Exhibit 99.2 - Sterling Medivations, Inc. audited financial statements as of
December 31, 2000 and for the period from inception (January 13, 2000) through
December 31, 2000, together with the report of PricewaterhouseCoopers LLP
(Minneapolis, MN) with respect thereto.
STERLING MEDIVATIONS, INC.
(A Development Stage Company)
Report on Audit of Financial Statements
As of December 31, 2000 and for the Period
from Inception (January 13, 2000) Through
December 31, 2000
Report of Independent Accountants
To the Board of Directors and Stockholders of
Sterling Medivations, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations, cash flows and changes in stockholders' equity and comprehensive
loss present fairly, in all material respects, the financial position of
Sterling Medivations, Inc. (a development stage company) as of December 31,
2000, and the results of its operations and its cash flows for the period from
inception (January 13, 2000) through December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
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 incurred a loss and negative cash flows
from operations since inception and expects to require additional funds to
continue its operations through 2001, all of which raises substantial doubt
about the Company's 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.
/s/ PricewaterhouseCoopers LLP
March 30, 2001
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Sterling Medivations, Inc.
(A Development Stage Company)
Balance Sheet
As of December 31, 2000
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 653,126
Prepaid expenses 7,868
-----------
Total current assets 660,994
Furniture and equipment, net 5,928
Patents 94,642
-----------
Total assets $ 761,564
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,491
Accrued consulting expenses 13,720
-----------
Total liabilities 48,211
-----------
Stockholders' equity:
Common stock, $.001 par value, 6,000,000 authorized, 2,564,583 shares issued
and outstanding 2,565
Additional paid-in capital, common stock 18,476
Series A convertible preferred stock; $.001 par value; $1.00 per share liquidation
preference; 1,000,000 shares authorized, issued and outstanding 1,000
Additional paid-in capital, preferred stock 968,746
Deficit accumulated during development stage (277,434)
-----------
Total stockholders' equity 713,353
-----------
Total liabilities and stockholders' equity $ 761,564
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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Sterling Medivations, Inc.
(A Development Stage Company)
Statement of Operations
For the period from inception (January 13, 2000) through December 31, 2000
- -------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development $ 202,534
General and administrative 101,225
-----------
Total operating expenses 303,759
-----------
Operating loss (303,759)
Interest income 26,325
-----------
Net loss $ (277,434)
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
13
Sterling Medivations, Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity and Comprehensive Loss For the
period from inception (January 13, 2000) through December 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
---------------------------------------------------------------------
PRICE ADDITIONAL
PER PAID-IN
DATE DESCRIPTION SHARE SHARES STOCK CAPITAL
------- --------- ------ -----------
January 13, 2000 Issuance of common stock $ 0.007 2,550,000 $2,550 $11,326
for cash and equipment,
less offering costs
of $5,178
March 14, 2000 Convertible preferred stock $ 1.00
issued in exchange for
cash, less offering costs
of $30,254
July 17, 2000 Convertible preferred stock $ 1.00
issued in exchange
for cash
July 18, 2000 Issuance of common stock $ 0.20 14,583 15 2,902
for services
Stock compensation expense 4,248
Net and comprehensive loss
for the period from inception
(January 13, 2000) through
December 31, 2000
--------- ------ -------
Balances, December 31, 2,564,583 $2,565 $18,476
========= ====== =======
CONVERTIBLE PREFERRED STOCK DEFICIT
-------------------------------------- ACCUMULATED
ADDITIONAL DURING THE
PAID-IN DEVELOPMENT
DATE DESCRIPTION SHARES STOCK CAPITAL STAGE TOTAL
------ ------ ----------- ------------ ----------
January 13, 2000 Issuance of common stock $ 13,876
for cash and equipment,
less offering costs
of $5,178
March 14, 2000 Convertible preferred stock 195,000 $ 195 $164,551 164,746
issued in exchange for
cash, less offering costs
of $30,254
July 17, 2000 Convertible preferred stock 805,000 805 804,195 805,000
issued in exchange
for cash
July 18, 2000 Issuance of common stock 2,917
for services
Stock compensation expense 4,248
Net and comprehensive loss
for the period from inception
(January 13, 2000) through
December 31, 2000 $(277,434) (277,434)
--------- ------ -------- --------- ---------
Balances, December 31, 1,000,000 $1,000 $968,746 $(277,434) $ 713,353
========= ====== ======== ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14
Sterling Medivations, Inc.
(A Development Stage Company)
Statement of Cash Flows
For the period from inception (January 13, 2000) through December 31, 2000
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (277,434)
Reconciliation of net loss to net cash used in operating activities:
Depreciation 1,186
Stock compensation expense 7,165
Changes in operating assets and liabilities:
Prepaid expenses (7,868)
Accounts payable 18,024
Accrued consulting expenses 13,720
-----------
Net cash used in operating activities (245,207)
-----------
Cash flows from investing activities:
Purchase of furniture and equipment (2,895)
Patent costs (78,175)
-----------
Net cash used in investing activities (81,070)
-----------
Cash flows from financing activities:
Issuance of Series A convertible preferred stock 1,000,000
Stock issuance costs (35,432)
Proceeds from sale of common stock 14,835
-----------
Net cash provided by financing activities 979,403
-----------
Net increase in cash 653,126
Cash:
Beginning of period --
-----------
End of period $ 653,126
===========
Noncash financing activities:
In January 2000, the Company issued common stock in exchange for $4,219 of
equipment
At December 31, 2000, there were $16,467 of patent costs accrued in accounts
payable
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
15
STERLING MEDIVATIONS, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS ORGANIZATION
Sterling Medivations, Inc. (the Company) is a development stage
company, incorporated under the laws of the State of Delaware and
started operations on January 13, 2000, when it issued stock to its
founders. The Company is developing insulin infusion devices which
deliver insulin to people with diabetes.
2. BUSINESS OF PRESENTATION AND GOING CONCERN
The accompanying financial statements have been prepared on a basis
which assumes that the Company will continue as a going concern and
which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The
Company has a limited operating history and has incurred a loss and
negative cash flows from operations since its inception. The Company
expects to incur additional losses and to require additional funding in
order to continue its operations through 2001. These circumstances
raise substantial doubt about the Company's ability to continue as a
going concern.
Management is seeking to raise additional funds through debt or equity
financing. Additionally, the Company is continuing to pursue
development of its products. However, there can be no assurance that
such additional funding will be available on terms acceptable to the
Company or at all, and there can be no assurance that the Company will
successfully develop its products or that the Company will receive the
regulatory approvals necessary to market its products.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash. The Company
places its cash primarily in checking and money market accounts with
financial institutions that management considers creditworthy.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is determined
using the straight-line method over the estimated useful lives (three
years) of the assets. Maintenance and repairs are charged to expense as
incurred.
PATENTS
The Company has filed applications for patents with the U.S. Patent and
Trademark Office. The legal fees and application costs associated with
obtaining patents from the U.S. Patent and Trademark Office are
capitalized as incurred. Upon issuance of the
16
STERLING MEDIVATIONS, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
related patents, the capitalized costs are amortized using the
straight-line method over five years.
As of December 31, 2000, none of the patents applied for have been
issued.
LONG-LIVED ASSETS
The recoverability of intangible assets and other long-lived assets is
assessed periodically or whenever adverse events or changes in
circumstances or business climate indicate that the expected cash flows
previously anticipated warrant a reassessment. When such reassessments
indicate the potential of impairment, all business factors are
considered and, if the carrying value of such intangible assets is not
likely to be recovered from future undiscounted operating cash flows,
they will be written down for financial reporting purposes.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), the Company
has elected to account for stock-based compensation to employees using
the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations (APB Opinion No. 25). Accordingly, compensation cost
for stock options granted to employees is measured as the excess, if
any, of the fair value of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The Company
accounts for stock-based compensation to nonemployees using the fair
value method prescribed by SFAS No. 123. Compensation cost for stock
options granted to nonemployees is measured based on the fair value of
the option at the date of grant with the unvested portion revalued at
each balance sheet date. Compensation costs, if any, are amortized on a
straight-line basis over the underlying option vesting terms.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS No. 109). The asset and liability approach of SFAS No. 109
requires the recognition of deferred tax assets and liabilities for the
tax consequences of temporary differences between the tax bases of
assets and liabilities and their carrying amounts for financial
reporting purposes using enacted tax rates in effect for the years in
which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
COMPREHENSIVE LOSS
Comprehensive loss, as defined in Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," includes all
changes in equity (net assets) during a period from non-owner sources.
The Company has not had any changes in stockholders' equity from
nonowner sources other than a net loss.
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STERLING MEDIVATIONS, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
4. SELECTED BALANCE SHEET INFORMATION
The following presents selected balance sheet information as of
December 31, 2000:
Furniture and office equipment, net:
Office equipment $ 7,114
Less accumulated depreciation 1,186
-------
$ 5,928
=======
5. STOCKHOLDERS' EQUITY
In April 2000 and June 2000, the Company's Board of Directors and
stockholders authorized a 6-for-1 stock split and a 0.85-for-1 reverse
stock split of its common stock, respectively. The stock splits have
been retroactively reflected in the accompanying financial statements.
CAPITAL STOCK
As of December 31, 2000, the Company and its stockholders have
authorized 12,000,000 shares of stock, of which 6,000,000 shares have
been designated as common stock, 1,000,000 shares have been designated
Series A Convertible Preferred Stock (Series A), and 5,000,000 shares
are undesignated.
CONVERTIBLE PREFERRED STOCK
As of December 31, 2000, terms of the Company's convertible preferred
stock are as follows:
NUMBER OF SHARES
CONVERTIBLE PREFERRED AUTHORIZED, ISSUED AND
STOCK LIQUIDATION PREFERENCE OUTSTANDING
--------------------- ---------------------- ----------------------
Series A $1.00 per share 1,000,000
CONVERSION
All Series A shares shall be automatically converted into common stock
on a one-for-one basis (subject to certain anti-dilutive adjustments of
the conversion price, as defined) upon (i) the written consent of the
holders of a majority of the outstanding Series A shares, or (ii) the
closing of a public offering of the Company's common stock of at least
$3.00 per share with gross proceeds of at least $10,000,000. The
Company has reserved 1,000,000 shares of unissued common stock for the
purpose of effecting the conversion of the shares of the Series A.
VOTING RIGHTS
The Series A stockholders are entitled to a number of votes equal to
the number of shares of common stock into which such shares of Series A
is convertible. In addition, an affirmative vote of the majority of the
Series A stockholders is required to sell the Company and to amend the
Company's Articles of Incorporation in a manner which may adversely
affect the current Series A stockholders.
18
STERLING MEDIVATIONS, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DIVIDENDS
The holders of Series A shall be entitled to receive noncumulative
dividends in preference to any dividend on the common stock at the rate
of 8% per annum of the original purchase price per share of the Series
A. Dividends shall be payable on the Series A out of funds legally
available for declaration of dividends, only if and when declared by
the Company's Board of Directors. No such dividends have been declared.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the
Company, including a merger, acquisition or reorganization where the
beneficial owners of the Company's common stock and convertible
preferred stock do not own a majority of the outstanding shares of the
surviving, purchasing, or newly resulting corporation or a sale of all
or substantially all of the assets of the Company, Series A
stockholders are entitled to a per share distribution in preference to
common stockholders equal to the original issue price per share of
$1.00 plus any declared but unpaid dividends. After this distribution,
the remaining assets, if any, shall be distributed pro rata among the
holders of the common stock. In the event that funds are insufficient
to make a complete liquidation distribution to holders of Series A, the
holders shall share ratably in any distribution.
6. STOCK OPTIONS
In April 2000, the Company's stockholders approved the Sterling
Medivations, Inc. 2000 Stock Incentive Plan (the Plan). Under the Plan,
options to purchase up to 394,444 shares of common stock could be
granted to directors, officers and employees of and advisors to the
Company at exercise prices not less than 100% of the fair value (as
determined by the Board of Directors) of the Company's common stock on
the date of grant. These options, which may be incentive or
non-qualified stock options, have exercise prices and vesting terms
established by the Board of Directors at the time of each grant.
Vesting terms of outstanding options range from one to four years. All
options expire ten years after the date of grant.
The following is a summary of stock option activity:
WEIGHTED
SHARES AVERAGE
AVAILABLE OPTIONS EXERCISE PRICE
STOCK OPTIONS FOR GRANT OUTSTANDING PER SHARE
Shares reserved 394,444
Options granted (94,000) 94,000 $ 0.80
--------- ------
Balances, December 31, 2000 300,444 94,000 $ 0.80
--------- ------
19
STERLING MEDIVATIONS, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
Total compensation expense relating to option grants measured using the
intrinsic value method for grants to employees, as prescribed by APB
Opinion No. 25 and using the fair value method for grants to
nonemployees as prescribed by SFAS No. 123, was $4,248, for the period
from inception (January 13, 2000) through December 31, 2000. As of
December 31, 2000, there was $454 of compensation expense related to
these options that will be recognized in future periods.
The following summarizes information about stock options outstanding as
of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
$ 1.00 70,000 9.0 $ 1.00 56,000 $ 1.00
$ 0.20 24,000 9.5 $ 0.20
------- ---- ------ ------- -------
94,000 9.1 $ 0.80 56,000 $ 1.00
======= ==== ====== ======= =======
PRO FORMA COMPENSATION
Had compensation cost for all options granted by the Company been
determined based on the option fair value at the grant date, net loss
would have been increased to the following pro forma amounts:
PERIOD FROM
INCEPTION (JANUARY
13, 2000) THROUGH
DECEMBER 31, 2000
Net loss:
As reported $ (277,434)
Pro forma (277,682)
The weighted average fair value of employee options on the date of
grant was $0.08 per option.
For purposes of applying the fair value method as prescribed by SFAS
No. 123, the Company used the Black-Scholes option pricing model with
four years as the expected holding period of the options, the risk-free
rate used by the Company was the quoted U.S. Treasury rate on the dates
of the related option grants (weighted average rate of 6.42%), and a
volatility of 45%.
20
STERLING MEDIVATIONS, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
7. INCOME TAXES
As of December 31, 2000, the Company has generated net operating loss
carryforwards of approximately $176,000 that may be offset against
future taxable income through 2020. In addition, the Company had
approximately $101,000 of future deductible temporary differences as of
December 31, 2000, related primarily to different methods in accounting
for start-up costs for financial and tax reporting purposes. The
Company has established a valuation allowance as of December 31, 2000
that offsets the net tax benefits associated with the loss
carryforwards and other temporary differences in light of the Company's
current stage of development.
Under the Internal Revenue Code Section 382, certain stock transactions
which significantly change ownership, including sale of stock and the
granting of options to purchase stock, could limit the amount of net
operating loss carryforwards that may be utilized on an annual basis to
offset taxable income in future periods.
21