AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 2002
REGISTRATION NO. 333-_____
________________________________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___________________________________________________
ESSTEC, INC.
(Name of small business issuer in its charter)
_______________________________________________________________________________
Nevada 7379 95-4786439
(State of other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
_______________________________________________________________________________
9500 East Artesia Blvd, Suite 203, Bellflower, CA 90706
(562) 867 1232
(562) 867 0933 (fax)
Shaun D. C. Edwardes
9500 East Artesia Blvd
Suite 203
Bellflower, CA 90706
(562) 867 1232
(562) 867 0933 (fax)
(Name, address and telephone number of agent for service)
COPIES TO:
Nimish Patel, Esq. Thomas J. Poletti, Esq.
Pollet, Richardson & Patel, A Law Corporation Kirkpatrick & Lockhart LLP
10900 Wilshire Blvd. Suite 500 10100 Santa Monica Blvd, 7th Floor,
Los Angeles, CA 90024 Los Angeles, CA 90067
(310) 208-1182 (310) 552-5000
(310) 208-1154 (fax) (310) 552-5001 (fax)
________________________________________________________________________________
Approximate Date of Proposed Sale to the Public: As soon as practicable after
this Registration Statement becomes effective.
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, check
the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [X]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED MAXIMUM AGGREGATE MAXIMUM AGGREGATE AMOUNT OF
SHARES OFFERED(1) OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------- ------------------- ------------------ ------------------
Shares of common stock, $.001 par value(2) 1,150,000 $11,500,000 $ 1,058.00
- ---------------------------------------------------------- ------------------- ------------------ ------------------
Shares of common stock, $.001 par value, issuable
upon exercise of the Representative's Warrants(3) 100,000 $ 1,200,000 $ 110.40
- ---------------------------------------------------------- ------------------- ------------------ ------------------
Total 1,250,000 $12,700,000 $ 1,168.40
- ---------------------------------------------------------- ------------------- ------------------ ------------------
(1) Includes 150,000 shares of common stock which may be purchased by the
underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933,
as amended.
(3) The Representative's Warrants are to be issued to the representative of our
Underwriter, and represent warrants for our common stock equal to 10% of
our offering, not including the over-allotment option, at an exercise price
of 120% of our offering price. Estimated solely for the purpose of
computing the registration fee pursuant to Rule 457(g) of the Securities
Act of 1933, as amended.
==========================================================================================================================
The information in this prospectus is not complete and may be amended. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED _________, 2002
1,000,000 SHARES
[GRAPHIC OMITED]
ESSTEC, INC.
Common Stock
________________________
This is the initial public offering for EssTec, Inc. We are offering
1,000,000 shares of our common stock, $0.001 par value. The estimated initial
public offering price will be between $8.00 and $10.00 per share.
We intend to apply to list our common stock on the American Stock Exchange
under the symbol "EST."
================================================================================
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 5.
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.
================================================================================
Underwriting
Discounts Proceeds to
Price to Public and Commissions EssTec, Inc.
---------------- ------------------ ------------
Per Share . . . . . . . $ $ $
Total . . . . . . . . . $ $ $
This is a firm commitment underwriting. The underwriters may also purchase
up to 150,000 additional shares of common stock from us at the public offering
price, less the underwriting discount, within 60 days from the date of this
prospectus to cover over-allotments. Delivery of the shares of common stock
will be made on or about __________, 2002.
WESTPARK CAPITAL, INC.
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as to
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . 5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS . . . . . 11
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . 12
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . 12
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . 13
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . 16
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 28
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 31
PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . 33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . 35
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . 37
TRANSFER AGENT AND REGISTRAR . . . . . . . . . . . . . . . 37
LISTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . 38
SHARES ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . 39
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . 41
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . 43
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
WHERE YOU CAN FIND MORE INFORMATION ABOUT US . . . . . . 43
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 44
PROSPECTUS SUMMARY
-------------------
This summary highlights selected information in this prospectus, but it may
not contain all of the information that is important to you. To better
understand this offering, and for a more complete description of the offering,
you should read this entire prospectus carefully, including the "Risk Factors"
section and the financial statements and the notes to those statements, which
are included elsewhere in this prospectus. All references to "EssTec" or
"EssTec, Inc." in this document refer to EssTec, Inc. and its 98%-owned
subsidiary, EssTec (Pvt.) Ltd., unless otherwise indicated.
OUR BUSINESS
We are a technology consulting and software platform development company,
and have developed the EssFlow system, our proprietary software application
platform which allows for central communication and data storage for multiple
parties. EssFlow applications can be modified based on client and industry
needs. The particular benefit of our technology is that it allows individuals
who are not organized under one company structure to share and collaborate on
the same information. If all participants were under the same company structure,
the issue of a central database could be handled internally by a company
intranet. EssFlow allows outsiders in.
Our first suite of products completed using the EssFlow technology is the
MedFlow system. The MedFlow system replaces the traditional paper-based
communication and filing systems endemic to the health care industry with an
electronic system, allowing all parties on the system to electronically
integrate all communications, files and even billing into one secure location
accessible via the Internet. MedFlow has an easily navigated user interface,
which permits individuals with only a minimal amount of technical skill to use
the product. As the needs of each MedFlow client grows, the system is scalable,
in that features can easily be added or modified, preventing costly system
replacements.
We have also developed a version of MedFlow specifically targeting the
worker compensation industry. This industry combines different organizations and
sectors together, including employers, attorneys, courts, doctors, specialists,
insurance companies, diagnostic centers, and patients. The flow of information
is typically slow, and many times incomplete. Our customized product allows each
of these parties to share relevant information with one another in real-time,
increasing the speed and efficiency of case processing and generating a more
accurate billing account than the current manual system. We are also pursuing an
EnterFlow platform based on the EssFlow technology for the entertainment
industry.
We intend to market our products both domestically and internationally, and
have completed agreements to market our products in the United Arab Emirates and
Canada. The UAE is a particular focus of our marketing efforts, due to its
proximity to our development center in Pakistan, and the UAE's focus on
positioning itself to become a dominant information technology center of the
Middle East.
Our technology consulting business provides general software development
services for businesses, and expertise focuses on the development of wireless
applications for mobile devices such as mobile phones, personal digital
assistants and handheld computers to streamline the business operations of our
clients. We maintain an off-shore development center in Lahore, Pakistan, and
use this center to employ skilled technicians who are proficient in the major
programming languages, but at substantially lower cost than an on-shore
competitor would have to pay for a similar level of skilled labor. This business
model enabled us to successfully procure and complete projects for a number of
clients based in North America, including Yahoo! and Nokia.
___________________________________________________
We were incorporated in Nevada in February 2000. Our principal executive
offices are located at 9500 East Artesia Blvd, Suite 203, Bellflower, CA 90706,
and our telephone number is (562) 867-1232. Our web site address is
http://www.esstec.com.
-1-
THE OFFERING
Common Stock offered . . . . . . . . . . . . . . . . . 1,000,000 shares
Common Stock to be outstanding after the offering . . . . 5,251,162 shares
Use of Proceeds . . . . . . . . . . . . . . . . . . . . Debt repayment and payment of deferred salaries, and remaining
proceeds to product development, acquisitions and strategic
alliances, working capital and general corporate purposes. See
"Use of Proceeds" on page 16.
The number of shares of our common stock that will be outstanding after
this offering is based on the number of shares of common stock outstanding on
the date of this prospectus. The number of shares that will be outstanding
after this offering excludes:
- 805,208 shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2002 (1) at a weighted average price of
$3.46 per share;
- 2,194,792 shares of common stock available as of March 31, 2002 for
future issuances under our 2000 Stock Option Plan;
- 150,000 shares of common stock issuable to the underwriter upon
exercise of the over-allotment option;
- 100,000 shares of common stock issuable upon exercise of warrants
issued to underwriter on closing of the offering; and
- 1,712,140 shares of common stock issuable upon exercise of outstanding
warrants as of March 31, 2002.(2)
ADDITIONAL INFORMATION
Unless otherwise indicated, this prospectus assumes that the underwriters
have not exercised their option to purchase additional shares.
In this prospectus, the terms "Company," "EssTec," "we," "us," and "our"
refer to EssTec, Inc., a Nevada corporation, and, unless the context otherwise
requires, "common stock" refers to the common stock, par value $.001 per share,
of EssTec, Inc.
_____________________
(1) Between April 1, 2002 and July 12, 2002, options representing an
additional 20,000 shares of common stock at an exercise price of $5.00 per share
and expiring in 2005 were issued. Of the 805,208 shares underlying currently
outstanding options, options representing 50,000 shares will expire, if
unexercised, on the date of filing.by the date of this, unless exercise, on the
date of this filing.
(2) Between March 31, 2002 and July 12, 2002, an additional 551,586 shares
of our common stock were issued upon the exercise of warrants at a weighted
average exercise price of $0.30 per share. Of the 1,712,140 shares underlying
currently outstanding warrants, warrants representing 896,421 shares of common
stock will expire, unless exercised, on the date of this filing.
-2-
SUMMARY FINANCIAL DATA
The following table presents summary consolidated financial data for
EssTec, and is derived from the historical consolidated financial statements of
EssTec, Inc. and our 98%-owned subsidiary EssTec (Pvt.) Ltd. Some variations
may exist in representing our consolidated statements due to the fact that our
fiscal year ends on December 31, while our subsidiary's fiscal year ends March
31.
The data presented in this table are derived from the historical
consolidated financial statements and notes thereto that are included elsewhere
in this prospectus. You should read those sections for a further explanation of
the financial data summarized here. Our historical financial statements are
only of limited use in making an investment decision. This is because the
financial presentation of our operations in the future will be different from
what they have been historically. Specifically, we intend to enter into a
series of acquisitions with other companies internationally, and we have altered
and intend to continue to alter our business model, scaling back our consulting
work and focusing primarily on our technology development and software
production. See our discussions in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a complete
discussion of the change in our business model and its effect on our financial
presentation. You should read the following table in conjunction with the
financial statements and the notes to those financial statements appearing
elsewhere in this prospectus.
February 11, 2000
(date of inception) January 1, 2001 Three month Three month
through through period ended period ended
December 31, 2000 December 31, 2001 March 31, 2001 March 31, 2002
(Audited) (Audited) (Unaudited) (Unaudited)
- --------------------------------------- ----------------- ---------------- ---------------- --------------
STATEMENT OF OPERATIONS DATA
- ---------------------------------------
Net revenues $ 438,602 $ 522,408 $ 194,334 $ 82,099
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Cost of revenues $ 285,409 $ 524,630 $ 185,645 $ 64,114
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Gross profit (loss) $ 153,193 $ (2,222) $ 8,689 $ 17,985
- --------------------------------------- ----------------- ---------------- ---------------- --------------
General and administrative expenses $ 987,659 $ 1,363,020 $ 359,132 $ 67,224
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Non-cash operating expenses $ 60,373 $ 1,092,530 $ 43,000 $ 674,973
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Research and development 0 $ 65,975 0 $ 27,560
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Operating loss $ (894,839) $ (2,523,747) $ (393,443) $ (751,772)
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Net loss $ (894,839) $ (2,511,853) $ (393,443) $ (750,162)
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Comprehensive loss $ (894,839) $ (2,514,088) $ (399,989) $ (752,397)
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Loss per share:
Basic and diluted comprehensive
loss per share $ (0.22) $ (0.57) $ (0.09) $ (0.22)
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Basic and diluted weighted average
shares 4,015,162 4,435,288 4,626,695 3,441,557
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Pro forma basic and diluted
comprehensive loss per share (1) ___ $ (0.50) ___ $ (0.19)
- --------------------------------------- ----------------- ---------------- ---------------- --------------
Pro forma basic and diluted weighted
average shares (1) ___ 4,986,874 __ 3,993,143
- --------------------------------------- ----------------- ---------------- ---------------- --------------
As adjusted basic and diluted
comprehensive loss per share (2) __ $ (0.42) __ $ (0.15)
- --------------------------------------- ----------------- ---------------- ---------------- --------------
As adjusted basic and diluted
weighted average shares (2) __ 5,986,874 __ 4,993,143
- --------------------------------------- ----------------- ---------------- ---------------- --------------
-3-
4
Year ended Three month
December 31, period ended
2001 March 31, 2002 Pro forma (1) As adjusted (2)
(Audited) (Unaudited) (Unaudited) (Unaudited)
- ------------------------------ -------------- -------------- ---------------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 9,384 $ 2,361 $ 168,388 $ 5,967,516
- ------------------------------ -------------- -------------- ---------------- -------------
Working capital (deficit) $ (605,875) $ (498,179) $ (332,152) $ 6,162,465
- ------------------------------ -------------- -------------- ---------------- -------------
Total assets $ 310,551 $ 356,327 $ 522,264 $ 6,321,392
- ------------------------------ -------------- -------------- ---------------- -------------
Long-term debt, net of
current portion $ 5,383 $ 5,383 $ 5,383 $ 0
- ------------------------------ -------------- -------------- ---------------- -------------
Stockholders' equity (deficit) $ (441,567) $ (344,535) $ (178,508) $ 6,321,492
- ------------------------------ -------------- -------------- ---------------- -------------
(1) Giving effect to the exercise of 551,586 warrants for net proceeds of
$166,027, and the issuance of 28,500 shares committed for issuance as of
March 31, 2002.
(2) Giving effect to the sale of 1,000,000 shares of common stock offered
hereby at the offering price of $8.00 per share and the application of the
net proceeds therefrom, after deducting the underwriting discount and
commissions and estimated offering expenses payable by us. See "Use of
Proceeds."
-4-
RISK FACTORS
------------
This offering and an investment in our common stock involve a high degree
of risk. You should consider carefully the risks described below, which are the
most significant risks we face based on our business and the industry in which
we operate, before you decide to buy our common stock. If any of the following
risks were to occur, our business, financial condition or results of operations
would likely suffer. In that event, the trading price of our common stock could
decline, and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We have an accumulated deficit, are not currently profitable and expect to incur
significant expenses in the near future as we alter our business model, which
may reduce our profitability.
We have incurred a cumulative net loss of $4,156,854 for the period from
our inception on February 11, 2000 to March 31, 2002, and are currently
experiencing negative cash flow. We expect to continue to experience negative
cash flow and operating losses through at least the rest of this year and the
first quarter of the next fiscal year, as we continue to make significant
expenditures for acquisitions, sales and marketing, international expansion,
infrastructure development and general and administrative functions, in light of
our new business model. See our discussion in "Business." As a result, we will
need to generate significant revenues to achieve profitability. If our revenues
grow more slowly than we anticipate, or if our operating expenses exceed our
expectations, our results of operations would be adversely impacted.
Our auditors have indicated uncertainty concerning our ability to continue
operations as a going concern.
Our auditors have indicated uncertainty concerning our ability to continue
as a going concern as of the most recent audited financial statements. We
cannot assure you that our ability to obtain additional customers or financing
sources will be impaired as a result of this qualification. Additionally, we
can not assure you that our proposed projects and services, if fully developed,
can be successfully marketed or that we will ever achieve significant revenues
or profitable margins and therefore remain a going concern.
Our limited operating history makes it difficult to evaluate our business.
We were founded in February 2000. As a result, we have a limited operating
history on which you can base your evaluation of our business and prospects.
Our business and prospects must be considered in light of the risks and
uncertainties frequently encountered by companies in their early stages of
development. These risks are further amplified by the fact that we are operating
in a technology market which is relatively new and rapidly evolving. These
risks and uncertainties include the following:
- our business model and strategy are still evolving and are continually
being reviewed and revised;
- we may not be able to successfully implement our business model and
strategy; and
- our management has not worked together for very long.
We cannot be sure that we will be successful in meeting these challenges
and addressing these risks and uncertainties. If we are unable to do so, our
business will not be successful and the value of your investment in our company
will decline.
We are changing our business model from consulting to technology development and
sales of proprietary software , which is a new business model. Our failure to
develop commercially viable technology or generate revenues from our new
business may have a material adverse effect on our business, our operations and
our financial position.
Historically, our revenues have been derived entirely from our consulting
activities. At the end of the last fiscal year, we decided to change our
business focus from service-based consulting activities to product-based
technology development and the creation of our proprietary software platforms.
We have not yet generated any revenues from our new business focus, and, as of
March 31, 2002, have already expended $93,535 in research, development and
marketing for our software platforms. Additionally, we are not seeking out
additional consulting clients or revenue. If we fail to successfully implement
our new business plan, it may have a material adverse effect on our business,
our operations, and our results of operations.
-5-
Potential fluctuations in our quarterly results make financial forecasting
difficult and could affect our common stock trading price.
As a result of our limited operating history, rapid growth, planned
acquisitions and the emerging nature of the markets in which we compete, we
believe that quarter-to-quarter comparisons of results of operations for
preceding quarters are not necessarily meaningful. Our quarterly results of
operations may fluctuate significantly in the future as a result of a variety of
factors, many of which are outside our control. Some of the factors that could
cause our quarterly or annual operating results to fluctuate include market
acceptance of our services and applications, product development, competitive
pressures, and customer retention. For example, our clients generally retain us
on a project-by-project basis, rather than under long-term contracts. As a
result, a client may or may not engage us for further services once a project is
completed or may unilaterally reduce the scope of, or terminate, existing
projects. The absence of long-term contracts and the need for new clients
create an uncertain and uneven revenue stream, which could negatively affect our
financial condition
You should not rely on the results of any one quarter as an indication of
our future performance. If in some future quarter our results of operations
were to fall below the expectations of securities analysts and investors, the
trading price of our common stock would likely decline.
We may be unsuccessful in expanding into new markets, and our inability to at
least recover our costs in acquiring businesses and forming joint ventures may
materially adversely affect our business, our operations and our financial
position.
A key component of our business plan is to establish and expand our
services in foreign markets, and we have already incurred approximately $489,299
in expenses related to researching and forming joint ventures, teaming
agreements and acquisitions from our inception to the end of the fiscal year
ended December 31, 2001, and $19,575 in the first quarter of this fiscal year.
We intend to spend an additional $150,000 for the remainder of the fiscal year.
See our discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." We will face risks inherent to new
ventures in each new market that we enter, including a lack of acceptance of our
business model. We may also incur substantial costs related to entering into new
markets, which may not be recoverable if we are unsuccessful in these markets.
Our failure to recover these costs and expenses may have a material adverse
effect on our business, our operations, and our financial position.
We have entered into an agreement which provides for an affiliated company to
appoint two directors to our Board of Directors, including the possibility of
the Chairmanship, for the duration of a five-year agreement.
We entered into an agreement with Elegant Set-Up General Trading Estb., a
Dubai marketing company, in order to market our software technology in a
cost-effective method and to act as a finder in offering our securities after
the conclusion of this offering. In exchange for these services, we have granted
them a series of options, which vest upon completion of three defined events,
none of which have occurred. We also granted Elegant the right to appoint two
directors to our Board of Directors, including the possibility of the
Chairmanship, for the duration of the agreement. The agreement is renewable upon
mutual consent. You will not have the right to elect a director for two of our
board positions, currently set at nine, while this agreement is in effect.
We will record substantial expenses related to our issuance of stock options
that may have a material negative impact on our operating results for the
foreseeable future.
We have entered into an agreement with Elegant Set-Up, a related party,
which requires us to issue options representing 600,000 shares, or 10.52% of our
outstanding shares after the closing of this offering, not including other
outstanding warrants and options or the underwriter's overallotment option.
These options will be issued upon the occurrence of a milestone defined by three
markers, and when issued will result in a consulting expense equal to the fair
market value of the options issued or the services performed, whichever is more
readily determinable. This expense may have a material adverse impact on our
results of operations. See further discussion of this event in our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Accounting," and our discussions in "Business - International
Expansion" and "Certain Relationships and Related Party Transactions."
-6-
We are subject to risks associated with our international operations, which may
materially affect our operations and results of operations.
A significant component of our business strategy is to continue to expand
internationally. For example, our primary technology base is in Pakistan. We
could be adversely affected by any major hostilities involving Pakistan which
result in the interruption or curtailment of trade between Pakistan and its
trading partners. For example, if the United States or any of its trading
partners reinstitutes the recently lifted trade sanctions, it may adversely
impact our business operations and financial position.
We also intend to expand our marketing campaign further into the Gulf
Cooperation Council states of Middle East region, which include Bahrain, Qatar,
Kuwait, Saudi Arabia, Oman and the United Arab Emirates. We have begun our
efforts by entering into a marketing agreement to begin selling our products in
the United Arab Emirates. We have also entered into teaming agreements with
companies in Europe and Australia.
We cannot assure you that we will be successful in expanding into
additional international markets. In addition to the uncertainty regarding our
ability to generate revenue from foreign operations and expand our international
presence, there are risks inherent in doing business internationally, including:
- changing regulatory requirements;
- legal uncertainty regarding foreign laws, tariffs and other trade
barriers;
- political instability;
- potentially adverse tax consequences;
- foreign currency fluctuations which could result in increased
operating expenses and reduced revenue;
- difficulty receiving dividends and distributions from our foreign
subsidiaries and divisions;
- difficulty in collecting accounts receivables; and
- cultural differences.
Any one or more of these factors may materially adversely affect our
business in a number of ways, such as increased costs, operational difficulties
and reductions in revenue.
We may be liable for defects or errors in the applications we develop, which may
materially harm our business and our financial position.
Many of the applications we develop are critical to the operations of our
clients' businesses. Any defects or errors in these applications could result
in:
- delayed or lost client revenues;
- adverse customer reaction toward EssTec;
- negative publicity;
- additional expenditures to correct the problem; and
- claims against us.
Our standard contracts limit our damages arising from our negligent conduct
in rendering our services. These contractual provisions may not protect us from
liability for damages. In addition, large claims may not be adequately covered
by insurance and may raise our insurance costs, which may materially adversely
affect our business and our financial position.
-7-
Our market is subject to rapid technological change, and we may not be able to
keep up with these changes and this could result in a loss of customers and harm
our ability to compete.
The markets for our services and products are characterized by rapid
technological change. There are many competing standards and platforms for
wireless solutions and new ones are constantly introduced. We expect that new
technologies will emerge as competition and the need for higher and more cost
effective bandwidth increases. The development of new, technologically advanced
products and services is a complex and uncertain process requiring high levels
of innovation and highly skilled engineering and development personnel, as well
as the accurate anticipation of technological and market trends. In order to
compete, we must be able to deliver a working solution to our customers that is
highly reliable, operate with their existing equipment, lower the customer's
costs of acquisition, installation, and maintenance, and provide an overall
cost-effective solution. We cannot assure you that we will be able to identify,
develop, manufacture, market, or support new or enhanced products and services
successfully, if at all, or on a timely basis. Further, we cannot assure you
that our new products and services will gain market acceptance or that we will
be able to respond effectively to product announcements by competitors,
technological changes, or emerging industry standards. Any failure to respond
to technological change would significantly harm our business.
We may engage in future strategic alliances or acquisitions that could dilute
the holdings of our existing stockholders, cause us to incur significant
expenses, or adversely affect our financial position.
We may review strategic alliance or acquisition opportunities that would
complement our current business or enhance our technological capabilities.
Integrating any newly acquired businesses, technologies or services may be
expensive and time-consuming. To finance any acquisitions, it may be necessary
for us to raise additional funds through public or private financings.
Additional funds may not be available on terms that are favorable to us and, in
the case of equity financings, may result in dilution to our stockholders. We
may not be able to operate any acquired businesses profitably or otherwise
implement our growth strategy successfully. If we are unable to integrate any
newly acquired entities or technologies effectively, our operating results could
suffer. Future acquisitions by us could also result in large and immediate
write-offs, incurrence of debt and contingent liabilities, or amortization of
intangibles, any of which could harm our operating results.
Rapid growth may strain our operations and require us to incur costs to upgrade
our infrastructure, which may adversely affect our financial position.
We plan to continue to expand our operations significantly. This
anticipated growth may place a significant strain on our management and
operational resources. In order to manage our growth effectively, we must
implement and improve our operational systems, procedures, and controls on a
timely basis. We will also have to increase the capacity of our current
infrastructure, particularly related to our off-shore development center, to
meet the additional demand. If we cannot manage growth effectively, our business
could be significantly harmed.
We derive a significant portion of our revenue from a few material customers.
Our failure to maintain this customer base would materially, adversely impact
our results of operations and our financial condition.
As of December 31, 2001, 83% of our revenues have been generated by two
customers, International Wireless and Control Systems, Inc. and Physicians
Mobile Medical Group, Inc. As of March 31, 2002 Crescent Diagnostic Medical
Group, a related party, accounted for approximately 51% of our revenues. We do
not have agreements with these companies requiring them to maintain a
relationship with us. Our inability to maintain these customers, or find new
customers generating enough revenue to replace that which may be lost in
terminating relationships with any of these customers, may have a material
adverse impact on our results of operations and our financial condition.
Continued competition in our markets may lead to a reduction in our prices,
revenues, and market share, which may have a material adverse impact on our
operations and financial position.
There are several existing companies that provide information technology
and consulting similar to the services we provide. Many of these companies,
including Action Technologies Inc, eFlexx and CDIT, have substantially greater
financial, technical, marketing, distribution resources, and brand name
-8-
recognition than we have and they may use these advantages to capture
significant market share. Increased competition could result in significant
price erosion, reduced revenue, lower margins or loss of market share, any of
which would significantly harm our business and our financial condition. See
our discussion in "Business - Competition."
If we fail to attract and retain employees, our growth could be limited and our
costs could increase, which may adversely affect our results of operations and
our financial position.
Our future success depends in large part upon our ability to attract, train
and retain highly skilled executive-level management and creative and technical
personnel. The competition in the technology industry for such personnel is
intense, and we cannot be sure that we will be successful in attracting,
training and retaining such personnel. Most of our employees and several of our
executive officers have joined us recently, and all employees are subject to "at
will" employment. Most of our employees are not subject to non-competition
agreements. High turnover resulting in additional training expense would
decrease our profitability. We cannot guarantee that we will be able to replace
any of our management personnel in the event their services become unavailable.
Our products and services could infringe on the intellectual property rights of
others, and we may not be able to protect our intellectual property rights in
foreign jurisdictions. Either event may cause us to engage in costly litigation
and, if we are not successful, could cause us to pay substantial damages and
prohibit us from selling our products or servicing our clients.
We cannot be certain that our technology and other intellectual property
does not infringe upon the intellectual property rights of others. Authorship
and priority of intellectual property rights can be difficult to verify.
Because patent applications in the United States are not publicly disclosed
until the patent is issued, applications may have been filed which relate to
services similar to those offered by us. We may be subject to legal proceedings
and claims from time to time in the ordinary course of our business, including
claims of alleged infringement of the trademarks and other intellectual property
rights of third parties.
If our products violate third-party proprietary rights, or third parties
infringe on our intellectual property rights, we cannot assure you that we would
be able to arrange licensing agreements or other satisfactory resolutions on
commercially reasonable terms, if at all. Any claims, made either by us or
against us, relating to the infringement of third-party propriety rights could
result in the expenditure of significant financial and managerial resources and
injunctions preventing us from providing services. Such claims could severely
harm our financial condition and ability to compete.
Our primary operations are located in Los Angeles, California and Lahore,
Pakistan, both of which have experienced power disruptions and natural
disasters, such as earthquakes, on a more frequent basis than many other
geographical locations. As a result, we are subject to risks of operational
failure that are beyond our control, the occurrence of which may materially
adversely impact our operations and our financial position.
Our ability to provide reliable and effective component requirements
fulfillment depends on the efficient and uninterrupted operations of our
computer and communications systems. Substantially all of our development
operations are located in Lahore, Pakistan and our headquarters are located in
Los Angeles, California. Our systems and operations are vulnerable to damage
and interruption from fire, flood, telecommunications failure, break-ins,
earthquake and similar events. Our operations may also be interrupted by power
disruptions, including rolling black outs which have been implemented in
California and Pakistan due to the acute power shortage. We do not maintain
alternate power sources. We have no formal disaster recovery plan and carry
insufficient insurance to compensate us for any such losses that may occur.
Furthermore, our security mechanisms may be inadequate to prevent security
breaches to our computer systems, including computer viruses, electronic
break-ins and similar disruptions. Such security breaches or operational
failures could expose us to liability, impair our operations and harm our
reputation.
We may be adversely impacted by the events of and actions in response to
September 11, 2001. A recurrence of terrorist attacks in any of our countries
of operation, or a reluctance on the part of our target markets in the Middle
East to engage us as an American company may have a material adverse impact on
our business plan, our operations and our financial condition.
We may be adversely affected by the events of September 11, 2001, in New
York, Washington, DC and Pennsylvania, as well as actions taken by the United
-9-
States in response. At this time, the long term effects of these events, or
other similar or related events that may occur in the future, on the technology
development and technology consulting industries or the economic conditions in
the United States, Pakistan and the United Arab Emirates, our primary areas of
marketing and operations, are not yet known. We cannot assure you that our
business plan, which reduces costs by using programmers in Pakistan, will not be
adversely impacted by future terrorist attacks or actions taken in response to
those attacks, which may include a reluctance on the part of our potential
market base in the Middle East to engage the services of a US company. Our
results of operations and financial condition could be adversely impacted if
those events and other related events cause either a decline in any of these
economies, or if any of events result in trade restrictions or embargoes in any
of the countries in which we operate, or any of the countries in which our
material customers are currently located or may be located in the future.
RISKS RELATED TO THIS OFFERING
There has been no prior market for our common stock, and a public market for our
stock may not develop or be sustained, which could cause our stock price to fall
below the initial public offering price.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market in our common stock may not develop or be
sustained after this offering, and the market price might fall below the initial
public offering price. The initial public offering price may bear no
relationship to the price which the common stock will trade upon completion of
this offering. The initial public offering price will be determined based on
negotiations between the representatives of the underwriters and us, based on
factors that may not necessarily reflect our assets, past operating results,
financial condition or other established criteria of value.
The market price of our common stock may fluctuate significantly as result
of a number of factors, including competitive developments and securities
analysts' expectations and recommendations. In addition, our relatively small
market capitalization and public float after this offering may cause our stock
price to be subject to even more volatility.
You will experience immediate dilution with respect to your shares and
additional dilution if persons holding options or warrants to purchase our stock
exercise their options or warrants.
If you purchase common stock in this offering, you will pay more for your
shares than existing stockholders paid for their shares. Accordingly you will
incur immediate and substantial dilution of $6.58 per share, representing the
difference between our book value per share after giving effect to this offering
and the initial public offering price, assuming an offering price of $8.00 per
share. In addition, if we raise additional funds through future financings or
to the extent that options and warrants to purchase common stock are exercised,
you may experience further dilution.
The sale or availability for sale of substantial amounts of our shares of common
stock could cause our stock price to decline.
If our existing stockholders sell a substantial number of their shares of
our common stock after this offering, or the public market perceives that these
sales may occur, the market price of our common stock could decline. The shares
of the common stock outstanding prior to this offering are restricted securities
as defined in Rule 144 under the Securities Act. These shares may be sold in
the future pursuant to a registration statement or without registration pursuant
to Rule 144 or Rule 701 under the Securities Act or another exemption from
registration.
In connection with this offering, our officers and directors and a number
of significant stockholders have agreed not to sell any shares of common stock
or securities convertible or exercisable into common stock for six to 18 months
after the effectiveness of offering without the consent of WestPark Capital,
Inc. The effect that sales in the public market of shares held by principal
stockholders or other stockholders or the potential availability of future sales
of these shares will have on the market price of our common stock is
unpredictable.
-10-
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
-------------------------------------------------
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by these forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms by other
comparable terminology. You should understand that the following important
factors, in addition to those set forth above or elsewhere in this prospectus,
could cause our results to differ materially from those expressed in our
forward-looking statements. These factors include:
- our reliance on the fees generated by our consulting practice, which
are being reduced as we focus on our technology development, which is
not yet revenue-generating;
- trends in the market for our services and our products;
- trends in the information technology industry;
- whether we can continue and manage growth;
- increased competition;
- effects of changes in profit margins;
- the unknown effects of possible system failures and rapid changes in
technology;
- trends in government regulation; and
- changes in political and economic stability in any of the countries in
which we currently operate, or intend to operate in the future.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform these
statements to actual results.
-11-
USE OF PROCEEDS
---------------
We estimate that our net proceeds from the sale of the shares of common
stock we are offering will be approximately $6,500,000, or $7,500,000 if the
underwriters exercise their over-allotment option in full, based on an assumed
initial public offering price of $8.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
primary purposes of this offering are to obtain additional equity capital,
create a public market for our common stock, and facilitate future access to
public markets.
We intend to use the net proceeds we receive from this offering in the
following manner and order of priority:
1. Debt payments $ 8,820
a. Deferred compensation (1) $ 141,912
b. Accounts payable $ 283,634
c. Accrued expenses $ 107,254
d. Due to related parties (2) $ 159,252
2. General corporate and business development,
including working capital for operations and
reserve for future acquisitions
(not yet identified) $ 5,799,128
____________
Total $6,500,000
(1) See our discussion in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Liquidity and Capital Resources" and
"Certain Relationships and Related Party Transactions."
(2) $150,000 is due to Red Sea Ltd. for consulting services to be performed,
discussed in "Certain Relationships and Related Party Transactions," and
$9,242 is due to a company, owned by our former Chief Executive Officer, in
repayment for a non-interest bearing loan to us over the last fiscal year
for general working expenses.
Pending their use, we plan to invest the net proceeds of the offering in
interest-bearing, investment grade securities, along with any additional
proceeds not previously allocated.
DIVIDEND POLICY
---------------
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business, and we do not expect to pay any cash dividends in the foreseeable
future.
-12-
CAPITALIZATION
--------------
The following table reflects our capitalization as of March 31, 2002:
- - on an actual basis;
- - on a pro forma basis to reflect the exercise of 551,586 warrants for net
proceeds of 166,027 and the issuance of 28,500 shares of common stock that
were committed for issuance as of March 31, 2002; and
- - on an adjusted basis to reflect our receipt of the net proceeds from the
sale of the shares of common stock in this offering at an assumed initial
public offering price of $8.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses.
You should read this table with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Description of Capital Stock"
and the financial statements and the related notes.
As of March 31, 2002
--------------------
Actual Pro forma Pro forma as
(Unaudited) (Unaudited) adjusted (Unaudited)
------------ ------------ ---------------------
Long-term debt, net of current portion $ 5,383 $ 5,383 --
- ----------------------------------------------------- ------------ ------------ ---------------------
Stockholders' equity:
- -----------------------------------------------------
Preferred stock, 5,000,000 shares authorized, no
shares issued or outstanding, actual, pro forma and
as adjusted -- -- --
- ----------------------------------------------------- ------------ ------------ ---------------------
Common stock, $.001 par value, 50,000,000 shares
authorized, 3,671,076 issued and outstanding,
4,251,162 issued and outstanding pro forma;
5,251,162 issued and outstanding pro forma as
adjusted $ 3,671 $ 4,251 $ 5,251
- ----------------------------------------------------- ------------ ------------ ---------------------
Committed stock $ 5,990 -- --
- ----------------------------------------------------- ------------ ------------ ---------------------
Deferred compensation $ (820,397) $ (820,397) $ (820,397)
- ----------------------------------------------------- ------------ ------------ ---------------------
Additional paid-in capital $ 4,625,290 $ 4,796,727 $ 11,295,727
- ----------------------------------------------------- ------------ ------------ ---------------------
Accumulated other comprehensive loss $ (2,235) $ (2,235) $ (2,235)
- ----------------------------------------------------- ------------ ------------ ---------------------
Accumulated deficit $(4,156,854) $(4,156,854) $ (4,156,854)
- ----------------------------------------------------- ------------ ------------ ---------------------
Total stockholders' equity (deficit) $ (344,535) $ (178,508) $ 6,321,492
- ----------------------------------------------------- ------------ ------------ ---------------------
Total capitalization $ (339,152) $ (173,125) $ 6,321,492
- ----------------------------------------------------- ------------ ------------ ---------------------
The number of shares of our common stock that will be outstanding after
this offering is based on the number of shares of common stock outstanding as of
March 31, 2002. The number of shares that will be outstanding after this
offering excludes:
- 805,208 shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2002 (1) at a weighted average price of
$3.46 per share;
- 2,194,792 shares of common stock available as of March 31, 2002 for
future issuances under our 2000 Stock Option Plan;
- 150,000 shares of common stock issuable upon exercise of the
over-allotment option;
- 100,000 shares of common stock issuable upon exercise of warrants
issued to representative on closing of the offering; and
- 1,712,140 shares of common stock issuable upon exercise of outstanding
warrants as of March 31, 2002 (2).
-13-
____________________
(1) Between April 1, 2002 and July 12, 2002, options representing an
additional 20,000 shares of common stock at an exercise price of $5.00 per share
and expiring in 2005 were issued. Of the 805,208 shares underlying currently
outstanding options, options representing 50,000 shares will expire, if
unexercised, on the date of filing.by the date of this, unless exercise, on the
date of this filing.
(2) Between March 31, 2002 and July 12, 2002, an additional 551,586 shares
of our common stock were issued upon the exercise of warrants at a weighted
average exercise price of $0.30 per share. Of the 1,712,140 shares underlying
currently outstanding warrants, warrants representing 896,421 shares of common
stock will expire, unless exercised, on the date of this filing.
<REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.>
-14-
DILUTION
--------
Our pro forma net tangible book value at March 31, 2002 was $(178,508), or
$(0.04) per share, based on 4,251,162 shares of our common stock outstanding,
after giving effect to the exercise of 551,586 warrants for net proceeds of
$166,027, and the issuance of 28,500 shares committed for issuance as of March
31, 2002.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of our common stock in this offering and the
pro forma net tangible book value per share of common stock immediately after
completion of this offering. After giving effect to the sale of the shares of
common stock by us at the assumed initial public offering price of $8.00 per
share, less the underwriting discounts and commissions and our estimated
offering expenses, our pro forma net tangible book value at March 31, 2002 would
be $6.32 million, or $1.20 per share. This represents an immediate increase in
the pro forma net tangible book value of $1.24 per share to existing
stockholders and an immediate dilution of $6.80 per share to new investors
purchasing shares at the assumed initial public offering price of $8.00 per
share. The following table illustrates this per share dilution:
Assumed initial public offering price per share $ 8.00
--------------------------------------------------------------------- ------
Pro forma as adjusted net tangible book value per
share at March 31, 2002 $ 1.20
--------------------------------------------------------------------- ------
Increase per share attributable to new investors $ 1.24
--------------------------------------------------------------------- ------
Dilution per share to new investors in this offering $ 6.80
--------------------------------------------------------------------- ------
Our sale of additional shares of common stock upon exercise in full of the
underwriters' over-allotment option would reduce the percentage of common stock
held by all assumed existing stockholders to 78.7% of the total number of shares
of common stock to be outstanding upon completion of this offering and will
increase the number of shares of common stock held by new investors to 1,150,000
shares or 21.3% of the total number of shares of common tock to be outstanding
upon completion of this offering.
The following table summarizes, as of March 31, 2002, the pro forma number
of shares of common stock purchased from us, the total consideration paid and
the average price per share paid by the existing stockholders and by you (before
deduction of the underwriting discounts and commissions and estimated offering
expenses.
Average
Shares Purchased Total Consideration Price
------------------- --------------------- per
Number Percent Amount Percent Share
--------- -------- ----------- -------- -----
Existing stockholders 4,251,162 80.9% $ 4,791,317 37.5% $1.13
- --------------------- --------- -------- ----------- -------- -----
New investors 1,000,000 19.1% $ 8,000,000 62.5% $8.00
- --------------------- --------- -------- ----------- -------- -----
Total 5,251,162 100% $12,791,317 100%
- --------------------- --------- -------- ----------- --------
All of the above computations assumes no exercise of the underwriters over
allotment of 150,000 shares of Common Stock and the underwriters warrants equal
to 10% of the total offering, exercisable at 120% of the total offering price.
All of the above computations also assumes no exercise of outstanding options or
warrants to purchase Common Stock. As of March 31, 2002, options to purchase
805,208 shares of Common Stock were outstanding at a weighted average exercise
price of approximately $3.46 per share under our 2000 Stock Option Plan and
1,712,140 warrants (1) were outstanding at a weighted average exercise price of
$0.40 per share. If any options or warrants become vested and exercised, you
will suffer further dilution.
___________________
() Between April 1, 2002 and July 12, 2002, options representing an
additional 20,000 shares of common stock at an exercise price of $5.00 per share
and expiring in 2005 were issued, and 551,586 shares of our common stock were
issued upon the exercise of warrants at a weighted average exercise price of
$0.30 per share. Options representing 50,000 shares will expire, if
unexercised, on the date of filing, and warrants representing 896,421 shares of
common stock will expire, unless exercised, on the date of this filing.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
----------------------------------
You should read the following discussion and analysis of our financial
condition and results of operations together with "Selected Financial Data" and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties, and assumptions. The actual results may
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, those presented
under "Risk Factors" on page 5 and elsewhere in this prospectus.
Essential Tech, Inc. was originally a subsidiary of Converge Global, Inc.,
with separate operations, employees, facilities and management. On February 11,
2000, we were separately incorporated in the state of Nevada, but remained a
wholly-owned subsidiary of Converge. Essential Tech (Pvt.) Ltd, a 98%-owned
sister subsidiary of Converge based in Pakistan, was reorganized as our direct
subsidiary. On October 6, 2000, we changed our name to Esstec, Inc. In December
2000, both we and Converge executed a debt conversion agreement, in which
Converge agreed to settle an outstanding debt to us in the amount of $800,000
for services performed, in exchange for which we received 255,782 shares of our
common stock, which we subsequently cancelled. Converge then distributed all of
its remaining shares of our common stock to a number of outstanding debtholders
of Converge, retaining no interest in our company. We do not have any current
relationship with Converge.
Historically, we have conducted business exclusively as a technology
consulting service, providing general software development services for
businesses, and focusing our expertise on the development of wireless
applications for mobile devices such as mobile phones, personal digital
assistants and handheld computers to streamline the business operations of our
clients. We maintain an off-shore development center in Lahore, Pakistan, and
use this center to employ skilled technicians who are highly proficient in the
major programming languages, but at a fraction of the cost that an on-shore
competitor would have to pay for a similar level of skilled labor.
74% of our revenue was generated between August 2000 and the end of 2000,
for fiscal year 2000. We responded to this increase in sales by aggressively
expanding our personnel by 250%, which resulted in increased expenses. We also
revised our business strategy by setting high revenue targets which corresponded
to our increased workforce, and in February 2001, began implementing our plan
for overseas expansion by spending $162,876 to establish our offices in the UAE.
However, as a result of market conditions in 2001, in July 2001 we reduced our
target revenues and implemented a cost-cutting strategy, which was designed to
address our understanding that our realized revenues for the 2001 fiscal year
would not meet our target revenues, and we needed to reduce the infrastructure
and personnel we had acquired, and expensed, in our effort to meet our target
revenues. As a result of this plan, we reduced our costs by eliminating 69% of
our staff in our US office, 50% of our staff in our Pakistan office, closing our
offices in the UAE, and eliminating benefits such as corporate housing and
employee entertainment expenses. The costs associated with the implementation of
this plan were $33,000 for the year ended December 31, 2001.
In 2001, following the downturn in the economy, and particularly the
technology sector, we decided to shift our business focus from consulting to
product development. While we still maintain our wireless and project consulting
business, we have also begun research and development on several different
proprietary applications and products that we believe will experience market
demand in several industry segments. Our first major product line is the EssFlow
system, a software application platform which allows central communication and
data storage for multiple parties, and has applications which can be modified
based on client and industry needs. We completed the first version of this
product in April 2002.
TRENDS
Over the next fiscal year, we intend to shift our focus to product
development. This business will require us to hire additional marketing staff
over the next two fiscal years, both domestically and internationally. The
number of staff we hire will be determined based on where we find our most
lucrative markets and the geographic trends of the technology sector. If, for
example, we find that our largest market is in the Middle East, sales tend to be
more relationship-driven, which will lead to our hiring only a small number of
people who maintain these relationships. A focus on the United States, however,
would require a larger team of more conventional marketing professionals.
Product sales is, generally speaking, a higher revenue margin business.
-16-
However, we will incur increased marketing and production costs that we did not
experience when we were solely a consulting company. We will also experience
higher research costs, for future products, and higher development costs for our
existing products, although we intend to use customers to subsidize our research
and development costs if possible. In April 2002, we achieved technological
feasibility for our EssFlow suite, and intend to capitalize the remainder of the
research and development costs related to this suite beginning in the second
quarter of this fiscal year.
We also intend to expand our business through acquisitions, which will
require us to expend cash in both researching prospective acquisition targets
and purchasing these targets, as appropriate. We will either use stock or cash
to complete these acquisitions, based on the nature of the acquisition, and will
experience accounting treatment concerns as these transactions conclude. We will
incur additional costs as we integrate each acquisition, but expect these costs
to be reduced over the long-term through successful introduction of our combined
products and services, as discussed in our "Business-Acquisition Strategy"
section.
ACCOUNTING
In order to generate capital and to preserve our cash flow while continuing
operations, between January 2002 and March 2002 we issued 200,000 stock options
and 25,000 warrants. The options were exercisable at $5.00 per share, which was
the fair market value at the time, and the warrants were exercisable at $0.30
per share. These shares represent a substantial discount from the top end of
our proposed offering range of $10. For accounting purposes, we have expensed
these options and warrants to reflect a potential offering price of $10.00 per
share, which is our deemed fair market value. This resulted in an aggregated
expense for the first quarter of this fiscal year of $1,242,500.
We anticipate expensing options and warrants we have issued after March 31,
2002 either during the second quarter, or amortized over the duration of the
option or warrant, as appropriate.
STOCK CONTRIBUTION
On October 1, 2001, 12 stockholders, all of whom were founders of our
company, contributed 1,722,109 shares of our common stock, with an average
purchase price of $0, back to EssTec, in exchange for warrants to purchase the
same number of shares of common stock at an exercise price of $0.30 per share.
The warrants expired immediately upon filing this registration statement and
prospectus, and 825,688 shares were issued upon exercise of these warrants. This
contribution was voluntarily conducted in order to correct the uneven and
inefficient capital structure, which our founders and our Board of Directors
believed existed at the time.
RESULTS OF OPERATIONS
THE THREE MONTH PERIOD ENDED MARCH 31, 2002 AS COMPARED TO THE THREE MONTH
PERIOD ENDED MARCH 31, 2001
NET REVENUES:
Our net revenues for the three month period ended March 31, 2002 was
$82,099, $54,000 of which was derived from our consulting business and $28,008
of which was attributed to the sale of our EssFlow product. This is $112,235
less then the revenues for the same period in 2001. The reduction in revenues
is due to the shift in our business plan from a pure consulting services sales
to a mix of consulting and product sales. This diverted our focus towards
product development and design, rather then business development activities.
COST OF REVENUES:
Our cost of revenues for the period ended March 31, 2002 was $64,114, which
was 65% lower than our cost of revenues for the same period in 2001. This cost
is attributable to decrease in headcount in our Pakistan office. The reduction
in expenses is due to the cost-reduction plan implemented by our management in
2001.
-17-
GROSS PROFIT (LOSS):
Our gross profit (loss) for the three month period ended March 31, 2002 was
$17,985, which is $9,296 more than that of the same period in 2001. The cost
cutting efforts undertaken by us in 2001 resulted in reduction of our cost of
revenues and hence an increase in the profitability of our operations.
GENERAL AND ADMINISTRATIVE EXPENSES:
Our general and administrative expenses for the three month period ended
March 31, 2002 was $67,224, as compared to $359,132 for the same period in 2001.
Our cost reduction efforts of 2001 had resulted in a reduction of $291,908 for
the quarter.
NON-CASH EXPENSES:
Our non-cash expenses for the three month period ended March 31, 2002 were
$674,973, as compared to $43,000 for the same period ended March 31, 2001. In
addition to amortized expenses from previously issued options, during the first
quarter of 2002, we issued options to purchase 200,000 shares of common stock to
employees at an exercise price of $5.00 per share. This is a substantial
discount to the high end of this offering price of $10.00. As a result of this
difference, we listed an expenditure of $312,500 and deferred compensation of
$687,500 based on our deemed fair market value of $10.00 per share. In addition
to the options, we also issued 25,000 warrants to our Vice President of
Operations with an exercise price of $0.30. This resulted in an expenditure of
$242,500 in compensation expenses based on our deemed fair market value of
$10.00 per share. During the three month period ended March 31, 2001, the fair
market value of our common stock was $3.50, which resulted in substantially
lower expenses and amortized expenses for that quarter.
RESEARCH AND DEVELOPMENT:
Our research and development expenses for the three month period ended
March 31, 2002 was $27,560, as compared to $0 for the same period in 2001.
These expenses were all related to our development of the EssFlow platform,
which began in the fourth quarter of 2001.
COMPREHENSIVE LOSS TO STOCKHOLDERS:
Our comprehensive loss to stockholders for the three month period ended
March 31, 2002 was $752,397, as compared to $399,989 for the same period in
2001. The increase of $352,408 is attributable to the cost-reduction plan
described above.
FISCAL YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE FISCAL YEAR ENDED
DECEMBER 31, 2000.
NET REVENUES:
Our net revenues for the fiscal year ended December 31, 2001 were $522,408, of
which $487,225 was derived from our consulting business and $35,183 was derived
from our product sales, as compared to $438,602 for the period from our
inception to December 31, 2000, all of which was attributable to our consulting
business. During the second half of 2001, we signed business development
consulting contracts with Rowley Corp. Their efforts resulted in contracts
generating $264,000, resulting in an increase of $48,623 revenues as compared to
fiscal 2000.
COST OF REVENUES:
Our cost of revenues for the fiscal year ended December 31, 2001 were
$524,630, as compared to $285,409 for the period from our inception to December
31, 2000. This increase was due to the expansion plan, primarily in personnel,
we put in place in response to the aggressive sales growth we experienced from
third quarter of 2000.
-18-
GROSS PROFIT (LOSS):
Our gross profit (loss) for the fiscal year ended December 31, 2001 was
$(2,222), as compared to $153,193 for the period from our inception to December
31, 2000. As highlighted above, our cost of revenue increased 89% in fiscal
2001, while the revenues grew by 19%, resulting in a decrease in our
profitability.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses for the fiscal year ended December 31,
2001 were $1,363,020, as compared to $987,659 for the same period ended December
31, 2000. As mentioned above, our revenues did not grow at the rate anticipated.
In response to the slow growth, we employed an independent consultant to help us
in the business development activities, which resulted in an increase of
approximately $700,000 in consulting expenses. We also spent $162,876 for the
establishment of our offices in the UAE in February 2001, as part of our new
business strategy for overseas expansion. We subsequently closed those offices
in December 2001 due to our inability to achieve contracts that would justify
our expense of maintaining an office in Dubai.
NON-CASH EXPENSES
Non-cash expenses for the fiscal year ended December 31, 2001 were
$1,092,530 as compared to $60,373 for the same period in 2000. This increase is
attributed to a series of warrants and options granted during the fiscal year
ended 2001. These include, in particular, (1) two options granted to Mr. Shezad
Rokerya, a director at the time of issuance, representing 75,000 shares of
common stock with an exercise price of $1.50, which resulted in an expense of
$150,000, (2) one option granted to Mr. Bill Cheung, a director, representing
150,000 shares of common stock with an exercise price of $3.50, resulting in an
expense of $112,500, and (3) one option granted to a related party, Red Sea
Ltd., representing 150,000 shares of common stock with an exercise price of
$3.50 per share, resulting in an expense of $75,000. In addition to these
options, we also issued a warrant representing 100,000 shares of common stock to
Mr. Mohammad Khan, a director at the time of issuance, with an exercise price of
$0.30 per share. This warrant resulted in an expense of $470,000.
RESEARCH AND DEVELOPMENT:
Our research and development expenditures for the fiscal year ended
December 31, 2001 was $65,975 as compared to $0 for the period from our
inception to December 31, 2000. The increase was due to our increased expenses
in developing our EssFlow platform, resulting from our change in our business
model from consulting to technology development and product sales.
COMPREHENSIVE LOSS TO STOCKHOLDERS:
Our comprehensive loss to stockholders for the fiscal year ended December
31, 2001 was $2,514,088 as compared to $894,839 for the period from our
inception to December 31, 2000. This loss is due to each and all of the
factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Since inception we have funded our capital requirements through private
placements of restricted shares and warrants, which total $1,882,207 from
inception to March 31, 2002, as well as debt financing. We intend to use the
proceeds from this offering to pay down our outstanding debt and expand through
international sales and acquisitions.
As of March 31, 2002, we had aggregate outstanding liabilities of $700,862.
This consists of a total of $141,912 of deferred compensation to officers and
directors and $159,242 of amounts due to related parties, all of which are
described in further detail in "Certain Relationships and Related Party
Transactions," and $390,888 of accounts payable and accrued expenses.
Discussions of all material liabilities and commitments are described as
follows:
-19-
On February 1, 2001, we entered into a consulting agreement with Mr. Shezad
Rokerya, who was a director at the time of the agreement. This agreement is
discussed further in our discussion titled "Executive Compensation."
In April 2001, we issued an unsecured note payable to Winthrop Ventures for
general operating expenses and working capital. The principal amount the note
was $50,000, bearing an interest rate of 14 % and maturing on June 17, 2002.
Our balance due as of March 31, 2002 was $45,569, and will be repaid in its
entirety on or about July 20, 2002.
In June 2001, we issued an unsecured note payable to Mark Stiedham, an
individual unrelated to us, for general operating expenses and working capital
in the amount of $30,000, bearing an interest rate of 6% and maturing on June
21, 2001. This note was repaid and retired on March 29, 2002.
On July 15, 2001, we entered into a consulting agreement for $100,000 with
Rowley Corporation for business development both in the US and overseas, which
is personally guaranteed by Tariq Khan, our former Chief Executive Officer and
President. In addition, we issued 75,000 stock options exercisable at $3.50 per
share upon the consultant's fulfillment of its obligation to generate $250,000
in revenues for us in September 2001. Consulting expenses totaling $125,250 were
recorded for this issuance. As of June 15, 2002, our balance due under this
agreement is $55,500, and we issued options representing 75,000 shares of common
stock to the consultant. See our discussion in "Business-International
Expansion."
On September 5, 2001, we entered into a consulting agreement with Red Sea,
Ltd, an affiliated party, for business development. Red Sea will also receive a
monthly retainer of $24,000, beginning after Red Sea has successfully raised
$5,000,000 in equity financing or $1,000,000 in revenues, neither of which has
occurred as of the date of the prospectus, until the agreement expires on
September 5, 2002. See our discussions in "Business- International Expansion"
and "Certain Relationships and Related Party Transactions." As of June 15, 2002,
the consultant earned $0.00, and we issued options due to Red Sea on signing at
an exercise price of $3.50 per share, representing 150,000 shares of common
stock. The options vest in increments of 12,500 every month, for a one year
period.
On February 15, 2002, we entered into an agreement with Elegant Set-Up
General Trading Estb, a business development company in Dubai, United Arab
Emirates. This agreement is discussed further in our discussions titled "Certain
Relationships and Related Party Transactions" and "Business-International
Expansion."
On March 14, 2002, we entered into an at-will employment agreement with Mr.
Basit, our Chief Operating Officer, discussed in our discussion titled
"Executive Compensation."
The following table summarizes our cash obligations for next 18 months.
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
- ---------------------------------- ----------------------------------------------
TOTAL LESS THEN 12 12-18
MONTHS MONTHS
- ---------------------------------- ----------------------- ------------- -------
Trade Payables $ 692,042 $ 692,042 -
- ---------------------------------- ----------------------- ------------- ------
Capital Lease Obligations $ 8,820 $ 3,437 $5,383
- ---------------------------------- ----------------------- ------------- ------
Operating Leases - - -
- ---------------------------------- ----------------------- ------------- ------
Unconditional Purchase Obligations - - -
- ---------------------------------- ----------------------- ------------- ------
Other Long-term Obligations - - -
- ---------------------------------- ----------------------- ------------- ------
Total Contractual Cash Obligations $ 700,862 $ 695,479 $5,383
- ---------------------------------- ----------------------- ------------- ------
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
Annual and quarterly fluctuations in our results of operations may be
caused by the timing and composition of orders from our customers and
distribution channels. Our future results also may be affected by a number of
factors, including our ability to offer our services and applications at
competitive prices and to anticipate customer demands. Our results may also be
affected by economic conditions in the geographical areas in which we operate.
All of the foregoing may result in substantial unanticipated quarterly earnings
shortfalls or losses. Due to all of the foregoing, we believe that
period-to-period comparisons of our results of operations are not necessarily
-20-
meaningful and should not be relied upon as indicative of future performance.
We do not expect any additional or altered impact as a result of our proposed
acquisitions.
FOREIGN CURRENCY
We operate on an international basis with substantially all revenues
produced in US dollars. The US dollar is the functional currency of our
operations. We incur expenses for personnel and various purchases incurred in
those countries other than the United States, in the currency of those
countries, with the most significant one being the Pakistan rupee. Exchange
rate fluctuations of the Pakistan rupee in relation to the US dollar have not
been significant in recent years. We cannot predict the effect of exchange rate
fluctuations upon future operating results due to the number of currencies
involved. Historically we have not experienced significant variations in
financial results due to currency fluctuations. Also, we have not historically
attempted to reduce our currency risks through hedging instruments, and have no
plans to engage in hedging activities at this time, although we may do so in the
future.
We maintain cash accounts in Pakistan containing no more cash than that
required to fund operations for 60 days at any time to reduce our risk should
the unlikely event of confiscation or other restriction on our accounts occur in
Pakistan. We do not expect any additional or altered impact as a result of our
proposed acquisitions.
INFLATION
We believe that our revenue and results of operations have not been
significantly impacted by inflation since we began operations. The majority of
our staff is located in Lahore, Pakistan, and increases in inflation gets offset
by the devaluation of the currency against dollar. For our US operations, the
inflation impact was negligible due to the aggressive retrenchment of our
operations to curtail the cost of operations. We do not expect any additional
or altered impact as a result of our proposed acquisitions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of long-lived assets, except for
certain obligations of lessees. This statement is not applicable to us.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, the accounting and reporting
provisions of APB No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business, and amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The adoption of SFAS No.
144 has not had a material impact, if any, on our financial position or results
of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. This statement rescinds SFAS No. 4, which required all gains and
losses from extinguishments of debt to be aggregated and if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No.
145 amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
This statement is not applicable to us.
-21-
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial conditions and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and disclosures on the date of
the financial statements. On an on-going basis, we evaluate our estimates,
including, but not limited to, those related to revenue recognition. We use
authoritative pronouncements, historical experience, and other assumptions as
the basis for making judgments. Actual results could differ from those
estimates. We believe that the following critical accounting policies affect
our more significant judgments and estimates in the preparation of our
consolidated financial statements:
REVENUE RECOGNITION
For software installation and consulting contracts, we recognize revenue
based on the following:
For fixed fee contracts, we recognize revenue based on the percent
complete, calculated as either the number of direct labor hours in the project
to date divided by the estimated total direct labor hours, or based upon the
completion of specific task benchmarks. It is our policy to record contract
losses in their entirety in the period in which such losses are estimable. Any
revenues associated with pre-payments or pre-billings are deferred until the
revenue is earned.
For non-fixed fee jobs, revenue is recognized as services are performed and
adjusted to realizable value, if necessary.
We did not have any significant post-contract support obligations at the
time of revenue recognition for any contracts in progress or completed during
the year ended December 31, 2001 and the period from February 11, 2000
(inception) to December 31, 2000. Our accounting policy regarding vendor and
post-contract support obligations is based on the terms of the customers'
contract, which are billable upon the occurrence of the post-sale support. Any
prepayments would be deferred until the support period was complete.
<REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.>
-22-
BUSINESS
--------
HISTORY AND CONSULTING BUSINESS
Essential Tech, Inc. was originally a subsidiary of Converge Global, Inc.,
with separate operations, employees, facilities and management. On February 11,
2000, we were separately incorporated in the state of Nevada, but remained a
wholly-owned subsidiary of Converge. Essential Tech (Pvt.) Ltd, a 98%-owned
sister subsidiary of Converge based in Pakistan, was reorganized as our direct
subsidiary. On October 6, 2000, we changed our name to Esstec, Inc. In
December 2000, both we and Converge executed a debt conversion agreement, in
which Converge agreed to settle an outstanding debt to us in the amount of
$800,000 for services performed, in exchange for which we received 255,782
shares of our common stock, which we subsequently cancelled. Converge then
distributed all of its remaining shares of our common stock to a number of
outstanding debtholders of Converge, retaining no interest in our company. We
do not have any current relationship with Converge.
Historically, we have conducted business exclusively as a technology
consulting service, providing general software development services for
businesses, and focusing our expertise on the development of wireless
applications for mobile devices such as mobile phones, personal digital
assistants and handheld computers to streamline the business operations of our
clients. We maintain an off-shore development center in Lahore, Pakistan, and
use this center to employ skilled technicians who are highly proficient in the
major programming languages, but at substantially lower cost than an on-shore
competitor would have to pay for a similar level of skilled labor. This business
model enabled us to successfully procure and complete projects for a number of
clients based in North America, including Yahoo! and Nokia.
In February 2002, we entered into a teaming agreement with L3 Technology, a
Canadian software development company. We have agreed to be a non-exclusive
distributor of their iMatix software platform either in conjunction with our
software products or on a stand-alone basis in exchange for 15% to 30% of the
sale revenue. We have also agreed to conduct "joint bidding" with L3, allowing
us to combine resources in locating end purchasers and conducting product sales.
This agreement is for a period of one year and renewal by mutual agreement.
PRODUCT DEVELOPMENT
ESSFLOW
In 2001, following the downturn in the economy, and particularly the
technology sector, we decided to shift our business focus from consulting to
product development. The sale of consulting services is generally considered a
far less scalable and profitable enterprise than sales of products. We then
determined that it would be in our best interests to develop specific
technologies based on our consulting knowledge and experience, which we could
then use to move into direct product sales. On December 2, 2001, we were
retained by Crescent Diagnostic Medical Group, a related party, to develop the
EssFlow system, our proprietary software application platform which allows for
central communication and data storage for multiple parties. EssFlow
applications can be modified based on client and industry needs. The first
version of our EssFlow product was completed in April 2002. The particular
benefit of our technology is that it allows individuals who are not organized
under one company structure to share and collaborate on the same information. If
all participants were under the same company structure, the issue of a central
database could be handled internally by a company intranet. Essflow allows
outsiders in.
While we still maintain our wireless and project consulting business, we
have also begun research and development on several different proprietary
applications and products that we believe will experience market demand in
several industry segments. We intend to focus on mobile technologies that
complement our existing suite of products, and anticipate both developing these
technologies as well as acquiring companies with technologies that complement
ours and are financially advantageous. See our discussion in
"Business-Acquisition Strategy."
MEDFLOW
Our first suite of products completed using the EssFlow technology is the
MedFlow system. The MedFlow system replaces the traditional paper-based
communication and filing systems endemic to the health care industry with an
-23-
electronic system, allowing all parties on the system to electronically
integrate all communications, files and even billing into one secure location
accessible via the Internet. MedFlow has an easily navigated user interface,
which permits individuals with only a minimal amount of technical skill to use
the product. As the needs of each MedFlow client grows, the system is scalable,
in that new features can easily be added or modified, preventing costly system
replacements.
As discussed above, our agreement with Crescent Diagnostic Medical Group
resulted in our development of a version of MedFlow specifically targeting the
worker compensation industry. This industry combines different organizations and
sectors together, including employers, attorneys, courts, doctors, specialists,
insurance companies, diagnostic centers, and patients. The flow of information
is typically slow, and many times incomplete. Our customized product will allow
each of these parties to share relevant information with one another in
real-time, increasing the speed and efficiency of case processing and generating
a more accurate billing account than the current manual system.
ENTERFLOW
We are also pursuing an EnterFlow platform based on the EssFlow technology
for the entertainment industry. We have entered into agreements in principle to
develop three niche products in the EnterFlow platform.
Film and Television Industry and Production
------------------------------------------------
This industry typically involves a number of different departments and
personnel working from different locations to produce a film or television
project. Our product will permit all of the individuals involved in the
production access to the project through a user-friendly interface via the
Internet and/ or a wireless personal digital assistant, each of which is
password-protected. Our system will also allow each producer to access multiple
different production projects within the system with a single mouse click.
EnterFlow is designed to store and access all aspects of the production project,
including budgets, scripts, and digital pictures for casting, streaming dailies
(footage of film shot on any particular day) and information from web cameras
deployed on the project set.
We intend to market our EnterFlow product to a wide variety of clients in
the entertainment industry, ranging from independent producers and studios to
large studios and networks that want to monitor entire production slates and
keep an online archive of easily referenced materials.
Recording Industry and Production
------------------------------------
We also intend to market our EnterFlow product to the recording industry,
particularly record companies and individual record producers. This industry is
similar to the film and television industry in that it involves multiple parties
and departments for record production. EnterFlow will enable users in the
industry in the various stages of pre-production (including rehearsal), track
selection, producer selection, studio selection, and session musician and
equipment hire to access information regarding budget updates, scheduling,
travel, equipment hire, rough mixes, and other creative and administrative
elements which are continuously updated in real time.
Post-Production and Distribution Industry
--------------------------------------------
We intend to market our EnterFlow product to a third segment of the
entertainment industry, the post-production and distribution aspect of the
industry. Once a recording project is delivered to a record company, a myriad of
departments get involved in taking the finished product to market. This includes
manufacturing, promotion, domestic and international marketing and promotion,
and may require additional editing including the addition or revision of musical
tracks or remixing of existing tracks. Each of these processes must be
coordinated between the record company, the artist, the producer, and various
attorneys, managers, publishers, merchandisers and touring personnel. Our
product will be further developed to address the needs of the record companies
to manage the progress and workflow of completed.
ACQUISITION STRATEGY
In addition to our consulting work and developing our own proprietary
applications and products, we intend to acquire businesses with technologies
that complement our existing suite of products or technologies. Our ideal
-24-
targets would share our target client base, which we believe may reduce our
costs of business development costs. We also intend to seek out companies with
technologies in an advanced state of development, which we believe may mitigate
our research and development costs, as well as our time to market.
We intend to focus our acquisitions to maximize our off-shore development
model to acquire target companies that have viable products, but are not yet
profitable. We believe we can purchase these "revenue generating, money losing"
operations in the information technology industry at currently depressed
valuations. We then intend to restructure these companies into profitable
enterprises primarily by supplementing the acquired company's development team
with our cost-effective, skilled basic programming teams. We believe this may
substantially reduce the cost of development, which would provide a stream of
revenue for us. We intend to fund these acquisitions with either cash, stock or
a combination of both, as we deem appropriate at the time.
We do not have any agreements to enter into any acquisitions at this time.
INTERNATIONAL EXPANSION
We also believe that an opportunity for growth exists in a number of
regions outside the US which other companies have abandoned or withdrawn from
due to perceived conditions of high competition and over-saturation. To this
end, we have begun our international expansion in the United Arab Emirates.
According to the government of the UAE, the UAE has been positioning itself to
become a dominant information technology center of the Middle East, and has
spent over $700,000,000 since October of 2000 to develop a state of the art
technology park referred to as "Internet City and Media City." This technology
park combines a premiere technological infrastructure in a tax-free zone fully
supported by the Government of Dubai. The City has already attracted companies
such as Sun MicroSystems and Microsoft to establish a corporate presence.
We have decided to begin our Middle Eastern focus in the UAE for several
reasons. The establishment of the Internet City and the support of the
governments of Dubai and the UAE have created an environment which promotes and
encourages the development of technology and technology-related industries. Its
proximity to Pakistan will allow us to more effectively manage our development
resources in our region. Additionally, the UAE government and financial
institutions have already proven (through the establishment of the Dubai
Internet City) to be supportive of companies looking to either develop or
transfer technology to the Middle East. Finally, we believe that we have a
number of relationships and contacts within this region that make it most
logical for us to market our products and services to this region, and to begin
our international expansion with the UAE.
In February 2001, we opened an office in Dubai, UAE. However, we were
unable to secure contracts which would justify our expense in maintaining an
office in Dubai. In September 2001, we entered into a consulting agreement with
Red Sea LTD, a corporate strategy firm, to assist with our business development
in Europe and in targeting acquisition candidates outside the United States. In
December 2001, we closed our Dubai office, and decided to establish and maintain
our presence in Dubai through our contracts with Red Sea and Elegant Set-Up,
described below. In exchange for an engagement fee of $150,000, Red Sea will
develop an acquisition strategy and alliance agreement and close both an
acquisition agreement and an alliance agreement within one year of entering into
the consulting agreement. Red Sea will also be paid a monthly retainer of
$24,000, beginning after Red Sea has successfully raised $5,000,000 in equity
financing or $1,000,000 in revenues, neither of which has occurred as of the
date of the prospectus, and neither of which apply to this offering. Red Sea has
also been issued non-qualified stock options for 150,000 shares of our common
stock at an exercise price of $3.50, which vest one year after executing the
agreement. Our Chief Financial Officer is also a director of Red Sea. Please
refer to our discussions in "Certain Relationships and Related Party
Transactions."
In March 2002, we completed an agreement with Elegant Set-Up, a UAE
marketing company, to market our technology products in the UAE. We will
provide technological support and $8,500 per month as salary for two employees,
as well as options to purchase 600,000 shares of our common stock at an exercise
price of $5.00 on the successful achievement of a milestone consisting of three
markers:
-25-
- obtaining three contracts from "well-reputed" clients, as determined
by our management, for EssTec products, and subsequent receipt of our
project cost and profit mark-up;
- assistance in obtaining five UAE investors for EssTec shares; and
- assistance in obtaining four UAE investors within 60 days of the
agreement. We have not issued any of these options as of the date of
this prospectus.
This agreement is for five years, renewable by mutual agreement. In
addition, Elegant has the right to appoint two directors to our Board of
Directors, with the possibility of one Director being named Chairman of the
Board, for the duration of the agreement. Please refer to our discussions in
"Certain Relationships and Related Transactions."
In July 2001, we entered into a consulting agreement with Rowley
Corporation to assist us with business development and marketing
internationally. In exchange for a payment of $100,000 and options to purchase
75,000 shares of our common stock with an exercise price of $3.50, we were
introduced to Physicians Mobile Medical Group. We were awarded a $250,000
contract by Physicians Mobile Medical Group, a California business providing
workers' compensation-related health care services to Southern California, to
develop a software platform for use in the workers' compensation industry, and
compatible with their proprietary website. In addition, we signed a contract
with Crescent Diagnostic Medical Group in December 2001 for the development of
our proprietary system called Compflow, which eventually became the basis of our
EssFlow platform, for which we received $84,000.
COMPETITION
Although there are several competitors offering various segments of our
overall approach, to the best of our knowledge, no single company exists that is
providing all of the individual facets of our business plan and strategy. The
following table summarizes the positions of our chief competitors. The check
marks indicate competing industries.
Collaborative Mobile
Workflow Services
Company Name Product Focus Portals Offshore
- ---------------------- -------------- -------- --------- ---------
ESSTEC X X X X
- ---------------------- -------------- -------- --------- ---------
Action Technologies, Inc X X
- ---------------------- -------------- -------- --------- ---------
e-flexx X X
- ---------------------- -------------- -------- --------- ---------
CDIT X X
- ---------------------- -------------- -------- --------- ---------
Itouch X
- ---------------------- -------------- -------- --------- ---------
MobileWay X
- ---------------------- -------------- -------- --------- ---------
Due to the changing nature and size of the software consulting business, we
believe that neither we nor any of our chief competitors has a significant
market share with respect to the software products and services development
industry.
Our primary method of competing in this arena is our ability to provide
technology development services and consulting through our off-shore facility
which we believe has a cheaper cost of labor then any of our major competitors.
For further discussion, please refer to our risk factor entitled "Continued
competition in our markets may lead to a reduction in our prices, revenues, and
market share."
CUSTOMERS AND SUPPLIERS
As of December 31, 2001, International Wireless Control Systems, Inc. and
Physicians Mobile Medical Group, Inc. accounted for 83% of our revenue. As of
March 31, 2002, Crescent Diagnostic Medical Group, a related party, accounted
for approximately 51% of our revenue. However, that contract has since
expired, and we do not anticipate having that company account for any
significant percentage of revenues going forward. We had no other customers
that generated over 10% of sales for the year ended December 31, 2001, and none
of our customers are affiliates. We do not rely on any supplier for a material
amount of our raw materials, and we purchase all supplies at fair market prices.
INTELLECTUAL PROPERTY
Although each of our subsidiaries produces proprietary software and
wireless technology and applications, due to the high cost of patent
applications and enforcement, as well as the ease with which other technology
-26-
companies can avoid patent enforcement, all of our companies have elected not to
apply for patent protection. Should the nature of the industry change such that
it becomes financially and operationally advisable for us to pursue patent
protection and enforcement, we may reconsider this business decision.
GOVERNMENT REGULATION
We are not aware of any government regulations that would affect our
industry or the operations of any of our businesses.
RESEARCH AND DEVELOPMENT
EssTec has conducted most of its research and development on behalf of
customers that have paid for our services. In addition to any research and
development that has been done at the expense of our customers, EssTec has spent
approximately $65,975 during each of the last two fiscal years on research and
development activities, predominantly for the development of our EssFlow
platform.
FACILITIES AND EQUIPMENT
Our headquarters are located in a facility in Bellflower, California. We
have been permitted to use these premises rent-free for the duration of our
contract with Crescent Diagnostics, which will expire in October 2002. See our
discussion in "Certain Relationships and Related Party Transactions." After
the contract expires, we will relocate to a leased space, the terms of which
will be determined at that time. We also lease a 2500 square foot office space
in Lahore, Pakistan. The lease on this facility is for a term through July 31,
2002. The rental payment is approximately $460 per month. We believe that we
will be able to extend the lease terms or find alternative space without
incurring a material cost.
EMPLOYEES
As of the date of this prospectus, we have a total of 17 employees. 5
employees work in our United States facility, and 12 work in our Pakistan
facilities.
LITIGATION
To the best knowledge of management, there are no litigation matters
pending or threatened against us.
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MANAGEMENT
-----------
DIRECTORS AND EXECUTIVE OFFICERS
Directors serve until the next annual meeting or until their successors are
duly qualified and elected. Officers serve at the discretion of the Board of
Directors. Our directors and officers as of the date of this prospectus are as
follows:
NAME AGE POSITION
---- --- --------
Shaun Edwardes 39 Chief Executive Officer
Khalid El-Saadi 30 Chief Financial Officer
Treasurer
Ali Basit 38 Chief Operating Officer
Abdul Saquib 34 Vice President - Operations
Secretary
Faysal Zarooni 38 Director, Chairman of Board of
Directors
Bill Cheung 31 Director
Ramsey Hakim 37 Director
Dr. Sana Khan 35 Director
Syed Nasir Zafar Ahmed 33 Director
SHAUN EDWARDES: Mr. Edwardes has served as Chief Executive Officer to
EssTec since March 2002. Prior to that, Mr. Edwardes served as Executive Vice
President - Business Development to EssTec from January 2002 until March 2002.
Mr. Edwardes served as Chief of Operations for Public Media Works, Inc., an
interactive film production company, from January 2001 to December 2001. From
October 1999 to December 2000, Mr. Edwardes served as Vice President of Business
Development for Voxsurf Software, Ltd., specializing in voice and WAP (wireless
application protocol) software development. From January 1999 to September
1999, Mr. Edwardes also served as Principal for DC Management, a development and
management company for recording artists. From January 1996 to December 1998,
Mr. Edwardes served as General Manager for Operations of Last Beat, Inc.
KHALID EL-SAADI: Mr. El-Saadi has served as Chief Financial Officer and
Treasurer to EssTec since February 2002. From November 1999 to January 2001 Mr.
El-Saadi served as Principal of Euclid/eCorporate Partners, a technology-focused
venture capital partnership, based in New York, between Euclid SR Partners and
the Saudi Economic and Development Company. From March 1997 to March 1999, Mr.
El-Saadi served as Marketing Manager and Treasurer of the Abdullatif Jameel
Group, the largest independent Toyota distributor. Prior to 1997, Mr. El-Saadi
served as Senior Manager with the Treasury Client Services Group at the National
Commercial Bank of Saudi Arabia, and as Assistant Manager with the Treasury
Marketing Unit at the Saudi American Bank (CITIBANK). Mr. El-Saadi holds a BS in
International Business Administration from the American College of Switzerland.
ALI BASIT: Mr. Basit has served as Chief Operating Officer to EssTec since
March 2002. From July 2000 to December 2001, Mr. Basit served as Director of
Research and Development for Glovia, International, a division of Fujitsu North
America, a software development company. From August 1999 to July 2000, Mr.
Basit served as Senior Web Development Manager for Epoch Networks, Inc., an
Internet service provider, specializing in business-to-business and
business-to-consumer e-commerce applications. From February 1997 to August 1999,
Mr. Basit served as Systems Engineer for Experian North America, a credit
reporting company formerly known as TRW.
ABDUL L. SAQUIB: Mr. Saquib has served as Vice President-Operations and
Secretary to EssTec since September 2000. From June 2000 to September 2000, Mr.
Saquib served as Business Development Manager of Intelilabs, Inc., developing
the company's US presence. From May 1996 to January 2000, Mr. Saquib held
various positions with Citibank N.A. Pakistan, including Operations Manager for
the flagship branch of Citibank in Pakistan with assets of $700 million. Mr.
Saquib holds a BS in Electrical Engineering from Ohio University, and received
an MA in Economics from Ohio University in 1992.
-28-
FAYSAL ZAROONI: Mr. Zarooni has served as a director and as Chairman of the
Board of Directors to EssTec since February 2002. Mr. Zarooni has served as
Managing Director to the Al Zarooni Group of Companies, a real estate company
that develops and rents properties in Dubai and Abu Dhabi, since 1989. Mr.
Zarooni has served as Director to and owner of Elegant Set-Up, a Dubai, UAE
business development company, since 2000. Mr. Zarooni holds a BBA in Business
Administration from the University of Central Florida.
BILL CHEUNG: Mr. Cheung has served as a director of EssTec since December
2001. From April 1997 to November 2001, Mr. Cheung served as Marketing and
Sales Partner with Golden Horizon Plastic Corp. From March 1994 to March 1997,
Mr. Cheung served as Sales Manager to National Plastics Color.
RAMSEY HAKIM: Mr. Hakim has served as a director to EssTec since August
2001. From 1994 to 2002, Mr. Hakim served as Director of Business Development to
AT&T, Inc., focusing on the development of corporate alliances and partnerships.
Mr. Hakim received a BS in Computer Science from the University of California in
1986, and an MBA from the University of California in 1989.
DR. SANA KHAN: Dr. Khan has served as a director to EssTec since February
2002. Dr. Khan served as President and Medical Director of Crescent Diagnostics,
Inc. from September 1996 to December 1999, and President and Medical Director of
Crescent Diagnostics Medical Group since January 2000. Dr. Khan received a BS in
Biology from the University of California, Irvine in 1986, and a joint MD/Ph.D.
(Anatomy/ Neurobiology) from the University of California, Los Angeles in 1993.
SYED NASIR ZAFAR AHMED: Mr. Ahmed has served as a director to EssTec since
February 2002. From 1996 to the present, Mr. Ahmed has served as Director to
Farnaz Enterprises, an import house for the import of Neutrogena line of
products in Pakistan. Mr. Ahmed has served as Director to ZAFCO (Pvt.) Ltd., a
Karachi-based international trading house, since his founding of the company in
1988. ZAFCO is currently the exclusive distributor of Neutrogena, General Mills,
Frito-Lay Inc, Freeman Cosmetics and Dial Corporation products in Pakistan. Mr.
Ahmed has also served as a Director to Elegant Set-Up, a Dubai, UAE business
development company, since 2000. Mr. Ahmed has a BS in Business from the
University of Southern California.
ADVISORY BOARD
We currently maintain an Advisory Board, comprised of individuals
possessing particular expertise or experience in various areas pertaining to our
business. Currently, our Advisory Board has three members, each of which serves
at the discretion of the Board of Directors. As consideration of their
services, we have granted to each Advisory Board member options to purchase a
number of shares of our common stock based on the length of their agreement and
amount of time they committed to be spent on our activities.
Current members of our Advisory Board are:
1. Mukhtar Hasan
2. Monis Rahman
3. Shezad Rokerya
MUKHTAR HASAN: Mr. Hasan graduated from the University of Karachi with a
Bachelor of Commerce in 1970, and qualified as a Chartered Accountant with Eric
Nabarro & Partners, London in 1974. From 1974 through 1979, Mr. Hasan served as
head of financial operations in the United Kingdom for the Habib Bank A.G.
Zurich in London, and joined the National Bank of Ras-al-Khaimah from 1979 to
1980. In 1980, Mr. Hasan was appointed Finance Director of Intermarine Shipping
Limited in London, a bulk cargo vessel company. In 1983, he assisted in
establishing the Tawoos Group in Oman, which manages and operates companies in
various fields and encompasses approximately 30 companies. In 1995, he assisted
in organizing Renaissance Services SAOG, and was subsequently appointed Chief
Executive Officer of Renaissance. In 1998, Mr. Hasan established Redwood
Partners, a corporate finance firm focusing exclusively on the GCC markets. He
is also a Fellow of the Institute of Chartered Accountants in England and Wales,
and a director of several private companies.
-29-
MONIS RAHMAN: Mr. Rahman graduated from the University of Wisconsin-Madison
with a B.S. degree in Electrical and Computer Engineering. Mr. Rahman began his
career in 1993 at Intel Corporation as a member of Intel's Itanium
microprocessor development team. From 1997 to 1998, Mr. Rahman was a senior
architect at Advanced Micro Devices. From 1998 to 1999 Mr. Rahman was CEO &
President of Crestech, a chip design consulting services company. In February
1999, Mr. Rahman founded eDaycare.com, which he subsequently sold to Parent
Watch, Inc. in 2000. He then established an independent practice of technology
consultation in the field of advance chip designs and manufacturing.
SHEZAD ROKERYA: Mr. Rokerya is the Chairman of The Interlink Companies, a
Private Investment and Merchant bank, which he founded in 1990. Mr. Rokerya is
also Chairman of Interlink Equity Capital L.P., a South Asian private equity
banking buy-out fund formed to make friendly acquisitions of banks undergoing
privatization, and managed the company's expansion into information technology
venture capital arena by establishing partnerships with TATA, iAsiaworks, CBSI
and Parsec. Mr. Rokerya also serves on the boards of numerous Interlink
subsidiaries, outside investment vehicles and portfolio companies. Prior to
that, Mr. Rokerya was employed in private investments with Lehman Brothers and
Merrill Lynch & Co. He has also served as financier and advisor to the Saudi
Royal Family on telecommunications, hotel and railway infrastructure projects
throughout the Kingdom of Saudi Arabia. Mr. Rokerya is a native of Montreal,
Canada where he attended McGill University and later attended Western State Law
School.
We do not employ any member of our Advisory Board. Although none has any
material commitments to other companies at this time, each member may acquire
commitments to other entities in the future, which may limit his availability to
us. There can be no assurance that we will be able to retain any of our
Advisory Board members.
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-30-
EXECUTIVE COMPENSATION
----------------------
The following table sets forth the total compensation earned by or paid to
our Chief Executive Officer and our other most highly compensated executive
officers earning over $100,000 for the fiscal year ended December 31, 2001.
LONG TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION Awards Payouts
----------------------------------- ------------------------ --------
Other Securities
Annual Restricted Underlying LTIP All Other
Compen- Stock Options/SARs Payouts Compen-
Year Salary ($) Bonus ($) sation ($) Awards ($) (#) ($) sation ($)
---- ----------- ---------- ----------- ----------- --- -------- -----------
Tariq Khan, Chief
Executive Officer
and President (1) 2001 $60,000.00 $0.00 $0.00 $0.00 0 $0.00 $0.00
- ------------------ ---- ----------- ---------- ----------- ----------- --- -------- -----------
OPTIONS/SAR GRANTS IN THE FISCAL YEAR 2001
------------------------------------------
INDIVIDUAL GRANTS
-----------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Option/SARs Employees in Fiscal Exercise or Base Expiration
Name Year Granted (#) Year Price ($/Share) Date
- ---------------------- ----------- -------------------- ----------------- --------------- -----------
Tariq Khan, Chief
Executive Officer and
President (1) 2001 0 0.00%
- ---------------------- ----------- -------------------- ----------------- -------------- -----------
(1) Mr. Khan resigned on January 1, 2002.
EMPLOYMENT AND RELATED AGREEMENTS
OFFICERS
All of our US employees have employment agreements. However, each of these
employees maintains "at will" employment. A form of our employment agreement is
attached as an exhibit to this prospectus.
On January 14, 2002, we entered into an at-will employment agreement with
Mr. Edwardes, our Chief Executive Officer. Mr. Edwardes's salary is accrued at
$8,000 per month from the date of the agreement, payable at the closing of this
offering. In addition, Mr. Edwardes will receive $1,000 per month. In addition,
on the same date, he received an option representing 50,000 shares of common
stock with an exercise price of $5.00 and an expiration date of January 14,
2012, which will vest upon effectiveness of this offering, and accelerates on
the closing of this offering, and an option representing 25,000 shares of common
stock vested over a period of one year from the date of the agreement.
On March 14, 2002, we entered into an at-will employment agreement with Mr.
Basit, our Chief Operating Officer. Mr. Basit's salary is accrued at $5,000 per
month from the date of the agreement until the closing of this offering. In
addition, Mr. Basit will receive an annual salary of $125,000 thereafter,
effective from the date of the closing of this offering. He also received an
option on that same date representing 100,000 shares of common stock with an
exercise price of $5.00 and an expiration date of March 14, 2012, which vests
two years from the date of the agreement.
-31-
On March 15, 2002, we entered into an at-will employment agreement with Mr.
El-Saadi, our Chief Financial Officer. Mr. El-Saadi received an option on that
same date representing 25,000 shares of common stock at an exercise price of
$5.00 and an expiration date of March 15, 2012, which will vest one year from
the date of the agreement.
DIRECTORS
In October 2001, we issued warrants representing 100,000 shares of our
common stock to Mohammed Khan, a director at the time of issuance, as
compensation for his services as a Director. The warrants had an exercise price
of $0.30 per share, and were exercised in December 2001. Mr. Khan resigned from
the board in February 2002.
In October 2001, we entered in a consulting agreement with Mr. Bill Cheung,
for his membership in our Board of Directors. He was awarded an option
representing 150,000 shares of common stock with an exercise price of $3.50, and
which vested fully on the date of the agreement.
On February 1, 2001, we entered into a consulting agreement with Mr. Shezad
Rokerya, who was a director at the time of the agreement, but resigned at the
end of his last term. Mr. Rokerya received a retainer fee of $25,000 and was
granted a total of 6 stock options representing 295,000 shares of common stock
as compensation for his services as a director, beginning December 31, 2001. The
exercise price of these options range from $1.50 to $3.50. This agreement
expired on February 1, 2002.
STOCK OPTION PLAN
On March 1, 2000, our stockholders and Board of Directors adopted the 2000
Incentive and Non-statutory Stock Option Plan. The purpose of this stock option
plan is to advance the interests of EssTec by encouraging and enabling
acquisition of a financial interest in our company by our officers and other key
individuals. The stock option plan is intended to aid us in attracting and
retaining key employees, to stimulate the efforts of such individuals and to
strengthen their desire to remain with us. A maximum of 3,000,000 shares of our
common stock are available to be issued under the stock option plan. As of
March 31, 2002, we have granted options under our stock option plan representing
805,208 shares of underlying common stock and options representing 460,000
shares have been exercised.
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-32-
PRINCIPAL STOCKHOLDERS
----------------------
The following table sets forth certain information regarding our shares of
outstanding common stock beneficially owned as of July 12, 2002, based on
4,251,162 issued and outstanding shares, by (i) each of our directors and
executive officers, (ii) all directors and executive officers as a group, and
(iii) each other person who is known by us to own beneficially more than 5% of
our common stock.
Amount and Nature of
Name and Address of Beneficial Owners(1) Beneficial Ownership(2) Percent Ownership(2)
- --------------------------------------------------- ----------------------- -------------------- -----------------
Pre Offering Post Offering
-------------------- ------------------
Faysal Zarooni 0 0 0
P.O. Box 53144
Dubai, UAE
- --------------------------------------------------- ----------------------- -------------------- -----------------
Shaun Edwardes
15457 Vista Haven Place
Sherman Oaks, CA 91403 68,836(3) 1.50% 1.23%
- --------------------------------------------------- ----------------------- -------------------- -----------------
Abdul Latif Saquib
14035 W. Tahiti Way, # 226
Marina Del Ray, CA 90292 65,000(4) 1.42% 1.17%
- --------------------------------------------------- ----------------------- -------------------- -----------------
Khalid El-Saadi
1158 26th Street, # 244
Santa Monica, CA 90403 18,767(5) 0.41% 0.34%
- --------------------------------------------------- ----------------------- -------------------- -----------------
Ali S. Basit
16329 Glen Alder Court
La Mirada, CA 90638 35,568(6) 0.78% 0.64%
- --------------------------------------------------- ----------------------- -------------------- -----------------
Syed Nasir Zafar Ahmed 0 0 0
25/2 31st Street, Phase V
Karachi, Pakistan
- --------------------------------------------------- ----------------------- -------------------- -----------------
Ramsey Hakim
10530 Butterfield Rd.,
Los Angeles, CA 90064 5,000(7) 0.11% 0.09%
- --------------------------------------------------- ----------------------- -------------------- -----------------
Bill Cheung
2786 Shakespeare Drive
San Marino, CA 91108 150,000(8) 3.28% 2.69%
- --------------------------------------------------- ----------------------- -------------------- -----------------
Sana U. Khan
4944 E Crescent Drive
Anaheim Hills, CA 92807 28,000 0.61% 0.50%
- --------------------------------------------------- ----------------------- -------------------- -----------------
All executive officers and directors as a group (9
persons) 371,170 7.37% 6.15%
- --------------------------------------------------- ----------------------- -------------------- -----------------
Mr. Gerald Calame(9)
Mill Mall, P. O. Box 964
Road Town Tortolla,
British Virgin Islands 1,231,337 26.89% 22.07%
- --------------------------------------------------- ----------------------- -------------------- -----------------
John King (10)
Charlotte House
Nassau, Bahamas 500,347 10.93% 8.97%
- --------------------------------------------------- ----------------------- -------------------- -----------------
Winthorp Venture Fund
1080 Southeast 3rd Avenue
Fort Lauderdale, FL 33316 398,500 8.70% 7.14%
- --------------------------------------------------- ----------------------- -------------------- -----------------
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(1) Each person named in the table has sole voting and investment power with
respect to all common stock beneficially owned by him or her, subject to
applicable community property law, except as otherwise indicated.
(2) The percentages shown are calculated based upon the shares of common stock
outstanding as of the date of this prospectus. The numbers and percentages
shown include the shares of common stock actually owned as of the date of
this prospectus and the shares of common stock that the identified person
or group had the right to acquire within 60 days of such date. In
calculating the percentage of ownership, all shares of common stock that
the identified person or group had the right to acquire within 60 days of
the date of this prospectus upon the exercise of options and warrants, or
the conversion of preferred stock, are deemed to be outstanding for the
purpose of computing the percentage of the shares of common stock owned by
such person or group, but are not deemed to be outstanding for the purpose
of computing the percentage of the shares of common stock owned by any
other person.
(3) Consisting of 25,000 shares underlying stock options exercisable at $5.00
per share of common stock from January 14, 2002 through Jan 13, 2012 and
43,836 shares underlying stock options exercisable at $5.00 per share of
common stock from January 14, 2002 through Jan 13, 2012.
(4) Consisting of 50,000 shares underlying stock options exercisable at $1.00
per share of common stock from September 15, 2000 through September 14,
2010 and 15,000 shares.
(5) Consisting of 18,767 shares underlying stock options exercisable at $5.00
per share of common stock from March 1, 2002 through February 28, 2012.
(6) Consisting of 35,568 shares underlying stock options exercisable at $5.00
per share of the common stock from March 15, 2002 through March 14, 2012.
(7) Consisting of 5,000 shares underlying stock options exercisable at a price
of $1.00 from September 15, 2001 through September 14, 2010.
(8) Consisting of 150,000 shares underlying stock options exercisable at a
price of $3.50 from October 15, 2001 through October 14, 2011.
(9) All shares are held indirectly by Mr. Calame through Ucino Finance Ltd.,
Mill Mall, P. O. Box 964 Road Town Tortolla, British Virgin Islands.
(10) All shares are held indirectly by Mr. King through Knightrider Investments,
Ltd, Charlotte House Nassau, Bahamas.
-34-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
We have deferred compensation to Mr. Hamid Kabani, our former Chief
Financial Officer, for services provided from December 2000 to July 2001, in the
amount of $60,000. Additionally, we have deferred compensation to three current
officers, Mr. Ali Basit, for services provided from March 2002 to July 10, 2002
in the amount of $15,000, Mr. Abdul L. Saquib, for services provided from
February 2001 to July 10, 2002, in the amount of $33,499, and Mr. Shaun
Edwardes, for services provided from January 2002 to July 10, 2002, in the
amount of $41,037. All amounts are due for services rendered to us in their
capacities as officers and employees, and we intend to pay down these unsecured,
non-interest-bearing debts with the proceeds of this offering. See our
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
We also have an agreement with Crescent Diagnostic Medical Group, to which
one of our directors, Dr. Sana Khan, is President and Medical Director, in which
we are designing and providing a software platform for Crescent based on our
EssFlow technology, in exchange for our office space and a monthly fee of
$14,000. We entered into this agreement in December 2001, and it expires in
October 2002. During the three months ended March 31, 2002, we recognized
revenues of $42,000 as a result of this contract. We have a verbal agreement
with Dr. Khan to maintain our offices in their current location for the duration
of our contract with Crescent.
In March 2002, we executed a consulting agreement with First Step, Inc., to
which our Chief Executive Officer, Mr. Shaun Edwardes, is a director. The
purpose of this agreement was to develop brand identity for First Step Inc. We
completed the project in March 2002, and were paid $40,000 for our services.
In March 2002, we issued warrants representing 25,000 shares of our common
stock to Mr. Abdul Saquib, our Vice President of Operations, as compensation for
his services as an officer. The warrants had an exercise price of $0.30 per
share, and were exercised in March 2002. This resulted in non-cash compensation
expense of $242,500 for the first quarter of fiscal year 2002, representing the
difference between the exercise price and the deemed fair market value of $10.00
at that time.
On February 1, 2002 we executed an agreement with Elegant Set-Up, a Dubai,
UAE business development company owned by a director, Mr. Faysal Zarooni, and to
which another of our directors, Mr. Syed Nasir Zafar Ahmed, who also serves as a
director. The purpose of this agreement is to expand our product sales into the
Middle East, as well as locating investors for our shares of common stock. This
agreement, and Elegant's requirement to locate investors, expressly does not
apply to this offering. The agreement terms are that EssTec will provide
technological support and $8,500 per month as salary for two employees, as well
as 600,000 options convertible into one share of EssTec common stock at an
exercise price of $5.00 on the successful achievement of a milestone consisting
of three markers: (1) obtaining three contracts from "well-reputed" clients for
EssTec products, and receipt of EssTec's project cost and profit mark-up, (2)
assistance in obtaining five UAE investors for EssTec shares, and (3) assistance
in obtaining four UAE investors within 60 days of the agreement. We have not
issued any of these options as of the date of this prospectus. This agreement
expires on January 31, 2007.
In October 2001, we issued options representing 150,000 shares of our
common stock to Mr. Bill Cheung, one of our directors, as compensation for his
services as director. The options have an exercise price of $3.50 per share and
expire in October 2011. This resulted in a non-cash compensation expense of
$112,500 for the fiscal year ending on December 31, 2001, representing the
difference between the exercise price and deemed fair market value of $5.00 at
that time.
In October 2001, we issued warrants representing 100,000 shares of our
common stock to Mr. Mohammed Khan, a director at the time of issuance, as
compensation for his services as a director. The warrants had an exercise price
of $0.30 per share, and were exercised in December 2001. We listed a non-cash
compensation expense of $470,000 at the time of issuance, representing the
difference between the exercise price and our deemed fair market value of $5.00
at that time.
In September 2001, we entered into a consulting agreement with Red Sea LTD,
a corporate strategy firm, to assist with our business development in Europe and
-35-
in targeting acquisition candidates outside the United States. In exchange for
an engagement fee of $150,000, Red Sea will develop an acquisition strategy and
alliance agreement and close both an acquisition agreement and an alliance
agreement within one year of entering into the consulting agreement. Red Sea
will also be paid a monthly retainer of $24,000, beginning after Red Sea has
successfully raised $5,000,000 in equity financing or $1,000,000 in revenues,
neither of which has occurred as of the date of the prospectus. Red Sea has
also been issued non-qualified stock options for 150,000 shares of our common
stock at an exercise price of $3.50, which vest one year after executing the
agreement. This agreement excludes this offering. Our Chief Financial
Officer is also a director of Red Sea. Please refer to our discussions in
"Business-International expansion." This agreement expires in September 2002.
In February 2001, we issued options representing 75,000 shares of common
stock to Mr. Shezad Rokerya at an exercise price of $1.50 per share of common
stock as compensation for consulting services. This award resulted in a
non-cash compensation expense of $150,000 for the fiscal year ended December
31, 2001, representing the difference between the exercise price and deemed fair
market value of $3.50 at that time. In February 2002, Mr. Rokerya's previous
consulting agreement expired, and we executed a new consulting agreement with
him. In April 2002, we issued options representing 20,000 shares of common stock
with an exercise price of $5.00 to Mr. Rokerya as compensation for these
services. These options vest monthly on a pro-rata basis for the duration of
the one-year consulting agreement.
On December 20, 2000, we entered into a debt conversion agreement with our
former parent, Converge, whereby Converge returned 255,782 shares of our common
stock in exchange for cancellation of the outstanding debt of $895,238 owed to
the us by Converge for providing web services to them between February and
December 2000. We entered into a series of consulting and service contracts
with Converge during the period from our inception to December 31, 2000, which
totaled $134,193. However, since January 1, 2001, we have not provided any
services to Converge.
Additionally, some of our officers and directors may hold directorships in
other companies, which may detract from the time they are able to give to our
company, and some of those companies may compete with ours. We do not have a
formal policy regarding conflicts of interest for our officers or directors.
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DESCRIPTION OF CAPITAL STOCK
----------------------------
We are authorized to issue 50,000,000 shares of common stock, $.001 par
value per share, and 5,000,000 shares of undesignated preferred stock, $.001 par
value per share. The following is a summary of the material provisions of our
capital stock, certificate of incorporation and bylaws.
COMMON STOCK
As of July 12, 2002, there are 4,251,162 shares of common stock
outstanding, which are held of record by 97 stockholders. In addition, as of the
date of this prospectus, there are 805,208 shares of common stock subject to
outstanding options and 1,712,140 shares of common stock subject to outstanding
warrants. Upon completion of this offering, there will be 5,251,162 shares of
common stock outstanding assuming no exercise of the underwriter's
over-allotment option, and 5,401,162 shares outstanding assuming full exercise
of the underwriter's over-allotment option and the exercise of the
representative's warrants, discussed in the section entitled "Underwriting."
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared from time to
time by the Board of Directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution, or winding up, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and non-assessable, and the shares of common stock to be issued upon the
closing of this offering will be fully paid and non-assessable.
PREFERRED STOCK
Our Board of Directors has the authority, without action by our
stockholders, to issue up to 5,000,000 shares of preferred stock in one or more
series and to designate the rights, preferences and privileges of each series,
any or all of which may be greater than the rights of the common stock. The
effect of the issuance of any shares of preferred stock upon the rights of
holders of the common stock might include, among other things, restricting
dividends on the common stock, diluting the voting power of the common stock,
impairing the liquidation rights of the common stock and delaying or preventing
a change in control of EssTec without further action by the stockholders. We
have not issued any preferred shares, and have no plans to issue any shares of
preferred stock upon completion of this offering.
TRANSFER AGENT AND REGISTRAR
----------------------------
The transfer agent and registrar for the common stock is ______________.
LISTING
-------
We intend to apply for quotation of our common stock on the AMEX market
under the symbol of "EST."
-37-
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The laws of the State of Nevada and our Bylaws provide for indemnification
of our directors for liabilities and expenses that they may incur in such
capacities, and include provisions indemnifying officers and directors for any
liability which may be incurred under the Securities Act of 1933, as amended
(the "Securities Act"). In general, directors and officers are indemnified with
respect to actions taken in good faith in a manner reasonably believed to be in,
or not opposed to, our best interests, and with respect to any criminal action
or proceeding, actions that the indemnitee had no reasonable cause to believe
were unlawful. Indemnification provisions relating to our underwriting
agreement is discussed in the section entitled "Underwriting."
Insofar as indemnification for liabilities arising under the Securities 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 Securities Act and is, therefore, unenforceable.
<REMAINDER OF PAGE INTENTIONALLY LEFT BLANK>
-38-
SHARES ELIGIBLE FOR FUTURE SALE
-------------------------------
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of our common stock. Upon
completion of this offering, we will have 5,251,162 outstanding shares of common
stock, which assumes
- the issuance of 1,000,000 shares of common stock offered by us; and
- no exercise of the underwriter's over-allotment option.
All of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act. If shares are
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act, their sales of shares would be subject to the limitations and
restrictions that are described below.
All of the remaining shares of common stock outstanding were issued and
sold by us in reliance on an exemption from the registration requirements of the
Securities Act and will become eligible for sale in the public market pursuant
to Rule 144 as described below. All securities owned by our officers and
directors will be subject to a lock-up agreement, described below, beginning on
the date of this prospectus.
Approximate Shares Eligible for
Relevant Dates Future Sale Comment
- ------------------------------------ ------------------------------------ -----------------------------------
Freely tradable shares sold in this
On the date of this prospectus 1,000,000 (1) Offering
- ------------------------------------ ------------------------------------ -----------------------------------
180 days following the date of Initial public offering lock-up
effectiveness of this prospectus 1,053,145 (2) expires for officers and directors
- ------------------------------------ ------------------------------------ -----------------------------------
360 days following the date of Initial public offering lock-up
effectiveness of this prospectus 1,078,145 (2) expires for officers and directors
- ------------------------------------ ------------------------------------ -----------------------------------
540 days following the date of Initial public offering lock-up
effectiveness of this prospectus 1,078,145 (2) expires for officers and directors
- ------------------------------------ ------------------------------------ -----------------------------------
Shares salable under Rule 144 or
Pursuant to Rule 144 1,900,975 (3) Rule 144(k)
- ------------------------------------ ------------------------------------ -----------------------------------
(1) Assuming the 150,000 underwriter's overallotment shares are not issued.
(2) Includes officers, directors, and 5% stockholders, who will be permitted
to sell during each release period on a pro-rata basis.
(3) Includes all shareholders except the officers, directors and 5%
stockholders.
STOCK OPTIONS
As of March 31, 2002, there were a total of 805,208 shares of common stock
subject to outstanding options under our 2000 Incentive and Non-statutory Stock
Option Plan, of which 640,017 were vested. On March 31, 2004, all of the
remaining of 185,191 options will be fully vested. Upon exercise of the
options, the shares of restricted common stock may be sold in compliance with
Rule 144 after the appropriate holding period as described above.
LOCK-UP AGREEMENTS
Each of our officers and directors, who beneficially own an aggregate of
approximately 371,170 shares of our common stock have agreed not to offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of our common stock or enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of any shares of our common stock or any securities convertible into
or exercisable or exchangeable for shares of our common stock, for a period
ranging between 180 and 540 days after the effectiveness date of this
prospectus, without the prior written consent of WestPark Capital, Inc., with
the exception of securities sold or issued pursuant to any employee benefit or
-39-
option plans described in this prospectus and registration statement, or
intra-family transfers for estate planning purposes.
<REMAINDER OF PAGE INTENTIONALLY LEFT BLANK>
-40-
UNDERWRITING
------------
Subject to the terms and conditions contained in the underwriting
agreement, the underwriters named below, have agreed to purchase from us the
respective number of shares of common stock set forth opposite the underwriter's
name:
Name of Underwriter Number of Shares
- --------------------------------------------------------------------------------
WestPark Capital, Inc. . . . . . . . . . . . . . . 1,000,000
- --------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . 1,000,000
We have granted the underwriter an option, exercisable for 60 days from the
date of this prospectus, to purchase up to 150,000 additional shares at the
initial public offering price, less the underwriting discounts, as set forth on
the cover page of this prospectus. The underwriter may exercise such options
only to cover over-allotments made in connection with the sale of common stock
in this offering. To the extent this option is exercised, the underwriter will
become obligated, subject to limited conditions, to purchase additional shares
of common stock. If the underwriter's option is exercised in full, the total
price to the public would be $9,200,000, the total underwriting discounts and
commissions would be $1,196,000 million. Assuming other expenses of the offering
payable by us, currently estimated at $460,000, are paid, total net proceeds to
us would be $6,500,000, assuming an offering price $8.00.
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain legal matters by their counsel
and other conditions. The nature of the underwriters' obligations is that they
are obligated to purchase and pay for all the shares of the common stock offered
hereby, if any shares are purchased. However, the underwriters are not required
to take or pay for the shares covered by the underwriters' over-allotment option
described below.
The underwriter proposes initially to offer stock directly to the public at
the public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession not in excess of $___ per share.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the representatives of the underwriters. The
representatives have advised us that the underwriters do not expect sales to
accounts for which any of the underwriters will exercise discretion as to such
sale to exceed 5% of the total number of shares offered hereby.
Each of our executive officers, directors, and security holders holding 5%
or more of our common stock have agreed that they will not, without the prior
written consent of WestPark Capital, Inc. (which consent may be withheld in its
sole discretion), dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the effectiveness date of this prospectus continuing to a date between 180
and 540 days after such date, as described in our discussion entitled "Shares
Eligible for Future Sale."
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or part.
REPRESENTATIVE'S WARRANTS
As partial consideration for acting as underwriters for this offering, we
have agreed to sell the representative at the closing of this offering, at a
price of $0.001 per warrant, to purchase an additional amount of common shares
equal to 10% of the shares sold in this offering (exclusive of the
over-allotment shares). This warrant will expire five years after the date this
-41-
registration statement becomes effective, and is exercisable at 120% of the
offering price for this offering. We will also be required to register the
shares underlying the warrants upon exercise. Depending on the market price of
our shares at the time of exercise, the shares issued may result in dilution to
the holdings of all those holding our shares at the time of exercise.
INDEMNIFICATION
We have agreed to indemnify the underwriter against liabilities which may
arise under the federal securities regulations, including the Securities Act, to
the extent that such liabilities are the result of our action, claim or
omission, and have agreed to contribute to payments the underwriters may be
required to make in respect of those liabilities. The underwriter has agreed to
indemnify us against liabilities which may arise under the federal securities
regulations, including the Securities Act, to the extent that such liabilities
are the result of the underwriter's action or claim, or any action, claim or
omission we have committed which was the result of our reliance on the
statements, claims or omissions or the underwriter, and has agreed to contribute
payments to us that we may be required to make in respect of those liabilities.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price for the shares of common stock
offered by this prospectus will be determined by negotiations between us and the
representative of the underwriters. Among the factors to be considered in
determining the initial public offering price will be:
- - the ability of our management;
- - our prospect for future earnings;
- - the present state of our development and our current financial condition;
- - the general condition of the securities markets at the time of this
offering; and
- - the recent market prices of, and the demand for, publicly traded stock of
generally comparable companies.
The estimated initial public offering price range set forth on the cover
page of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
<REMAINDER OF PAGE INTENTIONALLY LEFT BLANK>
-42-
LEGAL MATTERS
-------------
The validity of the common stock offered by this prospectus will be passed
upon for us by Pollet, Richardson & Patel, A Law Corporation, Los Angeles,
California. Legal matters in connection with the offering will be passed upon
for the underwriters by Kirkpatrick & Lockhart LLP, Los Angeles, California.
EXPERTS
-------
The financial statements of appearing in this prospectus have been audited
by Singer Lewak Greenbaum & Goldstein, LLP, independent accountants, to the
extent and for the periods indicated in their report appearing elsewhere herein,
which report expresses an unqualified opinion and includes an explanatory
paragraph relating to EssTec's ability to continue as a going concern and are
included in reliance on such report and upon the authority of such firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
--------------------------------------------
We filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act for the shares of common stock
in this offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to our common stock
and us, we refer you to the registration statement and the exhibits and schedule
that were filed with the registration statement. Statements contained in this
prospectus about the contents of any contract or any other document that is
filed as an exhibit to the registration statement are not necessarily complete,
and we refer you to the full text of the contract or other document filed as an
exhibit to the registration statement. A copy of the registration statement and
the exhibits and schedules that were filed with the registration statement may
be inspected without charge at the public reference facilities maintained by the
Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the SEC upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the 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 not required to deliver annual reports to stockholders, and we do
not intend to voluntarily send annual reports with audited financial statements
to stockholders. However, upon completion of this offering, we will become
subject to the information and periodic reporting requirements of the Securities
Exchange Act and, in accordance with the requirements of the Securities Exchange
Act will file periodic reports, proxy statements, and other information with the
Securities and Exchange Commission. These periodic reports, proxy statements,
and other information will be available for inspection and copying at the
regional offices, public reference facilities and web site of the Securities and
Exchange Commission referred to above. We have not filed any reports or
statements with the Securities and Exchange Commission prior to filing this
registration statement and prospectus.
-43-
INDEX TO FINANCIAL STATEMENTS
-----------------------------
ESSTEC, INC. AND SUBSIDIARY
CONTENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations and Comprehensive Loss F-5 - F-6
Consolidated Statements of Shareholders' Deficit F-7 - F-9
Consolidated Statements of Cash Flows F-10 - F-13
Notes to Consolidated Financial Statements F-14 - F-34
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
Esstec, Inc. and subsidiary
We have audited the accompanying consolidated balance sheet of Esstec, Inc. and
subsidiary as of December 31, 2001, and the related consolidated statements of
operations and comprehensive loss, shareholders' deficit, and cash flows for the
year then ended, and the period from February 11, 2000 (inception) to December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Esstec, Inc. and
subsidiary as of December 31, 2001, and the results of their operations and
their cash flows for the year then ended, and the period from February 11, 2000
(inception) to December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company had negative cash flows from operations
since inception. In addition, the Company has been dependent on sales to
affiliates to generate a significant portion of its revenues. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 10, 2002
F-2
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
March 31, December 31,
2002 2001
-------- --------
(unaudited)
CURRENT ASSETS
Cash $ 2,361 $ 9,384
Accounts receivable 42,789 19,463
Other receivables 41,860 29,650
Related party receivables 74,151 74,084
Prepaid expenses 4,106 8,279
Deferred offering costs 32,033 -
-------- --------
Total current assets 197,300 140,860
PROPERTY AND EQUIPMENT, net 135,463 145,992
OTHER ASSETS 23,564 23,699
-------- --------
TOTAL ASSETS $356,327 $310,551
======== ========
The accompanying notes are an integral part of these financial statements.
F-3
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
March 31, December 31,
2002 2001
------------ ------------
(unaudited)
CURRENT LIABILITIES
Accounts payable $ 283,634 $ 350,632
Accrued expenses 107,254 94,178
Due to related parties 159,242 185,331
Deferred compensation 141,912 112,115
Current portion of capital lease obligation 3,437 4,479
------------ ------------
Total current liabilities 695,479 746,735
CAPITAL LEASE OBLIGATION net of current portion 5,383 5,383
------------ ------------
Total liabilities 700,862 752,118
------------ ------------
COMMITMENTS
SHAREHOLDERS' DEFICIT
Preferred stock, $0.001 par value
5,000,000 shares authorized
0 (unaudited) and 0 shares issued and outstanding - -
Common stock, $0.001 par value
50,000,000 shares authorized
3,671,076 (unaudited) and 3,242,117 shares issued
and outstanding 3,671 3,242
Common stock committed, 28,500 and 113,143 shares 5,990 76,000
Deferred compensation (820,397) (137,759)
Additional paid-in capital 4,625,290 3,025,877
Accumulated other comprehensive loss (2,235) (2,235)
Accumulated deficit (4,156,854) (3,406,692)
------------ ------------
Total shareholders' deficit (344,535) (441,567)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 356,327 $ 310,551
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2001,
THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
February 11,
For the 2000
For the Three Months Ended Year Ended (Inception) to
March 31, December 31, December 31,
2002 2001 2001 2000
------------ ---------- ------------ ----------
(unaudited) (unaudited)
NET REVENUES
Software development revenues -
former parent and affiliates $ 82,000 $ - $ - $ 85,476
Software development revenues -
non-affiliates 99 194,334 522,408 353,126
------------ ---------- ------------ ----------
Total net revenues 82,099 194,334 522,408 438,602
------------ ---------- ------------ ----------
COST OF REVENUES
Cost of revenues - former parent
and affiliates 64,114 - - 134,193
Cost of revenues - non-affiliates - 185,645 524,630 151,216
------------ ---------- ------------ ----------
Total cost of revenues 64,114 185,645 524,630 285,409
------------ ---------- ------------ ----------
GROSS PROFIT (LOSS)
Gross loss - former parent and
affiliates 17,886 - - (48,717)
Gross profit (loss) - non-affiliates 99 8,689 (2,222) 201,910
------------ ---------- ------------ ----------
Total gross profit (loss) 17,985 8,689 (2,222) 153,193
------------ ---------- ------------ ----------
GENERAL AND ADMINISTRATIVE
EXPENSES 67,224 359,132 1,363,020 987,659
NON-CASH OPERATING EXPENSES 674,973 43,000 1,092,530 60,373
RESEARCH AND DEVELOPMENT
EXPENSES 27,560 - 65,975 -
------------ ---------- ------------ ----------
LOSS FROM OPERATIONS (751,772) (393,443) (2,523,747) (894,839)
------------ ---------- ------------ ----------
The accompanying notes are an integral part of these financial statements.
F-5
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2001,
THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
February 11,
For the 2000
For the Three Months Ended Year Ended (Inception) to
March 31, December 31, December 31,
2002 2001 2001 2000
------------ ----------- ------------ -----------
(unaudited) (unaudited)
OTHER INCOME (EXPENSE)
Interest income $ - $ - $ 240 $ -
Interest expense (7,390) - (6,346) -
Other income 9,000 - 18,000 -
------------ ----------- ------------ -----------
Total other income (expense) 1,610 - 11,894 -
------------ ----------- ------------ -----------
NET LOSS (750,162) (393,443) (2,511,853) (894,839)
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment (2,235) (6,546) (2,235) -
------------ ----------- ------------ -----------
COMPREHENSIVE LOSS $ (752,397) $ (399,989) $(2,514,088) $ (894,839)
============ =========== ============ ===========
BASIC AND DILUTED COMPREHENSIVE
LOSS PER COMMON SHARE $ (0.22) $ (0.09) $ (0.57) $ (0.22)
============ =========== ============ ===========
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
USED TO COMPUTE BASIS AND
DILUTED LOSS PER SHARE 3,441,557 4,626,695 4,435,288 4,015,162
============ =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-6
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2001,
THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
Accumulated
Other
Common Deferred Additional Compre-
Common Stock Stock Treasury Compen- Paid-In hensive Accumulated
Shares Amount Committed Stock sation Capital Loss Deficit Total
---------- ----------- ---------- ---------- ------- ---------- ---------- --------- ---------
Balance, February 11,
2000 (inception) 3,250,000 $ 3,250 $ - $ - $ - $ (3,250) $ - $ - $ -
Issuance of common
stock for cash 1,337,195 1,337 999,142 1,000,479
Issuance of stock
options
as compensation (170,399) 230,772 60,373
Issuance of warrants
for cash 159,980 159,980
Net loss (894,839) (894,839)
---------- ----------- ---------- ---------- ------- ---------- ---------- --------- ---------
Balance, December 31,
2000 4,587,195 4,587 - - (170,399) 1,386,644 - (894,839) 325,993
Issuance of common
stock for cash 158,785 159 636,589 636,748
Issuance of common
stock as compensation
expense 9,028 9 45,131 45,140
Issuance of stock options
and warrants to employees
as compensation 811,250 811,250
Issuance of stock options
to consultant 125,250 125,250
Amortization of deferred
compensation 32,640 32,640
Exercise of stock options
with cash 235,000 235 12,015 12,250
The accompanying notes are an integral part of these financial statements.
F-7
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2001,
THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
Accumulated
Other
Common Deferred Additional Compre-
Common Stock Stock Treasury Compen- Paid-In hensive Accumulated
Shares Amount Committed Stock sation Capital Loss Deficit Total
---------- ----------- ---------- ---------- ------- ---------- ---------- --------- ---------
Exercise of stock options
in lieu of compensation 225,000 $ 225 $ $ $ $ 2,025 $ $ $ 2,250
Exercise of warrants
with cash 5,000 5 4,995 5,000
Committed stock for
exercise of warrant 30,000 30,000
Committed stock recorded
as consulting expense 46,000 46,000
Contribution of founders'
shares (1,722,109) (1,722) 1,722 -
Cancellation of treasury
stock (255,782) (256) 256 -
Foreign currency
translation
adjustment (2,235) (2,235)
Net loss (2,511,853) (2,511,853)
---------- ----------- ---------- ---------- ------- ---------- --------- ----------- -----------
Balance, December 31,
2001 3,242,117 3,242 76,000 - (137,759) 3,025,877 (2,235) (3,406,692) (411,567)
Issuance of common
stock for cash
(unaudited) 17,000 17 84,983 85,000
Exercise of warrants in
lieu of compensation
(unaudited) 299,102 299 89,432 89,731
Issuance of committed
stock (unaudited) 112,857 113 (75,000) 74,887 -
The accompanying notes are an integral part of these financial statements.
F-8
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2001,
THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
Accumulated
Other
Common Deferred Additional Compre-
Common Stock Stock Treasury Compen- Paid-In hensive Accumulated
Shares Amount Committed Stock sation Capital Loss Deficit Total
---------- ----------- ---------- ---------- ------- ---------- ---------- --------- ----------
Committed stock
recorded for interest
expense (unaudited) $ $ 5,990 $ $ $ $ $ $ 5,990
Collection of loan
receivable in lieu of
issuance of committed
stock (unaudited) (1,000) (1,000)
Issuance of stock
options and warrants
to employees (unaudited) 1,242,500 1,242,500
Amortization of employee
stock options (unaudited) (687,500) 107,611 555,000
Amortization of deferred
compensation
(unaudited) 4,862 4,862
Net loss (unaudited) (750,162) (750,162)
---------- ----------- ---------- ---------- -------- ---------- ---------- --------- -----------
Balance, March 31,
2002 (unaudited) 3,671,076 $ 3,671 $ 5,990 $ - $(820,397) $4,625,290 $(2,235) $(4,156,854) $(344,535)
========== =========== ========== ========== ========= ========== ========= ========== ==========
The accompanying notes are an integral part of these financial statements.
F-9
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001,
THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
February 11,
For the 2000
For the Three Months Ended Year Ended (Inception) to
March 31, December 31, December 31,
2002 2001 2001 2000
------------ ----------- ------------ -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (750,162) $(393,443) $(2,511,853) $(894,839)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 10,070 9,837 46,558 16,457
Bad debt expense - - (110,000) 110,000
Loss on disposal of equipment 459 - - -
Write-off of deferred offering
costs - 36,398 206,892 -
Stock-based compensation 674,973 43,000 1,016,530 60,373
Common stock issued and
committed for services - - 76,000 -
Committed stock recorded
as interest expense 5,990 - - -
Collection of loan receivable in
lieu of issuance of committed
stock (1,000) - - -
(Increase) decrease in
Accounts receivable (23,326) 74,975 188,088 (207,551)
Other receivables (12,210) (1,250) (15,357) (14,293)
Related party receivables (67) (56,215) (9,584) -
Prepaid expenses 4,173 - (8,279) -
Other assets 135 2,242 (19,157) (4,542)
Increase (decrease) in
Accounts payable 15,233 17,068 175,688 174,944
Accrued expenses 12,034 (5,094) 72,515 31,525
Due to related parties (26,089) 19,042 120,831 -
Deferred compensation 29,797 - 112,115 -
Deferred revenue - - (38,274) 38,274
------------ ---------- ------------ ----------
Net cash used in operating activities (59,990) (253,440) (697,287) (689,652)
------------ ---------- ------------ ----------
The accompanying notes are an integral part of these financial statements.
F-10
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001,
THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
February 11,
For the 2000
For the Three Months Ended Year Ended (Inception) to
March 31, December 31, December 31,
2002 2001 2001 2000
------------ ----------- ------------ -----------
(unaudited) (unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $ - $(28,408) $(28,408) $ (180,599)
------------ --------- --------- -----------
Net cash used in investing activities - (28,408) (28,408) (180,599)
------------ --------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering costs (32,033) - - (206,892)
Proceeds from the exercise of stock
options - - 12,250 -
Proceeds from the exercise of
warrants - - 5,000 -
Proceeds from sale of common
stock and warrants 85,000 302,000 636,748 1,160,459
------------ --------- --------- -----------
Net cash provided by financing
activities 52,967 302,000 653,998 953,567
------------ --------- --------- -----------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH - (6,725) (2,235) -
------------ --------- --------- -----------
Net increase (decrease) in cash (7,023) 13,427 (73,932) 83,316
CASH, BEGINNING OF PERIOD 9,384 83,316 83,316 -
------------ --------- --------- -----------
CASH, END OF PERIOD $ 2,361 $ 96,743 $ 9,384 $ 83,316
============ ========= ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
INTEREST PAID $ - $ - $ - $ -
============ ========= ========= ===========
INCOME TAXES PAID $ - $ - $ - $ -
============ ========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-11
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001,
THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 2001, the Company:
- - issued 225,000 shares of common stock to an employee for the exercise of
stock options. Payment was made by the conversion of accrued compensation
totaling $2,250.
- - issued 9,028 shares of common stock as compensation expense totaling
$45,140.
- - committed to issue 100,000 shares of common stock to an officer of the
Company when he exercised warrants to purchase the shares for $30,000 in
accrued consulting fees.
- - committed to issue 13,143 shares of common stock to a consultant for
services. The Company recorded $46,000 of consulting expense related to the
transaction
- - recorded compensation expense of $843,890 related to options issued to
employees at exercise prices below the market value of the Company's common
stock.
- - recorded consulting expense of $125,250 related to options issued to a
consultant for fulfilling a consulting contract.
During the period from February 11, 2000 (inception) to December 31, 2000, the
Company:
- - was founded and issued 3,000,000 common shares to Converge, its former
parent company, and 250,000 common shares and 450,000 options to three
founding shareholders.
- - recorded compensation expense of $60,373 related to options issued to
employees at exercise prices below the market value of the Company's common
stock.
During the three months ended March 31, 2002 (unaudited), the Company:
- - issued 100,000 shares of common stock from committed stock to an officer
upon the exercise of warrants to purchase 100,000 shares of common stock at
$0.30 per share. In lieu of a cash payment for the exercise, the Company
converted $30,000 of accrued consulting fees.
- - issued 25,000 shares of common stock from the cashless exercise of warrants
by an officer of the Company in lieu of deferred compensation totaling
$7,500.
- - committed to issue 28,500 shares of common stock to a debtor for the
extension of the due date of a note payable. In relation to this
transaction, the Company recorded interest expense totaling $5,990.
The accompanying notes are an integral part of these financial statements.
F-12
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001,
THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
- - recorded compensation expense totaling $107,611 for the amortization of
stock options issued to an employee at an exercise price below the market
value of the Company's common stock.
- - issued 274,102 shares of common stock from the cashless exercise of
warrants by a related party vendor in lieu of accounts payable totaling
$82,231.
- - issued warrants to purchase 25,000 shares of common stock to an officer of
the Company and recorded compensation expense totaling $242,500.
- - recorded compensation expense of $312,500 and $687,500 of deferred
compensation related to options issued to employees at exercise prices
below the market value of the Company's common stock.
- - issued 12,857 shares of common stock from committed stock to a vendor for
services totaling $45,000.
The accompanying notes are an integral part of these financial statements.
F-13
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION
Essential Tech, Inc. was incorporated in the state of Nevada on February 11,
2000 and effected a name change to Esstec, Inc. ("Esstec") on October 6, 2000.
Esstec is a professional services company that focuses on e-commerce
initiatives, interactive multi-media, and mobile software applications for
clients in various industries, including the telecommunications and
entertainment industries. The majority of Esstec's clients are in Southern
California.
Esstec was founded by Converge Global, Inc. ("Converge"), a publicly traded
Internet portfolio company headquartered in Santa Monica, California. At
December 31, 2001, Converge did not own any shares of Esstec.
In February 2001, Esstec established a branch office in Dubai in the United Arab
Emirates. In December 2001, this office was closed.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- -----------------------------
The consolidated financial statements include the accounts of Esstec and its
subsidiary, Essential Tec of Pakistan, (collectively, the "Company"). All
material inter-company transactions and balances have been eliminated.
Going Concern and Basis of Presentation
- --------------------------------------------
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, the
Company had negative cash flows from operations since inception. In addition,
the Company has been dependent on sales to affiliates to generate a significant
portion of its revenues. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue its existence. The recovery of the Company's assets is
dependent upon continued operations of the Company.
Management plans to take the following steps to meet the Company's operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue as a going concern:
- - improve management of accrued expenses and accounts payable.
F-14
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Going Concern and Basis of Presentation (Continued)
- --------------------------------------------
- - improve expenses of its distribution and marketing methods.
- - identify and acquire additional companies for which the Company has
executed letters of intent.
- - obtain additional equity financing, including the completion of its
in-process private placement and a planned initial public offering in
July 2002.
Revenue Recognition
- --------------------
For software installation and consulting contracts, the Company recognizes
revenue based on the following:
- - For fixed fee contracts, the Company recognizes revenue based on the
percent complete, calculated as either the number of direct labor hours in the
project to date divided by the estimated total direct labor hours, or based upon
the completion of specific task benchmarks. It is the Company's policy to record
contract losses in their entirety in the period in which such losses can be
estimated. Any revenues associated with pre-payments or pre-billings are
deferred until the revenue is earned.
- - For non-fixed fee jobs, revenue is recognized as services are performed
and adjusted to realizable value, if necessary.
- - There were not any significant post-contract support obligations at the
time of revenue recognition for any contracts in progress or completed during
the year ended December 31, 2001 and the period from February 11, 2000
(inception) to December 31, 2000. The Company's accounting policy regarding
vendor and post-contract support obligations is based on the terms of the
customers' contract, which are billable upon the occurrence of the post-contract
support. Any prepayments would be deferred until the support period was
complete.
Comprehensive Loss
- -------------------
The Company utilizes Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting comprehensive loss and its components in a financial statement.
Comprehensive loss as defined includes all changes in equity (net assets) during
a period from non-owner sources. Examples of items to be included in
comprehensive loss, which are excluded from net loss, include foreign currency
translation adjustments and unrealized gains and losses on available-for-sale
securities. Comprehensive loss presented in these consolidated financial
statements resulted from foreign currency translations.
F-15
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
- ------------------------
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over estimated useful lives as follows:
Computer equipment 4 years
Computer software and hardware 3 to 5 years
Furniture and office equipment 10 years
Vehicles 5 years
Expenditures for replacements and betterments are capitalized while repairs and
maintenance are charged to expense as incurred.
Fair Value of Financial Instruments
- ---------------------------------------
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's
financial instruments, including cash, accounts receivable, accounts payable,
accrued expenses, and deferred compensation, the carrying amounts approximate
fair value due to their short maturities. The amount shown for the capital lease
obligation also approximates fair value because current interest rates offered
to the Company for debt similar maturities are substantially the same.
Stock Options and Warrants
- -----------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for stock-based compensation. However, SFAS No. 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the accounting
method of APB Opinion No. 25 must make pro forma disclosures of net loss and
loss per share as if the fair value method of accounting defined in SFAS No. 123
had been applied. The Company has elected to account for its stock-based
compensation to employees under APB Opinion No. 25.
Software Development Costs
- ----------------------------
Software development costs are capitalized in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility and is discontinued when the product
is available for sale. The establishment of technological feasibility requires
considerable judgment by management. Amortization of capitalized software
development costs is provided on a product-by-product basis on the straight-line
method over the estimated economic life of the products (not to exceed five
years).
F-16
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Software Development Costs (Continued)
- ----------------------------
At December 31, 2001, the Company did not have any capitalized software costs as
its HomeAccess Program, the only software program that it any right, title, or
interest in, had not yet met the criteria specified in SFAS No. 86 to require
capitalization.
Income Taxes
- -------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax return. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax basis of assets
and liabilities and their financial report amounts at each period end, based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Loss per Share
- ----------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per share
is computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Because the Company has incurred net losses, basic
and diluted loss per share are the same.
Estimates
- ---------
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Concentrations of Credit Risk
- --------------------------------
The Company sells its products throughout the United States, extends credit to
its customers, and performs ongoing credit evaluations of such customers. The
Company does not obtain collateral to secure its accounts receivable. The
Company evaluates its accounts receivable on a regular basis for collectability
and provides for an allowance for potential credit losses as deemed necessary.
F-17
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of Credit Risk (Continued)
- --------------------------------
Two customers accounted for 48% and 35% of the Company's net sales for the year
ended December 31, 2001. Three customers accounted for 29%, 26%, and 25% of the
Company's net sales to non-affiliates for the period from February 11, 2000
(inception) to December 31, 2000. One customer accounted for 95% (unaudited) of
the Company's net sales for the three months ended March 31, 2001. At December
31, 2001 and March 31, 2002, amounts due from one customer were 14% and 0%
(unaudited), respectively, of accounts receivable.
Recently Issued Accounting Pronouncements
- --------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations." This statement addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Pre-Acquisition Contingencies of
Purchased Enterprises." All business combinations in the scope of this statement
are to be accounted for using one method, the purchase method. The provisions
of this statement apply to all business combinations initiated after June 30,
2001. Use of the pooling-of-interests method for those business combinations is
prohibited. This statement also applies to all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001
or later. The Company does not expect adoption of SFAS No. 141 to have a
material impact, if any, on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. It is effective for fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been issued previously. This statement is not applicable to
the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of long-lived assets, except for
certain obligations of lessees. This statement is not applicable to the
Company.
F-18
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (Continued)
- --------------------------------------------
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," the accounting and
reporting provisions of APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions," for the disposal
of a segment of a business, and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Company
does not expect adoption of SFAS No. 144 to have a material impact, if any, on
its financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. This statement rescinds SFAS No. 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in APB No. 30 will now be used to classify those gains and
losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4
has been rescinded. SFAS No. 44 has been rescinded as it is no longer
necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-lease transactions. This statement
also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may change
accounting practice. The Company does not expect adoption of SFAS No. 145 to
have a material impact, if any, on its financial position or results of
operations.
F-19
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 and March 31, 2002 consisted of the
following:
March 31, December 31,
2002 2001
---------- ----------
(unaudited)
Computer equipment $ 36,566 $ 36,566
Computer software and hardware 136,211 136,670
Furniture and office equipment 16,149 16,149
Vehicles 19,624 19,624
---------- ----------
208,550 209,009
Less accumulated depreciation 73,087 63,017
---------- ----------
TOTAL $135,463 $145,992
========== ==========
Depreciation expense was $46,558, $16,457, $10,070 (unaudited), and $9,837
(unaudited) for the year ended December 31, 2001, the period from February 11,
2000 (inception) to December 31, 2000, and the three months ended March 31, 2002
and 2001, respectively.
NOTE 4 - COMMITMENTS
Leases
- ------
Prior to July 2001, the Company leased its corporate offices under a
month-to-month operating lease. From July 2001 to March 2002, the Company used
its premises rent-free. Rent expense was $50,317, $54,836, $9,000 (unaudited),
and $26,540 (unaudited) for the year ended December 31, 2001, the period from
February 11, 2000 (inception) to December 31, 2000, and the three months ended
March 31, 2002 and 2001, respectively, including $36,670, $33,907, $0
(unaudited), and $11,100 (unaudited), respectively, paid to two related parties.
In January 2002, the Company entered into a capital lease agreement for the
purchase of a vehicle. The lease is for 36 months and requires monthly payments
of $506, including interest at 25% per annum.
F-20
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS (CONTINUED)
Leases (Continued)
- ------
Future minimum payments under this capital lease at December 31, 2001 were as
follows:
Year Ended
December 31,
-------------
2002 $ 6,072
2003 6,072
------------
12,144
Less amount representing interest 2,282
-----------
9,862
Less current portion 4,479
-----------
LONG-TERM PORTION $ 5,383
===========
Agreements
- ----------
On February 1, 2001, the Company entered into a consulting agreement with one of
its Board members. The Board member received a retainer fee of $25,000 and was
granted a total of 295,000 stock options at various terms as compensation as of
December 31, 2001.
On July 15, 2001, the Company entered into a consulting agreement for a service
fee of $100,000, which is personally guaranteed by an officer of the Company.
In addition, the Company issued options to purchase 75,000 shares of common
stock, which are exercisable at $3.50 per share upon the consultant generating
$250,000 in revenues for the Company. As of December 31, 2001, the Company
accrued $100,000 for the service fee and recorded consulting expense of $125,250
for the issuance of stock options to the consultant.
On September 5, 2001, the Company entered into a consulting agreement for
business development. The consultant is to receive a 3% commission on all
realized revenues. As of December 31, 2001, the Company also issued to the
consultant options to purchase 150,000 shares of common stock, which are
exercisable at $3.50 per share and vest over a six-month period.
F-21
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - COMMITMENTS (CONTINUED)
Agreements (Continued)
- ----------
On February 15, 2002, the Company entered into a one-year teaming agreement with
a software developer. The Company will have the right to acquire the license
rights to use the developer's software technology and to purchase the software
product at a 30% discount. The Company has also agreed for joint bidding with
the developer in order to obtain more customers.
See Note 7 for related party agreements.
NOTE 5 - SHAREHOLDERS' EQUITY
Preferred Stock
- ----------------
On April 30, 2001, the Board of Directors approved to increase the number of
authorized shares of preferred stock, $0.001 par value, from 500,000 to
5,000,000.
Common Stock
- -------------
On April 30, 2001, the Board of Directors approved to increase the number of
authorized shares of common stock, $0.001 par value, from 10,000,000 to
50,000,000.
Common Stock Issued during the Year Ended December 31, 2001
- --------------------------------------------------------------------
On May 18, 2001, the Company issued 5,000 shares of common stock for cash
totaling $5,000 upon the exercise of warrants to purchase common stock at $1 per
share.
On June 27, 2001, the Company issued 225,000 shares of common stock to an
employee for the exercise of stock options. Payment was made by the conversion
of accrued compensation totaling $2,250.
On September 24, 2001, the Company issued 9,028 shares of common stock as
compensation expense totaling $45,140.
On December 1, 2001, the Company committed to issue 100,000 shares of common
stock to an officer of the Company when he exercised warrants to purchase the
shares for $30,000 in accrued consulting fees.
F-22
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock Issued during the Year Ended December 31, 2001 (Continued)
- --------------------------------------------------------------------
During the year ended December 31, 2001, the Company issued 158,785 shares of
common stock for cash totaling $636,748.
During the year ended December 31, 2001, the Company issued 235,000 shares of
common stock for the exercise of stock options with cash totaling $12,250.
During the year ended December 31, 2001, the Company committed to issue 13,143
shares of common stock to a consultant for services. The Company recorded
$46,000 of consulting expense related to the transaction.
On October 1, 2001, certain shareholders of the Company, including founders,
contributed back to the Company 1,722,109 shares of common stock in exchange for
warrants to purchase 1,722,109 shares of common stock at an exercise price of
$0.30 per share. The warrants expire if not exercised prior to the filing of a
registration statement with the Securities and Exchange Commission.
Common Stock Issued during the Period from February 11, 2000 (Inception) to
- --------------------------------------------------------------------------------
December 31, 2000
- -------------------
On February 11, 2000, the Company was founded and issued 3,000,000 common shares
to Converge, its former parent company, and 250,000 common shares and 450,000
options (see Note 7) to three founding shareholders.
During the period from February 11, 2000 (inception) to December 31, 2000, the
Company completed private placement transactions in which the Company issued
1,337,195 shares of common stock at prices ranging from $0.50 to $3.50 for total
cash of $1,000,479.
Common Stock Issued during the Three Months Ended March 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
In January 2002, the Company issued 12,857 shares of common stock from committed
stock for services rendered totaling $45,000.
In March 2002, the Company issued 25,000 shares of common stock from the
cashless exercise of warrants by an officer of the Company in lieu of deferred
compensation totaling $7,500.
During the three months ended March 31, 2002, the Company raised $85,000 from
the issuance of common stock to various investors at $5 per share for a total of
17,000 shares.
F-23
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock Issued during the Three Months Ended March 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
(Continued)
During the three months ended March 31, 2002, the Company issued 100,000 shares
of common stock from committed stock to its consultant for services rendered
totaling $30,000.
During the three months ended March 31, 2002, the Company committed to issue
28,500 shares of common stock to a debtor for the extension of the due date of a
note payable. In relation to this transaction, the Company recorded interest
expense totaling $5,990.
Stock Options
- --------------
The Company adopted the 2000 Incentive and Non-Statutory Stock Option Plan (the
"Plan") on March 1, 2000 and reserved 1,000,000 shares of common stock for
grants of stock options under the Plan. Generally, options granted under the
Plan expire upon the earlier of one or two years from the date of grant (the
duration of employment in the case of an incentive stock option granted to two
officials of the Company) or up to the optionee's termination of employment or
service. On March 16, 2001, the Board of Directors approved to increase the
number of reserved shares from 1,000,000 to 2,000,000. On March 1, 2002, the
Board of Directors approved an increase in the number of reserved shares from
2,000,000 to 3,000,000.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25 and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for stock and options/warrants issued to outside
third parties and for options issued to employees where the exercise price is
less than the fair market value of the Company's common stock at the grant date,
where the Company recognizes the difference between the exercise price and the
fair market value of the stock as compensation expense over the period of the
service.
During the year ended December 31, 2001 and the period from February 11, 2000
(inception) to December 31, 2000, the Company recorded compensation expense of
$843,890 and $60,373, respectively, related to options issued to employees at
exercise prices below the market value of the Company's common stock.
During the three months ended March 31, 2002, the Company recorded compensation
expense totaling $107,611 (unaudited) for the amortization of stock options
issued to an employee at an exercise price below the market value of the
Company's common stock.
F-24
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Options (Continued)
- --------------
During the three months ended March 31, 2002, the Company issued options to
purchase 200,000 shares of common stock to employees. The options were
immediately exercisable at $5 per share. Related to these issuances, the
Company recognized $312,500 (unaudited) of compensation expense and $687,500
(unaudited) of deferred compensation.
If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under its plan consistent with the
methodology prescribed by SFAS No. 123, the Company's net loss and loss per
share would be increased to the pro forma amounts indicated below for the year
ended December 31, 2001 and the period from February 11, 2000 (inception) to
December 31, 2000:
2001 2000
--------------- ---------------
Net loss
As reported $ (2,511,853) $ (894,839)
Pro forma $ (3,387,349) $ (946,778)
Basic and diluted loss per common share
As reported $ (0.57) $ (0.22)
Pro forma $ (0.76) $ (0.23)
These pro forma amounts may not be representative of future disclosures because
they do not take into effect pro forma compensation expense related to grants
made before 1995. The fair value of these options was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the year ended December 31, 2001 and the period
from February 11, 2000 (inception) to December 31, 2000: dividend yields of 0%
and 0%, respectively; expected volatility of 85% and 40%, respectively;
risk-free interest rates of 3.6% and 6.4%, respectively; and expected lives of
1.91 and three years, respectively.
The weighted-average fair value of options granted during the year ended
December 31, 2001 for which the exercise price equaled the market price on the
grant date was $1.67, and the weighted-average exercise price was $3.50. The
weighted-average fair value of options granted during the year ended December
31, 2001 for which the exercise price was less than the market price on the
grant date was $2.72, and the weighted-average exercise price was $3. No
options were issued during the year ended December 31, 2001 where the exercise
price exceeded the stock price at the date of grant.
F-25
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Options (Continued)
- --------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The following summarizes the stock option transactions under the Plan:
Weighted-
Average
Number of Exercise
Shares Price
-------------- -------------
Outstanding, February 11, 2000 (inception) - $ -
Granted to founders 450,000 $ 0.01
Granted to employees 523,900 $ 0.70
--------------
Outstanding, December 31, 2000 973,900 $ 0.38
Granted to employees 1,075,000 $ 3.22
Exercised (460,000) $ 0.03
Forfeited/canceled (975,127) $ 2.08
--------------
OUTSTANDING, DECEMBER 31, 2001 613,773 $ 2.92
==============
EXERCISABLE, DECEMBER 31, 2001 485,541 $ 2.87
==============
F-26
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Options (Continued)
- --------------
The exercisable price of the options outstanding at December 31, 2001 ranged
from $0.01 to $3.50. The weighted-average remaining contractual life of the
options outstanding at December 31, 2001 is 8.02 years, and information relating
to these options is as follows:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Prices Outstanding Exercisable Life Outstanding Exercisable
- ------------ ----------- ----------- ---------- ------------ ------------
0.01 - 0.30 9,853 9,853 8.59 years $ 0.10 $ 0.10
0.50 - 1.50 141,420 121,480 4.91 years $ 1.22 $ 1.27
3.50 462,500 355,208 8.55 years $ 3.50 $ 3.50
----------- -----------
613,773 486,541
============ ===========
Warrants Issued during the Year Ended December 31, 2001 and the Period from
- --------------------------------------------------------------------------------
February 11, 2000 (Inception) to December 31, 2000
- ---------------------------------------------------------
During the year ended December 31, 2001, the Company entered into two finder's
fee agreements, whereby warrants to purchase 250,000 shares of the Company's
common stock were issued to each finder. Subsequent to December 31, 2001, loan
agreements and the warrants issued were rescinded. As of December 31, 2001,
none of these warrants were disclosed as outstanding.
During the year ended December 31, 2001, the Company issued 100,000 shares of
common stock to a member of the Board of Directors upon the exercise of warrants
to purchase 100,000 shares of common stock at $0.30 per share. In lieu of a
cash payment for the exercise, the Company converted $30,000 of accrued
consulting fees.
In connection with a private placement on March 30, 2000, the Company sold
33,266 warrants to purchase shares of the Company's common stock at an exercise
price of $1 per share. The warrants may be exercised any time after issuance
and for a period of three years from the date of the private placement.
Aggregate amounts raised in connection with this issuance were $9,980. As of
December 31, 2001, none of these warrants were exercised.
F-27
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED)
Warrants Issued during the Year Ended December 31, 2001 and the Period from
- --------------------------------------------------------------------------------
February 11, 2000 (Inception) to December 31, 2000 (Continued)
- ---------------------------------------------------------
In connection with a private placement during June 2000, the Company sold
500,000 warrants to purchase shares of the Company's common stock at an exercise
price of $1 per share. The warrants may be exercised any time after issuance
and for a period of five years from the date of the private placement.
Aggregate amounts raised in connection with this issuance were $150,000. As of
December 31, 2001, none of these warrants were exercised.
The following summarizes the warrant transactions:
Weighted-
Average
Number of Exercise
Shares Price
------------- -------------
Outstanding, February 11, 2000 (inception) - $ -
Granted 523,266 $ 1.00
------------- -------------
Outstanding, December 31, 2000 523,266 $ 1.00
Granted 2,332,109 $ 0.30
Exercised (105,000) $ 0.33
Forfeited/canceled (764,133) $ 0.54
------------- -------------
OUTSTANDING, DECEMBER 31, 2001 1,986,242 $ 0.39
============= =============
EXERCISABLE, DECEMBER 31, 2001 1,986,242 $ 0.39
============= ==============
The exercisable prices of the warrants outstanding at December 31, 2001 were
$0.30 and $1. The weighted-average remaining contractual life of the warrants
outstanding at December 31, 2001 and other information relating to these
warrants is as follows:
Weighted-
Average
Remaining
Exercise Warrants Warrants Contractual
Price Outstanding Exercisable Life
------------ ------------- ------------ ---------------------
$ 0.30 1,722,109 1,722,109 upon filing of a
registration
statement
$ 1.00 264,133 264,133 3.5 years
------------- ------------
1,986,242 1,986,242
============= ============
F-28
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' EQUITY (CONTINUED)
Warrants Issued during the Three Months Ended March 31, 2002 (unaudited)
- --------------------------------------------------------------------------------
In March 2002, the Company issued 274,102 shares of common stock from the
cashless exercise of warrants by a related party vendor in lieu of accounts
payable totaling $82,231.
In March 2002, the Company issued warrants to purchase 25,000 shares of common
stock to an officer of the Company and recorded compensation expense totaling
$242,500.
Underwriter's Agreements
- -------------------------
On August 31, 2000, the Company signed a letter of intent with its managing
underwriter to offer approximately 1,000,000 shares of common stock to the
public. Under the agreement, the Company would issue warrants to purchase up to
10% of the shares sold by the Company. The warrants would be exercisable for a
period of five years commencing one year after the effective date of the
registration statement. This offering was subsequently canceled, and the
Company wrote off $206,892 in offering costs related to it and other private
placements.
On October 26, 2001, the Company signed a letter of intent with its managing
underwriter to offer approximately 1,000,000 shares of common stock to the
public at a purchase price of $8 to $12 per share. Under the agreement, the
Underwriter will be issued an over-allotment option to purchase shares of the
Company's common stock in an amount up to an additional 15% of the shares to be
sold by the Company to be exercisable at the public offering price for a 60-day
period.
The Company will compensate its underwriter with the Company's common stock at
10% of the gross proceeds, plus a non-accountable expense allowance of 3% of the
gross proceeds. In addition, the Company will issue to the underwriter
five-year warrants to purchase common stock at a purchase price of $0.001 per
warrant, up to 10% of the shares sold by the Company, upon the effective date of
the Company's registration statement. These warrants are exercisable at 120% of
the public offering price. The Company also agreed to pay a consulting fee of
$3,000 per month over a 24-month period in order to retain the underwriter.
F-29
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES
The differences between the provision for income taxes and income taxes at the
federal statutory tax rate for the year ended December 31, 2001, the period from
February 11, 2000 (inception) to December 31, 2000, and the three months ended
March 31, 2002 and 2001 were as follows:
For the
Period from
February 11,
For the 2000
For the Three Months Ended Year Ended (Inception) to
March 31, December 31, December 31,
2002 2001 2001 2000
------------ ----------- ------------ -----------
(unaudited) (unaudited)
Income tax at federal
statutory tax rate 34.0% 34.0% 34.0% 34.0%
State tax, net of federal
benefit 6.0 6.0 6.0 6.0
Valuation allowance (40.0) (40.0) (40.0) (40.0)
------------ ----------- ------------ -----------
TOTAL - % -% -% -%
============ =========== ============ ===========
The components of the deferred income tax assets (liabilities) as of December
31, 2001 were as follows:
Options and warrants $ 24,000
Net operating loss carryforwards 1,276,000
------------
1,300,000
Valuation allowance (1,300,000)
-----------
TOTAL $ -
===========
F-30
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS
Service Agreements with Converge and Subsequent Conversion of Accounts
- ------------------------------------------------------------------------------
Receivable
- ----------
On February 15, 2000, the Company entered into a sales and service agreement
with Converge. The agreement called for the Company to perform certain Web
development and implementation work on Converge's Web site and called for fees
in the amount of $200,000 to be billed and paid on certain benchmarks. On April
25, 2000, the Company entered into a separate agreement with a subsidiary of
Converge for certain Web site development work related to that company's Web
site. This second agreement called for fees in the amount of $700,000 to be
billed and paid on certain benchmarks. At December 31, 2000, both projects were
substantially complete. Neither agreement called for additional services to be
performed by the Company beyond completion of the work.
On December 20, 2000, the Company executed a debt conversion agreement with
Converge, whereby Converge returned 255,782 shares of the Company's common stock
in exchange for cancellation of the remaining debt owed to the Company under the
two contracts discussed above. The cancelled receivable amounted to $895,238.
The Company has not recorded any revenue related to the canceled receivable as
Converge, a related party, did not have any basis in the stock. The stock was
taken into treasury and recorded in the accompanying consolidated financial
statements during the year ended December 31, 2000. As of December 31, 2001,
all treasury stock was canceled. The Company incurred costs totaling $134,193
relating to projects conducted from its former parent.
Other Related Party Transactions
- -----------------------------------
As of December 31, 2001, the Company had a receivable of $27,725 from Converge.
In addition, the Company had a receivable of $36,460 from Digitalmen, a
subsidiary of Converge. The Company recorded revenues in the amount of $85,476
earned on various consulting and service contracts with affiliates during the
period from February 11, 2000 (inception) to December 31, 2000.
During the period from February 11, 2000 (inception) to December 31, 2000, the
Company leased office space from two affiliates. Rent expense paid to these two
affiliates aggregated to $36,670, $33,907, $0 (unaudited), and $11,100
(unaudited) for the year ended December 31, 2001, the period from February 11,
2000 (inception) to December 31, 2000, and the three months ended March 31, 2002
and 2001, respectively.
During the period from February 11, 2000 (inception) to December 31, 2000, the
Company paid two affiliates approximately $14,000 for hardware support purchases
and maintenance.
F-31
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
Other Related Party Transactions (Continued)
- -----------------------------------
During the period from February 11, 2000 (inception) to December 31, 2000, in
connection with the Company's initial capitalization, the Company granted
450,000 options to three founding shareholders at an exercise price of $0.01 per
share. These options are exercisable and outstanding at December 31, 2001.
During the year ended December 31, 2001, the Company had a receivable of $9,899
from Manhattan Capital Partners, which is owned by one of the Company's
officers.
During the year ended December 31, 2001, the Company contracted Manhattan West,
Inc., which is owned by one of the Company's officers, to perform investment
banking services. At December 31, 2001, the Company owed $35,331 to Manhattan
West, Inc.
During the year ended December 31, 2001, the Company entered into a consulting
agreement with one of its officers for $30,000. In December 2001, the Company
entered into a debt conversion agreement with the officer which allowed a
non-cash exercise of his warrants in lieu of compensation. The warrants were
issued at $0.30 per share for a total of 100,000 shares of common stock. The
Company did not issue the shares as of December 31, 2001 and recorded the fair
value of the compensation as committed stock.
During the year ended December 31, 2001, the Company entered into a consulting
agreement with Red Sea Ltd., which is owned by one of the Company's officers,
for a total fee of $150,000. The consultant will receive a monthly retainer of
$24,000 after the successful funding of $5,000,000 in equity financing or
$1,000,000 in booked revenues by the consultant. In December 2001, the Company
entered into a debt conversion agreement with the consulting firm in order to
issue 150,000 of common stock in lieu of the fee of $150,000. The debt
conversion agreement for compensation in common stock was cancelled in December
2001. At December 31, 2001, the Company owed $150,000 to Red Sea Ltd. as
accounts payable.
On February 1, 2002, the Company entered into a five-year agency agreement with
a business developer in Dubai in United Arab Emigrates. The payment to the
consultant is contingent upon performance of three requirements in order to
increase the Company's sales and customer base. Upon the completion of the
requirements, the consultant will receive options to purchase 300,000 shares of
the Company's common stock at an exercise price of $5 per share. The consultant
will receive additional options to purchase 300,000 shares of the Company's
common stock at an exercise price of $5 per share on the condition that
Information Technology contracts are obtained for the Company. In addition, the
Company will hire two salaried employees in Dubai upon completion of the
contract.
F-32
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
Other Related Party Transactions (Continued)
- -----------------------------------
During the three months ended March 31, 2002, the Company recognized software
development revenues totaling $82,000 (unaudited) for services rendered to
companies owned by directors of the Company.
During the year ended December 31, 2001, the Company entered into a sales
agreement with a related party. The Company will provide consulting services
for a monthly fee of $14,000 for a period of one year.
NOTE 8 - SEGMENT INFORMATION
For internal reporting purposes, management segregates the Company into two
divisions as follows for the year ended December 31, 2001 and the period from
February 11, 2000 (inception) to December 31, 2000:
2001
----------------------------------------------------------
Essential Tec
Esstec of Pakistan Eliminations TOTAL
----------- -------------- ------------- -------------
Net revenues $ 517,398 $ 45,947 $ (40,937) $ 522,408
Income (loss)
from operations $ (2,550,988) $ 27,241 $ - $(2,523,747)
Depreciation $ 30,539 $ 16,019 $ - $ 46,558
2000
----------------------------------------------------------
Essential Tec
Esstec of Pakistan Eliminations TOTAL
----------- -------------- ------------- --------------
Net revenues $ 438,602 $ - $ - $ 438,602
Loss from
operations $ (786,861) $ (107,978) $ $ (894,839)
Depreciation $ 12,091 $ 4,366 $ - $ 16,457
Most corporate expenses, such as legal and accounting expenses and public
relations expenses, are included in Esstec.
F-33
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND MARCH 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 9 - SUBSEQUENT EVENTS
In April 2002, a shareholder partially exercised his warrants for 20,756 shares
of common stock at $0.30 per share for a total cash payment of $6,227.
In April 2002, the Company issued 216,666 shares of common stock to three
individuals for cash totaling $65,000 upon the exercise of warrants to purchase
common stock at $0.30 per share.
F-34
No person is authorized to give any information or to make any representation
other than those contained in this prospectus, and if made such information or
representation must not be relied upon as having been given or authorized. This
prospectus does not constitute an offer to sell or a solicitation of an offer to 1,000,000 Shares of Common Stock
buy any securities other than the securities offered by this prospectus or an
offer to sell or a solicitation of an offer to buy the securities in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
The delivery of this prospectus shall not, under any circumstances, create any
implication that there have been no changes in the affairs of EssTec, Inc. since [Graphics Omitted]
the date of this prospectus. However, in the event of a material change, this
prospectus will be amended or supplemented accordingly. ESSTEC
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . . . . . . .
SUMMARY FINANCIAL DATA . . . . . . . . . . . .
RISK FACTORS . . . . . . . . . . . . . . . . . ----------------------------------
USE OF PROCEEDS . . . . . . . . . . . . . . . PROSPECTUS
DIVIDEND POLICY . . . . . . . . . . . . . . .
CAPITALIZATION . . . . . . . . . . . . . . . ----------------------------------
DILUTION . . . . . . . . . . . . . . . . . .
MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . .
BUSINESS . . . . . . . . . . . . . . . . . .
MANAGEMENT . . . . . . . . . . . . . . . . . .
EXECUTIVE COMPENSATION . . . . . . . . . . . .
PRINCIPAL STOCKHOLDERS . . . . . . . . . . . .
CERTAIN RELATIONSHIPS . . . . . . . . . . . .
DESCRIPTION OF CAPITAL STOCK . . . . . . . . .
TRANSFER AGENT AND REGISTRAR . . . . . . . . .
LISTING . . . . . . . . . . . . . . . . . . .
INDEMNIFICATION OF DIRECTORS AND OFFICERS. . .
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . .
UNDERWRITING . . . . . . . . . . . . . . . .
LEGAL MATTERS . . . . . . . . . . . . . . . .
EXPERTS. . . . . . . . . . . . . . . . . . . .
WHERE YOU CAN FIND MORE INFORMATION. . . . . .
UNTIL ________, 2002, 25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING, ALL
DEALERS THAT BUY, SELL OR TRADE SHARES, WHETHER OR NOT PARTICIPATING IN THIS _____ , 2002
OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN
ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS ---------------------------------
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-45-
PART II
-------
INFORMATION NOT REQUIRED IN PROSPECTUS
--------------------------------------
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Nevada law, our certificate of incorporation eliminates the
liability of directors to us or our stockholders for monetary damages for breach
of fiduciary duty as directors, except to the extent otherwise required by
Nevada law.
Our certificate of incorporation provides that we will indemnify each
person who was or is made a party to any proceeding by reason of the fact that
such person is or was a director or officer of the company against all expense,
liability and loss reasonably incurred or suffered by such person in connection
therewith to the fullest extent authorized by Nevada law. Our bylaws provide for
a similar indemnity to our directors and officers to the fullest extent
authorized by Nevada law. Our certificate of incorporation also gives us the
ability to enter into indemnification agreements with each of our directors and
officers. We intend to enter into indemnification agreements with certain of our
directors and officers, which provide for the indemnification of our directors
or officers against any and all expenses, judgments, fines, penalties, and
amounts paid in settlement, to the fullest extent permitted by law. We expect to
maintain liability insurance for our officers and directors.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, and controlling persons pursuant to
the foregoing provision, or otherwise, we have 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 us of expenses incurred or paid by any one of our directors, officers
or controlling persons in the successful defense of any action, suit or
proceeding) is asserted against us by such director, officer or controlling
person in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by us in connection with the registration of
the Shares is as follows:
SEC Registration . . . . . . . . . . . . . . . . . . . . . . . . $
NASD Fees . . . . . . . . . . . . . . . . . . . . . . . . . . $
AM EX Listing Fees . . . . . . . . . . . . . . . . . . . . . . $
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . $
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . $
Legal Fees and Expenses, including Blue Sky Fees and Expenses . . $
Printing Costs . . . . . . . . . . . . . . . . . . . . . . . . . $
Miscellaneous Expenses . . . . . . . . . . . . . . . . . . . . . $
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
RECENT SALES OF UNREGISTERED SECURITIES
In February 2000, we completed a private placement of our common stock and
warrants to 7 investors. We sold 1,050,000 shares at $.50 each (for total
proceeds of $525,000) and 189,134 warrants at $.60 each ($113,480.40) in this
private placement. This private placement was exempt from the registration
provisions of the Securities Act of 1933, as amended (the "Act") by virtue of
Section 4(2) of the Act, as transactions by an issuer not involving any public
offering. The securities issued pursuant to the private placement were
restricted securities as defined in Rule 144 of the Act. All investors in the
private placement were accredited investors as that term is defined in Rule 501
of Regulation D adopted under the Act.
-46-
In July 2000, we completed a private placement of our common stock to 9
investors. We sold 262,195 shares at $1.50 each ($393,292.50) in this private
placement. This private placement was exempt from the registration provisions
of the Act by virtue of Section 4(2) of the Act, as transactions by an issuer
not involving any public offering. The securities issued pursuant to the
private placement were restricted securities as defined in Rule 144 of the Act.
All investors in the private placement were accredited investors as that term is
defined in Rule 501 of Regulation D adopted under the Act.
In August 2001, we completed a private placement of our common stock to 12
investors. We sold 129,785 shares at $3.50 each ($454,247.50) and 75,000
warrants at $ 0.60 each ($45,000) in this private placement. This private
placement was exempt from the registration provisions of the Securities Act of
1933, as amended (the "Act") by virtue of Section 4(2) of the Act, as
transactions by an issuer not involving any public offering. The securities
issued pursuant to the private placement were restricted securities as defined
in Rule 144 of the Act. All investors in the private placement were accredited
investors as that term is defined in Rule 501 of Regulation D adopted under the
Act.
In February 2002, we completed a private placement of our common stock to
14 investors. We sold 71,000 shares at $5.00 each ($355,000) in this private
placement. This private placement was exempt from the registration provisions of
the Act by virtue of Section 4(2) of the Act, as transactions by an issuer not
involving any public offering. The securities issued pursuant to the private
placement were restricted securities as defined in Rule 144 of the Act. All
investors in the private placement were accredited investors as that term is
defined in Rule 501 of Regulation D adopted under the Act.
WARRANTS
As of March 31, 2002, we had 1,712,140 warrants outstanding, each warrant
to convert to one share of EssTec common stock at an exercise price between
$0.30 and $1.00. From March 31, 2002 and July 12, 2002, 551,586 warrants were
exercised at a price of $0.30. Out of the remaining outstanding warrants,
896,421 warrants, with an exercise price of $0.30 per warrant, will expire,
unless exercised, upon this filing, and 264,133 warrants, with an exercise price
of $1.00 per warrant, will expire, if not exercised, in September 2005.
OPTIONS
As of March 31, 2002, we had 9,853 options outstanding, each option to
convert to one share of EssTec common stock at an exercise price of $ 0.10. As
of that same date, we had the following additional options: 2,855 options
outstanding, each option to convert to one share of EssTec common stock at an
exercise price of $ 0.50; 55,000 options outstanding, each option to convert to
one share of EssTec common stock at an exercise price of $1.00; 75,000 options
outstanding, each option to convert to one share of EssTec common stock at an
exercise price of $ 1.50; 462,500 options outstanding, each option to convert to
one share of EssTec common stock at an exercise price of $ 3.50; and 200,000
options outstanding, each option to convert to one share of EssTec common stock
at an exercise price of $ 5.00. In April 2002, we issued 20,000 options, each
option to convert to one share of EssTec common stock at an exercise price of
$5.00.
On February 1, 2002 we executed an agreement with Elegant Set-Up, whereby
in addition to EssTec's provision of technological support and $8,500 per month
as salary for two employees, EssTec has agreed to grant Elegant 300,000 options
convertible into one share of EssTec common stock at an exercise price of $5.00
on the successful achievement of a milestone consisting of three markers: (1)
obtaining three contracts from "well-reputed" clients for EssTec products, and
receipt of EssTec's project cost and profit mark-up, (2) assistance in obtaining
five UAE investors for EssTec shares, and (3) assistance in obtaining four UAE
investors within 60 days of the agreement. We have not issued any of these
options as of the date of this prospectus.
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On March 1, 2000, our shareholders and Board of Directors adopted the 2000
Incentive and Non-statutory Stock Option Plan. The purpose of this stock option
plan is to advance the interests of EssTec by encouraging and enabling
acquisition of a financial interest in our company by our officers and other key
individuals. The stock option plan is intended to aid us in attracting and
retaining key employees, to stimulate the efforts of such individuals and to
strengthen their desire to remain with us. A maximum of 3,000,000 shares of our
common stock are available to be issued under the stock option plan. As of the
date of this prospectus, we have granted 30 options under our stock option plan,
representing 825,208 shares of underlying common stock.
We issued 25 options in 2000, representing 421,273 underlying shares of
common stock, with an average weighted exercise price of $0.28. We issued 16
options in 2001, representing 537,500 underlying shares of common stock, with an
average weighted exercise price of $3.22. We issued 4 options in 2002 through
the date of this prospectus, representing 220,000 underlying shares of common
stock, with an average weighted exercise price of $5.00.
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ITEM 27. EXHIBITS
Exhibits
- --------
1.0 Form of Underwriting Agreement*
1.1 Form of Representative's Warrant*
3.0 Articles of Incorporation, dated February 10, 2000
3.1 Amendment to Articles changing name to EssTec, Inc., dated October 6, 2000
3.2 Amendment to Articles increasing authorized shares, dated May 10, 2001
3.3 Bylaws, dated February 11, 2000
3.4 Debt Conversion Agreement with Converge Global, Inc., dated December 20, 2000
4.0 Form of Common Stock certificate for EssTec, Inc.
5.0 Opinion of Pollet, Richardson & Patel, A Law Corporation*
10.1 Lease for premises located in Lahore, Pakistan, dated August 1, 2000
10.2 Sub-lease for premises located in Los Angeles, California, dated April 1, 2001
10.3 2000 Incentive and Nonstatutory Stock Option Plan, dated March 1, 2000
10.4 Consulting Agreement with Rowley Corporation, dated July 15, 2001
10.5 Consulting Agreement with Red Sea, Ltd., dated September 5, 2001
10.6 Agreement with Elegant Set-Up General Trading Estb., dated February 1, 2002
10.7 Teaming Agreement with L3 Technology, dated February 2002
10.8 Agreement with Crescent Diagnostic Medical Group, dated December 2, 2001
10.9 Form of Employment Agreement
10.10 Employment Agreement with Mr. Ali Basit, dated March 14, 2002
10.11 Employment Agreement with Mr. Shaun Edwardes, dated January 14, 2002
10.12 Employment Agreement with Mr. Khalid El-Saadi, dated March 15, 2002
10.13 Consulting Agreement Mr. Bill Cheung, dated October 2001
10.14 Consulting Agreement with Mr. Shezad Rokerya, dated February 1, 2001
10.15 Advisory Board Agreement with Mohammed Khan, dated February 1, 2001
10.16 Advisory Board Agreement with Shezad Rokerya, dated February 1, 2001
10.17 Agreement with Physicians Mobile Medical Group, Inc., dated July 6, 2001
10.18 Advisory Board Agreement with Mukhtar M. Hasan, dated April 1, 2001
10.19 Consulting Agreement with Nick Gatfield, dated March 20, 2002
10.20 Consulting Agreement with Public Film Works, dated March 15, 2002
21.0 List of subsidiaries of EssTec, Inc.
23.0 Consent of Pollet, Richardson & Patel, A Law Corporation (included in their
opinion set forth in Exhibit 5 hereto)
23.1 Consent of Singer Lewak Greenbaum & Goldstein, LLP
24.0 Power of Attorney (see signature page)
* To be filed by amendment
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3) To remove from registration by means of post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
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4) The issuer will supplement the prospectus, after the end of the
subscription period, to include the results of the subscription offer, the
transactions by the underwriters during the subscription period, the amount
of unsubscribed securities that the underwriters will purchase and the
terms of any later reoffering. If the underwriters make any public offering
of the securities on terms different from those on the cover page of the
prospectus, the issuer will file a post-effective amendment to state the
terms of such offering.
5) 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.
6) The issuer will provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
7) As the issuer is relying on Rule 430A, the issuer will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
effective.
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial bona fide offering of those securities.
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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 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on July 19, 2002
EssTec, Inc.
/s/ Abdul L. Saquib
----------------------
By: Abdul Saquib
Title: Vice President and Secretary
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
* July 19, 2002
______________________ _______________
Shaun Edwardes Chief Executive Officer
(Principal Executive Officer)
* July 19, 2002
______________________ ________________
Chief Financial Officer and Treasurer
Khalid El-Saadi (Principal Financial Officer, Controller)
* July 19, 2002
______________________ ________________
Ali Basit Chief Operating Officer
/s/ Abdul Saquib July 19, 2002
______________________ ________________
Abdul Saquib Vice President - Operations and Secretary
* July 19, 2002
______________________ ________________
Faysal Zarooni Director, Chairman of Board of Directors
* July 19, 2002
______________________ ________________
Bill Cheung Director
* July 19, 2002
______________________ ________________
Ramsey Hakim Director
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* July 19, 2002
______________________ ________________
Sana Khan Director
* July 19, 2002
______________________ ________________
Syed Nasir Zafar Ahmed Director
* By: Abdul Saquib, Attorney-in-Fact
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POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Shaun D. C. Edwardes and Abdul L. Saquib,
and each one of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, or any related
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and any other
regulatory authority, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or either of them, or
their, his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Shaun D.C, Edwardes May 21, 2002
- ---------------------------
Shaun D.C. Edwardes Chief Executive Officer
(Principal Executive Officer)
/s/ Khalid El-Saadi May 15, 2002
- ---------------------------- Chief Financial Officer and Treasurer
Khalid El-Saadi (Principal Financial Officer)
/s/ Ali Basit July 19, 2002
- ----------------------------
Ali Basit Chief Operating Officer
/s/ Abdul Saquib May 15, 2002
- ----------------------------
Abdul Saquib Vice President - Operations and Secretary
/s/ Faysal Zarooni May 21, 2002
- ----------------------------
Faysal Zarooni Director, Chairman of Board of Directors
/s/ Bill Cheung May 15, 2002
- ----------------------------
Bill Cheung Director
/s/ Ramsey Hakim June 3, 2002
- ----------------------------
Ramsey Hakim Director
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/s/ Sana Khan May 29, 2002
- ----------------------------
Sana Khan Director
/s/ Syed Nasir Zafar Ahmed May 21, 2002
- ----------------------------
Syed Nasir Zafar Ahmed Director
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