EX-99.1 3 p17957_ex99-1.txt UNAUDITED FINANCIALS S2 Technologies, Inc. (a development stage enterprise) Financial Statements (Unaudited) As of August 31, 2003 and for the Six month periods ended August 31, 2003 and 2002 and for the Period from June 13, 2000 (date of inception) to August 31, 2003 S2 Technologies, Inc. (a development stage enterprise) Balance Sheets (unaudited) --------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements. S2 Technologies, Inc. (a development stage enterprise) Statements of Operations (unaudited) -------------------------------------------------------------------------------- For the Period from June 13, 2000 (date of Six months Six months inception) ended ended through August 31, August 31, August 31, --------- ----------- ----------- 2003 2002 2003 --------- ----------- ----------- Revenues $ 66,000 $ 2,000 $ 97,000 Cost and expenses: Cost of revenue -- -- 5,000 Research and development 400,000 665,000 3,065,000 Selling and marketing 249,000 179,000 603,000 General and administrative 269,000 283,000 1,151,000 --------- ----------- ----------- Total costs and expenses 918,000 1,127,000 4,824,000 --------- ----------- ----------- Loss from operations (852,000) (1,125,000) (4,727,000) Interest income 3,000 5,000 38,000 --------- ----------- ----------- Net loss $(849,000) $(1,120,000) $(4,689,000) ========= =========== =========== The accompanying notes are an integral part of these financial statements. S2 Technologies, Inc. (a development stage enterprise) Statements of Cash Flows (unaudited) --------------------------------------------------------------------------------

The accompanying notes are an integral part of these financial statements. S2 Technologies, Inc. (a development stage enterprise) Notes to Financial Statements -------------------------------------------------------------------------------- 1. The Company and Basis of Presentation S2 Technologies, Inc. (the "Company") was incorporated in the State of California on June 13, 2000. The Company was formed to design and develop an integrated development tool for embedded systems developers. Since its inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, acquiring operating assets, initial selling and marketing activities, 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. The Company, to date, has been dependent on external financing to fund operations, has not yet generated cash flows from operations and has a net deficit of $4,689,000. In May 2003, the Company received a financing of $875,000 from the sale of Series B-1 convertible preferred stock to existing shareholders. In September 2003, the Company received an additional financing of $125,000 from the sale of Series B-1 convertible preferred stock to an existing shareholder. The Company operates in a highly competitive market characterized by rapidly changing technology. The Company intends to incur significant expenses to develop and promote its products. Failure to generate sufficient revenues, raise additional capital or reduce discretionary expenditures would have a material adverse effect on the Company's ability to continue as a going concern and achieve its intended business objectives. 2. Employee Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations, and Financial Accounting Standards Board Interpretation ("FIN") No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Awards Plans," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company's common stock and the exercise price. SFAS No. 123 defines a "fair value" based method of accounting for an employee stock option or similar equity investment. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring Goods and Services." The Company applies APB 25 and related interpretations in accounting for employee and director options granted under the Plan. 1 S2 Technologies, Inc. (a development stage enterprise) Notes to Financial Statements (Continued) -------------------------------------------------------------------------------- Had compensation cost for the Company's stock-based employee compensation plan been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No. 123, the Company's net loss would have been as follows: Period June 13, (date Six Months inception) Ended August February 2003 2002 2003 ---- ---- ---- Net loss $(849,000) $(1,120,000) $(4,689,000) Add: Amortization of deferred stock-based compensation, determined under intrinsic value method, as reported net 1,000 8,000 153,000 Deduct Total stock-based employee compensation expense determined under fair value method for all awards (6,000) (16,000) (167,000) --------- ----------- ----------- Pro forma net loss $(854,000) $(1,128,000) $(4,703,000) ========= =========== =========== Because options vest over several years and additional option grants are expected to be made in future years, the pro forma results are not representative of the pro forma results for future years. 3. Comprehensive income SFAS No. 130, "Reporting Comprehensive Income," requires a full set of general purpose financial statements to be expanded to include the reporting of "comprehensive income (loss)." Comprehensive income (loss) is comprised of two components, net income (loss) and other comprehensive income (loss). There were no differences between the net loss as reported and comprehensive loss for the years ended August 31, 2003 and 2002, and for the period from June 13, 2000 (date of inception) to August 31, 2003. 4. Recent accounting pronouncements 2 S2 Technologies, Inc. (a development stage enterprise) Notes to Financial Statements (Continued) -------------------------------------------------------------------------------- In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a rollforward of the entity's product warranty liabilities. The Company applied the recognition provisions of FIN 45 prospectively to guarantees issued after February 28, 2003. The disclosure provisions of FIN 45 are effective. At August 31, 2003, no guarantees were issued by the Company and no product warranty liability was recorded by the Company. The Company has included additional disclosures in accordance with FIN 45 in Note 12. In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect EITF Issue 00-21 to have a material effect on its results of operations or financial condition. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The Company has included additional disclosures in accordance with SFAS No. 148 in Note 2. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The Company is currently evaluating the effect that the adoption of FIN 46 will have on its results of operations and financial condition. 3 S2 Technologies, Inc. (a development stage enterprise) Notes to Financial Statements (Continued) -------------------------------------------------------------------------------- In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classifies a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company believes that the adoption of this standard will have no material impact on its financial statements. 5. Convertible Preferred Stock Convertible preferred stock (no par value) at August 31, 2003 consists of the following: Proceeds Net of Share Issuance Liquidation Authorized Outstanding Costs Amount ---------- ----------- ----- ------ Series A 2,592,593 2,592,593 $ 694,000 $ 700,000 Series B 10,000,000 9,964,286 3,389,000 3,488,000 Series B-1 2,900,000 2,499,997 848,000 875,000 ---------- ---------- ---------- ---------- 15,492,593 15,056,876 $4,931,000 $5,063,000 ========== ========== ========== ========== The holders of Series A convertible preferred stock ("Series A preferred"), Series B convertible preferred stock ("Series B preferred") and Series B-1 convertible preferred stock ("Series B-1 preferred") have various rights and preferences as follows: Voting The holders of the preferred stock are entitled to the number of votes equal to the number of shares of common stock into which each share of such preferred stock could be converted on the record date for the vote or written consent of shareholders. The shares of preferred stock shall be voted equally with the shares of common stock as one class. 4 S2 Technologies, Inc. (a development stage enterprise) Notes to Financial Statements (Continued) -------------------------------------------------------------------------------- In addition to any other class vote that may be required by law, the Company shall obtain the approval of at least a majority of the outstanding Series A preferred and/or at least 66 2/3% of the outstanding Series B preferred and Series B-1 preferred, in the aggregate, for validating (a) any amendment of the Articles of Incorporation, (b) any adverse change to the powers, rights, preferences, privileges or restrictions of the Series A preferred and Series B preferred, (c) any increase in the authorized number of shares of preferred stock, (d) any authorization of any new class or series of stock, (e) any repurchase or redemption of preferred stock, (f) any repurchase, redemption, payment of dividends with respect to common stock other than shares subject to the right of repurchase by the Company, (g) any action that results in the payment or declaration of a dividend on any shares of common stock or preferred stock, (h) any voluntary dissolution or liquidation of the Company or (i) any change in the authorized number of members of the Company's Board of Directors. Dividends The holders of Series A preferred, Series B preferred and Series B-1 preferred are entitled to receive, when and if declared by the Board of Directors and out of funds legally available, noncumulative dividends at the per annum rate of $0.022, $0.028 and $0.028 per share, respectively. The holders of Series A preferred, Series B preferred and Series B-1 preferred will also be entitled to participate in dividends on common stock, when and if declared by the Board of Directors, based on the number of shares of common stock held on an as-if converted basis. No dividends on preferred stock or common stock have been declared by the Board from inception through August 31, 2003. Liquidation In the event of any liquidation, dissolution or winding up of the affairs of the Company, including (a) a reorganization, merger or consolidation of the Company with or into any other entity or (b) a sale of all or substantially all of its assets which will result in the transfer of 50% or more of the outstanding voting power of the Company, the holders of the outstanding Series A preferred, Series B preferred and Series B-1 preferred shall receive for each share an amount equal to the sum of $0.27, $0.35 and $0.35 per share, respectively, plus all declared but unpaid dividends, payable in preference and priority to any payments made to the holders of the then outstanding common stock. If the entire assets and funds of the Company legally available for distribution are insufficient to permit the payment to such holders of Series A preferred, Series B preferred and Series B-1 preferred their full preferential amount, then such assets and funds shall be distributed among the holders of Series A preferred, Series B preferred and Series B-1 preferred ratably in proportion to the amounts that would be payable to such holders if such assets were sufficient to permit payment in full. After payment to the holders of the Series A preferred, Series B preferred and Series B-1 preferred, the remaining assets and funds of the Company legally available for distribution, if any, shall be distributed ratably to the holders of the common stock and the preferred stock on an as-if-converted basis. 5 S2 Technologies, Inc. (a development stage enterprise) Notes to Financial Statements (Continued) -------------------------------------------------------------------------------- Conversion Each share of preferred stock, at the option of the holder, is convertible into a number of fully paid shares of common stock as determined by multiplying the then in effect Series A preferred, Series B preferred and Series B-1 preferred conversion rates by the number of shares of Series A preferred, Series B preferred and Series B-1 preferred being converted, respectively. The conversion rates in effect at any time for conversion of the Series A preferred, the Series B preferred and the Series B-1 preferred shall be the quotient obtained by dividing the original issue price of the Series A preferred, the Series B preferred and the Series B-1 preferred by the Series A preferred conversion price, the Series B preferred conversion price and the Series B-1 preferred conversion price, respectively. The initial conversion price of Series A preferred, Series preferred and Series B-1 preferred is $0.27, $0.35 and $0.35, respectively, and is subject to adjustment in accordance with antidilution provisions contained in the Company's Articles of Incorporation and for Series B-1 preferred subject to adjustment for milestone completion included in the Company's Restated Articles of Incorporation. Conversion is automatic (a) immediately upon the closing of a firm commitment underwritten public offering in which the public offering price equals or exceeds $5.00 per share with cash proceeds of at least $20,000,000, (b) upon the consent of at least a majority of the outstanding shares of Series A preferred (for Series A preferred) or at least a majority of the outstanding shares of Series B preferred (for Series B preferred) and Series B-1 preferred (for Series B-1 preferred) voting together as a single class. At August 31, 2003, 15,492,593 shares of common stock have been reserved for conversion. Redemption The holders of at least two-thirds of the outstanding Series B preferred and Series B-1 preferred voting together as a single class may require the Company to redeem the Series B preferred and Series B-1 preferred by paying in cash $0.35 per share plus any accrued but unpaid dividends. Redemption would occur in three equal annual installments, beginning on the fifth anniversary of the original issue date. 6. Warrants for Convertible Preferred Stock In June 2001, the Company entered into two convertible promissory notes for $300,000. The notes were converted into Series B preferred stock in October 2001. In conjunction with the issuance of the notes, the Company issued warrants to purchase 35,714 shares of Series B preferred stock at an exercise price of $0.35 per share. Such warrants are outstanding at August 31, 2003 and expire in October 2006. Using the Black-Scholes pricing model, the Company determined that the fair value of the warrants was not material. 6 S2 Technologies, Inc. (a development stage enterprise) Notes to Financial Statements (Continued) -------------------------------------------------------------------------------- 7. Common Stock The Company's Articles of Incorporation, as amended, authorize the Company to issue 30,000,000 shares of no par value common stock. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to the prior rights of holders of all classes of stock outstanding. A portion of the shares sold are subject to a right of repurchase by the Company subject to vesting, which is generally over a four year period from the earlier of issue date or employee hire date, as applicable, until vesting is complete. At August 31, 2003, there were 93,750 shares subject to repurchase. 8. Full Recourse Note In December 2000, the Company accepted full recourse note from an employee totaling $14,000 to finance the purchase of 300,000 shares of common stock. Interest on the note is computed at an annual rate of 10%. Principal and accrued interest are due in December 2010. The note is included in shareholders' deficit. 9. Warrants for Common Stock In July 2000 in connection with a consulting agreement, the Company issued warrants vesting over three years to purchase 700,000 shares of common stock for $0.001 per share for consulting services to be performed over three years. In March 2002 and August 2003, 466,666 and 233,334 warrants, respectively were exercised for common stock. Using the Black-Scholes pricing model, the Company determined that the fair value of the warrants was $29,000 at the date of grant and is amortized over three years. At each reporting date, the Company remeasures the unamortized portion of such warrant using the Black-Scholes pricing model. For the years ended August 31, 2003 and 2002 and for the period from June 13, 2000 (date of inception) to August 31, 2003, the Company recorded $0, $2,000 and $29,000 of expense associated with these warrants, respectively. 10. Stock-Based Compensation In July 2000, the Company sold 5,100,000 shares of common stock to the founders of the Company for assignment of intellectual property. In conjunction with this transaction, the Company recorded $153,000 of deferred stock-based compensation representing the excess of the deemed fair value of the common stock over the deemed fair value of the intellectual property at the date of purchase. The compensation expense is being amortized over the vesting period of three years from the date of purchase. The Company recognized $1,000, $8,000 and $153,000 for the amortization of compensation expense during the six months ended August 31, 2003 and 2002 and for the period from June 10, 2000 (date of inception) to August 31, 2003, respectively. 7 S2 Technologies, Inc. (a development stage enterprise) Notes to Financial Statements (Continued) -------------------------------------------------------------------------------- During the six months ended August 31, 2003 and 2002 and for the period from June 13, 2000 (date of inception) to August 31, 2003, the Company granted options to acquire 0, 15,000 and 120,000 shares of common stock, respectively, at an exercise price of $0.060 in the six month ended August 31, 2002 and $0.045 in fiscal 2002 and 2001 to non-employees in exchange for services. The fair value of the common stock options was determined to be $0, $0 and $4,000, respectively, using the Black-Scholes pricing model. Stock-based compensation related to stock options granted to non-employees is recognized as the service is provided. The Company recorded a stock compensation expense of $0, $0 and $4,000, respectively. At each reporting date, the Company remeasures the unvested portion of such option grants using the Black-Scholes pricing model. As a result, the stock based compensation expense fluctuates as the fair value of the common stock fluctuates. 11. Commitments The Company leases its facilities under an operating lease agreement, which expires in March 2004. Future minimum lease obligations of $37,000 and $1,000 are payable in the ending February 28, 2004 and February 29, 2005, respectively. Rental expense for the six months ended August 31, 2003 and 2002 and for the period from June 13, 2000 (date of inception) to August 31, 2003 was $38,000, $32,000 and $154,000, respectively. The Company enters into agreements with customers in the normal course of business that contain various guarantees such as indemnification of its or a third party's intellectual property. At August 31, 2003, the Company had not recorded any liability associated with these guarantees. 12. Related Party Transactions and Subsequent Event Through Oryx Ventures, LLC, Oryx Technology Corporation has invested a total of $2,743,000 in preferred stock of the Company from July 2000 through August 2003. In addition, Messrs. Micciche and Underseth (through November 2002) of Oryx Technology Corporation provide certain management services to the Company in exchange for cash and warrants to purchase common stock in the Company. The Company issued warrants to purchase 700,000 shares of common stock for $0.001 per share, of which 466,666 were exercised in March 2002 and 233,334 were exercised in August 2003. Mark Underseth, Chief Executive Officer of the Company is the brother of Mitchel Underseth who was Chief Financial Officer of Oryx Technology Corporation until November 2002, when he became Chief Financial Officer of the Company. The following table summarizes Oryx Technology Corporation's ownership as of February 28, 2003: 8 S2 Technologies, Inc. (a development stage enterprise) Notes to Financial Statements (Continued) -------------------------------------------------------------------------------- Oryx Technology Corporation's Company's Ownership Shares ---------------------------- Outstanding Shares % Series A Preferred 2,592,593 1,851,853 71% Series B Preferred 9,964,286 5,835,715 58% Series B-1 Preferred 2,499,997 571,428 23% Common Stock 6,106,250 700,000 11% Total 21,163,126 8,958,996 42.3% The following table summarizes the outstanding warrants and stock options as of August 31, 2003: Oryx Technology Corporation's Company's Ownership Shares ---------------------------- Outstanding Shares % Warrants for Series B 35,714 - 0% Stock options 1,843,500 - 0% In September 2003, Oryx Technology Corporation has made an additional investment of $125,000 in preferred stock. 9

ORYX TECHNOLOGY CORP 8-K/A