EXHIBIT 99.2
AUDITED FINANCIAL INFORMATION OF INNOZEN, INC. AS OF DECEMBER 31, 2006 AND 2005
AND FOR THE YEARS THEN ENDED.
INNOZEN, INC.
FINANCIAL STATEMENTS
YEARS ENDED
DECEMBER 31, 2006 AND 2005
INNOZEN, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006 AND 2005
CONTENTS
PAGE
Independent Auditors' Report...................................................1
Balance Sheets.................................................................2
Statements of Operations ......................................................3
Statements of Stockholders' Equity (Deficit) ..................................4
Statements of Cash Flows.......................................................5
Notes to Financial Statements..................................................6
GH&J
GREEN HASSON & JANKS LLP
BUSINESS ADVISORS AND CPAs
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Innozen, Inc.
We have audited the accompanying balance sheets of Innozen, Inc. as of December
31, 2006 and 2005, and the related statements of operations, stockholders'
equity (deficit) 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 the 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 Innozen, Inc. as of December
31, 2006 and 2005, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ Green Hason & Janks LLP
August 7, 2007
Los Angeles, California
INNOZEN, INC.
BALANCE SHEETS
ASSETS December 31
--------------------------
2006 2005
----------- -----------
CURRENT ASSETS:
Cash and Cash Equivalents $ 320,217 $ 1,006,231
Accounts Receivable - Trade (Net of Allowance for 49,814 107,827
Doubtful Accounts of $2,000 in 2006 and 2005)
Royalty and License Fee Receivables 50,420 275,879
Inventory 387,240 148,764
Other Current Assets 41,641 38,945
----------- -----------
TOTAL CURRENT ASSETS 849,332 1,577,646
PROPERTY AND EQUIPMENT (NET) 496,743 445,777
OTHER ASSETS:
Intangible Assets 130,763 56,429
Other Assets 17,500 17,500
----------- -----------
TOTAL OTHER ASSETS 148,263 73,929
----------- -----------
TOTAL ASSETS $ 1,494,338 $ 2,097,352
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes Payable $ 577,100 $ --
Current Maturities of Obligations Under Capital Leases 184,517 120,372
Accounts Payable and Accrued Expenses 455,309 110,556
Related Party Payables 158,285 58,285
Deferred Revenue 469,750 75,000
----------- -----------
TOTAL CURRENT LIABILITIES 1,844,961 364,213
OTHER LIABILITIES:
Obligations Under Capital Leases 202,833 260,297
Deferred Revenue 512,500 587,500
----------- -----------
TOTAL OTHER LIABILITIES 715,333 847,797
----------- -----------
TOTAL LIABILITIES 2,560,294 1,212,010
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible Preferred Stock - Series a - $0.0001 Par Value,
8,000,000 Shares Authorized; 6,950,826 and 6,701,274
Shares Issued and Outstanding in 2006 and 2005,
Respectively (Liquidation Preference of $3,055,850) 695 670
Common Stock - $0.0001 Par Value, 26,000,000 Shares
Authorized; 14,000,000 Shares Issued and Outstanding 1,400 1,400
Additional Paid-in-capital 5,607,755 5,605,284
Accumulated Deficit (6,675,806) (4,722,012)
----------- -----------
Total Stockholders' Equity (Deficit) (1,065,956) 885,342
----------- -----------
Total Liabilities and Stockholders'
Equity (Deficit) $ 1,494,338 $ 2,097,352
=========== ===========
the Accompanying Notes are an Integral Part of These Financial Statements
-2-
INNOZEN, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31
-----------------------------
2006 2005
----------- -----------
SALES:
Gross Sales $ 725,300 $ 540,042
Incentives and Promotional Discounts (288,780) (173,917)
----------- -----------
NET SALES 436,520 366,125
COST OF GOODS SOLD 466,812 721,495
----------- -----------
GROSS LOSS (30,292) (355,370)
ROYALTY INCOME 261,280 303,491
LICENSING INCOME 125,000 203,000
----------- -----------
TOTAL INCOME 355,988 151,121
OPERATING EXPENSES:
Research and Development Expenses 114,472 199,426
Manufacturing Development Expenses 281,202 67,921
Selling Expenses 472,141 391,767
General and Administrative Expenses 1,439,846 980,926
----------- -----------
TOTAL OPERATING EXPENSES 2,307,661 1,640,040
----------- -----------
LOSS FROM OPERATIONS (1,951,673) (1,488,919)
OTHER INCOME (EXPENSE):
Interest Expense (38,990) (2,979)
Interest Income 11,635 25,114
Other Income 26,034 49,725
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (1,321) 71,860
----------- -----------
LOSS BEFORE PROVISION
FOR INCOME TAXES (1,952,994) (1,417,059)
Provision for Income Taxes 800 800
----------- -----------
NET LOSS $(1,953,794) $(1,417,859)
=========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements
-3-
INNOZEN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2006 AND 2005
Convertible Preferred Stock -
Series A Common Stock
--------------------------------------------------- Additional Stockholders'
Number of Number of Paid-In Accumulted Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
----------- ---------- ----------- ---------- ----------- ----------- -----------
Balance at January 1, 2005 -- $ -- 14,000,000 $ 1,400 $ 2,662,350 $(3,304,153) $ (640,403)
Conversion of Notes Payable to
Convertible Preferred Stock - 1,250,004 125 -- -- 549,875 -- 550,000
Series A
Issuance of Convertible Preferred 5,445,588 544 -- -- 2,393,003 -- 2,393,547
Stock - Series A
Preferred Stock - Series A Issued 5,682 1 -- -- 56 -- 57
Pursuant to Exercise of Warrants
Net Loss -- -- -- -- -- (1,417,859) (1,417,859)
----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2005 6,701,274 670 14,000,000 1,400 5,605,284 (4,722,012) 885,342
249,552 25 -- -- 2,471 2,496
Preferred Stock - Series a Issued
Pursuant to Exercise of Warrants
Net Loss -- -- -- -- -- (1,953,794) (1,953,794)
----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2006 6,950,826 $ 695 14,000,000 $ 1,400 $ 5,607,755 $(6,675,806) $(1,065,956)
==============================================================================================
The Accompanying Notes are an Integral Part of These Financial Statements
-4-
INNOZEN, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31
--------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,953,794) $(1,417,859)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation and Amortization 79,654 1,876
(Increase) Decrease In:
Accounts Receivable - Trade 58,013 (15,461)
Royalty and License Fee Receivables 225,459 (103,765)
Inventory (238,476) (28,324)
Other Current Assets (2,696) (36,375)
Other Assets -- (17,500)
Increase (Decrease) In:
Accounts Payable and Accrued Expenses 362,180 (48,352)
Related Party Payables 100,000 70,285
Deferred Revenue 319,750 212,500
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,049,910) (1,382,975)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment -- (51,373)
Acquisition of Intangible Assets (74,334) (48,859)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (74,334) (100,232)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Notes Payable 577,100 --
Payments On Capital Lease Obligations (141,366) (9,592)
Proceeds Received From Issuance of Convertible
Preferred Stock - Series A 2,496 2,393,604
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 438,230 2,384,012
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (686,014) 900,805
Cash and Cash Equivalents - Beginning of Year 1,006,231 105,426
----------- -----------
CASH AND CASH EQUIVALENTS- END OF YEAR $ 320,217 $ 1,006,231
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Year for Interest $ 38,990 $ 2,979
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Property and Equipment Acquired With $ 148,047 $ 390,261
Capital Lease Obligations
Notes Payable Converted Into Convertible -- 550,000
Preferred Stock - Series A
the Accompanying Notes are an Integral Part of These Financial Statements
-5-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS
Innozen, Inc. (the company) was incorporated under the laws of the
State of Delaware on May 30, 2002. The company discovers, develops,
and markets, or out licenses, innovative over-the-counter (OTC)
health products. The company's goal is to develop high-quality OTC
products that successfully treat common consumer health problems
while minimizing the risk of side effects and is considered by many
to be the preeminent formulator and developer of thin film-strips
that deliver drug actives. The company maintains a drug research and
development facility and a manufacturing plant in Woodland Hills,
California.
(b) MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to use certain
estimates and assumptions. Those estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses during the reporting period. Although management believes
its estimates are appropriate, changes in assumptions utilized in
preparing such estimates could cause these estimates to change
sometime in the future.
(c) CASH AND CASH EQUIVALENTS
The company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash and
cash equivalents.
The company maintains its cash and cash equivalents in bank deposit
accounts which, at times, may exceed federally insured limits. The
company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk on cash and cash
equivalents.
(d) TRADE AND OTHER RECEIVABLES
Receivables are recorded when billed or accrued and represent claims
against third parties that will be settled in cash. The carrying
value of receivables, net of the allowance for doubtful accounts,
represents their estimated net realizable value. The company
performs periodic credit evaluation of its customers and generally
does not require collateral. The allowance for doubtful accounts is
estimated based on historical collection trends, type of customer,
the age of outstanding receivables and existing economic conditions.
If events or changes in circumstances indicate that specific
receivable balances may be impaired, further consideration is given
to the collectibility of those balances and the allowance is
adjusted accordingly. Past due receivable balances are written-off
when internal collection efforts have been unsuccessful in
collecting the amount due.
-6-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) INVENTORY
Inventory consists of raw materials, work-in-process and finished
goods at December 31, 2006 and raw materials and finished goods at
December 31, 2005. Inventory is stated at the lower of cost or
market using the first-in, first-out method.
(f) PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost, net of related
accumulated depreciation. Depreciation has been provided using the
straight-line method, based upon the following estimated useful
lives:
Capital Lease Equipment 5 Years
Leasehold Improvements 39 Years
Computer Equipment and Software 3 - 5 Years
Expenditures for maintenance and repairs are charged to operations
as incurred while renewals and betterments are capitalized.
(g) INTANGIBLE ASSETS
The company evaluates long-lived assets and certain identifiable
intangibles, other than goodwill, for impairment whenever events or
changes in circumstances indicate that the carrying value of an
asset may not be recoverable. An impairment loss is recognized when
the sum of the undiscounted future cash flows is less than the
carrying amount of the asset, in which case a write-down is recorded
to reduce the related asset to its estimated value. No such
impairment losses have been recognized during the years ended
December 31, 2006 and 2005.
Intangible assets subject to amortization would be amortized by use
of the straight-line method over their estimated useful lives as
follows:
Patents 20 Years
(h) REVENUE RECOGNITION
Revenue is recognized on sale of licensed products when title has
transferred.
License fees received up-front in exchange for the right to use
assets are recognized over the term of the licensing agreement.
Royalties ranging from 5% to 8% are based on actual sales of
licensed products which are recognized when reported as earned.
Deferred revenue is comprised of advance payments received under
various licensing, royalty and manufacturing agreements, the terms
of which range from five to fifteen years. The payments are not
creditable against royalties and are generally nonrefundable. At
December 31, 2006 and 2005, the company had received $982,250 and
$662,500, respectively, of such advance payments.
-7-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(i) CUSTOMER REBATES AND INCENTIVES
The company offers various rebates and incentives to its customers
based on customer sales volumes and advertising plans. The amounts
incurred are subject to changes in market conditions, customer
marketing strategies and changes in the profitability or
sell-through of the related merchandise. These rebates and
incentives are offered at the later of the date at which the related
revenue is recognized or the date at which the rebate or incentive
is offered and are recorded as reductions of sales in accordance
with EITF-01-09.
(j) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when
incurred. The amounts charged to operations during the years ended
December 31, 2006 and 2005 were $114,472 and $199,426, respectively.
(k) ADVERTISING
The company expenses advertising costs as incurred. Advertising
expense for the years ended December 31, 2006 and 2005 were $303,391
and $305,695, respectively.
(l) SHIPPING AND HANDLING FEES AND COSTS
Shipping and handling costs associated with inbound freight are
included with cost of goods sold. Shipping and handling costs
associated with outbound freight are included in operating expenses
and totaled $116,681 and $46,176 for the years ended December 31,
2006 and 2005, respectively.
(m) INCOME TAXES
Income taxes are provided based on income reported in the financial
statements adjusted for transactions that do not enter into the
computation of income taxes payable.
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying currently enacted statutory tax
rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing
assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(n) STOCK-BASED COMPENSATION
The company accounts for stock transactions with non-employees under
the provisions of Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment. Transactions in which goods or
services are the consideration received for the issuance of equity
stock are accounted for based on the fair value of the consideration
received or the fair value of the equity stock issued, whichever is
more reliably measurable.
-8-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(n) STOCK-BASED COMPENSATION (continued)
The company also accounts for stock transactions with employees
under the provisions of SFAS No. 123(R), which became effective for
reporting periods beginning after December 15, 2005. Under SFAS No.
123(R), the cost of services received from employees in exchange for
awards of share-based compensation is generally measured based on
the grant-date fair value of the equity instruments issued. However,
the company shall continue to account for any portion of awards
outstanding at the date of initial application of SFAS No. 123(R),
using the accounting principles originally applied to those awards.
As such, the company has continued to apply the provisions of APB
opinion 25, Accounting for Stock Issued to Employees, to awards
outstanding prior to January 1, 2006. In terms of APB Opinion 25,
compensation costs for stock options, if any, are measured as the
excess of the market price of the company stock at the date of grant
over the amount an employee must pay to acquire the stock. No
accounting recognition is given to stock options granted at or above
fair market value until the options are exercised. Upon exercise,
net proceeds, including tax benefits realized, are credited to
stockholders' equity.
(o) RECENT ACCOUNTING PRONOUNCEMENT
In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement 109." FIN 48
clarifies the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes
a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken, or
expected to be taken, on a tax return. FIN 48 is effective for
fiscal years beginning after December 15, 2006. If there are changes
in net assets as a result of application of FIN 48, these will be
accounted for as an adjustment to retained earnings. The company
expects to adopt FIN 48 in the first quarter of 2007 and has not
currently determined the impact of FIN 48 on its financial position
and results of operations.
NOTE 2 - INVENTORY
Inventory consists of the following: 2006 2005
-------- --------
Raw Materials $101,791 $ 22,918
Work in Process 109,011 --
Finished Goods 176,438 125,846
-------- --------
TOTAL INVENTORY $387,240 $148,764
======== ========
-9-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2006 2005
--------- ---------
Capital Lease Equipment $ 518,446 $ 390,260
Leasehold Improvements 41,143 41,143
Computer Equipment and Software 18,684 16,250
--------- ---------
TOTAL 578,273 447,653
Less: Accumulated Depreciation (81,530) (1,876)
--------- ---------
NET PROPERTY AND EQUIPMENT $ 496,743 $ 445,777
========= =========
Depreciation expense for the years ended December 31, 2006 and 2005
amounted to $79,654 and $1,876, respectively, which includes depreciation
of $74,064 for capitalized leased assets for the year ended December 31,
2006. Accumulated depreciation for property held under capital leases was
$74,064 as December 31, 2006. At December 31, 2005, property held under
capital leases had not yet been placed in service.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets consist of the following:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------------ --------- ------------
Subject To Amortization:
Patents $ 127,788 $ -- $ 127,788
Not Subject to Amortization:
Trademarks 2,975 -- 2,975
------------ --------- ------------
TOTAL INTANGIBLE ASSETS
AT DECEMBER 31, 2006 $ 130,763 $ -- $ 130,763
============ ========= ============
Subject To Amortization:
Patents $ 53,604 $ -- $ 53,604
Not Subject to Amortization:
Trademarks 2,825 -- 2,825
------------ --------- ------------
TOTAL INTANGIBLE ASSETS
AT DECEMBER 31, 2005 $ 56,429 $ -- $ 56,429
============ ========= ============
No amortization expense was charged to operations for the years ended
December 31, 2006 and 2005 as the company is in the process of receiving
final approvals on its patents.
-10-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 5 - NOTES PAYABLE
In 2006, the company issued promissory notes amounting to $577,100 which
were convertible to Convertible Preferred Stock- Series B at an exercise
price of $0.50 per share. Unless converted, the notes accrue interest at
8% per annum from January 1, 2007 and are payable on or before February
28, 2007.
In 2004, the company issued promissory notes amounting to $550,000 which
were convertible to Convertible Preferred Stock - Series A at an exercise
price of $ 0.44 per share. On February 23, 2005, these notes were
converted into 1,250,004 shares of Convertible Preferred Stock - Series A.
NOTE 6 - CAPITAL LEASE OBLIGATIONS
During the year ended December 31, 2005, the company entered into a
sale-leaseback arrangement. Under the arrangement, the company sold
certain manufacturing equipment and leased it back for a period of three
years. The leaseback has been accounted for as a capital lease. No gain
was realized on this transaction.
The following is a schedule by years of future minimum lease payments
under capital leases together with the present value of the net minimum
lease payments as of December 31, 2006:
YEARS ENDING DECEMBER 31
2007 $ 213,420
2008 213,419
-----------
TOTAL MINIMUM LEASE PAYMENTS 426,839
Less: Amount Representing Interest (39,489)
-----------
PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS 387,350
Less: Current Obligations (184,517)
-----------
NON-CURRENT OBLIGATIONS
UNDER CAPITAL LEASES $ 202,833
===========
-11-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 7 - INCOME TAXES
Deferred income tax assets (liabilities) are comprised of the following:
2006 2005
----------- -----------
DEFERRED INCOME TAX ASSETS:
Net Operating Loss Carryover $ 2,014,000 $ 1,356,000
Research and Development Credit Carryover 125,000 74,000
Deferred Revenue 354,000 228,000
Other Deferred Income Tax Assets 2,000 3,000
----------- -----------
TOTAL DEFERRED INCOME TAX ASSETS 2,495,000 1,661,000
DEFERRED INCOME TAX LIABILITIES:
State Income Taxes (164,000) (98,000)
Depreciation and Amortization (3,000) (2,000)
----------- -----------
TOTAL DEFERRED INCOME
TAX LIABILITIES (167,000) (100,000)
----------- -----------
NET DEFERRED INCOME
TAX ASSETS 2,328,000 1,561,000
Less: Valuation Allowance (2,328,000) (1,561,000)
----------- -----------
TOTAL NET DEFERRED INCOME TAX LIABILITIES $ -- $ --
=========== ===========
The provision for income taxes for the year ended December 31, 2006 and
2005 consist of the following:
2006 2005
----------- -----------
Current -- Federal $ -- $ --
Current -- State 800 800
Deferred Income Tax Benefit -- --
----------- -----------
PROVISION FOR INCOME TAXES $ 800 $ 800
=========== ===========
The provision for income taxes differs from the federal statutory rate of
34% primarily due to the non-deductibility of certain expenses and the
effect of the valuation allowance.
The company has net operating loss carryforwards for both federal and
state income tax purposes for 2006 of approximately $4,700,000, which
expire in years 2022 through 2024. In addition, the company has research
and development credit carryforwards for both federal and state income tax
purposes for 2006 of approximately $87,000 and $38,000, respectively.
A valuation allowance was established to reduce the effect of research and
development credit carryovers, net operating losses and deferred income
tax assets to the amount that is likely to be realized. During the year
ended December 31, 2006 the valuation allowance increased by $767,000.
-12-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 8 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2006, the company had a note payable to
an affiliated corporation with common ownership in the amount of $100,000,
at a 7.5% interest rate per annum, which was repaid in June 2007. As of
December 31, 2006, this amount was included in related party payables.
In addition, during the year ended December 31, 2005, this affiliated
corporation paid $58,285 for certain expenses on behalf of the company,
which is included in related party payables at December 31, 2006 and 2005.
NOTE 9 - CONVERTIBLE PREFERRED STOCK
The company is authorized to issue two classes of stock - common stock and
preferred stock. Preferred stock authorized to issue is 8,0000,000 shares
divided into series. The first series consists of 8,000,000 shares
designated as Convertible Preferred Stock - Series A. During 2006, 249,552
shares of Convertible Preferred Stock - Series A were issued at $0.01 per
share for proceeds of $2,496 through the exercise of warrants. During
2005, 5,682 warrants were exercised for total consideration of $57.
During 2005, $550,000 of promissory notes were converted into 1,250,004
shares of Convertible Preferred Stock - Series A at $0.44 per share. In
addition, 5,445,588 shares of Convertible Preferred Stock - Series A were
issued at $0.44 per share for proceeds of $2,393,547, net of issuance
costs.
Each share of Convertible Preferred Stock - Series A is convertible at the
option of the holder into one share of common stock at the original Series
A issue price of $0.44 per share or at an automatic conversion of the
earlier of a public offering of common stock or by agreement of at least
80% of the preferred stockholders. There were no conversions during 2006
and 2005.
In addition, a holder of each share of Convertible Preferred Stock -
Series A shall have the right to one vote for each share of common stock
into which such share of Convertible Preferred Stock - Series A could then
be converted. Voting powers are equivalent to those of common
stockholders.
The holders of the Convertible Preferred Stock - Series A are entitled to
dividends once declared by the Board of Directors. No dividends were
declared for the year ended December 31, 2006 and 2005.
Upon liquidation, in preference to any distribution to holders of common
stock, the holders of Convertible Preferred Stock - Series A shall receive
the original Series A issue price of $0.44 per share and an amount equal
to all declared but unpaid dividends on such share.
-13-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 10 - STOCK OPTION PLAN
During 2005, the company adopted a stock option plan which allows the
company to grant up to 2,600,000 common shares to employees, non-employee
board members and consultants through stock options, stock appreciation
rights and restricted stock awards.
(a) STOCK OPTIONS
The plan offers two types of stock options, incentive stock options
and nonqualified stock options. Incentive stock options may only be
granted to employees and the exercise price of shares shall be
greater than or equal to the fair market value of a share of company
stock on the date the option is granted. If the employee holds stock
carrying more than 10% of the voting power of the company, then the
exercise price must not be less than 110% of the fair market value
of the company stock on the date the option is granted. Nonqualified
stock option's exercise price shall not be less than 85% of the fair
market value of such shares on the grant date, with the provision
that the exercise price for a 10% stockholder shall not be less than
110% of the fair market value of such shares on the grant date. If
an employee is exercising an incentive stock option for the first
time and the aggregate fair market value of the stock on the date of
the grant exceeds $100,000, then the excess shall be treated as a
nonqualified stock option. The terms of the options cannot exceed
ten years from the option grant date, with the provision that for a
10% stockholder, the option term cannot exceed five years. With the
exception of options granted to senior management, options granted
to employees generally vest at a rate of 25% per annum, commencing
on the first anniversary of the grant date. Options granted during
2005 had an additional immediate vesting of 25%.
Total options outstanding were 2,540,390 and 2,485,000 at December
31, 2006 and 2005, respectively. 100,000 options were granted during
the year ended December 31, 2006 and 44,610 options were forfeited
during the year then ended. During the year ended December 31, 2005,
2,460,000 options were granted and no options were forfeited during
the year then ended. No options were exercised during the years
ended December 31, 2006 and 2005. The exercise prices of the stock
options which were granted during the years ended December 31, 2006
and 2005 were equal to the estimated fair value of the company's
stock on the date of the grant.
A summary of stock option data is as follows:
Options Outstanding
----------------------------------------------------------
Weighted
Weighted Average Options
Range of Average Remaining Exercisable
Exercise Exercise Number of Contractual Number of
Prices Price Shares Life Shares
- --------------------------------------------------------------------------------
2006 $0.30 to $0.35 $0.30 2,540,390 8.29 1,217,500
2005 $0.30 $0.30 2,485,000 9.28 615,000
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INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE 10 - STOCK OPTION PLAN (continued)
(a) STOCK OPTIONS (continued)
Proforma information regarding net income is required by SFAS No.
123 (before revision) and has been determined as if the company had
accounted for its employee stock options under the fair value method
of that statement. The fair value for these options was estimated at
the date of grant using the minimum value method, which utilizes a
near zero volatility factor. The remaining assumptions, which are
weighted averages under this model, are as follows:
Expected Life 10 Years
Risk-Free Interest Rate 7.25% to 8.25%
Dividend Yield 0%
This option valuation model requires input of highly subjective
assumptions. Because the company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion,
the existing model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Based on the fair value method pricing computation under SFAS No.
123(R), net loss for the year ended December 31, 2006 would not be
materially different from that reported in the company's
accompanying statements of operations and stockholders' equity
(deficit). Accordingly, no compensation expense has been recognized
by the company under its stock option plan for the year ended
December 31, 2006.
Based on the minimum value method pricing computation under SFAS No.
123, proforma net loss for the year ended December 31, 2005 would
not be materially different from that reported in the company's
accompanying statements of operations and stockholders' equity
(deficit).
(b) STOCK APPRECIATION RIGHTS
Stock appreciation rights (SAR) may be granted separately or in
tandem with stock options. If granted with incentive stock options,
the SAR can only be granted in tandem at the time of the grant of
the incentive stock option. Upon exercise of a stock option, the SAR
relating to the company stock covered by such option shall
terminate. Upon exercise of the SAR, the related stock option shall
terminate to the extent of an equal number of shares of the company.
The SAR exercise price shall be an amount equal to the value of the
stock appreciation, which is payable in cash, company stock or a
combination. The stock appreciation for a SAR is the excess of the
fair market value of the underlying company stock on the date of
exercise of the SAR over the base amount of the SAR established by
the Committee at the time the SAR is granted. No SAR shares were
issued or exercised during the years ended December 31, 2006 and
2005.
-15-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 10 - STOCK OPTION PLAN (continued)
(c) RESTRICTED STOCK AWARDS
Restricted stock awards may be granted or transferred to employees
for consideration for qualified performance-based compensation or
for no consideration. The Committee must set out in writing the
goals, performance period, threshold, target and maximum amounts
that may be paid if the performance goals are met. The restricted
stock award will lapse if the employee ceases to be employed or
provide service to the company during the restriction period, which
is described on the stock award certificate. The grantee has the
right to vote and receive dividends on such award shares during the
restriction period. With the exception of restricted stock awards
granted to officers, employee restricted stock awards generally vest
at a rate of 20% per annum, commencing on the first anniversary of
the grant date. No restricted stock awards were granted or exercised
during the years ended December 31, 2006 and 2005.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
The company leases its facility in Woodland Hills, California. The
agreement requires monthly payments of $7,616 and expires on January
1, 2010. The company has the option to extend the term for one
additional year.
The minimum lease commitments as of December 31, 2006 are as
follows:
YEARS ENDING DECEMBER 31
2007 $ 127,572
2008 143,700
2009 158,828
------------
TOTAL $ 430,100
============
Total rent expense under operating leases for the year ended
December 31, 2006 and 2005 amounted to $135,636 and $101,806,
respectively.
(b) MANUFACTURING AGREEMENT
In 2005, the company entered into an agreement with an unrelated
entity whereby the company would agree to pay 6% of net revenues
from the manufacturing of its products except Suppress products.
This agreement was entered into in consideration of various services
provided to the company, including the completion of the equipment
lease financing of the company's film strip manufacturing equipment.
Net revenues are defined as all non-refundable third party revenues
received by the company for manufacturing at its on-site facility,
minus the cost to the company, including labor, materials, shipping
and all other manufacturing-related costs. The agreement will expire
in November 2009, or on the date the majority interest of the
company is sold. No amounts were payable under this agreement during
the year ended December 31, 2006 and 2005.
-16-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
(c) OUTSTANDING WARRANTS TO PURCHASE STOCK
At December 31, 2006 and 2005 the holders of the Convertible
Preferred Stock - Series A held 731,955 and 981,507 warrants to
purchase additional shares of Convertible Preferred Stock - Series
A, respectively. The warrants expire at various dates through June
2015 and have an exercise price of $0.01 per share, subject to
adjustment to prevent dilution of the rights granted under the
warrant. In 2005, 5,682 warrants were exercised for a total
consideration of $57. In 2006, 249,552 warrants were exercised for
total consideration of $2,496. In January 2007, an additional
394,892 warrants were exercised for total consideration of $3,948.
In addition, at December 31, 2006 and 2005, certain consultants to
the company had outstanding warrants to purchase 540,000 and 507,750
shares of common stock at prices ranging from $0.01 to $0.40 per
share. The warrants expire at various dates through December 2016.
(d) DISTRIBUTION CONTRACT
During 2006, the company entered into a distribution contract with
Schering-Plough PTY Limited (Schering) whereby the company granted
to Schering an exclusive, royalty-free license to distribute,
market, offer to sell and import the company's film strip products
in Australia, New Zealand, Singapore, Indonesia, Pakistan, Hong
Kong, Taiwan, Vietnam, Malaysia, Thailand, Korea, Philippines, India
and China (territories). Schering will appoint the company as the
exclusive supplier of film strip products in the cough and cold
market to Schering for distribution in the territories. With respect
to all purchase orders submitted by Schering to the company,
Schering shall wire to the company 50% of the invoiced amount due
upon submitting the purchase order and the remaining 50% of the
invoice amount due when Schering receives shipping notification of
the order. The contract expires in May 2011.
No amount was paid relating to this contract for the year ended
December 31, 2006.
NOTE 12 - MAJOR CUSTOMERS
The company had sales to three customers during the year ended December
31, 2006, which accounted for approximately 82% of net product sales. As
of December 31, 2006, the amounts due from these customers were
approximately 64% of total accounts receivable and royalty and license fee
receivables.
During the year ended December 31, 2005, the company had sales to three
customers which accounted for approximately 54% of net product sales. As
of December 31, 2005, the amounts due from these customers were
approximately 45% of total accounts receivable and royalty and license fee
receivables.
-17-
INNOZEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
NOTE 13 - SUBSEQUENT EVENTS
In February 2007, the company filed its Fourth Amended and Restated
Certificate of Incorporation. Under the Amendment, the company is
authorized to issue 37,000,000 shares broken down into 27,000,000 shares
of common stock at par value of $0.0001 per share, 8,000,000 shares of
Preferred Stock -- Series A at par value of $0.0001 per share and
2,000,000 shares of Preferred Stock - Series B shares at par value of
$0.0001 per share.
In February 2007, $577,100 of promissory notes were converted into
1,154,200 shares of Convertible Preferred Stock - Series B at $0.50 per
share. In addition, 230,840 warrants were received upon the conversion of
the promissory notes.
In May 2007, Healthsport, Inc. (Healthsport) entered into an Agreement and
Plan of Merger (the merger) with the company and Innozen Acquisition Sub,
Inc. (Acquisition Sub), a wholly-owned subsidiary of Healthsport.
Immediately before the merger, the company converted all their preferred
stocks and warrants to common stock. At the effective time and upon the
terms and conditions of the merger and in accordance with Delaware General
Corporate Law, in exchange for 18,250,000 shares of Healthsport's common
stock, Acquisition Sub was merged with and into the company, after which,
the company became a wholly-owned subsidiary of Healthsport. The company
continued as the surviving corporation and the separate existence of
Acquisition Sub ceased to exist. After the merger each of the company's
stock options was converted into the right to receive a vested option to
purchase one Healthsport common share at an exercise price of $1.36 per
share based on a $0.30 current exercise price of the company. The
company's stock options with exercise prices higher than $0.30 will be
converted into options of Healthsport with an equally increased exercise
price.
-18-