AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 2002
REGISTRATION NO. 333-96913
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
AMENDMENT NO. 2
TO
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 of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
________________________________________________________________________________
9500 East Artesia Blvd, Suite 203, Bellflower, CA 90706
(562) 867-1232
(562) 867-0933 (fax)
Ali Basit
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, Kirkpatrick & Lockhart LLP
10900 Wilshire Blvd. Suite 500 10100 Santa Monica Blvd, 7th Floor,
A Law Corporation Los Angeles, CA 90067
Los Angeles, CA 90024 (310) 552-5000
(310) 208-1182 (310) 552-5001 (fax)
(310) 208-1154 (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.
- --------------------------------------------------------------------------------------------------------------------
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 100,000 $1,200,000 $110.40
upon exercise of the representative's warrants(3)
- --------------------------------------------------------------------------------------------------------------------
Representative's warrants 100,000 $0 $0
- --------------------------------------------------------------------------------------------------------------------
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 the
underwriters, and represent warrants for our common stock equal to 10% of
the shares sold in the offering, not including the over-allotment option,
at an exercise price of 120% of the initial public offering price.
Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(g) under the Securities Act of 1933,
as amended.
The information in this prospectus is not complete and may be changed. 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
ESSTEC, INC.
Common Stock
--------------------------------------------------------
This is the initial public offering for EssTec, Inc. We are offering
1,000,000 shares of our common stock. 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
and Proceeds to
Price to Public 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. In addition, on the closing of this
offering, we will sell to the representative of the underwriters warrants to
purchase an aggregate of 100,000 shares of our common stock at a per share
exercise price of 120% of the initial public offering price. 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 13
DIVIDEND POLICY 13
CAPITALIZATION 14
DILUTION 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS 17
BUSINESS 26
MANAGEMENT 33
EXECUTIVE COMPENSATION 36
PRINCIPAL STOCKHOLDERS 38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
DESCRIPTION OF CAPITAL STOCK 44
TRANSFER AGENT AND REGISTRAR 44
LISTING 44
INDEMNIFICATION OF DIRECTORS AND OFFICERS 45
SHARES ELIGIBLE FOR FUTURE SALE 46
UNDERWRITING 48
LEGAL MATTERS 50
EXPERTS 50
WHERE YOU CAN FIND MORE INFORMATION ABOUT US 50
INDEX TO FINANCIAL STATEMENTS 51
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.
___________________________________________________
We were incorporated in Nevada on February 11, 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 5,276,162 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 13.
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:
* 751,845 shares of common stock issuable upon exercise of stock
options outstanding as of November 6, 2002 at a weighted average
price of $3.50 per share;
* 1,788,156 shares of common stock available as of November 6, 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 the representative of the underwriters on closing of
this offering; and
* 284,133 shares of common stock issuable upon exercise of
outstanding warrants as of November 6, 2002.
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.
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 June
30.
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.
"Net loss" refers to all changes in equity (net assets) due to our
operations and internal decisions. "Comprehensive loss" refers to all changes in
equity during a fiscal period based on net loss, as well as events not initiated
by us (e.g., external decisions). 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 in our consolidated financial statements resulted
from foreign currency translations.
February 11, January 1,2001 Six month Six month
2000 through period ended period ended
(date of December 31, June 30, 2001 June 30, 2002
inception) 2001 (Unaudited) (Unaudited)
through (Audited)
December 31,
2000
(Audited)
- --------------------------------------- ------------- ---------------- ---------------- ------------------
STATEMENT OF OPERATIONS DATA
- --------------------------------------- ------------- ---------------- ---------------- ------------------
Net revenues $438,602 $ 522,408 $ 220,974 $ 139,621
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Cost of revenues $285,409 $ 524,630 $ 383,838 $ 105,511
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Gross profit (loss) $153,193 $ (2,222) $ (162,864) $ 34,110
- -------------------------------------- -------------- ---------------- ---------------- ------------------
General and administrative expenses $987,659 $ 1,363,020 $ 713,242 $ 235,608
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Non-cash operating expenses $ 60,373 $ 1,092,530 $ 188,623 $ 881,737
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Research and development 0 $ 65,975 $ 65,975 $ 99,570
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Operating loss $(894,839) $(2,523,747) $(1,130,704) $(1,182,805)
- -------------------------------------- -------------- --------- ----- ---------------- ------------------
Net loss $(894,839) $(2,511,853) $(1,130,645) $(1,181,266)
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Comprehensive loss $(894,839) $(2,514,088) $(1,130,645) $(1,181,266)
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Comprehensive Loss per share:
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Basic and diluted comprehensive
loss per share $ (0.22) $ (0.57) $ (0.24) $ (0.32)
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Basic and diluted weighted average
shares 4,015,162 4,435,288 4,665,511 3,653,478
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Pro forma basic and diluted
comprehensive loss per share (1) ___ $ (0.58) ___ $ (0.35)
- -------------------------------------- -------------- ---------------- ---------------- ------------------
Pro forma basic and diluted
weighted average shares (1) ___ 4,710,288 ___ 3,928,478
- -------------------------------------- -------------- ---------------- ---------------- ------------------
As adjusted basic and diluted
comprehensive loss per share (2) ___ $ (0.48) ___ $ (0.24)
- -------------------------------------- -------------- ---------------- ---------------- ------------------
As adjusted basic and diluted weighted
average shares (2) ___ 5,710,288 __ 4,928,478
- -------------------------------------- -------------- ---------------- ---------------- ------------------
3
Year ended Six month
December 31 period ended
2001 June 30, 2002 Pro forma (1) As adjusted (2)
(Audited) (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------- ------------ ------------- ------------- ---------------
BALANCE SHEET DATA:
- --------------------------------------- ------------ ------------- ------------- ---------------
Cash and cash equivalents $ 9,384 $ 8,436 $ 78,426 $7,578,436
- --------------------------------------- ------------ ------------- ------------- ---------------
Working capital (deficit) $(605,875) $(526,735) $(456,735) $7,040,255
- --------------------------------------- ------------ ------------- ------------- ---------------
Total assets $ 310,551 $ 352,685 $ 422,685 $7,165,579
- --------------------------------------- ------------ ------------- ------------ ---------------
Total liabilities $ 752,118 $ 757,106 $ 757,106 $ 0
- --------------------------------------- ------------ ------------- ------------ ---------------
Long-term debt, net of current portion $ 5,383 $ 3,010 $ 3,010 $ 0
- --------------------------------------- ------------ ------------- ------------ ---------------
Stockholders' equity (deficit) $(441,567) $(404,421) $(334,421) $7,165,579
- --------------------------------------- ------------ ------------- ------------ ---------------
(1) Giving effect to the exercise of 233,333 warrants for net proceeds of
$70,000, and the issuance of 16,667 shares committed for issuance
as of June 30, 2002.
2) Giving effect to the sale of 1,000,000 shares of common stock offered
hereby at a proposed initial public offering price of $9.00 per share
and the application of the estimated 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 $4,587,958 for the period from
our inception on February 11, 2000 to June 30, 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, we may experience reduced profitability, which may reduce the
value of your investment.
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 THE SUCCESS OF
OUR BUSINESS MODEL AND THE EFFECTIVENESS OF OUR MANAGEMENT. IF OUR PLAN IS NOT
SUCCESSFUL, OR OUR MANAGEMENT IS NOT EFFECTIVE, THE VALUE OF YOUR INVESTMENT MAY
DECLINE.
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.
THROUGH THE YEAR ENDED DECEMBER 31, 2001 WE RELIED ON OUR CONSULTING SERVICES TO
GENERATE 100% OF OUR REVENUE. WE HAVE MODIFIED OUR OPERATIONS TO A MIX OF
REVENUES FROM THE CONSULTING SERVICES AND SALES OF PROPRIETARY SOFTWARE, WITH
A GREATER EMPHASIS ON THE SALE OF THE PROPRIETARY SOFTWAREOUR FAILURE TO
DEVELOP COMMERCIALLY VIABLE TECHNOLOGY OR GENERATE REVENUES FROM OUR NEW
BUSINESS MODEL MAY REDUCE OUR FINANCIAL POSITION SUCH THAT WE WILL NOT BE ABLE
TO CONTINUE OPERATIONS WITHOUT REEVALUATING AND/OR REVISING OUR BUSINESS PLAN.
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 just service-based consulting activities to a mix of
5
consulting services and product-based technology development and the creation of
our proprietary software platforms. As of June 30, 2002 we have only generated
$70,000 in revenues from our new business focus, but have expended $165,545 in
research, development and marketing for our software platforms. If we fail to
successfully implement our new business plan, we may not be able to generate
sufficient revenue to continue operations, and we may not be in a financial
position to continue operations without reevaluating and/or revising our
business plan.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY RESULTS, DUE TO THE FACT THAT WE DO NOT
HAVE A HISTORY OF ENGAGING IN LONG-TERM PROJECTS, BUT RATHER DERIVE THE MAJORITY
OF OUR REVENUE FROM SHORT-TERM PROJECTS WHICH ARE COMPLETED WITHIN A QUARTER,
MAKES FINANCIAL FORECASTING BASED ON OUR REVENUE STREAM DIFFICULT, AND WE MAY
BE UNABLE TO MEET THE PREDICTIONS OF MARKET ANALYSTS AND INVESTORS. BOTH OUR
INABILITY TO MEET FORECASTED PREDICTIONS AND THE TENDENCY OF INVESTORS TO TRADE
BASED ON PREDICTED REVENUE STREAM MAY ADVERSELY 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 harm our ability to
finance our operations.
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 $40,098 in the first two quarters of this fiscal
year. We intend to spend an additional $150,000 for the remainder of the fiscal
year. See our discussion in "Business-International Expansion." 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 materially adversely impact our cash flow and ability to meet our regular
operating expenses, which may, in turn be deleterious to our ability to serve
our existing clientele and our competitive position to obtain new clients.
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. AS A RESULT, YOU
WILL NOT BE ABLE TO ELECT TWO DIRECTORS TO OUR BOARD FOR THE DURATION OF THE
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 future offerings of our
securities after the conclusion of this offering, should we decide to sell
additional securities either publicly or privately in the future. 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. Although these Board members will
maintain a fiduciary duty to the shareholders of our company, they may have
interests which conflict the Board members elected by the shareholders.
Additionally, should the bylaws be modified to reduce the number of board
members, these directors may constitute a majority of the Board of Directors.
6
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
ability to finance our operations through credit facilities or other debt
instruments, which may have a material adverse impact on our ability to finance
our ongoing operations and expansion. 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."
OUR PRIMARY TECHNOLOGY BASE IS LOCATED IN PAKISTAN, WHICH MAY EXPERIENCE THE
EFFECTS OF CURRENT HOSTILITIES IN THE REGION. AN INTERRUPTION OF TRADE BETWEEN
PAKISTAN AND ITS TRADING PARTNERS MAY HAVE A MATERIAL ADVERSE IMPACT ON OUR
ABILITY TO OPERATE IN THIS REGION, WHICH MAY, IN TURN, HARM OUR ABILITY TO
CONTINUE OPERATIONS IN THE REGION, AND, OVER TIME, MAY FORCE US TO REVISE OR
DISCARD OUR BUSINESS PLAN.
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 ability to continue operations and pursue further sales in both
Pakistan and the region as a whole. Over an extended period of time, this may
have a material adverse effect on the overall viability of our business plan.
WE INTEND TO EXPAND OUR OPERATIONS INTERNATIONALLY IN THE IMMEDIATE FUTURE, AND
MAY EXPERIENCE A NUMBER OF RISKS ASSOCIATED WITH NEW INTERNATIONAL OPERATIONS.
IF WE ARE UNABLE TO SUCCESSFULLY NEGOTIATE THESE RISKS, WE MAY BE UNABLE TO
COMPETE SUCCESSFULLY IN INTERNATIONAL MARKETS, WHICH WILL ADVERSELY IMPACT OUR
BUSINESS PLAN, AND, DEPENDING ON THE AMOUNT INVESTED IN OUR INTERNATIONAL
OPERATIONS, MAY MATERIALLY IMPACT OUR FINANCIAL POSITION AND RESULTS OF
OPERATION.
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.
7
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 increase
our expenses, and adversely impact our ability to meet our ongoing business
operations, as well as our ability to maintain our competitive position within
the industry as a reliable supplier of both products and services.
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 by materially
reducing our ability to successfully compete within the industry.
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 and our ability to
finance our operations and become profitable.
8
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 due to significant increase in expenses,
without a correlative increase in revenues.
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 June 30, 2002 Crescent Diagnostic Medical
Group, a related party, accounted for approximately 40% of our revenues and 1st
Step, Inc., a related party, accounted for approximately 29% of our revenues.
The remaining 31% of our revenues were generated by three non-affiliated
parties: Comprehensive Outpatient Surgery Center (10%), Manhattan Projects.com,
Inc. (11%) and True View Diagnostic Centers, Inc. (10%). 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 due to loss of revenue.
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
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, WHICH 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.
9
If our products violate third-party proprietary 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
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.
WE DO NOT INTEND TO APPLY FOR PROTECTION OF OUR INTELLECTUAL PROPERTY, AND, AS A
RESULT, OUR COMPETITORS MAY OFFER PRODUCTS SIMILAR OR IDENTICAL TO OURS AND WE
WILL BE UNABLE TO ENFORCE OUR RIGHTS AGAINST SUCH COMPETITORS. OUR INABILITY TO
PROTECT OUR PRODUCTS MAY RESULT IN INCREASED COMPETITION BY COMPETITORS, WHICH
MAY REDUCE OUR MARKET SHARE AND ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.
We do not intend to apply for protection of our software platforms or other
developed products under domestic or foreign intellectual property laws due to
the high cost of procuring and enforcing protection, and the substantial
difficulty in proving violation of intellectual property rights for software
products. As a result, we will not be able to enforce any intellectual property
rights, or prosecute violations of these rights. If one of our competitors
infringes on our rights by reproducing our products in the same or similar
format to ours, at reduced price, we may experience a loss of clientele and
market share, and a resulting reduction in financial position.
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
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.
10
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 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.
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;
11
* 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.
<REMAINDER OF PAGE INTENTIONALLY LEFT BLANK>
12
USE OF PROCEEDS
---------------
We estimate that our net proceeds from the sale of the shares of common
stock we are offering will be approximately $7,500,000, or $8,674,500 if the
underwriters exercise their over-allotment option in full, based on an assumed
initial public offering price of $9.00 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. Deferred compensation (1) $ 183,572
2. Accounts payable $ 292,448
3. Accrued expenses (2) $ 116,772
4. Due to related parties (3) $ 157,234
5. Business development (4) $ 5,749,974
General corporate funds, including working
capital for operations $ 1,000,000
---------
Total $ 7,500,000
_____________
(1) Consisting of $32,417 owed to former employees ($17,476 owed to Mohammed
Ali Tariq, $9,988 owed to Adnan Rana, and $4,953 to Junaid Khan) and
$151,155 owed to current and former officers and directors. See our
discussion regarding the amount owed to current and former officers and
directors 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) Consists of $27,000 owed to Winthrop Ventures Fund, with an 18%
interest rate and currently in default. See our discussion in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources." $69,772 is due in accrued
federal and California state taxes.
(3) $153,407 is due to Red Sea Ltd., an affiliated party (our Chief Financial
Officer is a director to Red Sea), for consulting services to be performed,
discussed in "Certain Relationships and Related Party Transactions," and
$3,827 is due to Manhattan West, Inc., which is owned by our former Chief
Executive Officer, Tariq Khan, in repayment for a non-interest bearing loan
to us over the last fiscal year for general working expenses.
(4) Primarily consisting of reserved funds for future acquisitions, none of
which have been currently identified.
__________________
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. A significant portion of our proceeds are
allocated to general business development (76.7%) and general working capital
(13.3%). The reason for this offering is to generate general corporate funding,
a large portion of which we hope to use to acquire businesses in the future.
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.
13
CAPITALIZATION
--------------
The following table reflects our capitalization as of June 30, 2002:
* on an actual basis;
* on a pro forma basis to reflect the exercise of 233,333 warrants for
net proceeds of $ 70,000 and the issuance of 16,667 shares of common
stock that were committed for issuance as of June 30, 2002 and the
issuance of 25,000 shares of common stock for loan fees; 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 $9.00 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 June 30, 2002
-------------------
Actual Pro forma Pro forma
(Unaudited) (Unaudited) as adjusted
(Unaudited)
- -------------------------------------- ------------ ------------ -------------
Long-term debt, net of current portion $3,010 $3,010 --
- -------------------------------------- ------------ ------------ -------------
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,
4,001,163 issued and outstanding,
4,276,164 issued and outstanding
pro forma; 5,276,164 issued
and outstanding pro forma as adjusted $4,002 $4,277 $5,277
- -------------------------------------- ------------ ------------ -------------
Committed stock $5,000 -- --
- -------------------------------------- ------------ ------------ -------------
Deferred compensation $(643,855) $(643,855) $(643,855)
- -------------------------------------- ------------ ------------ -------------
Additional paid-in capital $4,820,625 $5,095,350 $12,594,350
- -------------------------------------- ------------ ------------ -------------
Accumulated other comprehensive loss $(2,235) $(2,235) $(2,235)
- -------------------------------------- ------------ ------------ -------------
Accumulated deficit $(4,587,958) $(4,787,958) $(4,787,958)
- -------------------------------------- ------------ ------------ -------------
Total stockholders' equity (deficit) $(404,421) $(334,421) $7,165,579
- -------------------------------------- ------------ ------------ -------------
Total capitalization $(401,411) $(331,411) $7,165,579
- -------------------------------------- ------------ ------------ -------------
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
June 30, 2002. The number of shares that will be outstanding after this
offering excludes:
* 751,845 shares of common stock issuable upon exercise of stock options
outstanding as of November 6, 2002 at a weighted average price of
$3.50 per share;
* 1,788,156 shares of common stock available as of November 6, 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 the representative of the underwriters on closing of this
offering; and
* 284,133 shares of common stock issuable upon exercise of outstanding
warrants as of November 6, 2002.
14
DILUTION
--------
Our pro forma net tangible book value at June 30, 2002 was $(334,421), or
$(0.08) per share, based on 4,292,830 shares of our common stock outstanding,
after giving effect to the exercise of 233,333 warrants for net proceeds of
$70,000, and the issuance of 16,667 shares committed for issuance as of June 30,
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 $9.00 per
share, less the underwriting discounts and commissions and our estimated
offering expenses, our pro forma net tangible book value at June 30, 2002 would
be $7.16 million, or $1.35 per share. This represents an immediate increase in
the pro forma net tangible book value of $1.44 per share to existing
stockholders and an immediate dilution of $7.65 per share to new investors
purchasing shares at the assumed initial public offering price of $9.00 per
share. The following table illustrates this per share dilution:
- ------------------------------------------------------------------------- -----
Assumed initial public offering price per share $9.00
- ----------------------------------------------- -----
Pro forma as adjusted net tangible book value per share at June 30, 2002 $1.35
- ------------------------------------------------------------------------- -----
Increase per share attributable to new investors $1.44
- ------------------------------------------------------------------------- -----
Dilution per share to new investors in this offering $7.65
- ------------------------------------------------------------------------- -----
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 78.8% 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 21.2% of the total number of shares of common tock to be outstanding
upon completion of this offering.
The following table summarizes, as of June 30, 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.
Shares Purchased Total Consideration Average Price
------------------ ---------------------
Number Percent Amount Percent per Share
--------- -------- ----------- -------- -------------
Existing stockholders 4,276,164 81.1% $ 5,099,627 36.2% $1.19
- --------------------- --------- -------- ----------- -------- -------------
New investors 1,000,000 18.9% $ 9,000,000 63.8% $9.00
- --------------------- --------- -------- ----------- -------- -------------
Total 5,276,164 100% $14,099,627 100%
- --------------------- --------- -------- ----------- -------- -------------
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 November 6, 2002, options to purchase
751,845 shares of Common Stock were outstanding at a weighted average exercise
price of approximately $3.50 per share under our 2000 Stock Option Plan, and
warrants representing 284,133 shares 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.
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.
Our company was incorporated on February 11, 2000 as a wholly-owned
subsidiary of Converge Global, Inc., with separate operations, employees,
facilities and management. We were incorporated in the state of Nevada as
"Essential Tech, Inc." Essential Tech (Pvt.) Ltd, a 98%-owned sister
subsidiary of Converge based in Pakistan, became our direct subsidiary in
February 2000. Essential Tech (Pvt.) Ltd was incorporated in August 1999 to
take advantage of the benefits offered by the Pakistan labor force, but prior to
February 2000, it had not commenced operations and there had been no material
activity in the company. 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
16
people who maintain these relationships. A focus on the United States, however,
would require are larger team of more conventional marketing professionals.
Product sales are, generally speaking, a higher revenue margin business.
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.
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 June 2002 we issued 221,500 stock options
and 45,000 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 to
$5.00 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 half of this fiscal year of $881,737
We anticipate expensing options and warrants we have issued after June 30,
2002 either during the third quarter, or amortized over the duration of the
option or warrant, as appropriate.
STOCK CONTRIBUTION
On October 1, 2001, 6 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.
PLAN OF OPERATIONS
Our plan of operations for the next 12 months will primarily focus on
continuing our research and development for our suite of EssFlow products, and
expanding our development facilities overseas, particularly in Pakistan and
Dubai. We also intend to pursue joint ventures and partnership agreements
internationally, focusing on the US market and the Middle East. We may pursue
acquisitions of businesses in the next 12 months, as well, should a satisfactory
opportunity arise which will benefit both our company and our shareholders.
Following the conclusion of this offering, we anticipate that we will have
enough cash for our operations and research and development for the next 12
months. Over this period, we anticipate spending $1,000,000 for our daily
operations, and $500,000 for research and development, to develop additional
industry applications for our EssFlow system. The particular industries will be
determined by the needs of our existing and future clientele. Any additional
funds we receive through this offering, as well as from revenue, will be spent
on developing our business overseas, including marketing our EssFlow products in
the markets previously described, and entering into joint venture and joint
marketing agreements to increase our customer base.
As discussed in our "Business" section, we may pursue business acquisitions
which complement our existing suite of products or technologies. Our ideal
targets would share our target client base, which we believe may reduce our
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. If we find
suitable targets, we may need to generate additional funds to complete our
acquisitions. We intend to finance these transactions primarily, if not
entirely, through additional share issuances.
17
We anticipate hiring an additional 60 employees over the next 12 months:
40 software developers for our Pakistan operations, 15 marketing employees for
business development (7 in the US and 8 in Dubai), and 5 senior managers (split
between the US and Dubai). We may revise our number of employees, or purchase
additional equipment, as a result of any acquisition we complete. However, we
cannot estimate these figures at this time.
RESULTS OF OPERATIONS
THE SIX MONTH PERIOD ENDED JUNE 30, 2002 AS COMPARED TO THE SIX MONTH PERIOD
ENDED JUNE 30, 2001
NET REVENUES:
Our net revenues for the six month period ended June 30, 2002 was $139,621,
$83,621 of which was derived from our consulting business and $56,000 of which
was attributed to the sale of our Medflow product. This is $81,353 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 than business development activities.
For the six month period ended June 30, 2002, 69%, or $96,000, of our
revenues were generated from affiliated parties, as compared to 0% of our
revenues for the same period in 2001 (100% of our revenues for the period in
2001 were generated from non-affiliated parties).
COST OF REVENUES:
Our cost of revenues for the period ended June 30, 2002 was $105,511, which
was 73% 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.
GROSS PROFIT (LOSS):
Our gross profit (loss) for the six month period ended June 30, 2002 was
$34,110, which is $196,974 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 six month period ended June
30, 2002 was $235,608, as compared to $713,242 for the same period in 2001. As
part of our cost reduction plan in 2001, discussed in our overview, above, we
undertook series of steps that included reduction in personnel, benefits, and
outsourced professional services. As a result of this, we had significantly
reduced costs associated with salary and wages ($219,000 less) and reduced
professional services costs ($499,000 less).
NON-CASH EXPENSES:
Our non-cash expenses for the six month period ended June 30, 2002 were
$881,737, as compared to $188,623 for the same period ended June 30, 2001. In
addition to amortized expenses from previously issued options, during the first
half of fiscal 2002, we issued options to purchase 221,500 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 $466,250 and deferred
compensation of $641,250 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 and 20,000 warrants to
purchase common stock, with an exercise price of $5.00 per share , to our legal
counsel in exchange for services provided. This resulted in an expenditure of
$242,500 in compensation expenses, and $15,000 in non-cash legal expenses, based
on our deemed fair market value of $10.00 per share. During the six month period
ended June 30, 2001, the fair market value of our common stock was $3.50, which
resulted in substantially lower expenses and amortized expenses for that
quarter.
18
RESEARCH AND DEVELOPMENT:
Our research and development expenses for the six month period ended June
30, 2002 was $99,570, as compared to $65,975 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 six month period ended June
30, 2002 was $1,181,266, as compared to $1,130,645 for the same period in 2001,
which is 4% more than the previous year. Our gross profit realized through
cost-reduction efforts was offset by our accounting for non-cash compensation
expenses related to the issuance of stock options and warrants, resulting in
minimal change to the comprehensive loss to stockholders. "Net loss" refers to
all changes in equity (net assets) due to our operations and internal decisions.
"Comprehensive loss" refers to all changes in equity during a fiscal period
based on net loss, as well as events not initiated by us (e.g., external
decisions). 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
in our consolidated financial statements resulted from foreign currency
translations.
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.
During the fiscal year ended December 31, 2001, 0% of our revenues were
generated by affiliated parties (100% of our revenues for the fiscal year were
generated by non-affiliated parties), as compared to 19% in the fiscal year
ended December 31, 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.
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.
19
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 $1,977,683 from
inception to June 30, 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 June 30, 2002, we had aggregate outstanding liabilities of $757,106.
This consists of a total of $183,572 of deferred compensation to former
employees, officers and directors, $157,234 of amounts due to related parties,
all of which are described in further detail in "Certain Relationships and
Related Party Transactions," $409,220 of accounts payable and accrued expenses,
and $7,080 in capital lease liabilities.
Discussions of all material liabilities and commitments for the required
period are described as follows:
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. This agreement is discussed further in
our discussion titled "Executive Compensation."
In April 2001, we issued an unsecured note payable to Winthrop Venture Fund
Ltd. 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 June 30, 2002 was $47,000. On August 5, 2002, we
paid $20,000 of this outstanding amount to Winthrop Venture. However, as of
June 17, 2002, we became in default of the terms of the promissory note, and
have issued 20,000 shares of restricted common stock to Winthrop Ventures and
increased the interest rate on the account to 18% annually, as required by the
terms of the note. We have an undefined extension on the note on these new
terms, and anticipate paying this note in full with the proceeds from this
offering. Accordingly, upon the closing of this offering, we do not anticipate
that this note will have any material effect on our operations, liquidity and/
or financial position in the long term.
20
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, a non-affiliated company, 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
November 6, 2002, our balance due under this agreement is $25,500, 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. The agreement terms are that we 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 our 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 our products, and
receipt of our project cost and profit mark-up, (2) assistance in obtaining five
UAE investors for our 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. This
agreement is discussed further in our discussions titled "Certain Relationships
and Related Party Transactions" and "Business-International Expansion." We do
not anticipate that these payments will have a material impact on either or our
short-term or long-term liquidity.
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. On September 15, 2002, Mr. Shaun
Edwardes, our previous Chief Executive Officer, resigned from that position due
to time constraints. Mr. Basit was then appointed Chief Executive Officer,
effective September 15, 2002. For further discussion, see 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 MONTHS 12-18 MONTHS
-------- -------------------- -------------
Trade Payables $750,026 $ 750,026 -
- ---------------------------------- -------- -------------------- -------------
Capital Lease Obligations $ 7,080 $ 4,070 $ 3,010
- ---------------------------------- -------- -------------------- -------------
Operating Leases - - -
- ---------------------------------- -------- -------------------- -------------
Unconditional Purchase Obligations - - -
- ---------------------------------- -------- -------------------- -------------
Other Long-term Obligations - - -
- ---------------------------------- -------- -------------------- -------------
Total Contractual Cash Obligations $757,106 $ 754,096 $ 3,010
- ---------------------------------- -------- -------------------- -------------
21
FLUCTUATIONS IN OPERATING RESULTS
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
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. Please refer to our discussion in the risk factor titled
"Potential fluctuations in our quarterly results, due to the fact that we do not
have a history of engaging in long-term projects, but rather derive the majority
of our revenue from short-term projects which are completed within a quarter,
makes financial forecasting based on our revenue stream difficult, and we may
be unable to meet the predictions of market analysts and investors. Both our
inability to meet forecasted predictions and the tendency of investors to trade
based on predicted revenue stream may adversely affect our common stock trading
price."
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.
22
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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
This statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF
Issue 94-3, a liability for an exit cost, as defined, was recognized at the date
of an entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. We do not expect adoption of SFAS No.
146 to have a material impact, if any, on our financial position or results of
operations.
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.
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23
BUSINESS
--------
HISTORY AND CONSULTING BUSINESS
Our company was incorporated on February 11, 2000 as a wholly-owned
subsidiary of Converge Global, Inc., with separate operations, employees,
facilities and management. We were incorporated in the state of Nevada as
"Essential Tech, Inc.". Essential Tech (Pvt.) Ltd, a 98%-owned sister
subsidiary of Converge based in Pakistan, became our direct subsidiary in
February 2000. Essential Tech (Pvt.) Ltd was incorporated in August 1999 to
take advantage of the benefits offered by the Pakistan labor force, but prior to
February 2000, it had not commenced operations and there had been no material
activity in the company. 80% of our software development is conducted through
our subsidiary in Pakistan. The remaining 20% of development, and 100% of our
sales and marketing, are conducted directly through our US office.
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.
Through the year ended December 31, 2001, we 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. Commencing in 2002, we refocused our business to a mix of consulting
services and product-based technology development, focusing on the creation of
our proprietary software platforms. All of our product development work for
both of our proprietary applications and our consulting clients is conducted
through our off-shore development center in Lahore, Pakistan. We use this
center to employ skilled software developers and 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. Our U.S. operations consist primarily of management and our project
managers, who serve as liaisons between our clients and our developers and
technicians in Pakistan.
In February 2002, we entered into a teaming agreement with L3 Technology,
an unaffiliated Canadian software development company. We have agreed to be a
non-exclusive distributor of their mobileIP 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.
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 "Acquisition
Strategy."
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. With this in mind, we started
working on the development of a software platform that can then be customized
for each client's needs. This platform was named EssFlow Systems.
24
EssFlow Systems can be modified based on client and industry needs. The
first suite of products based on EssFlow Systems 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.
However, many projects require individuals from various companies to interact
with and manipulate the same information from one database, which becomes
complicated and complex without a central intranet. Essflow resolves this issue
by allowing outside collaborators to have the same access to information as
internal intranet users. EssFlow allows outsiders in.
The EssFlow platform essentially consists of the following components:
* A complex registration system registering permitted users and levels
of access,
* An information sharing system which allows work product to be shared
among registered users,
* A scheduling system to provide both communal and individual
calendaring of work and meetings,
* A billing system which allows all registered users to be put into
one system, either manually or automatically, and provide access to
the billing lists to all registered users, and
* A collection system notifying registered users of outstanding
collectable bills due by other registered users, and automatically
submitting letters of notice, or other desired responses, as set up
by the billing party.
Application and usage of EssFlow System's functions would differ from
industry to industry, and company to company. This necessitates development of
product suites specific to different industries. We customize the registration,
information, scheduling, billing, and collection systems to meet these different
needs. We have found, however, that industries tend to require specific
customizations of these systems, which we can further modify according to a
specific client's needs. We decided to initially concentrate on two industries,
namely the healthcare and entertainment industries.
MedFlow
MedFlow is our suite of products targeted for the healthcare industry. The
entire suite is completed using the EssFlow Systems. The MedFlow system
replaces the traditional paper-based communication and filing systems endemic to
the health care industry with an electronic system, allowing all health care
providers, insurance representatives, hospital or clinic agents and billing
services 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.
On December 2, 2001, we were retained by Crescent Diagnostic Medical Group,
a related party, to develop a customized version of MedFlow, targeted towards
the worker compensation industry. The President and Medical Director of
Crescent Diagnostic, Dr. Sana Khan, is also a director of our company. This
agreement expired in April 2002. On July 15, 2002, we entered into a two-month
agreement with Crescent Diagnostics to enhance the system we developed for
Crescent, for which we were paid an additional $28,000. We have not experienced
any significant adverse consequences as a result of our completion of these
agreements, and do not anticipate experiencing any such consequence. For a
detailed discussion of the terms of these agreement and our relationship with
Crescent Diagnostic, please refer to our discussion in "Certain Relationships
and Related Party Transactions."
EnterFlow
We are also pursuing an EnterFlow platform based on the EssFlow Systems for
the entertainment industry. We have entered into agreements in principle to
develop three niche products in the EnterFlow platform.
25
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.
CONSULTING SERVICES
We intend to continue to provide our consulting services to small- and
mid-size companies both domestically and internationally. Our general
consulting services, which previously generated 100% of our revenues, consist of
identification and resolution of the company's information technology needs.
As a result of our new business focus, we also provide consulting services
to our software customers. Our EssFlow product is not an "off-the-shelf"
product which is simply purchased in a store and installed in a company's
system. The EssFlow suite of products provide general templates for an
industry, and we use our consulting services to customize the product purchased
for both the industry needs of the client, as well as the specific needs of the
company.
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
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
26
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, nor are we in
preliminary discussions to acquire any companies, affiliated or unaffiliated, at
this time. However, we may decide to acquire businesses in the future which may
be affiliated with our officers, directors, significant shareholders, or other
affiliated parties. We do not have a conflict of interest policy at this time,
but may adopt one in the future if our directors deem it advisable.
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.
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. Either party may terminate the agreement, with or without cause,
at any time, upon fifteen days' written notice. Our Chief Financial Officer is
also a director of Red Sea. We have extended this agreement for 180 days
following the effectiveness of this offering. 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:
* 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.
27
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, for which we received $70,000.
MARKETING AND DISTRIBUTION
Our MedFlow product is currently being marketed throughout the United
States, and we intend to market it in the near future in the Middle East and
Europe. We do not have any current marketing arrangements for this product in
these regions currently, but anticipate entering into marketing agreements
within the next fiscal year.
Our EnterFlow product is not currently being marketed, but we anticipate
launching it within the next fiscal year in the United States and Europe. We do
not have any current marketing arrangements for this product. Any additional
products we develop from our EssFlow technology will be marketed based on the
region or regions which we predict will have the highest usage of our product.
Our consulting services are generally paired with our product sales, and
provided as a means of customizing a product for a niche market or business,
rather than as an independent service. We also have a teaming agreement with
L3, discussed above, which provides that we will do customization of their
software platform for customers in the US, the Middle East and Canada.
We do not maintain a specific system or contractual relationship with any
other entity to engage in mass or systematic distribution of our products, as
each individual purchaser will require our customization of the product to their
particular business.
COMPETITION
The software consulting and product development industries are very
competitive. The consulting industry is characterized by several large
companies, including IBM and CSC, as well as a large number of small companies
serving niche markets. The product development industry is characterized
primarily by a few very large companies, such as Sun Microsystems and Microsoft,
with a large number of small companies serving niche markets. 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.
COMPANY NAME COLLABORATIVE MOBILE PORTALS OFFSHORE
WORKFLOW SERVICES
PRODUCT FOCUS
-------------- ------------ ------- --------
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.
28
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, 83% of our revenues have been generated by two
customers, International Wireless and Control Systems, Inc. and Physicians
Mobile Medical Group, Inc. As of June 30, 2002 Crescent Diagnostic Medical
Group, a related party, accounted for approximately 40% of our revenues and 1st
Step, Inc., a related party, accounted for approximately 29% of our revenues.
Mr. Shaun Edwardes, our former Chief Executive Officer, is a director of 1st
Step, and Mr. Bill Cheung, our director, also serves as Chief Executive Officer
and a director to 1st Step. The remaining 31% of our revenues were generated by
three non-affiliated parties: Comprehensive Outpatient Surgery Center (10%),
Manhattan Projects.com, Inc. (11%) and True View Diagnostic Centers, Inc. (10%).
Our agreement with Crescent Diagnostic has since expired, and we do not
anticipate have that company account for a significant percentage of revenues
going forward. We do not have any other customers generating over 10% as of
June 30, 2002, and none of our other 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
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
$0.00 in fiscal 2000; $65,975 during fiscal 2001; and $99,570 during the six
month period ending June 30, 2002 on research and development activities,
predominantly for the development of our EssFlow System. We have spent $165,545
on research and development in the past two fiscal years and the interim period
of this fiscal year, 51% of which has been borne by our customers.
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." The
contract has since expired, but Crescent has verbally agreed to permit us to
remain in our present facility on our present terms indefinitely. 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, but has been extended until July
31, 2003. 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 16 employees, 14 of
which are full-time. Four employees, including two part-time 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.
29
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30
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
---- --- --------
Ali Basit 38 Chief Executive Officer
Khalid El-Saadi 30 Chief Financial Officer Treasurer
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
ALI BASIT: Mr. Basit has served as Chief Executive Officer to EssTec since
September 2002. Mr. Basit served as Chief Operating Officer of EssTec from
March 2002 to September 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. Mr. Basit is a full time employee of
EssTec and devotes 100% of his time to the business of EssTec.
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. Mr. El-Saadi is a full time employee of EssTec
and devotes 100% of his time to the business of EssTec
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. Mr. Saquib is a full time
employee of EssTec and devotes 100% of his time to the business of EssTec.
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. Mr. Zarooni anticipates
devoting 8 hours per week to the business of EssTec.
31
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. Mr. Cheung also
serves as Chief Financial Officer and director to 1st Step, Inc., a position he
has held since its inception in February 2002. Mr. Cheung anticipates devoting
8 hours per week to the business of EssTec.
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.
Mr. Hakim anticipates devoting 8 hours per week to the business of EssTec.
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. Dr. Khan anticipates devoting 8 hours per week to the
business of EssTec.
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. Mr. Ahmed anticipates devoting 8
hours per week to the business of EssTec.
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.
MONIS RAHMAN: Mr. Rahman graduated from the University of
Wisconsin-Madison with a B.S. degree in Electrical and Computer Engineering.
Mr. Rahman served as a member of Intel Corporation's Itanium microprocessor
development team, from 1993 to 1997. 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.
32
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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33
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 $100,000 for the fiscal year ended December 31, 2001.
LONG TERM COMPENSATION
------------------------- -----------------------------
ANNUAL COMPENSATION Awards Payouts
------------------------- ------ ---------- -------------- ------- -----------
Other Restricted Securities LTIP All Other
Bonus Annual Stock Underlying Payouts Compen
Year Salary ($) ($) Compen- Awards($) Options/SARs -sation ($)
sation ($) (#)
---- ----------- ---------- ---------- ---------- ------------- ------- -----------
Tariq Khan, Chief 2001 $ 60,000.00 $ 0.00 $ 0.00 $ 0.00 0 $ 0.00 $ 0.00
Executive Officer
and President (1)
- ------------------ ---- ----------- ---------- --------- ---------- ------------- ------- -----------
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, 2001 0 0.00%
Chief Executive
Officer and President (1)
- ---------------------------------------------- ------------------- ----------------- ----------
(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 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. On September 15, 2002, Mr. Shaun
Edwardes, our previous Chief Executive Officer, resigned from that position due
to time constraints. Mr. Basit was then appointed Chief Executive Officer,
effective September 15, 2002.
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.
34
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. In addition to this Mr. Cheung
will also receive 3% commission on all revenues generated entirely through his
efforts, including sales contracts entered into as a result of his introduction
to the contracting party.
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.
All of our directors are paid $500 for attending each board meeting. Other
then this they are not entitled to any other compensation.
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
November 6, 2002, we have granted options under our stock option plan
representing 1,286,708 shares of underlying common stock, of which options
representing 460,000 shares have been exercised. Of these exercised options,
225,000 shares were returned to us in October 2001, as part of our Stock
Contribution. See our discussion under "Management's Discussion and Analysis."
Of the remaining issued options, options representing 74,863 shares have
expired, and options representing 751,845 shares remain outstanding.
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35
PRINCIPAL STOCKHOLDERS
----------------------
The following table sets forth certain information regarding our shares of
outstanding common stock beneficially owned as of September 19, 2002, based on
4,276,162 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, and 259,335 shares held through options which are exerciseable
within 60 days.
Name and Address of Beneficial Owners(1) Amount and Nature of Percent Ownership(2)
Beneficial Ownership(2)
============================================= ======================== =============================
Pre Offering Post Offering
------------- --------------
Faysal Zarooni 0 0 0
P.O. Box 53144
Dubai, UAE
- ---------------------------------------------- ----------------------- -------------- -------------
Ali S. Basit 35,568(3) 0.78% 0.64%
16329 Glen Alder Court
La Mirada, CA 90638
- ---------------------------------------------- ----------------------- -------------- -------------
Abdul Latif Saquib 75,000(4) 1.65% 1.35%
14035 W. Tahiti Way, # 226
Marina Del Ray, CA 90292
- ---------------------------------------------- ----------------------- -------------- -------------
Khalid El-Saadi 18,767(5) 0.41% 0.34%
1158 26th Street, # 244
Santa Monica, CA 90403
- ---------------------------------------------- ----------------------- -------------- -------------
Syed Nasir Zafar Ahmed 0 0 0
25/2 31st Street, Phase V
Karachi, Pakistan
- ---------------------------------------------- ----------------------- -------------- -------------
Ramsey Hakim 5,000(6) 0.11% 0.09%
10359 Rossbury Place0.,
Los Angeles, CA 90064
- ---------------------------------------------- ----------------------- -------------- -------------
Bill Cheung 150,000(7) 3.31% 2.71%
2786 Shakespeare Drive
San Marino, CA 91108
- ---------------------------------------------- ----------------------- -------------- -------------
Sana U. Khan 28,000 0.62% 0.51%
4944 E Crescent Drive
Anaheim Hills, CA 92807
- ---------------------------------------------- ----------------------- -------------- -------------
All executive officers and directors as a 302,335 6. 89% 5.64%
group (9 persons)
- ---------------------------------------------- ----------------------- -------------- -------------
Mr. Gerald Calame(8) 1,172,257 25.85% 21.18%
Mill Mall, P. O. Box 964
Road Town Tortolla,
British Virgin Islands
- ---------------------------------------------- ----------------------- -------------- -------------
John King (9) 500,347 11.03% 9.04%
Charlotte House
Nassau, Bahamas
- ---------------------------------------------- ----------------------- -------------- -------------
Winthrop Venture Management Inc. (10) 423,500 9.34% 7.65%
1080 Southeast 3rd Avenue
Fort Lauderdale, FL 33316
- ---------------------------------------------- ----------------------- -------------- -------------
(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.
36
(2) The percentages shown are calculated based upon the shares of common stock
outstanding as of September 19, 2002 on a fully diluted basis. This
includes 4,276,162 shares of common stock and stock options representing
259,335 shares of common stock that the identified person or group had the
right to acquire within 60 days of such date.
(3) 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.
(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. Also includes 10,000 shares of common stock held by
Mr. Saquib's father.
(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 5,000 shares underlying stock options exercisable at a price
of $1.00 from September 15, 2001 through September 14, 2010.
(7) Consisting of 150,000 shares underlying stock options exercisable at a
price of $3.50 from October 15, 2001 through October 14, 2011.
(8) All shares are held indirectly by Mr. Calame through Ucino Finance Ltd.,
Mill Mall, P. O. Box 964 Road Town Tortolla, British Virgin Islands.
(9) All shares are held indirectly by Mr. King through Knightrider Investments,
Ltd, Charlotte House Nassau, Bahamas.
(10) The Winthrop Venture Management, Inc. is the General Partner of the
Winthrop Venture Fund.
37
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, and Mr. Shaun Edwardes, for services provided from January
2002 to July 10, 2002, in the amount of $41,037. We have also deferred
reimbursement of expenses incurred by Mohammed Khan, our former director, for
the period from December 15, 2001 to January 15, 2002, in the amount of $1,619.
Additionally, we have deferred compensation to two 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. 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 owe $3,827 to ManhattanWest, Inc., which is owned by our former Chief
Executive Officer, Mr. Tariq Khan in repayment for a non-interest bearing loan
to us over the last fiscal year for general working expenses.
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 customizing our MedFlow product for worker compensation industry, in
exchange for our office space and a monthly fee of $14,000. We entered into
this agreement in December 2001. During the six months ended June 30, 2002, we
recognized revenues of $56,000 as a result of this contract. We have a verbal
agreement with Dr. Khan to maintain our offices in their current location for
the remainder of this year. This agreement expired in April 2002. On July 15,
2002, we entered into a two-month agreement with Crescent Diagnostics to enhance
the system we developed for Crescent, for which we were paid an additional
$28,000. We have not experienced any significant adverse consequences as a
result of our completion of these agreements, and do not anticipate experiencing
any such consequence.
In March 2002, we executed a consulting agreement with 1st Step, Inc., to
which Mr. Shaun Edwardes, our former Chief Executive Officer, is a director. The
purpose of this agreement was to develop brand identity for 1st Step. We
completed the project in March 2002, and were paid $40,000 for our services.
Bill Cheung, our director, also serves as Chief Executive Officer and a director
to 1st Step. 1st Step has no other affiliation with EssTec aside from the
completed agreement and the affiliations of Messrs. Edwardes and Cheung.
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 September 15, 2000, we issued to Mr. Saquib incentive stock
options representing 50,000 shares of restricted common stock at an exercise
price of $1.00, expiring on September 15, 2010.
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.
On January 14, 2002, we entered into an at-will employment agreement with
Mr. Edwardes, who was then our Chief Executive Officer. Mr. Edwardes' salary
accrued at $9,000 per month from the date of the agreement to his resignation on
September 15, 2002, payable at the closing of this offering. In addition, on
the same date, he received an incentive stock option representing 50,000 shares
of common stock with an exercise price of $5.00 and an expiration date of
38
January 14, 2012, which vest over a period of one year, but accelerate to vest
fully upon effectiveness of this offering. Mr. Edwardes terminated this
agreement on September 15, 2002 by resigning from the position of Chief
Executive Officer, citing reasons of time constraints. Due to the fact that the
options awarded to him were incentive stock options, the terms of the option
were altered to reflect Mr. Edwardes' resignation on September 15, 2002.
Accordingly, options representing 33,425 shares of common stock had vested, and
these will expire on March 15, 2002. Additionally, Mr. Edwardes received a
second option on January 14, 2002 representing 25,000 shares of common stock,
with an exercise price of $5.00 and an expiration date of January 14, 2012,
which vest over a period of one year from the date of the agreement. At the
time of Mr. Edwardes' resignation, options representing 16,712 shares of common
stock had vested, and expired on March 15, 2002. No further options will vest
under either of these issuances.
On October 1, 2001, the four individuals or entities holding founders'
shares exchanged those shares for warrants to purchase an equal number of shares
at $0.30 per share. See our discussion in "Management's Discussion and Analysis
and Results of Operation." Converge returned 1,372,105 shares, Shuaib Rana
returned 50,000 shares, Adnan Rana returned 37,500 shares, and Junaid Khan
returned 37,500 shares. In addition, Tariq Khan returned 112,500 shares, which
were received upon exercise of an option in July 2001, and Imran Hussein
returned 112,500 shares, which were received upon exercise of an option in July
2001. We then conducted a private placement granting each of these five
individuals and Converge warrants to purchase an equal number of shares at $0.30
per share (1,722,109 shares in the aggregate). 825,688 shares were issued upon
exercise of these warrants and the remainder of the warrants expired unexercised
upon the initial filing of this registration statement and prospectus. This
stock 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.
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 addition to these warrants, we also agreed to pay a salary of
$5,000 per month to Mr. Khan for his services as a director, which accrued from
June 1, 2001 until his resignation as a director, effective January 15, 2002.
As of December 2001, we owed Mr. Khan $30,000 as advisory fees. This debt was
converted to 100,000 shares as per the debt conversion agreement signed with Mr.
Khan on December 1, 2001.
On September 1, 2001, we entered into an independent consulting services
agreement with Manhattan Capital Partners, LLC, to which Mr. Tariq Khan, our
Chief Executive Officer at the time, serves as General Partner. Manhattan
Capital Partners was to provide services regarding acquisition strategy,
alliance development, business development and assistance with equity financing,
in exchange for which we would provide a $150,000 fee and a $24,000 monthly
retainer upon securing $5,000,000 in equity financing or $1,000,000 in revenues.
None of these events have occurred, and we have not received any services from
Manhattan Capital Partners, and have not paid any funds nor incurred any
expenses as a result of this agreement. This agreement expires at any time upon
receipt of notice from either party.
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 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. We
39
currently owe Red Sea the $150,000 fee, including $3,407 in interest (4.5%), and
we anticipate paying this in its entirety from the proceeds of this offering.
See "Use of Proceeds." 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 expired in
September 2002, but we have extended this agreement for 180 days following the
effectiveness of this offering.
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. As of November 6, 2002, we owe a balance of $25,500. For further
discussion of this agreement, see our disclosure under "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
In 2001, Mr. Shezad Rokerya, then a director, was issued a series of
options in exchange for consulting services and services as a director. On
February 1, 2001, we entered into a consulting agreement with Mr. 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. The option issuances are detailed in the next paragraph.
In February 2001, we issued options representing 150,000 shares of common
stock to Mr. Rokerya at an exercise price of $1.50 per share, and expiring in
February 2011. 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. Mr. Rokerya was awarded additional options representing 20,000 shares
of common stock in February 2001 with an exercise price of $3.50, expiring
February 2011. In March 2001, Mr. Rokerya received options representing 50,000
shares of common stock at an exercise price of $3.50 and expiring March 2011. In
April 2001, Mr. Rokerya received options representing 75,000 shares of common
stock at an exercise price of $3.50, expiring April 2011. In October 1, 2001, as
a result of our 2:1 reverse split, Mr. Rokerya's options representing 295,000
shares of common stock were reduced to options representing 147,500 shares of
common stock, consisting of options representing 75,000 shares of common stock
at $1.50 per share, and options representing 72,500 shares of common stock at
$3.50 per share. Options representing 50,000 of these shares of common stock,
exerciseable at $1.50 per share, expired on the initial filing of this
prospectus. In February 2002, Mr. Rokerya's previous consulting agreement
expired, and we executed a new consulting agreement with him, granting him a
position on our advisory board, and additional options representing 20,000
shares of common stock with an exercise price of $5.00 as compensation for his
services. These options expire February 2004, and vest monthly on a pro-rata
basis for the duration of the one-year consulting agreement.
From June 2000 to July 2001, we leased our principal business property from
Inetversity Inc., to which our former Chief Executive Officer, Mr. Khan, was the
majority shareholder. We paid $5,881 per month in rent, and negotiated our lease
at arms-length terms. The annual rent of $70,577 was paid in full on a timely
basis.
In February 2001, Manhattan West, which is owned by our former Chief
Executive Officer, Tariq Khan, loaned us $35,331 for general working capital for
our Pakistan operations. This amount was evidenced by an agreement stating that
the loan was of indefinite duration, bearing no interest rate, nor is there any
right to demand payment of any balance outstanding. In March 2002, both we and
Manhattan West agreed to convert the note, for which the entire balance remained
outstanding, into restricted shares of our Pakistan subsidiary. The number of
shares will be determined on the valuation of the subsidiary at the close of
this fiscal year, at which time we will issue $35,331 worth of our subsidiary's
shares to Manhattan West.
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.
In July 2000, we sold Manhattan Capital Partners a portion of our unused
hardware, for which we are currently owed $9,899.
In February 2000, we issued 3,250,000 shares of restricted common stock as
founders' shares on our inception. 3,000,000 of these shares were issued to
Converge Global, 100,000 to Shuaib Rana for his services in organizing and
initiating our operations in Pakistan, and 75,000 shares to Adnan Rana and
Junaid Khan for their services in organizing our operations in the United
States. In December 2000, Converge Global returned 255,782 shares of common
40
stock in exchange for services we provided to them from the date of our
inception to December 2000.
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, nor
do we maintain a formal policy regarding time allocations between our officers
and directors and additional positions they may hold.
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41
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 September 19, 2002, there are 4,276,162 shares of common stock
outstanding, which are held of record by 99 stockholders. In addition, as of
the date of this prospectus, there are 776,708 shares of common stock subject to
outstanding options and 284,133 shares of common stock subject to outstanding
warrants. Upon completion of this offering, there will be 5,276,162 shares of
common stock outstanding assuming no exercise of the underwriter's
over-allotment option, and 5,427,162 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, with the exception of the election
of directors, for which all holders of voting shares are permitted to cumulate
their votes. 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.
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."
42
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.
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43
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 5,276,162 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.
- ---------------------------------- --------------------------- -----------------------------------------------------
On the date of this prospectus 1,000,000 (1) Freely tradable shares sold in this Offering
- ---------------------------------- --------------------------- ----------------------------------------------------
180 days following the date of
effectiveness of this prospectus 823,035 (2) Initial public offering lock-up expires for off
- ---------------------------------- --------------------------- ----------------------------------------------------
effectiveness of this prospectus 823,035 (2) Initial public offering lock-up expires for off
- ---------------------------------- --------------------------- ----------------------------------------------------
540 days following the date of
effectiveness of this prospectus 823,035 (2) Initial public offering lock-up expires for off
- ---------------------------------- --------------------------- ----------------------------------------------------
Pursuant to Rule 144 2,180,058 (3) Shares salable under Rule 144 or 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.
WARRANTS
As of November 6, 2002, there were 8 warrants issued and outstanding,
representing 284,133 shares of underlying common stock. The warrants have
various exercise dates, expiration dates, and exercise prices.
STOCK OPTIONS
As of November 6, 2002, there were a total of 776,708 shares of common
stock subject to outstanding options under our 2000 Incentive and Non-statutory
Stock Option Plan, of which 671,825 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.
44
LOCK-UP AGREEMENTS
Each of our officers and directors, who beneficially own an aggregate of
approximately 302,335 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
option plans described in this prospectus and registration statement, or
intra-family transfers for estate planning purposes.
<REMAINDER OF PAGE INTENTIONALLY LEFT BLANK>
45
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 to 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, assuming the
initial public offering price of $9.00 per share, the total price to the public
would be $10,350,000, the total underwriting discounts and commissions would be
$1,035,000. Assuming other expenses of the offering payable by us, currently
estimated at $640,500, are paid, total net proceeds to us would be $8,674,500,
assuming an initial public offering price $9.00 per share.
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 on
a firm commitment basis 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
46
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
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>
47
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.
48
INDEX TO FINANCIAL STATEMENTS
-----------------------------
ESSTEC, INC. AND SUBSIDIARY
CONTENTS
DECEMBER 31, 2001 AND JUNE 30, 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' Equity (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' equity (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 subsequent to
December 31, 2001. 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 JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
June 30, December 31,
2002 2001
-------- --------
(unaudited)
CURRENT ASSETS
Cash $ 8,436 $ 9,384
Accounts receivable 2,789 19,463
Other receivables 54,860 29,650
Related party receivables 74,151 74,084
Prepaid expenses 909 8,279
Deferred offering costs 86,216 -
-------- --------
Total current assets 227,361 140,860
PROPERTY AND EQUIPMENT, net 125,324 145,992
OTHER ASSETS - 23,699
-------- --------
TOTAL ASSETS $352,685 $310,551
======== ========
The accompanying notes are an integral part of these financials statements.
F-3
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
June 30, December 31,
2002 2001
------------ ------------
(unaudited)
CURRENT LIABILITIES
Accounts payable $ 292,448 $ 350,632
Accrued expenses 116,772 94,178
Due to related parties 157,234 185,331
Deferred compensation 183,572 112,115
Current portion of capital lease obligation 4,070 4,479
------------ ------------
Total current liabilities 754,096 746,735
CAPITAL LEASE OBLIGATION, net of current portion 3,010 5,383
------------ ------------
Total liabilities 757,106 752,118
------------ ------------
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
4,001,163 (unaudited) and 3,242,117 shares issued
and outstanding 4,002 3,242
Common stock committed, 16,667 (unaudited)
and 113,143 shares 5,000 76,000
Deferred compensation (643,855) (137,759)
Additional paid-in capital 4,820,625 3,025,877
Accumulated other comprehensive loss (2,235) (2,235)
Accumulated deficit (4,587,958) (3,406,692)
------------ ------------
Total shareholders' deficit (404,421) (441,567)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 352,685 $ 310,551
============ ============
The accompanying notes are an integral part of these financials statements.
F-4
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2001,
FOR THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
AND FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
February 11,
For the 2000
For the Six Months Ended Year Ended (Inception) to
June 30, December 31, December 31,
------------ ------------ ------------ ----------
2002 2001 2001 2000
------------ ------------ ------------ ----------
(unaudited) (unaudited)
NET REVENUES
Software development revenues -
former parent and affiliates $ 96,000 $ - $ - $ 85,476
Software development revenues -
non-affiliates 43,621 220,974 522,408 353,126
------------ ------------ ------------ ----------
Total net revenues 139,621 220,974 522,408 438,602
------------ ------------ ------------ ----------
COST OF REVENUES
Cost of revenues - former parent
and affiliates 79,510 - - 134,193
Cost of revenues - non-affiliates 26,001 383,838 524,630 151,216
------------ ------------ ------------ ----------
Total cost of revenues 105,511 383,838 524,630 285,409
------------ ------------ ------------ ----------
GROSS PROFIT (LOSS)
Gross profit (loss) - former parent
and affiliates 16,490 - - (48,717)
Gross profit (loss) - non-affiliates 17,620 (162,864) (2,222) 201,910
------------ ------------ ------------ ----------
Total gross profit (loss) 34,110 (162,864) (2,222) 153,193
GENERAL AND ADMINISTRATIVE
EXPENSES 235,608 713,242 1,363,020 987,659
NON-CASH CONSULTING AND LEGAL
EXPENSE 15,000 - 201,250 -
NON-CASH COMPENSATION
EXPENSE 866,737 188,623 891,280 60,373
RESEARCH AND DEVELOPMENT
EXPENSES 99,570 65,975 65,975 -
------------ ------------ ------------ ----------
LOSS FROM OPERATIONS (1,182,805) (1,130,704) (2,523,747) (894,839)
------------ ------------ ------------ ----------
The accompanying notes are an integral part of these financials statements.
F-5
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, 2001,
FOR THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
AND FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
February 11,
For the 2000
For the Six Months Ended Year Ended (Inception) to
June 30, December 31, December 31,
------------ ------------ ------------ ----------
2002 2001 2001 2000
------------ ------------ ------------ ----------
(unaudited) (unaudited)
OTHER INCOME (EXPENSE)
Interest income - 59 240 -
Interest expense (7,461) - (6,346) -
Other income 9,000 - 18,000 -
------------ ------------ ------------ -----------
Total other income (expense) 1,539 59 11,894 -
------------ ------------ ------------ -----------
NET LOSS (1,181,266) (1,130,645) (2,511,853) (894,839)
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment - - (2,235) -
------------ ------------ ------------ -----------
COMPREHENSIVE LOSS $(1,181,266) $(1,130,645) $(2,514,088) $ (894,839)
============ ============ ============ ===========
BASIC AND DILUTED COMPREHENSIVE
LOSS PER COMMON SHARE $ (0.32) $ (0.24) $ (0.57) $ (0.22)
============ ============ ============ ===========
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
USED TO COMPUTE BASIC AND
DILUTED COMPREHENSIVE LOSS
PER SHARE 3,653,478 4,665,511 4,435,288 4,015,162
============ ============ ============ ===========
The accompanying notes are an integral part of these financials statements.
F-6
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Period from February 11, 2000 (Inception) to June 30, 2002 (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
Exercise of stock options
in lieu of compensation 225,000 225 2,025 2,250
The accompanying notes are an integral part of these financials statements.
F-7
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Period from February 11, 2000 (Inception) to June 30, 2002 (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 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) (441,567)
Issuance of common
stock for cash
(unaudited) 17,000 17 84,983 85,000
Issuance of committed
stock (unaudited) 112,857 113 (75,000) 74,887 -
Issuance of stock options
and warrants to
employees as
compensation
(unaudited) (766,250) 1,392,389 626,139
Issuance of warrants
for services rendered
(unaudited) 76,477 76,477
The accompanying notes are an integral part of these financials statements.
F-8
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO JUNE 30, 2002 (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
----------- ------------ ---------- ------ --------- -------- ------- -------- ------------
AMORTIZATION OF EMPLOYEE
STOCK OPTIONS (unaudited) $ $ $ $ $ 107,611 $ $ $ 107,611
AMORTIZATION OF DEFERRED
COMPENSATION
(unaudited) 132,987 132,987
ADJUSTMENT OF DEFERRED
COMPENSATION
(unaudited) 127,167 (127,167) -
EXERCISE OF WARRANTS IN
LIEU OF COMPENSATION
(unaudited) 299,102 299 89,432 89,731
EXERCISE OF WARRANTS
FOR CASH (unaudited) 301,587 302 5,000 90,174 95,476
ISSUANCE OF COMMON
STOCK AS INTEREST
EXPENSE (unaudited) 28,500 29 5,962 5,991
COLLECTION OF LOAN
RECEIVABLE IN LIEU OF
ISSUANCE OF COMMITTED
STOCK (unaudited) (1,000) (1,000)
NET LOSS (unaudited) (1,181,266) (1,181,266)
----------- ------------ ---------- ------ --------- -------- ------- -------- ------------
BALANCE, JUNE 30, 2002
(UNAUDITED) 4,001,163 $ 4,002 $ 5,000 $ - $(643,855) $4,820,625 $(2,235) $(4,587,958) $(404,421)
============ ============ ========== ====== ========== ========== ======== ============ ==========
The accompanying notes are an integral part of these financials statements.
F-9
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001,
FOR THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
AND FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
February 11,
For the 2000
For the Six Months Ended Year Ended (Inception) to
June 30, December 31, December 31,
2002 2001 2001 2000
------------ ------------ ------------ ----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,181,266) $(1,130,645) $(2,511,853) $(894,839)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 20,093 24,951 46,558 16,457
Bad debt expense - (110,000) (110,000) 110,000
Loss on disposal of property
and equipment 576 - - -
Write-off of deferred offering
costs - 206,892 206,892 -
Stock-based compensation 866,736 188,623 891,280 60,373
Common stock issued for
services rendered - - 125,250 -
Options and warrants issued
for services 15,000 - - -
Common stock issued and
committed for services - - 76,000 -
Common stock issued as
interest expense 5,991 - - -
(Increase) decrease in
Accounts receivable 16,674 198,256 188,088 (207,551)
Other receivables (26,210) (16,957) (15,357) (14,293)
Related party receivables (67) (71,885) (9,584) -
Prepaid expenses 7,370 - (8,279) -
Other assets 23,699 (17,834) (19,157) (4,542)
Increase (decrease) in
Accounts payable 3,293 119,377 175,688 174,944
Accrued expenses 19,812 113,609 72,515 31,525
Due to related parties 54,134 (9,271) 120,831 -
Deferred compensation 78,957 120,808 112,115 -
Deferred revenue - (38,274) (38,274) 38,274
------------ ------------ ------------ ----------
Net cash used in operating activities (95,208) (422,350) (697,287) (689,652)
------------ ------------ ------------ ----------
The accompanying notes are an integral part of these financials statements.
F-10
ESSTEC, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001,
FOR THE PERIOD FROM FEBRUARY 11, 2000 (INCEPTION) TO DECEMBER 31, 2000, AND
AND FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
- --------------------------------------------------------------------------------
For the
Period from
February 11,
For the 2000
For the Six Months Ended Year Ended (Inception) to
June 30, December 31, December 31,
2002 2001 2001 2000
------------ ---------- ---------- ----------
(unaudited) (unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of property and
equipment $ - $ (45,540) $ (28,408) $ (180,599)
------------ ---------- ---------- -----------
Net cash used in investing activities - (45,540) (28,408) (180,599)
------------ ---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Book overdraft - 10,576 - -
Offering costs (86,216) - - (206,892)
Proceeds from the exercise of
stock options - 2,250 12,250 -
Proceeds from the exercise of
warrants 95,476 5,000 5,000 -
Proceeds from sale of common
stock and warrants 85,000 366,748 636,748 1,160,459
------------ ---------- ---------- -----------
Net cash provided by financing
activities 94,260 384,574 653,998 953,567
------------ ---------- ---------- -----------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH - - (2,235) -
------------ ---------- ---------- -----------
Net increase (decrease) in cash (948) (83,316) (73,932) 83,316
CASH, BEGINNING OF PERIOD 9,384 83,316 83,316 -
------------ ---------- ---------- -----------
CASH, END OF PERIOD $ 8,436 $ - $ 9,384 $ 83,316
============ ========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
INTEREST PAID $ - $ - $ - $ -
============ ========== ========== ===========
INCOME TAXES PAID $ - $ - $ - $ -
============ ========== ========== ===========
The accompanying notes are an integral part of these financials statements.
F-11
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (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 $891,280 related to options and warrants
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
purchase 37,500 shares of common stock for services rendered.
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 six months ended June 30, 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.
- - issued 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 $5,991.
F-12
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
- - recorded compensation expense totaling $282,987 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 $341,250 and $766,250 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.
- - issued warrants to purchase 20,000 shares of common stock for services
rendered and recorded legal expense totaling $76,477.
F-13
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 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"). Essential
Tec of Pakistan did not have any operations prior to February 11, 2000. 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 subsequent to December 31, 2001. 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 JUNE 30, 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.
- - 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 JUNE 30, 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
- ---------------------------------------
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 JUNE 30, 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 EssFlow system, a software application platform that allows for central
communication and data storage for multiple parties, 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 JUNE 30, 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. At December 31, 2001 and June 30, 2002,
amounts due from one customer were 14% and 100% (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 JUNE 30, 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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. The Company does not expect adoption
of SFAS No. 146 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 JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 and June 30, 2002 consisted of the
following:
June 30, December 31,
2002 2001
---------- ----------
(unaudited)
Computer equipment $ 36,500 $ 36,566
Computer software and hardware 136,211 136,670
Furniture and office equipment 16,134 16,149
Vehicles 19,588 19,624
----------- -------------
208,433 209,009
Less accumulated depreciation 83,109 63,017
----------- -------------
TOTAL $ 125,324 $ 145,992
=========== =============
Depreciation expense was $46,558, $16,457, $20,093 (unaudited), and $24,951
(unaudited) for the year ended December 31, 2001, the period from February 11,
2000 (inception) to December 31, 2000, and the six months ended June 30, 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. Rent expense was $50,317, $54,836, $0
(unaudited), and $26,940 (unaudited) for the year ended December 31, 2001, the
period from February 11, 2000 (inception) to December 31, 2000, and the six
months ended June 30, 2002 and 2001, respectively, including $36,670, $33,907,
$0 (unaudited), and $0 (unaudited), respectively, paid to two related parties.
From July 2001 to June 2002, the Company used its premises rent-free. The
Company has not recorded contributed capital for this period as the value of the
contributed rent is not material.
In January 2001, 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 19% per annum.
F-20
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 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 to assist the Company in managing its business operations and
growth. The Board member received a retainer fee of $25,000 and was granted
stock options to purchase a total of 295,000 shares of common stock at various
terms as compensation as of December 31, 2001.
On July 15, 2001, the Company entered into a consulting agreement with a
consultant to assist the Company in analyzing its business development
opportunities and exploring strategic allegiances 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 with an
individual for assistance in business development, advising on marketing,
developing strategic alliances, and advising on fundraising. 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 JUNE 30, 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 to joint bid with the
developer in order to obtain more customers.
See Note 7 for related party agreements.
NOTE 5 - SHAREHOLDERS' DEFICIT
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 JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' DEFICIT (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 Six months Ended June 30, 2002 (unaudited)
- --------------------------------------------------------------------------------
In January 2002, the Company issued 12,857 shares of common stock from committed
stock for services rendered totaling $45,000.
In February 2002, the Company issued 17,000 shares of common stock for cash
totaling $85,000.
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 six months ended June 30, 2002, the Company issued 28,500 shares of
common stock to a debtor for the extension of the due date of a note payable and
recorded interest expense totaling $5,991.
F-23
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' DEFICIT (CONTINUED)
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
$421,280 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 year ended December 31, 2001, the Company recorded consulting expense
of $125,250 related to options issued to purchase 37,500 shares of common stock
for services rendered.
During the six months ended June 30, 2002, the Company recorded compensation
expense totaling $282,987 (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.
During the six months ended June 30, 2002, the Company issued options to
purchase 221,500 (unaudited) shares of common stock to employees. The options
were immediately exercisable at $5 per share. Related to these issuances, the
Company recognized $341,250 (unaudited) of compensation expense and $766,250
(unaudited) of deferred compensation.
F-24
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' DEFICIT (CONTINUED)
Stock Options (Continued)
- --------------
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.
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.
F-25
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' DEFICIT (CONTINUED)
Stock Options (Continued)
- --------------
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
============
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
============ ===========
F-26
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' DEFICIT (CONTINUED)
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 warrants to purchase
100,000 shares of the Company's common stock to a member of the Board of
Directors and recorded compensation expense totaling $470,000. In addition, the
Company committed to issue 100,000 shares of common stock to the Board member
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
warrants to purchase 33,266 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.
In connection with a private placement during June 2000, the Company sold
warrants to purchase 500,000 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.
F-27
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' DEFICIT (CONTINUED)
Warrants Issued during the Year Ended December 31, 2001 and the Period from
- --------------------------------------------------------------------------------
February 11, 2000 (Inception) to December 31, 2000 (Continued)
- ---------------------------------------------------------
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
============ ============
Warrants Issued during the Six months Ended June 30, 2002 (unaudited)
- -------------------------------------------------------------------------------
In January 2002, 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.
F-28
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' DEFICIT (CONTINUED)
Warrants Issued during the Six months Ended June 30, 2002 (unaudited)
- -------------------------------------------------------------------------------
(Continued)
- ----------
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.
During the six months ended June 30, 2002, the Company issued warrants to
purchase 20,000 shares of common stock and recorded legal expense totaling
$76,477 for the payment of legal services rendered totaling $61,477 and for
future services totaling $15,000.
During the six months ended June 30, 2002, the Company issued 301,587 shares of
common stock for the exercise of warrants with cash totaling $90,476.
During the six months ended June 30, 2002, the Company committed to issue 16,667
shares of common stock for the exercise of warrants with cash totaling $5,000.
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.
F-29
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5 - SHAREHOLDERS' DEFICIT (CONTINUED)
Underwriter's Agreements (Continued)
- -------------------------
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.
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 six months ended
June 30, 2002 and 2001 were as follows:
For the
Period from
February 11,
For the 2000
For the Six Months Ended Year Ended (Inception) to
June 30, 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 JUNE 30, 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 $0 (unaudited)
for the year ended December 31, 2001, the period from February 11, 2000
(inception) to December 31, 2000, and the six months ended June 30, 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 JUNE 30, 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
options to purchase 450,000 shares of common stock to three founding
shareholders at an exercise price of $0.01 per share. These options were
exercised during the year ended December 31, 2001.
During the year ended December 31, 2001, the Company had a receivable of $9,899
from Manhattan Capital Partners, LLC, which is owned by one of the Company's
officers.
During the year ended December 31, 2001, Manhattan West, Inc., which is owned by
one of the Company's officers, advanced $35,331 to the Company, for general
working capital for the subsidiary in Pakistan.
During the year ended December 31, 2001, the Company entered into a consulting
agreement with one of its officers for $30,000 to assist the Company in managing
its business operations and growth. 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 to develop acquisition strategies, develop strategic
alliances, and develop business and marketing strategies. 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.
F-32
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
Other Related Party Transactions (Continued)
- -----------------------------------
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 the following three requirements in
order to increase the Company's sales and customer base:
- - The consultant will obtain three contracts from "well reputed" clients, as
defined.
- - The consultant will ensure a minimum of five "well reputed" parties, as
defined, will purchase stock in the Company's initial public offering.
- - Within 60 days of the agreement, the consultant will ensure that four
"well reputed" parties, as defined, will be shareholders in the Company.
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 sales are obtained for
the Company. In addition, the Company will hire two salaried employees in Dubai
upon completion of the contract. As of June 30, 2002, none of the requirements
had been met, and the Company had not recognized any expense related to the
contract. The estimated aggregated value of the options on the execution date of
the contract was approximately $3,800,000. The Company will recognize this
amount when the options have been earned by the consultant.
During the six months ended June 30, 2002, the Company recognized software
development revenues totaling $96,000 (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.
F-33
ESSTEC, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND JUNE 30, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
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.
NOTE 9 - SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to June 30, 2002, certain shareholders of the Company exercised
warrants to purchase 233,330 shares of common stock at a price of $0.30 per
share for a total of $70,000.
Subsequent to June 30, 2002, the Company issued 25,000 shares of common stock to
a shareholder as a default fee on his loan payable.
Subsequent to June 30, 2002, the Company canceled warrants to purchase 50,000
shares of common stock held by one of its shareholders based on the original
warrant agreement. Per the agreement, the warrants expired upon the Company
filing a registration statement with the Securities and Exchange Commission.
Subsequent to June 30, 2002, the Company canceled warrants to purchase 896,421
shares of common stock held by various shareholders based on the original
warrant agreement. Per the agreement, the warrants expired upon the Company
filing a registration statement with the Securities and Exchange Commission.
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
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
the date of this prospectus. However, in the event of a material change, this
prospectus will be amended or supplemented accordingly.
TABLE OF CONTENTS
PROSPECTUS SUMMARY 1
RISK FACTORS 5
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 11 1,000,000 SHARES OF COMMON STOCK
USE OF PROCEEDS 13
DIVIDEND POLICY 13
CAPITALIZATION 14
DILUTION 16 ESSTEC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS 17
BUSINESS 26
MANAGEMENT 33
EXECUTIVE COMPENSATION 36
PRINCIPAL STOCKHOLDERS 38 -------------------------------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40 PROSPECTUS
DESCRIPTION OF CAPITAL STOCK 44 -------------------------------
TRANSFER AGENT AND REGISTRAR 44
LISTING 44
INDEMNIFICATION OF DIRECTORS AND OFFICERS 45
SHARES ELIGIBLE FOR FUTURE SALE 46
UNDERWRITING 48
LEGAL MATTERS 50 _____, 2002
EXPERTS 50
WHERE YOU CAN FIND MORE INFORMATION ABOUT US 50
INDEX TO FINANCIAL STATEMENTS 51
UNTIL ________, 2002, 25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING, ALL
DEALERS THAT BUY, SELL OR TRADE SHARES, WHETHER OR NOT PARTICIPATING IN THIS
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.
_______________________________
50
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 $1,402
NASD Fees $4,500
AMEX Listing Fees $36,500
Accounting Fees and Expenses $100,000
Transfer Agent Fees $3,500
Legal Fees and Expenses, including Blue Sky Fees and Expenses $100,000
Printing Costs $84,000
Miscellaneous Expenses $270,098
Total $600,000
RECENT SALES OF UNREGISTERED SECURITIES
In February 2000, 3,250,000 shares of restricted common stock were issued
as founders' shares on our inception. 3,000,000 of these shares were issued to
Converge Global, 100,000 to Shuaib Rana for his services in organizing and
initiating EssTec's operations in Pakistan, and 75,000 shares each to Adnan Rana
and Junaid Khan for their services in organizing EssTec's operations in the
United States. None of the individuals held management positions at either
Converge or EssTec, and did not hold management positions during or after
performing their services. These shares were valued at par value ($0.001).
51
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. The transaction was conducted in full compliance with the
information and disclosure requirements of Regulation D, and all investors had
superior access to all corporate and financial information. No general
solicitation, offering or sale was conducted in connection with the issuance of
shares.
In June 2000, we completed a private placement of our common stock and
warrants to 7 investors. We sold 1,050,000 shares at $0.50 each (for total
proceeds of $525,000) and warrants representing 189,134 shares at $0.60 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. The transaction was
conducted in full compliance with the information and disclosure requirements of
Regulation D, and all investors had access to all corporate and financial
information. No general solicitation, offering or sale was conducted in
connection with the issuance of shares.
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. The transaction was
conducted in full compliance with the information and disclosure requirements of
Regulation D, and all investors had access to all corporate and financial
information. No general solicitation, offering or sale was conducted in
connection with the issuance of shares.
In December 2000, Converge Global returned 255,782 shares of common stock
in exchange for services provided to them since the date of EssTec's inception
to December 2000.
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.
On July 15, 2001, we entered into a consulting agreement for $100,000 with
Rowley Corporation, a non-affiliated company, for business development both in
the US and overseas (customer development, unrelated to sale of stock or other
securities of EssTec), 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." This transaction 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 equity holders
in the purchasing entity, Rowley Corporation, were accredited investors as that
term is defined in Rule 501 of Regulation D adopted under the Act. The
transaction was conducted in full compliance with the information and disclosure
requirements of Regulation D, and all investors had access to all corporate and
52
financial information. No general solicitation, offering or sale was conducted
in connection with the issuance of shares.
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 warrants
representing 75,000 shares 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. The transaction was conducted in full compliance with the
information and disclosure requirements of Regulation D, and all investors had
access to all corporate and financial information. No general solicitation,
offering or sale was conducted in connection with the issuance of shares.
In October 2001 we issued 9,028 shares of restricted common stock, valued
at $1.75 per share, were issued to Abdul Qadir T. Muhiedeen, in compensation for
services as general manager of EssTec's Dubai operations for the previous eight
months. 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 December 2001 we issued 100,000 shares in
satisfaction of compensation owed to Mr. Mohammed Khan, our former director.
See our discussion in "Certain Relationships and Related Party Transactions."
Each of these transactions 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, as well as
Rule 701 of the Act, as payment pursuant to deferred compensation. 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. The transaction was conducted in full compliance with the
information and disclosure requirements of Regulation D, and all investors had
access to all corporate and financial information. No general solicitation,
offering or sale was conducted in connection with the issuance of shares.
Furthermore, EssTec was not reporting under Section 13 or 15 of the Exchange Act
at the time, the stockholders were employees, directors, officers, consultants
or advisors to EssTec, are each and all natural persons who provided bona fide
services not relating to capital raising, and the amount of shares issued
pursuant to Rule 701 in the aggregate did not exceed $1,000,000 in a 12 month
period.
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. In addition to this Mr. Cheung
will also receive 3% commission on all revenues generated entirely through his
efforts, including sales contracts entered into as a result of his introduction
to the contracting party.
On October 1, 2001, the four individuals or entities of founders' shares
held by them in exchange for warrants to purchase an equal number of shares at
$0.30 per share. See our discussion in "Management's Discussion and Analysis
and Results of Operation." Converge returned 1,372,105 shares, Shuaib Rana
returned 50,000 shares, Adnan Rana returned 37,500 shares, and Junaid Khan
returned 37,500 shares. In addition, Tariq Khan returned 112,500 shares, which
were received upon exercise of an option in July 2001, and Imran Hussein
returned 112,500 shares, which were received upon exercise of an option in July
2001. These five individuals and Converge then received warrants to purchase an
equal number of shares at $0.30 per share (1,722,109 shares in the aggregate) in
a 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. The transaction was conducted in full
compliance with the information and disclosure requirements of Regulation D, and
all investors had access to all corporate and financial information. No general
solicitation, offering or sale was conducted in connection with the issuance of
shares. 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.
53
In February 2002, we issued 12,857 shares, valued at $3.50 per share, to
CSN Global, Inc. for human resources services provided by them. In January 2002
we issued 28,500 shares of common stock to Winthrop Venture Fund due to our
default in payment on the note issued to EssTec by Winthrop, as required by the
terms of the promissory note. The note was subsequently amended to extend the
maturation to June 2002, at which time we issued an additional 25,000 shares of
common stock to Winthrop due as a result of our default. See our discussion in
"Management's Discussion and Analysis - Liquidity and Capital Resources." These
transactions were private placements, 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. Both entities have certified to us that they
qualify as accredited investors as that term is defined in Rule 501 of
Regulation D adopted under the Act. The transaction was conducted in full
compliance with the information and disclosure requirements of Regulation D, and
all investors had access to all corporate and financial information. No general
solicitation, offering or sale was conducted in connection with the issuance of
shares.
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. The transaction was
conducted in full compliance with the information and disclosure requirements of
Regulation D, and all investors had access to all corporate and financial
information. No general solicitation, offering or sale was conducted in
connection with the issuance of shares.
On March 14, 2002, we issued an option to Mr. Basit, our current Chief
Executive Officer, 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.
On March 15, 2002, we issued an option to Mr. El-Saadi, our Chief Financial
Officer, 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.
From our inception to November 6, 2002, EssTec issued 34 options under its
2000 Incentive and Non-incentive Stock Option Plan, representing 1,286,708
shares of common stock. Of these, 3 options have been exercised at exercise
prices ranging from $0.02 to $1.00, representing 460,000 shares. Of the 460,000
shares issued, 225,000 were returned to us as part of the Stock Contribution. Of
the remaining options issued, an option representing 50,000 shares expired on
July 22, 2002, and 2 additional options representing 24,863 shares expired on
September 15, 2002. Of those remaining options, options representing 751,845
shares are still outstanding, with exercise prices range from $0.10 to $5.00.
Included in these option issuances are a number of options issued to our current
and former management and affiliated parties for services rendered, as well as
option issuances to employees and consultants as incentive stock options. We
have also issued warrants to our current and former management and affiliated
parties for services rendered. For a detailed discussion of these transactions,
please refer to our discussion in "Certain Relationships and Related Party
Transactions." We have also issued the following warrants and options to our
officers and directors, each and all of which involved officers and/or directors
who had superior access to all corporate and financial information. No general
solicitation, offering or sale was conducted in connection with the issuance of
shares. EssTec was not reporting under Section 13 or 15 of the Exchange Act at
the time, the stockholders were employees, directors, officers, consultants or
advisors to EssTec, are each and all natural persons who provided bona fide
services not relating to capital raising, and the amount of shares issued
pursuant to Rule 701 in the aggregate did not exceed $1,000,000 in a 12 month
period.
Between May 2001 and November 2002, warrants representing 855,688 shares of
common stock were exercised at prices ranging from $0.30 to $1.00.
54
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**
10.1.1 Amended lease for premises located in Lahore, Pakistan, dated July 31, 2002
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, 2000**
10.5.1 Amended Consulting Agreement with Red Sea, Ltd., dated September 1, 2002
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**
10.8.1 Agreement with Crescent Diagnostic Medical Group, dated July 15, 2002
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**
10.21 Independent Consultant Services Agreement with Manhattan Capital
Partners LLC, dated September 1, 2001**
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**
* To be filed by amendment
** Previously filed with this registration statement
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;
55
(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. Notwithstanding the forgoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation From the low or high end of the
estimated maximum offering range may be reflected in the form of
prospects filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(c) 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.
4) 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.
5) 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.
6) 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.
56
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 November 12,
2002.
EssTec, Inc.
By: /S/ Abdul Saquib
-------------------------------
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
*
Ali Basit Chief Executive Officer
(Principal Executive Officer) November 12, 2002
* Chief Financial Officer and Treasurer
Khalid El-Saadi (Principal Financial Officer, Principal Accounting Officer) November 12, 2002
/s/ Abdul Saquib
Abdul Saquib Vice President - Operations and Secretary November 12, 2002
*
Faysal Zarooni Director, Chairman of Board of Directors November 12, 2002
*
Bill Cheung Director November 12, 2002
*
Ramsey Hakim Director November 12, 2002
*
Sana Khan Director November 12, 2002
57
*
Syed Nasir Zafar Ahmed Director November 12, 2002
* By: Abdul Saquib, Attorney-in-Fact
58