As filed with the United States Securities and
Exchange Commission on June 6, 2005
Registration No. 333-124220
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ETOTALSOURCE, INC.
(Name of Registrant as specified in its charter)
Colorado 7372 84-1066959
-------- ---- ----------
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
Michael A. Littman
1510 Pool Boulevard 7609 Ralston Rd.
Yuba City, CA 95993 Arvada, CO 80002
(530) 751-9015 (303) 422-8127
-------------- --------------
(Address and telephone number (Name, address, and telephone
of principal executive offices) number of agent for service)
Copies to:
Clayton E. Parker, Esq. Christopher J. DeLise, Esq.
Kirkpatrick & Lockhart LL.P. Kirkpatrick & Lockhart LL.P.
201 South Biscayne Boulevard 201 South Biscayne Boulevard
Suite 2000 Suite 2000
Miami, FL 33131 Miami, FL 33131
Telephone: (305) 539-3300 Telephone: (305) 539-3300
Telecopier: (305) 358-7095 Telecopier: (305) 358-7095
Approximate date of commencement of proposed sale of the securities 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 of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier of the effective
registration statement for the offering. |_|
If this is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, 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 under the Securities Act of 1933, check the following box. |_|
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 this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Preliminary Prospectus, subject to completion, dated June 3, 2005
PROSPECTUS
eTotalSource, INC.
244,590,000 Shares of Common Stock
This prospectus relates to the sale of up to 244,590,000 shares of
common stock of eTotalSource, Inc. by certain persons who are, or will become,
stockholders of eTotalSource. The selling stockholders consist of:
o Cornell Capital Partners, L.P. which intends to sell up to an
aggregate amount of 235,083,334 shares of eTotalSource common
stock, which includes 200,000,000 shares of common stock
issued under the 2005 Standby Equity Distribution Agreement,
31,250,000 shares of common stock underlying the 2005 Secured
Convertible Debentures, and 3,833,334 shares of common stock
issued as a one-time commitment fee.
o Newbridge Securities Corporation, an unaffiliated registered
broker-dealer retained by eTotalSource in connection with the
2005 Standby Equity Distribution Agreement, which intends to
sell 166,666 shares of eTotalSource common stock issued as a
one-time placement agent fee.
o Other selling stockholders, which intend to sell up to an
aggregate amount of 9,340,000 shares of eTotalSource common
stock previously issued in various financing transactions with
eTotalSource.
Please refer to "Selling Stockholders" beginning on page 15 of this
prospectus.
eTotalSource is not selling any shares of common stock in this offering
and therefore will not receive any proceeds from this offering. eTotalSource
will, however, receive proceeds from the sale of common stock under the 2005
Standby Equity Distribution Agreement. All costs associated with this
registration will be borne by eTotalSource.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. These prices will fluctuate based on the demand for
the shares of our common stock. On June 2, 2005, the closing price of our
common stock was $0.046 per share.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933, as amended, in connection with the sale of common stock
under the 2005 Standby Equity Distribution Agreement. Pursuant to the 2005
Standby Equity Distribution Agreement, Cornell Capital Partners will pay
eTotalSource 98% of the lowest volume weighted average price of the common stock
during the five consecutive trading days immediately following the advance
notice date. The 2% purchase price discount on the purchase of the common stock
to be received by Cornell Capital Partners, and the 3,833,334 shares issued as a
one-time commitment fee under the 2005 Standby Equity Distribution Agreement,
are underwriting discounts. In addition, Cornell Capital Partners is entitled to
retain 5% of the proceeds raised by eTotalSource under the 2005 Standby Equity
Distribution Agreement. eTotalSource has paid Cornell Capital Partners a
one-time commitment fee in the form of 3,833,334 shares of our common stock.
eTotalSource engaged Newbridge Securities Corporation, an unaffiliated
registered broker-deal, to advise eTotalSource in connection with the 2004
Standby Equity Distribution Agreement. Newbridge Securities Corporation was paid
a one-time fee of $10,000 by the issuance of 166,666 shares of eTotalSource's
common stock.
eTotalSource's common stock is deemed to be "penny stock" as that term
is defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934,
as amended. Broker-dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Broker-dealers are required to determine whether an investment in a penny stock
is suitable investment for a prospective investor.
eTotalSource's common stock is dually quoted on the Over-the-Counter
Bulletin Board and Pink Sheets under the symbol "ETLS.OB."
These securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on page 6 of this prospectus.
With the exception of Cornell Capital Partners, which is an
"underwriter" within the meaning of the Securities Act of 1933, as amended, no
other underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. This offering will terminate 24 months after the
accompanying registration statement is declared effective by the United States
Securities and Exchange Commission. None of the proceeds from the sale of stock
by the selling stockholders will be placed in escrow, trust or any similar
account.
Neither the United States Securities and Exchange Commission nor any
state securities regulators have approved or disapproved of these securities, or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this prospectus is June __, 2005.
ii
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY.........................................................................................................1
THE OFFERING...............................................................................................................3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION.................................................................................4
RISK FACTORS...............................................................................................................6
FORWARD-LOOKING STATEMENTS................................................................................................14
SELLING STOCKHOLDERS......................................................................................................15
USE OF PROCEEDS...........................................................................................................20
DILUTION .................................................................................................................21
THE STANDBY EQUITY DISTRIBUTION AGREEMENT.................................................................................22
PLAN OF DISTRIBUTION......................................................................................................25
MANAGEMENT'S DISCUSSION AND ANALYSIS......................................................................................27
DESCRIPTION OF BUSINESS...................................................................................................32
MANAGEMENT................................................................................................................35
FISCAL YEAR-END OPTIONS/SAR VALUES........................................................................................38
DESCRIPTION OF PROPERTY...................................................................................................39
LEGAL PROCEEDINGS.........................................................................................................40
PRINCIPAL STOCKHOLDERS....................................................................................................41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................................43
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS............................44
DESCRIPTION OF SECURITIES.................................................................................................47
EXPERTS ..................................................................................................................51
LEGAL MATTERS.............................................................................................................51
HOW TO GET MORE INFORMATION...............................................................................................51
FINANCIAL STATEMENTS.....................................................................................................F-i
PART II ...............................................................................................................II-1
iii
PROSPECTUS SUMMARY
Our History
Premium Enterprises, Inc. was incorporated in Colorado on September 16,
1987. For a period of time in 1988-94, Premium operated three fast lube
locations, at various times in Arizona and Colorado as "Grease Monkey"
franchises. The locations were unprofitable, two were sold, and the last
franchise closed in 1994. Premium then attempted to enter the automobile and
truck tire recycling business in 1994. It formed a limited partnership of which
it owned 62.5% and commenced limited tire recycling operations. The equipment
proved to be inadequate and Premium ran out of capital to continue operations
and ceased all operations in 1996. Premium wrote-off all of its investment in
equipment and licenses for tire recycling in 1996. Premium was dormant from 1996
through 2002.
eTotalSource, Inc. was incorporated in California on February 7, 2000.
eTotalSource was founded with the express goal of designing a better interface
for information and education multimedia delivery.
On December 20, 2002, Premium entered into a Plan and Agreement of
Reorganization with eTotalSource and its shareholders whereby Premium acquired
91% of the issued and outstanding common stock of eTotalSource in exchange for
15,540,001 shares of common stock of Premium. The contract was completed
December 31, 2002. On June 17, 2003, Premium's shareholders voted to amend the
Articles of Incorporation to change the name of Premium Enterprises, Inc. to
eTotalSource, Inc. eTotalSource is a subsidiary of Premium. The sole business of
Premium is that of its subsidiary, eTotalSource.
Our Business
eTotalSource is a developer and supplier of proprietary multimedia
software technology and a publisher of multimedia training content. Its clients
have included: U.S. Department of Defense, Boeing, Steven Spielberg Online Film
School, Pacific Bell/SBC, Grant School District, California State University,
Logistics Management Institute, First American Title Company and other corporate
entities. The Company's clients work with eTotalSource to develop, produce,
market, and distribute multimedia development software. eTotalSource is also
marketing educational training programs it has produced utilizing its
proprietary software.
eTotalSource was founded with the express goal of designing a better
interface for information and education multimedia delivery. Approximately one
year after inception, the beta Presenta Pro(TM) platform was completed and has
been continually enhanced ever since. Presenta Pro(TM) features back-end
development of multi-panel time synchronized presentations and course work, as
well as testing, feedback and performance monitoring. Clients are utilizing
Presenta Pro(TM) as a platform for distance learning and computer-based
training. Presenta Pro(TM) is delivered via the Internet, intranet, or CD/DVD
ROM. Presenta Pro(TM) simplifies the production and delivery of multimedia
presentations and content while at the same time improving the quality and
effectiveness of the presentations. Presenta Pro(TM) is designed with cost
saving features and it offers post-production opportunities.
eTotalSource employs a dual strategy to meet market demands and
opportunities that includes both software licensing and publishing: software
licensing and publishing. eTotalSource is licensing Presenta Pro(TM) software
via distribution partners and an internal sales and marketing team. The
marketing team intends to direct its sales effort in targeting the education,
corporate and government markets. The cost of the product ranges from $5,500 to
$15,000, and eTotalSource is positioning the software package for a volume
intensive market. The nearest competitor (in quality or functionality), Virage,
prices its product at substantially higher prices. eTotalSource's aggressive
pricing policy is intended to appeal to governments, schools and corporate
clients. eTotalSource also publishes and produces original content and
postproduction services, and participates in the sales and distribution of the
final published product.
eTotalSource shares in the revenue derived from the program sales.
eTotalSource carefully chooses its content, identifying unique subjects and
niches offering more probable sales. eTotalSource believes these markets are
generally underserved and in need of the program packages that it produces.
1
Going Concern
The accompanying financial statements have been presented assuming that
eTotalSource will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. eTotalSource has incurred significant operating losses since
inception and as of March 31, 2005, had a net working capital deficit of
$2,574,479, a stockholders' deficit of $2,815,794, notes payable totaling
$632,000 were in default with related accrued interest in arrears of $52,045,
and legal judgments against eTotalSource totaling $204,788 have been
adjudicated. Management continues to meet operating deficits primarily through
short-term borrowings and is attempting to utilize other debt and non-dilutive
equity financing alternatives to sustain operations. Additionally, we may obtain
funding from Cornell Capital Partners under the 2005 Standby Equity Distribution
Agreement, subject to the limitations discussed elsewhere in this prospectus.
Whether such financing will be available as needed and the ultimate form of such
financing is uncertain and the effects of this uncertainty could ultimately lead
to bankruptcy. Unless eTotalSource successfully obtains suitable significant
additional financing and attains profitable operations, there is substantial
doubt about eTotalSource's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effect
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.
The Offering
eTotalSource cannot predict the actual number of shares of common stock
that will be issued pursuant to the 2005 Standby Equity Distribution Agreement,
in part, because the purchase price of the shares will fluctuate based on
prevailing market conditions and eTotalSource has not determined the total
amount of advances it intends to draw. It may be necessary for eTotalSource's
shareholders to approve an increase in eTotalSource's authorized common stock
for eTotalSource to register additional shares of common stock in order to have
sufficient authorized shares available to draw down the full amount under the
2005 Standby Equity Distribution Agreement. In the event we desire to draw down
any available amounts remaining under the 2005 Standby Equity Distribution
Agreement, after we have issued 200,000,000 being registered in the accompanying
registration statement and assuming we have obtained shareholder approval to
increase our authorized common stock, we will have to file a new registration
statement to cover such additional shares which we will issue for additional
draw downs under the 2005 Standby Equity Distribution Agreement.
The sale of shares pursuant to the 2005 Standby Equity Distribution
Agreement will have a dilutive impact on eTotalSource stockholders. At a recent
stock price of $0.046 per share, eTotalSource would have to issue 221,827,862
shares of common stock to draw down the entire $10,000,000 available under the
2005 Standby Equity Distribution Agreement. eTotalSource is only registering
200,000,000 shares of its common stock under the 2005 Standby Equity
Distribution Agreement in the accompanying registration statement, which at a
recent stock price of $0.046 per share, eTotalSource would be able to receive
maximum gross proceeds of $9,016,000 under the 2005 Standby Equity Distribution
Agreement. Upon issuance, these shares would represent approximately 81% of
eTotalSource then issued and outstanding common stock as of June 2, 2005.
The significant downward pressure on eTotalSource's stock price caused
by the sale of a significant number of shares under the 2005 Standby Equity
Distribution Agreement could cause eTotalSource's stock price to decline, thus
allowing short sellers of eTotalSource stock an opportunity to take advantage of
any decrease in the value of eTotalSource stock. The presence of short sellers
in eTotalSource's common stock may further depress the price of eTotalSource's
common stock.
eTotalSource is registering 244,590,000 shares of common stock in this
offering. These shares represent approximately 82% of eTotalSource's authorized
capital stock and would upon issuance represent approximately 84% of the then
issued and outstanding common stock and eTotalSource anticipates all such shares
will be sold in this offering. If all or a significant block of these shares are
held by one or more shareholders working together, then such shareholder or
shareholders would have enough shares to exert significant influence on
eTotalSource in an election of directors.
About Us
eTotalSource's principal place of business is located at 1510 Poole
Boulevard, Yuba City, California 95993. eTotalSource's telephone number is (530)
751-9615.
2
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are, or will become, eTotalSource stockholders. The selling stockholders
consist of:
o Cornell Capital Partners, which intends to sell up to an
aggregate amount of 244,590,000 shares of eTotalSource common
stock, which, based on a recent stock price of $0.046 per
share, includes 200,000,000 shares pursuant to the 2005
Standby Equity Distribution Agreement, 31,250,000 shares
underlying the 2005 Secured Convertible Debentures, and
3,833,334 shares in connection with a one-time commitment fee.
o Newbridge Securities Corporation, an unaffiliated
broker-dealer retained by eTotalSource in connection with the
2004 Standby Equity Distribution Agreement, which intends to
sell up to 166,666 shares of eTotalSource common stock issued
as a one-time placement agent fee.
o Other selling stockholders, which intend to sell up to an
aggregate amount of 9,340,000 shares of eTotalSource common
stock previously issued in various financing transactions with
eTotalSource.
Pursuant to the 2005 Standby Equity Distribution Agreement,
eTotalSource may, at its discretion, periodically issue and sell to Cornell
Capital Partners shares of its common stock for a total purchase price of
$10,000,000. However, based on the current price of eTotalSource's common stock,
it does not have a sufficient number of shares to permit delivery of the
securities required to obtain the $10,000,000. Cornell Capital Partners will
purchase the shares of common stock for 98% of the lowest volume weighted
average price of eTotalSource common stock during the five consecutive trading
days immediately following notice of eTotalSource's intent to make a draw down
under the 2005 Standby Equity Distribution Agreement. In addition, Cornell
Capital Partners is entitled to retain 5% of the proceeds raised by eTotalSource
under the 2005 Standby Equity Distribution Agreement. Cornell Capital Partners
intends to sell any shares purchased under the 2005 Standby Equity Distribution
Agreement at the then-prevailing market price.
Based on eTotalSource's recent stock price of $0.046 per share,
eTotalSource would have to issue to Cornell Capital Partners 221,827,862 shares
of its common stock in order to draw down the entire $10,000,000 available to
eTotalSource under the 2005 Standby Equity Distribution Agreement. As of June 2,
2005, eTotalSource had 46,710,821 shares of common stock issued and outstanding.
Common Stock Offered 244,590,000 shares by selling stockholders
Offering Price Market price
Common Stock Outstanding Before the Offering 46,710,821 shares (as of June 2, 2005)
Use of Proceeds eTotalSource will not receive any proceeds from the shares
offered by the selling stockholders. Any proceeds
eTotalSource receives from the sale of common stock under
the Standby Equity Distribution Agreement will be used for
general corporate and working capital purposes and
acquisitions. See "Use of Proceeds."
Risk Factors The securities offered hereby involve a high degree of risk
and immediate substantial dilution. See "Risk Factors" and
"Dilution."
Over-the-Counter Bulletin Board Symbol "ETLS"
3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of eTotalSource's financial statements,
which are included elsewhere in this prospectus. You should read the following
data together with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus as well as with
eTotalSource's financial statements and the notes thereto.
Statement Of Operations Data
Three Three
Months Ended Months Ended Year Ended Year Ended
03/31/05 03/31/04 12/31/04 12/31/03
------------ ------------ ------------ ------------
Revenues $ 14,987 $ 18,093 $ 209,198 $ 281,919
General and Administrative Expenses 252,525 397,262 2,390,905 1,860,146
------------ ------------ ------------ ------------
Operating Income (Loss) (237,538) (379,170) (2,181,707) (1,578,227)
Other Income (Expense)
Gain on sale of office building -- -- -- 205,705
Interest expense (47,761) (27,368) (190,592) (602,045)
Other income (expense), net 1,342 (19) (376) 7,992
------------ ------------ ------------ ------------
Total Other Income (Expense) (46,419) (27,386) (190,968) (388,348)
------------ ------------ ------------ ------------
Net (Loss) $ (283,957) $ (406,556) $ (2,372,675) $ (1,966,575)
============ ============ ============ ============
Basic and Diluted (Loss) per Share $ (0.01) $ (0.01) $ (0.06) $ (0.10)
============ ============ ============ ============
Weighted Average Common Shares Outstanding 46,710,821 30,307,449 37,897,170 19,830,586
============ ============ ============ ============
4
Balance Sheet Data
December 31,
March 31, 2005 2004
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ASSETS
Current Assets
Cash $ 401 $ 37,849
Accounts receivable -- --
Other 1,286 1,296
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Total Current Assets 1,687 39,145
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Property and equipment
Equipment 88,122 88,122
Less accumulated depreciation (60,279) (56,786)
----------- -----------
Total Property and Equipment, net 27,843 31,336
----------- -----------
Other Assets
Patents applications and trademarks, net 23,899 24,907
Deposits 1,162 1,162
----------- -----------
Total Other Assets 25,061 26,069
----------- -----------
Total Assets $ 54,591 $ 96,550
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Convertible notes payable $ 250,000 $ 417,569
Other notes payable 632,000 632,000
Judgments payable 204,788 204,788
Accounts payable 295,303 183,461
Accrued compensation payable 939,025 845,880
Accrued interest payable 198,801 185,475
Other accrued liabilities -- --
Deferred revenue 56,250 67,500
----------- -----------
Total Current Liabilities 2,576,166 2,536,673
----------- -----------
Convertible Notes Payable, less current maturities 294,219 117,900
----------- -----------
----------- -----------
Total Liabilities 2,870,385 2,654,573
----------- -----------
Commitment and Contingencies
Stockholders' Equity (Deficit)
Common stock; no par value; 46,710,821 shares issued and outstanding March 31, 2005 5,810,485 5,784,300
Accumulated (deficit) (8,626,279) (8,342,323)
----------- -----------
Total Stockholders' (Deficit) (2,815,794) (2,558,023)
----------- -----------
Total Liabilities and Stockholders' (Deficit) $ 54,591 $ 96,550
=========== ===========
5
RISK FACTORS
eTotalSource's business involves a high degree of risk. You should
carefully consider the following risk factors and the other information in this
prospectus, including eTotalSource's financial statements and the related notes.
If any of the following risks actually occurs, eTotalSource's business,
operating results, prospects or financial condition could be seriously harmed.
ETOTALSOURCE IS SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM ITS
BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY
CONSIDER THE RISKS AND UNCERTAINTIES OR DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO PURCHASE ETOTALSOURCE'S COMMON
STOCK. IF ANY OF THESE RISKS OR UNCERTAINTIES ACTUALLY OCCURS, ETOTALSOURCE'S
BUSINESS, FINANCIAL CONDITION, AND/OR OPERATING RESULTS COULD BE MATERIALLY
HARMED. IN THAT CASE, THE TRADING PRICE OF ETOTALSOURCE'S COMMON STOCK COULD
DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
Risks Related To Our Business
eTotalSource Lost Money For The Three Months Ended March 31, 2005, The Year
Ended December 31, 2004 and 2003, And Losses May Continue In The Future
For the three months ended March 31, 2005, we incurred a net loss of
$283,957. For the year ended December 31, 2004, we incurred a net loss of
$2,372,675, and for the year ended December 31, 2003, we incurred a net loss of
$1,966,575. Our accumulated deficit as of March 31, 2005 was $8,628,279. We
anticipate that we will in all likelihood have to rely on external financing for
all of our capital requirements. Future losses are likely to continue unless we
successfully implement our business plan. Our ability to continue as a going
concern will be dependent upon our ability to draw down on the 2005 Standby
Equity Distribution Agreement which we have entered into with Cornell Capital
Partners. If we incur any problems in drawing down or the 2005 Standby Equity
Distribution Agreement, we may experience significant liquidity and cash flow
problems. If we are not successful in reaching and maintaining profitable
operations, we may not be able to attract sufficient capital to continue our
operations. Our inability to obtain adequate financing will result in the need
to curtail business operations and will likely result in a lower stock price.
There Is Substantial Doubt About Our Ability To Continue As A Going Concern Due
To Insufficient Revenues To Cover Our Operating Costs, Which Means That We May
Not Be Able To Continue Operations Unless We Obtain Additional Funding
Our independent auditors added a going concern qualification to their
report issued in connection with their audit of our December 31, 2004 and 2003
financial statements. The auditors noted in their report that eTotalSource
incurred significant recurring losses, and as of December 31, 2004 had a
substantial liquidity shortage, including default conditions on certain notes
payable and judgments payable to creditors. As a consequence, the auditors noted
that eTotalSource required significant additional financing to satisfy
outstanding obligations and continue operations, and the auditors opined that
unless eTotalSource obtained suitable significant additional financing, there is
substantial doubt about eTotalSource's ability to continue as a going concern.
Those conditions continued through the first quarter of 2005 resulting in
operating losses and liquidity shortages, including default conditions on
certain notes payable and judgments payable to creditors.
The accompanying financial statements have been presented assuming that
eTotalSource will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. eTotalSource has incurred significant operating losses since
inception and as of March 31, 2005, had a net working capital deficit of
$2,574,479, a stockholders' deficit of $2,815,794, notes payable totaling
$632,000 were in default with related accrued interest in arrears of $52,045,
and legal judgments against eTotalSource totaling $204,788 have been
adjudicated.
Management anticipates that eTotalSource will incur net losses for the
immediate future, and expect eTotalSource's operating expenses to increase
significantly, and, as a result, eTotalSource will need to generate monthly
revenue if it is to continue as a going concern. To the extent that we do not
generate revenue at anticipated rates from contracts with the government and
others, that we do not obtain additional funding, that our stock price does not
increase, that we are unable to adjust operating expense levels accordingly, we
may not have the ability to continue on as a going concern. Our financial
6
statements which accompany this prospectus do not include any adjustments that
might result from the outcome of this uncertainty.
We May Not Be Able To Access Sufficient Funds When Needed Under The 2005 Standby
Equity Distribution Agreement And The Price Of Our Common Stock Will Affect Our
Ability To Draw Down On The Standby Equity Distribution Agreement
Currently, we are dependent upon external financing to fund our
operations. Our financing needs are expected to be provided, in large part, by
the 2005 Standby Equity Distribution Agreement. We may not provide advance
notice less than six trading days apart and each maximum drawdown is limited to
$200,000 every seven trading days. Because of the advance restriction, we may
not be able to access sufficient funds when needed. If the market price of our
shares of common stock declines, we would be required to issue more shares of
common stock in order to draw down the same dollar amount of an advance than if
our stock price was higher. Our Articles of Incorporation currently authorize
eTotalSource to issue 300,000,000 shares. In the event that it becomes necessary
for us to increase our authorized common stock, and we do not obtain shareholder
approval to amend our Articles of Incorporation and increase our authorized
common stock, we will not be able to draw down the entire $10,000,000 available
under the 2005 Standby Equity Distribution if the price of our common stock
declines. In the event we desire to draw down any available amounts remaining
under the 2005 Standby Equity Distribution Agreement, after we have issued
200,000,000 being registered in the accompanying registration statement and
assuming we have obtained shareholder approval to increase our authorized common
stock, we will have to file a new registration statement to cover such
additional shares which we will issue for additional draw downs under the 2005
Standby Equity Distribution Agreement.
In addition, we are not registering enough shares to draw down the
entire $10,000,000 available to us under the 2005 Standby Equity Distribution
Agreement. Specifically, there is an inverse relationship between the price of
our common stock and the number of shares of common stock which will be issued
under the 2005 Standby Equity Distribution Agreement. Based on our recent stock
price of $0.046, we would have to issue to Cornell Capital Partners 221,827,862
shares of our common stock in order to draw down the entire $10,000,000
available to us under the 2005 Standby Equity Distribution Agreement. We are
registering 200,000,000 shares of our common stock under the 2005 Standby Equity
Distribution Agreement (plus, an additional 3,833,334 shares being registered as
a one-time commitment fee, and an additional 31,250,000 shares underlying the
2005 Secured Convertible Debentures) in the accompanying registration statement.
Based on our recent stock price of $0.046 and the fact that we are registering
200,000,000 shares of our common stock under the 2005 Standby Equity
Distribution Agreement in the accompanying registration statement, we could only
draw down a maximum gross amount of $9,016,000 under the 2005 Standby Equity
Distribution Agreement. Our Articles of Incorporation currently authorize
eTotalSource to issue 300,000,000 shares and, as of June 2, 2005, we had
46,710,821 shares of common stock issued and outstanding. In the event we desire
to draw down any available amounts remaining under the 2005 Standby Equity
Distribution Agreement after we have issued the 200,000,000 shares being
registered under the 2005 Standby Equity Distribution Agreement in the
accompanying registration statement, we will have to file a new registration
statement to cover such additional shares that we would issue for additional
draw downs on the 2005 Standby Equity Distribution Agreement. Unless we obtain
profitable operations, it is unlikely that we will be able to secure additional
financing from external sources other than our 2005 Standby Equity Distribution
Agreement. Therefore, if we are unable to draw down on our 2005 Standby Equity
Distribution Agreement, we may be forced to curtail or cease our business
operations.
In light of the foregoing limitations, we would need to submit a
$200,000 advance request approximately every 10 trading days for 24 months in
order to attain the full $10,000,000 available under the 2005 Standby Equity
Distribution Agreement; however, we do not currently have sufficient authorized
shares given the current price of our stock to permit the delivery of the
securities required to obtain the maximum $10,000,000 available under the 2005
Standby Equity Distribution Agreement.
In addition, pursuant to the terms of 2005 Standby Equity Distribution
Agreement, Cornell Capital Partners may not own more than 9.9% of our
outstanding shares of common stock. In the event that Cornell Capital Partners
decides to not sell the shares of our common stock that have been issued to it
after they receive an advance from us in order to keep them below 9.9%
beneficial ownership, the potential adverse impact on our ability to receive
funds under the 2005 Standby Equity Distribution Agreement given Cornell Capital
Partners' current 8.21% ownership in eTotalSource would be that the we would not
have sufficient funds to continue operations beyond June 30, 2005. The maximum
dollar amount that we may require Cornell Capital Partners to purchase in a
single draw, if Cornell Capital Partners decides not to sell any of its
currently held securities, depends on the current price of our stock and the
balance of shares to bring Cornell Capital Partners to the 9.9% ownership
7
limitation. The following table outlines the maximum purchases for Cornell
Capital Partners based on a range of stock prices.
eTotalSource: Current Issued Shares: 46,710,821
-------------
Cornell Capital Partners: Current Shares Held: 3,833,334
-------------------------
Current % 8.21%
Maximum % 9.90%
Maximum # of Shares: 4,624,371
Balance of
Shares: 791,037
@ 25% @ 50%
@ 25% Decrease Increase in Increase in
Current Price Per @ 50% Decrease In in Current Current Share Current
Share @ 100% Current Share Price Share Price Price Share Price
- ---------------------- ------------------ ----------------------- ----------------- --------------- -------------
$0.046 $36,387.71 $18,193.86 $27,290.79 $45,484.64 $54,581.57
Accordingly, if we are unable to draw down sufficient funds under the
2005 Standby Equity Distribution Agreement, we may be forced to curtail or cease
our business operations.
We Have Negative Working Capital, Which May Cause Us To Curtail Operations
We had negative working capital of $2,574,479 at March 31, 2005 and
continue to need cash for operations. We have relied on significant external
financing to fund our operations. As of March 31, 2005, we had $401 of cash on
hand and total current assets were $1,687, and our total current liabilities
were $2,576,166. We will need to raise additional capital to fund our
anticipated operating expenses and future expansion. Among other things,
external financing may be required to cover our operating costs. Unless we
obtain profitable operations, it is unlikely that we will be able to secure
additional financing from external sources. If we are unable to secure
additional financing or we cannot draw down on the 2005 Standby Equity
Distribution Agreement, we believe that we have sufficient funds to continue
operations only until June 30, 2005. If for whatever reason sufficient funds are
not available under the 2005 Standby Equity Distribution Agreement, we will
attempt to secure additional funding from third parties, but there is no
assurance that we will be successful in obtaining same. We estimate that we will
require, at a minimum, approximately $2,000,000 to fund our operations in
accordance with our business plan for 12 months following the anticipated
effective date of the accompanying Registration Statement. The sale of our
common stock to raise capital may cause dilution to our existing shareholders.
Our inability to obtain adequate financing will result in the need to curtail
business operations. Any of these events would be materially harmful to our
business and may result in a lower stock price. Our inability to obtain adequate
financing will result in the need to curtail business operations and you could
lose your entire investment. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We Need Additional Capital To Be Successful, Which Will Potentially Dilute The
Value Of Our Shareholders' Shares
We need substantial capital to execute our business plan. To finance
our operations to date, we have relied on private offerings, exercises of
warrants, and loans. As of June 2, 2005, we have issued an aggregate of
46,710,821 shares of common stock to finance our operations. We will issue up to
an additional 2,386,500 shares if all of the outstanding options and warrants
are exercised. The terms on which we obtain additional financing, including the
exercise of outstanding debentures and warrants, may dilute the existing
shareholders' investment, or otherwise adversely affect their position. It is
also possible that we will be unable to obtain the additional funding we need as
and when we need it. If we are unable to obtain additional funding as and when
needed, we could be forced to curtail or cease our operations.
All Of Our Assets Are Securing Our Obligations To Cornell Capital Partners
Pursuant to the terms contained in that certain Security Agreement
dated April 20, 2005, by and between eTotalSource and Cornell Capital Partners,
all of our obligations under the 2005 Securities Purchase Agreement, the 2005
Secured Convertible Debentures, the 2005 Investor Registration Rights Agreement,
the 2005 Irrevocable Transfer Agent Instructions, and the 2005 Escrow Agreements
are secured by substantially all of our non-cash assets as of such date or
8
thereafter acquired by us. Accordingly, if we are unable to satisfy any of our
obligations under the foregoing agreements, our assets may be foreclosed upon
and our business may be shut down.
Our Success Is Based On Increasing Demand For Our Products
We depend on the continued demand for our products and on favorable
general economic conditions. We cannot assure you that our business strategy
will be successful or that we will successfully address these risks or
difficulties. If we should fail to adequately address any of these risks or
difficulties, we could be forced to curtail or cease our business operations.
We Rely On Our Senior Management And Will Be Harmed If Any Or All Of Them Leave
Our success is dependent on the efforts, experience and relationships
of Terry Eilers, our Chief Executive Officer and Chairman, Virgil Baker, our
Chief Financial Officer and a director, and Michael Sullinger, our Chief
Operating Officer and a director, and other essential staff. If any of these
individuals become unable to continue in their role, our business or prospects
could be adversely affected. Although we have entered into employment agreements
with each of our executive officers, we cannot assure you that such individuals
will continue in their present capacity for any particular period of time.
Fluctuations In Our Operating Results May Adversely Affect Our Stock Price And
Purchasers Of Our Shares Of Common Stock May Lose All Or A Portion Of Their
Investment
Historically, there has been volatility in the market price for our
common stock. Our quarterly operating results, the number of shareholders
desiring to sell their share, changes in general conditions in the economy, the
financial markets or the healthcare industry, or other developments affecting us
or our competitors, could cause the market price of our common stock to
fluctuate substantially. We expect to experience significant fluctuations in our
future quarterly operating results due to a variety of factors.
Accordingly, in one or more future quarters, our operating results may
fall below the expectations of securities analysts and investors. In this event,
the market price of our common stock would likely be materially adversely
affected. If the selling shareholders all elect to sell their shares of our
common stock at the same time, the market price of our shares may decrease. It
is possible that the selling shareholders will offer all of the shares for sale.
Further, because it is possible that a significant number of shares could be
sold at the same time, the sales, or the possibility thereof, may have a
depressive effect on the market price of our common stock.
Our Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly
Our common stock is currently traded on the Over-the-Counter Bulletin
Board and Pink Sheets. Prior to this offering, there has been a limited public
market for our common stock and there can be no assurance that an active trading
market for our common stock will develop. This could adversely affect our
shareholders' ability to sell our common stock in short time periods, or
possibly at all. Our common stock is thinly traded compared to larger, more
widely known companies in our industry. Thinly traded common stock can be more
volatile than common stock traded in an active public market. The average daily
trading volume of our common stock from approximately March 2, 2005 through June
2, 2005 was approximately 81,000 shares. The high and low trading price of our
common stock for the last 52 weeks has been $0.14 and $0.015, respectively. Our
common stock has experienced, and is likely to experience in the future,
significant price and volume fluctuations, which could adversely affect the
market price of our common stock without regard to our operating performance. In
addition, we believe that factors such as quarterly fluctuations in our
financial results and changes in the overall economy or the condition of the
financial markets, could cause the price of our common stock to fluctuate
substantially.
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Sell Their Shares Due To Suitability Requirements
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
amended. Penny stocks are stock:
o with a price of less than $5.00 per share;
o that are not traded on a "recognized" national exchange;
9
o whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ-listed stock must still have a price of not
less than $5.00 per share); or
o stock in issuers with net tangible assets less than $2,000,000
(if the issuer has been in continuous operation for at least
three years) or $5,000,000 (if in continuous operation for
less than three years), or with average revenues of less than
$6,000,000 for the last three years.
Broker-dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker-dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline.
Shareholders should be aware that, according to United States
Securities and Exchange Commission, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include (i) control
of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) "boiler room" practices involving high-pressure sales tactics
and unrealistic price projections by inexperienced sales persons; (iv) excessive
and undisclosed bid-ask differentials and markups by selling broker-dealers; and
(v) the wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired consequent investor losses.
eTotalSource's management is aware of the abuses that have occurred historically
in the penny stock market. Although eTotalSource does not expect to be in a
position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to eTotalSource's securities.
We Will Have To Obtain Shareholder Approval To Amend Our Articles Of
Incorporation To Authorize Additional Common Stock In Order To Draw Down The
Entire $10,000,000 Under The 2005 Standby Equity Distribution Agreement
Our Articles of Incorporation currently authorize 300,000,000 shares of
common stock. We are only registering 200,000,000 shares of our common stock
under the 2005 Standby Equity Distribution Agreement in the accompanying
registration statement, which based on a recent stock price of $0.046 per share,
would result in our being able to receive maximum gross proceeds of $9,016,000
under the 2005 Standby Equity Distribution Agreement. Based on our recent stock
price of $0.046, we would have to issue to Cornell Capital Partners 221,827,862
shares of our common stock in order to draw down the entire $10,000,000
available to us under the 2005 Standby Equity Distribution Agreement. However,
since our Articles of Incorporation currently authorize only 300,000,000 shares
of common stock, we would be required to obtain the consent of the majority of
the holders of our common stock to amend our Articles of Incorporation to
increase our authorized common stock above the current 300,000,000 shares
authorized. Further, in the event we desire to draw down any available amounts
remaining under the 2005 Standby Equity Distribution Agreement after we have
issued 200,000,000 being registered in the accompanying registration statement,
we will have to file a new registration statement to cover such additional
shares which we will issue for additional draw downs under the 2005 Standby
Equity Distribution Agreement.
In light of the limitations contained in the 2005 Standby Equity
Distribution Agreement, we would need to submit a $200,000 advance request
approximately every 10 trading days for 24 months in order to attain the full
$10,000,000 available under the 2005 Standby Equity Distribution Agreement;
however, we do not currently have sufficient shares given the current price of
our stock to permit the delivery of the securities required to obtain the
maximum $10,000,000 available under the 2005 Standby Equity Distribution
Agreement.
Existing Shareholders Will Experience Significant Dilution From Our Sale Of
Shares Under 2005 The Standby Equity Distribution Agreement
The sale of shares pursuant to the 2005 Standby Equity Distribution
Agreement will have a dilutive impact on our stockholders. At our current stock
price of $0.046, we would have to issue 221,827,862 shares of common stock to
draw down the entire $10,000,000 available to us under the 2005 Standby Equity
Distribution Agreement. These shares would represent approximately 88% of our
outstanding common stock upon issuance. In the event that we need to issue
221,827,862 shares to fully utilize the 2005 Standby Equity Distribution
Agreement, we would have to obtain shareholder approval to amend our Articles of
Incorporation to increase our authorized common stock above the current
300,000,000 shares authorized.
10
The 2005 Standby Equity Distribution Agreement Could Have An Adverse Effect On
Our Ability To Make Acquisitions With Our Common Stock
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the 2005 Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. As we issue shares of common stock pursuant to the 2005 Standby
Equity Distribution Agreement, we may not have sufficient shares of our common
stock available to successfully attract and consummate future acquisitions. In
the event we desire to draw down any available amounts remaining under the 2005
Standby Equity Distribution Agreement, after we have issued 200,000,000 being
registered in the accompanying registration statement and assuming we have
obtained shareholder approval to increase our authorized common stock, we will
have to file a new registration statement to cover such additional shares which
we will issue for additional draw downs under the 2005 Standby Equity
Distribution Agreement.
Sale Of Shares Eligible For Future Sale Could Adversely Affect The Market Price
All of the approximate 8,117,946 shares of common stock which are
currently held, directly or indirectly, by management (as well as an additional
2,743,408 shares held directly or indirectly by our non-management directors)
have been issued in reliance on private placement exemptions under the
Securities Act of 1933, as amended. Such shares will not be available for sale
in the open market without separate registration except in reliance upon Rule
144 under the Securities Act of 1933, as amended. In general, under Rule 144 a
person (or persons whose shares are aggregated), who has beneficially owned
shares acquired in a non-public transaction, for at least one year, including
persons who may be deemed affiliates of eTotalSource, as defined, would be
entitled to sell within any 3-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of common stock, or the
average weekly reported trading volume during the four calendar weeks preceding
such sale, provided that current public information is then available. If a
substantial number of the shares owned by these stockholders were sold under
Rule 144 or a registered offering, the market price of the common stock could be
adversely affected.
eTotalSource's Competition is Better Capitalized and Has Greater Marketing
Capabilities Which Could Adversely Affect eTotalSource's Ability to Compete in
the Marketplace
eTotalSource is in competition with other services and products
developed and marketed by much larger corporations, which are better capitalized
and have far greater marketing capabilities than eTotalSource. eTotalSource
expects to be at a disadvantage when competing with many firms that have
substantially greater financial and management resources and capabilities than
eTotalSource. As a result of these disadvantages, eTotalSource may not be able
to effectively complete in the markets in which its products and services are
sold, which would, in turn, affect its ability to continue to operate.
11
Risks Related To This Offering
Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Some
of our stockholders, including officers and directors, are the holders of
"restricted securities". These restricted securities may be resold in the public
market only if registered or pursuant to an exemption from registration. Some of
these shares may be resold under Rule 144. As of June 2, 2005, 25,381,793
shares of our common stock are deemed restricted.
Upon completion of this offering, and assuming all shares registered in
this offering are resold in the public market, there will be an additional
244,590,000 shares of common stock outstanding. All of these shares of common
stock may be immediately resold in the public market upon effectiveness of the
accompanying registration statement.
Existing Shareholders Will Experience Significant Dilution From Our Sale Of
Shares Under The Standby Equity Distribution Agreement And The Conversion Of
2004 Secured Convertible Debentures Refinanced As The 2005 Secured Convertible
Debentures
The sale of shares pursuant to the 2005 Standby Equity Distribution
Agreement will have a dilutive impact on our stockholders. At a recent stock
price of $0.046, we would have to issue 221,827,862 shares of common stock to
draw down the entire $10,000,000 available to us under the 2005 Standby Equity
Distribution Agreement. We are only registering 200,000,000 shares of our common
stock under the 2005 Standby Equity Distribution Agreement in the accompanying
registration statement. These shares would represent approximately 81% of our
outstanding common stock upon issuance.
The Selling Stockholders Intend To Sell Their Shares Of Common Stock In The
Market, Which Sales May Cause Our Stock Price To Decline
The selling stockholders intend to sell in the public market the shares
of common stock being registered in this offering. That means that up to
244,590,000 shares of common stock, the number of shares being registered in
this offering, may be sold. Such sales may cause our stock price to decline.
Cornell Capital Partners Will Pay Less Than The Then-Prevailing Market Price And
Will Have An Incentive To Sell Its Shares
Cornell Capital Partners will purchase shares of our common stock
pursuant to the 2005 Standby Equity Distribution Agreement at a purchase price
that is less than the then-prevailing market price of our common stock. Cornell
Capital Partners will have an incentive to immediately sell any shares of
eTotalSource common stock that it purchases pursuant to the 2005 Standby Equity
Distribution Agreement to realize a gain on the difference between the purchase
price and the then-prevailing market price of our common stock. To the extent
Cornell Capital Partners sells its common stock, our common stock price may
decrease due to the additional shares in the market. This could allow Cornell
Capital Partners to sell greater amounts of common stock, the sales of which
would further depress the stock price.
The Sale Of Material Amounts Of Common Stock Under The Accompanying Registration
Statement Could Encourage Short Sales By Third Parties
The significant downward pressure on our stock price caused by the sale
of a significant number of shares under the 2005 Standby Equity Distribution
Agreement could cause our stock price to decline, thus allowing short sellers of
our stock an opportunity to take advantage of any decrease in the value of our
stock. The presence of short sellers in our common stock may further depress the
price of our common stock.
The Price You Pay In This Offering Will Fluctuate
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the Over-the-Counter Bulletin Board.
Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.
12
The Issuance Of Shares Of Common Stock Under This Offering Could Result In A
Change Of Control
We are registering 244,590,000 shares of common stock in this offering.
These shares represent approximately 82% of our authorized capital stock and
would upon issuance represent approximately 84% of the then issued and
outstanding common stock and we anticipate all such shares will be sold in this
offering. If all or a significant block of these shares are held by one or more
shareholders working together, then such shareholder or shareholders would have
enough shares to exert significant influence on eTotalSource in an election of
directors.
13
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties, and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies, and expectations, are generally identifiable by
use of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words, or other
variations on these words, or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things: (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans, and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
14
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. A description of each selling stockholder's relationship to
eTotalSource and how each selling stockholder acquired or will acquire the
shares to be sold in this offering is detailed in the information immediately
following this table.
Percentage of
Outstanding Shares to be Percentage of
Shares Shares Acquired Under the Shares
Beneficially Beneficially Standby Equity Shares to be Beneficially
Owned Before Owned Before Distribution Sold in the Owned After
Selling Stockholder Offering Offering (1) Agreement Offering Offering (1)
- ------------------- -------- ------------ --------- -------- ------------
Cornell Capital Partners, L.P. 3,833,334 (2) 8.21% 200,000,000 235,683,334 (3) 0%
Newbridge Securities Corporation 166,666 * -- 166,666 (4) 0%
Theodore Schall 1,200,000 (5) 2.57% -- 1,200,000 0%
Robert H. Baker, as Trustee of
the RHB Trust, dated June 7, 2002 2,287,500 (6) 4.90% -- 2,287,500 0%
James Boras 3,162,500 (7) 6.77% -- 3,162,500 0%
Charles E. and Mary G. Dorn, as
Trustees of the Dorn Family Trust,
dated August 3, 1993 800,000 (8) 1.71% -- 800,000 0%
David Mello 562,500 (9) 1.20% -- 562,500 0%
Daniel and Lisa Sue Lee, as
Trustees of the Daniel and Lisa
Sue Lee Trust, restated 1982 500,000 (10) 1.07% -- 500,000 0%
Timothy Kwan 500,000 (11) 1.07% -- 500,000 0%
Terry Coffee 312,500 (12) * -- 312,500 0%
John J. Donnelly 15,000 (13) * -- 15,000 0%
- ---------------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 46,710,821 shares of
common stock outstanding as of June 2, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days
of June 2, 2005. Beneficial ownership is determined in accordance with
the rules of the United States Securities and Exchange Commission and
generally includes voting or investment power with respect to
securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable
or exercisable within 60 days of June 2, 2005 are deemed to be
beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) The 3,833,334 shares of common stock represent shares underlying a
one-time commitment fee pursuant to the 2004 Standby Equity
Distribution Agreement. We are registering 200,000,000 shares of common
stock to be resold by Cornell Capital Partners under the 2005 Standby
Equity Distribution Agreement. In the event we desire to draw down any
available amounts remaining under the 2005 Standby Equity Distribution
Agreement after we have issued the 200,000,000 shares being registered
in the 244,590,000 shares being registered in the accompanying
registration statement, we will have to file a new registration
statement to cover such additional shares that we would issue for
additional draw downs under the 2005 Standby Equity Distribution
Agreement.
(3) The total amount of shares to be sold in the offering by Cornell
Capital Partners, L.P. is comprised of: (a) 31,250,000 shares which are
being registered pursuant to the 2005 Secured Convertible Debenture in
the aggregate principal amount of $350,000; (b) 200,000,000 shares
under the 2005 Standby Equity Distribution Agreement; and (c) 3,833,334
shares being registered as a one-time commitment fee. Please note that
the terms of the 2005 Secured Convertible Debentures held by Cornell
Capital Partners provide that, except upon an event of default or at
maturity, in no event shall Cornell Capital Partners be entitled to
convert such Secured Convertible Debentures for a number of shares
which, upon giving effect to the conversion, would cause the aggregate
number of shares beneficially owned by Cornell Capital Partners and its
affiliates to exceed 4.99% of the total outstanding shares of
eTotalSource following such conversion. Please also note that for the
2005 Secured Convertible Debentures conversion, we are assuming a
market price of $0.046 per share. Because the conversion price may
fluctuate based on the market price of our stock, the actual number of
shares to be issued upon conversion of such Secured Convertible
Debentures may be higher or lower.
(4) Received as a one-time placement agent fee under the 2004 Placement
Agent Agreement, which shares were issued on October 8, 2004.
(5) Received for services provided to eTotalSource. Theodore Schall makes
all of his own investment decisions.
(6) Acquired through a subscription for shares of common stock of
eTotalSource offered through a private placement of securities. Robert
Baker makes all investment decisions on behalf of the trust.
(7) Acquired through a subscription for shares of common stock of
eTotalSource offered through a private placement of securities. James
Boras makes all of his own investment decisions.
(8) Acquired through a subscription for shares of common stock of
eTotalSource offered through a private placement of securities. Charles
Dorn makes all investment decisions on behalf of the trust.
(9) Acquired through a subscription for shares of common stock of
eTotalSource offered through a private placement of securities. David
Mello makes all of his own investment decisions.
(10) Acquired through a subscription for shares of common stock of
eTotalSource offered through a private placement of securities. Daniel
Lee makes all investment decisions on behalf of the trust.
(11) Acquired through a subscription for shares of common stock of
eTotalSource offered through a private placement of securities. Timothy
Kwan makes all of his own investment decisions.
15
(12) Acquired through a subscription for shares of common stock of
eTotalSource offered through a private placement of securities. Terry
Coffee makes all of his own investment decisions.
(13) Received for services rendered prior to merger with Premium
Enterprises, Inc. John Donnelly makes all of his own investment
decisions.
The following information contains a description of each selling
stockholder's relationship to eTotalSource and how the selling stockholder
acquired the shares to be sold in this offering. The selling stockholders have
not held a position or office, or had any other material relationship, with
eTotalSource, except as follows:
Shares Acquired In Financing Transactions With Cornell Capital Partners
Cornell Capital Partners, L.P. is the investor under the 2005 Standby
Equity Distribution Agreements and the holder of the 2005 Secured Convertible
Debentures, all as described below. All investment decisions of Cornell Capital
Partners are made by its general partner, Yorkville Advisors, LLC. Mark Angelo,
the Managing Member of Yorkville Advisors, makes the investment decisions on
behalf of Yorkville Advisors. Cornell Capital Partners acquired all shares being
registered in this offering in financing transactions with eTotalSource. These
transactions are described below.
2004 Transactions
We entered into the following financing agreements with Cornell Capital
Partners in 2004, all of which have since been mutually terminated pursuant to
the Termination Agreement described below:
o The 2004 Securities Purchase Agreement. On October 6, 2004, we
entered into a Securities Purchase Agreement with Cornell
Capital Partners. Pursuant to the Securities Purchase
Agreement, eTotalSource could sell to Cornell Capital
Partners, and Cornell Capital Partners could purchase from
eTotalSource, up to $350,000 worth of secured convertible
debentures pursuant to the terms contained in the secured
debentures we issued in 2004. The 2004 Securities Purchase
Agreement, along with all other financing agreements that we
entered into with Cornell capital Partners on or about October
6, 2004, were mutually terminated by eTotalSource and Cornell
Capital Partners pursuant to that certain Termination
Agreement dated April 20, 2005, a copy of which is being filed
as an exhibit to this prospectus (the "Termination
Agreement").
o The 2004 Standby Equity Distribution Agreement. On October 6,
2004, we also entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners. Pursuant to the 2004
Standby Equity Distribution Agreement, we could, at our
discretion, periodically sell to Cornell Capital Partners
shares of our common stock for a total purchase price of up to
$10,000,000. For each share of common stock purchased under
the 2004 Standby Equity Distribution Agreement, Cornell
Capital Partners would pay eTotalSource 98% of the lowest
volume weighted average price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on
which our common stock is traded for the five trading days
immediately following the notice date. Further, Cornell
Capital Partners would retain a fee of 5% of each advance
under the 2004 Standby Equity Distribution Agreement. In
connection with the 2004 Standby Equity Distribution
Agreement, Cornell Capital Partners received a one-time
commitment fee in the form of 3,833,334 shares of our common
stock issued on October 8, 2004. The 2004 Standby Equity
Distribution Agreement was mutually terminated by eTotalSource
and Cornell Capital Partners pursuant to the Termination
Agreement.
o The 2004 Secured Convertible Debentures (Refinanced as the
2005 Secured Convertible Debentures). The 2004 Secured
Convertible Debentures were convertible at the holder's option
any time up to maturity at a conversion price equal to the
lower of (i) 120% of the closing bid price of the common stock
as listed on a principal market, as quoted by Bloomberg, L.P.,
on October 12, 2004, or (ii) an amount equal to 80% of the
lowest closing bid price of our common stock, as quoted by
Bloomberg, L.P., for the five trading days immediately
preceding the conversion date. At maturity, the remaining
unpaid principal and accrued interest under the 2004 Secured
Convertible Debentures were to be, at our option, either paid
or converted into shares of common stock at a conversion price
equal to the lower of (i) 120% of the closing bid price of our
common stock as listed on a principal market, as quoted by
Bloomberg, L.P., on October 12, 2004, or (ii) 80% of the
lowest closing bid price of our common stock, as quoted by
Bloomberg L.P., for the five trading days immediately
preceding the conversion date. The 2004 Secured Convertible
Debentures were secured by substantially all of eTotalSource's
assets. The 2004 Secured Convertible Debentures accrued
interest at a rate of 5% per year and had a 2-year term.
Cornell Capital Partners purchased a Secured Convertible
Debenture in the principal amount of $175,000 from
eTotalSource on October 12, 2004, and a second Secured
Convertible Debenture in the principal amount of $175,000 from
eTotalSource on or about December 2, 2004. Both 2004 Secured
Convertible Debentures were mutually terminated by
eTotalSource and Cornell Capital Partners pursuant to the
Termination Agreement; however, the outstanding principal
16
amounts and accrued interest under the two 2004 Secured
Convertible debentures were refinanced as the 2005 Secured
Convertible Debentures that eTotalSource and Cornell Capital
Partners entered into on April 20, 2005, the terms of which
are described below.
Pursuant to that certain Registration Statement on Form SB-2,
which we filed with the United States Securities and Exchange
Commission on November 24, 2004 (File No. 333-120786) (the "2004
Registration Statement"), we intended to register 15,000,000 shares
under the 2004 Standby Equity Distribution Agreement, 3,833,334 shares
issued to Cornell Capital Partners as a one-time commitment fee
pursuant to the 2004 Standby Equity Distribution Agreement, and
31,250,000 shares under the 2004 Secured Convertible Debentures
refinanced as the 2005 Secured Convertible Debentures (together with an
additional 9,340,000 shares on behalf of other stockholders).
On March 11, 2005, we amended our Articles of Incorporation to
reflect shareholder approval of an increase in our authorized shares of
common stock from 100,000,000 to 300,000,000, no par value.
On April 19, 2005, we filed with the United States Securities
and Exchange Commission a request for an order permitting eTotalSource
to withdrawal the 2004 Registration Statement.
On April 20, 2005, we terminated the 2004 Standby Equity
Distribution Agreement, the 2004 Secured Convertible Debentures, the
2004 Securities Purchase Agreement, and all other financing agreements
that we entered into with Cornell Capital Partners on October 6, 2004
by execution of the Termination Agreement described above.
Accordingly, none of the shares that we intended to register
under the 2004 Registration Statement were in fact registered and no
such shares were sold.
2005 Transactions
We entered into the following financing agreements with Cornell Capital
Partners in 2005:
o The 2005 Securities Purchase Agreement. On April 20, 2005, we
entered into a Securities Purchase Agreement with Cornell
Capital Partners. Pursuant to the 2005 Securities Purchase
Agreement, eTotalSource may sell to Cornell Capital Partners,
and Cornell Capital Partners may purchase from eTotalSource,
up to $350,000 worth of secured convertible debentures
pursuant to the terms contained in the 2005 Secured
Convertible Debentures described below.
o The 2005 Standby Equity Distribution Agreement. On April 20,
2005, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners Pursuant to the 2005 Standby
Equity Distribution Agreement, we may, at our discretion,
periodically sell to Cornell Capital Partners shares of our
common stock for a total purchase price of up to $10,000,000.
For each share of common stock purchased under the 2005
Standby Equity Distribution Agreement, Cornell Capital
Partners will pay eTotalSource 98% of the lowest volume
weighted average price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on
which our common stock is traded for the five trading days
immediately following the notice date. Further, Cornell
Capital Partners will retain a fee of 5% of each advance under
the 2005 Standby Equity Distribution Agreement. In light of
the limitations contained in the 2005 Standby Equity
Distribution Agreement, we would need to submit a $200,000
advance request approximately every 10 trading days for 24
months in order to attain the full $10,000,000 available under
the 2005 Standby Equity Distribution Agreement; however, we do
not currently have sufficient shares given the current price
of our stock to permit the delivery of the securities required
to obtain the maximum $10,000,000 available under the 2005
Standby Equity Distribution Agreement.
o The 2005 Secured Convertible Debentures (the Refinanced 2004
Secured Convertible Debentures). The 2005 Secured Convertible
Debentures are convertible at the holder's option any time up
to maturity at a conversion price per share equal to $0.0112.
At maturity, the remaining unpaid principal and accrued
interest under the 2005 Secured Convertible Debentures shall
be, at our option, either paid or converted into shares of
common stock at a conversion price equal to $0.0112. The 2005
Secured Convertible Debentures are secured by substantially
all of eTotalSource's assets. The 2005 Secured Convertible
Debentures accrue interest at a rate of 5% per year and have a
17
2-year term. Cornell Capital Partners purchased a 2004 Secured
Convertible Debenture in the principal amount of $175,000 from
eTotalSource on October 12, 2004, and a second 2004 Secured
Convertible Debenture in the principal amount of $175,000 from
eTotalSource on or about December 2, 2004 pursuant to the 2004
Secured Convertible Debenture. These two 2004 Secured
Convertible Debentures were mutually terminated by
eTotalSource and Cornell Capital Partners pursuant to the
Termination Agreement; however, the principal amounts and
accrued interest outstanding under the 2004 Secured
Convertible Debentures are now subject to the terms and
conditions contained in the 2005 Secured Convertible
Debentures (i.e., the 2004 Secured Convertible Debentures were
refinanced as the 2005 Secured Convertible Debentures). We are
registering in this offering 31,250,000 shares of common stock
underlying the 2005 Secured Convertible Debentures.
In the registration statement that accompanies this prospectus, we
intend to register the 3,833,334 shares issued to Cornell Capital
Partners as a one-time commitment fee the 166,666 shares of common
stock issued to Newbridge Securities Corporation as a one-time
placement agent fee, 200,000,000 shares under the 2005 Standby Equity
Distribution Agreement, 31,250,000 shares under the 2005 Secured
Convertible Debentures, and an additional 9,340,000 shares that we
intend to register on behalf of other stockholders.
Risks Related to Sales by Cornell Capital Partners
There are certain risks related to sales by Cornell Capital Partners,
including:
o The outstanding shares are issued based on a discount to the
market price. As a result, the lower the stock price around
the time Cornell Capital Partners is issued shares, the
greater chance that Cornell Capital Partners gets more shares.
This could result in substantial dilution to the interests of
other holders of our common stock.
o To the extent Cornell Capital Partners sells its common stock,
our common stock price may decrease due to the additional
shares in the market. This could allow Cornell Capital
Partners to sell greater amounts of common stock, the sales of
which would further depress our stock price.
o The significant downward pressure on the price of our common
stock as Cornell Capital Partners sells material amounts of
common stocks could encourage short sales by third parties.
This could place further downward pressure on the price of our
common stock.
Shares Acquired by Other Selling Stockholders
o Theodore Schall. Received his shares for services provided to
eTotalSource. Mr. Schall makes all of his own investment
decisions.
o Robert H. Baker, as Trustee of the RHB Trust, dated June 7,
2002. Acquired its shares through a subscription for shares of
common stock of eTotalSource offered through a private
placement of securities. Mr. Baker makes all investment
decisions on behalf of the trust.
o James Boras. Acquired his shares through a subscription for
shares of common stock of eTotalSource offered through a
private placement of securities. Mr. Boras makes all of his
own investment decisions.
o Charles R. and Mary G. Dorn, as Trustees of the Dorn Family
Trust, dated August 3, 1993. Acquired its shares through a
subscription for shares of common stock of eTotalSource
offered through a private placement of securities. Mr. Dorn
makes all investment decisions on behalf of the trust.
o David Mello. Acquired his shares through a subscription for
shares of common stock of eTotalSource offered through a
private placement of securities. Mr. Mello makes all of his
own investment decisions.
o Daniel and Lisa Sue Lee, as Trustee of the Daniel and Lisa Sue
Lee Trust, restated 1982. Acquired its shares through a
subscription for shares of common stock of eTotalSource
offered through a private placement of securities. Mr. Lee
makes all investment decisions on behalf of the trust.
o Timothy Kwan. Acquired his shares through a subscription for
shares of common stock of eTotalSource offered through a
private placement of securities. Mr. Kwan makes all of his own
investment decisions.
18
o Terry Coffee. Acquired his shares through a subscription for
shares of common stock of eTotalSource offered through a
private placement of securities. Mr. Coffee makes all of his
own investment decisions.
o John J. Donnelly. Received his shares for services rendered
prior to merger with Premium Enterprises, Inc. Mr. Donnelly
makes all of his own investment decisions.
19
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and resold from time-to-time by the selling stockholders. There will be
no proceeds to us from the resale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners, L.P. under the 2005 Standby Equity Distribution
Agreement. The purchase price of the shares purchased under the 2005 Standby
Equity Distribution Agreement will be equal to 98% of the lowest volume weighted
average price of our common stock on the Over-the-Counter Bulletin Board for the
five consecutive trading days immediately following the advance notice date.
eTotalSource will pay Cornell Capital Partners 5% of each advance as an
additional fee.
eTotalSource is registering 200,000,000 shares of common stock for
issuance under the 2005 Standby Equity Distribution Agreement. At a recent price
of $0.046 per share, eTotalSource would receive gross proceeds of $9,016,000.
For illustrative purposes, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received under the
2005 Standby Equity Distribution Agreement. The table assumes estimated offering
expenses of $85,000 plus 5% retainage payable to Cornell Capital Partners.
Gross Proceeds: $ 1,000,000 $ 5,000,000 $ 10,000,000
Less: 5% retainage (50,000) (250,000) (550,000)
Less Offering expenses (85,000) (85,000) (85,000)
------------ ------------ ------------
Net Proceeds $ 865,000 $ 4,665,000 $ 9,415,000
============ ============ ============
USE OF PROCEEDS:
Production 259,500 1,399,500 2,824,500
Marketing and Public Relations 216,250 1,166,250 2,353,750
Advertising 86,500 466,500 941,500
General Corporate and Working
Capital 302,750 1,632,750 3,295,250
------------ ------------ ------------
Total $ 4,665,000 $ 9,415,000 $ 865,000
============ ============ ============
In light of the limitations contained in the 2005 Standby Equity
Distribution Agreement, we would need to submit a $200,000 advance request
approximately every 10 trading days for 24 months in order to attain the full
$10,000,000 available under the 2005 Standby Equity Distribution Agreement;
however, we do not currently have sufficient shares given the current price of
our stock to permit the delivery of the securities required to obtain the
maximum $10,000,000 available under the 2005 Standby Equity Distribution
Agreement.
eTotalSource has represented to Cornell Capital Partners that the net
proceeds eTotalSource receives under the 2005 Standby Equity Distribution
Agreement will be used for general corporate purposes and acquisitions. In no
event will the net proceeds eTotalSource receives under the 2005 Standby Equity
Distribution Agreement be used by eTotalSource for the payment (or loaned to any
such person for the payment) of any judgment, or other liability, incurred by
any executive officer, officer, director or employee of eTotalSource, except for
any liability owed to such person for services rendered, or if any judgment or
other liability is incurred by such person originating from services rendered to
eTotalSource, or eTotalSource has indemnified such person from liability.
20
DILUTION
The net tangible book value of eTotalSource as of March 31, 2005 was
($2,815,794) or ($0.0603) per share of common stock outstanding on March 31,
2005. Net tangible book value per share is determined by dividing the tangible
book value of eTotalSource (i.e., total assets less total intangible assets less
total liabilities) by the number of outstanding shares of our common stock.
Since this offering is being made solely by the selling stockholders and none of
the proceeds will be paid to eTotalSource, our net tangible book value will be
unaffected by this offering. Our net tangible book value, however, will be
impacted by the common stock to be issued under the 2005 Standby Equity
Distribution Agreement. The amount of dilution will depend on the offering price
and number of shares to be issued under the 2005 Standby Equity Distribution
Agreement. The following example shows the dilution to new investors at an
offering price of $0.0451 per share, which is 98% of a recent share price of
$0.046.
If we assume that eTotalSource had issued 221,827,862 shares of common
stock under the 2005 Standby Equity Distribution Agreement (i.e., the maximum
number of shares needed in order to draw down the entire $10,000,000 available
under such agreement), at an assumed offering price of $0.0451 per share, less
retention fees of $500,000 and offering expenses of $85,000, our net tangible
book value as of December 31, 2004 would have been $6,599,206 or $0.024575 per
share (note, however, that at an offering price of $0.046 per share, based on
the number of shares registered in this offering under the 2005 Standby Equity
Distribution Agreement eTotalSource would only receive gross proceeds of
$9,415,000). Such an offering would represent an immediate increase in net
tangible book value to existing stockholders of $0.084856 per share and an
immediate dilution to new stockholders of $0.020505 per share. The following
table illustrates the per share dilution:
Assumed public offering price per share $0.045100
Net tangible book value per share before this offering $(0.0603)
Increase attributable to new investors $0.084856
---------
Net tangible book value per share after this offering $0.024575
---------
Dilution per share to new stockholders $0.020505
=========
The offering price of our common stock is based on the then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may experience, we have prepared the following table showing the
dilution per share at various assumed offering prices:
DILUTION
ASSUMED NO. OF SHARES PER SHARE
OFFERING PRICE TO BE ISSUED (1) TO NEW INVESTORS
-------------- ---------------- ----------------
$0.045080 221,827,862 $0.0205050
$0.033810 295,770,482 $0.0145412
$0.022540 443,655,723 $0.0090820
$0.011270 887,311,446 $0.0042046
- ---------------
(1) eTotalSource is registering 200,000,000 shares of common stock issued
pursuant to the 2005 Standby Equity Distribution Agreement.
21
THE STANDBY EQUITY DISTRIBUTION AGREEMENT
Overview.
As described above, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP in 2004, which was mutually
terminated on April 20, 2005, and in 2005. The terms of 2004 Standby Equity
Distribution Agreement and 2005 Standby Equity Distribution Agreement are
substantially identical but for the relevant dates.
The 2005 Standby Equity Distribution Agreement.
On April 20, 2005, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners. Pursuant to the 2005 Standby Equity
Distribution Agreement, we may, at our discretion, periodically sell to Cornell
Capital Partners shares of our common stock for a total purchase price of up to
$10,000,000. For each share of common stock purchased under the 2005 Standby
Equity Distribution Agreement, Cornell Capital Partners will pay eTotalSource
98% of the lowest volume weighted average price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the five trading days immediately following the notice date.
Cornell Capital Partners is a private limited partnership whose business
operations are conducted through its general partner, Yorkville Advisors, LLC.
Further, Cornell Capital Partners is entitled to retain a fee of 5% of each
advance under the 2005 Standby Equity Distribution Agreement.
Pursuant to the 2005 Standby Equity Distribution Agreement, we may
periodically sell shares of common stock to Cornell Capital Partners to raise
capital to fund our working capital needs. The periodic sale of shares is known
as an "advance". We may not provide advance notice less than six trading days
apart and each maximum drawdown of $200,000 per advance is limited to every
seven trading days. A closing will be held five trading days after such written
notice at which time we will deliver shares of common stock and Cornell Capital
Partners will pay the advance amount. The maximum term of the 2005 Standby
Equity Distribution Agreement is 24 months.
We may request advances under the 2005 Standby Equity Distribution
Agreement once the underlying shares are registered with the United States
Securities and Exchange Commission. Thereafter, we may continue to request
advances until Cornell Capital Partners has advanced $10,000,000 or 24 months
after the effective date of the accompanying registration statement, whichever
occurs first.
The amount of each advance is limited to a maximum draw down of
$200,000 every seven trading days. At a recent stock price of $0.046, we would
have to issue 4,436,557 shares of common stock to Cornell Capital Partners to
draw down the maximum advance amount of $200,000. The amount available under the
2005 Standby Equity Distribution Agreement is not dependent on the price or
volume of our common stock. Our ability to request advances are conditioned upon
our registering the shares of common stock with the United States Securities and
Exchange Commission.
In addition, pursuant to the terms of 2005 Standby Equity Distribution
Agreement, Cornell Capital Partners may not own more than 9.9% of our
outstanding shares of common stock and therefore, we may not request advances if
the shares to be issued in connection with such advances would result in Cornell
Capital Partners owning more than 9.9% of our outstanding common stock. We do
not have any agreements with Cornell Capital Partners regarding the distribution
of such stock, although Cornell Capital Partners has indicated that it intends
to promptly sell any stock received under the 2005 Standby Equity Distribution
Agreement. In the event that Cornell Capital Partners decides to not sell the
shares of our common stock that have been issued to it after they receive an
advance from us in order to keep them below 9.9% beneficial ownership, the
potential adverse impact on our ability to receive funds under the 2005 Standby
Equity Distribution Agreement given Cornell Capital Partners' current 8.21%
ownership in eTotalSource would be that the we would not have sufficient funds
to continue operations beyond June 30, 2005. The maximum dollar amount that we
may require Cornell Capital Partners to purchase in a single draw, if Cornell
Capital Partners decides not to sell any of its currently held securities,
depends on the current price of our stock and the balance of shares to bring
Cornell Capital Partners to the 9.9% ownership limitation. The following table
outlines the maximum purchases for Cornell Capital Partners based on a range of
stock prices.
22
eTotalSource: Current Issued Shares: 46,710,821
-------------
Cornell Capital Partners: Current Shares Held: 3,833,334
-------------------------
Current % 8.21%
Maximum % 9.90%
Maximum # of Shares: 4,624,371
Balance of
Shares: 791,037
@ 25% @ 50%
@ 25% Decrease Increase in Increase in
Current Price Per @ 50% Decrease In in Current Current Share Current
Share @ 100% Current Share Price Share Price Price Share Price
- ---------------------- ------------------ ----------------------- ----------------- --------------- -------------
$0.046 $38,387.71 $18,193.86 $27,290.79 $45,484.64 $54,581.57
Accordingly, if we are unable to draw down sufficient funds under the
2005 Standby Equity Distribution Agreement, we may be forced to curtail or cease
our business operations.
In light of the foregoing limitations, we would need to submit a
$200,000 advance request approximately every 10 trading days for 24 months in
order to attain the full $10,000,000 available under the 2005 Standby Equity
Distribution Agreement; however, we do not currently have sufficient shares
given the current price of our stock to permit the delivery of the securities
required to obtain the maximum $10,000,000 available under the 2005 Standby
Equity Distribution Agreement.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the 2005 Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. Nonetheless, we can estimate the number of shares of our common
stock that will be issued using certain assumptions. Based on our recent stock
price of $0.046 and that we are registering 200,000,000 shares of our common
stock under the 2005 Standby Equity Distribution Agreement in the accompanying
registration statement, we could draw down a maximum gross amount of $9,016,000
under the 2005 Standby Equity Distribution Agreement. These 200,000,000 shares
would represent approximately 81% of our outstanding common stock upon issuance.
We are registering 200,000,000 shares of common stock to be resold by Cornell
Capital Partners pursuant to 2005 Standby Equity Distribution Agreement.
There is an inverse relationship between our stock price and the number
of shares to be issued under the 2005 Standby Equity Distribution Agreement.
That is, as our stock price declines, we would be required to issue a greater
number of shares under the 2005 Standby Equity Distribution Agreement for a
given advance. The issuance of a larger number of shares under the 2005 Standby
Equity Distribution Agreement may result in a change of control. That is, if all
or a significant block of such shares are held by one or more shareholders
working together, then such shareholder or shareholders would have enough shares
to assume control of eTotalSource by electing its or their own directors.
In order for us to utilize the full $10,000,000 available under the
2005 Standby Equity Distribution, it may be necessary for our shareholders to
approve an increase in our authorized common stock and for us to register
additional shares of common stock. This is currently the case based on our stock
price of $0.046 as of June 2, 2005. eTotalSource is authorized in its Articles
of Incorporation to issue up to 300,000,000 shares of common stock. As of June
2, 2005, eTotalSource had 46,710,821 shares of common stock outstanding.
eTotalSource is registering 200,000,000 shares of common stock hereunder to be
issued under the 2005 Standby Equity Distribution Agreement.
In the event we desire to draw down any available amounts remaining
under the 2005 Standby Equity Distribution Agreement after we have issued the
200,000,000 shares being registered in the accompanying registration statement
(and assuming we have obtained shareholder approval to increase our authorized
common stock), we will have to file a new registration statement to cover such
additional shares which we will issue for additional draw downs under the 2005
Standby Equity Distribution Agreement.
23
Proceeds under the 2005 Standby Equity Distribution Agreement will be
used in the manner set forth in the Section of this Prospectus entitled "Use of
Proceeds". We cannot predict the total amount of proceeds to be raised in this
transaction because we have not determined the total amount of advances we
intend to draw.
We are not paying any commitment fees to Cornell Capital Partners, nor
any placement agent fees to Newbridge Securities Corporation, under the 2005
Standby Equity Distribution Agreement or 2005 Placement Agent Agreement,
respectively.
eTotalSource is registering 200,000,000 shares of common stock under
the 2005 Standby Equity Distribution Agreement pursuant to the accompanying
registration statement. The costs associated with this registration, which we
estimate to be approximately $85,000 (consisting primarily of professional
fees), will be borne by us. There are no other significant closing conditions to
draws under the 2005 Standby Equity Distribution Agreement.
24
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders, and with the exception of Cornell
Capital Partners, L.P. as principal or through one or more underwriters,
brokers, dealers or agents from time-to-time in one or more transactions (which
may involve crosses or block transactions) (i) on the Over-the-Counter Bulletin
Board or in any other market on which the price of our shares of common stock
are quoted or (ii) in transactions otherwise than on the Over-the-Counter
Bulletin Board or in any other market on which the price of our shares of common
stock are quoted. Any of such transactions may be effected at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at varying prices determined at the time of sale or at negotiated or
fixed prices, in each case as determined by the selling stockholders or by
agreement between the selling stockholders and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of common stock to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or commissions from purchasers of common stock for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved). The selling stockholders and
any brokers, dealers or agents that participate in the distribution of the
common stock may be deemed to be underwriters, and any profit on the sale of
common stock by them and any discounts, concessions or commissions received by
any such underwriters, brokers, dealers or agents may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933, as amended, in connection with the sale of common stock
under the 2005 Standby Equity Distribution Agreement. Cornell Capital Partners
will pay us 98% of the lowest volume weighted average price of our common stock
on the Over-the-Counter Bulletin Board or other principal trading market on
which our common stock is traded for the five consecutive trading days
immediately following the advance date. In addition, Cornell Capital Partners
will retain 5% of each advance under the 2005 Standby Equity Distribution
Agreement. The 2% purchase price discount, the 5% retention, and the one-time
commitment fee under the 2005 Standby Equity Distribution Agreement in the form
of 3,833,334 shares of our common stock, are all underwriting discounts. We
engaged Newbridge Securities Corporation, a registered broker-dealer, to advise
us in connection with the 2005 Standby Equity Distribution Agreement. For its
services, Newbridge Securities Corporation received $10,000, which was paid by
the issuance of 166,666 shares of our common stock. Pursuant to the 2005
Placement Agent Agreement, Newbridge Securities Corporation provided services
consisting of reviewing the terms of the 2005 Standby Equity Distribution
Agreement and advising us with respect to those terms. The 2005 Placement Agent
Agreement is coterminous with and will terminate upon the same terms as the 2005
Standby Equity Distribution Agreement.
Cornell Capital Partners was formed in February of 2000 as a Delaware
limited partnership. Cornell Capital Partners is a domestic hedge fund in the
business of investing in and financing public companies. Cornell Capital
Partners does not intend to make a market in our stock or to otherwise engage in
stabilizing or other transactions intended to help support our stock price.
Prospective investors should take these factors into consideration before
purchasing our common stock.
In consideration of Cornell Capital Partners' execution and delivery of
the 2005 Standby Equity Distribution Agreement, eTotalSource will indemnify
Cornell Capital Partners and all of its officers, directors, partners, employees
and agents, from and against any and all actions, causes of actions, suits,
claims, losses, costs, penalties, fees, liabilities and damages incurred by the
indemnified party as a result of, or relating to: (i) any misrepresentation or
breach of any representation or warranty made by eTotalSource in the 2005
Standby Equity Distribution Agreement or 2005 Registration Rights Agreement in
connection therewith or any other document contemplated thereby; (ii) any breach
of any covenant, agreement or obligation of eTotalSource contained in the 2005
Standby Equity Distribution Agreement or the 2005 Registration Rights Agreement
executed in connection therewith or any other document contemplated thereby; or
(iii) any cause of action, suit or claim brought against such indemnified party
and arising out of or resulting from the execution, delivery, performance or
enforcement of the 2005 Standby Equity Distribution Agreement or any document in
connection therewith.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all 50 states. In addition, in
certain states the shares of common stock in this offering may not be sold
25
unless the shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
We will pay all of the expenses incident to the registration, offering,
and sale of the shares of common stock to the public hereunder other than
commissions, fees, and discounts of underwriters, brokers, dealers and agents.
We have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act of
1933, as amended. We estimate that the expenses of the offering to be borne by
us will be approximately $85,000. These offering expenses consist of a United
States Securities and Exchange Commission registration fee of $931.89, printing
and engraving fees and expenses of $2,500, accounting fees and expenses of
$20,000, legal fees and expenses of $50,000, and miscellaneous expenses of
$11,568.11. We will not receive any proceeds from the sale of any of the shares
of common stock by the selling stockholders. We will, however, receive proceeds
from the sale of common stock under the Standby Equity Distribution Agreement.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Securities Exchange Act of 1934, as
amended, will apply to purchases and sales of shares of common stock by the
selling stockholders, and that there are restrictions on market-making
activities by persons engaged in the distribution of the shares. Under
Registration M, the selling stockholders or their agents may not bid for,
purchase, or attempt to induce any person to bid for or purchase, shares of our
common stock while such selling stockholders are distributing shares covered by
this prospectus. The selling stockholders are advised that if a particular offer
of common stock is to be made on terms constituting a material change from the
information set forth above with respect to the Plan of Distribution, then, to
the extent required, a post-effective amendment to the accompanying registration
statement must be filed with the United States Securities and Exchange
Commission.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the
consolidated financial statements of eTotalSource and the notes thereto
appearing elsewhere in this filing. Statements in this "Management's Discussion
and Analysis" and elsewhere in this prospectus that are not statements of
historical or current fact constitute "forward-looking statements." For an
overview of eTotalSource, please see the section of this prospectus entitled
"Description of the Business," which follows this section.
Going Concern Considerations
The accompanying financial statements have been presented assuming
that eTotalSource will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. However, there is substantial doubt about the ability of
eTotalSource to continue as a going concern as disclosed in the notes to the
December 31, 2004 financial statements filed on Form 10-KSB. Those conditions
continued through the first quarter of 2005 resulting in operating losses and
liquidity shortages, including default conditions on certain notes payable and
judgments payable to creditors. eTotalSource has incurred significant operating
losses since inception and as of March 31, 2005, had a net working capital
deficit of $2,574,479, a stockholders' deficit of $2,815,794, notes payable
totaling $632,000 were in default with related accrued interest in arrears of
$52,095, and legal judgments against eTotalSource totaling $204,788 have been
adjudicated. Management continues to meet operating deficits primarily through
short-term borrowings and is attempting to utilize other debt and non-dilutive
equity financing alternatives to sustain operations. Additionally, upon the
effectuation of this Registration Statement, we anticipate being able to obtain
funding from Cornell Capital Partners under the 2005 Standby Equity Distribution
Agreement subject to the limitations discussed elsewhere in this prospectus.
Whether such financing will be available as needed and the ultimate form of such
financing is uncertain and the effects of this uncertainty could ultimately lead
to bankruptcy. Unless eTotalSource successfully obtains suitable significant
additional financing and attains profitable operations, there is substantial
doubt about eTotalSource's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effect
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.
Critical Accounting Policies And Estimates
eTotalSource recognizes revenue in accordance with Statement of
Position No. 97-2 "Software Revenue Recognition" issued by the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants ("AICPA"). Revenues are recorded net of an allowance for estimated
returns and collectibility at the time of billing.
Product revenue is derived primarily from the sale of self-produced
training multimedia and not related off-the-shelf software products.
eTotalSource recognizes revenue from sales of these products at the time of
shipment to customers. Service revenue is primarily derived from production of
videos for others and is recognized upon customer acceptance.
Deferred revenue includes payments received for product licenses
covering future periods and advances on service contracts that have not yet be
fulfilled.
Significant estimates include evaluation of the company's income tax
net operating loss carry-forwards and valuation of non-monetary transactions in
connection with issuances of common stock and common stock warrants and options.
None of these policies had any material or substantial effect upon
eTotalSource's operations.
Financial Condition
There is substantial doubt about the ability of eTotalSource to
continue as a going concern as disclosed in the notes to the December 31, 2004
financial statements filed by eTotalSource on Form 10-KSB. Further, the
auditors' report which accompanied said financial statements also contained a
going concern qualification which called into question our ability to continue
as a going concern. Those conditions continued through the first quarter of 2005
resulting in operating losses and liquidity shortages, including default
conditions on certain notes payable and judgments payable to creditors. As of
March 31, 2005, current liabilities exceed current assets by approximately $2.57
27
million.
Management continues to meet operating deficits primarily through
short-term borrowings and is attempting to utilize other debt and non-dilutive
equity financing alternatives to sustain operations. Whether such financing will
be available as needed and the ultimate form of such financing is uncertain and
the effects of this uncertainty could ultimately lead to bankruptcy.
Results Of Operations
For The Three Month Period Ended March 31, 2005 Compared To The Same Period
Ended March 31, 2004
Revenues
Revenues for the three months ended March 31, 2005 were $14,987 versus
$18,093 for the corresponding 2004 period, a decrease of $3,106 or 17%. The
decrease was attributable to fewer sales of eTotalSource's CD training products.
Expenses
Operating expenses for the three month period ended March 31, 2005 were
$252,525 as compared to $397,262 for the comparable 2004 period, a decrease of
$144,737 or 36%. The decrease was primarily due to a decrease in stock-based
compensation and payroll expenses. Payroll expenses for the three month period
ended March 31, 2005 were $107,177 as compared to $114,256 for the comparable
period in 2004, a decrease of $7,079 or 6%.
Interest expense for the three month period ended March 31, 2005 was
$47,761 as compared to $27,368 for the corresponding 2004 period, an increase of
$20,393 or 75%. The increase in interest expense is the result of the
amortization expense in 2005 of the fair value of warrants issued as incentives
to lenders and the amortization of the discount on convertible debentures.
Net Income (Loss)
eTotalSource recognized a loss for the three month period ended March
31, 2005 in the amount of $283,957 or $0.01 per share, as compared with a loss
of $406,556 or $0.01 per share for the corresponding period ended March 31,
2004. The decrease of $122,599 was attributable to the decrease in stock
compensation and payroll expenses.
For The Year Ended December 31, 2004, As Compared To The Year Ended December 31,
2003
Changes in Financial Condition
On December 30, 2002, Premium Enterprises, Inc. acquired 91% of the
preferred and common stock of eTotalSource, Inc. pursuant to an Agreement and
Plan of Reorganization effective December 30, 2002, by issuing 15,540,011 shares
of Premium's common stock to eTotalSource shareholders. Immediately after the
transaction, the eTotalSource shareholders owned approximately 89% of Premium's
common stock. Coincident with the transaction, Premium changed its fiscal year
from June 30 to December 31. The reorganization is recorded as a
recapitalization effected by a reverse merger wherein Premium is treated as the
acquiree for accounting purposes, even though it is the legal acquirer. The
transaction has been accounted for as a purchase, and accordingly, since the
transaction occurred December 30, 2002, the results of operations for the
periods presented represent solely those of the accounting acquirer,
eTotalSource. Since Premium was a non-operating shell with limited business
activity, goodwill was not recorded.
On June 9, 2003, eTotalSource sold its office building for $1,050,000,
received net cash proceeds of $142,596 after retiring mortgage debt, and
recognized a $205,705 net capital gain.
In February 2005, the shareholders approved an increase of authorized
shares from 100,000,000 shares to 300,000,000 shares.
28
Revenue
eTotalSource had revenues from operations of $209,198 and $281,919 in
the years ended December 31, 2004 and 2003, respectively. This decrease was
attributable to lower sales of the CD training programs and no post-productive
income.
Expenses
eTotalSource incurred expenses incident to operations in the amount of
$2,390,905 in 2004 and $1,860,146 in 2003 an increase of $530,759 or 29%. The
increase was primarily due to an increase in stock compensation, payroll
expenses, and fees connected with the convertible debentures. Stock compensation
for 2004 was $287,855 more than the comparable 2003 period. Payroll expenses for
2004 were $90,918 more than comparable 2003 period, a 25% increase. Investment
advisory fees for 2004 were $50,855 more than the comparable 2003 period, a 294%
increase.
Interest expense for 2004 was $190,592 as compared with $602,045 for
the corresponding 2003 period, a $411,453 decrease, or a 68% decrease. The
decrease in interest expense is the result of the June 2003 retirement of
mortgages payable upon the sale of the Company's business office building,
conversion of debt to equity in 2004 and a decrease in amortization expense in
2004 of the fair value of warrants issued as incentives to lenders.
Net Income (Loss)
The Company had a net loss from operations of $2,372,675 in 2004
compared to a loss of $1,966,575 in 2003. The loss per share was approximately
$0.06 in 2004 and $0.10 in 2003.
Liquidity And Capital Resources
Liquidity
At March 31, 2005, eTotalSource had $401 in cash with which to conduct
operations, a decline of $37,448 during the quarter. There can be no assurance
that eTotalSource will be able to complete its business plan or fully exploit
business opportunities that management may identify. Accordingly, eTotalSource
will need to seek additional financing through loans, the sale and issuance of
additional debt and/or equity securities, or other financing arrangements,
including loans from our shareholders to cover expenses. eTotalSource presently
has no capital availability except through the Standby Equity Distribution
Agreements described above.
eTotalSource is unable to carry out any plan of business without
funding. We cannot predict to what extent our current lack of liquidity and
capital resources will impair the continuation of business or whether it will
incur further operating losses. There is no assurance that we can continue as a
going concern without substantial funding, for which there is no source.
eTotalSource does not have capital sufficient to meet its current cash
needs. We will have to seek loans or equity placements to cover such cash needs.
Lack of its existing capital may be a sufficient impediment to prevent it from
accomplishing the goal of successfully executing its business plan. eTotalSource
will need to raise, at a minimum, approximately $2,000,000 to conduct its
operations in accordance with its business plan for 12 months following the
anticipated effective date of the accompanying Registration Statement. At the
present, we have sufficient funding to allow us to continue operations until
June 30, 2005. If for whatever reason, eTotalSource has insufficient funds to
continue operations, it will attempt to secure additional funding through third
parties so as to allow it to continue operations beyond such date, but can
provide no assurance that such funds will be obtained.
No commitments to provide additional funds have been made by management
or other stockholders. Accordingly, there can be no assurance that any
additional funds will be available to eTotalSource to allow it to cover its
expenses as they may be incurred.
Irrespective of whether eTotalSource's cash assets prove to be
inadequate to meet our operational needs, we might seek to compensate providers
of services by issuances of stock in lieu of cash.
29
As discussed in the Capital Resources section below, upon the
effectiveness of this Registration Statement, eTotalSource may be able to obtain
financing from Cornell Capital Partners by drawing down funds available under
the Standby Equity Distribution Agreement subject to certain limitations
discussed elsewhere in this prospectus. Management anticipates that financing
provided by Cornell Capital Partners should help to provide additional liquidity
for eTotalSource. eTotalSource does not intend to pay dividends in the
foreseeable future.
Capital Resources
On April 20, 2005, eTotalSource sold a $175,000 secured convertible
debenture to Cornell Capital Partners, L.P. This debenture accrues interest at a
rate of 5% per year and matures two years from the issuance date. The debenture
is convertible at Cornell Capital Partners' option any time up to maturity at a
conversion price per share equal to $0.112. At maturity, eTotalSource has the
option to either pay the holder the outstanding principal balance and accrued
interest or to convert the debenture into shares of common stock at a conversion
price per share equal to $0.112. eTotalSource has the right to redeem up to 80%
of the outstanding principal plus accrued interest of the convertible debentures
upon thirty days notice for 120% of the amount redeemed plus accrued interest.
Except after an event of default, as set forth in the secured convertible
debenture, the holder is not entitled to convert such debenture for a number of
shares of our common stock in excess of that number of shares which, upon giving
effect to such conversion, would cause the aggregate number of shares of common
stock beneficially held by such holder and its affiliated to exceed 4.99% of our
outstanding shares of common stock. After we file the accompanying registration
statement with the United States Securities and Exchange Commission registering
the shares of common stock underlying the secured convertible debenture, we will
issue a second secured convertible debenture to Cornell Capital Partners in the
principal amount of $175,000 upon the same terms and conditions as the first
secured Convertible Debenture above.
Pursuant to the 2005 Standby Equity Distribution Agreement,
eTotalSource may issue and sell to Cornell Capital Partners common stock for a
total purchase price of up to $10,000,000. Subject to certain conditions,
eTotalSource will be entitled to commence drawing down on the Standby Equity
Distribution Agreement as soon as the common stock to be issued thereunder is
registered with the United States Securities and Exchange Commission and such
sales may continue for two years thereafter. The purchase price for the shares
will be equal to 98% of, or a 2% purchase price discount to, the market price,
which is defined as the lowest closing bid price of the common stock during the
five consecutive trading days immediately following the advance notice date. The
amount of each advance is subject to an aggregate maximum advance amount of
$200,000, with no advance occurring within seven trading days of a prior
advance. Cornell Capital Partners received 3,833,334 shares of eTotalSource
common stock as a one-time commitment fee. Cornell Capital Partners is entitled
to retain a fee of 5% of each advance. In addition, eTotalSource entered into a
Placement Agent Agreement with Newbridge Securities Corporation, a registered
broker-dealer. Pursuant to this agreement, BSI has paid a one-time placement
agent fee of 166,666 shares of common stock equal to $10,000.
In light of the limitations contained in the 2005 Standby Equity
Distribution Agreement, we would need to submit a $200,000 advance request
approximately every 10 trading days for 24 months in order to attain the full
$10,000,000 available under the 2005 Standby Equity Distribution Agreement;
however, we do not currently have sufficient shares given the current price of
our stock to permit the delivery of the securities required to obtain the
maximum $10,000,000 available under the 2005 Standby Equity Distribution
Agreement.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Standby Equity Distribution Agreement, in part,
because the purchase price of the shares will fluctuate based on prevailing
market conditions and we have not determined the total amount of advances we
intend to draw. Pursuant to our Articles of Incorporation, we are authorized to
issue up to 300,000,000 shares of common stock, of which 96,710,821 are
outstanding. At a recent price of $0.046 per share, we would be required to
issue at $0.0451 (i.e., 98% of $0.046), 221,827,862 shares of common stock in
order to fully utilize the $10,000,000 available under the 2005 Standby Equity
Distribution Agreement. Therefore, at our current stock price, we would be
required to authorize and register additional shares of our common stock to
fully utilize the amount originally available under the 2005 Standby Equity
Distribution Agreement. At a recent stock price of $0.046, we would need to
authorize approximately 25,000,000 additional shares to fully utilize the 2005
Standby Equity Distribution Agreement after taking into account (i) the total
number of shares outstanding as of the date hereof, (ii) our total authorized
shares of common stock, (iii) the 31,250,000 shares underlying the 2005 Secured
Convertible Debentures that we are registering in this offering, and (iv) the
total number of shares we would need to register in order to draw the entire
$10,000,000 available under the 2005 Standby Equity Distribution Agreement. In
the event we desire to draw down any available amounts remaining under the 2005
Standby Equity Distribution Agreement after we have issued 200,000,000 being
registered in the accompanying Registration Statement (and assuming we have
obtained shareholder approval to increase our authorized common stock), we will
have to file a new registration statement to cover such additional shares which
we will issue for additional draw downs under the 2005 Standby Equity
30
Distribution Agreement. Whether we will file a new registration statement will
depend, in part, on the current market price of our common stock at the time(s)
we draw down available amounts remaining under the 2005 Standby Equity
Distribution Agreement.
We estimate that we will require approximately $2,000,000 to operate
our business for 12 months following the anticipated effective date of the
accompanying Registration Statement. We may not have sufficient cash flow from
operations to sufficiently meet all of our cash requirements for such period of
time. Our ability to continue as a going concern is dependent upon our ability
to attain a satisfactory level of profitability, have access to suitable
financing, satisfy our contractual obligations with creditors on a timely basis,
and develop further revenue sources. Currently, we have enough cash on hand to
only operate our business until June 30, 2005.
Contractual Obligations and Commercial Commitments
As of March 31, 2005, the following obligations were outstanding:
Payments Due by Period
----------------------------------------------------------------------
Less than
Contractual Obligations 1 year 2-3 years 4-5 years After 5 years Total
- ----------------------- ---------- ----------- --------- ------------- ----------
Judgments payable $ 204,788 $ .00 $.00 $.00 $ 204,788
Short Term Note Payables 882,000 .00 .00 .00 882,000
Convertible Debentures .00 294,219 .00 .00 294,219
Other Current liabilities 1,489,378 .00 .00 .00 1,489,378
---------- ----------- ---- ---- ----------
Total contractual cash obligations $2,576,166 $ 294,219 $.00 $.00 $2,870,385
========== =========== ==== ==== ==========
eTotalSource leases its corporate offices in Yuba City, California on a
month-to month with no expiration date. Monthly rentals under the lease are
approximately $2,500.
31
DESCRIPTION OF BUSINESS
History
The company was incorporated in Colorado on September 16, 1987 as
Premium Enterprises, Inc. On December 20, 2002 Premium Enterprises, Inc.
("Premium") entered into a Plan and Agreement of Reorganization with
eTotalSource, Inc. and its shareholders whereby Premium acquired 91% of the
issued and outstanding common stock of eTotalSource in exchange for 15,540,001
shares of common stock of Premium. The contract was completed December 31, 2002.
On June 17, 2003, shareholders voted to amend the Articles of Incorporation to
change the name of Premium Enterprises, Inc. to eTotalSource, Inc. For a period
of time in 1988-94, Premium operated three fast lube locations, at various times
in Arizona and Colorado as "Grease Monkey" franchises. The locations were
unprofitable, two were sold, and the last franchise closed in 1994. Premium then
attempted to enter the automobile and truck tire recycling business in 1994. It
formed a limited partnership of which it owned 62.5% and commenced limited tire
recycling operations. The equipment proved to be inadequate and Premium ran out
of capital to continue operations and ceased all operations in 1996. Premium
wrote-off all of its investment in equipment and licenses for tire recycling in
1996. Premium was dormant from 1996 until 2002, when it effectuated the
above-described Plan and Agreement of Reorganization with eTotalSource and its
shareholders.
eTotalSource, Inc., a California corporation, was founded on February
7, 2000. eTotalSource is a subsidiary of Premium and the sole business of
Premium.
Our Business
eTotalSource is a developer and supplier of proprietary multimedia
software technology, and a publisher of multimedia training content. Its clients
have included: U.S. Department of Defense, Boeing, Steven Spielberg Online Film
School, Pacific Bell/SBC, Grant School District, California State University,
Logistics Management Institute, First American Title Company and other corporate
entities. eTotalSource's clients work with eTotalSource to develop, produce,
market, and distribute multimedia development software. eTotalSource also
markets educational training programs it has produced utilizing its proprietary
software.
eTotalSource was founded with the express goal of designing a better
interface for information and education multimedia delivery. Approximately one
year after inception, the beta Presenta ProTM platform was completed. Presenta
ProTM features back-end development of multi-panel time synchronized
presentations and course work, as well as testing, feedback and performance
monitoring. Clients are utilizing Presenta ProTM as a platform for distance
learning and computer-based training. Presenta ProTM is delivered via the
Internet, intranet, or CD/DVD.
Our Software And Intellectual Property
eTotalSource has developed a software application, Presenta ProTM that
simplifies the production and delivery of multimedia presentations and content
while at the same time improving the quality and effectiveness of the
presentations. Presenta ProTM is designed with cost saving features and it
offers post-production opportunities.
Presenta ProTM features include:
o Multi-panel time synchronized presentation
o Quick content and program development
o Rich video and content experience
o Still images
o Graphics
o Flash
o Links to Website
o Live Cams
o Test and quizzes to tract performance
o Users progress can be tracked
o Diagrams
o Simple server requirements
32
o Reduces training and learning curve time
o Easy to implement and use
Our Business Model
eTotalSource employs a dual strategy to meet market demands and
opportunities that includes both software licensing and publishing.
eTotalSource is licensing Presenta ProTM software via distribution
partners and an internal sales and marketing team. The marketing team will be
directing its sales effort in targeting the education, corporate and government
markets. The cost of the product ranges from $5,500 to $15,000, and eTotalSource
is positioning the software package for a volume intensive market. The nearest
competitor (in quality or functionality), Virage, prices its product at
substantially higher prices. The aggressive pricing policy is intended to appeal
to governments, schools and corporate clients.
eTotalSource publishes and produces original content and postproduction
services, and participates in the sales and distribution of the final published
product.
eTotalSource shares in the revenue derived from the program sales.
eTotalSource carefully chooses its content, identifying unique subjects and
niches offering more probable sales. We believe that these markets are generally
underserved and in need of the program packages that are produced by
eTotalSource. Examples of finished products currently being marketed include:
o Anger Management Facilitator Training and Certification
o Domestic Violence Facilitator Training and Certification
o School Maintenance, Cleaning Training and Certification
o Emergency Disaster Preparedness - Terrorist Awareness
o Mandated School Internet Acceptable Use Policy ("AUP")
Intellectual Property Differentiation
eTotalSource currently has five patents pending:
o Multiple screen operating environment, framework and tools for
transacting e-commerce;
o System and method for pre-loading still imagery data in an
interactive multimedia presentation; provides an image
pre-loading system that maximizes available network bandwidth;
o System and method for dynamically managing web content using a
browser independent framework, which provides an interactive
system for enabling dynamic updating of web content to "live"
websites;
o System and method for providing an interactive multimedia
presentation environment with low bandwidth capable sessions,
which provides an integrated presentation environment
consisting of multi-screen clinic logically defined within a
browser application; and
o Presenta Pro(TM) production and delivery system, which
provides a multi-screen environment for presenting multimedia
presentations with video, images, flash images and text all
integrating with the video.
eTotalSource's technological differentiation is based on high quality
and low cost software. We believe that Presenta ProTM is easier to use and
considerably more flexible than eTotalSource's closest competitor. We believe
that Presenta ProTM is priced to be affordable, cost-effective, and
training-efficient. Presenta Pro'sTM ease of implementation and quality it a
viable choice for authoring software and distance learning tools.
Technology
The Presenta ProTM, production and delivery system is modular and was
designed to allow rapid addition of functionality. The platform provides high
quality streaming of video and audio, and was designed for delivery over the
Internet, intranet, CD or DVD. The Presenta ProTM system has been created using
33
the Delphi development system. The server portion of Presenta ProTM is a custom
control that connects to a Microsoft SQL server. The data is distributed to the
viewing client via a custom control that connects to the server via Extensible
Markup Language ("XML"). The backend is scalable and transportable. The
production client uses all custom code written in Delphi connecting to the SQL
server via TCP/IP. The end user client can be run on any Windows based personal
computer and requires minimum system resources. There are several modules to the
end-user client that allow the producer to export video to either a CD/DVD
format or stand alone web site. We believe that eTotalSource's technology and
user interface are advanced in their simplicity of use and ability to deliver
multiple platforms and media simultaneously.
Employees
As of June 2, 2005, we had seven full-time employees, of which three
were executives. No employees are presently represented by any labor unions. We
believe our relations with our employees to be good, however additional
employees will need to be recruited to meet our growth projections.
34
MANAGEMENT
The following persons are members of our board of directors and/or
executive officers, in the capacities indicated, as of June 2, 2005:
NAME AGE POSITION HELD TENURE
---- --- ------------- ------
Terry Eilers 57 President, CEO, Director Since 2002
Virgil Baker 52 CFO, Director Since 2002
Michael Sullinger 59 Secretary, COO, Director Since 2002
A. Richard Barber 64 Director Since 2002
J. Cody Morrow 50 Director Since 2002
The directors named above will serve until the next annual meeting of
eTotalSource's stockholders. Thereafter, directors will be elected for one-year
terms at the annual stockholders' meeting. Officers will hold their positions at
the pleasure of the board of directors, absent any employment agreement, of
which none currently exists or is contemplated.
There is no arrangement or understanding between the directors and
officers of eTotalSource and any other person pursuant to which any director or
officer was or is to be selected as a director or officer.
The directors of eTotalSource will devote such time to eTotalSource's
affairs on an "as needed" basis, but less than 20 hours per month. As a result,
the actual amount of time which they will devote to eTotalSource's affairs is
unknown and is likely to vary substantially from month to month.
Terry Eilers, CEO and Chairman
Mr. Eilers has served as CEO and a Director of eTotalSource since its
formation, and has served as its Chairman of the board of directors since 2000.
From 1994 to 2002, Mr. Eilers, along with Virgil Baker, devoted all of his time
to the development of online training and the prototype software for
PresentaPro(TM). In 2000, Mr. Eilers, along with Virgil Baker, formed
eTotalSource.com, Inc. and became the CEO and President. From 1987 to 1994, Mr.
Eilers was founder of a seminar company and traveled all over the world giving
seminars on Real Estate and motivational seminars. From 1984 to 1987, Mr. Eilers
served as Vice President, Regional Manager and Regional Training Director for
Lawyers Title Company. Mr. Eilers was involved in the creation, operation and
sale of Sydney Cambric Publishing from 1983 to 1985, where he was in charge of
implementing marketing and management systems, developing and supervising
management training and conducting live seminars worldwide for many Fortune 500
companies. Over the past 30 years, Mr. Eilers management and computer sales
programs have been utilized by major real estate entities, banks, savings and
loans, insurance companies, sales and research organizations and publishing
companies worldwide. Mr. Eilers is a frequent author, having written, and
published through Crescent Publishing, Sydney Cambric Publishing and the Disney
Corporation-Hyperion Publishing, 12 books concentrated in the real estate,
business management and personal development fields. Some of the titles Mr.
Eilers has written include: How to Sell Your Home Fast (Disney/Hyperion), How To
Buy the Home You Want (Disney/Hyperion), The Title and Document Handbook (Sydney
Cambric), Mortgage Lending Handbook (Sydney Cambric), Mastering Peak Performance
(EMR Publishing), Real Estate Calculator Handbook (Sydney Cambric). Mr. Eilers
earned his AA in the Administration of Justice from Sacramento City College in
1971 and from 1970 to 1985 completed extensive course work at California State
College, Sacramento, Yuba College, and Lincoln School of Law.
Virgil Baker, CFO and Director
Mr. Baker has served as CFO of eTotalSource since 2002 and has served
as a director since 2003. From 1996 to 2000, Mr. Baker, along with Terry Eilers,
devoted all of his time to the development of online training and the prototype
software for PresentaPro(TM). In 2000, Mr. Baker, along with Terry Eilers,
formed eTotalSource.com, Inc. and became the CFO. From 1993 to 1996, Mr. Baker
was the CFO for AGRICO, a large agriculture corporation, where he designed and
integrated the network programs for the accounting, cash flow and inventory
systems on a nationwide basis. Mr. Baker earned a BA in Accounting from
California State University in Chico in 1992.
35
Michael Sullinger, COO and Director
Mr. Sullinger has served as COO and a director of eTotalSource since
2003. Mr. Sullinger's background is in development and management of
partnerships and joint ventures. Since 1993, Mr. Sullinger has practiced law in
Yuba City, California. Mr. Sullinger has served on the board of director of
numerous government, business and philanthropic organizations. Mr. Sullinger
earned his BA in Business from San Francisco State University in 1977, and
earned his JD from Cal Northern School of Law in 1993.
J. Cody Morrow, Director
Mr. Morrow has served as a director of eTotalSource since 2003. Mr.
Morrow is currently President of Morrow Marketing International, a position he
has held since 1995. Mr. Morrow has many years experience in opening foreign
markets to new businesses. From 1989 to 1993, Mr. Morrow was President of
Monarch Development Corporation, a Southern California-based real estate
development company.
A. Richard Barber, Director
Mr. Barber has served as a director of eTotalSource since 2003. Since
1983, Mr. Barber has served as senior partner of A. Richard Barber & Associates,
a literary agency and consultant to numerous major publishing companies. From
1969 to 1983, Mr. Barber was the Director of Development for Network
Enterprises, Inc., where he supervised the creations and writing of television
and film properties. Mr. Barber was a Director and Senior Editor of Public
Relations for Viking Penguin, Inc. From 1971 to 1989, Mr. Barber was a lecturer
in publishing at New York, Harvard and Radcliff Universities. Mr. Barber earned
an M.A. and PhD from Columbia University in 1962-1963.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, and
the rules thereunder require eTotalSource's officers and directors, and persons
who beneficially own more than 10% of a registered class of eTotalSource's
equity securities, to file reports of ownership and changes in ownership with
the United States Securities and Exchange Commission and to furnish eTotalSource
with copies thereof. Based on its reviews of the copies of the Section 16(a)
forms received by it, or written representations from certain reporting persons,
eTotalSource believes that, during the last fiscal year, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with and timely filed, except that the following
persons each received 400,000 shares of common stock on September 30, 2004 in
exchange for services provided to eTotalSource for which Section 16(a) forms
were filed during April 2004, and therefore, not in a timely manner.
Code Of Ethics
On November 16, 2004, eTotalSource's board of directors adopted a
written Code of Ethics designed to deter wrongdoing and promote honest and
ethical conduct, full, fair and accurate disclosure, compliance with laws,
prompt internal reporting and accountability to adherence to the Code of Ethics.
This Code of Ethics is being filed with the United States Securities and
Exchange Commission as an exhibit to the accompanying Registration Statement.
The following table sets forth, for the fiscal year ended December 31,
2004, 2003 and 2002, certain information regarding the compensation earned by
eTotalSource's named executive officers with respect to services rendered by
them to eTotalSource. eTotalSource accrued or paid compensation to executive
officers as a group for services rendered to eTotalSource in all capacities
during fiscal years 2002 to 2004 as shown in the following table. No cash
bonuses were or are to be paid to such persons for services rendered in the
fiscal year ended December 31, 2004. There are no compensatory plans or
arrangements, with respect to any executive office of eTotalSource, which result
or will result from the resignation, retirement or any other termination of such
individual's employment with eTotalSource or from a change in control of
eTotalSource or a change in the individual's responsibilities following a change
in control.
36
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------------- ------------------------------------------------------
Awards Payouts
------------------------- ---------------------------
Restricted Securities
Other Annual Stock Underlying All Other
Name and Principal Salary Bonus Compensation Award(s) Options/SARs LTIP Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
- ------------------ ----- -------- ------- ------------- ---------- ------------- ------------ -------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ------------------ ----- -------- ------- -------------- ----------- ------------- ------------ -------------
Terry Eilers,
CEO 2002 $37,000 0 0 0 200,000 0 0
2003 $79,000 0 0 0 100,000 0 $200,000
2004 0 0 0 0 0 0 0
Michael Sullinger,
COO, 2002 0 0 0 0 0 0 0
2003 0 0 0 0 200,000 0 $200,000
2004 46,000 0 0 0 0 0 0
Virgil Baker,
CFO 2002 $18,000 0 0 0 200,000 0 0
2003 $76,900 0 0 0 100,000 0 0
2004 $96,000 0 0 0 0 0 0
The following table sets forth, for the fiscal year ended December 31,
2004 certain information regarding the options/SARs granted to eTotalSource's
named executive officers.
OPTION/SAR GRANTS TABLE
No. of Securities
Underlying Options/SARs % Total Options/SARs Granted Exercise or Base
Granted to Employees in year ended Price
Name (#) December 31, 2004(%) ($ per Share) Expiration Date
- ---- ------------------------- -------------------- ------------- ---------------
Terry Eilers 200,000 * $0.50 12/15/2011
Terry Eilers 100,000 * $0.50 12/12/2012
Virgil Baker 200,000 * $0.50 12/15/2011
Virgil Baker 100,000 * $0.50 12/12/2012
Michael Sullinger 200,000 * $0.50 12/12/2012
Richard Barber 25,000 * $0.50 12/15/2011
Richard Barber 25,000 * $0.50 12/15/2012
Morrow Revocable Trust
(beneficially J.
Cody Morrow & Family) 200,000 * $0.50 12/15/2011
- -------------
* Were assumed by eTotalSource as part of reorganization
The following table sets forth certain information regarding options
exercised in fiscal year ended December 31, 2004 by eTotalSource's named
executive officers.
37
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTIONS/SAR VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs
at FY-End at FY-End
Shares Acquired on Value ------------------------------- ---------------------------
Exercise Realized (#) ($)
------------------ -------- ------------------------------- ---------------------------
Name (#) ($) Exercisable Unexcersiable Exercisable Unexcersiable
- ---- ------------------ -------- ------------ -------------- ----------- -------------
Terry Eilers -- -- -- -- -- --
Michael Sullinger -- -- -- -- -- --
Virgil Baker -- -- -- -- -- --
Director Compensation
Except as noted below, directors received no cash compensation for
their service to eTotalSource as directors for the fiscal year ended December
31, 2004, but can be reimbursed for expenses actually incurred in connection
with attending meetings of the board of directors.
For the fiscal year ended December 31, 2004, eTotalSource issued to A.
Richard Barber, a director, 400,000 shares of eTotalSource's common stock at
$0.05 per share.
Employment Agreements
Agreements were executed with the Chief Executive Officer, Terry
Eilers, and the Chief Financial Officer, Virgil Baker, at the inception of
eTotalSource (February 7, 2000), which expire December 31, 2005. Annual salary
is $150,000 and $96,000 respectively, and each accrues an annual non-accountable
automobile allowance of $9,000. The agreements also provide for 10% royalties on
license revenues of eTotalSource's Presenta Pro(TM) software and an annual bonus
of incentive stock options (covering 200,000 shares each). In addition, under
the expired agreement, Mr. Eilers is entitled to a 5% referral commission on
certain sales. Unpaid salary and commissions can be paid with warrants to
purchase common stock at $1.00 per share. During 2004 and 2003, CEO compensation
expensed pursuant to these arrangements totaled $159,000, and CFO compensation
totaled $105,000, respectively (exclusive of the fair value of incentive stock
options).
An agreement was executed August 1, 2002 with the Chief Operating
Officer, Michael Sullinger, which expires December 31, 2007. Annual salary is
$120,000 and a non-accountable automobile allowance of $9,000. The agreement
also provides for a 10% royalty on the license revenues of eTotalSource's
Presenta Pro(TM) software and an annual bonus of incentive stock options
(covering 200,000 shares). Unpaid salary and commissions can be paid with
warrants to purchase common stock at $1.00 per share. During 2004 and 2003, COO
compensation expensed pursuant to these arrangements totaled $69,000 and
$69,500, respectively (exclusive of the fair value of incentive stock options).
Committees Of The Board Of Directors
Currently, eTotalSource does not have any executive or standing
committees of the board of directors.
Other Compensation
There are no annuity, pension or retirement benefits proposed to be
paid to officers, directors, or employees of eTotalSource in the event of
retirement at normal retirement date as there is no existing plan provided for
or contributed to by eTotalSource. No remuneration is proposed to be paid in the
future directly or indirectly by eTotalSource to any officer or director since
there is no existing plan, which provides for such payment.
38
DESCRIPTION OF PROPERTY
On June 9, 2003, eTotalSource sold its building and land to a
non-affiliate note holder for $1,050,000. Effective with the sale of its
building and land on June 9, 2003, eTotalSource began leasing its corporate
offices in Yuba City, California on a month-to-month basis with no expiration
date. Monthly payments under the lease are approximately $2,500. Such premises
are adequate to serve its current staffing level. The offices consist of
approximately 1,700 square feet.
39
LEGAL PROCEEDINGS
We are not currently a party to any material litigation, nor are we
aware of any potential material litigation, other than as set forth below.
eTotalSource has defended an action and has reached a settlement for
$50,000 with Alchemy Communications in connection with a breach of contract
claim involving co-location of eTotalSource's servers with Alchemy. $83,000 has
been accrued as a judgment payable as of December 31, 2002. eTotalSource intends
to pay $50,000 as soon as sufficient funds are available to do so, and in March
of 2003, eTotalSource issued 30,000 shares of its common stock in partial
satisfaction of the settlement. No action has been taken by Alchemy to enforce
the terms of the settlement and eTotalSource does not anticipate any action will
be taken by Alchemy to enforce the settlement, provided that the balance of
funds owed is paid within a reasonable period of time.
In 1997, Premium Enterprises, Inc. was sued by Tusco, Inc. for an
alleged breach of the company's lease with Tusco. Tusco prevailed in its suit
and obtained a judgment against Premium for $75,000. No action has been taken by
Tusco to enforce the judgment against Premium or eTotalSource, its successor,
and eTotalSource does not anticipate any action will be taken by Tusco to
enforce the judgment. Nonetheless, eTotalSource has recorded a liability for the
full amount of the judgment.
In 1996, Premium Enterprises, Inc. was sued by Ally Capital Corporation
for an alleged breach of contract claim. Ally prevailed in its suit and obtained
a judgment against Premium for $47,000. No action has been taken by Ally to
enforce the judgment against Premium or eTotalSource, its successor, and
eTotalSource does not anticipate any action will be taken by Ally to enforce the
judgment as Ally is no longer in business according to Colorado Secretary of
State's office. Nonetheless, eTotalSource has recorded a liability for the full
amount of the judgment.
40
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the
beneficial ownership of all shares of common stock at June 2, 2005 for each
executive officer and director of eTotalSource and for each person known to us
who owns beneficially more than 5% of the outstanding shares of our common
stock. The percentage ownership shown in such table is based upon 46,710,821
common shares issued and outstanding at June 2, 2005 and ownership by these
persons of options or warrants exercisable within 60 days of such date. Also
included is beneficial ownership on a fully-diluted basis showing all
authorized, but unissued, shares of our common stock at June 2, 2005 as issued
and outstanding. Unless otherwise indicated, each person has sole voting and
investment power over such shares.
There are no shares of preferred stock issued and outstanding as of
June 2, 2005.
We are registering 244,590,000 shares of common stock in this offering.
These shares represent approximately 82% of our authorized capital stock and
would upon issuance represent approximately 84% of the then issued and
outstanding common stock and we anticipate all such shares will be sold in this
offering. If all or a significant block of these shares are held by one or more
shareholders working together, then such shareholder or shareholders would have
enough shares to effect a change in control of eTotalSource.
41
Officers, Director and Beneficial Owners, As of June 2, 2005
Amount of
Beneficial Percentage
Title of Class Name and Address of Beneficial Owner Ownership of Class (1)
-------------- ------------------------------------ --------- ------------
Common Terry Eilers 6,672,039 14.2%
1510 Poole Boulevard
Yuba City, CA 95993
Common Virgil Baker 1,577,363 3.3%
1510 Poole Boulevard
Yuba City, CA 95993
Common Michael Sullinger 668,544 1.4%
1510 Poole Boulevard
Yuba City, CA 95993
Common A. Richard Barber 998,352 2.0%
1510 Poole Boulevard
Yuba City, CA 95993
Common Morrow Revocable Trust 1,845,056 3.9%
(beneficially J. Cody Morrow & Family)
12655 Rough & Ready
Grass Valley, CA 95945
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (5 PERSONS
NAMED ABOVE) 11,761,154 25.1%
Common Clark Davenport 1,535,386 3.3%
1510 Poole Boulevard
Yuba City, CA 95993
Common Cornell Capital Partners, L.P. 3,833,334 8.2%
101 Hudson Street, Suite 3700
Jersey City, NJ 07302
Common Robert H. Baker, as Trustee of the RHB Trust, dated June 7,
2002 2,287,500 4.9%
1940 Blossom Rock Pl.
Gold Rive, CA 95670
Common James Boras 3,162,500 6.8%
3501 Autumn Point Lane
Carmichael, CA 95608
- -----------------
(1) Applicable percentage of ownership is based on 46,710,821 shares of
common stock outstanding as of June 2, 2005 together with securities
exercisable or convertible into shares of common stock within 60 days
of June 2, 2005 for each stockholder. Beneficial ownership is
determined in accordance with the rules of the United States Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to
securities exercisable or convertible into shares of common stock that
are currently exercisable or exercisable within 60 days of June 2, 2005
are deemed to be beneficially owned by the person holding such options
for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two years, eTotalSource has not entered into a
transaction with a value in excess of $60,000 with a director, officer or
beneficial owner of 5% or more of eTotalSource's common stock, except as
disclosed in the following paragraphs.
On December 30, 2002, Premium Enterprises, Inc. acquired 91% of the
preferred and common stock of eTotalSource, Inc. pursuant to an Agreement and
Plan of Reorganization, effective December 30, 2002, by issuing 15,540,011
shares of Premium's common stock to eTotalSource shareholders. Immediately after
the transaction, the eTotalSource shareholders owned approximately 89% of the
Premium's common stock. Coincident with the transaction, Premium changed its
fiscal year from June 30 to December 31. The reorganization is recorded as a
recapitalization effected by a reverse merger wherein Premium is treated as the
acquiree for accounting purposes, even though it is the legal acquirer. The
transaction has been accounted for as a purchase, and accordingly, since the
transaction occurred December 31, 2002, the results of operations for the
periods presented represent solely those of the accounting acquirer,
eTotalSource. Since Premium was a non-operating shell with limited business
activity, goodwill was not recorded.
No officer, director, or affiliate of eTotalSource has or proposes to
have any direct or indirect material interest in any asset proposed to be
acquired through security holdings, contracts, options, or otherwise.
43
MARKET PRICE OF AND DIVIDENDS
ON THE REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
Our common stock began trading on January 4, 2002 on the
Over-the-Counter Bulletin Board under the trading symbol "ETLS". Our stock is
quoted on the Over-the-Counter Bulletin Board. The following table sets forth
the range of high and low closing sale price as reported by the Over-the-Counter
Bulletin Board for our common stock for the fiscal quarters indicated. The
Over-the-Counter Bulletin Board quotations represent quotations between dealers
without adjustment for retail mark-up, markdowns or commissions and may not
represent actual transactions.
2002 High Low
August 7 (first available date) to September 30 0.010 0.010
October 1 to December 31 0.010 0.010
2003 High Low
January 1 to March 31 0.350 0.010
April 1 to June 30 0.350 0.060
July 1 to September 30 0.200 0.050
October 1 to December 31 0.170 0.050
2004 High Low
January 1 to March 31 0.195 0.120
April 1 to June 30 0.200 0.070
July 1 to September 30 0.120 0.045
October 1 to December 31 0.095 0.046
2005 High Low
January 1 to March 31 0.045 0.024
On June 2, 2005, the last trade price of our common stock as reported
on the Over-the-Counter Bulletin Board was $0.046 per share. On June 2, 2005, we
believe we had in excess of 347 holders of common stock and 46,710,821 shares of
our common stock were issued and outstanding. Many of our shares are held in
brokers' accounts, so we are unable to give an accurate statement of the number
of shareholders. No shares of preferred stock were issued and outstanding on
June 2, 2005.
Dividends
We have not paid any dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. We intend to
retain any earnings to finance the growth of the business. We cannot assure you
that we will ever pay cash dividends. Whether we pay any cash dividends in the
future will depend on the financial condition, results of operations and other
factors that the board of directors will consider.
Recent Sales of Unregistered Securities
During the last three years, eTotalSource issued the following
unregistered securities:
On April 20, 2005, we entered into the 2005 Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the 2005 Standby
Equity Distribution Agreement, we may, at our discretion, periodically sell to
Cornell Capital Partners shares of our common stock for a total purchase price
of up to $10,000,000. For each share of common stock purchased under the 2005
Standby Equity Distribution Agreement, Cornell Capital Partners will pay
eTotalSource 98% of the lowest volume weighted average price of our common stock
on the Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the five trading days immediately following the
notice date. Further, Cornell Capital Partners will retain a fee of 5% of each
advance under the 2005 Standby Equity Distribution Agreement. In connection with
the 2005 Standby Equity Distribution Agreement, Cornell Capital Partners
received a one-time commitment fee in the form of 3,833,334 restricted shares of
our common stock. In light of the limitations contained in the 2005 Standby
Equity Distribution Agreement, we would need to submit a $200,000 advance
request approximately every 10 trading days for 24 months in order to attain the
full $10,000,000 available under the 2005 Standby Equity Distribution Agreement;
however, we do not currently have sufficient shares given the current price of
our stock to permit the delivery of the securities required to obtain the
maximum $10,000,000 available under the 2005 Standby Equity Distribution
Agreement.
44
eTotalSource engaged Newbridge Securities Corporation, an unaffiliated
registered broker-deal, to advise eTotalSource in connection with the 2005
Standby Equity Distribution Agreement. Newbridge Securities Corporation was paid
a one-time fee of $10,000 by the issuance of 166,666 restricted shares of
eTotalSource's common stock issued on October 8, 2004.
Also on April 20, 2005, we issued the 2005 Secured Convertible
Debenture to Cornell Capital Partners, L.P. in the principal amount of $350,000,
plus accrued interest. The 2005 Secured Convertible Debenture accrues interest
at the rate of 5% per year. At eTotalSource's option, the entire principal
amount and all accrued interest can be either: (i) paid to the holder of the
2005 Secured Convertible Debenture on the second-year anniversary thereof or
(ii) converted into shares of eTotalSource common stock. The 2005 Secured
Convertible Debenture is convertible into shares of our common stock as a price
per share that is equal to $0.112. The 2005 Secured Convertible Debenture is
convertible at the holder's option. The 2005 Secured Convertible Debenture has a
term of two years and is secured by all of our assets. At eTotalSource's option,
the 2005 Secured Convertible Debenture may be paid in cash or converted into
shares of our common stock unless converted earlier by the holder. Except after
an event of default, as set forth in the secured 2005 Secured Convertible
Debenture, the holder is not entitled to convert such debenture for a number of
shares of our common stock in excess of that number of shares which, upon giving
effect to such conversion, would cause the aggregate number of shares of common
stock beneficially held by such holder and its affiliated to exceed 4.99% of our
outstanding shares of common stock. As described below, Cornell Capital Partners
purchased a 2004 Secured Convertible Debenture in the principal amount of
$175,000 from eTotalSource on October 12, 2004, and a second 2004 Secured
Convertible Debenture in the principal amount of $175,000 from eTotalSource on
or about December 2, 2004 pursuant to the 2004 Secured Convertible Debenture.
These two 2004 Secured Convertible Debentures were mutually terminated by
eTotalSource and Cornell Capital Partners pursuant to the Termination Agreement;
however, the principal amounts and accrued interest outstanding under the 2004
Secured Convertible Debentures are now subject to the terms and conditions
contained in the 2005 Secured Convertible Debentures (i.e., the 2004 Secured
Convertible Debentures were refinanced as the 2005 Secured Convertible
Debenture).
On October 12, 2004, we issued a 2004 Secured Convertible Debenture to
Cornell Capital Partners, LP in the principal amount of $175,000, and on or
about December 2, 2004, we issued a second 2004 Secured Convertible Debenture to
Cornell Capital Partners in the principal amount of $175,000, both pursuant to
the 2004 Secured Convertible Debenture. These two 2004 Secured Convertible
Debentures were mutually terminated by eTotalSource and Cornell Capital Partners
pursuant to the Termination Agreement dated April 20, 2005; however, the
principal amounts and accrued interest outstanding under the 2004 Secured
Convertible Debentures are now subject to the terms and conditions contained in
the 2005 Secured Convertible Debenture (i.e., the 2004 Secured Convertible
Debentures were refinanced as the 2005 Secured Convertible Debenture). The 2004
Secured Convertible Debentures accrued interest at the rate of 5% per year. At
eTotalSource's option, the entire principal amount and all accrued interest
could either be: (i) paid to the holder of the 2004 Secured Convertible
Debenture on the third-year anniversary thereof or (ii) converted into shares of
eTotalSource common stock. The 2004 Secured Convertible Debentures were
convertible into shares of our common stock as a price per share that is equal
to the lesser of: (i) an amount equal to 120% of the closing bid price as listed
on a principal market, as quoted by Bloomberg, L.P., on October 12, 2004, or
(ii) an amount equal to 80% of the lowest closing bid price of our common stock,
as quoted by Bloomberg, L.P., for the five trading days immediately preceding
the conversion date. The 2004 Secured Convertible Debentures were convertible at
the holder's option. The 2004 Secured Convertible Debentures had terms of two
years and were secured by substantially all of our assets. At eTotalSource's
option, the 2004 Secured Convertible Debentures could be paid in cash or
converted into shares of our common stock unless converted earlier by the
holder. Except after an event of default, as set forth in the 2004 Secured
Convertible Debentures, the holders were not entitled to convert such debentures
for a number of shares of our common stock in excess of that number of shares
which, upon giving effect to such conversion, would cause the aggregate number
of shares of common stock beneficially held by such holder and its affiliated to
exceed 4.99% of our outstanding shares of common stock.
On October 6, 2004, we entered into the 2004 Standby Equity
Distribution Agreement with Cornell Capital Partners, LP. Pursuant to the 2004
Standby Equity Distribution Agreement, we may, at our discretion, periodically
sell to Cornell Capital Partners shares of our common stock for a total purchase
price of up to $10,000,000. For each share of common stock purchased under the
2004 Standby Equity Distribution Agreement, Cornell Capital Partners will pay
eTotalSource 98% of the lowest volume weighted average price of our common stock
on the Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the five trading days immediately following the
notice date. Further, Cornell Capital Partners will retain a fee of 5% of each
advance under the 20004 Standby Equity Distribution Agreement. In connection
with the 2004 Standby Equity Distribution Agreement, Cornell Capital Partners
received a one-time commitment fee in the form of 3,833,334 restricted shares of
our common stock issued on October 8, 2004.
45
On September 30, 2004, each of the following persons were issued
400,000 restricted shares of common stock in exchange for services provided to
eTotalSource: Michael Sullinger, COO, Virgil Baker, CFO, and A. Richard Barber.
The effective price per share issued was $0.05.
In July of 2004, eTotalSource issued 100,000 restricted shares of
common stock to an unrelated individual for $9,000 of services accrued for in
the second quarter.
Also in July of 2004, eTotalSource issued 1,400,000 shares of
restricted common stock to a former contract consultant in settlement of a
contract. The fair value of the shares were accrued for in the second quarter
based on the quoted price of the stock on the date of settlement, a total of
$126,000.
Also in July of 2004, eTotalSource issued 2,000,000 shares of
restricted common stock to an unrelated company for sales and marketing services
completed and accepted in the third quarter. The shares will be recorded at
their fair value, $300,000, based on the quoted price of the stock at the date
of the contract.
Effective December 19, 2003, eTotalSource entered into a private
placement agreement for the sale of up to 12,000,000 shares of its common stock
pursuant to Regulation S of the Securities Act of 1933, as amended, commencing
in January of 2004. The purchaser had until the sooner of April 30, 2004 or
until 12,000,000 shares are sold to deliver one or more purchase notices to
eTotalSource. The agreement provided for a variable purchase price based on a
percentage of the five-day average closing price on the date of a purchase with
a floor price of $0.08 cents net to eTotalSource. Based on the foregoing private
placement, eTotalSource sold a total of 8,125,000 shares resulting in net
proceeds to eTotalSource of $530,000. The purchaser represented to eTotalSource
that it intended to acquire the shares for its own account with no then present
intention of dividing its interest with others or reselling or otherwise
disposing of all or any portion of the shares. The shares were offered in a
private transaction, not part of a distribution of shares.
Except as otherwise indicated above, eTotalSource believes that all of
the above transactions were transactions not involving any public offering
within the meaning of Section 4(2) of the Securities Act of 1933, as amended,
because: (a) each of the transactions involved the offering of such securities
to a substantially limited number of persons; (b) each person took the
securities as an investment for his/her/its own account and not with a view
toward further distribution; (c) each person had access to information
equivalent to that which would be included in a registration statement on the
applicable form under the Securities Act of 1933, as amended; and (d) each
person had knowledge and experience in business and financial matters to
understand the merits and risk of the investment. Accordingly, no registration
statement needed to be in effect prior to such issuances.
46
DESCRIPTION OF SECURITIES
Our Articles of Incorporation currently authorize us to issue
300,000,000 shares of common stock, no par value per share. On March 11, 2005,
we filed an amendment to our Articles of Incorporation to increase our
authorized shares of capital/common stock from 100,000,000 to 300,000,000. Our
Articles of Incorporation do not authorize us to issue any preferred stock. At
June 2, 2005, 46,710,821 shares of common stock were outstanding.
Common Stock
All shares of common stock, when issued, will be fully paid and
non-assessable. All shares are equal to each other with respect to voting,
liquidation, and dividend rights. Special shareholders' meetings may be called
by the officers or director, or upon the request of holders of at least
one-tenth of the outstanding shares. Holders of shares are entitled to one vote
at any shareholders' meeting for each share they own as of the record date fixed
by the board of directors. There is no quorum requirement for shareholders'
meetings. Therefore, a vote of the majority of the shares represented at a
meeting will govern even if this is substantially less than a majority of the
shares outstanding. Holders of shares are entitled to receive such dividends as
may be declared by the board of directors out of funds legally available
therefore, and upon liquidation are entitled to participate pro rata in a
distribution of assets available for such a distribution to shareholders. There
are no conversion, preemptive or other subscription rights or privileges with
respect to any shares. Reference is made to eTotalSource's Articles of
Incorporation and its bylaws as well as to the applicable statutes of the State
of Colorado for a more complete description of the rights and liabilities of
holders of shares. It should be noted that the board of directors without notice
to the shareholders may amend the bylaws. The shares of eTotalSource do not have
cumulative voting rights, which means that the holders of more than 50% of the
shares voting for election of directors may elect all the directors if they
choose to do so. In such event, the holders of the remaining shares aggregating
less than 50% of the shares voting for election of directors may not be able to
elect any director.
Preferred Stock
eTotalSource has no preferred stock authorized.
Options and Warrants
Effective December 3, 2001, eTotalSource adopted the eTotalSource, Inc.
2001 Stock Option Plan (the "Plan"). A total of 1,800,000 shares of eTotalSource
common stock were reserved for exercise of stock options under the Plan. The
Plan, administered by eTotalSource's board of directors, provides for the grant
of incentive stock options to employees and directors at fair market value and
non-statutory stock options to consultants and others. No option can be for a
term of more than 10 years from the date of grant. The option price is at the
discretion of the board of directors; provided however, for incentive stock
options it shall not be less than fair market value on the date of grant (110%
for certain options becoming exercisable that exceed $100,000), and for
non-statutory options not less than 85% of fair market value on the date of
grant. All options issued by eTotalSource to date have exercise prices which
were equal to the estimated fair market value of eTotalSource's common stock at
the date of grant. The following table summarizes stock options outstanding and
excisable as of June 2, 2005:
- ------------------ ------------------------ ------------------------ ----------------------- -------------------------------
Options Outstanding Options Outstanding Options Exercisable Options Exercisable
- ------------------ ------------------------ ------------------------ ----------------------- -------------------------------
Range of Weighted Average Weighted Average Exercise
Exercise Prices Number Outstanding Remaining Life Number Exercisable Price
- ------------------ ------------------------ ------------------------ ----------------------- -------------------------------
$0.50 1,262,500 6.9 years 1,262,500 $0.50
- ------------------ ------------------------ ------------------------ ----------------------- -------------------------------
47
Information concerning all stock option activity is summarized in the
following table:
- --------------------------------------- -------------------------------------- ---------------------------------------------
Option Shares Option Prices Per Share
- --------------------------------------- -------------------------------------- ---------------------------------------------
Outstanding, December 31, 2002 1,560,700 0.50
- --------------------------------------- -------------------------------------- ---------------------------------------------
Granted -- --
- --------------------------------------- -------------------------------------- ---------------------------------------------
Forfeited (48,200) 0.50
- --------------------------------------- -------------------------------------- ---------------------------------------------
Exercised -- --
- --------------------------------------- -------------------------------------- ---------------------------------------------
Outstanding, December 31, 2003 1,512,500 0.50
- --------------------------------------- -------------------------------------- ---------------------------------------------
Granted -- --
- --------------------------------------- -------------------------------------- ---------------------------------------------
Forfeited 250,000 0.50
- --------------------------------------- -------------------------------------- ---------------------------------------------
Exercised -- --
- --------------------------------------- -------------------------------------- ---------------------------------------------
Outstanding, December 31, 2004 1,262,500 $0.50
- --------------------------------------- -------------------------------------- ---------------------------------------------
No options were granted in 2003 or 2004.
eTotalSource also has outstanding options and warrants that it has
issued to consultants and lenders to purchase a total of 1,056,500 shares of
common stock of eTotalSource at $0.75 per share: 74,000 expire in 2005, 40,000
expire in 2006, 817,500 expire in 2007, and 125,000 expire in 2011. As of
December 31, 2004, the weighted average expected life of all such compensatory
options and warrants was 5.7 years.
Debentures
On October 12, 2004, we issued a 2004 Secured Convertible Debenture to
Cornell Capital Partners, LP in the principal amount of $175,000, and on or
about December 2, 2004, we issued a second 2004 Secured Convertible Debenture to
Cornell Capital Partners in the principal amount of $175,000, both pursuant to
the 2004 Secured Convertible Debenture. These two 2004 Secured Convertible
Debentures were mutually terminated by eTotalSource and Cornell Capital Partners
pursuant to the Termination Agreement dated April 20, 2005; however, the
principal amounts and accrued interest outstanding under the 2004 Secured
Convertible Debentures are now subject to the terms and conditions contained in
the 2005 Secured Convertible Debenture (i.e., the 2004 Secured Convertible
Debentures were refinanced as the 2005 Secured Convertible Debenture). The 2004
Secured Convertible Debentures accrued interest at the rate of 5% per year. At
eTotalSource's option, the entire principal amount and all accrued interest
could either be: (i) paid to the holder of the 2004 Secured Convertible
Debenture on the third-year anniversary thereof or (ii) converted into shares of
eTotalSource common stock. The 2004 Secured Convertible Debentures were
convertible into shares of our common stock as a price per share that is equal
to the lesser of: (i) an amount equal to 120% of the closing bid price as listed
on a principal market, as quoted by Bloomberg, L.P., on October 12, 2004, or
(ii) an amount equal to 80% of the lowest closing bid price of our common stock,
as quoted by Bloomberg, L.P., for the five trading days immediately preceding
the conversion date. The 2004 Secured Convertible Debentures were convertible at
the holder's option. The 2004 Secured Convertible Debentures had terms of two
years and were secured by substantially all of our assets. At eTotalSource's
option, the 2004 Secured Convertible Debentures could be paid in cash or
converted into shares of our common stock unless converted earlier by the
holder. Except after an event of default, as set forth in the 2004 Secured
Convertible Debentures, the holders were not entitled to convert such debentures
for a number of shares of our common stock in excess of that number of shares
which, upon giving effect to such conversion, would cause the aggregate number
of shares of common stock beneficially held by such holder and its affiliated to
exceed 4.99% of our outstanding shares of common stock.
On April 20, 2005, we issued the 2005 Secured Convertible Debenture to
Cornell Capital Partners, L.P. in the principal amount of $350,000, plus accrued
interest. The 2005 Secured Convertible Debenture accrues interest at the rate of
5% per year. At eTotalSource's option, the entire principal amount and all
accrued interest can be either: (i) paid to the holder of the 2005 Secured
Convertible Debenture on the second-year anniversary thereof or (ii) converted
into shares of eTotalSource common stock. The 2005 Secured Convertible Debenture
is convertible into shares of our common stock as a price per share that is
equal to $0.112. The 2005 Secured Convertible Debenture is convertible at the
holder's option. The 2005 Secured Convertible Debenture has a term of two years
and is secured by all of our assets. At eTotalSource's option, the 2005 Secured
Convertible Debenture may be paid in cash or converted into shares of our common
stock unless converted earlier by the holder. Except after an event of default,
as set forth in the secured 2005 Secured Convertible Debenture, the holder is
not entitled to convert such debenture for a number of shares of our common
stock in excess of that number of shares which, upon giving effect to such
conversion, would cause the aggregate number of shares of common stock
48
beneficially held by such holder and its affiliated to exceed 4.99% of our
outstanding shares of common stock. As described above, Cornell Capital Partners
purchased a 2004 Secured Convertible Debenture in the principal amount of
$175,000 from eTotalSource on October 12, 2004, and a second 2004 Secured
Convertible Debenture in the principal amount of $175,000 from eTotalSource on
or about December 2, 2004 pursuant to the 2004 Secured Convertible Debenture.
These two 2004 Secured Convertible Debentures were mutually terminated by
eTotalSource and Cornell Capital Partners pursuant to the Termination Agreement
dated April 20, 2005; however, the principal amounts and accrued interest
outstanding under the 2004 Secured Convertible Debentures are now subject to the
terms and conditions contained in the 2005 Secured Convertible Debentures (i.e.,
the 2004 Secured Convertible Debentures were refinanced as the 2005 Secured
Convertible Debenture).
Shares Eligible For Future Sale
46,710,821 shares of common stock are outstanding on the date of this
prospectus and an additional 2,386,500 shares will be issued if all of the
outstanding warrants are exercised and all of the notes are converted to common
stock. All of the shares that may be sold pursuant to this prospectus will be
freely tradable without restriction or further registration under the Securities
Act of 1933, as amended, except that any shares issued to our affiliates, as
that term is defined in Rule 144 under the Securities Act of 1933, as amended,
may generally only be sold in compliance with the provisions of Rule 144
described below. In general, our affiliates are any persons that directly, or
indirectly through one or more intermediaries, control, or are controlled by, or
are under common control with us.
Of the 46,710,821 shares of common stock outstanding as of the date of
this prospectus, 17,263,847 shares are held by our affiliates and will be
restricted securities as that term is defined in Rule 144. These restricted
shares may only be sold if they are registered under the Securities Act of 1933,
as amended, or are exempt from such registration requirements.
200,000,000 shares of common stock are being registered in this
offering for resale by Cornell Capital Partners, L.P. pursuant to the 2005
Standby Equity Distribution Agreement, in addition to the 3,833,334 shares being
registered in this offering for resale by Cornell Capital Partners in connection
with eTotalSource's payment of a one-time commitment fee paid to Cornell Capital
Partners pursuant to the 2005 Standby Equity Distribution Agreement.
31,250,000 shares of common stock are being registered in this offering
for resale by Cornell Capital Partners, L.P. pursuant to the 2005 Secured
Convertible Debentures.
166,666 shares of common stock, in payment of a one-time $10,000
placement fee, are being registered in this offering for resale by Newbridge
Securities Corporation, a registered broker-dealer that we engaged to advise us
in connection with the 2005 Standby Equity Distribution Agreement.
9,340,000 shares of common stock are being registered in this offering
for resale by other selling stockholders of eTotalSource who have acquired such
shares in various transactions with us.
Rule 144
In general, under Rule 144 of the Securities Act of 1933, as amended, a
shareholder who owns restricted shares that have been outstanding for at least
one year is entitled to sell, within any 3-month period, a number of these
restricted shares that does not exceed the greater of 1% of the then outstanding
shares of common stock immediately on the date of this prospectus, or, subject
to certain restrictions, the average weekly reported trading volume in the
common stock during the four calendar weeks preceding filing of a notice on Form
144 with respect to the sale.
In addition, affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, to
sell shares of common stock that are not restricted securities. Sales under Rule
144 are also governed by manner of sale provisions and notice requirements, and
current public information about us must be available. Under Rule 144(k), a
shareholder who is not currently and who has not been for at least three months
before the sale an affiliate and who owns restricted shares that have been
outstanding for at least two years may resell these restricted shares without
compliance with the above requirements.
Transfer Agent & Registrar
The transfer agent and registrar for our common stock is Executive
Registrar and Transfer, Inc., 3615 South Huron Street, Suite 104, Englewood,
Colorado 80110.
49
Limitation Of Liability And Indemnification Of Officers And Directors
The Colorado Revised Statutes exclude personal liability of
eTotalSource's directors and its stockholders for monetary damages for breach of
fiduciary duty except in certain specified circumstances. Accordingly,
eTotalSource will have a much more limited right of action against its directors
that otherwise would be the case. This provision does not affect the liability
of any director under federal or applicable state securities laws.
The Colorado Revised Statutes provide for the indemnification of
eTotalSource's directors, officers, employees, and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them in
any litigation to which they become a party arising from their association with
or activities on behalf of eTotalSource. eTotalSource will also bear the
expenses of such litigation for any of its directors, officers, employees, or
agents, upon such person's promise to repay eTotalSource therefor if it is
ultimately determined that any such person shall not have been entitled to
indemnification.
eTotalSource's Articles of Incorporation and Bylaws include
indemnification provisions under which eTotalSource has agreed to indemnify
directors and officers of eTotalSource from and against certain claims arising
from or related to future acts or omissions as a director or officer of
eTotalSource. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of eTotalSource pursuant to the foregoing, or otherwise,
eTotalSource has been advised that in the opinion of the United States
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933, as amended, and is therefore,
unenforceable.
Anti-Takeover Effects of Provisions of The Articles of Incorporation
The authorized but unissued shares of eTotalSource's common stock are
available for future issuance as authorized by the board of directors without
the approval of eTotalSource's stockholders. These additional shares may be
utilized for a variety of corporate purposes, including but not limited to,
future public or direct offerings to raise additional capital, corporate
acquisitions and employee incentive plans. The issuance of such shares may also
be used to deter a potential takeover of eTotalSource that may otherwise be
beneficial to stockholders by diluting the shares held by a potential suitor or
issuing shares to a stockholder that will vote in accordance with eTotalSource's
board of directors' desires. A takeover may be beneficial to stockholders
because, among other reasons, a potential suitor may offer stockholders a
premium for their shares of stock compared to the then-existing market price.
50
EXPERTS
eTotalSource's consolidated financial statements as of December 31,
2004 and for the years ended December 31, 2004 and 2003 have been audited by
Gordon, Hughes & Banks, LLP, an independent registered public accounting firm.
We have included our consolidated financial statements in this prospectus in
reliance on the report of Gordon, Hughes & Banks, LLP, given on their authority
as experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of common stock offered through this
prospectus will be passed on by Michael A. Littman, Esq. A copy of his legal
opinion is attached hereto.
HOW TO GET MORE INFORMATION
We have filed with the United States Securities and Exchange Commission
a registration statement on Form SB-2 under the Securities Act of 1933, as
amended, with respect to the securities offered by this prospectus. This
prospectus, which forms a part of the registration statement, does not contain
all the information set forth in the registration statement, as permitted by the
rules and regulations of the United States Securities and Exchange Commission.
For further information with respect to us and the securities offered by this
prospectus, reference is made to the registration statement. Statements
contained in this prospectus as to the contents of any contract or other
document that we have filed as an exhibit to the registration statement are
qualified in their entirety by reference to the exhibits for a complete
statement of their terms and conditions. The registration statement and other
information may be read and copied at the United States Securities and Exchange
Commission's Public Reference Room at 450 Fifth Street N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The Commission
maintains a website at www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the United States Securities and Exchange Commission.
51
eTotalSource, Inc.
INDEX TO
FINANCIAL STATEMENTS
PAGE(S)
FINANCIAL STATEMENTS - MARCH 31, 2005 (UNAUDITED)
Condensed Consolidated Balance Sheet as of March 31, 2005 ................................... F-1
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005 and
2004 ...................................................................................... F-2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and
2004 ...................................................................................... F-3
Notes To Condensed Consolidated Financial Statements ........................................ F-4
FINANCIAL STATEMENTS - DECEMBER 31, 2004 and DECEMBER 31, 2003
Report of Independent Registered Public Accounting Firm ..................................... F-5
Consolidated Balance Sheet as of December 31, 2004 .......................................... F-6
Consolidated Statements of Operations for the Years Ended December 31, 2004 and 2003 ........ F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003 ........ F-8
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended
December 31, 2004 and 2003 ................................................................ F-9
Notes to Consolidated Financial Statements .................................................. F-10
F-i
eTotalSource, Inc.
Condensed Consolidated Balance Sheet
ASSETS March 31,
2005
-----------
Current Assets
Cash $ 401
Other 1,286
-----------
Total Current Assets 1,687
-----------
Property and Equipment
Furniture and equipment 88,122
Less accumulated depreciation (60,279)
-----------
27,843
-----------
Other Assets
Patents applications and trademarks, less $16,439 and $15,431 accumulated amortization, respectively 23,899
Deposits 1,162
-----------
25,061
-----------
Total Assets $ 54,591
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Convertible notes payable $ 250,000
Other notes payable 632,000
Judgments payable 204,788
Accounts payable 295,303
Accrued compensation payable 939,025
Accrued interest payable 198,801
Deferred revenue 56,250
-----------
Total Current Liabilities 2,576,166
Convertible Notes Payable, less current maturities 294,219
-----------
Total Liabilities 2,870,385
-----------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock; no par value; 300 million shares authorized,
46,710,821 shares issued and outstanding 5,810,485
Accumulated (deficit) (8,626,279)
-----------
Total Stockholders' Equity (2,815,794)
-----------
Total Liabilities and Stockholders' Equity (Deficit) $ 54,591
===========
See accompanying notes.
F-1
eTotalSource, Inc.
Condensed Consolidated Statements of Operations
----------------------------------
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
-------------- --------------
Revenues $ 14,987 $ 18,093
General and Administrative Expenses 252,525 397,262
------------ ------------
Operating Income (Loss) (237,538) (379,170)
Other Income (Expense)
Interest expense (47,761) (27,368)
Other income (expense), net 1,342 (19)
------------ ------------
Total Other Income (Expense) (46,419) (27,386)
------------ ------------
Net (Loss) $ (283,957) $ (406,556)
============ ============
Basic and Diluted (Loss) per Share $ (0.01) $ (0.01)
============ ============
Weighted Average Common Shares Outstanding 46,710,821 30,307,449
============ ============
See accompanying notes.
F-2
eTotalSource, Inc.
Condensed Consolidated Statements of Cash Flows
--------------------------------------
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
---------------- ----------------
Cash Flows From (Used in) Operating Activities:
Net (loss) $(283,957) $(406,556)
Adjustments to reconcile net (loss) to net cash provided by operating
activities-
Depreciation and amortization 13,251 5,681
Loss on retirement of assets -- 18
Stock issued for services and in lieu of interest -- 160,000
Stock options and warrant expense 26,185 25,338
Changes in assets and liabilities:
Decrease (increase) in accounts receivable -- 85
Decrease (increase) in deposits -- 196
Decrease (increase) in other current assets 11 --
Increase (decrease) in payables, credit cards and accrued liabilities 218,312 (5,016)
Increase (decrease) in deferred revenue (11,250) (11,250)
--------- ---------
Net Cash (Used in) Operating Activities (37,448) (231,504)
--------- ---------
Cash Flows From (Used in) Investing Activities:
Purchase of equipment -- (9,077)
--------- ---------
Net Cash (Used in) Investing Activities -- (9,077)
--------- ---------
Increase (decrease) in Cash and Cash Equivalents (37,448) (240,581)
Cash and Cash Equivalents - Beginning of Period 37,849 313,084
--------- ---------
Cash and Cash Equivalents - End of Period $ 401 $ 72,503
========= =========
Supplemental Disclosures:
Interest paid $ 12,713 $ 378,804
Income taxes paid -- 800
Non-cash investing and financing transactions:
Conversion of debt to equity -- 340,000
See accompanying notes.
F-3
eTotalSource, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
The accompanying unaudited financial statements of eTotalSource, Inc. (the
"Company") were prepared in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation of the results of operations and financial condition for the
periods presented have been included. Such adjustments are of a normal recurring
nature. The results of operations for the three-month period ended March 31,
2005 are not necessarily indicative of the results of operations that can be
expected for the fiscal year ending December 31, 2005. For further information,
refer to the Company's audited financial statements and footnotes thereto
included elsewhere in this prospectus.
Certain reclassifications have been made to prior year expenses to conform to
the current year presentation and have no effect on the reported net loss for
either period.
Note B - Contingency
As reported in the December 31, 2004 financial statements, the Company has
incurred significant recurring losses from operations and has a substantial
liquidity shortage, including default conditions on certain notes payable and
judgments payable to creditors. The foregoing raises substantial doubt about the
Company's ability to continue as a going concern. These conditions are
substantially unchanged through the first quarter of 2005. The accompanying
condensed consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Note C - Events Subsequent to March 31, 2005
On April 20, 2005, the Company and Cornell Capital Partners, LP ("Cornell"), the
holder of two $175,000 convertible debentures issued in 2004, agreed to modify
the 20% floating conversion rate of the debentures to a fixed rate equal to
$0.0112 per share. In addition, the term of the debentures was reset for a new
24-month period beginning April 20, 2005, when the principal and accrued
interest shall be, at the Company's option, either paid or converted into shares
of common stock at a conversion price equal to $0.0112 per share.
In addition, on April 20, 2005, the Company borrowed $100,000 from Cornell and
issued it a note payable with interest accruing at 12%. The note and accrued
interest is due on the earlier of (i) the effective date a proposed Registration
Statement on Form SB-2 is filed with the United States Securities and Exchange
Commission (the "SEC"), or (ii) August 1, 2005. The note is secured by 8,117,946
shares of Company common stock of three officers of the Company.
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
eTotalSource, Inc.
Yuba City, California
We have audited the accompanying consolidated balance sheet of eTotalSource,
Inc. (formerly Premium Enterprises, Inc. - the "Company") as of December 31,
2004 and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for the years ended December 31, 2004 and 2003.
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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 eTotalSource, Inc.
at December 31, 2004, and the results of its consolidated operations and its
cash flows for the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been presented assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. As
discussed in Note 1 to the financial statements, the Company has incurred
significant recurring losses, and as of December 31, 2004 has a substantial
liquidity shortage, including default conditions on certain notes payable and
judgments payable to creditors. As a consequence, the Company requires
significant additional financing to satisfy outstanding obligations and continue
operations. Unless the Company successfully obtains suitable significant
additional financing, there is substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also discussed in Note 1. The financial statements do not include any
adjustments to reflect the possible future effect on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Gordon, Hughes & Banks, LLP
Greenwood Village, Colorado
February 28, 2005
F-5
eTotalSource, Inc.
Consolidated Balance Sheet
December 31, 2004
ASSETS
Current Assets
Cash $ 37,849
Other 1,296
-----------
Total Current Assets 39,145
-----------
Property and Equipment
Furniture and equipment 88,122
Less accumulated depreciation (56,786)
-----------
31,336
-----------
Other Assets
Patent applications and trademarks, less $15,431 accumulated amortization 24,907
Deposits 1,162
-----------
26,069
-----------
Total Assets $ 96,550
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Convertible notes payable $ 417,569
Other notes payable 632,000
Judgments payable 204,788
Accounts payable 183,461
Accrued compensation payable 845,880
Accrued interest payable 185,475
Deferred revenue 67,500
-----------
Total Current Liabilities 2,536,673
Convertible Notes Payable, less current maturities 117,900
-----------
Total Liabilities 2,654,573
-----------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock; no par value; 100 million shares authorized,
46,710,821 shares issued and outstanding 5,784,300
Accumulated (deficit) (8,342,323)
-----------
Total Stockholders' Equity (Deficit) (2,558,023)
-----------
Total Liabilities and Stockholders' Equity (Deficit) $ 96,550
===========
See accompanying notes.
F-6
eTotalSource, Inc.
Consolidated Statements of Operations
December 31,
-----------------------------------
2004 2003
------------ ------------
Revenues $ 209,198 $ 281,919
General and Administrative Expenses 2,390,905 1,860,146
------------ ------------
Operating Income (Loss) (2,181,707) (1,578,227)
Other Income (Expense)
Gain on sale of building -- 205,705
Interest expense (190,592) (602,045)
Other income (expense), net (376) 7,992
------------ ------------
Total Other Income (Expense) (190,968) (388,348)
------------ ------------
Net (Loss) $ (2,372,675) $ (1,966,575)
============ ============
Basic and Diluted (Loss) per Share $ (0.06) $ (0.10)
============ ============
Weighted Average Common Shares Outstanding 37,897,170 19,830,586
============ ============
See accompanying notes.
F-7
eTotalSource, Inc.
Consolidated Statements of Cash Flows
December 31,
----------------------------
2004 2003
----------- -----------
Cash Flows From (Used in) Operating Activities:
Net (loss) $(2,372,675) $(1,966,575)
Adjustments to reconcile net (loss) to net cash provided by operating
activities-
Depreciation and amortization 26,938 30,383
Gain on sale of building -- (205,705)
Loss on retirement of assets 1,745 4,460
Stock issued for services and in lieu of interest 1,391,105 751,350
Stock issued for accrued interest upon debt conversion 52,400 182,620
Stock options and warrant expense 106,411 440,103
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 414 --
Decrease (increase) in other current assets (1,296) 47,708
Decrease (increase) in deposits 196 2,618
Increase (decrease) in payables, credit cards and accrued liabilities 222,604 170,347
Increase (decrease) in deferred revenue (45,000) (45,000)
----------- -----------
Net Cash (Used in) Operating Activities (617,158) (587,691)
----------- -----------
Cash Flows From (Used in) Investing Activities:
Net proceeds from sale of fixed assets 1,000 142,596
Purchase of equipment (9,077) (9,005)
----------- -----------
Net Cash (Used in) Investing Activities
(8,077) 133,591
----------- -----------
Cash Flows From (Used in) Financing Act ivies:
Proceeds from issuance of convertible notes payable 350,000 --
Payments on mortgages and notes payable -- (204,642)
Proceeds from issuance of notes payable -- 360,000
Proceeds from sale of stock -- 561,500
----------- -----------
Net Cash From Financing Activities 350,000 716,858
----------- -----------
Increase (decrease) in Cash and Cash Equivalents (275,235) 262,758
Cash and Cash Equivalents - Beginning of Period 313,084 50,326
----------- -----------
Cash and Cash Equivalents - End of Period $ 37,849 $ 313,084
=========== ===========
Supplemental Disclosures:
Interest paid $ 109,535 $ 378,804
Income taxes paid 1,600 800
Non-cash investing and financing transactions:
Conversion of accounts payable and accrued expenses to equity 427,500 --
Conversion of debt to equity 80,000 340,000
Convertible notes payable discount 70,000 --
See accompanying notes.
F-8
eTotalSource, Inc
Consolidated Statement of Stockholders' Equity (Deficit)
Common Stock
------------------------------ Accumulated
Shares Amount (Deficit) Total
------------- -------------- --------------- -------------
December 31, 2002 17,565,151 $ 1,381,311 $ (4,003,073) $ (2,621,762)
Issued for services or in lieu of interest
($.08 to $.525 per share) 4,050,000 751,350 -- 751,350
Conversion of notes payable-
Convertible notes ($.35 per share) 459,056 160,670 -- 160,670
Other notes payable ($.08 and $.24 per
share) 2,500,000 361,950 -- 361,950
Issuance for cash in private placement ($.08 per
share) 6,625,000 530,000 -- 530,000
Exercise of warrants ($.09 per share) 350,000 31,500 -- 31,500
Options and warrants -
Interest -- 364,721 -- 364,721
Services -- 75,382 -- 75,382
Shares rescinded by officer (2,000,000) -- -- --
Net (loss) -- -- (1,966,575) (1,966,575)
------------ ------------ ------------ ------------
December 31, 2003 29,549,207 3,656,884 (5,969,648) (2,312,764)
Issued for services or in lieu of interest
($.05 to $.53 per share) 13,644,505 1,443,505 -- 1,443,505
Conversion of debt -
Convertible notes ($.165 to $.20 per share) 469,318 87,500 -- 87,500
Other payables ($.075 to $.20 per share) 1,766,495 320,000 -- 320,000
Reorganization debt ($.167 to $.176 per
share) 583,505 100,000 -- 100,000
Options and warrants -
Services -- 101,911 -- 101,911
Interest -- 4,500 -- 4,500
Pre-reorganization shares issued (*1) 697,791 -- -- --
Additional paid-in-capital -
Discounts - convertible debenture bonds -- 70,000 -- 70,000
Net (loss) -- -- (2,372,675) (2,372,675)
------------ ------------ ------------ ------------
December 31, 2004 $ 5,784,300 $ (8,342,323) $ (2,558,023) 46,710,821
============ ============ ============ ============
(*1) These shares were not issued at the time of the reorganization and were
not used in the weighted average calculation prior to this issuance.
See accompanying notes.
F-9
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
eTotalSource, Inc., the "Company" - formerly named Premium Enterprises, Inc.
("PMN"), was incorporated in Colorado on September 16, 1987. The principal
activities of the Company are developing and publishing proprietary multimedia
software technology and training media. The Company's primary customers are
corporations, governmental organizations and agencies. The Company is based in
Yuba City, California.
Reorganization in 2002
On December 30, 2002, PMN acquired 91% of the preferred and common stock of
eTotalSource, Inc. ("eTS" - incorporated in California on February 7, 2000),
pursuant to an Agreement and Plan of Reorganization effective December 30, 2002,
by issuing 15,540,011 shares of PMN common stock to eTS shareholders.
Immediately after the transaction, the eTS shareholders owned approximately
88.5% of the Company's common stock. During 2004, the Company issued 697,791
shares of previously reserved common stock to acquire the remaining eTS stock
and 583,505 shares to settle pre-reorganization accounts payable of PMN totaling
$100,000.
Going Concern Considerations
The accompanying financial statements have been presented assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred significant operating losses since inception and as of
December 31, 2004 had a net working capital deficit of approximately
$(2,498,000), a stockholders' deficit of $(2,558,023), notes payable totaling
$582,000 were in default with related accrued interest in arrears of $60,955,
and legal judgments against the Company of $204,788 had been adjudicated.
Management's plans to address these matters include the issuance of debt and
equity securities and increasing revenue. Unless the Company successfully
obtains suitable significant additional financing and attains profitable
operations, there is substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effect on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary after the elimination of intercompany balances and
transactions.
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position No.97-2
"Software Revenue Recognition" issued by the Accounting Standards Executive
Committee of the AICPA. Revenues are recorded net of an allowance for estimated
returns and collectibility at the time of billing.
F-10
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product revenue is derived primarily from the sale of self-produced training
multimedia and related off-the-shelf software products. The Company recognizes
revenue from sales of these products at the time of shipment to customers.
Service revenue is primarily derived from production of videos for others and is
recognized upon customer acceptance.
Deferred revenue includes payments received for product licenses covering future
periods and advances on service contracts that have not yet been fulfilled.
Software and Development Costs
The Company capitalizes purchased software that is ready for use and development
costs of marketable software incurred from the time of technological feasibility
until the software is ready for use. Research and development costs and other
computer software maintenance costs are expensed as incurred. As of December 31,
2004, the Company has not capitalized any software development costs.
Furniture and Equipment
Furniture and equipment are recorded at cost. Maintenance and repairs are
charged to operations when incurred. When property and equipment are sold or
otherwise disposed of, the asset account and related accumulated depreciation
account are relieved, and any gain or loss is included in operations. The cost
of property is depreciated using the straight-line method over estimated useful
lives ranging from five to seven years. Depreciation charged to operations was
$17,435 in 2004 and $25,092 in 2003.
Patents and Trademarks
Patents and trademarks represent the legal and application costs of multimedia
technology used in operations and are amortized using the straight-line method
over an estimated useful life of ten years.
Comprehensive Income
For the periods presented, the Company had no items of comprehensive income or
loss, and accordingly, comprehensive income is the same as the net loss
reported.
Segment Reporting
In June 1997, Statement of Financial Accounting Standards ("SFAS") 131,
"Disclosure about Segments of an Enterprise and Related Information," was
issued. Operating segments, as defined in the pronouncement, are components of
an enterprise about which separate financial information is available and that
are evaluated regularly by management in deciding how to allocate resources and
assess performance. As of December 31, 2004 and 2003, the Company had one
operating segment, publishing proprietary multimedia software technology and
training media.
Income Taxes
Deferred income taxes are based on temporary differences between the financial
statement and tax basis of assets and liabilities existing at each balance sheet
date using enacted tax rates for years during which taxes are expected to be
paid or recovered.
Cash Equivalents
For the purpose of reporting cash flows, the Company considers as cash
equivalents all highly liquid investments with a maturity of three months or
less at the time of purchase.
F-11
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Impairment
If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If this review indicates that the value of the asset
will not be recoverable, as determined based on projected undiscounted cash
flows related to the asset over its remaining life, then the carrying value of
the asset is reduced to its estimated fair value.
Earnings (Loss) Per Share
Basic earnings per share are computed using the weighted average number of
shares outstanding during each period. Diluted earnings per share is computed on
the basis of the average number of common shares outstanding and the dilutive
effect of convertible notes payable, stock options and warrants using the
"treasury stock" method. Basic and diluted earnings per share are the same
during the periods presented since the Company had net losses and the inclusion
of stock options and warrants would be anti-dilutive.
Stock-Based Compensation
The Company accounts for stock-based compensation using Accounting Principles
Board's Opinion No. 25 ("APB 25"). Under APB 25, compensation expense is
recognized for stock options with an exercise price that is less than the market
price on the grant date of the option. For stock options with exercise prices at
or above the market value of the stock on the grant date, the Company has
adopted the Financial Accounting Standards Board ("FASB") disclosure-only
provisions of Statement of Accounting Standards No. 123 Accounting for
Stock-Based Compensation ("SFAS 123"). The Company has adopted the
disclosure-only provisions of SFAS 123 for stock options granted to the
employees and directors. There were no options granted in 2004 or 2003.
Beneficial Conversion Feature of Debt
In accordance with Emerging Issues Task Force No. 98-5, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, and No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, the Company recognizes the value of conversion
rights attached to convertible debt. These rights give the debt holder the
ability to convert his debt into common stock at a price per share that is less
than the trading price to the public on the day the loan is made to the Company.
The beneficial value is calculated based on the market price of the stock at the
commitment date in excess of the conversion rate of the debt and related
accruing interest and is recorded as a discount to the related debt and an
addition to additional paid in capital. The discount is amortized and recorded
as interest expense over the remaining outstanding period of related debt.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R "Share-Based Payment," a revision to
FASB No. 123. SFAS 123R replaces existing requirements under SFAS 123 and APB
25, and requires public companies to recognize the cost of employee services
received in exchange for equity instruments, based on the grant-date fair value
of those instruments, with limited exceptions. SFAS 123R also affects the
pattern in which compensation cost is recognized, the accounting for employee
share purchase plans, and the accounting for income tax effects of share-based
payment transactions. For small-business filers, SFAS 123R will be effective for
interim periods beginning after December 15, 2005. The Company is currently
determining what impact the proposed statement would have on its results of
operations and financial position. In November 2004, the FASB issued SFAS 151,
which revised ARB 43, relating to inventory costs. This revision is to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). This Statement requires that these items
be recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overhead to the costs of conversion be based on
normal capacity of the production facilities. This Statement is effective for
financial statements for fiscal years
F-12
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning after June 15, 2005. Earlier application is permitted for inventory
costs incurred during fiscal years beginning after the date this Statement is
issued. Management believes this Statement will have no impact on the financial
statements of the Company once adopted.
In December 2004, the FASB issued SFAS 152, which amends SFAS 66, "Accounting
for Sales of Real Estate", to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA
Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This Statement also amends SFAS 67, Accounting for Costs and
Initial Rental Operations of Real Estate Projects, to state that the guidance
for (a) incidental operations and (b) costs incurred to sell real estate
projects does not apply to real-estate time-sharing transactions. The accounting
for those operations and costs is subject to the guidance in SOP 04-2. This
Statement is effective for financial statements for fiscal years beginning after
June 15, 2005. Management believes this Statement will have no impact on the
financial statements of the Company once adopted.
In December 2004, the FASB issued SFAS 153. This Statement addresses the
measurement of exchanges of non-monetary assets. The guidance in APB 29,
Accounting for Non-monetary Transactions, is based on the principle that
exchanges of non-monetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends APB 29 to eliminate the
exception for non-monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non-monetary assets that do not
have commercial substance. A non-monetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005. Earlier application is permitted for
non-monetary asset exchanges incurred during fiscal years beginning after the
date of this Statement is issued. Management believes this Statement will have
no impact on the financial statements of the Company once adopted.
F-13
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. NOTES PAYABLE
Note payable to a trust; interest at 15% payable monthly through December 18, 2003 when $ 172,000
principal and unpaid interest are due. The note is in default
Note payable to a trust; interest at 10% and principal due January 17, 2003, extended to 110,000
December 17, 2003 (with interest increased to 18% and due monthly beginning February 17, 2003)
The note is in default
Note payable to a trust; interest at 14% payable monthly through December 18, 2003 when 40,000
principal and unpaid interest are due. The note is in default
Promissory notes payable; interest at 6% payable monthly, due in 2001, unsecured. Principal and 150,000
accrued interest ($36,200 at December 31, 2004) are convertible to common stock at $.50 per
share. Warrants also issued to two note holders to purchase 37,500 shares of common stock for
five years at $.50 per share. The notes are in default
Promissory note payable; principal and accrued interest at 8% payable in 2002, extended to May
15, 2003, unsecured. Principal and accrued interest ($18,081 at December 31, 2004) convertible 100,000
to Company common stock at $.50 per share. Warrants also issued to the note holder to purchase
55,248 shares of common stock for five years at $.50 per share. The note is in default
Note payable to an unrelated trust; stated interest rate of 10% due June 2003, extended to June 50,000
2004. As consideration for forbearance, the note holder received 50,000 shares of common stock
in 2004, valued at $.525 per share ($26,250). In October 2004, the note was extended to April
2005
Note payable to an unrelated trust; principal and interest at 10% due monthly. This note is a 250,000
revolving credit obligation and eTotalSource can repay and borrow up to the amount of the note
In October 2004, the note was extended to April 2005
Convertible debenture bonds to an unrelated company, principal and interest at 5%, payable 285,469
October 6, 2006 and December 2, 2006, secured by 31,250,000 shares of common stock. Principal
and accrued interest ($2,757 at December 31, 2004) convertible to common stock at a conversion
price equal to the lower of (i) 120% of the closing bid price of our common stock as listed on a
principal exchange, as quoted by Bloomberg, L.P., as of October 6, 2004 and December 2, 2004,
respectively, or (ii) 80% of the lowest closing bid price of our common stock, as quoted by
Bloomberg, L.P., for the five trading days immediately preceding the conversion date. At the
due date the Company has the option to repay the debt or issue common stock. In connection with
this transaction, the Company recorded a discount of $70,000; the debt is stated net of the
remaining discount of $64,531
Note payable to a director; principal and interest at 9.2%, due December 4, 2002, extended to
May 1, 2003, unsecured. The note is in default. 10,000
----------
Total 1,167,469
Less: current maturities 1,049,569
----------
Long-term maturities $ 117,900
==========
F-14
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INCOME TAXES
At December 31, 2004, the Company had a net operating loss carry-forward of
approximately $3 million that may be offset against future taxable income
through from 2020 through 2024. These carry-forwards are subject to review by
the Internal Revenue Service.
The Company has fully reserved the $1 million tax benefit of the operating loss
carry-forward, by a valuation allowance of the same amount, because the
likelihood of realization of the tax benefit cannot be determined. The net
change in the valuation allowance for deferred tax assets was a decrease of $1.3
million during 2004.
Temporary differences between the time of reporting certain items for financial
statement and tax reporting purposes consists primarily of depreciation and
deferred revenue.
NOTE 4. STOCKHOLDERS' EQUITY
Convertible Notes Payable
During 2004, notes payable and accrued interest totaling $87,500 were converted
to 469,318 shares of common stock ($.165 - $.20 per share) as follows:
Notes Payable Accrued Interest Total Conversion Price
------------- ---------------- ----- ----------------
$50,000 $ 7,500 $57,500 $ .20
30,000 -- 30,000 .165
In addition, during 2004, accounts payable and accrued liabilities totaling
$420,000 were converted into 2,350,000 shares of common stock at conversion
prices of $.075 to $.20 per share.
During 2003, 459,056 shares of common stock were issued to convertible note
holders at $.35 per share. In addition, other notes payable and accrued interest
totaling $361,950 were converted into 2,500,000 shares of common stock at
conversion prices of $.08 to $.35 per share.
Stock Issued for Services and Interest
During 2004, the Company issued 13,369,505 shares of common stock for services,
expensed at the fair value of the stock based on contemporaneous stock market
quotes at $.05 - $.17 per share (a total of $1,391,105).
During 2004, the Company issued 275,000 shares of common stock to note holders
as compensation for additional interest. The Company has expensed the fair value
of the stock based on contemporaneous stock market quotes at $.09 - $.53 per
share (a total of $52,400).
During 2004, the Company issued 697,791 shares of common stock previously
reserved in connection with the December 30, 2002 reorganization.
In 2003, 4,050,000 shares of common stock were issued to six individuals for
services or in lieu of interest at per share valuations ranging from $.08 to
$.525.
Stock Options and Warrants Issued for Services and in Lieu of Interest
In 2004 and 2003, the Company recorded expenses for options and warrants to
purchase common stock issued to consultants and lenders totaling $106,411 and
$440,103, respectively. Valuations of the transactions are based on the
estimated fair value of the options or warrants on the grant date using the
Black-Scholes pricing model. Consulting expense is recognized over the term of
the option or warrant period. Interest expense is recognized over the related
term of the related obligation on a straight-line basis.
F-15
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. STOCK OPTIONS AND WARRANTS
Stock Option Plan
Effective December 3, 2001, the Company adopted the eTotalSource, Inc. 2001
Stock Option Plan (the "Plan"). A total of 1.8 million shares of Company common
stock were reserved for exercise of stock options under the Plan. The Plan,
administered by the Company's board of directors, provides for the grant of
incentive stock options to employees and directors at fair market value and
non-statutory stock options to consultants and others. No option can be for a
term of more than ten years from the date of grant. The option price is at the
discretion of the board; provided however, for incentive stock options it shall
not be less than fair market value on the date of grant (110% for certain
options becoming exercisable that exceed $100,000), and for non-statutory
options not less than 85% of fair market value on the date of grant. All options
issued by the Company to date have exercise prices which were equal to the
estimated fair market value of the Company's common stock at the date of grant.
A summary of stock options outstanding and exercisable as of December
31, 2004 follows:
- ----------------- ----------------------- ----------------------- --------------------- -----------------------------
Options Outstanding Options Outstanding Options Exercisable Options Exercisable
- ----------------- ----------------------- ----------------------- --------------------- -----------------------------
Range of
Exercise Number Weighted Average Number Weighted Average Exercise
Prices Outstanding Remaining Life Exercisable Price
- ----------------- ----------------------- ----------------------- --------------------- -----------------------------
$0.50 1,262,500 6.9 years 1,262,500 $0.50
- ----------------- ----------------------- ----------------------- --------------------- -----------------------------
Information concerning all stock option activity is summarized in the
following table:
- ------------------------------------------- -------------------------------- ----------------------------------------
Option Shares Option Prices Per Share
- ------------------------------------------- -------------------------------- ----------------------------------------
Outstanding, December 31, 2002 1,560,700 $ 0.50
- ------------------------------------------- -------------------------------- ----------------------------------------
Granted -- --
- ------------------------------------------- -------------------------------- ----------------------------------------
Forfeited (48,200) $ 0.50
- ------------------------------------------- -------------------------------- ----------------------------------------
Exercised -- --
- ------------------------------------------- -------------------------------- ----------------------------------------
Outstanding, December 31, 2003 1,512,500 $ 0.50
- ------------------------------------------- -------------------------------- ----------------------------------------
Granted -- --
- ------------------------------------------- -------------------------------- ----------------------------------------
Forfeited (250,000) $ 0.50
- ------------------------------------------- -------------------------------- ----------------------------------------
Exercised -- --
- ------------------------------------------- -------------------------------- ----------------------------------------
Outstanding, December 31, 2004 1,262,500 $ 0.50
- ------------------------------------------- -------------------------------- ----------------------------------------
There were no options granted under the Plan in 2003 or 2004.
Stock Options and Warrants Issued to Others
eTotalSource also has outstanding options and warrants that it has issued to
consultants and lenders to purchase a total of 1,056,500 shares of common stock
of eTotalSource at $0.75 per share: 74,000 expire in 2005, 40,000 expire in
2006, 817,500 expire in 2007, and 125,000 expire in 2011. As of December 31,
2004, the weighted average expected life of all such compensatory options and
warrants was 5.7 years.
F-16
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts payable and accrued liabilities
approximate fair value because of their short-term maturities. The fair value of
notes and judgments payable approximates fair value because of the market rate
of interest on the debt.
NOTE 7. FINANCIAL INSTRUMENTS AND CONCENTRATIONS
Financial Instruments
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash.
The Company maintains its cash deposits in one bank. Its bank accounts are
guaranteed by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
The amount on deposit in the financial institution did not exceed the $100,000
FDIC insured limit at December 31, 2004. Management believes that the financial
institution is financially sound.
Significant Customers
Revenue from customers in excess of ten-percent of total Company revenue
follows:
Customer 2004 2003
-------- ---- ----
A 46% 6%
B 11% --%
NOTE 8. COMMITMENTS AND CONTINGENCIES
Executive Employment Contracts
The Company has employment agreements with its three executive officers:
1. Agreements were executed with the Chief Executive Officer and the Chief
Financial Officer at the inception of the Company (February 7, 2000)
which expire December 31, 2005. Annual salary is $150,000 and $96,000,
respectively, and each accrues a non-accountable automobile allowance
of $9,000. The agreements also provide for an annual bonus of incentive
stock options (covering 200,000 shares each). In addition, the CEO is
entitled to a 5% referral commission on certain sales. Unpaid salary
and commissions can be paid with warrants to purchase common stock at
$1 per share. During both 2004 and 2003, CEO compensation expensed
pursuant to these arrangements totaled $159,000, and CFO compensation
totaled $105,000, respectively (exclusive of the fair value and of
incentive stock options). Both officers have elected to forego the 2004
and 2003 annual bonus of incentive stock options.
2. An agreement was executed August 1, 2000 with the Chief Operating
Officer which expires December 31, 2007. Annual salary is $120,000 and
a non-accountable automobile allowance of $9,000. The agreement also
provides for an annual bonus of incentive stock options (covering
200,000 shares). Unpaid salary and commissions can be paid with
warrants to purchase common stock at $1 per share. During 2004 and
2003, COO compensation expensed pursuant to these arrangements was
accrued on a "half-time" basis and totaled $69,000 and $64,500,
respectively (exclusive of the fair value of incentive stock options).
The officer has elected to forego the 2004 and 2003 annual bonus of
incentive stock options.
F-17
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. EVENTS SUBSEQUENT TO DECEMBER 31, 2004
On February 4, 2005, at a Special Meeting of Shareholders, the shareholders
approved an amendment to the Company's Articles of Incorporation to increase the
number of Common Shares authorized from one hundred million (100,000,000) to
three hundred million (300,000,000). The measure was passed with 30,898,791
shares voting in favor and 296,896 shares voting against, which was sufficient
to carry out the proposal.
F-18
We have not authorized any dealer, salesperson or other person to provide any
information or make any representations about eTotalSource, Inc. except the
information or representations contained in this prospectus. You should not rely
on any additional information or representations if made.
-----------------------
This prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy any securities:
o except the common stock offered by this prospectus;
o in any jurisdiction in which the offer or solicitation is not
authorized;
o in any jurisdiction where the dealer or other salesperson is
not qualified to make the offer or solicitation;
o to any person to whom it is unlawful to make the offer or
solicitation; or
o to any person who is not a United States resident or who is
outside the jurisdiction of the United States.
The delivery of this prospectus or any accompanying sale does not imply that:
o there have been no changes in the affairs of eTotalSource,
Inc. after the date of this prospectus; or
o the information contained in this prospectus is correct after
the date of this prospectus.
-----------------------
Until _____________, 2005, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.
----------------------
PROSPECTUS
---------------------
244,590,000
Shares of Common Stock
eTotalSource, Inc.
_______________, 2005
P-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Colorado Revised Statutes exclude personal liability of
eTotalSource's directors and its stockholders for monetary damages for breach of
fiduciary duty except in certain specified circumstances. Accordingly,
eTotalSource will have a much more limited right of action against its directors
that otherwise would be the case. This provision does not affect the liability
of any director under federal or applicable state securities laws.
The Colorado Revised Statutes provide for the indemnification of
eTotalSource's directors, officers, employees, and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them in
any litigation to which they become a party arising from their association with
or activities on behalf of eTotalSource. eTotalSource will also bear the
expenses of such litigation for any of its directors, officers, employees, or
agents, upon such person's promise to repay eTotalSource therefor if it is
ultimately determined that any such person shall not have been entitled to
indemnification.
The eTotalSource's Articles of Incorporation and bylaws include
indemnification provisions under which eTotalSource has agreed to indemnify
directors and officers of eTotalSource from and against certain claims arising
from or related to future acts or omissions as a director or officer of
eTotalSource. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of eTotalSource pursuant to the foregoing, or otherwise,
eTotalSource has been advised that in the opinion of the United States
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933, as amended, and is therefore,
unenforceable.
eTotalSource has not purchased insurance against costs which may be
incurred by it pursuant to the foregoing provisions of its Articles of
Incorporation and bylaws, nor does it insure its officers and directors against
liabilities incurred by them in the discharge of their functions as such
officers and directors.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
ITEM AMOUNT
- ------------------------------------------------------------------------------------------------
United States Securities and Exchange Commission registration fee $ 931.89
Printing and engraving fees* $ 2,500.00
Accounting fees and expenses * $20,000.00
Legal fees and expenses * $50,000.00
Miscellaneous (including Blue Sky fees, transfer agent fees and registrar fees)* $11,568.11
----------
Total Estimated Expenses $85,000.00
==========
- ------------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, eTotalSource issued the following
unregistered securities:
On April 20, 2005, we entered into the 2005 Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the 2005 Standby
Equity Distribution Agreement, we may, at our discretion, periodically sell to
Cornell Capital Partners shares of our common stock for a total purchase price
of up to $10,000,000. For each share of common stock purchased under the 2005
Standby Equity Distribution Agreement, Cornell Capital Partners will pay
eTotalSource 98% of the lowest volume weighted average price of our common stock
on the Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the five trading days immediately following the
notice date. Further, Cornell Capital Partners will retain a fee of 5% of each
advance under the 2005 Standby Equity Distribution Agreement. In connection with
the 2005 Standby Equity Distribution Agreement, Cornell Capital Partners
received a one-time commitment fee in the form of 3,833,334 restricted shares of
our common stock.
II-1
eTotalSource engaged Newbridge Securities Corporation, an unaffiliated
registered broker-deal, to advise eTotalSource in connection with the 2005
Standby Equity Distribution Agreement. Newbridge Securities Corporation was paid
a one-time fee of $10,000 by the issuance of 166,666 restricted shares of
eTotalSource's common stock issued on October 8, 2004.
Also on April 20, 2005, we issued the 2005 Secured Convertible
Debenture to Cornell Capital Partners, L.P. in the principal amount of $350,000,
plus accrued interest. The 2005 Secured Convertible Debenture accrues interest
at the rate of 5% per year. At eTotalSource's option, the entire principal
amount and all accrued interest can be either: (i) paid to the holder of the
2005 Secured Convertible Debenture on the second-year anniversary thereof or
(ii) converted into shares of eTotalSource common stock. The 2005 Secured
Convertible Debenture is convertible into shares of our common stock as a price
per share that is equal to $0.112. The 2005 Secured Convertible Debenture is
convertible at the holder's option. The 2005 Secured Convertible Debenture has a
term of two years and is secured by all of our assets. At eTotalSource's option,
the 2005 Secured Convertible Debenture may be paid in cash or converted into
shares of our common stock unless converted earlier by the holder. Except after
an event of default, as set forth in the secured 2005 Secured Convertible
Debenture, the holder is not entitled to convert such debenture for a number of
shares of our common stock in excess of that number of shares which, upon giving
effect to such conversion, would cause the aggregate number of shares of common
stock beneficially held by such holder and its affiliated to exceed 4.99% of our
outstanding shares of common stock. As described below, Cornell Capital Partners
purchased a 2004 Secured Convertible Debenture in the principal amount of
$175,000 from eTotalSource on October 12, 2004, and a second 2004 Secured
Convertible Debenture in the principal amount of $175,000 from eTotalSource on
or about December 2, 2004 pursuant to the 2004 Secured Convertible Debenture.
These two 2004 Secured Convertible Debentures were mutually terminated by
eTotalSource and Cornell Capital Partners pursuant to the Termination Agreement;
however, the principal amounts and accrued interest outstanding under the 2004
Secured Convertible Debentures are now subject to the terms and conditions
contained in the 2005 Secured Convertible Debentures (i.e., the 2004 Secured
Convertible Debentures were refinanced as the 2005 Secured Convertible
Debenture).
On October 12, 2004, we issued a 2004 Secured Convertible Debenture to
Cornell Capital Partners, LP in the principal amount of $175,000, and on or
about December 2, 2004, we issued a second 2004 Secured Convertible Debenture to
Cornell Capital Partners in the principal amount of $175,000, both pursuant to
the 2004 Secured Convertible Debenture. These two 2004 Secured Convertible
Debentures were mutually terminated by eTotalSource and Cornell Capital Partners
pursuant to the Termination Agreement dated April 20, 2005; however, the
principal amounts and accrued interest outstanding under the 2004 Secured
Convertible Debentures are now subject to the terms and conditions contained in
the 2005 Secured Convertible Debenture (i.e., the 2004 Secured Convertible
Debentures were refinanced as the 2005 Secured Convertible Debenture). The 2004
Secured Convertible Debentures accrued interest at the rate of 5% per year. At
eTotalSource's option, the entire principal amount and all accrued interest
could either be: (i) paid to the holder of the 2004 Secured Convertible
Debenture on the third-year anniversary thereof or (ii) converted into shares of
eTotalSource common stock. The 2004 Secured Convertible Debentures were
convertible into shares of our common stock as a price per share that is equal
to the lesser of: (i) an amount equal to 120% of the closing bid price as listed
on a principal market, as quoted by Bloomberg, L.P., on October 12, 2004, or
(ii) an amount equal to 80% of the lowest closing bid price of our common stock,
as quoted by Bloomberg, L.P., for the five trading days immediately preceding
the conversion date. The 2004 Secured Convertible Debentures were convertible at
the holder's option. The 2004 Secured Convertible Debentures had terms of two
years and were secured by substantially all of our assets. At eTotalSource's
option, the 2004 Secured Convertible Debentures could be paid in cash or
converted into shares of our common stock unless converted earlier by the
holder. Except after an event of default, as set forth in the 2004 Secured
Convertible Debentures, the holders were not entitled to convert such debentures
for a number of shares of our common stock in excess of that number of shares
which, upon giving effect to such conversion, would cause the aggregate number
of shares of common stock beneficially held by such holder and its affiliated to
exceed 4.99% of our outstanding shares of common stock.
On October 6, 2004, we entered into the 2004 Standby Equity
Distribution Agreement with Cornell Capital Partners, LP. Pursuant to the 2004
Standby Equity Distribution Agreement, we may, at our discretion, periodically
sell to Cornell Capital Partners shares of our common stock for a total purchase
price of up to $10,000,000. For each share of common stock purchased under the
2004 Standby Equity Distribution Agreement, Cornell Capital Partners will pay
eTotalSource 98% of the lowest volume weighted average price of our common stock
on the Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the five trading days immediately following the
notice date. Further, Cornell Capital Partners will retain a fee of 5% of each
advance under the 20004 Standby Equity Distribution Agreement. In connection
with the 2004 Standby Equity Distribution Agreement, Cornell Capital Partners
received a one-time commitment fee in the form of 3,833,334 restricted shares of
our common stock issued on October 8, 2004.
II-2
On September 30, 2004, each of the following persons were issued
400,000 restricted shares of common stock in exchange for services provided to
eTotalSource: Michael Sullinger, COO, Virgil Baker, CFO, and A. Richard Barber.
The effective price per share issued was $0.05.
In July of 2004, eTotalSource issued 100,000 restricted shares of
common stock to an unrelated individual for $9,000 of services accrued for in
the second quarter.
Also in July of 2004, eTotalSource issued 1,400,000 shares of
restricted common stock to a former contract consultant in settlement of a
contract. The fair value of the shares were accrued for in the second quarter
based on the quoted price of the stock on the date of settlement, a total of
$126,000.
Also in July of 2004, eTotalSource issued 2,000,000 shares of
restricted common stock to an unrelated company for sales and marketing services
completed and accepted in the third quarter. The shares will be recorded at
their fair value, $300,000, based on the quoted price of the stock at the date
of the contract.
Effective December 19, 2003, eTotalSource entered into a private
placement agreement for the sale of up to 12,000,000 shares of its common stock
pursuant to Regulation S of the Securities Act of 1933, as amended, commencing
in January of 2004. The purchaser had until the sooner of April 30, 2004 or
until 12,000,000 shares are sold to deliver one or more purchase notices to
eTotalSource. The agreement provided for a variable purchase price based on a
percentage of the five-day average closing price on the date of a purchase with
a floor price of $0.08 cents net to eTotalSource. Based on the foregoing private
placement, eTotalSource sold a total of 8,125,000 shares resulting in net
proceeds to eTotalSource of $530,000. The purchaser represented to eTotalSource
that it intended to acquire the shares for its own account with no then present
intention of dividing its interest with others or reselling or otherwise
disposing of all or any portion of the shares. The shares were offered in a
private transaction, not part of a distribution of shares.
Except as otherwise indicated above, eTotalSource believes that all of
the above transactions were transactions not involving any public offering
within the meaning of Section 4(2) of the Securities Act of 1933, as amended,
because: (a) each of the transactions involved the offering of such securities
to a substantially limited number of persons; (b) each person took the
securities as an investment for his/her/its own account and not with a view
toward further distribution; (c) each person had access to information
equivalent to that which would be included in a registration statement on the
applicable form under the Securities Act of 1933, as amended; and (d) each
person had knowledge and experience in business and financial matters to
understand the merits and risk of the investment. Accordingly, no registration
statement needed to be in effect prior to such issuances.
Exhibits Required By Item 601 of Regulation S-B
The exhibits listed below and designated as "provided herewith" (rather
than incorporated by reference) follow the signature page to this prospectus in
sequential order.
DESIGNATION OF
EXHIBIT AS
SET FORTH
IN ITEM 601
OF REGULATION S-B DESCRIPTION LOCATION
- ----------------- ----------- --------
3.1 Articles of Incorporation Incorporated by reference to the Registration
Statement on Form SB-2 filed on April 21, 2005
(File No. 333-124220)
3.2 Bylaws Incorporated by reference to the Registration
Statement on Form SB-2 filed on April 21, 2005
(File No. 333-124220)
3.3 Certificate of Amendment of the Articles of Incorporated by reference to the current report
Incorporation on Form 8-K dated July 14, 2003. (File no.
000-49797)
II-3
DESIGNATION OF
EXHIBIT AS
SET FORTH
IN ITEM 601
OF REGULATION S-B DESCRIPTION LOCATION
- ----------------- ----------- --------
3.4 Articles of Amendment to the Articles of Incorporated by reference to the current report
Incorporation on Form 8-K dated December 1, 2003 (File no.
000-49797)
3.5 Articles of Amendment to the Articles of Incorporated by reference to the Registration
Incorporation Statement on Form SB-2 filed on April 21, 2005
(File No. 333-124220)
4.1 2003 Stock Plan Incorporated by reference to the current
report on Form S-8 dated May 23, 2003. (File
no. 333-105518)
4.11 2004 Stock Plan Incorporated by reference to the current
report on Form S-8 dated July 15, 2004. (File
no. 333-111732)
5.1 Legal Opinion re: legality Incorporated by reference to the Registration
Statement on Form SB-2 filed on April 21, 2005
(File No. 333-124220)
10.1 Plan & Agreement of Reorganization dated Incorporated by reference to the Annual Report
December 18, 2002 by and between Premium on Form 8-K dated December 30, 2002. (File no.
Enterprises, Inc and eTotalSource, Inc. 000-49797)
10.2 Employment Agreement of Terry Eilers dated Incorporated by reference to the Registration
February 7, 2000 (together with Statement on Form SB-2 filed on April 21, 2005
amendment/extension thereto) (File No. 333-124220)
10.3 Employment Agreement of Virgil Baker dated Incorporated by reference to the Registration
February 7, 2000 (together with Statement on Form SB-2 filed on April 21, 2005
amendment/extension thereto) (File No. 333-124220)
10.4 Employment Agreement of Michael Sullinger Incorporated by reference to the Registration
dated August 1, 2002 Statement on Form SB-2 filed on April 21, 2005
(File No. 333-124220)
10.5 Securities Purchase Agreement, dated October Incorporated by reference to the Registration
6, 2004, by and between eTotalSource, Inc. Statement on Form SB-2 filed on April 21, 2005
and Cornell Capital Partners, L.P. (File No. 333-124220)
II-4
DESIGNATION OF
EXHIBIT AS
SET FORTH
IN ITEM 601
OF REGULATION S-B DESCRIPTION LOCATION
- ----------------- ----------- --------
10.6 Investor Registration Rights Agreement, dated Incorporated by reference to the Registration
October 6, 2004, by and between eTotalSource, Statement on Form SB-2 filed on April 21, 2005
Inc. and Cornell Capital Partners, L.P. (File No. 333-124220)
10.7 Security Agreement, dated October 6, 2004, by Incorporated by reference to the Registration
and between eTotalSource, Inc. and Cornell Statement on Form SB-2 filed on April 21, 2005
Capital Partners, L.P. (File No. 333-124220)
10.8 Irrevocable Transfer Agent Instructions, Incorporated by reference to the Registration
dated October 6, 2004, by and among Statement on Form SB-2 filed on April 21, 2005
eTotalSource, Inc., Cornell Capital Partners, (File No. 333-124220)
L.P., and Executive Registrar & Transfer, Inc.
10.9 Escrow Agreement (SEDA), dated October 6, Incorporated by reference to the Registration
2004, by and among eTotalSource, Inc., Statement on Form SB-2 filed on April 21, 2005
Cornell Capital Partners, L.P., and David (File No. 333-124220)
Gonzalez, Esq.
10.10 Escrow Agreement (CD), dated October 6, 2004, Incorporated by reference to the Registration
by and among eTotalSource, Inc., Cornell Statement on Form SB-2 filed on April 21, 2005
Capital Partners, L.P., and David Gonzalez, (File No. 333-124220)
Esq.
10.11 Secured Convertible Debenture, dated October Incorporated by reference to the Registration
6, 2004 Statement on Form SB-2 filed on April 21, 2005
(File No. 333-124220)
10.12 Standby Equity Distribution Agreement, dated Incorporated by reference to the Registration
October 6, 2004, by and between eTotalSource, Statement on Form SB-2 filed on April 21, 2005
Inc. and Cornell Capital Partners, L.P. (File No. 333-124220)
10.13 Registration Rights Agreement, dated October Incorporated by reference to the Registration
6, 2004, by and between eTotalSource, Inc. Statement on Form SB-2 filed on April 21, 2005
and Cornell Capital Partners, L.P. (File No. 333-124220)
10.14 Placement Agent Agreement, dated October 6, Incorporated by reference to the Registration
2004, by and among eTotalSource, Inc., Statement on Form SB-2 filed on April 21, 2005
Cornell Capital Partners, and Newbridge (File No. 333-124220)
Securities Corporation, L.P.
II-5
DESIGNATION OF
EXHIBIT AS
SET FORTH
IN ITEM 601
OF REGULATION S-B DESCRIPTION LOCATION
- ----------------- ----------- --------
10.15 Termination Agreement, dated April 20, 2005 Incorporated by reference to the Registration
by and between eTotalSource, Inc. and Cornell Statement on Form SB-2 filed on April 21, 2005
Capital Partners, L.P. (File No. 333-124220)
10.16 Securities Purchase Agreement, dated April Incorporated by reference to the Registration
20, 2005 by and between eTotalSource, Inc. Statement on Form SB-2 filed on April 21, 2005
and Cornell Capital Partners, L.P. (File No. 333-124220)
10.17 Registration Rights Agreement, dated April Incorporated by reference to the Registration
20, 2005, by and between eTotalSource, Inc. Statement on Form SB-2 filed on April 21, 2005
and Cornell Capital Partners, L.P. (File No. 333-124220)
10.18 Security Agreement, dated April 20, 2005, by Incorporated by reference to the Registration
and between eTotalSource, Inc. and Cornell Statement on Form SB-2 filed on April 21, 2005
Capital Partners, L.P. (File No. 333-124220)
10.19 Irrevocable Transfer Agent Instructions, Incorporated by reference to the Registration
dated April 20, 2005, by and among Statement on Form SB-2 filed on April 21, 2005
eTotalSource, Inc., Cornell Capital Partners, (File No. 333-124220)
L.P., and Executive Registrar & Transfer, Inc.
10.20 Escrow Agreement (SEDA), dated April 20, Incorporated by reference to the Registration
2005, by and among eTotalSource, Inc., Statement on Form SB-2 filed on April 21, 2005
Cornell Capital Partners, L.P., and David (File No. 333-124220)
Gonzalez, Esq.
10.21 Escrow Agreement (CD), dated April 20, 2005, Incorporated by reference to the Registration
by and among eTotalSource, Inc., Cornell Statement on Form SB-2 filed on April 21, 2005
Capital Partners, L.P., and David Gonzalez, (File No. 333-124220)
Esq.
10.22 Secured Convertible Debenture, dated April Incorporated by reference to the Registration
20, 2005 Statement on Form SB-2 filed on April 21, 2005
(File No. 333-124220)
10.23 Standby Equity Distribution Agreement, dated Provided herewith
April 20, 2005, by and between eTotalSource,
Inc. and Cornell Capital Partners, L.P.
10.24 Investor Registration Rights Agreement, dated Incorporated by reference to the Registration
April 20, 2005, by and between eTotalSource, Statement on Form SB-2 filed on April 21, 2005
Inc. and Cornell Capital Partners, L.P. (File No. 333-124220)
II-6
DESIGNATION OF
EXHIBIT AS
SET FORTH
IN ITEM 601
OF REGULATION S-B DESCRIPTION LOCATION
- ----------------- ----------- --------
10.25 Placement Agent Agreement, dated April 20, Incorporated by reference to the Registration
2005, by and among eTotalSource, Inc., Statement on Form SB-2 filed on April 21, 2005
Cornell Capital Partners, and Newbridge (File No. 333-124220)
Securities Corporation, L.P.
14.01 Code of Ethics Incorporated by reference to the Registration
Statement on Form SB-2 filed on April 21, 2005
(File No. 333-124220)
23.1 Updated Consent of Experts and Counsel Provided herewith
(Gordon, Hughes & Banks, LLP)
II-7
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) 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 foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement;
(iii) Include any additional or changed material information
on the plan of distribution;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, 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 bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, 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
United States Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, 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 of 1933, as amended, and will be governed by the final
adjudication of such issue.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing this registration statement on Form
SB-2 and authorized this registration statement to be signed on its behalf by
the undersigned, on June 3, 2005.
eTotalSource, Inc.
By: /s/ Terry L. Eilers
----------------------------------
Name: Terry L. Eilers
Title: Chief Executive Officer, Chairman,
and Principal Executive Officer
By: /s Virgil D. Baker
----------------------------------
Name: Virgil D. Baker
Title: Chief Financial Officer, Director,
and Principal Financial and
Accounting Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Terry L. Eilers
- ----------------------------
Terry L. Eilers Chief Executive Officer and Chairman of the Board June 3, 2005
/s/ Virgil Baker
- ----------------------------
Virgil D. Baker Chief Financial Officer and Director June 3, 2005
/s/ Michael Sullinger
- ----------------------------
Michael Sullinger Chief Operating Officer and Director June 3, 2005
/s/ A. Richard Barber
- ----------------------------
A. Richard Barber Director June 3, 2005
/s/ J. Cody Morrow
- ----------------------------
J. Cody Morrow Director June 3, 2005
II-9