortized to expense in
accordance with FASB Interpretation No. 44 over the vesting
period of the individual options. Accordingly, if the exercise
price of the Company's employee options equals or exceeds the
market price of the underlying shares on the date of grant, no
compensation expense is recognized. Options or shares awards
issued to non-employees or non-employee directors are valued
using the fair value method and expensed over the period
services are provided.
BASIC AND DILUTED LOSS PER SHARE:
In accordance with SFAS No. 128, "Earnings Per Share," the
basic loss per common share is computed by dividing net loss
available to common stockholders less preferred dividends by
the weighted average number of common shares outstanding.
Diluted loss per common share is computed similarly to basic
loss per common share, except that the denominator is
increased to include the number of additional common shares
that would have been outstanding if the potential common
shares had been issued and if the additional common shares
were not anti-dilutive. The Company has excluded all
outstanding options and convertible debt from the calculation
of diluted net loss per share because these securities are
anti-dilutive. As of March 31, 2002 and 2001, the Company has
approximately 974,000 and 560,000 common stock equivalents,
respectively. As of December 31, 2002, the Company has 625,000
common stock equivalents.
COMPREHENSIVE INCOME:
SFAS No. 130, "Reporting Comprehensive Income," establishes
standards for the reporting and display of comprehensive
income and its components in the financial statements. As of
December 31, 2002 and March 31, 2002 and 2001, the Company has
no items that represent comprehensive income and, therefore,
has not included a schedule of comprehensive income in the
financial statements.
21
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, SFAS No. 141, "Business Combinations," was
approved by the Financial Accounting Standards Board ("FASB").
SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30,
2001. Goodwill and certain intangible assets will remain on
the balance sheet and not be amortized. On an annual basis,
and when there is reason to suspect that their values have
been diminished or impaired, these assets must be tested for
impairment, and write-downs may be necessary. The Company has
implemented SFAS No. 141 as of July 1, 2001.
In July 2001, SFAS No. 142, "Goodwill and Other Intangible
Assets," was approved by the FASB. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an
impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease
upon adoption of this statement. The Company has implemented
SFAS No. 142 as of March 31, 2001.
In August 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations," was issued which requires the recognition of a
liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially
recorded, the carrying amount of the related long-lived asset
is correspondingly increased. Over time, the liability is
accreted to its present value and the related capitalized
charge is depreciated over the useful life of the asset. SFAS
No. 143 is effective for fiscal years beginning after June 15,
2002. The Company does not expect the adoption to have a
material impact on the Company's financial position or results
of operations.
In August 2001, SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," was issued. This statement
addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets and broadens the
definition of what constitutes a discontinued operation and
how results of a discontinued operation are to be measured and
presented. The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of this statement did not have
a material effect on the Company's financial position or
results of operations.
22
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In April 2002, the FASB issued Statement No. 145, "Rescission
of SFAS Statements No. 4, 44, and 64, Amendment of SFAS
Statement No. 13, and Technical Corrections," to update,
clarify, and simplify existing accounting pronouncements. SFAS
Statement No. 4, which required all gains and losses from debt
extinguishment to be aggregated and, if material, classified
as an extraordinary item, net of related tax effect, was
rescinded. Consequently, SFAS Statement No. 64, which amended
SFAS Statement No. 4, was rescinded because it was no longer
necessary. The adoption of this statement was implemented by
the Company as of April 1, 2002 and did not have a material
effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No.
146 addresses accounting and reporting for cost associated
with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be
recognized and measured initially at fair value when the
liability is incurred. FASB No. 146 is effective for exit or
disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of this
statement did not have a material effect on the Company's
financial statements.
In October 2002, the FASB issued Statement No. 147,
"Acquisitions of Certain Financial Institutions-an amendment
of FASB Statements No. 72 and 144 and FASB Interpretation No.
9," which removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in
accordance with Statements No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. In addition,
this Statement amends SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its
scope long-term customer-relationship intangible assets of
financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder
intangible assets. The requirements relating to acquisitions
of financial institutions is effective for acquisitions for
which the date of acquisition is on or after October 1, 2002.
The provisions related to accounting for the impairment or
disposal of certain long-term customer-relationship intangible
assets are effective on October 1, 2002. The adoption of this
Statement did not have a material impact to the Company's
financial position or results of operations as the Company has
not engaged in either of these activities.
23
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In December 2002, the FASB issued Statement No. 148,
"Accounting for Stock-Based Compensation-Transition and
Disclosure," which amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of
accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition
guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002,
with earlier application permitted in certain circumstances.
The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods
beginning after December 15, 2002. The adoption of this
statement did not have a material impact on the Company's
financial position or results of operations as the Company has
not elected to change to the fair value based method of
accounting for stock-based employee compensation.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." Interpretation
46 changes the criteria by which one company includes another
entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates
a variable interest entity is called the primary beneficiary
of that entity. The consolidation requirements of
Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of
the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company does not expect
the adoption to have a material impact to the Company's
financial position or results of operations.
24
(2) GOING CONCERN:
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going
concern. As of December 31, 2002 and March 31, 2002, the Company has
not generated significant revenue, has a working capital deficit of
$48,610 (unaudited) and $2,597,801, respectively, and has incurred
substantial losses for the year ended March 31, 2002 totaling
$1,028,397 and from inception (November 21, 2000) through December 31,
2002, totaling $2,732,635 (unaudited).
The Company is currently attempting to raise additional financing. For
the period from April 1, 2002 to December 31, 2002, the Company has
raised additional equity and debt financing of $237,000 (see Note 10)
and subsequent to December 31, 2002, the Company has raised additional
equity and debt financing of $80,500 (see Note 12).
For the period from April 1, 2002 to December 31, 2002, the Company has
also received additional capital contributions from a related party of
$292,718 (see Notes 5 and 10).
The Company is currently test marketing and branding their product,
Alleratin. The Company is planning a national rollout of Alleratin
during the fourth quarter of the fiscal year ended March 31, 2003.
The Company has also restructured the minimum royalty obligation due to
Gene Pharmaceuticals, LLC (see Notes 3 and 7). As of December 31, 2002,
the Company no longer has a minimum royalty obligation due and has
issued 2,000,000 shares of its common stock valued at a fair market
value of $4,000,000 as consideration for the contract payable totaling
$2,341,622.
The Company requires substantial capital to pursue its operating
strategy, which includes commercialization of Alleratin, and currently
has limited cash for operations. Until the Company can obtain revenues
sufficient to fund working capital needs and additional research and
development costs necessary to obtain the regulatory approvals for
commercialization, the Company will be dependent upon external sources
of financing.
During December 2002, the Company entered into negotiations to acquire
a publicly traded vehicle to reverse merge with, which would help
facilitate the raising of additional equity financing.
25
(2) GOING CONCERN, CONTINUED:
There can be no assurances that sufficient financing will be available
on terms acceptable to the Company, or at all. If the Company is unable
to obtain such financing, the Company will be forced to scale back
operations, which could have an adverse effect on the Company's
financial condition and results of operations. These factors raise
substantial doubt about the Company's ability to continue as a going
concern.
Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity
for the Company to continue as a going concern.
(3) ACQUISITION OF CERTAIN ASSETS:
On November 22, 2000, the Company entered into an asset purchase
agreement to acquire certain tangible and intangible assets from Gene
Pharmaceuticals, LLC, formerly known as Allergy Limited, LLC ("GP
LLC"), an unrelated company. As consideration, the Company agreed to
pay a $150,000 down payment, as well as royalty payments calculated as
a percentage of gross sales of the product known as "Immune-Eeze,"
occurring on or after January 1, 2001. The royalty payments were to be
computed and payable quarterly, beginning with the quarter ended March
31, 2001, at the greater of the:
(i) Buyers Minimum Royalty Obligation (see Note 7);
(ii) rate of 6% of annual gross sales on the first
$50,000,000 in gross sales; and
(iii) rate of 3% of annual gross sales on all gross sales
in excess of $50,000,000.
The Company's minimum royalty obligation to GP LLC in the event that
gross sales in any quarter did not meet certain threshold amounts
totals was to be $3,930,000. The minimum guaranteed purchase price was
payable through 2022 (see Note 7).
Gross sales are defined as all payments received by the Company on
worldwide sales of all products containing Vitamin B12 including, but
not limited to, sales of all products in pediatric doses and for use by
domestic animals.
Per the asset purchase agreement, the Company had the option to buy the
patent outright with no royalty or future minimum royalty payments for
the following:
a) $5,000,000 through June 30, 2002;
b) $6,000,000 from July 1, 2002 to June 30, 2003;
c) $7,000,000 from July 1, 2003 to June 30, 2004; or
d) $8,000,000 thereafter.
26
(3) ACQUISITION OF CERTAIN ASSETS, CONTINUED:
The tangible and intangible assets purchased resulted in the recording
of $6,250 of inventory, $2,222,744 of patents as of November 22, 2000,
and, since the minimum royalty payments did not include interest, the
Company has recorded a discount on the contract payable totaling
$1,701,006, using an interest rate of 6%, which was being amortized
over the life of the payable (see Note 7).
Per the asset purchase agreement, the Company has secured the rights to
two patents, which were valued at their fair market values as of the at
date of purchase (see Note 7). The patents are for the introduction of,
or "delivery" of, Cyanocobalamin, via a lozenge, and cover the various
forms of B12 used to provide relief from allergy and bronchial asthma
symptoms. The U.S. patent expires in 2009. Additional U.S. and foreign
patents covering the use of lozenges delivering B12 for allergic
diseases are in effect until 2019. In July 2001, the Company was
granted a Notice of Entitlement intended to expand geographic coverage
of the two existing patents. Amortization will be calculated on a
straight-line basis over the shorter of the remaining economic life or
estimated lives of the patents, ranging from 9 to 17 years, once
shipment of products begins. The Company recorded its patents based
upon the discounted value of the contract payable.
Recognition of contingent royalty payments above the guaranteed
purchase price will be expensed in the period they are incurred (see
Note 7).
As of March 31, 2002, the Company was in default on the minimum
guaranteed payments. On April 20, 2002, payments relating to the
minimum guaranteed purchase price were extended without penalty until
May 31, 2002, at which time the first payment was due and payable . The
Company remained in default of the agreement.
Per the asset purchase agreement, in event of default on any of the
royalty or minimum royalty payments to the seller and such default is
not cured with in 120 days, all purchased assets would revert back to
GP LLC.
On December 19, 2002, GP LLC and the Company entered into a new
memorandum of agreement whereby they amended the terms of the original
asset purchase agreement whereby the purchase price shall be as
follows:
a) the sum of all amounts previously paid by the Company
under the asset purchase agreement totaling $161,000;
b) the sum of $4,000,000 payable in the form of 2,000,000
shares of the Company's common stock valued at $2.00 per
share; and
c) a royalty calculated at 1.5% of the gross sales of the
product, as defined above.
27
(3) ACQUISITION OF CERTAIN ASSETS, CONTINUED:
Royalty payments shall commence to accrue on December 19, 2002, and will be
computed and payable quarterly.
As a result, the Company satisfied its indebtness to GP LLC, and
reduced its future royalty obligation related to the patents in
exchange for the shares, and therefore increased the carrying amount of
the patents to $3,905,832. Based upon an independent appraisal, the
fair value of the patents were deemed to be $3,850,000 as of December
31, 2002. Therefore, the Company recorded an impairment expense of
$55,832 as of December 31, 2002, which is included in other operating
expenses.
The Company has also recorded the issuance of the common stock and
removed all guaranteed minimum royalty obligations under the original
asset purchase agreement (see Note 7).
(4) PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consisted of the following:
March 31,
December 31, ----------------------------------
2002 2002 2001
---------------- ------------------ --------------
(unaudited)
Furniture and fixtures $ 65,000 $ 65,000 $ 53,300
Office equipment 21,121 17,621 -
---------------- ---------------- ---------------
86,121 82,621 53,300
Less accumulated depreciation (23,768) (14,886) (2,021)
---------------- ---------------- ---------------
$ 62,353 $ 67,735 $ 51,279
================ ================ ===============
For the year ended March 31, 2002 and for the period from inception
(November 21, 2000) to March 31, 2001, depreciation expense was $12,865
and $2,021, respectively. For the nine months ended December 31, 2002,
depreciation expense was $8,882 (unaudited).
28
(5) RELATED PARTY TRANSACTIONS:
The Company had the following related party transactions:
Due to Related Parties
March 31,
December 31, ----------------------------------
2002 2002 2001
---------------- ------------------ --------------
(unaudited)
a) R&R Holdings $ 33,642 $ - $ 31,250
b) Chief Operating Officer - 129,852 12,500
c) Executive Vice President - 129,852 12,500
d) Consultant - 11,550 -
---------------- ---------------- ---------------
$ 33,642 $ 271,254 $ 56,250
================ ================ ===============
a) On January 1, 2001, the Company entered into a
consulting contract with R&R Development, Inc. DBA R&R
Holdings, Inc. ("R&R") whereby they would provide managerial
consulting services to the Company at the rate of $125,000 per
year and the rate shall increase to $135,000 per year when and
if the Company completes a merger with a public shell company.
R&R is also a shareholder of the Company. Through March 31,
2001, the Company had accrued $31,250 of consulting fees
relating to this agreement. No payments were made during the
period from inception (November 21, 2000) to March 31, 2001.
For the year ended March 31, 2002, the Company accrued an
additional $125,000 of consulting fees relating to this
agreement.
During the year ended March 31, 2002, the Company issued
216,358 shares of its common stock valued at $1.00 per share
or $216,358 which represented the fair market value on the
date of issuance, as consideration for the accrued consulting
services to date and as a prepayment for consulting services
to be provided per the contract relating to the year ended
March 31, 2003. As of March 31, 2002, the Company prepaid
$60,108 of consulting fees under the contract and has recorded
it as deferred compensation.
During the period from April 1, 2002 to December 31, 2002, R&R
accrued an additional $93,750 of consulting fees relating to
this agreement. As of December 31, 2002, $33,642 was payable
under this contract (unaudited) and $60,108 reduced deferred
compensation.
29
(5) RELATED PARTY TRANSACTIONS, CONTINUED:
During the period from inception (November 21, 2000) to March
31, 2001, R&R advanced the Company cash and also paid certain
expenses directly on behalf of the Company totaling $62,681.
The Company has recorded these transactions as a contribution
to capital as of March 31, 2001.
During the year ended March 31, 2002, R&R advanced the Company
cash and also paid certain expenses directly on behalf of the
Company totaling $211,269. The Company has recorded these
transactions as a contribution to capital as of March 31,
2002.
During the period from April 1, 2002 to December 31, 2002, R&R
advanced the Company cash and also paid certain expenses
directly on behalf of the Company totaling $292,718
(unaudited). The Company has recorded these transactions as a
contribution to capital as of December 31, 2002.
b) The Executive Vice President ("EVP") of the Company entered
into an employment agreement dated November 22, 2000, amended
on December 31, 2001, which pays an annual salary of up to
$125,000 and certain bonuses. The EVP was also granted options
to purchase 230,000 shares of common stock of the Company at
an exercise price of $1.00 per share (see Note 11). For the
period from inception (November 21, 2000) to March 31, 2001,
the Company accrued $12,500 of services relating to the
agreement. For the year ended March 31, 2002, the Company
accrued an additional $133,352 relating to this agreement.
During the year ended March 31, 2002, the Company issued
32,000 options to the EVP to purchase its common stock at
$0.50 per share. The Company's common stock had a fair market
value of $1.00 per share on the date of issuance and the
$16,000 difference in the fair market value of the stock
options was recorded as a reduction in the amount due under
the employment contract and as a contribution to capital (see
Note 11). As of March 31, 2002 and 2001, the Company had a
liability to the EVP totaling $129,852 and $12,500,
respectively. Per the amended employment agreement, if certain
payments were not made to the EVP relating to the employee
agreement, an additional $55,000 of bonus compensation would
accrue during the year ended March 31, 2003. For the nine
months ended December 31, 2002, the Company accrued an
additional $148,750 relating to this agreement, $93,750 of
salary and a $55,000 bonus, which from inception (November 21,
2000) left a balance of $278,602 due to the EVP. As of
December 31, 2002, the EVP entered into an agreement whereby
he exercised his 262,000 options with a total exercise price
of $246,000. The consideration for the exercise was
forgiveness of accrued salary in the amount of $278,602.
30
(5) RELATED PARTY TRANSACTIONS, CONTINUED:
c) The Chief Operating Officer ("COO") of the Company entered
into an employment agreement dated November 2000, amended on
December 31, 2001, which pays an annual salary of up to
$125,000 and certain bonuses. The COO was also granted options
to purchase 230,000 shares of common stock of the Company at
an exercise price of $1.00 per share (see Note 11). For the
period from inception (November 21, 2000) to March 31, 2001,
the Company accrued $12,500 of services relating to the
agreement. For the year ended March 31, 2002, the Company
accrued an additional $133,352 relating to this agreement.
During the year ended March 31, 2002, the Company issued
32,000 options to the COO to purchase its common stock at
$0.50 per share. The Company's common stock had a fair market
value of $1.00 per share on the date of issuance and the
$16,000 difference in the fair market value of the stock
options was recorded as a reduction in the amount due under
the employment contract and as a contribution to capital (see
Note 11). As of March 31, 2002 and 2001, the Company had a
liability to the COO totaling $129,852 and $12,500,
respectively. Per the amended employment agreement, if certain
payments were not made to the COO relating to the employee
agreement, an additional $55,000 of bonus compensation would
accrue during the year ended March 31, 2003. For the period
from April 1, 2002 to July 31, 2002, the Company accrued an
additional $96,667 relating to this agreement, $41,667 of
salary and a $55,000 bonus, which from inception (November 21,
2000) left a balance of $226,519 due to the COO as of July 31,
2002. As of July 31, 2002, the COO resigned from the Company
and entered into an agreement whereby he would exercise
262,000 options with a total exercise price of $246,000. The
consideration for the exercise was forgiveness of accrued
salary in the amount of $226,519. The Company recognized
additional compensation expense of $19,481 relating to this
transaction.
(d) The Company entered into an employment agreement with its Vice
President the ("VP") that pays $5,000 per month, plus an
annual performance bonus of up to 33% of the annual salary.
The agreement also granted the VP 200,000 options to purchase
shares of the Company's common stock at $1.00 per share. As of
March 31, 2002 and 2001, the Company owed the VP $11,550 and
$0, respectively on the agreement. For the nine months ended
December 31, 2002, the Company accrued an additional $45,000
relating to this agreement and made payments during the period
totaling $11,800, which left a balance of $44,750 due to the
VP. The VP was also owed $2,770 relating to unreimbursed
expenses. As of December 31, 2002, the VP entered into an
agreement whereby the Company shall pay $5,000 to the VP and
the VP would also exercise 50,000 of his options with a total
exercise price of $50,000 and as consideration forgive all
balances owed to him as of December 31, 2002. This resulted in
the Company recognizing an additional compensation expense of
$7,480. The VP also tendered his resignation as of December
31, 2002.
31
(6) Income Taxes:
The components of the provision for income taxes were as follows:
March 31,
December 31, ----------------------------------
2002 2002 2001
---------------- ---------------- ---------------
(unaudited)
Current tax expense
U.S. federal $ - $ - $ -
State and local - - -
---------------- ---------------- ---------------
Total current - - -
---------------- ---------------- ---------------
Deferred tax expense
U.S. federal - - -
State and local - - -
---------------- ---------------- ---------------
Total deferred - - -
---------------- ---------------- ---------------
Total tax provision $ - $ - $ -
================ ================ ===============
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
Federal Income Tax Rate 34.0%
Deferred Tax Charge (Credit) -
Effect of Valuation Allowance (34.0)%
State Income Tax, net of Federal Benefit -
Effective Income Tax Rate -
As of March 31, 2002 and 2001, the Company had Federal net carryforward
losses of approximately $1,223,000 and $195,000, respectively, and had
State net carryforward losses of approximately $612,000 and $98,000,
respectively. Because of the current uncertainty of realizing the
benefit of the tax carryforward, a valuation allowance equal to the
deferred tax assets benefit for the loss carryforward has been
established. The full realization of the tax benefit associated with
the carryforward depends predominantly upon the Company's ability to
generate taxable income during the carryforward period.
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes.
32
(6) INCOME TAXES, CONTINUED:
Significant components of the Company's deferred tax asset were as
follows.
March 31,
December 31, ----------------------------------
2002 2002 2001
---------------- ------------------ --------------
(unaudited)
Deferred tax asset
Loss carryforwards $ 1,050,000 $ 470,000 $ 75,000
Less valuation allowance (1,050,000) (470,000) (75,000)
---------------- ---------------- ---------------
Net deferred tax assets $ - $ - $ -
================ ================ ===============
Federal net operating loss carryforwards expire through 2021, while
State net operating loss carryforwards expire through 2013. Per year
availability is subject to change of ownership limitations under
Internal Revenue Code Section 382.
(7) CONTRACT PAYABLE:
Patent
As discussed in Note 3, the Company, as part of the purchase of certain
tangible and intangible assets, was committed to pay a minimum
guaranteed purchase price and contingent additional royalty payments
based upon certain levels of sales (performance covenant).
The minimum royalty payments did not include interest, therefore
Company has recorded a discount on the contract payable totaling
$1,701,006, using an interest rate of 6%, which was being amortized
over the life of the payable.
The minimum guaranteed purchase price and performance covenant
contained under the asset purchase agreement dated November 22, 2000
was as follows:
Minimum
purchase price
Initial payment $ 150,000
4 quarterly payments of $15,000 60,000
4 quarterly payments of $30,000 120,000
75 quarterly payments of $48,000 3,600,000
-----------------
3,930,000
Less amounts representing interest (1,701,006)
---------------
Present value of minimum royalty payments $ 2,228,994
=================
33
(7) CONTRACT PAYABLE, CONTINUED:
The minimum payments under the agreement were to begin March 31, 2001.
During the year ended March 31, 2002 and the period from inception
(November 21, 2000) to March 31, 2001, the Company made payments of
$75,000 and $75,000, respectively, which totaled the $150,000 down
payment.
As of March 31, 2002, the Company was in default on the minimum
guaranteed payments, and the minimum guaranteed payments were postponed
without penalty until May 31, 2002, at which time the first payment was
due and payable.
During the nine moths ending December 31, 2002, the Company became in
default of the agreement when only $11,000 of minimum royalty payments
were made (unaudited).
During the year ended March 31, 2002 and the period from inception
(November 21, 2000) to March 31, 2002, the Company incurred interest
expense on the contract payable totaling $128,111 and $52,428,
respectively. During the nine months ended December 31, 2002
(unaudited), the Company incurred interest expense on the contract
payable totaling $93,089.
Also as discussed in Note 3, on December 19, 2002, GP LLC and the
Company entered into a new memorandum of agreement whereby they amended
the terms of the original asset purchase agreement and there are no
more minimum guaranteed payments mandatory under the agreement and the
Company issued 2,000,000 shares of its common stock valued at
$4,000,000.
As a result of this new agreement, as of December 19, 2002, the Company
has removed the contract payable and all guaranteed minimum royalty
obligations from its liabilities (see Note 3).
(8) NOTES PAYABLE:
On October 22, 2001, the Company entered into a note payable to an
unrelated party totaling $20,000 bearing interest at the rate of 18%
per annum. On October 26, 2001, the Company entered into an additional
note payable with the same party for $30,000, bearing interest at the
rate of 18% per annum. Both notes were due on or before December 22,
2001. The Company repaid these notes, including accrued interest of
$2,561, on January 2, 2002.
During September 2001, the Company entered into a convertible note
payable totaling $50,000. The note was convertible into the Company
common stock at $1.00 per share when the fair market value of the stock
was $2.00 per share. Therefore, the Company recognized a beneficial
conversion expense totaling $50,000.
34
(8) NOTES PAYABLE, CONTINUED:
This note was converted into 50,000 shares of the Company's common
stock during December 2002.
(9) COMMITMENTS AND CONTINGENCIES:
During the period from inception (November 21, 2000) to December 31,
2001, the Company had an operating lease for office space totaling
approximately $2,900 per month. On December 19, 2001, the Company
signed a one-year lease for new office space commencing January 1, 2002
for a base rent of approximately $5,900 and then took additional space
that increased the base rent to approximately $12,000 per month.
The Company paid a security deposit of $15,600 and as of March 31,
2002, this security deposit was recorded in other current assets. As of
December 31, 2002, this security deposit has been expensed and the
Company is in a dispute with the landlord.
The lease also called for one year of building signage rights and, as
consideration, the Company issued 15,600 shares of their common stock,
valued at $15,600 for the signage rights. These rights were recorded as
a prepaid expense and were amortized over a period of one year ending
December 31, 2002.
Rent expense for the year ended March 31, 2002 and for the period from
inception (November 22, 2000) to March 31, 2001, was $33,784 and
$11,689, respectively. For the nine months ended December 31, 2002,
rent expense was $102,041 (unaudited).
On December 27, 2002, the Company entered into an employee agreement
with Robert A. Dietrich to be its Chief Financial Officer ("CFO") on a
part-time basis. This agreement will become effective January 2, 2003.
The CFO shall receive 25,000 fully vested options to purchase 25,000
shares of the Company's common stock with a strike price of $1.00 per
share. The fair market value of the shares is $2.00 per share,
therefore during January 2003, the Company will recognize $25,000 of
compensation expense upon issuance. The CFO will receive $86.54 per
hour for the first eight hours worked each week; will vest 260 options
shares with a strike price of $1.00 per share share for the next eight
hours worked; and will be paid $86.54 per hour for the next eight hours
worked each week. Option certificates will be issued weekly. The
agreement will be reviewed no longer than six months from the date of
execution. Each options issued under this agreement will bear
compensation expense as determined by the fair market value of the
Company's common stock on the date of issuance.
35
(9) COMMITMENTS AND CONTINGENCIES, CONTINUED:
The Company is negotiating a potential merger transaction and, during
December 2002, has entered into negotiations to acquire a publicly
traded vehicle. As part of the negotiations, the Company has made a
good faith deposit of $100,000 into an escrow account that, as of
December 31, 2002, is classified by the Company as restricted cash.
(10) STOCKHOLDERS' EQUITY (DEFICIT):
COMMON STOCK
The aggregate number of shares of common stock that the Company has
authority to issue is 25,000,000 shares at a par value of $0.001. As of
December 31, 2002 and March 31, 2002 and 2001, 19,716,208, 16,965,708,
and 16,492,000, shares were issued and outstanding, respectively.
Common Stock For Property and Equipment
a) On November 22, 2000, the Company issued 16,300,000 shares of
its common stock, at par, as founder's shares in exchange for
certain property and equipment, with a fair value of $16,300
upon formation of the Company.
b) During April 2001, the Company issued 6,750 shares of its
common stock valued at $6,750 for telephone equipment, which
represented the fair market value on the date of issuance.
c) During January 2002, the Company issued 1,000 shares of its
common stock for property and equipment with a fair value
of $3,000.
Issuance of Common Stock for Cash
a) During the period from inception (November 21, 2000) to March
31, 2001, the Company issued 182,000 shares of its common
stock for $182,000, which represented its fair value on the
date of issuance.
b) During the year ended March 31, 2002, the Company issued
172,000 shares of its common stock for $204,500, which
represented its fair value on the date of issuance.
c) During the nine months ended December 31, 2002, the Company
issued 108,500 shares of its common stock for $187,000
(unaudited).
36
(10) STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED:
Issuance of Common Stock for Services to Related Party
During the year ended March 31, 2002, the Company issued 216,358 shares
of its common stock valued at $1.00 per share or $216,358 as
consideration for past and future consulting services provided by a
related party, which represented the fair market value on the date of
issuance. As of March 31, 2002, the Company had deferred compensation
of $60,108 relating to this issuance.
Issuance of Common Stock for Services
During the period from inception (November 21, 2000) to March 31, 2001,
the Company issued 10,000 shares of its common stock valued at $10,000,
for various services performed by consultants. This represented the
fair market value of the common stock and services on the date of
issuance.
During the year ended March 31, 2002, the Company issued 45,000 shares
of its common stock valued at $45,000, for various services performed
by consultants. This represented the fair market value of the common
stock and services on the date of issuance.
During the nine months ended December 31, 2002, the Company issued
$18,000 shares of its common stock valued at $36,000, for various
services performed by consultants (unaudited). This represented the
fair market value of the common stock and services on the date of
issuance.
Capital Contribution
R&R
As discussed in Note 5, R&R advanced the Company cash or paid
certain expenses on the Company's behalf totaling $292,718,
$211,269, and $62,681 for the nine months ended December 31,
2002 (unaudited), year ended March 31, 2002, and period from
inception (November 21, 2000) to March 31, 2001, respectively.
These transactions have been recorded as contributions to
capital.
Bonus expense - Silver Mountain Productions
During May 2002, Silver Mountain Productions ("SMP"), a
related company owned by management, transferred 25,000 shares
of the Company's common stock as a bonus to an employee.
Compensation expense in the amount of $50,000, the fair value
of the shares, was recognized.
37
(10) STOCKHOLDERS' EQUITY (DEFICIT), CONTINUED:
Issuance of Common Stock for Prepaid Advertising
During March 2002, the Company issued 15,600 shares of its common stock
valued at $15,600 for prepaid advertising expense, which represented
the fair market value on the date of issuance.
Issuance of Common Stock for Website Development Costs
During May 2001, the Company issued 17,000 shares of its common stock
valued at $17,000 for website development costs, which represented the
fair market value on the date of issuance.
Issuance of Common Stock for Patents
As discussed in Note 3, on December 19, 2002, GP LLC and the Company
entered into a new memorandum of agreement whereby they amended the
terms of the original asset purchase agreement. The purchase price of
the patent is the sum of all amounts previously paid by the Company
under the asset purchase agreement totaling $161,000 as well as
$4,000,000 for the issuance of 2,000,000 shares of the Company's common
stock valued at $2.00 per share, which represented the fair market
value on the date of issuance.
(11) STOCK OPTIONS:
Stock Option Plan
In 2002, the Company adopted a Stock Option Plan (the "Plan") initially
reserving an aggregate of 1,250,000 shares of the Company's common
stock (the "Available Shares") for issuance pursuant to the exercise of
stock options, which may be granted to employees and consultants to the
Company. The Plan options were subsequently increased to 2,000,000
shares effective as of December 31, 2001.
The Plan provides for the granting at the discretion of the Board of
Directors of both qualified incentive stock options and non-qualified
stock options. Consultants may receive only non-qualified stock
options. The maximum term of the stock options are three to five years
and generally vest proportionately throughout the term of the option.
38
(11) STOCK OPTIONS, CONTINUED:
Stock Option Plan, Continued
The Company's option activity for the years ended March 31, 2002 and
2001 and the nine months ended December 31, 2002 (unaudited) is as
follows:
March 31,
December 31, ----------------------------------
2002 2002 2001
---------------- ------------------ --------------
(unaudited)
Options outstanding -
beginning of period 974,000 560,000 -
Granted during the year 300,000 714,000 760,000
Exercised during the year (574,000) - -
Forfeited during the year (75,000) - -
Canceled during the year (300,000) (200,000)
---------------- ---------------- ----------------
Options outstanding - end of period 625,000 974,000 560,000
================ ================ ===============
Options exercisable -
March 31, 2002 and 2001 353,334 -
Weighted average exercise price $ 0.95 $ 1.02
Weighted average remaining life 3.9 years 4.7 years
Issuance of Stock Options
On November 22, 2000, the Chief Operating Officer and Executive Vice
President of the Company were granted options to purchase 460,000
shares of its common stock of the Company at an exercise price of $1.00
per share. These options expire on November 22, 2003. The options vest
over three years. At the date of grant, the fair value of the common
stock was $1.00 per share. At the date of the grant, the exercise price
was equal to the fair value of the stock; therefore, no compensation
expense was recorded. These options were exercised during the nine
months ended December 31, 2002.
On March 1, 2001, the Company granted stock options to an employee to
purchase 100,000 shares of its common stock at an exercise price of
$1.10 per share. The options vest over a three-year period beginning
with 25,000 on the first anniversary, 25,000 on the second anniversary
and 50,000 on the third anniversary. At the date of grant, the fair
value of the common stock was $1.00 per share. At the date of the
grant, the exercise price was higher than the fair value of the stock;
therefore, no compensation expense was recorded. The employee was
terminated with 75,000 unvested options for the nine months ended
December 31, 2002.
39
(11) STOCK OPTIONS, CONTINUED:
Issuance of Stock Options, Continued
On November 22, 2000, the Company granted stock options to a consultant
to purchase 200,000 shares of its common stock at an exercise price of
$1.00 per share. The options vest over a three-year period beginning
with 50,000 on the first anniversary, 50,000 on the second anniversary
and 100,000 on the third anniversary and expire on November 22, 2005.
At the date of grant, the fair value of the common stock was $1.00 per
share. At the date of the grant, the exercise price was equal to the
fair value of the stock; therefore, no compensation expense was
recorded. These options were cancelled unvested during the year ended
March 31, 2002.
On April 1, 2001, the Company granted stock options to a consultant to
purchase 100,000 shares of its common stock at an exercise price of
$1.00 per share. These options were to vest over a period of two years
after the date of grant. The consulting agreement was cancelled on
August 31, 2001 and the stock options were cancelled.
On April 19, 2001, the Company granted stock options to an employee to
purchase 200,000 shares of its common stock at an exercise price of
$1.00 per share. The options vest over a three-year period beginning
with 50,000 on the first anniversary, 50,000 on the second anniversary
and 100,000 on the third anniversary and expire on November 22, 2005.
At the date of grant, the fair value of the common stock was $1.00 per
share. At the date of the grant, the exercise price was equal to the
fair value of the stock; therefore, no compensation expense was
recorded.
During September 2001, the Company issued 32,000 options each to its
COO and EVP to purchase its common stock at $0.50 per share. These
options were issued as consideration for services performed by the COO
and EVP of the Company. The Company recognized an expense of $0.50 per
option or $32,000 relating to these options under the employment
contracts and reduced its liability to the COO and EVP by $32,000. The
fair value of the Company's common stock on the date of issuance with
$1.00. These options were exercised during the nine months ended
December 31, 2002.
During May 2001, the Company granted 200,000 stock options to purchase
its common stock as follows: 100,000 options to a consultant at an
exercise price of $1.00 per share and 100,000 options to a consultant
at an exercise price of $1.10 per share. These options vest over a
period of up to 5 years after the date of grant. At March 31, 2002, the
exercise price was equal to or higher than the fair value of the stock;
therefore, no compensation expense has been recorded.
40
(11) STOCK OPTIONS, CONTINUED:
Issuance of Stock Options, Continued
During May 2001, the Company granted stock options to an employee to
purchase 150,000 shares at an exercise price of $1.00 per share. The
options vest ratably over a three-year period beginning after the date
of the grant. At the date of grant, the fair value of the common stock
was $1.00 per share. At the date of the grant, the exercise price was
equal to the fair value of the stock; therefore, no compensation
expense was recorded.
During May 2002, the Company granted stock options to three consultants
to purchase a total of 300,000 shares at an exercise price of $1.00 per
share. The options vest over immediately on the execution date of the
consulting agreement. At the date of the grant, the fair value of the
common stock was $2.00 per share. The Company valued these options
under the Black-Scholes model with a total valuation of approximately
$350,000, which was included in the statements of operations for the
nine months ended December 31, 2002.
Proforma Earnings
The Company uses the intrinsic value method (APB Opinion 25) to account
for its stock options granted to officers, directors, and employees.
Under this method, compensation expense is recorded over the vesting
period based on the difference between the exercise price and quoted
market price on the date the options are granted. Since the Company has
granted all its stock options at an exercise price equal to or above
the quoted market on the date measurement date, no compensation expense
related to grants of stock options to employees has been recorded.
Had the Company chosen the fair value method of accounting for
transactions involving stock option issuance to employees pursuant to
SFAS No. 123, the Company would have recorded an additional $67,097 and
$16,026 in compensation costs for the years ended March 31, 2002 and
2001, respectively, as presented by the proforma earnings statement, as
follows.
41
(11) STOCK OPTIONS, CONTINUED:
Proforma Earnings, Continued
March 31,
December 31, ----------------------------------
2002 2002 2001
----------------- ------------------ --------------
(unaudited)
Net loss:
As reported $ (1,509,374) $ (1,028,397) $ (194,864)
================= ================= ================
FAS 123 effect
Proforma $ (1,509,374) $ (1,095,464) $ (210,890)
================= ================= ================
Net loss per common share - basic and diluted:
As reported $ (0.09) $ (0.06) $ (0.01)
================= ================= ================
Proforma $ (0.09) $ (0.07) $ (0.01)
================= ================= ================
For fiscal year 2002, the Black-Scholes option-pricing model with a
risk-free interest rate of ranging from 4.9% to 5.6%, a volatility of
-0-%, zero dividend yield and an expected life of ranging from one to
two-and-a-half years for the options was used to determine the fair
value of options rendered. The weighted average fair value of the
options issued during the year was $0.10.
For fiscal year 2001, the Black-Scholes option-pricing model with a
risk-free interest rate of 5.6%, a volatility of -0-%, zero dividend
yield, and an expected life of one year for the options was used to
determine the fair value of options rendered. The weighted average fair
value of the options issued during the year was $0.13.
(12) SUBSEQUENT EVENTS (UNAUDITED):
For the period from January 1, 2003 to February 10, 2003, the Company
received $80,500 through debt and equity financing.
The Company is negotiating a potential merger transaction pursuant to
these negotiations and has made a good faith deposit of $100,000.