Exhibit 99.2
DietSmart Inc.
(formerly Dietology)
Financial Statements
Period from June 15, 1999 (Inception)
to June 30, 2000
DietSmart Inc.
Index
Report of independent certified public accountants 2
Financial statements:
Balance sheet 3
Statement of loss 4
Statement of stockholders' equity 5
Statement of cash flows 6
Summary of business and significant accounting policies 7-10
Notes to financial statements 11-19
1
Report of Independent Certified Public Accountants
The Stockholders
DietSmart Inc.
New York, New York
We have audited the accompanying balance sheet of DietSmart Inc. ("Company"), a
company in the development stage, as of June 30, 2000, and the related
statements of loss, stockholders' equity and cash flows for the period from June
15, 1999 (inception) to June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DietSmart Inc. at June 30,
2000, and the results of its operations and its cash flows for the period from
June 15, 1999 (inception) to June 30, 2000, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming DietSmart Inc.
will continue as a going concern. As discussed in Note 1, the Company is in the
development stage, has had nominal revenues from operations and has generated a
net loss of $1,534,408 since inception. In addition, the Company will require
substantial, additional funds for development and marketing of its products.
These matters raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
October 4, 2000
2
DietSmart Inc.
Balance Sheet
June 30, 2000
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Assets
Current:
Cash $ 370,936
Prepaid sponsorship agreement (Note 3) 100,000
Other current assets 15,918
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Total current assets 486,854
Deferred promotion agreement (Note 6) 275,000
Security deposit 20,665
Deferred consulting fees (Note 3) 362,674
Property and equipment, net (Note 2) 498,284
--------------------------------------------------------------------
$ 1,643,477
====================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses (Note 3) $ 190,187
Deferred compensation (Note 4) 156,250
Compensation payable (Note 3) 100,000
--------------------------------------------------------------------
Total liabilities 446,437
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Commitments (Notes 3, 4 and 5)
Stockholders' equity (Note 3):
Preferred stock - 7,000,000 shares authorized -
Series A preferred stock, $.001 par value -
2,000,000 shares authorized, 1,645,000 issued
and outstanding 1,645
Series B preferred stock, $.001 par value -
1,538,462 shares authorized, 307,693 issued and
outstanding 308
Series B preferred stock - 76,923 shares 77
subscribed
Common stock, $.001 par value - 18,000,000 shares
authorized, 6,572,361 issued and outstanding 6,572
Additional paid-in capital 3,623,931
Unearned compensation (901,085)
Deficit accumulated during the development stage (1,534,408)
Treasury stock, at cost (3,427,639 shares) -
Total stockholders' equity 1,197,040
--------------------------------------------------------------------
$ 1,643,477
====================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
3
DietSmart Inc.
Statement of Loss
Period from June 15, 1999 (inception) to June 30, 2000
---------------------------------------------------------------------
Interest income $ 19,464
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Operating expenses:
Salaries 474,795
Professional fees 295,121
Stock-based compensation to employees and 199,115
officers (Note 3)
General and administrative 154,447
Stock-based consulting fees (Note 3) 141,376
Consultant fees 124,459
Sales and marketing 84,058
Rent (Note 3) 55,200
Depreciation and amortization 25,301
---------------------------------------------------------------------
Total operating expenses 1,553,872
---------------------------------------------------------------------
Net loss $(1,534,408)
=====================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
4
DietSmart Inc.
Statement of Stockholders' Equity
Period from June 15, 1999 (inception) to June 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
Preferred stock
Preferred stock subscribed
--------------------------------------- -------------------
Series A Series B Series B Common stock
---------------- ---------------- ------------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------------------------------------------
Initial contribution - $ - - $ - - $ - 200 $ 200
Stock split - - - - - - 9,999,800 9,800
Contribution of treasury shares - - - - - - (3,427,639) (3,428)
Options issued for consulting services - - - - - - - -
Conversion of convertible debt to
Preferred Stock Series A 400,000 400 - - - - - -
Issuance of Preferred Stock Series A 1,245,000 1,245 - - - - - -
Options issued to an officer and an
employee as compensation - - - - - - - -
Issuance of unvested options to an
officer and an employee - - - - - - - -
Issuance of Preferred Stock Series B
for cash - - 115,385 116 - - - -
Issuance of Preferred Stock Series B in
lieu of payment of a promotional
agreement - - 192,308 192 - - - -
Subscribed shares of Preferred Stock
Series B - - - - 76,923 77 - -
Net loss from inception through
------------------------------------------------------------------------------------------------------------------------------------
June 30, 2000 - - - - - - - -
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 1,645,000 $1,645 307,693 $308 76,923 $77 6,572,361 $ 6,572
====================================================================================================================================
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Deficit
accumulated
Additional during the Total
paid-in Unearned development Treasury Stock stockholders'
-------------------
capital compensation stage Shares Amount equity
------------------------------------------------------------------------------------------------------------------------------------
Initial contribution $ 10,000 $ - $ - - $ - $ 10,200
Stock split (9,800) - - - - -
Contribution of treasury shares 3,428 - - 3,427,639 - -
Options issued for consulting services 387,133 - - - - 387,133
Conversion of convertible debt to
Preferred Stock Series A 399,600 - - - - 400,000
Issuance of Preferred Stock Series A 1,243,755 - - - - 1,245,000
Options issued to an officer and an
employee as compensation 189,115 - - - - 189,115
Issuance of unvested options to an
officer and an employee 901,085 (901,085) - - - -
Issuance of Preferred Stock Series B
for cash 149,884 - - - - 150,000
Issuance of Preferred Stock Series B in
lieu of payment of a promotional 249,808 - - - - 250,000
agreement
Subscribed shares of Preferred Stock
Series B 99,923 - - - - 100,000
Net loss from inception through
------------------------------------------------------------------------------------------------------------------------------------
June 30, 2000 - - (1,534,408) - - (1,534,408)
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 $3,623,931 $(901,085) $(1,534,408) 3,427,639 $ - $ 1,197,040
====================================================================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
5
DietSmart Inc.
Statement of Cash Flows
Period from June 15, 1999 (inception) to June 30, 2000
----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,534,408)
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Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of consulting contracts compensated via the issuance of options 24,459
Noncash consulting expenses provided in exchange for the issuance of common stock 100,000
Deferred compensation 156,250
Noncash compensation expense to officers and employees in exchange for options and
shares 199,115
Depreciation and amortization 25,301
Changes in operating assets and liabilities:
Prepaid sponsorship agreement (100,000)
Prepaid promotion agreement (25,000)
Other assets (15,918)
Security deposit (20,665)
Accounts payable 151,646
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Total adjustments 495,188
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Net cash used in operating activities (1,039,220)
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Cash flows from investing activities:
Capital expenditures (485,044)
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Cash flows from financing activities:
Issuance of common stock 200
Issuance of convertible debt 400,000
Issuance of Preferred Stock Series A 1,245,000
Issuance of Preferred Stock Series B 150,000
Subscribed share of Preferred Stock Series B 100,000
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,895,200
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Net increase in cash 370,936
Cash, beginning of period -
----------------------------------------------------------------------------------------------------------
Cash, end of period $ 370,936
=========================================================================================================
See accompanying summary of business and significant accounting policies
and notes to financial statements.
6
DietSmart Inc.
Summary of Business and Significant Accounting Policies
Business DietSmart Inc. ("DietSmart" or the "Company"), a
development stage enterprise, was incorporated on
June 15, 1999 under the name, Dietology, under the
laws of the State of Delaware. During January 2000,
the Company changed its name to DietSmart, Inc.
DietSmart is an online weight loss service that
provides its clients with custom-tailored diet and
fitness programs for a fee.
Basis of Presentation The financial statements have been prepared in
accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage
Enterprises," which requires development stage
enterprises to employ the same accounting principles
as operating companies.
Property and Equipment Property and equipment are stated at cost.
Depreciation will be computed using the straight-line
method over the estimated useful lives of the assets,
which range from three to seven years.
Use of Estimates The preparation of 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 disclosures of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition To date, the Company has generated nominal revenues.
DietSmart anticipates that its revenue will primarily
be comprised of monthly registration fees,
commissions, advertising and other revenue.
The Company will recognize revenues according to the
type of product or service being sold and the
structure of the contract negotiated with the
individual.
7
DietSmart Inc.
Summary of Business and Significant Accounting Policies
Advertising Revenue
The Company will also earn revenue from the sale of
advertising on its web site. These revenues will be
recognized as the advertisement is displayed.
Comprehensive Income The Company is required to report comprehensive
income under SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting
and display of comprehensive income, its components
and accumulated balances. Comprehensive income is
defined to include all changes in equity except
those resulting from investments by owners and
distributions to owners. There were no items of
comprehensive income during the period presented.
Income Taxes The Company uses the liability method of accounting
for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Deferred income tax
assets and liabilities are recognized based on the
temporary differences between the financial
statement and income tax bases of assets,
liabilities and carryforwards using enacted tax
rates. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply
to taxable income in the years in which those
temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized
in income in the period that includes the enactment
date. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the
amount expected to be realized.
The Company has net operating losses ("NOLs") of
approximately $1,045,000 which expire in 2020.
Deferred tax assets resulting from these NOLs, the
stock-based compensation issued to consultants and
employees not yet exercised, and deferred
compensation have been offset with a valuation
allowance of a full amount.
8
DietSmart Inc.
Summary of Business and Significant Accounting Policies
Stock-Based Compensation The Company accounts for its stock option awards
under the intrinsic value based method of
accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued
to Employees". Under the intrinsic value based
method, compensation cost is the excess, if any,
of the fair market value of the stock at grant
date or other measurement date over the amount an
employee must pay to acquire the stock. The
Company will make pro forma disclosures of net
loss as if the fair value based method of
accounting had been applied, as required by SFAS
No. 123, "Accounting for Stock-Based
Compensation."
For option and stock grants to nonemployees, the
Company capitalizes certain costs and amortizes
the ascribed value of such grants over the related
service period or useful life of the underlying
asset.
Capitalized Software In March 1998, the American Institute of Certified
Costs Public Accountants ("AICPA") issued Statement of
Position No. 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance over accounting for computer software
developed or obtained for internal use including
the requirement to capitalize specified costs and
amortization of such costs.
The Company has capitalized certain incurred
software development costs in connection with its
online services. The costs associated with
research and development of such technology were
expensed as incurred. Software development costs
incurred subsequent to establishing technological
feasibility have been capitalized. Technological
feasibility is established upon the completion of
a detailed program design (in the absence of any
high risk issues or uncertainties). Capitalized
software costs are being amortized over a period
of three years. Maintenance costs incurred in
connection with the software are being expensed as
incurred.
9
DietSmart Inc.
Summary of Business and Significant Accounting Policies
In 2000, the Emerging Issues Task Force ("EITF")
issued a consensus on EITF Issue No. 00-2, "Website
Development Costs," which established guidelines
for accounting for website development costs and is
effective for quarterly periods beginning after
June 30, 2000. Although the Company is still
evaluating its impact, the Company does not believe
its adoption will have a significant effect on its
financial statements.
10
DietSmart Inc.
Notes to Financial Statements
1. Going Concern The accompanying financial statements have been
prepared assuming that the Company will continue
as a going concern. The Company is in the
development stage and has had nominal revenues
from operations since inception and has generated
a net loss of $1,534,408. There can be no
assurance that the Company will be able to obtain
the substantial additional capital resources
necessary to pursue its business plan or that any
assumptions relating to its business plan will
prove to be accurate. The Company is pursuing
sources of additional financing and there can be
no assurance that any such financing will be
available to the Company on commercially
reasonable terms, or at all. Any inability to
obtain additional financing will have a material
adverse effect on the Company, including possibly
requiring the Company to significantly curtail or
cease operations.
These factors raise substantial doubt about the
ability of the Company to continue as a going
concern. The financial statements do not include
any adjustments that might result from the outcome
of this uncertainty.
2. Property and Property and equipment, net consists of the
Equipment, Net following:
June 30, 2000
-------------------------------------------------------------
Capitalized software development costs $363,207
Computer equipment 103,390
Furniture and equipment 28,991
Telecommunication equipment 27,997
-------------------------------------------------------------
523,585
Less: Accumulated depreciation and
amortization (25,301)
-------------------------------------------------------------
Property and equipment, net $498,284
=============================================================
11
DietSmart Inc.
Notes to Financial Statements
3. Commitments Lease Commitments
The Company leases office space for its corporate
headquarters in New York City under an operating lease
through November 2002.
The minimum lease payments required under the
noncancellable operating lease for the years subsequent
to June 30, 2000 approximate:
Year ending June 30,
-----------------------------------------
2001 $ 92,000
2002 96,000
2003 38,000
-----------------------------------------
$226,000
=========================================
Total rent expense for the period from June 15, 1999
(inception) to June 30, 2000 was approximately $48,000.
Consulting Agreements
During October 1999, the Company entered into a four-
year consulting agreement whereby the consultant would
perform advisory, web development and maintenance
services for the Company. The value of the contract was
agreed to be $500,000. According to the terms of the
contract, the Company is required to pay $172,000 cash
and issue options to purchase 327,639 shares of Company
common stock at an exercise price equal to $0.01. For
the services rendered during the period from inception
through June 30, 2000, the Company has capitalized
software costs under this agreement totaling $88,541,
which includes $50,000 of cash payments. Accounts
payable includes $38,541 representing the amount of the
liability outstanding for services performed to date.
12
DietSmart Inc.
Notes to Financial Statements
On January 14, 2000, the Company signed an annual
consulting contract for business advisory and
promotional services in exchange for 270,000 shares of
common stock to be delivered on January 14, 2001. The
value ascribed to this contract was based on the fair
value of the Company's common stock on January 14,
2000. The shares are earned on a monthly basis and, in
the event the contract is terminated prior to the
delivery date, the Company must deliver the pro rata
portion of earned shares. At June 30, 2000, the Company
has accrued a charge of approximately $100,000. If and
when such shares are issued, the Company will reduce
this liability and increase stockholders' equity.
From December 1999 through March 2000, the Company
granted options to nine consultants with a fair value
of $168,859 for services to be performed for periods up
to 5 years. The fair values ascribed to these option
grants was determined using a binomial mode option
model as described in Note 5. These amounts have been
recorded as deferred consulting fees and are being
amortized over the related contract lives. During the
period from December 16, 1999 through June 30, 2000,
$24,459 has been amortized based upon the terms of the
underlying contracts.
Sponsorship Agreement
The Company has entered into an agreement with an
online network whereby the network guarantees the
delivery of impressions and banners for the Company.
The commitment for this agreement is $150,000 for the
year ending June 2001. Originally, this agreement
required fees of $750,000, but during September 2000,
the Company renegotiated this commitment to $150,000.
13
DietSmart Inc.
Notes to Financial Statements
4. Employment The Company has entered into employment agreements
Agreements ("Agreements") with certain key employees ("Executives")
providing for future minimum annual compensation as
follows:
Year ending June 30,
----------------------------------------------------------
2001 $225,000
2002 225,000
2003 225,000
2004 68,750
==========================================================
Upon execution of the Agreements, the Executives entered
into a deferral agreement with the Company that permits
them to defer payment of their bonus and base salaries
from the Company to a future date. The amount deferred by
the Executives shall vest 100% upon the earlier to occur
of (i) the date of an investor financing, or series of
related financings, occurring on or after January 1, 2000
and securing gross proceeds to the Company of at least
$2,000,000 or (ii) the date of the Executive's termination
of employment with the Company other than the Executive's
voluntary termination by the Company for cause. The
compensation will accrue interest at the rate of 6% per
annum. For the period from October 1, 1999 (inception) to
June 30, 2000, deferred compensation expense was $156,250.
14
DietSmart Inc.
Notes to Financial Statements
5. Stock Options On December 16, 1999, the Company adopted the 1999 Stock
Option Plan ("Plan") which provides for the granting of
non-qualified stock options and common shares to
employees, non-employee directors and consultants and the
granting of incentive stock options to employees. Awards
of up to a maximum aggregate of 3,427,639 shares of common
stock have been reserved for the Plan. As of June 30,
2000, 2,379,750 options were granted to employees and
consultants, 270,000 shares have been reserved to be
utilized as payment for consulting services during January
2001 and 327,639 shares have been reserved for option
agreements delivered, but not signed by the third-party
participants. Subsequent to year-end, an additional
357,500 options were granted and related shares reserved
under this Plan.
The Company has issued stock options under the Plan to key
employees and certain consultants to purchase its common
stock at the fair value on the date of grant. The fair
value of each option was determined by using a binomial
mode option-pricing model. The fair market value of each
option grant was estimated by using the following
assumptions for the fiscal year ended 2000; risk-free
interest rates of 6.0%; dividend yield of 0%; expected
lives of 10 years and volatility of .60%. Additional
adjustments are made for assumed cancellations and
expectations that shares acquired through exercise of
options are held during employment.
June 30, 2000
----------------------------------------------------------------------------
Weighted
Weighted average fair
average value at grant
Fixed price portions Shares exercise price date
----------------------------------------------------------------------------
Outstanding, beginning
of year - $ - $ -
Granted 2,379,750 .09 .45
Exercised - - -
Expired - - -
----------------------------------------------------------------------------
Outstanding, end of year 2,379,750 $ .09 $ .45
============================================================================
15
DietSmart Inc.
Notes to Financial Statements
The following table summarizes information about fixed
stock options outstanding at June 30, 2000:
Options Options
outstanding exercisable
------------------------------------- ------------------
Weighted average
Number remaining Number
outstanding at contractual life exercisable at
Exercise prices 6/30/00 (years) 6/30/00
-----------------------------------------------------------------------------------
$ .01 1,380,000 9.4 44,516
.80 872,750 9.6 5,000
1.00 35,000 9.9 -
1.30 92,000 9.9 -
-----------------------------------------------------------------------------------
These options vest pro rata between three to five years
from their date of issuance and expire 10 years from date
of grant.
Under the accounting provisions of SFAS 123, the Company's
pro forma net loss is approximately $1,974,000.
One officer and an employee of the Company were granted
1,395,000 options to purchase shares at an exercise price
less than fair value. A compensation charge of $189,115
was recorded by the Company for the vested portion of this
award based on the difference between the fair value of
those shares and the exercise price on the date of grant.
6. Equity (a) Initial Contributions
Transactions
On September 13, 1999, the Company issued 200 shares
of common stock to its founding members for $200 cash
and management services rendered by these individuals
valued by the Board of Directors at $10,000.
16
DietSmart Inc.
Notes to Financial Statements
(b) Treasury Stock and Recapitalizations
On December 15, 1999, the Board of Directors approved
a 50,000:1 stock split and the authorized shares of
the Company were increased to 20,000,000 shares, of
which 18,000,000 shares were designated as common
stock and 2,000,000 as preferred stock, designated as
Series A. The founding shareholders contributed
3,427,639 back to the Company as treasury stock to be
utilized for options and shares granted under the
Company's stock incentive plan.
On March 30, 2000, the Board of Directors increased
the amount of authorized shares of the Company to
25,000,000, of which 18,000,000 shares were
designated as common stock and 7,000,000 were
designated as preferred stock.
(c) Convertible Debt
Between November 3, 1999 and December 8, 1999, the
Company issued $400,000 of 5.5% convertible debt to
independent third parties. Such debt was convertible
at the same rate as the terms of any equity financing
the Company entered into while the debt was
outstanding. The convertible debt was converted into
Series A preferred stock on December 17, 1999.
(d) Preferred Stock
The Company issued an additional 1,245,000 shares of
Series A preferred stock in exchange for $1,245,000.
The Series A shares are convertible and have the same
dividend and voting rights as the common stock, have
liquidation preference over the holders of common
stock and will be automatically converted into common
stock in the event of the Company's consummation of
an initial public offering under the Securities Act
of 1933 under the same terms of the offering.
17
DietSmart Inc.
Notes to Financial Statements
From April 27 through May 30, 2000, the Company
issued 384,616 shares of Series B preferred stock for
$1.30 per share. These shares were issued as payment
for $250,000 for promotional services and $250,000
cash. The Company has not yet issued 76,923 shares as
the stock purchase agreements have not yet been
signed by the shareholders. The shares of Series B
preferred stock are convertible and have the same
dividends and voting rights as the common stock, have
liquidation preference over the holders of Series A
preferred stock and the common stock and will be
automatically converted into common stock in the
event of the Company's consummation of an initial
public offering under the Securities Act of 1933
under the same terms of the offering.
7. Supplemental Cash paid for interest during the period from inception
Cash Flow through June 30, 2000 was approximately $1,800. No monies
Information were paid for income taxes during this period.
The Company converted $400,000 of 5.5% convertible debt
into 400,000 shares of $.001 Series A preferred stock.
In exchange for future services related to sponsorship
services, the Company issued 192,308 shares of Series B
preferred stock.
As fees for consulting services contracted for two to five
years, the Company issued options to purchase 467,750
shares of common stock with a fair value of $168,859.
The Company capitalized $38,541 of website development
services based on an agreement utilizing options for
consideration.
18
DietSmart Inc.
Notes to Financial Statements
8. Subsequent Event During August 2000, the Company issued a $150,000
convertible debt note which bears interest at an
annual rate of 6.01%. This note is convertible at the
same rate and terms of any equity financing the
Company enters into while the debt is outstanding.
Subsequent to June 30, 2000, the Company received
proceeds of $1,080,000 for the sale of 830,771 shares
of Series B preferred stock.
19