SHEP TECHNOLOGIES INC.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States Dollars)
(Unaudited, Prepared by Management)
JUNE 30, 2003
SHEP TECHNOLOGIES INC.
(A Development Stage Company)
Consolidated Balance Sheets
(Expressed in United States Dollars)
As at June 30, 2003
(Unaudited, Prepared by Management)
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ASSETS |
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Going Concern(note 2)
Subsequent event (note 13)
On behalf of the Board: |
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The accompanying notes are an integral part of these consolidated financial statements.
SHEP TECHNOLOGIES INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Expressed in United States Dollars)
For the Period Ended June 30, 2003
(Unaudited, Prepared by Management)
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The accompanying notes are an integral part of these consolidated financial statements.
SHEP TECHNOLOGIES INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Expressed in United States Dollars)
For the Period Ended June 30, 2003
(Unaudited, Prepared by Management)
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The accompanying notes are an integral part of these consolidated financial statements.
SHEP TECHNOLOGIES INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Expressed in United States Dollars)
For the Period Ended June 30, 2003
(Unaudited, Prepared by Management)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements do not include all information and footnote disclosures required for an annual set of financial statements under United States generally accepted accounting principles. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows as at June 30, 2003 and for all periods presented, have been included. Interim results for the six-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year as a whole.
The unaudited consolidated balance sheets, statements of operations and statements of cash flows include the accounts of the Company and its direct and indirect wholly-owned subsidiaries: SHEP Limited, an Isle of Man corporation; SHEP Technology, Inc., a Maine corporation; and SHEP Technologies, Inc., a Delaware Corporation. These financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information. The accounting principles used in these financial statements are those used in the preparation of the Company's audited financial statements for the year ended December 31, 2002.
These financial statements should be read in conjunction with the audited annual financial statements and notes thereto, as included in the Company's annual report for the fiscal year ended December 31, 2002. These consolidated financial statements also comply, in all material respects, with Canadian generally accepted accounting principles with respect to recognition, measurement and presentation.
2. Going Concern
These consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America with the on-going assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation. However, certain conditions noted below currently exist which raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.
The operations of the Company have primarily been funded by the issuance of capital stock and debt. Continued operations of the Company are dependent on the Company's ability to complete additional equity financings or generate profitable operations in the future. Management's plan in this regard is to secure additional funds through future equity financings. Such financings may not be available or may not be available on reasonable terms.
June 30, | December 31, | |
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3. Stock-based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to account for stock-based compensation for employees, directors and officers using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, compensation cost for relevant stock options issued in the period is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee is required to pay for the stock.
The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS 123 and the consensus in Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services".
The following table illustrates the effect on loss and loss per common share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation for employee, directors and officers.
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4. Capital Assets
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5. Intangible Assets
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6. Loans Payable
Loans payable consist of two loans, one for $60,000 and one for $40,000, both bearing interest at 8% per annum, unsecured and due on the earlier of January 31, 2004 or on the date the Company receives debt or equity financing of at least $1,000,000. Interest in the amount of $3,850 has been accrued at June 30, 2003.
7. Capital Stock
Common stock
The common stock of the Company are all of the same class, are voting and entitle stockholders to receive dividends. In the event of a liquidation, dissolution or winding up, the common stockholders are entitled to receive equal distributions of net assets or any dividends which may be declared.
On February 28, 2003, the Company completed a private placement consisting of 245,667 units at a price of $0.75 per unit for proceeds of $184,250. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.25 per share for a period of one year.
On April 3, 2003, the Company completed a private placement consisting of 588,235 units at a price of $0.85 per unit for gross proceeds of $500,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.25 per share for a period of one year. The Company incurred $65,000 of share issuance costs associated with the private placement.
On May 23, 2003, the Company completed a private placement consisting of 438,597 units at a price of $0.57 per unit for gross proceeds of $250,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.25 per share for a period of two years. The Company incurred $32,500 of share issuance costs associated with the private placement.
On June 4, 2003, the Company issued 50,000 shares of common stock as compensation to a consultant in consideration for services rendered at a price of $0.69 per share for a total of $34,500 in consulting expenses.
On June 11, 2003, the Company completed a private placement consisting of 614,036 units at a price of $0.57 per unit for gross proceeds of $350,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.25 per share for a period of two years. The Company incurred $45,000 of share issuance costs associated with the private placement.
On June 24, 2003, the Company received proceeds of $166,666 for the exercise of 133,333 warrants at a price of $1.25 per share.
On June 24, 2003, an officer and director of the Company exercised his 350,000 vested stock options in a cashless exercise. The stock was trading at a price of $2.85 per share, and his exercise prices was $1.00 per share, resulting in an issuance of 227,192 shares and stock-based compensation expense of $647,500.
Warrants
As of June 30, 2003, the following warrants are outstanding:
- 511,333 warrants exercisable at a price of $1.25 per share expiring September 12, 2003.
- 122,834 warrants exercisable at a price of $1.25 per share expiring February 28, 2004.
- 294,118 warrants exercisable at a price of $1.25 per share expiring April 3, 2004.
- 219,299 warrants exercisable at a price of $1.25 per share expiring May 23, 2005.
- 307,018 warrants exercisable at a price of $1.25 per share expiring June 11, 2005.
Stock Options
On October 8, 2002, the Company adopted a stock incentive plan (the "2002 Stock Plan") to provide incentives to employees, directors and consultants. At the Company's annual general meeting, held November 22, 2002, the Company's shareholders approved the 2002 Stock Plan which provides for the issuance of up to 2,200,000 options of common stock with the maximum term of ten years. The board of directors has the exclusive power over the granting of options and their vesting provisions.
As of June 30, 2003, the Company had granted 1,875,000 options to employees, directors and consultants. The options have six-year terms, an exercise price of $1.00 per share and vest in varying amounts at the discretion of the board of directors. The fair value of the options granted in the six months ended June 30, 2003 was $0.91 per share based on the Black-Scholes option-pricing model. The fair value of options granted to consultants and non-directors of the Company recognized during the six months ended June 30, 2003 was $32,000 which has been recorded as consulting fees in the period.
On June 24, 2003, an officer and director of the Company exercised his 350,000 vested stock options in a cashless exercise. The stock was trading at a price of $2.85 per share, and his exercise prices was $1.00 per share, resulting in an issuance of 227,192 shares and stock-based compensation expense of $647,500.
A summary of the 2002 Stock Plan activity during the six months ended June 30, 2003, with comparative figures for 2002, is as follows:
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A summary of stock options outstanding at June 30, 2003 is as follows:
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The Company uses the Black-Scholes option-pricing model to compute estimated fair value, based on the following assumptions:
Risk-free interest rate | 4.5% |
8. Related Party Transactions
The Company entered into the following transactions with related parties during the period ended June 30, 2003:
- Paid or accrued management fees of $26,994 (2002 - $61,128) to companies controlled by directors of the Company.
- Paid or accrued administration fees included in general and office expenses of $8,755 (2002 - $Nil) to a company controlled by a director of the Company.
- Paid or accrued management fees of $22,500 (2002 - $Nil) to a company controlled by an officer and director of the Company.
- Paid or accrued rent and office costs of $18,967 (2002 - $Nil) to a company controlled by an officer and director of the Company.
- Paid or accrued consulting fees of $49,362 (2002 - $Nil) to a company controlled by an officer and director of the Company.
- Paid or accrued consulting fees of $10,211 (2002 - $Nil) to a company controlled by a director of the Company.
- An officer and director of the Company exercised his 350,000 vested stock options in a cashless exercise. The stock was trading at a price of $2.85 per share, and his exercise prices was $1.00 per share, resulting in an issuance of 227,192 shares and stock-based compensation expense of $647,500.
These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
9. Accounts payable - related parties, as at June 30, 2003:
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10. Selling, General and Administrative
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Financial Statement Presentation:
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11. SEGMENT INFORMATION
The Company operates in one business segment being the development of stored hydraulic energy propulsion technology. The Company's operations are conducted in three geographic segments being the United Kingdom ("UK"), theUnited States of America ("USA") and Canada. Sales totaling $0 (2002 - $22,432) were made to one customer in the USA for the period ended June 30. This represented 100% (2002: 100%) of the Company's total sales.
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12. Supplemental Disclosure With Respect To Cash Flows
Significant non-cash transactions for the period ended June 30, 2003 consisted of:
- On June 4, 2003, the Company issued 50,000 shares of common stock as compensation to a consultant in consideration for services rendered at a price of $0.69 per share for a total of $34,500 in consulting expenses.
- On June 24, 2003, an officer and director of the Company exercised 350,000 vested stock options in a cashless exercise. The stock was trading at a price of $2.85 per share, and his exercise prices was $1.00 per share, resulting in an issuance of 227,192 shares and stock-based compensation expense of $647,500.
13. Subsequent Event
Private Placement
On July 15, 2003, the Company completed a private placement consisting of 384,615 units at a price of $1.30 per unit for gross proceeds of $500,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant (or 192,308 warrants) whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.50 per share for a period of one year. The Company incurred $65,000 of share issuance costs associated with the private placement.
SHEP TECHNOLOGIES INC.
QUARTERLY REPORT - FORM 51-901F
For the Quarter Ended June 30, 2003
(All amounts expressed in United States Dollars, unless otherwise stated)
SHEP TECHNOLOGIES INC.
("The Company")
SCHEDULE A: FINANCIAL STATEMENTS
See attached unaudited consolidated financial statements for the period ended June 30, 2003.
SCHEDULE B: SUPPLEMENTARY INFORMATION
All amounts in the unaudited consolidated financial statements and in this Form 51-901F are stated in United States Dollars, unless otherwise explicitly stated.
1. Analysis of expenses and deferred costs.
See attached unaudited consolidated financial statements for the quarter ended June 30, 2003.
2. Related party transactions.
See attached notes to the unaudited consolidated financial statements for the quarter ended June 30, 2003.
3. Summary of securities issued and options granted during the period:
a) Summary of securities issued during the quarter:
On April 3, 2003, the Company completed a private placement consisting of 588,235 units at a price of $0.85 per unit for gross proceeds of $500,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.25 per share for a period of one year. The Company incurred $65,000 of share issuance costs associated with the private placement.
On May 23, 2003, the Company completed a private placement consisting of 438,597 units at a price of $0.57 per unit for proceeds of $250,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.25 per share for a period of one year. The Company incurred $32,500 of share issuance costs associated with the private placement.
On June 4, 2003, the Company issued 50,000 shares of common stock as compensation to a consultant in consideration for services rendered at a price of $0.69 per share for a total of $34,500 in consulting expenses.
On June 11, 2003, the Company completed a private placement consisting of 614,036 units at a price of $0.57 per unit for proceeds of $350,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.25 per share for a period of one year. The Company incurred $45,000 of share issuance costs associated with the private placement.
On June 24, 2003, the Company received proceeds of $166,666 for the exercise of 133,333 warrants at a price of $1.25 per share.
On June 24, 2003, an officer and director of the Company exercised his 350,000 vested stock options in a cashless exercise. The stock was trading at a price of $2.85 per share, and his exercise prices was $1.00 per share, resulting in an issuance of 227,192 shares and stock-based compensation expense of $647,500.
b) Summary of stock options granted during the quarter:
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Clive A. Bowen | Director | 100,000 | $1.00 | 20-May-03 | 3-Jan-09 |
Paul Davies | Consultant | 50,000 | $1.00 | 11-Jun-03 | 10-Jun-09 |
Peter Chalk | Employee | 25,000 | $1.00 | 11-Jun-03 | 10-Jun-09 |
Dominic Chappell | Consultant | 100,000 | $1.00 | 11-Jun-03 | 10-Jun-09 |
Hugh Frazer | Consultant | 50,000 | $1.00 | 11-Jun-03 | 10-Jun-09 |
PacWest Group | Consultant | 50,000 | $1.00 | 11-Jun-03 | 10-Jun-09 |
Clive A Bowen | Director | 500,000 | $1.00 | 11-Jun-03 | 10-Jun-09 |
Total | 875,000 |
4. Summary of securities as at the end of the reporting period:
a) Description of authorized share capital including number of shares for each class, dividend rates on
preferred shares and whether or not cumulative redemption and conversion provisions:
See attached unaudited consolidated financial statements for the quarter ended June 30, 2003.
b) Number and recorded value for shares issued and outstanding:
See attached unaudited consolidated financial statements for the quarter ended June 30, 2003.
Description of options, warrants and convertible securities outstanding, including any number or amount, exercise or conversion price and expiry date, and any recorded value:
A summary of stock options outstanding at June 30, 2003 is as follows:
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4. A summary of warrants outstanding at June 30, 2003 follows:
As of June 30, 2003, the following warrants are outstanding:
- 511,333 warrants exercisable at a price of $1.25 per share expiring September 12, 2003.
- 122,834 warrants exercisable at a price of $1.25 per share expiring February 28, 2004.
- 294,118 warrants exercisable at a price of $1.25 per share expiring April 3, 2004.
- 219,299 warrants exercisable at a price of $1.25 per share expiring May 23, 2005.
- 307,018 warrants exercisable at a price of $1.25 per share expiring June 11, 2005.
As of June 30, 2003, the following convertible securities are outstanding :
Convertible securities - none.
d) Number of shares in each class of shares subject to escrow or pooling agreements:
There were no shares subject to escrow or pooling arrangements at June 30, 2003.
5. Names of the directors and officers as at the date this report was signed and filed.
Directors: | Bowen, Clive A. - Director |
Officers: | Burke, Malcolm P. - President and CEO |
SHEP TECHNOLOGIES INC.
("The Company")
SCHEDULE C: MANAGEMENT DISCUSSION AND ANALYSIS
Overview
The Company's results include the accounts of the SHEP Technologies Inc. and its direct and indirect wholly-owned subsidiaries: SHEP Limited, an Isle of Man corporation; SHEP Technology, Inc., a Maine corporation; and SHEP Technologies, Inc., a Delaware Corporation.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis of the financial condition and operating results of the Company for the three month periods ended June 30, 2003 and June 30, 2002 and should be read in conjunction with the unaudited consolidated financial statements and notes attached hereto. These are the results of the SHEP Limited business acquired as at September 12, 2002, which for generally accepted accounting principles in the United States of America, require that the historical comparative results of the accounting acquirer become the results of the legal parent.
The Company's financial statements included herein were prepared in accordance with generally accepted accounted principles for the United States of America. They also comply, with respect to recognition, measurement and presentation, without requiring material adjustments, with generally accepted accounting principles in Canada
The Company is in the development stage and has recorded limited revenues. In the past, the Company has acquired necessary capital through the limited issuance of its common shares, increasing indebtedness and through advances from related parties. There is no assurance that these sources will continue to be available in future operating periods.
All amounts in the financial statements and in this Form 51-901F are stated in United States Dollars, unless explicitly stated otherwise.
OPERATING RESULTS
Comparison of the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002:
The net loss for the three months ended June 30, 2003 was $1,248,073 compared to a net loss for the same period in 2002 of $301,717. The loss increased primarily due to recording the impact of $714,000 in non-cash compensation expenses related to the 2002 stock option plan ($647,500 regarding a cashless exercise, $34,500 in consulting fees paid with stock, and $32,000 regarding options issued to non-employee, non-director consultants). In addition to the compensation expense impact in the period, office and general and professional fees increased relative to the same period in the prior year (office and general: 2003 - $60,610 and 2002 - $21,933; professional fees: 2003 - $89,500 and 2002- $11,262) due to the added filing and reporting costs associated with the public company, and added activity in the current period associated with corporate finance, legal, audit and filing fees associated with private placements and research and development project administration.
In the current period $120,293 of research and development was expensed pertaining the services of one R&D contractor, Pi Technology , a UK-based global leader in the design and development of automotive electronics and engine control software, including innovative control system technologies for the alternative fuels market.
LIQUIDITY AND CAPITAL RESOURCES
As at June 30, 2003, total cash was $510,411, current assets exceeded current liabilities by $259,856, and total assets exceeded total liabilities by $395,916. The Company has been actively seeking additional financings to support the furthering of its operations plan. In the three months ended June 30, 2003 the Company received four private placements for net proceeds after issuance costs of $957,500. In June 2003 133,333 warrants were exercised and an additional $166,666 in proceeds were received.
The Company is in the development stage and expects to remain in the development stage for the current operating year. Consequently, we expect no net funds to be generated from operations in the present operating year. The Company's current working capital is not sufficient to meet its business operating objectives. The Company's ability to satisfy projected working capital requirements is entirely dependent upon its ability to secure additional funding through public or private sales of securities, including equity securities of the Company. There is no assurance that the Company will be able to secure the necessary capital on terms acceptable to the Company or at all.
Capital expenditures in the form of development of a prototype platform vehicle are planned for the next 12 months amounting to $2,140,000. At this time discussions are ongoing with a number of potential sources of funding from a combination of private placements, government grants and other sources.
Operations outlook
During the current fiscal year, the Company is progressing through a pre-development planning project with Pi Technologies. The Company is continuing to negotiate with prospective funding sources with the goal of raising sufficient fund to support the significant capital expenditure program with Pi Technology which will include funds for the development of the SHEP prototype platform, for hiring UK based personnel, establishing a dedicated base of UK operations, continuing operations in the UK and in North America, and for maintaining public company activities from North America.
Investor Relations
Commencing on May 1, 2003, the Company entered into a month-to-month agreement and engaged the services of Pac West Group for investor relations and corporate communications services. The agreement provides for payment of a monthly fee to Pac West Group in the amount of $5,000 and 50,000 options in the common shares of the Company.
During quarter ended June 30, 2003, the Company also continued to use the services of Sundar Communications Group Inc. by extending their contract for a further three-month period. The contract for Sundar Communications, if not further extended, will expire on September 30, 2003.
Also during this period, officers of the Company continued to communicate directly with shareholders and prospective shareholders and financiers.
SUBSEQUENT EVENTS
On July 15, 2003, the Company completed a private placement consisting of 384,615 units at a price of $1.30 per unit for gross proceeds of $500,000. Each unit consists of one share of common stock and one-half of one non-transferable share purchase warrant (or 192,308 warrants) whereby each whole warrant entitles the holder to acquire one additional share of common stock at a price of $1.50 per share for a period of one year. The Company incurred $65,000 of share issuance costs associated with the private placement.