Registration No. 333-106839
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
Form SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
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(Name of small business issuer in its charter)
Nevada
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(State or jurisdiction of incorporation or organization)
5075
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(Primary Standard Industrial Classification Code Number)
88-0492134
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(I.R.S. Employer Identification No.)
114 West Magnolia Street, Suite 400-142 Suite 200, 10125 199B Street
Bellingham, WA 98225 Langley, BC Canada V1M 3W9
Telephone: 360-392-3902 Telephone: 604-882-6520
Telecopy: 360-733-3941 Telecopy: 604-882-6521
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(Address and telephone number (Address and telephone number
of principal executive offices) of principal place of business)
Jason McDiarmid, President
114 West Magnolia Street, Suite 400-142
Bellingham, WA 98225
Telephone: 360-392-3902
Telecopy: 360-733-3941
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(Name, address and telephone number of agent for service)
Copy to:
James R. Kruse
Kevin C. Timken
Kruse Landa Maycock & Ricks, LLC
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Telephone: 801-531-7090
Telecopy: 801-531-7091
As soon as practicable after the effective date of this registration
statement.
Approximate date of proposed sale to the public
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
Calculation of Registration Fee
================================================================================================================================
Title of each class of securities to Amount to be Proposed maximum Proposed maximum Amount of
be registered registered offering price per aggregate offering registration fee
unit price(1)
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Common stock, $0.001 5,000,000 $5.00 $25,000,000 $2,022.50
par value per share
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457 under the Securities Act of 1933,
based on a price of $5.00 per share.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
Subject To Completion, Dated September 12, 2003
The information contained in this preliminary prospectus is not complete and may
be changed. The Company and selling stockholders may not sell these securities
until the registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any jurisdiction where the offer or sale is not permitted.
5,000,000 Shares
Essential Innovations Technology Corp.
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This prospectus relates to our offer and sale of 2,534,386 shares of common
stock to provide a portion of the capital we need. This is a "best-efforts"
offering. There is no minimum number of shares that must be sold. This offering
will continue until all 2,534,386 shares are sold, until we terminate the
offering, or until that date that is nine months after the date of this
prospectus, whichever occurs first.
This prospectus also relates to the resale of up to 2,465,614 shares of common
stock held by the selling stockholders. The selling stockholders may offer and
sell such shares using this prospectus in transactions at a fixed offering price
of $5.00 per share until a trading market develops in our common stock, at which
time the selling stockholders may sell shares in transactions:
(i) in the over-the-counter market or otherwise;
(ii) at market prices, which may vary during the offering period, or at
negotiated prices; and
(iii) in ordinary brokerage transactions, in block transactions, in
privately negotiated transactions, or otherwise.
The selling stockholders will receive all of the proceeds from the sale of their
shares and will pay all underwriting discounts and selling commissions relating
to the sale of those shares.
We have agreed to pay the legal, accounting, printing and other expenses related
to the registration of the sale of the shares pursuant to this prospectus, which
we estimate will total approximately $150,000.
An investment in our shares involves certain risks. We urge you to read the
"Risk Factors" section beginning on page 4 and the rest of this prospectus
before making an investment decision.
Our common stock is not traded in any established trading market. No securities
broker or dealer has agreed to make a market for our common stock after this
offering. We cannot assure that any viable trading market will exist for our
common stock following this offering.
========================= ================= ================= ==================
Price to Underwriting Proceeds to
Public Discount Company(1)
- ------------------------- ----------------- ----------------- ------------------
Per Share................ $5.00 -- $12,671,930
Total.................. $5.00 -- $12,671,930
========================= ================= ================= ==================
(1) This amount does not reflect the costs of the offering, which are estimated
to be $150,000. These proceeds are based upon our proposed offer and sale
of 2,534,386 shares of common stock; we will receive no proceeds from the
offer and sale of up to 2,465,614 shares of stock held by the selling
stockholders.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is __________________, 2003.
Prospectus Summary Information
This prospectus summary contains an overview of the information from
the prospectus, but may not contain all of the information that is important to
you. This prospectus includes specific terms of the offering of our common
stock, information about our business, and financial data. We encourage you to
read this prospectus, including the Risk Factors section beginning on page 4, in
its entirety before making an investment decision.
As used in this prospectus, the terms "we," "us" and "our" refer to
Essential Innovations Technology Corp., a Nevada corporation, and our wholly
owned subsidiaries, Essential Innovations Corporation, a Canadian corporation,
and Essential Innovations Asia Ltd., a Hong Kong company.
Essential Innovations Technology Corp.
Essential Innovations Technology Corp. is driven to provide
eco-friendly lifestyle enhancement technologies for the betterment of energy,
water, air and health. We are focusing our efforts on:
o commercialization and market entry strategies for our proprietary
EI Elemental Heat Energy System, which uses efficient geothermal
heat exchange, or geoexchange, technology at its core and is
currently being used to heat and cool our Canadian research and
development plant;
o land acquisition to allow us to contribute the property and our
technology expertise to a joint venture or partnership with
credible development partners for development;
o development of synergistic industry relationships and alliances,
particularly with large builders and developers that recognize
environmental sensitivity and energy and water conservation as an
important feature of land planning and infrastructure development;
and
o execution of product licensing and distribution agreements for our
EI Elemental Heat Energy System as well as our water treatment and
consumer wellness products.
Financial Condition and Ability to Continue as a Going Concern
We are a development-stage company and have had only minimal revenue
from operations. For the fiscal year ended October 31, 2002, we incurred a net
loss of $613,341, and our cumulative loss from our inception through October 31,
2002, was $795,947. At October 31, 2002, we had a net stockholders' deficit of
$186,340. Accordingly, the independent auditors' report accompanying our audited
financial statements as of October 31, 2002, included in this prospectus, states
that conditions exist that raise substantial doubt about our ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. See consolidated financial
statements.
Our Business
EI Elemental Heat Energy System
We are currently focused on commercialization of our EI Elemental Heat
Energy System. For nearly two years we have been using a prototype to both heat
and cool our research and development headquarters in Langley, British Columbia,
and we are now installing prototypes into pilot projects in the field for
further testing prior to full-scale commercialization targeted for late 2004.
1
The core technology of our EI Elemental Heat Energy System is a
geothermal heat pump, referred to in the industry as a geoexchange or heat
exchange technology. It utilizes an Artificial Intelligence Controls
Diagnostics, or AICD, subsystem that regulates and monitors the system and
includes both a liquid crystal diode, or LCD, interface and a voice-activated
interface for users. Over time, we intend to add a number of enhancements to the
core technology; however, the EI Elemental Heat Energy System is a complete and
functional system using only the core technology.
We have identified a private, three-story home in Vancouver, British
Columbia, that we will be using as our first field installation and pilot
project. In early July 2003, we began the installation process. Because the
house is being substantially renovated at the same time, we expect the
installation to take a number of months as we coordinate with the overall
renovation schedule.
After installation, each of the two EI Elemental Heat Energy System
units will be monitored at our research and development facility through an
Internet link. An additional monitoring system will record all commands sent to
the system by the residents of the house. This information will be used to focus
our development efforts as we work toward making the EI Elemental Heat Energy
System commercially available.
We have entered into an agreement to purchase land in San Marcos,
Texas. We are depositing into escrow 628,134 shares of common stock to be
delivered against tender of title and will owe approximately $314,000 at
closing. This transaction will provide us with a tangible asset and allow us to
present plans and business models to developers as we seek joint venture
participants to participate in potential eco-sustainable development of the land
that would incorporate our EI Elemental Heat Energy System as well as potential
other technologies. We believe such a demonstration development would allow us
to test the installation and production aspects of our technologies, market a
project, and offer a new environmentally sensitive method of development to
other home and resort developers.
Other Technology
We also are developing a line of water treatment and purification
systems. These units can be designed to meet the water quality requirements of
municipal or rural water for residential or commercial applications at the point
at which the water enters the building. We will be able to customize system
configuration and technologies depending on the water contaminants and the
particular production volume and the post-treatment water quality requirements.
Technologies that may be included in the overall system designs include media
filtration, specific cartridge filtration, ion exchange, reverse osmosis,
distillation, ozonation and ultraviolet sterilization. We believe we can design
systems suitable for either residential or commercial water treatment
applications.
Marketing and Distribution Agreements with SOTA Instruments Inc.
Our Asian subsidiary holds an international marketing agreement with
SOTA Instruments Inc., a Canadian company, for the exclusive, non-North American
rights to certain consumer wellness products. Under the exclusive marketing
agreement, our Asian subsidiary has agreed to identify and recruit persons or
entities to act as product distributors under exclusive distribution agreements
with SOTA for the sale of SOTA's consumer wellness products. Under the exclusive
marketing agreement, our Asian subsidiary will not sell SOTA's consumer wellness
products, but will be paid a commission on sales made by the distributors we
identify.
2
Our Asian subsidiary is currently negotiating the exclusive
distribution rights to these same products for Hong Kong and Mainland China. If
we are successful in obtaining these exclusive distribution rights, our Asian
subsidiary will market SOTA's consumer wellness products directly to consumers
and provide customer service and technical support.
We believe there is a significant market for these products outside
North America, particularly in the Asian market, and that the marketing of such
products may potentially provide early-stage cash flow to assist us in
offsetting the research and development costs of the alternative energy products
we are currently developing.
History and Corporate Information
Essential Innovations Technology Corp. was incorporated on April 4,
2001, under the laws of the state of Nevada. Our wholly owned subsidiaries are
Essential Innovations Corporation, federally incorporated under the laws of
Canada on February 9, 2001, to perform research and development for the EI
Elemental Heat Energy System, and Essential Innovations Asia Ltd., a Hong Kong
company incorporated on April 9, 2002, to market SOTA's consumer wellness
products.
Our United States office is located at 114 West Magnolia Street, Suite
400-142, Bellingham, Washington 98225. Our telephone number is 360-392-3902 and
our facsimile number is 360-733-3941. Our administrative, research and
development facility is located at Suite 200, 10125-199B Street, Langley,
British Columbia, Canada V1M 3W9. Our telephone number at that facility is
604-882-6520 and our facsimile number there is 604-882-6521.
Currently, our principal place of business is located at our
administrative, research and development facility in British Columbia, as are
the majority of our executive officers and substantially all of our physical
assets. Our media credits, which comprise the majority of our total assets, are
for advertising in media and are located entirely within the United States.
Summary Consolidated Financial Data
The following summary of historical consolidated financial information
for the six-month period ended April 30, 2003, for the fiscal year ended October
31, 2002, and from the date of inception through October 31, 2001, is derived
from our unaudited interim financial statements and the audited consolidated
financial statements included in this prospectus:
Six-Month February 9,
Period Ended Fiscal 2001 - (Date
April 30, Year Ended of Inception) Cumulative
2003 October 31, to October 31, (Since
(unaudited) 2002 2001 Inception)
--------------- ---------------- ---------------- ----------------
STATEMENT OF OPERATIONS DATA:
Sales........................................ $ -- $ 8,544 $ -- $ 8,544
Loss for the period.......................... 1,084,657 613,341 182,606 1,880,604
Loss per share-basic and diluted............. 0.11 0.07 0.02 0.20
Weighted average shares...................... 10,184,898 9,394,841 8,677,659 9,389,859
BALANCE SHEET DATA (as at):
Working capital (deficit).................... $ (238,746) $ (220,408) $ (15,302) $ (238,746)
Total current assets......................... 44,286 6,568 24,685 44,286
Long-term debt............................... -- -- --
Total stockholders' equity (deficit)......... 245,763 (186,340) 18,374 245,763
3
Risk Factors
Risk Factors Relating to our Business
We may fail to continue as a going concern.
We have incurred substantial operating losses and negative cash flows
from operations since inception, and our obligations and commitments for the
year ending October 31, 2003, exceed the cash we have available. As a result of
these conditions, substantial doubt exists about our ability to continue as a
going concern, which has been noted by our auditors in their report on our
consolidated financial statements for the year ended October 31, 2002.
We currently have no significant operating capital and are dependent
upon the success of this offering to be able to implement our business
plan.
We presently have no significant operating capital and are
substantially dependent upon receipt of the proceeds from our sale of a
substantial number of shares of this offering to provide the capital necessary
to execute our business plan. We believe that we will need to sell at least
400,000 shares in this offering for net proceeds of approximately $1,850,000 to
be able to bring our EI Elemental Heat Energy System to market and meet our
preliminary production targets by the end of fiscal year 2004. No person has
committed to purchase any shares in this offering, and we have no commitments
for other funding. In the event that the proceeds from this offering are not
sufficient, we will need to seek additional financing from commercial lenders or
other sources, for which we have no commitments or arrangements, or we will be
required to delay the implementation of our business plan.
We cannot assure that we will be able to commercialize our prototype EI
Elemental Heat Energy System.
We have only completed the construction and successful testing of the
core technology of our proprietary EI Elemental Heat Energy System prototype and
have not yet completed installation of a pilot project. We may be unable to
transition this prototype into an effective or commercially feasible and
competitive process. Further, we may be unable to develop or commercialize some
or all of our planned enhancements to the EI Elemental Heat Energy System. We
may be unable to compete with other manufactures of similar products whether or
not we are able to include those enhancements in our EI Elemental Heat Energy
System.
We have not obtained approvals for our EI Elemental Heat Energy System
from either the Canadian Standards Association or Underwriters
Laboratories, and if we are unable to do so, our ability to obtain
market acceptance may be limited.
We intend to submit our EI Elemental Heat Energy system to the Canadian
Standards Association ("CSA"), Underwriters Laboratories, Inc. ("UL"), or both,
for approval, but we have not yet submitted it to either body. It is possible
that we will be unable to obtain one or both of these approvals, and such a
failure would likely reduce the acceptance of our EI Elemental Heat Energy
System in the market.
Sales of consumer wellness products may expose us to substantial
liability.
If we are able to sell consumer wellness products, those products may
not have the desired levels of effectiveness or, in fact, may not be effective
at all. It is possible, therefore, that we may be exposed to claims for refunds
from consumers who do not believe they have achieved the anticipated results.
Further, there is always the possibility of unanticipated side effects from the
use of the consumer wellness products. Such side effects could result in
liability to individual consumers and regulatory action from governmental
agencies that could substantially impair our consumer wellness products
business.
4
Our officers and directors are subject to conflicts of interest, and
there is a risk that they will place their interests ahead of ours.
Dr. Diana Allen, Dr. David Rezachek, and Peter Bond, directors, offer
consulting services or are associated with other organizations that may be
involved with researching, developing or marketing products that are similar to
the products we propose to develop and market. We do not have confidentiality or
noncompetition agreements with these directors to limit them from working on or
consulting on the development of similar technologies. William Baumgartner is
the owner of certain technology that we may attempt to acquire. From time to
time, such associations may give rise to conflicts of interest that may not be
resolved in our favor.
We may not succeed if we are unable to attract employees and retain the
services of our key personnel.
Our performance is substantially dependent on retaining current
management and key personnel and on recruiting and hiring additional management
and key personnel. In particular, as we continue adapting our new technology to
commercial applications, we will rely on the technical expertise of Steve
Wuschke, our chief technical officer, and the business development experience of
Jason McDiarmid, our chief executive officer. If we are unable to retain Mr.
Wuschke or Mr. McDiarmid, or if we are unable to hire suitable sales, marketing
and operational personnel, we may not be able to successfully develop, improve,
market and sell products based on this new technology. Competition for
individuals with the qualifications that we require is intense, and we may not
be able to attract, assimilate or retain these highly qualified people. The
failure to attract, integrate, motivate and retain these employees could harm
our business.
We have not entered into written employment agreements with any
officer, except for our chief financial officer, Kenneth G.C. Telford. We have
not obtained key man life insurance on our officers or directors.
It may be difficult for our stockholders to enforce any civil
liabilities against us or our officers of directors because many of our
officers and substantially all of our operations are currently outside
the United States.
Many of our assets are located outside the United States, a majority of
our directors and officers are nationals and/or residents of countries other
than the United States, and all or a substantial portion of such persons' assets
are located outside the United States. As a result, it may be difficult for
investors to enforce within the United States any judgments obtained against us
or our officers or directors, including judgments predicated upon the civil
liability provisions of the securities laws of the United States or any state.
If we are unable to protect our intellectual property rights, we may be
unable to compete successfully.
We believe that our success will be dependent to a large extent on
proprietary features of our EI Elemental Heat Energy System. We expect that we
may continue to use proprietary technologies for future product enhancements.
Unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. We have not patented any of our technologies or methods
5
or obtained any copyright or trademark protection, and we have not entered into
confidentiality or noncompetition agreements with any of our officers, directors
or employees. We cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where
applicable laws may not protect our proprietary rights as fully as in the United
States. We may be unable to adequately protect our proprietary technology and
preclude competitors from independently developing products with functionality
or features similar to those of our products.
We will be exposed to the risk of product liability claims related to
the EI Elemental Heat Energy System.
Any sales of the EI Elemental Heat Energy System will carry significant
risks of product liability. We anticipate that purchasers of the EI Elemental
Heat Energy System will rely on it for heating and cooling purposes and any
failures of the system may cause them damage. We may be unable to obtain product
liability insurance or, if we are able to do so, we may be unable to do so at
rates that will make it cost-effective. Any successful product liability claim
made against us could substantially reduce or eliminate any economic return to
our stockholders or us.
We have chosen to limit the liability of our directors and indemnify
our officers and directors to the maximum extent permitted by law,
which may result in costs to our Company.
Our articles of incorporation limit the liability of directors to the
maximum extent permitted by Nevada law. In addition, our bylaws require us to
indemnify our directors and officers and allow us to indemnify our other
employees and agents to the fullest extent permitted at law. At present, there
is no pending litigation or proceeding involving any director, officer, employee
or agent in which indemnification will be required or permitted. We are not
aware of any threatened litigation or proceeding that might result in a claim
for indemnification. Any such claim for indemnification, however, may result in
significant costs to us. If we permit indemnification for liabilities arising
under the Securities Act of 1933 to directors, officers or controlling persons
under these provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, this indemnification is against public
policy as expressed in the Securities Act and is unenforceable.
Our executive officers and major stockholders exercise significant
control over our Company, which will significantly limit the ability of
purchasers in this offering to exercise any control over our Company.
As of August 31, 2003, the executive officers and holders of 5% or more
of our outstanding common stock together beneficially owned 7,417,714 shares, or
approximately 63.0%, of our outstanding common stock. These stockholders are
able to control all matters requiring approval by stockholders, including the
election of directors and the approval of significant corporate transactions.
This concentration of ownership may also have the effect of delaying, deterring
or preventing a change in control and may make some transactions more difficult
or impossible to complete without the support of these stockholders.
Fluctuations in the value of the United States dollar as compared to
other currencies may affect our financial performance.
We expect a substantial portion of our revenues to be based on sales
and services rendered to customers outside the United States in Canada and Asia.
As a result, fluctuations in the value of the United States dollar to the
Canadian dollar and the relevant Asian currency may affect our financial
performance. We have no plan or policy to utilize forward contracts or currency
options to minimize this exposure, and even if these measures are implemented,
they may not be cost-effective or fully offset such future currency risks.
6
Risk Factors Relating to our Common Stock
There is no established trading market for our securities and such a
market may never develop, which would mean that investors might be
unable to sell our securities.
There is currently no public market for our common stock. No one has
committed to commence a trading market, and we cannot assure a public market
will ever develop. If such a market does develop, our common stock may never
trade at or above the offering price.
There are additional shares of common stock available for future sale,
which may depress the market price and liquidity of shares purchased in
this offering.
The sale or potential sale of shares of common stock by our present
stockholders could have an adverse effect on any trading market for our common
stock that may exist in the future. Of the 11,371,041 shares of common stock
currently issued and outstanding, 9,411,000 shares were issued in excess of one
year ago and 5,750,000 of those were issued more than two years ago. All of such
shares were issued without registration under the Securities Act and are
"restricted securities," as that term is defined under the Securities Act.
However, after one year has passed after such securities were last purchased
from us or one of our affiliates, such shares may be available for resale from
time to time by means of ordinary brokerage transactions or to market makers in
any trading market that may develop pursuant to Rule 144 under the Securities
Act, subject to the requirements and limitations imposed by Rule 144. After two
years have passed after such securities were last purchased from us or one of
our affiliates, such shares can be sold by nonaffiliates without complying with
any of the provisions of Rule 144. The possibility of such resales may have a
depressive effect on the price and liquidity of our common stock.
Investors purchasing our common stock in this offering will be subject
to substantial and immediate dilution.
Persons purchasing common stock will likely suffer a substantial and
immediate dilution to the net tangible book value of their shares below the
purchase price. See Dilution and Comparative Data beginning on page 11.
There has been no independent due diligence review related to this
offering, potential investors cannot rely on any analysis but their
own, and there is a risk that such an analysis will be insufficient.
No securities broker-dealer or other person has been engaged to perform
any due diligence or similar review of us, of our common stock, or of this
offering on behalf of persons that may purchase common stock in this offering or
any other person. Potential investors must therefore rely on their own analysis
without the benefit of any objective third-party review of our Company, our
common stock, and the statements made in this prospectus. Accordingly, there is
a risk that potential investors will be unable to determine whether the price at
which we are offering our common stock is reasonable or whether the statements
we have made herein are accurate and complete.
7
There are substantial options and warrants outstanding, which may limit
our ability to obtain financing in the future and which may be
exercised when the effect would be to depress the market price of the
common stock.
We have issued and outstanding options and warrants to purchase up to
an additional 3,475,800 shares of common stock at a weighted average exercise
price of approximately $0.61 per share. The existence of such options may prove
to be a hindrance to future financing, and the exercise of options may further
dilute the interests of the stockholders. The possible future resale of common
stock issuable on the exercise of such options could adversely affect the
prevailing market price of our common stock. Further, the holders of options and
warrants may exercise them at a time when we would otherwise be able to obtain
additional equity capital on terms more favorable to us.
Forward-Looking Statements
This prospectus contains statements about the future, sometimes
referred to as "forward-looking" statements. Forward-looking statements are
typically identified by the use of the words "believe," "may," "could,"
"should," "expect," "anticipate," "estimate," "project," "propose," "plan,"
"intend" and similar words and expressions. Statements that describe our future
strategic plans, goals or objectives are also forward-looking statements.
Readers of this document are cautioned that any forward-looking
statements, including those regarding us or our management's current beliefs,
expectations, anticipations, estimations, projections, proposals, plans or
intentions, are not guarantees of future performance or results of events and
involve risks and uncertainties.
The forward-looking information is based on present circumstances and
on our predictions respecting events that have not occurred, that may not occur,
or that may occur with different consequences from those now assumed or
anticipated. Actual events or results may differ materially from those discussed
in the forward-looking statements as a result of various factors, including the
risk factors detailed in this document. The forward-looking statements included
in this document are made only as of the date of this document.
8
Use of Proceeds
No person has committed to purchase any shares offered by us in this
offering, and we cannot assure that we will receive any proceeds from this
offering. The following table illustrates the amount of net proceeds to be
received by us on the sale of common stock and the intended uses of such
proceeds in their order of priority. For illustrative purposes only, the first
column assumes the sale of 750,000 shares of common stock, the second column
assumes the sale of 1,500,000 shares of common stock, and the third column
assumes the sale of all 2,534,386 shares of common stock offered by us:
Assume Sale of
-----------------------------------------------------------
750,000 Shares 1,500,000 Shares 2,534,386 Shares
------------------- ------------------- -------------------
Gross proceeds that would be received assuming
the sale of the number of shares indicated............ $3,750,000 $7,500,000 $12,671,930
Less offering costs..................................... (150,000) (150,000) (150,000)
------------------- ------------------- -------------------
Net proceeds........................................ 3,600,000 7,350,000 12,521,930
------------------- ------------------- -------------------
General and administrative expenses..................... 1,090,841 1,756,841 2,178,771
Product development, commercialization and marketing.... 1,500,000 3,000,000 3,750,000
Reduction of current liabilities(1)..................... 279,159 279,159 279,159
Payment of San Marcos, Texas property purchase note..... 314,000 314,000 314,000
Potential other property acquisitions................... 500,000 2,000,000 6,000,000
------------------- ------------------- -------------------
Total uses.......................................... $3,600,000 $7,350,000 $12,521,930
=================== =================== ===================
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(1) Includes payments of accrued salaries and benefits to officers and directors
of $172,596.
To the extent that we receive insufficient net proceeds from this
offering of our common stock, we will restrict our expenditures by implementing
cost-cutting measures to reduce general and administrative expenses, slowing the
level of product development, particularly enhancements to the core technology
of our EI Elemental Heat Energy System, slowing our commercialization and
marketing efforts, and continuing to defer accrued current liabilities. If funds
are not available from the sale of our common stock, we may also seek to extend
the terms of payment required on closing of the San Marcos, Texas lands pending
the availability of other funds through borrowings, a joint venture, or other
arrangement.
We have not identified any property for potential purchase, but may
seek to acquire additional property for further development and
commercialization of our EI Elemental Heat Energy System.
There can be no assurance that any shares of common stock will be sold
or that we will receive any net proceeds from this offering.
Pending the use of the net proceeds from the offering, any such funds
will be invested in investment-grade, short-term, interest-bearing securities,
including government obligations and other money market instruments.
9
Common Stock and Dividend Policy
Common Stock
There is no public trading market for our common stock.
As of August 31, 2003, we had 11,371,041 shares of common stock issued
and 72,380 shares subscribed but unissued, and 400,000 shares of Series A
Convertible Preferred Stock subscribed, but unissued. Of those shares, 5,750,000
shares were issued more than two years ago, and 9,411,000 shares were issued
more than one year ago, all of which may be eligible for resale subject to the
requirements and limitations imposed by Rule 144. We are registering the resale
of 2,465,614 shares of common stock for the selling stockholders identified in
this registration statement.
We have reserved for issuance 3,475,800 shares of common stock upon the
exercise of issued and outstanding options and warrants and 400,000 shares of
common stock upon the conversion of the Series A Convertible Preferred Stock.
As of August 31, 2003, there were approximately 90 holders of our
common stock.
Dividend Policy
We have never paid cash dividends on our common stock and do not
anticipate that we will pay any dividends in the foreseeable future. We intend
to reinvest any future earnings to further expand our business.
10
Dilution and Comparative Data
Dilution
As of April 30, 2003, we had an unaudited net tangible book value
(total tangible assets less total liabilities) of $245,763, with 10,729,157
shares of common stock outstanding. After adjusting for the $1,500,000
liquidation preference of the Series A Preferred Stock subscribed as of such
date, we had a net tangible book deficiency attributable to the common stock of
$1,254,237, or approximately $(0.12) per share. The following table illustrates
the dilution to the net tangible book value per share of common stock to be sold
in this offering, without taking into account any changes after April 30, 2003,
as adjusted: (a) the issuance of 750,000 shares and the receipt of $3,600,000 in
net proceeds therefrom, (b) the issuance of 1,500,000 shares and the receipt of
$7,350,000 in net proceeds therefrom, and (c) the issuance of 2,534,386 shares
and the receipt of $12,521,930 in net proceeds therefrom, presented merely for
the purpose of illustration:
750,000 1,500,000 2,534,386
Shares Sold Shares Sold Shares Sold
------------------------------------ -----------------
Before offering, as adjusted:
Net tangible (deficiency)................................... $ (1,254,237) $ (1,254,237) $ (1,254,237)
Net tangible book value per share (1)....................... (0.12) (0.12) (0.12)
Assume sale of common stock:
Pro forma net tangible book value........................... 2,345,763 6,095,763 11,267,693
Pro forma net tangible book value per share (1)............. 0.20 0.50 0.85
Increase (decrease) per share to present stockholders
attributable to cash payments made by purchasers of common
shares under this offering.................................. 0.32 0.62 0.97
Dilution to investors in this offering...................... 4.80 4.50 4.15
- ---------------------
(1) Determined by dividing the number of shares of common stock outstanding
into the net tangible book value attributable to our common stock. The pro
forma amounts include the net dollar amount received from this offering and
the number of shares sold hereunder.
11
We have entered into an agreement to purchase certain real property
near San Marcos, Texas, and have placed 628,134 shares of common stock in trust
for delivery at closing, together with our $314,000 cash payment, to the seller
against delivery of a deed to the property. The following table illustrates the
dilution to the net tangible book value of our common stock based on our
unaudited tangible book value as of April 30, 2003, without taking into account
any changes since that date, except for the issuance of 628,134 shares of common
stock and our $314,000 cash payment for the purchase of $1,256,267 in real
property, as further adjusted, solely for the purposes of illustration, to give
effect to (a) the issuance of 750,000 shares and the receipt of $3,600,000 in
net proceeds therefrom, (b) the issuance of 1,500,000 shares and the receipt of
$7,350,000 in net proceeds therefrom, and (c) the issuance of 2,534,386 shares
and the receipt of $12,521,930 in net proceeds therefrom:
750,000 1,500,000 2,534,386
Shares Sold Shares Sold Shares Sold
------------------------------------ -----------------
Before offering, as adjusted:
Net tangible book value..................................... $ 2,030 $ 2,030 $ 2,030
Net tangible book value per share (1)....................... 0.00 0.00 0.00
Assume sale of common stock:
Pro forma net tangible book value........................... 3,602,030 7,352,030 12,523,960
Pro forma net tangible book value per share (1)............. 0.30 0.57 0.90
Increase (decrease) per share to present stockholders
attributable to cash payments made by purchasers of common
shares under this offering.................................. 0.30 0.57 0.90
Dilution to investors in this offering...................... 4.70 4.43 4.10
- --------------------------
(1) Determined by dividing the number of shares of common stock outstanding
into the net tangible book value attributable to our common stock. The pro
forma amounts include the net dollar amount received from this offering and
the number of shares sold hereunder.
12
Comparative Data
The following table illustrates the relative amount invested and stock
ownership of our existing stockholders, including the common stock equivalents
of the 400,000 shares of Series A Preferred Stock outstanding, and investors in
this offering, assuming, solely for the purpose of illustration, the sale of
750,000 shares, the sale of 1,500,000 shares, and the sale of all offered
2,534,386 shares, based on our April 30, 2003, unaudited financial statements,
except for the issuance of 628,134 shares and an approximately $314,000 note
payable for the purchase of real property, as adjusted:
Shares Purchased Cash Invested*
----------------------------- ----------------------------
Percent Percent Average Price
Number of Total Amount(s) of Total Per Share
-------------- -------------- -------------- ------------- ---------------
750,000 Shares Sold:
Investors in this offering............ 750,000 6.2 $ 3,750,000 83.2 $ 5.00
Existing stockholders................. 11,357,291 93.8 755,407 16.8 0.07
-------------- -------------- -------------- --------------
12,107,291 100.0 $ 4,505,407 100.0 0.37
1,500,000 Shares Sold:
Investors in this offering............ 1,500,000 11.7 $ 7,500,000 90.8 $ 5.00
Existing stockholders................. 11,357,291 88.3 755,407 9.2 0.07
-------------- -------------- -------------- --------------
12,857,291 100.0 $ 8,255,407 100.0 0.64
2,534,386 Shares Sold:
Investors in this offering............ 2,534,386 18.2 $12,671,930 94.4 $ 5.00
Existing stockholders................. 11,357,291 81.8 755,407 5.6 0.07
-------------- -------------- -------------- --------------
13,891,677 100.0 $13,427,337 100.0 0.97
- -------------------
* Includes only stock issued for consideration other than services as
reflected on the statements of stockholders' equity and comprehensive loss.
Management's Discussion and Analysis or Plan of Operation
This prospectus contains forward-looking statements. Our actual results
could differ materially from those set forth as a result of general economic
conditions and changes in the assumptions used in making such forward-looking
statements. The following discussion and analysis of our financial condition and
results of operations should be read together with the audited consolidated
financial statements and accompanying notes and the other financial information
appearing elsewhere in this prospectus.
Plan of Operation
Over the next 12 months, we hope to continue to develop and
commercialize our EI Elemental Heat Energy System, acquire the San Marcos,
Texas, property we have agreed to purchase, and market our consumer wellness
products. To date, we have generated only very limited revenue from our
operations, have substantial ongoing losses, and do not have enough cash to
satisfy our cash requirements for the next six months. In their report on our
financial statements for the fiscal year ended October 31, 2002, our auditors
stated that conditions exist that raise substantial doubt as to our ability to
continue as a going concern.
13
Our net losses for the year ending October 31, 2002, and the interim
period dated April 30, 2003, of approximately $613,341 and $1,084,657,
respectively, are primarily attributable to research and development and general
and administrative costs. As of October 31, 2002, we had total assets of
$42,230, total current liabilities of $226,976, and $1,925 in cash. For the six
months ended April 30, 2003, research and development and general and
administrative costs were the primary contributors to the resulting additional
losses for the period of $1,084,657. As of April 30, 2003, we had total assets
of $528,795, consisting almost entirely of media credits acquired in exchange
for our preferred stock, total current liabilities of $283,032, and $29,527 in
cash.
For the fiscal year ended October 31, 2002, we had de minimis revenue
of $173 from marketing our geoexchange products and $8,371 from our Asia-based
consumer wellness products. This $8,544 aggregate revenue, with a cost of sales
of $6,257, constitutes our only revenue since inception. We expect to continue
to incur losses at least through fiscal year 2004. In light of the development
nature of our Company and the continuing costs of research and development,
there can be no assurance that we will generate revenue, achieve or maintain
profitability, or initiate and sustain future growth.
Between inception and April 30, 2003, we obtained net cash of $805,337
from financing activities to provide cash of $709,129 required to fund operating
activities and $58,369 for investments. Financing activities generated $647,587
from the issuance of common and preferred stock, $176,698 in net loan proceeds,
including $116,656 in advances from stockholders, and $16,042 in tenant
inducements. We intend to continue to rely principally on the sale of
securities, including the sale of common stock in this offering, and loans from
stockholders and others to meet our cash requirements. To date, we have received
approximately $164,000 in loans from stockholders. The terms of those loans are
described under "Certain Transactions," page 30, herein. In addition, as of
April 30, 2003, we had prepaid expenses and deposits that included $1,500,000 of
media credits, which have been recorded for financial statement purposes at
$440,000, that we acquired in consideration of the issuance of 400,000 shares of
Series A Preferred Stock under an agreement to acquire $25.0 million in face
amount of media credits for an aggregate of $12.5 million. See Note 8(a) to our
unaudited financial statements for the period ended April 30, 2003. We intend to
barter these credits for goods or services we may require for our business or to
sell them for cash to generate additional working capital that requires no debt
or equity commitment. We will rely principally on the sale of stock in this
offering to meet our requirements for additional capital. We may also seek to
sell preferred stock in private placements outside the United States. We cannot
assure that we will be able to sell any offered shares. We have no commitments
from anyone to purchase our common stock, to loan us additional funds, or to
enable us to realize value from the media credits. There is no assurance that we
will be able to continue to effectively raise capital. Even if we are able to
continue to access capital, there is no assurance that we will be able to do so
at a cost to us that will be economically viable.
During the six months ended April 30, 2003, we incurred approximately
$1,040,000 in general and administrative expenses and $44,000 for research and
development expenses, requiring cash of approximately $183,000. Based on this
recent experience and our current level of expenditures, we estimate that we
will require cash of approximately $375,000 to $400,000 for general and
administrative expenses per quarter through October 31, 2004, for ongoing and
expanded general and administrative expenses, including salaries to officers and
directors, in addition to the funds required for our EI Elemental Heat Energy
System, San Marcos Eco-Sustainable Development and consumer wellness projects.
Actual expenditures will depend both on the level of our general and
administrative requirements and the availability of funds from this offering or
other sources.
Over the next 12 months, we plan to continue to move towards the full
commercialization of the EI Elemental Heat Energy System, including seeking
approvals of the Canadian Standards Association ("CSA") and Underwriters
Laboratories, Inc. ("UL"). The EI Elemental Heat Energy System has been in
14
operation under in-house testing conditions for nearly two years and is now
being put into field-testing and pilot project applications. The first pilot
project began in July 2003 and the first phase of the installation, which is the
drilling and laying of the geo-field, is now complete. The cost for the
completion of this first pilot project will be approximately $17,500, including
the drilling, installation of the geo-field, and the purchase of all the
necessary component parts. We have already paid all of the necessary expenses
and acquired all of the necessary component parts.
We anticipate that we will require approximately $1.0 million for
demonstration, complete commercialization and initial marketing of the EI
Elemental Heat Energy System prior to the end of our fiscal year ending October
31, 2004. This amount includes the allocation of $50,000 for the filing of
patents on the technology as well as up to another $100,000 to apply for and
pursue both the CSA and the UL certification approvals for the technology before
it goes to turn-key manufacturing. We expect that any limited revenue from the
sale of initial units prior to that date will not provide significant funds for
further development, commercialization or marketing. We anticipate that we will
require a minimum of $500,000 for development of the solar director and the
phase change module system enhancements for our EI Elemental Heat Energy System,
and that we would require up to $2,000,000 for the commercialization of all such
enhancements up to the end of 2008. These enhancements are longer term prospects
and do not preclude or limit the commercialization of the core system technology
and will not affect our targeted commercialization of the EI Elemental Heat
Energy System for fall 2004.
In September 2003, we will launch a direct sales campaign for
additional pilot project installations of the EI Elemental Heat Energy System,
as well as for our line of water treatment/purification technologies, beginning
in British Columbia, Canada, the site of our research and development
operations. We have the necessary supplier agreements in place with payment
terms of net 30 or net 45 days for those components required to satisfy initial
orders, so by taking a 50% advance deposit from clients on sales orders, we
expect to be able to maintain and manage sales volume and inventory without
having to increase significantly our working capital requirements. We have a
staff of three sales people who are to be remunerated via commission, which
reduces any increment in fixed salary expenditure.
In September 2003, we will also initiate a campaign to recruit
distributors for the consumer wellness products. We began test marketing in Hong
Kong in May 2002, with participation in the Natural Products Expo Asia 2002. We
are recommencing efforts in September 2003, as SOTA's next-generation units are
now ready and being manufactured in the People's Republic of China for
distribution from Hong Kong. Our sales campaign will require approximately
$10,000 for minimal administrative functions. Our two salespeople in Hong Kong
are to be remunerated via commission requiring no fixed salary expense, and we
have payment terms with SOTA so that we can take deposits on sales orders prior
to ordering, minimizing working capital requirements. If funds become available,
we anticipate allocating up to $250,000 for enhanced marketing activities to
draw attention from the rest of the Asian region.
Over the next 12 months, we intend to meet the required closing
conditions to be able to complete the acquisition of property under contract in
San Marcos, Texas. We intend to borrow from an unrelated lender the $314,067 due
the seller on the purchase of the San Marcos, Texas, property on the closing
date and are now seeking that financing. We have no loan commitments or credit
facilities and cannot assure that we will qualify for any borrowings in view of
our financial condition and results of operations. We expect that such borrowing
will be secured by a lien on the property purchased. We intend to use proceeds
from the sale of our common stock in this offering to repay this indebtedness.
We also intend to continue to look for other property during the next fiscal
year that we can acquire on favorable terms that might allow us to proceed with
our vision of environmentally friendly, eco-sustainable land development and
permit us to create a built-in market for our EI Elemental Heat Energy System
and our line of water treatment/purification technologies.
15
We also anticipate that we will require approximately $2,000,000 by the
end of the 2004 fiscal year to expand our administrative and technical staff,
provide the necessary manufacturing equipment, and purchase the required
component parts to effectively manufacture our target of 3,000 units of the EI
Elemental Heat Energy System by the end of fiscal 2004.
Business and Property
Essential Innovations Technology Corp.
Essential Innovations Technology Corp. is driven to provide
eco-friendly lifestyle enhancement technologies for the betterment of energy,
water, air and health. We are focusing our efforts on:
o commercialization and market entry strategies for our
proprietary EI Elemental Heat Energy System which uses
efficient geothermal heat exchange, or geoexchange, technology
at its core and is currently being used to heat and cool our
Canadian research and development facility;
o land acquisition to allow us to contribute the property and
our technology expertise to a joint venture or partnership
with credible development partners for development;
o development of synergistic industry relationships and
alliances, particularly with large builders and developers
that recognize environmental sensitivity and energy and water
conservation as an important feature of land planning and
infrastructure development;
o execution of product licensing and distribution agreements for
our EI Elemental Heat Energy System as well as our water
treatment and consumer wellness products; and
o development of enhancements to the core technology of our EI
Elemental Heat Energy System that we believe would improve its
performances and marketability.
EI Elemental Heat Energy System
Heat pump technology has been used for decades to provide heat supply
to residential, commercial and industrial applications. Over the past decade,
the industry has begun to embrace the use of geothermal heat pump technology,
extracting heat from the earth to provide the necessary energy for a number of
applications.
Core Technology
Our EI Elemental Heat Energy System is built around a geothermal heat
pump, also referred to in the industry as a geoexchange technology. A geothermal
heat pump is a renewable energy feature that uses the natural heat storage
ability of the earth and/or groundwater to heat or cool a building. The earth
absorbs and stores heat energy from the sun. To use that stored energy, heat is
extracted from the earth through a liquid medium (groundwater or a propylene
glycol solution) and is pumped to the heat pump or heat exchanger and then
utilized to heat the building. In the summer, the process is reversed to cool
the structure.
16
In summer months and in climatic regions of constant heat, our heat
energy system transfers excess heat into available groundwater or ground loops
containing a liquid heat transfer medium. During the winter months and in
climatic regions of constant cold, the opposite occurs with heat being
transferred out of available groundwater or ground loops containing a liquid
heat-transfer medium.
Our EI Elemental Heat Energy System is a combination of both the
geothermal and air-to-water heat pump technologies and will be classified as a
dual or multisource heat pump. We use chlorine-free, commercially available
refrigerants that meet applicable environmental requirements and that are
effective with the range of operating temperatures of our system.
We have incorporated a proprietary Artificial Intelligence Controls
Diagnostics subsystem, or AICD, designed to regulate and monitor the system for
optimum and maximized efficiencies. The AICD supports a personal computer
interface with a keypad and a liquid crystal diode, or LCD, screen to make it
user-friendly. We will have the ability to incorporate wireless technology with
the option to include individual wireless room sensors upon installation.
The AICD is used to determine the point at which heat energy stored in
the earth or groundwater should be extracted and used or at which point heat
energy should be transferred to the earth and/or groundwater. The AICD also
continually collects data and has been designed to be used with a modem or
advanced Ethernet connection to gather and collect system information from a
remote site. As an example of the uses of AICD, it will enable the system to
store historical data relating to the length of time it took the system to reach
optimum temperature set point. Then for future run times, that information can
be used to start the heating or cooling at precisely the right time to achieve
the best temperature set point and when necessary, be able to adjust for
variables such as climate and seasonal conditions.
The AICD is also equipped with a voice correspondence component, which
allows the operator to be told about the state of the system operating
characteristics and conditions that occur within the unit and its controls. If
no sound is preferred, the system voice can be disabled and remote notification
can be provided. The system is designed to provide standard notifications, such
as the outside temperature, set point and inside temperature, as well as
troubleshooting notifications, such as noting the changeover from heating to
cooling, the existence of a fouled or dirty filter, and other malfunctions.
An essential part of our EI Elemental Heat Energy System is the LCD
interface. The LCD screen constantly displays active and stored data, providing
the operator with quality of service and performance. The keypad is outfitted
with simple, easy to understand, colored pads and directional arrows that
simplify data collection and storage. Our EI Elemental Heat Energy System also
includes the ability to communicate to a personal computer that can display
graphical information that can be modified.
This core technology is currently being used in our research and
development facility and has now been put into a packaged unit for field testing
in our pilot project. Although we have a number of planned enhancements to add
to this core technology over time, the EI Elemental Heat Energy System is a
complete unit using only the core technology, and it is the core technology that
we will now work to commercialize by late 2004.
Planned Enhancements to the EI Elemental Heat Energy System
There are a number of enhancements to the EI Elemental Heat Energy
System that we have in the early stages of development. All of these
enhancements will require substantial additional work before we can consider
integrating them with the core technology, and we cannot assure that we will
ever be able to do so.
17
Phase Change Module Technology
We are working to develop a proprietary phase change module that can
store substantial amounts of heat energy at a minimal cost. One or more phase
change modules could then be incorporated with the EI Elemental Heat Energy
System. We have completed drawings and a preliminary design, but have not yet
finalized the design, constructed an actual prototype of the phase change
module, or written the software necessary to integrate it into the system. We
intend for the phase change module to be used efficiently for either a heat
source or a heat storage system. The benefits of the phase change module would
be most evident when addressing periods of peak heating demand and peak cooling
demand. The ability to use stored heat energy on demand, without having to
recreate it, would reduce heating costs. This proprietary subsystem would reduce
costs by storing excess heat that would otherwise be wasted and by reducing the
size and cost of other system components. Given the current development status
and our projected allocation of resources, we do not anticipate being able to
integrate this system enhancement with our commercialized core technology any
sooner than late 2006.
Solar Design
We hope to put into effect a proprietary solar director to use solar
energy to reduce the total cost of system operation. We have completed our
preliminary design and drawings of the solar director, but have not yet
constructed the solar director or written the software necessary to integrate it
into the system. We intend for our AICD subsystem to work with the solar
director to continually place it in the position to best collect the sun's
energy. By collecting and absorbing the sun's energy, the solar director would
relieve the load on the geothermal ground loop system, in turn reducing the cost
of the heat pump installation by permitting the installation of a smaller ground
loop system in the overall design. The heat energy gathered from the sun could
then be used to heat domestic hot water, supply heat on demand during the day,
or store heat during the day in phase change modules for use at night. Given the
current development status and our projected allocation of resources, we do not
anticipate being able to integrate this system enhancement with our core
technology any sooner than late 2008.
EI Elemental Heat Energy System Pilot Project
We are currently principally focused on commercialization of our EI
Elemental Heat Energy System. A prototype with the core technology has been used
successfully to both heat and cool our research and development headquarters in
Langley, British Columbia, for nearly two years. This prototype has now been
placed into a packaged system. We have identified a private, three-story home in
Vancouver, British Columbia, that we will be using as our first field
installation and pilot project. In the first week of July 2003, we began the
installation process, and in the third week of July, we successfully completed
the required drilling and placement of the ground coils into the ground. The
next phase of the installation, to begin in September 2003, will see us putting
two EI Elemental Heat Energy Systems into the home, one of which will provide
radiant floor heating to the first and second floors, while the other will
provide heating for the third floor and cooling for the entire house. The EI
Elemental Heat Energy Systems will be replacing a natural gas furnace and a
natural gas hot water heater.
Approvals
We intend to submit our EI Elemental Heat Energy System to both the
Canadian Standards Association ("CSA") and Underwriters Laboratories, Inc.
("UL") for approval. We believe that approval by one or more of these
organizations will enhance market acceptance of the EI Elemental Heat Energy
System. In an effort to prepare for such approvals, we have chosen only
component parts that have already received CSA approval, UL approval, or both.
18
However, we have not yet submitted the EI Elemental Heat Energy System to the
CSA or UL for approval, and we cannot provide any assurance that we will
ultimately receive the approval of either organization.
San Marcos Property Acquisition
We have agreed to purchase property in San Marcos, Texas. The property
is adjacent to Interstate 35, approximately 26 miles south of Austin, Texas, and
approximately 46 miles north of San Antonio. We are depositing 628,134 shares of
our common stock into escrow to be delivered against tender of title and will
owe approximately $314,000 on closing. The acquisition of this property, when
complete, will provide us with additional tangible assets. The property has been
appraised by a qualified independent appraiser at $1,570,334. We are evaluating
our options to determine what, if anything, will be done with the property after
closing. Among our options, we are considering seeking joint venture
participants to participate in potential eco-sustainable development of the land
that would incorporate our EI Elemental Heat Energy System as well as potential
other technologies.
Additional Niche Marketing Opportunity
We are exploring a strategic opportunity we have identified to market
our EI Elemental Heat Energy System to native communities as an environmentally
friendly, economical heating and cooling alternative.
We are working to establish demonstration projects for our EI Elemental
Heat Energy System in British Columbia, Canada, while exploring access to other
marketplaces with the goal of initiating projects to provide a baseline
reference to market to the indigenous communities of broader Canada, the United
States, Australia and New Zealand.
As one example, in Whistler, British Columbia, the Squamish Nation and
Mt. Currie Indian Band have announced that during the summer of 2004 they will
begin construction of a cultural center to serve high tourism demand. Whistler
is a year-round resort destination of international caliber and the site of many
of the events of the 2010 Winter Olympics, recently awarded to Vancouver. We are
currently negotiating with the Squamish Nation and the Mt. Currie Indian Band
for the installation of the EI Elemental Heat Energy System in the cultural
center to provide a visible application of our EI Elemental Heat Energy System.
Offices of the Whistler, British Columbia, and Canadian governments are
cooperating in this project, which we believe would offer an opportunity to seek
exposure for our product in local, regional, national and international media.
Anticipated Pricing
We anticipate that the EI Elemental Heat Energy System will have a
target retail price ranging between $4,000 and $10,000 depending upon the total
system features.
In addition to the cost of the system, there will be a significant
installation requirement for drilling and ground coil placement of from $3,000
to $10,000, dependent upon the drilling and trenching requirement. We anticipate
that a typical total price for the system and installation will be between
$12,000 and $20,000. Although the cost of geoexchange technology has a higher
initial capital cost than more conventional heating and cooling technologies,
the user will realize substantially reduced operating costs, with payback
periods on that additional upfront cost typically between two to five years,
depending on local electrical power rates.
19
Other Technology
We also have developed a line of water treatment and purification
systems. These units can be designed to meet the requirements of a variety of
residential or commercial applications treating municipal or rural water
supplies and purifying municipal or rural water at the point at which it enters
the building. System configuration and technologies can be customized depending
on the water contaminants and the particular production volume and the
post-treatment water quality requirements. Technologies that may be included in
the overall system designs include media filtration, specific cartridge
filtration, ion exchange, reverse osmosis, distillation, ozonation and
ultraviolet sterilization.
We have also acquired aeration technology that we believe has potential
application as a waste water technology or as a mixing apparatus within water
treatment systems. Although a provisional patent application was filed for this
technology, we have not filed a full patent application and have no plans to do
so at this time. Accordingly, we do not now have, and may never acquire, the
protection that a patent would provide. As a result, others may develop
identical or substantially similar technology and we would be unable to prevent
them from bringing it to market. We currently do not have any plans to develop
or use our aeration technology, although we intend to retain it because we hold
it under a royalty-only agreement and it costs us nothing to do so.
Consumer Wellness Products
On April 9, 2002, we entered into an agreement with SOTA Instruments
Inc., or SOTA, of British Columbia, Canada, for the exclusive global marketing
rights, excluding Canada and the United States of America, to certain consumer
wellness products. Under the exclusive marketing agreement, our Asian subsidiary
has agreed to identify persons or entities to enter into exclusive distribution
agreements, or "distributors," with SOTA for the sale of SOTA's consumer
wellness products. Under the exclusive marketing agreement, our Asian subsidiary
will not make any sales of SOTA's consumer wellness products, but will be paid a
commission on sales made by the distributors we identify. We are also
negotiating an agreement for the exclusive distribution rights for SOTA products
in Hong Kong and Mainland China. If we are successful in obtaining the exclusive
distribution rights, our Asian subsidiary would market SOTA's consumer wellness
products directly to consumers and provide customer service and technical
support.
We began test marketing in Hong Kong in May 2002, with participation in
the Natural Products Expo Asia 2002. During this period of test marketing, we
generated revenue of $8,371. Since that time, we have been working to formulate
relationships in Hong Kong with importers, wholesalers, distributors and
practitioners to build the foundation for our full-scale product launch in
September 2003, as SOTA's next-generation units are now ready and being
manufactured in Hong Kong. SOTA is seeking to have its newly redesigned units
qualify for ISO 9000 status, an international manufacturing quality standard.
As our Asian subsidiary proceeds to establish master dealers that are
given exclusive rights in countries around the world, we will be paid based upon
net sales at the following rates:
(a) 20% of net sales for the first year following the start date;
(b) 15% of net sales for the second year following the start date; and
(c) 5% of net sales after the end of the second year following the
start date.
20
Under the distribution agreement we are currently negotiating, we would
be the master dealer in Hong Kong and China, meaning that we would receive not
only the commission structure described above, but also the mark-up from master
dealer to the dealer and/or retail level.
In consideration of the exclusive international marketing rights to
SOTA's products, we granted SOTA options to purchase 200,000 shares of common
stock, vesting in the amounts of 50,000 shares in the first year, 50,000 shares
in the second year, and 100,000 shares in the third year, at a price of $0.25
per share. We expect to market and distribute the following SOTA products:
o The Silver Pulser makes electrically-charged ionic-colloidal
silver and generates micro currents of electricity.
o The Magnetic Pulser outputs an intense, time-variant, pulsed,
DC magnetic field that penetrates up to nine inches. The
DC-pulsed field creates gentle electrical microcurrents in
living organic materials that contain an electrolyte such as
saline.
o The Water O3Zonator saturates eight ounces of water with ozone
(O3) in less than two minutes, achieving an ORP (Oxidation
Reduction Potential) of over 800 millivolts. The Water
O3Zonator can operate from a 12 volt DC power source like an
automobile battery or a solar panel.
o The Bio-Tuner is an electronic system that applies specific
frequencies and harmonics. The Bio-Tuner, based on cranial
electrical stimulation research, outputs a modified
rectilinear waveform with over 500 harmonic frequencies in
each pulse.
Competitive Business Conditions
There are a number of companies already active in the areas of heat
exchange technology development and distribution that are substantially larger
and better funded than we are and that have significantly longer histories in
the respective marketplace. Our principal competitors for the commercialization
of our EI Elemental Heat Energy System will be Econar Energy Systems, Water
Furnace International and Climate Master, as well as others, almost all of which
have greater financial, technical, managerial and marketing resources than we.
We believe competition in marketing heat exchange technology is based
principally on the initial price of units as compared both with other heat
exchange systems and traditional systems, the period estimated to be required to
recoup any higher installation costs from energy savings during operation, the
reliability of the system, public familiarity with and acceptance of heat
exchange systems, and the reputation of the manufacturer.
In our effort to address competition, we have initiated discussions
with a number of large developers for joint venture or partnership
possibilities. In seeking relationships with developers, we emphasize the
21
possible public image benefits from using environmentally friendly technologies,
as well as marketing and revenue benefits. We also believe that by acquiring
land such as that under contract in San Marcos, Texas, we may be able to
contribute to land to a project to attract a developer for a possible joint
venture. We would require in a joint venture that development of the property
use our technology throughout, so that we can create our own market to use our
technology.
In an effort to address competition, we also recruited Peter Bond, a
principal in both Water Furnace International and Climate Master, Inc., two of
our competitors in the industry, to join our board of directors in August 2003.
We expect Mr. Bond to take a very active role in the commercialization and
manufacturing of our EI Elemental Heat Energy System. Mr. Bond was instrumental
in the development of Water Furnace International and Climate Master, Inc.
There are many corporations active in marketing consumer wellness
products that are larger and better funded than we are and that have longer
histories in this industry. A large number of those companies, including Dabur,
Terumo and Nikken, are currently marketing their products in Asia. In order to
compete, we expect to rely on the efforts of SOTA to assist in our marketing and
promoting efforts.
Properties
Our United States office is located in Bellingham, Washington. Our
administrative, research and development facility is currently located in
Langley, British Columbia, Canada, occupying approximately 7,000 square feet. We
have performed significant leasehold improvements to the site. Our current lease
expires in 2004 and has a three-year renewal option. In addition, we have the
option to lease 2,000 square feet of space if so required. We believe that these
facilities will be more than adequate in the future for our continued research
and development needs. We plan to use part of the land in Texas, following the
closing of that transaction, for a manufacturing plant build-out to accommodate
a manufacturing capability for us within the next 18 to 24 months.
We intend to maintain our research and development in the lower
mainland region of British Columbia, Canada, for the foreseeable future because:
o We believe this particular geographic region is home to other
alternative energy companies.
o We know of no other manufacturer of geoexchange technology in
Western Canada.
o We believe there are available, educated, human resources with
particular educational and work experience in the alternative
energy field.
o The Canadian government has programs to grant initiatives and
joint environmental development projects and that may enable
us to expedite our research and development efforts as we move
toward commercialization of the EI Elemental Heat Energy
System with members of the federal and provincial funding
agencies.
o This area has strong business and cultural connections to
Asia, particularly the Pacific Rim, which we believe will
facilitate dealing with Asian customers, our Asian subsidiary
and our potential Asian strategic associates.
o Travel from Vancouver to numerous destinations in Asia is
available on a regular, nonstop basis.
o We believe we can continue research and development efforts in
Canada more economically than in the United States because of
the relative strength of the Canadian dollar.
Legal Proceedings
We are not a party to any material pending proceedings, and no material
legal proceedings have been threatened by us or, to the best of our knowledge,
against us.
22
Management
All of the directors will serve until the next annual meeting of
stockholders or until their earlier death, retirement, resignation or removal.
Executive officers serve at the discretion of the board of directors and are
appointed to serve until the first board meeting following the annual meeting of
stockholders.
The following table sets forth the name, age, and position of each of
our current directors and executive officers:
Name Age Title
- ------------------------------ ---- --------------------------------------------
Jason McDiarmid 32 President, Chief Executive Officer
and Director
Steve Wuschke 29 Chief Technical Officer and Director
Kenneth G.C. Telford 54 Secretary/Treasurer, Chief Financial Officer
and Director
Peter Bond 65 Director
David Rezachek, Ph.D., P.Eng. 52 Director
Diana M. Allen, Ph.D. 37 Director
William Yang, P.Eng. 56 Director
William Baumgartner, P.Eng. 71 Director
Jeane Manning 61 Director
Stevan Perry 32 Vice-President Systems Integration
The principal occupation, title and business experience of our
executive officers and directors during the past five years, including the names
and locations of employers, are indicated below.
Executive Officers
Jason McDiarmid has been our president, chief executive officer and a
director since 2001. Mr. McDiarmid is a 1994 graduate of the British Columbia
Institute of Technology in the Department of International Trade and
Transportation. From 1997 through 1999, Mr. McDiarmid served as president and
founder of Global Diversification Investment Corporation, a company with which
he created, wrote, published and distributed "Diversity; Gearing your Funds
Toward a Successful Portfolio," a stock market newsletter publication sold
throughout North America. That newsletter publication, which provided
publicly-traded companies the opportunity to advertise to a network of new
potential investors, ceased publication in 1999. From 1999 through 2001, Mr.
McDiarmid was not actively seeking employment and was investigating
opportunities in the renewable energy field and working with other of our
principals on matters preliminary to our incorporation. Mr. McDiarmid currently
resides in British Columbia, Canada.
Steve Wuschke has served as our chief technical officer and a director
since 2001. Mr. Wuschke is a 1996 honors graduate of Kwantlen University from
the Department of Robotics and Automation. Following graduation, he completed
the Technical Project Management Program at Simon Fraser University in British
Columbia. From 1996 to 2001, Mr. Wuschke was lead project manager for special
interface designs working directly with research and development for Delta
Controls Inc., a globally recognized automation and controls company. During his
time at Delta Controls, Mr. Wuschke was assigned to Chicago for a year where he
worked on contract for Arrowhead Environmental as an applications engineer
designing and implementing building automation systems for high-rise hotels,
commercial and institutional buildings. During his schooling, Mr. Wuschke
received the "Presidents Award of Excellence" for academic achievement and built
23
an electric vehicle for his final thesis project. Mr. Wuschke is the inventor
whose proprietary designs we will implement and proceed to patent in the
development of our EI Elemental Heat Energy System. He will serve as head of our
research and development program and oversee design and testing of the heat
energy system. Mr. Wuschke currently resides in British Columbia, Canada.
Kenneth G.C. Telford has been our chief financial officer, secretary
and a director since January 1, 2003. Mr. Telford is both a Chartered Accountant
(Canada) and Certified Public Accountant (USA). Mr. Telford has been a partner
in Telford Sadovnick, PLLC, Certified Public Accountants in the United States
since 1998. Mr. Telford has been the chief financial officer and secretary for
Brek Energy Corporation, a publicly traded company, since July 1, 2000. Mr.
Telford was also previously a partner in Sadovnick Telford + Skov Chartered
Accountants in Canada from 1994-2001 and in the international accounting firm
Touche Ross & Co. (now Deloitte & Touche), as well as chief operating officer
and chief financial officer of an automotive rental company called Tropical Rent
a Car Systems, Inc. Mr. Telford has advised numerous companies, operating in
both North America and Asia Pacific, on a broad range of financial and business
matters. Mr. Telford currently resides in Hong Kong, SAR, China.
Stevan Perry has been our vice-president for systems integration since
2001. Mr. Perry worked as a robotics and automation specialist at Delta Controls
from 2000 to 2001. At Delta Controls, he was involved with setup, programming
and troubleshooting for BACnet upgrades to meet with the most recent industry
protocols within the controls and automation development field. From 1996 to
2000, Mr. Perry was an HVAC applications engineer with Weber Controls,
responsible for mechanical systems commissioning, project management, CADD
drawing, design and end-user training and system demonstrations. Mr. Perry has
attended training sponsored by the American Society of Heating, Refrigerating
and Air-conditioning Engineers ("ASHRAE") and has a vast network of contacts
throughout the automation and controls industry, as well as a network of family
connections within the environmental engineering industry. Mr. Perry has both
Canadian and British citizenship and currently resides in British Columbia,
Canada.
Board of Directors
Peter Bond has over 18 years experience in the energy conservation
industry at various levels including management, advisory and consulting. Since
1999, Mr. Bond has served as the general manager of Koax Corporation, a
manufacturer of heat pump components, responsible for all facets of operating
the manufacturing facility for heat pump components such as engineering,
marketing, sales and day-to-day plant operations. From 1997-1999, Mr. Bond
served as the director of plant operations for Climate Master Inc. of Oklahoma
City, Oklahoma. He was in charge of the entire plant, including the reorganizing
of the manufacturing facility for Climate Master Inc. From 1993 to 1997, Mr.
Bond was a principal of and investor in Earth Energy Technologies of Billings,
Montana. From 1984 through 1993, he served with Water Furnace International
Industries (WFI Industries) in various capacities from a principal and an
officer to a role as a consultant, to his final role as the chief operating
officer in his last three years there. Mr. Bond currently resides in Oklahoma
City, Oklahoma, USA.
Dr. David Rezachek, Ph.D., P.Eng., has more than 25 years of experience
in energy and environmental systems research, design, demonstration, analysis,
engineering and project management. He has been a registered professional
mechanical engineer in the state of Hawaii for more than 16 years. He has also
served as project manager for dozens of projects in the areas of renewable and
conventional energy, energy efficiency and conservation, electric and hybrid
vehicles, alternative fuels, energy and engineering education, and environmental
engineering. Since 1993, he has been the president of Rezachek and Associates,
an environmental consulting firm. Many of these projects involved research,
development, demonstration and commercialization of new and relatively untested
technologies, systems and concepts. Prior to completing his Ph.D. in 1991, Dr.
Rezachek completed a Master's thesis on the "Application of Heat Pumps to
24
Residential Water Heating (Evaluation of Solar Assisted Heat Pumps)," which
relates directly to our first prototype development, the "EI Elemental Heat
Energy System," providing us a wealth of direct and applicable experience and
knowledge towards this proprietary innovation. Dr. Rezachek currently resides in
Oahu, Hawaii, USA.
Dr. Diana Allen, Ph.D., has been employed as an associate professor in
the Department of Earth Sciences at Simon Fraser University in Vancouver,
British Columbia, Canada, since June 2002, where she served as an assistant
professor from 1996 to 2000, and is a registered professional geoscientist with
the Association of Professional Engineers and Geoscientists of British Columbia.
Dr. Allen has over 10 years research and consulting experience in the
hydrogeological design of ground source geothermal systems, particularly aquifer
thermal energy storage (ATES) systems, and is a strong proponent of alternative
energy technologies. Her consulting experience includes the design of the ATES
systems at Carleton University ATES system (Phase 2), Environment Canada's
Environmental Technology Center, and most recently, Agriculture and Agri-Foods
Canada's new laboratory facility at the Pacific Agricultural Research Park in
Agassiz, British Columbia. Dr. Allen has published numerous scientific papers
and technical reports related to ATES system design, specifically, the
optimization of the storage and energy recovery efficiency of ATES systems, and
has given presentations at several international conferences and at technical
sessions held in conjunction with the Expert Meetings for Annex 13 under the
Implementing Agreement on Energy Conservation through Energy Storage
(International Energy Association) on various aspects of well-field and well
design, and numerical hydrogeological and thermal transport modeling. Dr. Allen
has also been a member of the board of directors of the Canadian Geothermal
Energy Association for the past several years. Dr. Allen currently resides in
British Columbia, Canada.
William Yang, P.Eng., has substantial engineering project management
experience, having been employed with the Canadian Federal Government (Transport
Canada and Department of Energy, Mineral Mine and Resources) from 1976 to 1981
and in private sector industry (General Motors of Canada) from 1973 to 1976.
From 1981 to 1999, he was involved in the power-engineering sector working with
China Light and Power Company in Hong Kong, one of the largest power companies
in southeast Asia. With China Light and Power, he was responsible for
implementing strategic planning and new power plant studies (coal, gas and
nuclear plants) with business partners that included Exxon, ARCO and Guangdong
Electric of China. His responsibilities also included the handling of contract
negotiations worth multimillions in fuel and shipping agreements. Mr. Yang was
awarded a degree in Mechanical Engineering from Queens' University in Kingston,
Ontario, in 1973, and is a member of the Associations of Professional Engineers
of Ontario. Most recently, Mr. Yang has been responsible for sourcing and
facilitating our new business development, project management and marketing
activities in Asia. Mr. Yang currently resides in Shenzhen, China.
William Baumgartner, P.Eng., is an experienced hands-on engineer with
over 30 years expertise in scientific and engineering programs involving
research, planning, design, management and construction with West Coast
Transmission Company, a large client of both GE and Westinghouse in the
development of jet engines and large-scale turbines, from 1968 through 1976.
Since then, while traveling throughout Europe, Asia and Australia, he began to
successfully manufacture and market boundary layer pumps and turbines for
multiple applications based on Tesla principles of design. Mr. Baumgartner is a
practical experimenter, building and developing all his own prototypes while at
the same time having the theoretical understanding of technologies, coupled with
the ability to communicate the ideas and methodology. Mr. Baumgartner designed
and built his first Tesla (boundary layer) air turbine in 1973. The boundary
layer pump utilizes the boundary layer friction within the working fluid to
produce a pumping effect or turbine effect, and in certain applications far
exceeds the efficiency and other performance characteristics of other pumps and
turbines. Mr. Baumgartner has successfully manufactured and marketed his
25
boundary layer pumps in small quantities around the world since the late 1970s.
Mr. Baumgartner currently resides in British Columbia, Canada.
Jeane Manning is a freelance journalist and published author who since
1981 has traveled throughout North America and Europe to report on new-energy
technologies. During past years, she worked as a newspaper reporter and editor.
She previously served as a board member on two other new-energy organizations,
one of which is Blue Energy focusing on the use of tidal power for energy
creation. Ms. Manning received her B.A. degree in sociology (cum laude) from the
University of Idaho in 1963. Her articles and essays have appeared in numerous
energy journals as well as several books, and in her most recent book, "The
Coming Energy Revolution," she provides us with an intriguing and insightful
look at the forces behind the free-energy movement. Ms. Manning currently
resides in British Columbia, Canada.
Executive Compensation
During the period beginning at our inception on February 9, 2001, and
ending October 31, 2001, we paid our chief executive officer, Jason McDiarmid,
$18,523. During the fiscal year ended October 31, 2002, we paid Mr. McDiarmid
$10,671. From November 1, 2002, through July 31, 2003, we were obligated under
an oral employment agreement to pay Mr. McDiarmid $10,000 per month. Of the
amount due Mr. McDiarmid for the six months ended April 30, 2003, we paid him
$2,880 and accrued but deferred payment of $57,120.
Effective August 1, 2003, our board of directors approved employment
terms with Messrs. Jason McDiarmid, our chief executive officer, Kenneth
Telford, our chief financial officer, and Steve Wuschke, our chief technical
officer, at salaries of $165,000, $150,000, and $132,000, respectively. Salaries
for each of these officers will be accrued but unpaid until such time as the
board of directors determines that we have sufficient financial resources to
commence payment.
Equity Compensation Plan Information
As of August 31, 2003, we had authorized securities for issuance under
equity compensation plans that had not been approved by the stockholders, but
none under equity compensation plans that were approved by the stockholders. The
following table shows the aggregate amount of securities authorized for issuance
under all equity compensation plans as of August 31, 2003:
Number of securities
Number of securities to be remaining available for
issued upon exercise of Weighted-average exercise future issuance under
outstanding options, price of outstanding equity compensation plans
warrants and options, warrants (excluding securities
rights and rights reflected in column (a))
Plan Category (a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders....... -- -- --
Equity compensation
plans not approved by
security holders....... 3,020,000 $0.62 --
----------- ------- ------
Total...................... 3,020,000 $0.62 --
=========== ======= ======
26
We have granted options to purchase 3,020,000 shares of our common
stock to our officers, directors, employees and consultants as compensation for
their services. Those options are immediately vested, have exercise prices
ranging from $0.25 to $1.00, and expire beginning in 2007 and ending in 2012.
Indemnification of Officers and Directors
Our articles of incorporation and bylaws provide for the
indemnification of our officers, directors and others to the maximum extent
permitted by Nevada law. Accordingly, our officers and directors would be
entitled to indemnification under a variety of circumstances, which may include
liabilities under the Securities Act of 1933.
Insofar as indemnification under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is contrary to public
policy as expressed in the Securities Act of 1933 and therefore is
unenforceable.
Limitation on Liability
Our articles of incorporation limit the liability of directors to the
maximum extent permitted by Nevada law. In addition, our bylaws require us to
indemnify our directors and officers and allow us to indemnify our other
employees and agents to the fullest extent permitted at law. At present, we are
aware of no material pending litigation or proceeding involving any director,
officer, employee or agent in which indemnification will be required or
permitted. We are not aware of any threatened litigation or preceding that might
result in a claim for indemnification. If we permit indemnification for
liabilities arising under the Securities Act to directors, officers or
controlling persons under these provisions, we have been informed that, in the
opinion of the Securities and Exchange Commission, this indemnification is
against public policy as expressed in the Securities Act and is unenforceable.
A majority of our directors and our auditors are residents of Canada.
As a result, it may be difficult for our stockholders residing in the United
States to effect service of process within the United States upon such directors
and experts who are not residents of the United States. It may also be difficult
to realize in the United States upon judgments of courts of the United States
predicated upon civil liability of such directors and experts under the United
States federal securities laws. Canadian courts may not (i) enforce judgments of
United States courts of competent jurisdiction obtained against such directors
or experts predicated upon the civil liabilities provisions of such securities
laws, or (ii) impose liabilities in original actions against such directors and
experts predicated solely upon such securities laws. Accordingly, United States
stockholders may be forced to bring actions against our directors and experts
under Canadian law and in Canadian courts in order to enforce any claims that
they may have against such directors and experts. Subject to necessary
registration under applicable provincial corporate statutes in the case of a
corporate stockholder, Canadian courts do not restrict the ability of
nonresident persons to sue in their courts.
27
Principal Stockholders
The following table sets forth certain information as of August 31,
2003, with respect to the beneficial ownership of the our common stock by each
beneficial owner of more than 5% of the outstanding shares of our common stock,
each director, and all executive officers and directors as a group, specifically
indicating the number of shares of common stock owned by each such person and
group and the percentage of our common stock so owned. Each person has sole
voting and investment power with respect to the shares of common stock, except
as otherwise indicated:
Assume Company's Sale of(1)
-------------------------------
Before Offering 750,000 1,500,000 2,534,386
------------------------------------------ --------- ---------- ----------
Stockholder (2) Description Number %(3) (4) %(3) (4) %(3) (4) %(3) (4)
- ----------------------------------------- --------------------------------------------------------------------------
William Yang (5)........................ Common stock 2,340,580 19.9% 18.7% 17.6% 16.4%
(Principal stockholder and director) Options (6) 650,000 5.2 4.9 4.7 4.3
Suite 200, 10125 199B Street ----------
Langley, BC Canada V1M 3W9 2,990,580 24.1 22.7 21.5 20.0
Jason McDiarmid......................... Common stock 1,400,000 11.9 11.2 10.5 9.8
(Principal stockholder, director Options (6) 500,000 4.1 3.8 3.6 3.4
and officer) ----------
Suite 200, 10125 199B Street 1,900,000 15.5 14.6 13.8 12.8
Langley, BC Canada V1M 3W9
Stevan Perry............................ Common stock 1,200,000 10.2 9.6 9.0 8.4
(Principal stockholder and officer) Options (6) 500,000 4.1 3.8 3.6 3.4
Suite 200, 10125 199B Street ----------
Langley, BC Canada V1M 3W9 1,700,000 13.9 13.1 12.3 11.5
Steve Wuschke........................... Common stock 1,550,000 13.2 12.4 11.7 10.8
(Principal stockholder, director Options (6) 550,000 4.5 4.2 4.0 3.7
and officer) ----------
Suite 200, 10125 199B Street 2,100,000 17.0 16.1 15.2 14.1
Langley, BC Canada V1M 3W9
Kenneth G.C. Telford.................... Common stock 150,000 1.3 1.2 1.1 1.0
(Director and officer) Options (6) 225,000 1.9 1.8 1.7 1.5
200-10125, 199B Street ----------
Langley, BC Canada V1M 3W9 375,000 3.1 2.9 2.8 2.6
William Baumgartner..................... Common stock 70,000 0.6 0.6 0.5 0.5
(Principal stockholder and director) Options (6) 100,000 0.8 0.8 0.7 0.7
Suite 200, 10125 199B Street ----------
Langley, BC Canada V1M 3W9 170,000 1.4 1.3 1.3 1.2
Diana Allen............................. Common stock 25,000 0.2 0.2 0.2 0.2
(Director) Options (6) 50,000 0.4 0.4 0.4 0.3
Suite 200, 10125 199B Street ----------
Langley, BC Canada V1M 3W9 75,000 0.6 0.6 0.6 0.5
28
Assume Company's Sale of(1)
-------------------------------
Before Offering 750,000 1,500,000 2,534,386
------------------------------------------ --------- ---------- ----------
Stockholder (2) Description Number %(3) (4) %(3) (4) %(3) (4) %(3) (4)
- ----------------------------------------- --------------------------------------------------------------------------
Jeane Manning........................... Common stock 5,000 0.0 0.0 0.0 0.0
(Director) Options (6) 50,000 0.4 0.4 0.4 0.3
Suite 200, 10125 199B Street --------
Langley, BC Canada V1M 3W9 55,000 0.5 0.4 0.4 0.4
David Rezachek.......................... Common stock 25,000 0.2 0.2 0.2 0.2
(Director) Options (6) 50,000 0.4 0.4 0.4 0.3
Suite 200, 10125 199B Street --------
Langley, BC Canada V1M 3W9 75,000 0.6 0.6 0.6 0.5
Peter Bond.............................. Common stock -- -- -- -- --
(Director)
Suite 200, 10125 199B Street
Langley, BC Canada V1M 3W9
All officers and directors
as a group (10 persons)............... Common stock 6,765,580 57.5 54.0 51.0 47.3
Options (6) 2,675,000 18.5 17.6 16.8 15.8
------------
9,440,580 65.4 62.1 59.2 55.6
Albert T. Lowman Living Trust (7)....... Common stock 652,134 5.5 5.2 4.9 4.6
(Principal stockholder) Options (6) -- -- -- -- --
3603 Hunter Road ------------
San Marcos, TX 78666-9348 652,134 5.5 5.2 4.9 4.6
Millennium Capital Quest Corp........... Series A
(Principal stockholder) Preferred Stock 400,000 100.0%
222 Munson Road
Wolcott, CT 06716
- --------------------
(1) Without giving effect to the sale of any shares by such stockholders in the
offering. See Selling Stockholders at page 33.
(2) Except as otherwise noted, shares are owned beneficially and of record, and
such record stockholder has sole voting, investment and dispositive power.
(3) All percentages are calculated as if the 400,000 shares of preferred stock
issued and outstanding had been converted to common stock.
(4) Calculations of total percentages of ownership outstanding for each
individual assume the exercise of currently vested options held by that
individual to which the percentage relates. Percentages calculated for
totals of all executive officers and directors as a group assume the
exercise of all vested options held by the indicated group.
(5) Consists of 2,340,580 shares of common stock, options to purchase 500,000
shares of common stock, and a warrant to purchase 50,000 shares of common
stock held by Morpheus Financial Corporation, which is controlled by Mr.
Yang. As a director of Morpheus, Mr. Yang is deemed to hold or share voting
and dispositive power over all of such shares.
(6) These vested options and immediately-exercisable warrants give the holders
the right to acquire shares of common stock at prices ranging from $0.25 to
$1.00 per share with various expiration dates ranging from 2007 to 2012.
(7) The beneficiaries of the Albert T. Lowman Living Trust are Albert T.
Lowman, Darlyne Lowman, Todd Albert Lowman, and Cathy Northcutt. This
number assumes delivery of shares out of escrow at closing the San Marcos
real property purchase.
29
Certain Transactions
Stock Issuances
At April 30, 2001, we issued 70,000 shares of our common stock to Diana
Allen, William Baumgartner, David Rezachek, and Jeane Manning, all members of
our board of directors, at the par value of $0.001 per share, in recognition of
their service on our board of directors.
In April 2002, William Baumgartner, a member of our board of directors,
purchased 20,000 shares of our common stock for a total of $10,000, or $0.50 per
share.
In April 2003, William Baumgartner, a member of our board of directors,
purchased 35,000 shares of our common stock for a total of $35,000, or $1.00 per
share.
Morpheus Financial Corporation
On June 1, 2001, Morpheus Financial Corporation, of which our director
William Yang is a director and deemed the beneficial owner, purchased 400,000
shares of our common stock for a total of $100,000, or $0.25 per share.
Since our inception, we have borrowed a total of US $103,440 from
Morpheus Financial Corporation. William Yang, a member of our board of
directors, is a principal of Morpheus. Of those loans, $30,000 were loaned under
an agreement that we will repay them when we are able to do so and that we will
pay 12% interest on the principal amount equaling $3,600, regardless of when
repayment is made. As additional consideration for the granting of the $30,000
loan, we also issued to Morpheus a five-year warrant to purchase 50,000 shares
of our common stock at a price of $0.35 per share. These loans were not the
result of arm's-length negotiations; however, we believe them to be on terms as
favorable as or more favorable to us than we would have been able to obtain
elsewhere. During the fiscal quarter ended April 30, 2003, Morpheus agreed to
convert $72,645 of the $103,440 balance outstanding into 290,580 shares of our
common stock, or at $0.25 per share. The shares were recorded at their estimated
fair value of $145,790, calculated by reference to the market value of the
shares at the time of the settlement, and we recognized a loss on settlement of
$72,645. At the date of this prospectus, the remaining loan amount now
outstanding to Morpheus totals $33,600, including interest. (See note 7 to our
audited consolidated financial statements for the fiscal year ended October 31,
2002, and notes 8 and 9 to our unaudited financial statements for the six-month
period ended April 30, 2003.)
Norm Wuschke
In April 2002, we borrowed CDN $45,000 (approximately US $30,000 as of
the date of the loan) from Norm Wuschke. Mr. Wuschke is the father of Steve
Wuschke, a member of our board of directors and our chief technology officer.
This loan was to be repaid when we were able to do so and required us to pay 12%
interest on the principal amount, regardless of when repayment was made. As
additional consideration for the granting of the loan, we also issued to Mr.
Wuschke a five-year warrant to purchase 50,000 shares of our common stock at a
price of $0.35 per share. This loan was not the result of arm's-length
negotiations; however, we believe its terms to be as favorable as or more
favorable to us than we would have been able to obtain elsewhere. On February 4,
2003, the principal amount of the loan was repaid with the accrued interest paid
April 9, 2003. This loan was repaid in full by converting $20,000 of the loan
amount into 80,000 shares of common stock, or at $0.25 per share, and repaying
the remaining $13,600 of principal and accrued interest in cash. (See note 6 to
our audited financial statements for the fiscal year ended October 31, 2002, and
notes 7 and 9 to the unaudited financial statements for the six-month period
ended April 30, 2003.)
30
On April 1, 2003, Steve Wuschke, a director and executive officer of
ours, loaned us CDN $45,000 (approximately US $30,600 as of the loan date). The
loan is at 8% per annum interest, with monthly interest-only payments, and the
entire principal due on or before April 1, 2004. As partial consideration for
making the loan, we granted Mr. Wuschke warrants to purchase 50,000 shares of
our common stock, expiring in 2012, with 25,000 of the warrants exercisable at
$0.25 per share and the remaining 25,000 exercisable at $0.50 per share. This
loan was not the result of arm's-length negotiations; however, we believe its
terms to be as favorable as or more favorable to us than we would have been able
to obtain elsewhere. (See note 15(b) to our audited financial statements for the
fiscal year ended October 31, 2002, and notes 7 and 9 to the unaudited financial
statements for the six-month period ended April 30, 2003.)
31
Description of Securities
We are authorized to issue 100,000,000 shares of common stock, $0.001
par value, and 10,000,000 shares of preferred stock, $0.001 par value.
Common Stock
As of August 31, 2003, we had 11,371,041 shares of common stock issued
and outstanding, which includes 400,000 shares reserved for conversion of the
Series A Preferred Stock and the 628,134 escrow shares issued to the Albert T.
Lowman Living Trust and 72,380 shares of common stock subscribed but unissued.
The holders of common stock are entitled to one vote per share on each matter
submitted to a vote at any meeting of stockholders. Holders of common stock do
not have cumulative voting rights, and therefore, a majority of the outstanding
shares voting at a meeting of stockholders is able to elect the entire board of
directors, and if they do so, minority stockholders would not be able to elect
any members to the board of directors. Our bylaws provide that a majority of our
issued and outstanding shares constitutes a quorum for stockholders' meetings,
except with respect to certain matters for which a greater percentage quorum is
required by statute.
Our stockholders have no preemptive rights to acquire additional shares
of common stock or other securities. Our common stock is not subject to
redemption and carries no subscription or conversion rights. In the event of
liquidation of our company, the shares of common stock are entitled to share
equally in corporate assets after satisfaction of all liabilities and the
payment of any liquidation preferences.
Holders of common stock are entitled to receive such dividends, as the
board of directors may from time to time declare out of funds legally available
for the payment of dividends. We seek growth and expansion of our business
through the reinvestment of profits, if any, and do not anticipate that we will
pay dividends on the common stock in the foreseeable future.
As of August 31, 2003, we had reserved for issuance on exercise of
options and warrants an aggregate of 3,488,300 shares of common stock, with a
weighted average exercise price of approximately $0.61 per share.
Preferred Stock
Under our articles of incorporation, our board of directors is
authorized, without stockholder action, to issue preferred stock in one or more
series and to fix the number of shares and rights, preferences and limitations
of each series. Among the specific matters that may be determined by the board
of directors are the dividend rate, the redemption price, if any, conversion
rights, if any, the amount payable in the event of any voluntary liquidation or
dissolution of our company and voting rights, if any. As of August 31, 2003,
there were 400,000 shares of Series A Preferred Stock issued and outstanding.
The Series A Preferred Stock carries a liquidation preference of $3.75 per
share, is convertible to common stock on a one-for-one basis, and is redeemable
by us at $0.01 per share if the purchaser fails to meet certain contractual
obligations.
32
Selling Stockholders
The following table sets forth certain information regarding beneficial
ownership of common stock of each selling stockholder and as adjusted to give
effect to the sale of the common stock offered through this prospectus:
Number** Percent, assuming sale of shares indicated
----------------------------------- ---------------------------------------------
Before After
Name of Beneficial Owner Offering Registered Offering None 750,000 1,500,000 2,534,386
------------------------ -------- ---------- -------- ---- ------- --------- ---------
Stevan Perry (1)............ 1,200,000 100,000 1,100,000 9.3% 8.8% 8.3% 7.7%
Steve Wuschke (2)........... 1,550,000 100,000 1,450,001 2.3 11.6 10.9 10.1
Jason McDiarmid (3)......... 1,400,000 100,000 1,300,001 1.0 10.4 9.8 9.1
William Yang (4)............ 2,340,580 700,000 1,640,581 3.9 13.1 12.4 11.5
Diana Allen (5)............. 25,000 10,000 15,000 * * * *
David Rezachek (6).......... 25,000 10,000 15,000 * * * *
Jeane Manning (7)........... 5,000 5,000 -- * * * *
William Baumgartner (8)..... 70,000 20,000 50,000 * * * *
Kenneth G.C. Telford (9).... 150,000 60,000 90,000 * * * *
Albert T. Lowman
Living Trust.............. 628,134 315,000 313,134 2.7* 2.5 2.4 2.2
Brent McIver................ 25,000 12,500 12,500 * * * *
J. Carl Guterres............ 22,000 11,000 11,000 * * * *
Sienna McCandless........... 22,000 11,000 11,000 * * * *
Maria Paskalidis............ 88,000 44,000 44,000 * * * *
Amber McCandless............ 22,000 11,000 11,000 * * * *
Sanju S. Sandhu............. 88,000 44,000 44,000 * * * *
Stephanie Millward.......... 22,000 11,000 11,000 * * * *
Katherine Tom............... 44,000 44,000 -- * * * *
Marco Abenante.............. 79,800 79,800 -- * * * *
Carmine Clemente............ 22,000 11,000 11,000 * * * *
David Fiorvento............. 22,000 11,000 11,000 * * * *
Michael Villafuerte......... 22,000 11,000 11,000 * * * *
Paul Yu..................... 66,000 66,000 -- * * * *
Geoff Shoji................. 44,000 44,000 -- * * * *
Troy Wood................... 22,000 11,000 11,000 * * * *
Ryan Wallace................ 54,000 49,000 5,000 * * * *
Thomas Foltyn............... 22,000 11,000 11,000 * * * *
Erick Factor................ 22,000 22,000 -- * * * *
Lyle Hampton................ 122,000 11,000 111,000 * * * *
Craig Stann................. 44,000 22,000 22,000 * * * *
Rory Stowell................ 40,000 40,000 -- * * * *
Billy Paskilidis............ 20,000 10,000 10,000 * * * *
Harpreet Singh Mann......... 20,000 10,000 10,000 * * * *
Constantine Paskilidis...... 20,000 10,000 10,000 * * * *
Michael Scanlan............. 20,000 10,000 10,000 * * * *
Russell Gowanlock........... 10,000 5,000 5,000 * * * *
Kenn Buxton................. 28,000 11,500 16,500 * * * *
Simon Daniels............... 10,000 5,000 5,000 * * * *
Marcie Harriott............. 32,000 16,000 16,000 * * * *
Dominic Stann............... 10,000 5,000 5,000 * * * *
Aaron Davison............... 10,000 5,000 5,000 * * * *
Cliff Wuschke............... 10,000 5,000 5,000 * * * *
Lesley Punt................. 10,000 5,000 5,000 * * * *
Philip Punt................. 30,000 15,000 15,000 * * * *
Graham Boothby.............. 10,000 5,000 5,000 * * * *
Jacek Zielinski............. 53,750 40,000 13,750 * * * *
Melissa Youseffi............ 20,000 10,000 10,000 * * * *
Robert Marsh................ 10,000 5,000 5,000 * * * *
33
Number** Percent, assuming sale of shares indicated
----------------------------------- ---------------------------------------------
Before After
Name of Beneficial Owner Offering Registered Offering None 750,000 1,500,000 2,534,386
------------------------ -------- ---------- -------- ---- ------- --------- ---------
Advantage Trading Ltd....... 10,000 5,000 5,000 * * * *
Harry Paskilidis............ 20,000 10,000 10,000 * * * *
Marc Maurer................. 10,000 5,000 5,000 * * * *
Avrum Miller................ 20,000 10,000 10,000 * * * *
Carmine Risi................ 10,000 5,000 5,000 * * * *
Karri Wu.................... 20,000 10,000 10,000 * * * *
Thomas Tournier............. 10,000 5,000 5,000 * * * *
Jason Haywood............... 10,000 5,000 5,000 * * * *
Al Lowman................... 24,000 12,000 12,000 * * * *
Che Koostra-Nair............ 6,667 3,334 3,333 * * * *
Norm Wuschke................ 80,000 40,000 40,000 * * * *
Autoworld Sales & Leasing... 100,480 60,480 40,000 * * * *
John McCandless............. 46,500 20,000 26,500 * * * *
Jessica Patrick............. 50,000 20,000 30,000 * * * *
Jim Dooley.................. 100,000 25,000 75,000 * * * *
Vickie Lam.................. 25,000 10,000 15,000 * * * *
Miriam Campos............... 50,000 50,000 -- * * * *
--------- --------- ---------
Total 9,224,911 2,465,614 6,759,297
========= ========= =========
- ------------------
* Less than 1%.
** Excludes options. See Principal Stockholders at page 28.
(1) Mr. Perry is our vice-president for systems integration.
(2) Mr. Wuschke is our chief technical officer and a director.
(3) Mr. McDiarmid is our chief executive officer, president and a director.
(4) Mr. Yang is a director. Mr. Yang owns 50,000 shares in his own name and, as
a director of Morpheus Financial Corporation, is deemed the beneficial
owner of 2,290,580 shares held by Morpheus Financial Corporation.
(5) Ms. Allen is a director.
(6) Mr. Rezachek is a director.
(7) Ms. Manning is a director.
(8) Mr. Baumgartner is a director.
(9) Mr. Telford is our secretary/treasurer, chief financial officer and a
director.
Plan of Distribution
Determination of Offering Price
Our board of directors has determined the $5.00 per share offering
price based on its subjective assessment of our business prospects, including
its assessment of the potential of our consumer wellness products, our research
and development efforts, particularly with regard to EI Elemental Heat Energy
System, our management team, as well as current market conditions and
opportunities. Ultimately, however, potential investors should understand that
the offering price was established arbitrarily and does not bear any
relationship to our assets, book value, or other traditionally recognized
criteria of value.
Sales by the Company
We will offer up to 2,534,386 shares of common stock on a "best
efforts" basis to the public from time to time at $5.00 per share. There is no
assurance that all or any portion of the shares will be sold.
No person has agreed to purchase any of the shares, and we have made no
arrangement to escrow or return any funds to investors if less than all offered
shares are sold. There is no minimum number of shares that must be sold. The
offering will continue until all offered shares are sold or we determine to
terminate the offering.
34
Jason McDiarmid, Kenneth G.C. Telford, Steve Wuschke, and Stevan Perry,
each of whom is one of our officers, directors, or both, will offer the shares
on our behalf. Each will participate in such offering in reliance on the
exemption from being deemed a broker-dealer as set forth in Rule 3a4-1
promulgated under the Securities Exchange Act of 1934, as amended, in those
jurisdictions where sales by such persons are permitted. Specifically, none of
them is subject to a statutory disqualification; none of them will be
compensated for his participation in the offering by the payment of commissions
or otherwise based directly or indirectly on his efforts in the offering; none
of them is, has been for the last 12 months, or will be, at the time of the
offering, a broker or dealer or an associated person of a broker or dealer; each
of them performs substantial duties on our behalf other than transactions in
securities; and none of them will participate or has participated in an offering
of securities except as specifically permitted by Rule 3a4-1(4)(ii)(C).
Persons who desire to purchase shares may do so by transmitting funds
to our executive office at 114 West Magnolia Street, Suite 400-142, Bellingham,
Washington 98225, together with a written statement signed by the purchaser
setting forth the amount to be purchased, and the name(s), address, and social
security or tax identification number of the person(s) in whose name the
certificate is to be issued. We reserve the right to reject any subscription, in
whole or in part.
The shares offered are subject to prior sales, when, as and if accepted
by us and subject to our right to reject subscriptions, in whole or in part.
We will not pay commissions, discounts or other fees in connection with
the offer and sale of such shares.
Our officers and directors do not intend to purchase any of such
shares.
Sales by Selling Stockholders
The selling stockholders and any of their pledges, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. There is no assurance that the
selling stockholders will sell any or all of the common stock in this offering.
These sales will be at a fixed price of $5.00 per share until a trading market
develops in our common stock, at which time, the selling stockholders may use
any one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account;
o an exchange distribution following the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales or sales of shares not previously owned by the
seller;
35
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; or
o any other lawful method.
Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commission or discounts from selling stockholders in amounts to be negotiated.
If any broker-dealer acts as agent for the purchaser of shares, the
broker-dealer may receive commission from the purchaser in amounts to be
negotiated. To our knowledge, none of the selling stockholders is a
broker-dealer or affiliated with a broker-dealer.
The selling stockholders do not expect these commissions and discounts
to exceed what is customary in the types of transactions involved. The selling
stockholders and any broker-dealers or agents who are involved in selling the
shares may be considered to be "underwriters" within the meaning of the
Securities Act for such sales. An underwriter is a person who has purchased
shares from an issuer with a view towards distributing the shares to the public.
In such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be considered to be
underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares in this offering. However, we will not pay any
commissions or any other fees in connection with the resale of the common stock
in this offering. We have agreed to indemnify the selling stockholders and their
officers, directors, employees and agents, and each person who controls any
selling stockholder, in certain circumstances against certain liabilities,
including liabilities arising under the Securities Act. Each selling stockholder
has agreed to indemnify us and our directors and officers in certain
circumstances against certain liabilities, including liabilities arising under
the Securities Act.
If a selling stockholder notifies us that it has a material arrangement
with a broker-dealer for the resale of the common stock, then we would be
required to amend the registration statement of which this prospectus is a part,
and file a prospectus supplement to describe the agreements between the selling
stockholder and the broker-dealer.
Legality of Stock
The legality under Nevada law of the common stock to be sold by the
selling stockholders has been passed upon for us by Kruse Landa Maycock & Ricks,
LLC.
Where You Can Find Additional Information
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act for the common
stock sold in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the accompanying
exhibits and schedules. For further information about us and our common stock,
we refer you to the registration statement and the accompanying exhibits and
schedules. Statements contained in this prospectus regarding the contents of any
contract or any other document to which we refer are not necessarily complete.
36
In each instance, reference is made to the copy of the contract or document
filed as an exhibit to the registration statement, and each statement is
qualified in all respects by that reference. Copies of these materials may be
obtained at prescribed rates from the public reference room of the Securities
and Exchange Commission at Room 1300, 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the public reference room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
address of the site is http://www.sec.gov.
Upon the effectiveness of the registration statement of which this
prospectus is a part, we will be subject to the reporting requirements of the
Securities Exchange Act of 1934, and we will file annual, quarterly and special
reports, proxy statements and other information with the Securities and Exchange
Commission. Copies of these materials, when filed, may be obtained at prescribed
rates from the public reference room of the Securities and Exchange Commission
at Room 1300, 450 Fifth Street, N.W., Washington, D.C. 20549. Our SEC filings
will also be available to you free of charge at the Securities Exchange
Commission's web site at http://www.sec.gov.
37
Index to
Consolidated Financial Statements
(Expressed in United States dollars)
Auditors' Report to the Board of Directors................................F-1
Consolidated Balance Sheets as at October 31, 2002 and 2001...............F-2
Consolidated Statements of Operations for the year ended October
31, 2002, the period from inception on February 9, 2001, to
October 31, 2001, and cumulative from inception on February 9,
2001, to October 31, 2002..............................................F-3
Consolidated Statement of Stockholders' Equity and Comprehensive
Loss for the year ended October 31, 2002, and the period from
inception on February 9, 2001 to October 31, 2001......................F-4
Consolidated Statements of Cash Flows for the year ended October
31, 2002, the period from inception on February 9, 2001 to
October 31, 2001, and cumulative from inception on February 9,
2001 to October 31, 2002...............................................F-5
Notes to Consolidated Financial Statements for the year ended
October 31, 2002, and the period from inception on February 9,
2001 to October 31, 2001...............................................F-6
Consolidated Balance Sheets as at April 30, 2003 (unaudited) and
October 31, 2002......................................................F-20
Consolidated Statement of Operations for the six months ended
April 30, 2003 and 2002, and the cumulative period from
inception on February 9, 2001, to April 30, 2003 (unaudited)..........F-21
Consolidated Statement of Stockholders' Equity and Comprehensive
Loss for the six months ended April 30, 2003 (unaudited)..............F-22
Consolidated Statement of Cash Flows for the six months ended
April 30, 2003 and 2002 and cumulative from inception on
February 9, 2001, to April 30, 2003 (unaudited).......................F-23
Notes to Consolidated Financial Statements for the six months
ended April 30, 2003 and 2002, and the period from inception
on February 9, 2001, to April 30, 2003 (unaudited)....................F-24
38
KPMG LLP
Chartered Accountants
Box 10426, 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
Telefax (604) 691-3031
www.kpmg.ca
AUDITORS' REPORT TO THE BOARD OF DIRECTORS
We have audited the accompanying consolidated balance sheets of Essential
Innovations Technology Corp. (a development stage enterprise) as at October 31,
2002 and 2001 and the related consolidated statements of operations,
stockholders' equity and comprehensive loss and cash flows for the periods then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
October 31, 2002 and 2001 and the results of its operations and its cash flows
for the periods then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has not generated positive cash flow from
operations since inception that raises substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
April 23, 2003
F-1
Essential Innovations Technology Corp.
(A Development Stage Enterprise)
Consolidated Balance Sheets
(Expressed in United States dollars)
October 31, 2002 and 2001
- ---------------------------------------------------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 1,925 $ 18,910
Goods and services tax receivable 4,323 4,419
Prepaid expenses 320 1,356
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 6,568 24,685
Property and equipment (note 5) 31,402 39,084
Deposits 4,260 3,504
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 42,230 $ 67,273
=====================================================================================================================
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable $ 48,178 $ 4,350
Accrued liabilities 37,674 16,957
Current portion of tenant inducements 3,991 5,347
Loan payable (note 6) 28,841 -
Due to shareholders (note 7) 108,292 13,333
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 226,976 39,987
Tenant inducements 1,594 8,912
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 228,570 48,899
Stockholders' equity (deficiency):
Common stock:
$0.001 par value, authorized 100,000,000 shares (note 8)
issued and outstanding 9,543,000 shares
(2001 - nil) 9,543 -
subscribed and unissued 60,000 shares
(2001 - 9,023,000) 60 9,023
Additional paid-in capital 608,933 228,272
Stock subscriptions receivable (90) (29,595)
Deficit accumulated during the development stage (795,947) (182,606)
Accumulated other comprehensive loss (8,839) (6,720)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (186,340) 18,374
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 42,230 $ 67,273
=====================================================================================================================
Commitments (note 12)
Subsequent events (note 15)
See accompanying notes to consolidated financial statements.
F-2
Essential Innovations Technology Corp.
(A Development Stage Enterprise)
Consolidated Statements of Operations
(Expressed in United States dollars)
- ---------------------------------------------------------------------------------------------------------------------
Cumulative
Period from from
inception on inception on
February 9, February 9,
Year ended 2001 to 2001 to
October 31, October 31, October 31,
2002 2001 2002
- ---------------------------------------------------------------------------------------------------------------------
Revenue $ 8,544 $ - $ 8,544
Cost of sales 6,257 - 6,257
- ---------------------------------------------------------------------------------------------------------------------
2,287 - 2,287
Expenses:
General and administrative 456,834 134,963 591,797
Research and development 158,854 47,922 206,776
- ---------------------------------------------------------------------------------------------------------------------
615,688 182,885 798,573
Other earnings (expenses):
Interest income 60 279 339
- ---------------------------------------------------------------------------------------------------------------------
60 279 339
- ---------------------------------------------------------------------------------------------------------------------
Loss for the period $ (613,341) $ (182,606) $ (795,947)
=====================================================================================================================
Loss per share - basic and diluted $ (0.07) $ (0.02) $ (0.09)
Weighted average number of shares outstanding 9,394,841 8,677,659 9,139,595
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
Essential Innovations Technology Corp.
(A Development Stage Enterprise)
Consolidated Statement of Stockholders' Equity and Comprehensive Loss
(Expressed in United States dollars)
Year ended October 31, 2002
Period from inception on February 9, 2001 to October 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Deficit
Common stock accumulated Accumulated
(note 8) Additional Stock during the other Total
Number paid-in subscriptions development comprehensive stockholders'
of shares Amount capital receivable stage loss equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, February 9, 2001 - $ - $ - $ - $ - $ - $ -
Loss for the period - - - - (182,606) - (182,606)
Foreign currency translation loss - - - - - (6,720) (6,720)
------------
Comprehensive loss (189,326)
Common stock subscribed at
incorporation for cash of
$0.001 per share 8,095,000 8,095 - - - - 8,095
Common stock subscribed
for cash of $0.25 per share 928,000 928 231,072 - - - 232,000
Stock issue costs - - (2,800) - - - (2,800)
Subscriptions receivable - - - (29,595) - - (29,595)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2001 9,023,000 9,023 228,272 (29,595) (182,606) (6,720) 18,374
Loss for the period - - - - (613,341) - (613,341)
Foreign currency translation - - - - - (2,119) (2,119)
------------
Comprehensive loss (615,460)
Subscription received - - - 29,505 - - 29,505
Common stock issued for cash
(note 8) 513,600 514 201,286 - - - 201,800
Common stock issued for
services received (note 8) 6,400 6 3,194 - - - 3,200
Common stock subscribed
(and unissued) for services
received (note 8) 50,000 50 24,950 - - _ 25,000
Common stock subscribed
(and unissued) for cash (note
8) 10,000 10 4,990 - - - 5,000
Options and warrants issued
In exchange for services
received (note 8) - - 150,241 - - - 150,241
Stock issue costs - - (4,000) - - - (4,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2002 9,603,000 $ 9,603 $ 608,933 $ (90) $ (795,947) $ (8,839) $ (186,340)
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
Essential Innovations Technology Corp.
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Period from from
inception on inception on
February 9, February 9,
Year ended 2001 to 2001 to
October 31, October 31, October 31,
2002 2001 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in):
Operations:
Loss for the period $ (613,341) $ (182,606) $ (795,947)
Adjustments to reconcile loss for the period to
net cash provided by operations:
Loss on disposal of leasehold improvements - 6,138 6,138
Amortization of property and equipment 12,689 1,738 14,427
Amortization of tenant inducements (8,674) (1,783) (10,457)
Services received, paid by common shares 28,200 - 28,200
Services received, paid by issuance of
options and warrants 150,241 - 150,241
Changes in assets and liabilities (note 11) 65,677 15,532 81,209
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operations (365,208) (160,981) (526,189)
Investments:
Purchase of property and equipment (7,149) (46,960) (54,109)
Other (756) (3,504) (4,260)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investments (7,905) (50,464) (58,369)
Financing:
Subscriptions for common stock 232,305 207,700 440,005
Tenant inducements received - 16,042 16,042
Advances from shareholders 102,523 14,133 116,656
Repayments to shareholders (7,684) (800) (8,484)
Loan proceeds received 28,841 - 28,841
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing 355,985 237,075 593,060
Foreign exchange gain (loss) on cash held in
foreign currency 143 (6,720) (6,577)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (16,985) 18,910 1,925
Cash, beginning of period 18,910 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 1,925 $ 18,910 $ 1,925
====================================================================================================================================
Supplementary information:
Interest paid $ - $ - $ -
Income taxes paid - - -
Non-cash transactions:
Common shares subscribed in exchange
for stock subscriptions receivable - 29,595 34,595
Common shares subscribed and issued in
exchange for services received 28,200 - 28,200
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
Essential Innovations Technology Corp.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Year ended October 31, 2002
Period from inception on February 9, 2001 to October 31, 2001
- --------------------------------------------------------------------------------
1. Description of business:
Essential Innovations Technology Corp. (the "Company") was incorporated
under the laws of the state of Nevada on April 4, 2001 (note 3(a)). The
Company is engaged in the development and distribution of ecofriendly
lifestyle enhancement technologies for the betterment of energy, water, air
and health. To October 31, 2002, substantially all of the Company's efforts
have been directed towards product and distribution chain development.
Accordingly, for financial reporting purposes, the Company is considered to
be a development stage enterprise. Essential Innovations Asia Limited was
incorporated as a wholly-owned subsidiary on April 9, 2002, for the purpose
of marketing under exclusive global rights, except Canada and the United
States, the bio-energetic devices produced by SOTA Instruments.
2. Future operations:
The Company's financial statements have been prepared using generally
accepted accounting principles of the United States of America applicable
to a going concern which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. To date, the
Company has not generated positive cash flow from operations. It is the
Company's intention to raise additional equity to finance the further
development of its business until positive operating cash flow can be
generated from its operations. However, there can be no assurance that such
additional funds required will be available to the Company when required or
on terms acceptable to the Company. Such limitations could have a material
adverse effect on the Company's business, financial condition or operations
and these financial statements do not include any adjustment that could
result therefrom. Failure to obtain sufficient additional funding would
necessitate the Company reduce or limit its operating activities.
3. Significant accounting policies:
(a) Basis of consolidation:
These consolidated financial statements include the accounts of
Essential Innovation Technology Corp. and its wholly-owned
subsidiaries, Essential Innovation Corporation and Essential
Innovations Asia Limited. Essential Innovation Corporation was
incorporated on February 9, 2001, and as noted above, the Company was
incorporated on April 4, 2001. At that time, all the existing
shareholders of EIC exchanged their common shares for common shares of
the Company. The Company had no assets and liabilities at the time of
the exchange. As the only assets of the combined entity after the
exchange were those of the subsidiary prior to the exchange, a change
in ownership did not take place. As this exchange lacked substance, it
was not a purchase event and has been accounted for based on existing
carrying amounts of the subsidiary's assets and liabilities,
consistent with the guidance contained in FASB Technical Bulletin 85-5
Issues Relating to Accounting for Business Combinations. All
significant inter-company balances and transactions have been
eliminated.
F-6
3. Significant accounting policies (continued):
(b) Cash and cash equivalents:
The Company considers all highly liquid debt instruments with
maturities of three months or less when acquired to be cash
equivalents.
(c) Property and equipment:
Property and equipment is stated at cost and amortized over its
estimated useful life to the Company of the following basis:
----------------------------------------------------------------------
Asset Basis Rate
----------------------------------------------------------------------
Computer equipment declining-balance 3 years
Office furniture and equipment declining-balance 5 years
Leasehold improvements straight-line 3 years
----------------------------------------------------------------------
(d) Investment tax credits:
The Company follows the cost reduction method of accounting for
investment tax credits ("ITC") whereby the benefit of assistance is
recognized as a reduction in the cost of the related capital asset or
expenditure when receipt of the investment tax credit is considered to
be reasonably assured. Once the Company's ITC claims have been
assessed by CCRA, any excess or deficiency between the amount
previously recognized and the actual net ITC received will be
reflected in the period the notice of assessment is received.
(e) Tenant inducements:
Tenant inducements, related to a rent free period received by the
Company upon entering into a lease for its research and development
facilities, are capitalized and amortized over the initial term of the
related lease.
(f) Research and development expenses:
Research and development costs are expensed as incurred. Costs
incurred to date include personnel and facilities costs, amortization
of related property and equipment and licensing fees for technology
used in the development effort.
(g) Advertising expenses:
Advertising costs are expensed as incurred and included in general and
administrative expenses.
F-7
3. Significant accounting policies (continued):
(h) Income taxes:
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry
forwards. 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. To the extent that it is not considered to be more
likely than not that a deferred tax asset will be realized, a
valuation allowance is provided.
(i) Loss per share:
Basic loss per share is calculated by dividing the net loss by the
weighted average number of common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. For all periods presented,
all potentially issuable common stock is anti-dilutive.
(j) Comprehensive loss:
SFAS No. 130 establishes standards for reporting comprehensive income
(loss) and its components in financial statements. Comprehensive loss,
as defined, includes all changes in equity (net assets) during a
period from non-owner sources. To date, the Company has not had any
significant transactions that are required to be reported in other
comprehensive loss, except for foreign currency translation
adjustments as described in note 3(l).
(k) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America
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 fiscal year. Actual results may differ from those estimates.
F-8
3. Significant accounting policies (continued):
(l) Translation of foreign currencies:
The functional currency of the Company is the Canadian dollar. For
reporting purposes, Canadian dollar denominated assets and liabilities
are translated into United States dollars at the exchange rate in
effect at the balance sheet date. Revenues and expenses arising from
Canadian dollar transactions are translated into United States dollars
at the average rate for the period. Translation adjustments resulting
from this process are presented in accumulated other comprehensive
loss on the consolidated balance sheet as a separate component of
stockholders' equity.
(m) Financial instruments:
The Company has the following financial instruments: cash, goods and
services tax receivable, accounts payable, accrued liabilities, and
amounts due to shareholders. The carrying value of these financial
instruments approximates their fair value due to their liquidity or
their short-term nature.
(n) Concentration of credit risk:
Financial instruments that potentially subject the Company to credit
risk consist principally of cash and goods and services tax
receivable. Cash is deposited with high credit quality financial
institutions. Goods and services tax is receivable from a department
of the Government of Canada.
(o) Segment information:
The Company operates in two reportable segments. Approximately 80% of
the Company's assets and operations are in Canada (note 14).
(p) Impairment or disposal of long-lived assets:
The Company reviews long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
undiscounted future net cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its undiscounted
estimated future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair
value of the asset. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
F-9
3. Significant accounting policies (continued):
(q) Stock-based compensation:
The Company accounts for stock-based compensation arrangements with
employees in accordance with the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
No. 25") and complies with the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Under APB No. 25,
compensation expense is based on the difference, if any, between fair
value of the Company's stock and the exercise price of options issued
on the date of grant. Unearned compensation, if any, is amortized over
the vesting period of the individual options.
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") 96-18. All transactions in which goods or services
are the consideration received for the issuance of equity instruments
are accounted for based on the fair value of the equity instrument,
issued as the services are performed and the instruments earned.
4. Recent accounting pronouncements:
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement addresses the diverse accounting
practices for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company
will be required to adopt this standard on January 1, 2003. The Company
does not anticipate that the statement will have a material impact on the
Company's financial statements.
In July 2002, the Financials Accounting Standards Board issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities,
which requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Such costs covered by the standard
include lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. SFAS No. 146 replaces the previous
accounting guidance provided by the Emerging Issues Task Force Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002 and the Company does
not anticipate that the statement will have a material impact on the
Company's financial statements or results of operations.
F-10
4. Recent accounting pronouncements (continued):
In December 2002, the FASB approved Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123 ("SFAS No. 148"). SFAS
No. 148 amends Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123") to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS
No. 148 is effective for financial statements for fiscal years ending after
December 15, 2002. The Company will continue to account for stock based
compensation using the methods detailed in the stock-based compensation
accounting policy.
5. Property and equipment:
Property and equipment consist of the following:
-----------------------------------------------------------------------------------------------
Accumulated Net book
2002 Cost amortization value
-----------------------------------------------------------------------------------------------
Computer equipment $ 3,823 $ 1,278 $ 2,545
Computer software 1,343 103 1,240
Office furniture and equipment 11,903 2,405 9,498
Leasehold improvements 28,760 10,641 18,119
-----------------------------------------------------------------------------------------------
$ 45,829 $ 14,427 $ 31,402
===============================================================================================
-----------------------------------------------------------------------------------------------
Accumulated Net book
2001 Cost amortization value
-----------------------------------------------------------------------------------------------
Computer equipment $ 2,774 $ 251 $ 2,523
Office furniture and equipment 6,969 419 6,550
Leasehold improvements 31,079 1,068 30,011
-----------------------------------------------------------------------------------------------
$ 40,822 $ 1,738 $ 39,084
===============================================================================================
F-11
6. Loan payable:
The loan payable is to a family member of an officer and director of the
Company. The loan is unsecured, without specific terms of repayment and a
flat interest charge of 12% has been accrued. Warrants were granted which
entitle the holder to purchase 50,000 common shares at $0.35 per share. The
fair value of the warrants of $11,329 has been included in additional paid
in capital in accordance with APB 14. Due to the fact that interest payable
on this obligation was due in full from inception of the loan, all related
interest expense has been expensed fully in the year ended October 31,
2002. Subsequent to October 31, 2002, the holder converted $20,000 of the
loan into 80,000 common shares (notes 8(a)(iii) and 15(a)(iii)).
7. Due to shareholders:
Amounts due to shareholders at October 31, 2002 are unsecured, without
specific terms of repayment and non-interest bearing with the exception of
$30,000 for which a flat interest charge of 12% has been accrued. Warrants
were granted which entitle the holder to purchase 50,000 common shares at
$0.35 per share. The fair value of the warrants of $11,329 has been
included in additional paid in capital in accordance with APB 14. Due to
the fact that interest payable on this obligation was due in full from
inception of the loan, all related interest expense has been expensed fully
in the year ended October 31, 2002. Subsequent to October 31, 2002, a
shareholder has converted $72,645 of non-interest bearing loans into
290,580 common shares (notes 8(a)(ii) and 15(a)(iii)).
8. Share capital:
During the year ended October 31, 2002, the Company increased its
authorized capital with the creation of 10,000,000 preferred shares of
$0.001 par value. The designation of rights including voting powers,
preferences and restrictions shall be determined by the board of directors
before the issuance of any shares. No preferred shares have been issued.
During the year ended October 31, 2002, the Company issued 220,000 common
shares at $0.25 per share for total cash proceeds of $55,000 and 293,600
common shares at $0.50 per share for total cash proceeds of $146,800. All
shares were issued for cash in arms length transactions at the Company's
best estimate of fair market value at the time. In addition, the Company
received cash subscription proceeds for a further 10,000 common shares that
remain unissued at October 31, 2002. The Company paid stock issue costs of
$4,000.
Also during the year ended October 31, 2002, the Company issued 6,400
common shares, at $0.50 per share, in exchange for services received. The
Company has committed to issue a further 50,000 common shares, at $0.50 per
share, to a director in exchange for services received in the year. These
shares have been issued at fair value which the Company determines based
upon the current selling price of its common shares to third parties for
cash. The director's shares remain unissued at October 31, 2002.
F-12
8. Share capital (continued):
During the year ended October 31, 2002 the Company granted the following
warrants and options:
(a) Warrants:
(i) SOTA Instruments Inc. - 200,000 warrants exercisable at $0.25 per
share as follows: 50,000 exercisable after April 9, 2003, 50,000
exercisable after April 9, 2004, and 100,000 exercisable after
April 9, 2005. The Company has expensed the fair value of $60,940
in relation to these warrants.
(ii) Morpheus Financial Corp, a shareholder - 50,000 warrants
exercisable at $0.35 per share (note 7). The Company has expensed
the fair value of $11,329 attributed to these warrants.
(iii)Private Financing - 50,000 warrants exercisable at $0.35 per
share (note 6). The Company has expensed the fair value of
$11,329 attributed to these warrants.
(b) Options:
The Company has granted options to certain purchasers of common shares
to acquire additional common shares as follows:
(i) 30,000 exercisable at $0.75 per share up to and including the
year 2007
(ii) 30,000 exercisable at $1.00 per share up to and including the
year 2007
The Company does not have a formal stock option plan but, in addition
to the options listed above, has granted a total of 2,520,000 fully
vested options to directors, employees, advisors and consultants to
purchase common share of the Company as follows:
-----------------------------------------------------------------------
Number of options Exercise price Expiry date
-----------------------------------------------------------------------
Directors and employees:
225,000 $0.25 2007
125,000 $0.50 2007
750,000 $0.75 2012
750,000 $1.00 2012
Advisors and consultants:
100,000 $0.25 2007
45,000 $0.50 2007
25,000 $1.00 2007
250,000 $0.75 2012
250,000 $1.00 2012
-----------------------------------------------------------------------
F-13
8. Share capital (continued):
(b) Options (continued):
The Company has expensed $56,250 for options issued to directors and
employees using the intrinsic method of valuation and $10,393 for
options issued to advisors and consultants using the fair value method
of valuation.
The Company applies the intrinsic-value-based method of accounting
prescribed by APB No. 25, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, to account for its
fixed-plan stock options. Under this method, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic-value-based method of accounting
described above, and has adopted only the disclosure requirements of SFAS
No. 123. The following table illustrates the effect on loss for the periods
if the fair-value-based method had been applied to all outstanding and
unvested awards in each period.
---------------------------------------------------------------------------------------------
October 31, October 31,
2002 2001
---------------------------------------------------------------------------------------------
Loss for the period, as reported $ (613,341) $ (182,606)
Stock-based employee compensation expense included
in reported loss 150,241 -
Total stock-based employee compensation expense
determined under fair-value-based method for
all rewards, net of tax (244,701) -
---------------------------------------------------------------------------------------------
Pro forma loss for the period $ (707,801) $ (182,606)
=============================================================================================
Pro forma loss per share $ (0.08) $ (0.02)
=============================================================================================
9. Interest expense:
During the year, the Company incurred total interest expense of $29,719 on
short-term loans and advances (notes 6 and 7).
F-14
10. Income taxes:
No provision for income taxes has been made for the period as the Company
incurred net losses.
(a) Deferred tax assets:
As at October 31, 2002, the Company has net operating losses of
approximately $207,000 available for future deduction from taxable
income derived in the United States of America until the years 2021 to
2022. In addition the Company's Canadian subsidiary has non-capital
losses of approximately $256,000 available for future deductions from
taxable income derived in Canada, which expire in 2008 to 2009 and the
Company's Hong Kong subsidiary has non-capital operating losses of
approximately $109,000 which do not expire. The potential benefit of
net operating loss carry forwards has not been recognized in the
financial statements since the Company cannot determine that it is
more likely than not that such benefit will be utilized in future
years. The components of the net deferred tax asset and the amount of
the valuation allowance are as follows:
---------------------------------------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carry forwards (expiring 2008) $ 180,000 $ 33,313
Research and development expenses - 15,240
---------------------------------------------------------------------------------------------------------
180,000 48,553
Valuation allowance (180,000) (48,553)
---------------------------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
=========================================================================================================
(b) Investment tax credits:
The Company's Canadian subsidiary has investment tax credits of
$16,000 which may be carried forward and used to offset the
subsidiary's future Canadian income tax liabilities. The benefit of
these tax credits has not been recognized in the financial statements
and they will expire in 2012.
F-15
11. Changes in assets and liabilities:
---------------------------------------------------------------------------------------------------
Period from Cumulative from
inception on inception on
Year ended February 9, 2001 February 9, 2001
October 31, to October 31, to October 31,
2002 2001 2002
---------------------------------------------------------------------------------------------------
Goods and services tax receivable $ 96 $ (4,419) $ (4,323)
Prepaid expenses 1,036 (1,356) (320)
Accounts payable 43,828 4,350 48,178
Accrued liabilities 20,717 16,957 37,674
---------------------------------------------------------------------------------------------------
$ 65,677 $ 15,532 $ 81,209
===================================================================================================
12. Commitments:
(a) The Company is committed under the terms of a lease for the use of
office premises in the following annual amounts:
---------------------------------------------------------------------------
Year ending October 31:
2003 $ 34,365
2004 36,568
---------------------------------------------------------------------------
For the year ended October 31, 2002, the Company incurred total
expenses of $43,920 related to the premises lease (2001 - $34,050).
(b) The Company is committed under the terms of an operating lease for an
automobile in the following annual amounts:
---------------------------------------------------------------------------
Year ending October 31:
2003 $ 3,827
2004 3,827
2005 2,552
---------------------------------------------------------------------------
For the year ended October 31, 2002, the Company incurred total
expenses of $5,253 in connection with the automobile lease (2001 -
$1,381).
F-16
13. Related party transactions:
During the year ended October 31, 2002 the Company paid consulting fees to
shareholders in the amount of $16,818 (2001 - nil), and issued options to
shareholders valued at $10,393 in exchange for consulting services
received.
Interest expense of $29,719 (2001 - nil) reported in note 9 has been
accrued on short-term loans and advances to the related parties described
in notes 6 and 7.
14. Segmented information:
The Company views its operations in two businesses - geothermal and
bio-energetic medical. The geothermal business is located in the Americas
and the bio-energetic medical business is located in Asia. Summarized
financial information by segment for the year ended October 31, 2002, the
period from February 9, 2001 (inception) to October 31, 2001 and cumulative
from February 9, 2001 (inception) to October 31, 2002, as taken from the
internal management reports, is as follows:
--------------------------------------------------------------------------------------------------------------
Period from Cumulative from
inception on inception on
Year ended February 9, 2001 February 9, 2001
October 31, to October 31, to October 31,
2002 2001 2002
--------------------------------------------------------------------------------------------------------------
Revenue:
Geothermal $ 173 $ - $ 173
Bio-Energetic Medical 8,371 - 8,371
--------------------------------------------------------------------------------------------------------------
$ 8,544 $ - $ 8,544
==============================================================================================================
Loss:
Geothermal $ (504,078) $ (182,606) $ (686,684)
Bio-Energetic Medical (109,263) - (109,263)
--------------------------------------------------------------------------------------------------------------
$ (613,341) $ (182,606) $ (795,947)
==============================================================================================================
Assets:
Geothermal $ 39,746 $ 67,273
Bio-Energetic Medical 2,484 -
---------------------------------------------------------------------------------------
$ 42,230 $ 67,273
=======================================================================================
F-17
15. Subsequent events:
(a) Subsequent to October 31, 2002 the Company has approved the issuance
of the following additional shares and options:
(i) 313,597 common shares for cash resulting in gross proceeds of
$205,782;
(ii) options to certain investors to acquire 12,900 common shares at
$0.25 and 12,900 common shares at $0.50 to the year 2007;
(iii)370,580 common shares on the conversion of $72,645 of amounts due
to a shareholder (note 7) and $20,000 of the loan payable (note
6);
(iv) 381,500 common shares to certain employees and consultants for
services rendered at a deemed fair value of $0.50 per share;
(v) 500,000 options to purchase common shares of the Company to
certain employees and consultants consisting of 262,500 with an
exercise price of $0.50 and 237,500 with an exercise price of
$1.00; and
(vi) 60,480 common shares in exchange for equipment valued at $15,120.
(b) Subsequent to October 31, 2002, the Company borrowed CDN$45,000 from a
shareholder. This loan is unsecured and bears interest at 8% per
annum, compounded monthly. Interest is payable monthly, with the
entire principal together with any unpaid interest due on March 27,
2004. In connection with this loan, the Company has issued an
additional 25,000 options with an exercise price of $0.25 per share,
and 25,000 options with an exercise price of $0.50 per share. Options
are exercisable for a period of nine years.
(c) Subsequent to October 31, 2002, the Company entered into an agreement
to acquire $25,000,000 in Retail Rate Card Media Credits ("Media
Credits") representing the right to purchase advertising by
television, print, radio, internet, magazine, facsimile, direct mail
and telephone at the customary retail cost without any discount or
other concessions.
Under the terms of the agreement, the Company will issue 400,000
series A preferred shares, with an assigned preference in liquidation
of $1,500,000, in exchange for the right to purchase the advertising
represented by the Media Credits at a discount of 50% from Retail Rate
Card rates. The series A preferred shares represent a deposit of $1.5
million which will be applied pro rata against Media Credits used with
the result that the Company will be required to make cash payments
equal to 44% of the retail rate of the Media Credits actually used.
The Company may also sell or transfer the Media Credits to third
parties.
F-18
15. Subsequent events (continued):
(c) Continued:
The preferred shares are non-voting, not entitled to dividends, and
automatically convert into common shares at the later of (i) eighteen
months after the closing date of the agreement, and (ii) 180 days
after an initial public offering of the Company's common stock that
results in net proceeds to the Company of at least $10,000,000. The
conversion price will be 75% of the price paid for shares of common
stock by public investors in connection with the IPO of the Company.
The preferred shares will be redeemable for $0.01 per share if Media
Credits are not honoured by the providers or any Media Credits remain
unused after their expiration at the end of ten years.
In the event the Media Credits are not used or sold within six months
of the closing date of the agreement, the Company will be required to
pay a monthly standby fee equal to 1/12th of 1% of the amount
represented by the Retail Rate Card of the media not so used or sold,
to a maximum of $8,333 per month.
(d) Subsequent to October 31, 2002, the Company entered into a agreement
with a shareholder to acquire approximately 35 acres of commercial and
residential lands in San Marcos, Texas at an appraised value of
$1,570,334, payable on the closing date, being 90 days after the
vendor is able to deliver clear title, by way of cash of $314,067 and
the issuance of 628,134 common shares of the Company at an agreed
price of $2 per share. This land will be classified as held for resale
as it is the Company's intention to either sell the land or develop it
for future sale. The Company has undertaken to register 315,000 of the
common shares being issued in a registration statement to be filed
with the Securities and Exchange Commission and the remainder of the
shares in a secondary registration statement to be filed within 180
days of the first day of public trading of the Company's common
shares. The Company will be required to issue additional common shares
to the vendors equal to the difference, if any, between proceeds they
received from the sale of their shares within the first twelve months
from the first day of public trading of the Company's shares and
$1,570,334.
F-19
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Consolidated Balance Sheets
(Expressed in United States dollars)
April 30, 2003 (unaudited) and October 31, 2002
Assets
April 30, 2003 October 31, 2002
(unaudited)
Current assets:
Cash $ 29,527 $ 1,925
Goods and services tax receivable 3,640 4,323
Prepaid expenses 11,119 320
----------------------------------------------------------------------------------------
Total current assets 44,286 6,568
Media credits (note 8(a)) 440,000 -
Property and equipment (note 4) 41,186 31,402
Deposits 3,323 4,260
- --------------------------------------------------------------------------------------------------
Total assets $ 528,795 $ 42,230
==================================================================================================
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable $ 33,384 $ 48,178
Accrued liabilities 45,600 37,674
Salaries payable 145,596 -
Current portion of tenant inducements 3,873 3,991
Loans payable (note 5) 24,140 28,841
Due to shareholders (note 6) 30,439 108,292
----------------------------------------------------------------------------------------
Total current liabilities 283,032 226,976
Tenant inducements - 1,594
- --------------------------------------------------------------------------------------------------
Total liabilities 283,032 228,570
==================================================================================================
Stockholders' Equity (Deficiency) (note 7)
Preferred stock:
$0.001 par value, authorized 10,000,000 shares
subscribed and unissued 400,000 shares (2002 - nil) 400 -
Common stock:
$0.001 par value, authorized 100,000,000 shares
issued and outstanding 10,729,157 shares
(2002 - 9,543,000 shares) 10,729 9,543
subscribed and unissued 13,750 shares (2002 - 60,000 shares) 14 60
Additional paid in capital 2,130,263 608,933
Stock subscriptions receivable (90) (90)
Deficit accumulated during development stage (1,880,604) (795,947)
Accumulated other comprehensive loss (14,949) (8,839)
-------------------------------------------------------------------------------------------
Total stockholders' equity 245,763 (186,340)
- --------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 528,795 $ 42,230
==================================================================================================
See accompanying notes to consolidated financial statements.
F-20
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Consolidated Statement of Operations
(Expressed in United States dollars)
For the six months ended April 30, 2003 and 2002 and the cumulative period from
inception on February 9, 2001 to April 30, 2003 (unaudited)
Cumulative
from inception
Six months Six months on February 9,
Ended April Ended April 2001 to April
30, 2003 30, 2003 30, 2003
Revenue $ - $ - $ 8,544
Cost of Sales - - 6,257
------------------------------------------------------------
Gross Profit - - 2,287
Expenses:
General and administrative 1,040,258 283,129 1,632,055
Research and development 44,439 43,782 251,215
------------------------------------------------------------
1,084,697 326,911 1,883,270
Other income:
Interest income 40 36 379
------------------------------------------------------------
40 36 379
------------------------------------------------------------
Loss for the period $ 1,084,657 $ 326,875 $ 1,880,604
===============================================================================================================
Loss per share - basic and diluted $ 0.11 $ 0.04 $ 0.20
Weighted average number of shares outstanding 10,184,898 9,270,580 9,389,859
===============================================================================================================
See accompanying notes to consolidated financial statements.
F-21
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Consolidated Statement of Stockholders' Equity and Comprehensive Loss (Expressed
in United States dollars) For the six months ended April 30, 2003 (unaudited)
Common stock Preferred stock Additional Stock Deficit Accumulated Total
(note 7(c)) (note 7(b) paid in subscriptions accumulated other stockholders'
capital receivable during the comprehensive equity
development loss
stage
---------- ------------------- ------ ----------- -------- ------------ ---------- ------------
Number of Number of
Shares Amount Shares Amount
Balance, October 31, 2002 9,603,000 $ 9,603 - $ - $ 608,933 $ (90) $ (795,947) $ (8,839) $ (186,340)
Common stock issued 313,597 314 200,433 200,747
for cash
Common stock issued 60,480 60 30,180 30,240
for equipment (note 7(b))
Common stock issued on 370,580 371 184,919 185,290
conversion of loans (note 7(b))
Common stock issued for
services received
(note 7(b)) 381,500 381 190,369 190,750
Variable stock compensation
costs 362,500 362,500
Options issued in exchange
for services received note
7(c)(iv) 64,901 64,901
Options issued for
financing notes 5 and
7(c) 41,607 41,607
Preferred shares subscribed
for prepaid media credits
but not issued (note 8(a)) 400,000 400 439,600 440,000
Cash received for 13,750
common shares subscribed
but not issued 13,750 14 8,736 8,750
Stock issue costs (1,915) (1,915)
Loss for the period (1,084,657) (1,084,657)
Foreign currency translation (6,110) (6,110)
-----------
Comprehensive loss (1,090,767)
-----------------------------------------------------------------------------------------------------
Balance April 30, 2003 10,742,907 $10,743 400,000 $ 400 $ 2,130,263 $ (90) $ (1,880,604) $ (14,949) $ 245,763
=====================================================================================================
See accompanying notes to consolidated financial statements.
F-22
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Consolidated Statement of Cash Flows
(Expressed in United States dollars)
For the six months ended April 30, 2003 and 2002 and
cumulative from inception on February 9, 2001 to April 30, 2003 (unaudited)
Six months Six months Cumulative
ended April ended April from
30, 2003 30, 2003 inception on
February 9,
2001 to April
30, 2003
---------------- -------------- ---------------
Cash provided by (used in):
Operations:
Loss for the period $ (1,084,657) $ (326,875) $ (1,880,604)
Adjustment to reconcile loss for the period to
net cash used in operating activities:
Loss on disposal of leasehold improvements - - 6,138
Amortization of property and equipment 7,602 5,933 22,029
Amortization of tenant inducements (2,020) (1,968) (12,477)
Services received, paid by issuance of
common shares 182,875 211,075
Excess of fair value of common shares issued
for debt conversion and equipment 107,765 107,765
Services received, paid by issuance of
options and warrants 469,008 125,242 619,249
Changes in assets and liabilities (Note 9) 136,487 (36,998) 217,696
------------------------------------------------------------------------------------------------------
Net cash used in operating activities (182,940) (234,666) (709,129)
--------------------------------------------------
Investments:
Purchase of property and equipment - (2,328) (54,109)
Other - 401 (4,260)
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities - (1,927) (58,369)
--------------------------------------------------
Financing:
Issuance of common stock 207,582 189,595 647,587
Tenant inducements received - - 16,042
Advances from shareholders - 30,000 116,656
Repayments to shareholders (5,208) (12,621) (13,692)
Loan proceeds received 31,201 28,841 60,042
Loan repayments (21,298) - (21,298)
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 212,277 235,815 805,337
--------------------------------------------------
Foreign exchange gain (loss) on cash held in
foreign currency (1,735) - (8,312)
--------------------------------------------------
Increase in cash during the period 27,602 (778) 29,527
Cash at beginning of the period 1,925 18,910 -
--------------------------------------------------
Cash at end of the period $ 29,527 $ 18,132 $ 29,527
==================================================
Supplementary information:
Interest paid $ - $ - $ -
Income taxes paid - - -
Non-cash transactions:
Common shares subscribed in exchange for stock
subscriptions receivable - 25,211 -
Common shares issued for prepaid consulting
services 7,875
Preferred shares subscribed for prepaid media credits 440,000
Loans converted to common shares 185,290
Property and equipment acquired for stock 30,240
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-23
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the six months ended April 30, 2003 and 2002 and the Period from inception
on February 9, 2001 to April 30, 2003 (unaudited)
1. Description of business
Essential Innovations Technology Corp. (the "Company") was incorporated under
the laws of the state of Nevada on April 4, 2001 (note 3(a)). The Company is
engaged in the development and distribution of eco-friendly lifestyle
enhancement technologies for the betterment of energy, water, air and health. To
April 30, 2003, substantially all of the Company's efforts have been directed
towards product and distribution chain development. Accordingly, for financial
reporting purposes, the Company is considered to be a development stage
enterprise. Essential Innovations Asia Limited was incorporated, as a
wholly-owned subsidiary, on April 9, 2002 for the purpose of marketing, under
exclusive global rights, except Canada and the United States, the bio-energetic
devices produced by SOTA Instruments.
2. Future operations
The Company's financial statements have been prepared using generally accepted
accounting principles of the United States of America applicable to a going
concern which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. T o date, the Company has not
generated revenue from its products nor positive cash flow from operations and
has a material working capital deficit. To continue as a going concern it is the
Company's intention to raise additional equity to finance the further
development of its business until positive operating cash flow can be generated
from its operations. However, there can be no assurance that such additional
funds required will be available to the Company when required or on terms
acceptable to the Company. Such limitations could have a material adverse effect
on the Company's business, financial condition or operations and these financial
statements do not include any adjustment that could result there from. Failure
to obtain sufficient additional funding will necessitate the Company to reduce
or limit its operating activities.
3. Significant accounting policies
(a) Basis of consolidation:
These consolidated financial statements include the accounts of Essential
Innovation Technology Corp. and its wholly-owned subsidiaries, Essential
Innovation Corporation and Essential Innovations Asia Limited. Essential
Innovation Corporation was incorporated on February 9, 2001 and as noted above,
the Company was incorporated on April 4, 2001. At that time, all the existing
shareholders of EIC exchanged their common shares for common shares of the
Company. The Company had no assets and liabilities at the time of the exchange.
As the only assets of the combined entity after the exchange were those of the
subsidiary prior to the exchange, a change in ownership did not take place. As
this exchange lacked substance, it was not a purchase event and has been
accounted for based on existing carrying amounts of the subsidiary's assets and
liabilities, consistent with the guidance contained in FASB Technical Bulletin
85-5 Issues Relating to Accounting for Business Combinations. All significant
inter-company balances and transactions have been eliminated.
F-24
3. Significant accounting policies (continued)
(b) Cash and cash equivalents:
The Company considers all highly liquid debt instruments with maturities of
three months or less when acquired to be cash equivalents.
(c) Property and equipment:
Property and equipment is stated at cost and is amortized over its estimated
useful life to the Company of the following basis:
--------------------------------------- ------------------------- ------------
Asset Basis Rate
--------------------------------------- ------------------------- ------------
Automotive equipment declining-balance 3 years
Computer equipment declining-balance 3 years
Office furniture and equipment declining-balance 5 years
Leasehold improvements straight-line 3 years
--------------------------------------- ------------------------- ------------
(d) Investment tax credits:
The Company follows the cost reduction method of accounting for investment tax
credits ("ITC") whereby the benefit of assistance is recognized as a reduction
in the cost of the related capital asset or expenditure when receipt of the
investment tax credit is considered to be reasonably assured. Once the Company's
ITC claims have been assessed by Revenue Canada, any excess or deficiency of the
net ITC receivable will be reflected in the period the notice of assessment is
received.
(e) Tenant inducements:
Tenant inducements, related to a free rent period received by the Company upon
entering into a lease for its research and development facilities, are
capitalized and amortized over the initial term of the related lease.
(f) Research and development expenses:
Research and development costs are expensed as incurred. Costs incurred to date
include personnel can facilities costs, amortization of related property and
equipment and licensing fees for technology used in the development effort.
(g) Advertising expenses:
Advertising costs are expensed as incurred in accordance with AICPA Statement of
Position 93-7 Reporting on Advertising Costs and included in general and
administrative expenses.
In accordance with the above policy, Media credits, which are a deposit to be
applied against the cost of advertising and media acquired, will be amortized
into income as related media services are acquired for cash in accordance with
the terms of the underlying agreement (note 8(a)).
F-25
3. Significant accounting policies (continued)
(h) Income taxes:
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. 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. To
the extent that it is not considered to be more likely than not that a deferred
tax asset will be realized, a valuation allowance is provided.
(i) Loss per share:
Basic Loss Per Share is calculated by dividing the net loss by the weighted
average number of common shares outstanding for the period. Diluted Loss Per
Share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
For all periods presented, all potentially issuable common stock is
anti-dilutive.
(j) Comprehensive loss:
SFAS No. 130 establishes standards for reporting comprehensive income (loss) and
its components in financial statements. Comprehensive loss, as defined, includes
all changes in equity (net assets) during a period from non-owner sources. To
date, the Company has not had any significant transactions that are required to
be reported in other comprehensive loss, except for foreign currency translation
adjustments as described in note 3(l).
(k) Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America 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 fiscal period. Actual results may differ from those estimates.
(1) Translation of foreign currencies:
The functional currency of the Company is the Canadian dollar. For reporting
purposes, Canadian dollar denominated assets and liabilities are translated into
United States dollars at the exchange rate in effect at the balance sheet date.
Revenues and expenses arising from Canadian dollar transactions are translated
into United States dollars at the average rate for the period. Translation
adjustments resulting from this process are presented in accumulated other
comprehensive loss on the consolidated balance sheet as a separate component of
stockholders' equity.
(m) Financial instruments:
The Company has the following financial instruments: cash, goods and services
tax receivable, accounts payable, accrued liabilities, and amounts due to
shareholders. The carrying value of these financial instruments approximates
their fair value due to their liquidity or their short-term nature.
F-26
3. Significant accounting policies (continued)
(n) Concentration of credit risk:
Financial instruments that potentially subject the Company to credit risk
consist principally of cash and goods and services tax receivable. Cash is
deposited with high credit quality financial institutions. Goods and services
tax is receivable from a department of the Government of Canada.
(o) Segment information:
The Company operates in two reportable segments. Substantially all of the
Company's operations are in Canada (note 12).
(p) Impairment or disposal of long-lived assets:
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its undiscounted estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(q) Stock based compensation:
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") 96-18. All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument, whichever is more reliably measurable.
The Company accounts for stock-based compensation arrangements with employees in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations including FASB Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, an interpretation of APB Opinion No.
25 and complies with the disclosure provisions of SFAS No. 123 Accounting for
Stock-Based Compensation. Under APB No. 25, compensation expense is based on the
difference, if any, between the fair value of the Company's stock and the
exercise price of options issued on the date of grant. Unearned compensation, if
any, is amortized over the vesting period of the individual options.
3. Significant accounting policies (continued)
As allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted only
the disclosure requirements of SFAS No. 123. The following table illustrates the
effect on net income if the fair-value-based method had been applied to all
outstanding and unvested awards in each period.
April 30,
2003 2002
----------------------------------------------
Loss, as reported $ (1,084,657) $ (326,875)
Add stock-based employee compensation expense included in 469,008 125,242
reported net income, net of tax
Deduct total stock-based employee compensation expense (132,081) (213,291)
determined under fair-value-based method for all rewards,
net of tax
----------------------------------------------
Pro forma loss $ (747,724) $ (414,924)
==============================================
(r) Interim financial statements
These interim financial statements are unaudited and include all adjustments
which in the opinion of management are necessary in order to make the financial
statements not misleading.
4. Property and equipment
Property and equipment consists of the following:
Net Book Value
--------------------------------
Accumulated April 30, October 31,
Cost Depreciation 2003 2002
- ----------------------------------------------------------------------------------------------------------
Automotive equipment $ 15,565 $ 865 $ 14,700 $ -
Computer equipment 4,036 2,032 2,004 2,545
Computer Software 1,395 336 1,059 1,240
Office furniture and equipment 12,746 3,592 9,154 9,498
Leasehold improvments 30,797 16,528 14,269 18,119
- ----------------------------------------------------------------------------------------------------------
$ 64,539 $ 23,353 $ 41,186 $ 31,402
==========================================================================================================
F-27
5. Loans Payable
Loans payable consist of the following:
April 30, 2003 October 31, 2002
N. Wuschke $ - $ 28,841
S. Wuschke 24,140 -
--------------------------------------------------------------------
$ 24,140 $ 28,841
====================================================================
During the six months ended April 30, 2003 the loan payable to N. Wuschke, a
family member of a director and officer of the Company, was repaid in full by
converting $20,000 of the loan into 80,000 fully paid common shares and repaying
the balance together with accrued interest. The shares were recorded at their
estimated fair value of $40,000, calculated by reference to the market value of
the shares at the time of the settlement, and the Company recognized a loss on
settlement of $20,000. (Note 7(b)).
On April 1, 2003, S. Wuschke, a director and officer of the Company, made an
unsecured loan to the Company in the amount of Cdn $45,000 (US $30,600), due on
demand, payable monthly as to interest of 8% with the principal to be repaid in
full on or before April 1, 2004. In connection with this loan, options were
granted which entitle the holder to purchase 50,000 common shares of the Company
until 2012, 25,000 at $0.25 per share and 25,000 at $0.50 per share. The fair
value of the options of $37,978 has been expensed during the six months ended
April 30, 2003.
6. Due to Shareholders
Amounts due to shareholders at April 30, 2003 are unsecured, without specific
terms of repayment and non-interest bearing with the exception of $30,000 for
which a flat interest of 12% has been accrued. In the year ended October 31,
2002, warrants were granted which entitle the holder of the $30,000 loan to
purchase 50,000 common shares at $0.35 per share. The fair value of the warrants
of $11,329 was expensed during the six months ended April 30, 2002. During the
six months ended April 30, 2003 a shareholder has converted $72,645 of
non-interest bearing loans into 290,580 common shares. The shares were recorded
at their estimated fair value of $145,290, calculated by reference to the market
value of the shares at the time of the settlement, and the Company recognized a
loss on settlement of $72,645 (Note 7(b)).
7. Share Capital
(a) Preferred shares
During the year ended October 31, 2002 the Company increased its authorized
capital with the creation of 10,000,000 preferred shares of $0.001 par value.
The designation of rights including voting powers, preferences and restrictions
shall be determined by the board of directors before the issuance of any shares.
F-28
7. Share Capital (continued)
During the six months ended April 30, 2003, the Company entered into an
agreement for the acquisition of media credits requiring a deposit of $1.5
million which the Company satisfied in full by agreeing unconditionally to issue
400,000 series A preferred shares (see note 8(a)). For financial statement
purposes the Company has recorded these shares at their estimated fair value of
$440,000 or $1.10 per share. These shares are non-voting, not entitled to
dividends and are automatically convertible into common shares, on a one for one
basis, upon the later of eighteen months after the date of the agreement,
February 14, 2003, or one hundred eighty days after the Company's initial public
offering yielding a minimum of $10 million. The preferred shares will be
redeemable at the option of the Company for $0.01 per share if media credits are
not honored by the providers or any media credits remain unused after their
expiration.
(b) Common shares
During the six months ended April 30, 2003, the Company issued 10,000 common
shares for which proceeds had been received prior to October 31, 2002 and
313,597 common shares for total cash proceeds of $200,747 received during the
period, including 25,800 shares at $0.25 per share, 187,000 shares at $0.50 per
share, and 100,797 shares at $1.00 per share. The Company paid stock issue costs
of $1,915 of which $1,107 was paid to two officers and directors of the Company.
The Company also received $8,750 for 13,750 shares which remain unissued as at
April 30, 2003.
In addition, the Company has recorded the following transactions during the six
months ended April 30, 2003:
- acquisition of certain automotive equipment, valued at $15,120, in
exchange for 60,480 common shares. The common shares have been
recorded at their estimated fair value of $0.50 per share on the
date of the transaction, and the Company has recorded a loss of
$15,120 on the exchange.
- conversion of a portion of certain shareholder and other loans
totaling $92,645 for 370,580 common shares. The common shares have
been recorded at their estimated fair value of $0.50 per share on
the dates of settlement, and the Company has recorded losses of
$92,645 arising from the settlements (notes 5 and 6).
- issuance of 381,500 common shares, to certain employees and
consultants for services provided. The common shares have been
recorded at their estimated fair value of $0.50 on the dates
services were provided.
During the year ended October 31, 2002, the Company issued 220,000 common shares
at $0.25 per share for total proceeds of $55,000 and 310,000 common shares at
$0.50 per share for total proceeds of $155,000. The Company paid stock issue
costs of $4,000.
During the year ended October 31, 2002, the Company issued 50,000 common shares
to a director for services provided. These shares have been recorded at their
estimated fair value of $0.50.
F-29
7. Share Capital (continued)
(c) Warrants and options
During the six months ended April 30, 2003 the Company issued the following
options:
i) options issued to certain investors to acquire 12,900 common shares at
$0.25 per share and 12,900 common shares at $0.50 per share
exercisable to the year 2007. The Company has expensed the fair value
of $706 during the six months ended April 30, 2003 in relation to
these options.
ii) options to a shareholder and director, for making a loan to the
Company, to acquire 25,000 common shares at $0.25 per share and 25,000
common shares at $0.50 per share exercisable to the year 2012. The
Company has expensed the fair value of $37,978 during the six months
ended April 30, 2003 in relation to these options.
iii) Options issued to certain investors to acquire 10,000 common shares at
$1.00 per share and 10,000 common shares at $2.00 per share
exercisable to the year 2010. The Company has expensed the fair value
of $2,923 during the six months ended April 30, 2003 in relation to
these options.
500,000 options to purchase common shares of the Company to certain employees
and consultants consisting of 262,500 with an exercise price of $0.50 per share
and 237,500 with an exercise price of $1.00 per share. All options are fully
vested and exercisable to the year 2010. The Company has expensed the fair value
of the options issued to consultants of $27,401, and the intrinsic value of the
options issued to employees of $37,500, during the six months ended April 30,
2003.
A summary of the Company's stock options and warrants:
Weighted Weighted
average average
Number of exercise Number of exercise
Options price Options price
---------------------------------------------------------------
Outstanding at beginning of period 2,880,000 $ 0.57 - $ -
Granted
-options issued to directors,
employees, advisors, and 500,000 0.74 2,520,000 0.60
consultants
-options issued to others 95,800 1.16 60,000 0.88
-warrants 300,000 0.28
Exercised - - - -
---------------------------------------------------------------
Outstanding at end of period 3,475,800 $ 0.61 2,880,000 $ 0.57
===============================================================
F-30
7. Share Capital (continued)
Exercise Expiry
Number Price Date
--------------- ------------------ -------------
Directors & Employees 225,000 $0.25 2007
125,000 $0.50 2007
262,500 $0.50 2010
750,000 $0.75 2012
750,000 $1.00 2012
237,500 $1.00 2010
Advisors & Consultants 100,000 $0.25 2007
45,000 $0.50 2007
25,000 $1.00 2007
250,000 $0.75 2012
250,000 $1.00 2012
Others 12,900 $0.25 2007
12,900 $0.50 2007
30,000 $0.75 2007
30,000 $1.00 2007
10,000 $1.00 2010
10,000 $2.00 2010
25,000 $0.25 2012
25,000 $0.50 2012
Warrants 200,000 $0.25
100,000 $0.35
8. Commitments
(a) On February 14, 2003 the Company entered into an agreement to acquire
$25,000,000 in Retail Rate Card Media Credits ("Media Credits") at a cost of
$12.5 million. The Media Credits represent the right to purchase advertising by
television, print, radio, internet, magazine, facsimile, direct mail and
telephone at the customary retail cost without any discount or other
concessions. These credits are valid for an initial period of eighteen months.
At the end of the eighteen month period any unused credits will be automatically
extended for use up to ten years from the date of the agreement. These credits
maybe either used by the Company or sold to other parties at the option of the
Company.
The Company has agreed unconditionally to issue 400,000 series A preferred
shares in full satisfaction of an initial payment of $1,500,000 on the
agreement. The remaining balance of $11 million will become payable as the media
credits are used. The preferred shares are non-voting, not entitled to dividends
and are automatically convertible into common shares upon the later of eighteen
months after the date of the agreement or one hundred eighty days after the
Company's initial public offering. The conversion price is the face value of the
preferred shares converted divided by 75% of the price paid for common shares by
public investors in connection with the initial public offering. The preferred
shares will be redeemable, at the option of the Company, for $0.01 per share if
media credits are not honored by the providers or any media credits remain
unused after their expiration.
The agreement calls for the Company to pay a stand-by fee, commencing six months
after the agreement date, of 1% of the unpaid cost of the first $10 million
(face value) of media credits not used.
F-31
8. Commitments (continued)
The Company has recorded this initial payment as a deposit to be expensed as the
media credits are acquired and either used by the Company or sold to other
parties.
(b) On March 24, 2003 the Company entered into a agreement with a shareholder to
acquire approximately 35 acres of commercial and residential lands in San
Marcos, Texas at an appraised value of $1,570,334 payable, on closing date,
being 90 days after the vendor is able to deliver clear title, by way of cash of
$314,067 and the delivery of 628,134 common shares of the Company at an agreed
price of $2 per share.
The Company has undertaken to register 315,000 of the common shares being issued
in an upcoming registration statement and the remainder of the shares in a
secondary registration statement to be filed within 180 days of the first day of
public trading of the Company's common shares. A further condition is for the
Company to issue additional common shares to the vendors equal to the difference
between proceeds they received from the sale of their shares within the first
twelve months from the first day of public trading of the Company's shares and
$1,570,334.
Subsequent to April 30, 2003 the Company issued the 628,134 common shares which
are being held in escrow pending the closing of the acquisition of the land.
(c) The Company is committed under the terms of a lease for the use of office
premises in the following annual amounts:
------------------------------------------------------------------
2003 $ 23,961
2004 39,935
------------------------------------------------------------------
(d) The Company is committed under the terms of an operating lease for an
automobile in the following annual amounts:
------------------------------------------------------------------
2003 $ 2,419
2004 4,838
2005 4,838
2006 4,838
2007 2,419
------------------------------------------------------------------
9. Changes in Assets and Liabilities
Changes in assets and liabilities comprise the following:
April 30, April 30,
2003 2002
-------------------------------------------------------------------------
Goods and services tax receivable $ 683 $ 1,830
Prepaid expenses (2,924) (50,490)
Accounts payable (14,794) (1,418)
Accrued liabilities 7,926 13,080
Salaries payable 145,596 -
-------------------------------------------------------------------------
$ 136,487 $ (36,998)
=========================================================================
F-32
10. Related Party Transactions
During the six months ended April 30, 2003:
(a) The Company has accrued consulting fees to a company controlled by an
officer and director of the Company in the amount of $27,000 (2002 - nil)
(b) The Company paid commissions on certain equity raised to two officers and
directors of $1,107 (2002 - nil)
(c) A shareholder converted $72,645 of loans into 290,580 common shares ( notes
6 and 7(b))
(d) The father of a director and officer converted $20,000 of loans into 80,000
common shares (notes 5 and 7(b)).
(e) A director and officer made an unsecured loan to the Company of Cdn $45,000
(US $30,600) payable monthly as to interest of 8%, due in full April 1, 2004
(note 5).
(f) The Company entered into an agreement with a shareholder to acquire
approximately 35 acres of residential and commercial lands in San Marcos, Texas
appraised at $1,570,334 payable by way of cash of $314,067 and the issuance of
628,134 common shares of the Company at an agreed price of $2 per share. (notes
8(b) and 11).
11. Subsequent Events
Subsequent to April 30, 2003, the Company has:
(a) Received subscriptions for 33,700 common shares and total cash proceeds of
$33,700.
(b) Received a subscription for 38,680 common shares in return for certain
automotive equipment valued at $21,713.
(c) Issued options to certain investors for 6,250 common shares at $1.00 per
share and 6,250 common shares at $2.00 per share exercisable until July 2010.
(d) Issued 628,134 common shares, at an agreed price of $2 per share, which are
being held in escrow pending the acquisition of certain land (notes 8 (b) and
11).
F-33
12. Segment Information
The Company views its operations in two businesses - geothermal and
bio-energetic medical. The geothermal business is located in the Americas and
the bio-energetic medical business is located in Asia. Summarized financial
information by segment for the six months ended April 30, 2003 and 2002 and
cumulative from inception on February 9, 2001 to April 30, 2003 as taken from
the unaudited internal management reports, is as follows:
Cumulative
from inception
Six months Six months on February 9,
ended April ended April 2001 to April
30, 2003 30, 2002 30, 2003
Revenue
Geothermal $ - $ - $ 173
Corporate - - -
Bio-Energetic Medical - - 8,371
----------------------------------------------------------------------------------
$ - $ - $ 8,544
Loss
Geothermal $ 183,501 $ 272,325 $ 870,185
Corporate 897,635 897,635
Bio-Energetic Medical 3,521 23,300 112,784
----------------------------------------------------------------------------------
$ 1,084,657 $ 295,625 $ 1,880,604
Assets
Geothermal $ 68,733
Corporate 458,972
Bio-Energetic Medical 1,090
----------------------------------------------
$ 528,795
F-34
====================================== ======================================
- --------------------------------------
TABLE OF CONTENTS
- --------------------------------------
$25,000,000 Maximum
Prospectus Summary Information.......1
Risk Factors.........................4
Forward-Looking Statements...........8
Use of Proceeds......................9
Common Stock and Dividend Policy....10 ESSENTIAL INNOVATIONS
Dilution and Comparative Data.......11 TECHNOLOGY CORP.
Management's Discussion and
Analysis or Plan of Operation.....13
Business and Property...............16
Management..........................23
Principal Stockholders..............28
Certain Transactions................30 5,000,000 Shares Maximum
Description of Securities...........32 Common Stock
Selling Stockholders................33 $0.001 Par Value
Plan of Distribution................34
Legality of Stock...................36
Where You Can Find
Additional Information............36
Index to Financial Statements.......38
You should rely on the information
contained in this Prospectus. No
dealer, salesperson or other person is
authorized to give information that is ---------------------
not contained in this Prospectus. This PROSPECTUS
Prospectus is not an offer to sell nor ---------------------
is it seeking an offer to buy these
securities in any jurisdiction where
the offer or sale is not permitted.
The information contained in this
Prospectus is correct only as of the
date of this Prospectus, regardless of
the time of the delivery of this
Prospectus or any sale of these
securities. Until [__________], 2003
(40 days after the commencement of the
offering), all dealers that effect
transactions in these securities,
whether or not participating in this September __, 2003
offering, may be required to deliver a
Prospectus. This is in addition to the
dealers' obligation to deliver a
Prospectus when acting as underwriters
and with respect to their unsold
allotments or subscriptions.
====================================== ======================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
- --------------------------------------------------------------------------------
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Subsection 1 of Section 78.7502 of the Nevada Revised Statutes (the
"Nevada Law") empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he is not liable pursuant to Section 78.138 of the
Nevada Law or if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. Section 78.138 of the Nevada Law provides that, with
certain exceptions, a director or officer is not individually liable to the
corporation or its stockholders for any damages as a result of any act or
failure to act in his capacity as a director or officer unless it is proven that
(i) his act or failure to act constituted a breach of his fiduciary duties as a
director or officer, and (ii) his breach of those duties involved intentional
misconduct, fraud or a knowing violation of law.
Subsection 2 of Section 78.7502 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above against expenses,
including amounts paid in settlement and attorneys' fees actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted under similar standards, except that no indemnification may be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged by a court of competent jurisdiction to be liable to the
corporation or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which such action or suit was brought
determines that, despite the adjudication of liability, such person is fairly
and reasonably entitled to indemnity for such expenses as the court deems
proper.
Section 78.7502 further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (1) and (2) of Section 78.7502, or in
the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith. Section 78.751 of the Nevada Law provides that the
indemnification provided for by Section 78.7502 shall not be deemed exclusive or
exclude any other rights to which the indemnified party may be entitled and that
the scope of indemnification shall continue as to directors, officers, employees
or agents who have ceased to hold such positions, and to their heirs, executors
and administrators. Section 78.752 of the Nevada Law empowers the corporation to
purchase and maintain insurance on behalf of a director, officer, employee or
agent of the corporation against any liability asserted against him or incurred
by him in any such capacity or arising out of his status as such whether or not
the corporation would have the power to indemnify him against such liabilities
under Section 78.7502.
II-1
Article VI of the registrant's articles of incorporation provides that,
to the fullest extent permitted by the Nevada Law, the registrant shall
indemnify directors and may indemnify officers, employees, or agents of the
registrant to the extent authorized by the board of directors and in the manner
set forth in the bylaws of the registrant. The bylaws provide, pursuant to
Subsection 2 of Section 78.751, that the expenses of officers and directors
incurred in defending any action, suit or proceeding, whether civil or criminal,
must be paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon delivery, if required by
Nevada Law, of an undertaking by or on behalf of the director or officer to
repay all amounts so advanced if it is ultimately determined by a court of
competent jurisdiction that the officer or director is not entitled to be
indemnified by the corporation. The registrant also enters into indemnification
agreements consistent with Nevada Law with certain of its directors and
officers. In addition, the registrant's officers and directors are provided with
indemnification against certain liabilities pursuant to a directors' and
officers' liability policy.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
pursuant to the foregoing provisions, registrant has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
contrary to public policy as expressed in the Securities Act of 1933, and
therefore, is unenforceable. (See Item 28. Undertaking.)
- --------------------------------------------------------------------------------
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
- --------------------------------------------------------------------------------
The following table sets forth the estimated expenses payable by
Registrant in connection with the offering:
Nature of Expense Amount
SEC registration fees............................................. $ 2,023
Accounting fees and expenses...................................... 45,000
Legal fees and expenses........................................... 50,000
Printing and engraving expenses................................... 12,500
State securities laws compliance fees and expenses................ 22,500
Miscellaneous..................................................... 17,977
----------
Total.................................................... $ 150,000
==========
- --------------------------------------------------------------------------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
- --------------------------------------------------------------------------------
During the three years preceding the filing of this registration
statement, Registrant has issued securities without registration under the
Securities Act on the terms and circumstances described in the following
paragraphs.
Transactions involving the issuances of stock to persons who, at the
time of such transactions, were either executive officers, directors, principal
stockholders or other affiliates are noted. In each case of the issuance of
stock to affiliates, unless otherwise noted, such affiliates purchased stock on
II-2
the same terms at which stock was sold to unrelated parties in contemporaneous
transactions, and such transactions were approved unanimously by the
disinterested directors.
Issuances to Founders and Directors
Issuances upon Organization
In March and April 2001, we issued an aggregate of 8,000,000 shares of
our common stock to our founders and initial members of our board of directors.
These shares were issued at their par value of $0.001 per share in recognition
of the founder's contributions of the business plan and organizational efforts
and of the directors' agreement to serve in that capacity. Each of our founders
and initial directors was intimately acquainted with our business plan and
proposed activities at the time of the issuance of these shares.
Subsequent Issuances
On June 1, 2001, we issued 70,000 shares of our common stock to the
members of our board of directors at their par value of $0.001 per share in
recognition of their continued service on our board of directors.
In March 2003, we issued 290,580 shares of our common stock to Morpheus
Financial Corporation (which is deemed to be owned by William Yang, one of our
directors) upon the conversion of $72,465 owed to it at an agreed conversion
rate of $0.25 per share. Morpheus Financial Corporation represented in writing
that it was not a resident of the United States and that the securities
constituted restricted securities and consented to a restrictive legend on the
certificates to be issued. This transaction was made in reliance on Regulation
S.
In March 2003, we also issued 50,000 shares at an agreed value of $0.50
per share to Mr. Yang as compensation for providing consulting and advisory
services in Hong Kong and the People's Republic of China related to the
formulation and development of our marketing and distribution plan in the
Asia-Pacific region. Mr. Yang represented in writing that he was not a resident
of the United States and that the securities constituted restricted securities
and consented to a restrictive legend on the certificate to be issued. This sale
was made in reliance on Regulation S.
Issuances to Investors outside the United States
During the period from our inception (February 9, 2001) through the
date of this prospectus, we have sold an aggregate of 1,726,097 shares of our
common stock to a total of 56 investors outside the United States for a total of
US $643,147 in cash. These shares were issued at prices ranging from $0.25 to
$1.00 per share. No general solicitation was used, no commission or other
remuneration was paid in connection with such transactions, and no underwriter
participated. All purchasers represented in writing that they were not residents
of the United States, acknowledged in writing that the securities constituted
restricted securities, and consented to a restrictive legend on the certificates
to be issued. These sales were made in reliance on Regulation S.
In July 2003, we agreed to issue an aggregate of 18,700 shares of
common stock, options to purchase 7,500 shares of common stock at $1.00 per
share, and options to purchase 7,500 shares of common stock at $2.00 per share
to three investors for an aggregate of $18,700. All of the options are
exercisable until July 1, 2010. Each investor is also entitled, in the event a
trading market develops for our common stock and the share price is below $1.00
per share, to require us to issue them additional shares of common stock in the
II-3
amounts necessary to have the total number of shares, when multiplied by the
market price, equal the amount of their investment. All investors represented in
writing that they were not residents of the United States, acknowledged in
writing that the securities constituted restricted securities, and consented to
a restrictive legend on the certificates to be issued. These sales were made in
reliance on Regulation S.
In June 2001, we issued 25,000 shares of our common stock as
compensation for services performed on our behalf by a contractor who assisted
us with the construction and completion of the 2,000 square foot office space
within our 7,000 square foot Canadian facility. These shares were issued at an
agreed value of $0.001 per share. No general solicitation was used and no
commission or other remuneration was paid in connection with the transaction.
The purchaser represented in writing that he was not a resident of the United
States, acknowledged in writing that the securities constituted restricted
securities, and consented to a restrictive legend on the certificate to be
issued. This sale was made in reliance on Regulation S.
In March 2003, we issued 60,480 shares of our common stock to an
automobile dealer in Canada for two vehicles with an agreed value of $15,120. No
general solicitation was used and no commission or other remuneration was paid
in connection with the transaction. The purchaser represented in writing that it
was not a resident of the United States, acknowledged in writing that the
securities constituted restricted securities, and consented to a restrictive
legend on the certificate to be issued. This sale was made in reliance on
Regulation S.
In August 2003, we agreed to issue 38,680 shares of our common stock to
an individual in Canada for one motor vehicle with an agreed value of 421,713.
No general solicitation was used and no commission or other remuneration was
paid in connection with the transaction. The purchaser represented in writing
that he was not a citizen of the United States, acknowledged in writing that the
securities constituted restricted securities, and consented to a restrictive
legend on the certificate to be issued. This sale was made in reliance on
Regulation S.
In March 2003, we issued an aggregate of 2,371,500 shares at an agreed
value of $0.50 per share to a total of four of our employees in Canada as
compensation for their efforts in the development and pre-commercialization of
our EI Elemental Heat Energy System and the ongoing sales, marketing, and
administrative day-to-day operation and oversight of the corporation. The
employees represented in writing that they were not residents of the United
States and that the securities constituted restricted securities and consented
to a restrictive legend on the certificates to be issued. These sales were made
in reliance on Regulation S.
In March 2003, we issued 80,000 shares of our common stock to Norman
Wuschke (the father of one of our directors) upon the conversion of $20,000 owed
to him at an agreed conversion rate of $0.25 per share. Mr. Wuschke represented
in writing that he was not a resident of the United States and that the
securities constituted restricted securities and consented to a restrictive
legend on the certificates to be issued. This transaction was made in reliance
on Regulation S.
In March 2003, we issued 10,000 shares at an agreed value of $0.50 per
share to one nonaffiliated individual for financial consulting and advisory
services performed on our behalf, focused particularly on introductions to
certain experienced individuals who might agree to join us as members of our
board of directors or advisory board. The recipient represented in writing that
he was not a resident of the United States and that the securities constituted
restricted securities, and consented to a restrictive legend on the certificate
to be issued. This sale was made in reliance on Regulation S.
II-4
Issuances to United States Investors
Between May 2001 and April 2003, we issued an aggregate of 90,000
shares of our common stock to a total of four United States investors for a
total of US$33,000 in cash. These shares were issued at prices ranging between
$0.25 and $0.50 per share. No general solicitation was used, no commission or
other remuneration was paid in connection with such transactions, and no
underwriter participated. All purchasers acknowledged in writing that the
securities constituted restricted securities and consented to a restrictive
legend on the certificates to be issued.
In March 2003, we issued 400,000 shares of Series A Preferred Stock
with an agreed value of $3.75 per share to one investor as a deposit for the
purchase of $1.5 million in media credits. No general solicitation was used, no
commission or other remuneration was paid in connection with such transaction,
and no underwriter participated. The purchaser acknowledged in writing that the
securities constituted restricted securities and consented to a restrictive
legend on the certificate to be issued.
Exemptions from Registration
Except as expressly otherwise stated above, each of the above
transactions was effected in reliance on the exemption from registration
provided in Section 4(2) of the Securities Act as transactions not involving any
public offering. In each case, the offering was limited and without any general
solicitation, there were a limited number of investors, and the investors were
sophisticated relative to an investment in the Company and able to bear the
economic risks of their investment. Each transaction was negotiated with an
officer of the Company to answer questions from the investors and provide
additional material information requested, to the extent it could be provided
without unreasonable effort or expense. The investors had access to material
information of the kind that registration would provide. All certificates
contained a restrictive legend.
- --------------------------------------------------------------------------------
ITEM 27. EXHIBITS
- --------------------------------------------------------------------------------
Exhibits
Exhibit
Number Title of Document Location
- -------------- ---------------------------------------------------------------------------------- --------------------
Item 3. Articles of Incorporation and Bylaws
- -------------- ---------------------------------------------------------------------------------- --------------------
3.01 Articles of Incorporation Incorporated by
reference(1)
3.02 Articles of Amendment to the Articles of Incorporation Incorporated by
reference(1)
3.03 Bylaws This filing
Item 4. Instruments Defining the Rights of Holders, Including Indentures
- -------------- ---------------------------------------------------------------------------------- --------------------
4.01 Specimen stock certificate Incorporated by
reference(1)
II-5
Exhibit
Number Title of Document Location
- -------------- ---------------------------------------------------------------------------------- --------------------
4.02 Form of Designation of Rights, Privileges and Preferences of Series A Incorporated by
Preferred Stock reference(1)
Item 5. Opinion re: Legality
- -------------- ---------------------------------------------------------------------------------- --------------------
5.01 Opinion of Kruse Landa Maycock & Ricks, LLC Incorporated by
reference(1)
Item 10. Material Contracts
- -------------- ---------------------------------------------------------------------------------- --------------------
10.01 Lease between Canden Industries Ltd. and Essential Innovations Corp. dated Incorporated by
September 1, 2001 reference(1)
10.02 Technology Sale Agreement between William Baumgartner and Essential Incorporated by
Innovations Technology Corp. dated February 20, 2002 reference(1)
10.03 International Marketing Agreement among SOTA Instruments, Inc., Essential Incorporated by
Innovations Asia Limited and Essential Innovations Technology Corporation reference(1)
dated April 9, 2002
10.04 Agreement between: Crown Plaza Executive Suites Corporation and Essential Incorporated by
Innovations Technology Corporation dated November 26, 2002 reference(1)
10.05 Official Term Sheet between Mr. Ken Telford and Essential Innovations Incorporated by
Technology Corp. effective January 1, 2003, signed February 21, 2003 reference(1)
10.06 Media Transfer and Stock Purchase Agreement among Essential Innovations Incorporated by
Technology Corporation, Digital Alliance Group, LLC, and Millennium Capital reference(1)
Quest Corp. dated as of February 14, 2003
10.07 Land Transfer and Stock Purchase Agreement among Essential Innovations Incorporated by
Technology Corp., Albert T. Lowman Living Trust, Darlyne Rossow Lowman, Todd reference(1)
Alan Lowman and Cathy Lowman Northcutt dated as of March 24, 2003
10.08 Addendum to Original Land Transfer and Stock Purchase Agreement among Incorporated by
Essential Innovations Technology Corp., Albert T. Lowman Living Trust, reference(1)
Darlyne Rossow Lowman, Todd Alan Lowman and Cathy Lowman Northcutt dated May
30, 2003
10.09 Letter of Agreement between Norm Wuschke and Essential Innovations This filing
Technology Corp. dated February 10, 2003
10.10 Letter of Agreement between Morpheus Financial Corporation and Essential This filing
Innovations Technology Corp. dated February 27, 2003
10.11 Letter of Commitment between Steve Wuschke and Essential Innovations This filing
Technology Corp. dated April 1, 2003
10.12 Form of Subscription Agreement This filing
10.13 Employment Term Sheet for Jason McDiarmid This filing
10.14 Employment Term Sheet for Ken Telford This filing
10.15 Employment Term Sheet for Steve Wuschke This filing
II-6
Exhibit
Number Title of Document Location
- -------------- ---------------------------------------------------------------------------------- --------------------
Item 21. Subsidiaries of the Registrant
- -------------- ---------------------------------------------------------------------------------- --------------------
21.01 Schedule of Subsidiaries Incorporated by
reference(1)
Item 23. Consents of Experts and Counsel
- -------------- ---------------------------------------------------------------------------------- --------------------
23.01 Consent of KPMG, LLP, Independent Accountants This filing
23.02 Consent of Kruse Landa Maycock & Ricks, LLC Included in 5.01
above
Item 24. Power of Attorney
- -------------- ---------------------------------------------------------------------------------- --------------------
24.01 Power of Attorney Signatures Incorporated by
reference(1)
- --------------------------------------------------------------------------------
ITEM 28. UNDERTAKING
- --------------------------------------------------------------------------------
The undersigned registrant hereby undertakes that it will:
(1) file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(a) include any prospectus required by Section
10(a)(3) of the Securities Act;
(b) reflect in the prospectus any facts or events
which, individually or together, represent a fundamental
change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
(ss.230.424(b) of this chapter) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(c) include any additional or changed material
information on the plan of distribution.
(2) for determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering; and
II-7
(3) file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
The undersigned registrant requests acceleration of the effective date
of the registration statement under Rule 461 under the Securities Act, and
includes the following:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-8
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this amendment no. 1
to registration statement to be signed on its behalf by the undersigned, in the
City of Vancouver, Province of British Columbia, Canada, on September 12, 2003.
Essential Innovations Technology Corp.
(Registrant)
By /s/ Jason McDiarmid
------------------------------------
Jason McDiarmid, Its President
and Principal Executive Officer
By /s/ Kenneth G.C. Telford
------------------------------------
Kenneth G.C. Telford
Its Principal Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement has been signed by the following persons in
the capacities and on the dates stated:
/s/ Jason McDiarmid
- ------------------------------
Jason McDiarmid, Director
/s/ Steve Wuschke
- ------------------------------
Steve Wuschke, Director
/s/ David Rezachek
- ------------------------------
David Rezachek, Director
/s/ Diana M. Allen
- ------------------------------
Diana M. Allen, Director
/s/ William Yang
- ------------------------------
William Yang, Director By /s/ Jason McDiarmid
-----------------------------------
Jason McDiarmid, Attorney-in-Fact
/s/ William Baumgartner Dated September 12, 2003
- ------------------------------
William Baumgartner, Director
/s/ Jeane Manning
- ------------------------------
Jeane Manning, Director
/s/ Kenneth G.C. Telford
- ------------------------------
Kenneth G.C. Telford, Director
II-9