Registration No. 333-106839
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 2 to
Form SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
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(Name of small business issuer in its charter)
Nevada
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(State or jurisdiction of incorporation or organization)
5075
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(Primary Standard Industrial Classification Code Number)
88-0492134
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(I.R.S. Employer Identification No.)
114 West Magnolia Street, Suite 400-142 101-5219 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
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(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
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(Name, address and telephone number of agent for service)
Copy to:
James R. Kruse
Kevin C. Timken
Kruse Landa Maycock & Ricks, LLC
Eighth Floor, Bank One Tower
50 West Broadway
Salt Lake City, Utah 84101
Telephone: 801-531-7090
Telecopy: 801-531-7091
As soon as practicable after the effective date of this registration statement.
(Approximate date of proposed sale to the public)
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [X]
1,628,350 Shares
Essential Innovations Technology Corp.
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This prospectus relates to the resale of up to 1,628,350 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 such time, if ever, that 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.
The purpose of this post-effective amendment is to de-register 1,371,650 of the
3,000,000 shares originally registered by the selling stockholders and to
de-register all 4,500,000 shares previously registered for sale by us. This
means that we are no longer issuing any shares to the public in connection with
this offering and that the offering now consists only of 1,628,350 shares that
the selling stockholders are offering.
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. We cannot
assure that any viable trading market will exist for our common stock following
this offering.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _______________, 2005.
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. provides ecofriendly, geothermal
and water treatment technologies. 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, 2004, we incurred a net
loss of approximately $2.1 million, and our cumulative net loss from our
inception through October 31, 2004, was approximately $5.3 million. At October
31, 2004, we had a net stockholders' deficit of approximately $721,000.
Accordingly, the independent auditors' report accompanying our audited
consolidated financial statements as of fiscal years ended October 31, 2004 and
2003, 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.
The Offering
The purpose of this post-effective amendment is to de-register
1,371,650 of the 3,000,000 shares originally registered by the selling
stockholders and to de-register all 4,500,000 shares previously registered for
sale by us. This means that we are no longer issuing any shares to the public in
connection with this offering and that the offering now consists only of
1,628,350 shares that the selling stockholders are offering.
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.
2
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.
Other Technology
We have begun to market our point-of-entry water treatment and
purification systems under the name "EI Water Master Series." 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. The systems are easily customizable to suit either
residential or commercial water treatment applications.
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, development and manufacturing facility in British
Columbia, as are the majority of our executive officers and substantially all of
our physical assets.
There is currently no public trading market for our common stock and
holders of our common stock, including purchasers in this offering, have no
access to any established market in which to sell their shares. A registered
broker-dealer has filed an application on Form 211 with the National Association
of Securities Dealers, Inc. that, if approved, would result in the quoting of
our common stock on the Over-the-Counter Bulletin Board, or OTCBB. We cannot
provide any assurances that the application will be approved or that, if
approved, the quoting of our common stock on the OTCBB would result in the
development of a public trading market sufficient to provide holders of our
common stock with any liquidity.
3
Summary Consolidated Financial Data
The following summary of historical consolidated financial information
for the fiscal years ended October 31, 2004 and 2003, and from the date of
inception through October 31, 2004, is derived from our audited consolidated
financial statements included in this prospectus:
Fiscal Fiscal
Year Ended Year Ended Cumulative
October 31, October 31, (Since
2004 2003 Inception)
---------------- --------------- ----------------
STATEMENT OF OPERATIONS DATA:
Sales........................................... $ -- $ -- $ --
Loss for the period............................. $ (2,089,011) $ (2,410,137) $ (5,295,095)
Loss per share-basic and diluted................ $ (0.18) $ (0.23)
Weighted average shares......................... 11,801,123 10,583,026
BALANCE SHEET DATA (as at):
Working capital deficit......................... $ (774,590) $ (413,233) $
Total current assets............................ $ 32,577 $ 29,619 $
Long-term debt.................................. $ -- $ -- $
Total stockholders' deficit..................... $ (721,026) $ (338,735) $
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, 2004, 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, 2004 and 2003.
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.
4
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 October 31, 2004, we had total current liabilities of approximately
$807,000, including accounts payable at approximately $254,000, accrued expenses
of approximately $56,000, accrued wages of approximately $105,000, and notes
payable to related parties and amounts due to stockholders of approximately
$372,000, and approximately $20,000 for tenant inducements. As of the same date,
we had cash of only $87. 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 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, a director, offers consulting services and is
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 this director to limit him 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.
5
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
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 us.
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.
6
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
us.
As of January 28, 2005, the directors, executive officers and holders
of 5% or more of our outstanding common stock together beneficially owned
6,540,357 shares, or approximately 49.9%, 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 in Canada. As a result, if the relative
strength of the dollar increases as related to the value of the Canadian dollar,
our financial performance would likely be adversely affected and it would become
more 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 13,119,153 shares of common stock
currently issued and outstanding, approximately 12.0 million shares were issued
in excess of one year ago and more than 10.0 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.
7
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
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 5,585,000 shares of common stock, with the 5,485,000 options
having a weighted average exercise price of approximately $0.79 per share and
the 100,000 warrants having a weighted average exercise price of approximately
$0.35 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.
8
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.
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 January 28, 2005, we had 13,119,153 shares of common stock issued
and outstanding. Of those shares, more than 10.0 million shares were issued more
than two years ago, and approximately 12.0 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
1,628,350 shares of common stock for the selling stockholders identified in this
registration statement.
We have reserved for issuance 5,585,000 shares of common stock upon the
exercise of issued and outstanding options and warrants.
As of January 28, 2005, there were approximately 140 holders of our
common stock.
9
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.
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 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.
o Our product is not certified by either Underwriters
Laboratories or Canadian Underwriters Laboratories, and we are
unable to predict with certainty how soon or if we will have
these certifications.
Plan of Operation
Over the next 12 months, we hope to continue to develop and
commercialize our EI Elemental Heat Energy System and identify an interested
development partner that would provide us the opportunity to install the EI
Elemental Heat Energy System in a "green" project. To date, we have not
generated 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 its report on our audited consolidated financial statements for the
fiscal years ended October 31, 2004 and 2003, our auditor stated that conditions
exist that raise substantial doubt as to our ability to continue as a going
concern.
10
Our net losses for the years ended October 31, 2004, and October 31,
2003, of approximately $2.1 million and $2.4 million, respectively, are
primarily attributable to research and development costs, general and
administrative costs, and an impairment charge for media credits. As of October
31, 2004, we had total current assets of approximately $32,000, total current
liabilities of approximately $807,000, for a working capital deficit of
$775,000. We continue to owe approximately $190,000 to providers of professional
services that are past due and $372,000 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. As of October 31,
2003, we had total current assets of approximately $30,000, total current
liabilities of approximately $443,000, and $2,626 in cash.
For the fiscal year ended October 31, 2004, we had no revenue from
marketing our geoexchange products and only minimal revenue from our Asia-based
consumer wellness products, which was classified and shown as discontinued
operations. We expect to continue to incur losses at least through fiscal year
2005. In light of our development nature and the continuing costs of
manufacturing, there can be no assurance that we will achieve or maintain
profitability or initiate and sustain future growth.
Between inception and October 31, 2004, we obtained net cash of
approximately $1,213,000 from financing activities to provide cash of
approximately $1,178,000 required to fund operating activities and approximately
$35,000 for investments. Financing activities generated approximately $693,000
from the issuance of common and preferred stock, approximately $504,000 in net
loan proceeds and approximately $16,000 in tenant inducements.
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 year ended
October 31, 2004, we incurred approximately $1,678,000 in general and
administrative expenses and approximately $395,000 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.
11
Over the next 12 months, we plan to continue to move towards the full
commercialization of the EI Elemental Heat Energy System, including seeking
approvals of the Canadian Standards Association ("CSA") and/or Canadian
Underwriters Laboratories ("CUL") and Underwriters Laboratories, Inc. ("UL") in
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 was in operation under in-house testing
conditions for nearly two years and has now been put into successful
field-testing and pilot project applications. Our first pilot project saw the
drilling and laying of the geofield in July 2003. We have already paid all of
the necessary expenses and acquired all of the necessary component parts.
However, beyond the geofield the installation to date has not been completed as
the homeowner has been financially incapable of completing the install. Our
second pilot project, in a new home near Horseshoe Bay in West Vancouver,
British Columbia, is now completely installed and operating successfully. We
have since completed our sixth sale and third installation, and we are now in
final production of the manufactured product line.
We anticipate that we will require approximately $750,000 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 CSA or CUL and the UL certification approvals for the technology. 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 2010. 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 commercialization activities are centered in two areas. The primary
focus of our commercialization activities is to prepare the EI Elemental Heat
Energy System for submission to CSA or UL for both safety and efficiency
testing, which includes electrical safety conformance. 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
ongoing research and development activities 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 initiated a direct sales campaign for geothermal 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
25-50% 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 also anticipate that we will require approximately $750,000 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 100 units of the EI
Elemental Heat Energy System by the end of fiscal 2005.
We have terminated our public offering of securities and have filed
this post-effective amendment to de-register the 4,500,000 shares of common
stock registered for sale by us. This offering now consists of only the
1,628,350 shares offered for sale by the selling stockholders, and will result
12
in no proceeds to us. 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.
Business and Property
Essential Innovations Technology Corp.
Essential Innovations Technology Corp. provides ecofriendly, geothermal
and water treatment technologies. 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 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.
We manufacture and distribute our geoexchange system, the "EI Elemental
Series," in Vancouver, Canada. The EI Elemental family of products is a
high-efficiency, ecofriendly, comfort system that provides heating, cooling,
dehumidification, as well as domestic hot water production, for residential,
commercial and industrial applications. The EI Elemental family of products
ranges in sizes from 1.5 to 10 tons for forced air heating/cooling, hydronic
radiant floor heating, or a combination of both. Furthermore, all models are
flexible and can be constructed vertically or horizontally to meet space
requirements for retrofit or new construction.
We have begun to market our point-of-entry water treatment and
purification systems under the name "EI Water Master Series." These units can be
designed to meet the requirements of nearly any residential or commercial
point-of-entry application, whether on municipal or rural water supplies. System
configuration and technologies have the capability to be customized depending on
the water contaminants, 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. The systems are easily customizable to suit either residential or
commercial water treatment applications.
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,
13
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, referred to in the industry as a geoexchange technology. A geothermal heat
pump is a renewable energy feature of our system 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.
The EI Elemental Heat Energy System possesses a number of distinct
qualities:
o The EI Elemental system is specifically designed for
particular operating environments. We have developed
individual systems to operate very efficiently in different
kinds of climates.
o The EI Elemental system has its foundation in the refrigerant
R410a. R410a is a new, ecologically friendly, extremely
efficient refrigerant that is emerging as the industry
standard for geothermal heat pump technology.
o The EI Elemental system incorporates a state-of-the-art
proprietary Artificial Intelligence Control Diagnostic, or
AICD, subsystem designed to regulate and monitor the system
for maximized efficiencies. This AICD subsystem stores and
collects real-time operating data that are processed in
preprogrammed control algorithms to provide maximum unit
efficiency and indoor comfort control. The AICD subsystem
incorporates a liquid crystal diode, or LCD, screen and simple
keypad promoting functionality through ease of use.
Additionally, the system is upgradeable and allows for
interoperability with other integrated home management
systems.
Our EI Elemental Heat Energy System can operate as a geothermal source,
or water source heat pump, to provide heating, cooling, and/or domestic hot
water. 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.
Our AICD subsystem 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 subsystem 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, to
adjust for variables such as climate and seasonal conditions.
In the future, the AICD subsystem will also be equipped with a voice
correspondence component (currently under design) that allows the operator to be
told about the state of the system operating characteristics and conditions that
14
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 past research
and development activities and now ongoing manufacturing activities, is now
being produced in our manufacturing facility as a packaged unit for ongoing and
future sales, installation and distribution. To date, we have spent
approximately $768,000 on research and development activities in bringing the EI
Elemental to the product state now ready for manufacture. 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
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 2008.
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,
15
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 2010.
EI Elemental Heat Energy System Pilot Project and Marketing Development
We are currently principally focused on the manufacturing,
distribution, sales and installation of our EI Elemental Heat Energy System. A
prototype with the core technology was previously used successfully to both heat
and cool our former research and development headquarters in British Columbia
for nearly two years. This prototype has now been placed into a packaged system
we call the EI Elemental Heat Energy System family of geoexchange units. In
summer 2002, we used a private, three-story home in Vancouver, British Columbia,
as our first field installation and pilot project. The EI Elemental Heat Energy
Systems were scheduled to replace a natural gas furnace and a natural gas hot
water heater. The plan was to install two EI Elemental Heat Energy Systems into
the home, one of which would provide radiant floor heating to the first and
second floors, while the other would provide heating for the third floor and
cooling for the entire house. Unfortunately, after the installation of the
geofield in the summer of 2002, the homeowner experienced financial difficulties
and has not yet been able to allow us to complete the installation of the heat
pump. In July 2003, we began the installation process and successfully completed
the required drilling and placement of the ground coils on our second pilot
project installation. Our second pilot installation, in a new home near
Horseshoe Bay in West Vancouver, British Columbia, is now completely installed
and operating successfully. We have since completed our sixth sale and third
installation, and we are now in final production of the manufactured product
line.
To source potential future sales in the Asian marketplace, we have
retained an individual under a consulting agreement 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 either the
Canadian Standards Association ("CSA") or Canadian Underwriters Laboratories
("CUL") and Underwriters Laboratories, Inc. ("UL") for approval in 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
CSA or CUL approval, UL approval, or both. However, we have not yet submitted
the EI Elemental Heat Energy System to the CSA or CUL or UL for approval, and we
cannot provide any assurance that we will ultimately receive the approval of
either organization.
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 for residential applications, 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.
16
Other Technology
We have begun to market our point-of-entry water treatment and
purification systems under the name "EI Water Master Series." These units can be
designed to meet the requirements of nearly any residential or commercial
point-of-entry application, whether on municipal or rural water supplies. System
configuration and technologies have the capability to be customized depending on
the water contaminants, 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. The systems are easily customizable to suit either residential or
commercial water treatment applications.
We have also acquired aeration technology that we believe has potential
application as a waste water technology or as a mixing apparatus within water
treatment systems. Although a provisional patent application was filed for this
technology, we have not filed a full patent application and have no plans to do
so at this time. Accordingly, we do not now have, and may never acquire, the
protection that a patent would provide. As a result, others may develop
identical or substantially similar technology and we would be unable to prevent
them from bringing it to market. We currently do not have any plans to develop
or use 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.
17
In an effort to address competition, we 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. As of September
15, 2004, Mr. Bond accepted the position of our chief operating officer and is
now actively pursuing commercialization and manufacturing of our EI Elemental
Heat Energy System and heads up our manufacturing facility and operations. 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 is the owner of a print shop, and his public
relations services have consisted largely of printing our promotional and sales
materials and developing domestic and overseas distribution channels.
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
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, manufacturing and distribution facility is currently located in
British Columbia, Canada, occupying approximately 18,900 square feet.
Additionally, we occupy a small office in downtown Vancouver for administrative
functions currently on a month-to-month basis. We have performed significant
leasehold improvements to the 18,900 square feet 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 for our continued manufacturing needs and
our research and development initiatives.
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.
18
o The Canadian government has programs to grant initiatives and
joint environmental development projects and that may enable
us to expedite our research and development efforts as we move
toward commercialization of the EI Elemental Heat Energy
System with members of the federal and provincial funding
agencies.
o This area has strong business and cultural connections to
Asia, particularly the Pacific Rim, which we believe will
facilitate dealing with Asian customers, our Asian subsidiary
and our potential Asian strategic associates.
o Travel from Vancouver to numerous destinations in Asia is
available on a regular, nonstop basis.
o We believe we can continue research and development efforts in
Canada more economically than in the United States because of
the relative strength of the Canadian dollar.
Legal Proceedings
We are not a party to any material pending proceedings, and no material
legal proceedings have been threatened by us or, to the best of our knowledge,
against us.
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
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.
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McDiarmid was not actively seeking employment and was investigating
opportunities in the renewable energy field and working with other of our
principals on matters preliminary to our incorporation. Mr. McDiarmid currently
resides in British Columbia, Canada.
Steve Wuschke has served as our chief technical officer and a director
since 2001. Mr. Wuschke is a 1996 honors graduate of Kwantlen University from
the Department of Robotics and Automation. Following graduation, he completed
the Technical Project Management Program at Simon Fraser University in British
Columbia. From 1996 to 2001, Mr. Wuschke was lead project manager for special
interface designs working directly with research and development for Delta
Controls Inc., a globally recognized automation and controls company. During his
time at Delta Controls, Mr. Wuschke was assigned to Chicago for a year where he
worked on contract for Arrowhead Environmental as an applications engineer
designing and implementing building automation systems for high-rise hotels,
commercial and institutional buildings. During his schooling, Mr. Wuschke
received the "Presidents Award of Excellence" for academic achievement and built
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 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, Telford Sadovnick, PLLC, Certified Public Accountants in the United
States from 1998-2004, 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
20
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.
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.
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 $100,000 in any of the last three fiscal years:
Long-Term Compensation
-------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Restricted Underlying All Other
Year Other Annual Stock Options/ LTIP Compen-
Name and Principal Ended Compensation Award(s) SARs Payouts sation
Position Oct. 31 Salary ($) Bonus ($) ($) ($) (no.) ($) ($)
- ------------------------------------------------------------------------------------------------------------
Jason McDiarmid 2004 $165,000(1) -- $5,355(2) -- -- -- --
President 2003 4,743(3) -- 10,000(2) -- -- -- --
(CEO) 2002 10,671 -- 2,182(2) -- -- -- --
Kenneth G.C. Telford 2004 $135,000(4) -- -- -- -- -- --
(CFO) 2003 38,686(5) -- -- -- -- -- --
2002 -- -- -- -- -- -- --
Steve Wuschke 2004 $132,000(6) -- -- -- -- -- --
(CTO) 2003 31,971(7) -- -- -- -- -- --
2002 4,347 -- -- -- -- -- --
- ---------------
(1) All of the amount due Mr. McDiarmid for the fiscal year ended October 31,
2004, was paid to him in common stock at the price of $0.75 per share, plus
an additional $0.25 per share representing the total fair value of the
shares.
(2) Vehicle lease.
(3) 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.
(4) All of the amount due Mr. Telford for the fiscal year ended October 31,
2004, was paid to him in common stock at the price of $0.75 per share
issued to Denon Capital, plus an additional $0.25 per share representing
the total fair value of the shares.
(5) All of the amount due Mr. Telford for the fiscal year ended October 31,
2003, was paid to him in common stock at the price of $0.75 per share
issued to Denon Capital, plus an additional $0.25 per share representing
the total fair value of the shares.
(6) Of the amount due Mr. Wuschke for the fiscal year ended October 31, 2004,
$89,000 was paid by issuing 118,667 shares of our common stock, the
remainder was accrued but deferred.
(7) Of the amount due Mr. Wuschke for the fiscal year ended October 31, 2003,
we paid him $4,443 in cash and $27,528 was paid by issuing 36,704 shares of
our common stock.
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
22
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.
Equity Compensation Plan Information
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 January 28, 2005:
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....... 5,485,000 $0.79 --
--------- --
Total...................... 5,485,000 $0.79 --
========= ====
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.
23
A majority of our directors are residents of Canada. As a result, it
may be difficult for our stockholders residing in the United States to effect
service of process within the United States upon such directors and experts who
are not residents of the United States. It may also be difficult to realize in
the United States upon judgments of courts of the United States predicated upon
civil liability of such directors and experts under the United States federal
securities laws. Canadian courts may not (i) enforce judgments of United States
courts of competent jurisdiction obtained against such directors or experts
predicated upon the civil liabilities provisions of such securities laws, or
(ii) impose liabilities in original actions against such directors and experts
predicated solely upon such securities laws. Accordingly, United States
stockholders may be forced to bring actions against our directors and experts
under Canadian law and in Canadian courts in order to enforce any claims that
they may have against such directors and experts. Subject to necessary
registration under applicable provincial corporate statutes in the case of a
corporate stockholder, Canadian courts do not restrict the ability of
nonresident persons to sue in their courts.
Principal Stockholders
The following table sets forth certain information as of January 28,
2005, 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)
- ---------------------------------------------------------------------------------------------------------------
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 12.5
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 6.0
(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 13.0
24
Stockholder(1) Description Number %(2)(3)
- ---------------------------------------------------------------------------------------------------------------
Jason McDiarmid........................................... Common stock 806,667 6.1
(Principal stockholder, director and officer) Options(6) 913,000 6.5
#101-5219 192nd Street ----------
Cloverdale, BC, Canada V3S 4P6 1,719,667 12.3
Steve Wuschke............................................. Common stock 977,243 7.4
(Principal stockholder, director and officer) Options(6) 912,000 6.5
#101-5219 192nd Street ----------
Cloverdale, BC, Canada V3S 4P6 1,889,243 13.5
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 8.9
William Baumgartner....................................... Common stock 70,000 0.5
(Principal stockholder and director) Options(6) 100,000 0.8
#101-5219 192nd Street ----------
Cloverdale, BC, Canada V3S 4P6 170,000 1.3
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) 300,000 2.2
#101-5219 192nd Street ----------
Cloverdale, BC, Canada V3S 4P6 560,000 4.2
All officers and directors
as a group (8 persons).................................... Common stock 2,843,417 21.7
Options(6) 3,000,000 18.6
----------
5,843,417 36.3%
==========
- -------------------
(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 30.
(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.
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. 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, we 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. In
October 2004, we issued 113,333 shares of our common stock to Mr. Telford in
conversion of $85,000 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. On January 17, 2005, Mr. White resigned as a
member of our board of directors and, by their terms, the unvested options were
cancelled.
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, we 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 accrued but unpaid
salary. Also in September 2003, we agreed to issue the same three executive
26
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 4 to our audited consolidated financial statements for the
fiscal year ended October 31, 2004.)
Norm Wuschke
In April 2002, we borrowed CDN$45,000 (approximately US$30,000 as of
the date of the loan) from Norm Wuschke. Mr. Wuschke is the father of Steve
Wuschke, a member of our board of directors and our chief technology officer.
This loan was to be repaid when we were able to do so and required us to pay 12%
interest on the principal amount, regardless of when repayment was made. As
additional consideration for the granting of the loan, we also issued to Mr.
Wuschke a five-year warrant to purchase 50,000 shares of our common stock at a
price of $0.35 per share. This loan was not the result of arm's-length
negotiations; however, we believe its terms to be as favorable as or more
favorable to us than we would have been able to obtain elsewhere. On February 4,
2003, the principal amount of the loan was repaid with the accrued interest paid
27
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 4 to our audited consolidated
financial statements for the fiscal year ended October 31, 2004.) 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 4 to our audited consolidated financial
statements for the fiscal year ended October 31, 2004.)
In January 2004, we borrowed an additional $31,704 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 4 to the audited consolidated
financial statements for the fiscal year ended October 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 4 to the audited consolidated financial statements for the fiscal year
ended October 31, 2004.)
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 4 to
the audited consolidated financial statements for the fiscal year ended October
31, 2004.)
In January 2004, we borrowed an additional $31,703 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 4 to the audited consolidated
financial statements for the fiscal year ended October 31, 2004.)
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.
28
In October 2004, we borrowed an additional $95,833 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 4 to the audited consolidated
financial statements for the fiscal year ended October 31, 2004.)
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 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 4 to the audited consolidated financial
statements for the fiscal year ended October 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 January 28, 2005, we had 13,119,153 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 January 28, 2005, we had reserved for issuance on exercise of
options and warrants an aggregate of 5,585,000 shares of common stock, with the
5,485,000 options having a weighted average exercise price of approximately
$0.79 per share and the 100,000 warrants having a weighted average exercise
price of $0.35 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 January 28, 2005, 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
Ecogenics Limited(5) 800,000 300,000 500,000 3.8
Fannie Mao Guterres(6) 790,580 125,000 665,580 5.1
Katherine Tam 219,000 99,000 120,000 *
Marco Abenante 504,412 180,000 324,412 2.5
Paul Yu 334,985 116,000 218,985 1.7
Richard McDiarmid 150,000 55,000 95,000 *
Dave Speers 107,522 44,284 63,238 *
Paul Guterres 114,000 47,320 66,680 *
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 -- *
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 -- *
30
Before Offering After Offering
--------------- ------------------------------
To Be
Name of Beneficial Owner Number(1) Registered Number(1) Percentage
------------------------ --------- ---------- --------- ----------
Kyle McDiarmid 30,000 10,000 20,000 *
Shane Higgins 2,000 2,000 -- *
Angelita Fabros 16,000 16,000 -- *
Fred Choy 10,000 10,000 -- *
Franco Cortese 55,000 34,754 20,256 *
Massimo Nicoletti 25,000 10,000 15,000 *
Johnny Mah 15,000 15,000 -- *
Ruth Findlay 10,000 10,000 -- *
Sean Piekaar 104,616 41,896 62,720 *
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 -- *
Kevin Wuschke 20,000 10,000 10,000 *
Yoshitaka Takeuschi 25,000 25,000 -- *
Corrine Humphrey 250,000 34,988 215,012 1.6
Heather Speers 10,000 10,000 -- *
James D. Roberts 40,000 40,000 -- *
Doug Lockhart 20,000 20,000 -- *
Brenda Lockhart 20,000 20,000 -- *
---------- ---------- ----------
Total 5,776,973 1,628,350 4,148,623
========== ========== ==========
- -------------------
* 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 350,155 shares in his own name and, as a
director of Denon Capital Strategies Limited, is deemed the beneficial
owner of 299,352 shares held by Denon Capital Strategies Limited.
(4) Mr. Bond is chief operating officer and a director.
(5) Ecogenics Limited is a principal stockholder.
(6) Fannie Mae Guterres is a principal stockholder.
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.
31
Sales of Shares in this Offering
We are no longer issuing shares to the public in this offering, and the
only shares remaining in the offering are the 1,628,350 shares offered by the
selling stockholders.
There is currently no public trading market for our common stock, and
holders of our common stock have no access to any established market in which to
sell their shares.
Sales by the selling stockholders will be at a fixed price of $1.25 per
share until such time, if any, as our common stock is traded on the
Over-the-Counter Bulletin Board, or OTCBB, or other securities exchange. A
registered broker-dealer has filed an application on Form 211 with the National
Association of Securities Dealers, Inc. that, if approved, would result in the
quoting of our common stock on the OTCBB. We cannot provide any assurances that
the application will be approved or that, if approved, the quoting of our common
stock on the OTCBB would result in the development of a public trading market
sufficient to provide holders of our common stock with any liquidity. 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;
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
32
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
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.
33
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.
34
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
CONSOLIDATED FINANCIAL REPORT
OCTOBER 31, 2004 AND 2003
C O N T E N T S
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003
CONSOLIDATED BALANCE SHEET F-2
CONSOLIDATED STATEMENTS OF OPERATIONS F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND
COMPREHENSIVE LOSS F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, and the related consolidated statements of operations,
stockholders' deficit and comprehensive loss, and cash flows for the years ended
October 31, 2004 and 2003, and for the period from February 9, 2001 (date of
inception) to October 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Essential
Innovations Technology Corp. (a development stage company) and Subsidiaries as
of October 31, 2004, and the results of their operations and their cash flows
for the years ended October 31, 2004 and 2003, and for the period from February
9, 2001 (date of inception) to October 31, 2004, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has not generated revenues or
positive cash flow from operations since inception and has an accumulated
deficit of $5,295,095 at October 31, 2004. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans regarding those matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Peterson Sullivan PLLC
January 6, 2005
Seattle, Washington
F-1
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
October 31, 2004
(In United States Dollars)
ASSETS
Current Assets
Cash $ 87
Goods and services tax receivable 8,965
Inventory 2,145
Prepaid expenses 21,380
---------------
Total current assets 32,577
Property and Equipment, net 39,987
Deposits 13,577
---------------
$ 86,141
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 254,193
Accrued expenses 55,748
Accrued wages 104,880
Tenant inducements 20,433
Notes payable, related parties 32,846
Due to stockholders 339,067
---------------
Total current liabilities 807,167
Stockholders' Deficit
Preferred stock:
$0.001 par value, authorized 10,000,000 shares,
no shares issued and outstanding
Common stock:
$0.001 par value, authorized 100,000,000 shares,
issued and outstanding 12,924,539 shares 12,925
Common stock issuable, 104,241 shares 104
Additional paid-in capital 4,584,989
Deficit accumulated during development stage (5,295,095)
Accumulated other comprehensive loss (23,949)
---------------
Total stockholders' deficit (721,026)
---------------
$ 86,141
===============
See Notes to Consolidated Financial Statements
F-2
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended October 31, 2004 and 2003, and the Period From
February 9, 2001 (Date of Inception) to October 31, 2004
(In United States Dollars)
Cumulative
During the
Development
2004 2003 Stage
-------------- -------------- --------------
Revenue $ - $ - $ -
Expenses
General and administrative 1,678,162 1,716,109 3,844,799
Research and development 394,982 166,316 768,074
Charge for impairment of media credits 440,000 440,000
-------------- -------------- --------------
2,073,144 2,322,425 5,052,873
Other income (expense)
Interest expense (8,681) (1,112) (9,793)
Interest expense, related parties (2,387) (81,823) (113,929)
Interest income 17 70 426
-------------- -------------- --------------
(11,051) (82,865) (123,296)
-------------- -------------- --------------
Loss from continuing operations (2,084,195) (2,405,290) (5,176,169)
Discontinued operation
Loss from operations of discontinued segment (4,816) (4,847) (118,926)
-------------- -------------- --------------
Net loss $ (2,089,011) $ (2,410,137) $ (5,295,095)
============== ============== ==============
Net loss per share - basic and diluted
Continuing operations $ (0.18) $ (0.23)
Discontinued operations - -
-------------- --------------
Net loss per share $ (0.18) $ (0.23)
============== ==============
Weighted average number of shares outstanding 11,801,123 10,583,026
============== ==============
See Notes to Consolidated Financial Statements
F-3
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
For the Years in the Period From February 9, 2001
(Date of Inception) to October 31, 2004
(In United States Dollars)
Accumu-
Common Deficit lated
Preferred stock Common stock stock issuable Stock accumulated other Total
---------------- ------------------- ---------------- Additonal subscrip- during compre- stock-
Number of Number of Number of paid-in tions development hensive holders'
Shares Amount 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 - - 9,543,000 9,543 60,000 60 608,933 (90) (795,947) (8,839) (186,340)
See Notes to Consolidated Financial Statements
F-4
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
(Continued)
For the Years in the Period From February 9, 2001
(Date of Inception) to October 31, 2004
(In United States Dollars)
Accumu-
Common Deficit lated
Preferred stock Common stock stock issuable Stock accumulated other Total
---------------- ------------------- ---------------- Additonal subscrip- during compre- stock-
Number of Number of Number of paid-in tions development hensive holders'
Shares Amount Shares Amount Shares Amount capital receivable stage loss deficit
------- ----- ---------- ------- ------- ----- ---------- ------- ----------- -------- ---------
Balance
October 31, 2002 - - 9,543,000 9,543 60,000 60 608,933 (90) (795,947) (8,839) (186,340)
Loss for the year - - - - - - - - (2,410,137) (2,410,137)
Foreign currency
translation - - - - - - - - - (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
Common stock
subscribed and
issued - - 60,000 60 (60,000) (60) - - - - -
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 400,000 400 11,355,985 11,356 - - 2,870,399 (90) (3,206,084) (14,716) (338,735)
Loss for the year - - - - - - - - (2,089,011) - (2,089,011)
Foreign currency
translation - - - - - - - - - (9,233) (9,233)
-----------
Comprehensive loss - - - - - - - - - - (2,098,244)
Common stock
issued for services
received - - 691,525 692 - - 690,836 - - - 691,528
Common stock issuable
for option
on land - - - - 100,000 100 99,900 - - - 100,000
Options issued in
exchange for
services received - - - - - - 43,344 - - - 43,344
Receipt of stock
subscriptions - - - - - - - 90 - - 90
Common stock issuable
for cash - - - - 4,241 4 7,958 - - - 7,962
Redemption of
preferred shares (400,000) (400) - - - - (3,600) - - - (4,000)
Common stock issued
on settlement
of debt - - 877,029 877 - - 876,152 - - - 877,029
------- ----- ---------- ------- ------- ----- ---------- ------- ----------- -------- -----------
Balance
October 31, 2004 - $ - 12,924,539 $12,925 104,241 $ 104 $4,584,989 $ - $(5,295,095) $(23,949) $ (721,026)
======= ===== ========== ======= ======= ===== ========== ======= =========== ======== ===========
See 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, 2004 and 2003, and the Period From
February 9, 2001 (Date of Inception) to October 31, 2004
(In United States Dollars)
Cumulative
During the
Development
2004 2003 Stage
------------------ ----------------- ----------------
Cash Flows From Operating Activities
Net loss $ (2,089,011) $ (2,410,137) $ (5,295,095)
Adjustment to reconcile net loss to
net cash used in operating activities
Loss on disposal of property and equipment 5,754 8,985 14,739
Loss on lapse of real estate option 110,000 110,000
Depreciation of property and equipment 20,220 18,009 61,641
Gain on tenant inducements (1,950) (3,635) (16,042)
Common stock issued for services including related loss 218,920 75,000 297,120
Common stock issued to related parties for services 472,608 400,750 898,358
Loss related to common stock issued to related parties
for debt settlement and equipment 219,257 302,042 521,299
Options and warrants issued for services 5,846 51,827 129,006
Options and warrants issued to related parties
for services 37,498 578,454 694,860
Charge for impairment of media credits 440,000 440,000
Foreign exchange effect on cash (9,233) (13,245) (31,902)
Changes in assets and liabilities
Goods and services tax receivable 1,452 (6,094) (8,965)
Inventory 10,931 (576) 10,355
Prepaid expenses and deposits (25,602) (4,775) (34,957)
Accounts payable 66,430 139,585 254,193
Accrued expenses and wages 636,235 103,386 777,295
-------------- -------------- --------------
Net cash used in operating activities (320,645) (320,424) (1,178,095)
Cash Flows From Investing Activities
Purchase of property and equipment (2,634) (6,432) (63,175)
Proceeds from disposal of assets 15,749 12,780 28,529
-------------- -------------- --------------
Net cash provided by (used in) investing activities 13,115 6,348 (34,646)
Cash Flows From Financing Activities
Issuance of common stock 249,078 689,083
Redemption of preferred shares (4,000) (4,000)
Stock subscriptions received 8,052 8,052
Tenant inducements received 16,042
Advances from shareholders 294,428 28,513 439,597
Repayments to shareholders (21,413) (29,897)
Loan proceeds received 6,511 74,501 109,853
Loan repayments (15,902) (15,902)
-------------- -------------- --------------
Net cash provided by financing activities 304,991 314,777 1,212,828
-------------- -------------- --------------
Net change in cash during the period (2,539) 701 87
Cash at beginning of the period 2,626 1,925 -
-------------- -------------- --------------
Cash at end of the period $ 87 $ 2,626 $ 87
============== ============== ==============
See Notes to Consolidated Financial Statements
F-6
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended October 31, 2004 and 2003, and the
Period From February 9, 2001 (Date of Inception) to October 31, 2004
(In United States Dollars)
Cumulative
During the
Development
2004 2003 Stage
------------------ ----------------- ----------------
Supplementary Information:
Interest paid $ 3,600 $ 5,363 $ 8,963
Income taxes paid - - -
Non-cash transactions:
Common shares subscribed in exchange for stock
subscriptions receivable 25,211
Preferred shares issued for prepaid media credits 440,000 440,000
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 debt and accrued expenses by issuance
of common shares, net of related loss of $219,257
in 2004, $109,645 in 2003, and $328,902 for the
cumulative period 657,772 159,645 817,417
Automotive equipment acquired from a related party
for common shares 51,323 51,323
See 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 Innovations Corporation ("EIC") is engaged in the manufacturing and
distribution of both the "EI Elemental Heat Energy System" family of geothermal
heat products and technology, and the "EI Water Master Series" line of
point-of-entry water treatment and purification systems. Substantially all of
the Company's efforts have been directed towards product and distribution chain
development primarily in western Canada. Accordingly, for financial reporting
purposes, the Company is considered to be a development stage company. 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 in August
2004.
Future Operations
The Company's consolidated 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 consolidated financial statements do not
include any adjustment that could result. Failure to obtain sufficient
additional funding would necessitate the Company reduce or limit its operating
activities.
Basis of Consolidation
These consolidated financial statements include the accounts of Essential
Innovations Technology Corp. and its wholly-owned subsidiaries, EIC and
Essential Innovations Asia Limited ("EIAL"). EIC 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. Since 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. Since 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, Canada and Hong Kong.
F-8
Inventory
Inventory consists of retail products which 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 expenditures that
substantially increase the useful lives of existing assets 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 manufacturing and 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 will be expensed as incurred. No advertising expense has been
incurred since inception.
Revenue Recognition
Revenues from the sales of bio-energetic medical products were recognized as the
sales were made, the price was fixed and determinable, collectibility was
probable and no significant Company obligations with regard to the products
remained. Future revenues from the sale of geothermal products will be
recognized in the same manner.
Discontinued Operations
On August 16, 2004, the Company and SOTA Instruments, Inc. agreed to terminate
their International Marketing Agreement. Accordingly, operating results of this
segment have been presented as discontinued operations in these consolidated
financial statements. During 2004, 2003 and the cumulative period during the
development stage, operations from this business segment generated revenues of
approximately $750, $0 and $8,544, respectively.
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 ITC
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 available to common
shareholders by the weighted average number of common shares outstanding in the
period. Diluted loss per share takes into consideration common shares
outstanding (computed under basic loss per share) and potentially dilutive
securities. There were no potentially dilutive common shares outstanding during
the period February 9, 2001 to October 31, 2004. During 2004, the Company
committed to issue 100,000 common shares for an option on a land purchase and
received cash for 4,241 of these common shares; all of which are expected to be
issued subsequent to year end. For purposes of loss per share computations, all
of these shares have been reported as common stock issuable and are included as
outstanding as of October 31, 2004.
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 consolidated 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 consolidated financial statements and the reported amounts of
revenues and expenses during the fiscal year. Actual results may differ from
those estimates.
F-10
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.
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 statements of
operations, which amount was not material for 2004 and 2003.
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
consolidated 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 wages, notes payable to
related parties and amounts due to stockholders. 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 loss if the fair-value method had been applied to all outstanding
and unvested awards in each period:
2004 2003
---------------- ----------------
Net loss, as reported $ (2,089,011) $ (2,410,137)
Add stock-based employee compensation expense included in
reported net loss, net of tax 61,403 71,611
Deduct total stock-based employee compensation expense
determined under the fair-value method, net of tax (169,519) (506,987)
---------------- ----------------
Pro forma net loss $ (2,197,127) $ (2,845,513)
================ ================
Pro forma net loss per share $ (0.19) $ (0.27)
================ ================
Note 2. Recent Accounting Pronouncements
SFAS No. 151, "Inventory Costs" is effective for fiscal years beginning after
June 15, 2005. This statement amends the guidance in APB No. 43, Chapter 4,
"Inventory Pricing" to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). The
adoption of SFAS 151 is expected to have no impact on the Company's consolidated
financial statements.
SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions" is
effective for fiscal years beginning after June 15, 2005. This Statement amends
SFAS No. 66, "Accounting for Sales of Real Estate" to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position 04-2, "Accounting for Real Estate
Time-Sharing Transactions". The adoption of SFAS 152 is expected to have no
impact on the Company's consolidated financial statements.
SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.
29" is effective for fiscal years beginning after June 15, 2005. This Statement
addresses the measurement of exchange of nonmonetary assets and eliminates the
exception from fair value measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions" and replaces it with an exception for exchanges that
do not have commercial substance. The adoption of SFAS 153 is expected to have
no impact on the Company's consolidated financial statements.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
statement 123R, Share-Based Payment, that addresses the accounting for
share-based payment transactions (for example, stock options and awards of
restricted stock) in which an employer receives employee-services in exchange
for equity securities of the Company or liabilities that are based on the fair
value of the Company's equity securities. This eliminated the use of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and will require such
transactions be accounted for using a fair-value-based method and recording
compensation expense rather than the optional pro forma disclosure of what
expense amounts might be.
F-12
Note 3. Property and Equipment
Property and equipment consist of the following:
Computer equipment $ 5,310
Computer software 1,862
Office furniture and equipment 21,399
Automotive 5,672
Leasehold improvements 19,379
----------------
53,622
Less accumulated depreciation (13,635)
----------------
$ 39,987
================
Note 4. Related Party Transactions and Balances
Notes Payable, Related Parties
During 2003, a director and officer of the Company made an unsecured loan to the
Company in the amount of $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
was recorded as interest expense during 2003. During 2004, the loan was extended
and the Company agreed to pay an additional $6,511 in refinancing costs. The
balance outstanding on these notes at October 31, 2004, is $32,846.
Due to Stockholders
Amounts due to stockholders at October 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 2004, $3600 in accrued interest was paid. 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 fair value of the shares at the time of
the settlement, and the Company recognized an additional expense of $72,645.
During 2004, $7,976 of amounts due to shareholders were settled by the issuing
of 10,635 fully paid common shares. The Company recognized an additional expense
of $2,659 on these transactions. The balance outstanding under this arrangement
was due at October 31, 2004, is $339,067.
Other Related Party Transactions
During 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
$136,264. During 2004, these consulting fees and related expenses, and
$38,000 of additional unpaid amounts owing as of October 31, 2003, were
converted into 232,352 common shares of the Company and the Company
recognized an expense of $58,088 for the amount the fair value of the
stock exceeded the services.
F-13
o Certain management and directors of the Company converted $418,427 of
accrued wages into 557,903 common shares of the Company and the Company
recognized an expense of $139,476 for the amount the fair value of the
stock exceeded the wages.
During 2003:
o 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 fair value of the shares at the time of
the settlement and, as a result, the Company recognized additional
expense of $20,000.
o 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 was recorded as interest expense during 2003. These
loans and accrued interest of $4,248 were repaid in full during 2004 by
the issuance of 63,397 fully paid common shares. The Company recognized
additional expense of $15,849.
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
$90,454. During 2003, $50,000 of these consulting fees was converted
into 67,000 common shares of the Company and the Company recognized an
expense of $17,000 for the amount the 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 of $1,107 to two directors for
certain equity they raised.
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.
Note 5. 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 which 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 non-voting,
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. During 2004, these shares were redeemed for
total consideration of $4,000 which resulted in a premium of $3,600.
F-14
Common Shares
During 2004:
o The Company issued 36,652 common shares for services with a fair value
of $36,652. The common shares have been recorded at their estimated
fair value of $1.00 per share on the date of the transactions.
o The Company issued 425,000 common shares to certain employees and
consultants 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 877,029 common shares to certain
management and directors for payment of accrued wages and loans in the
amount of $657,772. 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 recorded additional compensation of $219,257 resulting
from the transactions.
o The Company issued 53,730 common shares to a certain employee to settle
an accrual for services provided valued at $53,730. The common shares
have been recorded at their estimated fair value of $1.00 per share on
the date of the transaction.
o The Company issued 60,001 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 additional compensation
of $51,167.
o The Company issued 116,142 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 compensation of $116,142.
o The Company received cash of $7,962 for a subscription of 4,241 common
shares. The shares had not been issued as of October 31, 2004, but are
recorded as issuable at that date.
o The Company has recorded an expense of $100,000 for the issuance of
100,000 common shares at their estimated fair value of $1.00 per share
related to a deposit on an option to purchase real estate which did not
proceed. The shares had not been issued as of October 31, 2004, but are
recorded as issuable at that date.
During 2003:
o 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 2003, 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.
F-15
o The Company acquired automotive equipment from a stockholder, valued at
$15,120, in exchange for 60,480 common shares. The common shares were
recorded at their estimated fair value of $0.50 per share on the date
of the transaction, and the Company 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 The Company settled a portion of certain shareholder and other loans
totaling $92,645 for 370,580 common shares. The common shares were
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 The Company issued 666,500 common shares to certain employees and
consultants for services provided. The common shares were 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 The Company acquired automotive equipment with a fair value of $12,728
from a stockholder in exchange for 38,680 common shares. The common
shares were 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 The Company settled $50,000 payable to a company controlled by a
director and officer in exchange for 67,000 common shares. The common
shares were 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 The Company received automotive equipment and repairs with a fair value
of $31,200 from a related party in exchange for 124,800 common shares.
The common shares were recorded at their estimated fair value of $1.00
per share on the date of the transaction and the Company 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 The Company issued 10,000 common shares for the option to acquire 650
acres in Rifle, Colorado for $2.3 million. The common shares were
recorded at their estimated fair value of $1.00 per share.
o The Company issued 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 October 31, 2004, the Company had outstanding warrants to purchase 100,000
shares of the Company's common stock, at $0.35 per share. The warrants expire in
2007. At October 31, 2004, 100,000 shares of common stock were reserved for that
purpose.
F-16
Note 6. 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.
A summary of the Company's stock options is as follows:
Number of Weighted Average
Options Exercise Price
-------------------- --------------------
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
Options issued to directors, employees, advisors, and
consultants 690,000 1.14
--------------------
Outstanding at October 31, 2004 5,560,000 0.79
====================
The following table summarizes stock options outstanding at October 31, 2004:
Average Remaining Number
Number Outstanding at Contractual Life Exercisable at
Exercise Price October 31, 2004 (Years) October 31, 2004
- ----------------------------- -------------------------- ------------------------ -------------------------
$0.25 404,750 3.68 404,750
0.50 547,250 5.20 547,250
0.75 1,458,000 8.46 1,458,000
1.00 2,763,750 7.73 2,651,250
1.25 50,000 6.50 50,000
1.50 320,000 7.00 207,500
2.00 16,250 6.00 16,250
-------------------------- -------------------------
5,560,000 5,335,000
========================== =========================
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%.
Note 7. Income Taxes
No provision for income taxes has been made for the period since the Company
incurred net losses.
F-17
Deferred Tax Assets
As of October 31, 2004, the Company has net operating losses of approximately
$2,763,100 available for future deduction from taxable income derived in the
United States which begin to expire in the year 2022. In addition, the Company's
Canadian subsidiary has non-capital losses of approximately U.S. $1,117,800
available for future deductions from taxable income derived in Canada, which
begin to expire in 2008. The Company's Hong Kong subsidiary has non-capital
operating losses of approximately U.S. $118,000 which do not expire. The
potential benefit of net operating loss carryforwards has not been recognized in
the consolidated 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:
2004 2003
------------ --------------
Deferred tax assets
Net operating loss carryforwards (expiring through 2024) $ 1,385,100 $ 800,000
Research and development credits 42,000 45,500
Stock compensation expense 106,700 214,295
Capital loss carryforward 37,400
Valuation allowance (1,571,200) (1,059,795)
------------ --------------
Net deferred tax assets $ - $ -
============ ==============
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 ($511,405 and $879,795 for 2004 and 2003, respectively) and
to a lesser extent to the tax rate differential on losses in foreign countries.
Investment Tax Credits
As of October 31, 2004, the Company's Canadian subsidiary has investment tax
credits of U.S. $42,000 which may be carried forward and used to offset the
subsidiary's future Canadian income tax liabilities. The benefit of these tax
credits has not been recognized in the consolidated financial statements and
they will expire in 2012.
Note 8. Commitments
During 2004, an agreement by the Company to acquire certain land in Kentucky
lapsed. Under the terms of the agreement, the Company is required to issue
100,000 fully paid common shares at the estimated fair value of $1.00 per share.
Accordingly, an expense of $100,000 was recorded in 2004. The shares are
expected to be issued subsequent to year end.
The Company has an operating lease for office and warehouse space in Surrey,
B.C., Canada. The lease expires June 30, 2007, and there are two options to
renew the lease, each for an additional two years. Required payments on this
lease total in 2005 - $110,679; 2006 - $112,099; 2007 - $75,368. The Company
also has a month-to-month lease for office space in Bellingham, Washington. For
2004 and 2003, the Company incurred total rent expense of $49,404 and $35,833,
respectively.
F-18
Note 9. Subsequent Events
Subsequent to October 31, 2004:
o The Company issued 90,373 fully paid common shares to certain
employees for services, valued at $86,530, incurred after
October 31, 2004.
o The Company issued the 104,241 common shares that were
reported as common stock issuable as of October 31, 2004.
F-19
====================================== ========================================
- --------------------------------------
TABLE OF CONTENTS $3,750,000 Maximum
- --------------------------------------
Prospectus Summary Information.......2
Risk Factors.........................4
Forward-Looking Statements...........9 ESSENTIAL INNOVATIONS
No Net Proceeds to Us................9 TECHNOLOGY CORP.
Common Stock and Dividend Policy.....9
Management's Discussion and
Analysis or Plan of Operation.....10
Business and Property...............13
Management..........................19
Principal Stockholders..............24 1,628,350 Shares Maximum
Certain Transactions................26 Common Stock
Description of Securities...........29 $0.001 Par Value
Selling Stockholders................30
Plan of Distribution................31
Legality of Stock...................33
Where You Can Find
Additional Information............33
Change in Accountant................33
Index to Financial Statements.......35 ---------------------
PROSPECTUS
You should rely on the information ---------------------
contained in this Prospectus. No
dealer, salesperson or other person is
authorized to give information that is
not contained in this Prospectus. This
Prospectus is not an offer to sell nor
is it seeking an offer to buy these
securities in any jurisdiction where
the offer or sale is not permitted.
The information contained in this
Prospectus is correct only as of the
date of this Prospectus, regardless of
the time of the delivery of this __________________, 2005
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
==========
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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.
II-3
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.
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. On January 17, 2005, Mr. White resigned as a
member of our board of directors and, by their terms, the unvested options were
cancelled.
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.
II-4
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
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.
II-5
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
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.
II-6
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.
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.
II-7
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
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
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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.
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.
II-9
Exhibit
Number* Title of Document Location
- -------------- ----------------------------------------------------------------- -------------------------------------
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.
10.09 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.
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.
II-10
Exhibit
Number* Title of Document Location
- -------------- ----------------------------------------------------------------- -------------------------------------
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.
10.24 Lease Dated June 1, 2004, between 394617 B.C. Ltd. and Incorporated by reference from
Essential Innovations Corporation, as modified by a letter post-effective amendment no. 1 to
agreement dated July 28, 2004 the registration statement on Form
SB-2, SEC File No. 333-106839,
filed December 27, 2004.
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.
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Exhibit
Number* Title of Document Location
- -------------- ----------------------------------------------------------------- -------------------------------------
Item 23. Consents of Experts and Counsel
- -------------- ----------------------------------------------------------------- -------------------------------------
23.01 Consent of Peterson Sullivan PLLC This filing
23.02 Consent of Kruse Landa Maycock & Ricks, LLC Included in 5.01 above
Item 24. Power of Attorney
- -------------- ----------------------------------------------------------------- -------------------------------------
24.01 Power of Attorney Signatures Incorporated by reference 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;
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(b) reflect in the prospectus any facts or events
which, individually or together, represent a fundamental
change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
(ss.230.424(b) of this chapter) if, in the aggregate, the
changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
(c) include any additional or changed material
information on the plan of distribution.
(2) for determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering; and
(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.
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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. 2 to registration statement to be signed on its February 28, 2005.
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. 2 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
----------------------------------
Jason McDiarmid, Attorney-in-Fact
/s/ William Baumgartner Dated February 28, 2005
- -------------------------------
William Baumgartner, Director
/s/ Jeane Manning
- -------------------------------
Jeane Manning, Director
/s/ Kenneth G.C. Telford
- -------------------------------
Kenneth G.C. Telford, Director
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