Registration No. 333-106839
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 1 to
Form SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
---------------------------------------------
(Name of small business issuer in its charter)
Nevada
--------------------------------------------------------
(State or jurisdiction of incorporation or organization)
5075
-------------------------------------------------------
(Primary Standard Industrial Classification Code Number)
88-0492134
-------------------------------------
(I.R.S. Employer Identification No.)
114 West Magnolia Street, Suite 400-142 101-5219 192nd Street
Bellingham, WA 98225 Cloverdale, BC Canada V3S 4P6
Telephone: 360-392-3902 Telephone: 604-882-6520
Telecopy: 360-733-3941 Telecopy: 604-882-6521
- ---------------------------------------- ---------------------------------
(Address and telephone number of (Address and telephone number of
principal executive offices) 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
--------------------------------------------------------
(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]
3,000,000 Shares
Essential Innovations Technology Corp.
- --------------------------------------------------------------------------------
This prospectus relates to the resale of up to 3,000,000 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
$1.25 per share until our common stock is traded on the OTC Bulletin Board or
other securities exchange, 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.
- --------------------------------------------------------------------------------
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 _______________, 2004.
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 providing eco-friendly
lifestyle enhancement technologies for the betterment of energy, water, air and
health. Our primary efforts are focused on the 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.
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, 2003, we incurred a net
loss of approximately $2.4 million, and our cumulative loss from our inception
through October 31, 2003, was approximately $3.2 million. At October 31, 2003,
we had a net stockholders' deficit of approximately $339,000. Accordingly, the
independent auditors' reports accompanying our audited consolidated financial
statements as of fiscal years ended October 31, 2003 and 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 British Columbia. We have
now installed prototypes into pilot projects in the field and have commenced
selling and installing the EI Elemental Heat Energy System.
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. 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 continue to seek potential land acquisitions that would provide us
the opportunity 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,
2
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.
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.
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 #101 - 5219 192nd Street, Cloverdale, British
Columbia, Canada V3S 4P6. Our telephone number at that facility is 604-574-9595
and our facsimile number there is 604-574-9597.
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.
Summary Consolidated Financial Data
The following summary of historical consolidated financial information
for the nine-month period ended July 31, 2004, the fiscal years ended October
31, 2003 and 2002, and from the date of inception through July 31, 2004, is
derived from our unaudited and audited consolidated financial statements
included in this prospectus:
Nine Fiscal Fiscal
Months Ended Year Ended Year Ended Cumulative
July 31, October 31, October 31, (Since
2004 2003 2002 Inception)
-------------- -------------- -------------- ---------------
STATEMENT OF OPERATIONS DATA:
Sales.......................................... $ -- $ -- $ 8,544 $ 8,544
Loss for the period............................ (1,226,735) (2,410,137) (613,341) (4,322,878)
Loss per share-basic and diluted............... (0.10) (0.23) (0.07)
Weighted average shares........................ 11,708,162 10,583,026 9,394,841
BALANCE SHEET DATA (as at):
Working capital (deficit)...................... $ (841,742) $ (413,233) $ (220,408) $ (841,742)
Total current assets........................... 27,742 29,619 6,568 27,742
Long-term debt................................. -- -- -- --
Total stockholders' equity (deficit)........... (785,274) (338,735) (186,340) (782,274)
3
RISK FACTORS
Risk Factors Relating to our Business
We are insolvent, are in arrears on current accounts and on salaries
and wages to our employees, and 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 ended October 31, 2003, exceeded the cash we had available. We are
currently insolvent and we are in arrears on our current accounts and on
salaries and wages to our employees. 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 reports on our consolidated financial
statements for the year ended October 31, 2003 and 2002.
We currently have no significant operating capital and will need to
raise additional capital to implement our business plan.
We presently have no significant operating capital. We believe that we
will need to raise approximately $1,500,000 to be able to meet our preliminary
production targets by the end of fiscal year 2005. We have no commitments for
that funding, and we cannot provide any assurance that we will raise any
meaningful amount of capital. We will need to seek additional financing from the
sale of equity or 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.
Our current liabilities continue to increase, and if those to whom we
owe accounts and notes payable were to demand payment, we would be
unable to do so.
At July 31, 2004, we had total current liabilities of approximately
$869,000, including accounts payable at approximately $315,000, accrued expenses
of approximately $89,000, accrued wages of approximately $169,000, and notes
payable to related parties and amounts due to stockholders of approximately
$33,000. As of the same date, we had cash of only approximately $13,000. If
those to whom these payments are due were to demand immediate payment, as they
are entitled to do, we would be unable to make the required payment and would be
subject to liability if our creditors chose to enforce their rights, which could
result in our bankruptcy and liquidation, at worst. Under such a scenario, our
assets would be distributed to our creditors leaving nothing to be distributed
to our stockholders.
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.
4
We have not obtained approvals for our EI Elemental Heat Energy System
from either the Canadian Underwriters Laboratories 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
Underwriters Laboratories ("CUL"), 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.
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. 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 expertise of Steve Wuschke, our
chief technical officer, Jason McDiarmid, our chief executive officer, and Peter
Bond, our chief operating officer. If we are unable to retain these executive
officers, 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. We have not obtained key man life
insurance on our officers or directors. 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.
It may be difficult for our stockholders to enforce any civil
liabilities against us or our officers or 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
5
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
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 directors, 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 December 10, 2004, the directors, executive officers and holders
of 5% or more of our outstanding common stock together beneficially owned
6,580,357 shares, or approximately 50.5%, 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, if the relative strength of the dollar increases as related to the
value of the Canadian dollar and the relevant Asian currency, our financial
performance would likely be adversely affected and it would become more
6
difficult to compete with entities whose operations were conducted outside the
United States in the relevant currencies. 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.
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 adversely affect the price and liquidity of shares purchased
in this offering in any public trading market that may develop.
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 13,022,206 shares of common stock
currently issued and outstanding, approximately 10.0 million shares were issued
in excess of one year ago and more than 8.0 million 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.
There are certain rules applicable to our common stock as a "penny
stock," and those rules may limit the liquidity and the resale of our
common stock.
The Securities and Exchange Commission, or the SEC, has promulgated
rules governing over-the-counter trading in penny stocks, defined generally as
securities trading below $5 per share that are not quoted on a securities
exchange or Nasdaq or which do not meet other substantive criteria. Under these
rules, our common stock is currently classified as a penny stock. As a penny
stock, our common stock is currently subject to rules promulgated by the SEC
that impose additional sales practice requirements on broker-dealers that might
sell such securities to persons other than established customers and
institutional accredited investors. For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written consent to the transaction prior to sale.
Further, if the price of the stock is below $5 per share and the issuer does not
have $2.0 million or more net tangible assets or is not listed on a registered
national securities exchange or Nasdaq, sales of such stock in the secondary
trading market are subject to certain additional rules promulgated by the SEC.
These rules generally require, among other things, that brokers engaged in
secondary trading of penny stocks provide customers with written disclosure
documents, monthly statements of the market value of penny stocks, disclosure of
the bid and asked prices, and disclosure of the compensation to the
broker-dealer and the salesperson working for the broker-dealer in connection
with the transaction. If a trading market for our common stock develops, these
rules and regulations may affect the ability of broker-dealers to sell our
7
common stock, thereby effectively limiting the liquidity of our common stock.
These rules may also adversely affect the ability of persons that acquire our
common stock to resell their securities in any trading market that may exist at
the time of such intended sale.
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 the selling stockholders are offering our common stock is reasonable or
whether the statements we have made herein are accurate and complete.
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 price of the common
stock.
We have issued and outstanding options and warrants to purchase up to
an additional 5,560,000 shares of common stock, with the 5,260,000 options
having a weighted average exercise price of approximately $0.76 per share and
the 100,000 warrants having a weighted average exercise price of approximately
$0.25 per share. The existence of such options and warrants may prove to be a
hindrance to future financing, and the exercise of options and warrants may
further dilute the interests of the stockholders. The possible future resale of
common stock issuable on the exercise of such options and warrants could
adversely affect the price of our common stock in any trading market that might
develop. Further, the options and warrants may be exercised 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
No Net Proceeds to Us
We will receive no proceeds from the sale of our common stock by the
selling stockholders.
Common Stock and Dividend Policy
Common Stock
There is no public trading market for our common stock.
As of December 10, 2004, we had 13,022,206 shares of common stock
issued and outstanding. Of those shares, more than 8.0 million shares were
issued more than two years ago, and approximately 10.0 million 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 do not have any
shares of preferred stock issued and outstanding. We are registering the resale
of 3,000,000 shares of common stock for the selling stockholders identified in
this registration statement.
We have reserved for issuance 5,560,000 shares of common stock upon the
exercise of issued and outstanding options and warrants.
As of December 10, 2004, there were approximately 140 holders of our
common stock.
Penny Stock Regulations
Our stock is presently regulated as a penny stock and broker-dealers
will be subject to such regulations that impose additional requirements on us
and on broker-dealers that want to publish quotations or make a market in our
common stock. See Risk Factors: Risks Related to our Common Stock-- There are
certain rules applicable to our common stock as a "penny stock," and those rules
may limit the liquidity and the resale 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.
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.
9
Introduction
Our plan of operation should be reviewed in light of the following
uncertainties:
o Since our inception in February 2001, we have been unable to
produce any material revenues.
o Our cumulative loss is continuing to grow and our accounts
payable and loans payable are increasing.
o We are unable to predict with certainty how soon we will have
the EI Elemental Heat Energy System ready to market.
o Even if we are able to develop and market the EI Elemental
Heat Energy Systems in a way that enables us to be competitive
with other industry participants, our success will be
dependent in many ways on factors outside our control, such as
the costs of more traditional heating sources and governmental
policies that encourage or discourage the use of
nontraditional heating sources.
Plan of Operation
Over the next 12 months, we hope to continue to develop and
commercialize our EI Elemental Heat Energy System and identify a real property
acquisition that would provide us the opportunity to install the EI Elemental
Heat Energy System in a demonstration project. To date, we have generated no
material 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 reports on our audited consolidated financial statements for the fiscal
years ended October 31, 2003 and 2002, our auditors stated that conditions exist
that raise substantial doubt as to our ability to continue as a going concern.
Our net losses for the year ended October 31, 2003, and the three and
nine months ended July 31, 2004, of approximately $2.4 million, $320,000 and
$1,227,000, respectively, are primarily attributable to research and development
and general and administrative costs. As of October 31, 2003, we had total
assets of approximately $104,000, total current liabilities of approximately
$443,000, and approximately $2,600 in cash. For the fiscal year ended October
31, 2003, research and development and general and administrative costs, and an
impairment charge for media credits were the primary contributors to the
resulting additional losses for the period. As of July 31, 2004, we had total
assets of approximately $84,000, total current liabilities of approximately
$869,000, and approximately $13,000 in cash. We continue to have approximately
$230,000 owed to providers of professional services that are past due and
$33,000 in loans from related parties that have no specified due date. We have
been unable to make payments as due on several of our accounts, but none of our
creditors has declared us to be in default or threatened legal action as of the
date of this prospectus.
For the fiscal year ended October 31, 2002, we had de minimis revenue
of $173 from marketing our geoexchange products and approximately $8,400 from
our Asia-based consumer wellness products. This approximate $8,500 aggregate
revenue, with a cost of sales of approximately $6,300, constitutes our only
revenue since inception. We expect to continue to incur losses at least through
fiscal year 2005. 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 July 31, 2004, we obtained net cash of
approximately $1,137,000 from financing activities to provide cash of
10
approximately $1,080,000 required to fund operating activities and approximately
$43,000 for investments. Financing activities generated approximately $689,000
from the issuance of common and preferred stock, approximately $109,000 in net
loan proceeds and approximately $16,000 in tenant inducements. We intend to
continue to rely principally on the sale of securities and loans from
stockholders and others to meet our cash requirements. The terms of the loans
from stockholders are described under "Certain Transactions," page 26 herein. We
may seek to sell our common or preferred stock in private placements outside the
United States. We have no commitments from anyone to purchase our common or
preferred stock or to loan us additional funds. 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 fiscal year ended October 31, 2003, we incurred
approximately $1.7 million in general and administrative expenses, $166,000 for
research and development expenses, and a charge for impairment of media credits
of $440,000, requiring cash of approximately $306,000. We initially recorded the
media credits at our best estimate of the fair value of the preferred shares
issued in exchange, being $1.10 per preferred share, in accordance with the
requirements of FASB Statement 123. In reaching this decision, we determined
that the fair value of the consideration given (i.e. preferred shares issued)
was more reliably determinable than the fair value of the media credits received
in the exchange. The estimated fair value of $1.10 per share was determined
after considering, among other things, the fact that common shares were being
issued for $1.00 per share in arm's-length, cash-based transactions at or near
the date the media credits were acquired. At the time the media credits were
recorded as an asset, we believed that we would be able to sell the media
credits in a short time period for at least the amount recorded. An impairment
charge was subsequently recognized for the fully carrying amount of the media
credits only after we failed to successfully locate a buyer for the credits and
reached a determination that it was no longer reasonable to expect that we would
be able to realize any economic benefit from the asset through sale or use. We
have subsequently agreed to redeem the preferred stock for a total payment of
$4,000. We have returned all media credits to the seller and, based upon the
terms of the agreement and the verbal assurances from Millennium that it was
returning the preferred stock certificate to us for cancellation, deemed the
preferred shares cancelled and provided stop-transfer instructions to our
transfer agent pending physical return of the certificate. During the nine-month
period ended July 31, 2004, we incurred approximately $953,000 in general and
administrative expenses and approximately $273,000 in research and development
expenses. Based on this recent experience and our current level of expenditures,
we estimate that we will require cash of approximately $400,000 for research and
development expenses and general and administrative expenses per quarter through
October 31, 2005, including salaries to officers and directors, in addition to
the funds required for our EI Elemental Heat Energy System. Actual expenditures
will depend both on the level of our general and administrative requirements and
the availability of funds.
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 Underwriters Laboratories ("CUL") and Underwriters
Laboratories, Inc. ("UL") in early 2005. We have spent several months preparing
our submission for those certifications. We have now completed the planning and
the necessary material and component lists we will require to manufacture
systems for submission and testing, and we expect to have systems ready to be
submitted by March 2005. The EI Elemental Heat Energy System has been in
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 geofield, is now complete. The cost for the
completion of this first pilot project will be approximately $17,500, including
the drilling, installation of the geofield, 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. Our second pilot project, in
11
a new home near Horseshoe Bay in West Vancouver, British Columbia, is now
completely installed and operating successfully. We are now selling and
installing the EI Elemental Heat Energy System on a commercial basis.
We anticipate that we will require approximately $1.5 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, 2005. 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 CUL and the UL certification approvals for the technology before
we are in a position to build and supply complete finished products without
further adjustments or enhancements to our manufacturing process. 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 $2.0 million 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 initial commercialization of the EI Elemental Heat Energy System.
Our research and development activities are centered in two areas. The
primary focus of our research and development activities is to prepare the EI
Elemental Heat Energy System for submission to UL for both safety and efficiency
testing, which includes a mechanical redesign and electrical safety conformance.
The mechanical redesign entails reconfiguring the existing EI Elemental Heat
Energy System to be smaller, more efficient, easier to produce and easier to
maintain. The electrical safety conformance involves following strict electrical
safety standards for electrical design and production and developing coherent
schematics that users, repairmen and safety inspectors can understand. The
secondary, but parallel focus, of our research and development activity includes
designing manufacturing tools needed to produce the EI Elemental Heat Energy
System efficiently. We estimate that our research and development activities
will require approximately $100,000 to $150,000 during the fiscal year ending
October 31, 2005.
We have begun 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 hope to take a
50% advance from clients on sales orders, which would enable us to maintain
sales volume and inventory without having to increase significantly our working
capital requirement. We have a staff of three salespeople who are to be
remunerated via commission, which reduces any increment in fixed salary
expenditure.
We 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.
We also anticipate that we will require approximately $1.5 million by
the end of the 2005 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 300 units of the EI
Elemental Heat Energy System by the end of fiscal 2005.
12
Business and Property
Essential Innovations Technology Corp.
Essential Innovations Technology Corp. is providing 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 other products; and
o development of enhancements to the core technology of our EI
Elemental Heat Energy System that we believe would improve its
performance 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.
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.
13
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, which represents the product of our research and
development activities, 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. In the fiscal years ended October 31, 2003, and October 31, 2002,
we spent approximately $166,000 and $159,000, respectively on research and
development activities. 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 are now beginning to sell and install.
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.
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
14
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 and Marketing Development
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
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, 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. We anticipate that the home, which is undergoing
significant renovations unrelated to our pilot project, will be ready for us to
begin the next phase of the installation in July or August 2004. The EI
Elemental Heat Energy Systems will be replacing a natural gas furnace and a
natural gas hot water heater. Our second pilot installation, in a new home near
Horseshoe Bay in West Vancouver, British Columbia, is now completely installed
and operating successfully.
To source potential future sales in the Asian marketplace, we have
retained two individuals under consulting agreements to help develop future
sales, marketing and distribution channels, as well as to investigate potential
strategic alliances or joint ventures, for the EI Elemental Heat Energy System
in Asia.
Approvals
We intend to submit our EI Elemental Heat Energy System to both the
Canadian Underwriters Laboratories ("CUL") and Underwriters Laboratories, Inc.
("UL") for approval in early 2005. 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 CUL approval, UL approval, or both.
However, we have not yet submitted the EI Elemental Heat Energy System to the
15
CUL or UL for approval, and we cannot provide any assurance that we will
ultimately receive the approval of either organization.
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 expose our product in local,
regional, national and international media.
Pricing
The EI Elemental Heat Energy System has a retail price ranging between
$3,000 and $12,000 depending upon the system sizing and features, with no units
available between one and ten tons of heating and cooling capacity.
In addition to the cost of the system, there will be a significant
installation requirement for drilling and ground coil placement of from $5,000
to $20,000, dependent upon the drilling and trenching requirement. We anticipate
that a typical total price for the system and installation will be between
$15,000 and $40,000 for a standard residential installation. 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 three to seven years, depending on local
electrical power rates.
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
16
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 the aeration technology we have acquired, although we intend to retain it
because we hold it under an agreement that imposes no obligations on us other
than the obligation to pay royalties to the person from whom we acquired the
technology in the event we are successful in using it commercially.
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
possible public image benefits from using environmentally friendly technologies,
as well as marketing and revenue benefits. We also believe that by acquiring
land, we may be able to contribute 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
former 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. In October 2003, Mr. Bond agreed to serve as our chief operating officer,
and 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.
Consultants
We maintain a consulting agreement with Paul Yu, a resident of
Vancouver, British Columbia. Mr. Yu's agreement was entered into as of October
1, 2003, for a term of one year, for which he was paid an aggregate of 50,000
shares of common stock upon entering into the agreement. Mr. Yu is the owner of
a print shop, and his public relations services have consisted largely of
printing our promotional and sales materials. Mr. Yu's agreement has been
renewed for an additional two-year term for an additional issuance of 150,000
shares of common stock.
Millennium Capital Quest Corp.
In February 2003, we entered into an agreement with Millennium Capital
Quest Corp., or Millennium, under which Millennium would provide us with certain
17
investor financial relations, public relations, and consulting services. As part
of its service package, Millennium offered us the opportunity to purchase $25
million in retail rate card media credits, or the media credits, for $12.5
million. The media credits purportedly represented the right to purchase
advertising by television, print, radio, Internet, magazine, facsimile, direct
mail and telephone. At the time, Millennium assured us that it would be able to
assist us with the resale of the media credits. We agreed to purchase the media
credits and paid Millennium 400,000 shares of preferred stock, with an agreement
to pay the remainder of the purchase price upon the resale of the media credits.
The preferred stock we issued to Millennium was convertible into common
stock upon the later of 18 months after the date of the agreement (which would
be August 14, 2004), or 180 days after our initial public offering, provided
that Millennium had raised a minimum of $10 million through the initial public
offering. The preferred stock was redeemable by us at $0.01 per share if the
media credits were not honored by the providers or if any media credits remain
unused after their expiration.
Millennium was unsuccessful in its efforts to assist us in reselling
the media credits. Based on this lack of success, we first took an impairment
charge against the recorded value of the media credits. See Management's
Discussion and Analysis or Plan of Operation: Plan of Operation. Subsequently,
in June 2004, we entered into an agreement with Millennium that permitted us to
terminate the agreement and redeem the preferred stock at the contractual $0.01
per share price. We have returned the media credits to Millennium and, based
upon the terms of the agreement and the verbal assurances of Millennium that it
was returning the preferred stock certificate to us for cancellation, deemed the
preferred shares cancelled and provided stop transfer instructions to our
transfer agent pending physical return of the certificate.
Properties
Our United States office is located in Bellingham, Washington. Our
administrative, research and development facility is currently located in
British Columbia, Canada, occupying approximately 18,900 square feet. We have
performed significant leasehold improvements to the site. Our current lease
expires in 2007 and has two additional two-year renewal options. We believe that
these facilities will be more than adequate in the future for our continued
research and development needs.
We intend to maintain our research, development and manufacturing 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.
18
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.
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 34 President, Chief Executive Officer
and Director
Steve Wuschke 30 Chief Technical Officer and Director
Kenneth G.C. Telford 55 Secretary/Treasurer, Chief Financial
Officer and Director
Peter Bond 66 Chief Operating Officer and Director
David Rezachek, Ph.D., P.Eng. 54 Director
William Yang, P.Eng. 58 Director
William Baumgartner, P.Eng. 74 Director
Jeane Manning 64 Director
Russell White 61 Director
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
19
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
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 served as the chief financial officer and secretary for
Brek Energy Corporation, a publicly traded company, from July 1, 2000, to
October 31, 2003. 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.
Peter Bond has been our chief operating officer since October 2004 and
a director since August 2003. Mr. 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.
Board of Directors
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
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.
20
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
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.
Russell White has more than 25 years experience in corporate
management. Mr. White spent 33 years employed by Pfizer, Inc., serving as
Regional Sales Manager for the Mid-Atlantic Region for 10 years, where he
supervised 10 district managers and 125 sales representatives. Mr. White was
inducted into Pfizer's Hall of Fame in 1995. Since his retirement from Pfizer in
1999, Mr. White has engaged in management consulting and currently serves as the
Senior Assistant Soccer Coach for Union University. Mr. White received a B.S.
degree in biology from Henderson State University in Arkadelphia, Arkansas, in
1965 and served in the United States Army from 1965-67.
21
Executive Compensation
The following table sets forth, for the last three fiscal years of the
Company, the annual and long-term compensation earned by, awarded to, or paid to
the person who was our Chief Executive Officer. No officer or employee earned in
excess of $100,000 in any of the last three fiscal years:
Long-Term Compensation
------------------------------
Annual Compensation Awards Payouts
------------------------------------ --------------------- --------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Restricted Underlying All
Year Other Annual Stock Options/ LTIP Other
Name and Principal Ended Compensation Award(s) SARs Payouts Compen-
Position Oct. 31 Salary ($) Bonus ($) ($) ($) (no.) ($) sation ($)
- ------------------- ---------- ----------- ---------- ------------- ---------- ---------- ------- -----------
Jason McDiarmid 2003 4,743(1) -- 10,000(2) -- -- -- --
President 2002 10,671 -- 2,182(2) -- -- -- --
(CEO) 2001 18,523 -- -- -- -- -- --
_______________
(1) Of the amount due Mr. McDiarmid for the fiscal year ended October 31, 2003,
we paid him $4,743 and accrued but deferred payment of $126,508, of which
$85,258 was forgiven as described below.
(2) Vehicle lease.
In September 2003, we formalized agreements with Mr. McDiarmid and
certain other officers under which they agreed to forsake and waive any claim to
payment of the salaries that have accrued and were unpaid at July 31, 2003, in
consideration of the issuance of options to purchase shares of our common stock
at the price of $0.75 per share. Mr. McDiarmid forgave $85,258 and received
options to purchase 113,000 shares of our common stock under this agreement.
Effective August 1, 2003, our board of directors approved agreements
with Messrs. Jason McDiarmid, our chief executive officer, Kenneth Telford, our
chief financial officer, and Steve Wuschke, our chief technical officer, at
annual amounts of $165,000, $150,000, and $132,000, respectively. Through the
date of this prospectus, payments due to each of these officers from August 1,
2003, forward have been accrued but unpaid. Although we will not pay these
amounts until such time as the board of directors determines that we have
sufficient financial resources to commence payment, significant portions of
these accrued but unpaid amounts were converted into common stock in March 2004
and October 2004. See Certain Transactions: Stock and Option Issuances. Mr.
Telford has assigned the right to receive amounts due to him to Denon Capital
Strategies, Ltd., an entity of which he is a director.
22
Equity Compensation Plan Information
As of December 10, 2004, 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 December 10, 2004:
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....... 5,560,000 $0.78 --
---------
Total...................... 5,560,000 $0.78 --
=========
These options are immediately vested (with the exception of 75,000 options that
vest in March 2005), have exercise prices ranging from $0.25 to $1.50, 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 the auditors who reported on our
financial statements for the fiscal year ended October 31, 2002, 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
23
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.
Principal Stockholders
The following table sets forth certain information as of December 10,
2004, 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:
Stockholder(1) Description Number %(2)(3)
- ------------------------------------------------------------- ----------------------- ---------------- -------------
Common Stock:
Morpheus Financial Corp.(4)............................... Common stock 1,100,000 8.4%
(Principal stockholder) Options 500,000 3.7
Room 603-4 Valley Centre Warrants 50,000 0.4
80-82 Morrison Hill Road ----------
Wanchai, Hong Kong 1,650,000 12.6
Ecogenics Limited(5)...................................... Common stock 800,000 6.1
(Principal stockholder)
# 1703, 17th Floor
Hing Yip Commercial Centre
272-284 Des Voeux Rd Central
Hong Kong SAR
Fannie Mao Guterres....................................... Common stock 790,580 6.1
(Principal stockholder)
1004 - 2680 Bayshore Drive
Vancouver, B.C.
V6G 3H6
Stevan Perry.............................................. Common stock 1,006,360 7.7
(Principal stockholder) Options(6) 803,000 5.8
#101-5219 192nd Street ----------------
Cloverdale, BC, Canada V3S 4P6 1,809,360 13.1
Jason McDiarmid........................................... Common stock 846,667 6.5
(Principal stockholder, director and officer) Options(6) 913,000 6.6
#101-5219 192nd Street ----------------
Cloverdale, BC, Canada V3S 4P6 1,759,667 12.6
24
Stockholder(1) Description Number %(2)(3)
- ------------------------------------------------------------- ----------------------- ---------------- -------------
Steve Wuschke............................................. Common stock 977,243 7.5
(Principal stockholder, director and officer) Options(6) 912,000 6.5
#101-5219 192nd Street ----------------
Cloverdale, BC, Canada V3S 4P6 1,889,243 13.6
Kenneth G.C. Telford...................................... Common stock 649,507 5.0
(Director and officer) Options(6) 575,000 4.2
#101-5219 192nd Street ----------------
Cloverdale, BC, Canada V3S 4P6 1,224,507 9.0
William Baumgartner....................................... Common stock 70,000 0.5
(Principal stockholder Options(6) 100,000 0.8
and director) ----------------
#101-5219 192nd Street 170,000 1.3
Cloverdale, BC, Canada V3S 4P6
William Yang ............................................. Common stock 50,000 0.4
(Director) Options(6) 100,000 0.8
#101-5219 192nd Street ----------------
Cloverdale, BC, Canada V3S 4P6 150,000 1.1
Jeane Manning............................................. Common stock 5,000 0.0
(Director) Options(6) 50,000 0.4
#101-5219 192nd Street ----------------
Cloverdale, BC, Canada V3S 4P6 55,000 0.4
David Rezachek............................................ Common stock 25,000 0.2
(Director) Options(6) 50,000 0.4
#101-5219 192nd Street ----------------
Cloverdale, BC, Canada V3S 4P6 75,000 0.6
Peter Bond................................................ Common stock 260,000 2.0
(Director) Options (6) 200,000 1.5
#101-5219 192nd Street ----------------
Cloverdale, BC, Canada V3S 4P6 460,000 3.5
Russell White............................................. Options(7) 75,000 0.6
(Director)
#3 Deepwood Drive
Jackson, TN
All officers and directors
as a group (9 persons).................................... Common stock 2,883,417 22.1
Options(6)(7) 2,975,000 18.6
----------------
5,858,417 36.6%
================
- -----------------
(1) Except as otherwise noted, shares are owned beneficially and of record, and
such record stockholder has sole voting, investment and dispositive power.
(2) Without giving effect to the sale of any shares by such stockholders in the
offering. See Selling Stockholders at page 31.
(3) 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.
(4) The control person for Morpheus Financial Corp. is Queenie Cheung.
(5) The control person for Ecogenics Limited is Sytske Kimman.
(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
$1.50 per share with various expiration dates ranging from 2007 to 2012.
(7) 37,500 have an exercise price of $1.00 per share and 37,500 have an
exercise price of $1.50 per share and expire on July 1, 2010.
25
Certain Transactions
Stock and Option Issuances
At April 30, 2001, we issued an aggregate of 70,000 shares of our
common stock to Diana Allen, William Baumgartner, David Rezachek, and Jeane
Manning, all members of our board of directors on that date, 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.
Kenneth G.C. Telford joined us in January 2003 under an agreement that
provided for him to serve as our chief financial officer, providing his own
staff. Effective in August 2003, before that agreement expired, we entered into
a subsequent agreement with Mr. Telford to provide those services, which does
not require him to provide staff. Mr. Telford continues to provide us his
services under that agreement. Under those agreements, Mr. Telford and his staff
earned an aggregate of $90,454 in fees and expenses, 175,000 shares of our
common stock, and options to purchase another 475,000 shares of our common stock
at prices ranging from $0.50 to $1.00 per share during the fiscal year ended
October 31, 2003. During the nine-month period ended July 31, 2004, we accrued
$75,840 in fees and expenses under that agreement. At Mr. Telford's request, all
fees and expenses under the agreements have been paid to Denon Capital
Strategies, Ltd., an entity of which he is a director.
In September 2003, the board of the Company ratified an agreement
entered into on July 31, 2003, and agreed to issue 67,000 additional shares of
our common stock to Mr. Telford, upon the conversion of $50,000 owed to him in
accrued but unpaid fees at an agreed conversion rate of $0.75 per share. At Mr.
Telford's request, those shares were issued in the name of Denon Capital
Strategies, Ltd. Also in September 2003, we agreed to issue to Mr. Telford
200,000 shares of our common stock as consideration for his agreement to enter
into the subsequent agreement with us.
In March 2004, we agreed to issue 119,019 shares of common stock to Mr.
Telford in conversion of $89,264 in accrued but unpaid fees and expenses. At Mr.
Telford's request, those shares were issued in the name of Denon Capital
Strategies, Ltd.
On March 1, 2004, we issued options to purchase 150,000 shares of
common stock to Russell White in recognition of his agreement to serve on our
board of directors. Of these options, 75,000 were vested upon their grant
(37,500 of which have an exercise price of $1.00 per share and 37,500 of which
have an exercise price of $1.50 per share) and expire on July 1, 2010; the other
75,000 options become vested on March 1, 2005 (37,500 of which have an exercise
price of $1.00 per share and 37,500 of which have an exercise price of $1.50 per
share) and expire on March 1, 2010.
In September 2003, we agreed to issue 25,000 shares of our common stock
to Peter Bond in recognition of his agreement to serve on our board of
directors.
In September 2003, the board of the Company ratified agreements entered
into on July 31, 2003, with three of our executive officers, two of whom are
also directors, to issue options to purchase an aggregate of 278,000 shares of
our common stock, upon the conversion of a total of $208,786 owed to them in
26
accrued but unpaid salary. Also in September 2003, we agreed to issue the same
three executive officers options to purchase an aggregate of 650,000 shares of
our common stock as consideration for their agreements to enter into new
employment agreements with us.
In March 2004, we entered into informal agreements with four of our
executive officers, three of whom are directors, to issue 421,486 shares of
common stock upon the conversion of $316,115 in accrued but unpaid salary. Those
agreements were not reduced to writing.
In October 2004, we agreed to issue 225,000 shares of common stock to
our director Peter Bond in recognition of his agreement to serve as our chief
operating officer. At the same time, we granted Mr. Bond options to purchase
300,000 shares of our common stock--150,000 of those options were immediately
exercisable (75,000 of which have an exercise price of $1.00 per share and
75,000 of which have an exercise price of $1.50 per share) and the remaining
150,000 options vest on September 15, 2005, subject to Mr. Bond's continued
employment with us (75,000 of those options have an exercise price of $1.00 per
share and 75,000 have an exercise price of $1.50 per share).
In October 2004, we agreed to issue an aggregate of 368,000 shares of
our common stock to four of our executive officers, three of whom are also
directors, upon conversion of a total of $276,000 in accrued but unpaid salary.
Loans
Morpheus Financial Corporation
On June 1, 2001, Morpheus Financial Corporation, of which our director
William Yang was then 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 $103,342 from Morpheus
Financial Corporation. William Yang, a member of our board of directors, was a
principal of Morpheus until September 2003. 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 our board of directors'
determination as to the value of the shares at the time of the settlement, and
we recognized an additional expense of $72,645. At the date of this prospectus,
the remaining loan amount now outstanding to Morpheus totals $33,600, including
interest. (See note 5 to our audited consolidated financial statements for the
fiscal year ended October 31, 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
27
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 and repaying the remaining $12,547 of
principal and accrued interest in cash. (See note 5 to our audited consolidated
financial statements for the fiscal year ended October 31, 2003.) The shares
were recorded at their estimated fair value of $40,000, calculated by reference
to our board of directors' determination as to the value of the shares at the
time of the settlement, and as a result, we recognized additional expense of
$20,000.
Steve Wuschke
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 5 to our audited consolidated financial
statements for the fiscal year ended October 31, 2003.)
In January 2004, we borrowed an additional $31,704.24 from Mr. Wuschke.
This loan is unsecured, without specific terms of repayment, and does not bear
interest. 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 3 to the unaudited interim
financial statements for the nine-month period ended July 31, 2004.)
Jason McDiarmid
On October 1, 2003, we borrowed $33,000 from Jason McDiarmid, our
president and chief executive officer. The loan is payable on demand after March
31, 2004, accrues interest at the rate of 12%, regardless of the date of
repayment, and is unsecured. As additional consideration for making the loan, we
also issued to Mr. McDiarmid options to purchase 25,000 shares of our common
stock at an exercise price of $0.25 per share and options to purchase 25,000
shares of our common stock at an exercise price of $0.50 per share, all of which
are exercisable until January 1, 2011. 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 5 to the audited consolidated financial statements for the fiscal year
ended October 31, 2003.)
On October 20, 2003, we borrowed $10,000 from Jason McDiarmid, our
president and chief executive officer. The loan is payable on demand after March
31, 2004, accrues interest at the rate of 9% per year, calculated and payable
monthly, and is unsecured. 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 5 to
the audited consolidated financial statements for the fiscal year ended October
31, 2003.)
In January 2004, we borrowed an additional $31,703.37 from Mr.
McDiarmid. This loan is unsecured, without specific terms of repayment, and does
not bear interest. 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 3 to the unaudited
interim financial statements for the nine-month period ended July 31, 2004.)
28
In March 2004, we issued 76,618 shares of common stock to Mr. McDiarmid
upon the conversion of $57,464 of principal and accrued interest due under these
loans.
In October 2004, we borrowed an additional $95,833.33 from Mr.
McDiarmid. This loan is unsecured, without specific terms of repayment, and does
not bear interest. 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.
Kenneth G.C. Telford
In two installments on August 14, 2003, and September 1, 2003, we
borrowed an aggregate of CDN$6,000 (approximately US$4,300) on the dates of the
installments. This loan is payable on demand after March 31, 2004, accrues
interest at the rate of 9% per year, calculated and payable monthly, and is
unsecured. 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 5 to the audited consolidated
financial statements for the fiscal year ended October 31, 2003.)
In March 2004, we issued 10,975 shares of common stock to Mr. Telford
upon the conversion of $5,008 in principal and accrued interest due on this loan
and an additional $3,186 in advances made by Mr. Telford on our behalf.
Stevan Perry
In January 2004, we borrowed $31,703.37 from Mr. Perry. This loan is
unsecured, without specific terms of repayment, and does not bear interest. 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 3 to the unaudited interim financial statements
for the nine-month period ended July 31, 2004.)
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 December 10, 2004, we had 13,022,206 shares of common stock
issued and outstanding. 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.
29
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 December 10, 2004, we had reserved for issuance on exercise of
options and warrants an aggregate of 5,560,000 shares of common stock, with the
5,560,000 options having a weighted average exercise price of approximately
$0.78 per share and the 100,000 warrants having a weighted average exercise
price of $0.25 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 December 10, 2004,
no shares of preferred stock were issued and outstanding.
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:
Before Offering After Offering
------------------ -------------------------------
To Be
Name of Beneficial Owner Number(1) Registered Number(1) Percentage
------------------------ --------- ---------- --------- ----------
Steve Wuschke(2) 977,243 25,000 952,243 7.3%
Kenneth G.C. Telford(3) 649,507 90,000 559,507 4.3
Peter Bond(4) 260,000 20,000 240,000 1.8
Stevan Perry 1,006,360 45,000 961,360 7.4
Morpheus Financial Corp.(5) 1,100,000 300,000 800,000 6.1
Ecogenics Limited(6) 800,000 300,000 500,000 3.8
Fannie Mao Guterres(7) 790,580 125,000 665,580 5.1
J. Carl Guterres 22,000 11,000 11,000 *
Maria Paskalidis 88,000 44,000 44,000 *
Katherine Tam 219,000 99,000 120,000 *
Marco Abenante 474,600 180,000 294,600 2.3
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 334,985 116,000 218,985 1.7
Geoff Shoji 44,000 44,000 -- *
Troy Wood 22,000 11,000 11,000 *
Ryan Wallace 54,000 33,000 21,000 *
Erick Factor 22,000 22,000 -- *
Lyle Hampton 122,000 11,000 111,000 *
30
Before Offering After Offering
------------------ -------------------------------
To Be
Name of Beneficial Owner Number(1) Registered Number(1) Percentage
------------------------ --------- ---------- --------- ----------
Rory Stowell 40,000 20,000 20,000 *
Billy Paskilidis 58,680 48,680 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 48,000 12,000 36,000 *
Dominic Stann 10,000 5,000 5,000 *
Aaron Davison 15,000 5,000 10,000 *
Cliff Wuschke 50,000 50,000 -- *
Lesley Punt 10,000 5,000 5,000 *
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 13,700 5,000 8,700 *
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 *
Che Koostra-Nair 6,667 3,334 3,333 *
Norm Wuschke 80,000 40,000 40,000 *
Autoworld Sales & Leasing 100,480 52,724 47,756 *
John McCandless 100,250 40,000 60,250 *
Jessica Patrick 50,000 10,000 40,000 *
Vickie Lam 25,000 10,000 15,000 *
Rodica Cimpan 5,000 5,000 -- *
Agnes Lam 5,000 5,000 -- *
Lam Metal 10,000 10,000 -- *
Sidney Skerritt 10,000 5,000 5,000 *
Edward Lin 40,000 20,000 20,000 *
Luc Delestrade 32,303 5,000 27,303 *
Mark Spurr 3,898 3,666 232 *
Richard McDiarmid 150,000 55,000 95,000 *
Dave Speers 66,162 44,284 21,878 *
Matthew Norman 6,000 6,000 -- *
Neil Nijjer 4,000 4,000 -- *
Jean Paul Marques 4,000 4,000 -- *
Michele Falco 8,000 8,000 -- *
Ryan Dunn 30,000 10,000 20,000 *
Aaron Dunn 30,000 10,000 20,000 *
Marc Mathys 10,000 10,000 -- *
SOTA Instruments, Inc. 50,000 10,000 40,000 *
Miriam Campos 50,000 50,000 -- *
Paul Guterres 72,000 47,320 24,680 *
31
Before Offering After Offering
------------------ -------------------------------
To Be
Name of Beneficial Owner Number(1) Registered Number(1) Percentage
------------------------ --------- ---------- --------- ----------
Jack Quist 20,000 20,000 -- *
Selwyn Deokiesingh 10,000 10,000 -- *
Laura Taylor 10,000 10,000 -- *
Dylan Mahood 2,500 2,500 -- *
Karly Mahood 2,500 2,500 -- *
Garrett Greene 4,000 4,000 -- *
Linda White 25,000 25,000 -- *
Russell White(8) 25,000 25,000 -- *
Adam Brown 10,000 10,000 -- *
Thomas Adamson 10,000 10,000 -- *
Andrew Lewis 10,000 10,000 -- *
Estrella Valerio 10,000 10,000 -- *
Clarke Nakamoto 12,000 12,000 -- *
Lorne McDiarmid 5,000 5,000 -- *
Cathy McDiarmid 5,000 5,000 -- *
Grant Ritchie 10,000 10,000 -- *
Kyle McDiarmid 30,000 10,000 20,000 *
Shane Higgins 2,000 2,000 -- *
Angelita Fabros 16,000 16,000 -- *
Christy Fabros 25,000 25,000 -- *
Thelma Hietbrink 10,000 10,000 -- *
Fred Choy 10,000 10,000 -- *
Josephine Copon 75,000 25,000 50,000 *
Franco Cortese 55,000 55,000 -- *
Massimo Nicoletti 25,000 25,000 -- *
Johnny Mah 15,000 15,000 -- *
Geotech Drilling 10,000 10,000 -- *
David Bridger 25,000 10,000 15,000 *
Ruth Findlay 10,000 10,000 -- *
Sean Piekaar 63,774 41,896 21,878 *
Chris Watson 10,000 10,000 -- *
Terry Eyton 10,000 10,000 -- *
Bryce Eyton 10,000 10,000 -- *
Shinji Hayama 73,440 73,440 -- *
Jennifer Anderson 5,000 5,000 -- *
Lexcorp International 17,668 17,668 -- *
Greg Page 10,000 10,000 -- *
Jeremy Oliver 15,000 5,000 10,000 *
Kevin Wuschke 20,000 10,000 10,000 *
Yoshitaka Takeuschi 25,000 25,000 -- *
Corrine Humphrey 250,000 34,988 215,012 1.8
Heather Speers 10,000 10,000 -- *
James D. Roberts 40,000 40,000 -- *
Doug Lockhart 20,000 20,000 -- *
32
Before Offering After Offering
------------------ -------------------------------
To Be
Name of Beneficial Owner Number(1) Registered Number(1) Percentage
------------------------ --------- ---------- --------- ----------
Brenda Lockhart 20,000 20,000 -- *
--------- --------- ---------
Total 9,569,047 3,000,000 6,569,047
========= ========= =========
- -----------------
* Less than 1%.
(1) Excludes options. See Principal Stockholders at page 24.
(2) Mr. Wuschke is our chief technical officer and a director.
(3) Mr. Telford is our secretary/treasurer, chief financial officer and a
director. Mr. Telford owns 360,155 shares in his own name and, as a
director of Denon Capital Strategies Limited, is deemed the beneficial
owner of 186,019 shares held by Denon Capital Strategies Limited.
(4) Mr. Bond is chief operating officer and a director.
(5) Morpheus Financial Corporation is a principal stockholder.
(6) Ecogenics Limited is a principal stockholder.
(7) Fannie Mae Guterres is a principal stockholder.
(8) Mr. White is a director.
Plan of Distribution
Determination of Offering Price
Our board of directors has determined the $1.25 per share offering
price based on its subjective assessment of our business prospects, including
its assessment of the potential of 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 Selling Stockholders
Sales by the selling stockholders will be at a fixed price of $1.25 per
share until our common stock is traded on the OTC Bulletin Board or other
securities exchange. At that 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;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
33
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 that 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 that 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 that 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.
There is no assurance that the selling stockholders will sell any or
all of the common stock in this offering.
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.
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
34
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.
We are subject to the reporting requirements of the Securities Exchange
Act of 1934, and we 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 are also available to you
free of charge at the Securities Exchange Commission's web site at
http://www.sec.gov.
Change in Accountant
On December 24, 2003, we dismissed KPMG, LLP, of Vancouver, British
Columbia, Canada ("KPMG"), as our principal accountant to audit and report on
our financial statements for the year ended October 31, 2003. The decision to
dismiss KPMG was made with the approval of our board of directors.
The reports of KPMG on our financial statements consisting of
consolidated balance sheet as of October 31, 2002 and 2001, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended October 31, 2002 and 2001, did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to audit scope or
accounting principles. KPMG's opinion in its report on our consolidated
financial statements as of and for the years ended October 31, 2002 and 2001,
expressed substantial doubt with respect to our ability to continue as a going
concern and contained a separate paragraph stating "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 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty."
In connection with our audits for the fiscal years ended October 31,
2002 and 2001, and any subsequent interim period preceding the dismissal of
KPMG, there were no disagreements with KPMG or reportable events on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to the
satisfaction of KPMG, would have caused it to make reference to the subject
matter of the disagreement in connection with its report.
On January 8, 2004, our board of directors approved the engagement of
Peterson Sullivan PLLC ("Peterson"), Seattle, Washington, as independent
accountant and auditor to report on our financial statements for the year ended
October 31, 2003.
No consultations occurred between us and Peterson during the two most
recent fiscal years and any subsequent interim period prior to Peterson's
appointment regarding either (i) the application of accounting principles to a
specific completed or contemplated transaction, the type of audit opinion that
might be rendered on our financial statements, or other information provided
that was considered by us in reaching a decision as to an accounting, auditing
or financial reporting issue, or (ii) any matter that was the subject of
disagreement or a reportable event requiring disclosure under Item 304(a)(1)(v)
of Regulation S-K.
35
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT................................................F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.....................F-2
FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2003
AND 2002
CONSOLIDATED BALANCE SHEET..............................................F-3
CONSOLIDATED STATEMENTS OF OPERATIONS...................................F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND
COMPREHENSIVE LOSS...................................................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS...........................F-6 and F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................F-8 - F-21
FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED
JULY 31, 2004
CONSOLIDATED BALANCE SHEET.............................................F-22
CONSOLIDATED STATEMENTS OF OPERATIONS..................................F-23
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND
COMPREHENSIVE LOSS..................................................F-24
CONSOLIDATED STATEMENTS OF CASH FLOWS.........................F-25 and F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................F-27 - F-36
36
[Peterson Sullivan PLLC Letterhead]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Essential Innovations Technology Corp.
Bellingham, Washington
We have audited the accompanying consolidated balance sheet of Essential
Innovations Technology Corp. (a development stage company) and subsidiaries as
of October 31, 2003, and the related consolidated statements of operations,
stockholders' deficit and comprehensive loss and cash flows for the year then
ended and for the period from February 9, 2001 (date of inception) to October
31, 2003. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company (a
development stage company) and subsidiaries as of October 31, 2003, and the
results of their operations and their cash flows for the year then ended and for
the period from February 9, 2001 (date of inception) to October 31, 2003, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has not generated positive cash flow from
operations since inception and has an accumulated deficit of $3,206,084 at
October 31, 2003. These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Peterson Sullivan PLLC
Peterson Sullivan PLLC
Seattle, Washington
January 9, 2004
F-1
KPMG LLP
Chartered Accountants
PO Box 10426 777 Dunsmuir Street Telephone (604) 691-3000
Vancouver BC V7Y 1K3 Telefax (604) 691-3031
Canada www.kpmg.ca
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors
Essential Innovations Technology Corp.
We have audited the accompanying consolidated statements of operations, cash
flows and stockholders' equity and comprehensive loss of Essential Innovations
Technology Corp. (a development stage enterprise) for the year ended October 31,
2002. 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 audit.
We conducted our audit in accordance with standards established by the Public
Company Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of the Company's 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 1 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 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG LLP (signed)
Chartered Accountants
Vancouver, Canada
April 23, 2003
KPMG LLP, a Canadian limited liability partnership is the Canadian member of
KPMG International, a Swiss nonoperating association.
F-2
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
October 31, 2003
(In United States Dollars)
ASSETS
Current Assets
Cash $ 2,626
Goods and services tax receivable 10,417
Inventory 13,076
Prepaid expenses 3,500
----------------
Total current assets 29,619
Property and Equipment, net 58,643
Deposits 15,855
----------------
$ 104,117
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 187,763
Accrued expenses 41,836
Accrued wages 99,224
Tenant inducements 1,950
Notes payable, related parties 67,440
Due to shareholders 44,639
----------------
Total current liabilities 442,852
Stockholders' Deficit
Preferred stock, $0.001 par value; 10,000,000 shares authorized;
400,000 shares issued and outstanding 400
Common stock, $0.001 par value; 100,000,000 shares
authorized; 11,355,985 shares issued and outstanding 11,356
Additional paid-in capital 2,870,399
Stock subscriptions receivable (90)
Deficit accumulated during the development stage (3,206,084)
Accumulated other comprehensive loss (14,716)
----------------
Total stockholders' deficit (338,735)
----------------
$ 104,117
================
See accompanying notes to consolidated financial statements.
F-3
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended October 31, 2003 and 2002, and the Period From
February 9, 2001 (Date of Inception) to October 31, 2003
(In United States Dollars)
Cumulative During
the Development
2003 2002 Stage
--------------- --------------- --------------
Revenue $ - $ 8,544 $ 8,544
Cost of Sales - 6,257 6,257
--------------- --------------- --------------
Gross profit - 2,287 2,287
Expenses
General and administrative 1,720,956 427,115 2,283,034
Research and development 166,316 158,854 373,092
Impairment of media credits 440,000 - 440,000
--------------- --------------- --------------
2,327,272 585,969 3,096,126
Other Income (Expense)
Interest expense (1,112) - (1,112)
Interest expense, related parties (81,823) (29,719) (111,542)
Interest income 70 60 409
--------------- --------------- --------------
(82,865) (29,659) (112,245)
--------------- --------------- --------------
Net Loss $ (2,410,137) $ (613,341) $ (3,206,084)
=============== =============== ==============
Loss per share - basic and diluted $ (0.23) $ (0.07)
=============== ===============
Weighted average number of shares
outstanding 10,583,026 9,394,841
=============== ===============
See accompanying notes to consolidated financial statements.
F-4
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
For the Years Ended October 31, 2003 and 2002, and the Period
From February 9, 2001 (Date of Inception) to October 31, 2001
(In United States Dollars)
Deficit Accumulated
Common Stock Preferred Stock Stock Accumulated Other
------------------- ----------------- Additional Subscrip- During the Compre- Total
Number of Number of Paid-in tions Development hensive Stockholders'
Shares Amount Shares Amount Capital Receivable Stage Loss Deficit
---------- ------- --------- ------ ----------- ---------- ----------- ----------- ------------
Balance, February 9, 2001 - $ - - $ - $ - $ - $ - $ - $ -
Net 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 issued for cash
of $0.25 per share 928,000 928 - - 231,072 - - - 232,000
Stock issue costs - - - - (2,800) - - - (2,800)
Subscription 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 year - - - - - - (613,341) - (613,341)
Foreign currency translation loss - - - - - - - (2,119) (2,119)
-----------
Comprehensive loss (615,460)
Subscriptions received - - - - - 29,505 - - 29,505
Common stock issued for cash 513,600 514 - - 201,286 - - - 201,800
Common stock issued for services
received 6,400 6 - - 3,194 - - - 3,200
Common stock subscribed (and
unissued) for services received 50,000 50 - - 24,950 - - - 25,000
Common stock subscribed (and
unissued) for cash 10,000 10 - - 4,990 - - - 5,000
Options and warrants issued for
services received - - - - 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)
Loss for the year - - - - - - (2,410,137) - (2,410,137)
Foreign currency translation loss - - - - - - - (5,877) (5,877)
-----------
Comprehensive loss (2,416,014)
Common stock issued for cash 364,945 365 - - 250,628 - - - 250,993
Common stock issued for equipment 223,960 224 - - 193,496 - - - 193,720
Common stock issued on settlement
of loans 370,580 371 - - 184,919 - - - 185,290
Common stock issued for services
received 666,500 666 - - 475,084 - - - 475,750
Common stock issued for option
on land 10,000 10 - - 9,990 - - - 10,000
Common stock issued on exercise
of options 50,000 50 - - 12,450 - - - 12,500
Variable stock compensation costs - - - - 362,500 - - - 362,500
Options issued in exchange for
services received - - - - 187,618 - - - 187,618
Options issued for financing - - - - 80,163 - - - 80,163
Preferred shares issued for prepaid
media credits - - 400,000 400 439,600 - - - 440,000
Common stock issued for settlement
of debt 67,000 67 - - 66,933 - - - 67,000
Stock issue costs - - - - (1,915) - - - (1,915)
---------- ------- ------- ----- ----------- -------- ----------- -------- -----------
Balance, October 31, 2003 11,355,985 $11,356 400,000 $ 400 $ 2,870,399 $ (90) $(3,206,084) $(14,716) $ (338,735)
========== ======= ======= ===== =========== ======== =========== ======== ===========
See accompanying notes to consolidated financial statements.
F-5
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31, 2003 and 2002, and the Period From
February 9, 2001 (Date of Inception) to October 31, 2003
(In United States Dollars)
Cumulative During
the Development
2003 2002 Stage
------------- ------------ -----------------
Cash Flows From Operating Activities
Loss for the period $ (2,410,137) $ (613,341) $ (3,206,084)
Adjustment to reconcile net loss for the period
to net cash used in operating activities
Loss (gain) on disposal of assets 8,985 - 8,985
Depreciation of property and equipment 18,009 12,689 41,421
Amortization of tenant inducements (3,635) (8,674) (14,092)
Common stock issued for services 75,000 3,200 78,200
Common stock issued to related parties for services 400,750 - 400,750
Common stock subscribed (and unissued) to related parties
for services received - 25,000 25,000
Common stock issued to related parties for
debt settlement and equipment 302,042 - 302,042
Options and warrants issued for services 51,827 71,333 123,160
Options and warrants issued to related parties for services 578,454 78,908 657,362
Charge for impairment of media credits 440,000 - 440,000
Changes in assets and liabilities
Goods and services tax receivable (6,094) 96 (10,417)
Inventory (576) - (576)
Prepaid expenses (3,180) 1,036 (3,500)
Accounts payable 139,585 43,828 187,763
Accrued expenses 4,162 20,717 41,836
Accrued wages 99,224 - 99,224
------------- ------------ ------------
Net cash used in operating activities (305,584) (365,208) (828,926)
Cash Flows From Investing Activities
Purchase of property and equipment (6,432) (7,149) (60,541)
Proceeds from disposal of assets 12,780 - 12,780
Deposits and other (1,595) (756) (5,855)
------------- ------------ ------------
Net cash provided by (used in) investing activities 4,753 (7,905) (53,616)
Cash Flows From Financing Activities
Issuance of common stock 249,078 232,305 689,083
Tenant inducements received 16,042
Advances from shareholders 28,513 102,523 145,169
Repayments to shareholders (21,413) (7,684) (29,897)
Note proceeds received 74,501 28,841 103,342
Note repayments (15,902) - (15,902)
------------- ------------ ------------
Net cash provided by financing activities 314,777 355,985 907,837
Foreign exchange gain (loss) on cash held in foreign currency (13,245) 143 (22,669)
------------- ------------ ------------
Net change in cash during the year 701 (16,985) 2,626
Cash at beginning of period 1,925 18,910 -
------------- ------------ ------------
Cash at end of period $ 2,626 $ 1,925 $ 2,626
============= ============ ============
See accompanying notes to consolidated financial statements.
F-6
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31, 2003 and 2002, and the Period From
February 9, 2001 (Date of Inception) to October 31, 2003
(In United States Dollars)
Cumulative During
the Development
2003 2002 Stage
------------ ------------ ------------
Supplementary Information
Interest paid $ 5,363 $ - $ 5,363
Non-cash transactions
Common shares subscribed in exchange for stock
subscriptions receivable - 25,211 25,211
Preferred shares issued for prepaid media credits 440,000 - 440,000
Automotive equipment acquired from a related party
for common shares 51,323 - 51,323
Common shares issued for deposit on proposed
land purchase 10,000 - 10,000
Common shares issued for purchase of inventory 12,500 - 12,500
Payment on notes payable to related parties by
issuance of common shares 20,000 - 20,000
Payment on shareholder debt by issuance of
common shares 72,645 - 72,645
See accompanying notes to consolidated financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In United States Dollars)
Note 1. Description of Business and Summary of Significant Accounting Policies
Organization
Essential Innovations Technology Corp. (the "Company") was incorporated under
the laws of the state of Nevada on April 4, 2001. The Company's subsidiary,
Essential Innovation Corporation ("EIC") is engaged in the development and
distribution of ecofriendly lifestyle enhancement technologies for the
betterment of energy, water, air and health. 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 company. Essential Innovations Asia Limited ("EIAL") was
incorporated as a wholly-owned subsidiary on April 9, 2002, for the purpose of
marketing under exclusive global rights, excluding Canada and the United States,
the bio-energetic devices produced by SOTA Instruments.
Future Operations
The Company's financial statements have been prepared using accounting
principles generally accepted in the United States 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 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. Failure to obtain sufficient additional funding would necessitate
the Company to reduce or limit its operating activities.
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 of 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.
Cash
Cash consists of checking accounts held at financial institutions in the United
States and Canada.
F-8
Inventories
Inventories of retail products are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation, unless
the estimated future undiscounted cash flows expected to result from either the
use of an asset or its eventual disposition is less than its carrying amount in
which case an impairment loss is recognized based on the fair value of the
asset.
Depreciation of property and equipment is based on the estimated useful lives of
the assets and is computed using straight-line and accelerated methods over
lives ranging between three and five years. Repairs and maintenance are charged
to expense as incurred. Expenditures for new facilities and those expenditures
that substantially increase the useful lives of existing properties are
capitalized, as well as interest costs associated with major capital projects
until ready for their intended use.
Tenant Inducements
Tenant inducements are related to a rent-free period received by the Company
upon entering into a lease for its research and development facilities and are
capitalized and amortized over the initial term of the related lease.
Research and Development Expenses
Research and development costs are expensed as incurred. Costs incurred to date
include personnel and facilities costs, depreciation and amortization of
research and development related property and equipment and licensing fees for
technology used in the development effort.
Advertising Expenses
Advertising costs are expensed as incurred. No advertising expense was incurred
in 2003 or 2002.
Revenue Recognition
Revenues from the sales of bio-energetic medical products are recognized as the
sales are made, the price is fixed and determinable, collectibility is probable
and no significant company obligations with regard to the products remain.
Future revenues from the sale of geothermal products will be recognized in the
same manner.
F-9
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 carryforwards. 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.
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. Any adjustments
necessary to ITC are recorded in the period the adjustments are known.
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
antidilutive.
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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Foreign Operations and Currency Translation
The Company translates foreign assets and liabilities of its subsidiaries, other
than those denominated in U.S. dollars, at the rate of exchange at the balance
sheet date. Revenues and expenses are translated at the average rate of exchange
throughout the year. Gains or losses from these translations are reported as a
separate component of other comprehensive income (loss), until all or a part of
the investment in the subsidiaries is sold or liquidated. The translation
adjustments do not recognize the effect of income tax because the Company
expects to reinvest the amounts indefinitely in operations.
F-10
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the local functional currency
are included in "general and administrative expenses" in the statement of
operations, which amount was not material for 2003 and 2002.
Effective August 1, 2003, the Company changed its functional currency from the
Canadian dollar to the U.S. dollar. The Company continues to use the U.S. dollar
as its reporting currency. The reason for the change was because a majority of
the Company's transactions are denominated in U.S. dollars. Consistent with SFAS
No. 52, Foreign Currency Translation, the change in functional currency will be
accounted for prospectively, therefore, there is no effect on the historical
financial statements. The translated amounts for nonmonetary assets at July 31,
2003, became the accounting basis for those assets as of August 1, 2003. EIC
continues to use the Canadian dollar as its functional currency. EIAL continues
to use the Hong Kong dollar as its functional currency.
Financial Instruments
The Company has the following financial instruments: cash, goods and services
tax receivable, accounts payable, accrued expenses, and amounts due to related
parties and shareholders. The carrying value of these financial instruments
approximates their fair value due to their liquidity or their short-term nature.
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.
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 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 ("the
intrinsic-value method"). Unearned compensation, if any, is amortized over the
vesting period of the individual options.
F-11
As allowed by SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value 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 (loss) if the fair-value method had been applied to all
outstanding and unvested awards in each period:
2003 2002
------------- -------------
Net loss, as reported $ (2,410,137) $ (613,341)
Add stock-based employee compensation expense included in
reported net loss, net of tax 71,611 150,241
Deduct total stock-based employee compensation expense
determined under the fair-value method, net of tax (506,987) (244,701)
------------- -------------
Pro forma net loss $ (2,845,513) $ (707,801)
============= =============
Pro forma net loss per share $ (0.27) $ (0.08)
============= =============
Note 2. Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses the financial accounting and
reporting for obligations associated with an exit activity, including
restructuring, or with a disposal of long-lived assets. Exit activities include,
but are not limited to, eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. SFAS 146
specifies that a company will record a liability for a cost associated with an
exit or disposal activity only when that liability is incurred and can be
measured at fair value. Therefore, commitment to an exit plan or a plan of
disposal expresses only management's intended future actions and does not meet
the requirement for recognizing a liability and the related expense. SFAS 146 is
effective prospectively for exit or disposal activities initiated after December
31, 2002, with earlier adoption encouraged. The adoption of SFAS 146 did not
have an impact on our financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. The
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and measurement
provisions of the Interpretation apply to guarantees issued or modified after
December 31, 2002. The adoption of this accounting pronouncement did not have a
material effect on our financial position or results of operations.
F-12
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. SFAS 148 amends SFAS 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition to
SFAS 123's fair-value method of accounting for stock-based employee
compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB
Opinion No. 28, Interim Financial Reporting, to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS 148's amendment of the transition and annual disclosure requirements of
SFAS 123 are effective for our fiscal year 2004. SFAS 148's amendment of the
disclosure requirements of Opinion 28 was adopted during 2003.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. The Interpretation requires an investor with a
majority of the variable interests in a variable interest entity to consolidate
the entity and also requires majority and significant variable interest
investors to provide certain disclosures. A variable interest entity is an
entity in which the equity investors do not have a controlling interest or the
equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from the other
parties. This pronouncement requires the consolidation of variable interest
entities created after January 31, 2003. Consolidation provisions apply for
periods ending after March 15, 2004, for variable interest entities, other than
special purpose entities, created prior to February 1, 2003. We do not have any
variable interest entities, including special purpose entities, that must be
consolidated and therefore the adoption of the provision of FIN 46 will not have
an impact on our financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 is generally effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated after June 30, 2003. We
currently do not have any derivative instruments as defined in SFAS 133.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or an asset in some circumstances). SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have a material effect on our financial
position or results of operations.
F-13
Note 3. Property and Equipment
Property and equipment consist of the following:
Computer equipment $ 5,065
Computer software 1,862
Office furniture and equipment 17,991
Automotive 34,700
Leasehold improvements 34,003
----------------
93,621
Less accumulated depreciation (34,978)
----------------
$ 58,643
================
Note 4. Deposits
Deposits includes a $10,000 option payment made by the issuance of 10,000 common
shares at the estimated fair value of $1.00 per share. This option was for the
right to acquire approximately 650 acres of land near Rifle, Colorado for the
purchase price of $2.3 million payable by the issuance of common shares of the
Company. This option lapsed subsequent to the year end.
Note 5. Related Party Transactions and Balances
Notes Payable, Related Parties
During 2003, a note payable with a balance of $32,547 to a family member of a
director and officer of the Company was repaid in full by the issuance of 80,000
fully paid common shares and the payment of $12,547 in cash. 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, as a result,
the Company recognized additional expense of $20,000 $ -
During 2003, 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 only at 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 recorded as interest expense during 2003 24,140
During 2003, a director and officer of the Company made unsecured loans to the
Company totaling $43,300, due on demand after March 31, 2004. A loan for $33,300
has an interest rate of 12% and a $10,000 loan has an interest rate of 9%,
interest only is payable monthly. In connection with the $33,300 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 $36,730 has been recorded as interest expense
during 2003 43,300
---------------
$ 67,440
===============
F-14
Due to Shareholders
Amounts due to shareholders at October 31, 2003, are unsecured, without specific
terms of repayment and non-interest bearing with the exception of $30,000, for
which interest is 12% of the principal amount, regardless of when repayment was
made, and $4,546 (CDN$6,000), for which interest accrues at 9%. During 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 has been included in additional paid-in capital. During 2003, a
shareholder settled $72,645 of non-interest bearing loans in exchange for
290,580 fully paid common shares. The common 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 an
additional expense of $72,645.
Other Related Party Transactions
During 2003:
o The Company has incurred consulting fees and related expenses
to a company controlled by an officer and director of the
Company in the amount of $90,454. During 2003, $50,000 of
these consulting fees were converted into 67,000 common shares
of the Company and the Company recognized an expense of
$17,000 for the amount fair value of the stock exceeded the
services.
o Certain management and directors forgave $208,876 of accrued
wages and received 278,000 options to acquire common shares of
the Company at $0.75 per share.
o The Company paid total commissions to two directors for
certain equity they raised of $1,107.
o A director and officer of the Company lent the Company a total
of $4,546 (CDN$6,000) payable monthly as to interest of 9%
per annum due on demand after March 31, 2004.
o Interest expense of $7,114 was accrued on short-term loans and
advances to related parties.
During 2002:
o The Company paid consulting fees to shareholders in the amount
of $16,818 and issued options to shareholders valued at
$10,393 in exchange for consulting services received.
o Interest expense of $29,719 was accrued on short-term loans
and advances to related parties.
Note 6. Share Capital
Preferred Shares
During 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-15
During 2003, the Company entered into an agreement for the acquisition of media
credits requiring a deposit which the Company satisfied by issuing 400,000
series A preferred shares. The Company has recorded these shares at their
estimated fair value of $440,000 or $1.10 per share. These shares are
non-voting, noncumulative and are automatically convertible into common shares,
on a one-for-one basis, upon the later of 18 months after the date of the
agreement, February 14, 2003, or 180 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 of $0.01 per share if media credits are
not honored by the providers or any media credits remain unused after their
expiration.
Common Shares
During 2003, the Company issued 10,000 common shares for which proceeds had been
received prior to October 31, 2002, and 364,945 common shares for total cash
proceeds of $250,993 received during the year, including 25,800 shares at $0.25
per share, 187,000 shares at $0.50 per share, 13,750 shares at $0.64 per share,
134,497 shares at $1.00 per share and 3,898 shares at $2.00 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.
In addition, the Company recorded the following transactions during 2003:
o acquisition of certain automotive equipment from a
stockholder, 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 resulting from an increase in value of the shares
between the commitment date and settlement date.
o settlement 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 recorded a
loss of $92,645 arising from these settlements resulting from
an increase in value of the shares between the commitment date
and settlement date.
o issuance of 666,500 common shares, to certain employees and
consultants for services provided. The common shares have been
recorded at their estimated fair value on the dates the
services were provided being 381,500 at the estimated fair
value of $0.50 per share and 285,000 at the estimated fair
value of $1.00 per share.
o acquisition of certain automotive equipment from a
stockholder, with a fair value of $12,728, in exchange for
38,680 common shares. The common shares have been recorded at
their estimated fair value of $1.00 per share on the date of
the transaction, and the Company recorded a loss of $25,952 on
the exchange resulting from an increase in value of the shares
between the commitment date and settlement date.
o settlement of $50,000 payable to a company controlled by a
director and officer in exchange for 67,000 common shares. The
common shares have been recorded at their estimated fair value
of $1.00 per share on the date of the transaction and the
Company recorded a loss of $17,000 on the debt settlement
resulting from an increase in value of the shares between the
commitment date and settlement date.
F-16
o acquisition of certain automotive equipment and repairs from a
related party, with a fair value of $31,200, in exchange for
124,800 common shares. The common shares have been recorded at
their estimated fair value of $1.00 per share on the date of
the transaction and the Company has recorded a loss of $93,600
on the exchange resulting from an increase in value of the
shares between the commitment date and settlement date.
o issuance of 10,000 common shares for the option to acquire 650
acres in Rifle, Colorado for $2.3 million. The common shares
have been recorded at their estimated fair value of $1.00 per
share.
o issuance of 50,000 common shares on the exercise of warrants
by the holder at the exercise price of $0.25 per share. The
Company received inventory with a fair value of $12,500 for
these shares.
During 2002, the Company issued 220,000 common shares at $0.25 per share for
total proceeds of $55,000 and 293,600 common shares at $0.50 per share for total
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 during 2002. These shares were issued during 2003. The Company
paid stock issue costs of $4,000 during 2002.
Also during 2002, the Company issued 6,400 common shares, at $0.50 per share, in
exchange for services received. The Company also committed to issue 50,000
common shares, at $0.50 per share, to a director for services provided during
2002, which were issued during 2003. 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.
Stock Purchase Warrants
At October 31, 2003, the Company had outstanding warrants to purchase 250,000
shares of the Company's common stock, at $0.25 per share. The warrants expire in
years beginning with 2007 and continuing through 2010. At October 31, 2003,
250,000 shares of common stock were reserved for that purpose.
Note 7. Stock-based Compensation
Although the Company does not have a formal stock option plan, during 2003, the
Company issued stock options to directors, employees, advisors and consultants.
F-17
A summary of the Company's stock options is as follows:
Weighted Average
Number of Options Exercise Price
------------------- ------------------
Outstanding at October 31, 2001 - $ -
Granted
Options issued to directors, employees, advisors, and
consultants 2,520,000 0.61
Options issued to others 60,000 0.88
-------------
Outstanding at October 31, 2002 2,580,000 0.62
Granted
Options issued to directors, employees, advisors, and
consultants 2,131,700 0.91
Options issued to others 158,300 0.65
-------------
Outstanding at October 31, 2003 4,870,000 0.75
=============
The following table summarizes stock options outstanding at October 31, 2003:
Number
Number Outstanding at Average Remaining Exercisable at
Exercise Price October 31, 2003 Contractual Life (Years) October 31, 2003
- ------------------------- ------------------------ ------------------------- ------------------------
$0.25 404,750 4.68 404,750
0.50 547,250 6.20 547,250
0.75 1,308,000 8.46 1,308,000
1.00 2,518,750 7.73 2,468,750
1.50 75,000 7.00 25,000
2.00 16,250 7.00 16,250
------------------------ ------------------------
4,870,000 4,770,000
======================== ========================
The fair value of each option granted is estimated at the date of grant using
the Black-Scholes option-pricing model. The assumptions used in calculating the
fair value of the options granted were risk-free interest rate of 5.0%, a 5-year
expected life and a dividend yield of 0.0%.
F-18
Note 8. Media Credits
In February 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 issued 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 180 days after the Company's initial public offering providing the holder has
raised the Company a minimum of $10 million through the 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 Company had initially recorded the preferred share and corresponding prepaid
asset at $1.10 per share being the Company's best estimate of fair value at the
date the transaction was consummated. The Company has since recognized an
impairment charge of $440,000 against these media credits.
Note 9. Income Taxes
No provision for income taxes has been made for the period as the Company
incurred net losses.
Deferred Tax Assets
As of October 31, 2003 and 2002, the Company has net operating losses of
approximately $1,627,600 and $207,000, respectively, available for future
deduction from taxable income derived in the United States until the years 2021
and 2022. In addition, the Company's Canadian subsidiary has non-capital losses
of approximately $610,000 and $256,000, respectively, available for future
deductions from taxable income derived in Canada, which expire in 2008 and 2009,
and the Company's Hong Kong subsidiary has non-capital operating losses of
approximately $114,000, and $109,000, respectively, which do not expire. The
potential benefit of net operating loss carryforwards 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:
2003 2002
--------------- ---------------
Deferred tax assets
Net operating loss carryforwards (expiring through 2023) $ 800,000 $ 180,000
Research and development credits 45,500 10,400
Stock compensation expense 214,295 -
Valuation allowance (1,059,795) (190,400)
--------------- ---------------
Net deferred tax assets $ - $ -
=============== ===============
F-19
The difference between the U.S. Statutory Federal tax rate of 34% and the
provision for income tax of zero recorded by the Company is primarily
attributable to the change in the Company's valuation allowance against its
deferred tax assets ($879,795 and $180,000 for 2003 and 2002, respectively) and
to a lesser extent to the tax rate differential on losses in foreign countries.
Investment Tax Credits
As of October 31, 2003 and 2002, the Company's Canadian subsidiary has
investment tax credits of $45,500 and $16,000, respectively, 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.
Note 10. Commitments
During 2003, an agreement between the Company and one of its shareholders to
acquire certain land owned by the shareholder in San Marcos, Texas, was
terminated.
The Company has an operating lease for office space in Langley, B.C., Canada.
The lease expires August 31, 2004, with an option to renew the lease for an
additional three years. Required payments on this lease in 2004 total $38,220.
The Company also has a month-to-month lease for office space in Bellingham,
Washington. For 2003 and 2002, the Company incurred total rent expense of
$35,833 and $43,920, respectively, related to these leases.
Note 11. Business Segment Information
The Company operates in two reportable business segments - geothermal and
bio-energetic medical. The segments are managed separately because each business
requires different production and marketing strategies. The geothermal segment
is located in the Americas and the bio-energetic medical segment is located in
Asia. Summarized financial information by segment for the years ended October
31, 2003 and 2002, and cumulative from February 9, 2001 (inception) to October
31, 2003, as taken from the internal management reports, is as follows:
Cumulative During
the Development
2003 2002 Stage
--------------- -------------- --------------------
Revenue
Geothermal $ - $ 173 $ 173
Bio-Energetic Medical - 8,371 8,371
-------------- ------------ --------------
$ - $ 8,544 $ 8,544
============== ============ ==============
Loss
Geothermal $ (2,405,170) $ (504,078) $ (3,091,854)
Bio-Energetic Medical (4,967) (109,263) (114,230)
-------------- ------------ --------------
$ (2,410,137) $ (613,341) $ (3,206,084)
============== ============ ==============
Assets
Geothermal $ 93,050
Bio-Energetic Medical 11,067
--------------
$ 104,117
==============
F-20
Note 12. Subsequent Events
Subsequent to October 31, 2003, the Company has approved the issuance of the
following additional shares and options:
o 36,652 common shares for services with a fair value of
$11,663;
o 40,000 options to purchase common shares of the Company to
certain consultants consisting of 20,000 with an exercise
price of $1.00 and 20,000 with an exercise price of $1.50;
o 50,000 common shares and 100,000 options to purchase common
shares of the Company at an exercise price of $0.75 per share
to certain employees.
o The option to acquire 650 acres in Rifle, Colorado, lapsed.
F-21
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(a Development Stage Enterprise)
Consolidated Balance Sheet
(Expressed in United States dollars)
July 31, 2004
(unaudited)
Assets
Current assets:
Cash $ 13,306
Goods and services tax receivable 6,842
Inventory 5,385
Prepaid expenses and deposits 2,209
-----------------------------------------------------------------------------------------------
Total current assets 27,742
Property and equipment, net 36,397
Deposits 20,071
- ---------------------------------------------------------------------------------------------------------
Total assets $ 84,210
=========================================================================================================
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable $ 315,032
Accrued expenses 89,365
Accrued wages 169,261
Notes payable, related parties 32,846
Due to shareholders 262,980
-----------------------------------------------------------------------------------------------
Total current liabilities 869,484
Stockholders' Deficiency
Preferred stock:
$0.001 par value, authorized 10,000,000 shares
issued and outstanding nil shares
Common stock:
$0.001 par value, authorized 100,000,000 shares
issued and outstanding 12,073,147 shares 12,073
Additional paid in capital 3,640,023
Share Subscriptions 7,962
Deficit accumulated during development stage (4,432,819)
Accumulated other comprehensive loss (12,513)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' deficiency (785,274)
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficiency $ 84,210
=========================================================================================================
See accompanying notes to consolidated financial statements.
F-22
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(a Development Stage Enterprise)
Consolidated Statements of Operations
(Expressed in United States dollars)
For the three and nine months ended July 31, 2004 and 2003 and the cumulative
period from inception on February 9, 2001 to July 31, 2004 (unaudited)
Cumulative
from inception
Three Months Three Months Nine Months Nine Months on February 9,
ended July 31, ended July 31, ended July 31, ended July 31, 2001 to
2004 2003 2004 2003 July 31, 2004
Revenue $ - $ - $ - $ - $ 8,544
Cost of Sales - - - - 6,257
------------------------------------------------------------------------------------
Gross Profit - - - - 2,287
Expenses:
General and administrative 216,883 97,716 953,330 1,137,974 3,236,364
Research and development 102,634 58,695 273,422 103,134 646,514
Impairment of media credit - 440,000 - 440,000 440,000
----------------------------------------------------------------------------------------------------------------------
319,517 596,411 1,226,752 1,681,108 4,322,878
Other income (loss):
Interest expense - - - - (1,112)
Interest expense, related parties - - - - (111,542)
Interest income 3 26 17 66 426
----------------------------------------------------------------------------------------------------------------------
3 26 17 66 (112,228)
- -------------------------------------------------------------------------------------------------------------------------------
Loss for the period $ (319,514) $ (596,385) $ (1,226,735) $ (1,681,042) $ (4,432,819)
===============================================================================================================================
Loss per share - basic and diluted $ (0.03) $ (0.06) $ (0.10) $ (0.16)
Weighted average number of shares outstanding 11,986,495 10,772,096 11,708,162 10,382,781
============================================================================================================
See accompanying notes to consolidated financial statements.
F-23
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(a Development Stage Enterprise)
Consolidated Statement of Stockholders' Equity and Comprehensive Loss
(Expressed in United States dollars)
For the nine months ended July 31, 2004
(unaudited)
Deficit
Stock accumulated Accumulated Total
Preferred Additional subscrip- during the other stock-
Common stock stock paid in tions development comprehensive holders'
(note 4) (note 4) captial (receivable) stage loss equity
------------------- ------------------ ----------- ---------- ------------ ------------- -----------
Number of Amount Number Amount
Shares of Shares
Balance, October 31, 2003 11,355,985 $ 11,356 400,000 $ 400 $ 2,870,399 $ (90) $(3,206,084) $ (14,716) $ (338,735)
Common stock issued for
services received three
months ended January 31, 2004 86,652 87 - - 86,565 - - - 86,652
three months ended
April 30, 2004 79,910 80 - - 93,265 - - - 93,345
three months ended
July 31, 2004 23,903 24 - - 23,879 - - - 23,903
Common stock issued for
settlement of debt three
months ended April 30, 2004 526,697 526 - - 526,171 - - - 526,697
Options issued in exchange
for services received three
months ended January 31, 2004 - - - - 30,846 - - - 30,846
three months ended
April 30, 2004 - - - - 12,498 - - - 12,498
Receipt of share subscriptions - - - - - 8,052 - - 8,052
Redemption of preferred shares - -(400,000) (400) (3,600) - - - (4,000)
Loss for the period - - - - - - (1,226,735) - (1,226,735)
Foreign currency translation - - - - - - - 2,203 2,203
-----------
Comprehensive loss - - - - - - - - (1,224,532)
------------------------------------------------------------------------------------------------------
Balance July 31, 2004 12,073,147 $ 12,073 - $ - $ 3,640,023 $ 7,962 $(4,432,819) $ (12,513) $ (785,274)
======================================================================================================
See accompanying notes to consolidated financial statements.
F-24
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(a Development Stage Enterprise)
Consolidated Statement of Cash Flows
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003
and the cumulative period from inception on February 9, 2001 to July 31, 2004
(unaudited)
Nine months Nine months Cumulative
ended July 31, ended July 31, from inception
2004 2003 on February 9,
2001 to
July 31, 2004
Cash provided by (used in):
Operations:
Loss for the period $(1,226,735) $(1,681,042) $(4,432,819)
Adjustment to reconcile loss for the period to
net cash used in operating activities:
Loss on disposal of property and equipment 398 - 9,383
Loss on lapse of real estate option 10,000 - 10,000
Depreciation of property and equipment 17,426 12,638 58,847
Amortization of tenant inducements (1,950) (2,665) (16,042)
Common stock issued for services including related loss 203,900 - 282,100
Common stock issued to related parties
for services - 232,875 425,750
Loss related to common stock issued to related parties
for debt settlement and equipment 136,091 150,717 438,133
Options and warrants issued for services 5,846 - 129,006
Options and warrants issued to related
parties for services 37,498 540,335 694,860
Charge for impairment of media credits - 440,000 440,000
Foreign Exchange 2,203 4,532 (20,466)
Changes in assets and liabilities
Goods and services tax receivable 3,575 (1,618) (6,842)
Inventory 7,691 - 7,115
Prepaid expenses and deposits (12,925) (1,698) (22,280)
Accounts payable 127,269 41,239 15,032
Accrued expenses and wages 467,067 15,032 608,127
--------------------------------------------------------
Net cash used in operating activities (222,646) (249,655) (1,080,096)
--------------------------------------------------------
Investments:
Purchase of property and equipment (3,938) (1,954) (64,479)
Proceeds from disposal of assets 8,360 12,780 21,140
--------------------------------------------------------
Net cash provided by (used in) investing activities 4,422 10,826 (43,339)
--------------------------------------------------------
Financing:
Issuance of common stock - 241,282 689,083
Redemption of preferred shares (4,000) - (4,000)
Share subscriptions received 8,052 - 8,052
Tenant inducements received - - 16,042
Advances from shareholders 218,341 - 363,510
Repayments to shareholders - (6,367) (29,897)
Loan proceeds received 6,511 31,201 109,853
Loan repayments - (21,298) (15,902)
--------------------------------------------------------
Net cash provided by financing activities 228,904 244,818 1,136,741
--------------------------------------------------------
Increase in cash during the period 10,680 5,989 13,306
Cash at beginning of the period 2,626 1,925 -
--------------------------------------------------------
Cash at end of the period $ 13,306 $ 7,914 $ 13,306
========================================================
See accompanying notes to consolidated financial statements.
F-25
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(a Development Stage Enterprise)
Consolidated Statement of Cash Flows (continued)
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003
and the cumulative period from inception on February 9, 2001 to July 31, 2004
(unaudited)
Supplementary Information:
Nine months Nine months Cumulative
ended July 31, ended July 31, from inception
2004 2003 on February 9,
2001 to
July 31, 2004
Interest paid $ - $ 3,500 $ 5,363
Income taxes paid - - -
Non-cash transactions:
Common shares subscribed in exchange for stock
subscriptions receivable - - 25,211
Common shares issued for prepaid consulting
services - 2,625 -
Preferred shares issued for prepaid media credits - 440,000 440,000
Automotive equipment acquired from a related party
for common shares - 68,920 51,323
Common shares issued for deposit on proposed
land purchase - - 10,000
Common shares issued for purchase of inventory - - 12,500
Payment on notes payable to related parties by
issuance of common shares - - 20,000
Payment on debt by issuance of common shares 390,606 - 463,251
See accompanying notes to consolidated financial statements.
F-26
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Organization
Essential Innovations Technology Corp. (the "Company") was incorporated under
the laws of the state of Nevada on April 4, 2001. The Company's subsidiary,
Essential Innovations Corporation, is engaged in the development and
distribution of eco-friendly lifestyle enhancement solutions for the betterment
of energy, water, air and health. 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 in Canada and the United
States, the bio-energetic devices produced by SOTA Instruments. The agreement to
distribute SOTA products was terminated subsequent to July 31, 2004. (See Notes
6 and 9.)
Future Operations
The Company's consolidated financial statements have been prepared using
generally accepted accounting principles of the United States of America
applicable to a going concern that contemplates the realization of assets and
liquidation of liabilities in the normal course of business. To date, the
Company has not generated revenue from its products nor positive cash flow from
operations and has a material working capital deficit. 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 consolidated
financial statements do not include any adjustment that could result. Failure to
obtain sufficient additional funding will necessitate the Company to reduce or
limit its operating activities.
Basis of Consolidation
These consolidated financial statements include the accounts of Essential
Innovation Technology Corp. and its wholly-owned subsidiaries, Essential
Innovations Corporation and Essential Innovations Asia Limited. Essential
Innovations 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 Essential Innovations Corporation exchanged their
common shares for common shares of the Company. The Company had no assets or
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 intercompany balances and transactions
have been eliminated.
F-27
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
Interim Period Consolidated Financial Statements
The interim period consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosure
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such SEC rules and regulations. The interim period
consolidated financial statements should be read together with the audited
consolidated financial statements and accompanying notes included in the
Company's audited consolidated financial statements for the years ended October
31, 2003 and 2002. In the opinion of the Company, the unaudited consolidated
financial statements contained herein contain all adjustments necessary to
present a fair statement of the results of the interim periods presented.
Revenue Recognition
Revenues from the sales of products will be recognized as the sales are made,
the price is fixed and determinable, collectibility is probable and no
significant Company obligations with regard to the products remain.
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 antidilutive
because of the Company's net losses.
Foreign Operations and Currency Translation
The Company translates foreign assets and liabilities of its subsidiaries, other
than those denominated in U.S. dollars, at the rate of exchange at the balance
sheet date. Revenues and expenses are translated at the average rate of exchange
throughout the reporting period. Gains or losses from these translations are
reported as a separate component of other comprehensive income (loss), until all
or a part of the investment in the subsidiaries is sold or liquidated. The
translation adjustments do not recognize the effect of income tax because the
Company expects to reinvest the amounts indefinitely in operations.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the local functional currency
are included in "general and administrative expenses" in the statement of
operations, which amount was not material during the nine months ended July 31,
2004 and 2003.
F-28
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
Effective August 1, 2003, the Company changed its functional currency from the
Canadian dollar to the U.S. dollar. The Company continues to use the U.S. dollar
as its reporting currency. The reason for the change was because a majority of
the Company's transactions are denominated in U.S. dollars. Consistent with SFAS
No. 53, Foreign Currency Translation, the change in functional currency will be
accounted for prospectively, therefore, there is no effect on the historical
financial statements. The translated amounts for nonmonetary assets at July 31,
2003, became the accounting basis for those assets as of August 1, 2003.
Essential Innovations Corporation uses the Canadian dollar as its functional
currency. Essential Innovations Asia Limited uses the Hong Kong dollar as it
functional currency.
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 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 ("the
intrinsic-value method"). Unearned compensation, if any, is amortized over the
vesting period of the individual options.
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 (loss) if the fair-value-based method had been applied to
all outstanding and unvested awards in each period:
Nine months ended
July 31,
2004 2003
----------------------------------------------
Loss, as reported $ (1,226,735) $ (1,681,042)
Add stock-based employee compensation expense included in 61,403 540,335
reported net loss, net of tax
Deduct total stock-based employee compensation expense
determined under the fair-value method, net of tax (128,365) (267,269)
----------------------------------------------
Pro forma loss $ (1,293,697) $ (1,407,976)
==============================================
Pro forma loss per share $ (0.11) $ (0.14)
----------------------------------------------
F-29
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
2. Property and Equipment
Property and equipment consists of the following:
Accumulated Net Book
Cost Depreciation Value
- -----------------------------------------------------------------------------
Automotive equipment $ 23,186 $ 6,160 $ 17,026
Computer equipment 5,310 2,827 2,483
Computer software 1,862 669 1,193
21,399 7,303 14,096
Leasehold improvements 34,003 32,404 1,599
- -----------------------------------------------------------------------------
$ 85,760 $ 49,363 $ 36,397
=============================================================================
3. Related Party Transactions and Balances
Due to Shareholders
Amounts due to shareholders at July 31, 2004, are unsecured, without specific
terms of repayment and non-interest bearing with the exception of $30,000, for
which interest is 12% of the principal amount, regardless of when repayment was
made. During 2002, warrants were granted that 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 has been included in additional paid-in capital. During
2003, a shareholder settled $72,645 of non-interest bearing loans in exchange
for 290,580 fully paid common shares. The common 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 an
additional expense of $72,645.
Other Related Party Transactions
During the nine months ended July 31, 2004:
o The Company incurred consulting fees and related expenses to a company
controlled by an officer and director of the Company in the amount of
$113,764 (2003 $51,186). The unpaid balance as at July 31, 2004, of
$62,924 ( 2003 $1,186) is included in accounts payable.
o A special loan with a shareholder and director was renewed with the
agreement to pay an additional $4,883 (Cdn $6,511) in financing costs
incurred by the lender.
o Interest expense of $359 (2003 - nil) was accrued on short-term loans
and advances to related parties.
F-30
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
4. Share Capital
Preferred Shares
- ----------------
During 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.
During 2003, the Company entered into an agreement for the acquisition of media
credits requiring a deposit that the Company satisfied by issuing 400,000 Series
A preferred shares. The Company recorded these shares at their estimated fair
value of $440,000 or $1.10 per share. These shares were nonvoting, noncumulative
and were automatically convertible into common shares, on a one-for-one basis,
upon the later of 18 months after the date of the agreement, February 14, 2003,
or 180 days after the Company's initial public offering yielding a minimum of
$10 million. The preferred shares would have been redeemable at the option of
the Company of $0.01 per share if media credits were not honored by the
providers or any media credits remain unused after their expiration.
During the nine months ended July 31, 2004, all of the issued preferred shares
were redeemed for a total of $4,000 which resulted in a premium on redemption of
$3,600.
Common Shares
- -------------
During the nine months ended July 31, 2004:
o The Company issued 36,652 common shares for services with a fair value
of $11,663. The common shares have been recorded at their estimated
fair value of $1.00 per share on the date of the transactions, and the
Company has recorded a loss of $24,989 on the exchanges resulting from
an increase in value of the shares between the commitment date and
settlement date.
o The Company issued 50,000 common shares to certain employees for
services provided. The common shares have been recorded at their
estimated fair value of $1.00 per share on the dates the services were
provided.
o The Company issued a total of 509,029 common shares to certain
management and directors for payment of accrued wages and loans in the
amount of $381,772. The common shares have been recorded at their
estimated fair value of $1.00 per share on the date of the transaction,
and the Company has recorded a loss of $127,257 resulting from the
transactions.
o The Company issued 53,730 common shares to a certain employee for
services provided with a fair value of $67,162. The common shares have
been recorded at their estimated fair value of $1.25 per share on the
date of the transaction.
F-31
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
o The Company issued 17,668 common shares for payment of certain services
received with a fair value of $8,834. The common shares have been
recorded at their estimated fair value of $1.00 per share on the date
of the transaction, and the Company has recorded a loss of $8,834 on
the exchange.
o The Company issued 50,083 common shares to certain employees for
services provided. The common shares have been recorded at their
estimated fair value of $1.00 per share on the dates that the services
were provided and the Company has recorded a loss of $12,520 resulting
from the transactions.
o The Company received a subscription of $7,962 for 3,981 common shares
that were not issued as at July 31, 2004..
During 2003, the Company issued 10,000 common shares for which proceeds had been
received prior to October 31, 2002, and 364,945 common shares for total cash
proceeds of $250,993 received during the year, including 25,800 shares at $0.25
per share, 187,000 shares at $0.50 per share, 13,750 shares at $0.64 per share,
134,497 shares at $1.00 per share and 3,898 shares at $2.00 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.
In addition, the Company recorded the following transactions during 2003:
o acquisition of certain automotive equipment from a stockholder, 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 resulting from an increase in value of the
shares between the commitment date and settlement date.
o settlement 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 recorded a loss of $92,645 arising from
these settlements resulting from an increase in value of the shares
between the commitment date and settlement date.
o issuance of 666,500 common shares, to certain employees and consultants
for services provided. The common shares have been recorded at their
estimated fair value on the dates the services were provided being
381,500 at the estimated fair value of $0.50 per share and 285,000 at
the estimated fair value of $1.00 per share.
o acquisition of certain automotive equipment from a stockholder, with a
fair value of $12,728, in exchange for 38,680 common shares. The common
shares have been recorded at their estimated fair value of $1.00 per
share on the date of the transaction, and the Company recorded a loss
of $25,952 on the exchange resulting from an increase in value of the
shares between the commitment date and settlement date.
F-32
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
o settlement of $50,000 payable to a company controlled by a director and
officer in exchange for 67,000 common shares. The common shares have
been recorded at their estimated fair value of $1.00 per share on the
date of the transaction and the Company recorded a loss of $17,000 on
the debt settlement resulting from an increase in value of the shares
between the commitment date and settlement date.
o acquisition of certain automotive equipment and repairs from a related
party, with a fair value of $31,200, in exchange for 124,800 common
shares. The common shares have been recorded at their estimated fair
value of $1.00 per share on the date of the transaction and the Company
has recorded a loss of $93,600 on the exchange resulting from an
increase in value of the shares between the commitment date and
settlement date.
o issuance of 10,000 common shares for the option to acquire 650 acres in
Rifle, Colorado, for $2.3 million. The common shares have been recorded
at their estimated fair value of $1.00 per share.
o issuance of 50,000 common shares on the exercise of warrants by the
holder at the exercise price of $0.25 per share. The Company received
inventory with a fair value of $12,500 for these shares.
Stock Purchase Warrants
At July 31, 2004, the Company had outstanding warrants to purchase 250,000
shares of the Company's common stock, at $0.25 per share. The warrants expire in
years beginning with 2007 and continuing through 2010. At July 31, 2004,
250,000 shares of common stock were reserved for that purpose.
Subsequent to July 31, 2004, 150,000 of these warrants were cancelled (note 9).
5. Stock-Based Compensation
Although the Company does not have a formal stock option plan, during 2004 and
2003, the Company issued stock options to directors, employees, advisors, and
consultants.
F-33
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
A summary of the Company's stock options is as follows:
Number of Weighted Average
Options Exercise Price
------------------- ------------------
Outstanding at October 31, 2001 - $ -
Granted
Options issued to directors, employees, advisors, and
consultants 2,520,000 0.61
Options issued to others 60,000 0.88
-------------------
Outstanding at October 31, 2002 2,580,000 0.62
Granted
Options issued to directors, employees, advisors, and
consultants 2,131,700 0.91
Options issued to others 158,300 0.91
-------------------
Outstanding at October 31, 2003 4,870,000 0.75
Options issued to employees and consultants 390,000 1.06
-------------------
Outstanding as July 31, 2004 5,260,000 0.76
===================
The following table summarizes stock options outstanding at July 31, 2004:
Number
Number Outstanding at Average Remaining Exercisable at
Exercise Price July 31, 2004 Contractual Life (Years) July 31, 2004
- ------------------------- ------------------------ ------------------------- ------------------------
$0.25 404,750 3.43 404,750
0.50 547,250 4.95 547,250
0.75 1,458,000 7.11 1,458,000
1.00 2,613,750 6.48 2,526,250
1.25 50,000 3.43 50,000
1.50 170,000 5.75 82,500
2.00 16,250 5.75 16,250
------------------------ ------------------------
5,260,000 5,085,000
======================== ========================
The fair value of each option granted is estimated at the date of grant using
the Black-Scholes option-pricing model. The assumptions used in calculating the
fair value of the options granted were risk-free interest rate of 5.0%, a 5-year
expected life and a dividend yield of 0.0%.
F-34
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
6. Business Segment Information
Through July 31, 2004, the Company operated in two reportable business segments
- - geothermal and bio-energetic medical. The segments were managed separately
because each business required different production and marketing strategies.
The geothermal segment is located in the Americas and the bio-energetic medical
segment wais located in Asia. As discussed in note 9, subsequent to July 31,
2004, the Company terminated its agreement to distribute SOTA products, which
constituted the entire bio-energetic medical segment. For the accompanying
financial statements, the Company has not reported this as a discontinued
operation as such presentation is not material to these financial statements.
Summarized financial information by segment for the three and nine months ended
July 31, 2004 and 2003, and cumulative from February 9, 2001 (inception) to July
31, 2004, as taken from the internal management reports, is as follows:
Cumulative
Three months ended July 31 Nine months ended July 31 during the
---------------- ---------------- ----------------- ---------------- development
2004 2003 2004 2003 stage
---------------- ---------------- ----------------- ---------------- ----------------
Revenue
Geothermal $ - $ - $ - $ - $ 173
Bio-Energetic - - - - 8,371
------------- -------------- --------------- -------------- --------------
$ - $ - $ - $ - $ 8,544
Loss
Geothermal $ (317,625) $ (596,235) $ (1,224,136) $ (1,677,371) $ (4,315,990)
Bio-Energetic (1,889) (150) (2,599) (3,671) (116,829)
------------- -------------- --------------- -------------- --------------
$ (319,514) $ (596,385) $ (1,226,735) $ (1,681,042) $ (4,432,819)
Assets
Geothermal $ 82,301
Bio-Energetic 1,909
-------------
$ 84,210
7. Lease Commitment
The Company entered into a lease for new manufacturing and office premises for a
term of three years from July 1, 2004, plus two options to renew for two years
each. This lease calls for annual minimum payments of: first year $110,205;
second year $111,627; third year $113,049.
F-35
ESSENTIAL INNOVATIONS TECHNOLOGY CORP
(a Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
For the nine months ended July 31, 2004 and 2003 and the
Period from inception on February 9, 2001 to July 31, 2004
(unaudited)
8. Comparative Figures
Certain comparative figures have been reclassified to conform with the current
presentation.
9. Subsequent Events
Subsequent to July 31, 2004, the Company:
a) signed an agreement with SOTA Instruments Inc. terminating the
agreement to distribute SOTA products. The remaining
outstanding 150,000 warrants issued to SOTA Instruments Inc.
were returned to the Company and cancelled. Management expects
to formalize the plan for disposal of this segment during the
fourth quarter and will report the operations accordingly in
the annual report. Any gain or loss from this disposal is not
expected to be material.
b) agreed to issue 100,000 common shares, with an estimated fair
value of $1.00 per share, of the Company as payment under a
non-refundable option agreement to acquire a 75% equity
interest in Cavco, LLC, a Kentucky limited liability company
that is involved in developing an 18-hole golf course and
residential lots in Kentucky, for consideration of (i) a 6%
promissory note in the amount of $800,000 payable, to the
owner of the 75% equity interest in Cavco, LLC, 12 months
after closing that can, at the option of the holder, be
converted into common shares of the Company at share prices
varying between $1.25 to $1.75 per share, and (ii) a carried
5% interest in Cavco, LLC. The Company is also required to
arrange new financing for Cavco, LLC, in a minimum amount of
approximately $5 million.
c) agreed to issue 15,681 common shares to certain employees for
accrued services owing in the amount of $11,761 and an
additional 32,500 common shares to the same employees for
agreeing to provide their continuing services. The common
shares will be recorded at their estimated value of $1.00 per
share.
F-36
======================================= =======================================
- ---------------------------------------
TABLE OF CONTENTS
- ---------------------------------------
Prospectus Summary Information.......2 $3,750,000 Maximum
Risk Factors.........................4
Forward-Looking Statements...........8
No Net Proceeds to Us................9
Common Stock and Dividend Policy.....9
Management's Discussion and ESSENTIAL INNOVATIONS
Analysis or Plan of Operation......9 TECHNOLOGY CORP.
Business and Property...............13
Management..........................19
Principal Stockholders..............24
Certain Transactions................26
Description of Securities...........29
Selling Stockholders................30 3,000,000 Shares Maximum
Plan of Distribution................33 Common Stock
Legality of Stock...................34 $0.001 Par Value
Where You Can Find
Additional Information............34
Change in Accountant................35
Index to Financial Statements.......36
You should rely on the information ---------------------
contained in this Prospectus. No PROSPECTUS
dealer, salesperson or other person is ---------------------
authorized to give information that is
not contained in this Prospectus. This
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 __________________, 2004
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.
======================================= =======================================
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 that 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 that 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 that 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
the same terms at which stock was sold to unrelated parties in contemporaneous
transactions, and such transactions were approved unanimously by the
disinterested directors.
II-2
Issuances to Founders, Directors and Executive Officers
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 February 2003, we agreed to issue to Kenneth G.C. Telford and a
member of his staff an aggregate of 175,000 shares of common stock and options
to purchase 475,000 additional shares of common stock (250,000 with an exercise
price of $0.50 per share and 225,000 with an exercise price of $1.00 per share)
for consulting services, including Mr. Telford acting as our chief financial
officer, between January and September 2003. Mr. Telford represented in writing
that he was not a resident of the United States, acknowledged that the
securities constituted restricted securities, and consented to a restrictive
legend on the securities to be issued. This transaction was made in reliance on
Regulation S.
In March 2003, we issued 290,580 shares of our common stock to Morpheus
Financial Corporation (which at that time was 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.
In September 2003, we formalized an agreement effective July 31, 2003,
and agreed to issue 67,000 shares of our common stock to a company controlled by
Kenneth G.C. Telford, a director and our chief financial officer, upon the
conversion of $50,000 owed to him in accrued but unpaid consulting fees at an
agreed conversion rate of $0.75 per share. Also in September 2003, we agreed to
issue to Mr. Telford 200,000 shares of our common stock as consideration for his
agreement to enter into a new employment agreement with us. Mr. Telford
represented in writing that he was not a resident of the United States,
acknowledged 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 September 2003, we agreed to issue 25,000 shares of our common stock
to Peter Bond in recognition of his agreement to serve on our board of
directors. Mr. Bond acknowledged in writing that the securities constituted
restricted securities and consented to a restrictive legend on the certificates
to be issued.
II-3
In September 2003, we formalized agreements effective July 31, 2003,
with three of our executive officers, two of whom are also directors, to issue
options to purchase an aggregate of 278,000 shares of our common stock, upon the
conversion of a total of $208,876 owed to them in accrued but unpaid salary.
Also in September 2003, we agreed to issue the same three executive officers
options to purchase an aggregate of 650,000 shares of our common stock as
consideration for their agreements to enter into new employment agreements with
us. Each of the executive officers was not a resident of the United States, and
each acknowledged 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.
On October 1, 2003, we issued to Jason McDiarmid, our president and
chief executive officer, options to purchase 50,000 shares of our common stock
at any time before January 1, 2011, of which 25,000 options have an exercise
price of $0.25 per share and 25,000 options have an exercise price of $0.50 per
share. The options were issued as consideration for Mr. McDiarmid's making a
loan to us.
On March 1, 2004, we issued options to purchase 150,000 shares of
common stock to Russell White in recognition of his agreement to serve on our
board of directors. Of these options, 75,000 were vested upon their grant
(37,500 of which have an exercise price of $1.00 per share and 37,500 of which
have an exercise price of $1.50 per share) and expire on July 1, 2010; the other
75,000 options become vested on March 1, 2005 (37,500 of which have an exercise
price of $1.00 per share and 37,500 of which have an exercise price of $1.50 per
share) and expire on March 1, 2010.
In March 2004, we issued 509,029 shares of our common stock to four of
our executive officers, three of whom are directors, upon the conversion of
accrued but unpaid salaries and amounts due under loan agreements. The shares
were issued at a price of $0.75 per share. Each of the executive officers was
not a resident of the United States and each acknowledged that the securities
constituted restricted securities and consented to a restrictive legend on the
certificates to be issued. These transactions were made in reliance on
Regulation S.
In October 2004, we agreed to issue 225,000 shares of common stock to
our director, Peter Bond, in recognition of his agreement to serve as our chief
operating officer. Mr. Bond acknowledged in writing that the securities
constituted restricted securities and consented to a restrictive legend on the
certificates to be issued. At the same time, we granted Mr. Bond options to
purchase 300,000 shares of our common stock--150,000 of those options were
immediately exercisable (75,000 of which have an exercise price of $1.00 per
share and 75,000 of which have an exercise price of $1.50 per share) and the
remaining 150,000 options vest on September 15, 2005, subject to Mr. Bond's
continued employment with us (75,000 of which have an exercise price of $1.00
per share and 75,000 of which have an exercise price of $1.50 per share).
In October 2004, we agreed to issue an aggregate of 368,000 shares of
our common stock to four of our executive officers, three of whom are also
directors, upon conversion of $276,000 in accrued but unpaid salary. Each of the
executive officers was not a resident of the United States, and each
acknowledged 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.
Issuances to Investors outside the United States
During the period from our inception (February 9, 2001) through the
date of this registration statement, we have sold an aggregate of 2,396,137
shares of our common stock to a total of 61 investors outside the United States
for a total of $834,834 in cash. These shares were issued at prices ranging from
$0.25 to $2.00 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
II-4
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 March 2003, we issued an aggregate of 271,500 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.
In July 2003, we issued an aggregate of 18,700 shares of common stock,
options to purchase 6,250 shares of common stock at $1.00 per share, and options
to purchase 6,250 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 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 August 2003, we issued 38,680 shares of our common stock to an
individual in Canada for one motor vehicle with an agreed value of $21,713. No
general solicitation was used and no commission or other remuneration was paid
II-5
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 September 2003, we agreed to issue 3,898 shares of our common stock
for $7,796 in cash. 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 that the securities constituted restricted securities, and
consented to a restrictive legend on the certificate to be issued.
In September 2003, we agreed to issue 124,800 shares of our common
stock to an automobile dealer for one motor vehicle and vehicle maintenance with
an agreed value of $31,200. 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.
On October 1, 2003, we agreed to issue 50,000 shares of our common
stock as compensation to a consultant serving as a liaison and public relations
facilitator to generate sales, marketing and distribution channels in Asia. 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 transaction was made in
reliance on Regulation S.
In January 2004, we agreed to issue an aggregate of 36,652 shares of
our common stock to a nonaffiliated individual and a nonaffiliated entity for
printing and drilling services, respectively. The recipients 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 transactions were made in
reliance on Regulation S.
In January 2004, we agreed to issue an aggregate of 50,000 shares of
our common stock to two of our employees for engineering and hydro geologic
services related to the EI Elemental Heat Energy System. Also in January 2004,
we issued options to purchase an aggregate of 100,000 shares of our common stock
with an exercise price of $0.75 per share. Each employee 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. These transactions were made in reliance on
Regulation S.
In January 2004, we issued options to purchase an aggregate of 40,000
shares of our common stock to two consultants, who have subsequently agreed to
become employees of ours. One consultant provided computer systems and graphic
design services, while the sales and marketing strategic services related to
planning for our EI Elemental Heat Energy System. Each consultant received
options to purchase 10,000 shares of common stock with an exercise price of
$1.00 per share and options to purchase 10,000 shares of common stock with an
exercise price of $1.50 per share. Each consultant 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. These transactions were made in reliance on Regulation S.
In March 2004, we issued 17,668 shares of common stock upon the
conversion of $8,834 due for professional services. The recipient 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.
II-6
In March 2004, we issued 53,730 shares of common stock and options to
purchase 100,000 shares of common stock, expiring December 31, 2007 (50,000 of
which have an exercise price of $0.75 per share and 50,000 of which have an
exercise price of $1.25 per share) to an employee as payment for services
relating to corporate and media relations. The employee 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 April 2004, we issued an aggregate of 9,344 shares of common stock
to two employees as payment for services. One employee provided computer systems
and graphic design services, while the other provided sales and marketing
strategy services related to planning for our EI Elemental Heat Energy System.
Each employee 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. These transactions
were made in reliance on Regulation S.
In August 2004, we issued an aggregate of 15,681 shares of common stock
to three nonexecutive employees upon the conversion of $11,760 in accrued but
unpaid wages and an additional 32,500 shares of common stock for their agreement
to continue as employees. Each recipient 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
certificates to be issued. These transactions were made in reliance on
Regulation S.
In October 2004, we issued an aggregate of 17,878 shares of common
stock to three nonexecutive employees upon the conversion of $13,408 in accrued
but unpaid wages. Each recipient acknowledged 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
certificates to be issued. These transactions were conducted in reliance on
Regulation S.
In October 2004, we issued 150,000 shares of common stock to a
consultant in consideration of his agreement to provide consulting services for
an additional two years. We also issued 42,333 shares of common stock to the
same consultant as payment for $10,583.25 in printing services. The recipient
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 certificates to be issued. These
transactions were made in reliance on Regulation S.
Issuances to United States Investors
Between May 2001 and April 2003, we issued an aggregate of 88,000
shares of our common stock to a total of four United States investors for a
total of $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. In June 2004, we exercised our
contractual right to redeem these shares and will be paying an aggregate of
$4,000 to redeem the 400,000 shares and have them returned for cancellation.
In September 2003, we issued 10,000 shares of common stock to one
unaffiliated investor as consideration for the grant of an option to purchase
II-7
real property located in Colorado. No general solicitation was used, no
commission or remuneration was paid in connection with the transaction, and no
underwriter participated. The purchaser acknowledged in writing that the
securities constituted restricted securities and consented to a restrictive
legend on the certificates to be issued.
In August 2004, we agreed to issue 100,000 shares of common stock to
one unaffiliated investor as consideration for the grant of an option to
purchase real property located in Kentucky. No general solicitation was used, no
commission or remuneration was paid in connection with the transaction, and no
underwriter participated. The purchaser acknowledged in writing that the
securities constituted restricted securities, and consented to a restrictive
legend on the certificates 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.
II-8
- --------------------------------------------------------------------------------
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 from the
registration statement on Form
SB-2, SEC File No. 333-106839,
filed July 7, 2003.
3.02 Articles of Amendment to the Articles of Incorporation Incorporated by reference from the
registration statement on Form
SB-2, SEC File No. 333-106839,
filed July 7, 2003.
3.03 Bylaws Incorporated by reference from
amendment no. 1 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed September 12,
2003.
Item 4. Instruments Defining the Rights of Holders, Including Indentures
- -------------- ----------------------------------------------------------------- -------------------------------------
4.01 Specimen stock certificate Incorporated by reference from the
registration statement on Form
SB-2, SEC File No. 333-106839,
filed July 7, 2003.
4.02 Form of Designation of Rights, Privileges and Preferences Incorporated by reference from the
of Series A Preferred Stock registration statement on Form
SB-2, SEC File No. 333-106839,
filed July 7, 2003.
Item 5. Opinion re: Legality
- -------------- ----------------------------------------------------------------- -------------------------------------
5.01 Opinion of Kruse Landa Maycock & Ricks, LLC This filing
Item 10. Material Contracts
- -------------- ----------------------------------------------------------------- -------------------------------------
10.02 Technology Sale Agreement between William Baumgartner and Incorporated by reference from the
Essential Innovations Technology Corp. dated February 20, registration statement on Form
2002 SB-2, SEC File No. 333-106839,
filed July 7, 2003.
II-9
Exhibit
Number* Title of Document Location
- -------------- ----------------------------------------------------------------- -------------------------------------
10.03 International Marketing Agreement among SOTA Instruments, Incorporated by reference from the
Inc., Essential Innovations Asia Limited and Essential registration statement on Form
Innovations Technology Corporation dated April 9, 2002 SB-2, SEC File No. 333-106839,
filed July 7, 2003.
10.04 Agreement between: Crown Plaza Executive Suites Corporation Incorporated by reference from the
and Essential Innovations Technology Corporation dated registration statement on Form
November 26, 2002 SB-2, SEC File No. 333-106839,
filed July 7, 2003.
10.05 Official Term Sheet between Mr. Ken Telford and Essential Incorporated by reference from the
Innovations Technology Corp. effective January 1, 2003, registration statement on Form
signed February 21, 2003 SB-2, SEC File No. 333-106839,
filed July 7, 2003.
10.06 Media Transfer and Stock Purchase Agreement among Essential Incorporated by reference from the
Innovations Technology Corporation, Digital Alliance Group, registration statement on Form
LLC, and Millennium Capital Quest Corp. dated as of SB-2, SEC File No. 333-106839,
February 14, 2003 filed July 7, 2003.
10.09 Letter of Agreement between Norm Wuschke and Essential Incorporated by reference from
Innovations Technology Corp. dated February 10, 2003 amendment no. 1 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed September 12, 2003.
10.10 Letter of Agreement between Morpheus Financial Corporation Incorporated by reference from
and Essential Innovations Technology Corp. dated February amendment no. 1 to the registration
27, 2003 statement on Form SB-2, SEC File
No. 333-106839, filed September 12, 2003.
10.11 Letter of Commitment between Steve Wuschke and Essential Incorporated by reference from
Innovations Technology Corp. dated April 1, 2003 amendment no. 1 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed September 12, 2003.
10.12 Form of Subscription Agreement Incorporated by reference from
amendment no. 1 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed September 12,
2003.
10.13 Employment Term Sheet for Jason McDiarmid Incorporated by reference from
amendment no. 1 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed September 12,
2003.
10.14 Employment Term Sheet for Ken Telford Incorporated by reference from
amendment no. 1 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed September 12,
2003.
II-10
Exhibit
Number* Title of Document Location
- -------------- ----------------------------------------------------------------- -------------------------------------
10.15 Employment Term Sheet for Steve Wuschke Incorporated by reference from
amendment no. 1 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed September 12,
2003.
10.16 Employment Term Sheet for Stevan Perry Incorporated by reference from
amendment no. 2 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed November 17,
2003.
10.17 Loan Agreement among Kenneth G.C. Telford, Inc., Essential Incorporated by reference from
Innovations Corp., and Essential Innovations Technology amendment no. 2 to the registration
Corp. dated September 1, 2003 statement on Form SB-2, SEC File
No. 333-106839, filed November 17, 2003.
10.18 Loan Agreement between Jason McDiarmid and Essential Incorporated by reference from
Innovations Technology Corp., dated October 1, 2003 amendment no. 2 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed November 17, 2003.
10.19 Loan Agreement between Jason McDiarmid and Essential Incorporated by reference from
Innovations Technology Corp., dated October 20, 2003 amendment no. 2 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed November 17, 2003.
10.21 Consulting Agreement between Paul Yu and Essential Incorporated by reference from
Innovations Technology Corp. dated October 1, 2003 amendment no. 4 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed March 23, 2004.
10.22 Media Credit and Stock Purchase Agreement Official Incorporated by reference from
Termination Letter between Essential Innovations Technology amendment no. 6 to the registration
Corporation and Millennium Capital Quest Corp. dated June statement on Form SB-2, SEC File
13, 2004 No. 333-106839, filed June 22,
2004.
10.23 Official Termination Letter dated August 16, 2004, among Incorporated by reference from
SOTA Instruments Inc. and Essential Innovations Asia current report on Form 8-K filed
Limited and Essential Innovations Technology Corp. August 23, 2004.
10.24 Lease Dated June 1, 2004, between 394617 B.C. Ltd. and This filing.
Essential Innovations Corporation, as modified by a letter
agreement dated July 28, 2004
II-11
Exhibit
Number* Title of Document Location
- -------------- ----------------------------------------------------------------- -------------------------------------
Item 16 Letter on Change in Certifying Accountant
- -------------- ----------------------------------------------------------------- -------------------------------------
16.01 Letter from KPMG LLP to U.S. Securities and Exchange Commission Incorporated by reference from
dated July 9, 2004, regarding change in certifying accountant amendment no. 7 to the registration
statement on Form SB-2, SEC File
No. 333-106839, filed July 9, 2004.
Item 21. Subsidiaries of the Registrant
- -------------- ----------------------------------------------------------------- -------------------------------------
21.01 Schedule of Subsidiaries Incorporated by reference from the
registration statement on Form
SB-2, SEC File No. 333-106839,
filed July 7, 2003.
Item 23. Consents of Experts and Counsel
- -------------- ----------------------------------------------------------------- -------------------------------------
23.01 Consent of Peterson Sullivan PLLC This filing
23.02 Consent of KPMG LLP, Independent Registered Public This filing
Accounting Firm
23.03 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 from the
registration statement on Form
SB-2, SEC File No. 333-106839,
filed July 7, 2003.
- ------------------
* The number preceding the decimal indicates the applicable SEC reference
number in Item 601, and the number following the decimal indicating the
sequence of the particular document. Omitted numbers in the sequence refer
to documents previously filed as an exhibit, but no longer required.
- --------------------------------------------------------------------------------
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
II-12
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
(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-13
- --------------------------------------------------------------------------------
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 post-effective
amendment no. 1 to registration statement to be signed on its December 27, 2004.
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
post-effective amendment no. 1 to registration statement has been signed by the
following persons in the capacities and on the date stated:
/s/ Jason McDiarmid
- ---------------------------------
Jason McDiarmid, Director
/s/ Steve Wuschke
- ---------------------------------
Steve Wuschke, Director
/s/ David Rezachek
- ---------------------------------
David Rezachek, Director
/s/ William Yang
- ---------------------------------
William Yang, Director By /s/ Jason McDiarmid
-----------------------------------
/s/ William Baumgartner Jason McDiarmid, Attorney-in-Fact
- --------------------------------- Dated December 27, 2004
William Baumgartner, Director
/s/ Jeane Manning
- ---------------------------------
Jeane Manning, Director
/s/ Kenneth G.C. Telford
- ---------------------------------
Kenneth G.C. Telford, Director
II-14