UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2005
|_| Transition Report pursuant to 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period __________ to __________
Commission File Number: 000-29803
EYI INDUSTRIES, INC.
--------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0407078
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7865 Edmonds Street
Burnaby, BC CANADA V3N 1B9
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (604) 759-5031
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NOT APPLICABLE
--------------
(Former name, former address and former fiscal year end, if
changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days:
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 167,803,292 shares of common stock
issued and outstanding as of August 19, 2005.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B, and,
therefore, do not include all information and footnotes necessary for a complete
presentation of financial position, results of operations, cash flows, and
stockholders' equity in conformity with accounting principles generally accepted
in the United States of America. In the opinion of management, all adjustments
considered necessary for a fair presentation of the results of operations and
financial position have been included and all such adjustments are of a normal
recurring nature. Operating results for the quarterly period ended June 30, 2005
are not necessarily indicative of the results that can be expected for the year
ending December 31, 2005.
As used in this quarterly report, the terms "we", "us", "our", "EYI" and "our
company" mean EYI Industries, Inc. and its subsidiaries unless otherwise
indicated. All dollar amounts in this quarterly report are in U.S. dollars
unless otherwise stated.
2
EYI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
June 30, 2005 December 31, 2004
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ -- $ --
Restricted cash -- 100,248
Accounts receivable, net of allowance 40,455 36,061
Related party receivables 4,295 -
Prepaid expenses 669,157 852,764
Inventory 191,210 239,641
TOTAL CURRENT ASSETS 905,116 1,228,714
OTHER ASSETS
Property, plant and equipment, net 30,079 32,596
Deposits 27,746 2,236
TOTAL OTHER ASSETS 57,825 34,832
INTANGIBLE ASSETS 15,481 16,561
TOTAL ASSETS $ 978,422 $ 1,280,107
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank indebtedness $ 24,112 $ 72,456
Accounts payable and accrued liabilities 1,467,479 1,141,001
Accounts payable - related parties 765,241 159,455
Interest payable, convertible debt 31,364 10,616
Notes payable - related party 40,000 90,000
Convertible debt-related party, net of discount 432,918 379,724
Loan payable, Cornell 200,000 -
TOTAL CURRENT LIABILITIES 2,961,114 1,853,252
LIABILITIES FROM DISCONTINUED OPERATIONS 382,067 405,838
MINORITY INTEREST IN SUBSIDIARY 306,514 346,819
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, 167,803,292 and 162,753,092 shares issued
and outstanding, respectively 167,803 162,753
Additional paid-in capital 3,708,856 3,048,606
Stock options and warrants 2,378,994 2,563,043
Subscription receivable (195,000) (15,000)
Accumulated deficit (8,731,926) (7,085,205)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,671,273) (1,325,802)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 978,422 $ 1,280,107
The accompanying condensed notes are an integral part of these
financial statements.
3
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
Three Months Ended Six Month Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUE $ 1,225,216 1,928,630 $ 2,514,283 3,420,438
COST OF GOODS SOLD 254,402 668,933 489,936 1,082,693
970,814
GROSS PROFIT BEFORE COMMISSION EXPENSE 1,259,697 2,024,347 2,337,745
COMMISSION EXPENSE 450,857 664,290 922,462 1,078,895
GROSS PROFIT AFTER COST OF GOODS SOLD AND
COMMISSION EXPENSE 519,957 595,407 1,101,885 1,258,850
GROSS PROFIT AFTER COMMISSION EXPENSE
OPERATING EXPENSES
Consulting fees 240,848 255,374 478,810 505,894
Legal and professional 80,512 147,072 146,757 166,374
Customer service 65,471 253,078 152,005 377,417
Finance and administration 155,398 47,730 363,478 266,953
Sales and marketing 1,273 8,253 4,991 35,809
Telecommunications 124,890 90,369 242,258 193,067
Wages and benefits 371,526 270,599 743,152 486,669
Warehouse expense 16,819 119,036 61,846 157,142
TOTAL OPERATING EXPENSES 1,056,737 1,191,511 2,193,297 2,189,325
OPERATING LOSS (536,780) (596,104) (1,091,412) (930,475)
OTHER INCOME (EXPENSES)
Interest and other income 319 3,173 3,468 9,411
Interest expense (34,442) (12,511) (54,578) (33,991)
Foreign currency gain/(discount) (13,191) 2,616 (149,487) (6,187)
TOTAL OTHER INCOME (EXPENSES) (47,314) (6,722) (200,597) (30,767)
NET LOSS BEFORE TAXES (584,094 (602,826) (1,292,009) (961,242)
PROVISION FOR INCOME TAXES -- -- -- --
NET LOSS BEFORE ALLOCATION TO MINORITY
INTEREST (584,094) (602,826) (1,292,009) (961,242)
ALLOCATION OF LOSS TO MINORITY INTEREST 17,161 13,067 32,749 21,683
ALLOCATION OF LOSS TO DISCONTINUED OPERATIONS (296,000) (98,283) (387,461) (170,690)
NET LOSS $ (862,933) (688,042) $ (1,646,721) (1,110,249)
BASIC AND DILUTED
NET LOSS PER COMMON SHARE $ (0.01) nil$ $ (0.01) (0.01)
NET LOSS PER COMMON SHARE: DISCONTINUED
OPERATIONS nil nil nil nil
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK SHARES OUSTANDING
FOR BASIC AND DILUTED CALCULATION 157,060,345 154,888,830 149,845,868 152,852,287
The accompanying condensed notes are an integral part of these
financial statements.
4
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
Common Stock Discount
----------------------- Additional on
Number of Paid-in Common Subscription Option/ Retained
Shares Amount Capital 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
5
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
--------------------------------------------------------------------------------
Common Stock Discount
----------------------- Additional on
Number of Paid-in Common Subscription Option/ Retained
Shares Amount Capital Stock Receivable Warrants Earnings Total
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
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
6
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
--------------------------------------------------------------------------------
Common Stock Discount
----------------------- Additional on
Number of Paid-in Common Subscription Option/ Retained
Shares Amount Capital Stock Receivable Warrants Earnings Total
Cancellation of
discount on
common stock -- -- (53,598) 53,598 -- -- -- --
Beneficial
conversion of
convertible debt -- -- 250,000 -- -- -- -- 250,000
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 $162,753,29 $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
Nazlin-options
exercised 250,000 250 14,750 -- -- (5,000) -- 10,000
Gladys Sargeant
506 Subscription
Agreement 1,000,000 1,000 4,000 -- -- 15,000 -- 20,000
Vested stock
option issued for
consulting at an
average price of
$0.03 per share -- -- -- -- -- 62,250 -- 62,250
Cancelled stock
options issued
for compensation
and consulting at
an average price
of $0.08 per
option -- -- -- -- -- (425,300) 425,300 --
7
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
--------------------------------------------------------------------------------
Common Stock Discount
----------------------- Additional on
Number of Paid-in Common Subscription Option/ Retained
Shares Amount Capital Stock Receivable Warrants Earnings Total
Net loss for
period ended
June 30, 2005 -- -- -- -- -- -- (1,646,721) (1,646,721)
Balance June 30,
2005 (Unaudited) $167,803,292 $ 167,803 3,708,856 $ -- $ (195,000) $ 2,378,994 $ (8,731,926) $(2,671,273)
The accompanying condensed notes are an integral part of these
financial statements.
8
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Six Months Ended
June 30, 2005 June 30, 2004
(Unaudited) (Unaudited)
---------------------------------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net loss $ (1,646,720) $ (1,110,249)
Loss allocated to minority interest 32,750 21,683
(1,679,470) (1,131,932)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 44,064 50,493
Stock and warrants issued for employee
compensation and consulting 231,250 198,000
Stock issued for options exercised in lieu
of legal fees -- 11,000
Non cash return of legal fees -- (47,500)
Stock issued for financing guaranty and pledge 40,000 --
Discount recognized on convertible debt 38,159 --
Liabilities in excess of assets on
discontinued operations 382,06 301,788
Decrease (increase) in:
Related party receivables 427 470
Accounts receivable 5,351 47,651
Prepaid expenses 188,013 48,675
Inventory 48,431 46,049
Deposits (3,385) --
Increase (decrease) in:
Accounts payable and accrued liabilities 249,301 (94,364)
Accounts payable - related parties 175,096 35,801
Net cash used by operating activities (280,696) (533,869)
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Decrease/(increase) in restricted cash 100,248 13,368
Decrease (increase) in property, plant, and equipment (12,726) 49,352
Net cash provided by investing activities 87,522 62,720
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Net change in bank indebtedness (48,344) (217,158)
Issuance of stock, net of private placement costs &
warrants 8,500 485,045
Proceeds from convertible debt -- 202,500
Net proceeds from loan payable-Cornell 200,000 --
Net cash provided by financing activities 160,156 470,387
Net increase in cash and cash equivalents (33,018) (762)
CASH - Beginning of Year 33,018 52,075
CASH - End of Period $ -- $ 51,313
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ 34,442 $ 33,991
Income taxes paid $ -- $ --
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Stock subscription issued for promissory note $ 180,000 $ 15,000
Stock options vested for compensation and consulting $ 231,250 $ --
Stock issued for options exercised in lieu of debt $ -- $ 528,000
Stock issued for options exercised in lieu of legal fees $ 10,000 $ 71,000
Stock and warrants issued for prepaid expenses $ -- $ 1,150,000
Stock issued for deferred offering costs $ -- $ 390,000
Stock and warrants issued for expenses $ -- $ 198,000
Stock and warrants issued through 506 Private Placement $ 20,000 $ --
The accompanying condensed notes are an integral part of these
financial statements.
9
EYI INDUSTRIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 was the distribution center for the Company's
product in addition to other products until April 30, 2005 at which time the
Company made the decision to discontinue its operations (see Note 11). 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 read 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 accruals have been made to the financial statements.
The preparation of financial statements in accordance with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities known to exist as of the date the financial statements are
published, and the reported amounts of revenues and expenses during the
reporting period. Uncertainties with respect to such estimates and assumptions
are inherent in the preparation of the Company's financial statements;
accordingly, it is possible that the actual results could differ from these
estimates and assumptions that could have a material effect on the reported
amounts of the Company's financial position and results of operations.
10
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.
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.
Reclassification
Certain amounts from prior periods have been reclassified to conform to the
current period presentation. This reclassification has resulted in no changes to
the Company's accumulated deficit or net losses presented.
Restricted Cash
Restricted cash includes deposits held in a reserve account in the amount of $0
and $100,248 at June 30, 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. Effective June 9, 2005, the bank deemed that this
deposit is no longer necessary and released the funds to the Company.
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 $74,646 and $117,700 for the six months
ended June 30, 2005 and June 30, 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 $2,056,000 and an accumulated deficit incurred
through June 30, 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.
11
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.
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.
12
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, net of allowance at June 30, 2005 and December 31, 2004
consist of amounts due from 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.
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, E.C. 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.
13
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 June 30, 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. This agreement was replaced with a
revised Standby Equity Distribution Agreement with Cornell dated May 13, 2005.
The terms of the agreement remain the same. (See Note 10.)
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.
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 June 30, 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 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 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.
14
On April 5, 2005, 250,000 options were exercised at $0.04 per share at the
aggregate exercise price of $10,000. 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 date of issuance.
On June 9, 2005, the Company sold, under a private placement offering, 1,000,000
shares of common stock at $0.02 per share for a total of $8,500 in cash and
$11,500 in the form of forgone debt owed to a consultant and related party. In
addition, 3,000,000 warrants were also granted in conjunction with this offering
at a price of $0.02. (see Note 9.)
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 June 30, 2005; estimated risk-free interest rate of 4%, estimated
volatility of 120% and term of two years.
Warrants
During the quarter ended June 30, 2005, the Company sold 1,000,000 common shares
through a private placement. In addition, the purchaser of the shares received
warrants to purchase three additional share of common stock for each share
purchased, exercisable at $0.02 per share for a period of two years.
Stock Options
Following is a summary of the status of the stock options during the six months:
Weighted Average
Number of Shares Exercise Price
--------------------- ----------------------
Outstanding at December 31, 2004 19,747,390 $ 0.14
Granted 5,106,610 $ 0.06
Exercised (8,436,610) $ 0.06
Forfeited -- $ --
--------------------- -----------------------
Options outstanding at June 30, 2005 16,417,390 $ 0.144
===================== =======================
Options exercisable at June 30, 2005 13,772,890 $ 0.13
===================== =======================
Weighted average fair value of options granted $ 0.12
=======================
Summarized information about stock options outstanding and exercisable at June
30, 2005 is as follows:
15
-----------------------------------------------------------------
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
Number of Weighted Average Average Exercise Price
Warrants Remaining Life
--------------------------------------------------------------------------
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
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.
16
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 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. (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.)
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.
17
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.
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.
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 1,000 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.
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.
18
NOTE 11 - DISCONTINUED OPERATIONS
During the period ended June 30, 2005, the Company elected to discontinue the
operations of Halo Distribution LLC (hereinafter "Halo"), a subsidiary of the
Company and recorded costs associated from discontinued operations of $387,461
for the period ended June 30, 2005. In addition, the Company reclassified the
December 31, 2004 balance sheet to reflect $405,838 of liabilities from the
discontinued subsidiary and recorded costs from discontinued operations of
$170,690 for the period ended June 30, 2004.
The assets and liabilities disposed of from discontinued operations at June 30,
2005 were as follows:
Total Assets $ --
Accounts payable $ 78,217
Accrued liabilities 198,850
Accounts payable - related party 105,000
-----------
Total Liabilities 382,067
Liabilities in excess of assets $ 382,067
===========
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" (hereinafter "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. SFAS No. 146 was issued in June 2002, effective
December 31, 2002. The Company's financial position and results of operations
have not been affected by adopting SFAS No. 146.
NOTE 12 - 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 13 - 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 June 30, 2005 and December 31,
2004, a total of $0, and $248 respectively, was not insured.
19
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 14 - 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.
NOTE 15 - SUBSEQUENT EVENTS
On July 28, 2005, the Company entered into an Investor Relations Agreement with
Agora Investor Relations Corp ("AGORA"). Pursuant to the terms of the agreement
AGORA agreed to provide certain services including marketing, branding and
investor communications services, in consideration of which we agreed to: (i)
pay AGORA a fee of $2,500 per month commencing August 1, 2005; and (ii) issue to
AGORA warrants to be registered by us to purchase 350,000 shares of our common
stock exercisable at a price of $0.06 per share and vesting over a twelve month
period. The agreement is for an initial term of August 1, 2005 to July 31, 2006
and is renewable at EYI's option for an additional term of 12 months under the
same terms and conditions.
On August 1, 2005, the Company entered into a promissory note with Cornell
Capital Partners, LP for the principal sum of one Million (U.S.) dollars
($1,000,000) and will be payable in nineteen equal weekly installments of Fifty
Thousand Dollars ($50,000) and one additional installment of Eighty-five
Thousand Thirteen Dollars and Seventy Cents (85,013.70) start on September 5,
2005. Interest on this note is twelve percent (12%) per annum.
On August 1, 2005, pursuant to references made to the Standby Equity
Distribution Agreement dated June 22, 2004, and the Promissory Note dated August
1, 2005, the Company allocated fifty-one million two hundred thousand
(51,200,000) shares of the Company's common stock into escrow.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
The information in this discussion contains forward-looking statements. These
forward-looking statements involve risks and uncertainties, including statements
regarding EYI Industries, Inc.'s (the "Company") capital needs, business
strategy and expectations. Any statements contained herein that are not
statements of historical facts may be deemed to be forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such
as "may", "should", "expect", "plan", "intend", "anticipate", "believe",
"estimate", "predict", "potential" or "continue", the negative of such terms or
other comparable terminology. Actual events or results may differ materially. In
evaluating these statements, you should consider various factors, including the
risks outlined in the Risk Factors section below, and, from time to time, in
other reports the Company files with the Securities and Exchange Commission (the
"SEC"). These factors may cause the Company's actual results to differ
materially from any forward-looking statement.
20
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 380,000
IBAs, of which approximately 9,500 we consider "active". An "active" IBA is one
who purchased our products within the preceding 12 months. Over 1,300 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.
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 June 30, 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. 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. We
also believe that 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 since our last fiscal
quarter ended March 31, 2005:
We entered into an investor relations agreement (the "IR Agreement") dated as of
July 28, 2005 with AGORA Investor Relations Corp. ("Agora"), a private company
incorporated under the laws of Ontario, Canada. Pursuant to the terms of the
agreement Agora agreed to provide certain services including marketing, branding
and investor communications services, in consideration of which we agreed to:
(i) pay Agora a fee of $2,500 per month commencing August 1, 2005; and (ii)
issue to Agora warrants to be registered by us to purchase 350,000 shares of our
common stock exercisable at a price of $0.06 per share and vesting over a twelve
month period. The Agreement is for an initial term of August 1, 2005 to July 31,
2006 and is renewable at EYI's option for an additional term of 12 months under
the same terms and conditions. We are presently negotiating an amendment to
certain of the terms of the IR Agreement to provide for the issuance of
restricted shares of our common stock in place of the warrants to be received by
Agora under the IR Agreement.
21
On August 1, 2005, we received a loan from Cornell Capital Partners, LP
("Cornell") of $1,000,000 secured by a promissory note with Cornell and payable
in nineteen equal weekly installments of $50,000 and one additional installment
of $85,013 starting on September 5, 2005. Interest accrues on the note at a rate
of twelve percent (12%) per annum.
We entered into a letter of intent with Guangzhou CEIEC Enterprise (Group) Co.
Ltd. (CEIEC), a Chinese company. Pursuant to the terms of the letter of intent
CEIEC agreed commencing in September, 2005, subject to further negotiations
respecting the terms and price of the purchase orders, to enter into certain
purchase commitments to purchase up to 30,000,000 of EYI's water filtration
systems for the removal of nitrates and arsenic from potable water (the
"Filtration System") and to acquire the master agency rights to market and
distribute the Filtration System in China. The parties agreed to sign an initial
purchase order in September, 2005 and CEIEC agreed to purchase not less than
$10,000 of the Filtration Systems as samples. The letter of intent is subject to
the negotiation of a final agreement outlining the terms and price of the
purchase orders.
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.
On May 27, 2005 we filed a registration statement on Form SB-2 (Registration No.
333-125344) 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. The registration
statement was subsequently declared effective by the SEC on July 29, 2005
During our fiscal quarter ended June 30, 2005, we ceased warehousing and
distributing our products through Halo Distribution LLC ("Halo"), our wholly
owned subsidiary and elected to discontinue the operations of Halo. 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. We presently intend to
continue warehousing and shipping our products through Source One.
22
On April 29, 2005 Essentially Yours Industries, Inc., our wholly owned
subsidiary ("EYI") 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 (the "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 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. The Reseller Agreement was
subsequently by way of an Addendum dated for reference June 1, 2005 (the
"Addendum"). Pursuant to the terms of the Addendum, MARTI agreed to provide EYII
with: (i) a unit for removal of nitrates, nitrites and arsenic from water, (ii)
an exclusively designed pitcher; and (iii) funding of up to a maximum of $10,000
for the production of a promotional DVD demonstrating the arsenic removal unit.
On July 14, 2005 EYII entered into a non-circumvention and non-disclosure
agreement with MARTI for the purpose of protecting the parties on a world wide
basis against the circumvention of one by the other through unauthorized
contacts with the other party's business sources during the term of the Reseller
Agreement and provide for joint protection of proprietary information of the
parties. The agreement contains standard terms respecting confidentiality and
non-circumvention and is for a term of: (i) five years from the date of the
execution, or (ii) the duration of the Reseller Agreement, whichever is longer.
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 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.
We intend over the next twelve months to undertake the following:
New Product Introduction. In May 2005, we entered into a 5 year exclusive
Reseller Agreement with Metals & Arsenic Removal Technology, Inc ("MARTI"). The
Reseller Agreement offers EYI exclusive network marketing rights of a
reformulated version of the MARTI products. The MARTI units are a portable water
filtration product that have been tested in an EP accredited laboratory and
tests concluded that the filtration unit effectively treats and removed arsenic
from water supplies. In June 2005, we initiated our pre-launch program for the
MARTI products, now named Code Blue (TM). We anticipate shipments of this
product to begin in August 2005.
International Sales. 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 (the "JV Agreement") with World Wide Buyers' Club
Inc. ("WWBC") and Supra Group, Inc. ("Supra Group"), 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 JV 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.
Over the next twelve months we intend to expand our operations into the Asian
market. In June 2005, we secured the consulting services of Ms. Eliza Fung who
will primarily assist in the entry and development of EYI into the Asian market.
It is expected that sales will commence in Hong Kong in the fall of 2005.
Network Support. We intend 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. 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.
23
RESULTS OF OPERATIONS
Second Quarter and Six Months Summary
Second Quarter Ended June 30 Six Months Ended June 30
---------------------------------------------- ---------------------------------------------
2005 2004 Percentage 2005 2004 Percentage
Increase / Increase /
(Decrease) (Decrease)
Revenue $1,225,216 $1,928,630 (36.47%) $2,514,283 $3,420,438 (26.49%)
Cost of Goods Sold $254,402 $668,933 (61.97%) $489,936 $1,082,693 (54.75%)
Gross Profit before commission $970,814 $1,259,697 (22.93%) $2,024,347 $2,337,745 (13.41%)
expense
Commission expense $450,857 $664,290 (32.13%) $922,462 $1,078,895 (14.50%)
Gross Profit $519,957 $595,407 (12.67%) $1,101,885 $1,258,850 (12.47%)
Gross Profit Margin 42.44% 30.87% 37.46% 43.83% 36.80% 19.08%
Revenues
During the three months ended June 30, 2005 we had total revenues of $1,225,216
as compared to revenues of $1,928,630 for the same period in 2004 which
represents a decline of $703,414 or 36%. The year-to-date results for 2005
compared with 2004 indicate a revenue decline of $906,155 or 26%. 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
24
During the three months ended June 30, 2005 as compared to the same period in
2004, we had gross profits of $519,957 and $595,407 respectively. This
represents a decline of $75,450 or 13%. The year-to-date results for 2005
compared with 2004 indicate that the gross profit has declined $156,965 or 12%.
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:
Operating Expenses
------------------------------------------- ------------------------------------------------
Second Quarter Ended June 30 Six Months Ended June 30
------------------------------------------- ------------------------------------------------
Percentage Percentage
2005 2004 Increase / 2005 2004 Increase /
(Decrease) (Decrease)
Consulting fees $240,848 $255,374 (5.69%) $478,810 $505,894 (5.35%)
Legal and professional $80,512 $147,072 (45.26%) $146,757 $166,374 (11.79%)
Customer service $65,471 $253,078 (74.13%) $152,005 $377,417 (59.72%)
Finance and administration $155,398 $47,730 225.58% $363,478 $266,953 36.16%
Sales and marketing $1,273 $8,253 (84.58%) $4,991 $35,809 (86.06%)
Telecommunications $124,890 $90,369 38.20% $242,258 $193,067 25.48%
Wages and benefits $371,526 $270,599 37.30% $743,152 $486,669 52.70%
Warehouse expense $16,819 $119,036 (85.87%) $61,846 $157,142 (60.64%)
Operating Expenses $1,056,737 $1,191,511 (11.31%) $2,193,297 $2,189,325 0.18%
We incurred operating expenses in the amount of $1,056,737 during the three
months ended June 30, 2005, compared to $1,191,511 for the three months ended
June 30, 2004. The following explains the most significant changes for the
periods presented:
Customer Service - For the three months ended June30, 2005, customer services
fees totaled $65,471 and represented 6% of our total operating expenditures, as
compared to $253,078 or 21% of the total operating expenditures for the three
months ended June 30, 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", below.
Finance and administration - For the three months ended June 30, 2005, finance
and administration fees totaled $155,398 and represented 15% of our total
operating expenditures, as compared to $47,730 or 4% of the total operating
expenditures for the three months ended June 30, 2004. A majority of the
increased expenditures realized during the June 2005 quarter relates to
depreciation expenditures associated with the discontinuation of operations of
Halo Distributions LLC.
Wages and benefits - For the three months ended June 30, 2005, wages and
benefits totaled $371,526 and represented 35% of our total operating
expenditures, as compared to $270,599 or 23% of the total operating expenditures
for the three months ended June 30, 2004. This increase is primarily a
combination of the April 2004 staff expansion and the accrual of a severance
package for a terminated employee.
25
FINANCIAL CONDITION
Cash and Working Capital
---------------------------------------------------------------------
Percentage
Increase /
At June 30, 2005 At December 31, 2004 (Decrease)
Current Assets $905,116 $1,228,714 (26%)
Current Liabilities $2,961,114 $1,853,252 60%
Working Capital (Deficit) ($2,055,998) ($624,538) (229%)
We had cash of $0 as at June 30, 2005, compared with cash of $0 as at December
31, 2004. We had a working capital deficit at June 30, 2005 and December 31,
2004 of $2,055,998 and $624,538 respectively. The increase to our working
capital deficit was primarily attributed to the increases in our trade payables,
related party payables and amounts due on the Cornell Convertible Debenture. The
increase in convertible debt relates to the accrued interest on the debt.
Liabilities
---------------------------------------------------------------------
Percentage
At December 31, Increase /
At June 30, 2005 2004 (Decrease)
Accounts Payable and Accrued
Liabilities $1,467,479 $1,141,001 29%
Accounts Payable-Related Parties $765,241 $159,455 380%
Convertible Debt-Related Party, Net
Of Discount $432,918 $379,724 14%
Loan Payable, Cornell $200,000 $0 100%
We had an increase of 29% in Accounts Payable and Accrued Liabilities during the
three months which represents the increase in unpaid trade payables. We also
experienced a 380% 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 six months ended June 30, 2005 was
$280,696 compared to $533,869 for the comparative period in 2004, representing a
decrease of $253,173 or 47%.
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 six months ended June 30, 2005 was $160,156, compared to $470,387 for
the six months ended June 30, 2004.
26
Financing Requirements
Our consolidated interim financial statements included with this Quarterly
Report on Form 10-QSB have been prepared assuming that we will continue as a
going concern. As shown in the accompanying financial statements, we had
negative working capital of approximately $2,056,000 and an accumulated deficit
of approximately $8,732,000 incurred through June 30, 2005.
Our current sources of working capital are sufficient to satisfy our anticipated
current working capital needs. In the event we do not receive further financing
from our arrangements with Cornell, we will be required to seek additional
financing to fully implement our business plan. We may not be able to obtain
additional working capital on acceptable terms, or at all. Accordingly, there is
substantial doubt about our ability to continue as a going concern. We
anticipate that any additional financing would be through the sales of our
common or preferred stock or placement of convertible debt.
We presently do not have any arrangements in place for the sale of any of our
securities and there is no assurance that we will be able to raise any
additional capital that we require to continue operations. In the event that we
are unable to raise additional financing on acceptable terms, then we may have
to scale back our plan of operations and operating expenditures. We anticipate
that we will continue to incur losses until such time as the revenues we are
able to generate from sales and licensing of our products exceed our increased
operating expenses. We base this expectation in part on the expectation that we
will incur increased operating expenses in completing our stated plan of
operations and there is no assurance that we will generate revenues that exceed
these expenses.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to the Consolidated
Financial Statements, which are included in our Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2004.
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.
RISKS AND UNCERTAINTIES
27
We have a limited operating history, an accumulated deficit and may have
continued losses for the foreseeable future with no assurance of profitability.
As of June 30, 2005, we had an accumulated deficit of $8,731,925. We will need
to generate significant revenues to achieve profitability, which may not occur.
We expect operating expenses to increase as a result of the further
implementation of our business plan. Even if we achieve profitability, we may be
unable to sustain or increase profitability on a quarterly or annual basis in
the future. It is possible that we will never achieve profitability.
Management has established plans designed to attempt to increase the sales of
our products, and decrease debt. We plan on continuing to reduce expenses, and
with small gains in any combination of network sales, direct sales,
international sales, and warehouse sales, believe that we will eventually be
able to reverse the present deficit. Management intends to seek additional
capital from new equity securities offerings that should provide funds needed to
increase liquidity, and implement our business plan. Management's plans include
negotiations to convert 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.
We have a working capital deficit; we may need to raise additional capital to
finance operations.
We have relied on significant external financing to fund our operations. As of
June 30, 2005, we had $0 of cash on hand and our total current assets were
$905,116. Our current liabilities were $2,961,114 as at June 30, 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 additional financing from external
sources. If we are unable to secure additional financing or we cannot draw down
on the Standby Equity Distribution Agreement, we believe that we will be
required to seek additional financing to fund our continued operations. The sale
of our common stock to raise capital may cause dilution to our existing
shareholders. Our inability to obtain adequate financing will result in the need
to curtail business operations. Any of these events would be materially harmful
to our business and may result in a lower stock price. Our inability to obtain
adequate financing will result in the need to curtail business operations and
you could lose your entire investment. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
We have been subject to a going concern option 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 $2,056,000 and an accumulated deficit
incurred through June 30, 2005, which raises substantial doubt about 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 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.
28
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. 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 impact our ability to market products.
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.
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 that are dietary
supplements or personal care products do not require governmental approvals to
market in the United States. Our key products are classified as follows:
29
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 (drops)(R)
o Prosoteine(R)
Personal Care Products
o Definition (cream)(R)
Other Products
o Code Blue(TM)
o Code Blue(TM) TOGO
Code Blue is a new addition to our product line-a water filtration unit and
shipping commenced in August 2005.
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 also are 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.
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.
30
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:
o the evolving interpretations of existing laws and regulations, and
o the enactment of new laws and regulations pertaining in general to network
marketing organizations and product distribution.
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.
31
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:
o our network marketing policies were enforced, and
o 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 these 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 customers will accept new products.
32
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 70% 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, 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
consultants 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.
33
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.
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 contain contaminants or include
inadequate instructions 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 products
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.
Our common stock is "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 a "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks are
stock:
34
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 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 to sell shares to third parties
or to otherwise dispose of them. This could cause our stock price to decline.
ITEM 3. CONTROLS AND PROCEDURES.
Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Our disclosure
controls and procedures are designed to provide a reasonable level of assurance
of achieving our disclosure control objectives. Our Principal Executive Officer
and Principal Accounting Officer have concluded that our disclosure controls and
procedures are, in fact, effective at this reasonable assurance level as of the
period covered.
Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of our internal controls during our last
fiscal quarter, our Principal Executive Officer and Principal Financial Officer
have determined that there are no changes to our internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. 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.
2. Action By Suhl, Harris and Babich
35
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 an aggregate of 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.
Management believes this claim to be without merit and intends to vigorously
defend against this claim.
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 of 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, and
are considering initiating proceedings against Eyewonder for breach of contract.
4. Lease Agreement with Business Centers, LLC
In February 1999 our subsidiary, Halo Distribution, LLC entered into a Lease
Agreement with Business Centers, LLC (the "Landlord"). This Lease Agreement was
extended for a period of three years on January 5, 2004. We received a letter
dated August 2, 2005 notifying us of a default by Halo under the lease agreement
and notice that the landlord intends to commence legal proceedings against Halo
and EYI for the sum of $150,000 for defaulted lease payments. We intend to
vigorously defend against any potential legal claims respecting this matter.
5. Action by Eyewonder, Inc.
On August 8, 2005 we received notice from counsel to Eyewonder, Inc.
("Eyewonder") that Eyewonder is contemplating legal action against EYI for
failure to assist in procuring a legal opinion for the removal of the legend
restrictions on 5,476,190 restricted shares of EYI's common stock issued to
Eyewonder. We intend to vigorously defend against any potential legal claims
respecting this matter, and are considering initiating proceedings against
Eyewonder for breach of contract.
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.
36
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Unregistered Sales of Equity Securities
During the three months ended June 30, 2005, we completed the sales of the
following securities that were not registered pursuant to the Securities Act of
1933 (the "Securities Act") and have not been reported on our previous Quarterly
Reports on Form 10-QSB during the year:
On June 9, 2005, we issued 1,000,000 shares of common stock and 3,000,000
warrants for the purchase of shares of our common stock at an exercise price of
$0.02 per share to one investor. The shares were purchased from us in a private
placement transaction pursuant to Rule 506 of Regulation D of the Securities
Act. All securities 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.
Use of Proceeds
We registered the resale of 97,264,558 shares of our common stock (the "Shares")
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, at
prices established on the Over-the-Counter Bulletin Board during the term of the
offering pursuant to a registration statement on Form SB-2 under the Securities
Act of 1933 (the "Offering"). The SEC declared our registration statement on
Form SB-2 (Registration No. 333-125344), effective on July 29, 2005 (the
"Effective Date"). We did not sell any shares of our common stock in the
Offering and therefore will not receive any proceeds from the Offering. However,
we will receive the proceeds from the sale of shares of common stock to Cornell
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 Offering will terminate
twenty four months after the Effective Date. We are paying all expenses of the
Offering. No portion of these expenses will be paid by the selling stockholders.
The selling stockholders, however, will pay any other expenses incurred in
selling their common stock, including any brokerage commissions or costs of
sale.
Cornell is an "underwriter" within the meaning of the Securities Act in
connection with the sale of common stock under the Standby Equity Distribution
Agreement. Cornell will pay EYI 98% of the lowest volume weighted average price
of EYI 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 will retain 5% of the proceeds
received by EYI 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. The
5% retainage and the commitment fee are underwriting discounts. In addition, we
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 our common
stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 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)
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)
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)
38
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)
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, Inc.(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(15)
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)
10.52 Consulting Agreement dated June 1, 2005 between EYI Industries, Inc. and Eliza Fung
10.53 Addendum to the Reseller Agreement dated June 1, 2005 between Essentially Yours Industries Inc. and Metals
& Arsenic Removal Technology, Inc.
10.54 Non-Circumvention and Non-Disclosure Agreement dated July 14, 2005 between Essentially Yours Industries
Inc. and Metals & Arsenic Removal Technology, Inc.
10.55 Promissory Note dated August 1, 2005 between EYI Industries Inc. and Cornell capital Partners, LP
10.56 Investor Relations Agreement dated July 28, 2005 between EYI Industries Inc. and Agora Investor Relations Corp.
14.1 Code of Ethics(5)
21.1 List of Subsidiaries(15)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Notes
-----
(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.
39
(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.
(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 20, 2005
(b) Reports on Form 8-K:
--------------------------------------------------------------------------------
Date of SEC filing
of Form 8-K Description of the Form 8-K
--------------------------------------------------------------------------------
January 12, 2005 Disclosure of lease agreement entered into by EYI's
wholly owned subsidiary 642706 B.C. Ltd.
--------------------------------------------------------------------------------
January 24, 2005 Disclosure of termination of letter of intent
entered into between EYI and Vespa Power Products
Limited in July, 2004.
--------------------------------------------------------------------------------
January 24, 2005 Amendment to January 24, 2005 Form 8-K to include
exhibit respecting disclosure of termination of
letter of intent entered into between EYI and Vespa
Power Products Limited in July, 2004.
--------------------------------------------------------------------------------
February 15, 2005 Disclosure of termination of existing stock options
of Mr. Sargeant and Mr. O'Neill.
--------------------------------------------------------------------------------
March 10, 2005 Disclosure of amendments to EYI's bylaws to remove
restrictions on the forms of consideration
acceptable for the issuance of shares of EYI and
to decrease quorum for the transaction of business
at stockholders meetings.
--------------------------------------------------------------------------------
May 17, 2005 Disclosure of Reseller Agreement entered into with
Metals & Arsenic Removal Technology, Inc.
--------------------------------------------------------------------------------
40
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EYI INDUSTRIES, INC.
By: /s/ Jay Sargeant
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Jay Sargeant
President, Chief Executive Officer,
and Director
(Principal Executive Officer)
Date: August 19, 2005
By: /s/ Rajesh Raniga
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Rajesh Raniga
Chief Financial Officer
(Principal Accounting Officer)
Date: August 19, 2005