As filed with the Securities and Exchange Commission on May 27, 2005
Registration No. 333-_________
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EYI INDUSTRIES INC.
(Name of registrant as specified in its charter)
Nevada 2833 88-0407078
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Identification No.)
Organization) Classification Code
Number)
7865 Edmonds Street Jay Sargeant
Burnaby, BC 7865 Edmonds Street
Canada V3N 1B9 Burnaby, BC
604-759-5031 Canada V3N 1B9
(Address and telephone number 604-759-5031
of principal executive (Name, address, and
offices) telephone number of
agent for service)
Copies to:
Clayton E. Parker, Esq. Ronald S. Haligman, Esq.
Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP
201 South Biscayne Boulevard 201 South Biscayne Boulevard
Suite 2000 Suite 2000
Miami, Florida 33131 Miami, Florida 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. |X|
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. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier 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, 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,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
================================== ====================== ===================== ====================== =====================
Proposed Maximum Proposed Maximum Amount
Title Of Each Class Amount Offering Price Aggregate Of Registration
Of Securities To Be Registered To Be Registered Per Share(1) Offering Price(1) Fee(2)
---------------------------------- ---------------------- --------------------- ---------------------- ---------------------
Common stock, par value $0.001 97,264,558 (2) $0.03 $2,917,936.74 $343.44
per share
---------------------------------- ---------------------- --------------------- ---------------------- ---------------------
TOTAL 97,264,558 (2) $0.03 $2,917,936.74 $343.44
================================== ====================== ===================== ====================== =====================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked
prices as of May 24, 2005.
(2) Of these shares, 85,000,000 shares are being registered under a Standby
Equity Distribution Agreement 1,266,589 shares were issued as a commitment
fee under a Standby Equity Distribution Agreement, 33,411 shares were
issued as a placement agent fee pursuant to the Standby Equity
Distribution Agreement, 8,352,823 shares are being registered underlying
convertible debentures and 2,611,735 shares were previously issued in
private placement transactions.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 27, 2005
EYI INDUSTRIES INC.
97,264,558 SHARES OF COMMON STOCK
This Prospectus relates to the sale of up to 97,264,558 shares of EYI
Industries' common stock by certain persons, who are, or will become,
stockholders of EYI Industries.
Please refer to "Selling Stockholders" beginning on page 18.
EYI Industries is not selling any shares of common stock in this offering
and therefore will not receive any proceeds from this offering. We will,
however, receive proceeds from the sale of common stock under the Standby Equity
Distribution Agreement. All costs associated with this registration will be
borne by us.
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 common stock. On May 24, 2005, the last reported sales price of
our common stock was $0.03 per share.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Pursuant to the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay EYI Industries 98% of
the market price of our common stock. In addition, Cornell Capital Partners is
entitled to retain 5% of the proceeds raised by us under the Standby Equity
Distribution Agreement. Further, pursuant to an agreement between EYI Industries
and Source Capital Group, Inc., EYI Industries is obligated to pay Source
Capital Group from any proceeds we receive from sources introduced to us by
Source Capital Group, a cash amount equal to 4.5% of such proceeds and warrants
to purchase shares of our common stock equal to 6% of such proceeds. Source
Capital Group introduced us to Cornell Capital Partners.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under applicable state law or that an exemption
from registration is available.
Our common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol "EYII."
These securities are speculative and involve a high degree of risk. Please
refer to "Risk Factors" beginning on page 5.
With the exception of Cornell Capital Partners, which is an "underwriter"
within the meaning of the Securities Act of 1933, no other underwriter or person
has been engaged to facilitate the sale of shares of common stock in this
offering. This offering will terminate 24 months after the accompanying
registration statement is declared effective by the Securities and Exchange
Commission. None of the proceeds from the sale of stock by the selling
stockholder will be placed in escrow, trust or any similar account.
The information in this prospectus is not complete and may be changed.
This selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer these securities in any state where the offer or sale
is not permitted.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved 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 May 27, 2005
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION.....................................5
FORWARD-LOOKING STATEMENTS....................................................18
SELLING STOCKHOLDERS..........................................................19
USE OF PROCEEDS...............................................................23
DILUTION......................................................................24
STANDBY EQUITY DISTRIBUTION AGREEMENT.........................................25
PLAN OF DISTRIBUTION..........................................................28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................30
DESCRIPTION OF BUSINESS.......................................................40
MANAGEMENT....................................................................60
FISCAL YEAR END OPTIONS/SAR VALUES............................................63
DESCRIPTION OF PROPERTY.......................................................66
LEGAL PROCEEDINGS.............................................................67
PRINCIPAL SHAREHOLDERS........................................................69
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................71
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS.................................73
DESCRIPTION OF SECURITIES.....................................................77
EXPERTS.......................................................................81
LEGAL MATTERS.................................................................81
AVAILABLE INFORMATION.........................................................81
INDEX TO FINANCIAL STATEMENTS................................................F-i
PART II.....................................................................II-1
--------------------------------------------------------------------------------
Our audited financial statements for the fiscal year December 31, 2004 are
contained in our Annual Report on Form 10-KSB.
i
PROSPECTUS SUMMARY
The following Prospectus Summary contains the most material information on
EYI Industries Inc. You should read the entire Prospectus carefully, including
"Risk Factors" and our Financial Statements and the notes to the Financial
Statements before making any investment decision.
OUR COMPANY
We are in the business of selling, marketing, and distributing a product
line consisting of approximately 30 nutritional products in two categories,
dietary supplements and personal care products. Our most successful product is
Calorad, a liquid collagen-based dietary supplement presently available on the
market. These products are marketed through a network marketing program in which
IBAs (Independent Business Associates) purchase products for resale to retail
customers as well as for their own personal use. We have a list of over 400,000
IBAs, of which approximately 14,000 we consider "active". An "active" IBA is one
who purchased our products within the preceding 12 months. Over 1,500 of these
IBAs are considered "very active". A "very active" IBA is one who is on our
automatic Auto-ship Program and is current with their annual administration fee.
Our Auto-ship Program allows our IBAs to set up a reoccurring order that is
automatically shipped to them each month.
Our independent auditors have added an explanatory paragraph to their
audit issued in connection with the financial statements for the years ended
December 31, 2004 and December 31, 2003, relative to our ability to continue as
a going concern. We have negative working capital of approximately $1,640,000
and an accumulated deficit of $7,868,993 incurred through March 31, 2005, which
raises substantial doubt about our ability to continue as a going concern. Our
ability to obtain additional funding will determine our ability to continue as a
going concern. Accordingly, there is substantial doubt about our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We have a history of losses. We have incurred an operating loss since
inception and had an accumulated deficit of $7,868,993 as of March 31, 2005. For
the year ended December 31, 2004, we incurred a net loss of $4,462,795. For the
six months ended December 31, 2003 and for the year ended June 30, 2003, we
incurred a net loss of $969,987 and $1,644,456, respectively. Consequently, 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, which calls for us to secure both debt
and equity financing while pursuing acquisitions and/or joint ventures with
companies in the nutritional supplement industry.
The IBAs in our network are encouraged to recruit interested people to
become new distributors of our products. New IBAs are placed beneath the
recruiting IBA in the "network" and are referred to as being in that IBA's
"down-line" organization. Our marketing plan is designed to provide incentives
for IBAs to build, maintain and motivate an organization of recruited
distributors in their down-line organization to maximize their earning
potential. IBAs generate income by purchasing our products at wholesale prices
and reselling them at retail prices. IBAs also earn commissions on product
purchases generated by their down-line organization.
On an ongoing basis we review our product line for duplication and sales
trends and make adjustments accordingly. As of March 31, 2005, our product line
consisted of: (i) 22 dietary supplement products; and (ii) 8 personal care
products consisting primarily of cosmetic and skin care products. Our products
are primarily manufactured by Nutri-Diem, Inc., a related party, and sold by us
under a license and distribution agreement with Nutri-Diem Inc. Certain of our
own products are manufactured for us by third party manufacturers pursuant to
formulations developed for us. Our products are sold to our IBAs located in the
United States and Canada.
We believe that our network marketing system is suited to marketing
dietary supplement and personal care products, because sales of such products
are strengthened by ongoing personal contact between IBAs and their customers.
Our network marketing system appeals to a broad cross-section of people,
particularly those looking to supplement family income or who are seeking
part-time work. IBAs are given the opportunity, through our sponsored events and
training sessions, to network with other distributors, develop selling skills
and establish personal goals. We supplement monetary incentives with other forms
of recognition, in order to motivate IBAs.
ABOUT US
Our principal place of business is located at 7865 Edmonds Street,
Burnaby, BC Canada, V3N 1B9 and our telephone number at that address is
604-759-5031.
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are, or will become, our stockholders. The selling stockholders consist of:
o Cornell Capital Partners, which intends to sell up to an aggregate
amount of 86,266,589 shares of common stock, which includes
85,000,000 pursuant to a Standby Equity Distribution Agreement and
1,266,589 shares of common stock issued as a commitment fee pursuant
to the Standby Equity Distribution Agreement.
o Newbridge Securities Corporation, an unaffiliated broker-dealer
retained by EYI Industries in connection with the Standby Equity
Distribution Agreement, which intends to sell up to 33,411 shares of
common stock issued as a placement agent fee.
o Other selling stockholders, who intend to sell up to 8,352,823
shares of common stock underlying convertible debentures.
o Other selling stockholders, who intend to sell up to 2,611,735
shares of common stock previously issued.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners shares of
our common stock for a total purchase price of $10 million. Cornell Capital
Partners will purchase the shares of common stock for 98% of the lowest volume
weighted average price of our common stock during the 5 trading days immediately
following notice of our intent to make a draw down under the Standby Equity
Distribution Agreement. Cornell Capital Partners intends to sell any shares
purchased under the Standby Equity Distribution Agreement at the then prevailing
market price. In addition, pursuant to a verbal amendment to an agreement dated
May 25, 2004 between EYI Industries and Source Capital Group, Inc., we are
obligated to pay to Source Capital Group from any proceeds we receive from
sources introduced to us by Source Capital Group, a cash amount equal to 4.5% of
such proceeds received by us and warrants to purchase shares of our common stock
equal to 6% of such proceeds received by us. Source Capital Group introduced us
to Cornell Capital Partners.
The commitment amount of the Standby Equity Distribution Agreement is $10
million. At a recent stock price of $0.03 per share, EYI would only be able to
receive gross proceeds of $2,499,000 using the 85,000,000 shares being
registered in the accompanying registration statement under the Standby Equity
Distribution Agreement. EYI would be required to register 255,136,054 additional
shares at this assumed price to obtain the entire $10 million available under
the Standby Equity Distribution Agreement. Based on the limited number of
available authorized shares of common stock, EYI would need to obtain
shareholder approval to increase the authorized shares of common stock to access
additional amounts under the Standby Equity Distribution Agreement.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners shares of
our common stock for a total purchase price of $10 million. The amount of each
advance is subject to a maximum weekly advance amount of $250,000, and we may
not submit any advance within seven trading days of a prior advance. Cornell
Capital Partners will pay EYI 98% of, or a 2% discount to, the lowest volume
weighted average price of the common stock during the five consecutive trading
day period immediately following the notice date. Of each advance made by the
Company, Cornell Capital Partners shall retain 5% of each advance. In addition,
Cornell Capital Partners received a one-time commitment fee in the form of
1,266,589 shares of common stock, under the Standby Equity Distribution
Agreement. Cornell Capital Partners intends to sell any shares purchased under
the Standby Equity Distribution Agreement at the then prevailing market price.
Among other things, this prospectus relates to the shares of common stock to be
issued under the Standby Equity Distribution Agreement. There are substantial
risks to investors as a result of the issuance of shares of common stock under
the Standby Equity Distribution Agreement. These risks include dilution of
shareholders, significant decline in EYI's stock price and our inability to draw
sufficient funds when needed.
There is an inverse relationship between our stock price and the number of
shares to be issued under the Standby Equity Distribution Agreement. That is, as
our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following tables, which show the net
cash to be received by EYI and the number of shares to be issued under the
Standby Equity Distribution Agreement at a recent price of $0.03 per share and
25%, 50% and 75% discounts to the recent price.
2
Net Cash To EYI
Market Price: $ 0.03 $ 0.0225 $ 0.015 $ 0.0075
Purchase Price: $ 0.0294 $ 0.02205 $ 0.0147 $ 0.00735
No. of Shares(1): 85,000,000 85,000,000 85,000,000 85,000,000
Percent Outstanding (3): 33.76% 33.76% 33.76% 33.76%
Net Cash to EYI:(4) $ 2,176,595 $ 1,611,195 $ 1,045,796 $ 480,396
(1) Represents the number of shares of common stock registered in the
accompanying registration statement, which could be issued to Cornell
Capital Partners under the Standby Equity Distribution Agreement at the
prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners under the Standby
Equity Distribution Agreement.
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(4) Net cash equals the gross proceeds minus the 5% retainage and $85,000 in
offering expenses, and 4.5% fees to Source Capital.
Number of Shares To Be Issued To Receive Gross Proceeds of $10 Million
Market Price: $ 0.03 $ 0.0225 $ 0.015 $ 0.0075
Purchase Price: $ 0.0294 $ 0.002205 $ 0.0147 $ 0.00735
No. of Shares(1): 340,136,054(2)(3) 453,514,739(2)(3) 680,272,109(2)(3) 1,360,544,218(2)(3)
Total Outstanding (4): 506,939,346(3)(5) 620,318,031(3)(5) 847,075,401(3)(5) 1,527,347,510(3)(5)
Percent Outstanding (6): 67.10% 73.11% 80.31% 89.08%
Gross Proceeds to EYI: $ 10,000,000 $ 10,000,000 $ 10,000,000 $ 10,000,000
(1) We are only registering 85,000,000 shares of common stock under this
prospectus. We will need to register additional shares of common stock to
obtain the entire $10 million available under the Standby Equity
Distribution Agreement at these stated purchase prices.
(2) Represents that total number of shares of common stock which would need to
be issued at the stated purchase price.
(3) At the stated purchase price and based on the limited number of available
authorized shares of common stock, EYI would need to obtain shareholder
approval to increase the authorized shares of common stock to obtain the
entire $10 million available under the Standby Equity Distribution
Agreement.
(4) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners, LP under the
Standby Equity Distribution Agreement.
(5) EYI's current Articles of Incorporation, as amended, authorize the
issuance of 300,000,000 shares of common stock.
(6) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
3
Common Stock Offered 97,264,588 shares
Offering Price Market price
Common Stock Outstanding 166,803,292 shares
Before The Offering(1)
Common Stock Outstanding 260,156,115
After The Offering(2)
Use Of Proceeds We will not receive any of the proceeds from the
sale of stock by the selling stockholder. Any
proceeds we receive from the sale of common stock
under the Standby Equity Distribution Agreement will
be used to finance acquisitions and general working
capital purposes. See "Use of Proceeds."
Risk Factors The securities offered hereby involve a high degree
of risk and immediate substantial dilution and
should not be purchased by investors who cannot
afford the loss of their entire investment. See
"Risk Factors" and "Dilution."
Dividend Policy We do not intend to pay dividends on our
common stock. We plan to retain any earnings for use
in the operation of our business and to find future
growth.
Over-The-Counter EYI
Bulletin Board Symbol
----------
(1) Based on shares outstanding as of May 24, 2005.
(2) Assumes that all 85,000,000 shares, which are offered under this
Prospectus in connection with our Standby Equity Distribution Agreement,
are issued as well as the 8,352,823 shares which are offered under this
Prospectus in connection with the conversion of convertible debentures,
are issued.
4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of our 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 our Financial Statements
and the notes therewith.
For the Year Short Period
For the Three Ended Ended
Months Ended December 31, December 31,
March 31, 2005 2004 2003
STATEMENT OF OPERATION DATA: (Unaudited) (Audited) (Audited)
---------------------------- ------------- ------------- -------------
Revenue $ 1,313,768 $ 6,229,029 $ 4,313,579
Cost Of Goods Sold 251,148 1,277,241 734,421
------------- ------------- -------------
Gross Profit Before Commission Expense 1,062,620 4,951,788 3,579,158
------------- ------------- -------------
Commission Expense 471,605 2,486,970 2,111,379
------------- ------------- -------------
Gross Profit After Cost of Goods Sold and Commission Expense 591,015 2,464,818 1,467,779
------------- ------------- -------------
Operating Expenses
Consulting fees 237,962 1,438,362 394,200
Legal and professional 69,125 333,549 145,001
Customer service 86,534 393,244 488,944
Finance and administration 208,080 2,101,842 324,853
Sales and marketing 3,718 154,638 92,834
Telecommunications 119,162 501,599 231,318
Wages and benefits 406,627 1,296,801 547,076
Warehouse expense 105,900 524,987 221,882
------------- ------------- -------------
Total Operating Expenses 1,237,108 6,745,022 2,446,108
------------- ------------- -------------
Loss from Operations (646,093) (4,280,204) (978,329)
------------- ------------- -------------
Other Income (Expenses) (153,283) (271,346) (7,928)
Net Loss Before Taxes (799,376) (4,551,550) (986,257)
Provision For Taxes -- -- --
------------- ------------- -------------
Net Loss Before Allocation To Minority Interest (799,376) (4,551,550) (986,257)
Allocation Of Loss To Minority Interest 15,588 88,755 16,270
Net Loss $ (783,788) $ (4,462,795) $ (969,987)
------------- ------------- -------------
Basic And Diluted Net Loss Per Common Share nil $ (0.03) (0.01)
============= ============= =============
Weighted Average Number Of Common Stock Shares Outstanding 157,060,345 157,060,345 128,090,625
============= ============= =============
5
December 31, December 31,
March 31, 2005 2004 2003 (Audited)
BALANCE SHEET DATA: (Unaudited) (Audited) (Restated)
------------- ------------- -------------
Current Assets
Cash $ 5,450 $ 33,018 $ 52,075
Restricted cash 100,370 100,248 223,682
Accounts receivable 62,440 45,806 52,323
Related party receivables -- 4,996 5,465
Prepaid expenses 824,047 857,170 28,600
Inventory 195,071 239,641 254,367
------------- ------------- -------------
Total Current Assets 1,187,378 1,280,879 616,512
------------- ------------- -------------
Property, Plant and Equipment, Net 55,208 60,336 143,439
Deposits -- 24,361 --
Intangible Assets 16,291 16,561 19,801
------------- ------------- -------------
Total Assets $ 1,258,877 $ 1,382,137 $ 779,752
============= ============= =============
Current Liabilities
Bank indebtedness $ 13,780 $ 72,456 $ 259,977
Accounts payable and accrued liabilities 1,398,316 1,218,178 836,751
Accounts payable - related parties 691,473 590,146 689,367
Interest payable, convertible debt 16,781 10,616 --
Notes payable - related party 90,000 90,000 90,000
Convertible debt-related party, net of discount 417,886 379,724 --
Customer deposits -- -- 6,250
Loan payable, Cornell 200,000 -- --
------------- ------------- -------------
Total Current Liabilities 2,828,236 2,361,120 1,882,345
------------- ------------- -------------
Minority Interest in Subsidiary 331,231 346,819 468,877
------------- ------------- -------------
Stockholders' Equity (Deficit)
Common stock 166,553 162,753 148,181
Discount on common stock -- -- (53,598)
Additional paid-in capital 3,264,806 3,048,606 827,972
Stock warrants 2,732,044 2,563,043 128,385
Subscription Receivable (195,000) (15,000) --
Accumulated deficit (7,868,993) (7,085,205) (2,622,410)
------------- ------------- -------------
Total Stockholders' Equity (Deficit) (1,900,590) (1,325,802) (1,571,470)
------------- ------------- -------------
Total Liabilities And Stockholders' Equity (Deficit) $ 1,258,877 $ 1,382,137 $ 779,752
============= ============= =============
6
RISK FACTORS
WE ARE SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
We Have Historically Lost Money And Losses May Continue In the Future
We have a history of losses. We have incurred an operating loss since
inception and had an accumulated deficit of $7,868,993 as of March 31, 2005.
Consequently, 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, which calls for us to secure both debt
and equity financing while pursuing acquisitions and/or joint ventures with
companies in the nutritional supplement industry. Our ability to continue as a
going concern will be dependent upon our ability to draw down on our Standby
Equity Distribution Agreement that we have established with Cornell Capital
Partners. If we incur any problems in drawing down our Standby Equity
Distribution Agreement, we may experience significant liquidity and cash flow
problems. If we are not successful in reaching and maintaining profitable
operations, we may not be able to attract sufficient capital to continue our
operations. Our inability to obtain adequate financing will result in the need
to curtail business operations and will likely result in a lower stock price.
We Have Been Subject To A Going Concern Opinion From Our Independent Auditors
Our independent auditors have added an explanatory paragraph to their
audit issued in connection with the financial statements for the period ended
December 31, 2004, relative to our ability to continue as a going concern. We
have negative working capital of approximately $1,640,000 and an accumulated
deficit incurred through March 31, 2005, which raises substantial doubt about
our ability to continue as a going concern. Our ability to obtain additional
funding will determine our ability to continue as a going concern. Accordingly,
there is substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
If We Are Unable To Raise Additional Capital To Finance Operations, We Will Need
To Curtail Or Cease Our Business Operations
We have relied on significant external financing to fund our operations.
As of March 31, 2005, we had $5,450 in cash and our total current assets were
$1,187,378. Our current liabilities were $2,828,236 as of March 31, 2005. 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 financing from external sources other
than our Standby Equity Distribution Agreement with Cornell. In the event we do
not obtain the necessary financing to fund our anticipated operating expenses,
we will be forced to reduce our personnel and curtail other operating expenses.
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 Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly
Our common stock is traded on the Over-the-Counter Bulletin Board. Our
common stock is thinly traded compared to larger, more widely known companies in
the nutritional supplement industry. Thinly traded common stock can be more
volatile than common stock traded in an active public market. The lower our
stock price, the more shares we will have to issue in connection with advances
we may request under our Standby Equity Distribution Agreement. The high and low
bid price of our common stock for the last two years has $0.45 and $0.025,
respectively. The average monthly trading volume of our common stock in 2003 and
2004 was 72,761 and 276,059 shares, 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.
7
We Are Currently Dependent On Our Standby Equity Distribution Agreement With
Cornell Capital Partners; We May Not Be Able To Access Sufficient Funds When
Needed; The Price Of Our Common Stock Will Affect Our Ability To Draw Down On
The Standby Equity Distribution Agreement
Currently, we are dependent upon external financing to fund our
operations. Our financing needs are expected to be provided, in large part, by
our Standby Equity Distribution Agreement. Therefore, we are dependent on our
Standby Equity Distribution Agreement with Cornell Capital Partners to fund our
operations. We will receive no funding under the Standby Equity Distribution
Agreement until such time as the accompanying registration statement registering
the resale of shares acquired by Cornell Capital Partners under the Standby
Equity Distribution Agreement has been declared effective by the Securities and
Exchange Commission. There is no assurance that the registration statement will
become effective in the near future or ever. Our ability to access other
financing is limited by the terms of the Standby Equity Distribution Agreement.
The amount of each advance under the Standby Equity Distribution Agreement
is subject to a maximum amount equal to $250,000. We may not request an advance
under the Standby Equity Distribution Agreement less than six trading days after
a prior advance request. Because of this maximum advance restriction, we may not
be able to access sufficient funds when needed. In addition, pursuant to the
Standby Equity Distribution Agreement, once the registration statement is
effective, in order to receive advances we must have filed with the Securities
and Exchange Commission in a timely manner, all reports, notices and other
documents required of a "reporting company" under the Exchange Act.
In addition, as we draw down on our Standby Equity Distribution Agreement
and more shares of our common stock are sold, our stock price could decrease
significantly and make further advances impractical or impossible during time
periods in which we may need financing. Unless we obtain profitable operations,
it is unlikely that we will be able to secure additional financing from external
sources other than our Standby Equity Distribution Agreement. Therefore, if we
are unable to draw down on our Standby Equity Distribution Agreement, we may be
forced to curtail or cease our business operations.
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. 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 In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million 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.
The Issuance Of Preferred Stock May Entrench Management Or Discourage A Change
Of Control
Our Articles of Incorporation authorize the issuance of up to 10,000,000
shares of preferred stock that would have designations rights, and preferences
determined from time to time by our Board of Directors. Accordingly, our Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividends, liquidation, conversion, voting, or other rights that
8
could adversely affect the voting power or other rights of the holders of our
common stock. In the event of issuance, the preferred stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the company or, alternatively, granting the holders of
preferred stock such rights as to entrench management. Current members of our
management that are large stockholders may have peculiar interests that are
different form other stockholders. Therefore, conflicting interests of certain
members of management and our stockholders may lead to stockholders desiring to
replace these individuals. In the event this occurs and the holders of our
common stock desired to remove current management, it is possible that our Board
of Directors could issue preferred stock and grant the holders thereof such
rights and preferences so as to discourage or frustrate attempts by the common
stockholders to remove current management. In doing so, management would be able
to severely limit the rights of common stockholders to elect the Board of
Directors. In addition, by issuing preferred stock, management could prevent
other shareholders from receiving a premium price for their shares as part of a
tender offer.
Mr. Jay Sargeant, our President and Chief Executive Officer Controls
Approximately 57% Of Our Common Stock On A Fully Diluted Basis And Such
Concentration Of Ownership May Have The Effect Of Delaying Or Preventing A
Change Of Control Of Our Company
Mr. Jay Sargeant, our President, Chief Executive Officer and a Director,
beneficially owns approximately 57% of EYI's currently issued and outstanding
common stock. As a result, Mr. Sargeant will have significant influence in
matters requiring stockholder approval, including the election and removal of
directors, the approval of significant corporate transactions, such as any
merger, consolidation or sale of all or substantially all of EYI's assets, and
the control of the board of directors and affairs of EYI. Accordingly, such
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of EYI, impeding a merger, consolidation,
takeover or other business combination involving EYI or discouraging a potential
acquirer from attempting to obtain control of EYI.
We May Not Be Able To Compete Effectively Against Our Competitors, Which Could
Force Us To Curtail Or Cease Business Operations
Many of our competitors have significantly greater name recognition,
financial resources and larger distribution channels. In addition, our industry
is characterized by low barriers to entity, which means we may face more
competitors in the future. If we are not able to compete effectively against our
competitors, we will be forced to curtail or cease our business operations. Our
main competitors are Usana Health Sciences, Reliv International and Mannatech
Incorporated based on product offerings and sales pay structure. Our market
share in the nutrition supplement industry is very small at this time.
Investors Should Not Rely On An Investment In Our Stock For The Payment Of Cash
Dividends
We have not paid any cash dividends on our capital stock and we do not
anticipate paying cash dividends in the future. Investors should not make an
investment in our common stock if they require dividend income. Any return on an
investment in our common stock will be as a result of any appreciation, if any,
in our stock price.
There Are No Conclusive Studies Regarding The Medical Benefits Of Nutritional
Products
Many of the ingredients in our current products, and we anticipate in our
future products, will be vitamins, minerals, herbs and other substances for
which there is not a long history of human consumption. Although we believe all
of our products to be safe when taken as directed by us, there is little
experience with human consumption of certain of these product ingredients in
concentrated form. In addition, we are highly dependent upon consumers'
perception of the safety and quality of our products as well as similar products
distributed by other companies, we could be adversely affected in the event any
of our products or any similar products distributed by other companies should
prove or be asserted to be harmful to consumers. In addition, because of our
dependence upon consumer perceptions, adverse publicity associated with illness
or other adverse effects resulting from consumers' failure to consume our
products as we suggest or other misuse or abuse of our products or any similar
products distributed by other companies could have a material adverse effect on
the results of our operations and financial condition.
Adverse Publicity With Respect To Nutritional Products May Force Us To Curtail
Or Cease Our Business Operations
In the future, scientific research and/or publicity may not be favorable
to the nutritional product market or any particular product, or may be
inconsistent with any earlier favorable research or publicity. Future reports of
research that are unfavorable to nutritional products could force us to curtail
or cease our business operations. Because of our dependence upon consumer
perceptions, adverse publicity associated with illness or other adverse effects
resulting from the consumption of our products or any similar products
distributed by other companies could have a material adverse effect on our
operations. Such adverse publicity could arise even if the adverse effects
associated with such products resulted from consumers' failure to consume such
products as directed. In addition, we may not be able to counter the effects of
negative publicity concerning the efficacy of our products. Any such occurrence
could have a negative effect on our operations and force us to curtail or cease
our business operations.
9
We Will Have To Develop New Products In Order To Keep Pace With Changing
Consumer Demands Or We Could Be Forced To Curtail Or Cease Our Business
Operations
The dietary supplement industry is highly competitive and characterized by
changing consumer preferences and continuous introduction of new products. Our
goal is to expand our portfolio of dietary supplement products through internal
development and/or products serving niche segments of the industry. New products
must be introduced in a timely and regular basis to maintain distributor and
consumer interest and appeal to varying consumer preferences.
We believe that any future success of our company will depend, in part, on
our ability to anticipate changes in consumer preferences and acquire, manage,
develop and introduce, in a timely manner, new products that adequately address
such changes. If we are unable to develop and introduce new products or if our
new products are not successful, our sales may be adversely affected as
customers seek competitive products. In the past, we have engaged in very
limited research and development with respect to the development of new
products, as indicated by our lack of research and development expenses. Our
lack of experience in developing and introducing new products combined with our
limited financial resources may prevent us from successfully developing and
introducing any new products in the future. Any reduction in purchases or
consumption of our existing products could force us to curtail or cease our
business operations.
We Are Dependent On Our IBAs For Our Product Marketing Efforts; The Loss Of A
Significant Number Of IBAs Or The Loss Of A Key IBA Could Adversely Affect Our
Sales
Our success and growth depend upon our ability to attract, retain and
motivate our network of IBAs who market our products. IBAs are independent
contractors who purchase products directly from us for resale and their own use.
IBAs typically offer and sell our products on a part-time basis and may engage
in other business activities, possibly including the sale of products offered by
our competitors. Typically, we have non-exclusive arrangements with our IBAs
which may be canceled on short notice and contain no minimum purchase
requirements. While we encourage IBAs to focus on the purchase and sale of our
products, they may give higher priority to other products, reducing their
efforts devoted to marketing our products. Also, our ability to attract and
retain IBAs could be negatively affected by adverse publicity relating to us,
our products or our operations. In addition, as a result of our network
marketing program, the down-line organizations headed by a relatively small
number of key IBAs are responsible for a significant percentage of total sales.
The loss of a significant number of IBAs, including any key IBA, for any
reason, could adversely affect our sales and operating results, and could impair
our ability to attract new IBAs. The loss of any IBAs could potentially reduce
our sales and force us to curtail or cease our business operations. There is no
assurance that our network marketing program will continue to be successful or
that we will be able to retain or expand our current network of IBAs. Also, if
our IBAs do not accept recent changes to our commission plan, our business may
be adversely affected.
Government Regulation By The Food And Drug Administration And Other Federal And
State Entities Of Our Products Can Negatively Impact Our Ability To Market
Products
The manufacturing, processing, formulation, packaging, labeling and
advertising of nutritional products are subject to regulation by one or more
federal agencies, including the Food and Drug Administration, the Federal Trade
Commission, the Consumer Product Safety Commission, the United States Department
of Agriculture, the United States Postal Service, the United States
Environmental Protection Agency and the Occupational Safety and Health
Administration. These activities are also regulated by various agencies of the
states and localities, as well as of foreign countries, in which our products
may be sold. We may incur significant costs in complying with these regulations.
In the event we cannot comply with government regulations affecting our business
and products, we may be forced to curtail or cease our business operations.
We market products that fall under two types of Food and Drug
Administration regulations: dietary supplements and personal care products. In
general, a dietary supplement:
o is a product (other than tobacco) that is intended to supplement the
diet that bears or contains one or more of the following dietary
ingredients: a vitamin, a mineral, a herb or other botanical, an
amino acid, a dietary substance for use by man to supplement the
diet by increasing the total daily intake, or a concentrate,
metabolite, constituent, extract, or combinations of these
ingredients.
10
o is intended for ingestion in pill, capsule, tablet, or liquid form.
o is not represented for use as a conventional food or as the sole
item of a meal or diet.
o is labeled as a "dietary supplement."
Personal care products are intended to be applied to the human body for
cleansing, beautifying, promoting attractiveness, or altering the appearance
without affecting the body's structure or functions. Included in this definition
are products such as skin creams, lotions, perfumes, lipsticks, fingernail
polishes, eye and facial make-up preparations, shampoos, permanent waves, hair
colors, toothpastes, deodorants, and any material intended for use as a
component of a cosmetic product. The Food & Drug Administration has a limited
ability to regulate personal care products.
Dietary supplements must follow labeling guidelines outlined by the FDA.
Neither dietary supplements nor personal care products require FDA or other
government approval or notification to market in the United States.
Under the Dietary Supplement Health and Education Act of 1994, companies
that manufacture and distribute dietary supplements are limited in the
statements that they are permitted to make about nutritional support on the
product label without FDA approval. In addition, a manufacturer of a dietary
supplement must have substantiation for any such statement made and must not
claim to diagnose, mitigate, treat, cure or prevent a specific disease or class
of disease. The product label must also contain a prominent disclaimer. These
restrictions may restrict our flexibility in marketing our product.
We believe that all of our existing and proposed products are dietary
supplements or personal care products that do not require governmental approvals
to market in the United States. Our key products are classified as follows:
Dietary Supplements
o Calorad(R)
o Agrisept-L(R)
o Oxy-Up(R)
o Triomin
o Noni Plus(R)
o Iso-Greens(R)
o Definition(R) (drops)
o Essential Omega
o Prosoteine(R)
Personal Care Products
o Definition (R)(cream)
The processing, formulation, packaging, labeling and advertising of such
products, however, are subject to regulation by one or more federal agencies,
including the FDA, the Federal Trade Commission, the Consumer Products Safety
Commission, the Department of Agriculture and the Environmental Protection
Agency. Our activities are also subject to regulation by various agencies of the
states and localities in which our products are sold. Among other things, such
regulation puts a burden on our ability to bring products to market. Any changes
in the current regulatory environment could impose requirements that would make
bringing new products to market more expensive or restrict the ways we can
market our products.
11
No governmental agency or other third party makes a determination as to
whether our products qualify as dietary supplements, personal care products or
neither. We make this determination based on the ingredients contained in the
products and the claims we make for the products.
If The Federal Trade Commission Or Certain States Object To Our Product Claims
And Advertising We May Be Forced To Give Refunds, Pay Damages, Stop Marketing
Certain Products Or Change Our Business Methods
The Federal Trade Commission and certain states regulate advertising,
product claims, and other consumer matters, including advertising of our
products. In the past several years the Federal Trade Commission has instituted
enforcement actions against several dietary supplement companies for false or
deceptive advertising of certain products. We provide no assurance that:
o the Federal Trade Commission will not question our past or future
advertising or other operations; or
o a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations.
Also, our IBAs and their customers may file actions on their own behalf,
as a class or otherwise, and may file complaints with the Federal Trade
Commission or state or local consumer affairs offices. These agencies may take
action on their own initiative or on a referral from IBAs, consumers or others.
If taken, such actions may result in:
o entries of consent decrees;
o refunds of amounts paid by the complaining IBA or consumer;
o refunds to an entire class of IBAs or customers;
o other damages; and
o changes in our method of doing business.
A Complaint Based On The Activities Of One IBA, Whether Or Not Such Activities
Were Authorized By Us, Could Result In An Order Affecting Some Or All IBAs In A
Particular State, And An Order In One State Could Influence Courts Or Government
Agencies In Other States
Our IBAs act as independent sales people and are not closely supervised by
EYI or supervised by us at all. We have little or no control or knowledge of our
IBAs' actual sales activities and therefore, we have little or no ability to
ensure that our IBAs comply with regulations and rules regarding how they market
and sell our products. It is possible that we may be held liable for the actions
of our IBAs. Proceedings resulting from any complaints in connection with our
IBAs' marketing and sales activities may result in significant defense costs,
settlement payments or judgments and could force to curtail or cease our
business operations.
If our network marketing program is shown to violate federal or state
regulations, we may be unable to market our products. Our network marketing
program is subject to a number of federal and state laws and regulations
administered by the Federal Trade Commission and various state agencies. These
laws and regulations include securities, franchise investment, business
opportunity and criminal laws prohibiting the use of "pyramid" or "endless
chain" types of selling organizations. These regulations are generally directed
at ensuring that product sales are ultimately made to consumers (as opposed to
other IBAs) and that advancement within the network marketing program is based
on sales of products, rather than investment in the company or other non-retail
sales related criteria.
The compensation structure of a network marketing organization is very
complex. Compliance with all of the applicable regulations and laws is uncertain
because of: the evolving interpretations of existing laws and regulations, and
the enactment of new laws and regulations pertaining in general to network
marketing organizations and product distribution.
12
We have not obtained any no-action letters or advance rulings from any
federal or state securities regulator or other governmental agency concerning
the legality of our operations. Also, we are not relying on a formal opinion of
counsel to such effect. Accordingly there is the risk that our network marketing
system could be found to be in noncompliance with applicable laws and
regulations, which could have a material adverse effect on us. Such a decision
could require modification of our network marketing program, result in negative
publicity, or have a negative effect on IBA morale and loyalty. In addition, our
network marketing system will be subject to regulations in foreign markets
administered by foreign agencies should we expand our network marketing
organization into such markets.
The Legality Of Our Network Marketing Program Is Subject To Challenge By Our
IBAs
We are subject to the risk of challenges to the legality of our network
marketing organization by our IBAs, both individually and as a class. Generally,
such challenges would be based on claims that our network marketing program was
operated as an illegal "pyramid scheme" in violation of federal securities laws,
state unfair practice and fraud laws and the Racketeer Influenced and Corrupt
Organizations Act. An illegal pyramid scheme is generally a marketing scheme
that promotes "inventory loading" and does not encourage retail sales of the
products and services to ultimate consumers. Inventory loading occurs when
distributors purchase large quantities of non-returnable inventory to obtain the
full amount of compensation available under the network marketing program. In
the event of challenges to the legality of our network marketing organization by
our IBAs, there is no assurance that we will be able to demonstrate that:
our network marketing policies were enforced and
the network marketing program and IBAs' compensation thereunder serve as
safeguards to deter inventory loading and encourage retail sales to the ultimate
consumers.
Proceedings Resulting From Claims Could Result In Significant Defense Costs,
Settlement Payments Or Judgments, And Could Have A Material Adverse Effect On Us
One of our competitors, Nutrition for Life International, Inc., a
multi-level seller of personal care and nutritional supplements, announced in
1999 that it had settled class action litigation brought by distributors
alleging fraud in connection with the operation of a pyramid scheme. Nutrition
for Life International agreed to pay in excess of $3 million to settle claims
brought on behalf of its distributors and certain purchasers of its stock.
We believe that our marketing program is significantly different from the
program allegedly promoted by Nutrition for Life International and that our
marketing program is not in violation of anti-pyramid laws or regulations.
However, there can be no assurance that claims similar to the claims brought
against Nutrition for Life International and other multi-level marketing
organizations will not be made against us, or that we would prevail in the event
any such claims were made. Furthermore, even if we were successful in defending
against any such claims, the costs of conducting such a defense, both in dollars
spent and in management time, could be material and adversely affect our
operating results and financial condition. In addition, the negative publicity
of such a suit could adversely affect our sales and ability to attract and
retain IBAs.
A Large Portion Of Our Sales Is Attributable To Calorad; If Calorad Loses Market
Share Or Loses Favor In The Marketplace, Our Financial Results Will Suffer
A significant portion of our net sales is expected to be dependent upon
our Calorad product. Calorad has traditionally represented more than 65% of our
net sales and, although we hope to expand and diversify our product offerings,
Calorad is expected to provide a large portion of our net sales in the
foreseeable future. If Calorad loses market share or loses favor in the
marketplace, our financial results will suffer.
Our Products Are Subject To Obsolescence, Which Could Reduce Our Sales
Significantly
The introduction by us or our competitors of new dietary supplement or
personal care products offering increased functionality or enhanced results may
render our existing products obsolete and unmarketable. Therefore, our ability
to successfully introduce new products into the market on a timely basis and
achieve acceptable levels of sales has and will continue to be a significant
factor in our ability to grow and remain competitive and profitable. In
addition, the nature and mix of our products are important factors in attracting
and maintaining our network of IBAs, which consequently affects demand for our
products. Although we seek to introduce additional products, the success of new
products is subject to a number of conditions, including customer acceptance.
There can be no assurance that our efforts to develop innovative new products
will be successful or that customers will accept new products.
13
In addition, no assurance can be given that new products currently
experiencing strong popularity will maintain their sales over time. In the event
we are unable to successfully increase the product mix and maintain competitive
product replacements or enhancements in a timely manner in response to the
introduction of new products, competitive or otherwise, our sales and earnings
will be materially and adversely affected.
We Have No Manufacturing Capabilities And We Are Dependent Upon Nutri-Diem, Inc.
And Other Companies To Manufacture Our Products
We have no manufacturing facilities and have no present intention to
manufacture any of our dietary supplement and personal care products. We are
dependent upon relationships with independent manufacturers to fulfill our
product needs. Nutri-Diem, Inc., a related party, manufactures and supplies more
than 80% of our products. We have contracts with Nutri-Diem that require us to
purchase set amounts of its manufactured products for at least the next five
years and possibly the next ten years. It is possible that these contracts with
Nutri-Diem, Inc. could become unfavorable, and we may not be able to use other
manufacturers to provide us with these services if our terms with Nutri-Diem,
Inc. become unfavorable. In addition, we must be able to obtain our dietary
supplement and personal care products at a cost that permits us to charge a
price acceptable to the customer, while also accommodating distribution costs
and third party sales compensation. Competitors who do own their own
manufacturing may have an advantage over us with respect to pricing,
availability of product and in other areas through their control of the
manufacturing process. In addition, because our agreement with Nutri-Diem, Inc.
requires us to mandatory purchase minimums, we face that risk that we may not
receive purchase orders for sufficient amounts of product that will enable us to
sell the quantities that we are required to purchase. In the event that this
occurs, we will be forced to hold larger quantities of inventory, which could
adversely affect our cash flow and our ability to pay our operating expenses. In
addition, if we are forced to hold longer quantities of inventory, we face the
risk that our inventory becomes obsolete with the passage of large amounts of
time.
We may not be able to deliver various products to our customers if third
party providers fail to provide necessary ingredients to us. We are dependent on
various third parties for various ingredients for our products. Some of the
third parties that provide ingredients to us have a limited operating history
and are themselves dependent on reliable delivery of products from others. As a
result, our ability to deliver various products to our users may be adversely
affected by the failure of these third parties to provide reliable various
ingredients for our products.
We Are Materially Dependent Upon Our Key Personnel And The Loss Of Such Key
Personnel Could Result In Delays In The Implementation Of Our Business Plan Or
Business Failure
We depend upon the continued involvement of Jay Sargeant, our President,
Chief Executive Officer and Director, and Dori O'Neill, our Executive Vice
President, Chief Operations Officer, Secretary, Treasurer and Director. As we
are a developing company, the further implementation of our business plan is
dependent on the entrepreneurial skills and direction of management. Mr.
Sargeant and Mr. O'Neill guide and direct our activity and vision. This
direction requires an awareness of the market, the competition, current and
future markets and technologies that would allow us to continue our operations.
The loss or lack of availability of these individuals could materially adversely
affect our business and operations. We do not carry "key person" life insurance
for these officers and directors, and we would be adversely affected by the loss
of these two key consultants.
We Face Substantial Competition In The Dietary Supplement And Personal Care
Industry, Including Products That Compete Directly With Calorad
The dietary supplement and personal care industry is highly competitive.
It is relatively easy for new companies to enter the industry due to the
availability of numerous contract manufacturers, a ready availability of natural
ingredients and a relatively relaxed regulatory environment. Numerous companies
compete with us in the development, manufacture and marketing of supplements as
their sole or principal business. Generally, these companies are well funded and
sophisticated in their marketing approaches.
Depending On The Product Category, Our Competition Varies
Calorad competes directly with Colvera, a product with different
ingredients but a similar concept. Additionally, Calorad competes indirectly
with food plans such as Weight Watchers and meal replacement products such as
Slim Fast. Our Noni Plus product competes with Morinda and others. Our other
products have similar well-funded and sophisticated competitors. Increased
competitive activity from such companies could make it more difficult for us to
increase or keep market share, since such companies have greater financial and
other resources available to them and possess far more extensive manufacturing,
distribution and marketing capabilities.
14
We May Be Subject To Products Liability Claims And May Not Have Adequate
Insurance To Cover Such Claims. As With Other Retailers, Distributors And
Manufacturers Of Products That Are Designed To Be Ingested, We Face An Inherent
Risk Of Exposure To Product Liability Claims In The Event That The Use Of Our
Products Results In Injury
We, like any other retailers and distributors of products that are
designed to be ingested, face an inherent risk of exposure to product liability
claims in the event that the use of our products results in injury. Such claims
may include, among others, that our products contain contaminants or include
inadequate instructions as to use or inadequate warnings concerning side effects
and interactions with other substances. With respect to product liability
claims, we have coverage of $2,000,000 per occurrence and $2,000,000 in the
aggregate. Because our policies are purchased on a year-to-year basis, industry
conditions or our own claims experience could make it difficult for us to secure
the necessary insurance at a reasonable cost. In addition, we may not be able to
secure insurance that will be adequate to cover liabilities. We generally do not
obtain contractual indemnification from parties supplying raw materials or
marketing our products. In any event, any such indemnification is limited by its
terms and, as a practical matter, to the creditworthiness of the other party. In
the event that we do not have adequate insurance or contractual indemnification,
liabilities relating to defective products could require us to pay the injured
parties' damages which are significant compared to our net worth or revenues.
We May Be Adversely Affected By Unfavorable Publicity Relating To Our Product Or
Similar Products Manufactured By Our Competitors
We believe that the dietary supplement products market is affected by
national media attention regarding the consumption of these products. Future
scientific research or publicity may be unfavorable to the dietary supplement
products market generally or to any particular product and may be inconsistent
with earlier favorable research or publicity. Adverse publicity associated with
illness or other adverse effects resulting from the consumption of products
distributed by other companies, which are similar to our products, could reduce
consumer demand for our products and consequently our revenues. This may occur
even if the publicity did not relate to our products. Adverse publicity directly
concerning our products could be expected to have an immediate negative effect
on the market for that product.
Because We Have Few Proprietary Rights, Others Can Provide Products And Services
Substantially Equivalent To Ours
We hold no patents. We believe that most of the technology used by us in
the design and implementation of our products may be known and available to
others. Consequently, others may be able to formulate products equivalent to
ours. We rely on confidentiality agreements and trade secret laws to protect our
confidential information. In addition, we restrict access to confidential
information on a "need to know" basis. However, there can be no assurance that
we will be able to maintain the confidentiality of our proprietary information.
If our pending trademark or other proprietary rights are violated, or if a third
party claims that we violate its trademark or other proprietary rights, we may
be required to engage in litigation. Proprietary rights litigation tends to be
costly and time consuming. Bringing or defending claims related to our
proprietary rights may require us to redirect our human and monetary resources
to address those claims.
We Often Use Our Securities As Consideration In Contracts Related To Our
Operations, Which Will Cause Existing Shareholders To Experience Significant
Dilution
We often issue our securities as consideration in contracts related to our
operations. We issued our securities in these transactions primarily because
historically we have had insufficient cash to fund our operations. From December
2003 to date the company has issued approximately 7,000,000 shares of common
stock and granted 6,000,000 stock options and 6,000,000 warrants in connection
with agreements with outside consultants and service providers. As a result of
such issuances, existing shareholders of EYI have experienced a dilutive impact
to their ownership of our company. We may be forced to issue additional
securities of EYI in the future transactions in lieu for cash and shareholders
would experience additional dilution.
The Restrictions On Our Ability To Sell Securities Under The Terms Of The
Standby Equity Distribution Agreement Could Impede Us From Using Our Securities
As Consideration In Contracts Related To Our Operations
Under the Standby Equity Distribution Agreement, we are restricted, during
the commitment period of the Standby Equity Distribution Agreement, form issuing
or selling any of our common stock without consideration or for consideration
per share less than the bid price of a share of our common stock on the date of
issuance. We are also restricted from issuing or selling any derivative security
or other security granting the holder the right to acquire our common stock
without consideration or for consideration per share less than the bid price of
a share of common stock on the date of issuance. These restrictions could impede
us from using our securities as consideration in contracts related to our
operations, including, but not limited to, common stock issued to consultants
and vendors. This may force us to use our limited cash to pay third parties as
opposed to issue our securities and may also lead to certain parties deciding to
not enter into contracts with us. If we have difficulty in entering into
contracts related to our operations, we may be forced to curtail or cease our
business operations.
15
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 shareholders, 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 May 24, 2005, approximately
131,000,000 share 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
93,352,823 shares of common stock outstanding. All of these shares of common
stock may be immediately resold in the public market upon effectiveness of the
accompanying registration statement.
Existing Shareholders Will Experience Significant Dilution From Our Sale Of
Shares Under The Standby Equity Distribution Agreement
The sale of shares pursuant to the Standby Equity Distribution Agreement
will have a dilutive impact on our stockholders. At a recent stock price of
$0.03, we would have to issue 340,136,054 shares of common stock to draw down
the entire $10 million available to us under the Standby Equity Distribution
Agreement. However, our current Articles of Incorporation authorize us to issue
300,000,000 shares of common stock. We are registering 85,000,000 shares of our
common stock under the Standby Equity Distribution Agreement. If we need to
issue more than the 85,000,000 shares to draw down the entire $10 million
available under the Standby Equity Distribution Agreement, we will have to
obtain shareholder approval to amend our Articles of Incorporation to increase
our authorized common stock and we will have to file a new registration
statement covering any additional shares.
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 97,264,558
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
The significant downward pressure on our stock price caused by the sale of
a significant number of shares under the Standby Equity Distribution Agreement
could cause our stock price to decline, thus allowing short sellers of our stock
an opportunity to take advantage of any decrease in the value of our stock. The
presence of short sellers in our common stock may further depress the price of
our common stock. Cornell Capital Partners can cover any short positions only
with shares received from us under the Standby Equity Distribution Agreement.
If Cornell Capital Partners Does Not Honor Its Commitments Under The Standby
Equity Distribution Agreement, We Could Be Forced To Curtail Or Cease Our
Business Operations
Cornell Capital Partners was founded in February 2000 as a Delaware
limited partnership and, therefore, has a short history to evaluate it as a
business. Cornell Capital Partners is not a registered broker-dealer. In the
event that Cornell Capital Partners has insufficient capital to fund our
requested advances under the Standby Equity Distribution Agreement, any recourse
we may have against Cornell Capital Partners may not adequately compensate us
for damages we may incur due to this breach. Any failure by Cornell Capital
Partners to fail to honor its commitment to fund EYI Industries could force us
to curtail or cease our business operations.
16
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 97,264,558 shares of common stock in this offering.
These shares represent 32.42% of our authorized capital stock and would upon
issuance represent approximately 37.39% 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 EYI Industries.
17
FORWARD-LOOKING STATEMENTS
Risks Associated With Forward-Looking Statements
This Prospectus contains certain forward-looking statements regarding
management's plans and objectives for future operations including plans and
objectives relating to our planned marketing efforts and future economic
performance. The forward-looking statements and associated risks set forth in
this Prospectus include or relate to, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends in
our industry, (d) our ability to obtain and retain sufficient capital for future
operations, 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.
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that we will be able to make acquisitions on
a timely basis, that we will retain the acquiree's customers, that there will be
no material adverse competitive or technological change in conditions in our
business, that demand for our products will significantly increase, that our
President and Chief Executive Officer will remain employed as such, that our
forecasts accurately anticipate market demand, and that there will be no
material adverse change in our operations or business or in governmental
regulations affecting us or our manufacturers and/or suppliers. The foregoing
assumptions are based on judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond our control. Accordingly, although we believe that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, as disclosed elsewhere in the "Risk Factors" section of this
prospectus, there are a number of other risks inherent in our business and
operations which could cause our operating results to vary markedly and
adversely from prior results or the results contemplated by the forward-looking
statements. Growth in absolute and relative amounts of cost of goods sold and
selling, general and administrative expenses or the occurrence of extraordinary
events could cause actual results to vary materially from the results
contemplated by the forward-looking statements. Management decisions, including
budgeting, are subjective in many respects and periodic revisions must be made
to reflect actual conditions and business developments, the impact of which may
cause us to alter marketing, capital investment and other expenditures, which
may also materially adversely affect our results of operations. In light of
significant uncertainties inherent in the forward-looking information included
in this prospectus, the inclusion of such information should not be regarded as
a representation by us or any other person that our objectives or plans will be
achieved.
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. Any statement in
this prospectus and in the documents incorporated by reference into this
prospectus that is not a statement of an historical fact constitutes a
"forward-looking statement". Further, when we use the words "may", "expect",
"anticipate", "plan", "believe", "seek", "estimate", "internal", and similar
words, we intend to identify statements and expressions that may be forward-
looking statements. We believe it is important to communicate certain of our
expectations to our investors. Forward-looking statements are not guarantees of
future performance. They involve risks, uncertainties and assumptions that could
cause our future results to differ materially from those expressed in any
forward-looking statements. Many factors are beyond our ability to control or
predict. You are accordingly cautioned not to place undue reliance on such
forward-looking statements. Important factors that may cause our actual results
to differ from such forward-looking statements include, but are not limited to,
the risk factors discussed below. Before you invest in our common stock, you
should be aware that the occurrence of any of the events described under "Risk
Factors" in this prospectus could have a material adverse effect on our
business, financial condition and results of operation. In such a case, the
trading price of our common stock could decline and you could lose all or part
of your investment.
18
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. A description of each selling shareholder's relationship to EYI
Industries and how each selling shareholder acquired the shares to be sold in
this offering is detailed in the information immediately following this table.
Percentage of
Percentage Outstanding
of Shares to be Shares to be Percentage
Outstanding Acquired Acquired of
Shares Under the Under the Outstanding
Shares Beneficially Standby Standby Shares
Beneficially Owned Equity Equity Shares Beneficially
Owned Before Before Distribution Distribution to be Sold in Owned After
Selling Stockholder Offering Offering(1) Agreement Agreement the Offering Offering
------------------- -------- ----------- --------- --------- ------------ --------
Cornell Capital Partners, L.P. 1,266,589(2) * 85,000,000(4) 33.76% 111,266,589 0%
Newbridge Securities Corporation 33,411 * -- -- 33,411 0%
Taib Securities(3) 8,259,475 4.72% -- -- 8,269,295 0%
Lloyd and Alberta Sargeant 4,781,774(5) 2.87% -- -- 478,177(7) 0%
Bayonne Holdings, Inc. 4,605,240 2.76% -- -- 460,524(7) 0%
Winslow Drive Corp. (8) 4,605,240 2.76% -- -- 460,524(7) 0%
Dartmouth Productions (9) 4,605,240 2.76% -- -- 460,524(7) 0%
649645 BC Ltd. 4,605,240 2.76% -- -- 460,524(7) 0%
Good Companion Broadcasting 767,540 * -- -- 76,754(7) *
Thomas Diehl 383,770 * -- -- 38,377(7) *
W. Donald Diehl 383,770 * -- -- 38,377(7) *
Michel Grise 17,971,748(6) * -- -- 26,864(7) *
Louise Desmarais 268,639 * -- -- 26,864(7) *
Health Inc. 204,680 * -- -- 20,468(7) *
Patrick Grise 153,508 * -- -- 15,351(7) *
Herbert Keay 107,456 * -- -- 10,746(7) *
Doug Moore 102,359 * -- -- 10,236(7) *
Frank Shaw 69,815 * -- -- 6,982(7) *
Gregg Trigg 66,776 * -- -- 6,678(7) *
Daniel Boisvert 46,052 * -- -- 4,605(7) *
Deacon & Traill Innovations 34,539 * -- -- 3,454(7) *
Gerry Nehra 25,590 * -- -- 2,559(7) *
Steven Petrosino 15,351 * -- -- 1,535(7) *
Healthy Solutions 8,443 * -- -- 844(7) *
Ruby Miller-Lyman 7,675 * -- -- 768(7) *
----------
* Less than 1%.
(1) Applicable percentage of ownership is based on 166,803,292 shares of
common stock outstanding as of May 24, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
May 24, 2005, for each stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible
into shares of common stock that are currently exercisable or exercisable
within 60 days of May 24, 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. Note
that affiliates are subject to Rule 144 and Insider trading regulations -
percentage computation is for form purposes only.
(2) Represents 1,266,589 shares issued as a commitment fee under the Standby
Equity Distribution Agreement.
19
(3) Please note that the terms of the Secured Convertible Debentures held by
Taib Securities provide that in no event shall the holder be entitled to
convert the Secured Convertible Debentures for a number of shares which,
upon giving effect to the conversion, would cause the aggregate number of
shares beneficially owned by Cornell and its affiliates to exceed 4.99% of
the outstanding shares of EYI Industries following such conversion.
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 the
debentures may be higher or lower. We are registering 8,269,295 shares to
cover such conversions for the convertible debenture holder.
(4) Represents up to 85,000,000 shares, which are being registered for
issuance under the Standby Equity Distribution Agreement.
(5) Lloyd and Alberta Sargeant are the brother and sister-in-law to Mr. Jay
Sargeant, our President, Chief Executive Officer and a Director.
(6) Michel Grise is a named beneficiary of the Jay Sargeant Trust and is,
therefore, an indirect owner, with respect to the 17,195,966 shares. Under
the trust, Mr. Grise has the right to receive any cash distributions on
the shares, but Jay Sargeant, as the settlor of the Trust, has retained
the right to vote and dispose of the shares and to revoke or amend the
trust at any time.
(7) We are registering 10% of this shareholder's holdings pursuant to
"piggy-back" registration rights that we granted in connection with
obtaining this shareholder's consent to the shares exchange transaction
with Safe ID Corporation dated December 31, 2003.
(8) Winslow Drive Corp. is solely owned by Ms. Gladys Sargeant, the mother of
Mr. Jay Sargeant, EYI's President, Chief Executive Officer and a Director.
(9) Dartmount Production is solely owned by Mr. Robert Katz, the son-in-law of
Mr. Jay Sargeant, EYI's President, Chief Executive Officer and a Director.
The following information contains a description of each selling
shareholder's relationship to EYI Industries and how each selling shareholder
acquired the shares to be sold in this offering. None of the selling
stockholders have held a position or office, or had any other material
relationship, with EYI Industries, except as follows:
Shares Acquired In Financing Transactions With EYI Industries
Cornell Capital Partners. Cornell Capital Partners is the investor under
the Standby Equity Distribution Agreement. All investment decisions of Cornell
Capital Partners are made by its general partner, Yorkville Advisors, LLC. Mark
Angelo, the managing member of Yorkville Advisors, makes the investment
decisions on behalf of Yorkville Advisors. Cornell Capital Partners acquired all
shares being registered in this offering in financing transactions with EYI
Industries. These transactions are explained below:
Standby Equity Distribution Agreement. On June 22, 2004, we entered into a
Standby Equity Distribution Agreement with Cornell Capital Partners. On May 13,
2005, we mutually agreed to terminate the Standby Equity Distribution Agreement.
On May 13, 2005, we entered into a new Standby Equity Distribution Agreement
with Cornell Capital Partners. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically issue and sell to Cornell
Capital Partners shares of common stock for a total purchase price of $10.0
million. The maximum amount of each advance is $250,000. Cornell Capital
Partners will purchase shares of our common stock for a 2% discount to the
lowest volume weighted average price of our common stock for the 5 days
immediately following the notice date. In addition, Cornell Capital Partners
will retain 5% of each advance under the Standby Equity Distribution Agreement
and received a one-time commitment fee of 1,266,589 shares of our common stock.
Cornell Capital Partners intends to sell any shares purchased under the Standby
Equity Distribution Agreement at the then prevailing market price.
Secured Convertible Debentures. On June 22, 2004, we entered into a
secured convertible debenture transaction with Cornell Capital Partners in the
principal amount of $500,000. The sale of these Secured Convertible Debentures
is complete. EYI Industries received $250,000 from the issuance of the first
Secured Convertible Debenture on June 22, 2004, and we received $250,000 five
business days following the filing of the accompanying registration statement.
The Secured Convertible Debentures are convertible at the holder's option any
time up to maturity at a conversion price equal to the lower of (i) 120% of the
closing bid price of the common stock as of the date of issuance, or (ii) 80% of
the average of the lowest daily volume weighted average price of our common
stock for the 5 trading days immediately preceding the conversion date. At
maturity, the remaining unpaid principal and accrued interest under the
debentures shall 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 common stock as of the date of issuance or (ii) 80% of the
lowest closing bid price of the common stock for the lowest trading days of the
5 trading days immediately preceding the conversion date. The Secured
Convertible Debenture is secured by all of EYI Industries' assets. The Secured
Convertible Debentures accrue interest at a rate of 5% per year and have a term
of 3 years. In the event the Secured Convertible Debentures are redeemed, then
EYI Industries will issue to the holders a warrant to purchase 50,000 shares for
every $100,000 redeemed at an exercise price of 120% of the closing bid price as
of June 22, 2004. The holders purchased the Secured Convertible Debentures from
EYI Industries in a private placement on June 22, 2004. On September 24, 2004,
we issued the second secured convertible debenture in the principal amount of
$250,000 to Cornell Capital Partners on the same terms and conditions as the
secured convertible debenture described above. EYI Industries is registering in
this offering 8,352,823 shares of common stock underlying the Secured
Convertible Debentures. On April 4, 2005, Cornell Capital Partners assigned all
of its rights and interests in the secured convertible debentures to Taib Bank
E.C. All investment decisions of Taib Bank E.C. are made by Larry Chaleff, its
Managing Director. In addition, on April 4, 2005, EYI Industries and Taib Bank
E.C. entered into a Redemption Agreement, whereby EYI Industries agreed to first
use any proceeds received by EYI Industries under the Equity Distribution
Agreement with Cornell Capital Partners to redeem any remaining principal and
accrued interest under the assigned Secured Convertible Debentures.
20
There are certain risks related to sales by Cornell Capital Partners,
including:
o The outstanding shares will be issued based on discount to the
market rate. As a result, the lower the stock price, the greater
number of shares that will be issued to Cornell Capital Partners.
This could result in substantial dilution to the interests of other
holders of common stock.
o To the extent Cornell Capital Partners sells its common stock, the
common stock price may decrease due to the additional shares in the
market. This could allow Cornell Capital Partners to sell greater
amounts of common stock, the sales of which would further depress
the stock price.
o The significant downward pressure on the price of the common stock
as Cornell Capital Partners sells material amounts of common stocks
could encourage short sales by others. This could place further
downward pressure on the price of the common stock.
Newbridge Securities Corporation. Newbridge Securities Corporation is an
unaffiliated registered broker-dealer that has been retained by us. For its
services in connection with the Standby Equity Distribution Agreement, Newbridge
Securities Corporation received a fee of $10,000, which we paid by the issuance
of 33,411 shares of common stock of EYI Industries. These shares are being
registered in this offering. All investment decisions of Newbridge Securities
Corporation are made by its President, Guy Amico.
Other Selling Shareholders
649645 B.C. Ltd. received its shares pursuant to a Share Exchange
Agreement, dated December 31, 2003, by and among Safe ID Corporation, EYI
Industries and the shareholders of EYI Industries. All investment decisions of
649645 B.C Ltd. are made by Clifford and Clara O'Neill. Mr. and Mrs. O'Neill are
the parents to Mr. Dori O'Neill, Secretary, Chief Operations Officer and a
Director.
Bayonne Holdings, Inc. received its shares pursuant to a Share Exchange
Agreement, dated December 31, 2003, by and among Safe ID Corporation, EYI
Industries and the shareholders of EYI Industries. All investment decisions of
Bayonne Holdings are made by Evan Wryde.
Winslow Drive Corp. received its shares pursuant to a Share Exchange
Agreement, dated December 31, 2003, by and among Safe ID Corporation, EYI
Industries and the shareholders of EYI Industries. All investment decisions of
Winslow Drive Corp. are made by Gladys Sargeant. Mrs. Sargeant is the mother to
Mr. Jay Sargeant, our President, Chief Executive Officer and a Director.
Dartmouth Productions received its shares pursuant to a Share Exchange
Agreement, dated December 31, 2003, by and among Safe ID Corporation, EYI
Industries and the shareholders of EYI Industries. All investment decisions of
Dartmouth Productions are made by Robert Katz. Mr. Katz is the son-in-law to Mr.
Jay Sargeant, our President, Chief Executive Officer and a Director.
Good Companion Broadcasting received its shares pursuant to a Share
Exchange Agreement, dated December 31, 2003, by and among Safe ID Corporation,
EYI Industries and the shareholders of EYI Industries. All investment decisions
of Good Companion Broadcasting are made by Jerry Jacobs. Mr. Jacobs has a
Distribution Agreement with our subsidiary.
Health Inc. received its shares pursuant to a Share Exchange Agreement,
dated December 31, 2003, by and among Safe ID Corporation, EYI Industries and
the shareholders of EYI Industries. All investment decisions of Health Inc. are
made by Jack and Barbara Herd. Mr. and Mrs. Herd are Independent Business
Associates of our subsidiary.
Deacon & Traill Innovations received its shares pursuant to a Share
Exchange Agreement, dated December 31, 2003, by and among Safe ID Corporation,
EYI Industries and the shareholders of EYI Industries. All investment decisions
of Deacon & Traill Innovations are made by Tim and Cathy Deacon.
21
Healthy Solutions received its shares pursuant to a Share Exchange
Agreement, dated December 31, 2003, by and among Safe ID Corporation, EYI
Industries and the shareholders of EYI Industries. All investment decisions of
Healthy Solutions are made by Lorey Torrieri. Ms. Torrieri has a Distribution
Agreement with our subsidiary.
22
USE OF PROCEEDS
This Prospectus relates to shares of our common stock that may be offered
and sold from time to time by Cornell Capital Partners. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Standby Equity Distribution Agreement, which
we intend to use for general working capital purposes, including, among other
things, sales and marketing, product development and debt retirement. The
purchase price of the shares purchased under the Standby Equity Distribution
Agreement will be equal to 98% of the lowest volume weighted average price of
our common stock on the Over-the-Counter Bulletin Board for the 5 consecutive
trading days immediately following an advance date. Cornell Capital Partners
will retain 5% of each advance pursuant to the terms of our Standby Equity
Distribution Agreement
Determination Of Offering Price
The price at which the shares may actually be sold will be determined by
the market price of the common stock as of the date of sale by Cornell Capital
Partners.
For illustrative purposes, EYI Industries has set forth below its intended
use of proceeds for the range of net proceeds indicated below to be received
under the Standby Equity Distribution Agreement. The table assumes estimated
offering expenses of $85,000, plus the 5% retainage. In addition, pursuant to a
verbal amendment to an agreement dated May 25, 2004 between EYI Industries and
Source Capital Group, Inc., we are obligated to pay to Source Capital Group from
any proceeds we receive from sources introduced to us by Source Capital Group, a
cash amount equal to 4.5% of such proceeds received by us and warrants to
purchase shares of our common stock equal to 6% of such proceeds received by us.
Source Capital Group introduced us to Cornell Capital Partners.
GROSS PROCEEDS $ 1,000,000 $ 5,000,000 $10,000,000
NET PROCEEDS (reflects deductions of Cornell
Capital Partners' 5% retainage per each advance,4.5%
per advance to Source Capital and $85,000 for offering expenses $ 820,000 $ 4,440,000 $ 8,965,000
Use of Proceeds:
---------------------------------------------------------------------------------------------------------------------
General and Working Capital $ 565,000 $ 1,575,000 $ 2,550,000
Debt Retirement 255,000 500,000 1,250,000
Equipment
Computer Equipment -- 250,000 365,000
Phone Equipment -- 50,000 50,000
Sales and Marketing
Direct Mail Campaign -- 300,000 500,000
Affiliate Program/Eyewonder -- 150,000 750,000
Network Marketing Support -- 600,000 1,250,000
Spanish Network Marketing Support -- 150,000 250,000
TV & Radio Promotion -- 100,000 350,000
"Win Back" Campaign -- 50,000 150,000
Other -- -- 250,000
Product Development -- 500,000 1,000,000
Hispanic Buyers Club -- 215,000 250,000
Total $ 820,000 $ 4,440,000 $ 8,965,000
23
DILUTION
The net tangible book value of EYI Industries as of March 31, 2005 was
$(1,916,881) or $(0.0115) per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of EYI Industries (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to EYI Industries, our net
tangible book value will be unaffected by this offering. Our net tangible book
value, however, will be impacted by the common stock to be issued under the
Standby Equity Distribution Agreement. The amount of dilution will depend on the
offering price and number of shares to be issued under the Standby Equity
Distribution Agreement. The following example shows the dilution to new
investors at an offering price of $0.0294 per share.
If we assume that EYI Industries had issued 340,136,054 shares of common
stock under the Standby Equity Distribution Agreement at an assumed offering
price of $0.0294 per share (i.e., the maximum number of shares needed in order
to raise a total of $10 million available under the Standby Equity Distribution
Agreement), less a retention fee of $500,000 and offering expenses of $85,000,
our net tangible book value as of March 31, 2005 would have been $7,498,119 or
$0.0148 per share. Such an offering would represent an immediate increase in net
tangible book value to existing stockholders of $.0263 per share and an
immediate dilution to new stockholders of $0.0146 per share. The following table
illustrates the per share dilution:
Assumed public offering price per share $ 0.0294
Net tangible book value per share before this offering $ 0.0115
Increase attributable to new investors $ 0.0263
Net tangible book value per share after this offering -------- $ 0.0148
--------
Dilution per share to new stockholders $ 0.0146
========
The offering price of our common stock is based on the then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may experience, we have prepared the following table showing the
dilution per share at various assumed offering prices:
ASSUMED NO. OF SHARES TO BE DILUTION PER SHARE TO
OFFERING PRICE ISSUED(1) NEW INVESTORS
-------------- ------------------- ---------------------
$ 0.0294 340,136,054 $0.0146
$ 0.02205 453,514,739 $0.0100
$ 0.0147 680,272,109 $0.0058
$ 0.00735 1,360,544,218 $0.0024
----------
(1) EYI Industries is registering 85,000,000 shares of common stock pursuant
to the Standby Equity Distribution Agreement. In the event we need to
issue more than 85,000,000 shares of common stock being registered in the
accompanying registration statement to draw down the entire $10 million
available under the Standby Equity Distribution Agreement, we will have to
obtain shareholder approval to amend our Articles of Incorporation to
increase our authorized common stock and we will have to file a new
registration statement covering any additional shares.
24
STANDBY EQUITY DISTRIBUTION AGREEMENT
On June 22, 2004, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners. On May 13, 2005, we mutually agreed to terminate
the Standby Equity Distribution Agreement. On May 13, 2005, we entered into a
new Standby Equity Distribution Agreement with Cornell Capital Partners.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell shares of our common stock for a total
purchase price of $10 million. We are registering 85,000,000 shares to be issued
pursuant to the Standby Equity Distribution Agreement in the accompanying
registration statement. If we request advances under the Standby Equity
Distribution Agreement, Cornell Capital Partners will purchase shares of common
stock of EYI Industries for 98% of the lowest volume weighted average price on
the Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the 5 days immediately following the advance notice
date. Cornell Capital Partners intends to sell any shares purchased under the
Standby Equity Distribution Agreement at the market price. This Prospectus
relates to the shares of common stock to be issued to Cornell Capital Partners
under the Standby Equity Distribution Agreement, as well as shares of our common
stock issued to Cornell Capital Partners as a commitment fee under the Standby
Equity Distribution Agreement and shares of our common stock that may be issued
to Cornell Capital Partners pursuant to the conversion of a secured convertible
debenture and the exercise of warrants. Cornell Capital Partners cannot transfer
its interest in the Standby Equity Distribution Agreement to any other person.
We will not receive any advances pursuant to the Standby Equity
Distribution Agreement until the accompanying registration statement is declared
effective by the Securities and Exchange Commission. In addition, pursuant to
the Standby Equity Distribution Agreement, in order to receive advances we must
have filed with the Securities and Exchange Commission in a timely manner, all
reports, notices and other documents required of a "reporting company" under the
Securities Exchange Act of 1934, as amended. Based on a recent stock price of
$0.03, we would have to issue 340,136,054 shares of our common stock to draw
down the entire $10 million available to us under the Standby Equity
Distribution Agreement. Based on our recent stock price of $0.03 and that we are
registering 85,000,000 shares of our common stock under the Standby Equity
Distribution Agreement in the accompanying registration statement, we could only
draw down gross proceeds of $2,499,000 under the Standby Equity Distribution
Agreement. Our current Articles of Incorporation authorize us to issue
300,000,000 shares of common stock. We are registering 85,000,000 shares of our
common stock in the accompanying registration statement to be issued pursuant to
the Standby Equity Distribution Agreement. As a result, if we need to issue more
than 85,000,000 shares to draw down the entire $10 million available under the
Standby Equity Distribution Agreement, we will have to obtain shareholder
approval to amend our Articles of Incorporation to increase our authorized
common stock and we will have to file a new registration statement covering any
additional shares.
Advances. Pursuant to the Standby Equity Distribution Agreement, we may
periodically sell shares of common stock to Cornell Capital Partners to raise
capital to fund our working capital needs. The periodic sale of shares is known
as an advance. We may not request an advance fewer than six trading days from
the previous advance request. Cornell Capital Partners will retain 5% of each
advance under the Standby Equity Distribution Agreement.
Mechanics. We may, at our discretion, request advances from Cornell
Capital Partners by written notice, specifying the amount requested up to the
maximum advance amount. A closing will be held 5 trading days after such written
notice at which time we will deliver shares of common stock and Cornell Capital
Partners will pay the advance amount. We have the ability to determine when and
if we desire to draw an advance.
Commitment Period. We may request an advance at any time during the
commitment period. The commitment period begins on the date the Securities and
Exchange Commission first declares the accompanying registration statement
effective. The commitment period expires on the earliest to occur of (i) the
date on which Cornell Capital Partners has made advances totaling $10 million or
(ii) two years after the effective date of the accompanying registration
statement. Cornell Capital Partners' obligations under the Standby Equity
Distribution Agreement terminate in the event a registration statement covering
shares underlying the Standby Equity Distribution Agreement does not remain
effective.
Maximum Advance Amount. We may not request advances in excess of a total
of $10 million. The maximum amount of each advance is equal to $250,000. We may
not request an advance under the Standby Equity Distribution Agreement less than
six trading days after a price advance request. In addition, in no event shall
the number of shares issuable to Cornell Capital Partners cause it to own in
excess of 9.9% of the then outstanding shares of common stock of EYI Industries.
25
Number Of Shares To Be Issued. We cannot predict the actual number of
shares of common stock that will be issued pursuant to the Standby Equity
Distribution Agreement, in part, because the purchase price of the shares will
fluctuate based on prevailing market conditions and we have not determined the
total amount of advances we intend to draw. Nonetheless, we can estimate the
number of shares of common stock that will be issued using certain assumptions.
Based upon a recent price of our common stock of $0.03, we would have to issue
340,136,054 shares of our common stock to draw down the entire $10 million
available to us under the Standby Equity Distribution Agreement. Based on our
recent stock price of $0.03 and that we are registering 85,000,000 shares of our
common stock under the Standby Equity Distribution Agreement in the accompanying
registration statement, we could only draw down gross proceeds of $2,499,000
under the Standby Equity Distribution Agreement. You should be aware that there
is an inverse relationship between our stock price and the number of shares to
be issued under the Standby Equity Distribution Agreement. That is, as our stock
price declines, we would be required to issue a greater number of shares under
the Standby Equity Distribution Agreement for a given advance. This inverse
relationship is demonstrated by the following table, which shows the number of
shares of our common stock to be issued to Cornell Capital Partners, under the
Standby Equity Distribution Agreement, at various prices.
Market Price: $ 0.03 $ 0.0225 $ 0.015 $ 0.0075
Purchase Price: $ 0.0294 $ 0.02205 $ 0.0147 $ 0.00735
Number Of Shares Required To Draw Down the $10
Million Under The Standby Equity Distribution
Agreement: 340,136,054(2) 453,514,739(2) 680,272,109(2) 1,360,544,218(2)
Total Outstanding(3): 505,656,589 619,035,274 845,792,644 1,526,064,753
Percent Outstanding(4): 67.27% 73.26% 80.43% 89.15%
(1) Our current Articles of Incorporation do not permit us to issue more than
300,000,000 shares of common stock.
(2) We are registering 85,000,000 shares of our common stock under the Standby
Equity Distribution Agreement in the accompanying registration statement.
(3) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners.
(4) Represents the numbers shares of common stock to be issued to fully draw
down on the $10 million available under the Standby Equity Distribution
Agreement as a percentage of the total number shares outstanding.
In addition to showing the inverse relationship, the above table also
shows that the issuance of shares under the Standby Equity Distribution
Agreement may result in a change of control. 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 of EYI Industries.
Registration Rights. In connection with the Standby Equity Distribution
Agreement, we granted to Cornell Capital Partners certain registration rights.
Pursuant to a Registration Rights Agreement, dated May 13, 2005, we agreed to
register shares underlying advances under the Standby Equity Distribution
Agreement prior to the first sale to Cornell Capital Partners of our common
stock under the Standby Equity Distribution Agreement. The registration
statement accompanying this Prospectus will register such shares upon
effectiveness. The cost of this registration will be borne by us.
Net Proceeds. We cannot predict the total amount of proceeds to be raised
in this transaction, in part, because we have not determined the total amount of
the advances we intend to draw. However, we expect to incur expenses of
approximately $85,000 consisting primarily of professional fees incurred in
connection with registering 83,646,847 shares in this offering. In addition, we
are obligated to pay an underwriting discount to Cornell Capital Partners equal
to 5% of each advance.
Use Of Proceeds. We intend to use the net proceeds received under the
Standby Equity Distribution Agreement for general corporate purposes, as well as
any future acquisitions. Please see "Use of Proceeds."
Lock-up Period. Pursuant to the Standby Equity Distribution Agreement, we
agreed, during the commitment period of the Standby Equity Distribution
Agreement, not to: (i) issue or sell any common stock or preferred stock without
consideration or for consideration per share less than the bid price of a share
of our common stock on the date of issuance; (ii) issue or sell any derivative
security or other security granting the holder the right to acquire our common
stock without consideration or for consideration per share less than the bid
price of a share of our common stock on the date of issuance; or (iii) file any
registration statement on Form S-8.
26
Source Capital Group, Inc. On May 25, 2004 we entered into an agreement
with Source Capital Group, Inc. pursuant to which we are obligated to pay to
Source Capital Group from any proceeds we receive from sources introduced to us
by Source Capital Group a cash amount equal to 4.5% of such proceeds received by
us and warrants to purchase shares of our common stock equal to 6% of such
proceeds received by us.
27
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
EYI Industries' common stock owned by the selling stockholders may be effected
directly to purchasers by the selling stockholders or by pledgees, transferees
or other successors in interest, as principals 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 market or in any other market on which the price of EYI
Industries' shares of common stock are quoted or (ii) in transactions otherwise
than on the over-the-counter market or in any other market on which the price of
EYI Industries' shares of common stock are quoted. Any transferees and pledges
will be identified by a post-effective amendment to the accompanying
registration statement. 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 a selling stockholder or by
agreement between a selling stockholder and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of EYI Industries' 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). 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.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will pay EYI
Industries 98% of the lowest volume weighted average price of EYI Industries'
common stock on the Over-the-Counter Bulletin Board or other principal trading
market on which our common stock is traded for the 5 days immediately following
the advance date. In addition, Cornell Capital Partners will retain 5% of the
proceeds received by EYI Industries under the Standby Equity Distribution
Agreement, plus a one-time commitment fee of 1,266,589 shares of common stock to
be issued to Cornell Capital Partners. The 5% retainage and the commitment fee
are underwriting discounts. In addition, EYI Industries engaged Newbridge
Securities Corporation, a registered broker-dealer, to advise us in connection
with the Standby Equity Distribution Agreement. For its services, Newbridge
Securities Corporation received 33,411 shares of EYI Industries' common stock.
Cornell Capital Partners was formed in February 2000 as a Delaware limited
partnership. Cornell Capital Partners is a domestic hedge fund in the business
of investing in and financing public companies. Cornell Capital Partners does
not intend to make a market in EYI Industries' stock or to otherwise engage in
stabilizing or other transactions intended to help support the stock price.
Prospective investors should take these factors into consideration before
purchasing EYI Industries' 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 fifty states. In addition,
in certain states the shares of common stock 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.
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. Penny stocks
are stock: (i) with a price of less than $5.00 per share; (ii) that are not
traded on a "recognized" national exchange; (iii) 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 (iv) in issuers with net tangible
assets less than $2.0 million (if the issuer has been in continuous operation
for at least three years) or $5.0 million (if in continuous operation for less
than three years), or with average revenues of less than $6.0 million 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.
28
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $85,000, as well as retention of 5% of the gross proceeds received
under the Standby Equity Distribution Agreement. In addition, EYI Industries
engaged Newbridge Securities Corporation, a registered broker-dealer, to advise
us in connection with the Standby Equity Distribution Agreement. For its
services, Newbridge Securities Corporation received 33,411 shares of EYI
Industries' common stock. The estimated offering expenses consist of: a SEC
registration fee of $300, printing expenses of $5,000, accounting fees of
$20,000, legal fees of $50,000 and miscellaneous expenses of $9,700. We will not
receive any proceeds from the sale of any of the shares of common stock by the
selling stockholders. We will, however, receive proceeds from the sale of common
stock under the Standby Equity Distribution Agreement.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act 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 common stock of EYI Industries while such selling
stockholder is distributing shares covered by this Prospectus. Accordingly,
except as noted below, the selling stockholders are not permitted to cover short
sales by purchasing shares while the distribution is taking place. 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 Securities and Exchange Commission.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF EYI AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION AND ELSEWHERE IN THIS PROSPECTUS THAT ARE NOT
STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE "FORWARD-LOOKING
STATEMENTS."
Overview
We are in the business of selling, marketing, and distributing a product
line consisting of approximately 30 nutritional products in two categories,
dietary supplements and personal care products. As of March 31, 2005 our product
line consists of: (i) 22 dietary supplement products; and (ii) 8 personal care
products consisting primarily of cosmetic and skin care products. Our products
are primarily manufactured by Nutri-Diem, Inc. a related party, and sold by us
under a license and distribution agreement with Nutri-Diem, Inc. Certain of our
own products are manufactured for us by third party manufacturers pursuant to
formulations developed for us. Our products are sold in the United States and
Canada. Our products are marketed through a network marketing program in which
independent business associates purchase products for resale to retail customers
as well as for their own personal use. We have a list of over 400,000
independent business associates, of which approximately 14,000 we consider
"active". An "active" independent business associate is one who purchased our
products within the preceding 12 months.
Our independent auditors have added an explanatory paragraph to their
audit issued in connection with the financial statements for the period ended
December 31, 2004, relative to our ability to continue as a going concern. We
have negative working capital of approximately $1,640,000 and an accumulated
deficit incurred through March 31, 2005 of $7,868,993, which raises substantial
doubt about our ability to continue as a going concern. Our ability to obtain
additional funding will determine our ability to continue as a going concern.
Accordingly, there is substantial doubt about our ability to continue as a going
concern. Our financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We have a history of losses. We have incurred an operating loss since
inception and had an accumulated deficit of $7,868,993 as of March 31, 2005. For
the year ended December 31, 2004 we incurred a net loss of $4,462,795. For the
short period ended December 31, 2003 and for the year ended June 30, 2003, we
incurred a net loss of $969,987 and $1,644,456, respectively. Consequently, 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, which calls for us to secure both debt
and equity financing while pursuing acquisitions and/or joint ventures with
companies in the nutritional supplement industry.
Our core business is in network marketing development and sales. In 2004
we implemented some critical changes to our network marketing development and
sales strategy. We analyzed our compensation structure and realized that
although the plan paid the sales force more than industry standard, it was still
not encouraging sales, growth, duplication or retention. After months of study,
outside consulting, field leader's focus groups and senior management
discussion, we made key adjustments during our first fiscal quarter in 2004 that
are intended to cap the sales commission expense while at the same time promote
increased network sales. Our experience to date is that the changes to our
commission plan have improved our gross profit margin, however, they have also
resulted in an unexpected reduction in IBA retention which has adversely
affected our gross revenues. Upon analyzing our business and the amount of
commissions that we paid out, we discovered that our old compensation plan paid
out in excess of 70% commission. We have now capped our commission to 50% of
gross network sales. This did have a negative effect on all of our existing
IBA's. In fact, some ceased to represent our products because of that change.
Since the implementation of this new commission plan, we have experienced a
decline in gross network sales that management believes is directly related to
the lowering of the commissions paid to our IBAs.
To further facilitate growth and benefit from certain competitive
advantages conferred by the new commission plan, we have upgraded our Internet
support sites, created a trainer field certification program, developed a
regional training program and increased our face to face training capability.
These support tools are intended to ensure compliance, mature team and territory
development and assist sales growth. There were no additional financial costs
absorbed by the Company for these upgrades and programs as they were done
in-house utilizing existing manpower.
30
We see international sales as a key component for our growth in the next 5
years. During our second quarter of fiscal 2004, we entered into a joint venture
agreement with World Wide Buyers' Club Inc. and Supra Group, Inc., dated as of
May 28, 2004, for the purpose of jointly marketing and distributing our products
through the existing Supra Group distribution system in the Latin American
countries identified in the Joint Venture Agreement and the products of Supra
Group using the existing EYI distribution system to residents in the U.S. We
believe Supra Group has significant international experience, expertise and
contacts and that this alliance will assist in our ability to expand into
Spanish-speaking countries. As of the date of this registration statement, there
has not been no economic activity between the Company and World Wide Buyers'
Club Inc.
Our plan of operations over the next twelve months is to expand the
marketing of our Calorad product by internet direct and the distribution
network. The Company does not anticipate any additional costs for this expansion
as all related work will be done with existing staff. We also intend to support
the growth and expansion of the Sales Communication department. Their success is
measured on the number of inactive IBAs who, through the efforts of the Sales
Communication department, become current with their membership fees and purchase
our products. As the revenues generated by this department grow, we intend to
add additional staff.
During the fourth quarter of 2004, we launched our new product,
Prosoteine. Over the next twelve months, we intend to launch the second phase of
this campaign which includes an in-house-developed 6-week training program
called "15/5" which is designed to teach our IBAs and their guests about
Prosoteine in a telephone conference forum. The first 15/5 class started
February 18, 2005 and ran for 8 weeks, class two with a new 6 week program began
April 5, 2005 and concluded May 10, 2005. Additionally, we intend to distribute
support materials.
Also, over the next twelve months we intend to promote our Autoship
Program by offering one or more of the following: initial incentives, purchase
discounts, and long-term commitment rewards. We believe that our automated
ordering system supports on-going sales.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires our management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results may differ from those estimates.
Our management routinely makes judgments and estimates about the effects
of matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. We have
identified certain accounting policies, described below, that are the most
important to the portrayal of our current financial condition and results of
operations.
Accounts Receivable and Bad Debts
The Company estimates bad debts utilizing the allowance method, based upon
past experience and current market conditions. At March 31, 2005 and December
31, 2004, the Company recorded allowances of $19,853 and $16,321 to cover
accounts receivable balances over 60 days.
Inventory
The Company records inventories at the lower of cost or market on a
first-in, first-out basis. Our product inventory is reviewed each month and also
when the re-order of the product is necessary. On a monthly basis, our inventory
is reviewed based on the expiration of our existing inventory. Product that has
a shelf-life of less than 60 days is written off or discounted.
A re-order review consists of an evaluation of our current monthly sales
volume of the product, cost of product, shelf-life of the product, and the
manufacturers minimum purchase requirement which all determine the overall
potential profitability or loss of re-ordering. If the re-order of the product
has an assessed loss, then the recommendation to management is to remove the
product from the product line.
31
Restricted Cash
Restricted cash includes deposits held in a reserve account in the amount
of $100,370 and $100,248 at March 31, 2005 and December 31, 2004 respectively.
Such deposits are required by the bank as protection against unfunded charge
backs and returns of credit card transactions.
Revenue Recognition
The Company is in the business of selling nutritional products in two
categories: dietary supplements and personal care products. Sales of personal
care products represent less than 5% of the overall revenue and therefore are
not classified separately in the financial statements. The Company recognized
revenue from product sales when the products are shipped and title passes to
customer. Administrative fees charged to the Independent Business Associates are
included in the gross sales and amounted $41,096 and $67,500 for the three
months ended March 31, 2005 and March 31, 2004 respectively.
Stock Options And Warrants Granted To Employees And Non-Employees
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), defines a fair value-based method of
accounting for stock options and other equity instruments. The Company has
adopted this method, which measures compensation costs based on the estimated
fair value of the award and recognizes that cost over the service period.
Recent Accounting Pronouncements
New accounting pronouncements that have a current or future potential
impact on our financial statements are as follows:
In December 2004, the Financial Accounting Standards Board issued a
revision to Statement of Financial Accounting Standards No. 123R, "Accounting
for Stock Based Compensation." This statement supercedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This statement does not change the accounting guidance for share
based payment transactions with parties other than employees provided in
Statement of Financial Accounting Standards No. 123. This statement does not
address the accounting for employee share ownership plans, which are subject to
AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans." The Company has previously adopted SFAS 123 and the fair value
of accounting for stock options and other equity instruments. The Company has
determined that there was no impact to its financial statements from the
adoption of this new statement.
32
Results Of Operations
The following table summarizes operating results as a percentage of
revenue, respectively, for the periods indicated:
Summary of Year End Results
Twelve Months Short Period Twelve Months
ended ended ended
December 31, 2004 December 31, 2003 June 30, 2003
----------------- ----------------- -------------
Revenue 100% 100% 100%
Cost of goods sold 21% 17% 8%
Gross profit before commission expense 79% 83% 92%
Commission expense 40% 49% 65%
Gross profit after cost of goods sold and commission
expense 40% 34% 27%
Operating expenses 108% 57% 38%
Operating loss -69% -23% -11%
Year Ended December 31, 2004 Compared To Short Period Ended December 31, 2003
Revenues
During the year ended December 31, 2004 we had total revenues of
$6,229,029 and gross profits of $2,464,818 or 40% compared to revenues of
$4,313,579 and gross profits of $1,467,779 or 34% during the short period ended
December 31, 2003. The decrease in our revenues can be primarily attributed to
the following factors:
o the changes made to our commission plan in January 2004 in which our
overall commission payout to our IBAs was reduced and capped at 50%
of gross network sales, therefore, hindering our ability to retain
existing IBAs and attract new ones.
o our inability to fund marketing initiatives and programs that may
promote growth within new markets and existing ones.
o Lack of IBA participation in our autoship program.
Seasonal Sales Trends
* Based on our historical sales trends, EYI does experience a decline in
revenues during the summer months as well as in December.
Revenue By Segments
The following table summarizes our four revenue segments as a percentage
of total revenue, respectively, for the periods indicated:
Year ended Short period ended Year ended
12/31/04 12/31/03 6/30/03
---------- ------------------ ----------
Administration fees 3% 4% 2%
Binary sales 76% 86% 96%
Direct sales 18% 8% 2%
Shipping 2% 2% 1%
Total revenue 100% 100% 100%
33
Details of the most significant changes from the short year ended December
31, 2003 to the year ended December 31, 2004 are detailed below:
Binary sales - The binary sales segment represents $4,744,742 or 76% of
the total revenue earned during the year ended December 31, 2004, as compared to
$3,727,692 or 86% of the total revenues earned during the short period ended
December 31, 2003. Management believes that our inability to properly fund our
marketing initiatives hindered growth and retention in this segment.
Direct sales - The direct sales segment represents $1,150,759 or 18% of
the total revenue earned during the year ended December 31, 2004, as compared to
$330,229 or 8% of the total revenues earned during the short period ended
December 31, 2003. Since the launch of this segment in May 2003, EYI has
acquired new direct sales contracts which has supported the growth in direct
sales.
Gross Profit
Our consolidated gross profit increased to 40% for the year ended December
31, 2004 from 34% for the short period ended December 31, 2003. This increase is
attributed to the changes made to our commission plan in January 2004. By
reducing the commissions paid on binary sales, we experienced an increase in our
gross profit.
Short period
Year ended ended Year ended
12/31/04 12/31/03 6/30/03
------------------------------------------------
Binary sales $4,744,742 $3,727,692 $13,770,558
Commission - Binary $2,321,555 $2,034,737 $9,325,775
Gross profit on binary sales before cost of product $2,423,187 $1,692,955 $4,444,783
% of Total Revenue 51% 45% 32%
Expenses
Operating Expenses
The following table summarizes operating expenditures as a percentage of
total operating expenses, respectively, for the periods indicated:
34
Twelve Months Short Period
Ended Ended Twelve Months
December 31, December 31, Ended June 30,
2004 2003 2003
---- ---- ----
OPERATING EXPENSES
Consulting fees 21% 16% 14%
Legal and professional fees 5% 6% 6%
Customer service 6% 20% 23%
Finance and administration 31% 13% 15%
Sales and marketing 2% 4% 9%
Telecommunications 7% 9% 10%
Wages and benefits 19% 22% 17%
Warehouse expense 8% 9% 5%
Total Operating Expenses 100% 100% 100%
We incurred operating expenses in the amount of $6,745,022 for the year
ended December 31, 2004, compared to $2,446,108 for the short period ended
December 31, 2003. The following explains the most significant changes during
the periods presented:
Consulting fees - For the year ended December 31, 2004, consulting fees
totaled $1,438,362 and represented 21% of our total operating expenditures, as
compared to $394,200 or 16% of the total operating expenditures for the short
period ended December 31, 2003. This increase relates primarily to the cost
associated with stock options granted to consultants during the year.
Customer Service - For the year ended December 31, 2004, customer services
fees totaled $393,244 and represented 6% of our total operating expenditures, as
compared to $488,944 or 20% of the total operating expenditures for the short
period ended December 31, 2003. Until April 2004, we acquired our customer
service support department through a management agreement with EYI Corp. In
April 2004, we hired our own employees to perform this function and therefore,
the related expenses are included under Wages and Benefits.
Finance and administrations - For the year ended December 31, 2004,
finance and administration expenditures totaled $2,101,842 and represented 31%
of our total operating expenditures, as compared to $324,853 or 13% of the total
operating expenditures for the short period ended December 31, 2003. This
increase relates primarily to the cost associated with stock options granted to
employees during the year ended December 31, 2004. In addition, we expensed
$390,000 in financing costs during the year ended December 31, 2004.
Wages and benefits - For the year ended December 31, 2004, wages and
benefits totaled $1,296,801 and represented 19% of our total operating
expenditures, as compared to $547,076 or 22% of the total operating expenditures
for the short period ended December 31, 2003. Although we expanded our payroll
in April 2004 as indicated above, we reduced the overall wages and benefits
during the year by reducing staff in various departments.
Other Income (Expense)
During the year ended December 31, 2004 we had total other income
(expense) of ($271,346) compared to ($7,928) for the short period ended December
31, 2003. The increased expense relates to $250,000 in interest expense accrued
on the beneficial conversion of the June 2004 and September 2004 disbursements
from Cornell.
35
Liquidity And Financial Condition
Year Ended Short Period
Cash Flows 12/31/2004 12/31/2003
---------- ---------- ----------
Net Cash from (used in) Operating Activities ($826,300) ($490,611)
Net Cash from (used in) Investing Activities $122,723 ($9,177)
Net Cash from (used in) Financing Activities $684,520 $535,679
-------- --------
Net Increase (decrease) in Cash During Period $(19,057) $35,891
======== =======
Percentage
At Dec. 31, At Dec. 31, Increase /
Working Capital 2004 2003 (Decrease)
--------------- ---- ---- ----------
Current Assets $1,280,879 $616,512 107.8%
Current Liabilities ($2,361,120) ($1,882,345) 25.4%
Working Capital Surplus (Deficit) ($1,080,241) ($1,265,833) (14.7)%
We had cash and cash equivalents in the amount of $33,018 as of December
31, 2004 compared to cash in the amount of $52,075 as of December 31, 2003. We
had a working capital deficit of $1,080,241 as of December 31, 2004 compared to
a working capital deficit of $1,265,833 as of December 31, 2003.
Current Assets - We had an increase of $664,367 or 107.8% in our current
assets since December 31, 2003. This increase relates to our agreement with
Eyewonder, pursuant to which we prepaid the communications component.
Current Liabilities - We had an increase of $478,775 or 25% in our current
liabilities since December 31, 2003. This increase is primarily attributed to
the following: (i) increase in unpaid trade payables; and (ii) the convertible
debt per our loan agreement with Cornell entered into on June 2, 2004, pursuant
to which we received a net of $379,724 in exchange for convertible securities.
Cash Provided By Financing Activities
We have continued to finance our business primarily through private
placement sales of our common stock, short term loans, conversion of accrued
liabilities into stock and through increases in our accrued liabilities and
accounts payable, we have also received funding as a result of the exercise of
stock options. Cash provided by financing activities for the year ended December
31, 2004 was $684,520, compared to $535,679 for the year ended December 31,
2003.
Financing activities included the issuance of common stock for aggregate
proceeds of $492,316 during the year ended December 31, 2004 in private
placement and other transactions. During the year ended December 31, 2004 we
granted 24,934,000 stock options under our Stock Compensation Program at an
average weighted price of $0.14 per share.
On June 22, 2004, we entered into a secured convertible debenture
transaction with Cornell Capital Partners in the principal amount of $500,000.
The sale of these Secured Convertible Debentures is complete. EYI Industries
received $250,000 from the issuance of the first Secured Convertible Debenture
on June 22, 2004, and we received $250,000 five business days following the
filing of the accompanying registration statement. The Secured Convertible
Debentures are convertible at the holder's option any time up to maturity at a
conversion price equal to the lower of (i) 120% of the closing bid price of the
common stock as of the date of issuance, or (ii) 80% of the average of the
lowest daily volume weighted average price of our common stock for the 5 trading
days immediately preceding the conversion date. At maturity, the remaining
unpaid principal and accrued interest under the debentures shall 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 common
stock as of the date of issuance or (ii) 80% of the lowest closing bid price of
the common stock for the lowest trading days of the 5 trading days immediately
preceding the conversion date. The Secured Convertible Debenture is secured by
all of EYI Industries' assets. The Secured Convertible Debentures accrue
interest at a rate of 5% per year and have a term of 3 years. In the event the
Secured Convertible Debentures are redeemed, then EYI Industries will issue to
the holders a warrant to purchase 50,000 shares for every $100,000 redeemed at
an exercise price of 120% of the closing bid price as of June 22, 2004. The
holders purchased the Secured Convertible Debentures from EYI Industries in a
private placement on June 22, 2004. On September 24, 2004, we issued the second
secured convertible debenture in the principal amount of $250,000 to Cornell
Capital Partners on the same terms and conditions as the secured convertible
debenture described above. EYI Industries is registering in this offering
8,352,823 shares of common stock underlying the Secured Convertible Debentures.
On April 4, 2005, Cornell Capital Partners assigned all of its rights and
interests in the secured convertible debentures to Taib Bank E.C. All investment
decisions of Taib Bank E.C. are made by Larry Chaleff, its Managing Director. In
addition, on April 4, 2005, EYI Industries and Taib Bank E.C. entered into a
Redemption Agreement, whereby EYI Industries agreed to first use any proceeds
received by EYI Industries under the Equity Distribution Agreement with Cornell
Capital Partners to redeem any remaining principal and accrued interest under
the assigned Secured Convertible Debentures.
36
First Quarter 2005 Summary Of Operations
Three Months ended Three Months ended
March 31, 2005 March 31, 2004
-------------- --------------
Revenue $1,313,768 $1,529,195
Cost of goods sold $251,149 $417,490
Gross profit before commission expense $1,062,620 $1,111,705
Commission expense $471,605 $414,605
Gross profit after cost of goods sold and commission expense $591,015 $697,100
Operating expenses $1,237,108 $1,103,878
Operating loss ($646,093) ($406,778)
Three Months Ended March 31, 2005 Compared To Three Months Ended March 31, 2004
Revenues
During the three months ended March 31, 2005 we had total revenues of
$1,313,768 as compared to revenues of $1,529,195 for the same period in 2004
which represents a decline of $215,427 or 14%. The decrease in our revenues can
be primarily attributed to the following factors:
o Our inability to attract new IBA's
o Lack of IBA participation in our auto-ship program
o our inability to fund marketing initiatives and programs that may
promote growth within new markets and existing ones.
Gross Profit
During the three months ended March 31, 2005 as compared to the same
period in 2004, we had gross profits of $591,015 and $697,100 respectively. This
represents a decline of $106,085 or 15%. The decline in our gross profit is
primarily attributed to our decreased sales.
Expenses
Operating Expenses
The following table summarizes operating expenditures for the periods
indicated:
37
Three Months Three Months
Ended Ended
OPERATING EXPENSES March 31, 2005 March 31, 2004
------------------ -------------- --------------
Consulting fees $237,962 $250,520
Legal and professional fees $69,125 $20,052
Customer service $86,534 $124,339
Finance and administration $208,080 $219,223
Sales and marketing $3,718 $27,556
Telecommunications $119,162 $105,062
Wages and benefits $406,627 $252,066
Warehouse expense $105,900 $105,060
Total Operating Expenses $1,237,108 $1,103,878
We incurred operating expenses in the amount of $1,237,108 during the
three months ended March 31, 2005, compared to $1,103,878 for the three months
ended March 31, 2004. The following explains the most significant changes for
the periods presented:
Legal and Professional fees - For the three months ended March 31, 2005,
legal and professional fees totaled $69,125 and represented 6% of our total
operating expenditures, as compared to $20,052 or 2% of the total operating
expenditures for the three months ended March 31 2004. The increase is primarily
attributed to the costs associated with our reporting obligations under the
Exchange Act.
Customer Service - For the three months ended March 31, 2005, customer
services fees totaled $86,534 and represented 7% of our total operating
expenditures, as compared to $124,339 or 10% of the total operating expenditures
for the three months ended March 31, 2004. Until April 2004, we acquired our
customer service support department through a management agreement with EYI
Corp. In April 2004, we hired our own employees to perform this function and
therefore, the related expenses are included under Wages and Benefits.
Wages and benefits - For the three months ended March 31, 2005, wages and
benefits totaled $406,627 and represented 33% of our total operating
expenditures, as compared to $252,066 or 20% of the total operating expenditures
for the three months ended March 31, 2004. This increase is primarily a
combination of expanding our staff in April 2004 as indicated above, and we also
recorded an expense for vested stock options granted to our employees during
this quarter.
Financial Condition
Cash and Working Capital
At March 31, 2005 At December 31, 2004 Increase / (Decrease)
----------------- -------------------- ---------------------
Current Assets $1,187,378 $1,280,879 (7%)
Current Liabilities $2,828,236 $2,361,120 20%
Working Capital (Deficit) ($1,640,858) ($1,080,241) (52%)
We had cash of $5,450 as at March 31, 2005, compared with cash of $33,018
as at December 31, 2004. We had a working capital deficit at March 31, 2005 and
March 31, 2004 of $1,640,848 and $1,080,241 respectively. The increase to our
working capital deficit was primarily attributed to the increases in our trade
payables and related party payables.
Liabilities
At March 31, 2005 At December 31, 2004 Increase / (Decrease)
----------------- -------------------- ---------------------
Accounts Payable and Accrued Liabilities $1,398,316 $1,218,178 15%
Accounts Payable-Related Parties $691,473 $590,146 17%
Convertible Debt-Related Party, Net Of
Discount $417,886 $379,724 10%
Loan Payable, Cornell $200,000 $0 100%
38
We had an increase of 15% in Accounts Payable and Accrued Liabilities
during the three months which represents the increase in unpaid trade payables.
We also experienced a 17% increase in Accounts Payable-Related Parties which is
due to the increase in unpaid wages of two of our officers and an increase in
the amount owed to EYI Corp. The increase in convertible debt relates to the
accrued interest on the debt.
Cash Used In Operating Activities
Cash used in operating activities for the three months ended March 31,
2005 was $157,219 compared to $204,497 for the comparative period in 2004,
representing a decrease of $47,278 or 23%.
Cash Provided By Financing Activities
We have continued to finance our business primarily through private
placement sales of our common stock, exercises of stock options, short term
loans, conversion of accrued liabilities into stock and through increases in our
accrued liabilities and accounts payable. Cash provided by financing activities
for the three months ended March 31, 2005 was $141,324, compared to $181,578 for
the three months ended March 31, 2004.
39
DESCRIPTION OF BUSINESS
Overview
We are in the business of selling, marketing, and distributing a product
line consisting of approximately 30 nutritional products in two categories,
dietary supplements and personal care products. Our most successful product is
Calorad, a liquid collagen-based dietary supplement presently available on the
market. These products are marketed through a network marketing program in which
IBAs (Independent Business Associates) purchase products for resale to retail
customers as well as for their own personal use. We have a list of over 400,000
IBAs, of which approximately 14,000 we consider "active". An "active" IBA is one
who purchased our products within the preceding 12 months. Over 1,500 of these
IBAs are considered "very active". A "very active" IBA is one who is on our
automatic Auto-ship Program and is current with their annual administration fee.
The IBAs in our network are encouraged to recruit interested people to
become new distributors of our products. New IBAs are placed beneath the
recruiting IBA in the "network" and are referred to as being in that IBA's
"down-line" organization. Our marketing plan is designed to provide incentives
for IBAs to build, maintain and motivate an organization of recruited
distributors in their down-line organization to maximize their earning
potential. IBAs generate income by purchasing our products at wholesale prices
and reselling them at retail prices. IBAs also earn commissions on product
purchases generated by their down-line organization.
On an ongoing basis we review our product line for duplication and sales
trends and make adjustments accordingly. As of March 31, 2005, our product
line consisted of: (i) 22 dietary supplement products; and (ii) 8 personal care
products consisting primarily of cosmetic and skin care products. Our products
are primarily manufactured by Nutri-Diem, Inc., a related party, and sold by us
under a license and distribution agreement with Nutri-Diem Inc. Certain of our
own products are manufactured for us by third party manufacturers pursuant to
formulations developed for us. Our products are sold to our IBAs located in the
United States and Canada.
We believe that our network marketing system is suited to marketing
dietary supplement and personal care products, because sales of such products
are strengthened by ongoing personal contact between IBAs and their customers.
Our network marketing system appeals to a broad cross-section of people,
particularly those looking to supplement family income or who are seeking
part-time work. IBAs are given the opportunity, through our sponsored events and
training sessions, to network with other distributors, develop selling skills
and establish personal goals. We supplement monetary incentives with other forms
of recognition, in order to motivate IBAs.
Recent Corporate Developments
We experienced the following significant developments through the date of
this filing and during fiscal 2004:
o On May 13, 2005, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP ("Cornell") pursuant to
which we entered into the following agreements: a Registration
Rights Agreement, an Escrow Agreement, and a Placement Agent
Agreement. Pursuant to the terms of the Standby Equity Distribution
Agreement, we may, at our discretion, periodically issue and sell
shares of our common stock for a total purchase price of $10
million. If we request advances under the new Standby Equity
Distribution Agreement, Cornell will purchase shares of our common
stock for 98% of the lowest volume weighted average price on the
Over-the-Counter Bulletin Board or other principal market on which
our common stock is traded for the 5 days immediately following the
advance notice date. Cornell will retain 5% of each advance under
the new Standby Equity Distribution Agreement. We may not request
advances in excess of a total of $10 million. Pursuant to the terms
of our Registration Rights Agreement and the Standby Equity
Agreement with Cornell, we agreed to register and qualify, among
other things, the additional shares due to Cornell under the Standby
Equity Agreement under a registration statement filed with the SEC.
We signed a Termination Agreement on May 13, 2005, for the purpose
of terminating our Standby Equity Distribution Agreement,
Registration Rights Agreement and Escrow Agreement previously
entered into with Cornell on June 22, 2004.
40
o On April 25, 2005, we filed a letter with the Securities and
Exchange Commission requesting the withdrawal of our registration
statement on Form SB-2, originally filed on September 17, 2004. We
intend to file a new registration statement on Form SB-2 registering
the resale of 97,264,558 shares of our common stock held or to be
sold by certain of our stockholders, including Cornell, which
intends to sell up to an aggregate of 85,000,000 shares of our
common stock pursuant to our Standby Equity Distribution Agreement
with Cornell.
o On April 29, 2005, Essentially Yours Industries, Inc., our wholly
owned subsidiary ("EYII") signed a letter of intent with Metals &
Arsenic Removal Technology, Inc. ("MARTI") for the purpose of
marketing certain of MARTI's products provided to EYII on a
consignment basis and assigning marketing rights to certain of
MARTI's product lines to EYII, subject to EYII's entry into a
definitive agreement with MARTI by November 1, 2005. Subsequently,
on May 11, 2005 EYII entered into a Reseller Agreement with MARTI
for a term of five (5) years, pursuant to which MARTI appointed EYII
as the exclusive distributor of certain specially formulated MARTI
products on a consignment basis and provide EYII with a 1000 units
of inventory for sale to its customers, proceeds of which are
subject to fee payments to MARTI as set out in the schedules
accompanying the agreement.
o On April 22, 2005, EYII entered into a Fulfillment Services
Agreement with Source 1 Fulfillment ("Source One") to warehouse and
ship our products. Pursuant to the terms of the agreement, Source
One agreed to provide certain storage and fulfillment services to
EYII at the rates set out in the schedules to the agreement. Source
One also agreed to pay a referral commission of 10% of all handling
fees for any client EYII brings to Source One. The agreement is for
a term of one year and automatically renews each year unless
terminated by either party in accordance with the terms of the
agreement. Subsequently in May, 2005, we ceased warehousing and
distributing our products through Halo Distribution LLC ("Halo"),
our wholly owned subsidiary. We presently intend to continue
warehousing and shipping our products through Source One.
o On April 4, 2005, we entered into a redemption agreement with TAIB
Bank E.C. pursuant to which TAIB agreed to acquire by assignment a
two year 5% secured convertible debenture issued to Cornell Capital
Partners, L.P. in the amount of $245,000, and a two year 5%
convertible debenture in the amount of $5,000 held by Kent Chou, in
consideration of which we agreed not to modify or renegotiate the
terms of our Standby Equity Distribution Agreement with Cornell
Capital Partners, and to use any proceeds obtained by EYI under the
Standby Equity Distribution Agreement to make payments on the
debentures. The debentures were assigned to TAIB on April 4, 2005.
o On February 24, 2005, we received a loan of $200,000 from Cornell
Capital Partners secured by a secured promissory note. Under the
terms of the Secured Note, the loan is payable by April 24, 2005 and
accrues interest at a rate of 12% per annum. In connection with the
issuance of the Secured Note, we agreed to: (i) pay Cornell a fee of
$20,000; and (ii) pay Yorkville Advisors Management LLC a
structuring fee in the amount of $2,500. As a condition to Cornell's
entry into the Secured Note on February 24, 2005, an employee of
EYI, Janet Carpenter, entered into a guaranty agreement with Cornell
and a pledge and escrow agreement with Cornell and David Gonzalez.
Pursuant to the terms of the guaranty agreement and the pledge and
escrow agreement, Ms. Carpenter agreed to: (i) personally guarantee
the payment and performance obligations of EYI under the Secured
Note; and (ii) pledge to Cornell 3,000,000 shares of EYI held by her
to secure the obligations of EYI under the Secured Note. In
consideration of Ms. Carpenter providing the guarantee and pledge,
EYI entered into a bonus shares agreement dated February 14, 2005
with Ms. Carpenter, pursuant to which we agreed to issue to Ms.
Carpenter 800,000 shares of our common stock at a deemed price of
$0.05 per share. The shares are to be issued to Ms. Carpenter
pursuant to Regulation S of the Securities Act.
o On February 10, 2005, we entered into a loan agreement with Janet
Carpenter, pursuant to which we loaned Ms. Carpenter $180,000 for
the purpose of exercising 3,000,000 incentive stock options issued
to Ms. Carpenter under our stock compensation program. The loan is
payable on demand and accrues interest at a rate of 4% per annum.
The loan was secured by a promissory note dated effective February
10, 2005.
o In January, 2005, our wholly owned subsidiary 642706 B.C. Ltd.,
doing business as EYI Management, entered into a lease agreement
with Golden Plaza Company Ltd. and 681563, for the purpose of
leasing a 12,200 square foot building located in Burnaby, British
Columbia, Canada. The lease is for a term of seven years ending
December 31, 2011 and renewable for an additional period of five
years.
41
o In November, 2004, we completed the development of a trade-marked
and patent-pending product called Prosoteine. Prosoteine is a
proprietary plant-based amino-acid supplement. The new
patent-pending formula is designed specifically to address longevity
issues and energy issues. We commenced sales of Prosoteine in
November, 2004 under license from Nutri-Diem.
o During the quarter ended September 30, 2004, we created a new
department called Sales Communication. This department is
responsible for contacting our inactive IBA data base and
encouraging them to purchase our products.
o On November 12, 2004, we entered into a non-binding letter with
Romford Investments, PLC, which was subject to the consummation of a
formal agreement in December 2004, and the completion of our due
diligence review of the investment terms. Romford proposed to commit
to purchase a convertible debenture of EYI with a principal amount
of $10,000,000 in exchange for shares of Romford. Romford proposed
to enter into similar transactions with approximately 20-25 small
capitalization issuers whose stock is traded on the over-the-counter
bulletin board or Nasdaq Smallcap markets. At present we have not
formalized any agreements with Romford. The transaction has been
delayed due to regulatory concerns regarding Romford's proposed
investment. We continue to have an interest in this project and have
maintained contact with Romford.
o On September 24, 2004, we issued a secured convertible debenture to
Cornell Capital Partners in the principal amount of $250,000. The
secured convertible debenture is convertible at Cornell Capital
Partners' option any time up to maturity at a conversion price equal
to the lower of: (i) 120% of the closing bid price of the common
stock as of the date of issuance, or (ii) 80% of the average of the
lowest daily volume weighted average price of our common stock for
the 5 trading days immediately preceding the conversion date. At
maturity, the remaining unpaid principal and accrued interest under
the debentures must 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 common stock as of the date
of issuance, or (ii) 80% of the lowest closing bid price of the
common stock for the lowest trading days of the 5 trading days
immediately preceding the conversion date. The secured convertible
debenture is secured by all of our assets. The secured convertible
debenture accrues interest at a rate of 5% per year and has a term
of 2 years. In the event the secured convertible debentures are
redeemed, then we will issue to Cornell Capital Partners a warrant
to purchase 50,000 shares for every $100,000 redeemed at an exercise
price of 120% of the closing bid price as of September 24, 2004.
Cornell Capital Partners purchased the secured convertible
debentures from us in a private placement on September 24, 2004. On
April 4, 2005, Cornell Capital Partners assigned its interest in the
secured convertible debenture to Taib Bank, E.C. and Kent Chou.
o On September 17, 2004, we filed a registration statement on Form
SB-2 registering an offering of 83,646,847 shares of the common
stock held by certain of our stockholders, including Cornell Capital
Partners which intends to sell up to an aggregate amount of
80,918,173 shares of common stock, which includes 71,382,289
pursuant to a Standby Equity Distribution Agreement, described
below, 8,269,295 shares of common stock underlying convertible
debentures, and 1,266,589 shares of common stock issued as a
commitment fee pursuant to the Standby Equity Distribution
Agreement. Other selling stockholders include Newbridge Securities
Corporation, an unaffiliated registered broker-dealer retained by us
in connection with the Standby Equity Distribution Agreement, which
intends to sell under the registration statement 33,411 shares of
common stock issued as a placement agent fee. We are not selling any
shares of common stock in the offering and therefore will not
receive any proceeds from the offering. We will, however, receive
proceeds from the sale of common stock to Cornell Capital Partners
under the Standby Equity Distribution Agreement. All costs
associated with the registration of the offering will be borne by
us.
o On August 9, 2004, we entered into a non-binding letter of intent
with Venevision Continental LLC, a distribution, production and
entertainment company that is part of the Cisneros Group of
Companies, for the purpose of creating an extensive media campaign
throughout the Latin America market to promote and sell EYI's
flagship product, Calorad. It is intended that the campaign would
run on the Venevision Continental media network that serves Latin
America from Mexico to Argentina. Our letter of intent with
Venevision has expired. We have requested that Venevision sign an
extension to the letter of intent, and continue to maintain contact
with Venevision and their agents.
42
o In July, 2004, we entered into a letter of intent with a private
Canadian company for the purpose of acquiring all of its assets
including a worldwide marketing and distribution license of certain
products manufactured by Kawahara Co. Ltd. Of Japan. The letter of
intent was subject to the consummation of a definitive agreement
between the parties by November 1, 2004, and the completion of our
due diligence review of the company's Assets. The parties to the
letter of intent extended the date of consummation of a definitive
agreement to January 5, 2005. At present, the letter of intent has
expired and we have determined not proceed with this transaction.
o In July, 2004, we entered into subsidy agreements with Stancorp,
Winslow Drive Corp., and Premier Wellness Products (each a
"Participant"), each of which is controlled by a relative of Mr. Jay
Sargeant, our President. Pursuant to the terms of the subsidy
agreements, we agreed to pay each Participant a subsidy of $2,500
per week in consideration of sales and marketing services provided
by the Participants to us. The agreements are intended to provide a
fixed commission to the Participants during the transitional period
between pay plans. The subsidy agreements expired on October 15,
2004 and have been renewed every 12 weeks since their expiry.
o On June 22, 2004, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, pursuant to which we
entered into, among other things, the following agreements with
Cornell Capital Partners: Registration Rights Agreement, Securities
Purchase Agreement, Escrow Agreement, Placement Agent Agreement and
Investor Registration Rights Agreement. Pursuant to the terms of the
Standby Equity Distribution Agreement, we may, at our discretion,
periodically issue and sell shares of our common stock for a total
purchase price of $10 million. If we request advances under the
Standby Equity Distribution Agreement, Cornell Capital Partners will
purchase shares of our common stock for 98% of the lowest volume
weighted average price on the Over-the-Counter Bulletin Board or
other principal market on which our common stock is traded for the 5
days immediately following the advance notice date. Cornell Capital
Partners will retain 5% of each advance under the Standby Equity
Distribution Agreement. We may not request advances in excess of a
total of $10 million. The maximum of each advance is equal to
$250,000. Upon execution of the Standby Equity Distribution
Agreement, we agreed to pay a fee consisting of 1,266,589 shares of
our common stock as a commitment fee to Cornell Capital Partners,
and a placement agent fee of 33,411 shares to Newbridge Securities
Corporation pursuant to a Placement Agent Agreement we entered into
in connection with the Standby Equity Distribution Agreement.
Pursuant to the terms of our Registration Rights Agreement and the
Standby Equity Distribution Agreement with Cornell Capital Partners,
we agreed to register and qualify the commitment fee shares and the
placement agent fee and additional shares due to Cornell Capital
Partners under the Standby Equity Distribution Agreement under a
registration statement filed with the Securities and Exchange
Commission.
o Also on June 22, 2004, we issued a 5% secured convertible debenture
to Cornell Capital Partners in the principal amount of $250,000. The
secured convertible debenture is convertible at Cornell Capital
Partners' option any time up to maturity at a conversion price equal
to the lower of (i) 120% of the closing bid price of the common
stock as of the date of issuance, or (ii) 80% of the average of the
lowest daily volume weighted average price of our common stock for
the 5 trading days immediately preceding the conversion date. At
maturity, the remaining unpaid principal and accrued interest under
the debenture shall be, at our option, either paid or converted into
shares of common stock at the conversion price set out in the
agreement. The Secured Debenture is secured by all of our assets. In
the event the secured convertible debenture is redeemed, then we
will issue to Cornell Capital Partners a warrant to purchase 50,000
shares for every $100,000 redeemed at an exercise price of 120% of
the closing bid price as of June 22, 2004. We agreed to register the
resale of the amount of any principal owed which has been converted
under the Secured Debenture pursuant to the terms of our Investor
Registration Rights Agreement and Securities Purchase Agreement with
Cornell Capital Partners.
o On May 28, 2004, we entered into a joint venture agreement with
World Wide Buyers' Club Inc. ("WWBC") and Supra Group, Inc. ("SG").
Pursuant to the terms of the joint venture agreement, EYI and SG
agreed to form WWBC, a Nevada corporation, owned 51% by EYI and 49%
by SG. The purpose of the agreement is for the joint marketing and
distribution of products of SG using our existing distribution
system in the United States. The term of the agreement is 10 years
commencing May 6, 2004. As of December 31, 2004, there has been no
economic activity between EYI, SG, or WWBC.
43
o On May 4, 2004, we entered into a letter agreement with Eyewonder,
Inc., a strategic partner of EYI Industries. Eyewonder produces
streaming video pursuant to its proprietary technology. Eyewonder is
not a related party under Item 404 of Regulation S-B. Pursuant to
the letter agreement, Eyewonder agreed to manage an advertising and
lead generation campaign to promote and sell our products utilizing
Eyewonder's proprietary audio-video streaming technology. In
consideration of the services provided by Eyewonder under the
agreement, we agreed to pay the following fees: a fee of $100,000
for product promotions, a fee of $770,000 for the implementation of
a communications component for the campaign, and a fee of $140,000
for each consumer application. Under the terms of the agreement we
have the option to pay fees to Eyewonder through the issuance to
Eyewonder of units of our stock, each consisting one share at a
price of $0.21 per share and one share purchase warrant exercisable
at a price of $0.30 per share for a period of five years from the
date of issuance. Eyewonder is also entitled to a fee of 8% of the
gross revenue generated through all sales of products that result
from responses to advertising by Eyewonder. In addition, on
execution of the agreement, we agreed to issue options to purchase
1,100,000 shares of our common stock at a price of $0.22 per share
to certain individuals designated by Eyewonder. During the quarter
ended June 30, 2004, we constructed and completed our first
video-streaming ads and developed a Calorad customer training series
of video-streams. We intend to share this video-streaming training
model with our core Network channel. Additionally, both EyeWonder,
Inc. and our internet web-marketing division have begun to test the
ads in real time. In the next phase we intend to commence a sales
initiative to capture sales, create brand awareness and support
sales campaigns. At present we are awaiting completion of the
infrastructure for the ads by Eyewonder for us to proceed with our
sales initiative.
o On April 30, 2004, we entered into an amendment to our License and
Distribution Agreement with Nutri-Diem, lowering the amount of
expenditures we are required to make under the agreement. Pursuant
to the term of the original License and Distribution Agreement, we
were required to expend the following amounts on purchasing the
products of Nutri-Diem over the term of the Agreement: (i) from June
1, 2003 to May 31, 2004, the minimum amount of CDN$7,000,000, (ii)
from June 1, 2004 to May 31, 2005 the minimum amount of
CDN$20,000,000 and (iii) for each year thereafter, CDN$50,000,000.
Pursuant to the terms of the amendment to the License and
Distribution Agreement we are presently required to expend the
following amounts on purchasing the products of Nutri-Diem over the
term of the License and Distribution Agreement: (i) from June 1,
2003 to May 31, 2004, $1,530,000, from June 1, 2004 to May 31, 2005,
$3,825,000, and (iii) for each year thereafter, $5,355,000. We
reduced the minimum purchase amounts as management did not believe
that those amounts were achievable in the respective time period.
For the twelve months ended December 31, 2004 and December 31, 2003
we purchased product from Nutri-Diem totaling $1,640,857 CAD and
$2,318,073 CAD respectively. Nutri-diem earns a gross profit of 34%
to 39% on all product sales to EYI.
o In April, 2004, we entered into a two year consulting agreement with
Daniel Matos, pursuant to which Mr. Matos agreed to provide certain
consulting services to us, including developing business contacts
for EYI in Latin America and marketing and promoting EYI products in
Latin America, in consideration of which we granted Mr. Matos
2,000,000 incentive stock options at a deemed price of $0.20 per
share and paid Mr. Matos a consulting fee of $16,667 per month to be
used to acquire shares of EYI on the exercise of options granted to
Mr. Matos.
o On January 9, 2004, our subsidiary Halo Distribution LLC extended
its lease for our warehouse and distribution center in Louisville
Kentucky for an additional three years commencing May 1, 2004 to
April 30, 2007. See "Item 2. Description of Property".
o Effective January 1, 2004, we: (i) increased the consulting fees
payable to O'Neill Enterprises Inc., a private company controlled by
Mr. O'Neill, our Executive Vice-President, COO, Secretary, Treasurer
and director to $20,000 per month, and extended the term by five
years; (ii) extended the consulting agreement with Flaming Gorge,
Inc., a private company controlled by Mr. Sargeant, our President,
Chief Executive Officer and a member of our Board of Directors for
an additional term of five years; and (iii) entered into a
consulting agreement with Rajesh Raniga to act as our Chief
Financial Officer on a month to month basis for consideration of
CDN$150 per hour with a minimum charge of CDN$2,000 per month and
250,000 shares of our common stock to be issued pursuant to
Regulation S of the Securities Act.
44
Our core business is in network marketing development and sales. In 2004
we implemented some critical changes to our network marketing development and
sales strategy. We analyzed our compensation structure and realized that
although the plan paid the sales force more than industry standard, it was still
not encouraging sales, growth, duplication or retention. After months of study,
outside consulting, field leader's focus groups and senior management
discussion, we made key adjustments during our first fiscal quarter in 2004 that
are intended to cap the sales commission expense while at the same time promote
increased network sales. We anticipate retaining a higher percentage of both
customers and distributors with this new plan.
To further facilitate growth and benefit from certain competitive
advantages conferred by the new commission plan, we have upgraded our Internet
support sites, created a trainer field certification program, developed a
regional training program and increased our face to face training capability.
These support tools are intended to ensure compliance, mature team and territory
development and assist sales growth.
We see international sales as a key component for our growth in the next 5
years. During our second quarter of fiscal 2004, we entered into a joint venture
agreement with World Wide Buyers' Club Inc. and Supra Group, Inc., dated as of
May 28, 2004, for the purpose of jointly marketing and distributing our products
through the existing Supra Group distribution system in the Latin American
countries identified in the Joint Venture Agreement and the products of Supra
Group using the existing EYI distribution system to residents in the U.S. We
believe Supra Group has significant international experience, expertise and
contacts and that this alliance will assist in our ability to expand into
Spanish-speaking countries.
Our plan of operations over the next twelve months is to expand the
marketing of our Calorad product by internet direct and the distribution
network. We also intend to support the growth and expansion of the Sales
Communication department. Their success is measured on the number of inactive
IBAs who, through the efforts of the Sales Communication department, become
current with their membership fees and purchase our products. As the revenues
generated by this department grow, we intend to add additional staff.
During the fourth quarter of 2004, we launched our new product,
Prosoteine. Over the next twelve months, we intend to launch the second phase of
this campaign which includes an in-house-developed 6-week training program
called "15/5" which is designed to teach our IBAs and their guests about
Prosoteine in a telephone conference forum. Additionally, we intend to
distribute support materials. The first 15/5 class started February 8, 2005 and
ran for 8 weeks, class two with a new 6 week program, began April 5, 2005 and
concluded May 10, 2005.
Also, over the next twelve months we intend to promote our Autoship
Program by offering one or more of the following: initial incentives, purchase
discounts, and long-term commitment rewards. We believe that our automated
ordering system supports on-going sales. "Autoship" refers to our customers who
are on an automated monthly order system. These customers requested that orders
be shipped on a monthly basis and they are charged for the products on their
credit and/or debit cards.
Corporate Organization
We were incorporated under the laws of the State of Nevada on June 27,
1996, under the name of "Inter N. Corporation". From 1999 to 2002, our business
plan was to create a product line of miniaturized microchip technology for
insertion into inanimate objects or injection under the skin of animals. The
microchips were also intended to provide positive identification of personal
possessions such as cameras, bicycles, boats, cars, skis, paintings and clothes
using unique codes with many available combinations. From 1999 to 2002, we were
not able to raise the funds required for the micro-chip manufacturing and sales.
As a result, we again changed the focus of our business, to oil and gas
opportunities in 2002. From 1999 to 2003 we were a non-operating company with
limited assets and were not able to raise sufficient funds to fund our business
operations. On December 31, 2003, we completed a share exchange with certain of
the shareholders (the "EYI Shareholders") of Essentially Yours Industries, Inc.
a Nevada Corporation ("EYI Nevada"), under a Share Exchange Agreement, dated
November 4, 2003, (the "Exchange Agreement").
Under the terms of the Share Exchange Agreement, we issued 117,991,875
shares of our common stock, representing approximately 79.9% of our
then-outstanding common stock, to the EYI Shareholders in exchange for
15,372,733 shares of EYI Nevada common stock held by them. As a result, we
underwent a change of control. Following completion of the Exchange the EYI
Shareholders controlled approximately 79.9% of our outstanding common stock, and
we owned approximately 97.9% of EYI Nevada's issued and outstanding capital
stock. As a result of the transaction, we acquired the business of EYI Nevada
and EYI Nevada became our majority-owned subsidiary. Concurrent with the
acquisition, we changed our name to "EYI Industries, Inc." and our officers and
directors resigned, and nominees of the EYI Shareholders were elected as
successors.
45
Our present business operations are conducted through our majority owned
subsidiary EYI Nevada.
Subsidiaries And Affiliates
We presently have six subsidiaries through which we conduct our
operations, described as follows:
o Essentially Yours Industries, Inc., a Nevada Corporation (Majority
Owned). EYI Nevada was organized on June 20, 2002 upon the
completion of a merger between Burrard Capital Corp., a Nevada
Corporation, and Essentially Yours Industries, Inc., a Nevada
Corporation. The resulting merged entity continued under the name
Essentially Yours Industries, Inc. EYI Nevada is our majority owned
subsidiary which presently conducts our US business operations.
o 642706 B.C. Ltd., dba EYI Management, located in Surrey, British
Columbia (Wholly Owned), provides accounting, customer, service,
marketing and financial advisory services to us. 642706 B.C. Ltd. is
our wholly owned subsidiary and has experience in marketing health
and wellness products and experience in financial reporting for the
United States and Canada.
o Halo Distribution LLC, 7109 Global Drive, Louisville, Kentucky
(Wholly Owned). Halo was organized on January 15, 1999 in the state
of Kentucky. Halo is owned 99% by Essentially Yours Industries, Inc.
and 1% by RGM International, Inc. Halo Distribution LLC is our
wholly-owned subsidiary and is located in Louisville, Kentucky. Halo
Distribution LLC has 33,750 square feet of warehouse, and includes a
computerized pick and pack carousel system. Halo Distribution LLC
serves as a fulfillment center for orders of our products, which
provides us with full and complete control of this crucial part of
the business of marketing, selling, and distributing those products
to the IBAs and customers within the United States. In February
1999, Halo entered into a lease with Business Centers LLC with
respect to the premises located at 7109 Global Drive, Louisville,
Kentucky. The premises consist of approximately 33,750 square feet
of office and warehouse space. The lease was renewed on January 15,
2004 and extended the term of the lease until April 30, 2007. See
"Item 2. Description of Property".
o Essentially Yours Industries (Canada), Inc. (Wholly Owned), a
Canadian Federal Corporation, was incorporated in September 2002 and
is located in Surrey, British Columbia, and handles Canadian sales,
Canadian sales tax and Canadian reporting.
o RGM International, Inc., a Kentucky Corporation (Wholly Owned). RGM
was incorporated in July 1997. RGM is a dormant investment company
which holds 1% of Halo.
o World Wide Buyers' Club Inc., a Nevada Corporation (51% Owned).
World Wide Buyers' Club Inc. was organized by a joint venture
agreement effective May 6, 2004.
The following are our affiliates who are controlled by certain of our
directors and majority shareholders, as described below:
o Nutri-Diem, Inc., 470, Boul. Sir Wilfrid-Laurier bureau 103
Mont-St-Hilaire, Quebec, Canada. Nutri-Diem, Inc. is the
manufacturing facility in Quebec that supplies 80% of our products.
EYI Nevada negotiated with Nutri-Diem Inc. an exclusive Distribution
and Licensing Agreement where by EYI Nevada will sell the products
of Nutri-Diem Inc., such as Calorad and Agrisept-L, in the United
States and Canada, and elsewhere in the world, subject to suitable
arrangements. Michel Grise, former President of Nutri-Diem , Inc. is
one of our shareholders and a director of one of our subsidiaries.
Mr. Patrick Grise is the current President of Nutri-Diem, Inc. and
is a current shareholder of EYI.
o Essentially Yours Industries Corp., located at #201 8322 130th
Street, Surrey, British Columbia V3W 8J9, provides services to EYI
Nevada under a management agreement. These services consist of the
following: computer and management information systems and support.
Payments due under the management agreement are at cost of services
plus a mark-up of approximately 5%. Essentially Yours Industries
Corp. is controlled by certain of our shareholders including Jay
Sargeant, our President and Chief Executive Officer.
46
Key Operating Strengths
We believe the source of our success is our support of and compensation
program for our IBAs. We provide our IBAs with quality products and a
competitive commission program, along with training and motivational events and
services. We believe that we have established a strong operating platform to
support IBAs and facilitate future growth. The key components of this platform
include the following:
o quality dietary supplement and personal care products that appeal to
consumer demand for products that contribute to a healthy lifestyle;
o a compensation program that permits IBAs to earn income from profits
on the resale of products and residual income from product purchases
within a IBAs' down-line organization, as well as to participate in
various non- cash awards, such as promotional programs for computers
and other electronic equipment;
o a communications program that seeks to effectively and efficiently
communicate with IBAs by utilizing new technologies and marketing
techniques, as well as motivational events and training seminars;
o a continual expansion and improvement of our product line and
marketing plan;
o an in-house marketing department; and
o employment of computer technology to provide timely and accurate
product order processing, weekly commission payment processing and
detailed IBA earnings statements.
Growth Strategy
Our growth strategy is expansion of our product line and network of IBAs
to increase sales. An increase in the number of distributors generally results
in increased sales volume, and new products create enthusiasm among
distributors, serve as a promotional tool in selling other products, and
attracting new distributors.
We will also seek to increase sales through initiatives designed to
enhance sales in our existing markets. Such initiatives will include increasing
the number of our training and motivational events and teleconferences, hiring
additional IBA support personnel and establishing more convenient consignment
centers in targeted geographic markets.
Our growth strategy will require expanded IBA services and support,
increased personnel, expanded operational and financial systems, the
implementation of additional control procedures an expanded in-house marketing
department and marketing program as well as an increased presence on the
Internet. There is no assurance that we will be able to manage expanded
operations effectively. Furthermore, failure to implement financial, information
management, and other systems and to add control procedures could have a
material adverse effect on our results of operations and financial condition.
Industry Overview
Over the past several years, widely publicized reports and medical
research findings have suggested a correlation between the consumption of
dietary supplements and the reduced incidence of certain diseases. Thousands of
such reports and research findings can be found on the International
Bibliographic Information on Dietary Supplements (IBIDS) database produced by
the Office of Dietary Supplements. In 1995, US Congress established the Office
of Dietary Supplements, a division of the National Institutes of Health, to
conduct and coordinate research into the role of dietary supplements in
maintaining health and preventing disease. In addition, Congress has established
the Office of Alternative Medicine within the National Institutes of Health to
foster research into alternative medical treatments, which may include natural
remedies.
Products
Our product line consists of products in the categories of dietary
supplements and personal care. We currently market approximately 30 products,
exclusive of variations in product size, colors or similar variations of our
basic product line. For the year ended December 31, 2004 Calorad, sales
represented over 65% of our net sales and is expected to provide a large portion
of our net sales in the foreseeable future.
47
Dietary Supplements
We offer 22 products in the dietary supplement category which contain
herbs, vitamins, minerals and other natural ingredients. As stated above, the
dietary supplement product Calorad is expected to provide a large portion of our
net sales in the foreseeable future. The following products represent the
majority of our product sales in the dietary supplement category:
o Calorad(R): Calorad is a liquid collagen-based dietary supplement.
Calorad is available in three formulas: beef, fish, and AM.
o Agrisept-L(R): Agrisept-L is a dietary supplement of citrus extracts
used as a germicide.
o Oxy-Up(R): Oxy-Up is a liquid stabilized oxygen supplement.
o Triomin: Triomin is a liquid trace mineral dietary supplement.
o Noni Plus(R): Noni fruit has been around for centuries, used by
natives and ancient healers of many countries during the last
several thousand years to treat many ailments. We have combined this
fruit with our own Dead Sea ionic minerals.
o Iso-Greens(R): Iso-Greens is a nutrient-rich green food supplement.
The vegetables in Iso-Greens combine to supply 39 of the vitamins,
minerals and amino acids found in food, including Vitamin B-12.
o Definition(R) (drops): Definition is an all-natural herbal product
designed to feed and nurture the female breast. This product is
available in both cream and drop formulations.
o Essential Omega: Essential Omega is a dietary supplement that
provides essential fatty acids, including CLA and GLA. This product
may also be a support for weight loss and exercise programs.
o Prosoteine(R): Prosoteine is a plant based, natural, stimulant-free
liquid protein supplement.
Personal Care Products
We offer 8 personal care products. The following product represents the
majority of our product sales in the personal care category:
Definition (R)(cream): Definition is a safe, non-invasive, all-natural
herbal product designed to feed and nurture the female breast. The perfectly
selected ingredients work in harmony, helping the body to maintain the
nutritional needs of the mammary glands. It works with the body's natural
capabilities to maintain the shape and tone of youth in the female breast.
Promotional Materials. We will also derive revenues from the sale of
various educational and promotional materials designed to aid our distributors
in maintaining and building their businesses. Such materials include various
sales aids, informational videotapes and cassette recordings, and product and
marketing brochures. We produce many of our promotional material in-house and
have the capability to create just-in-time marketing pieces as needed and
constantly update our marketing material.
New Product Identification. We expand our product line through the
development of new products. New product ideas are derived from a number of
sources, including trade publications, scientific and health journals,
consultants, distributors and other third parties. Prior to introducing new
products, we investigate product formulation as it relates to regulatory
compliance and other issues.
We rely upon Nutri-Diem, Inc. and other manufacturers, independent
researchers, vendor research departments for product development services. When
a new product concept is identified or when an existing product must be
reformulated, the new product concept or reformulation project is generally
submitted to Nutri-Diem, Inc. or other manufacturers for technical development
and implementation. Nutri-Diem owns all of the rights to the products that they
produce. We do not incur any expense for the development of any products by
Nutri-Diem. We continually review our existing products for potential
enhancements to improve their effectiveness and marketability. While we consider
our product formulations to be proprietary trade secrets, such formulations are
not patented. Accordingly, there is no assurance that another company will not
replicate one or more of our products.
48
Product Procurement and Distribution; Insurance. More than 80% of our
product line in the dietary supplement category is manufactured by Nutri-Diem,
Inc., a related party, utilizing theirs and our product formulations, as well as
product formulations it licenses to us. A majority of our product line in the
personal care category is also manufactured by Nutri-Diem, Inc.
We have contracts with Nutri-Diem, Inc. that grant to us the exclusive
license and right to market, sale and distribute in Canada and the United States
and a non-exclusive right to market on the Internet certain products owned by
Michel Grise Consultant, Inc., a Quebec corporation, which is controlled by
Michel Grise. To maintain the license and distribution rights granted by those
contracts, we are obligated to purchase from Nutri-Diem, Inc. during that period
commencing on June 1, 2003, and continuing through and including May 31, 2004,
products totaling $1,530,000. Those contracts also specify that for the period
from June 1, 2004 to May 31, 2005, we are required to purchase from Nutri-Diem,
Inc. products totaling $3,825,000 Additionally, those contracts specify that for
each year commencing on June 1, and ending on May 31 thereafter during the term
of that agreement we are required to purchase products totaling $5,355,000 The
provisions of those contracts specify that Nutri-Diem, Inc. will offer us the
right to sell, market and distribute in those territories any new product
developed by Nutri-Diem, Inc.
If we are not in default at the expiration of the initial five year
period, those contracts will be automatically renewed for another five year
period. In the event we fail to make the minimum purchase during any year,
Nutri-Diem, Inc. has the option, to require us to pay Nutri-Diem, Inc. an amount
equal to 15% of the difference between the minimum amount for the respective
year and the amount of actual purchases during that year. Additionally, in the
event that we do not purchase the minimum amount during any particular year and
do not pay Nutri-Diem, Inc. that 15%, Nutri-Diem, Inc. in its sole discretion,
may terminate the respective contract or cause the license granted in the
contract to be non-exclusive.
In the event the relationship with any of our manufacturers becomes
impaired, we will be required to obtain alternative manufacturing sources for
our products. In such event, there is no assurance that the manufacturing
processes of our current manufacturers can be replicated by another
manufacturer. We believe that we would be able to obtain alternative sources of
our dietary supplement and personal care products. A significant delay or
reduction in availability of products, however, could have a material adverse
effect on our business, operating results and financial condition. We, as with
other marketers of products that are intended to be ingested, face the inherent
risk of exposure to product liability claims in the event that the use of our
products results in injury. We maintain product liability insurance coverage
with coverage limits of $2,000,000 per occurrence and $2,000,000 aggregate. We
have agreed to maintain, at our sole cost and expense, standard Product
Liability Advertiser Liability Insurance naming Nutri-Diem, Inc. and its
officers, directors, agents and employees, as additional insured parties in the
amount of $1,000,000. We generally do not obtain contractual indemnification
from other parties manufacturing our products. Although we have not experienced
any successful product liability claims, such claims could result in material
losses.
All of the items in our product line include a customer satisfaction
guarantee. Within 30 days of purchase, any retail customer or IBA who is not
satisfied with our product for any reason may return it or any unused portion to
the distributor from whom it was purchased or to us for a full refund or credit
toward the purchase of another product. IBAs may obtain replacements from us for
products returned to them by retail customers, if they return such products on a
timely basis. Furthermore, in most jurisdictions, we maintain a buy-back
program. Under this program, we will repurchase products sold to a distributor
(subject to a 10% restocking charge), provided that the distributor resigns as a
distributor and returns the product in marketable condition within one year of
original purchase, or longer where required by applicable state law or
regulations. We believe this buy-back program addresses a number of the
regulatory compliance issues pertaining to network marketing systems. We expect
that the cost of products returned to us will be less than 2% of gross sales.
Below is a summary of return information for the twelve months end March 31,
2005:
49
Month Deposit Sales Return Chargebacks Adj./Disc. Net Deposit
----- ------- ----- ------ ----------- ---------- -----------
April-04 $580,831 $601,847 $2,807 $292 $18,699 $580,049
May-04 $539,220 $559,528 $2,820 $523 $17,950 $538,235
June-04 $499,944 $520,412 $3,991 $1,081 $16,113 $499,227
July-04 $447,353 $451,937 $4,263 $221 $14,423 $433,029
August-04 $462,986 $474,415 $10,923 $359 $15,231 $447,902
September-04 $412,139 $429,322 $17,740 $159 $13,158 $398,265
October -04 $401,894 $410,321 $8,372 $238 $13,403 $388,308
November-04 $512,243 $519,102 $3,665 $284 $15,624 $499,529
December -04 $417,331 $438,882 $17,184 $459 $13,833 $407,406
-------- -------- ------- ---- ------- --------
January -05 $449,676 $453,483 $3,389 $321 $13,955 $435,818
February -05 $461,522 $468,356 $6,834 $187 $13,799 $447,536
March-05 $437,991 $441,628 $2,912 $602 $13,150 $424,964
-------- -------- ------ ---- ------- --------
Total $5,623,130 $5,769,233 $84,900 $4,726 $179,338 $5,500,268
========== ========== ======= ====== ======== ==========
Total % 100.00% 1.47% 0.08% 3.11% 95.34%
====== ==== ==== ==== =====
Our specific refund policies are as follows:
Retail Customer Guarantee
o A retail customer may return defective, unused product (at least
50%) to his/her IBA within thirty (30) days of purchase for exchange
or full refund.
o A written statement must be obtained from the customer stating the
reason for dissatisfaction.
o The original retail receipt showing the date of purchase must
accompany a written request for a return.
o A copy of the Customer Refund Form must be completed in full and
returned to EYI with the aforementioned documentation and product
(when product is requested).
o Upon receipt of the statement, retail receipt and the returned
product, EYI will promptly replace any returned product to the IBA.
o IBAs failure to comply with this guarantee policy may be reason for
termination.
o On product purchases of more than a one (1) month supply, the thirty
(30) day rule applies to the purchase (unless otherwise promised by
IBA to his/her retail customer. In this instance, the IBA is
responsible to uphold his/her retail guarantee to the customer not
EYI).
Refund To Independent Business Associates
If an IBA is not satisfied with a given EYI product, EYI will replace the
product with a product of same or like value, less shipping and handling
charges. If requested EYI will issue a credit for the purchase less shipping and
handling. This credit must be used within thirty (30) days of being issued. The
request for a replacement must occur within thirty (30) days of receipt of the
product by the IBA and the product must be in re-sale condition upon return.
IBAs must provide proof of purchase and cover the cost of the product return.
Note the following condition for refunds:
o EYI does not issue any refunds for product(s) previously certified
as sold under the 70% rule. (Please refer to point ten (10) in
Independent Business Association Regulations in Policies &
Procedures for details). As well, the refund will be less commission
paid on the returned product.
50
Distribution And Marketing
Our product line is distributed principally from our facilities in
Louisville, Kentucky and Surrey, British Columbia or from our consignment
centers. Products are warehoused in Louisville and Surrey and at selected
consignment centers.
We distribute our product line through our network marketing system where
Independent Business Associates ("IBAs") purchase product at wholesale and
through person-to-person contact, re-sell the product at retail prices. At March
31, 2005, we had approximately 14,000 "active" IBAs. To be considered "active" a
distributor must have purchased our products within the preceding 12 months and
be current with their administration fee. Our IBAs are independent contractors
who purchase products directly from us for resale to retail consumers. IBAs may
elect to work on a full-time or part-time basis. The Company's current system
does not allow for it to keep track of IBAs in a way that will make historical
information available for future use. We believe our network marketing system
appeals to a broad cross-section of people, particularly those seeking to:
o supplement family income,
o start a home business, or
o pursue employment opportunities other than conventional, full-time
employment.
o A majority of our IBAs sell our products on a part-time basis.
o We believe that our network marketing system is ideally suited to
marketing our product line, because sales of our products are
strengthened by ongoing personal contact between retail consumers
and IBAs, many of whom use our products themselves. Sales are made
through direct personal sales presentations, as well as
presentations made to groups. These sales methods are designed to
encourage individuals to purchase our products by informing
potential customers and IBAs of our product line and results of
personal use, and the potential financial benefits of becoming a
distributor. Our marketing efforts are typically focused on
middle-income families and individuals.
Our network marketing program encourages individuals to develop their own
down-line network marketing organizations. Each new IBA is either linked to:
o the existing distributor that personally enrolled the new
distributor into our network marketing program, or
o the existing distributor in the enrolling distributor's down-line as
specified by the enrolling distributor at the time of enrollment.
Growth of an IBAs' down-line organization is dependent on the recruiting
and enrollment of additional IBAs by the distributor or the IBAs within such
distributor's down-line organization. We currently do not keep records that
would enable us to calculate IBA turnover frequency. We are currently working on
a program that may enable us in the future to track IBA turnover.
IBAs are encouraged to assume responsibility for training and motivation
of other IBAs within their down-line organization and to conduct opportunity
meetings as soon as they are appropriately trained. We strive to maintain a high
level of motivation, morale, enthusiasm and integrity among the members of our
network marketing organization. We believe this result is achieved through a
combination of products, sales incentives, personal recognition of outstanding
achievement, and quality promotional materials. Under our network marketing
program, IBAs purchase sales aids from us and assume the costs of advertising
and marketing our product line to their customers, as well as the direct cost of
recruiting new IBAs. We believe that this form of sales organization is cost
efficient, because our direct sales expenses are primarily limited to the
payment of commissions, which are only incurred when products are sold.
We continually strive to improve our marketing strategies, including the
compensation structure within our network marketing program and the variety and
mix of products in our line, to attract and motivate IBAs. These efforts are
designed to increase IBAs' monthly product sales and the recruiting of new IBAs.
Growth of our network marketing program is in part attributable to our
incentive structure. IBAs earn profits by purchasing from our product line at
wholesale prices and selling our product line to their customers at retail.
51
Additionally, we have a commission structure which provides for payment of
commissions on product purchases made by other IBAs in a distributor's down-line
organization. IBAs derive this commission income mainly through their Business
Volume, as described below.
Business Volume is assigned to most of our products and is used to
calculate sales commission. The Business Volume, in most instances, is 50% of
the wholesale cost of a product. Commissions are based on the total Business
Volume which has been generated both personally and through the IBAs' down-line
activity. Therefore, as a down-line grows, it is possible for greater
commissions to be earned. None of our IBAs have derived $1 million per year or
greater for the years ended 2004, 2003 or 2002.
In order for an IBA to earn commissions, there are four requirements:
o an IBA needs to create a Business Center by filling out our IBA
Application and Agreement Form;
o an IBA needs to qualify his Business Center with a 100 Business
Volume order of our products;
o an IBA needs to activate his Business Center by making two personal
sales to two people who become qualified IBAs within one year of
entry into the business; and
o to be eligible for commission, an IBA needs to pay a yearly
administration fee of $40.
The average commission earned by our IBAs during the twelve month period
starting on January 1, 2004 and ending on December 31, 2004 was $1,168.
To aid IBAs in easily meeting the monthly personal product purchase
requirement to qualify for commission, we developed the "Auto-ship Program."
Under the Auto-ship Program purchasing arrangement, each Business Center
establishes a standing product order (20 Business Volume minimum) which is
automatically charged to a credit card or deducted from a bank account each
month prior to shipment of the ordered products. Additionally, Auto-ship allows
IBAs to purchase certain products at reduced prices. As of March 31, 2005, we
had over 1,500 IBAs participating in the Auto-ship Program.
Under our Consignment Center Program, we designate IBAs to operate
consignment centers. Each Consignment Center functions as our product
distribution center, carrying our products. As of December 31, 2004, we had 20
consignment centers. Consignment centers provide hubs of local product and
business training. They sell to customers at the point of purchase, teach sales
and marketing techniques, distribute literature about our products and business
while lowering our shipping and data-entry costs.
EYI CONSIGNMENT CENTER LIST
--------------------------------------------------------------------------------------------------------------------
NAME ADDRESS CITY STATE ZIP
--------------------------------------------------------------------------------------------------------------------
Petra Olivares #320 Calle Benitez Castano San Juan PR 00912
Wilson Vivas 40-08 82nd Street Jackson Hts. NY 11372
Audrey Franklin 102 Merchants Drive Norcross GA 30093
Judy Holm 31231 North 43rd Street Cave Creek AZ 85331
Gary Nassiff 5716 Blackmon Court Ft Worth TX 73137
Gary Young 52 Lurline Drive Covington LA 70433
Vikki Solberg 3801 Old Seaward Hwy. Anchorage AK 99503
Mercy Girala-Tye 3325 W 183 Street Torrance CA 90504
Alesia Ramirez 11657 Oxnard Street, #234 N. Hollywood CA 91606
Paula Cabunoc 16312 45th Place South Tukwila WA 98188
Ron & Donna Boersema 220 Hoover Blvd. Ste 1 Holland MI 49423
Monty Pearson HC 11 Box 69B Kamiah ID 83536
Richard Ridley 4716 Western Ave Knoxville TN 37921
Denise Hulse 2208 N. Stoneybrook Wichita KS 67226
Jack Herd 2704 Market Street Camphill PA 17011
Michael Whelan Sr. 2476 Pine Road Huntingdon Valley PA 19006
Larry Barbery 22406 FM 290 Hockley TX 77447
Robert Norton 6881 Creekcove Way Midvale UT 84047
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We maintain a computerized system for processing distributor orders and
calculating commission payments, which enables us to remit such payments
promptly to IBAs. We believe that prompt and accurate remittance of commissions
is vital to recruiting and maintaining IBAs, as well as increasing their
motivation and loyalty to us. We calculate the commissions weekly and pay
commissions biweekly.
We are committed to providing the best possible support to our IBAs. IBAs
in our network marketing program are provided training guides and are given the
opportunity to participate in our training programs. We sponsor weekly
conference calls for our IBAs, which include testimonials from successful IBAs
and satisfied customers, as well as current product and promotional information.
We produce weekly newsletters, which provide information on us, our products and
network marketing system. The newsletter is designed to help recruit new IBAs,
by answering commonly asked questions and includes product information and
business building information. The newsletter also provides a forum for us to
give additional recognition to our IBAs for outstanding performance. In
addition, we regularly sponsor training sessions for our IBAs across the United
States and Canada. At these training sessions IBAs are provided the opportunity
to learn more about our product line and selling techniques, so that they can
build their businesses more rapidly.
We also maintain an Internet site, www.eyicom.com, which is an integral
part of our product sales, customer retention, IBA recruitment and IBA
development efforts. Approximately 8,800 of our IBAs are networked
electronically, allowing them access to marketing information and sales leads.
Further, we provide IBAs with a free, e-commerce Internet "home page" to aid
their marketing efforts.
Government Regulation
In the United States (as well as in any foreign markets in which we may
sell our products), we are subject to laws, regulations, administrative
determinations, court decisions and similar constraints (as applicable, at the
federal, state and local levels) (hereinafter "regulations"). These regulations
include and pertain to, among others:
o the formulation, manufacture, packaging, labeling, distribution,
importation, sale and storage of our products,
o our product claims and advertising (including direct claims and
advertising as well as claims and advertising by distributors, for
which we may be held responsible), and
o our network marketing organization.
In the past, we have met and passed any inspection by the United States
and Food and Drug Department. October 7, 2002, we had a Food and Drug label
inspection. Notice to re-label on Calorad was submitted on October 9, 2002. A
panel was added to our Calorad product to round the calories to be in compliance
with the DSHEA Act of 1994. The "may proceed" release was issued on November 6,
2002. On February 2, 2004, a notice to redeliver from the Department of the
Treasury/United States Customs Service in Detroit, Michigan was issued,
requesting an inspection and import permit, along with an original CFI A
certificate (Canadian Food Inspection Agency Certificate). The entry number was
336-0214262-5. We met all requirements and the shipment was released on February
27th, 2004.
53
Formulations: We are reliant on our manufacturer's knowledge and expertise
as they develop our formulas. We do investigate the individual ingredients to
ensure they fall under the 1994 DSHEA Act definitions as well as the FDA
cosmetic regulations. We also receive confirmation that all preservatives are
GRAS (generally recognized as safe)
Manufacturing: We are reliant on our manufacturers that they are compliant
with GMP regulations and safety regulations put forth by the Food and Drug
Administration.
Packaging: We are reliant on our manufacturers that our packaging is in
compliance with FDA regulations.
Labeling: We consult with our FDA attorneys on a need to know basis
regarding labeling and have an in house labeling specialist that is experienced
in the 1994 DSHEA Act.
Distribution: Our facility has Food Grade Certification within the State
of Kentucky and is also registered with the FDA (Food and Drug Administration)
as a Food Grade Facility.
Sale and Storage: We have an in house General Manager/expert that over
sees shipping, import and export as well ensures our distribution facility is
compliant with all applicable laws in this area.
Importation: We have an in house purchasing agent that works with all
applicable laws with respect to NAFTA, Bio-terrorism and agricultural
requirements as well as a brokerage firm that works for us. We have always
successfully imported product to the United States with very few inspections or
violations.
Products
The formulation, manufacture, packaging, storing, labeling, advertising,
distribution and sale of our products are subject to regulation by federal
agencies, including the Food and Drug Administration, the Federal Trade
Commission, the Consumer Product Safety Commission, the United States Department
of Agriculture, the Environmental Protection Agency, and the United States
Postal Service. Our activities are also regulated by various agencies of the
states, localities and foreign countries in which our products are or may be
manufactured, distributed and sold. The Food and Drug Administration, in
particular, regulates the formulation, manufacture and labeling of dietary
supplements, cosmetics and skin care products, including some of our products.
Food and Drug Administration regulations require us and our suppliers to meet
relevant regulatory good manufacturing practices for the preparation, packaging
and storage of these products. Good manufacturing practices for dietary
supplements have yet to be promulgated, but are expected to be proposed. The
Dietary Supplement Health and Education Act of 1994 revised the provisions of
the Federal Food, Drug and Cosmetic Act concerning the composition and labeling
of dietary supplements, which we believe is generally favorable to the dietary
supplement industry. The Dietary Supplement Health and Education Act created a
new statutory class of "dietary supplements." This new class includes vitamins,
minerals, herbs, amino acids and other dietary substances for human use to
supplement the diet. In general, a dietary supplement is a product (other than
tobacco) that is intended to supplement the diet that bears or contains one or
more of the following dietary ingredients: a vitamin, a mineral, a herb or other
botanical, an amino acid, a dietary substance for use by man to supplement the
diet by increasing the total daily intake, or a concentrate, metabolite,
constituent, extract, or combinations of these ingredients; is intended for
ingestion in pill, capsule, tablet, or liquid form; is not represented for use
as a conventional food or as the sole item of a meal or diet; and is labeled as
a "dietary supplement." However, the Dietary Supplement Health and Education Act
grand fathered, with certain limitations, dietary ingredients that were on the
market before October 15, 1994. A dietary supplement containing a new dietary
ingredient and placed on the market on or after October 15, 1994 must have a
history of use or other evidence establishing a basis for expected safety.
Manufacturers of dietary supplements having a "structure-function" statement
must have substantiation that the statement is truthful and not misleading.
The majority of our sales come from products that are classified as
dietary supplements under the Federal Food, Drug and Cosmetic Act. The labeling
requirements for dietary supplements have been set forth in final regulations
with respect to labels affixed to containers beginning after March 23, 1999.
These regulations include how to declare nutrient content information, and the
proper detail and format required for the "supplemental facts" box. We revise
our product labels in compliance with these regulations. The costs of product
re-labeling were immaterial. Many states have also recently become active in the
regulation of dietary supplement products. These states may require modification
of labeling or formulation of certain of our products sold in these states.
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In addition, on April 29, 1998, the US Food and Drug Administration
published a proposed regulation offering guidance and providing limitations on
permissible structure/function statements to be placed on labels and in
brochures. Structure/function statements are claims of the benefit or effect of
a product or an ingredient on the body's structure or function. The proposed
regulation has not been finalized. We anticipate that some of the regulation as
proposed will become final, but this new regulation will not significantly
change the way that the Food and Drug Administration currently interprets
structure/function statements. Thus, we do not expect to make any substantial
label revisions based on this proposed regulation regarding any of our
structure/function product statements.
Personal care products are intended to be applied to the human body for
cleansing, beautifying, promoting attractiveness, or altering the appearance
without affecting the body's structure or functions. Included in this definition
are products such as skin creams, lotions, perfumes, lipsticks, fingernail
polishes, eye and facial make-up preparations, shampoos, permanent waves, hair
colors, toothpastes, deodorants, and any material intended for use as a
component of a cosmetic product. The Food & Drug Administration has a limited
ability to regulate personal care products. The Food & Drug Administration can
regulate personal care products after they are introduced into the market and
can review personal care products and their ingredients after they are sold to
the public.
As a marketer of products that are ingested by consumers, we are subject
to the risk that one or more of the ingredients in our products may become the
subject of adverse regulatory action.
A portion of our products sold in Canada have separate labels or
combination labels to satisfy Canadian compliance organizations, such as the
Food Inspection Agency and Health Canada. Health Canada is moving towards
stricter compliance guidelines for dietary supplement products through its
recently created Office of Natural Health Products. New compliance guidelines
through the Office of Natural Health Products may affect the formulation,
manufacture, packaging, storing, labeling, advertising, distribution and sale of
our products in Canada. We plan to comply with all regulations promulgated by
Office of Natural Health Products. Quebec has different label requirements than
the rest of Canada, however, a portion of our Canadian labels or combination
labels are compliant and sufficient for the sale in Quebec. Due to the small
percentage of sales in Canada, we do not hold separate Canadian labels for our
complete product line.
In foreign markets, prior to commencing operations and prior to making or
permitting sales of our products, we may be required to obtain an approval,
license or certification from the country's ministry of health or comparable
agency. Prior to entering a new market in which a formal approval, license or
certificate is required, we will be required to work extensively with local
authorities to obtain the requisite approvals. The approval process generally
will require us to present each product and product ingredient to appropriate
regulators and, in some instances, arrange for testing of products by local
technicians for ingredient analysis. Such approvals may be conditioned on
reformulation of our products or may be unavailable with respect to certain
products or ingredients.
Product Claims And Advertising
The Federal Trade Commission and certain states regulate advertising,
product claims, and other consumer matters, including advertising of our
products. All advertising, promotional and solicitation materials used by
distributors require our approval prior to use. The Federal Trade Commission has
in the past several years instituted enforcement actions against several dietary
supplement companies for false and misleading advertising of certain products.
In addition, the Federal Trade Commission has increased its scrutiny of the use
of testimonials. We have not been the target of Federal Trade Commission
enforcement action. There is no assurance that:
o the Federal Trade Commission will not question our advertising or
other operations in the future,
o a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations, or
o future Federal Trade Commission regulations or decisions will not
restrict the permissible scope of such claims.
55
We are also subject to the risk of claims by distributors and their
customers who may file actions on their own behalf, as a class or otherwise, and
may file complaints with the Federal Trade Commission or state or local consumer
affairs offices. These agencies may take action on their own initiative against
us for alleged advertising or product claim violations or on a referral from
distributors, consumers or others. Remedies sought in such actions may include
consent decrees and the refund of amounts paid by the complaining distributor or
consumer, refunds to an entire class of distributors or customers, or other
damages, as well as changes in our method of doing business. A complaint based
on the practice of one distributor, whether or not we authorized the practice,
could result in an order affecting some or all distributors in a particular
state. Also, an order in one state could influence courts or government agencies
in other states considering similar matters. Proceedings resulting from these
complaints may result in significant defense costs, settlement payments or
judgments and could have a material adverse effect on us.
Compliance Efforts
We attempt to remain in full compliance with all applicable laws and
regulations governing the manufacture, labeling, sale, distribution, and
advertising of our dietary supplements. We retain special legal counsel for
advice on both US Food and Drug Administration and US Federal Trade Commission
legal issues.
Network Marketing System
Our network marketing system is subject to a number of federal and state
regulations administered by the Federal Trade Commission and various state
agencies. These regulations are generally directed at ensuring that product
sales are ultimately made to consumers (as opposed to other distributors) and
that advancement within an organization be based on sales of the organization's
products, rather than investment in the organization or other non-retail sales
related criteria. For instance, in certain markets there are limits on the
extent to which distributors may earn royalties on sales generated by
distributors that were not directly sponsored by the distributor.
Our network marketing program and activities are subject to scrutiny by
various state and federal governmental regulatory agencies, to ensure compliance
with various types of laws and regulations. These laws and regulations include
securities, franchise investment, business opportunity and criminal laws
prohibiting the use of "pyramid" or "endless chain" types of selling
organizations. The compensation structure of such selling organizations is very
complex, and compliance with all of the applicable laws is uncertain in light of
evolving interpretation of existing laws and the enactment of new laws and
regulations pertaining to this type of product distribution. We have an ongoing
compliance program with assistance from legal counsel experienced in the laws
and regulations pertaining to network sales organizations. We are not aware of
any legal actions pending or threatened by any governmental authority against us
regarding the legality of our network marketing operations.
We currently have IBAs in the United States and Canada. We review the
requirements of various states, as well as seek legal advice regarding the
structure and operation of our selling organization to ensure that it complies
with all of the applicable laws and regulations pertaining to network sales
organizations. On the basis of these efforts and the experience of our
management, we believe that we are in compliance with all applicable federal and
state regulatory requirements. We have not obtained any no-action letters or
advance rulings from any federal or state security regulator or other
governmental agency concerning the legality of our operations, nor are we
relying on a formal opinion of counsel to such effect. We, accordingly, are
subject to the risk that, in one or more of our markets, our marketing system
could be found to not comply with applicable laws and regulations. Our failure
to comply with these regulations could have a material adverse effect on us in a
particular market or in general.
We are subject to the risk of challenges to the legality of our network
marketing organization, including claims by our distributors, both individually
and as a class. Most likely these claims would be based on our network marketing
program allegedly being operated as an illegal "pyramid scheme" in violation of
federal securities laws, state unfair practice and fraud laws and the Racketeer
Influenced and Corrupt Organizations Act.
We believe that our network marketing system is not classified as a
pyramid scheme under the standards set forth in applicable law. In particular,
in most jurisdictions, we maintain an inventory buy-back program to address the
problem of "inventory loading." Pursuant to this program, we repurchase products
sold to a distributor (subject to a 10% restocking charge) provided that the
distributor returns the product in marketable condition within one year of
original purchase, or longer where required by applicable state law or
regulations.
Our literature provided to distributors describes our buy-back program.
However, as is the case with other network marketing companies, the commissions
paid by us to our distributors are based on product purchases, including
purchases of products that are personally consumed by the down-line
distributors. Basing commissions on sales of personally consumed products may be
considered an inventory loading purchase. Furthermore, distributors' commissions
are based on the wholesale prices received by us on product purchases or, in
some cases, based upon the particular product purchased, on prices less than the
wholesale prices.
56
To further address the problem of "inventory loading," our IBAs must sell
at least 70% of their inventory before they can reorder.
In the event of challenges to the legality of our network marketing
organization by distributors, we would be required to:
o demonstrate that our network marketing policies are enforced, and
o demonstrate that the network marketing program and distributors'
compensation thereunder serve as safeguards to deter inventory
loading and encourage retail sales to the ultimate consumers.
Nutrition for Life International, Inc., one of our competitors and a
multi-level seller of personal care and nutritional supplements, announced in
1999 that it had settled class action litigation brought by distributors
alleging fraud in connection with the operation of a pyramid scheme. Nutrition
for Life agreed to pay in excess of $3 million to settle claims brought on
behalf of its distributors, and related securities fraud claims brought on
behalf of certain purchasers of its stock. We believe that our marketing program
is significantly different from the program allegedly promoted by Nutrition for
Life and that our marketing program is not in violation of anti-pyramid laws or
regulations. Two issues in the Nutrition for Life matter were a $1,000 buy-in
urged on new recruits, and the paying of commissions on product vouchers prior
to the actual delivery of product. By design, our marketing program offers no
incentive to anyone to make a large personal purchase nor do we use product
vouchers. However, there is no assurance that claims similar to the claims
brought against Nutrition for Life and other multi-level marketing organizations
will not be brought against us, or that we will prevail in the event any such
claims were made. Furthermore, even if we were successful in defending against
any such claims, the costs of conducting such a defense, both in dollars spent
and in management time, could be material and adversely affect our operating
results and financial condition. In addition, the negative publicity of such a
suit could adversely affect our sales and ability to attract and retain
distributors.
Competition
We are subject to significant competition in recruiting IBAs from other
network marketing organizations, including those that market products in the
dietary supplement and personal care categories, as well as other types of
products. There are more than 300 companies worldwide that utilize network
marketing techniques, many of which are substantially larger, offer a greater
variety of products, and have available considerably greater financial resources
than us. Our ability to remain competitive depends, in significant part, on our
success in recruiting and retaining IBAs through an attractive commission plan
and other incentives. We believe that our commission plan and incentive programs
provide our IBAs with significant income potential. However, there can be no
assurance that our programs for recruitment and retention of IBAs will continue
to be successful.
In addition, the business of marketing products in the dietary supplement
and personal care categories is highly competitive. This market segment includes
numerous manufacturers, other network marketing companies, catalog companies,
distributors, marketers, retailers and physicians that actively compete in the
sale of such products. We also compete with other providers of such products,
especially retail outlets, based upon convenience of purchase and immediate
availability of the purchased product. The market is highly sensitive to the
introduction of new products or weight management plans (including various
prescription drugs) that may rapidly capture a significant share of the market.
As a result, our ability to remain competitive depends, in part, upon the
successful introduction and addition of new products to our line.
Depending on the product category, our competition varies. Calorad
competes directly with Colvera, a product with different ingredients but a
similar concept. Additionally, Calorad competes indirectly with food plans such
as Weight Watchers and meal replacement products such as Slim Fast. Our Noni
Plus product competes with Morinda and others. Our other products have similar
well funded and sophisticated competitors. Increased competitive activity from
such companies could make it more difficult for us to increase or keep market
share, since such companies have greater financial and other resources available
to them and possess far more extensive manufacturing, distribution and marketing
capabilities.
57
Our network marketing competitors include small, privately held companies,
as well as larger, publicly held companies with greater financial resources and
greater product and market diversification and distribution. Our competitors
include Reliv International, Mannatech Incorporated and Usana Health Services.
Employees
As at May 24, 2005, we had 33 active employees. Of these employees, 3 are
executive officers, 4 are accounting, 1 is in investor relations, 12 are in
operations, 2 are in sales and marketing, 4 are in information systems, 1 is in
product development, 2 are in warehouse & purchasing, 3 are in sales
communication and 1 is in administration. We consider our employee relations to
be good. None of our employees is a member of a trade union and we have not
experienced any business interruption as a result of any labor disputes.
Research and Development Expenditures
We have not incurred any research or development expenditures during our
last two fiscal years.
Intellectual Property
We use several trademarks and trade names in connection with our products
and operations, as further described below. We rely on common law trademark
rights to protect our unregistered trademarks. Common law trademark rights do
not provide with the same level of protection as afforded by a United States
federal registration of a trademark. Also, common law trademark rights are
limited to the geographic area in which the trademark is actually used. In
addition, our product formulations are not protected by patents and are not
patentable. Therefore, there can be no assurance that another company will not
replicate one or more of our products.
We have a License Agreement with Nutri-Diem that gives EYI the exclusive
right to use the trademarks solely in connection with the sale, marketing and
distribution of the products. Our agreement states that we have non-exclusive
rights to use the trademarks on the Internet. The Agreement is based on a five
year term, with automatic renewal for another five year period. We also have
license agreement with EYI Corp which gives EYI the exclusive right to the
trademarks for the purpose of sales and marketing activities. The Agreement is
based on a 50 year term with a yearly renewal each year thereafter.
On June 30, 2002, the following Nutri-Diem trademarks were licensed to EYI
Nevada pursuant to the Marketing and Distribution Agreement in place between
Nutri-Diem and EYI Nevada. The owner of the trademarks set out in the table
below is Michel Grise Consultants Inc., an associated company of Nutri-Diem and
is controlled by Michel Grise, one of the directors of EYI Nevada:
Product Status
------- ------
Agrisept-L(R) Registered Trademark
Beaugest(R) Registered Trademark
Bellaffina(R) Registered Trademark
Calorad(R) Registered Trademark
Citrex(R) Registered Trademark
Citrio(R) Registered Trademark
Definition(R) Registered Trademark
Emulgent(R) Registered Trademark
Fem Fem(R) Registered Trademark
Golden Treat(R) Registered Trademark
Hom Hom(R) Registered Trademark
Invisible(R) Registered Trademark
Livocare(R) Registered Trademark
Melan Plus(R) Registered Trademark
Neocell(R) Registered Trademark
NRG(R) Registered Trademark
Parablast(R) Registered Trademark
Parattack(R) Registered Trademark
Prosoteine(R) Registered Trademark
Sea Krit(R) Registered Trademark
58
On June 30, 2002, EYI Nevada acquired a license from Essentially Yours
Industries Corp., an affiliated company, to use the below trademarks and
formulas for a term of 50 years, renewable at the option of EYI Nevada on a
yearly basis thereafter at the same yearly rate of $1.00 per year, from year to
year:
Copyright/Trademark Status of Application
------------------- ---------------------
Citri-plus(R) Registered Trademark
EYI w/design(R) Registered Trademark
Essential Marine(R) Registered Trademark
Essentially Yours(R) Registered Trademark
Essentially Yours Industries Corp. (with design) (R) Registered Trademark
Iso greens(R) Registered Trademark
Just Go Pro!(TM) Registered Trademark
Oxy Up(TM) Registered Trademark
Prosoteine(R) Registered Trademark
The Ultimate Performance Enhancer!(TM) Registered Trademark
59
MANAGEMENT
Directors And Executive Officers
Our directors, executive officers and key employees as of May 24, 2005 are
as follows:
Name Age Position with the Company Date First Elected or Appointed
---- --- ------------------------- -------------------------------
Jay Sargeant 57 President, Chief Executive Officer and Director, Chief Executive Officer and
Director President since December 31, 2003
Dori O'Neill 45 Executive Vice-President, Treasurer, Chief Executive Vice-President, Treasurer, Chief
Operations Officer, Secretary and Director Operations Officer, Secretary and Director
since December 31, 2003
Rajesh Raniga 39 Chief Financial Officer Chief Financial Officer since January 1, 2004
Bruce Nants 54 Director Director since March 1, 2004
Set forth below is a brief description of the background and business
experience of each of our executive officers and directors for the past five
years:
Jay Sargeant. Mr. Sargeant has been our President, Chief Executive Officer
and a member of our Board of Directors since December 31, 2003. Mr. Sargeant
graduated from Boston State College in 1979 with a Bachelors Degree in English
Literature and Psychology. From 1995 until June 30, 2002, the date of our merger
with Essentially Yours Industries, Inc., Mr. Sargeant was a director of
Essentially Yours Industries, Corp. a Canadian Federal corporation. Mr. Sargeant
has resigned as a member of the Board of Directors of Essentially Yours
Industries, Corp. to concentrate on our sales and marketing efforts. Mr.
Sargeant was a founder of Essentially Yours Industries, Corp.
Dori O'Neill. Mr. O'Neill has been our Executive Vice President, Chief
Operations Officer and a member of our Board of Directors since December 31,
2003. From 1997 to June 2002, Mr. O'Neill served as a Vice President and a
member of the Board of Directors of Essentially Yours Industries Corp., a
Canadian Federal corporation, from December 2001 to June 2002. From 1994 through
1998 Mr. O'Neill was a self-employed consultant.
Bruce Nants. Mr. Nants has been a member of our Board of Directors since
March 1, 2004. Mr. Nants is an attorney and has practiced since 1978 as a sole
practitioner.
Rajesh Raniga. Mr. Raniga has been our Chief Financial Officer since
January 1, 2004. Mr. Raniga is a Certified General Accountant. From 1989 to
present Mr. Raniga has practiced with Delves Freer Anderson Raniga Caine as a
general partner. In his private practice, prior to joining us, he specialized in
auditing publicly-listed companies as well as acquisitions and mergers. He has
also sat on the Board of Directors and served as the Chief Financial Officer of
Uniserve Communications Services Inc., an internet service provider listed on
the TSX Venture Exchange in Canada.
Family Relationships
There is no family relationship between any of our officers or directors.
Directors
Our Board of Directors consists of 3 (three) seats. Directors serve for a
term of one year and stand for election at our annual meeting of stockholders.
Pursuant to our Bylaws, as amended, a majority of directors may appoint a
successor to fill any vacancy on the Board of Directors.
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Terms Of Office
Our directors hold office until the next annual meeting of the
shareholders and until their successors have been elected and qualified. Our
officers hold office until their death, or until they shall resign or have been
removed from office.
Committees Of The Board Of Directors
We presently do not have an audit committee, compensation committee,
nominating committee, an executive committee of our board of directors, or any
other committees. However, our board of directors is considering establish
various committees during the current fiscal year.
Audit Committee Financial Expert
We have no financial expert. We believe the cost related to retaining a
financial expert at this time is prohibitive.
Code Of Ethics
We adopted a Code of Ethics applicable to our Chief Executive Officer,
Chief Financial Officer, Corporate Controller and certain other finance
executives, which is a "code of ethics" as defined by applicable rules of the
SEC. Our Code of Ethics is attached to our Annual Report on Form 10-KSB filed
with the SEC on April 14, 2004. If we make any amendments to our Code of Ethics
other than technical, administrative, or other non-substantive amendments, or
grant any waivers, including implicit waivers, from a provision of our Code of
Ethics to our chief executive officer, chief financial officer, or certain other
finance executives, we will disclose the nature of the amendment or waiver, its
effective date and to whom it applies in a Current Report on Form 8-K filed with
the SEC.
Compliance With Section 16(a) Of The Securities Exchange Act
Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who beneficially own more than ten percent of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent shareholders are required by SEC regulation to furnish us with copies of
all Section 16(a) forms they file. Based on our review of the copies of such
forms received by us, we believe that up to MAy 24, 2005 all such filing
requirements applicable to our officers and directors were complied with
exception that reports were filed late by the following persons:
Transactions Known Failures
Number of Late Not Timely to File a
Name and Principal Position Reports Reported Required Form
--------------------------- ------- -------- -------------
Jay Sargeant,
President, Chief Executive Officer, and Director 3 3 -
Dori O'Neill
President, Chief Operations Officer, Secretary, Treasurer and Director 5 5 -
Michel Grise
10% shareholder 1 1 -
61
ITEM 10. EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid by EYI
Industries, as well as certain other compensation paid or accrued, during the
fiscal years ended December 31, 2003 and 2002 to EYI Industries' named executive
officers. No restricted stock awards, long-term incentive plan payouts or other
types of compensation, other than the compensation identified in the chart
below, were paid to these executive officers during these fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
--------------------------------------------------------------------------------------------------
LTIP
Other Annual Restricted Options/* payouts All Other
Name Title Year Salary Bonus Compensation Stock Awarded SARs (#) ($) Compensation
---------------------------------------------------------------------------------------------------------------------------------
2005 60,000
Jay Sargeant(1) President, 2004 -- -- $240,000 (2) -- 4,200,000 -- --
CEO and 2003 -- -- $240,000 (2) -- -- --
Director 2002 -- -- $20,000 (2) -- -- --
2005 60,000
Dori O'Neill(3) Chief 2004 -- -- $240,000 (4) -- 7,400,000 -- --
Operations 2003 -- -- $180,000 (4) -- -- -- --
Officer, 2002 -- -- $30,000 (4) -- -- -- --
Secretary,
Treasurer
And Director
Maurizio Former 2004 N/A N/A N/A N/A N/A N/A N/A
Forigo(5) President and 2003 -- -- -- -- -- -- --
CEO 2002 -- -- -- -- -- -- --
---------------
(1) Mr. Sargeant was appointed as our President and Chief Executive Officer on
December 31, 2003.
(2) We paid management consulting fees to Flaming Gorge, Inc., a private
company controlled by Mr. Sargeant, our President, CEO and director, for
his management of the operation of the company and our subsidiaries,
reporting to the Board of Directors, and appointing managers to oversee
certain departments. Mr. Sargeant is compensated at the rate of $20,000
per month, on a month to month basis commencing November 5, 2002. The
agreement is for an initial five-year term, which is automatically
renewable upon expiry of the five-year period on a year-to-year basis.
(3) Mr. O'Neill was appointed as our Executive Vice-President, Chief
Operations Officer, Secretary, Treasurer on December 31, 2003.
(4) We paid management consulting fees to O'Neill Enterprises Inc., a private
company controlled by Mr. O'Neill, our Executive Vice-President, COO,
Secretary, Treasurer and director, for the management of day to day
activities and operations of the company and our subsidiaries. Mr. O'Neill
is compensated at the rate of $15,000 per month, on a month to month basis
commencing November 5, 2002. The agreement is for an initial five-year
term, which is automatically renewable upon expiry of the five-year period
on a year-to-year basis. Effective January 1, 2004, we increased the
consulting fees payable to O'Neill to $20,000 per month, and extended the
term by five years.
(5) Mr. Forigo resigned as our President and CEO on December 31, 2003.
The following table contains information regarding options granted during
the year ended December 31, 2004 to EYI Industries' named executive officer.
62
OPTION/SAR GRANTS TABLE
% Total
Options/SARs
Granted to
No. of Employees in
Securities year ended
Underlying December 31 Exercise or
Options/SARs 2003 Base Price
Name Granted (#) (%) ($ per Share) Expiration Date
---- ----------- --- ------------- ---------------
Jay Sargeant 3,200,000 (1) -- -- --
President, Chief Executive Officer 1,000,000
and Director 3,200,000 (1)
3,200,000 (3)
1,500,000 (4) $ 0.06 02/09/05
Dori O'Neill 3,200,000 (2) 17.95% 0.165 04/04/06
Secretary, Treasurer and Director 3,200,000 (1) 0.19 04/30/06
1,000,000 0.11 09/30/06
3,200,000 (1) 0.08 12/27/06
3,200,000 (3) 0.08 02/09/05
1,500,000 (4) $ 0.06
---------------
(1) On December 27, 2004, our board of directors approved the re-pricing of
3,200,000 options issued to Mr. O'Neill and 3,200,000 options issued to
Mr. Sargeant. The 6,400,000 options were cancelled on December 27, 2004
and 3,200,000 options were issued on December 27, 2004 to each of Mr.
O'Neill and Mr. Sargeant to replace their cancelled options. The new
options have a $0.08 exercise price and expire December 27, 2006.
(2) The 3,200,000 options were exercised on April 21, 2004
(3) The 3,200,000 options issued to Mr O'Neill and Mr Sargeant were cancelled
on February 9, 2005.
(4) Mr O'Neill and Mr Sargeant were issued 1,500,000 options each on
February 9, 2005 at $0.06 cents.
The following table contains information regarding options exercised in
the year ended December 31, 2003, and the number of shares of common stock
underlying options held as of December 31, 2003, by EYI Industries' named
executive officer.
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES
Number of Securities Underlying Value of Unexercised
Shares Unexercised Options/SARs In-the-Money Options/SARs
Acquired on Value at FY-End at FY-End
Exercise Realized (#) ($)
Name (#) ($) Exercisable Unexcersiable Exercisable Unexercsiable
---- --- --- ----------- ------------- ----------- -------------
Jay Sargeant 200,250 $22,027 3,999,750 -- -- --
President,
Chief Executive Officer and
Director
Dori O'Neill 3,200,000 $528,000 4,200,000 -- -- --
Secretary, Treasurer and
Director
Security Ownership Of Management
We are not aware of any arrangement that might result in a change in
control in the future.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth certain information concerning all equity
compensation plans previously approved by stockholders and all previous equity
compensation plans not previously approved by stockholders, as of the most
recently completed fiscal year. On February 17, 2004, our board of directors
approved the Stock Compensation Program (the "Plan"). The Plan became effective
on March 30, 2004. Under the Plan, options to purchase up to 25,000,000 shares
of our common stock may be granted to our employees, officers, directors, and
eligible consultants of our company. The Plan provides that the option price be
the fair market value of the stock at the date of grant as determined by the
Board of Directors. Options granted become exercisable and expire as determined
by the Board of Directors.
63
EQUITY COMPENSATION PLAN INFORMATION AS AT MAY 18, 2005
--------------------------------------------------------------------------------
Number of securities
Weighted-average remaining available for
Number of securities to exercise price of issuance under equity
be issued upon exercise outstanding compensation plans
of outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
Plan Category (a) (b) (c)
------------- --- --- ---
Equity Compensation Plans approved by
security holders Nil N/A N/A
Equity Compensation Plans not approved by
security holders 19,747,390 $0.14 per share 5,252,610
Total 19,747,390 $0.14 per share 5,252,610
Stock Compensation Program
On February 17, 2004, we established our Stock Compensation Program. The
purpose of the Plan is to advance the interests of our company and our
stockholders by strengthening our ability to obtain and retain the services of
the types of employees, consultants, officers and directors who will contribute
to our long term success and to provide incentives which are linked directly to
increases in stock value which will inure to the benefit of all our
stockholders. The Plan is administered by our Board of Directors or by a
committee of two or more non-employee directors appointed by the Board of
Directors (the "Administrator"). Subject to the provisions of the Plan, the
Administrator has full and final authority to grant the awards of stock options
and to determine the terms and conditions of the awards and the number of shares
to be issued pursuant thereto. Options granted under the Plan may be either
"incentive stock options," which qualify for special tax treatment under the
Internal Revenue Code of 1986, as amended, (the "Code"), nonqualified stock
options or restricted shares.
All of our employees and members of our Board of Directors are eligible to
be granted options. Individuals who have rendered or are expected to render
advisory or consulting services to us are also eligible to receive options. The
maximum number of shares of our common stock with respect to which options or
rights may be granted under the Plan to any participant is 25,000,000 shares,
subject to certain adjustments to prevent dilution.
The exact terms of the option granted are contained in an option agreement
between us and the person to whom such option is granted. Eligible employees are
not required to pay anything to receive options. The exercise price for
incentive stock options must be no less than 85% of the fair market value of the
common stock on the date of grant. The exercise price for nonqualified stock
options is determined by the Administrator in its sole and complete discretion.
An option holder may exercise options from time to time, subject to vesting.
Options will vest immediately upon death or disability of a participant and upon
certain change of control events.
The Administrator may amend the Plan at any time and in any manner,
subject to the following: (1) no recipient of any award may, without his or her
consent, be deprived thereof or of any of his or her rights thereunder or with
respect thereto as a result of such amendment or termination; and (2) any
outstanding incentive stock option that is modified, extended, renewed, or
otherwise altered must be treated in accordance with Section 424(h) of the Code.
The Plan terminates on March 30, 2014 unless sooner terminated by action
of the Board of Directors. All awards granted under the Plan expire ten years
from the date of grant, or such shorter period as is determined by the
Administrator. No option is exercisable by any person after such expiration. If
an award expires, terminates or is canceled, the shares of our common stock not
purchased thereunder may again be available for issuance under the Plan.
We filed a registration statement under the Securities Act of 1933, as
amended, to register the 25,000,000 shares of our common stock reserved for
issuance under the Plan on March 30, 2004.
Repricing of Options
During the year ended December 31, 2004, our board of directors approved
the re-pricing of: (i) options to purchase 3,200,000 shares of our common stock
granted in favor of Mr. Sargeant, our president and chief executive officer on
April 30, 2004 at a price of $0.19; and (ii) options to purchase 3,200,000
shares of our common stock granted in favor of Mr. O'Neill, our president and
chief executive officer on April 30, 2004 at a price of $0.19. The option price
was reduced to $0.08 per share in order that the exercise price was more
reflective of the then current trading price of our common stock and in order to
provide a continuing performance incentive. The 6,400,000 options were cancelled
on December 27, 2004 and 3,200,000 options were issued on December 27, 2004 to
each of Mr. O'Neill and Mr. Sargeant to replace their cancelled options. The new
options have a $0.08 exercise price and expire December 27, 2006. On February 9,
2005 the company cancelled 3,200,000 options for both Mr O'Neill and Mr
Sargeant, on the same date the company issued 1,500,00 options at 0.06 to both
Mr O'Neill and Mr Sargeant.
64
Compensation Arrangements
Compensation Of Directors
All of our directors receive reimbursement for out-of-pocket expenses for
attending Board of Directors meetings. From time to time we may engage certain
members of the Board of Directors to perform services on behalf of the Company
and may compensate such persons for the performance of those services.
In November 2002, we entered into a consulting agreement with Flaming
Gorge, Inc., a company controlled by Jay Sargeant, our President, Chief
Executive Officer and a member of our Board of Directors. Pursuant to this
agreement, we agreed to pay Flaming Gorge, Inc. $20,000 per month in
consideration of management consulting services provided by Mr. Sargeant to us.
The agreement automatically renews on a year-to-year basis at the end of the
initial five (5) year term.
In November 2002, we entered into a consulting agreement with O'Neill
Enterprises, Inc., a company controlled by Dori O'Neill, our Executive Vice
President, Chief Operations Officer, Secretary, Treasurer and a member of our
Board of Directors. Pursuant to the agreement, we agreed to pay $15,000 per
month in consideration of management consulting services provided by Mr. O'Neill
to us. This agreement automatically renews on a year-to-year basis at the end of
the initial five (5) year term. Effective January 1, 2004, we increased the
consulting fees payable to O'Neill Enterprises, Inc., to $20,000 per month for
management consulting services provided by Mr. O'Neill to us.
Long-Term Incentive Plans
We do not have any long-term incentive plans, pension plans, or similar
compensatory plans for our directors or executive officers.
65
DESCRIPTION OF PROPERTY
Our principal offices are located at 7865 Edmonds Street, Burnaby, BC,
Canada. Other property lease commitments include our warehouse, office, and
distribution centers in Louisville, Kentucky and Burnaby, British Columbia, as
described in the table below. None of our leases are with any affiliate or
related parties.
Location Term of Lease Square Feet Monthly Lease Commitment
-------- ------------- ----------- ------------------------
Louisville, Kentucky Three years, commencing April 30, 33,750 $10,419 per month from May 1, 2004 to April 30,
2007 2005; $11,719 per month from May 1, 2005 to
April 30, 2005; and $13,019 per month from May 1,
2006 to April 30, 2007
Burnaby, B.C. Seven years, commencing January 12,200 CDN$12,000 per month from January 1, 2005 to
1, 2005 December 1, 2005 (January 1, 2005-April 30,
2005 is a rent free period).
66
LEGAL PROCEEDINGS
Other than as described below, we are not a party to any material legal
proceedings and to our knowledge, no such proceedings are threatened or
contemplated.
1. Oppression Action by Lavorato/Heyman
In 2002, an oppression action was commenced in the Supreme Court of
British Columbia by the plaintiffs Brian Lavorato, Geraldine Heyman and their
respective holding companies, alleging that Essentially Yours Industries Corp.,
our affiliate, had improperly vended assets into Essentially Yours Industries,
Inc., our wholly owned subsidiary, as part of a corporate restructuring alleged
to be oppressive to the plaintiffs. As of April 4, 2003, the lawsuit has been
settled and was subsequently dismissed by the plaintiffs by consent, with the
exception of claims asserted by the plaintiffs against Thomas K. Viccars, a
former in-house counsel of Essentially Yours Industries, Corp., who may
potentially assert a third party claim against Essentially Yours Industries,
Inc. The Settlement of the Oppression Action was consented to by the Plaintiffs
pursuant to a written agreement between the Plaintiffs and, inter alia, EYI
Inc., dated as of April 4th, 2003, under which EYI Inc. agreed as follows, inter
alia:
o In consideration of 468058 B.C. Ltd. leasing to 642706 B.C. Ltd. (a
company related to EYI Inc.) EYI's business premises at 8310 and
8322, 130th Street, Surrey, B.C., EYI Inc. and Essentially Yours
Industries Corp. jointly and severally agreed to indemnify the
landlord in respect of the tenant's lease obligations till May 2005.
o EYI Inc. agreed to enter into a mutual release of all claims with
all parties (except Thomas Viccars). The mutual release was executed
by all parties (except Thomas Viccars) as of April 4th, 2003.
As part of the original action we claimed against Callum MacLeod, a
co-defendant, for breach of his employment agreement and Mr. MacLeod filed a
counterclaim against us for wrongful dismissal. We have filed a consolidated
statement of defense to the counterclaim, and interrogatories have been
responded to. Management believes this counterclaim to be without merit and
intends to vigorously defend against this claim.
2. Action By Suhl, Harris and Babich
In 2003 a consolidated action was brought by the plaintiffs Wolf Suhl,
Christine Harris and Edward Babich in the Supreme Court of British Columbia
pursuant to an order pronounced in the New Westminster Registry under Action No.
S061589 on May 7, 2003, which allowed the plaintiffs to proceed with an action
against Essentially Yours Industries, Inc. The plaintiffs allege that
Essentially Yours Industries, Inc. holds certain of its products or revenues
derived therefrom as trust property for the benefit of the plaintiffs.
The claim is for a total of $220,000 and an aggregate 4.9% of the
wholesale volume of sales generated by Essentially Yours Industries, Inc. from
the alleged trust property, and for damages and costs. A consolidated statement
of defence has been filed by Essentially Yours Industries, Inc., and
interrogatories have been responded to. A three day summary trial was set for
early April, 2005 for this matter, but has been adjourned to September pending
the outcome of further discoveries. Management believes this claim to be without
merit and intends to vigorously defend against this claim.
To the best of our knowledge, we are not subject to any other active or
pending legal proceedings or claims against us or our subsidiaries or any of our
properties that will have a material effect on our business or results of
operations. However, from time to time, we may become subject to claims and
litigation generally associated with any business venture.
67
3. Agreement with Source, Inc.
In February, 2004 we entered into a letter of commitment with Source, Inc.
("Source") for the purpose of further developing our corporate marketing
position with Source and for assistance in raising equity capital. Pursuant to
the terms the letter agreement, we agreed to: (i) pay Source 20% of the gross
revenues generated by Source under a Corporate Marketing Organization Agreement
("CMO Agreement") previously entered into with Premier Lifestyles International
Corporation, a company related to Source; (ii) to offer up to $4,000,000 of EYI
restricted stock over a 90 day period at $0.21 per share and warrants
exercisable at a price of $0.30 per share for investors referred to EYI by
Source in connection with any equity offerings by EYI; (iii) at the end of the
12 months period following execution of the agreement, and if Source had
referred enough investors to raise a minimum of $500,000, to issue to Source
$1,800,000 in common stock of EYI or pay the balance in cash; and (iv) on a
monthly basis, during the 12 month period, pay 50% of all monies collected by
EYI from Source referred investors, to be paid to Source towards the $1,800,000
to pay for the CMO Agreement and $300,000 towards a proposed web portal.
Subsequently, we terminated the CMO Agreement in accordance with its terms in
July, 2004, and notified Source that they failed to raise the minimum funding of
$500,000 in connection with EYI's equity offering closing in June, 2004. Source
has notified EYI that they dispute the fact that they did not raise the minimum
financing amount. Management believes that if Source were to advance any such
claims against EYI its chance of success would be remote and we intend to
vigorously defend against any potential legal claims respecting this matter.
68
PRINCIPAL SHAREHOLDERS
Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth information about the beneficial ownership
of our common stock as of May 24, 2005, by (i) each person who we know is the
beneficial owner of more than 5% of the outstanding shares of common stock (ii)
each of our directors or those nominated to be directors, and executive
officers, and (iii) all of our directors and executive officers as a group.
Name and Address Amount and Nature Percentage
Title of Class of Beneficial Owner of Beneficial Ownership of Common Stock(1)
-------------- ------------------- ----------------------- ------------------
Directors and Executive Officers
--------------------------------
Common Stock Jay Sargeant 93,472,157 shares 55.5%
3324 Military Avenue Direct and Indirect(2)
Los Angeles, California
Common Stock Dori O'Neill 12,934,884 shares 7.6%
6520 Walker Avenue Direct and Indirect (3)
Burnaby, British Columbia
Canada
Common Stock Bruce Nants 560,000 shares *
1999 West Colonial Drive Direct and Indirect(6)
Suite 211
Orlando, Florida
Common Stock Rajesh Raniga 700,000 shares *
13357-56 Avenue Direct and Indirect(7)
Surrey, British Columbia
Canada
Common Stock All Directors and Executive Officers 102,717,041 shares 60.14%
as a Group (Four Persons) Direct and Indirect
Holders of More than 5% of Our Common Stock
-------------------------------------------
Common Stock Barry Larose 23,643,302 shares 14.2%
20080 84th Avenue Indirect (4)
Langley, British Columbia
Canada
Common Stock Michel Grise 17,971,748 shares 10.8%
489 Rue Du Massif Direct and Indirect (5)
Mont St-Hilaire QC
Common Stock Jay Sargeant| 91,972,157 shares 55.5%
3324 Military Avenue Direct and Indirect(2)
Los Angeles, California
Common Stock Dori O'Neill 10,434,884 shares 7.6%
6520 Walker Avenue Direct and Indirect (3)
Burnaby, British Columbia
Canada
69
-------------
* Represents less than 1%.
(1) Applicable percentage of ownership is based on 166,803,292 shares of
common stock outstanding as of May 24, 2005 together with securities
exercisable or convertible into shares of common stock within 60 days of
May 24, 2005 for each stockholder. Beneficial ownership is determined in
accordance with the rules of the SEC 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 May
24, 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.
(2) The shares are held as follows: (i) 50,000 shares are held by Northern
Colorado, Inc., a company controlled by Mr. Sargeant; (ii) 65,477,302
shares are held in the Jay Sargeant Trust, of which Mr. Sargeant is the
Trustee. Mr. Sargeant has granted to the beneficiaries named in the trust
the right to receive any cash distributions on the shares and has agreed
to add to the trust corpus any stock dividends or shares granted in
respect of, or in exchange for, the shares currently held in the trust.
Mr. Sargeant retains the right to vote and dispose of the shares or amend
the trust at any time; (iii) 26,397,236 shares are held by Mr. Sargeant
beneficially as a named beneficiary under the trust; and (iv) 1,500,000
shares which may be acquired by Mr. Sargeant on exercise of incentive
stock options within 60 days of May 24, 2005. Mr. Sargeant acquired 47,619
shares as an investor in the Rule 506 Private Placement. Mr. Sargeant
purchased each share at a price of $0.21 with a warrant at $0.30.
(3) Consists of 3,066,500 shares of our common stock held by Dori O'Neill
directly, 7,368,384 shares held by Mr. O'Neill indirectly under the Jay
Sargeant Trust, and 2,500,000 shares which may be acquired by Mr. O'Neill
on exercise of incentive stock options within 60 days of May 18, 2005. Mr.
O'Neill is a named beneficiary of the Jay Sargeant Trust, and is therefore
an indirect beneficial owner, with respect to 7,368,384 shares. Under the
trust, Mr. O'Neill has the right to receive any cash distributions on the
shares, but Jay Sargeant, as the settlor of the Trust, has retained the
right to vote and dispose of the shares, and to revoke or amend the trust
at any time.
(4) Barry LaRose is a named beneficiary of the Jay Sargeant Trust, and is
therefore an indirect beneficial owner, with respect to 23,643,302 shares.
Under the Trust, Mr. LaRose has the right to receive any cash
distributions on the shares, but Jay Sargeant, as the settlor of the
Trust, has retained the right to vote and dispose of the shares and to
revoke or amend the trust at any time.
(5) Michel Grise is a named beneficiary of the Jay Sargeant Trust, and is
therefore an indirect owner, with respect to 17,195,966 shares. Under the
trust, Mr. Grise has the right to receive any cash distributions on the
shares, but Jay Sargeant, as the settlor of the Trust, has retained the
right to vote and dispose of the shares and to revoke or amend the trust
at any time.
(6) Consists of 60,000 shares held directly by Mr. Nants and 500,000 shares
which may be acquired by Mr. Nants on exercise of incentive stock options
within 60 days of May 24, 2005.
(7) Consists of 250,000 shares held directly by Mr. Raniga and 450,000 shares
which may be acquired by Mr. Raniga on exercise of incentive stock options
within 60 days of May 24, 2005.
70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as described below, none of the following parties has, since our
date of incorporation, had any material interest, direct or indirect, in any
transaction with us or in any presently proposed transaction that has or will
materially affect us, other than noted in this section:
o Any of our directors or officers;
o Any person proposed as a nominee for election as a director;
o Any person who beneficially owns, directly or indirectly, shares
carrying more than 10% of the voting rights attached to our
outstanding shares of common stock;
o Any of our promoters; and
o Any relative or spouse of any of the foregoing persons who has the
same house as such person.
In November 2002, we entered into a consulting agreement with Flaming
Gorge, Inc., a company controlled by Mr. Sargeant. Pursuant to this agreement,
we agreed to pay Flaming Gorge, Inc. $20,000 per month in consideration of
management consulting services provided by Mr. Sargeant to us. The agreement
automatically renews on a year-to-year basis at the end of the initial five (5)
year term.
In November 2002, we entered into a consulting agreement with O'Neill
Enterprises, Inc., a company controlled by Dori O'Neill, our Executive Vice
President, Chief Operations Officer, Secretary, Treasurer and a member of our
Board of Directors. Pursuant to the agreement, we agreed to pay $15,000 per
month in consideration of management consulting services provided by Mr. O'Neill
to us. This agreement automatically renews on a year-to-year basis at the end of
the initial five (5) year term. Effective January 1, 2004, we increased the
consulting fee payable to Mr. O'Neill to $20,000 per month with a five (5) year
extension.
On May 27, 2002, pursuant to a Declaration of Trust and the revised First
Amendment to Trust Agreement dated December 23, 2003, Jay Sargeant, our
President, Chief Executive Officer and a member of our Board of Directors,
agreed that in the event he becomes the owner of stock in EYI Nevada, and/or RGM
International, Inc., a Nevada corporation, he will hold stock in trust for the
below listed persons. As at December 14, 2004 Mr. Sargeant held 11,970,000
shares of common stock of EYI Nevada, allocated as follows:
Number of
Shares after
Name Number of Shares Exchange
---- ---------------- --------
Jay Sargeant 3,439,200 26,397,236
Barry LaRose 3,080,400 23,643,302
Michel Grise 2,240,400 17,195,966
Dori O'Neill 960,000 7,368,384
Thomas Viccars 960,000 7,368,384
Kristan Sargeant 480,000 3,684,192
Rena Davis 240,000 1,842,096
Donna Keay 180,000 1,381,572
Janet Carpenter 180,000 1,381,572
Shauna Browne 120,000 921,048
Harnek Chandi 90,000 690,786
71
On December 31, 2003, we completed a share exchange with certain
shareholders of EYI Nevada, pursuant to which we issued shares of our common
stock to the EYI shareholders in exchange for the shares of EYI Nevada common
stock held by them. Mr. Sargeant, our President, Chief Executive Officer and a
member of our board of directors, held shares in EYI Nevada, and, based on the
conversion ratio in the share exchange, Mr. Sargeant acquired 91,874,538 shares
in the exchange. Prior to the exchange, Northern Colorado, Inc., a company in
which Mr. Sargeant is a principal, already owned 50,000 shares, all of which Mr.
Sargeant may be deemed to be the beneficial owner. Following the exchange, the
total number of shares of which Mr. Sargeant has beneficial ownership is
91,924,538. Of these shares, 65,477,302 shares are held in the Jay Sargeant
Trust. Mr. Sargeant is the trustee of the trust, and he has retained the right
to vote and dispose of the shares and to revoke or amend the trust at any time.
Mr. Sargeant is also a named beneficiary of the Trust with respect to 26,397,236
shares.
Also, in connection with the Exchange we entered into the following
transactions and agreements:
1. We offered to Michel Grise, an EYI Shareholder, 357,143 shares of
common stock and 357,143 warrants to purchase additional shares of common stock
at a price of $0.20 per share in satisfaction of a loan from Mr. Grise to EYI
Nevada in the aggregate principal amount of $50,000, plus interest. Mr. Grise
accepted our offer, and the shares and warrants were issued to Mr. Grise on
December 31, 2003; and
2. We entered into a Registration Rights Agreement on December 31, 2003
with the EYI Shareholders, pursuant to which EYI Shareholders were granted the
right to request us to register up to 10% of the shares of our common stock
issued to each EYI Shareholder upon the filing of any registration statements by
us (other than registration statements on Form S-8 or Form S-4 or other limited
purpose).
During the year ended December 31, 2004, we purchased approximately 90% of
our products for resale from Nutri-Diem Inc., a company owned in part by a
director of our company.
In January 2004, the Company entered into a consulting agreement with
Rajesh Raniga Inc ("RR INC") whereas Rajesh Raniga, the principal of RR INC., is
to act as our Chief Financial Officer on a month to month basis for
consideration of $150 CAD per hour with a minimum charge of $2,000 CAD per month
and 250,000 shares of our common stock. In January, 2004, we issued 250,000
shares of restricted common stock to Rajesh Raniga Inc. as compensation for the
high degree of responsibility associated with the position, and the assistance
provided with the share exchange transaction with Safe ID. Mr. Raniga became our
chief financial officer on January 1, 2004. Rajesh Raniga, nor RR INC., is an
employee of the Company, but rather RR INC. is an independent contractor.
72
MARKET PRICE OF AND DIVIDENDS
ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
Our common stock has been listed on the NASD OTC Electronic Bulletin Board
sponsored by the National Association of Securities Dealers, Inc. under the
symbol "EYI" since January 30, 2004 following completion of the Exchange
Agreement among our company, certain of our shareholders and Safe ID
Corporation, see "Item 1. Description of Business" above. The shares of Safe ID
Corporation traded on the OTC BB under the symbol "MYID" from January 17, 2001
to January 30, 2004. The following table contains the reported high and low bid
prices for the common stock as reported on the OTC BB for the periods indicated.
The following table sets forth the high and low bid prices for the common
stock as reported on the Over-the-Counter Bulletin Board for each quarter since
June 21, 2001 for the periods indicated. Such information reflects inter dealer
prices without retail mark-up, mark down or commissions and may not represent
actual transactions.
The following table sets forth, for the period indicated, the bid price
range of our common stock.
YEAR 2002 High Bid Low Bid
--------- -------- -------
Quarter Ended March 31, 2002 $0.510 $0.250
Quarter Ended June 30, 2002 $0.760 $0.200
Quarter Ended September 30, 2002 $0.450 $0.160
Quarter Ended December 31, 2002 $0.430 $0.160
YEAR 2003 High Bid Low Bid
--------- -------- -------
Quarter Ended March 31, 2003 $0.265 $0.051
Quarter Ended June 30, 2003 $0.110 $0.032
Quarter Ended September 30, 2003 $0.340 $0.050
Quarter Ended December 31, 2003 $0.335 $0.190
YEAR 2004 High Bid Low Bid
--------- -------- -------
Quarter Ended March 31, 2004 $0.300 $0.190
Quarter Ended June 30, 2004 $0.320 $0.180
Quarter Ended September 30, 2004 $0.300 $0.110
Quarter Ended December 31, 2004 $0.140 $0.050
YEAR 2005 High Bid Low Bid
--------- -------- -------
Quarter Ended March 31, 2005 $0.05 $0.04
On May 24, 2005, the closing price of our common stock as reported on the
Over-the-Counter Bulletin Board was $0.03 per share. As of May 24, 2005, we had
in excess of 112 holders of common stock and 166,803,292 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.
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
On January 1, 2004 the Company entered into an agreement with a consultant
to provide services in exchange for 250,000 common shares at $0.28. During the
quarter ended March 31, 2004 we issued 100,000 shares of our common stock at a
price of $0.28 per share to a consultant in respect of fees owed for certain
consulting services provided to us by the consultant. All securities issued were
endorsed with a restrictive legend confirming that the securities cannot be
resold without registration under the Securities Act or an applicable exemption
from the registration requirements of the Securities Act. The issuance was
completed pursuant to Section 4(2) of the Securities Act on the basis that the
consultant was a sophisticated investor.
73
During the quarter ended June 30, 2004, we issued 50,000 shares of our
common stock at a price of $0.22 per share to a consultant in respect of fees
owed for certain consulting services provided to us by the consultant. All
securities issued were endorsed with a restrictive legend confirming that the
securities cannot be resold without registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
The issuance was completed pursuant to Section 4(2) of the Securities Act on the
basis that the consultant was a sophisticated investor.
During the quarter ended June 30, 2004, we issued 5,476,190 units at a
price of $0.21 per unit to Eyewonder in respect of certain amounts owed to
Eyewonder under our Letter Agreement with Eyewonder. Each unit was comprised of
one share of our common stock and one share purchase warrant entitling Eyewonder
to purchase one share of our common stock at an exercise price of $0.30 per
share for a period expiring May 4, 2009. Eyewonder is a subcontractor, which
provides streaming video technology to EYI. The Company believes that the
Eyewonder transaction was not a related party transaction, as the Company and
Eyewonder had no prior relationship and no individuals and/or entities were
related to the Company and Eyewonder. The issuance was completed pursuant to
Section 4(2) of the Securities Act on the basis that Eyewonder was a
sophisticated investor.
As of June 7, 2004, we completed the sale of 136,548 units at a price of
$0.21 per unit for proceeds of $28,675 to seven investors. Each unit was
comprised of one share of our common stock and one share purchase warrant. Each
share purchase warrant entitles the holder to purchase one share of our common
stock at a price of $0.30 per share for the three year period following closing.
A total of 136,548 shares and 136,548 share purchase warrants were issued. The
purchasers consisted of seven "accredited investors", as defined by Rule 501 of
Regulation D of the Securities Act. The sales were completed pursuant to Rule
506 of Regulation D of the Securities Act. All securities issued were endorsed
with a restrictive legend confirming that the securities cannot be resold
without registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act.
On June 22, 2004, we issued 1,266,589 and 33,411 restricted shares of our
common stock to Cornell Capital Partners and Newbridge Securities Corporation,
respectively in payment of certain fees owed to Cornell Capital Partners and
Newbridge under the terms of the Standby Equity Distribution Agreement and a
Placement Agent Agreement. All issuances were completed pursuant to Rule 506 of
Regulation D of the Securities Act on the basis that Newbridge and Cornell are
"accredited investors", as defined by Rule 501 of Regulation D of the Securities
Act. All securities issued were endorsed with a restrictive legend confirming
that the securities cannot be resold without registration under the Securities
Act or an applicable exemption from the registration requirements of the
Securities Act.
On June 22, 2004, we entered into a secured convertible debenture
transaction with Cornell Capital Partners in the principal amount of $500,000.
The sale of these Secured Convertible Debentures is complete. EYI Industries
received $250,000 from the issuance of the first Secured Convertible Debenture
on June 22, 2004, and we received $250,000 five business days following the
filing of the accompanying registration statement. The Secured Convertible
Debentures are convertible at the holder's option any time up to maturity at a
conversion price equal to the lower of (i) 120% of the closing bid price of the
common stock as of the date of issuance, or (ii) 80% of the average of the
lowest daily volume weighted average price of our common stock for the 5 trading
days immediately preceding the conversion date. At maturity, the remaining
unpaid principal and accrued interest under the debentures shall 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 common
stock as of the date of issuance or (ii) 80% of the lowest closing bid price of
the common stock for the lowest trading days of the 5 trading days immediately
preceding the conversion date. The Secured Convertible Debenture is secured by
all of EYI Industries' assets. The Secured Convertible Debentures accrue
interest at a rate of 5% per year and have a term of 3 years. In the event the
Secured Convertible Debentures are redeemed, then EYI Industries will issue to
the holders a warrant to purchase 50,000 shares for every $100,000 redeemed at
an exercise price of 120% of the closing bid price as of June 22, 2004. The
holders purchased the Secured Convertible Debentures from EYI Industries in a
private placement on June 22, 2004. On September 24, 2004, we issued the second
secured convertible debenture in the principal amount of $250,000 to Cornell
Capital Partners on the same terms and conditions as the secured convertible
debenture described above. EYI Industries is registering in this offering
8,352,823 shares of common stock underlying the Secured Convertible Debentures.
On April 4, 2005, Cornell Capital Partners assigned all of its rights and
interests in the secured convertible debentures to Taib Bank E.C. All investment
decisions of Taib Bank E.C. are made by Larry Chaleff, its Managing Director. In
addition, on April 4, 2005, EYI Industries and Taib Bank E.C. entered into a
Redemption Agreement, whereby EYI Industries agreed to first use any proceeds
received by EYI Industries under the Equity Distribution Agreement with Cornell
Capital Partners to redeem any remaining principal and accrued interest under
the assigned Secured Convertible Debentures.
74
Share of
Common Stock
Year Name of Holder Date Sold Reason Shares Issued
---- -------------- ---- ---- --------------------
2005 Janet Carpenter February 2005 800,000 Shares in lieu of guarantee
and pledge.
2004 Private Placement at January 2004 857,143 Private Placement
$0.14 per unit: warrants raise capital
at $0.20
Rajesh Raniga Inc. January 2004 250,000 Consulting Fees
valued at $0.28 per share
Private Placement at March 2004 609,312 Private Placement
$0.21 per unit; warrants raise capital
at $0.30
Equis Capital Corp. March 2004 100,000 Consulting Fees
Eyewonder Inc. May 2004 5,476,190 Service Fees
Michael Hatrak May 2004 50,000 Consulting Fees
Private Placement at June 2004 566,833 Private Placement to
$0.21 per unit; warrants raise capital
at $0.30
Cornell Capital Partners, LP June 2004 1,266,589 Commitment fee
pursuant to Standby
Equity Distribution Agreement
Newbridge Securities June 2004 33,411 Placement Agent fee
Corporation in connection with
Standby Equity Distribution
Agreement
2003* PNG Trading Co. Ltd. February 2003 250,000 Issued in lieu of funds
received
Hightech International March 2003 2,120,000 Settlement of Debt
Private Placement at September 2003 3,573,924 Private Placement to
$0.14 per unit; warrants raise capital
at $0.20
Michel Grise December 2003 357,143 Private Placement to
raise capital
2002* Turret Holdings, Inc. August 2002 333,333 Issued to settle debt of
$40,000.00
Microtech Industries August 2002 916,667 Funds received by
Company and shares
issued at $0.18
2001* - - -
75
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding EYI so as to make an informed investment decision. More specifically,
EYI had a reasonable basis to believe that each purchaser was an "accredited
investor" as defined in Regulation D of the 1933 Act and otherwise had the
requisite sophistication to make an investment in EYI's common stock.
-------------------
* Current management of EYI Industries has limited information with respect
to the issuances of unregistered securities prior to the Share Exchange
transaction consummated on December 31, 2003 between our company and
certain shareholders of Essentially Yours Industries, Inc.
76
DESCRIPTION OF SECURITIES
Common Stock
Our Articles of Incorporation authorize the issuance of 300,000,000 shares
of common stock, $0.001 par value per share. As of May 24, 2005, 166,803,292
shares of common stock were issued and outstanding. The following description is
a summary of the capital stock of EYI Industries and contains the material terms
of the capital stock. Additional information can be found in EYI Industries'
Articles of Incorporation and Bylaws.
Each holder of our common stock is entitled to one vote per share of
common stock standing in such holder's name on our records on each matter
submitted to a vote of our stockholders, except as otherwise required by law.
Holders of our common stock do not have cumulative voting rights so that the
holders of more than 50% of the combined shares of our common stock voting for
the election of directors may elect all of the directors if they choose to do so
and, in that event, the holders of the remaining shares of our common stock will
not be able to elect any members to our board of directors. Holders of our
common stock are entitled to equal dividends and distributions, per share, when,
as and if declared by our board of directors from funds legally available.
Holders of our common stock do not have preemptive rights to subscribe for any
of our securities nor are any shares of our common stock redeemable or
convertible into any of our other securities. If we liquidate, dissolve or wind
up our business or affairs, our assets will be divided up pro-rata on a
share-for-share basis among the holders of our common stock after creditors and
preferred shareholders, if any, are paid.
Preferred Stock
Our Articles of Incorporation authorize the issuance of 10,000,000 shares
of preferred stock, $0.001 par value per share, the designation and rights of
which are to be determined by our Board of Directors. As of May 24, 2005, no
shares of preferred stock were issued and outstanding.
Our Board of Directors has authority, without action by the shareholders,
to issue all or any portion of the authorized but unissued preferred stock in
one or more series and to determine the voting rights, preferences as to
dividends and liquidation, conversion rights, and other rights of such series.
We consider it desirable to have preferred stock available to provide increased
flexibility in structuring possible future acquisitions and financing and in
meeting corporate needs which may arise. If opportunities arise that would make
desirable the issuance of preferred stock through either public offering or
private placements, the provisions for preferred stock in our Articles of
Incorporation would avoid the possible delay and expense of a shareholder's
meeting, except as may be required by law or regulatory authorities. Issuance of
the preferred stock could result, however, in a series of securities outstanding
that will have certain preferences with respect to dividends and liquidation
over the common stock which would result in dilution of the income per share and
net book value of the common stock. Issuance of additional common stock pursuant
to any conversion right which may be attached to the terms of any series of
preferred stock may also result in dilution of the net income per share and the
net book value of the common stock. The specific terms of any series of
preferred stock will depend primarily on market conditions, terms of a proposed
acquisition or financing, and other factors existing at the time of issuance.
Therefore, it is not possible at this time to determine in what respect a
particular series of preferred stock will be superior to our common stock or any
other series of preferred stock which we may issue. Our Board of Directors may
issue additional preferred stock in future financing, but has no current plans
to do so at this time.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. We intend to furnish holders of our common stock annual reports
containing audited financial statements and to make public quarterly reports
containing unaudited financial information.
Convertible Debentures
On June 22, 2004, we entered into a secured convertible debenture
transaction with Cornell Capital Partners in the principal amount of $500,000.
The sale of these Secured Convertible Debentures is complete. EYI Industries
received $250,000 from the issuance of the first Secured Convertible Debenture
on June 22, 2004, and we received $250,000 five business days following the
filing of the accompanying registration statement. The Secured Convertible
Debentures are convertible at the holder's option any time up to maturity at a
conversion price equal to the lower of (i) 120% of the closing bid price of the
common stock as of the date of issuance, or (ii) 80% of the average of the
lowest daily volume weighted average price of our common stock for the 5 trading
days immediately preceding the conversion date. At maturity, the remaining
unpaid principal and accrued interest under the debentures shall be, at our
77
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 common
stock as of the date of issuance or (ii) 80% of the lowest closing bid price of
the common stock for the lowest trading days of the 5 trading days immediately
preceding the conversion date. The Secured Convertible Debenture is secured by
all of EYI Industries' assets. The Secured Convertible Debentures accrue
interest at a rate of 5% per year and have a term of 3 years. In the event the
Secured Convertible Debentures are redeemed, then EYI Industries will issue to
the holders a warrant to purchase 50,000 shares for every $100,000 redeemed at
an exercise price of 120% of the closing bid price as of June 22, 2004. The
holders purchased the Secured Convertible Debentures from EYI Industries in a
private placement on June 22, 2004. On September 24, 2004, we issued the second
secured convertible debenture in the principal amount of $250,000 to Cornell
Capital Partners on the same terms and conditions as the secured convertible
debenture described above. EYI Industries is registering in this offering
8,352,823 shares of common stock underlying the Secured Convertible Debentures.
On April 4, 2005, Cornell Capital Partners assigned all of its rights and
interests in the secured convertible debentures to Taib Bank E.C. All investment
decisions of Taib Bank E.C. are made by Larry Chaleff, its Managing Director. In
addition, on April 4, 2005, EYI Industries and Taib Bank E.C. entered into a
Redemption Agreement, whereby EYI Industries agreed to first use any proceeds
received by EYI Industries under the Equity Distribution Agreement with Cornell
Capital Partners to redeem any remaining principal and accrued interest under
the assigned Secured Convertible Debentures.
Summary Of Warrants Outstanding
Period Issued Purchase Aggregate
Issued Warrants Price Value Details of Issuance
------ -------- ----- ----- -------------------
4th Quarter 2003 3,668,413 - - Balance of Safe ID warrants
1st Quarter 2004 857,143 $ 0.20 $ 171,429 Private Placement $0.14 per unit; warrants
exercise price is $0.30
609,312 $ 0.30 $ 182,794 Private Placement $0.21 per unit; warrants
exercise price is $0.30
916,667 $ 0.24 Balance of reverse acq/share exchange not properly
determined December 31, 2003(expired)
2nd Quarter 2004 5,476,190 $ 0.21 $ 1,150,000 Pursuant to an Agreement with Eyewonder dated May
4, 2004
566,833 $ 0.30 $ 170,050 Private Placement $0.21 per unit; warrants
exercise price is $0.30
26,129 $ 0.31 $ 8,100 Pursuant to an agreement dated May 25, 2004 with
---------- -------- ---------- Source Capital Group, Inc.
Total 12,120,687 $ 1,682,372
Summary Of The Grant Of Options
Number of Exercise Options
Date of Grant Options Price (US) Exercised Vesting Period Capacity of Grant
------------- ------- ---------- --------- -------------- -----------------
March 30, 2004 3,200,000 $0.165 3,200,000 March 30, 2004 Consultant
1,000,000 $0.165 1,000,000 March 30,2004 Employee
April 5, 2004 1,439,000 $0.20 310,000 50% August 5, 2004 and 50% Canadian Consultants and
August 5, 2005 Employees
April 5, 2004 2,990,000 $0.20 336,360 Fully vested upon issuance Senior Management and
Executives
April 30, 2004 6,400,000 $0.19 6,400,000 Fully vested upon issuance Consultants (Executive
Officers)
78
Number of Exercise Options
Date of Grant Options Price (US) Exercised Vesting Period Capacity of Grant
------------- ------- ---------- --------- -------------- -----------------
April 30, 2004 2,910,000 $0.19 0 50% October 1, 2004 and US Consultants providing
50% October 1, 2005 services in various to EYI
April 30, 2004 2,000,000 $0.19 0 Vesting on October 1, 2004 Consultant working with
EYI with respect to
products in Latin Countries
June 1, 1004 100,000 $0.22 0 Vesting on August 1, 2004 Consultant working with
EYI in assisting in the
development and marketing
of new EYI products
July 2, 2004 100,000 $0.26 0 50% October 4, 2004 and Consultants providing
50% October 4, 2005 assistance to EYI Senior
Management
December 31, 2004 2,650,000 $0.11 200,250 Vesting on December 31, Senior
2004 Management/Consultants
October 13, 2004 500,000 $0.08 250,000 Vesting October 13, 2004 Consultant
November 1,2004 250,000 $0.20 0 50% February 1 2005 and Consultant
50% February 1 2006
December 27, 2004 7,450,000 $0.08 6,600,000 100% December, 31, 2004 Consultants and Employees
February 9, 2005 6,000,000 $0.06 3,000,000 100% February 9, 2005 Consultants and Employees
March 10, 2005 250,000 $0.04 250,000 100% March 10, 2005 Consultant
*** In addition under an Agreement dated May 4, 2004, EYI Industries has
agreed to issue options to purchase 1,100,000 shares of common stock at a
price of $0.22 per share to certain individuals designated by Eyewonder.
Transfer Agent
The transfer agent for our common stock is Corporate Stock Transfer of
Denver, Colorado and its telephone number is (303) 282-4800.
Disclosure Of SEC Position On Indemnification For Securities Act Liabilities
Our Articles of Incorporation, as well as our By-Laws provide for the
indemnification of directors, officers, employees and agents of the corporation
to the fullest extent provided by the corporate laws of the State of Nevada, as
well as is described in the Articles of Incorporation and the By-Laws. These
sections generally provide that the Company may indemnify any person who was or
is a party to any threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative except for an action by
or in right of the corporation by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation. Generally, no
indemnification may be made where the person has been determined to be negligent
or guilty of misconduct in the performance of his or her duties to the Company.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of EYI
Industries, pursuant to the foregoing provisions, or otherwise, we have been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933, and is, therefore, unenforceable.
79
Anti-Takeover Effects Of Provisions Of The Articles Of Incorporation Authorized
And Unissued Stock
The authorized but unissued shares of our common and preferred stock are
available for future issuance without our shareholders' approval. 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.
80
EXPERTS
The financial statements of EYI Industries incorporated herein have been
so incorporated in reliance upon the report of independent certified public
accountants, Williams and Webster, P.S., given upon their authority as experts
in auditing and accounting. The accountants are not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for their report on the
unaudited interim financial information because that report is not a "report" or
a "part" of the Registration Statement prepared or certified by the accountants
within the meaning of Section 7 and 11 of the 1933 Act.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us Burton Bartlett & Glogovac of Reno, Nevada.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the to the exhibits for a
complete statement of their terms and conditions. The registration statement and
other information may be read and copied at the Commission's Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission.
81
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS FOR MARCH 31, 2005
---------------------------------------
Consolidated Balance Sheets as of March 31, 2005 (unaudited) and
December 31, 2004 (unaudited) F-1
Consolidated Statement of Operations for the three months
ended March 31, 2005 (unaudited) and March 31, 2004 (unaudited) F-2
Consolidated Statement of Stockholders' Equity (Deficit)
from June 21 2002 through March 31, 2005 (unaudited) F-3
Consolidated Statements of Cash Flows fro the three months ended
March 31, 2005 (unaudited) and March 31, 2004 (unaudited) F-6
Notes to Financial Statements F-7
FINANCIAL STATEMENTS FOR DECEMBER 31, 2004
------------------------------------------
Report of Independent Certified Public Accountants F-16
Consolidated Balance Sheets as of December 31, 2004 (audited),
December 31, 3003 (restated) and June 30, 2003 F-17
Consolidated Statements of Operations for the year ended
December 31, 2004, the short period ended December 31, 2003
and year end June 30, 2003 F-18
Consolidated Statement of Stockholders' Equity (Deficit) from
June 21, 2003 through December 31, 2004 (audited) F-19
Consolidated Statements of Cash Flows for year ended December 31, 2004
(audited) and the short period ended December 31, 2003 F-20
Notes to Financial Statements F-21
FINANCIAL STATEMENTS FOR DECEMBER 31, 2003
------------------------------------------
Report of Independent Certified Public Accountants F-44
Consolidated Balance Sheets as of December 31, 2003
and June 30, 2003 (audited) F-45
Consolidated Statements of Operations for the six months ended
December 31, 2003, the year ended June 30, 2003 and from
June 21, 2002 (Inception) to June 30, 2002 (audited) F-46
Consolidated Statement of Stockholders' Equity (Deficit) from
June 21, 2002 through December 31, 2003 (audited) F-47
Consolidated Statements of Cash Flows for the six months ended
December 31, 2003, the year ended June 31, 2003 and from
June 21, 2002 (Inception) to June 30, 2002 (audited) F-49
Notes to Financial Statements F-50
F-i
EYI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
ASSETS Unaudited
CURRENT ASSETS
Cash $ 5,450 $ 33,018
Restricted cash 100,370 100,248
Accounts receivable, net of allowance 62,440 45,806
Related party receivables - 4,996
Prepaid expenses 824,047 857,170
Inventory 195,071 239,641
TOTAL CURRENT ASSETS 1,187,378 1,280,879
OTHER ASSETS
Property, plant and equipment, net 55,208 60,336
Deposits - 24,361
TOTAL OTHER ASSETS 55,208 84,697
INTANGIBLE ASSETS 16,291 16,561
TOTAL ASSETS $ 1,258,877 $ 1,382,137
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank indebtedness $ 13,780 $ 72,456
Accounts payable and accrued liabilities 1,398,316 1,218,178
Accounts payable - related parties 691,473 590,146
Interest payable, convertible debt 16,781 10,616
Notes payable - related party 90,000 90,000
Convertible debt-related party, net of discount 417,886 379,724
Loan payable, Cornell 200,000 -
TOTAL CURRENT LIABILITIES 2,828,236 2,361,120
MINORITY INTEREST IN SUBSIDIARY 331,231 346,819
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, $0.001 par value; 300,000,000 shares
authorized, 166,553,292 and 162,753,092 shares issued
and outstanding, respectively 166,553 162,753
Additional paid-in capital 3,264,806 3,048,606
Stock options and warrants 2,732,044 2,563,043
Subscription receivable (195,000) (15,000)
Accumulated deficit (7,868,993) (7,085,205)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,900,590) (1,325,802)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,258,877 $ 1,382,137
The accompanying condensed notes are an integral part
of these financial statements.
F-1
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, Three Months Ended March 31,
2005 2004
(Unaudited) (Unaudited)
REVENUE $ 1,313,768 $ 1,529,195
COST OF GOODS SOLD 251,148 417,490
GROSS PROFIT BEFORE COMMISSION EXPENSE 1,062,620 1,111,705
COMMISSION EXPENSE 471,605 414,605
GROSS PROFIT AFTER COST OF GOODS SOLD
AND COMMISSION EXPENSE 591,015 697,100
OPERATING EXPENSES
Consulting fees 237,962 250,520
Legal and professional 69,125 20,052
Customer service 86,534 124,339
Finance and administration 208,080 219,223
Sales and marketing 3,718 27,556
Telecommunications 119,162 105,062
Wages and benefits 406,627 252,066
Warehouse expense 105,900 105,060
TOTAL OPERATING EXPENSES 1,237,108 1,103,878
LOSS FROM OPERATIONS (646,093) (406,778)
OTHER INCOME (EXPENSES)
Interest and other income 3,149 6,238
Interest expense (20,136) (21,480)
Foreign currency gain (discount) (136,296) (8,803)
TOTAL OTHER INCOME (EXPENSES) (153,283) (24,045)
NET LOSS BEFORE TAXES (799,376) (430,823)
PROVISION FOR INCOME TAXES - -
NET LOSS BEFORE ALLOCATION TO MINORITY INTEREST (799,376) (430,823)
ALLOCATION OF LOSS TO MINORITY INTEREST 15,588 8,616
NET LOSS $ (783,788) $ (422,207)
BASIC AND DILUTED
NET LOSS PER COMMON SHARE $ nil $ nil
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK SHARES OUSTANDING
FOR BASIC AND DILUTED CALCULATION 157,060,345 149,845,868
The accompanying condensed notes are an integral part of
these financial statements.
F-2
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------- Additional
Number of Paid-in Discount on Subscription Option/ Retained
Shares Amount Capital Common Stock Receivable Warrants Earnings Total
----------------------------------------------------------------------------------------------------
Stock issued for
cash on June 21,
2002 23,026,200 $ 23,026 $ 6,974 $ - $ - $ - $ - $ 30,000
Contribution of
assets, liabilities
and subsidiaries
acquired at June 30,
2002 92,104,800 92,105 - (53,598) - - 38,507
Net loss for period
ended June 30, 2002 - - - - - (7,967) (7,967)
Balance, June 30,
2002 115,131,000 115,131 6,974 (53,598) - - (7,967) 60,540
Shares issued for
cash in private
placement for
$1.50 per share,
net of prorata share
of private
placement
fees of $61,206 2,914,603 2,915 477,307 - - - - 480,222
Net loss for fiscal
year ended
June 30, 2003 - - - - - - (1,644,456) (1,644,456)
Balance, June 30,
2003 118,045,603 118,046 484,281 (53,598) - - (1,652,423) (1,103,694)
Recapitalization and
share exchange
(restated) 30,135,067 30,135 343,691 - - 128,385 - 502,211
Net loss for fiscal
year ended
December 31, 2003 - - - - - - (969,987) (969,987)
Balance, December
31, 2003 (restated) 148,180,670 148,181 827,972 (53,598) - 128,385 (2,622,410)) (1,571,470)
Common stock issued
at $0.20 including
warrants less
expenses of $28,715 1,466,455 1,466 146,930 - - 70,844 - 219,240
Stock issued at
$0.165 per share for
cashless
exercise of options
in form of foregone
debt 3,200,000 3,200 524,800 - - - - 528,000
Stock issued for
exercise of options
at $0.20 per share
in lieu of payment
of legal fees 300,000 300 59,700 - - - - 60,000
Stock issued at
$0.165 per share for
cash and
promissory note for
exercise of options 1,000,000 1,000 164,000 - (15,000) - - 150,000
Common stock issued
at $0.21 including
warrants 5,476,190 5,476 487,381 - - 657,143 - 1,150,000
F-3
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------- Additional
Number of Paid-in Discount on Subscription Option/ Retained
Shares Amount Capital Common Stock Receivable Warrants Earnings Total
----------------------------------------------------------------------------------------------------
Common stock issued
at $0.21 including
warrants less
expenses of $3,231 566,833 567 36,369 - - 78,869 - 115,805
Stock issued for
exercise of options
at $0.22 per share
in lieu of
consulting fees 50,000 50 10,950 - - - - 11,000
Stock issued for
deferred financing
costs 1,300,000 1,300 388,700 - - - - 390,000
Adjustment to
subsidiaries stock
held by minority
interest 176,534 177 33,126 - - - - 33,303
Stock issued at
$0.28 per share for
consulting
agreement 350,000 350 97,650 - - - - 98,000
Vested stock options
issued for
consulting at an
average price
of $0.18 per option - - - - - 128,250 - 128,250
Vested stock options
issued for
compensation at an
average price of
$0.18 per option - - - - - 1,078,277 - 1,078,277
Stock issued at
$0.165 per share for
cash and
promissory note for
exercise of options 36,360 36 7,236 - - - - 7,272
Stock issued for
exercise of options
at $0.08 per share
in lieu of
consulting fees 200,000 200 15,800 - - - - 16,000
Stock issued for
exercise of options
at $0.08 per share
in lieu of
consulting fees 250,000 250 19,750 - - - - 20,000
Stock issued for
exercise of options
at $0.11 per share
by the CEO 200,250 200 31,841 - - (10,013) - 22,028
Cancellation of
discount on common
stock - - (53,598) 53,598 - - - -
Beneficial
conversion of
convertible debt - - 250,000 - - - - 250,000
F-4
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------------------------------------------------
Common Stock
-------------------- Additional
Number of Paid-in Discount on Subscription Option/ Retained
Shares Amount Capital Common Stock Receivable Warrants Earnings Total
----------------------------------------------------------------------------------------------------
Vested stock options
issued for
compensation and
consulting at an
average price of
$0.12 - - - - - 1,087,900 - 1,087,900
Cancelled stock
options issued for
compensation and
consulting at an
average price of
$0.19 per option - - - - - (656,612) - (656,612)
Net loss for period
ended December 31,
2004 - - - - - - (4,462,795) (4,462,795)
Balance December 31,
2004 $162,753,292 $162,753 $3,048,606 $ - $ (15,000) $2,563,043 $(7,085,205) $ (1,325,802)
Stock issued at
$0.06 per
Share for promissory
note for exercise of
options 3,000,000 3,000 177,000 - (180,000) - - -
Vested stock options
issued for
consulting at an
average price of
$0.07 per share - - - - - 35,250 - 35,250
Vested stock options
issued for employee
compensation at an
average price of
$0.07 per share - - - - - 133,750 - 133,750
Stock issued to
employee for
financing guaranty &
pledge valued at
$0.05 per share 800,000 800 39,200 - - - - 40,000
Net loss for period
ended March 31, 2005 - - - - - - (783,788) (783,788)
Balance March 31,
2005 (Unaudited) $166,533,292 $166,533 $ 3,264,806 $ - $(195,000) $2,732,043 $(7,868,993) $ (1,900,590)
The accompanying condensed notes are an integral part of
these financial statements.
F-5
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
(Unaudited) (Unaudited)
--------------------- ---------------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net loss $ (783,788) $ (422,207)
Loss allocated to minority interest 15,588 8,616
(799,376) (430,823)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 16,949 27,036
Stock and warrants issued for employee compensation and
consulting 169,000 98,000
Stock issued for financing guaranty and pledge 40,000 -
Discount recognized on convertible debt 38,162 -
Decrease (increase) in:
Related party receivables 4,996 224
Accounts receivable (16,634) (115,221)
Prepaid expenses 33,123 (46,874)
Inventory 44,570 32,612
Deposits 24,361 -
Increase (decrease) in:
Accounts payable and accrued liabilities 180,138 68,316
Accounts payable - related parties 101,327 94,257
Customer deposits - 67,976
Interest payable, convertible debt 6,165 -
Net cash used by operating activities (157,219) (204,497)
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Decrease (increase) in restricted cash (122) 13,486
Decrease (increase) in property, plant, and equipment (11,551) -
Net cash provided by investing activities (11,673) 13,486
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Net change in bank indebtedness (58,676) (37,664)
Issuance of stock, net of private placement costs & warrants - 219,242
Net proceeds from loan payable-Cornell 200,000 -
Net cash provided by financing activities 141,324 181,578
Net increase in cash and cash equivalents (27,568) (9,433)
CASH - Beginning of Year 33,018 52,073
CASH - End of Period $ 5,450 $ 42,640
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ 20,136 $ 21,480
Income taxes paid $ - $ -
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Stock options vested for employee compensation and consulting $ 169,000 $ -
Stock issued for financing guaranty and pledge $ 40,000 $ -
Discount recognized on convertible debt $ 38,162 $ -
Common stock issued for services $ - $ 98,000
The accompanying condensed notes are an integral part of
these financial statements.
F-6
EYI INDUSTRIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
NOTE 1 - DESCRIPTION OF BUSINESS
Essentially Yours Industries, Inc. (hereinafter "EYI") was incorporated on June
21, 2002 in the State of Nevada. The main business activities of Essentially
Yours Industries, Inc. were acquired through a merger with the former entity,
Burrard Capital, Inc., and other entities involved in EYI's reorganization. On
December 31, 2003, EYI entered into a share exchange agreement of its stock with
Safe ID Corporation ("Safe ID"). This transaction was accounted for as a share
exchange and recapitalization. As a result of this transaction, Safe ID has
changed its name to EYI Industries, Inc. ("the Company") and is acting as the
parent holding company for the operating subsidiaries.
The principal business of the Company is the marketing of health and wellness
care products. The Company sells its products through network marketing
distributors, which in turn, sell the products to the end customers. The Company
maintains its principal business office in Burnaby, British Columbia. Effective
for the period ended December 31, 2003, the Company elected to change its
year-end from June 30 to December 31.
The Company has four wholly owned subsidiaries. The first subsidiary is Halo
Distribution LLC (hereinafter "Halo", which was organized on January 15, 1999,
in the State of Kentucky. Halo is the distribution center for the Company's
product in addition to other products. The second subsidiary is RGM
International Inc., which was incorporated on July 3, 1997, in the State of
Nevada. RGM International Inc. is a dormant investment company, which owns one
percent of Halo. The third subsidiary is Essentially Yours Industries (Canada)
Inc. (hereinafter "EYI Canada"), which was organized on September 13, 2002, in
the province of British Columbia, Canada. EYI Canada markets health and wellness
care products for use in Canada. The fourth subsidiary is 642706 B.C. Ltd.,
doing business as EYI Management, which was organized on February 22, 2002, in
the province of British Columbia, Canada. EYI Management provides accounting and
marketing services to the consolidated entity.
In addition, the Company owns approximately 98% of Essentially Yours Industries,
Inc. ("EYII"), incorporated on June 21, 2002 in the State of Nevada. EYII
markets health and wellness care products for use in USA. The Company also owns
51% of World Wide Buyers' Club Inc., a Nevada corporation, which was organized
by a joint venture agreement effective May 6, 2004.
Basis of Presentation
The accompanying interim condensed financial statements are prepared in
accordance with rules set forth in Regulation SB of the Securities and Exchange
Commission. As said, these statements do not include all disclosures required
under generally accepted principles and should be red in conjunction with the
audited financial statements for the year ended December 31, 2004. In the
opinion of management, all required adjustments which consist of normal
re-occurring accrual have been made to the financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
This summary of significant accounting policies of EYI Industries, Inc., is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America, and have been consistently applied in the preparation of the
financial statements.
Accounts Receivable and Bad Debts
The Company estimates bad debts utilizing the allowance method, based upon past
experience and current market conditions. At March 31, 2005 and December 31,
2004, the Company recorded allowances of $19,853 and $16,321 to cover accounts
receivable balances over 60 days.
F-7
Inventory
The Company records inventories at the lower of cost or market on a first-in,
first-out basis. Our product inventory is reviewed each month and also when the
re-order of the product is necessary. On a monthly basis, our inventory is
reviewed based on the expiration of our existing inventory. Product that has a
shelf-life of less than 60 days is written off or discounted.
A re-order review consists of an evaluation of our current monthly sales volume
of the product, cost of product, shelf-life of the product, and the
manufacturers minimum purchase requirement which all determine the overall
potential profitability or loss of re-ordering. If the re-order of the product
has an assessed loss, then the recommendation to management is to remove the
product from the product line.
Restricted Cash
Restricted cash includes deposits held in a reserve account in the amount of
$100,370 and $100,248 at March 31, 2005 and December 31, 2004 respectively. Such
deposits are required by the bank as protection against unfunded charge backs
and returns of credit card transactions.
Revenue Recognition
The Company is in the business of selling nutritional products in two
categories: dietary supplements and personal care products. Sales of personal
care products represent less than 5% of the overall revenue and therefore are
not classified separately in the financial statements. The Company recognized
revenue from product sales when the products are shipped and title passes to
customer. Administrative fees charged to the Independent Business Associates are
included in the gross sales and amounted $41,096 and $67,500 for the three
months ended March 31, 2005 and March 31, 2004 respectively.
Stock Options and Warrants Granted to Employees and Non-Employees
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), defines a fair value-based method of accounting
for stock options and other equity instruments. The Company has adopted this
method, which measures compensation costs based on the estimated fair value of
the award and recognizes that cost over the service period.
Going Concern
As shown in the accompanying financial statements, the Company had negative
working capital of approximately $1,640,000 and an accumulated deficit incurred
through March 31, 2005. The Company also has limited cash resources and a
history of recurring losses. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
Management has established plans designed to increase the sales of the Company's
products, and decrease debt. The Company plans on continuing to reduce expenses,
and with small gains in any combination of network sales, direct sales,
international sales, and warehouse sales, believe that they will eventually be
able to reverse the present deficit. Management intends to seek additional
capital from new equity securities offerings that will provide funds needed to
increase liquidity, fund internal growth and fully implement its business plan.
Management plans include negotiations to convert significant portions of
existing debt into equity.
The timing and amount of capital requirements will depend on a number of
factors, including demand for products and services and the availability of
opportunities for international expansion through affiliations and other
business relationships.
NOTE 3 - REORGANIZATION
On May 27, 2002, Mr. Jay Sargeant, a shareholder of Essentially Yours
Industries, Corp. ("EYI Corp.") agreed to acquire all of the shares of the
Essentially Yours Industries, Inc. ("EYII"), along with the transfer agreement,
license agreement, and agency appointment agreement as described below, in
settlement of amounts owed to him. As part of this transaction, EYI Corp. agreed
to provide to EYII the services outlined in a management agreement. These
agreements became effective on June 30, 2002. EYII owns ninety-nine percent of
Halo Distributions LLC ("HALO"). The other one percent of HALO is owned by RGM
International, Inc. ("RGM"), a former subsidiary of EYI Corp., which was
transferred to Mr. Sargeant as additional consideration.
F-8
On June 30, 2002, the shareholder of EYII exchanged all of the outstanding
shares of EYII for 12,000,000 common shares of Burrard Capital Inc ("Burrard"),
a shell company with no assets or business operations. Concurrent with this
transaction, EYII was merged into Burrard with Burrard emerging as the surviving
entity. The combined entity was renamed Essentially Yours Industries, Inc. For
accounting purposes, the acquisition has been treated as a recapitalization of
EYII with EYII as the acquirer. Prior to this merger, EYII and RGM were
considered to be dormant companies, with the activities of HALO being
consolidated directly with EYII Corp. although the legal ownership was vested in
EYII and RGM. Therefore, the losses from HALO operations and the other economic
impacts prior to June 30, 2002 are considered to be the separate activity of EYI
Corp.
On June 30, 2002, EYII took over the sales and marketing activities of its
former holding company and entered into various agreements with that Company as
follows:
Transfer Agreement
As part of the aforementioned transaction and for consideration of $1, EYI Corp.
transferred and assigned to EYII all of its rights, title and interest in and to
the contracts with its Independent Business Associates and any other contracts
that may be identified by the parties as being inherent or necessary to the
sales and marketing activities to EYII.
License Agreement
EYI Corp. licensed to EYII all of the rights, title, and interest that it may
have in various intellectual properties for $1 per year for a term of 50 years.
The Company has the option at any time to require EYI Corp. to transfer all of
its rights, title, interest in and to the intellectual properties to the Company
at the sum of $1 or such greater sum as may be determined to be the fair market
value of such intellectual property as determined by agreement between the
parties, by arbitration or by the appropriate taxation authorities after all
assessments and appeals have been concluded.
Agency Appointment Agreement
EYI Corp. appointed EYII as the sole and exclusive agent to sell its remaining
inventory on hand as of June 30, 2002 at the prices previously established, and
to continue to sell at such price unless and until any change is agreed upon
with EYI Corp. In consideration for its efforts, the Company is entitled to a
sales commission of fifteen percent on all sales of such inventory.
Management Agreement
EYI Corp. agreed to perform various services such as administration, computer
support, and sales and customer support, on behalf of EYII for a term of one
year commencing June 30, 2002. The services and duties to be provided and
performed by EYI Corp. for EYII shall be determined and agreed upon by the
parties, from time to time, as required, provided however, it is understood and
agreed that such services will primarily consist of assisting EYII in the sales
and marketing business. At the date of these financial statements, the agreement
had expired, and EYII was operating on a month-to-month basis for management
services with EYI Corp.
The remuneration to be paid by EYII to EYI Corp. for the aforementioned services
is to be negotiated by the parties from time to time, provided however, the
parties agree that the remuneration to be paid shall be consistent with industry
standards for the type and nature of the services or duties being provided. At
the present time, EYII has agreed to pay EYI Corp. actual expenses plus a fee of
5% on these expenses.
NOTE 4 - ACCOUNTS RECEIVABLE AND CREDIT RISK
Accounts receivable at March 31, 2005 and December 31, 2004 consist primarily of
amounts due from third parties for distribution services provided by Halo and
direct retail clients of EYII.
NOTE 5 - PROPERTY AND EQUIPMENT
Capital assets are recorded at cost. Depreciation is calculated using the
straight line method over three to seven years.
F-9
NOTE 6 - CONVERTIBLE LOANS PAYABLE
On June 2, 2004, the Company issued to Cornell Capital Partners, LP a 5% secured
convertible debenture in the principal amount of $250,000 with a term of two
years, and interest at 5%. The debenture is convertible into the Company's
common stock at a price per share equal to the lessor of (a) 120% of the closing
bid price by the second anniversary date of issuance or (b) 100% of the lowest
daily volume weighted average price for the 30 days immediately prior to
conversion. On June 24, 2004, the Company received the $250,000 loan less
related expenses of approximately $65,000 which has been allocated as discount
on debt and will be amortized over a two year period. The convertible securities
are guaranteed by the assets of the Company. Under the agreement, the Company is
required to keep available common stock duly authorized for issuance in
satisfaction of the convertible. The conversion amount will be the face amount
of the convertible plus interest at the rate of 5% per annum from the closing
date of June 24, 2004 to the conversion date, which is the date on which the
Company receives a notice of conversion from the investor exercising the right
to convert the convertible into common shares of the Company. The debt will
automatically convert into common stock on the second anniversary date of
issuance. The terms of the debt do not require regular monthly payments.
On September 24, 2004, the Company issued to Cornell Capital Partners, LP
("Cornell") a 5% secured convertible debenture in the principal amount of
$250,000 with a term of two years, and interest at 5%. The debenture is
convertible into the Company's common stock at a price per share equal to the
lessor of (a) 120% of the closing bid price by the second anniversary date of
issuance or (b) 100% of the lowest daily volume weighted average price for the
30 days immediately prior to conversion. On September 27, 2004, the Company
re-assigned $245,000 of this debenture to Taib Bank, E.C. and reassigned $5,000
of debenture B to an individual. Under the debenture agreement, the Company's
failure to issue unrestricted, freely tradable common stock to Cornell or Taib
Bank or the individual upon conversion after the registration statement filed
pursuant to this transaction has been declared effective would be considered an
event of default, thereby entitling Cornell to accelerate full repayment of the
convertible securities then outstanding. Under the agreement, the Company is
required to maintain available common stock duly authorized for issuance in
satisfaction of the convertible. On September 24, 2004 the Company received the
$250,000 loan less related expenses of approximately $55,000, which has been
allocated as discount on debt and will be amortized over a two year period. The
convertible securities are guaranteed by the assets of the Company. Under the
agreement, the Company is required to keep available common stock duly
authorized for issuance in satisfaction of the convertible. The conversion
amount will be the face amount of the convertible plus interest at the rate of
5% per annum from the closing date of September, 2004 to the conversion date,
which is the date on which the Company receives a notice of conversion from the
investor exercising the right to convert the convertible into common shares of
the Company. The convertible will automatically convert into common stock on the
second anniversary date of issuance. The terms of the debt do not require
regular monthly payments.
The convertible debentures contained a beneficial conversion feature computed at
its intrinsic value that was the difference between the conversion price and the
fair value on the debenture issuance date of the common stock into which the
debt was convertible, multiplied by the number of shares into which the debt was
convertible at the commitment date. Since the beneficial conversion feature was
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, or $250,000, at December 31, 2004 and $0 at March 31, 2005,
was recorded as an interest expense and a component of stockholders' equity on
the balance sheet date.
Standby Equity Distribution Agreement
In June, 2004, the Company entered into a standby equity distribution agreement
with Cornell Capital Partners, LP ("Cornell"). Pursuant to this agreement,
Cornell will purchase up to $10,000,000 of the Company's common stock through a
placement agent over a two-year period after the effective registration of the
shares. In addition, the Company issued 1,300,000 shares of its common stock to
Cornell and the placement agent upon the inception of the standby equity
distribution agreement. The $390,000 value of these shares was recognized as a
period expense due to the fact that the 1,300,000 shares have been deemed to be
fully earned as of the date of the agreement.
NOTE 7 - INTANGIBLE ASSETS
Intangible assets consist of rights, title, and interest in and to the contracts
with the Company's independent business associates as well as the rights and
licenses to trademarks and formula for the Company's primary products. These
rights and licenses were obtained from the Company's former parent pursuant to a
transfer agreement, as well as from the Company's primary shareholder.
F-10
Trademarks and Formulas
Costs relating to the purchase of trademarks and formulas were capitalized and
amortized using the straight-line method over ten years, representing the
estimated life of the assets.
NOTE 8 - CAPITAL STOCK
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a
par value of $0.001. As of March 31, 2005 and December 31, 2004 the Company has
not issued any preferred stock.
Common Stock
The Company is authorized to issue 300,000,000 shares of common stock. All
shares have equal voting rights, are non-assessable and have one vote per share.
Voting rights are not cumulative and, therefore, the holders of more than 50% of
the common stock could, if they choose to do so, elect all of the directors of
the Company.
On February 10, 2005, we entered into a loan agreement with one of our
employees, pursuant to which we loaned her $180,000 for the purpose of
exercising 3,000,000 incentive stock options issued to her under our stock
compensation program. The loan is payable on demand and accrues interest at a
rate of 4% per annum. The loan was secured by a promissory note dated effective
February 10, 2005 and deemed to be a subscription receivable. (See Note 11)
On February 14, 2005 the Company entered into a bonus share agreement with one
of our employees and issued 800,000 shares of our common stock at a deemed price
of $0.05 per share. These shares were given in consideration for providing the
guarantee and pledge necessary for the Cornell loan. (See Note 10). The shares
are to be issued pursuant to Regulation S of the Securities Act.
NOTE 9 - COMMON STOCK OPTIONS AND WARRANTS
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (hereinafter "SFAS No. 123"), defines a fair value-based method of
accounting for stock options and other equity instruments. The Company has
adopted this method, which measures compensation costs based on the estimated
fair value of the award and recognizes that cost over the service period.
In accordance with SFAS No. 123, the fair value of stock options and warrants
granted are estimated using the Black-Scholes Option Price Calculation. The
following assumptions were made to value the stock options and warrants for the
period ended March 31, 2005; estimated risk-free interest rate of 4%, estimated
volatility of 120% and term of two years.
Stock Options
Following is a summary of the status of the stock options during the three
months:
Weighted Average
Number of Shares Exercise Price
------------------- ----------------
Outstanding at December 31, 2004 19,747,390 $ 0.14
Granted 6,250,000 $ 0.06
Exercised (3,000,000) $ 0.06
Forfeited - $ -
------------------- --------------
Options outstanding at March 31, 2005 22,997,390 $ 0.143
=================== ==============
Options exercisable at March 31, 2005 20,875,390 $ 0.12
=================== ==============
Weighted average fair value of options granted $ 0.11
==============
F-11
Summarized information about stock options outstanding and exercisable at March
31, 2005 is as follows:
Options Outstanding
Exercise Weighted Ave. Weighted Ave.
Price Number Remaining Exercise
Range of Shares Life Price
$0.04 - $0.26 22,997,390 2.00 $ 0.13
Options Exercisable
Exercise Weighted Ave. Weighted Ave.
Price Number Remaining Exercise
Range of Shares Life Price
$0.11 - $0.22 20,875,390 2.00 $ 0.12
Weighted Average
Number of Warrants Remaining Life Average Exercise Price
------------------ -------------- ----------------------
Outstanding and exercisable 2,751,746 2 $0.11
------------------ -------------- ----------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Purchase Agreement
On June 30, 2002, the Company entered into a distribution and license agreement
with a company in which one of the Company's directors has an ownership
interest. The agreement gives the Company the exclusive right to market, sell
and distribute certain products for a five-year renewable term. Management
estimates that 90% of the Company's sales volume results from products supplied
under this licensing agreement.
In the event that the Company is unable to meet the minimum purchase
requirements of the licensing agreement or the terms requiring it to pay 15% of
the difference between the minimum purchase amount referred to above and actual
purchases for that year in which there is a shortfall, then the licensor has
various remedies available to it including, renegotiating the agreement,
removing exclusivity rights, or terminating the agreement.
As of the date of these financial statements, the purchase requirements have not
been made and it has been determined by the Company to be a remote possibility
that the licensor will enforce the minimum purchase requirements, therefore,
there has not been an accrual made to the financial statements to reflect any
estimated liability pertaining to this agreement due to the fact that the
maximum time period to make a claim expired prior to the issuance of the
financial statements.
Lease Payments
The Company has operating lease commitments for its premises, office equipment
and an automobile. The minimum annual lease commitments are as follows:
Year ended December 31, Minimum Amount
----------------------- --------------
2005 $262,805
2006 276,739
2007 182,432
2008 135,000
2009 and thereafter 435,000
Management Agreement
EYI Corp. has agreed to perform various services and administrative assistance
to the Company on a month to month basis commencing April 1, 2004. The services
and duties to be provided and performed by EYI Corp. for EYII shall be
F-12
determined and agreed upon by the parties, from time to time, as required,
provided however, it is understood and agreed that such services will primarily
consist of assisting EYII in the sales and marketing business.
The remuneration to be paid by EYII to EYI Corp. for the aforementioned services
shall be the cost of actual expenses plus a fee of five (5%) percent for
services provided.
Regulatory Risks and Claims
The Company's products are subject to regulation by a number of federal, state,
entities, as well as those of foreign countries in which the Company's products
are sold. These regulatory entities may prohibit, or restrict, the sale,
distribution, or advertising of the Company's products for legal, health or
safety, related reasons. In addition to the potential risk of adverse regulatory
actions, the Company is subject to the risk of potential product liability
claims.
Secured Promissory Note
On February 24, 2005 we received a loan of $200,000 from Cornell secured by a
secured promissory note. Under the terms of the secured promissory note, the
loan is payable by April 24, 2005 and accrues interest at a rate of 12% per
annum. In connection with the issuance of the Secured Note, we agreed to: (i)
pay Cornell a fee of $20,000; and (ii) pay Yorkville Advisors Management LLC a
structuring fee in the amount of $2,500. As a condition to Cornell's entry into
the Secured Note on February 24, 2005, an employee of EYI, Janet Carpenter,
entered into a guaranty agreement with Cornell and a pledge and escrow agreement
with Cornell with David Gonzalez. Pursuant to the terms of the guaranty
agreement and the pledge and escrow agreement, Ms. Carpenter agreed to: (i)
personally guarantee the payment and performance obligations of EYI under the
Secured Note; and (ii) pledge to Cornell 3,000,000 shares of EYI held by her to
secure the obligations of EYI under the Secured Note. In consideration of Ms.
Carpenter providing the guarantee and pledge, EYI entered into a bonus share
agreement dated February 14, 2005 with Ms. Carpenter, pursuant to which we
agreed to issue to Ms. Carpenter 800,000 shares of our common stock at a deemed
price of $0.05 per share. The shares are to be issued to Ms. Carpenter pursuant
to Regulation S of the Securities Act. (See Note 8).
Subsidy Agreements
On July 23, 2004, the Company entered into subsidy agreements with three related
parties in which the Company agreed to pay a guaranteed amount of $2,500 per
week to each party for sales and marketing services. This is in lieu of all
commissions earned by each of these three individuals. The Company has renewed
these agreements every 12 weeks since they became effective.
Standby Equity Distribution Agreement
On June 22, 2004, the Company entered into a two-year standby equity
distribution agreement with Cornell Capital Partners LP ("Cornell"). Pursuant to
this agreement, Cornell will purchase up to 10,000,000 shares of the Company's
common stock through a placement agent. The Company issued 1,300,000 shares of
its common stock to Cornell and the placement agent upon the inception of this
agreement. The $390,000 value of these shares was based on the fair market value
of the shares on the date of the contract and is recognized as a period expense
due to the fact that the 1,300,000 shares have been deemed to be fully earned as
of the date of the agreement. (See Note 6.)
Other Matters
The Company's predecessor organization, Essentially Yours Industries Corp.
("EYIC"), a British Columbia corporation, has outstanding claims from the
Internal Revenue Service for penalties and interest of approximately $2,000,000.
Furthermore, one or more states may have claims against EYIC for unpaid state
income taxes. Management believes that these claims are limited solely to EYIC
and that any prospective unpaid tax claims against the Company are remote and
unable to be estimated.
F-13
In February, 2004 we entered into a letter of commitment with Source, Inc.
("Source") for the purpose of further developing our corporate marketing
position with Source and for assistance in raising equity capital. Pursuant to
the terms the letter agreement, we agreed to: (i) pay Source 20% of the gross
revenues generated by Source under a Corporate Marketing Organization Agreement
("CMO Agreement") previously entered into with Premier Lifestyles International
Corporation, a company related to Source; (ii) to offer up to $4,000,000 of EYI
restricted stock over a 90 day period at $0.21 per share and warrants
exercisable at a price of $0.30 per share for investors referred to EYI by
Source in connection with any equity offerings by EYI; (iii) at the end of the
12 months period following execution of the agreement, and if Source had
referred enough investors to raise a minimum of $500,000, to issue to Source
$1,800,000 in common stock of EYI or pay the balance in cash; and (iv) on a
monthly basis, during the 12 month period, pay 50% of all monies collected by
EYI from Source referred investors, to be paid to Source towards the $1,800,000
to pay for the CMO Agreement and $300,000 towards a proposed web portal.
Subsequently, we terminated the CMO agreement in accordance with its terms in
July, 2004, and notified Source that they failed to raise the minimum funding of
$500,000 in connection with EYI's equity offering closing in June, 2004. Source
has notified EYI that they dispute the fact that they did not raise the minimum
financing amount. Management believes that if Source were to advance any such
claims against EYI its chance of success would be remote and we intend to
vigorously defend against any potential legal claims respecting this matter.
NOTE 11 - RELATED PARTY NOTE PAYABLE
The Company issued two promissory notes, for a total of $90,000 in December
2003. The notes are unsecured, non-interest bearing and are payable upon demand.
On February 10, 2005 we entered into a loan agreement with one of our employees,
pursuant to which we loaned her $180,000. (See Note 8 and 10).
On February 14, 2005 the Company entered into a bonus share agreement with one
of our employees and issued 800,000 shares of our common stock according to the
terms of the agreement. (See Note 8 and 10).
NOTE 12 - CONCENTRATIONS
Bank Accounts
The Company maintains its cash accounts in two commercial banks. During the
year, the Company may maintain balances in excess of the federally insured
amounts in the accounts that are maintained in the United States. The Company
also maintains funds in commercial banks in Vancouver, British Columbia, in
which funds in U.S. dollars are not insured. At March 31, 2005 and December 31,
2004, a total of $0, and $248 respectively, was not insured.
Economic Dependence
During the year, the Company purchased approximately 90% of its products for
resale from one company, Nutri-Diem Inc., which is the sole supplier of the
Company's flagship product Calorad. Pursuant to a purchase agreement, the
Company is subject to minimum purchases per annum. (See Note 10.)
NOTE 13 - RELATED PARTY TRANSACTIONS
On May 27, 2002, Mr. Jay Sargeant, a shareholder of Essentially Yours
Industries, Corp. ("EYI Corp.") agreed to acquire all of the shares of the
Essentially Yours Industries, Inc. ("EYII"), along with the transfer agreement,
license agreement, and agency appointment agreement, in settlement of amounts
owed to him. As part of this transaction, EYI Corp. agreed to provide to EYII
the services outlined in a management agreement
The Company acquired, through agreements with Essentially Yours Industries,
Corp. ("EYI Corp"), the rights, title, and interest in and to the contracts with
the Company's Independent Business Associates as well as the rights and licenses
to trademarks and formula for the Company's primary products. Expanded details
are explained in Note 7.
Accounts payable to related parties represents amounts due to the president and
chief executive officer for services preformed during the last year as well as
to other related parties and the company with which they have a signed
management agreement. These payables are non-interest bearing and
non-collateralized.
See note 10 regarding subsidy agreements with related parties.
During the year, the Company purchased approximately 90% of its products for
resale from one company, Nutri-Diem Inc., which is owned in part by a director
of the Company.
F-14
NOTE 14 - SUBSEQUENT EVENTS
On May 13, 2005 the Company entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, LP ("Cornell") pursuant to which we entered into
the following agreements: a Registration Rights Agreement, an Escrow Agreement,
and a Placement Agent Agreement. Pursuant to the terms of the new Standby Equity
Distribution Agreement, we may, at our discretion, periodically issue and sell
shares of our common stock for a total purchase price of $10 million. If we
request advances under the Standby Equity Distribution Agreement, Cornell will
purchase shares of our common stock for 98% of the lowest volume weighted
average price on the Over-the-Counter Bulletin Board or other principal market
on which our common stock is traded for the 5 days immediately following the
advance notice date. Cornell will retain 5% of each advance under the new
Standby Equity Distribution Agreement. We may not request advances in excess of
a total of $10 million. Pursuant to the terms of our Registration Rights
Agreement and the Standby Equity Agreement with Cornell, we agreed to register
and qualify, among other things, the additional shares due to Cornell under the
Standby Equity Agreement under a registration statement filed with the SEC. We
signed a Termination Agreement on May 13, 2005, for the purpose of terminating
our Standby Equity Distribution Agreement, Registration Rights Agreement and
Escrow Agreement previously entered into with Cornell on June 22, 2004.
On May 11, 2005 the Company entered into a Reseller Agreement with MARTI for a
term of five (5) years, pursuant to which MARTI appointed EYII as the exclusive
distributor of certain specially formulated MARTI products on a consignment
basis and provide EYII with a 1000 units of inventory for sale to its customers,
proceeds of which are subject to fee payments to MARTI as set out in the
schedules accompanying the agreement.
On April 22, 2005 Essentially Yours Industries, Inc., our wholly owned
subsidiary ("EYII") entered into a Fulfillment Services Agreement with Source 1
Fulfillment ("Source One") to warehouse and ship our products. Pursuant to the
terms of the agreement, Source One agreed to provide certain storage and
fulfillment services to EYII at the rates set out in the schedules to the
agreement. Source One also agreed to pay a referral commission of 10% of all
handling fees for any client EYII brings to Source One. The agreement is for a
term of one year and automatically renews each year unless terminated by either
party in accordance with the terms of the agreement. Subsequently in May, 2005
we ceased warehousing and distributing our products through Halo Distribution
LLC ("Halo"), our wholly owned subsidiary. We presently intend to continue
warehousing and shipping our products through Source One.
On April 4, 2005 we entered into a redemption agreement with TAIB Bank E.C.
("TAIB") pursuant to which TAIB agreed to acquire by assignment a two year 5%
secured convertible debenture issued to Cornell Capital Partners, L.P.
("Cornell") in the amount of $245,000, and a two year 5% convertible debenture
in the amount of $5,000 held by Kent Chou, in consideration of which we agreed
not to modify or renegotiate the terms of our Standby Equity Distribution
Agreement ("SEDA") with Cornell, and to use any proceeds obtained by EYI under
the SEDA to make payments on the debentures. The debentures were assigned to
TAIB on April 4, 2005.
F-15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors
EYI Industries, Inc.
Surrey, British Columbia, Canada
We have audited the accompanying consolidated balance sheet of EYI Industries,
Inc. as of December 31, 2004, December 31, 2003 and June 30, 2003 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the periods then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 audit provides 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 EYI Industries,
Inc., as of December 31, 2004, December 31, 2003 and June 30, 2003 and the
results of its operations, stockholders' equity and its cash flows for the
periods then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has an accumulated deficit, and a negative
working capital position. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
those matters are described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Williams & Webster
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
April 15, 2005
F-16
EYI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------------------------------------------
December 31, December 31, June 30,
ASSETS 2004 2003 2003
(restated)
----------- ----------- -----------
CURRENT ASSETS
Cash $ 33,018 $ 52,075 $ 16,184
Restricted cash 100,248 223,682 223,682
Accounts receivable, net of allowance 45,806 52,323 26,596
Related party receivables 4,996 5,465 6,162
Prepaid expenses 857,170 28,600 36,484
Inventory 239,641 254,367 302,605
----------- ----------- -----------
TOTAL CURRENT ASSETS 1,280,879 616,512 611,713
----------- ----------- -----------
OTHER ASSETS
Property, plant and equipment, net 60,336 143,439 160,611
Deposits 24,361 -- 10,406
----------- ----------- -----------
TOTAL OTHER ASSETS 84,697 143,439 171,017
----------- ----------- -----------
INTANGIBLE ASSETS 16,561 19,801 19,801
----------- ----------- -----------
TOTAL ASSETS $ 1,382,137 $ 779,752 $ 802,531
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank indebtedness $ 72,456 $ 259,977 $ 274,880
Accounts payable and accrued liabilities 1,218,178 836,751 554,830
Accounts payable - related parties 590,146 689,367 545,075
Interest payable, convertible debt 10,616 -- --
Convertible debt-related party, net of discount 379,724 -- --
Customer deposits -- 6,250 46,292
Notes payable - related party 90,000 90,000 --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 2,361,120 1,882,345 1,421,077
----------- ----------- -----------
MINORITY INTEREST IN SUBSIDIARY $ 346,819 $ 468,877 $ 485,148
----------- ----------- -----------
STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued and outstanding -- -- --
Common stock, $0.001 par value; 300,000,000 shares
authorized, 162,753,292, 148,180,670 and
118,045,603 shares issued
and outstanding, respectively 162,753 148,181 118,046
Discount on common stock -- (53,598) (53,598)
Additional paid-in capital 3,048,606 827,972 484,281
Stock options and warrants 2,563,043 128,385 --
Subscription receivable (15,000) -- --
Accumulated deficit (7,085,205) (2,622,410) (1,652,423)
----------- ----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (1,325,802) (1,571,470) (1,103,694)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,382,137 $ 779,752 $ 802,531
=========== =========== ===========
The accompanying condensed notes are an integral part of
these financial statements.
F-17
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------
Year Ended Short Period Ended Year Ended
December 31, 2004 December 31, 2003 June 30, 2003
----------------- ----------------- -------------
REVENUE $ 6,229,029 $ 4,313,579 $ 14,390,049
COST OF GOODS SOLD 1,277,241 734,421 1,150,786
------------- ------------- -------------
GROSS PROFIT BEFORE COMMISSION EXPENSE 4,951,788 3,579,158 13,239,263
COMMISSION EXPENSE 2,486,970 2,111,379 9,360,920
------------- ------------- -------------
GROSS PROFIT AFTER COST OF GOODS SOLD AND COMMISSION EXPENSE 2,464,818 1,467,779 3,878,343
------------- ------------- -------------
OPERATING EXPENSES
Consulting fees 1,438,362 394,200 765,580
Legal and professional fees 333,549 145,001 354,356
Customer service 393,244 488,944 1,270,297
Finance and administration 2,101,842 324,853 835,008
Sales and marketing 154,638 92,834 506,276
Telecommunications 501,599 231,318 550,480
Wages and benefits 1,296,801 547,076 959,526
Warehouse expense 524,987 221,882 282,252
------------- ------------- -------------
TOTAL OPERATING EXPENSES 6,745,022 2,446,108 5,523,775
------------- ------------- -------------
LOSS FROM OPERATIONS (4,280,204) (978,329) (1,645,432)
------------- ------------- -------------
OTHER INCOME (EXPENSES)
Interest and other income 16,847 4,746 1,713
Interest expense (308,572) (21,879) (12,792)
Foreign currency gain (discount) 20,379 9,205 (16,697)
------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSES) (271,346) (7,928) (27,776)
------------- ------------- -------------
NET LOSS BEFORE TAXES (4,551,550) (986,257) (1,673,208)
PROVISION FOR INCOME TAXES -- -- --
------------- ------------- -------------
NET LOSS BEFORE ALLOCATION TO MINORITY INTEREST (4,551,550) (986,257) (1,673,208)
ALLOCATION OF LOSS TO MINORITY INTEREST 88,755 16,270 28,752
------------- ------------- -------------
NET LOSS $ (4,462,795) $ (969,987) $ (1,644,456)
============= ============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.03) $ (0.01) $ (0.01)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK SHARES OUTSTANDING
FOR BASIC AND DILUTED CALCULATION 157,060,345 128,090,625 118,045,603
============= ============= =============
The accompanying condensed notes are an integral part of
these financial statements.
F-18
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT)
-----------------------------------------------------------------------------------------------------------------
Common Stock
------------------------ Additional
Number of Paid-in Discount on
Shares Amount Capital Common Stock
------------ --------- ---------- -------------
Stock issued for cash on June 21, 2002 23,026,200 $ 23,026 $ 6,974 $ --
Contribution of assets, liabilities and
subsidiaries acquired at June 30, 2002 92,104,800 92,105 -- (53,598)
Net loss for period ended June 30, 2002 -- -- -- --
----------- ----------- ----------- -----------
Balance, June 30, 2002 115,131,000 115,131 6,974 (53,598)
Shares issued for cash in private
placement for $1.50 per share,
net of prorata share of private placement
fees of $61,206 2,914,603 2,915 477,307 --
Net loss for fiscal year ended
June 30, 2003 -- -- -- --
----------- ----------- ----------- -----------
Balance, June 30, 2003 118,045,603 118,046 484,281 (53,598)
Recapitalization and share exchange (restated) 30,135,067 30,135 343,691 --
Net loss for fiscal year ended
December 31, 2003 -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 2003 (restated) 148,180,670 148,181 827,972 (53,598)
Common stock issued at $0.20 including
warrants less expenses of $28,715 1,466,455 1,466 146,930 --
Stock issued at $0.165 per share for cashless
exercise of options in form of foregone debt 3,200,000 3,200 524,800 --
Stock issued for exercise of options at $0.20 per share
in lieu of payment of legal fees 300,000 300 59,700 --
Stock issued at $0.165 per share for cash and
promissory note for exercise of options 1,000,000 1,000 164,000 --
Common stock issued for services at $0.21 including
warrants 5,476,190 5,476 487,381 --
Common stock issued at $0.21 including
warrants less expenses of $3,231 566,833 567 36,369 --
Stock issued for exercise of options at $0.22 per share
in lieu of consulting fees 50,000 50 10,950 --
Stock issued for deferred financing costs 1,300,000 1,300 388,700 --
Adjustment to subsidiaries stock held by minority
interest 176,534 177 33,126 --
Stock issued at $0.28 per share for consulting agreement 350,000 350 97,650 --
Vested stock options issued for consulting at an
average price of $0.18 per option -- -- -- --
Vested stock options issued for consulting at an
average price of $0.18 per option -- -- -- --
Stock issued at $0.165 per share for cash and
promissory note for exercise of options 36,360 36 7,236 --
Stock issued for exercise of options at $0.08 per share
in lieu of consulting fees 200,000 200 15,800 --
Stock issued for exercise of options at $0.08 per share
in lieu of consulting fees 250,000 250 19,750 --
Stock issued for exercise of options at $0.11 per share
by the CEO 200,250 200 31,841 --
Cancellation of discount on common stock -- -- (53,598) 53,598
Beneficial conversion of converible debt -- -- 250,000 --
Vested stock options issued for compensation and
consulting at an average price of $0.12 per option -- -- -- --
Cancelled stock options issued for compensation and
consulting at an average price of $0.19 per option -- -- -- --
Net loss for period ended
December 31, 2004 -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 2004 162,753,292 $ 162,753 $ 3,048,606 $ --
=========== =========== =========== ===========
12,623 12,623
Subscription Option/ Retained
Receivable Warrants Earnings Total
------------- ----------- ----------- ---------
Stock issued for cash on June 21, 2002 $ - $ - $ - $ 30,000
Contribution of assets, liabilities and
subsidiaries acquired at June 30, 2002 - - 38,507
Net loss for period ended June 30, 2002 - (7,967) (7,967)
---------- ----------- ------------ -----------
Balance, June 30, 2002 - - (7,967) 60,540
Shares issued for cash in private
placement for $1.50 per share,
net of prorata share of private placement
fees of $61,206 - - - 480,222
Net loss for fiscal year ended
June 30, 2003 - - (1,644,456) (1,644,456)
---------- ----------- ------------ -----------
Balance, June 30, 2003 - - (1,652,423) (1,103,694)
Recapitalization and share exchange (restated) - 128,385 - 502,211
Net loss for fiscal year ended
December 31, 2003 - - (969,987) (969,987)
---------- ----------- ------------ -----------
Balance, December 31, 2003 (restated) - 128,385 (2,622,410) (1,571,470)
Common stock issued at $0.20 including
warrants less expenses of $28,715 - 70,844 - 219,240
Stock issued at $0.165 per share for cashless
exercise of options in form of foregone debt - - - 528,000
Stock issued for exercise of options at $0.20 per share
in lieu of payment of legal fees - - - 60,000
Stock issued at $0.165 per share for cash and
promissory note for exercise of options (15,000) - - 150,000
Common stock issued for services at $0.21 including
warrants - 657,143 - 1,150,000
Common stock issued at $0.21 including
warrants less expenses of $3,231 - 78,869 - 115,805
Stock issued for exercise of options at $0.22 per share
in lieu of consulting fees - - - 11,000
Stock issued for deferred financing costs - - - 390,000
Adjustment to subsidiaries stock held by minority
interest - - - 33,303
Stock issued at $0.28 per share for consulting agreement - - - 98,000
Vested stock options issued for consulting at an
average price of $0.18 per option - 128,250 - 128,250
Vested stock options issued for consulting at an
average price of $0.18 per option - 1,078,277 - 1,078,277
Stock issued at $0.165 per share for cash and
promissory note for exercise of options - - - 7,272
Stock issued for exercise of options at $0.08 per share
in lieu of consulting fees - - - 16,000
Stock issued for exercise of options at $0.08 per share
in lieu of consulting fees - - - 20,000
Stock issued for exercise of options at $0.11 per share
by the CEO - (10,013) - 22,028
Cancellation of discount on common stock - - - -
Beneficial conversion of converible debt - - - 250,000
Vested stock options issued for compensation and
consulting at an average price of $0.12 per option - 1,087,900 - 1,087,900
Cancelled stock options issued for compensation and
consulting at an average price of $0.19 per option - (656,612) - (656,612)
Net loss for period ended
December 31, 2004 - - (4,462,795) (4,462,795)
---------- ----------- ------------ -----------
Balance, December 31, 2004 $ (15,000) $2,563,043 $(7,085,205) $(1,325,802)
========== =========== ============ ===========
The accompanying condensed notes are an integral part of
these financial statements.
F-19
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------------
Twelve Months Ended Short Period Ended
December 31, 2004 December 31, 2003
----------------- -----------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net loss $(4,462,795) $ (969,987)
Loss allocated to minority interest 88,755 (16,270)
----------- -----------
(4,551,550) (986,257)
----------- -----------
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 87,054 36,756
Stock and warrants issued for employee compensation and consulting 1,735,814 --
Stock issued for deferred financing costs 390,000 --
Stock issued for options exercised in lieu of consulting and legal fees 207,000 --
Beneficial conversion of convertible debt 250,000 --
Decrease (increase) in:
Related party receivables 469 697
Accounts receivable 6,517 (25,727)
Prepaid expenses 221,430 7,884
Inventory 14,726 48,237
Deposits (24,361) --
Increase (decrease) in:
Accounts payable and accrued liabilities 392,043 273,549
Accounts payable - related parties 450,808 194,292
Customer deposits (6,250) (40,042)
----------- -----------
Net cash used by operating activities (826,300) (490,611)
----------- -----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Decrease (increase) in restricted cash 123,434 --
Decrease (increase) in property, plant, and equipment (711) (19,584)
Increase in security deposit -- 10,407
----------- -----------
Net cash provided by investing activities 122,723 (9,177)
----------- -----------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Net change in bank indebtedness (187,521) (14,904)
Cash received through recapitalization -- 550,583
Issuance of stock, net of private placement costs & warrants 492,316 --
Net proceeds from convertible debt 379,725 --
----------- -----------
Net cash provided by financing activities 684,520 535,679
----------- -----------
Net increase in cash and cash equivalents (19,057) 35,891
CASH - Beginning of Year 52,075 16,184
----------- -----------
CASH - End of Period $ 33,018 $ 52,075
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ 47,956 $ --
Income taxes paid $ -- $ --
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Stock and warrants issued for employee compensation and consulting $ 1,735,814 $ --
Stock issued for options exercised in lieu of debt $ 646,028 $ --
Stock subscription issued for promissory note $ 15,000 $
Stock and warrants issued for prepaid expenses $ 1,150,000 $
Stock issued for financing fees $ 390,000 $
Stock issued for options exercised in lieu of consulting and legal fees $ 207,000 $ --
Stock and warrants issued for prepaid expenses $ 1,150,000 $ --
Stock issued for financing fees $ 390,000 $ --
Beneficial conversion of convertible debt $ 250,000 $ --
The accompanying condensed notes are an integral part of
these financial statements.
F-20
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1 - DESCRIPTION OF BUSINESS
Essentially Yours Industries, Inc. (hereinafter "EYI") was incorporated on June
21, 2002 in the State of Nevada. The main business activities of Essentially
Yours Industries, Inc. were acquired through a merger with the former entity,
Burrard Capital, Inc., and other entities described in Note 4 concerning EYI's
reorganization. On December 31, 2003, EYI entered into a share exchange
agreement of its stock with Safe ID Corporation ("Safe ID"). This transaction
was accounted for as a share exchange and recapitalization. (See Note 3.). As a
result of this transaction, Safe ID has changed its name to EYI Industries, Inc.
("the Company") and is acting as the parent holding company for the operating
subsidiaries.
The principal business of the Company is the marketing of health and wellness
care products. The Company sells its products through network marketing
distributors, which in turn, sell the products to the end customers. The Company
maintains its principal business office in Surrey, British Columbia. Effective
for the period ended December 31, 2003, the Company elected to change its
year-end from June 30 to December 31.
The Company has four wholly owned subsidiaries. The first subsidiary is Halo
Distribution LLC (hereinafter "Halo"), which was organized on January 15, 1999,
in the State of Kentucky. Halo is the distribution center for the Company's
product in addition to other products. The second subsidiary is RGM
International Inc., which was incorporated on July 3, 1997, in the State of
Nevada. RGM International Inc. is a dormant investment company, which owns one
percent of Halo. The third subsidiary is Essentially Yours Industries (Canada)
Inc. (hereinafter "EYI Canada"), which was organized on September 13, 2002, in
the province of British Columbia, Canada. EYI Canada markets health and wellness
care products for use in Canada. The fourth subsidiary is 642706 B.C. Ltd.,
doing business as EYI Management, which was organized on February 22, 2002, in
the province of British Columbia, Canada. EYI Management provides accounting and
marketing services to the consolidated entity.
In addition, the Company owns approximately 98% of Essentially Yours Industries,
Inc. ("EYII"), incorporated on June 21, 2002 in the State of Nevada. EYII
markets health and wellness care products for use in USA. The Company also owns
51% of World Wide Buyers' Club Inc., a Nevada corporation, which was organized
by a joint venture agreement effective May 6, 2004. (See Note 6.)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
This summary of significant accounting policies of EYI Industries, Inc., is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America, and have been consistently applied in the preparation of the
financial statements.
Accounting Method
The Company's financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America.
F-21
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Accounting Pronouncements - Recent
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153. This statement addresses the measurement
of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," is based on the principle that
exchanges of nonmonetary 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 Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary 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. Management believes the adoption of this
statement will have no impact on the financial statements of the Company.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 152, which amends FASB statement No. 66,
"Accounting for Sales of Real Estate," to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing
Transactions." This statement also amends FASB Statement No. 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 the adoption of this
statement will have no impact on the financial statements of the Company.
In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123R, "Accounting for Stock
Based Compensation" (hereinafter "SFAS No. 123R"). This statement supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. This statement establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. This statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This statement does not change the accounting guidance for share
based payment transactions with parties other than employees provided in
Statement of Financial Accounting Standards No. 123. The Company has previously
adopted SFAS No. 123 and the fair value of accounting for stock options and
other equity instruments. The Company has determined that there was no impact to
its financial statements from the adoption of this new statement.
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, "Inventory Costs-- an amendment of ARB
No. 43, Chapter 4". This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges. . . ." This statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Management
does not believe the adoption of this statement will have any immediate material
impact on the Company.
F-22
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (hereinafter
"SFAS No. 150"). SFAS No. 150 establishes standards for classifying and
measuring certain financial instruments with characteristics of both liabilities
and equity and requires that those instruments be classified as liabilities in
statements of financial position. Previously, many of those instruments were
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
has determined that there was no impact from the adoption of this statement
Accounts Receivable and Bad Debts
The Company estimates bad debts utilizing the allowance method, based upon past
experience and current market conditions. At December 31, 2004, the Company
recorded an allowance of $16,321 to cover accounts receivable balances over 60
days . At December 31, 2003 and June 30, 2003, the Company determined that no
allowance was required although writeoffs in the amounts of $26,408 and $0,
respectively, were charged to bad debt expense in these two periods then ended.
Advertising Expenses
Advertising expenses consist primarily of costs incurred in the design,
development, and printing of Company literature and marketing materials. The
Company expenses all advertising expenditures as incurred. The Company's
advertising expenses were $18,937, $75,135 and $29,072, for the year ended
December 31, 2004, short period ended December 31, 2003 and year ended June 30,
2003, respectively.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments and short-term debt instruments with original maturities of
three months or less to be cash equivalents.
Restricted Cash
Restricted cash includes deposits held in a reserve account in the amount of
$100,248, $223,682, and $223,682 at December 31, 2004, December 31, 2003, and
June 30, 2003, respectively. Such deposits are required by the bank as
protection against unfunded charge backs and returns of credit card
transactions.
Compensated Absences
Employees of the Company are entitled to paid vacation, and sick days, depending
on job classification, length of service, and other factors. The Company accrued
vacation pay in the amounts of $60,186, $38,882, and $38,976 at December 31,
2004, December 31, 2003, and June 30, 2003, respectively.
Concentration of Credit Risk
The Company maintains its cash in one commercial account at a major financial
institution. Although the financial institution is considered creditworthy and
has not experienced any losses on its deposits, at December 31, 2004, the
Company's restricted cash balance exceeded Federal Deposit Insurance Corporation
(FDIC) limits by $248.
F-23
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Cost of Sales
Cost of sales consists of the purchase price of products sold, inbound and
outbound shipping charges, packaging supplies and costs associated with service
revenues and marketplace business.
Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (hereinafter "SFAS No. 133"), as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
These statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
At December 31, 2004, December 31, 2003, and June 30, 2003, the Company has not
engaged in any transactions that would be considered derivative instruments or
hedging activities.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128,
which provides for calculation of "basic" and "diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing net
income (loss) available to common shareholders by the weighted average common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity
similar to fully diluted earnings per share. Basic and diluted loss per share
were the same at the reporting dates, as inclusion of the common stock
equivalents would be anti-dilutive.
Estimates
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
Fair Value of Financial Instruments
The Company's financial instruments as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," include cash, trade accounts receivable, and accounts payable and
accrued expenses. All instruments are accounted for on a historical cost basis,
which, due to the short maturity of these financial instruments, approximates
fair value at December 31, 2004, December 31, 2003, and June 30, 2003.
F-24
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Foreign Currency Translation and Other Comprehensive Income
The Company has adopted Financial Accounting Standard No. 52. Monetary assets
and liabilities denominated in foreign currencies are translated into United
States dollars at rates of exchange in effect at the balance sheet date. Gains
or losses are included in income for the year. Non-monetary assets, liabilities
and items recorded in income arising from transactions denominated in foreign
currencies are translated at rates of exchange in effect at the date of the
transaction.
As the Company's functional currency is the U.S. dollar, and all translation
gains and losses are transactional, the Company has no assets with values
recorded in Canadian dollars and there is no recognition of other comprehensive
income in the financial statements.
Foreign Currency Valuation and Risk Exposure
While the Company's functional currency is the U.S. dollar and the majority of
its operations are in the United States, the Company maintains its main office
in Surrey, British Columbia. The assets and liabilities relating to the Canadian
operations are exposed to exchange rate fluctuations. Assets and liabilities of
the Company's foreign operations are translated into U.S. dollars at the
year-end exchange rates, and revenue and expenses are translated at the average
exchange rate during the period. Realized gains and losses from foreign currency
transactions are reflected in the results of operations.
Impaired Asset Policy
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for Impairment of Long-lived
Assets." In complying with this standard, the Company reviews its long-lived
assets quarterly to determine if any events or changes in circumstances have
transpired which indicate that the carrying value of its assets may not be
recoverable. The Company determines impairment by comparing the undiscounted
future cash flows estimated to be generated by its assets to their respective
carrying amounts.
The Company does not believe any adjustments are needed to the carrying value of
its assets at December 31, 2004, December 31, 2003 or June 30, 2003.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(hereinafter "SFAS No. 109"). This statement requires the recognition of
deferred tax liabilities and assets for the future consequences of events that
have been recognized in the Company's consolidated financial statement or tax
returns. Measurement of the deferred items is based on enacted tax laws. In the
event the future consequences of differences between financial reporting bases
and tax bases of the Company's assets and liabilities results in a deferred tax
asset, SFAS No. 109 requires an evaluation of the probability of being able to
realize the future benefits indicated by such an asset. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not that
some portion or all of the deferred tax asset will not be realized. (See Note
14.)
Inventories
The Company records inventories at the lower of cost or market on a first-in,
first-out basis.
F-25
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Long-lived Assets
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This standard
establishes a single accounting model for long-lived assets to be disposed of by
sale, including discontinued operations, and requires that these long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or discontinued operations.
Accordingly, the Company reviews the carrying amount of long-lived assets for
impairment where events or changes in circumstances indicate that the carrying
amount may not be recoverable. The determination of any impairment would include
a comparison of estimated future cash flows anticipated to be generated during
the remaining life of the assets to the net carrying value of the assets. For
the year ended December 31, 2004, short period ended December 31, 2003, and year
ended June 30, 2003 no impairments have been identified.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, which range from three to seven years. (See Note 7.)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant transactions and balances among
the companies included in the consolidated financial statements have been
eliminated.
Revenue Recognition
The Company is in the business of selling nutritional products in two
categories: dietary supplements and personal care products. Sales of personal
care products represent less than 5% of the overall revenue and therefore are
not classified separately in the financial statements. The Company recognized
revenue from product sales when the products are shipped and title passes to
customer. Administrative fees charged to the Independent Business Associates are
included in the gross sales and amounted $190,340, $161,040 and $314,971 for the
year ended December 31, 2004, the short period ended December 31, 2003, and year
ended June 30, 2003, respectively.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
(hereafter "SFAS No. 131") which supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," replacing the "industry segment"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS No. 131 also requires disclosures about products and services, geographic
areas and major customers. The adoption of SFAS No. 131 did not affect the
Company's results of operations or financial position. (See Note 17.)
Stock Options and Warrants Granted to Employees and Non-Employees
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), defines a fair value-based method of accounting
for stock options and other equity instruments. The Company has adopted this
method, which measures compensation costs based on the estimated fair value of
the award and recognizes that cost over the service period.
F-26
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Going Concern
As shown in the accompanying financial statements, the Company had negative
working capital of approximately $1,080,000 and an accumulated deficit incurred
through December 31, 2004. The Company also has limited cash resources and a
history of recurring losses. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
Management has established plans designed to increase the sales of the Company's
products, and decrease debt. The Company plans on continuing to reduce expenses,
and with small gains in any combination of network sales, direct sales,
international sales, and warehouse sales, believe that they will eventually be
able to reverse the present deficit. Management intends to seek additional
capital from new equity securities offerings that will provide funds needed to
increase liquidity, fund internal growth and fully implement its business plan.
Management plans include negotiations to convert significant portions of
existing debt into equity.
The timing and amount of capital requirements will depend on a number of
factors, including demand for products and services and the availability of
opportunities for international expansion through affiliations and other
business relationships.
NOTE 3 - SHARE EXCHANGE AGREEMENT
On December 31, 2003, Essentially Yours Industries, Inc. completed a share
exchange agreement with Safe ID Corporation ("Safe ID) and changed its name to
EYI Industries, Inc. Under the terms of the agreement, the Company issued
30,153,067 shares of its common stock to the shareholders of Safe ID. In
relation to this agreement and plan of recapitalization, the Company authorized
a 1 for 7.6754 exchange rate of the originally issued and outstanding
Essentially Yours Industries, Inc. shares. All references in the accompanying
financial statements and notes to the common shares and per share amounts have
been restated to reflect the reverse stock split. The Company also approved an
increase in the number of its authorized common stock shares to 300,000,000 when
in the months prior to the finalization of this agreement, the registrant prior
to the recapitalization sold approximately $550,000 of common stock and warrants
as part of private placement. These stock sales were in anticipation of this
agreement and recapitalization, and as such, are reflected as financing cash
flows.
As Safe ID was a non-operating public company with limited assets, the substance
of the transaction with Safe ID is a capital transaction, rather than a business
combination. The transaction is equivalent to the issuance of stock by the
Company for the net assets of Safe ID, accompanied by a recapitalization. The
accounting is identical to that resulting from a reverse acquisition, except
that no goodwill or other intangibles are recorded. The substantial asset of
Safe ID that was acquired was approximately $32,500 in cash. The liabilities
acquired by the Company under this agreement totaled approximately $11,800.
F-27
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 4 - REORGANIZATION
On May 27, 2002, Mr. Jay Sargeant, a shareholder of Essentially Yours
Industries, Corp. ("EYI Corp.") agreed to acquire all of the shares of the
Essentially Yours Industries, Inc. ("EYII"), along with the transfer agreement,
license agreement, and agency appointment agreement as described below, in
settlement of amounts owed to him. As part of this transaction, EYI Corp. agreed
to provide to EYII the services outlined in a management agreement. These
agreements became effective on June 30, 2002. EYII owns ninety-nine percent of
Halo Distributions LLC ("HALO"). The other one percent of HALO is owned by RGM
International, Inc. ("RGM"), a former subsidiary of EYI Corp., which was
transferred to Mr. Sargeant as additional consideration.
On June 30, 2002, the shareholder of EYII exchanged all of the outstanding
shares of EYII for 12,000,000 common shares of Burrard Capital Inc ("Burrard").
Concurrent with this transaction, EYII was merged into Burrard with Burrard
emerging as the surviving entity. The combined entity was renamed Essentially
Yours Industries, Inc. For accounting purposes, the acquisition has been treated
as a recapitalization of EYII with EYII as the acquirer. Prior to this merger,
EYII and RGM were considered to be dormant companies, with the activities of
HALO being consolidated directly with EYII Corp. although the legal ownership
was vested in EYII and RGM. Therefore, the losses from HALO operations and the
other economic impacts prior to June 30, 2002 are considered to be the separate
activity of EYI Corp.
On June 30, 2002, EYII took over the sales and marketing activities of its
former holding company and entered into various agreements with that Company as
follows:
Transfer Agreement
As part of the aforementioned transaction and for consideration of $1, EYI Corp.
transferred and assigned to EYII all of its rights, title and interest in and to
the contracts with its Independent Business Associates and any other contracts
that may be identified by the parties as being inherent or necessary to the
sales and marketing activities to EYII.
License Agreement
EYI Corp. licensed to EYII all of the rights, title, and interest that it may
have in various intellectual properties for $1 per year for a term of 50 years.
The Company has the option at any time to require EYI Corp. to transfer all of
its rights, title, interest in and to the intellectual properties to the Company
at the sum of $1 or such greater sum as may be determined to be the fair market
value of such intellectual property as determined by agreement between the
parties, by arbitration or by the appropriate taxation authorities after all
assessments and appeals have been concluded.
Agency Appointment Agreement
EYI Corp. appointed EYII as the sole and exclusive agent to sell its remaining
inventory on hand as of June 30, 2002 at the prices previously established, and
to continue to sell at such price unless and until any change is agreed upon
with EYI Corp. In consideration for its efforts, the Company is entitled to a
sales commission of fifteen percent on all sales of such inventory.
F-28
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Management Agreement
EYI Corp. agreed to perform various services such as administration, computer
support, and sales and customer support, on behalf of EYII for a term of one
year commencing June 30, 2002. The services and duties to be provided and
performed by EYI Corp. for EYII shall be determined and agreed upon by the
parties, from time to time, as required, provided however, it is understood and
agreed that such services will primarily consist of assisting EYII in the sales
and marketing business. At the date of these financial statements, the agreement
had expired, and EYII was operating on a month-to-month basis for management
services with EYI Corp.
The remuneration to be paid by EYII to EYI Corp. for the aforementioned services
is to be negotiated by the parties from time to time, provided however, the
parties agree that the remuneration to be paid shall be consistent with industry
standards for the type and nature of the services or duties being provided. At
the present time, EYII has agreed to pay EYI Corp. actual expenses plus a fee of
5% on these expenses.
NOTE 5 - ACCOUNTS RECEIVABLE AND CREDIT RISK
Accounts receivable at December 31, 2004, December 31, 2003 and June 30, 2003
consist primarily of amounts due from third parties for distribution services
provided by Halo and direct retail clients of EYII.
NOTE 6 - JOINT VENTURE AGREEMENT
On May 28, 2004, the Company entered into a joint venture agreement with World
Wide Buyers' Club Inc. ("WWBC") and Supra Group, Inc. ("SG") Pursuant to the
terms of the joint venture agreement, the Company and SG agree to form WWBC, a
Nevada corporation, owned 51% by the Company and 49% by SG. The purpose of the
agreement is jointly market and distribute products of SG using the Company's
existing distribution system in the United States. The term of the agreement is
10 years commencing May 6, 2004. As of December 31, 2004, there has been no
economic activity between the Company, SG, or WWBC.
F-29
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 7 - PROPERTY AND EQUIPMENT
Capital assets are recorded at cost. Depreciation is calculated using the
straight line method over three to seven years. The following is a summary of
property, equipment and accumulated depreciation at December 31, 2004, December
31, 2003 and June 30, 2003.
December 31, 2004 December 31, 2003 June 30, 2003
------------------------------- -------------------------------- --------------------------------
Accumulated Accumulated Accumulated
Cost Depreciation Cost Depreciation Cost Depreciation
---- ------------ ---- ------------ ---- ------------
Warehouse equipment $ 223,927 $ 207,525 $ 223,927 $ 175,353 $ 223,927 $ 159,359
Furniture and fixtures 18,698 18,083 18,698 15,453 18,527 414,074
Computer Equipment &
Software 115,392 83,995 115,392 40,265 95,527 422,756
Office equipment 3,510 3,410 3,510 2,909 3,510 2,616
Leasehold improvements 32,523 20,696 32,523 16,631 32,523 14,598
------------- -------------- -------------- ------------- -------------- -------------
Total 394,050 $ 333,714 394,050 $ 250,610 $ 374,014 $ 213,403
Less: accumulated
depreciation 333,714 250,611 213,403
------------- -------------- --------------
Total property, plant
and equipment, net $ 60,336 $ 143,439 $ 160,611
============= ============== ==============
Depreciation expense for the periods ended December 31, 2004, December 31, 2003,
and June 30, 2003, was $56,154, $36,756 and $50,888 respectively.
NOTE 8 - CONVERTIBLE LOANS PAYABLE
On June 2, 2004, the Company issued to Cornell Capital Partners, LP a 5% secured
convertible debenture in the principal amount of $250,000 with a term of two
years, and interest at 5%. The debenture is convertible into the Company's
common stock at a price per share equal to the lessor of (a) 120% of the closing
bid price by the second anniversary date of issuance or (b) 100% of the lowest
daily volume weighted average price for the 30 days immediately prior to
conversion. On June 24, 2004, the Company received the $250,000 loan less
related expenses of approximately $65,000 which has been allocated as discount
on debt and will be amortized over a two year period. The convertible securities
are guaranteed by the assets of the Company. Under the agreement, the Company is
required to keep available common stock duly authorized for issuance in
satisfaction of the convertible. The conversion amount will be the face amount
of the convertible plus interest at the rate of 5% per annum from the closing
date of June 24, 2004 to the conversion date, which is the date on which the
Company receives a notice of conversion from the investor exercising the right
to convert the convertible into common shares of the Company. The debt will
automatically convert into common stock on the second anniversary date of
issuance. The terms of the debt do not require regular monthly payments.
F-30
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
On September 24, 2004, the Company issued to Cornell Capital Partners, LP
("Cornell") a 5% secured convertible debenture in the principal amount of
$250,000 with a term of two years, and interest at 5%. The debenture is
convertible into the Company's common stock at a price per share equal to the
lessor of (a) 120% of the closing bid price by the second anniversary date of
issuance or (b) 100% of the lowest daily volume weighted average price for the
30 days immediately prior to conversion. On September 27, 2004, the Company
re-assigned $245,000 of this debenture to Taib Bank, E.C. and reassigned $5,000
of debenture B to an individual. Under the debenture agreement, the Company's
failure to issue unrestricted, freely tradable common stock to Cornell or Taib
Bank or the individual upon conversion after the registration statement filed
pursuant to this transaction has been declared effective would be considered an
event of default, thereby entitling Cornell to accelerate full repayment of the
convertible securities then outstanding. Under the agreement, the Company is
required to maintain available common stock duly authorized for issuance in
satisfaction of the convertible. One September 24, 2004 the Company received the
$250,000 loan less related expenses of approximately $55,000, which has been
allocated as discount on debt and will be amortized over a two year period. The
convertible securities are guaranteed by the assets of the Company. Under the
agreement, the Company is required to keep available common stock duly
authorized for issuance in satisfaction of the convertible. The conversion
amount will be the face amount of the convertible plus interest at the rate of
5% per annum from the closing date of September, 2004 to the conversion date,
which is the date on which the Company receives a notice of conversion from the
investor exercising the right to convert the convertible into common shares of
the Company. The convertible will automatically convert into common stock on the
second anniversary date of issuance. The terms of the debt do not require
regular monthly payments.
The convertible debentures contained a beneficial conversion feature computed at
its intrinsic value that was the difference between the conversion price and the
fair value on the debenture issuance date of the common stock into which the
debt was convertible, multiplied by the number of shares into which the debt was
convertible at the commitment date. Since the beneficial conversion feature was
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, or $250,000, was recorded as an interest expense and a
component of stockholders' equity on the balance sheet date.
Standby Equity Distribution Agreement
In June, 2004, the Company entered into a standby equity distribution agreement
with Cornell Capital Partners, LP ("Cornell"). Pursuant to this agreement,
Cornell will purchase up to $10,000,000 of the Company's common stock through a
placement agent over a two-year period after the effective registration of the
shares. In addition, the Company issued 1,300,000 shares of its common stock to
Cornell and the placement agent upon the inception of the standby equity
distribution agreement. The $390,000 value of these shares was recognized as a
period expense due to the fact that the 1,300,000 shares have been deemed to be
fully earned as of the date of the agreement.
NOTE 9 - INTANGIBLE ASSETS
Intangible assets consist of rights, title, and interest in and to the contracts
with the Company's independent business associates as well as the rights and
licenses to trademarks and formula for the Company's primary products. These
rights and licenses were obtained from the Company's former parent pursuant to a
transfer agreement, as well as from the Company's primary shareholder. (See Note
4.)
F-31
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Trademarks and Formulas
Costs relating to the purchase of trademarks and formulas were capitalized and
amortized using the straight-line method over ten years, representing the
estimated life of the assets.
The following is a summary of the intangible assets at December 31, 2004 and
December 31, 2003:
Accumulated
Cost Amortization Net
--------- ------------- -------------
Balance, December 31, 2003 $ 21,601 $ (1,800) $ 19,801
Activity in last twelve months - (3,240) (3,240)
--------- ------------- -----------
Balance, December 31, 2004 $ 21,601 $ (5,040) $ 16,561
========= ============= ===========
NOTE 10 - BANK INDEBTEDNESS
Bank indebtedness consists of checks written in excess of funds on deposit. The
underlying bank is used as an impress account with automatic transfers from the
Company's general account as checks are presented.
NOTE 11 - CAPITAL STOCK
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a
par value of $0.001. As of December 31, 2004, December 31, 2003, and June 30,
2003, the Company has not issued any preferred stock.
Common Stock
The Company is authorized to issue 300,000,000 shares of common stock. All
shares have equal voting rights, are non-assessable and have one vote per share.
Voting rights are not cumulative and, therefore, the holders of more than 50% of
the common stock could, if they choose to do so, elect all of the directors of
the Company.
In its initial capitalization in June 2002, the Company issued 23,026,200 shares
of common stock for a total of $30,000 cash.
Pursuant to the merger agreement as discussed in Note 4, an additional
92,104,800 shares of common stock were issued to the shareholder of Essentially
Yours Industries, Inc. The transaction was valued at $38,507, representing the
basis of Essentially Yours Industries, Inc. in the assets, liabilities and
subsidiaries that it contributed to Burrard Capital, Inc. At the completion of
the merger, the Company changed its name from Burrard Capital, Inc. to
Essentially Yours Industries, Inc.
In August, 2002, the Company sold, under a private placement offering, 5,400,043
shares of common stock at approximately $0.18 per share for a total of $994,122
in cash, net of private placement costs of $61,206. Of these shares, 2,485,440
shares which were purchased for $513,900 were determined to be shares related to
a minority interest, and were subsequently reclassified on the balance sheet as
minority interest in subsidiary. Minority shareholders hold approximately a
1.64% interest in the Company at December 31, 2004.
F-32
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
On December 31, 2003, the Company completed an acquisition agreement with Safe
ID, and at the completion of the merger, the Company changed its name from
Essentially Yours Industries, Inc. to EYI Industries, Inc. In connection with
this reverse merger, the Company issued 30,153,067 shares of its common stock
and warrants to the shareholders of Safe ID. This acquisition was valued at
$502,211. See Note 3 and 13. This transaction resulted in a discount on common
stock of $53,398. See Note 12.
On January 1, 2004, the Company entered into a agreement with an independent
contractor to provide services in exchange for 250,000 common shares. The
Company computed the number of shares issued in this transaction based on the
estimated fair market value of the Company's common stock on the dates of
issuance and recognized an expense of $70,000 for consulting fees.
On March 5, 2004, the Company entered into a agreement with an independent
contractor to provide services in exchange for 100,000 common shares. The
Company computed the number of shares issued in this transaction based on the
estimated fair market value of the Company's common stock on the dates of
issuance and recognized an expense of $28,000 for consulting fees.
During the quarter ended March 31, 2004, the Company received $219,230 net of
expenses from the private placement sale of 857,143 shares of common stock at
$0.14 per share and 609,312 shares of common stock at $0.21 per share. In
addition, the purchasers of the shares received warrants to purchase one
additional share of common stock for each share purchased, exercisable at $0.20
and $0.30 per share, respectively, for a period of two years.
On April 1, 2004, the Company entered into a consulting agreement granting a
consultant, Daniel Matoes, 2,000,000 stock options and requiring the payment of
a consulting fee of $16,667 each month. The consultant will use the monthly sum
to acquire shares of the Company by exercising the options once they vested on
October 1, 2004. As at December 31, 2004, the consultant has not exercised these
options. On April 6, 2004, an employee of the Company exercised 1,000,000
options at $0.165 per share at the aggregate exercise price of $165,000. The
options were paid by a combination of cash and a promissory note issued by the
employee to the Company in the amount of $15,000. The note has been determined
to be a stock subscription and has been allocated on the financial statements as
a subscription receivable.
On April 20, 2004, an officer of the Company exercised 3,200,000 options at
$0.165 per share at the aggregate exercise price of $528,000. The options were
paid in the form of foregone debt owed to the officer by the Company. (See Note
13.)
On May 4, 2004 the Company issued 5,476,190 common shares to Eyewonder, Inc.
("Eyewonder") at a price of $0.21 per share, pursuant to the terms of the Letter
Agreement dated May 4, 2004. The issuance of the 5,476,190 of common shares has
been determined to be a prepaid expense due to the conditions of the agreement
stating that the shares are fully paid in exchange for Eye wonder's role and
work in creating and managing an advertising and promotional on-line campaign
for the Company. Eyewonder Inc. also received 5,476,190 warrants exercisable at
a price of $0.30 per share for a period of five years from the date of issuance.
In addition, on execution of the agreement, the Company agreed to issue options
to purchase 1,100,000 shares of the Company's common stock at a price of $0.22
per share to certain individuals designated by Eyewonder. The total amount of
prepaid expense in the amount of $1,050,000 is being expensed over three years,
the life of the contract. For the year ending December 31, 2004, the Company has
expensed $192,830 on this contract.
On June 3, 2004, 300,000 options were exercised at $0.20 per share at the
aggregate exercise price of $60,000. The options were paid in the form of
forgone debt owed to the legal firm by the Company The Company computed the
number of options issued in this transaction based on the estimated fair market
value of the Company's common stock on the dates of issuance.
F-33
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
During the quarter ended June 30, 2004, the Company issued 50,000 restricted
shares at $0.22 per share in payment of consulting fees. The Company computed
the number of shares issued in this transaction based on the fair value of
services received and the market value of the Company's common stock on the
dates of issuance and recognized an expense of $11,000 to consulting fees.
During the quarter ended June 30, 2004, the Company received $115,805 from the
private placement sale of 566,833 shares of common stock at $0.21 per share. In
addition, the purchasers of the shares received warrants to purchase one
additional share of common stock for each share purchased, exercisable at $0.30
per share for a period of two years. (See Note 13.)
During the period ended June 30, 2004, the Company issued 1,300,000 shares of
its common stock for services received in relation to the standby equity
distribution agreement. (See Note 8)
During the quarter ended June 30, 2004, management determined that 176,534
shares were no longer allocated to shares held by the minority interest of
Essentially Yours Industries, Inc. The Company determined that the number of
shares incorrectly held by the minority interest had the effect of understating
the number of common shares outstanding and corrected the error by properly
allocating the 176,534 shares to common shares outstanding. The shares were
determined to have the value of approximately $0.19 per share for a total
increase in stockholders equity in the amount of $33,303.
During the quarter ended September 30, 2004, the Company began expensing stock
options granted to various employees and consultants in accordance with SFAS 123
recognition and measurement provisions as amended by SFAS 148. The Company
recognized a period expense of $1,206,527 for all vested stock options.
On June 24, 2004 and September 24, 2004, the Company obtained two disbursements
related to convertible debt financing with Cornell Capital (the "investor"), and
this transaction created a beneficial conversion feature for the investor. The
Company expensed $250,000 in anticipation of the conversion of debt to common
shares. (See Note 8.)
On July 1, 2004, the Company issued 100,000 stock options at $0.26 per share to
consultants in exchange for services. The options vest at 50% on October 1, 2004
and 50% on October 1, 2005.
On July 6, 2004, an employee of the Company exercised 36,360 options at $0.20
per share. The options were paid by cash in the amount of $7,272.
On September 30, 2004, the Company issued 2,650,000 stock options at $0.11 per
share to various consultants and an employee. These options vested immediately
upon issuance. (See Note 13.)
On October 13, 2004, 250,000 options were exercised at $0.08 per share for an
exercise price of $20,000. The options were paid in the form of lieu of legal
fees owed to a legal firm by the Company. The Company computed the number of
options issued in this transaction based on the estimate fair market value of
the Company's common stock on the dates of issuance.
On November 1, 2004, the Company issued 250,000 stock options at $0.20 per share
to a consultant. These options vest 50% on February 1, 2005 and 50% on February
1, 2006.
On December 27, 2004, the Company issued 1,050,000 stock options at $0.08 per
share to various consultants and employees. These options vested immediately
upon issuance.
On December 27, 2004, two officers agreed to terminate 6,400,000 stock options
at $0.19 per share that were previously granted to them in April 2004.
On December 27, 2004, two employees agreed to terminate 110,000 stock options at
$0.20 per share that were previously granted to them in April 2004.
F-34
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
During the quarter ended December 31, 2004, 200,000 options were exercised at
$0.08 per share for an exercise price of $16,000. The options were paid in the
form of lieu of legal fees owed to a legal firm by the Company. The Company
computed the number of options issued in this transaction based on the estimate
fair market value of the Company's common stock on the dates of issuance.
On December 31, 2004, 200,250 options were exercised at $0.11 per share for an
exercise price of $22,028. The options were paid in the form of lieu of debt
owed to the CEO of the Company by the Company. The Company computed the number
of options issued in this transaction based on the estimate fair market value of
the Company's common stock on the dates of issuance.
On December 31, 2004, the Company elected to close the discount on common stock
account in the amount of $53,598 to additional paid in capital account. (See
Note 12.)
NOTE 12 - DISCOUNT ON COMMON STOCK
As a result of the share exchange agreement between Safe ID and Essentially
Yours Industries, Inc., a discount on common stock was recorded in the amount of
$53,598 to reflect the partial deficit in the par value of the stock received in
the share exchange. This is the result of the recorded par value of the stock
exceeding the original value of the assets exchanged. On December 28, 2004, the
Company closed the discount on common stock account to the additional paid-in
capital account.
NOTE 13 - COMMON STOCK OPTIONS AND WARRANTS
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (hereinafter "SFAS No. 123"), defines a fair value-based method of
accounting for stock options and other equity instruments. The Company has
adopted this method, which measures compensation costs based on the estimated
fair value of the award and recognizes that cost over the service period.
In accordance with SFAS No. 123, the fair value of stock options and warrants
granted are estimated using the Black-Scholes Option Price Calculation. The
following assumptions were made to value the stock options and warrants for the
period ended December 31, 2004; estimated risk-free interest rate of 4%,
estimated volatility of 120% and term of two years.
Warrants
Warrants and Prior Year Adjustment
During the period ended June 30, 2004, the Company determined that an additional
916,667 warrants from the reverse acquisition and share exchange with Safe ID
Corporation had not been properly recorded and valued at the date of the change
of control nor at December 31, 2003. A correction of an error was made and is
reflected in the financial statements. The warrants were valued at $45,833. The
additional paid-in-capital was reduced by $45,833 and warrants accounted for in
the equity section was increased by the same. There was no effect on total
stockholders' equity or reported losses or deficits.
During the period ended December 31, 2004, the Company received $115,805 from
the private placement sale of 566,833 shares of common stock. In addition, the
purchasers of the shares received warrants to purchase one additional share of
common stock for each share purchased, exercisable at $0.30 per share for a
period of two years. The fair value of the warrants issued as part of the
private placement was determined to be $78,869.
F-35
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
During the period ended March 31, 2004, the Company received $219,240, less
expenses, from the private placement sale of 1,466,455 shares of common stock.
In addition, the purchasers of the shares received warrants to purchase one
additional share of common stock for each share purchased. Of these warrants
857,143 are exercisable at $0.20 per share and 609,312 are exercisable at $0.30
per share for a period of two years. The fair value of the warrants issued as
part of the private placement was determined to be $78,869.
On May 4, 2004, the Company issued 5,476,190 common shares to Eyewonder, Inc.
("Eyewonder") at a price of $0.21 per share, pursuant to the terms of a letter
agreement dated May 4, 2004. Eyewonder Inc. also received 5,476,190 warrants
exercisable at a price of $0.30 per share for a period of five years from the
date of issuance. (See Note 11.)
Stock Options
During the period ending December 31, 2004, the Company's board of directors
approved the Stock Compensation Program to allow up to 25,000,000 shares of
stock to be issued under the program This plan enables the Company to grant
stock options to directors, officers, employees and eligible consultants of the
Company. There was no Company stock option plan in effect prior to 2004.
During the period ended December 31, 2004, the Company granted stock options to
purchase a total of 24,934,000 shares of common stock to its employees,
directors, and consultants. The options were granted from $0.08 to $0.26 per
share. The Company recognized an expense to services and consulting of
$1,202,452 during the period ending December 31, 2004 for all vested options.
Following is a summary of the status of the stock options during the year ended
December 31, 2004:
Weighted
Number of Average
Shares Exercise Price
----------- --------
Outstanding at December 31, 2003 -- $ --
Granted 24,934,000 $ 0.15
Exercised (5,186,610) $ 0.16
Forfeited -- $ --
----------- --------
Options outstanding at December 31, 2004 19,747,390 $ 0.14
=========== ========
Options exercisable at December 31, 2004 16,950,390 $ 0.13
=========== ========
Weighted average fair value of options
granted in 2004 $ 0.13
==== ========
F-36
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Summarized information about stock options outstanding and exercisable at
December 31, 2004 is as follows:
Options Outstanding
------------------------------------------------------------------
Exercise Weighted Ave. Weighted Ave.
Price Number Remaining Exercise
Range of Shares Life Price
$0.08 - $0.26 19,747,390 2.00 $ 0.14
Options Exercisable
------------------------------------------------------------------
Exercise Weighted Ave. Weighted Ave.
Price Number Remaining Exercise
Range of Shares Life Price
$0.11 - $0.22 16,950,390 2.00 $ 0.13
Weighted
Number of Average Average
Warrants Remaining Life Exercise Price
--------------- ---------------- ---------------
Outstanding and exercisable 2,751,746 2 $0.11
NOTE 14 - INCOME TAXES
The significant components of the deferred tax asset at December 31, 2004,
December 31, 2003 and June 30, 2003 were as follows:
December 31, December 31 June 30,
2004 2003 2003
---------------- ------------ ------------
Net operating loss carryforward $ 7,082,200 $ 2,563,500 $ 1,564,300
================ ============ ============
Deferred tax asset: $ 2,408,000 $ 871,600 $ 531,900
Less valuation allowance for tax asset (2,408,000) (871,600) (531,900)
---------------- ------------ ------------
Net deferred tax asset $ - $ - $ -
================ ============ ============
At December 31, 2004, December 31, 2003, and June 30, 2003, the Company has net
operating loss carryforwards of approximately $7,082,200, $2,563,500, and
$1,564,300 respectively, which expire in the years 2022 through 2024. The change
in the allowance account from December 31, 2003 to December 31, 2004 was
$1,536,400.
The Company's subsidiaries in Canada are required to file income tax returns in
British Columbia, Canada. The losses from operations are allocated to both
United States and Canadian operations.
F-37
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Purchase Agreement
On June 30, 2002, the Company entered into a distribution and license agreement
with a company in which one of the Company's directors has an ownership
interest. The agreement gives the Company the exclusive right to market, sell
and distribute certain products for a five-year renewable term. Management
estimates that 90% of the Company's sales volume results from products supplied
under this licensing agreement.
During the quarter ended March 31, 2004, the Company negotiated the lowering of
the purchasing threshold, and pursuant to the agreement, the Company is required
to purchase the following amounts of product during the term of the agreement:
From June 1, 2004 to May 31, 2005 $3,964,000
For each year thereafter, during the term of this agreement, the Company is
obligated to purchase a minimum amount of $5,549,000 of product.
In the event that the Company is unable to meet the minimum purchase
requirements of the licensing agreement or the terms requiring it to pay 15% of
the difference between the minimum purchase amount referred to above and actual
purchases for that year in which there is a shortfall, then the licensor has
various remedies available to it including, renegotiating the agreement,
removing exclusivity rights, or terminating the agreement.
As of the date of these financial statements, the purchase requirements have not
been made and it has been determined by the Company to be a remote possibility
that the licensor will enforce the minimum purchase requirements, therefore,
there has not been an accrual made to the financial statements to reflect any
estimated liability pertaining to this agreement due to the fact that the
maximum time period to make a claim expired prior to the issuance of the
financial statements.
Lease Payments
The Company has operating lease commitments for its premises, office equipment
and an automobile. The minimum annual lease commitments are as follows:
Year ended December 31, Minimum Amount
----------------------- --------------
2005 $262,805
2006 276,739
2007 182,432
2008 135,000
2009 and thereafter 435,000
F-38
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
Management Agreement
EYI Corp. has agreed to perform various services and administrative assistance
to the Company on a month to month basis commencing April 1, 2004. The services
and duties to be provided and performed by EYI Corp. for EYII shall be
determined and agreed upon by the parties, from time to time, as required,
provided however, it is understood and agreed that such services will primarily
consist of assisting EYII in the sales and marketing business.
The remuneration to be paid by EYII to EYI Corp. for the aforementioned services
shall be the cost of actual expenses plus a fee of five (5%) percent for
services provided.
Regulatory Risks and Claims
The Company's products are subject to regulation by a number of federal, state,
entities, as well as those of foreign countries in which the Company's products
are sold. These regulatory entities may prohibit, or restrict, the sale,
distribution, or advertising of the Company's products for legal, health or
safety, related reasons. In addition to the potential risk of adverse regulatory
actions, the Company is subject to the risk of potential product liability
claims.
Subsidy Agreements
On July 23, 2004, the Company entered into subsidy agreements with three related
parties in which the Company agreed to pay a guaranteed amount of $2,500 per
week to each party for sales and marketing services. This is in lieu of all
commissions earned by each of these three individuals. The Company has renewed
these agreements every 12 weeks since they became effective.
Standby Equity Distribution Agreement
On June 22, 2004, the Company entered into a two-year standby equity
distribution agreement with Cornell Capital Partners LP ("Cornell"). Pursuant to
this agreement, Cornell will purchase up to 10,000,000 shares of the Company's
common stock through a placement agent. The Company issued 1,300,000 shares of
its common stock to Cornell and the placement agent upon the inception of this
agreement. The $390,000 value of these shares was based on the fair market value
of the shares on the date of the contract and is recognized as a period expense
due to the fact that the 1,300,000 shares have been deemed to be fully earned as
of the date of the agreement. (See Note 8.)
Other Matters
The Company's predecessor organization, Essentially Yours Industries Corp.
("EYIC"), a British Columbia corporation, has outstanding claims from the
Internal Revenue Service for penalties and interest of approximately $2,000,000.
Furthermore, one or more states may have claims against EYIC for unpaid state
income taxes. Management believes that these claims are limited solely to EYIC
and that any prospective unpaid tax claims against the Company are remote and
unable to be estimated.
F-39
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
In February, 2004 we entered into a letter of commitment with Source, Inc.
("Source") for the purpose of further developing our corporate marketing
position with Source and for assistance in raising equity capital. Pursuant to
the terms the letter agreement, we agreed to: (i) pay Source 20% of the gross
revenues generated by Source under a Corporate Marketing Organization Agreement
("CMO Agreement") previously entered into with Premier Lifestyles International
Corporation, a company related to Source; (ii) to offer up to $4,000,000 of EYI
restricted stock over a 90 day period at $0.21 per share and warrants
exercisable at a price of $0.30 per share for investors referred to EYI by
Source in connection with any equity offerings by EYI; (iii) at the end of the
12 months period following execution of the agreement, and if Source had
referred enough investors to raise a minimum of $500,000, to issue to Source
$1,800,000 in common stock of EYI or pay the balance in cash; and (iv) on a
monthly basis, during the 12 month period, pay 50% of all monies collected by
EYI from Source referred investors, to be paid to Source towards the $1,800,000
to pay for the CMO Agreement and $300,000 towards a proposed web portal.
Subsequently, we terminated the CMO agreement in accordance with its terms in
July, 2004, and notified Source that they failed to raise the minimum funding of
$500,000 in connection with EYI's equity offering closing in June, 2004. Source
has notified EYI that they dispute the fact that they did not raise the minimum
financing amount. Management believes that if Source were to advance any such
claims against EYI its chance of success would be remote and we intend to
vigorously defend against any potential legal claims respecting this matter.
NOTE 16 - RELATED PARTY NOTE PAYABLE
The Company issued two promissory notes, for a total of $90,000 in December
2003. The notes are unsecured, non-interest bearing and are payable upon demand.
NOTE 17 - CONCENTRATIONS
Bank Accounts
The Company maintains its cash accounts in two commercial banks. During the
year, the Company may maintain balances in excess of the federally insured
amounts in the accounts that are maintained in the United States. The Company
also maintains funds in commercial banks in Vancouver, British Columbia, in
which funds in U.S. dollars are not insured. At December 31, 2004, December 31,
2003, and June 30, 2003, a total of $248, $140, and $1,675, respectively, was
not insured.
Economic Dependence
During the year, the Company purchased approximately 90% of its products for
resale from one company, Nutri-Diem Inc., which is the sole supplier of the
Company's flagship product Calorad. Pursuant to a purchase agreement, the
Company is subject to minimum purchases per annum. (See Note 13.)
F-40
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 18 - SEGMENT REPORTING
The Company is organized into two reportable segments - EYI Industries, Inc. and
Halo. The two segments have different strategic goals and are managed
separately. EYI Industries, Inc., the first reportable segment, is a selling and
marketing company. The second reportable segment, Halo, operating as a
distribution center, derives approximately 90% of its activities from
distributing products for the Company and its subsidiaries.
The following tables present information about the two segments for December 31,
2004, December 31, 2003 and June 30, 2003:
Year Ended December 31, 2004
---------------------------------------------------------------------
EYI Ind., Inc. Halo Eliminations Consolidated
-------------- ---- ------------ ------------
External Revenue $ 6,085,731 $ 143,298 $ - $ 6,229,029
=============== =============== ========== ================
Operating Loss $ (4,078,763) $ (201,441) $ - $ (4,280,204)
=============== =============== ========== ================
Loss Before Income Taxes $ (4,350,109) $ (201,441) $ - $ (4,551,550)
=============== =============== ========== ================
Depreciation $ 12,749 $ 43,405 $ - $ 56,155
=============== =============== ========== ================
Interest Expense $ 308,572 $ - $ - $ 308,572
=============== =============== ========== ================
Identifiable Assets $ 1,304,818 $ 60,758 $ - $ 1,365,576
=============== =============== ========== ================
Intangible Assets 16,561 16,561
----------------
Total assets $ 1,382,137
================
Six Months Ended December 31, 2003
---------------------------------------------------------------------
EYI Ind., Inc. Halo Eliminations Consolidated
-------------- ---- ------------ ------------
External Revenue $ 4,218,961 $ 94,618 $ - $ 4,313,579
=============== =============== ========== ================
Operating Loss $ (892,673) $ (85,656) $ - $ (978,329)
=============== =============== ========== ================
Loss Before Income Taxes $ (900,601) $ (85,656) $ - $ (986,257)
=============== =============== ========== ================
Depreciation $ 13,792 $ 22,964 $ - $ -
=============== =============== ========== ================
Interest Expense $ 21,879 $ - $ - $ -
=============== =============== ========== ================
Identifiable Assets $ 547,334 $ 160,542 $ - $ 707,876
=============== =============== ========== ================
General corporate assets 19,801
----------------
Total assets $ 727,677
================
Year Ended June 30, 2003
---------------------------------------------------------------------
EYI Ind., I Halo Eliminations Consolidated
-------------- ---- ------------ ------------
External Revenue $ 14,306,684 $ 83,365 $ - $ 14,390,049
=============== =============== ========== ================
Operating Loss $ (1,526,387) $ (119,045) $ - $ (1,645,432)
=============== =============== ========== ================
Loss Before Income Taxes $ (1,554,163) $ (119,045) $ - $ (1,673,208)
=============== =============== ========== ================
Depreciation $ 9,093 $ 41,795 $ - $ 50,888
=============== =============== ========== ================
Interest Expense $ 11,272 $ 1,520 $ - $ 12,792
=============== =============== ========== ================
Identifiable Assets $ 584,655 $ 198,075 $ - $ 782,730
=============== =============== ========== ================
General corporate assets 19,801
----------------
Total assets $ 802,531
================
F-41
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
The accounting policies for the two reportable segments are the same as those
described in the summary of significant accounting policies.
NOTE 19 - RELATED PARTY TRANSACTIONS
On May 27, 2002, Mr. Jay Sargeant, a shareholder of Essentially Yours
Industries, Corp. ("EYI Corp.") agreed to acquire all of the shares of the
Essentially Yours Industries, Inc. ("EYII"), along with the transfer agreement,
license agreement, and agency appointment agreement, in settlement of amounts
owed to him. As part of this transaction, EYI Corp. agreed to provide to EYII
the services outlined in a management agreement. These agreements are more fully
described in Note 4.
The Company acquired, through agreements with Essentially Yours Industries,
Corp. ("EYI Corp"), the rights, title, and interest in and to the contracts with
the Company's Independent Business Associates as well as the rights and licenses
to trademarks and formula for the Company's primary products. Expanded details
are explained in Note 9.
Accounts payable to related parties represents amounts due to the president and
chief executive officer for services preformed during the last year as well as
to other related parties and the company with which they have a signed
management agreement. These payables are non-interest bearing and
non-collateralized.
See note 15 regarding subsidy agreements with related parties.
During the year, the Company purchased approximately 90% of its products for
resale from one company, Nutri-Diem Inc., which is owned in part by a director
of the Company. (See Note 15.)
NOTE 20 - RESTATEMENT
During the quarter ended June 30, 2004, management determined that 176,534
shares were no longer allocated to shares held by the minority interest of
Essentially Yours Industries, Inc. The Company determined that the number of
shares incorrectly held by the minority interest had the effect of understating
the number of common shares outstanding and corrected the error by properly
allocating the 176,534 shares to common shares outstanding. The shares were
determined to have the value of approximately $0.19 per share for a total
increase in stockholders equity in the amount of $33,303. The financial
statements have been restated to reflect the appropriate minority interest.
NOTE 21 - SUBSEQUENT EVENTS
On January 3, 2005, 642706 B.C. Ltd dba EYI Management signed a seven year lease
with Golden Plaza Company to lease the premises at 7865 Edmonds St., Burnaby,
B.C. The premise has a rentable area of 12,200 sq feet.
On February 9, 2005, two officers agreed to terminate 6,400,000 stock options
originally granted at $0.08 per share on December 27, 2004.
On February 9, 2005, the Company issued 6,000,000 stock options at a price of
$0.06 per share to an employee and two officers. These stock options vest
immediately.
On February 10, 2005, the Company loaned an employee $180,000 in order for her
to exercise 3,000,000 stock options. This loan is secured by a Promissory Note
and a Loan Agreement.
On February 14, 2005, the Company agreed through a Bonus Share Agreement, to
compensate Janet Carpenter with 800,000 shares of common stock at a deemed price
of $0.05 as consideration for her pledge of shares to secure the Secured
Promissory Note with Cornell Capital.
F-42
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
On February 24, 2005, the Company entered into a Secured Promissory Note with
Cornell Capital in which the Company received $200,000 less expenses. The
Promissory Note has interest of 12% and is due 60 days after the date of the
note.
On February 24, 2005, a Pledge and Escrow Agreement was signed between Janet
Carpenter, Cornell Capital and David Gonzalez whereas Janet Carpenter has
pledged her 3,000,000 shares to guarantee the Secured Promissory Note between
EYI and Cornell Capital.
On February 24, 2005, a Guaranty Agreement was signed between Janet Carpenter
and Cornell Capital in which Janet Carpenter has agreed to guarantee the
conditions of the Secured Promissory Note.
On March 3, 2005, a consultant agreed to terminate 250,000 stock options granted
to him on October 13, 2004.
On April 4, 2005, Cornell Capital Partners, LP entered into an Assignment
Agreement in which the Debenture dated June 22, 2004 in the principal amount of
$250,000 given by the Company to Cornell Capital Partners, LP was reassigned to
TAIB Bank, E.C.
On April 4, 2005, Cornell Capital Partners, LP entered into an Assignment
Agreement in which the Debenture dated June 22, 2004 in the principal amount of
$5,000 given by the Company to Kent Chou was reassigned to TAIB Bank, E.C.
On April 4, 2005, the Company entered into a Redemption Agreement with TAIB
Bank, E.C. to confirm that the Company would not seek to modify, alter,
renegotiate or otherwise cause any such action that would cause the termination
of the Standby Equity Agreement ("SEDA") dated June 22, 2004 with Cornell
Capital Partners, LP. The Company agreed that the first use of proceeds obtained
from the use of the SEDA will immediately redeem the Debenture with TAIB Bank.
F-43
Board of Directors
EYI Industries, Inc.
Surrey, British Columbia Canada
INDEPENDENT AUDITOR'S REPORT
----------------------------
We have audited the accompanying consolidated balance sheets of EYI Industries,
Inc., (a Nevada corporation) at December 31, 2003 and June 30, 2003,
respectively, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the six months ended December
31, 2003 and the year ended June 30, 2003, and the period from June 21, 2002
through to June 30, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards established by the Public
Company Accounting Oversight Board. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 EYI Industries, Inc.
as of December 31, 2003 and June 30, 2003, respectively, and the results of its
operations, stockholders' equity (deficit) and its cash flows for the six months
ended December 31, 2003 and the year ended June 30, 2003, and the period from
June 21, 2002 through to June 30, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 20 to the financial statements, an error resulted in the
overstatement of additional paid-in capital from the recapitalization of the
Company. Management discovered this issue and has corrected the understatement
of warrants. This error had no effect upon net losses or accumulated deficit.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has an accumulated deficit and a negative
working capital position which raises substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
April 1, 2004, except for Note 20 which is dated September 15, 2004.
F-44
EYI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------
December 31, 2003 December 31, 2002
Restated June 30, 2003 Unaudited
----------- ----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 52,075 $ 16,184 $ 517,487
Restricted cash 223,682 223,682 222,725
Accounts receivable 52,323 26,596 22,458
Related party receivables 5,465 6,162 6,470
Prepaid expenses 28,600 36,484 27,617
Inventory 254,367 302,604 219,360
----------- ----------- -----------
TOTAL CURRENT ASSETS 616,512 611,712 1,016,117
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 143,439 160,611 591,719
OTHER ASSETS
Deposit -- 10,407 --
INTANGIBLE ASSETS 19,801 19,801 1
----------- ----------- -----------
TOTAL ASSETS $ 779,752 $ 802,531 $ 1,607,837
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness $ 259,977 $ 274,880 $ 223,176
Accounts payable and accrued liabilities 836,751 554,830 427,966
Accounts payable - related parties 779,367 545,075 726,670
Customer deposits 6,250 46,292 50,832
Note payable -- -- 15,000
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 1,882,345 1,421,077 1,443,644
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES -- -- --
----------- ----------- -----------
MINORITY INTEREST IN SUBSIDIARY 468,877 485,148 496,090
----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued and outstanding -- -- --
Common stock, $0.001 par value; 300,000,000 shares
authorized,148,180,670, 118,045,603 and
118,045,603 shares issued and outstanding, respectively 148,181 118,046 118,046
Discount on common stock (53,598) (53,598) (53,598)
Additional paid-in capital 827,972 484,281 484,281
Stock warrants 128,385 -- --
Accumulated deficit (2,622,410) (1,652,423) (880,626)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,571,470) (1,103,694) (331,897)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 779,752 $ 802,531 $ 1,607,837
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-45
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------------------------------------------------------
From
June 21, 2002
Six Months Ended Year Ended Six Months Ended (Inception) to
December 31, 2003 June 30, 2003 December 31, 2002 June 30, 2002
------------- ------------- ------------- -------------
REVENUE $ 4,313,579 $ 14,390,049 $ 7,472,349 $ --
COST OF GOODS SOLD 2,845,800 10,511,706 5,676,878 --
------------- ------------- ------------- -------------
GROSS PROFIT 1,467,779 3,878,343 1,795,471 --
------------- ------------- ------------- -------------
OPERATING EXPENSES
Consulting fees 394,200 765,580 385,500 --
Legal and professional 145,001 354,356 -- --
Customer service 488,944 1,270,297 663,727 --
Finance and administration 324,853 835,008 769,926 --
Sales and marketing 92,834 506,276 481,167 --
Telecommunications 231,318 550,480 -- --
Wages and benefits 547,076 959,526 -- --
Warehouse expense 221,882 282,252 381,816 7,967
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 2,446,108 5,523,775 2,682,136 7,967
------------- ------------- ------------- -------------
OPERATING LOSS (978,329) (1,645,432) (886,665) (7,967)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES)
Interest and other income 4,746 1,713 1,610 --
Interest expense (21,879) (12,792) (1,396) --
Foreign currency gain/(discount) 9,205 (16,697) (4,017) --
------------- ------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSES) (7,928) (27,776) (3,803) --
------------- ------------- ------------- -------------
NET LOSS BEFORE TAXES (986,257) (1,673,208) (890,468) (7,967)
PROVISION FOR TAXES -- -- -- --
------------- ------------- ------------- -------------
NET LOSS BEFORE ALLOCATION TO MINORITY INTEREST (986,257) (1,673,208) (890,468)
ALLOCATION OF LOSS TO MINORITY INTEREST 16,270 28,752 17,809 --
------------- ------------- ------------- -------------
NET LOSS $ (969,987) $ (1,644,456) $ (872,659) $ (7,967)
============= ============= ============= =============
BASIC AND DILUTED
NET LOSS PER COMMON SHARE $ nil $ nil $ nil $ nil
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK SHARES OUTSTANDING 128,090,625 118,045,603 118,045,603 15,000,000
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-46
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------------------------------------------------------------------------
Common Stock
----------------------- Additional
Number of Paid-in Discount on Option/ Retained
Shares Amount Capital Common Stock Warrants Earnings Total
--------------------------------------------------------------------------------------------------
Stock issued for cash
on June 21, 2002 23,026,200 $ 23,026 $ 6,974 $ -- $ -- $ -- $ 30,000
Contribution of assets,
liabilities and
subsidiaries acquired
at June 30, 2002 92,104,800 92,105 -- (53,598) -- -- 38,507
Net loss for period
ended June 30, 2002 -- -- -- -- -- (7,967) (7,967)
--------------------------------------------------------------------------------------------------
Balance, June 30, 2002 115,131,000 115,131 6,974 (53,598) -- (7,967) 60,540
Shares issued for cash
in private placement
for $1.50/share,
net of prorata share
of private placement
fees of $61,206 2,914,603 2,915 477,307 -- -- -- 480,222
Net loss for fiscal
year ended
June 30, 2003 -- -- -- -- -- (1,644,456) (1,644,456)
--------------------------------------------------------------------------------------------------
Balance, June 30, 2003 118,045,603 118,046 484,281 (53,598) -- (1,652,423) (1,103,694)
Recapitalization and
share exchange 30,135,067 30,135 343,691 -- 128,385 -- 502,211
Net loss for fiscal
year ended
December 31, 2003 -- -- -- -- -- (969,987) (969,987)
--------------------------------------------------------------------------------------------------
Balance, December 31,
2003 (Restated) 148,180,670 $ 148,181 $ 827,972 $ (53,598) $ 128,385 $(2,622,410) $(1,571,470)
==================================================================================================
The accompanying notes are an integral part of these financial statements.
F-47
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------------- Additional
Number of Paid-in Discount on Option/ Retained
Shares Amount Capital Common Stock Warrants Earnings Total
------ ------ ------- ------------ -------- -------- -----
Stock issued for cash on June 21, 2002 23,026,200 $ 23,026 $ 6,974 $ - $ - $ - $ 30,000
Contribution of assets, liabilities and
subsidiaries acquired at June 30, 2002 92,104,800 92,105 - (53,598) - - 38,507
Net loss for period ended June 30, 2002 - - - - - (7,967) (7,967)
-------------------------------------------------------------------------------------
Balance, June 30, 2002 115,131,000 115,131 6,974 (53,598) - (7,967) 60,540
Shares issued for cash in private
placement for $1.50/share,
net of prorata share of private
placement
fees of $61,206 2,914,603 2,915 477,307 - - - 480,222
Net loss for the period ended
December 31, 2002 - - - - - (872,659) (872,659)
-------------------------------------------------------------------------------------
Balance, December 31, 2002 118,045,603 $118,046 $484,281 $ (53,598) $ - $ (880,626) $(331,897)
The accompanying notes are an integral part of these financial statements.
F-48
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended From
December 31, June 21, 2002
Six Months Ended Year Ended 2002 (Inception) to
December 31, 2003 June 30, 2003 (unaudited) June 30, 2002
----------------- ------------- ------------ --------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net loss $ (969,987) $(1,644,456) $ (872,659) (7,967)
Loss allocated to minority interest (16,270) (28,752) (17,809) --
----------- ----------- ----------- -----------
(986,257) (1,673,208) (890,468) (7,967)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 36,756 52,688 21,263 --
Decrease (increase) in:
Related party receivables 697 66,565 66,257 --
Accounts receivable (25,727) (14,275) (10,137) --
Prepaid expenses 7,884 9,480 18,347 (21,500)
Inventory 48,237 (302,605) (219,360) --
Increase (decrease) in:
Accounts payable 273,549 342,864 216,000 11,467
Accounts payable - related parties 194,292 545,075 726,670 --
Customer deposits (40,042) 46,292 50,830 --
----------- ----------- ----------- -----------
Net cash used by operating activities (490,611) (927,124) (20,598) (18,000)
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Increase in restricted cash -- (223,682) (222,725) --
Purchase of property, plant and equipment (19,584) (82,440) (483,923) --
Purchase of trademarks and formulas -- (21,600) -- --
Increase in security deposit 10,407 (10,406) -- --
----------- ----------- ----------- -----------
Net cash used by investing activities (9,177) (338,128) (706,648) 434
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Decrease in bank indebtedness (14,904) -- 223,176 --
Cash received through recapitalization 550,583 -- 15,000
Issuance of stock, net of private placement costs & warrants -- 994,122 994,123 30,000
----------- ----------- ----------- -----------
Net cash provided by financing activities 535,679 1,269,002 1,232,299 30,000
----------- ----------- ----------- -----------
Net increase in cash and cash equivalents 35,891 3,750 505,053 12,434
CASH - Beginning of Year 16,184 12,434 12,434 --
----------- ----------- ----------- -----------
CASH - End of Period $ 52,075 $ 16,184 $ 517,487 12,434
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ -- $ -- $ -- --
=========== =========== =========== ===========
Income taxes paid $ -- $ -- $ -- --
=========== =========== =========== ===========
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Contribution of assets, liabilities and subsidiaries for stock $ -- $ -- $ -- 38,507
The accompanying notes are an integral part of these financial statements.
F-49
EYI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE 1 - DESCRIPTION OF BUSINESS
Essentially Yours Industries, Inc., was incorporated on June 21, 2002 in the
State of Nevada. The main business activities of Essentially Yours Industries,
Inc. were acquired through a merger with the former entity, Burrard Capital,
Inc., and other entities described in Note 4 concerning the reorganization of
Essentially Yours Industries, Inc. On December 31, 2003, Essentially Yours
Industries, Inc. entered into a share exchange agreement of its stock with Safe
ID Corporation ("Safe ID"). This transaction is being accounted for as a share
exchange and recapitalization. See Note 3. As a result of this transaction, Safe
ID has changed its name to EYI Industries, Inc. ("the Company"), and is acting
as the parent holding company for the operating subsidiaries.
The principal business of the Company is the marketing of health and wellness
care products. The Company sells its products through network marketing
distributors, which in turn, sell the products to the end customers. The Company
maintains its principal business office in Surrey, British Columbia. The Company
has elected to change its year-end from June 30 to December 31.
The Company has four wholly owned subsidiaries. The first subsidiary is Halo
Distributions LLC (hereinafter Halo), which was organized on January 15, 1999,
in the State of Kentucky. Halo is the distribution center for the Company's
product in addition to other products. The second subsidiary is RGM
International Inc., which was incorporated on July 3, 1997, in the State of
Nevada. RGM International Inc. is a dormant investment company, which owns one
percent of Halo. The third subsidiary is Essentially Yours Industries (Canada)
Inc. (hereinafter "EYI Canada"), which was organized on September 13, 2002, in
the province of British Columbia, Canada. EYI Canada markets health and wellness
care products for use in Canada. The fourth subsidiary is 642706 B.C. Ltd.,
doing business as EYI Management, which was organized on February 22, 2002, in
the province of British Columbia, Canada. EYI Management provides accounting and
marketing services to the consolidated entity.
In addition, the Company owns approximately 98% of Essentially Yours Industries,
Inc. ("EYII"), incorporated on June 21, 2002 in the state of Nevada. EYII
markets health and wellness care products for use in USA.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
This summary of significant accounting policies of EYI Industries, Inc., is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America, and have been consistently applied in the preparation of the
financial statements.
Accounting Method
The Company's financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America.
In May 2003, the Financial Account Standards Board issued Statement of Financial
Accounting Standards No. 150, "Accounting for Certain Financial Instruments with
Accounting Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" (hereinafter "SFAS No. 150").
SFAS No. 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in statements of
financial position. Previously, many of those instruments were classified as
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company has not yet
determined the impact of the adoption of the statement.
F-50
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative instruments and Hedging Activities: (hereinafter "SFAS No. 149").
SFAS No. 149 amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement is effective for contracts entered into
or modified after December 31, 2003 and for hedging relationships designated
after December 31, 2003. The adoption of SFAS No. 149 is not expected to have an
impact on the financial position or results of operations of the Company.
In December 2002, the Financial Accounting Standards Board issued Statement No.
148 (hereinafter "SFAS No. 148") on "Accounting for Stock-Based
Compensation--Transition and Disclosure." This statement provides alternative
methods of transition for companies that choose to switch to the fair value
method of accounting for stock options. SFAS No. 148 also makes changes in the
disclosure requirements for stock-based compensation, regardless of which method
of accounting is chosen. Under the new standard, companies must report certain
types of information more prominently and in a more understandable format in the
footnotes to the financial statements, and this information must be included in
interim as well as annual financial statements. Historically, the Company has
not had any stock based compensation and therefore there are no disclosure
requirements of SFAS No. 148 in these financial statements.
In October 2002, the Financial Accounting Standards Board issued Statement No.
147 (hereinafter "SFAS No. 147") on "Acquisitions of Certain Financial
Institutions." This statement provides guidance on the accounting for the
acquisition of a financial institution. The Company's adoption of this standard
does not have an effect on its financial statements.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146," Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). SFAS No. 146 addresses significant
issues regarding the recognition, measurement, and reporting of costs associated
with exit and disposal activities, including restructuring activities. SFAS No.
146 also addresses recognition of certain costs related to terminating a
contract that is not a capital lease, costs to consolidate facilities or
relocate employees, and termination benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred-compensation
contract. There is no impact on the Company's financial position or results of
operations from adopting SFAS No. 146.
Accounts Receivable and Bad Debts
The Company estimates bad debts utilizing the allowance method, based upon past
experience and current market conditions. At December 31, 2003, June 30, 2003,
and December 31, 2002, the Company determined that no allowance was required, as
most sales are transacted via credit card or electronic transfer and therefore
are considered immediately collectible.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments and short-term debt instruments with original maturities of
three months or less to be cash equivalents.
Restricted Cash
Restricted cash includes deposits held in a reserve account in the amount of
$223,682, $223,682 and $222,725 at December 31, 2003, June 30, 2003, and
December 31, 2002, respectively. Such deposits are required by the bank as
protection against unfunded charge backs and returns of credit card
transactions.
Compensated Absences
Employees of the Company are entitled to paid vacation, and sick days, depending
on job classification, length of service, and other factors. The Company accrued
vacation pay in the amounts of $38,000, $39,000 and $0 at December 31, 2003,
June 30, 2003, and December 31, 2002 respectively.
Cost of Sales
Cost of sales consist of the purchase price of products sold, commissions,
inbound shipping charges, net of freight recovered from customers, and packaging
supplies.
F-51
Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (hereinafter "SFAS No. 133"), as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
These statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
At December 31, 2003, June 30, 2003 and December 31, 2002, the Company has not
engaged in any transactions that would be considered derivative instruments or
hedging activities.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128,
which provides for calculation of "basic" and "diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing net
income (loss) available to common shareholders by the weighted average common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity
similar to fully diluted earnings per share. Basic and diluted loss per share
were the same, at the reporting dates, as there were no common stock equivalents
outstanding.
Fair Value of Financial Instruments
The Company's financial instruments as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," include cash, trade accounts receivable, and accounts payable and
accrued expenses. All instruments are accounted for on a historical cost basis,
which, due to the short maturity of these financial instruments, approximates
fair value at December 31, 2003, June 30, 2003, and December 31, 2002.
Foreign Currency Translation and Other Comprehensive Income
The Company has adopted Financial Accounting Standard No. 52. Monetary assets
and liabilities denominated in foreign currencies are translated into United
States dollars at rates of exchange in effect at the balance sheet date. Gains
or losses are included in income for the year. Non-monetary assets, liabilities
and items recorded in income arising from transactions denominated in foreign
currencies are translated at rates of exchange in effect at the date of the
transaction.
As the Company's functional currency is the U.S. dollar, and all translation
gains and losses are transactional, the Company has no assets with value
recorded in Canadian dollar and there is no recognition of other comprehensive
income in the financial statements.
Foreign Currency Valuation and Risk Exposure
While the Company's functional currency is the U.S. dollar and the majority of
its operations are in the United States, the Company maintains its main office
in Surrey, British Columbia. The assets and liabilities relating to the Canadian
operations are exposed to exchange rate fluctuations. Assets and liabilities of
the Company's foreign operations are translated into U.S. dollars at the
year-end exchange rates, and revenue and expenses are translated at the average
exchange rate during the period. The net effect of exchange difference arising
from currency translation is disclosed as a separate component of stockholders'
equity. Realized gains and losses from foreign currency transactions are
reflected in the results of operations.
F-52
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires the recognition of deferred tax liabilities and assets for
the future consequences of events that have been recognized in the Company's
consolidated financial statement or tax returns. Measurement of the deferred
items is based on enacted tax laws. In the event the future consequences of
differences between financial reporting bases and tax bases of the Company's
assets and liabilities results in a deferred tax asset, SFAS No. 109 requires an
evaluation of the probability of being able to realize the future benefits
indicated by such an asset. A valuation allowance related to a deferred tax
asset is recorded when it is more likely than not that some portion or all of
the deferred tax asset will not be realized. See Note 12.
Inventories
The Company records inventories at the lower of cost or market on a first-in,
first-out basis.
Long-lived Assets
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This standard
establishes a single accounting model for long-lived assets to be disposed of by
sale, including discontinued operations, and requires that these long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or discontinued operations.
Accordingly, the Company reviews the carrying amount of long-lived assets for
impairment where events or changes in circumstances indicate that the carrying
amount may not be recoverable. The determination of any impairment would include
a comparison of estimated future cash flows anticipated to be generated during
the remaining life of the assets to the net carrying value of the assets. For
the years ended December 31, 2003, June 30, 2003, and December 31, 2002 no
impairments have been identified.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, which range from three to seven years. See Note 6.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant transactions and balances among
the companies included in the consolidated financial statements have been
eliminated.
Revenue Recognition
The Company recognizes revenue from product sales upon shipment to independent
distributors, the Company's customers. Revenue from administration fees is
recognized upon collection from independent distributors.
Advertising Expenses
Advertising expenses consist primarily of costs incurred in the design,
development, and printing of Company literature and marketing materials. The
Company expenses all advertising expenditures as incurred. The Company's
advertising expenses were $29,073, $75,135 and $11,662 for the periods ended
December 31, 2003, June 30, 2003, and December 31, 2002, respectively.
Use of Estimates
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
F-53
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
(hereafter "SFAS No. 131") which supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," replacing the "industry segment"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS No. 131 also requires disclosures about products and services, geographic
areas and major customers. The adoption of SFAS No. 131 did not affect the
Company's results of operations or financial position. See Note 17.
Going Concern
As shown in the accompanying financial statements, the Company had negative
working capital of approximately $1,266,000 and an accumulated deficit incurred
through December 31, 2003. The Company is currently putting technology in place
which will, if successful, mitigate these factors which raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
Management has established plans designed to increase the sales of the Company's
products, and decrease debt. The Company plans on continuing to reduce expenses,
and with small gains in any combination of network sales, direct sales,
international sales, and warehouse sales, believe that they will eventually be
able to reverse the present deficit. Management intends to seek additional
capital from new equity securities offerings that will provide funds needed to
increase liquidity, fund internal growth and fully implement its business plan.
Management plans include negotiations to convert significant portions of
existing debt into equity.
The timing and amount of capital requirements will depend on a number of
factors, including demand for products and services and the availability of
opportunities for international expansion through affiliations and other
business relationships.
NOTE 3 - SHARE EXCHANGE AGREEMENT
On December 31, 2003, Essentially Yours Industries, Inc. completed a share
exchange agreement with Safe ID Corporation ("Safe ID) and changed its name to
EYI Industries, Inc. Under the terms of the agreement, the Company issued
30,153,067 shares of its common stock to the shareholders of Safe ID. In
relation to this agreement and plan of recapitalization, the Company authorized
a 1 for 7.6754 exchange rate of the originally issued and outstanding
Essentially Yours Industries, Inc. shares. All references in the accompanying
financial statements and notes to the common shares and per share amounts have
been restated to reflect the reverse stock split. The Company also approved an
increase in the number of its authorized common stock shares to 300,000,000 when
in the months prior to the finalization of this agreement, the registrant prior
to the recapitalization sold approximately $550,000 of common stock and warrants
as part of private placement. These stock sales were in anticipation of this
agreement and recapitalization, and as such, are reflected as financing cash
flows.
As Safe ID was a non-operating public company with limited assets, the substance
of the transaction with Safe ID is a capital transaction, rather than a business
combination. The transaction is equivalent to the issuance of stock by the
Company for the net assets of Safe ID, accompanied by a recapitalization. The
accounting is identical to that resulting from a reverse acquisition, except
that no goodwill or other intangibles are recorded. The substantial asset of
Safe ID that was acquired was approximately $32,500 in cash. The liabilities
acquired by the Company under this agreement totaled approximately $11,800.
NOTE 4 - REORGANIZATION
On May 27, 2002, Mr. Jay Sargeant, a shareholder of Essentially Yours
Industries, Corp. ("EYI Corp.") agreed to acquire all of the shares of the
Essentially Yours Industries, Inc. ("EYII"), along with the transfer agreement,
license agreement, and agency appointment agreement as described below, in
settlement of amounts owed to him. As part of this transaction, EYI Corp. agreed
to provide to EYII the services outlined in a management agreement. These
agreements became effective on June 30, 2002. EYII owns ninety-nine percent of
Halo Distributions LLC ("HALO"). The other one percent of HALO is owned by RGM
International, Inc. ("RGM"), another subsidiary of EYI Corp., which was
transferred to Mr. Sargeant as additional consideration.
F-54
On June 30, 2002, the shareholder of EYII exchanged all of the outstanding
shares of EYII for 12,000,000 common shares of Burrard Capital Inc ("Burrard").
Concurrent with this transaction, EYII was merged into Burrard with Burrard
emerging as the surviving entity. The combined entity was renamed Essentially
Yours Industries, Inc. For accounting purposes, the acquisition has been treated
as a recapitalization of EYII with EYII as the acquirer. Prior to this merger,
EYII and RGM were considered to be dormant companies, with the activities of
HALO being consolidated directly with EYII Corp. although the legal ownership
was vested in EYII and RGM. Therefore, the losses from HALO operations and the
other economic impacts prior to June 30, 2002 are considered to be the separate
activity of EYI Corp.
On June 30, 2002, EYII took over the sales and marketing activities of its
former holding company and entered into various agreements with that Company as
follows:
Transfer Agreement
As part of the aforementioned transaction and for consideration of $1, EYI Corp.
transferred and assigned to EYII all of its rights, title and interest in and to
the contracts with its independent business associates and any other contracts
that may be identified by the parties as being inherent or necessary to the
sales and marketing activities to EYII.
License Agreement
EYI Corp. licensed to EYII all of the rights, title, and interest that it may
have in various intellectual properties for $1 per year for a term of 50 years.
The Company has the option at any time to require EYI Corp. to transfer all of
its rights, title, interest in and to the intellectual properties to the Company
at the sum of $1 or such greater sum as may be determined to be the fair market
value of such intellectual property as determined by agreement between the
parties, by arbitration or by the appropriate taxation authorities after all
assessments and appeals have been concluded.
Agency Appointment Agreement
EYI Corp. appointed EYII as the sole and exclusive agent to sell its remaining
inventory on hand as of June 30, 2002 at the prices previously established, and
to continue to sell at such price unless and until any change is agreed upon
with EYI Corp. In consideration for its efforts, the Company is entitled to a
sales commission of fifteen percent on all sales of such inventory.
Management Agreement
EYI Corp. agreed to perform various services such as administration, computer
support, and sales and customer support, on behalf of EYII for a term of one
year commencing June 30, 2002. The services and duties to be provided and
performed by EYI Corp. for EYII shall be determined and agreed upon by the
parties, from time to time, as required, provided however, it is understood and
agreed that such services will primarily consist of assisting EYII in the sales
and marketing business. At the date of these financial statements, the agreement
had expired, and EYII was operating on a month-to-month basis for management
services with EYI Corp.
The remuneration to be paid by EYII to EYI Corp. for the aforementioned services
is to be negotiated by the parties from time to time, provided however, the
parties agree that the remuneration to be paid shall be consistent with industry
standards for the type and nature of the services or duties being provided. At
the present time, EYII has agreed to pay EYI Corp. actual expenses plus a fee of
5% on these expenses.
NOTE 5 - ACCOUNTS RECEIVABLE AND CREDIT RISK
Accounts receivable at December 31, 2003, June 30, 2003 and December 31, 2002
consist primarily of amounts due from third parties for distribution services
provided by Halo.
NOTE 6 - PROPERTY AND EQUIPMENT
Capital assets are recorded at cost. Depreciation is calculated using the
straight-line method over three to seven years. The following is a summary of
property, equipment and accumulated depreciation at December 31, 2003, June 30,
2003, and December 31, 2002:
F-55
December 31, 2003 June 30, 2003 December 31, 2002
----------------------------- ----------------------------- -----------------------------
Accumulated Accumulated Accumulated
Cost Depreciation Cost Depreciation Cost Depreciation
--------- --------------- --------- --------------- --------- ---------------
Warehouse
equipment $ 223,927 $ 175,353 $ 223,927 $ 159,359 $ 223,927 $ 141,287
Furniture and
fixtures 18,698 15,453 18,527 14,074 18,698 11,224
Computer
Equipment &
Software 115,392 40,265 95,527 22,756 497,133 11,313
Office equipment 3,510 2,909 3,510 2,616 3,215 1,998
Leasehold
improvements 32,523 16,631 32,523 14,598 32,523 17,955
--------- -------------- --------- -------------- --------- ------------
Total 394,050 $ 250,611 374,014 $ 213,403 $ 775,496 $ 183,777
============== ============== ============
Less:
accumulated
depreciation 250,611 213,403 183,777
--------- --------- ---------
Total property,
plant and
equipment, net $ 143,439 $ 160,611 $ 591,719
========= ========= =========
Depreciation expense for the periods ended December 31, 2003, June 30, 2003 and
December 31, 2002 was $36,756 and $50,888, and $21,263, respectively.
NOTE 7 - INTANGIBLE ASSETS
Intangible assets consist of rights, title, and interest in and to the contracts
with the Company's independent business associates as well as the rights and
licenses to trademarks and formula for the Company's primary products. These
rights and licenses were obtained from its former holding Company pursuant to a
transfer agreement, as well as from the Company's primary shareholder. See Notes
4 and 9.
Trademarks and Formulas
Costs relating to the purchase of trademarks and formulas were capitalized and
amortized using the straight-line method over ten years, representing the
estimated life of the assets.
The following is a summary of the intangible assets at December 31, 2003, June
30, 2003 and December 31, 2002:
Cost Accumulated Net
Depreciation
----------- ---------------- -----------
Balance, December 31, 2002 $ 1 $ - $ 1
Activity in next six months 21,600 (1,800) 19,800
----------- ---------------- -----------
Balance, June 30, 2003 $ 21,601 $ (1,800) $ 19,801
Activity in next six months - - -
----------- ---------------- -----------
Balance, December 31, 2003 $ 21,601 $ (1,800) $ 19,801
=========== ================ ===========
NOTE 8 - BANK INDEBTEDNESS
Bank indebtedness consists of checks written in excess of funds on deposit. The
underlying bank is used as an imprest account with automatic transfers from the
Company's general account as checks are presented.
NOTE 9 - CAPITAL STOCK
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a
par value of $0.001. As of December 31, 2003, June 30, 2003, and December 31,
2002, the Company has not issued any preferred stock.
F-56
Common Stock
The Company is authorized to issue 300,000,000 shares of common stock. All
shares have equal voting rights, are non-assessable and have one vote per share.
Voting rights are not cumulative and, therefore, the holders of more than 50% of
the common stock could, if they choose to do so, elect all of the directors of
the Company.
In its initial capitalization in June 2002, the Company issued 23,026,200 shares
of common stock for a total of $30,000 cash.
Pursuant to the merger agreement as discussed in Note 4, an additional
92,104,800 shares of common stock were issued to the shareholder of Essentially
Yours Industries, Inc. The transaction was valued at $38,507, representing the
basis of Essentially Yours Industries, Inc. in the assets, liabilities and
subsidiaries that it contributed to Burrard Capital, Inc. At the completion of
the merger, the Company changed its name from Burrard Capital, Inc. to
Essentially Yours Industries, Inc.
In August, 2002, the Company sold, under a private placement offering, 5,400,043
shares of common stock at approximately $0.18 per share for a total of $994,122
in cash, net of private placement costs of $61,206. Of these 5,400,043 shares,
2,485,440 were purchased for $513,900, and were determined to be shares related
to a minority interest, and were subsequently reclassified on the balance sheet
as minority interest in subsidiary. Minority shareholders hold approximately a
1.64% interest in the Company at December 31, 2003.
On December 31, 2003, the Company completed an acquisition agreement with Safe
ID, and at the completion of the merger, the Company changed its name from
Essentially Yours Industries, Inc. to EYI Industries, Inc. In connection with
this reverse merger, the Company issued 30,153,067 shares of its common stock
and warrants to the shareholders of Safe ID. This acquisition was valued at
$502,211. See Note 3 and 11. This transaction resulted in a discount on common
stock of $53,398. See Note 10.
NOTE 10 - DISCOUNT ON COMMON STOCK
On December 31, 2003, as a result of the share exchange agreement between Safe
ID and Essentially Yours Industries, Inc., a discount on common stock was
recorded in the amount of $53,598 to reflect the partial deficit in the par
value of the stock received in the share exchange. This is the result of the
recorded par value of the stock exceeding the original value of the assets
exchanged. At the point in time when the Company's board of directors authorizes
a resolution to do so, the Company will close the discount on common stock
account to the additional paid-in capital account.
NOTE 11 - COMMON STOCK WARRANTS
Warrant Adjustment
During the year ended December 31, 2003, the Company determined that an
additional 916,667 warrants from the reverse acquisition and share exchange with
Safe Id Corporation had not been properly determined and valued at the date of
the change of control nor at December 31, 2003. A correction of an error was
made and is reflected in the financial statements. The warrants were valued at
$45,833. The additional paid-in-capital was reduced by $45,833 and warrants
accounted for in the equity section was increased by the same. There was no
effect on total stockholders equity or upon net income and accumulated deficits.
(See Note 20)
During the period ended December 31, 2003, in connection with the
recapitalization and reverse merger acquisition, the Company issued warrants to
purchase 2,751,746 shares of common stock with an exercise price of $0.20 and
term of two years. In accordance with Statement of Financial Accounting Standard
No. 123, the fair value of the warrants was estimated using the Black Scholes
Option Price Calculation. The following assumptions were made to value the
warrants: share price at $0.03, risk free interest rate of 4%, expected life of
2 years, and expected volatility of 110% with no dividends expected to be paid.
The Company recorded an expense for the value of the warrants based upon these
Black Scholes assumptions of $0.03 per warrant, or $82,552.
Weighted
Number of Average Average
Warrants Remaining Life Exercise Price
---------------- ---------------- ---------------
Outstanding and exercisable 2,751,746 2 $0.11
F-57
NOTE 12 - INCOME TAXES
The significant components of the deferred tax asset at December 31, 2003, June
30, 2003 and December 31, 2002 were as follows:
December 31, June 30, December 31,
2003 2003 2002
--------- --------- ---------
Deferred tax asset:
Net operating loss carryforward $ 871,590 $ 531,855 $ 302,940
Less valuation allowance for tax asset (871,590) (531,855) (302,940)
--------- --------- ---------
Net deferred tax asset $ -- $ -- $ --
========= ========= =========
At December 31, 2003, June 30, 2003, and December 31, 2002, the Company has net
operating loss carryforwards of approximately $2,563,000, $1,564,000, and
$891,000 respectively, which expire in the years 2022 through 2023. The change
in the allowance account from December 31, 2002 to December 31, 2003 was
$568,650.
The Company's subsidiaries in Canada are required to file income tax returns in
British Columbia, Canada. The losses from operations are allocated to both
United States and Canadian operations.
NOTE 13 - COMMITMENTS
Purchase Agreement
On June 30, 2002, the Company entered into a distribution and license agreement
with a company in which one of the Company's directors has an ownership
interest. The agreement gives the Company the exclusive right to market, sell
and distribute certain products for a five-year renewable term. Management
estimates that 90% of the Company's sale volume results from products supplied
under this licensing agreement.
Pursuant to the agreement, the Company is required to purchase the following
amounts of product during the term of the agreement:
June 1, 2003 - May 31, 2004 $ 5,399,152
June 1, 2004 - May 31, 2005 $ 15,426,147
June 1, 2005 - May 31, 2006 $ 38,565,368
June 1, 2006 - May 31, 2007 $ 38,565,368
In the event that the Company is unavailable to meet the minimum purchase
requirements of the licensing agreement or the terms requiring it to pay 15% of
the difference between the minimum purchase amount referred to above and actual
purchases for that year in which there is a shortfall, then the licensor has
various remedies available to it including, renegotiating the agreement,
removing exclusivity rights, or terminating the agreement.
As of the date of these financial statements, the licensor has not made any
additional demands of the Company.
Lease Payments
The Company has operating lease commitments for its premises, office equipment
and an automobile. The minimum annual lease commitments are as follows:
Year ended December 31, Minimum
----------------------- -------------
2004 $ 264,634
2005 177,356
2006 151,739
2007 52,432
F-58
NOTE 14 - CONTINGENCIES
Agency Appointment Agreement
As described in Note 4, the Company effectively acquired from EYI Corp. the
various rights needed to continue the sales and marketing activity of EYI Corp.
Both the transfer agreement and intellectual property license agreement were not
negotiated between parties on an arms length basis. The agreements contain
clauses that call for fair market value price adjustments payable to EYI Corp.
should either of the parties by agreement, arbitration, tax assessment or
through a third party action determine the consideration be less than fair
market value. The value of the property transferred was based upon an outside
professional valuation report and resulted in a reduction of accumulated
dividends owed to Mr. Sargeant by EYI Corp. of $360,000, which became his basis
in his stock in Essentially Yours Industries, Inc.. The assets transferred by
EYI Corp. to Essentially Yours Industries, Inc.. were transferred based upon
their original cost less accumulated depreciation and amortization in accordance
with generally accepted accounting principles.
Other Matters
The Company's predecessor organization, Essentially Yours Industries Corp.
("EYIC"), a British Columbia corporation, has outstanding claims from the
Internal Revenue Service for penalties and interest of approximately $2,000,000.
Furthermore, one or more states may have claims against EYIC for unpaid state
income taxes. Management believes that these claims are limited solely to EYIC
and that any prospective unpaid tax claims against the Company are remote and
unable to be estimated.
NOTE 15 - LOAN PAYABLE
The Company issued a promissory note, related to consulting fees, for a total of
$27,500 on December 15, 2003. The note bears interest at the rate of 10% per
annum, calculated daily from January 30, 2004 should the note not be repaid by
that date. The note is currently in default and interest continues to accrue.
NOTE 16 - CONCENTRATIONS
Bank Accounts
The Company maintains its cash accounts in a single commercial bank. During the
year, the Company may maintain balances in excess of the federally insured
amounts in the accounts that are maintained in the United States. The Company
also maintains funds in commercial banks in Vancouver, British Columbia, in
which funds in U.S. dollars are not insured. At December 31, 2003, June 30,
2003, and December 31, 2002 a total of $1,675, $5,000, and $9,238, respectively,
was not insured.
Foreign Operations
The accompanying balance sheet includes assets of approximately $155,000,
$629,000 and $822,000 at December 31, 2003, June 30, 2003, and December 31,
2002, respectively, relating to the Company's operations in Canada. Although the
country is considered politically and economically stable, it is always possible
that unanticipated events in foreign countries could disrupt the Company's
operations.
Economic Dependence
During the year, the Company purchased approximately 90% of its products for
resale from one company, Nutri-Diem Inc., which is the sole supplier of the
Company's flagship product Calorad. Pursuant to a purchase agreement, the
Company is subject to minimum purchases per annum. See Note 13.
NOTE 17 - SEGMENT REPORTING
The Company is organized into two reportable segments - EYI Industries, Inc. and
Halo. The two segments have different strategic goals and are managed
separately. EYI Industries, Inc., the first reportable segment, is a selling and
marketing company. The second reportable segment, Halo, operating as a
distribution center, derives approximately 90% of its activities from
distributing products for the Company and its subsidiaries.
F-59
The following tables present information about the two segments for December 31,
2003 and June 30, 2003:
Six Months Ended December 31, 2003
-------------------------------------------------------------------------------------------
EYI Ind., Inc. Halo Eliminations Consolidated
-------------------- ----------------- ------------------- --------------------
External Revenue $ 4,218,961 $ 94,618 $ - $ 4,313,579
==================== ================= =================== ====================
Operating Loss $ (855,762) $ (85,656) $ - $ (941,418)
==================== ================= =================== ====================
Loss Before Income Taxes $ (900,601) $ (85,656) $ - $ (986,257)
==================== ================= =================== ====================
Depreciation $ 13,792 $ 22,964 $ - $ -
==================== ================= =================== ====================
Interest Expense $ 21,879 $ - $ - $ -
==================== ================= =================== ====================
Identifiable Assets $ 547,334 $ 160,542 $ - $ 707,876
==================== ================= ===================
General corporate assets 19,801
--------------------
Total assets $ 727,677
====================
Year Ended June 30, 2003
-------------------------------------------------------------------------------------------
EYI Ind., Inc. Halo Eliminations Consolidated
-------------------- ----------------- ------------------- --------------------
External Revenue $ 14,306,684 $ 83,365 $ - $ 14,390,049
==================== ================= =================== ====================
Operating Loss $ (1,526,387) $ (119,045) $ - $ (1,645,432)
==================== ================= =================== --------------------
Loss Before Income Taxes $ (1,554,163) $ (119,045) $ - $ (1,673,208)
==================== ================= =================== ====================
Depreciation $ 9,093 $ 41,795 $ - $ 50,888
==================== ================= =================== ====================
Interest Expense $ 11,272 $ 1,520 $ - $ 12,792
==================== ================= =================== ====================
Identifiable Assets $ 584,655 $ 198,075 $ - $ 782,730
==================== ================= ===================
General corporate assets 19,801
--------------------
Total assets $ 802,531
====================
The accounting policies for the two reportable segments are the same as those
described in the summary of significant accounting policies. The Company
allocates resources to and evaluates performance of its operating segments based
on operating income.
NOTE 18 - RELATED PARTY TRANSACTIONS
Information related to related party transactions regarding the reorganization
can be found in Note 4. Related party information on intangibles is located in
Note 7. Related party commitments are located in Note 13.
Accounts payable to related parties represents amounts due to the president and
chief executive officer for services preformed during the last year. These
payables are non-interest bearing and non-collateralized.
During the year, the Company purchased approximately 90% of its products for
resale from one company, Nutri-Diem Inc., which is owned in part by a director
of the Company. See Note 13 and 15.
From time to time, the Company receives funds from related parties in the form
of loans. These are recorded as unsecured, non-interest bearing, short-term
loans, payable upon demand. At December 31, 2003, there was one related party
loan in the amount of $50,000.
NOTE 19 - SUBSEQUENT EVENTS
On March 24, 2004, the Company entered into a promissory note for monies
received in the amount of $10,000. The note is due on demand and interest
accrues at the rate of 5% per annum.
NOTE 20 - CORRECTION OF AN ERROR
Subsequent to the issuance of the original financial statements for the year
ended December 31, 2003, management discovered that certain accounting positions
and information were not correct.
F-60
During the year ended December 31, 2003, the Company determined that additional
916,667 warrants from the reverse acquisition and share exchange with Safe Id
Corporation had not been properly determined and valued at the date of the
change of control nor at December 31, 2003. Management determined that this
transaction had not been properly stated and had the effect of the overstatement
of additional paid in capital of $45,833 and the understatement of warrants of
$45,833. This restatement had no effect on the net loss for the year.
This correction and restatement had the no cumulative effect on the net loss or
accumulated deficit for the year, and had no effect on the losses per share for
the year ending December 31, 2003.
December 31, 2003
---------------------------
Originally
Reported Restated
---------- -----------
Financial Position:
Additional paid in capital $ 873,805 $ 827,972
Stock warrants $ 82,552 $ 128,385
Net Loss per Share nil nil
F-61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification Of Directors And Officers
EYI Industries' bylaws, as amended provide that we have the power to
indemnify any officer or director against damages if such person acted in good
faith and in a manner the person reasonably believed to be in the best interests
of our Company. No indemnification may be made (i) if a person is adjudged
liable unless a Court determines that such person is entitled to such
indemnification, (ii) with respect to amounts paid in settlement without court
approval or (iii) expenses incurred in defending any action without court
approval.
Item 25. Other Expenses Of Issuance And Distribution
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. All expenses will be paid by EYI Industries.
Securities and Exchange Commission Registration Fee $ 350
Printing and Engraving Expenses $ 5,000
Accounting Fees and Expenses $ 20,000
Legal Fees and Expenses $ 50,000
Miscellaneous $ 9,650
----------
TOTAL $ 85,000
==========
Item 26. Recent Sales Of Unregistered Securities
On January 1, 2004 the Company entered into an agreement with a consultant
to provide services in exchange for 250,000 common shares at $0.28.During the
quarter ended March 31, 2004 we issued 100,000 shares of our common stock at a
price of $0.26 per share to a consultant in respect of fees owed for certain
consulting services provided to us by the consultant. All securities issued were
endorsed with a restrictive legend confirming that the securities cannot be
resold without registration under the Securities Act or an applicable exemption
from the registration requirements of the Securities Act. The issuance was
completed pursuant to Section 4(2) of the Securities Act on the basis that the
consultant was a sophisticated investor.
During the quarter ended June 30, 2004 we issued 50,000 shares of our
common stock at a price of $0.22 per share to a consultant in respect of fees
owed for certain consulting services provided to us by the consultant. All
securities issued were endorsed with a restrictive legend confirming that the
securities cannot be resold without registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
The issuance was completed pursuant to Section 4(2) of the Securities Act on the
basis that the consultant was a sophisticated investor.
During the quarter ended June 30, 2004, we issued 5,476,190 units at a
price of $0.21 per unit to Eyewonder in respect of certain amounts owed to
Eyewonder under our Letter Agreement with Eyewonder. Each unit was comprised of
one share of our common stock and one share purchase warrant entitling Eyewonder
to purchase one share of our common stock at an exercise price of $0.30 per
share for a period expiring May 4, 2009. The issuance was completed pursuant to
Section 4(2) of the Securities Act on the basis that Eyewonder was a
sophisticated investor.
As of June 7, 2004, we completed the sale of 136,548 units at a price of
$0.21 per unit for proceeds of $28,675 to seven investors. Each unit was
comprised of one share of our common stock and one share purchase warrant. Each
share purchase warrant entitles the holder to purchase one share of our common
stock at a price of $0.30 per share for the three year period following closing.
A total of 136,548 shares and 136,548 share purchase warrants were issued. The
purchasers consisted of seven "accredited investors", as defined by Rule 501 of
Regulation D of the Securities Act. The sales were completed pursuant to Rule
506 of Regulation D of the Securities Act. All securities issued were endorsed
with a restrictive legend confirming that the securities cannot be resold
without registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act.
II-1
On June 22, 2004, we entered into a secured convertible debenture
transaction with Cornell Capital Partners in the principal amount of $500,000.
The sale of these Secured Convertible Debentures is complete. EYI Industries
received $250,000 from the issuance of the first Secured Convertible Debenture
on June 22, 2004, and we received $250,000 five business days following the
filing of the accompanying registration statement. The Secured Convertible
Debentures are convertible at the holder's option any time up to maturity at a
conversion price equal to the lower of (i) 120% of the closing bid price of the
common stock as of the date of issuance, or (ii) 80% of the average of the
lowest daily volume weighted average price of our common stock for the 5 trading
days immediately preceding the conversion date. At maturity, the remaining
unpaid principal and accrued interest under the debentures shall 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 common
stock as of the date of issuance or (ii) 80% of the lowest closing bid price of
the common stock for the lowest trading days of the 5 trading days immediately
preceding the conversion date. The Secured Convertible Debenture is secured by
all of EYI Industries' assets. The Secured Convertible Debentures accrue
interest at a rate of 5% per year and have a term of 3 years. In the event the
Secured Convertible Debentures are redeemed, then EYI Industries will issue to
the holders a warrant to purchase 50,000 shares for every $100,000 redeemed at
an exercise price of 120% of the closing bid price as of June 22, 2004. The
holders purchased the Secured Convertible Debentures from EYI Industries in a
private placement on June 22, 2004. On September 24, 2004, we issued the second
secured convertible debenture in the principal amount of $250,000 to Cornell
Capital Partners on the same terms and conditions as the secured convertible
debenture described above. EYI Industries is registering in this offering
8,352,823 shares of common stock underlying the Secured Convertible Debentures.
On April 4, 2005, Cornell Capital Partners assigned all of its rights and
interests in the secured convertible debentures to Taib Bank E.C. All investment
decisions of Taib Bank E.C. are made by Larry Chaleff, its Managing Director. In
addition, on April 4, 2005, EYI Industries and Taib Bank E.C. entered into a
Redemption Agreement, whereby EYI Industries agreed to first use any proceeds
received by EYI Industries under the Equity Distribution Agreement with Cornell
Capital Partners to redeem any remaining principal and accrued interest under
the assigned Secured Convertible Debentures.
* In February 2005, the company issued 800,000 shares of our common stock at
a deemed price of $0.05 per share to Janet Carpenter. These shares were
given to Ms. Carpenter in consideration of her providing the guarantee and
pledge required for our loan agreement with Cornell Capital.
Share of Common
Year Name of Holder Date Stock Sold Reason Shares Issued
---- -------------- ---- ---------- --------------------
2005 Janet Carpenter February 2005 800,000 Shares issued in lieu
of guaranty and pledge.
2004 Private Placement at January 2004 857,143 Private Placement
$0.14 per unit: warrants raise capital
at $0.20
Rajesh Raniga Inc. January 2004 250,000 Consulting Fees
Private Placement at March 2004 609,312 Private Placement
$0.21 per unit; warrants raise capital
at $0.30
Equis Capital Corp. March 2004 100,000 Consulting Fees
Eyewonder Inc. May 2004 5,476,190 Service Fees
Michael Hatrak May 2004 50,000 Consulting Fees
Private Placement at June 2004 566,833 Private Placement to
$0.21 per unit; warrants raise capital
at $0.30
Cornell Capital Partners, LP June 2004 1,266,589 Commitment fee
pursuant to Standby
Equity Distribution Agreement
Newbridge Securities June 2004 33,411 Placement Agent fee
Corporation in connection with
Standby Equity Distribution
Agreement
2003* PNG Trading Co. Ltd. February 2003 250,000 Issued in lieu of funds
received
Hightech International March 2003 2,120,000 Settlement of Debt
Private Placement at September 2003 3,573,924 Private Placement to
$0.14 per unit; warrants raise capital
at $0.20
Michel Grise December 2003 357,143 Private Placement to
raise capital
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With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding EYI so as to make an informed investment decision. More specifically,
EYI had a reasonable basis to believe that each purchaser was an "accredited
investor" as defined in Regulation D of the 1933 Act and otherwise had the
requisite sophistication to make an investment in EYI's common stock.
-------------------
* Current management of EYI Industries has limited information with respect
to the issuances of unregistered securities prior to the Share Exchange
transaction consummated on December 31, 2003 between our company and
certain shareholders of Essentially Yours Industries, Inc.
Item 27. Index to Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Articles of Incorporation.(1)
3.2 Certificate of Amendment to Articles of Incorporation dated December 29,
2003.(11)
3.3 Certificate of Amendment to Articles of Incorporation dated December 31,
2003.(11)
3.4 Bylaws.(1)
3.5 Amended Bylaws. (12)
5.1 Opinion re: legality (18)
10.1 Consulting Agreement, dated as of November 5, 2002, between Essentially
Yours Industries, Inc., a Nevada corporation, and Flaming Gorge, Inc.(1)
10.2 Consulting Agreement, dated as of November 5, 2002, between Essentially
Yours Industries, Inc., a Nevada corporation, and O'Neill Enterprises,
Inc.(1)
10.3 First Amendment to Trust Agreement dated December 23, 2003, between Jay
Sargeant and twelve named trust beneficiaries, revising the terms of the
Declaration of Trust dated as of May 27, 2002, between Jay Sargeant and
twelve named trust beneficiaries.(5)
10.4 Registration Rights Agreement, dated December 31, 2003, by and among Safe
ID Corporation, A Nevada corporation, and certain shareholders of EYI
Industries, Inc., A Nevada corporation.(5)
10.5 Stock Compensation Program(4)
10.6 Consulting Agreement dated December 27, 2003 between Rajesh Raniga Inc.
and Safe ID Corporation.(6)
10.7 Consulting Agreement dated January 1, 2004 between EYI Industries, Inc.
and O'Neill Enterprises Inc.(6)
II-3
10.8 Consulting Agreement dated January 1, 2004 between EYI Industries, Inc.
and Flaming Gorge, Inc. (6)
10.9 Addendum to the Distribution and License Agreement between Essentially
Yours Industries, Inc. and Nutri-Diem Inc. dated April 30, 2004.(6)
10.10 Letter Agreement dated May 4, 2004 between Eye Wonder, Inc. and EYI
Industries, Inc.(6)
10.11 Standby Equity Distribution Agreement, dated June 22, 2004 by and between
EYI Industries, Inc. and Cornell Capital Partners, LP(6)
10.12 Registration Rights Agreement, dated June 22, 2004 by and between EYI
Industries, Inc. and Cornell Capital Partners, LP(6)
10.13 Escrow Agreement, dated June 22, 2004 by and between EYI Industries, Inc.
and Cornell Capital Partners, LP(6)
10.14 Placement Agent Agreement, dated June 22, 2004 by and between EYI
Industries, Inc. and Cornell Capital Partners, LP(6)
10.15 Compensation Debenture, dated June 22, 2004(7)
10.16 Securities Purchase Agreement, dated June 22, 2004 by and between EYI
Industries, Inc. and Cornell Capital Partners, LP(6)
10.17 Investor Registration Rights Agreement, dated June 22, 2004 by and between
EYI Industries, Inc. and Cornell Capital Partners, LP(6)
10.18 Security Agreement, dated June 22, 2004 by and between EYI Industries,
Inc. and Cornell Capital Partners, LP(6)
10.19 Irrevocable Transfer Agent Instructions, dated June 22, 2004, by and among
EYI Industries, Inc., Cornell Capital Partners, LP and Corporate Stock
Transfer(6)
10.20 Escrow Agreement, dated June 22, 2004 by and among EYI Industries, Inc.,
Cornell Capital Partners, L.P. and Butler Gonzalez, LLP(6)
10.21 Form of Secured Convertible Debenture(6)
10.22 Form of Warrant(7)
10.23 Letter Agreement dated May 25, 2004 between EYI Industries, Inc. and
Source Capital Group, Inc.(8)
10.24 Lease Agreement dated May 1, 2003 among 468058 B.C. Ltd., 642706 B.C.
Ltd., Essentially Yours Industries Corp., and Essentially Yours
Industries, Inc. (8)
10.25 Amendment to Lease Agreement dated January 9, 2004 between Business
Centers, LLC and Halo Distribution, LLC. (8)
10.26 Subsidy Agreement dated July 23, 2004 between Essentially Yours
Industries, Inc. and Winslow Drive Corp. (8)
10.27 Subsidy Agreement dated July 23, 2004 between Essentially Yours
Industries, Inc. and Premier Wellness Products. (8)
10.28 Subsidy Agreement dated July 23, 2004 between Essentially Yours
Industries, Inc. and Stancorp. (8)
10.29 5% Secured Convertible Debenture dated September 24, 2004 between EYI
Industries, Inc. and Cornell Capital Partners, LP(8)
10.30 5% Secured Convertible Debenture dated September 27, 2004 between EYI
Industries, Inc. and Kent Chou(8)
10.31 5% Secured Convertible Debenture dated September 27, 2004 between EYI
Industries, Inc. Taib Bank, E.C.(8)
10.32 Assignment Agreement dated September 27, 2004 between Cornell Capital
Partners, LP and Taib Bank, E.C. (8)
II-4
10.33 Assignment Agreement dated September 27, 2004 between Cornell Capital
Partners, LP and Kent Chou(8)
10.34 Joint Venture Agreement dated May 28, 2004 between EYI Industries, Inc.,
World Wide Buyer's Club Inc. and Supra Group, Inc.(9)
10.35 Indenture of Lease Agreement dated January 3, 2005 between Golden Plaza
Company Ltd., 681563 B.C. Ltd., and 642706 B.C. Ltd.(10)
10.36 Consulting Services Agreement dated March 5, 2004 between EYI Industries,
Inc. and EQUIS Capital Corp.(13)
10.37 Letter dated May 25, 2004 between Source Capital Group, Inc. and EYI
Industries, Inc.(14)
10.38 Consulting Agreement dated April 1, 2004 between EYI Industries, Inc. and
Daniel Matos(14)
10.39 Loan Agreement between Janet Carpenter and EYI Industries, Inc., dated
February 10, 2005(15)
10.40 Promissory Note dated February 10, 2005 between Janet Carpenter and EYI
Industries(15)
10.41 Bonus Share Agreement between Janet Carpenter and EYI Industries, Inc.
dated February 14, 2005(15)
10.42 Pledge and Escrow Agreement dated February 24, 2005 between Janet
Carpenter, Cornell Capital Partners, LP and David Gonzalez. (15)
10.43 Guaranty Agreement dated February 24, 2005 between Janet Carpenter,
Cornell Capital Partners, LP(15)
10.44 Secured Promissory Note dated February 24, 2005 between EYI Industries,
Inc. and Cornell Capital Partners, LP(15)
10.45 Agreement dated April 22, 2005 between Essentially Yours Industries Inc.
and Source 1 Fulfillment(17)
10.46 Reseller Agreement dated May 11, 2005 between Essentially Yours Industries
Inc. and Metals & Arsenic Removal Technology, Inc. (16)
10.47 Termination Agreement dated May 13, 2005 between EYI Industries Inc. and
Cornell Capital Partners, LP(17)
10.48 Standby Equity Distribution Agreement dated May 13, 2005 between EYI
Industries Inc. and Cornell Capital Partners, LP(17)
10.49 Registration Rights Agreement dated May 13, 2005 between EYI Industries
Inc. and Cornell Capital Partners, LP(17)
10.50 Escrow Agreement dated May 13, 2005 between EYI Industries Inc. and
Cornell Capital Partners, LP(17)
10.51 Placement Agent Agreement dated May 13, 2005 between EYI Industries Inc.
and Cornell Capital Partners, LP(17)
14.1 Code of Ethics(5)
21.1 List of Subsidiaries(15)
23.1 Consent of Williams & Webster, P.S. (18)
23.2 Consent of Burton Bartlett & Glogovac (19)
--------------
(1) Filed as an exhibit to the registration statement on Form 10-SB/A of Safe
ID Corporation, filed with the SEC on September 21, 2000.
(2) Filed as an exhibit to the registration statement on Form SB-2 of
Essentially Yours Industries, Inc., filed with the SEC on November 12,
2002.
(3) Filed as an exhibit to our Current Report on Form 8-K, filed with the SEC
on January 8, 2004.
(4) Filed as an exhibit to our Registration Statement on Form S-8, filed with
the SEC on March 30, 2004.
(5) Filed as an exhibit to our annual report on Form 10-KSB for the year ended
December 31, 2003, filed with the SEC on April 14, 2004.
(6) Filed as an exhibit to our quarterly report on Form 10-QSB for the period
ended March 31, 2004, filed with the SEC on May 24, 2004.
(7) Filed as an exhibit to our registration statement on Form SB-2, filed with
the SEC on September 17, 2004.
(8) Filed as an exhibit to our quarterly report on Form 10-QSB for the period
ended September 30, 2004, filed with the SEC on November 22, 2004.
II-5
(9) Filed as an exhibit to our Amendment No. 1 to our registration statement
on Form SB-2 on December 23, 2004.
(10) Filed as an exhibit to our Current Report on Form 8-K, filed with the SEC
on January 12, 2005.
(11) Filed as an exhibit to our quarterly report on Form 10-QSB for the period
ended September 30, 2004, filed with the SEC on November 22, 2004.
(12) Filed as an exhibit to our Current Report on Form 8-K, filed with the SEC
on March 10, 2005.
(13) Filed as an exhibit to our quarterly report on Form 10-QSB/A for the
period ended March 31, 2004, filed with the SEC on December 15, 2004.
(14) Filed as an exhibit to our quarterly report on Form 10-QSB/A for the
period ended June 30, 2004, filed with the SEC on December 15, 2004.
(15) Filed as an exhibit to our annual report on Form 10-KSB for the period
ended December 31, 2004, filed with the SEC on April 18, 2005.
(16) Filed as an exhibit to our Current Report on Form 8-K, filed with the SEC
on May 17, 2005.
(17) Filed as an exhibit to our quarterly report on Form 10-QSB for the period
ended March 31, 2005, filed with the SEC on May 23, 2005.
(18) To be filed by amendment.
(19) Contained in Exhibit 5.1.
II-6
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 (the "ACT");
(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 percent 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 Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the bona fide offering thereof.
(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 Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on this Form SB-2 and authorized this
registration statement to be signed on our behalf by the undersigned, in
Burnaby, British Columbia, Canada May 27, 2005.
EYI INDUSTRIES INC.
By:/s/ Jay Sargeant
-----------------------------------------
Name: Jay Sargeant
Title: President, Chief Executive Officer
and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jay Sargeant his true and lawful attorney-in-fact
and agent, with full power of substitution and revocation, for him and in his
name, place and stead, in any and all capacities (until revoked in writing), to
sign any and all amendments (including post-effective amendments) to this
Registration Statement and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done as fully
for all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or is substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jay Sargeant President, Chief Executive Officer May 27, 2005
---------------- and Director
Jay Sargeant
/s/ Dori O' Neill Executive Vice President, Chief Operations May 27, 2005
---------------- Officer, Treasurer, Secretary and Director
Dori O' Neill
/s/ Rajesh Raniga Chief Financial Officer and May 27, 2005
---------------- Principal Accounting Officer
Rajesh Raniga
/s/ Bruce Nants Director May 27, 2005
----------------
Bruce Nants
II-8