As filed with the United States Securities and Exchange Commission on December
__, 2005
Registration No. 333-124220
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------------------
ETOTALSOURCE, INC.
------------------
(Name of Registrant as specified in its charter)
Colorado 7372 84-1066959
-------- ---- ----------
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
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 Kirkpatrick & Lockhart
Nicholson Graham, LLP Nicholson Graham, LLP
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. |_|
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum Amount Of
Title Of Each Class Of Amount To Be Offering Price Aggregate Offering Registration
Securities To Be Registered Registered Per Share (1) Price (1) Fee (3)
- --------------------------- ------------------ ---------------- ------------------ ------------
Common Stock, no par value 245,340,000 shares(2) $0.009 $2,208,060 $259.87
per share
TOTAL 245,340,000 shares(2) $0.009 $2,208,060 $259.87
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended. For
the purposes of this table, we have used the closing price of the common
stock traded on the Over-the-Counter Bulletin Board within 5 days from the
date hereof.
(2) Of these shares, 225,000,000 are shares of common stock to be issued upon
the conversion of the November 2005 Debentures issued to Cornell Capital
Partners LP, ("Cornell") 7,000,000 to be issued to Cornell upon the
exercise of warrants, 3,833,334 shares of common stock are issued to
Cornell as a one-time commitment fee under the 2004 SEDA, and 9,340,000
shares are being registered on behalf of other selling stockholders as
described herein.
(3) A registration fee of $931.89 was previously paid as part of the
Registration Statement filed with the U.S. Securities and Exchange
Commission on April 21, 2005, which was subsequently withdrawn on October
21, 2005. The Company hereby requests that the previously paid fee be
applied toward this registration fee.
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.
Prospectus subject to completion, dated December __, 2005
PROSPECTUS
eTotalSource, Inc.
245,340,000 Shares of Common Stock
This Prospectus relates to the sale of up to 245,340,000 shares of common
stock of eTotalSource, Inc. ("eTotalSource" or the "Company") by certain persons
who are stockholders of eTotalSource. The selling stockholders consist of:
The selling stockholders consist of:
o Cornell Capital Partners, LP ("Cornell") which intends to sell up to
an aggregate amount of 235,083,334 shares of eTotalSource common
stock, which includes 225,000,000 shares of common stock to be
issued upon the conversion of the November 2005 Debentures,
7,000,000 to be issued upon the exercise of warrants, and 3,833,334
shares of common stock issued as a one-time commitment fee in
connection with that certain Standby Equity Distribution Agreement,
dated October 6, 2004 (the "2004 SEDA").
o Newbridge Securities Corporation, an unaffiliated registered
broker-dealer retained by eTotalSource in connection with that
certain 2004 SEDA, which intends to sell 166,666 shares of
eTotalSource common stock issued as a one-time placement agent fee.
o Other selling stockholders, who 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 13 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. 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 December 27, 2005, the closing price of our
common stock was $0.009 per share.
The secured convertible debentures were issued pursuant to a Securities
Purchase Agreement, dated November 2, 2005, entered into by and between the
Company and Cornell, pursuant to which the Company issued to Cornell secured
convertible debentures in the amount of $1,000,000 (the "November 2005
Debentures"). The November 2005 Debentures are secured by substantially all of
the Company's assets, have a three-year term and accrue interest at 12% per
annum. Cornell is entitled, at its option, to convert, and sell all or any part
of the principal amount of the November 2005 Debentures, plus accrued interest
thereon, into shares of the Company's common stock at the price per share equal
to the lesser of (a) an amount equal to an amount equal to 120% of the closing
bid price of the Company's common stock as listed on a principal market as
quoted by Bloomberg LP, on the date hereof or (b) an amount equal to 80% of the
lowest closing bid price of the Company's common stock for the five trading days
immediately preceding the conversion date which may be adjusted pursuant to the
other terms of the November 2005 Debentures. 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.
No 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 (the "Commission").
Neither the 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 December __, 2005.
ii
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY............................................................1
THE OFFERING..................................................................3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION....................................4
RISK FACTORS..................................................................6
FORWARD-LOOKING STATEMENTS...................................................12
SELLING STOCKHOLDERS.........................................................13
PLAN OF DISTRIBUTION.........................................................20
MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................21
DESCRIPTION OF BUSINESS......................................................27
MANAGEMENT...................................................................30
FISCAL YEAR-END OPTIONS/SAR VALUES...........................................32
DESCRIPTION OF PROPERTY......................................................34
LEGAL PROCEEDINGS............................................................35
PRINCIPAL STOCKHOLDERS.......................................................36
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................38
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS..................................................39
DESCRIPTION OF SECURITIES....................................................43
EXPERTS......................................................................47
LEGAL MATTERS................................................................47
HOW TO GET MORE INFORMATION..................................................47
FINANCIAL STATEMENTS........................................................F-i
PART II....................................................................II-1
i
PROSPECTUS SUMMARY
Our History
Premium Enterprises, Inc. ("Premium") was incorporated in Colorado on
September 16, 1987. For a period of time in 1988 to 1994, 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 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 September 30, 2005, had a net working capital deficit of
$2,957,722, a stockholders' deficit of $3,092,952, notes payable totaling
$1,022,114 were in default with related accrued interest in arrears of $85,099,
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. 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 intends to register 245,340,000 shares of its common stock in
this Registration Statement. Of these shares, 225,000,000 are being registered
under the November 2005 Debentures, in the aggregate principal amount of
$1,000,000, issued to Cornell. The November 2005 Debentures are secured by
substantially all of the Company's assets, have a three-year term and accrue
interest at 12% per annum. Cornell is entitled, at its option, to convert, and
sell all or any part of the principal amount of the November 2005 Debentures,
plus accrued interest thereon, into shares of the Company's common stock at the
price per share equal to the lesser of (a) an amount equal to an amount equal to
120% of the closing bid price of the Company's common stock as listed on a
principal market as quoted by Bloomberg LP, on the date hereof or (b) an amount
equal to 80% of the lowest closing bid price of the common stock for the five
trading days immediately preceding the conversion date which may be adjusted
pursuant to the other terms of the November 2005 Debentures. The shares
registered under the November 2005 Debentures in this Registration Statement
represent 75% of eTotalSource's authorized capital stock and would upon issuance
represent approximately 83% of eTotalSource's then issued and outstanding common
stock. Cornell intends to resell all of these shares. The sale of shares to be
issued upon the conversion of the November 2005 Debentures will have a dilutive
impact on existing shareholders. The significant downward pressure on
eTotalSource's stock price caused by the sale of a significant number of shares
underlying the November 2005 Debentures 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
the Company's common stock.
Additionally, we are registering on behalf of Cornell 7,000,000 shares to
be issued upon the exercise of warrants and 3,833,334 shares of common stock
issued as a one-time commitment fee in connection with the 2004 SEDA. We are
registering on behalf of Newbridge 166,666 shares of common stock issued as a
one-time placement agent fee in connection with the 2004 SEDA, and 9,340,000
shares of eTotalSource common stock previously issued in various financing
transactions with eTotalSource for various other selling stockholders.
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 eTotalSource stockholders. The selling stockholders consist of:
o Cornell which intends to sell up to an aggregate amount of
235,083,334 shares of eTotalSource common stock, which includes
225,000,000 shares of common stock to be issued upon the conversion
of the November 2005 Debentures, 7,000,000 to be issued upon the
exercise of warrants, and 3,833,334 shares of common stock issued as
a one-time commitment fee in connection with the 2004 SEDA.
o Newbridge, an unaffiliated registered broker-dealer retained by
eTotalSource in connection with that certain 2004 SEDA, dated
October 6, 2004, which intends to sell 166,666 shares of
eTotalSource common stock issued as a one-time placement agent fee
thereunder.
o Other selling stockholders, whom intend to sell up to an aggregate
amount of 9,340,000 shares of eTotalSource common stock previously
issued in various financing transactions with the Company.
The November 2005 Debentures were issued pursuant to a Securities Purchase
Agreement, dated November 2, 2005, entered into by and between the Company with
Cornell. The November 2005 Debentures are secured by substantially all of the
Company's assets, have a three-year term and accrue interest at 12% per annum.
Cornell is entitled, at its option, to convert, and sell all or any part of the
principal amount of the debentures, plus accrued interest, into shares of the
Company's common stock at the price per share equal to the lesser of (a) an
amount equal to an amount equal to 120% of the closing bid price of the common
stock as listed on a principal market as quoted by Bloomberg LP, on the date
hereof or (b) an amount equal to 80% of the Company's lowest closing bid price
of the Company's common stock for the five trading days immediately preceding
the conversion date which may be adjusted pursuant to the other terms of the
November 2005 Debentures.
Common Stock Offered 245,340,000 shares by selling stockholders
Offering Price Market price
Common Stock Outstanding 46,710,821 shares (as of December 27, 2005)
Before the Offering
Use of Proceeds eTotalSource will not receive any proceeds from
the shares offered by the selling stockholders.
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 "ETLS.OB"
Board Symbol
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
Nine Nine
Months Ended Months Ended Year Ended Year Ended
09/30/05 09/30/04 12/31/04 12/31/03
------------ ------------ ------------ ------------
Revenues $ 41,836 $ 185,865 $ 209,198 $ 281,919
General and Administrative Expenses 727,254 1,803,447 2,390,905 1,860,146
------------ ------------ ------------ ------------
Operating Income (Loss) (685,418) (1,617,582) (2,181,707) (1,578,227)
------------ ------------ ------------ ------------
Other Income (Expense)
Gain (loss) on sale/ retirement of assets (245) 47 -- 205,705
Interest expense (188,125) (140,193) (190,592) (602,045)
Other income (expense), net 1,342 (209) (376) 7,992
------------ ------------ ------------ ------------
Total Other Income (Expense) (187,028) (140,355) (190,968) (388,348)
------------ ------------ ------------ ------------
Net (Loss) $ (872,446) $ (1,757,937) $ (2,372,675) $ (1,966,575)
============ ============ ============ ============
Basic and Diluted (Loss) per Share $ (0.02) $ (0.05) $ (0.06) $ (0.10)
============ ============ ============ ============
Weighted Average Common Shares Outstanding 46,710,821 36,197,851 37,897,170 19,830,586
============ ============ ============ ============
4
Balance Sheet Data
eTotalSource, Inc.
Condensed Consolidated Balance Sheets
ASSETS September 30, 2005 December 31, 2004
------------------ -----------------
Current Assets
Cash $ 12,661 $ 37,849
Other 1,242 1,296
------------------ -----------------
Total Current Assets 13,903 39,145
------------------ -----------------
Property and Equipment
Furniture and equipment 86,450 88,122
Less accumulated depreciation (64,809) (56,786)
------------------ -----------------
21,641 31,336
------------------ -----------------
Other Assets
Patent applications and trademarks, less $18,456 and
$15,431 accumulated amortization, respectively 21,882 24,907
Deposits 721 1,162
------------------ -----------------
22,603 26,069
------------------ -----------------
Total Assets $ 58,147 $ 96,550
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Convertible notes payable less $89,856 discount $ 260,143 $ 417,569
Other notes payable 757,000 632,000
Judgments payable 204,788 204,788
Accounts payable 370,269 183,461
Accrued compensation payable 1,081,983 845,880
Accrued interest payable 263,692 185,475
Deferred revenue 33,750 67,500
------------------ -----------------
Total Current Liabilities 2,971,625 2,536,673
Convertible Notes Payable, less current maturities and $170,526 discount 179,474 117,900
------------------ -----------------
Total Liabilities 3,151,099 2,654,573
------------------ -----------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock; no par value; 300 million shares authorized,
46,710,821 shares issued and outstanding 6,121,817 5,784,300
Accumulated (deficit) (9,214,769) (8,342,323)
------------------ -----------------
Total Stockholders' Equity (Deficit) (3,092,952) (2,558,023)
------------------ -----------------
Total Liabilities and Stockholders' Equity (Deficit) $ 58,147 $ 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 Years Ended December 31, 2004 and 2003, The Nine
months Ended September 30, 2005, And Losses May Continue In The Future
For the 12 months ended December 31, 2004 and 2003, we incurred a net loss
of $2,372,675 and $1,966,575, respectively. For the nine months ended September
2005 and September 2004, we incurred net losses of $872,446 and $1,757,937,
respectively. 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 rely on the
funds in connection with the November 2005 Debentures. 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 and second quarters 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 September 30, 2005, had a net working capital deficit of
$2,957,722, a stockholders' deficit of $3,092,952, notes payable totaling
$1,022,114 were in default with related accrued interest in arrears of $85,099,
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
statements which accompany this Prospectus do not include any adjustments that
might result from the outcome of this uncertainty.
6
We Have Negative Working Capital Which May Affect our Ability to Continue As A
Going Concern
We had negative working capital of $2,497,528 and $2,385,502 at December
31, 2004 and December 31, 2003, respectively, negative working capital of
$2,957,722 for the nine months ended September 30, 2005, and continue to need
cash for operations. We have relied on significant external financing to fund
our operations. As of September 30, 2005, we had $12,661 of cash on hand, total
current assets were $13,903, and our total current liabilities were $2,971,625.
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, we believe that we
have sufficient funds to continue operations only until March 31, 2006. We will
attempt to secure additional funding from third parties, but there is no
assurance that we will be successful in obtaining such funding. 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 September 30, 2005, we have issued an aggregate of 11,731,908
shares of common stock for cash to finance our operations. We will issue up to
an additional 234,396,000 shares for services if all of the outstanding
debentures and the outstanding options and warrants as of December 30, 2005 are
subsequently 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
Pursuant to the terms contained in that certain Amended and Restated
Security Agreement dated November 2, 2005, by and between eTotalSource and
Cornell, all of our obligations under the Securities Purchase Agreement, the
November 2005 Debenture, the Investor Registration Rights Agreement, the
Irrevocable Transfer Agent Instructions, and the Escrow Agreement are secured by
substantially all of our assets as of such date or 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, business experience,
understanding of the industry 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.
7
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 January 3, 2005 through
December 29, 2005 was 61,373 shares. The high and low trading price of our
common stock during the same period has been $0.0525 and $0.009, 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;
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.
8
Shareholders should be aware that, according to the 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.
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.
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 December 27, 2005, 22,802,668
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
232,000,000 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 The Conversion
Of November 2005 Debentures
Cornell may convert the November 2005 Debentures described herein into
shares of eTotalSource's common stock, at a conversion price which is at a 20%
discount to the market price. The subsequent sale of such shares by Cornell
could cause significant downward pressure on the price of eTotalSource's common
stock. This is especially the case if the shares being placed into the market
exceed the market's demand for the shares of eTotalSource's common stock. As the
stock price of eTotalSource's common stock declines, Cornell will be entitled to
receive an increasing number of shares under the convertible debentures. The
sale of such increasing number of shares by Cornell could cause further downward
pressure on the stock price to the detriment and dilution of existing investors,
as well as investors in this offering.
9
Further, there is no maximum number of shares eTotalSource might be
required to issue under securities with market-price based conversion or
exercise prices, such as securities issued in connection with the November 2005
Debentures, except for the 4.99% limitation on Cornell's ownership interest in
eTotalSource at any one time. However, Cornell may acquire and sell a number of
shares that far exceeds this limit, through the continual purchase and sale of
shares.
As a result, our net income per share could decrease in future periods,
and the market price of our common stock could decline. In addition, the lower
our stock price, the more shares of common stock we will have to issue upon
conversion of the November 2005 Debentures. If our stock price is lower, then
our existing stockholders would experience greater dilution.
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
245,340,000 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.
The Sale Of Material Amounts Of Common Stock Under The Accompanying Registration
Statement Could Encourage Short Sales By Third Parties
In many circumstances the provision of November 2005 Debentures for
companies that are traded on the Over-the-Counter Bulletin Board has the
potential to cause a significant downward pressure on the price of common stock.
This is especially the case if the shares being placed into the market exceed
the market's ability to take up the increased stock or if eTotalSource has not
performed in such a manner to show that the debt raised will be used to grow
eTotalSource. Such an event could place further downward pressure on the price
of common stock.
The outstanding November 2005 Debentures are convertible at a 20% discount
to the market price of our common stock. As a result, the opportunity exists for
short sellers and others to contribute to the future decline of eTotalSource's
stock price. Persons engaging in short sales first sell shares that they do not
own, and thereafter, purchase shares to cover their previous sales. To the
extent the stock price declines between the time the person sells the shares and
subsequently purchases the shares, the person engaging in short sales will
profit from the transaction, and the greater the decline in the stock, the
greater the profit to the person engaging in such short-sales. Because the
November 2005 Debentures are convertible at a discount to market, it is possible
that the debentures could be converted if the market price of our common stock
declines, thus, supplying any short sellers with the opportunity to cover their
short positions. By contrast, a person owning a long position in a stock, such
as an investor purchasing shares in this offering, first purchases the shares at
the then market price, if the stock price declines while the person owns the
shares, then upon the sale of such shares the person maintaining the long
position will incur a loss, and the greater the decline in the stock price, the
greater the loss which is incurred by the person owning a long position in the
stock.
If there are significant short sales of our stock, the price decline that
would result from this activity will cause our share price to decline more so
which in turn may cause long holders of our stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for our stock the price will decline. It is not possible
to predict if the circumstances where by a short sales could materialize or to
what our share price could drop. In some companies that have been subjected to
short sales their stock price has dropped to near zero. We cannot provide any
assurances that this situation will not happen to us.
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.
The Issuance Of Shares Of Common Stock Under This Offering Could Result In A
Change Of Control
We are registering 245,340,000 shares of common stock in this offering.
These shares represent approximately 82% of our authorized capital stock and
would upon issuance, which does not take into consideration shares already
issued to the selling stockholders, represent approximately 83% 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.
10
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.
11
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
Shares Shares Acquired Under the of Shares
Beneficially Beneficially Standby Equity Shares to Beneficially
Owned Before Owned Before Distribution be Sold in Owned After
Selling Stockholder Offering Offering (1) Agreement the Offering Offering (1)
- ----------------------------------- ------------ ------------- ------------------ ------------ ------------
Cornell Capital Partners, LP 3,833,334(2) 8.21% 235,683,334 200,000,000(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 December 27, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
December 27, 2005. Beneficial ownership is determined in accordance with
the rules of the 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 December 27, 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 SEDA.
(3) The total amount of shares to be sold in the offering by Cornell is
comprised of: (a) 225,000,000 shares which are being registered pursuant
to the November 2005 Debentures; (b)7,000,000 shares pursuant to warrants
issued to Cornell; and (c) 3,833,334 shares being registered as a one-time
commitment fee issued in connection with the 2004 SEDA. Please note that
the terms of the November 2005 Debentures held by Cornell provide that,
except upon an event of default or at maturity, in no event shall Cornell
be entitled to convert such November 2005 Debentures for a number of
shares which, upon giving effect to the conversion, would cause the
aggregate number of shares beneficially owned by Cornell and its
affiliates to exceed 4.99% of the total outstanding shares of eTotalSource
following such conversion. Please also note that for the November 2005
Debentures conversion, we are assuming a market price of $0.009 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 November 2005 Debentures may be higher or lower. All investment
decisions of Cornell 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.
(4) Received as a one-time placement agent fee under the Placement Agent
Agreement, dated October 6, 2004. Guy Amico makes the investment decisions
on behalf of Newbridge.
(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.
(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.
12
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
Cornell is the holder of the November 2005 Debentures, as described below.
All investment decisions of Cornell 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 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 in 2004,
all of which have since been mutually terminated pursuant to a termination
agreement as described below:
o The 2004 Securities Purchase Agreement. On October 6, 2004, we
entered into a Securities Purchase Agreement with Cornell. Pursuant
to the Securities Purchase Agreement, eTotalSource could have sold
to Cornell, and Cornell could have purchased from eTotalSource, up
to $350,000 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 on or about October 6,
2004, were mutually terminated by eTotalSource and Cornell pursuant
to that certain Termination Agreement dated April 20, 2005 (the
"April Termination Agreement").
o The 2004 Standby Equity Distribution Agreement (the "2004 SEDA"). On
October 6, 2004, we also entered into a Standby Equity Distribution
Agreement with Cornell. Pursuant to the 2004 SEDA, we could have, at
our discretion, periodically sold to Cornell 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 SEDA, Cornell would
have paid eTotalSource 98%, or a 2% discount, 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
was traded for the five trading days immediately following the
notice date. Further, Cornell would have retained a fee of 5% of
each advance under the 2004 SEDA. In connection with the 2004 SEDA,
Cornell 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 SEDA
was mutually terminated by eTotalSource and Cornell pursuant to the
April 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 Company's 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
the Company's 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 the
Company's 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 the Company's 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 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 pursuant to the April
Termination Agreement; however, the outstanding principal amounts
and accrued interest under the two 2004 Secured Convertible
debentures were refinanced as the 2005 Secured Convertible
Debentures that eTotalSource and Cornell entered into on April 20,
2005, the terms of which are described below.
13
Pursuant to that certain Registration Statement on Form SB-2, which we
filed with the Commission on November 24, 2004 (File No. 333-120786) (the "2004
Registration Statement"), we intended to register 15,000,000 shares under the
2004 SEDA, 3,833,334 shares issued to Cornell as a one-time commitment fee
pursuant to the 2004 SEDA, 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 a form RW with the Commission a request for an
order permitting eTotalSource to withdraw the 2004 Registration Statement.
On April 20, 2005, we terminated the 2004 SEDA, the 2004 Secured
Convertible Debentures, the 2004 Securities Purchase Agreement, and all other
financing agreements that we entered into with Cornell on October 6, 2004 by
execution of the November Termination Agreement described below.
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 in 2005:
o The November 2005 Securities Purchase Agreement. On November 2,
2005, we entered into a Securities Purchase Agreement with Cornell,
pursuant which we sell to Cornell, and Cornell may purchase from us,
up to $1,000,000 of secured convertible debentures pursuant to the
terms contained in the November 2005 Debentures described below.
o The November 2005 Secured Convertible Debentures (the "November 2005
Debentures"). The November 2005 Debentures were issued to
consolidate a convertible debenture dated October 7, 2004, in the
original principal amount of $175,000, a convertible debenture dated
December 2, 2004, in the original principal amount of $175,000 (both
Convertible Debentures shall collectively referred to as the "2004
Debentures") and a Convertible Debenture dated August 24, 2005, in
the original principal amount of $100,000 (the "August Debenture"),
plus accrued and unpaid interest on the 2004 Debentures and the
August Debenture, and to reflect additional funding in the amount of
$530,130. The November 2005 Debentures are secured by substantially
all of the Company's assets, have a three-year term and accrue
interest at 12% per annum. Cornell is entitled, at its option, to
convert, and sell all or any part of the principal amount of the
debentures, plus accrued interest, into shares of the Company's
common stock at the price per share equal to the lesser of (a) an
amount equal to an amount equal to 120% of the closing bid price of
the Company's common stock as listed on a principal market as quoted
by Bloomberg LP, on the date hereof or (b) an amount equal to 80% of
the lowest closing bid price of the Company's common stock for the
five trading days immediately preceding the conversion date which
may be adjusted pursuant to the other terms of the November 2005
Debentures.
o The 2005 Securities Purchase Agreement. On April 20, 2005, we
entered into a Securities Purchase Agreement with Cornell. Pursuant
to the 2005 Securities Purchase Agreement, eTotalSource could have
sold to Cornell, and Cornell could have purchased from eTotalSource,
up to $350,000 of secured convertible debentures pursuant to the
terms contained in the 2005 Secured Convertible Debentures described
below. The 2005 Securities Purchase Agreement, along with the
related Security Agreement, Secured Convertible Debentures and
Escrow Agreement, each dated as of April 20, 2005, were mutually
terminated by eTotalSource and Cornell pursuant to that certain
Termination Agreement dated November 2, 2005 (the "November
Termination Agreement").
14
o The 2005 Standby Equity Distribution Agreement. On April 20, 2005,
we entered into a Standby Equity Distribution Agreement with
Cornell. Pursuant to the 2005 Standby Equity Distribution Agreement,
we could have, at our discretion, periodically sold to Cornell
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 would have paid
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 the Company's common stock is traded for
the five trading days immediately following the notice date.
Further, Cornell would have retained a fee of 5% of each advance
under the 2005 Standby Equity Distribution Agreement. In light of
the restrictions contained in the 2005 Standby Equity Distribution
Agreement, we would have needed to submit a $200,000 advance request
approximately every 10 trading days for 23 months in order to attain
the full $10,000,000 available under the 2005 Standby Equity
Distribution Agreement. At a recent stock price of $0.009, we would
have had to issue 22,675,737 shares of common stock to Cornell to
draw down the maximum advance amount of $200,000. The 2005 Standby
Equity Distribution Agreement, along with the related Investor
Registration Rights Agreement, Placement Agent Agreement,
Irrevocable Transfer Agent Instructions, and Escrow Agreement, all
of which were dated as of April 20, 2005, were terminated by
eTotalSource and Cornell pursuant to the November Termination
Agreement.
In its original Registration Statement filed with the Commission on
April 21, 2005, the Company mistakenly filed an unexecuted draft of
the 2005 Standby Equity Distribution Agreement as an exhibit, which
draft included Sections 2.2(c) and (d). However, the final version
of the 2005 Standby Equity Distribution Agreement, which was
executed by the parties on April 20, 2005, did not include such
Sections 2.2(c) and (d). These provisions were removed based on
Cornell's request in response to comments it had received from the
Commission which suggested that these provisions were raising issues
that could prevent Cornell from being bound and irrevocably
committed under the Standby Equity Distribution Agreement as
required in the Commission's Interpretation 4S of the March 1999
Supplement of the Commission's publicly available Telephone
Interpretations (the "4S Interpretation").
There were no agreements, understanding or arrangements, whether
written or oral between the Company and Cornell with respect to
these changes, nor was any additional consideration, right or future
benefit provided or promised either the Company or by Cornell to the
other in connection with the deletion of Sections 2.2(c) and (d)
from the 2005 Standby Equity Distribution Agreement.
The error regarding the filing of the unexecuted draft was
discovered by the Company's Chief Operating Officer on or about May
12, 2005 upon reviewing the original Registration Statement and
exhibits thereto. The Chief Operating Officer notified Cornell
shortly thereafter of the variances between the agreements, but did
not notify the Commission or amend its registration statement
immediately upon discovery it needed some time to confer with its
outside legal counsel and Cornell and discuss how best to rectify
the error and what impact, if any, the error would have on the
Registration Statement. The Commission noted the discrepancy in a
Comment Letter sent to the Company on May 20, 2005, and the Company
has subsequently addressed this issue in subsequent Amendments to
the Registration Statement and filed amended exhibits with the
correct version of the 2005 Standby Equity Distribution Agreement.
Please note, although not specifically described in the original
registration statement, Section 2.6 (i) of the 2005 Standby Equity
Distribution Agreement was intended to apply to (and in practice,
has applied) only to third parties (including officers and directors
of the Company), and not to any shares issued or sold to Cornell
under the 2005 Secured Convertible Debenture or other financing
documents between the Company and Cornell. This interpretation by
the Company has been verified orally by Cornell. As noted above, the
2005 Standby Equity Distribution Agreement was terminated pursuant
to the November Termination Agreement.
o The 2005 Secured Convertible Debentures (the Refinanced 2004 Secured
Convertible Debentures). The 2005 Secured Convertible Debentures
were convertible at the holder's option any time up to maturity at a
conversion price per share equal to $0.0112. The terms of 2005
Secured Convertible Debentures did not preclude non-cash redemption.
As part of the redemption process, 20% of the indebtedness under the
Debenture would be convertible into common stock at the conversion
price of $0.0112 per share. Given this fixed rate, it was not
advantageous for the Company to redeem the Debenture for any amount
greater than required unless the stock's value declined to a value
equal to or less than that fixed rate. The 2005 Secured Convertible
Debentures were secured by substantially all of eTotalSource's
assets. The 2005 Secured Convertible Debentures accrued interest at
a rate of 5% per year and had a 2-year term. Cornell 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
pursuant to the Termination Agreement; however, the principal
amounts and accrued interest outstanding under the 2004 Secured
Convertible Debentures became subject 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). On November 2, 2005, the Company
consolidated the 2005 Secured Convertible Debentures (which included
the 2004 Secured Convertible Debentures) and a Convertible Debenture
dated August 19, 2005, in the original principal amount of $100,000
(the "August Debenture"), plus accrued and unpaid interest on the
2004 Debentures and the August Debenture, as well as additional
funding in the amount of $530,130, under the terms of the November
2005 Debentures.
15
o The 2005 Amended and Restated Escrow Agreements. The originally
filed Escrow Agreements as exhibits to the Registration Statement
filed with the Commission on April 21, 2005, contained provisions in
Section 7.a.i that granted the escrow agent, an affiliate of
Cornell, discretion with regard to the action he could take in the
event of a dispute or uncertainty involving the escrowed funds. In a
comment letter sent to the Company after filing the original
Registration Statement, the Commission expressed its concern with
respect to Section 7.a.i., particularly that any right of an
affiliate of the equity line financier to exercise discretion with
respect to escrowed funds appears inconsistent with the unrestricted
obligation that must be imposed upon the funding party concerning
its obligations to perform with respect to a put notice. In light of
the Commission comments, Cornell decided to amend the Escrow
Agreements as to remove any such discretion previously granted to
the escrow agent. Subsequently, on September 1, 2005, Cornell and
the Company entered into an Amended and Restated Escrow Agreements
in connection with the 2005 Standby Equity Distribution Agreement
and an Amended and Restated Escrow Agreements in connection with the
2005 Secured Convertible Debenture, whereby the escrow agent's
discretion was removed. The Amended and Restated Escrow Agreements
have been filed as exhibits to the Amendment No. 2 to the
Registration Statement, filed with the Commission on September 6,
2005 (File No. 333-124220). The 2005 Amended and Restated Escrow
Agreements were terminated pursuant to the November Termination
Agreement.
Newbridge Securities Corporation ("Newbridge"). The Company engaged
Newbridge Securities Corporation, an unaffiliated registered broker-deal, to
advise eTotalSource in connection with the 2004 SEDA. Guy Amico makes the
investment decisions on behalf of Newbridge. Newbridge 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.
Pursuant to that certain Registration Statement on Form SB-2, which we
filed with the Commission on April 21, 2005 (File No. 333-124220) (the "2005
Registration Statement"), we intended to register 200,000,000 shares under the
2005 Standby Equity Distribution Agreement, 3,833,334 shares issued to Cornell
as a one-time commitment fee pursuant to the 2004 SEDA, 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 October 21, 2005, we filed with the Commission a request for an order
permitting eTotalSource to withdraw the 2005 Registration Statement.
On November 2, 2005, we terminated the 2005 Standby Equity Distribution
Agreement, the 2005 Secured Convertible Debentures, the 2005 Securities Purchase
Agreement, and all other financing agreements that we entered into with Cornell
on April 20, 2005 by execution of the November Termination Agreement.
Accordingly, none of the shares that we intended to register under the
2005 Registration Statement were in fact registered and no such shares were
sold.
In the registration statement that accompanies this Prospectus, we intend
to register the 3,833,334 shares issued to Cornell as a one-time commitment fee
and the 166,666 shares of common stock issued to Newbridge Securities
Corporation as a one-time placement agent fee, which were both issued in
connection with the 2004 SEDA, along with 225,000,000 shares of common stock to
be issued upon the conversion of the November 2005 Debentures, 7,000,000 to be
issued upon the exercise of warrants, and an additional 9,340,000 shares that we
intend to register on behalf of other selling stockholders.
Risks Related to Sales by Cornell
There are certain risks related to sales by Cornell, 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 is issued shares, the greater chance that Cornell gets more
shares. This could result in substantial dilution to the interests
of other holders of our common stock.
o To the extent Cornell sells its common stock, our common stock price
may decrease due to the additional shares in the market. This could
allow Cornell to sell greater amounts of common stock, the sales of
which would further depress our stock price.
16
o The significant downward pressure on the price of our common stock
as Cornell 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.
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.
17
USE OF PROCEEDS
This Prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
On November 4, 2005, we received $412,221.91 representing the net proceeds
from the issuance of November 2005 Debentures to the selling stockholders under
the Securities Purchase Agreement, dated November 2, 2005. The total net
proceeds take into account estimated expenses in the amount of $117,908.09 and
payment of prior debt to Cornell in the amount of $469.870.
We have represented to Cornell that the net proceeds under the November
2005 Debentures will be used for general corporate and working capital purposes
only.
18
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 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 (the "Securities Act")
Cornell was formed in February of 2000 as a Delaware limited partnership.
Cornell is a domestic hedge fund in the business of investing in and financing
public companies. Cornell 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.
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
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 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 Commission
registration fee of $259.87, printing and engraving fees and expenses of $2,500,
accounting fees and expenses of $20,000, legal fees and expenses of
approximately $50,000, and miscellaneous expenses of $12,240.11. We will not
receive any proceeds from the sale of any of the shares of common stock by the
selling stockholders.
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 Commission.
19
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 third 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 September 30, 2005, had a net working capital
deficit of $2,957,722, a stockholders' deficit of $3,092,952, notes payable
totaling $1,022,114 were in default with related accrued interest in arrears of
$85,099, 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. 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 and second quarters of
2005 resulting in operating losses and liquidity shortages, including default
conditions on certain notes payable and judgments payable to creditors. As of
September 30, 2005, current liabilities exceed current assets by approximately
$2.96 million.
20
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
Results of Operations For The Three-Month Period Ended September 30, 2005
Compared To The Same Period Ended September 30, 2004
Revenues
Revenues for the three months ended September 30, 2005 were $12,852 versus
$70,598 for the corresponding 2004 period, a decrease of $57,746 or 82%. The
decrease was attributable to fewer sales of the compact disk training products
and decreased sales of software.
Expenses
Operating expenses for the three-month period ended September 30, 2005
were $207,584 as compared with $598,309 for the comparable period in 2004, a
decrease of $390,725 or 65%. The decrease was primarily due to a decrease in
stock compensation and payroll expenses. Payroll expenses for the three-month
period ended September 30, 2005 were $79,081 as compared to $108,862 for the
comparable period in 2004, a decrease of $29,781 or 27%.
Interest expense for the three-month period ended September 30, 2005 was
$75,585 as compared with $36,313 for the corresponding 2004 period, an increase
of $39,272 or 108%. 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 of a secured convertible debenture in 2005.
Net Income (Loss)
The Company recognized a net loss for the three-month period ended
September 30, 2005 in the amount of $270,495 or $0.01 per share, as compared
with a loss of $564,319, $0.02 per share for the corresponding period ended
September 30, 2004. The decrease of $293,824 or $0.01 per share was attributable
to the decrease in stock issued as compensation and in lieu of interest.
Results of Operations For The Nine-Month Period Ended September 30, 2005
Compared To The Same Period Ended September 30, 2004
Revenues
Revenues for the nine-month period ended September 30, 2005 were $41,836
versus $185,865 for the corresponding 2004 period, a decrease of $144,029 or
77%. The decrease was attributable to fewer sales of eTotalSource's CD training
products and decreased sales of software.
Expenses
Operating expenses for the nine-month period ended September 30, 2005 were
$727,254 as compared to $1,803,447 for the comparable 2004 period, a decrease of
$1,076,193 or 60%. The decrease was primarily due to a decrease in stock
compensation and payroll expenses. Payroll expenses for the nine-month period
ended September 30, 2005 were $276,323 as compared to $327,698 for the
comparable period in 2004, a decrease of $51,375 or 16%.
Interest expense for the nine-month period ended September 30, 2005 was
$188,125 as compared to $140,193 for the corresponding 2004 period, an increase
of $47,932 or 34%. 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 of a secured convertible debenture in 2005.
21
Net Income (Loss)
The Company recognized a net loss for the nine-month period ended
September 30, 2005 in the amount of $872,446 or $0.02 per share, as compared
with a loss of $1,757,937 or $0.05 per share for the corresponding period ended
September 30, 2004. The decrease of $885,491 or $0.03 per share was attributable
to the decrease in stock compensation and payroll expenses.
Results of Operations 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.
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
22
At September 30, 2005, eTotalSource had $12,661 in cash with which to
conduct operations, a decline of $25,188 during the preceding nine months. 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 except contingently available through the
Convertible Debentures described below.
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 existing capital may be a sufficient impediment to prevent eTotalSource
from accomplishing the goal of successfully executing its business plan.
eTotalSource will need to raise $2M to conduct its business activities over the
12-month period following expected date of effectiveness of the Registration
Statement. At the present, our current cash will last until March 31, 2006.
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.
Capital Resources
On November 2, 2005, the Company issued to Cornell secured convertible
debentures in the principal amount of $1,000,000. The November 2005 Debentures
were issued to consolidate the 2004 Debentures in the aggregate principal amount
of $350,000, the August Debenture in the principal amount of $100,000 (as
described below), plus accrued and unpaid interest on the 2004 Debentures and
the August Debenture, and to reflect additional funding in the amount of
$530,130. The November 2005 Debentures are secured by substantially all of the
Company's assets, have a three-year term and accrue interest at 12% per annum.
Cornell is entitled, at its option, to convert, and sell all or any part of the
principal amount of the November 2005 Debenture, plus accrued interest, into
shares of the Company's common stock, no par value per share, at the price per
share equal to the lesser of (a) an amount equal to an amount equal to 120% of
the closing bid price of the common stock as listed on a principal market as
quoted by Bloomberg LP, on the date hereof or (b) an amount equal to 80% of the
lowest closing bid price of the Company's common stock for the five trading days
immediately preceding the conversion date which may be adjusted pursuant to the
other terms of the November 2005 Debentures.
On August 24, 2005, the Company issued to Cornell a secured convertible
debenture in the principal amount of $100,000 (the "August Debenture"). Any part
of the principal amount of the August Debenture, plus accrued interest thereon,
was convertible at any time up to maturity, at Cornell's option, into shares of
the Company's common stock at a conversion price equal to $0.02. The August
Debenture was secured by substantially all of the Company's assets, had a
one-year term and accrued interest at 12% per annum. In the event the August
Debenture was redeemed, then eTotalSource would have issued to Cornell a warrant
to purchase 5,000,000 shares at an exercise price of $0.02 or as subsequently
adjusted under the terms of the warrant. The August Debentures were consolidated
into the November 2005 Debentures. The Securities Purchase Agreement, along with
the related Security Agreement, Secured Convertible Debentures and Escrow
Agreement, in connection with the August Debentures were mutually terminated by
the Company and Cornell pursuant to that certain Termination Agreement, dated
November 2, 2005, (the "Second November Termination Agreement").
23
On April 20, 2005, we issued the 2005 Secured Convertible Debenture to
Cornell in the principal amount of $350,000, plus accrued interest. The 2005
Secured Convertible Debenture accrued interest at the rate of 5% per year. At
eTotalSource's option, the entire principal amount and all accrued interest
could have been 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 was
convertible into shares of the Company's common stock as a price per share that
is equal to $0.112, at the holder's option. The 2005 Secured Convertible
Debenture had a term of two years and was secured by all of our assets. At
eTotalSource's option, the 2005 Secured Convertible Debenture could have been
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 was not entitled to
convert such debenture for a number of shares of the Company's 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 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 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 November 2, 2005, the Company consolidated the 2005 Secured
Convertible Debentures (which included the 2004 Secured Convertible Debentures)
and the August Debenture in the original principal amount of $100,000, plus
accrued and unpaid interest on the 2004 Debentures and the August Debenture, as
well as additional funding in the amount of $530,130, under the terms of the
November 2005 Debentures.
On April 20, 2005, we entered into the 2005 Standby Equity Distribution
Agreement with Cornell, pursuant to which we were able to periodically sell to
Cornell, at our discretion, 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 would have paid eTotalSource
98% of the lowest volume weighted average price of the Company's common stock on
the Over-the-Counter Bulletin Board or other principal market on which the
Company's common stock is traded for the five trading days immediately following
the notice date. Under the 2005 Standby Equity Distribution Agreement, we could
periodically have sold shares of common stock to Cornell, known as an advance,
to raise capital to fund our working capital needs. We were able to request an
advance every seven trading days with a maximum of $200,000 per advance. Cornell
was entitled to retain a fee of 5% of each advance under the 2005 Standby Equity
Distribution Agreement. The 2005 Standby Equity Distribution Agreement, along
with the related Investor Registration Rights Agreement, Placement Agent
Agreement, Irrevocable Transfer Agent Instructions, and Escrow Agreement, all of
which were dated as of April 20, 2005, were terminated by eTotalSource and
Cornell pursuant to the November Termination Agreement.
We could have requested advances under the 2005 Standby Equity
Distribution Agreement once the underlying shares were registered with the
Commission pursuant to the 2005 Registration Statement. Thereafter, we could
have continued to request advances until Cornell had advanced $10 million or 24
months after the effective date of the accompanying registration statement,
whichever occurred first.
The amount of each advance was limited to a maximum draw down of $200,000
every seven trading days. At a recent stock price of $0.009, we would have had
to issue 22,675,737 shares of common stock to Cornell to draw down the maximum
advance amount of $200,000. The amount available under the 2005 Standby Equity
Distribution Agreement was not dependent on the price or volume of our common
stock. Our ability to request advances was conditioned upon our registering
shares of common stock with the Commission pursuant to the 2005 Registration
Statement. In addition, we could not have requested advances if the shares to be
issued in connection with such advances would have resulted in Cornell owning
more than 9.9% of our outstanding common stock. We did not have any agreements
with Cornell regarding the distribution of such stock, although Cornell
indicated that it intended to promptly sell any stock received under the 2005
Standby Equity Distribution Agreement.
We could not have predicted the actual number of shares of common stock
that were to be issued pursuant to the 2005 Standby Equity Distribution
Agreement, in part, because the purchase price of the shares would have
fluctuated based on prevailing market conditions and we had not determined the
total amount of advances we intended to draw. Nonetheless, we estimated the
number of shares of our common stock that were to be issued using certain
assumptions. Based on our recent stock price of $0.009 and that we registered
200 million shares of our common stock under the 2005 Standby Equity
Distribution Agreement pursuant to the 2005 Registration Statement, we could
have drawn down a maximum gross amount of $1,764,000 under the 2005 Standby
Equity Distribution Agreement. These 200 million shares would have represented
approximately 81% of our outstanding common stock upon issuance.
There was 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 declined, we would have been 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 could have resulted in a change of
control. That is, if all or a significant block of such shares were held by one
or more shareholders working together, then such shareholder or shareholders
could have had enough shares to assume control of eTotalSource by electing its
or their own directors.
24
In order for us to have utilized the full $10 million available under the
2005 Standby Equity Distribution Agreement, it could have been necessary for our
shareholders to approve an increase in our authorized common stock and for us to
have registered additional shares of common stock. That was the case based on a
stock price of $0.02, which was the stock price close to the filing date of the
2005 Registration Statement. eTotalSource was authorized in its Articles of
Incorporation to issue up to 300 million shares of common stock. As of September
30, 2005, eTotalSource had 46,710,821 shares of common stock outstanding.
eTotalSource registered 200 million shares of common stock to be issued under
the 2005 Standby Equity Distribution Agreement by filing the 2005 Registration
Statement, which has been withdrawn on October 21, 2005.
In the event we desired to draw down any available amounts remaining under
the 2005 Standby Equity Distribution Agreement after we had issued the 200
million shares being registered in the 2005 Registration Statement (and assuming
we had obtained shareholder approval to increase our authorized common stock),
we would have had to file a new registration statement to cover such additional
shares which we would have issued for additional draw downs under the 2005
Standby Equity Distribution Agreement.
We did not pay any commitment fees to Cornell, nor any placement agent
fees to Newbridge, in connection with the 2005 Standby Equity Distribution
Agreement. The costs associated with the 2005 Registration Statement, estimated
to be approximately $85,000 (consisting primarily of professional fees), were
borne by us. There were no other significant closing conditions to draws under
the 2005 Standby Equity Distribution Agreement. eTotalSource sought to register
244,590,000 shares of common stock underlying the 2005 Standby Equity
Distribution Agreement pursuant to the 2005 Registration Statement, but withdrew
it on October 21, 2005. No shares were sold in connection with the 2005
Registration Statement.
Contractual Obligations and Commercial Commitments
As of December 27, 2005, the following obligations were outstanding:
Less than After
Contractual Obligations 1 year 2-3 years 4-5 years 5 years Total
- ---------------------------------- ---------- ------------- --------- ------- ----------
Judgments payable $ 204,788 $ .00 $ .00 $ .00 $ 204,788
Short Term note payables 1,022,114 .00 .00 .00 1,022,114
Convertible debentures .00 1,000,000 .00 .00 1,000,000
Other current liabilities 1,546,777 .00 .00 .00 1,546,777
---------- ------------- --------- ------- ----------
Total contractual cash obligations $2,773,679 $ 1,000,000 $ .00 $ .00 $3,773,679
========== ============= ========= ======= ==========
eTotalSource leases its corporate offices in Yuba City, California on a
month to month basis with no expiration date. Monthly rentals under the lease
are approximately $2,500.
25
DESCRIPTION OF BUSINESS
History
The company was incorporated in Colorado on September 16, 1987 as Premium
Enterprises, Inc. ("Premium"). 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, 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 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
o Reduces training and learning curve time
o Easy to implement and use
26
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 of the Company 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
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.
27
Employees
As of December 27, 2005, we had three full-time employees, all 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.
28
MANAGEMENT
The following persons are members of our Board of Directors and/or
executive officers, in the capacities indicated, as of December 27, 2005:
NAME AGE POSITION HELD TENURE
- ----------------- --- ------------------------ ----------
Terry Eilers 57 President, CEO, Director Since 2002
Virgil Baker 52 CFO, Director Since 2002
Michael Sullinger 60 Secretary, COO, Director Since 2002
A. Richard Barber 64 Director Since 2002
J. Cody Morrow 51 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 Presenta
Pro(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 Presenta Pro(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.
29
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
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.
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 was filed as an Exhibit to the Registration Statement filed with
the Commission on April 21, 2005.
Executive Compensation
Summary Compensation Table
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.
30
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, 2002 0 0 0 0 0 0 0
COO, 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 $96,000 0 0 0 0 0 0
The following table sets forth, for the fiscal year ended December 31,
2004 certain information regarding the options/SARs granted to eTotalSource's
named executive officers.
OPTION/SAR GRANTS TABLE
No. of Securities % Total Options/
Underlying Options/ SARs Granted to Exercise or
SARs Granted Employees in year ended Base Price Expiration
Name (#) December 31, 2004(%) ($ per Share) 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.
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTIONS/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/
Options/SARs at FY-End SARs at FY-End
Shares Acquired Value --------------------------- ---------------------------
on Exercise Realized (#) ($)
--------------- --------- --------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- --------------- --------- ----------- ------------- ----------- -------------
Terry Eilers -- -- -- -- -- --
Michael Sullinger -- -- -- -- -- --
Virgil Baker -- -- -- -- -- --
31
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
employment agreement for Mr. Eilers, he 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.
32
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.
33
LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation, nor is it
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 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 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.
34
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of all shares of common stock at December 27, 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 December 27, 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 December 27, 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
December 27, 2005.
We are registering 245,340,000 shares of common stock in this offering.
These shares represent approximately 82% of our authorized capital stock and
would upon issuance, which does not account for the shares already issued,
represent approximately 83% 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.
35
Officers, Director and Beneficial Owners, As of December 27, 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 1,945,056 4.1%
(beneficially J. Cody Morrow & Family)
12655 Rough & Ready
Grass Valley, CA 95945
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (5 PERSONS
NAMED ABOVE) 11,861,154 25.4%
Common Cornell 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 December 27, 2005 together with securities
exercisable or convertible into shares of common stock within 60 days of
December 27, 2005 for each stockholder. Beneficial ownership is determined
in accordance with the rules of the 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 December 27, 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.
36
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 acquired 91% of the preferred and common
stock of eTotalSource 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.
37
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.OB". 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 to September 30, 2002 $0.010 $0.010
October 1 to December 31, 2002 $0.010 $0.010
- --------------------------------------------------------------------------------
2003 High Low
- --------------------------------------------------------------------------------
January 1 to March 31, 2003 $0.350 $0.010
April 1 to June 30, 2003 $0.350 $0.060
July 1 to September 30, 2003 $0.200 $0.050
October 1 to December 31, 2003 $0.170 $0.050
- --------------------------------------------------------------------------------
2004 High Low
- --------------------------------------------------------------------------------
January 1 to March 31, 2004 $0.195 $0.120
April 1 to June 30, 2004 $0.200 $0.070
July 1 to September 30, 2004 $0.120 $0.045
October 1 to December 31, 200 $0.095 $0.046
- --------------------------------------------------------------------------------
2005 High Low
- --------------------------------------------------------------------------------
January 1 to March 31, 2005 $0.045 $0.014
April 1 to June 30, 2005 $0.052 $0.015
July 1 to September 1, 2005 $0.040 $0.015
October 1 to December 27, 2005 $0.040 $0.009
On December 27, 2005, the last trade price of our common stock as reported
on the Over-the-Counter Bulletin Board was $0.009 per share. On December 27,
2005, we believe we had in excess of 340 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 December 27, 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 November 2, 2005, the Company issued to Cornell secured convertible
debentures in the principal amount of $1,000,000 (the "November 2005
Debentures"). The November 2005 Debentures were issued to consolidate the 2004
Debentures, in the original principal amount of $350,000, and the August
Debenture, in the original principal amount of $100,000, plus accrued and unpaid
interest on the 2004 Debentures and the August Debenture, and to reflect
additional funding in the amount of $530,130. The November 2005 Debentures are
secured by substantially all of the Company's assets, have a three-year term and
accrue interest at 12% per annum. Cornell is entitled, at its option, to
convert, and sell all or any part of the principal amount of the November 2005
Debenture, plus accrued interest, into shares of the Company's common stock, no
par value per share, at the price per share equal to the lesser of (a) an amount
equal to an amount equal to 120% of the closing bid price of the common stock as
listed on a principal market as quoted by Bloomberg LP, on the date hereof or
(b) an amount equal to 80% of the lowest closing bid price of the Company's
common stock for the five trading days immediately preceding the conversion date
which may be adjusted pursuant to the other terms of the November 2005
Debentures.
38
On August 24, 2005, the Company issued to Cornell a secured convertible
debenture in the principal amount of $100,000. Any part of the principal amount
of the August Debenture, plus accrued interest thereon, is convertible at any
time up to maturity, at Cornell's option, into shares of the Company's common
stock at a conversion price equal to $0.02. The August Debenture was secured by
substantially all of the Company's assets, had a one-year term and accrued
interest at 12% per annum. In the event the August Debenture would have been
redeemed, then eTotalSource would issue to Cornell a warrant to purchase
5,000,000 shares at an exercise price of $0.02 or as subsequently adjusted under
the terms of the warrant. The August Debenture was consolidated into the
November 2005 Debentures. The Securities Purchase Agreement, along with the
related Security Agreement, Secured Convertible Debentures and Escrow Agreement,
in connection with the August 2005 Debentures were mutually terminated by the
Company and Cornell pursuant to the Second November Termination Agreement.
On April 20, 2005, we entered into the 2005 Standby Equity Distribution
Agreement with Cornell. Pursuant to the 2005 Standby Equity Distribution
Agreement, we could have, at our discretion, periodically sold to Cornell 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 would have paid 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 would have
retained a fee of 5% of each advance under the 2005 Standby Equity Distribution
Agreement. In connection with the 2005 Standby Equity Distribution Agreement,
Cornell 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 have had to submit a $200,000
advance request approximately every 10 trading days for 23 months in order to
attain the full $10,000,000 available under the 2005 Standby Equity Distribution
Agreement. At a recent stock price of $0.009, we would have had to issue
22,675,737 shares of common stock to Cornell to draw down the maximum advance
amount of $200,000. The 2005 Standby Equity Distribution Agreement, along with
the related Investor Registration Rights Agreement, Placement Agent Agreement,
Irrevocable Transfer Agent Instructions, and Escrow Agreement, all of which were
dated as of April 20, 2005, were terminated by eTotalSource and Cornell pursuant
to the November Termination Agreement.
eTotalSource engaged Newbridge Securities Corporation, an unaffiliated
registered broker-deal, to advise eTotalSource in connection with the 2004 SEDA.
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 in the principal amount of $350,000, plus accrued interest. The 2005
Secured Convertible Debenture accrued 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 was
convertible into shares of our common stock as a price per share that is equal
to $0.112. The 2005 Secured Convertible Debenture was convertible at the
holder's option. The 2005 Secured Convertible Debenture had a term of two years
and was secured by all of our assets. At eTotalSource's option, the 2005 Secured
Convertible Debenture could have been 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 was 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 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 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). The 2005 Securities
Purchase Agreement, along with the related Security Agreement, Secured
Convertible Debentures and Escrow Agreement, all of which were dated as of April
20, 2005, were mutually terminated by eTotalSource and Cornell pursuant to
November Termination Agreement. On November 2, 2005, the Company consolidated
the 2005 Secured Convertible Debentures (which included the 2004 Secured
Convertible Debentures) and the August Debenture, plus accrued and unpaid
interest on the 2004 Debentures and the August Debenture, as well as additional
funding in the amount of $530,130, under the terms of the November 2005
Debentures.
39
On October 12, 2004, we issued a 2004 Secured Convertible Debenture to
Cornell in the principal amount of $175,000, and on or about December 2, 2004,
we issued a second 2004 Secured Convertible Debenture to Cornell 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 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 have been either: (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 have been paid in cash or converted into shares of the
Company's 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
the Company's 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 SEDA with Cornell. Pursuant
to the 2004 SEDA, we could have, at our discretion, periodically sold to Cornell
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 SEDA, Cornell would have
paid 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 was traded for the five trading days immediately following the
notice date. Further, Cornell would have retained a fee of 5% of each advance
under the 2004 SEDA. In connection with the 2004 SEDA, Cornell received a
one-time commitment fee in the form of 3,833,334 restricted shares of our common
stock issued on October 8, 2004. The 2004 SEDA, October 6, 2004, and the related
financing agreements were mutually terminated by and the Company and Cornell on
April 20, 2005 pursuant to April Termination Agreement.
On September 30, 2004, each of the following persons was 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 was 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.
40
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.
41
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 December 27,
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 December 27, 2005:
Options Options Options Options
Outstanding Outstanding Exercisable Exercisable
----------- ---------------- ----------- ----------------
Number Weighted Average Number Weighted Average
Range of Exercise Prices Outstanding Remaining Life Exercisable Exercise Price
- ------------------------ ----------- ---------------- ----------- ----------------
$0.50 1,262,500 6.9 years 1,262,500 $0.50
42
Information concerning all stock option activity is summarized in the
following table:
Option Prices
Option Shares 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, of which 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 in the principal amount of $175,000, and on or about December 2, 2004,
we issued a second 2004 Secured Convertible Debenture to Cornell 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 pursuant to the April 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 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 was 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
have been 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 in the principal amount of $350,000, plus accrued interest. The 2005
Secured Convertible Debenture accrued interest at the rate of 5% per year. At
eTotalSource's option, the entire principal amount and all accrued interest
could have been 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 was
convertible into shares of our common stock as a price per share that was equal
to $0.112. The 2005 Secured Convertible Debenture was convertible at the
holder's option. The 2005 Secured Convertible Debenture had a term of two years
and was secured by all of our assets. At eTotalSource's option, the 2005 Secured
Convertible Debenture could have been 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 2005 Secured Convertible Debenture, the holder
was 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 above, Cornell 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 pursuant to the Termination Agreement dated April 20, 2005; the
principal amounts and accrued interest outstanding under the 2004 Secured
Convertible Debentures become 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
November 2, 2005, the Company consolidated the 2005 Secured Convertible
Debentures under the terms of the November 2005 Debentures.
43
On August 24, 2005, the Company issued to Cornell a secured convertible
debenture in the principal amount of $100,000. Any part of the principal amount
of the August Debenture, plus accrued interest thereon, was convertible at any
time up to maturity, at Cornell's option, into shares of the Company's common
stock at a conversion price equal to $0.02. The August Debenture was secured by
substantially all of the Company's assets, had a one-year term and accrued
interest at 12% per annum. In the event the August Debenture would have been
redeemed, then eTotalSource would have issued to Cornell a warrant to purchase
5,000,000 shares at an exercise price of $0.02 or as subsequently adjusted under
the terms of the warrant. The August Debenture was consolidated into the
November 2005 Debentures. The Securities Purchase Agreement, along with the
related Security Agreement, Secured Convertible Debentures and Escrow Agreement,
in connection with the August 2005 Debentures were mutually terminated by
eTotalSource and Cornell pursuant to the Second November Termination Agreement.
On November 2, 2005, the Company issued to Cornell secured convertible
debentures in the principal amount of $1,000,000. The November 2005 Debentures
were issued to consolidate the 2004 Debentures in the original principal amount
of $350,000, and the August Debenture, in the original principal amount of
$100,000, plus accrued and unpaid interest on the 2004 Debentures and the August
Debenture, and to reflect additional funding in the amount of $530,130. The
November 2005 Debentures are secured by substantially all of the Company's
assets, have a three-year term and accrue interest at 12% per annum. Cornell is
entitled, at its option, to convert, and sell all or any part of the principal
amount of the November 2005 Debenture, plus accrued interest, into shares of the
Company's common stock, no par value per share, at the price per share equal to
the lesser of (a) an amount equal to an amount equal to 120% of the closing bid
price of the common stock as listed on a principal market as quoted by Bloomberg
LP, on the date hereof or (b) an amount equal to 80% of the lowest closing bid
price of the common stock for the five trading days immediately preceding the
conversion date which may be adjusted pursuant to the other terms of the
November 2005 Debentures.
Shares Eligible For Future Sale
46,710,821 shares of common stock are outstanding on the date of this
Prospectus and an additional 234,396,000 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.
3,833,334 shares being registered in this offering for resale by Cornell
in connection with eTotalSource's payment of a one-time commitment fee paid to
Cornell pursuant to the 2004 SEDA.
225,000,000 shares of common stock are being registered in this offering
for resale by Cornell pursuant to the November 2005 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, a registered
broker-dealer, that the Company engaged to advise us in connection with the 2004
SEDA.
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 the Company.
44
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.
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 therefore 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 Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 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.
45
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., located at 7609 Ralston Road,
Arvada, Colorado 80002. The opinion issued by Mr. Littman will be filed by
amendment.
HOW TO GET MORE INFORMATION
We have filed with the 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 said
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this Prospectus, reference is made to said 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 said registration statement
are qualified in their entirety by reference to the exhibits for a complete
statement of their terms and conditions. Said registration statement and other
information may be read and copied at the Commission's Public Reference Room at
100 F Street N.E., 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 Commission.
46
eTotalSource, Inc.
INDEX TO
FINANCIAL STATEMENTS
PAGE(S)
INTERIM UNAUDITED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2005 F-1
Condensed Consolidated Statements of Operations for the Nine Months
Ended September 30, 2005 and 2004 F-2
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2005 and 2004 F-3
Notes To Condensed Consolidated Financial Statements F-4
ANNUAL FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-6
Consolidated Balance Sheet as of December 31, 2004 F-7
Consolidated Statements of Operations for the Years Ended December
31, 2004 and 2003 F-8
Consolidated Statements of Cash Flows for the Years Ended December
31, 2004 and 2003 F-9
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
for the Years Ended December 31, 2004 and 2003 F-10
Notes to Consolidated Financial Statements F-11
F-i
eTotalSource, Inc.
Condensed Consolidated Balance Sheets
September 30, December 31,
ASSETS 2005 2004
------------- ------------
Current Assets
Cash $ 12,661 $ 37,849
Other 1,242 1,296
------------- ------------
Total Current Assets 13,903 39,145
------------- ------------
Property and Equipment
Furniture and equipment 86,450 88,122
Less accumulated depreciation (64,809) (56,786)
------------- ------------
21,641 31,336
------------- ------------
Other Assets
Patent applications and trademarks, less $18,456 and
$15,431 accumulated amortization, respectively 21,882 24,907
Deposits 721 1,162
------------- ------------
22,603 26,069
------------- ------------
Total Assets $ 58,147 $ 96,550
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Convertible notes payable less $89,856 discount $ 260,143 $ 417,569
Other notes payable 757,000 632,000
Judgments payable 204,788 204,788
Accounts payable 370,269 183,461
Accrued compensation payable 1,081,983 845,880
Accrued interest payable 263,692 185,475
Deferred revenue 33,750 67,500
------------- ------------
Total Current Liabilities 2,971,625 2,536,673
Convertible Notes Payable, less current maturities and
$170,526 discount 179,474 117,900
------------- ------------
Total Liabilities 3,151,099 2,654,573
------------- ------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock; no par value; 300 million shares authorized,
46,710,821 shares issued and outstanding 6,121,817 5,784,300
Accumulated (deficit) (9,214,769) (8,342,323)
------------- ------------
Total Stockholders' Equity (Deficit) (3,092,952) (2,558,023)
------------- ------------
Total Liabilities and Stockholders' Equity (Deficit) $ 58,147 $ 96,550
============= ============
See accompanying notes.
F-1
eTotalSource, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues $ 12,852 $ 70,598 $ 41,836 $ 185,865
General and Administrative Expenses 207,584 598,309 727,254 1,803,447
------------ ------------ ------------ ------------
Operating Income (Loss) (194,732) (527,711) (685,418) (1,617,582)
Other Income (Expense)
Gain (loss) on sale or retirement of assets (178) -- (245) 47
Interest expense (75,585) (36,313) (188,125) (140,193)
Other income (expense), net -- (295) 1,342 (209)
------------ ------------ ------------ ------------
Total Other Income (Expense) (75,763) (36,608) (187,028) (140,355)
------------ ------------ ------------ ------------
Net (Loss) $ (270,495) $ (564,319) $ (872,446) $ (1,757,937)
============ ============ ============ ============
Basic and Diluted (Loss) per Share $ (0.01) $ (0.02) $ (0.02) $ (0.05)
============ ============ ============ ============
Weighted Average Common Shares Outstanding 46,710,821 35,800,117 46,710,821 36,197,851
============ ============ ============ ============
See accompanying notes.
F-2
eTotalSource, Inc.
Condensed Consolidated Statements of Cash Flows
Nine months Ended
September 30,
------------------------
2005 2004
--------- -----------
Cash Flows From (Used in) Operating Activities:
Net (loss) $(872,446) $(1,757,937)
Depreciation and amortization 82,071 16,419
Gain (loss) on sale or retirement of assets 245 1,435
Stock issued for services and in lieu of interest -- 1,033,700
Stock options and warrant expense 72,068 79,668
Changes in assets and liabilities:
Decrease (increase) in accounts receivable -- (2,108)
Decrease (increase) in other current assets 54 (1,323)
Decrease (increase) in deposits 441 196
Increase (decrease) in payables, credit cards and
accrued liabilities 501,129 361,659
Increase (decrease) in deferred revenue (33,750) (33,750)
--------- -----------
Net Cash (Used in) Operating Activities (250,188) (302,041)
--------- -----------
Cash Flows From (Used in) Investing Activities:
Purchase of equipment -- (9,077)
--------- -----------
Net Cash (Used in) Investing Activities -- (9,077)
--------- -----------
Cash Flows From (Used in) Financing Activities:
Proceeds from issuance of convertible debenture 100,000 --
Proceeds from issuance of notes payable 125,000 --
--------- -----------
Net Cash From Financing Activities 225,000 --
--------- -----------
Increase (decrease) in Cash and Cash Equivalents (25,188) (311,118)
Cash and Cash Equivalents - Beginning of Period 37,849 313,082
--------- -----------
Cash and Cash Equivalents - End of Period $ 12,661 $ 1,964
========= ===========
See accompanying notes.
F-3
eTOTALSOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
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 and nine-month periods ended
September 30, 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 in Item 7 of Form 10-KSB filed by the Company on March 25,
2005.
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 - Going Concern 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 third 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 - Convertible Debentures
On April 20, 2005, the Company and Cornell Capital Partners, LP ("Cornell"), the
holder of two $175,000 convertible debentures issued by the Company 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.
The debentures are reported net of a $170,526 unamortized discount related to a
beneficial conversion feature. This discount represents the quoted market price
of the Company's common stock on April 20, 2005 in excess of Cornell's
conversion rate. The discount is being amortized over the revised term of the
debentures.
On August 24, 2005, the Company issued to Cornell a secured convertible
debenture in the principal amount of $100,000. Any part of the principal amount
of the Secured Convertible Debenture, plus accrued interest thereon, is
convertible at any time up to maturity, at Cornell's option, into shares of the
Company's common stock at a conversion price equal to $0.02. The Secured
Convertible Debenture is secured by substantially all of the Company's assets,
has a one-year term and accrues interest at 12% per annum. In the event the
Secured Convertible Debenture is redeemed, then eTotalSource will issue to
Cornell a warrant to purchase 5,000,000 shares at an exercise price of $0.02 or
as subsequently adjusted under the terms of the warrant.
Note D - Notes Payable
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 Commission (the "SEC"), or (ii) August 1, 2005
(currently in default). The note is secured by 8,117,946 shares of Company
common stock beneficially held by three officers of the Company.
F-4
On June 27, 2005, the Company borrowed $25,000 from Cornell and issued it a note
payable with interest accruing at 10%. 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 SEC or (ii) August 1, 2005 (currently in default).
Note E - Subsequent Events
eTotalSource sought to register 244,590,000 shares of common stock underlying
the 2005 SEDA pursuant to a Registration Statement on Form SB-2 that
eTotalSource filed with the SEC on April 21, 2005 (the "2005 Registration
Statement"). We withdrew the 2005 Registration Statement on October 21, 2005.
The reason for the withdrawal of the 2004 Registration Statement was based on us
entering into a new financing arrangement with Cornell that we were negotiating
in late-March 2005, and therefore, we did not register the shares of stock
underlying the 2004 SEDA.
On November 2, 2005, the Company entered into a Securities Purchase Agreement
with Cornell, pursuant to which we issued to Cornell secured convertible
debentures in the principal amount of $1,000,000 (the "November 2005
Debenture"). Of this amount, $175,000 was previously funded on October 7, 2004,
$175,000 was previously funded on December 2, 2004, $100,000 was previously
funded on August 19, 2005, and $530,130 was funded on November 4, 2005. The
November 2005 Debenture was issued to consolidate these prior debentures plus
accrued and unpaid interest thereon as of November 2, 2005, which amounted to
$17,404 for the October 2004 Debenture and the December 2004 Debenture and to
$2,465.75 for the August 2005 Debenture, and to reflect additional funding to
the Company in the amount of $530,130.
The November 2005 Debenture is secured by substantially all of the Company's
assets, has a three-year term and accrues interest at 12% per annum. Cornell is
entitled, at its option, to convert, and sell all or any part of the principal
amount of the November 2005 Debenture, plus accrued interest thereon, into
shares of the Company's common stock, at a price per share equal to the lesser
of (a) an amount equal to an amount equal to 120% of the closing bid price of
the common stock as listed on a principal market as quoted by Bloomberg L.P., on
the date hereof or (b) an amount equal to 80% of the lowest closing bid price of
the common stock for the five trading days immediately preceding the conversion
date which may be adjusted pursuant to the other terms of the November 2005
Debenture.
F-5
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-6
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-7
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-8
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-9
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 46,710,821 $5,784,300 $(8,342,323) $(2,558,023)
*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-10
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-11
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-12
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 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.
F-13
eTotalSource, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-14
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 principal and unpaid interest are due
The note is in default $ 172,000
Note payable to a trust; interest at 10% and principal due
January 17, 2003, extended to December 17, 2003 (with interest
increased to 18% and due monthly beginning February 17, 2003)
The note is in default 110,000
Note payable to a trust; interest at 14% payable monthly through
December 18, 2003 when principal and unpaid interest are due
The note is in default 40,000
Promissory notes payable; interest at 6% payable monthly, due in
2001, unsecured. Principal and 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 150,000
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
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 100,000
Note payable to an unrelated trust; stated interest rate of 10%
due June 2003, extended to June 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 50,000
Note payable to an unrelated trust; principal and interest at 10%
due monthly. This note is a 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 250,000
Convertible debenture bonds to an unrelated company, principal
and interest at 5%, payable 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 $64,531 285,469
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-15
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-16
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 Options Options Options
Outstanding Outstanding Exercisable Exercisable
----------- ---------------- ----------- ----------------
Range of Number Weighted Average Number Weighted Average
Exercise Prices Outstanding Remaining Life Exercisable Exercise 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-17
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-18
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-19
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
---------------------
245,340,000
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 therefore 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 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
- --------------------------------------------------------------------------------
Commission registration fee $259.87
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)* $12,241.13
----------
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 November 2, 2005, the Company issued to Cornell secured convertible
debentures in the principal amount of $1,000,000. The November 2005 Debentures
were issued to consolidate the 2004 Convertible Debentures and the August
Debenture, plus accrued and unpaid interest on the 2004 Debentures and the
August Debenture, and to reflect additional funding in the amount of $530,130.
The November 2005 Debentures are secured by substantially all of the Company's
assets, have a three-year term and accrue interest at 12% per annum. Cornell is
entitled, at its option, to convert, and sell all or any part of the principal
amount of the November 2005 Debenture, plus accrued interest, into shares of the
Company's common stock, no par value per share, at the price per share equal to
the lesser of (a) an amount equal to an amount equal to 120% of the closing bid
price of the common stock as listed on a principal market as quoted by Bloomberg
LP, on the date hereof or (b) an amount equal to 80% of the lowest closing bid
price of the common stock for the five trading days immediately preceding the
conversion date which may be adjusted pursuant to the other terms of the
November 2005 Debentures.
II-1
On August 24, 2005, the Company issued to Cornell a secured convertible
debenture in the principal amount of $100,000. Any part of the principal amount
of the August Debenture, plus accrued interest thereon, was convertible at any
time up to maturity, at Cornell's option, into shares of the Company's common
stock at a conversion price equal to $0.02. The August Debenture was secured by
substantially all of the Company's assets, had a one-year term and accrued
interest at 12% per annum. In the event the Secured Convertible Debenture would
have been redeemed, then eTotalSource would have issued to Cornell a warrant to
purchase 5,000,000 shares at an exercise price of $0.02 or as subsequently
adjusted under the terms of the warrant. The August Debenture was consolidated
into the November 2005 Debentures. The Securities Purchase Agreement, along with
the related Security Agreement, Secured Convertible Debentures and Escrow
Agreement, in connection with the August 2005 Debentures were mutually
terminated by the Company and Cornell pursuant to the November Termination
Agreement.
On April 20, 2005, we entered into the 2005 Standby Equity Distribution
Agreement with Cornell. Pursuant to the 2005 Standby Equity Distribution
Agreement, we could have, at our discretion, periodically sold to Cornell 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 would have paid 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 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 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 have had to submit a $200,000
advance request approximately every 10 trading days for 23 months in order to
attain the full $10,000,000 available under the 2005 Standby Equity Distribution
Agreement. At a recent stock price of $0.009, we would have had to issue
22,675,737 shares of common stock to Cornell to draw down the maximum advance
amount of $200,000. The 2005 Standby Equity Distribution Agreement, along with
the related Investor Registration Rights Agreement, Placement Agent Agreement,
Irrevocable Transfer Agent Instructions, and Escrow Agreement, all of which were
dated as of April 20, 2005, were terminated by eTotalSource and Cornell pursuant
to the November Termination Agreement.
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 in the principal amount of $350,000, plus accrued interest. The 2005
Secured Convertible Debenture accrued interest at the rate of 5% per year. At
eTotalSource's option, the entire principal amount and all accrued interest
could have been 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 was convertible at the
holder's option. The 2005 Secured Convertible Debenture had a term of two years
and was secured by all of our assets. At eTotalSource's option, the 2005 Secured
Convertible Debenture could have been 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 was 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 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 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). The 2005 Securities
Purchase Agreement, along with the related Security Agreement, Secured
Convertible Debentures and Escrow Agreement, all of which were dated as of April
20, 2005, were mutually terminated by eTotalSource and Cornell pursuant to
November Termination Agreement. On November 2, 2005, the Company consolidated
the 2005 Secured Convertible Debentures (which included the 2004 Secured
Convertible Debentures) and the August Debenture, plus accrued and unpaid
interest on the 2004 Debentures and the August Debenture, as well as additional
funding in the amount of $530,130, under the terms of the November 2005
Debentures.
II-2
On October 12, 2004, we issued a 2004 Secured Convertible Debenture to
Cornell in the principal amount of $175,000, and on or about December 2, 2004,
we issued a second 2004 Secured Convertible Debenture to Cornell 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 pursuant to the Termination Agreement
dated April 20, 2005; however, the principal amounts and accrued interest
outstanding under the 2004 Secured Convertible Debentures become 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 have been: (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 SEDA with Cornell. Pursuant
to the 2004 SEDA, we could have, at our discretion, periodically sold to Cornell
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 SEDA, Cornell would have
paid 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 was traded for the five trading days immediately following the
notice date. Further, Cornell would have retained a fee of 5% of each advance
under the 20004 SEDA. In connection with the 2004 SEDA, Cornell received a
one-time commitment fee in the form of 3,833,334 restricted shares of our common
stock issued on October 8, 2004. The 2004 SEDA, October 6, 2004, and the related
financing agreements were mutually terminated by and the Company and Cornell
pursuant to the April Termination Agreement.
On September 30, 2004, each of the following persons was 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 was 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.
II-3
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.
II-4
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)
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 To be filed by amendment.
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
February 7, 2000 (together with Incorporated by reference to the Registration
amendment/extension thereto) Statement on Form SB-2 filed on April 21, 2005
(File No. 333-124220)
II-5
DESIGNATION OF EXHIBIT AS
SET FORTH IN ITEM 601 OF
REGULATION S-B DESCRIPTION LOCATION
- ------------------------- --------------------------------------------- -----------------------------------------------
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 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
(File No. 333-124220)
10.5 Termination Agreement, dated November 2, 2005 Incorporated by reference to the Current Report
by and between eTotalSource, Inc. and Cornell on Form 8-K dated December 23, 2005 (File no.
000-49797)
10.6 Termination Agreement, dated November 2, 2005 Incorporated by reference to the Current Report
by and between eTotalSource, Inc. and Cornell on Form 8-K dated December 23, 2005 (File no.
000-49797)
10.7 Securities Purchase Agreement, dated November Incorporated by reference to the Current Report
2, 2005 by and between eTotalSource, Inc. and on Form 8-K dated December 7, 2005 (File no.
Cornell 000-49797)
10.8 Investor Registration Rights Agreement, dated Incorporated by reference to the Current Report
November 2, 2005, by and between on Form 8-K dated December 7, 2005 (File no.
eTotalSource, Inc. and Cornell 000-49797)
10.9 Secured Convertible Debentures, dated Incorporated by reference to the Current Report
November 2, 2005, issued to Cornell on Form 8-K dated December 7, 2005 (File no.
000-49797)
10.10 Warrant, dated as of November 2, 2005 issued Incorporated by reference to the Current Report
to Cornell on Form 8-K dated December 7, 2005 (File no.
000-49797)
10.11 Amended and Restated Security Agreement, Incorporated by reference to the Current Report
dated November 2, 2005, by and among on Form 8-K dated December 7, 2005 (File no.
eTotalSource, Inc., Cornell, and David 000-49797)
Gonzalez, Esq.
10.12 Irrevocable Transfer Agent Instructions, Incorporated by reference to the Current Report
dated November 2, 2005, by and among on Form 8-K dated December 7, 2005 (File no.
eTotalSource, Inc., Cornell, and Executive 000-49797)
Registrar & Transfer, Inc.
II-6
DESIGNATION OF EXHIBIT AS
SET FORTH IN ITEM 601 OF
REGULATION S-B DESCRIPTION LOCATION
- ------------------------- --------------------------------------------- -----------------------------------------------
10.13 Escrow Agreement, dated November 2, 2005, by Incorporated by reference to the Current Report
and among eTotalSource, Inc., Cornell, and on Form 8-K dated December 7, 2005 (File no.
David Gonzalez, Esq. 000-49797)
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 Consent of Experts 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
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 December 30, 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 December 30, 2005
Chairman ofthe Board
/s/ Virgil Baker
- ---------------------
Virgil D. Baker Chief Financial Officer and December 30, 2005
Director
/s/ Michael Sullinger
- ---------------------
Michael Sullinger Chief Operating Officer and Director December 30, 2005
/s/ A. Richard Barber
- ---------------------
A. Richard Barber Director December 30, 2005
/s/ J. Cody Morrow
- ---------------------
J. Cody Morrow Director December 30, 2005
II-9