SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
--------------------
CURRENT REPORT
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarter Ended June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from_____ to _____
Commission File Number 0-32117
CYFIT WELLNESS SOLUTIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 91-1985634
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
corporation or organization) Identification Number)
225 Oser Drive, Happaugue, NY 11788
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (631) 851-7000
---------------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of the close of business on August 15, 2001, there were 21,713,700 shares
of the Registrant's Common Stock outstanding.
CYFIT WELLNESS SOLUTIONS INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors...............................................1
Consolidated Balance Sheet as of June 30, 2001...............................2
Consolidated Statements of Operations for the three
and six months ended June 30, 2001 and June 30,2000
and for the period from May 28, 1999 (date of inception)
to June 30, 2001.............................................................3
Consolidated Statement of Stockholders' Equity for the
six months ended June 30, 2001...............................................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and June 30, 2000 and for the period from
May 28, 1999 (date of inception) to June 30, 2001............................5
Notes to Consolidated Financial Statements...................................6
INDEPENDENT ACCOUNTANT'S REPORT
To the Stockholders and Board of Directors of
Cyfit Wellness Solutions, Inc.
Hauppauge, New York
We have reviewed the accompanying consolidated balance sheet
of Cyfit Wellness Solutions, Inc. and its subsidiaries (a development stage
company) as of June 30, 2001, the related consolidated statements of operations
for the three and six month periods ended June 30, 2001 and 2000 and for the
cumulative period from May 28, 1999 (date of inception) to June 30, 2001 the
related consolidated statement of stockholders' equity for the six month period
ended June 30, 2001 and the related consolidated statements of cash flows for
the six month periods ended June 30, 2001 and 2000 and for the cumulative period
from May 28, 1999 (date of inception) to June 30, 2001. These consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public Accountants. A review
of interim financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying consolidated financial
statements referred to above for them to be in conformity with generally
accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 16, 2001
Cyfit Wellness Solutions, Inc. And Subsidiaries
( A Development Stage Company)
Consolidated Balance Sheet (Unaudited)
June 30, 2001
-------------
ASSETS:
Current Assets:
Cash $ 22,537
Other current assets 40,519
-------------
Total Current Assets 63,056
-------------
Property and equipment -[Net] 1,790,912
Website development costs 1,410,033
Internet website 150,000
Customer list and other intangibles - [Net] 313,590
Deferred advertising 500,000
Other assets 28,790
-------------
Total Assets $ 4,256,381
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable $ 892,312
Accrued expenses and taxes 544,747
Note payable 827,500
Capital leases payable - current portion 301,115
Deferred revenue 100,200
Convertible note 60,000
Due to related party 561,240
-------------
Total current liabilities 3,287,114
-------------
Capital leases payable 102,393
-------------
Total Liabilities 3,389,507
-------------
Commitments and contingencies (Note 7)
Stockholders' Equity:
Preferred stock; par value $.001, 1,000,000 shares
authorized, no shares issued and outstanding
Common stock; par value $.001, 49,000,000 shares
authorized; 21,713,700 shares issued 21,713
Additional paid-in capital 8,334,101
Deferred compensation (173,400)
Deficit accumulated during development stage (7,315,540)
-------------
Total Stockholders' Equity 866,874
-------------
Total Liabilities and Stockholders' Equity $ 4,256,381
-------------
See notes to consolidated financial statements
2
Cyfit Wellness Solutions, Inc. And Subsidiaries
(A Development Stage Company)
Consolidated Statement Of Operations (Unaudited)
From
Three Months Ended Six Months Ended May 28, 1999
June 30 June 30 [Date of Inception]
---------------------------- ---------------------------- To June 30,
2001 2000 2001 2000 2001
------------ ------------ ------------ ------------ ------------
Revenues $ 103,610 $ 279,363 $ 232,007 $ 607,184 $ 1,237,019
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Compensation and related benefits 167,685 192,408 328,300 421,870 1,456,141
Occupancy cost 114,135 154,846 186,461 264,755 969,599
Contract work 70,793 72,441 122,526 129,806 281,914
Consulting fees 25,800 65,464 50,522 100,286 271,991
Advertising and promotion 28,999 107,487 83,726 159,958 530,273
Professional fees 43,143 76,272 90,566 151,248 344,243
General and administrative expenses 141,787 209,108 252,169 343,837 1,234,874
Asset impairment charge 404,056
Loss on sale of subsidiary 61,995
Research and product development 16,230 310,091 28,230 352,355 1,403,804
Reverse acquisition costs under recapitalization 300,000 300,000
Depreciation and amortization 126,584 170,075 251,168 340,151 964,863
Stock based compensation 37,500 121,500 287,750
Interest and bank charges 41,454 31,781 66,428 39,511 141,056
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 814,110 1,389,973 1,881,596 2,303,777 8,652,559
------------ ------------ ------------ ------------ ------------
Net Loss ($ 710,500) ($ 1,110,610) ($ 1,649,589) ($ 1,696,593) ($ 7,315,540)
------------ ------------ ------------ ------------ ------------
Basic and Fully Diluted Loss per Common Share ($ 0.03) ($ 0.05) ($ 0.08) ($ 0.08)
------------ ------------ ------------ ------------
Weighted Average Number of Shares 21,588,700 21,213,700 21,463,700 21,213,700
------------ ------------ ------------ ------------
See notes to consolidated financial statements
3
Cyfit Wellness Solutions, Inc. And Subsidiaries
(A Development Stage Company)
Statement Of Stockholders' Equity
For The Period Ended June 30, 2001 (Unaudited)
ADDITIONAL
PREFFERED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 2000 4,125,750 $ 413 13,774,250 $ 1,374 $ 8,423,692
Conversion of preferred stock
into common shares (4,125,750) (413) 4,125,750 413
Recapitalization adjustment
(See Note 1) -- -- 3,313,700 19,426 (320,591)
----------- ----------- -----------
Adjusted totals after
recapitalization -- -- 21,213,700 21,213 8,103,101
Stock options granted for
services rendered 100,000
Stock based compensation 500,000 500 47,000
Issuance of below market
employee stock options 84,000
Amortization of deferred
compensation
Net loss
BALANCE - June 30, 2001 21,713,700 $ 21,713 $ 8,334,101
----------- ----------- -----------
DEFICIT
ACCUMULATED
DURING THE
TREASURY DEFERRED DEVELOPMENT STOCKHOLDERS'
STOCK COMPENSATION STAGE EQUITY
----------- ----------- ----------- -----------
BALANCE - DECEMBER 31, 2000 ($ 299,250) ($ 215,000) ($5,665,951) $ 2,245,278
-----------
Conversion of preferred stock
into common shares 0
Recapitalization adjustment
(See Note 1) 299,250 -- -- (1,915)
----------- ----------- ----------- -----------
Adjusted totals after
recapitalization -- (215,000) (5,665,951) 2,243,363
Stock options granted for
services rendered 100,000
Stock based compensation 47,500
Issuance of below market
employee stock options 84,000
Amortization of deferred
compensation 41,600 41,600
Net loss (1,649,589) (1,649,589)
-----------
BALANCE - June 30, 2001 -- $ (173,400) $(7,315,540) $ 866,874
----------- ----------- ----------- -----------
4
Cyfit Wellness Solutions, Inc. And Subsidiaries
(A Development Stage Company)
Consolidated Statements Of Cash Flows (Unaudited)
Six Months Ended From May 28,1999
June 30 [Date of Inception]
-------------------------- To March 31,
Operating Activities: 2001 2000 2001
----------- ----------- -----------
Net Loss ($1,649,589) ($1,696,593) ($7,315,540)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 251,168 340,151 964,863
Acquisition costs under reverse merger 300,000 300,000
Loss on sale of subsidiary 61,995
Stock based compensation 131,500 297,750
Asset impairment charge 404,056
Other 47,955 152,096
Changes in operating assets and liabilities:
(Increase) decrease in note receivable 50,000 (50,000) 0
(Increase) decrease in other assets 64,926 20,659 (6,205)
Increase in accounts payable 266,462 214,480 868,128
Increase in deferred revenues 200,000 100,200
Increase (decrease) in accrued expenses and taxes 127,188 (11,133) 382,089
----------- ----------- -----------
Net Cash - Operating Activities (410,390) (982,436) (3,790,568)
----------- ----------- -----------
Investing Activities:
Acquisition of property and equipment (384,402) (1,031,048) (2,979,339)
----------- ----------- -----------
Financing Activities:
Proceeds from issuance of common and preferred stock, net 1,603,684 5,541,978
Advances from related parties 427,609 561,240
Proceeds from convertible note 60,000 60,000
Increase in notes payables, net 327,500 350,000 677,500
Payment of capital lease obligations (30,487) (48,274)
Other 0 0 0
----------- ----------- -----------
Net Cash - Financing Activities 815,109 1,923,197 6,792,444
----------- ----------- -----------
Net Increase (Decrease) In Cash 20,317 (90,287) 22,537
Cash - beginning of periods 2,220 96,670 0
----------- ----------- -----------
Cash - end of periods $ 22,537 $ 6,383 $ 22,537
----------- ----------- -----------
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 25,000 $ 32,900 $ 78,000
----------- ----------- -----------
Noncash Financing Transactions:
Stock based compensation $ 147,500
Capitalized lease obligations incurred $ 215,000
See notes to consolidated financial statements
5
Cyfit Wellness Solutions, Inc. and Subsidiaries
[A Development Stage Company]
Notes to Consolidated Financial Statements
(1) Description and Nature of Company Operations
Effective March 1, 2001, Sea Shell Galleries, Inc. (the "Registrant") acquired
approximately 85% of the shares of outstanding common stock of Cyfit Wellness
Solutions, Inc. and subsidiaries ("Cyfit") pursuant to a share exchange
agreement dated February 23, 2001 among the Registrant, Cyfit and holders of 85%
of the common stock of Cyfit (the "Agreement"). As a result of the share
exchanges pursuant to the Agreement, the Registrant issued 17,930,550 shares of
its common stock in exchange for a like amount of shares of Cyfit surrendered by
Cyfit shareholders. Prior to the closing, and as a condition there to 11,950,000
shares of common stock of the Registrant were returned to the Registrant for
cancellation, which reduced the number of outstanding shares to 2,700,000. In
addition, all of the Registrant's Class A and Class B warrants were cancelled.
Thus as of March 1, 2001 there were 20,630,550 shares of common stock of the
Registrant outstanding. Management believes that most if not all of the
remaining shareholders of Cyfit will exchange their shares, for shares of the
Registant in the near future. If all the remaining outstanding shares of Cyfit
are exchanged by their holders, an additional 2,469, 450 will be issued by the
Registrant in exchange therefor.
For accounting purposes, the Agreement is being recorded as a recapitalization
of Cyfit, with Cyfit as the acquirer. The shares issued are treated as being
issued for cash and are shown as outstanding for all periods presented in the
same manner as a stock split. An additional 583,150 shares were issued as part
of the recapitalization during the second quarter of 2001.
The consolidated financial statements prior to March 1, 2001 reflect the results
of operations and financial position of Cyfit.Pro forma information on this
transaction is not presented as, at the date of this transaction, Sea Shell
Galleries is considered a public shell and accordingly, the transaction will not
be considered a business combination. On June 21, 2001 Sea Shell Galleries, Inc.
amended its articles of incorporation to change its name to Cyfit Wellness
Solutions, Inc. The Registrant's OTCBB trading symbol was changed to CYFT.
The Company is engaged in providing internet health and wellness services to
improve its members fitness, diet and wellness of the body. The Company's
business model anticipates recurring revenue with low fixed costs through a
subscription based membership. The Company plans on providing precedent-setting
Internet services to its customer base [corporations, unions, associations] and
end-user subscriber base in a "real-time", online, interactive environment.
Since its inception, the Company has devoted substantially all of its efforts to
business planning, website development, recruiting management and technical
staff and raising capital. Accordingly, the Company is considered to be in the
development stage as defined in Statement of Financial Accounting Standards
("SFAS") No.7.
In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position of the Company as of June 30, 2001 and
the results of its operations for the three and six months ended June 30, 2001
and 2000. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes contained in the Company's
Form 8-K for the year ending December 31, 2000. The results of operations for
the three and six months ended June 30,2001 are not necessarily indicative of
the results for the entire year or any future interim period.
(2) Summary of Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 2 to the
Company's consolidated financial statements included in the Company's Form 8-K
for the year ended December 31, 2000.
Earnings per share is based on the weighted average number of shares outstanding
for the periods presented, reflecting the shares issued under the Agreement as
outstanding for all periods presented.
(3) Note Payable
On January 27, 2001 the Company assumed a promissory note in the amount of
$300,000 as part of the consideration under the recapitalization (see Note 1).
The Note bears interest at a rate of 8 percent per annum and matures on June
30,2001. Management is negotiating to extend the repayment terms to a later
date. These recapitalization costs have been expensed as part of the
consolidated statement of operations for the six months ended June 30, 2001.
On May 29, 2001, the Company executed a promissory note (the "Note") in the
amount of $500,000 for services rendered in years 2000 and 2001 related to the
development of its website. The principal and interest shall be due as follows:
(i) $150,000 plus accrued interest due and payable on June 30, 2001, (ii)
$200,000 plus accrued interest shall be due and payable on July 31,2001 and
(iii) $150,000 plus accrued interest shall be due and payable on August 15,2001.
The Company has not made any payments under the terms of the Agreement and as
such is in default. Interest accrues at the rate of 10 percent per annum.
Substantially all property and equipment has been pledged under the Agreement.
6
Management is negotiating to extend the repayment terms of the Note until such
time as additional capital proceeds are raised.
(4) Sale of Subsidiary
On December 7, 2000 the Company sold one of its two health club facilities to a
stockholder of the Company. The consideration under the contract aggregated
approximately $650,000 which included the assumption of certain liabilities of
approximately $260,000 by the buyer and the forgiveness of a promissory note in
the amount of $350,000. The Company realized a loss on the disposal of the
subsidiary of approximately $62,000.
During the six and twelve months ended June 30,2000 and December 31, 2000 the
Company recorded revenues of of approximately $432,000 and $800,000
respectively, from this health club facility which is included as part of the
consolidated statement of operations.
(5) Stock Based Compensation
On March 23, 2001 the Company granted 400,000 of stock options to certain key
employees. The exercise price is $0.10 and is discounted from a fair market
value of approximately $0.31 at the date of grant. The Company recorded a stock
based compensation charge in the first quarter of 2001 of $84,000 attributable
to the stock option discount.
During the year ended December 31, 2000, the Company entered into various
consulting agreements to render services principally related to ("the
Agreement") the completion of its subscription based website. For stock options
as defined under the Agreement, the Company had to adopt the stock option plan,
on or before March 31, 2001, which the Company did. The estimated fair value of
the options amounted to approximately $100,000, determined using the Black
Scholes Model, for services rendered during the six months ended June 30, 2001.
These costs have been capitalized as part of website development costs in the
balance sheet at June 30, 2001.
(6) Going Concern
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles, which contemplates the realization of
assets and settlements of liabilities in the normal course of business and
continuation of the Company as a going concern. The Company has incurred a net
loss of approximately $3.9 million and $1.7 million for the year ended December
31, 2000 and for the period May 28, 1999 [date of inception] to December 31,
1999. The Company has utilized approximately $2.0 million and $1.4 million in
cash during operations for the year ended December 31, 2000 and for the period
May 28, 1999 [ date of inception] to December 31, 1999. It is anticipated this
trend will continue since minimal revenue recognition is planned to be realized
until the internet web site is completed. During the fourth quarter of year
2001, the Company's business model anticipates minimal subscription based
revenue derived from the use of its web site.
The inability of the Company to generate cash from operations, considering
currently available funds, creates uncertainty about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern. The Company plans to raise additional capital proceeds to fund
the completion of its website, general working capital purposes and sustain
development stage operations during the year 2001. In addition, management
continues to implement various cost savings programs. The continuation of the
Company as a going concern is dependant upon the success of these plans.
(7) Subsequent Event
On July 26, 2001 the Company entered into an investment advisory services
agreement with an investment banking firm (the "Agreement") for a three year
period. Under the Agreement , the parties agree that the investment banking firm
shall act as the selected dealer in organizing a private placement on behalf of
the Company in an aggregate amount of $2.5 million which shall be set forth in a
selling agreement to be completed within forty five days from the execution of
this Agreement.
As an inducement to enter into the Agreement the Company agrees to pay certain
quarterly fees as defined and to issue certain warrants at an exercise price of
$0.10 per share for a period of five years commencing on the date of issuance.
7
Cyfit Wellness Solutions, Inc.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations
Three Months Ended June 30, 2001 and 2000
The Company's revenues, derived from its Health and Fitness Center, during the
three-month period ended June 30, 2001 amounted to approximately $103,600 versus
$279,400 for the same period in the prior year. The decrease of $175,800 from
revenues primarily results from the sale of one of two Health and Fitness
Centers in December 2000. Total operating expenses decreased by approximately
$575,900, from $1,390,000 to $814,100, due to lower costs associated with (i)
the nonrecurring product costs (research and development) of approximately
$294,000 and (ii) overall cost savings due to both the sale of the fitness
center and various cost-containment measures implemented by management.
As a result of the foregoing, the Company incurred a net loss of approximately
$710,500 or $0.03 per share (basic and diluted) for the three-month period ended
June 30, 2001 compared to a net loss of $1,110,600 or $0.05 per share (basic and
diluted) for the three-month period ended June 30, 2000.
Six Months Ended June 30, 2001 and 2000
The Company had revenues, derived from its Health and Fitness Center, during the
six-month period ended June 30, 2001 amounted to approximately $232,000 versus
$607,200 for the same period in 2000. The decline in revenues of approximately
$375,000 in revenues primarily results from the sale of one of two Health and
Fitness Centers in December 2000. Total operating expenses decreased by
approximately $422,000 from $2,303,800 to $1,881,600 due to lower costs
previously discussed offset by one-time merger-related costs of $300,000 related
to the Company's recapitalization, effective March 1, 2001.
As a result of the foregoing, the Company incurred a net loss of approximately
$1,649,600 or $0.08 per share (basic and diluted) for the six-month period ended
June 30, 2001 compared to a net loss of $1,696,600 or $0.08 per share (basic and
diluted) for the six-month period ended June 30, 2000.
Liquidity and Capital Resources
During the six months ended June 30, 2001, cash used by operating activities
approximated $410,400. Due to the difficult capital market conditions, the
Company is continually seeking various sources of capital to complete the final
stage of its product development and fund day-to-day operations. The Company
anticipates that it will continue to incur losses during the third and fourth
quarters of 2001. If the Company is unable to find additional capital sources,
it may have to further reduce its operations or cease operations.
Management is in negotiations with various underwriters to raise money. The
Company signed a contract with a major NYSE investment firm to raise $2.5
million in a private placement to be completed within 90-120 days of July 31,
2001.
The Company is in the process of negotiating repayment terms with various
debtors and vendors until such time as the Company obtains its capital needs. In
the interim, management continues to principally fund the day-to-day operations.
While currently in the final stages of implementation of its wellness product,
the Company's management anticipates quality assurance testing in the third
quarter and launching in the fourth quarter of 2001. Management expects sales of
the wellness product to commence early in the fourth quarter 2001. At the time
of launch, the Company intends to finalize pending sales contracts, which will
generate revenues that the Company has been securing over the past year. The
Company also intends to implement marketing programs to promote the awareness of
its wellness services.
8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CYFIT WELLNESS SOLUTIONS, INC.
August 17, 2001 By: /s/ EUGENE FERNANDEZ
-----------------------------
Eugene Fernandez
President
9