UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
=================
FORM 6-K
Amendment No. 1
REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13A-16 AND L5D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(SEPTEMBER 15, 2003)
DIVERSINET CORP.
- --------------------------------------------------------------------------------
(Name of Registrant)
2225 Sheppard Avenue East, Suite 1801, Toronto, Ontario M2J 5C2
- --------------------------------------------------------------------------------
(Address of principal executive offices)
1. Caradas, Inc. audited financial statements for the years ended December 31,
2002 and 2001.
2. Pro Forma Consolidated Financial Information of Diversinet Corp. for the
year ended October 31, 2002 and the nine months ended July 31, 2003.
3. Caradas, Inc. financial statements for the six months ended June 30, 2002
and 2001.
Indicate by check mark whether the Registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F X Form 40-F
-----
Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
YES NO X
------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 6-K to be signed on its behalf by the
undersigned, thereunto duly authorized
DIVERSINET CORP.
- -----------------------
(REGISTRANT)
DATE: SEPTEMBER 15, 2003 BY: /s/ DAVID HACKETT
--------------------------------------
DAVID HACKETT, CHIEF FINANCIAL OFFICER
AUDITORS' REPORT TO THE BOARD OF DIRECTORS
We have audited the accompanying balance sheets of Caradas, Inc. as at December
31, 2002 and 2001 and the related statements of earnings, stockholder's equity
(deficiency) and cash flows for the years 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 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as at December 31,
2002 and 2001 and the results of its operations and its cash flows for the years
then ended 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 1 to the
financial statements, the Company has incurred significant losses from
operations which raise substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
KPMG LLP
Chartered Accountants
Toronto, Canada
September 9, 2003
CARADAS, INC.
Balance Sheets
December 31, 2002 and 2001
(Expressed in U.S. dollars)
=============================================================================
2002 2001
- -----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 54,833 $131,134
Accounts receivable, net of allowance for doubtful
accounts of nil (2001 - nil) 399,401 648,465
Prepaids and deposits 14,125 5,700
---------------------------------------------------------------------------
Total current assets 468,359 785,299
Fixed assets, net (note 3) 195,369 104,359
- -----------------------------------------------------------------------------
Total assets $ 663,728 $889,658
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Bank indebtedness (note 4) $ 206,379 $ -
Accounts payable 98,465 67,124
Accrued liabilities (note 5) 93,575 24,202
Deferred revenue 243,085 141,368
Stockholder advances (note 7) 46,900 143,112
Current portion of capital lease (note 6) 15,236 -
---------------------------------------------------------------------------
Total current liabilities 703,640 375,806
Long term portion of capital lease (note 6) 22,930 -
Stockholders' equity (deficiency)
Common stock, $.001 par value:
Authorized:
10,970,000 common shares
Issued and outstanding:
8,316,496 common shares (2001 - 8,264,416) 8,317 8,264
Paid up capital 69,492 33,917
Retained earnings (deficit) (140,651) 471,671
---------------------------------------------------------------------------
Total stockholders' equity (deficiency) (62,842) 513,852
Commitments and contingencies (note 9)
Subsequent events (note 13)
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficiency) $ 663,728 $889,658
=============================================================================
See accompanying notes to financial statements.
CARADAS, INC.
Statements of Earnings
Years Ended December 31, 2002 and 2001
(Expressed in U.S. dollars)
=========================================================================
2002 2001
- -------------------------------------------------------------------------
Revenues (note 12) $4,123,673 $2,801,590
Cost of sales 2,022,252 1,215,327
- -------------------------------------------------------------------------
Gross profit 2,101,421 1,586,263
Research and development 939,624 416,762
Sales and marketing 1,044,675 396,255
General and administrative 666,647 260,782
Depreciation and amortization 52,508 13,905
- -------------------------------------------------------------------------
Income (loss) before the following: (602,033) 498,559
Other interest expense 7,538 300
Interest expense on capital lease 2,751 -
- -------------------------------------------------------------------------
Income (loss) for the year $ (612,322) $ 498,259
=========================================================================
See accompanying notes to financial statements.
Statements of Stockholders' Equity (Deficiency)
Years Ended December 31, 2002 and 2001
(Expressed in U.S. dollars)
=========================================================================================================================
Common stock Paid-up capital Retained Total
earnings stockholders'
(deficit) equity
(deficiency)
Number Amount
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' equity January 1, 2001 8,250,000 $ 8,250 $ 33,196 $ (26,588) $ 14,858
Additional contributions during the
year 721 721
Stock options exercised during the year 14,416 14 14
Income for the year 498,259 498,259
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' equity December 31, 2001 8,264,416 8,264 33,917 471,671 513,852
Additional contributions during the
year 35,575 35,575
Stock options exercised during the year 52,080 53 53
Loss for the year (612,322) (612,322)
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficiency)
December 31, 2002 8,316,496 $ 8,317 $ 69,492 $(140,651) $ (62,842)
=========================================================================================================================
See accompanying notes to financial statements
CARADAS, INC.
Statements of Cash Flows
Years Ended December 31, 2002 and 2001
(Expressed in U.S. dollars)
================================================================================================
2002 2001
- ------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) for the year $(612,322) $ 498,259
Add (deduct) items not requiring an outlay of cash:
Depreciation and amortization 52,508 13,905
Changes in non-cash working capital items related to operations:
Accounts receivable 249,064 (648,466)
Prepaids and deposits (8,425) (5,700)
Accounts payable 31,341 67,124
Accrued liabilities 69,373 24,202
Deferred revenue 101,717 141,368
- ------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (116,744) 90,692
================================================================================================
FINANCING ACTIVITIES
Capital lease payments (11,233) -
Stockholders' advances (96,212) 143,112
Exercise of stock options and additional paid up capital contributions 35,628 721
Bank indebtedness advances 281,379 -
Bank indebtedness repayments (75,000) -
- ------------------------------------------------------------------------------------------------
Cash provided by financing activities 134,562 143,833
================================================================================================
INVESTING ACTIVITIES
Additions to fixed assets (94,119) (116,722)
- ------------------------------------------------------------------------------------------------
Cash used in investing activities (94,119) (116,722)
================================================================================================
Net increase (decrease) in cash and cash equivalents during the year (76,301) 117,803
Cash and cash equivalents, beginning of the year 131,134 13,331
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $ 54,833 $ 131,134
================================================================================================
Supplemental cash flow information:
Interest paid $ 10,289 $ -
Supplemental disclosure of non-cash investing activities
Fixed assets acquired under capital lease $ 49,399 $ -
================================================================================================
See accompanying notes to financial statements.
CARADAS, INC.
Notes to Financial Statements
Years ended December 31, 2002 and 2001
(Expressed in U.S. dollars)
Caradas, Inc. ("Caradas or the "Company") is a credential management provider to
the enterprise, financial and retail markets. Caradas provides 'smart card
enablement' to these markets which demand open, secure, next generation
multi-application solutions in both the physical and digital environments, with
robust identity and authentication that seamlessly connects with continuously
updated, smart card-aware applications.
1. FUTURE OPERATIONS:
These financial statements have been prepared on a going concern basis,
which assumes the Company will continue in operation for the foreseeable
future and be able to realize its assets and satisfy its liabilities in its
normal course of business. Certain conditions and events exist that cast
substantial doubt on the Company's ability to continue as a going concern.
The Company has incurred significant losses and used significant amounts of
cash in operating activities in the year ended December 31, 2002.
Continued operations depend upon the Company's ability to generate future
profitable operations and/or obtain additional financing to fund future
operations and, ultimately, to generate positive cash flows from operating
activities. There can be no assurance that the Company will be successful
in obtaining additional financing or generating future profitable
operations.
Should the Company be unable to generate positive cash flows from
operations or secure additional financing in the foreseeable future, the
application of the going concern principle for financial statement
reporting purposes may no longer be appropriate. These financial statements
do not include any adjustments related to the valuation or classification
of recorded asset amounts or the amounts or classification of liabilities
that may be necessary should the Company be unable to continue as a going
concern.
2. SIGNIFICANT ACCOUNTING POLICIES:
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. Significant
accounting policies adopted by the Company are as follows:
a) Revenue Recognition:
Consulting revenues are recognized on a time and materials basis, or on a
percentage of completion basis, depending on the contract, as employees and
subcontractors provide services. Revenue from time and materials service
contracts are recognized as the services are provided. Revenue from fixed
price long-term contracts is recognized over the contract term based on the
percentage of services provided during the period compared to the total
estimated services to be provided over the entire contract. Losses on
contracts are recognized during the period in which the loss first becomes
probable and reasonably estimable. Contract losses are determined to be the
amount by which the estimated direct and indirect costs of the contract
exceed the estimated total revenues that will be generated by the contract.
Revenue recognized in excess of billings is recorded as unbilled services.
Billings in excess of revenue recognized are recorded as deferred revenue
until the above revenue recognition criteria are met. Reimbursements,
including those relating to travel and other out-of-pocket expenses, and
other similar third-party costs, are included in Revenues.
Revenue from software license agreements is recognized upon execution of a
license agreement and the shipment of the software, as long as all vendor
obligations have been satisfied, the license fee is fixed and determinable
and collection of the license fees is probable. Revenue from the sale of
additional software products is recognized as software is delivered.
Revenue earned on software arrangements involving multiple elements (i.e.,
software products, upgrades/enhancements, post contract customer support,
installation, training, etc.) is allocated to each element based on vendor
specific objective evidence of relative fair value of the elements. When
arrangements contain multiple elements and vendor specific objective
evidence only exists for all undelivered elements, the Company recognizes
revenue for the delivered elements using the residual method, whereby the
total arrangement fee is assigned to the undelivered elements based on
their fair value, with the residual assigned to the delivered elements and
recognized. For arrangements containing multiple elements where vendor
specific objective evidence does not exist for all undelivered elements,
revenue for the delivered and undelivered elements is deferred until either
vendor specific objective evidence exists for the remaining undelivered
elements or all elements have been delivered. The revenue allocated to post
contract customer support is recognized ratably over the term of the
support and revenue allocated to service elements (such as training and
installation) is recognized as the services are performed.
The Company's sales arrangements generally include standard payment terms
ranging up to 90 days. The Company provides a limited product warranty, the
costs of which have historically been insignificant.
Amounts received in advance of revenue recognition are recorded as deferred
revenue.
b) Cash and cash equivalents:
Cash and cash equivalents include cash on hand and short-term investments
in money market instruments with original maturities of 90 days or less
when acquired.
c) Accounts receivable:
When considered necessary by management, accounts receivable are stated net
of an allowance for doubtful accounts. The allowance is established via a
provision for bad debts charged to operations. On a periodic basis,
management evaluates its accounts receivable and establishes or adjusts its
allowance to an amount that it believes will be adequate to absorb possible
losses on accounts that may become uncollectible, based on evaluations of
the collectibility of individual accounts, the company's history of prior
loss experience and on current economic conditions. Accounts are charged
against the allowance when management believes that the collectibility of
the specific account is unlikely. The accompanying balance sheet at
December 31, 2002 does not include an allowance for doubtful accounts, as
one was not considered necessary by management.
d) Fixed assets:
Fixed assets are stated at cost less accumulated depreciation and
amortization. Expenditures for acquisitions and improvements that
significantly extend the useful life of an asset are capitalized.
Expenditures for maintenance and repairs are charged to operations as
incurred.
Depreciation and amortization on fixed assets is provided over the
estimates useful lives of the assets using the straight line method over
the following periods:
Equipment 5 years
Computer software 3 years
Furniture and fixtures 7 years
Upon the occurrence of specific triggering events, the Company regularly
reviews the carrying value of its fixed assets by comparing the carrying
amount of the asset to the expected future undiscounted cash flows to be
generated by the assets. If the carrying value exceeds the amount
recoverable, a write-down of the asset to its estimated fair value is
charged to the statement of earnings.
e) Income Taxes:
The Company is an S Corporation under the applicable provisions of federal
and state income tax statutes. As an S Corporation, taxable income or loss
is passed through directly to the stockholders.
f) Stock- based compensation:
The Company has elected to follow the intrinsic method of Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for its employee
stock options. Under APB 25, deferred stock-based compensation is recorded
at the option grant date in an amount equal to the difference between the
fair market value of a common share and the exercise price of the option.
Deferred stock-based compensation resulting from employee option grants is
amortized over the vesting period of the individual options. The Company
applies the fair value method of Financial Accounting Standards Board ("FAS
123"), "Accounting for Stock-Based Compensation" for valuing options
granted to non-employees.
g) Comprehensive income:
FAS No. 130, "Reporting Comprehensive Income", issued by the Financial
Accounting Standards Board establishes standards for the reporting and
presentation of comprehensive income. This standard defines comprehensive
income as the changes in equity of an enterprise, except those resulting
from stockholder transactions. For all years presented, the income (loss)
for the year is the same as comprehensive income (loss) for the year.
h) Use of estimates:
The preparation of these financial statements in conformity with generally
accepted accounting principles 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 these
financial statements and the reported amounts of revenue and expenses
during the year. Actual results could differ from those estimates.
i) Recent accounting pronouncements:
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of the Financial Accounting Standards Board Statements No.
5, 57 and 107 and a rescission of the Financial Accounting Standards Board
Interpretation No. 34. This Interpretation elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees issued. The Interpretation also clarifies
that a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the Interpretation are applicable
to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's financial statements.
The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 31, 2002.
3. FIXED ASSETS:
===========================================================================================================
Accumulated Net book
2002 Cost depreciation value
and amortization
- -----------------------------------------------------------------------------------------------------------
Equipment $228,301 $ 54,949 $ 173,352
Computer software 26,359 9,976 16,383
Furniture and fixtures 7,122 1,488 5,634
$261,782 $ 66,413 $ 195,369
===========================================================================================================
In 2002, depreciation and amortization expense amounted to $52,508.
===========================================================================================================
Accumulated Net book
2001 Cost depreciation value
and amortization
- -----------------------------------------------------------------------------------------------------------
Equipment $ 94,665 $ 10,625 $ 84,040
Computer software 16,749 2,791 13,958
Furniture and fixtures 6,850 489 6,361
$118,264 $ 13,905 $ 104,359
===========================================================================================================
In 2001, depreciation and amortization expense amounted to $13,905.
5. ACCRUED LIABILITIES:
================================================================================
2002 2001
- --------------------------------------------------------------------------------
Remuneration $64,186 $ -
Professional fees 12,000 9,680
Miscellaneous 17,389 14,522
- --------------------------------------------------------------------------------
$93,575 $24,202
================================================================================
6. CAPITAL LEASE:
This lease bears interest at 8.25% per annum and is repayable in monthly
principal and interest installments of $1,554 through March of 2005. The
obligation is secured by certain fixed assets of the Company. Year ending
December 31:
================================================================================
Year ending December 31:
2003 $18,646
2004 18,646
2005 4,661
- --------------------------------------------------------------------------------
Total minimum payments 41,953
Less amount representing interest (at a rate of 8.25%) 3,787
- --------------------------------------------------------------------------------
Present value of net minimum capital lease payments 38,166
Less current portion 15,236
- --------------------------------------------------------------------------------
$22,930
================================================================================
7. RELATED PARTY TRANSACTIONS:
In 2001, the Company received a loan of $143,100 from its
president/stockholder. During 2002, the Company borrowed an additional
$25,000. As of December 31, 2002, the Company had repaid $121,200,
resulting in an amount due to the president/stockholder of approximately
$46,900. The loan has no formal repayment terms and is non-interest
bearing.
During 2002, the Company purchased equipment, software, administrative
services and IT services from three different corporations that are
partially owned by an officer/stockholder of the Company. In addition, the
Company occupies a portion of office space leased by one of the related
corporations and pays an allocated portion of the rent. The Company
purchased goods and services of approximately $77,720 and approximately
$101,640 of equipment from these related corporations during 2002. At
December 31, 2002 the amount owed to these corporations totaled $37,760
which is included in accounts payable.
In 2002, the Company granted 2,500 stock options at an exercise price of
$.05 each to an employee of a corporation that is partially owned by an
officer of the Company.
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
The Company is exposed to the following risks related to financial assets
and liabilities:
(a) Fair values:
The fair values of the Company's current financial instruments other
than stockholder advances approximate their carrying amounts due to
their short-term nature. The fair value of the Company's capital lease
approximates its carrying value as it bears an interest rate that is
at the current market rate. The fair value of the stockholder advances
is not determinable due to its related party nature and terms.
(b) Credit risk:
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash equivalents
and accounts receivable. Cash equivalents are maintained at
high-quality financial institutions.
The Company generally does not require collateral for sales on credit.
The Company closely monitors extensions of credit. Management assesses
the need for allowances for potential credit losses by considering the
credit risk of specific customers, historical trends and other
information.
A summary of sales to major customers that exceeded 10% of total sales
during each of the years ended December 31, 2002 and 2001, and the
approximate amount due from these customers, as of December 31, 2002,
are as follows:
================================================================================
Sales Accounts
2002 2001 receivable
- --------------------------------------------------------------------------------
Customer 1 20% 32% $ 34,239
Customer 2 20% 10% 159,415
Customer 3 15% 2% -
Customer 4 13% 29% -
Customer 5 - 10% -
- --------------------------------------------------------------------------------
The Company does not consider itself to be economically dependent on any
single customer or supplier.
All revenue is attributable to geographic location based on the location of
the customer. All revenue was attributable to the United States in the
fiscal years ended December 31, 2002 and 2001.
9. COMMITMENTS AND CONTINGENCIES:
(a) Lease commitments:
Total future minimum operating lease payments including operating
costs are as follows:
================================================================================
2003 $ 62,138
2004 46,603
- --------------------------------------------------------------------------------
$ 108,741
================================================================================
The rent expense was $68,838 and $54,537 in 2002 and 2001,
respectively.
10. PROFIT-SHARING PLAN:
On January 1, 2002, the Company implemented a profit-sharing plan that
includes a 401(k) feature which covers substantially all of its employees.
The profit-sharing section of the plan is noncontributory and there is no
minimum annual contribution required under the plan. Company contributions
to the plan are determined at the discretion of the Board of Directors.
Employees must complete three years of service after which they are 100%
vested in the plan. There were no contributions for the year ended December
31, 2002.
The 401(k) section of the plan allows employees to contribute up to 20% of
qualified compensation on a salary reduction basis. Employees must complete
three months of service and attain the age of 18 years to be eligible.
11. STOCK OPTION PLAN:
In 1999, the Company adopted the "1999 Amended and Restated Stock
Option/Issuance Plan Stock" (the "incentive plan"). Under the incentive
plan, 2,657,500 options for the purchase of shares of Common Stock may be
granted. The incentive plan allows the granting of incentive stock options
to employees, and nonqualified options to employees, directors and
consultants. The Board of Directors is responsible for administration of
the incentive plan. The Board of Directors determines the option exercise
price and number of shares for which each option is granted.
The option price for the incentive stock options and nonqualified stock
options may not be less than the fair market value on the date the option
is granted. The majority of the qualified options granted under the
incentive plan vest 33% on the one year anniversary of issuance, and
subsequently vest 8.375% per quarter for the next two years. However, the
vesting for certain qualified options granted under the incentive plan have
alternate vesting schedules based on the Board's instructions at the time
of the grant. Nonqualified options vest based on the Board's instructions
at the time of the grant. Incentive stock options expire ten years from the
grant date, while nonqualified stock options expire no more than five years
from the grant date.
FAS 123 requires pro forma disclosure of net income, as if the fair value
based method as opposed to the intrinsic value based method of accounting
for employee stock options had been applied.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the date of grant, consistent with the provision
of FAS 123, the effect on net loss would be as follows for the year ended
December 31, 2002 and 2001.
================================================================================
2002 2001
- --------------------------------------------------------------------------------
Net income (loss) $ (612,322) $ 498,259
Stock compensation expense 29,000 2,129
- --------------------------------------------------------------------------------
Pro forma net income (loss) (641,322) 496,130
- --------------------------------------------------------------------------------
For the year ended December 31, 2002 and 2001, the following assumptions
were used in computing the proforma amounts. The fair value of the options
at grant date was estimated using the minimum value method with the
following assumptions: expected volatility of 0%; risk free interest rate
of 3%; expected lives of 5 or 10 years. The effects of applying FAS 123 in
this proforma disclosure is not indicative of future amounts.
The following table summarizes information about stock options outstanding
at December 31, 2002:
================================================================================================
Options outstanding Options vested
- ----------------------------------------------------------------- -----------------------------
Weighted average
Number remaining Weighted average Number Weighted average
Exercise price outstanding contractual life exercise price exercisable exercise price
- ----------------------------------------------------------------- -----------------------------
$.05 1,796,504 6.33 $ .05 1,204,004 $ .05
$.50 492,500 8.78 $ .50 137,834 $ .50
- ------------------------------------------------------------------------------------------------
2,289,004 6.86 $ .15 1,341,838 $ .10
================================================================================================
Changes for the employee stock option plan during the years ended December 31,
2002 and 2001 were as follows:
2002 2001
- ------------------------------------------------------------------- ---------------------------
Weighted average Weighted average
Number exercise price Number exercise price
- ------------------------------------------------------------------- ---------------------------
Options outstanding, beginning of year 1,996,084 $ .08 - $ -
Options granted 465,250 .50 2,020,500 .08
Options exercised (52,080) .05 (14,416) .05
Options cancelled (120,250) .50 (10,000) .05
- ------------------------------------------------------------------- ---------------------------
Options outstanding, end of year 2,289,004 $ .15 1,996,084 $ .10
=================================================================== ===========================
Options exercisable, end of year 1,341,838 $ .08 106,418 $ .10
=================================================================== ===========================
12. REVENUES
Revenue by source is as follows:
Revenue type Dec 31, 2002 Dec 31, 2001
- --------------------------------------------------------------------------------
Consulting 3,930,405 2,657,840
Product sales 47,793 143,750
Customer support 145,475 -
- --------------------------------------------------------------------------------
Total 4,123,673 2,801,590
================================================================================
13. SUBSEQUENT EVENTS:
(a) Increase in authorized number of shares
On February 12, 2003, the Company's Board of Directors voted to increase
the number of authorized shares of Common Stock to 20,000,000. In
connection with the increase, the amount of options that may be granted
under the stock option plan (Note 11) was increased to 9,366,438 shares.
Stock option activity for the six-month period ended June 30, 2003 is
summarized below:
Weighted average
Number of shares Exercise price
- --------------------------------------------------------------------------------
Outstanding at December 31, 2002 2,289,004 $ .15
Granted 7,614,619 .01
Expired/forfeited (812,500) .17
- --------------------------------------------------------------------------------
Outstanding at April 30, 2003 9,091,123 $ .03
================================================================================
(b) Acquisition by Diversinet Corp.
On September 1, 2003, 100% of the outstanding shares of Caradas, Inc. were
acquired by Diversinet Corp. The aggregate consideration was 1,417,500
Diversinet common shares and 200,000 share purchase warrants. The share
purchase warrants are exercisable at U.S.$2.45 per share for five years.
The share purchase warrants will vest to the holder quarterly over three
years. The acquisition will be accounted for using the purchase method.
FINANCIAL STATEMENTS
CARADAS, INC.
For the Six Months Ended June 30, 2003
(Unaudited)
CARADAS, INC.
BALANCE SHEETS
[in U.S. dollars]
JUNE 30 December 31
2003 2002
$ $
====================================================================================
(UNAUDITED)
ASSETS
CURRENT
Cash and cash equivalents 140,779 54,833
Accounts receivable, net of allowance for doubtful
accounts of nil( 2002 - nil) 371,410 399,401
Prepaids and deposits 11,016 14,125
- -------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 523,205 468,359
- -------------------------------------------------------------------------------------
Fixed assets, net 167,937 195,369
- -------------------------------------------------------------------------------------
TOTAL ASSETS 691,142 663,728
=====================================================================================
LIABILITIES AND STOCKHOLDERSEQUITY (DEFICIENCY)
CURRENT
Bank indebtedness 188,025 206,379
Accounts payable 140,152 98,465
Accrued liabilities 98,388 93,575
Deferred revenue 148,259 243,085
Stockholder advances 14,746 46,900
Current portion of capital lease 16,774 15,236
- -------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 606,344 703,640
- -------------------------------------------------------------------------------------
Long term portion of capital lease 13,449 22,930
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 619,793 726,570
=====================================================================================
STOCKHOLDERSEQUITY (DEFICIENCY)
Share capital 8,966 8,317
Paid up capital 1,007,474 69,492
Deficit (945,091) (140,651)
- -------------------------------------------------------------------------------------
TOTAL STOCKHOLDERSEQUITY (DEFICIENCY) 71,349 (62,842)
=====================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) 691,142 663,728
=====================================================================================
See accompanying notes to financial statements.
CARADAS, INC.
STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT)
[in U.S. dollars]
Six months ended June 30
(Unaudited)
2003 2002
$ $
- -----------------------------------------------------------------------------------------
REVENUE 1,725,064 2,234,400
Cost of sales 630,716 1,111,957
- -----------------------------------------------------------------------------------------
GROSS MARGIN 1,094,348 1,122,443
EXPENSES
Research and development (including stock-based compensation) 702,247 671,625
Sales and marketing (including stock-based compensation) 366,339 561,293
General and administrative (including stock-based compensation) 791,817 460,535
Depreciation and amortization 27,432 23,515
- -----------------------------------------------------------------------------------------
1,887,835 1,716,968
- -----------------------------------------------------------------------------------------
Loss before the following (793,487) (594,525)
Other interest expense 9,513 1,578
Interest expense on capital lease 1,440 994
=========================================================================================
LOSS FOR THE PERIOD (804,440) (597,097)
=========================================================================================
RETAINED EARNINGS (DEFICIT), BEGINNING OF PERIOD (140,651) 725,723
Loss for the period (804,440) (597,097)
- -----------------------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END OF PERIOD (945,091) 128,626
=========================================================================================
See accompanying notes to financial statements.
CARADAS, INC.
STATEMENTS OF CASH FLOWS
[in U.S. dollars]
Six months ended June 30
(Unaudited)
2003 2002
$ $
- -----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Income (loss) for the period (804,440) (597,097)
Add (deduct) items not requiring an outlay of cash:
Depreciation and amortization 27,432 23,515
Stock-based compensation 885,232 -
Changes in non-cash working capital items related to operations:
Accounts receivable 27,991 (9,781)
Prepaids and deposits 3,109 -
Accounts payable and accrued liabilities 46,500 206,378
Deferred revenue (94,826) 315,361
- -----------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 90,998 (61,624)
=========================================================================================
FINANCING ACTIVITIES
Capital lease payments (7,943) -
Stockholder advances (32,154) -
Issue of common shares 649 -
Additional paid up capital contributions 52,750 2,603
Bank indebtedness advances 85,716 181,379
Bank indebtedness repayments (104,070) -
- -----------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,052) 183,982
=========================================================================================
INVESTING ACTIVITIES
Additions to fixed assets - (75,603)
- -----------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES - (75,603)
=========================================================================================
NET INCREASE IN CASH AND CASH EQUIVALENTS DURING THE PERIOD 85,946 46,755
Cash and cash equivalents, beginning of the period 54,833 131,134
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD 140,779 177,889
=========================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID 10,953 2,572
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
FIXED ASSETS ACQUIRED UNDER CAPITAL LEASE - 49,399
=========================================================================================
See accompanying notes to financial statements.
CARADAS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(In US dollars)
Six months ended June 30, 2003
Caradas, Inc.(or the is a credential management provider to the enterprise,
financial and retail markets. Caradas provides smart card enablementto these
markets which demand open, secure, next generation multi-application solutions
in both the physical and digital environments, with robust identity and
authentication that seamlessly connects with continuously updated, smart
card-aware applications.
1. Future Operations
These interim financial statements have been prepared on a going concern basis,
which assumes the Company will continue in operation for the foreseeable future
and be able to realize its assets and satisfy its liabilities in its normal
course of business. Certain conditions and events exist that cast substantial
doubt on the Company's ability as a going concern.
The Company has incurred significant losses and used significant amounts of cash
in operating activities in the year ended December 31, 2002.
Continued operations depend upon the Company's ability to generate future
profitable operations and/or obtain additional financing to fund future
operations and, ultimately, to generate positive cash flows from operating
activities. There can be no assurance that the Company will be successful in
obtaining additional financing or generated future profitable operations.
Should the Company be unable to generate positive cash flows from operations or
secure additional financing in the foreseeable future, the application of the
going concern principle for financial statement reporting purposes may no longer
be appropriate. These interim financial statements do not include any
adjustments related to the valuation or classification of recorded asset amounts
or the amounts or classification of liabilities that may be necessary should the
Company be unable to continue as a going concern.
2. Significant accounting policies
a) Basis of presentation
In the opinion of management, the unaudited financial statements of the Company
have been prepared on a consistent basis with the December 31, 2002 audited
financial statements and include all material adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at June 30, 2003 and the statement of loss and deficit and cash flows
for the six months ended June 30, 2003 in accordance with United States
generally accepted accounting principles (GAAP). The disclosures contained in
these unaudited interim financial statements do not include all requirements of
generally accepted accounting principles for annual financial statements. The
unaudited interim financial statements should be read in conjunction with the
annual financial statements for the year ended December 31, 2002.
b) Stock-based compensation
The Company has elected to follow the intrinsic method of Accounting Principles
Board Opinion No. 25 (25for Stock Issued to Employeesand related
interpretations, in accounting for its employee stock options. Under APB 25,
deferred stock-based compensation is recorded at the option grant date in an
amount equal to the difference between the fair market value of a common share
and the exercise price of the option. Deferred stock-based compensation
resulting from employee option grants is amortized over the vesting period of
the individual options. The Company applies the fair value method of Financial
Accounting Standards Board (123for Stock-Based Compensationfor valuing options
granted to non-employees.
3. Share capital
a) As at June 30, 2003, the following were outstanding:
Number of common shares 8,966,474
Number of common share options granted under the
Company's stock option plan 9,091,123
On February 12, 2003, the CompanyBoard of Directors voted to increase the number
of authorized shares of Common Stock to 20,000,000. In connection with the
increase, the amount of options that may be granted under the stock option plan
was increased to 9,366,438 shares.
b) Stock-Based compensation
FAS 123 requires pro forma disclosure of net income, as if the fair value based
method as opposed to the intrinsic value based method of accounting for employee
stock options had been applied.
Had compensation cost for the Companystock option plans been determined based on
the fair value at the date of grant, consistent with the provision of FAS 123,
the effect on net loss would be as follows:
SIX MONTHS JUNE 30
2003
$
================================================================================
Income for the period (804,440)
Compensation expense related to the fair value of stock options 7,140
- --------------------------------------------------------------------------------
Proforma income for the period (811,580)
The fair value of each option granted has been determined using the minimal
value method. Assumptions used when valuing the options at their date of grant
using the minimal value method include: risk-free interest rate of 3%, estimated
life of five or ten years, expected divided yield of 0% and volatility of 0%.
The Company granted 7,614,619 options (2002 - 179,750) during the six month
period ended June 30, 2003. Compensation expense of $885,232 arose during the
period relating to options granted with an exercise price of $0.01. The
intrinsic value was calculated using $0.16 per share, the value arising when the
Company was sold to Diversinet Corp. During the six months ended June 30, 2003,
812,500 options were forfeited.
4. Subsequent event
On September 1, 2003, 100% of the outstanding shares of Caradas, Inc. were
acquired by Diversinet Corp. The aggregate consideration was 1,417,500
Diversinet common shares and 200,000 share purchase warrants. The share purchase
warrants are exercisable at $2.45 per share for five years. The share purchase
warrants will vest to the holder quarterly over three years. The acquisition
will be accounted for using the purchase method.
Pro Forma Consolidated Financial Information
DIVERSINET CORP.
Year ended October 31, 2002 and the nine months ended July 31, 2003
(Unaudited)
DIVERSINET CORP.
Pro Forma Consolidated Balance Sheet
July 31, 2003
(Expressed in Canadian dollars)
(Unaudited)
=====================================================================================================================
Pro forma
Pro-forma Diversinet Corp.
Diversinet Corp. Caradas, Inc. Adjustments Notes (note 1)
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 520,901 $ 191,456 $ 712,357
Short-term investments 3,482,618 - 3,482,618
Accounts receivable 1,638,914 505,118 2,144,032
Other receivable 139,207 - 139,207
Prepaid expenses 273,818 14,982 288,800
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,055,458 711,556 6,767,014
- ---------------------------------------------------------------------------------------------------------------------
Capital assets, net 1,269,387 228,399 1,497,786
Goodwill and intangible assets (note
2(b)) 1,446,397 - 7,458,956 3(a) 8,905,353
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 8,771,242 939,955 7,458,956 17,170,153
=====================================================================================================================
LIABILITES AND SHAREHOLDERS' EQUITY
CURRENT
Bank Indebtedness - 255,714 255,714
Accounts payable 1,170,306 190,607 1,360,913
Accrued liabilities 1,610,270 133,808 1,744,078
Current portion of promissory note 420,000 - 420,000
Current portion of notes payable 14,455 14,455
Stockholder Advances - 20,055 20,055
Current Portion of capital leases - 22,813 22,813
Deferred revenue 56,276 201,632 257,908
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,271,307 824,629 4,095,936
- ---------------------------------------------------------------------------------------------------------------------
Promissory note 420,000 - 420,000
Notes payable - 18,291 18,291
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,691,307 842,920 - 4,534,227
=====================================================================================================================
SHAREHOLDERS' EQUITY
Share capital 63,090,916 1,423,016 (1,423,016) 3(c)
6,616,351 3(a) 69,707,267
Share purchase warrants 589,824 - 939,640 3(a) 1,529,464
Contributed surplus 97,500 - 97,500
Deficit (58,698,305) (1,325,981) 1,325,981 3(c) (58,698,305)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 5,079,935 97,035 7,458,956 12,635,926
=====================================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 8,771,242 $ 939,955 - $ 17,170,153
=====================================================================================================================
See accompanying notes to pro forma consolidated financial information.
DIVERSINET CORP.
Pro Forma Consolidated Statement of Operations
Year ended October 31, 2002
(Expressed in Canadian dollars)
(Unaudited)
===========================================================================================================================
Pro forma
Diversinet
DSS Software Pro forma Corp.
Diversinet Corp. Technologies Caradas, Inc. adjustments Notes (note 1)
- ---------------------------------------------------------------------------------------------------------------------------
Revenue $ 1,117,785 $ 13,802,437 $ 6,474,167 $ $21,394,389
Cost of sales - 9,803,849 3,174,936 12,978,785
- ---------------------------------------------------------------------------------------------------------------------------
Gross margin 1,117,785 3,998,588 3,299,231 8,415,604
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Research and development 2,327,604 - 1,475,210 3,802,814
Sales and marketing 1,737,027 5,044,982 1,640,140 8,422,149
General and administrative 2,989,102 440,318 1,046,636 4,476,056
Depreciation and amortization 635,835 - 82,438 718,273
- ---------------------------------------------------------------------------------------------------------------------------
7,689,568 5,485,300 4,244,424 17,419,292
- ---------------------------------------------------------------------------------------------------------------------------
Loss before the following (6,571,783) (1,486,712) (945,193) (9,003,688)
Interest (income) expense (174,841) 22,925 16,154 5,625 3(b)(i) (130,137)
- ---------------------------------------------------------------------------------------------------------------------------
Loss for the year $ (6,396,942) $ (1,509,637) $ (961,347) $ (5,625) $(8,873,551)
===========================================================================================================================
Loss per share (note 4)
Basic and diluted $ (2.15) $ (2.02)
===========================================================================================================================
Weighted average number of
shares outstanding 2,971,692 4 4,389,192
===========================================================================================================================
See accompanying notes to pro forma consolidated financial information.
DIVERSINET CORP.
Pro Forma Consolidated Statement of Operations
Nine months ended July 31, 2003
(Expressed in Canadian dollars)
(Unaudited)
==============================================================================================================================
DSS Software
Technologies Caradas, Inc. Pro forma
from November from October 1, Diversinet
1, 2002 to 2002 to June 30, Pro forma Corp.
Diversinet Corp. January 2, 2003 2003 adjustments Notes (note 1)
- ------------------------------------------------------------------------------------------------------------------------------
Revenue $ 6,382,625 $ 1,881,943 $ 3,436,293 $11,700,861
Cost of sales 5,186,384 1,753,956 1,497,228 8,437,568
- ------------------------------------------------------------------------------------------------------------------------------
Gross margin 1,196,241 127,987 1,939,065 3,263,293
- ------------------------------------------------------------------------------------------------------------------------------
Expenses:
Research and development 1,144,546 - 1,182,178 2,326,724
Sales and marketing 1,181,342 1,554,854 770,942 3,507,138
General and administrative 2,610,283 87,025 903,754 3,601,062
Depreciation and amortization 609,641 - 99,489 709,130
- ------------------------------------------------------------------------------------------------------------------------------
5,545,812 1,641,879 2,956,363 10,144,054
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before the following (4,349,571) (1,513,892) (1,017,298) (6,880,761)
Interest (income) expense (86,572) 2,000 19,507 938 3(b)(i) (64,127))
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) for the period $ (4,262,999) $ (1,515,892) $(1,036,805) $ (938) (6,816,634)
==============================================================================================================================
Loss per share (note 4)
Basic and diluted (1.04) (1.24)
==============================================================================================================================
Weighted average number of
shares outstanding 4,085,920 4 5,503,420
==============================================================================================================================
See accompanying notes to pro forma consolidated financial information.
DIVERSINET CORP.
Notes to the Pro Forma Consolidated Financial Information
Year ended October 31, 2002 and nine months ended July 31, 2003
(Expressed in Canadian dollars)
(Unaudited)
1. BASIS OF PRESENTATION:
The unaudited pro forma consolidated financial information is based upon
the historical financial information described below after giving effect to
the transactions and adjustments described in notes 2 and 3. These
unaudited pro forma consolidated financial information are not necessarily
indicative of the results that would have been achieved had the
transactions actually taken place at the dates indicated and do not purport
to be indicative of the results that may be expected to occur in the
future. They do no include any non-recurring charges or credits arising
from the transactions described below.
The unaudited pro forma consolidated financial information for the year
ended October 31, 2002 should be read in conjunction with the audited
financial statements described above which are incorporated by reference or
included in the prospectus.
The unaudited pro forma consolidated information have been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP"),
which differs in certain material respects from United States GAAP, as
described in note 5. The unaudited proforma financial information give
effect to the acquisition of DSS Software Technologies by Diversinet Corp.
which was completed on January 2, 2003 and the acquisition of Caradas, Inc.
by Diversinet Corp. on September 1, 2003 as if it these occurred at the
dates indicated below.
(a) The unaudited pro forma consolidated statement of operations for the
year ended October 31, 2002 has been prepared by the management of
Diversinet Corp. and has been derived from:
(i) The audited financial statements of Diversinet Corp. for the year
ended October 31, 2002;
(ii) The audited financial statements of DSS Software Technologies for
the year ended December 31, 2002 translated into Canadian dollars
using the average exchange rate for the period;
(iii) The audited financial statements of Caradas, Inc. for the year
ended December 31, 2002 translated into Canadian dollars using
the average exchange rate for the period; and
(iv) The additional information provided in notes 2, 3 and 4.
(b) The unaudited pro forma consolidated statement of operations for the
nine months ended July 31, 2003 has been prepared by the management of
Diversinet Corp. and has been derived from:
(i) The unaudited financial statements of Diversinet Corp. for the
nine months ended July 31, 2003;
(ii) The unaudited results of operations of DSS Software Technologies
from November 1, 2002 to January 2, 2003 (date of acquisition)
translated into Canadian dollars using the average exchange rate
for the period;
(iii) The unaudited results of operations of Caradas, Inc. for the
nine months ended June 30, 2003 translated into Canadian dollars
using the average exchange rate for the period; and
(iv) The additional information provided in notes 2, 3 and 4.
(c) The unaudited proforma consolidated balance sheet at July 31, 2003 has
been has been prepared by the management of Diversinet Corp. and has
been derived from:
(i) The unaudited financial statements of Diversinet Corp. for the
period ended July 31, 2003;
(ii) The unaudited financial statement of Caradas, Inc. for the period
ended June 30, 2003 translated into Canadian dollars using the
period end exchange rate; and
(iii) The additional information provided in notes 2, 3 and 4.
The unaudited results of operations of DSS Software Technologies from November
1, 2002 to December 31, 2002 are included in the pro forma statements of
operations for both pro forma periods in (a) and (b) above. The results of
operations of DSS Software Technologies for the period November 1, 2002 to
December 31, 2002 are as follows:
================================================================================
Revenue $ 1,881,943
Cost of sales 1,753,956
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Gross margin 127,987
- --------------------------------------------------------------------------------
Expenses 1,641,879
- --------------------------------------------------------------------------------
Loss before the following: (1,513,892)
Interest expense (2,000)
- --------------------------------------------------------------------------------
Loss for the period $ (1,515,892)
================================================================================
The unaudited results of operations of Caradas, Inc. from October 1, 2002 to
December 31, 2002 are included in the pro forma statements of operations for the
pro forma periods in (b) above. The results of operations of Caradas, Inc. for
the period October 1, 2002 to December 31, 2002 are as follows:
================================================================================
Revenue $ 1,021,203
Cost of sales 614,226
- --------------------------------------------------------------------------------
Gross margin 406,977
- --------------------------------------------------------------------------------
Expenses 313,394
- --------------------------------------------------------------------------------
Income before the following: 93,583
Interest expense 4,172
- --------------------------------------------------------------------------------
Income for the period $ 89,411
================================================================================
2. PRO FORMA TRANSACTIONS:
(a) DSS Software Technologies
On January 2, 2003, Diversinet Corp. acquired 100% of the outstanding
shares of DSS Software Technologies, a consulting services provider. The
aggregate purchase price was $2,022,573 consisting of $473,070
(U.S.$300,000) in cash, $13,539 (U.S.$9,670) in cost associated with the
acquisition, $946,140 (U.S.$600,000) of promissory note payable in
instalments of U.S.$300,000 on January 2, 2004 and U.S.$300,000 on January
2, 2005 and 120,000 share purchase warrants with a fair value of $589,824
(U.S.$374,040). The share purchase warrants vest equally on January 2,
2003, 2004 and 2005 and are exercisable at U.S.$3.75 per share for five
years. Additional future cash consideration in the amount of $1,892,280
(U.S.$1,200,000) is payable based on the achievement of certain net income
targets over the next three years and will be recorded when the contingency
has been met. The acquisition was accounted for using the purchase method
and the purchase price was allocated as follows:
================================================================================
Net capital assets acquired $ 147,242
Working capital 457,957
Goodwill 1,417,374
- --------------------------------------------------------------------------------
Fair value assigned to consideration issued,
being common shares and share purchase
warrants $ 2,022,573
================================================================================
(b) Caradas, Inc.
On September 1, 2003, 100% of the outstanding shares of Caradas, Inc. were
acquired by Diversinet Corp. The aggregate purchase price was $7,555,991
consisting of 1,417,500 Diversinet Corp. common shares and 200,000 share
purchase warrants. The share purchase warrants are exercisable at U.S.$2.45
per share for five years. The share purchase warrants will vest to the
holder quarterly over three years. The acquisition will be accounted for
using the purchase method.
The allocation of the purchase price to the fair value of the assets
acquired and liabilities assumed set out below is preliminary and will be
finalized following completion of a full valuation of the acquired assets
and liabilities of Caradas. As such Diversinet Corp. has been required to
make certain assumptions with respect to the allocation of the purchase
price for accounting purposes in preparing this unaudited pro forma
consolidated information. The excess of the purchase price over the net
assets and liabilities will be allocated to identifiable intangible assets
and goodwill. There is not sufficient information available at this time to
perform the allocation. The actual allocation of the purchase price is
expected to change, which may result in significant differences in certain
pro forma adjustments. The preliminary allocation is as follows:
================================================================================
Capital assets acquired $ 228,399
Working capital (131,364)
Goodwill and intangible assets 7,458,956
- --------------------------------------------------------------------------------
Fair value assigned to consideration issued,
being common shares and share purchase
warrants $ 7,555,991
================================================================================
3. PRO FORMA ADJUSTMENTS:
The unaudited pro forma consolidated financial information give effect to
the transactions described in note 2 above, as if they had occurred at the
beginning of the periods presented. Pro forma transactions recognized in
the unaudited pro forma consolidated financial information are as follows:
(a) Purchase Price
Under the acquisition, Diversinet Corp. will acquire all of the issued and
outstanding shares of Caradas, Inc for US $5,435,965. Using the closing
exchange rate at the date of acquisition of $1.39, the Canadian dollar
purchase price of $7,555,991 will be satisfied by:
- the issuance of 1,417,500 common shares valued at $6,623,459 (based on
an estimated market price of $4.67 per share) and
- the issuance of 200,000 share purchase warrants valued at $940,000
(based on the fair value of the warrants issued being $4.70 per
share).
(b) Unaudited pro forma consolidated statements of earnings:
(i) Interest
Reduction in interest revenue due to the use of cash and cash
equivalents of Diversinet Corp. to acquire DSS Software Technologies.
(ii) Amortization
The intangible assets acquired, other than goodwill, will be amortized
over their useful lives. The purchase price allocation is preliminary
and no adjustment has been made to reflect the amortization of the
intangible assets on the acquisition of Caradas, Inc.
If the entire purchase price discrepancy was allocated to intangible
assets and amortized over five years, pro forma depreciation expense
for the year ended October 31, 2002 would be $1,491,791 and for the
nine months ended July 31, 2003 would be $1,118,843. If fifty percent
of the purchase price discrepancy was allocated to goodwill, pro forma
depreciation expense would be half the amounts stated.
(c) Pro forma shareholders' equity:
In accordance with Canadian generally accepted accounting principles,
the share capital, and deficit of Caradas, Inc as at June 30, 2003
have been eliminated to reflect the acquisition by Diversinet Corp.
4. LOSS PER SHARE:
Basic and diluted loss per share have been calculated using the weighted
average number of Diversinet Corp. common shares outstanding adjusted to
reflect the issuance of common shares by Diversinet Corp. in connection
with the acquisitions of Caradas, Inc.
On January 28, 2003 Diversinet Corp. completed a reverse stock split of its
issued and outstanding common shares whereby every ten shares of common
stock were exchanged for one share of common stock. The pro forma weighted
average number of common share has been restated to give effect to the
stock split.
5. DIFFERENCE BETWEEN CANADIAN AND U.S. GAAP:
=====================================================================================================
Year ended October 31, Nine months ended July
2002 31, 2003
- -----------------------------------------------------------------------------------------------------
Pro forma loss based on Canadian GAAP $ 8,873,551 $ 6,816,634
Compensation expense (a) 55,164 26,444
- -----------------------------------------------------------------------------------------------------
Pro forma loss based on U.S. GAAP 8,928,715 6,843,078
- -----------------------------------------------------------------------------------------------------
Basic and diluted loss per share under U.S. GAAP ($2.03) ($1.24)
=====================================================================================================
Weighted average number of shares 4,389,192 5,503,420
=====================================================================================================
(a) Options to consultants:
Under Canadian GAAP, the Company did not recognize compensation expense
when stock or stock options were issued to consultants prior to November 1,
2002. Any consideration paid on exercise of stock options or purchase of
stock is credited to share capital. Under U.S. GAAP and Canadian GAAP
subsequent to October 31, 2002, the Company records compensation expense
for stock or stock options granted in exchange for services from
consultants. The expense adjustments above reflect the compensation effect
of options granted prior to November 1, 2002.