iLearning, Inc.
Consolidated financial statements
As of December 31, 2000
Together with report of independent public accountants
Report of independent public accountants
To the Board of Directors of
iLearning, Inc.:
We have audited the accompanying consolidated balance sheet of iLearning, Inc.
and subsidiary (the Company) as of December 31, 2000, and the related
consolidated statements of operations, redeemable securities and stockholders'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of iLearning, Inc. and subsidiary
as of December 31, 2000, and the results of their operations and their cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
Baltimore, Maryland
March 27, 2001
iLearning, Inc.
Table of contents
Consolidated balance sheet
As of December 31, 2000......................................................1
Consolidated statement of operations
For the year ended December 31, 2000.........................................2
Consolidated statement of redeemable securities and stockholders' deficit
For the year ended December 31, 2000.........................................3
Consolidated statement of cash flows
For the year ended December 31, 2000.........................................4
Notes to consolidated financial statements
December 31, 2000............................................................5
iLearning, Inc.
Consolidated balance sheet
As of December 31, 2000
Assets
Current assets:
Cash and cash equivalents $ 780,857
Accounts receivable 100,139
Inventory 103,491
Prepaid expenses 186,681
------------
Total current assets 1,171,168
------------
Property and equipment, net 172,462
Software development costs, net 443,675
Acquired intangibles, net 890,092
Other assets, net 236,828
------------
Total assets $ 2,914,225
============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 2,029,671
Accrued expenses 268,947
Deferred revenue 568,400
Current portion of note payable 285,000
------------
Total current liabilities 3,152,018
Note payable, net of current portion 570,000
------------
Total liabilities 3,722,018
------------
Commitments and contingencies
Redeemable convertible preferred stock:
Series A convertible preferred stock,
convertible into one share of common stock,
liquidation preference of $5.56 per share
plus accrued dividends, $.01 par value,
10,000,000 shares authorized, 4,003,388
issued and outstanding 12,306,870
Stockholders' deficit:
Class A common stock, $.01 par value,
25,000,000 shares authorized, 5,404,000
shares issued and outstanding 54,040
Additional paid-in capital 661,569
Accumulated deficit (13,830,272)
------------
Total stockholders' deficit (13,114,663)
------------
Total liabilities and stockholders' deficit $ 2,914,225
============
The accompanying notes are an integral part of this consolidated statement.
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iLearning, Inc.
Consolidated statement of operations
For the year ended December 31, 2000
Revenues $ 1,152,224
Costs of revenues 2,260,140
-----------
Gross margin (1,107,916)
-----------
Operating expenses:
Product development 794,980
Sales and marketing 3,169,595
General and administrative 4,289,282
-----------
Total operating expenses 8,253,857
-----------
Loss from operations (9,361,773)
Interest income, net 34,994
-----------
Net loss $(9,326,779)
===========
The accompanying notes are an integral part of this consolidated statement.
2
iLearning, Inc.
Consolidated statement of redeemable securities and stockholders' deficit
For the year ended December 31, 2000
Stockholders' deficit
------------------------------------------------------------
Redeemable Convertible
Preferred Stock Common stock
------------------------ Members' ------------------------ Subscription
Shares Amount Capital Shares Amount receivable
--------- ------------ ------------ --------- ------------ ------------
Balance, December 31, 1999a -- $ -- $ 1,887,500 -- $ -- $ (210,000)
Issuance of common stock
in iLearning, Inc. -- -- (1,887,500) 5,402,000 54,020 210,000
Issuance of Redeemable
Convertible Preferred Stock 4,003,388 11,129,419 -- -- -- --
Issuance of common stock
for services -- -- -- 2,000 20 --
Accretion of Redeemable
Convertible Preferred Stock -- 1,177,451 -- -- -- --
Net loss -- -- -- -- -- --
--------- ------------ ------------ --------- ------------ ------------
Balance, December 31, 2000a 4,003,388 $ 12,306,870 $ -- 5,404,000 $ 54,040 $ --
========= ============ ============ ========= ============ ============
Stockholders' deficit
---------------------------------------------
Additional Total
paid-in Accumulated stockholders'
capital deficit equity (deficit)
------------ ------------ ----------------
Balance, December 31, 1999a $ -- $ (4,503,493) $ (2,825,993)
Issuance of common stock
in iLearning, Inc. 1,833,480 -- 210,000
Issuance of Redeemable
Convertible Preferred Stock -- -- --
Issuance of common stock
for services 5,540 -- 5,560
Accretion of Redeemable
Convertible Preferred Stock (1,177,451) -- (1,177,451)
Net loss -- (9,326,779) (9,326,779)
------------ ------------ ------------
Balance, December 31, 2000a $ 661,569 $(13,830,272) $(13,114,663)
============ ============ ============
3
iLearning, Inc.
Consolidated statement of cash flows
For the year ended December 31, 2000
Cash flows from operating activities:
Net loss $ (9,326,779)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 271,924
Noncash general and administrative expense 5,560
Changes in assets and liabilities:
Accounts receivable (15,521)
Prepaid expenses (86,681)
Inventory (103,491)
Other assets (225,427)
Accounts payable (1,199,788)
Accrued liabilities 185,029
Deferred revenue 568,400
------------
Net cash flows used in operating activities (9,926,774)
------------
Cash flows from investing activities:
Purchase of property and equipment (146,145)
Software development costs (543,302)
------------
Net cash flows used in investing activities (689,447)
------------
Cash flows from financing activities:
Repayments on notes payable (285,000)
Proceeds from issuance of preferred stock 11,129,419
Proceeds from collection of subscription receivable 210,000
------------
Net cash flows provided by financing activities 11,054,419
------------
Net increase in cash and cash equivalents 438,198
Cash and cash equivalents, beginning of year 342,659
------------
Cash and cash equivalents, end of year $ 780,857
============
The accompanying notes are an integral part of this consolidated statement.
4
iLearning, Inc.
Notes to consolidated financial statements
December 31, 2000
1. Organization and nature of business
iLearning, Inc.(iLearning or the Company, formerly Leaplt.com, Inc.) was
incorporated in the State of Delaware on April 14, 2000. A Subscription
Agreement between LeapIt.com, LLC and LeapIt.com Inc., was entered into on April
20, 2000 whereby LeapIt.com, LLC subscribed to purchase common shares of
LeapIt.com, Inc., in consideration for the transfer, conveyance and delivery of
all the assets and liabilities of LeapIt.com, LLC to the Company as of its March
31, 2000 balance sheet. The transaction was intended to qualify as a tax-free
exchange under Section 351 of the Internal Revenue Code of 1986, as amended. As
both entities had previously been under common control, this transaction has
been accounted for similar to a pooling of interests transaction, with
presentation of the transaction as if it occurred at the beginning of the period
with all assets and liabilities recorded at their carryover basis.
ILearning, Inc. provides innovative training and educational solutions for
businesses and organizations. From content to delivery, iLearning's products are
customized to meet each organization's educational needs. iLearning's firewall
friendly, proprietary technology uniquely positions the company to deliver
relevant content at near full motion frame rate, with as little as a 28.8K
dial-up connection. iLearning provides 1) the backend technology, implementation
and support, 2) an instructional content development and delivery service, and
3) the front-end administrative tools for client management of site content and
member databases.
iLearning, Inc. was originally founded as LeapIt.com, Inc. with an initial focus
on the development and implementation of a consumer web-based information
technology career training and management platform. The LeapIt.com consumer web
site was launched in May 2000. Membership was over 70,000 by August and over
100,000 by the end of 2000. In order to build a membership base, all training on
the LeapIt.com web site was free to members in 2000 with a subscription fee
service to be introduced in 2001. It is this web site that serves as a working
portal that demonstrates the iPlatform technology and product line which
iLearning brings to its business and organization client base. iLearning signed
its first iPlatform client in November 2000.
As of January 1, 2000, LeapIt.com, LLC entered into a Stock Purchase Agreement
to acquire all of the issued and outstanding shares of capital stock of
LANWrights, Inc., a Texas corporation. The purchase price for the shares was
$1,140,000 payable 25 percent at closing and 25 percent on each of January 1,
2001, 2002 and 2003, with the final payment subject to offset for an EBITDA
adjustment. The acquisition was accounted for under the purchase method of
accounting, whereby the purchase price was allocated to net assets and acquired
intangibles for $93,000 and $1,047,000, respectively. The LANWrights, Inc.
acquisition was included and made a part of the Assignment and Assumption
Agreement associated with the Subscription Agreement between LeapIt.com, LLC and
the Company. LANWrights, Inc. provides network-oriented writing, training, and
consulting and supplies accurate, timely information on cutting-edge
technologies and certification. LANWrights is known for developing technical
materials for companies such as Microsoft, Novell, GTE, Symantec and SUN
Microsystems. Substantially all of
5
iLearning's revenues in 2000 were derived from services performed by its
LANWrights subsidiary.
Since inception, the Company has incurred an accumulated deficit of
approximately $13.8 million. During 2000, the Company experienced operating
losses and negative cash flows from operations due to software development and
sales and marketing expenses associated with developing, branding and launching
its technology. In 2000, the Company raised approximately $13 million in
funding, consisting of: $7.5 million in venture funding and $5.5 million in
private equity financing. The Company intends on raising additional capital
during fiscal 2001. Management remains committed to taking all appropriate and
necessary actions to effect timely cost reductions and cash preservation in the
event management's revenue and cash flow expectations are not substantially met
during fiscal 2001. Management believes that, based on its plans, including
raising new capital, the Company will have sufficient cash to support operations
during fiscal 2001. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. However, iLearning
cannot assure that it will be able to obtain the financing necessary to continue
to support its business.
2. Summary of accounting policies:
Principles of consolidation
The consolidated financial statements include the accounts of iLearning, Inc.
and its subsidiary. All material intercompany accounts and transactions have
been eliminated in consolidation.
Use of estimates
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, 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
Cash and cash equivalents consist of cash on hand and highly liquid investments
with an original maturity of three months or less when purchased.
Concentration of credit risk
Financial instruments which potentially expose the Company to a concentration of
credit risk consist primarily of trade accounts receivable. The Company did not
record an allowance for doubtful accounts in 2000 as an allowance was not
considered necessary. Trade accounts receivable at year-end were current.
Inventory
Inventory consists of courseware books and other peripherals sold as
supplemental materials for the Company's online courses. Inventory is valued at
the cost of acquisition and relieved against cost of revenue for sales, obsolete
products and shortages discovered in physical inventory procedures.
6
Prepaid Assets
Prepaid assets consisted of the following as of December 31, 2000:
Prepaid content license fees $179,375
Other prepaid assets 7,306
--------
Total prepaid assets $186,681
========
Property and equipment
Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
assets, generally three to seven years for furniture and equipment, and over the
shorter of the estimated useful life of leasehold improvements or the related
lease term for such improvements. Upon the disposition of assets, the costs and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in the consolidated statement of operations.
Expenditures for repairs and maintenance are expensed as incurred.
Software development costs
The Company follows the guidelines established by Statement of Financial
Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." The Company's policy is to
expense the costs incurred prior to the establishment of technological
feasibility as product development costs. The establishment of technological
feasibility and the ongoing assessment of recoverability of software development
costs requires considerable judgment by management with respect to certain
external factors, including anticipated future gross revenue, estimated economic
life and changes in technologies. Based on the Company's product development
process, technological feasibility is established upon completion of a working
model and related testing. Development costs incurred beyond the point of
technological feasibility are capitalized. Capitalized software development
costs currently are all related to the Company's proprietary iPlatform
technology and were incurred after the Company developed a working model in 2000
and until the iPlatform technology was first launched in May 2000. Amortization
begins when the product/functionality is available for general release and is
computed using the straight-line method over the estimated economic life of
three years.
Development costs incurred to establish technological feasibility are reflected
as product development costs on the accompanying statement of operations, net of
any capitalized development costs and amounted to approximately $735,000 for the
year ended December 31, 2000.
Other assets
Other assets consist principally of content licenses that provide the Company
with the right to resell the content through its website.
7
Long-lived assets
The Company assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
asset's carrying value unlikely. An impairment loss would be recognized when the
sum of the expected future undiscounted net cash flows is less than the carrying
amount of the asset. The Company has identified no such impairment losses.
Deferred revenue
Deferred revenues are related to the sale of software licenses and deposits for
services to be performed. Software license revenues were deferred in accordance
with Statement of Position 97-2, "Software Revenue Recognition". The Company
expects to recognize the license fee revenue on a straight-line basis over the
term of our licensing agreements. The Company expects to recognize retainer
revenues in 2001.
Fair value of financial instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, prepaid expenses, accounts payable, accrued
expenses and notes payable. In management's opinion, the carrying amount of
these financial instruments approximated their fair values at December 31, 2000.
Revenue recognition
Revenue sources for 2000 consist of product (supplemental courseware books and
peripherals) sales, royalty income and services income. Product sales revenue is
derived completely from online sales. Revenues for product sales are recorded on
a monthly basis as products are shipped. Royalty revenue is recognized at the
time royalty checks are received from the third party agent due to uncertainties
over the completion of the earnings process until that time. Revenue from
consulting services is recognized when the work is completed or on a time and
materials basis over the course of the engagement.
Customers
The Company's customers consist primarily of national and international
associations, training/staffing businesses, educational enterprises and
corporate users.
Cost of revenues
Cost of revenues include software enhancement costs, consulting direct costs,
content conversion fees, content acquisition and license fees, hosting and
product delivery, fulfillment and maintenance.
Advertising costs
Advertising costs for producing and communicating advertising are expensed when
incurred. Total advertising expense for the year ended December 31, 2000,
including initial branding and development of collateral, was $2,652,908.
8
Accounting for income taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which
requires that deferred tax assets and liabilities be recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The recognition of net deferred assets is reduced,
if necessary, by a valuation allowance for the amount of any tax benefits that,
based on available evidence, are not expected to be realized. Deferred tax
assets and liabilities are measured using expected tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income tax expense in the period that includes the
enactment date.
3. Software development costs
Activity related to software development costs consisted of the following during
the year ended December 31, 2000:
Balance, January 1, 2000 $ --
Costs capitalized 543,302
Amortization during the year (99,627)
---------
Balance, December 31, 2000 $ 443,675
=========
4. Property and equipment
Property and equipment consisted of the following as of December 31, 2000:
Equipment $ 142,580
Furniture and fixtures 71,012
Leasehold improvements 18,020
---------
231,612
Less- accumulated depreciation and amortization (59,150)
---------
Property and equipment, net $ 172,462
=========
Depreciation and amortization expense related to property and equipment was
$51,643 in 2000.
5. Accrued liabilities
Accrued liabilities consisted of the following as of December 31, 2000:
Accrued bonus and payroll $204,166
Deferred salaries payable 62,394
Other accrued liabilities 2,387
--------
Total accrued liabilities $268,947
========
9
6. Redeemable convertible preferred stock:
In April 2000, the Company raised $11.1 million through the sale of 4,003,388
shares of its Series A Redeemable Convertible Preferred Stock (the Series A
Stock). The Series A Stock is redeemable at the option of the holder for $5.56
per share plus all accumulated and unpaid dividends at any time after April 20,
2005, and before April 20, 2006, if the Company receives a notice from at least
50 percent of the outstanding shares of the Series A Stock. Additionally,
holders of the Series A Stock are entitled to receive dividends at a rate of
$0.139 per share when and if declared by the Board of Directors of the Company.
The carrying amount of the securities is being accreted to the redemption value
of $5.56 per share plus accrued dividends using the effective interest method.
The accretion period is from the date of issuance of the Series A Stock to the
earliest date at which these securities become redeemable at the option of the
holder.
Each share of Series A Stock is convertible, at anytime by the holder, into one
share of common stock. The Series A stockholders are also entitled to
liquidation preference to $2.78 per share. The Series A stockholders have one
vote for each share of Series A Stock owned.
7. Stock-based compensation:
The Company has a stock option plan (the Plan) authorizing the grant of options
to employees, consultants and nonemployee directors. Under the Plan, the Company
may grant options to purchase up to 2,200,000 shares of common stock. Stock
options expire ten years form the date granted and vest over periods ranging
from six months to four years. During the year ended December 31, 2000, the
Company granted options to purchase 435,500 shares in accordance with the Plan.
Shares available for future grants amounted to 1,764,500 as of December 31,
2000. The Plan also allows for the granting of nonqualified options, restricted
stock and restricted stock units.
The Company applies APB Option No. 25 and related interpretations in accounting
for the Plan. During the year ended December 31, 2000, the Company granted
options with an exercise price equivalent or above the fair market value of the
stock at the date of grant. Had compensation expense for the Company's
stock-based compensation plan been determined based on the fair value of the
options at the grant dates for awards under the Plan consistent with the method
of Statement of Financial Accounting Standards No. 123, "Stock-Based
Compensation" (SFAS No. 123), the Company's pro forma net loss would have been
changed to the pro forma amounts indicated below:
Net loss:
As reported $(9,326,779)
Pro forma (9,338,057)
10
A summary of qualified option transactions during the year ended December 31,
2000, is as follows:
Weighted
average
exercise
Options price
------- --------
Outstanding, December 31, 1999 -- $ --
2000 activity:
Granted 435,500 2.42
Forfeited 31,500 2.78
------- -------
Outstanding, December 31, 2000 404,000 $ 2.39
======= =======
At December 31, 2000, there were 61,300 qualified options that were exercisable.
The weighted average fair value of qualified options granted to employees during
the year ended December 31, 2000, was $0.19 per share. The qualified options
granted during the year ended December 31, 2000, were granted at an exercise
price ranging from $2.00 to $2.78 per share and had a weighted average remaining
contractual life of 9.36 years.
The Company has computed, for pro forma disclosure purposes, the value of all
options granted during the year ended December 31, 2000, using the Black-Scholes
option pricing model as prescribed by SFAS No. 123 and the following weighted
average assumptions:
Risk-free interest rate 6.0%
Expected life 5 years
Volatility 0.01%
Dividend rate 0%
8. Income taxes:
At December 31, 2000, the Company had approximately $8.2 million of tax net
operating loss carryforwards (NOLs) which expire in the year 2020. SFAS No. 109
requires that the tax benefit of such NOLs be recorded as an asset to the extent
that management assesses the utilization of such NOLs to be "more likely than
not". Realization of the future tax benefits is dependent on the Company's
ability to generate taxable income within the carryforward period and also is
limited under certain circumstances, if the Company has a change in control, as
defined. Future levels of operating income are dependent upon general economic
conditions, including interest rates and general levels of economic activity,
competitive pressure on sales and margins and other factors beyond the Company's
control. Therefore, no assurance can be given that sufficient taxable income
will be generated for full utilization of the NOLs.
Based on the Company's history of earnings, future earnings of the Company may
not be sufficient to utilize these NOLs prior to their expiration. Accordingly,
the Company has recorded a deferred tax asset and a valuation allowance of
$3,531,327 relating to the net deferred tax assets of the Company. The Company
will continue to evaluate the likelihood of future profits and the necessity of
future adjustments to the deferred tax asset valuation allowance.
11
The difference between the recorded income tax benefit and the "expected" tax
benefit, based on the statutory federal income tax rate, is as follows as of
December 31, 2000:
Tax benefit at federal statutory rates $ 3,171,105
State income taxes, net of federal income tax effect 419,705
Other, net (59,483)
Valuation allowance (3,531,327)
-----------
Benefit for income taxes $ --
===========
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consist of the following:
Deferred tax assets
Deferred revenue $ 192,500
Amortization of software development costs 59,712
Net operating loss 3,147,655
Accrued liabilities 92,470
Amortization of organization costs 38,990
-----------
Total deferred tax assets 3,531,327
Valuation allowance (3,531,327)
-----------
Net deferred tax asset $ --
===========
9. Employee benefit plan
The Company has a 401(k) Profit Sharing Plan (the 401(k) Plan) available to all
employees meeting certain eligibility criteria which permits participants to
contribute up to certain limits as established by the Internal Revenue Service.
The 401(k) Plan provides for discretionary matching contributions by the Company
in an amount to be determined on an annual basis. In 2000, the Company did not
match employee contributions.
10. Related parties
In 1999, iLearning entered into a Course Conversion and Hosting Agreement (the
Agreement) with an entity in which one of iLearning's investors owns a voting
interest, pursuant to which the vendor would provide certain courseware
conversion and hosting services to iLearning. Pursuant to the terms of the
Agreement, iLearning retains all intellectual property rights of the converted
courses. Expenses incurred by iLearning for services performed by the vendor
under the Agreement were $1,750,000 in 2000.
In November 2000, iLearning entered into a one-year renewable Training Product
Sales Representative Agreement with an entity in which one of iLearning's
investors owns a minority interest, pursuant to which the entity will market and
sell iLearning courses in consideration for revenue sharing proceeds. Revenues
will be recognized on a monthly basis, based on actual courses sold.
12
In November 2000, iLearning entered into a Master Web Site Development and
Hosting Services Agreement with an entity controlled by one of iLearning's
investors, pursuant to which iLearning has agreed to develop and operate the
customer's web site portal. The terms of the agreement are similar to those of
other Master Web Site Development and Hosting Services Agreements entered into
with other third parties. Revenues will be recognized over the five-year term of
the agreement. There was no revenue recognized in 2000 related to this
agreement.
11. Commitments and contingencies:
Operating leases
The Company leases office space and certain office equipment under noncancelable
operating leases expiring through 2004. Future minimum annual rental commitments
under the lease agreements for the years ending December 31 are as follows:
2001 $58,615
2002 3,173
2003 3,334
2004 2,002
-------
Total minimum lease payments $67,124
=======
Rent expense for the year ended December 31, 2000, was $119,931.
Litigation
The Company, from time to time, is involved in routine legal matters incidental
to its normal operations. In management's opinion, the resolution of such
matters will not have a material adverse effect on the Company's consolidated
financial condition, results of operations or liquidity.
12. Subsequent events:
In January 2001, the Company entered into a three-year initial term Reseller
Agreement with a related party to the Company. The agreement provides for
initial non-refundable fees to the Company of $1,100,000 and on-going revenue
sharing income.
In March 2001, iLearning entered into a Master Services Agreement with a major
national association to provide software and website development (its iPlatform
product), hosting and consulting services. The agreement has an initial term of
six years, and the Company anticipates substantial revenues resulting from the
agreement.
In March 2001, the Company raised $2.0 million through the sale of 719,424
shares of its Series A Redeemable Convertible Preferred Stock to a third party.
This instrument has terms consistent with the Series A Stock issued in 2000.
13