As filed with the Securities and Exchange Commission on June 6, 2006
Registration No. 333-125344
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
EYI INDUSTRIES INC.
(Name of registrant as specified in its charter)
Nevada 2833 88-0407078
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
Jay Sargeant
7865 Edmonds Street 7865 Edmonds Street
Burnaby, BC Burnaby, BC
Canada V3N 1B9 Canada V3N 1B9
604-759-5031 604-759-5031
(Address and telephone number (Name, address, and telephone
of principal executive offices) number of agent for service)
Copies to:
Clayton E. Parker, Esq. Ronald S. Haligman, Esq.
Kirkpatrick & Lockhart Nicholson Graham Kirkpatrick & Lockhart Nicholson
LLP Graham LLP
201 South Biscayne Boulevard 201 South Biscayne Boulevard
Suite 2000 Suite 2000
Miami, Florida 33131 Miami, Florida 33131
Telephone: (305) 539-3300 Telephone: (305) 539-3300
Telecopier: (305) 358-7095 Telecopier: (305) 358-7095
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this registration statement becomes
effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier of the effective registration
statement for the offering. |_|
If this is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum Amount
Title Of Each Class Amount Offering Price Aggregate Of Registration
Of Securities To Be Registered To Be Registered Per Share(1) Offering Price(1) Fee(2)
------------------------------ ---------------- ------------ ----------------- ------
Common stock, par value $0.001
per share 739,976,079 (2) $0.03 $22,199,282.37 $2,375.32
--------------- ----- -------------- ---------
TOTAL 739,976,079 (2) $0.03 $22,199,282.37 $2,375.32
=============== ===== ============== =========
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked
prices as of June 1, 2006.
(2) Of these shares, 615,663,401 shares are being registered underlying
convertible debentures, 124,062,678 shares are being registered underlying
warrants and 250,000 shares were previously issued under a consulting
agreement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE 6, 2006
EYI INDUSTRIES INC.
739,976,079 SHARES OF COMMON STOCK
This Prospectus relates to the sale of up to 739,976,079 shares of EYI
Industries' common stock by certain persons, who are, or will become,
stockholders of EYI Industries.
Please refer to "Selling Stockholders" beginning on page 18.
EYI Industries is not selling any shares of common stock in this offering
and therefore will not receive any proceeds from this offering. We did, however,
receive proceeds from the sale of convertible debentures and we are registering
shares of common stock underlying these convertible debentures in the
accompanying registration statement.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. These prices will fluctuate based on the demand for
the shares of common stock. On June 1, 2006, the last reported sales price of
our common stock was $0.03 per share.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under applicable state law or that an exemption
from registration is available.
Our common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol "EYII."
These securities are speculative and involve a high degree of risk. Please
refer to "Risk Factors" beginning on page 6.
No underwriter or person has been engaged to facilitate the sale of shares
of common stock in this offering. This offering will terminate 24 months after
the accompanying registration statement is declared effective by the Securities
and Exchange Commission. None of the proceeds from the sale of stock by the
selling stockholder will be placed in escrow, trust or any similar account.
The information in this Prospectus is not complete and may be changed.
This selling stockholders may not sell these securities until the accompanying
registration statement filed with the Securities and Exchange Commission is
effective. This Prospectus is not an offer to sell these securities in any state
where the offer or sale is not permitted.
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is ______ __, 2006
TABLE OF CONTENTS
PROSPECTUS SUMMARY 1
THE OFFERING 2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION 3
FORWARD-LOOKING STATEMENTS 16
SELLING STOCKHOLDERS 17
USE OF PROCEEDS 19
PLAN OF DISTRIBUTION 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 21
DESCRIPTION OF BUSINESS 31
MANAGEMENT 51
FISCAL YEAR END OPTIONS/SAR VALUES 55
DESCRIPTION OF PROPERTY 58
LEGAL PROCEEDINGS 59
PRINCIPAL SHAREHOLDERS 60
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 62
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS 64
DESCRIPTION OF SECURITIES 69
EXPERTS 73
LEGAL MATTERS 73
AVAILABLE INFORMATION 73
INDEX TO FINANCIAL STATEMENTS F-i
PART II II-1
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Our audited financial statements for the fiscal year December 31, 2005 are
contained in our Annual Report on Form 10-KSB.
i
PROSPECTUS SUMMARY
The following Prospectus Summary contains the most material information on
EYI Industries Inc. You should read the entire Prospectus carefully, including
"Risk Factors" and our Financial Statements and the notes to the Financial
Statements before making any investment decision.
OUR COMPANY
We are in the business of selling, marketing, and distributing a product
line consisting of approximately 27 nutritional products in three (3)
categories, dietary supplements, personal care products and water filtration
systems. Our most successful product is Calorad, a liquid collagen-based dietary
supplement presently available on the market. Our 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 8,500
we consider "active". An "active" IBA is one who purchased our products within
the preceding 12 months. Over 1,200 of these IBAs are considered "very active".
A "very active" IBA is one who is on our automatic Convenience Program (formally
called Auto-Ship Program) and is current with their annual administration fee.
Our Convenience Program allows our IBAs to set up a reoccurring order that is
automatically shipped to them each month.
Our independent auditors have added an explanatory paragraph to their
audit issued in connection with the financial statements for the years ended
December 31, 2005 and December 31, 2004, relative to our ability to continue as
a going concern. We have negative working capital of $1,578,076 and an
accumulated deficit of $12,223,137 incurred through March 31, 2006, which raises
substantial doubt about our ability to continue as a going concern. Our ability
to obtain additional funding will determine our ability to continue as a going
concern. Accordingly, there is substantial doubt about our ability to continue
as a going concern. Our financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
We have a history of losses. We have incurred an operating loss since
inception and had an accumulated deficit of $12,223,137 as of March 31, 2006.
For the three months ended March 31, 2006 and 2005, we incurred a net loss of
$875,922 and $783,788, respectively. For the year ended December 31, 2005 and
2004, we incurred a net loss of $4,262,011 and $4,462,795, respectively.
Consequently, we will in all likelihood, have to rely on external financing for
all of our capital requirements. Future losses are likely to continue unless we
successfully implement our business plan, which calls for us to secure both debt
and equity financing while pursuing acquisitions and/or joint ventures with
companies in the nutritional supplement industry.
The IBAs in our network are encouraged to recruit interested people to
become new distributors of our products. New IBAs are placed beneath the
recruiting IBA in the "network" and are referred to as being in that IBA's
"down-line" organization. Our marketing plan is designed to provide incentives
for IBAs to build, maintain and motivate an organization of recruited
distributors in their down-line organization to maximize their earning
potential. IBAs generate income by purchasing our products at wholesale prices
and reselling them at retail prices. IBAs also earn commissions on product
purchases generated by their down-line organization.
On an ongoing basis we review our product line for duplication and sales
trends and make adjustments accordingly. As of March 31, 2006, our product line
consisted of: (i) 18 dietary supplement products; (ii) 7 personal care products
consisting primarily of cosmetic and skin care products; and (iii) 2 water
filtration system products. Our products are primarily manufactured by
Nutri-Diem, Inc., a related party, and sold by us under a license and
distribution agreement with Nutri-Diem Inc. Certain of our own products are
manufactured for us by third party manufacturers pursuant to formulations
developed for us. Our products are sold to our IBAs located in the United
States, Canada and Asia.
We believe that our network marketing system is suited to marketing
dietary supplements, personal care products and water filtration systems,
because sales of such products are strengthened by ongoing personal contact
between IBAs and their customers. Our network marketing system appeals to a
broad cross-section of people, particularly those looking to supplement family
income or who are seeking part-time work. IBAs are given the opportunity,
through our sponsored events and training sessions, to network with other
distributors, develop selling skills and establish personal goals. We supplement
monetary incentives with other forms of recognition, in order to motivate IBAs.
ABOUT US
Our principal place of business is located at 7865 Edmonds Street,
Burnaby, BC Canada, V3N 1B9 and our telephone number at that address is
604-759-5031.
THE OFFERING
This offering relates to the sale of common stock by certain persons who
are, or will become, our stockholders. The selling stockholders consist of:
o Cornell Capital Partners, which intends to sell up to an aggregate amount
of 431,894,379 shares of common stock, which includes 307,831,701 shares
underlying convertible debentures and 124,062,678 shares underlying
warrants.
o Taib Bank, B.S.C., which intends to sell up to an aggregate amount of
171,031,292 shares of common stock underlying convertible debentures.
o Certain Wealth, Ltd., which intends to sell up to an aggregate amount of
136,800,408 shares of common stock underlying convertible debentures.
o Rajesh Raniga, our Chief Financial Officer, who intends to sell up to
250,000 shares issued pursuant to a Consulting Agreement.
Common Stock Offered 739,976,079 shares
Offering Price Market price
Common Stock Outstanding 260,273,921 shares
Before The Offering(1)
Common Stock Outstanding 1,000,000,000
After The Offering(2)
Use Of Proceeds We will not receive any of the proceeds from
the sale of stock by the selling
stockholders. See "Use of Proceeds."
Risk Factors The securities offered hereby
involve a high degree of risk and immediate
substantial dilution and should not be
purchased by investors who cannot afford the
loss of their entire investment. See "Risk
Factors" and "Dilution."
Dividend Policy We do not intend to pay dividends on
our common stock. We plan to retain any
earnings for use in the operation of our
business and to find future growth.
Over-The-Counter EYII
Bulletin Board Symbol
----------
(1) Based on shares outstanding as of June 1, 2006.
(2) Assumes that all 739,726,079 shares, which are offered under this
Prospectus, pursuant to the conversion of convertible debentures and the
exercise of warrants are issued.
2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of our Financial Statements, which are included
elsewhere in this Prospectus. You should read the following data together with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this Prospectus as well as with our Financial Statements
and the notes therewith.
For the Three For the Year For the Year
Months Ended Ended Ended
March 31, December 31, December 31,
2006 2005 2004
STATEMENT OF OPERATION DATA: (Unaudited) (Audited) (Audited)
---------------------------- ----------- --------- ---------
Revenue $ 1,108,759 $ 4,980,408 $ 6,085,831
Cost Of Goods Sold 287,952 1,165,976 1,252,118
------------- ------------- -------------
Gross Profit Before Commission Expense 820,807 3,814,432 4,833,713
------------- ------------- -------------
Commission Expense 385,443 1,930,925 2,486,743
------------- ------------- -------------
Gross Profit After Cost of Goods Sold and Commission Expense 435,364 1,883,507 2,346,743
------------- ------------- -------------
Operating Expenses
Consulting fees 259,736 1,250,278 1,438,362
Legal and professional 74,482 306,948 321,713
Customer service 40,416 198,500 393,244
Finance and administration 499,973 1,378,118 2,101,842
Sales and marketing 78,624 15,741 154,638
Telecommunications 30,660 946,331 492,847
Wages and benefits 277,571 1,282,438 1,152,728
Warehouse expense 62,898 171,724 231,268
------------- ------------- -------------
Total Operating Expenses 1,324,360 5,550,077 6,286,642
------------- ------------- -------------
Loss from Operations (888,996) (3,666,570) (3,939,899)
------------- ------------- -------------
Other Income (Expenses) (4,346) (299,835) (271,346)
Net Loss Before Taxes (893,342) (3,966,405) (4,211,245)
Provision For Taxes -- -- --
------------- ------------- -------------
Net Loss Before Allocation To Minority Interest (893,342) (3,966,405) (4,211,245)
Allocation Of Loss To Minority Interest 17,420 84,762 88,755
Loss From Discontinued Operations -- (380,368) (340,305)
------------- ------------- -------------
Net Loss $ (875,922) $ (4,262,011) $ (4,462,795)
============= ============= =============
Basic And Diluted Net Loss Per Common Share nil $ (0.02) $ (0.03)
============= ============= =============
Weighted Average Number Of Common Stock Shares Outstanding 250,936,751 200,846,048 157,060,345
============= ============= =============
3
March 31, December 31, December 31,
2006 2005 2004
BALANCE SHEET DATA: (Unaudited) (Audited) (Audited)
------------------- ----------- --------- ---------
Current Assets
Cash $ 190,837 $ 25,639 $ --
Restricted cash -- -- 100,248
Accounts receivable 94,119 48,783 36,061
Related party receivables -- -- --
Prepaid expenses 18,485 12,387 852,764
Inventory 279,225 295,248 239,641
------------ ------------ ------------
Total Current Assets 582,666 382,057 1,228,714
------------ ------------ ------------
Property, Plant and Equipment, Net 63,720 49,671 32,596
Deposits 62,336 67,603 2,236
Intangible Assets 14,487 15,044 16,561
------------ ------------ ------------
Total Assets $ 723,209 $ 514,375 $ 1,280,107
============ ============ ============
Current Liabilities
Bank indebtedness $ -- $ -- $ 72,456
Accounts payable and accrued liabilities 1,427,120 1,929,409 1,141,001
Accounts payable - related parties 643,622 328,038 159,455
Interest payable, convertible debt -- -- 10,616
Notes payable - related party 90,000 90,000 90,000
Convertible debt-related party, net of discount -- -- 379,724
Customer deposits -- -- --
Loan payable, Cornell -- -- --
------------ ------------ ------------
Total Current Liabilities 2,160,742 2,347,087 1,853,252
Net Liabilities from discontinued operations 375,344 375,344 405,838
Minority Interest in Subsidiary 244,636 262,057 346,819
------------ ------------ ------------
Stockholders' Equity (Deficit)
Common stock 260,273 217,600 162,753
Discount on common stock -- -- --
Additional paid-in capital 7,397,617 6,155,518 3,048,606
Stock warrants 2,702,734 2,698,984 2,563,043
Subscription Receivable (195,000) (195,000) (15,000)
Accumulated deficit (12,223,137) (11,347,215) (7,085,205)
------------ ------------ ------------
Total Stockholders' Equity (Deficit) (2,057,513) (2,470,113) (1,325,802)
------------ ------------ ------------
Total Liabilities And Stockholders' Equity (Deficit) $ 723,209 $ 514,375 $ 1,280,107
============ ============ ============
================================================================================
4
RISK FACTORS
WE ARE SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
We Have Historically Lost Money And Losses May Continue In The Future
We have a history of losses. We have incurred an operating loss since
inception and had an accumulated deficit of $12,223,137 and $11,347,215 as of
March 31, 2006 and December 31, 2005, respectively. Consequently, we will in all
likelihood, have to rely on external financing for all of our capital
requirements. Future losses are likely to continue unless we successfully
implement our business plan, which calls for us to secure both debt and equity
financing while pursuing acquisitions and/or joint ventures with companies in
the nutritional supplement industry.
We Have Been Subject To A Going Concern Opinion From Our Independent Auditors
Our independent auditors have added an explanatory paragraph to their
audit issued in connection with the financial statements for the period ended
December 31, 2005, relative to our ability to continue as a going concern. We
have negative working capital of $1,578,076 and $1,965,030 as of March 31, 2006
and December 31, 2005, respectively, and an accumulated deficit of $12,223,137
incurred through March 31, 2006, which raises substantial doubt about our
ability to continue as a going concern. Our ability to obtain additional funding
will determine our ability to continue as a going concern. Accordingly, there is
substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
If We Are Unable To Raise Additional Capital To Finance Operations, We Will Need
To Curtail Or Cease Our Business Operations
We have relied on significant external financing to fund our operations.
As of March 31, 2006, we had $190,837 in cash and our total current assets were
$582,666. As of December 31, 2005, we had $25,639 in cash and our total current
assets were $382,057. Our current liabilities were $2,160,742 and $2,347,087,
respectively, as of March 31, 2006 and December 31, 2005. We will need to raise
additional capital to fund our anticipated operating expenses and future
expansion. Among other things, external financing may be required to cover our
operating costs. Unless we obtain profitable operations, it is unlikely that we
will be able to secure financing from external sources. In the event we do not
obtain the necessary financing to fund our anticipated operating expenses, we
will be forced to reduce our personnel and curtail other operating expenses.
The sale of our common stock to raise capital may cause dilution to our
existing shareholders. Our inability to obtain adequate financing will result in
the need to curtail business operations. Any of these events would be materially
harmful to our business and may result in a lower stock price. Our inability to
obtain adequate financing will result in the need to curtail business operations
and you could lose your entire investment.
Our Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly
Our common stock is traded on the Over-the-Counter Bulletin Board. Our
common stock is thinly traded compared to larger, more widely known companies in
the nutritional supplement industry. Thinly traded common stock can be more
volatile than common stock traded in an active public market. The high and low
bid price of our common stock for the last two years was $0.39 and $0.02,
respectively. Our common stock has experienced, and is likely to experience in
the future, significant price and volume fluctuations, which could adversely
affect the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly fluctuations
in our financial results and changes in the overall economy or the condition of
the financial markets could cause the price of our common stock to fluctuate
substantially.
5
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Sell Their Shares Due To Suitability Requirements
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
The Issuance Of Preferred Stock May Entrench Management Or Discourage A Change
Of Control
Our Articles of Incorporation authorize the issuance of up to 10,000,000
shares of preferred stock that would have designations rights, and preferences
determined from time to time by our Board of Directors. Accordingly, our Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividends, liquidation, conversion, voting, or other rights that
could adversely affect the voting power or other rights of the holders of our
common stock. In the event of issuance, the preferred stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the company or, alternatively, granting the holders of
preferred stock such rights as to entrench management. Current members of our
management that are large stockholders may have peculiar interests that are
different form other stockholders. Therefore, conflicting interests of certain
members of management and our stockholders may lead to stockholders desiring to
replace these individuals. In the event this occurs and the holders of our
common stock desired to remove current management, it is possible that our Board
of Directors could issue preferred stock and grant the holders thereof such
rights and preferences so as to discourage or frustrate attempts by the common
stockholders to remove current management. In doing so, management would be able
to severely limit the rights of common stockholders to elect the Board of
Directors. In addition, by issuing preferred stock, management could prevent
other shareholders from receiving a premium price for their shares as part of a
tender offer.
We May Not Be Able To Compete Effectively Against Our Competitors, Which Could
Force Us to Curtail Or Cease Business Operations
Many of our competitors have significantly greater name recognition,
financial resources and larger distribution channels. In addition, our industry
is characterized by low barriers to entity, which means we may face more
competitors in the future. If we are not able to compete effectively against our
competitors, we will be forced to curtail or cease our business operations. Our
main competitors are Usana Health Sciences, Relive International and Mannatech
Incorporated based on product offerings and sales pay structure. Our market
share in the nutrition supplement industry is very small at this time.
Investors Should Not Rely On An Investment In Our Stock For The Payment Of Cash
Dividends
We have not paid any cash dividends on our capital stock and we do not
anticipate paying cash dividends in the future. Investors should not make an
investment in our common stock if they require dividend income. Any return on an
investment in our common stock will be as a result of any appreciation, if any,
in our stock price.
6
There Are No Conclusive Studies Regarding The Medical Benefits Of Nutritional
Products
Many of the ingredients in our current products, and we anticipate in our
future products, will be vitamins, minerals, herbs and other substances for
which there is not a long history of human consumption. Although we believe all
of our products to be safe when taken as directed by us, there is little
experience with human consumption of certain of these product ingredients in
concentrated form. In addition, we are highly dependent upon consumers'
perception of the safety and quality of our products, as well as similar
products distributed by other companies. We could be adversely affected in the
event any of our products or any similar products distributed by other companies
should prove or be asserted to be harmful to consumers. In addition, because of
our dependence upon consumer perceptions, adverse publicity associated with
illness or other adverse effects resulting from consumers' failure to consume
our products as we suggest or other misuse or abuse of our products or any
similar products distributed by other companies could have a material adverse
effect on the results of our operations and financial condition.
Adverse Publicity With Respect To Nutritional Products May Force Us To Curtail
Or Cease Our Business Operations
In the future, scientific research and/or publicity may not be favorable
to the nutritional product market or any particular product, or may be
inconsistent with any earlier favorable research or publicity. Future reports of
research that are unfavorable to nutritional products could force us to curtail
or cease our business operations. Because of our dependence upon consumer
perceptions, adverse publicity associated with illness or other adverse effects
resulting from the consumption of our products or any similar products
distributed by other companies could have a material adverse effect on our
operations. Such adverse publicity could arise even if the adverse effects
associated with such products resulted from consumers' failure to consume such
products as directed. In addition, we may not be able to counter the effects of
negative publicity concerning the efficacy of our products. Any such occurrence
could have a negative effect on our operations and force us to curtail or cease
our business operations.
We Will Have to Develop New Products In Order To Keep Pace With Changing
Consumer Demands Or We Could Be Forced to Cease Or Curtail Our Business
Operations
The dietary supplement industry is highly competitive and characterized by
changing consumer preferences and continuous introduction of new products. Our
goal is to expand our portfolio of dietary supplement products through
acquisition of existing companies and/or products serving niche segments of the
industry. New products must be introduced in a timely and regular basis to
maintain distributor and consumer interest and appeal to varying consumer
preferences.
We believe that any future success of our company will depend, in part, on
our ability to anticipate changes in consumer preferences and acquire, manage,
develop and introduce, in a timely manner, new products that adequately address
such changes. If we are unable to develop and introduce new products or if our
new products are not successful, our sales may be adversely affected as
customers seek competitive products. In the past, we have engaged in very
limited research and development with respect to the development of new
products, as indicated by our lack of research and development expenses. Our
lack of experience in developing and introducing new products combined with our
limited financial resources may prevent us from successfully developing and
introducing any new products in the future. Any reduction in purchases or
consumption of our existing products could force us to curtail or cease our
business operations.
If We Fail To Further Penetrate And Expand Our Business In Existing Markets,
Then The Growth In Sales Of Our Products, Along With Our Operating Results,
Could Be Negatively Impacted
The success of our business is contingent on our ability to continue to
grow by further penetrating existing markets, both domestically and
internationally. Our ability to further penetrate existing markets in which we
compete is subject to numerous factors, many of which are out of our control.
For example, government regulations in both our domestic and international
markets can delay or prevent the introduction, or require the reformulation or
withdrawal, of some of our products, which could negatively impact our business,
financial condition and results of operations. Also, our ability to increase
market penetration in certain countries may be limited by the number of persons
in a given country inclined to pursue a network marketing business opportunity.
Moreover, our growth will depend upon improved training and other activities
that enhance distributor retention in our markets. As we continue to focus on
expanding our existing international operations may increase, which could harm
our financial conditional and operating results.
7
Failure To Expand Into, Or To Succeed In, New International Markets Will Limit
Our Ability To Grow Sales Of Our Products
We believe that our ability to achieve future growth is dependent in part
on our ability to continue our international expansion efforts. However, there
can be no assurance that we could be able to enter new international markets on
a timely basis, or that new markets would be profitable. We must overcome
significant regulatory and legal barriers before we can begin marketing in any
foreign market. Our operations in some markets also may be adversely affected by
political, economic and social instability in foreign countries.
We may be required to reformulate certain of our products before
commencing sales in a given country. Once we have entered a market, we must
adhere to the regulatory and legal requirements of that market. No assurance can
be given that we would be able to successfully reformulate our products in any
of our potential international markets to meet local regulatory requirements or
attract local customers. The failure to do so could result in increased costs of
producing products and adversely affect our financial condition. There can be no
assurance that we would be able to obtain and retain necessary permits and
approvals.
Also, it is difficult to assess the extent to which our products and sales
techniques would be accepted or successful in any given country. In addition to
significant regulatory barriers, we may also encounter problems conducting
operations in new markets with different cultures and legal systems from those
encountered elsewhere.
Additionally, in many markets, other network marking companies already
have significant market penetration, the effect of which could be to desensitize
the local distributor population to a new opportunity, or to make it more
difficult for us to recruit qualified distributors. There can be no assurance
that, even if we were able to commence operations in new foreign countries,
there would be a sufficiently large population of potential distributors
inclined to participate in a network marketing system offered by us. We believe
our future success could depend in part on our ability to seamlessly integrate
our business methods, including our distributor compensation plan, across all
markets in which our products are sold. There can be no assurance that we would
be able to further develop and maintain a seamless compensation program.
We Are Dependent On Our IBAs For Our Product Marketing Efforts; The Loss of A
Significant Number Of IBA's Or The Loss Of A Key IBA Could Adversely Affect our
Sales
Our success and growth depend upon our ability to attract, retain and
motivate our network of IBAs who market our products. IBAs are independent
contractors who purchase products directly from us for resale and their own use.
IBAs typically offer and sell our products on a part-time basis and may engage
in other business activities, possibly including the sale of products offered by
our competitors. Typically, we have non-exclusive arrangements with our IBAs
which may be canceled on short notice and contain no minimum purchase
requirements. While we encourage IBAs to focus on the purchase and sale of our
products, they may give higher priority to other products, reducing their
efforts devoted to marketing our products. Also, our ability to attract and
retain IBAs could be negatively affected by adverse publicity relating to us,
our products or our operations. In addition, as a result of our network
marketing program, the down-line organizations headed by a relatively small
number of key IBAs are responsible for a significant percentage of total sales.
The loss of a significant number of IBAs, including any key IBA, for any
reason, could adversely affect our sales and operating results, and could impair
our ability to attract new IBAs. The loss of any IBAs could potentially reduce
our sales and force us to curtail or cease our business operations. There is no
assurance that our network marketing program will continue to be successful or
that we will be able to retain or expand our current network of IBAs. Also, if
our IBAs do not accept recent changes to our commission plan, our business may
be adversely affected.
Since We Cannot Exert The Same Level Of Influence Or control Over Our IBAs As We
Could If They Were Our Own Employees, Our IBAs Could Fail to Comply With Our
Distributor Policies and Procedures, Which Could Result In Claims Against Us
That Could Harm Our Financial Condition and Operating Results
Our IBAs are independent contractors and, accordingly, we are not in a
position to directly provide the same direction, motivation and oversight as we
would if our distributors were our own employees. As a result, there can be no
assurance that our distributors will participate in our marketing strategies or
plans, accept our introduction of new products or comply with our IBA Policies
and Procedures.
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Government Regulation By The Food And Drug Administration And Other
Federal And State Entities Of Our Products Can Impact Our Ability To Market
Products
The manufacturing, processing, formulation, packaging, labeling and
advertising of nutritional products are subject to regulation by one or more
federal agencies, including the Food and Drug Administration, the Federal Trade
Commission, the Consumer Product Safety Commission, the United States Department
of Agriculture, the United States Postal Service, the United States
Environmental Protection Agency and the Occupational Safety and Health
Administration. These activities are also regulated by various agencies of the
states and localities, as well as of foreign countries, in which our products
may be sold. We may incur significant costs in complying with these regulations.
In the event we cannot comply with government regulations affecting our business
and products, we may be forced to curtail or cease our business operations.
On March 7, 2003, the FDA proposed a new regulation to require current
good manufacturing practices, or cGMPs, affecting the manufacturing, packing and
holding of dietary supplements. The proposed regulation would establish
standards to ensure that dietary supplements and dietary ingredients are not
adulterated with contaminants or impurities and are labeled to accurately
reflect the active ingredients and other ingredients in the products. It also
includes proposed requirements for designing and constructing physical plants,
establishing quality control procedures, and testing manufactured dietary
ingredients and dietary supplements, as well as proposed requirements for
maintaining records for handling consumer complaints related to current good
manufacturing practices. The final rule resulting from this rulemaking process
is currently undergoing review by the Office of Management and Budget.
Publication of the final rule is expected in the next several weeks. Because of
the long delay in issuing the final rule, there is considerable uncertainty as
to the provisions of the final rule, and as to how large an impact the rule will
have on the dietary supplement industry.
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 are dietary
supplements, personal care and/or water filtration products that do not require
governmental approvals to market in the United States. Our key products are
classified as follows:
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Dietary Supplements
o Calorad (R)
o Agrisept-L (R)
o Oxy-Up (R)
o Triomin
o Noni Plus (R)
o Iso-Greens (R)
o Definition (R) (drops)
o Prosoteine (R)
Personal Care Products
o Definition (R)(cream)
o Calorad (R) (cream)
Water Filtration Products
o Code Blue (TM)
o Code Blue (TM) Filter
The processing, formulation, packaging, labeling and advertising of such
products, however, are subject to regulation by one or more federal agencies,
including the FDA, the Federal Trade Commission, the Consumer Products Safety
Commission, the Department of Agriculture and the Environmental Protection
Agency. Our activities are also subject to regulation by various agencies of the
states and localities in which our products are sold. Among other things, such
regulation puts a burden on our ability to bring products to market. Any changes
in the current regulatory environment could impose requirements that would make
bringing new products to market more expensive or restrict the ways we can
market our products.
No governmental agency or other third party makes a determination as to
whether our products qualify as dietary supplements, personal care and/or water
filtration products or neither. We make this determination based on the
ingredients contained in the products and the claims we make for the products.
If The Federal Trade Commission Or Certain States Object To Our Product Claims
And Advertising We May Be Forced To Give Refunds, Pay Damages, Stop Marketing
Certain Products Or Change Our Business Methods
The Federal Trade Commission and certain states regulate advertising,
product claims, and other consumer matters, including advertising of our
products. In the past several years the Federal Trade Commission has instituted
enforcement actions against several dietary supplement companies for false or
deceptive advertising of certain products. We provide no assurance that:
o the Federal Trade Commission will not question our past or future
advertising or other operations; or
o a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations.
Also, our IBAs and their customers may file actions on their own behalf,
as a class or otherwise, and may file complaints with the Federal Trade
Commission or state or local consumer affairs offices. These agencies may take
action on their own initiative or on a referral from IBAs, consumers or others.
If taken, such actions may result in:
o entries of consent decrees;
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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.
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
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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 Claims Could Result in Significant Defense Costs,
Settlement Payments Or Judgments, And Could Have A Material Adverse Effect On Us
One of our previous 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 connections with the operation of a pyramid scheme. Nutrition
for Life International agreed to pay in excess of $3,000,000 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
A significant portion of our net sales is expected to be dependent upon
our Calorad product. Calorad has traditionally represented more than 70% of our
net sales and, although we hope to expand and diversify our product offerings,
Calorad is expected to provide a large portion of our net sales in the
foreseeable future. If Calorad loses market share or loses favor in the
marketplace, our financial results will suffer.
Our Products Are Subject To Obsolescence; Which Could Reduce Our Sales
Significantly
The introduction by us or our competitors of new dietary supplement or
personal care products offering increased functionality or enhanced results may
render our existing products obsolete and unmarketable. Therefore, our ability
to successfully introduce new products into the market on a timely basis and
achieve acceptable levels of sales has and will continue to be a significant
factor in our ability to grow and remain competitive and profitable. In
addition, the nature and mix of our products are important factors in attracting
and maintaining our network of IBAs, which consequently affects demand for our
products. Although we seek to introduce additional products, the success of new
products is subject to a number of conditions, including customer acceptance.
There can be no assurance that our efforts to develop innovative new products
will be successful or that customers will accept new products.
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 or water
filtration system. We are dependent upon relationships with independent
manufacturers to fulfill our product needs. Nutri-Diem, Inc., a related party,
manufactures and supplies more than 80% of our products. We have contracts with
Nutri-Diem that require us to purchase set amounts of its manufactured products
for at least the next five years and possibly the next ten years. It is possible
that these contracts with Nutri-Diem, Inc. could become unfavorable, and we may
not be able to use other manufacturers to provide us with these services if our
terms with Nutri-Diem, Inc. become unfavorable. In addition, we must be able to
obtain our dietary supplement and personal care products at a cost that permits
us to charge a price acceptable to the customer, while also accommodating
distribution costs and third party sales compensation. Competitors who do own
their own manufacturing may have an advantage over us with respect to pricing,
availability of product and in other areas through their control of the
manufacturing process. In addition, because our agreement with Nutri-Diem, Inc.
requires us to mandatory purchase minimums, we face that risk that we may
receive purchase orders for sufficient amounts of product that will enable us to
sell the quantities that we are required to purchase. In the event that this
occurs, we will be forced to hold larger quantities of inventory, which could
adversely affect our cash flow and our ability to pay our operating expenses. In
addition, if we are forced to hold longer quantities of inventory, we face the
risk that our inventory becomes obsolete with the passage of large amounts of
time.
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We may not be able to deliver various products to our customers if third
party providers fail to provide necessary ingredients to us. We are dependent on
various third parties for various ingredients for our products. Some of the
third parties that provide ingredients to us have a limited operating history
and are themselves dependent on reliable delivery of products from others. As a
result, our ability to deliver various products to our users may be adversely
affected by the failure of these third parties to provide reliable various
ingredients for our products.
We Are Materially Dependent Upon Our Key Personnel And The Loss Of Such Key
Personnel Could Result In Delays In The Implementation Of Our Business Plan Or
Business Failure
We depend upon the continued involvement of Jay Sargeant, our President,
Chief Executive Officer and Director, and Dori O'Neill, our Executive Vice
President, Chief Operations Officer, Secretary, Treasurer and Director. As we
are a developing company, the further implementation of our business plan is
dependent on the entrepreneurial skills and direction of management. Mr.
Sargeant and Mr. O'Neill who 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, Personal Care
Industry And Water Filtration Category Including Products That Compete Directly
With Calorad
The dietary supplement and personal care industry is highly competitive.
It is relatively easy for new companies to enter the industry due to the
availability of numerous contract manufacturers, a ready availability of natural
ingredients and a relatively relaxed regulatory environment. Numerous companies
compete with us in the development, manufacture and marketing of supplements as
their sole or principal business. Generally, these companies are well funded and
sophisticated in their marketing approaches.
Depending On The Product Category, Our Competition Varies
Calorad competes directly with Colvera, a product with different
ingredients but a similar concept. Additionally, Calorad competes indirectly
with food plans such as Weight Watchers and meal replacement products such as
Slim Fast. Our Noni Plus product competes with Tahitian Noni 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 results in injury. Such claims
may include, among others, that our products contain contaminants or include
inadequate instructions as to use or inadequate warnings concerning side effects
and interactions with other substances. With respect to product liability
claims, we have coverage of $2,000,000 per occurrence and $2,000,000 in the
aggregate. Because our policies are purchased on a year-to-year basis, industry
conditions or our own claims experience could make it difficult for us to secure
the necessary insurance at a reasonable cost. In addition, we may not be able to
secure insurance that will be adequate to cover liabilities. We generally do not
obtain contractual indemnification from parties supplying raw materials or
marketing our products. In any event, any such indemnification is limited by its
terms and, as a practical matter, to the creditworthiness of the other party. In
the event that we do not have adequate insurance or contractual indemnification,
liabilities relating to defective products could require us to pay the injured
parties' damages which are significant compared to our net worth or revenues.
13
We May Be Adversely Affected By Unfavorable Publicity Relating To Our Product Or
Similar Products Manufactured By Our Competitors
We believe that the dietary supplement products market is affected by
national media attention regarding the consumption of these products. Future
scientific research or publicity may be unfavorable to the dietary supplement
products market generally or to any particular product and may be inconsistent
with earlier favorable research or publicity. Adverse publicity associated with
illness or other adverse effects resulting from the consumption of products
distributed by other companies, which are similar to our products, could reduce
consumer demand for our products and consequently our revenues. This may occur
even if the publicity did not relate to our products. Adverse publicity directly
concerning our products could be expected to have an immediate negative effect
on the market for that product.
Because We Have Few Proprietary Rights, Others Can Provide Products And Services
Substantially Equivalent To Ours
We hold no patents. We believe that most of the technology used by us in
the design and implementation of our products may be known and available to
others.
Consequently, others may be able to formulate products equivalent to ours.
We rely on confidentiality agreements and trade secret laws to protect our
confidential information. In addition, we restrict access to confidential
information on a "need to know" basis. However, there can be no assurance that
we will be able to maintain the confidentiality of our proprietary information.
If our pending trademark or other proprietary rights are violated, or if a
third party claims that we violate its trademark or other proprietary rights, we
may be required to engage in litigation. Proprietary rights litigation tends to
be costly and time consuming. Bringing or defending claims related to our
proprietary rights may require us to redirect our human and monetary resources
to address those claims.
We Often Use Our Securities As Consideration In Contracts Related To Our
Operations; Which Will Cause Existing Shareholders To Experience Dilution
We often issue our securities as consideration in contracts related to our
operations. We issued our securities in these transactions primarily because
historically we have had insufficient cash to fund our operations. Over the past
two years, we have issued 6,226,190 shares of our common stock and 2,650,000
stock options for consideration other than cash. As a result of such issuances,
existing shareholders of EYI have experienced a dilutive impact o their
ownership of our company. We may be forced to issue additional securities of EYI
in the future transactions in lieu for cash and shareholders would experience
additional dilution.
RISKS RELATED TO THIS OFFERING
Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Some
of our shareholders, including officers and directors are the holders of
"restricted securities". These restricted securities may be resold in the public
market only if registered or pursuant to an exemption from registration. Some of
these shares may be resold under Rule 144. As of June 1, 2006, approximately
119,038,472 shares of our common stock are deemed restricted.
Upon completion of this offering, and assuming all shares registered in
this offering are resold in the public market, there will be an additional
739,726,079 shares of common stock outstanding. All of these shares of common
stock may be immediately resold in the public market upon effectiveness of the
accompanying registration statement.
Existing Shareholders Will Experience Significant Dilution From The Issuance Of
Our Common Stock Upon Conversion Of Convertible Debentures And Warrants
The issuance of our common stock upon conversion of convertible debentures
and warrants will have a dilutive impact on our stockholders. At a recent stock
price of $0.03, we would have to issue 187,500,000 shares of common stock upon
conversion of convertible debentures and 124,062,678 shares upon the exercise of
warrants. We are registering 615,663,401 shares of our common stock for issuance
upon conversion of convertible debentures and 124,062,678 shares upon the
exercise of warrants. If we need to issue more than 615,663,401 shares for
conversion of the convertible debentures in the principal amount of $4,500,000,
we will have to obtain shareholder approval to amend our Articles of
Incorporation to increase our authorized common stock above 1,000,000,000 shares
and we will have to file a new registration statement covering any additional
shares.
14
The Selling Stockholders Intend To Sell Their Shares Of Common Stock In The
Market, Which Sales May Cause Our Stock Price To Decline
The selling stockholders intend to sell in the public market the shares of
common stock being registered in this offering. That means that up to
739,976,079 shares of common stock, the number of shares being registered in
this offering may be sold. Such sales may cause our stock price to decline.
The Sale Of Material Amounts Of Common Stock Under The Accompanying Registration
Statement Could Encourage Short Sales By Third Parties
The significant downward pressure on our stock price caused by the sale of
the shares being registered in the accompanying registration statement could
cause our stock price to decline, thus allowing short sellers of our stock an
opportunity to take advantage of any decrease in the value of our stock. The
presence of short sellers in our common stock may further depress the price of
our common stock.
The Price You Pay In This Offering Will Fluctuate
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the Over-the-Counter Bulletin Board. Accordingly,
the price you pay in this offering may be higher or lower than the prices paid
by other people participating in this offering.
The Issuance Of Shares Of Common Stock Under This Offering Could Result In A
Change Of Control
We are registering 739,976,079 shares of common stock in this offering.
These shares represent approximately 74% of our authorized capital stock and
would upon issuance represent approximately 74% of the then-issued and
outstanding common stock and we anticipate all such shares will be sold in this
offering. If all or a significant block of these shares are held by one or more
shareholders working together, then such shareholder or shareholders would have
enough shares to exert significant influence on EYI Industries.
15
FORWARD-LOOKING STATEMENTS
Risks Associated With Forward-Looking Statements
This Prospectus contains certain forward-looking statements regarding
management's plans and objectives for future operations including plans and
objectives relating to our planned marketing efforts and future economic
performance. The forward-looking statements and associated risks set forth in
this Prospectus include or relate to, among other things, (a) our projected
sales and profitability, (b) our growth strategies, (c) anticipated trends in
our industry, (d) our ability to obtain and retain sufficient capital for future
operations, and (e) our anticipated needs for working capital. These statements
may be found under "Management's Discussion and Analysis or Plan of Operations"
and "Business," as well as in this Prospectus generally. Actual events or
results may differ materially from those discussed in forward-looking statements
as a result of various factors, including, without limitation, the risks
outlined under "Risk Factors" and matters described in this Prospectus
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this Prospectus will in fact
occur.
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that we will be able to make acquisitions on
a timely basis, that we will retain the acquiree's customers, that there will be
no material adverse competitive or technological change in conditions in our
business, that demand for our products will significantly increase, that our
President and Chief Executive Officer will remain employed as such, that our
forecasts accurately anticipate market demand, and that there will be no
material adverse change in our operations or business or in governmental
regulations affecting us or our manufacturers and/or suppliers. The foregoing
assumptions are based on judgments with respect to, among other things, future
economic, competitive and market conditions, and future business decisions, all
of which are difficult or impossible to predict accurately and many of which are
beyond our control. Accordingly, although we believe that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, as disclosed elsewhere in the "Risk Factors" section of this
prospectus, there are a number of other risks inherent in our business and
operations which could cause our operating results to vary markedly and
adversely from prior results or the results contemplated by the forward-looking
statements. Growth in absolute and relative amounts of cost of goods sold and
selling, general and administrative expenses or the occurrence of extraordinary
events could cause actual results to vary materially from the results
contemplated by the forward-looking statements. Management decisions, including
budgeting, are subjective in many respects and periodic revisions must be made
to reflect actual conditions and business developments, the impact of which may
cause us to alter marketing, capital investment and other expenditures, which
may also materially adversely affect our results of operations. In light of
significant uncertainties inherent in the forward-looking information included
in this prospectus, the inclusion of such information should not be regarded as
a representation by us or any other person that our objectives or plans will be
achieved.
Some of the information in this Prospectus contains forward-looking
statements that involve substantial risks and uncertainties. Any statement in
this prospectus and in the documents incorporated by reference into this
prospectus that is not a statement of an historical fact constitutes a
"forward-looking statement". Further, when we use the words "may", "expect",
"anticipate", "plan", "believe", "seek", "estimate", "internal", and similar
words, we intend to identify statements and expressions that may be forward-
looking statements. We believe it is important to communicate certain of our
expectations to our investors. Forward-looking statements are not guarantees of
future performance. They involve risks, uncertainties and assumptions that could
cause our future results to differ materially from those expressed in any
forward-looking statements. Many factors are beyond our ability to control or
predict. You are accordingly cautioned not to place undue reliance on such
forward-looking statements. Important factors that may cause our actual results
to differ from such forward-looking statements include, but are not limited to,
the risk factors discussed below. Before you invest in our common stock, you
should be aware that the occurrence of any of the events described under "Risk
Factors" in this Prospectus could have a material adverse effect on our
business, financial condition and results of operation. In such a case, the
trading price of our common stock could decline and you could lose all or part
of your investment.
16
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. A description of each selling shareholder's relationship to EYI
Industries and how each selling shareholder acquired the shares to be sold in
this offering is detailed in the information immediately following this table.
Percentage of Percentage of
Outstanding Outstanding
Shares Shares Shares Shares
Beneficially Beneficially to be Sold Beneficially
Owned Before Owned Before in the Owned
Selling Stockholder Offering Offering(1) Offering After Offering
------------------- ------------- ----------- -------- --------------
Cornell Capital Partners, L.P. 13,675,000(2) 4.99% 431,894,379(3) 0%
Taib Bank, B.S.C.(2) 13,675,000(2) 4.99% 171,031,292(4) 0%
Certain Wealth, Ltd. 13,675,000(2) 4.99% 136,800,402(5) 0%
Rajesh Raniga 350,000(6) * 250,000(7) *
------------ -------------
TOTAL 41,375,000 739,976,073
============ =============
---------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 260,273,921 shares of
common stock outstanding as of June 1, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days of
June 1, 2006, for each stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible
into shares of common stock that are currently exercisable or exercisable
within 60 days of June 1, 2006 are deemed to be beneficially owned by the
person holding such securities for the purpose of computing the percentage
of ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Note
that affiliates are subject to Rule 144 and Insider trading regulations -
percentage computation is for form purposes only.
(2) Please note that the terms of the convertible debentures held by Cornell
Capital Partners, L.P., Taib Bank, B.S.C. and Certain Wealth, Ltd. provide
that in no event shall the holder be entitled to convert the convertible
debentures for a number of shares which, upon giving effect to the
conversion, would cause the aggregate number of shares beneficially owned
by such holder and its affiliates to exceed 4.99% of the outstanding
shares of EYI Industries following such conversion. Because the conversion
price may fluctuate based on the market price of our stock, the actual
number of shares to be issued upon conversion of the debentures may be
higher or lower. We are registering 615,663,401 shares to cover such
conversions for the convertible debenture holders.
(3) Includes 307,831,701 shares of common stock underlying convertible
debentures and 124,062,678 shares underlying warrants.
(4) Represents 171,031,292 shares of common stock underlying convertible
debentures.
(5) Represents 136,800,402 shares of common stock underlying convertible
debentures.
(6) Includes 250,000 shares issued in connection with a Consulting Agreement
and 100,000 shares which may be acquired pursuant to the exercise of stock
options.
(7) Represents 250,000 shares issued in connection with the Consulting
Agreement, dated December 27, 2003.
The following information contains a description of each selling
shareholder's relationship to EYI Industries and how each selling shareholder
acquired the shares to be sold in this offering. None of the selling
stockholders have held a position or office, or have any other material
relationship, with EYI Industries, except as follows:
Shares Acquired In Financing Transactions With EYI Industries
Secured Convertible Debentures. On April 24, 2006, we entered into a
secured convertible debenture transaction with Cornell Capital Partners, Taib
Bank, B.S.C. and Certain Wealth, Ltd. in the principal amount of $4,500,000.
Pursuant to a Securities Purchase Agreement, on April 24, 2006 EYI Industries
received net proceeds of $1,305,000, associated with the issuance of secured
convertible debentures in the principal amount of $1,500,000 and we will issue
additional secured convertible debentures in the principal amount of $1,500,000
two (2) business days prior to filing the accompanying registration statement
and we will issue additional secured convertible debentures in the principal
amount of $1,500,000 two (2) business days prior to the accompanying
registration statement being declared effective by the Securities and Exchange
Commission. The secured convertible debentures are convertible at the holder's
option any time up to maturity at a conversion price equal to the lower of (i)
$0.06 or (ii) 80% of the lowest daily volume weighted average price of our
common stock for the 5 trading days immediately preceding the conversion date.
The secured convertible debentures are secured by all of EYI Industries' assets.
The secured convertible debentures accrue interest at a rate of 10% per year and
have a term of 3 years. In the event the secured convertible debentures are
redeemed, then EYI Industries will issue to the holders a warrant to purchase
100,000 shares for every $100,000 redeemed at an exercise price equal to 20% of
the principal amount being redeemed. The holders purchased the secured
convertible debentures from EYI Industries in a private placement on April 24,
2006. EYI Industries is registering in this offering 615,663,401 shares of
common stock underlying the secured convertible debentures.
17
Pursuant to the terms of the Securities Purchase Agreement and the
issuance of our secured convertible debentures, on April 24, 2006 we issued to
Cornell Capital Partners seventeen (17) warrants to purchase up to an aggregate
124,062,678 shares of our common stock at the discretion of Cornell Capital
Partners (collectively, the "Warrants") each for good and valuable
consideration. Pursuant to the terms of the Warrants, Cornell Capital Partners
is entitled to purchase from us: (1) 10,416,650 shares of our common stock at
$0.02 per share, (2) 13,888,866 shares of our common stock at $0.03 per share,
(3) 10,416,650 shares of our common stock at $0.04 per share, (4) 8,333,320
shares of our common stock at $0.05 per share, (5) 6,944,433 shares of our
common stock at $0.06 per share, (6) 5,952,371 shares of our common stock at
$0.07 per share, (7) 11,250,000 shares of our common stock at $0.08 per share,
(8) 10,000,000 shares of our common stock at $0.09 per share, (9) 19,000,000
shares of our common stock at $0.10 per share, (10) 8,181,818 shares of our
common stock at $0.11 per share, (11) 7,500,000 shares of our common stock at
$0.12 per share, (12) 3,333,333 shares of our common stock at $0.15 per share,
(13) 2,500,000 shares of our common stock at $0.20 per share, (14) 2,000,000
shares of our common stock at $0.25 per share, (15) 1,666,666 shares of our
common stock at $0.30 per share, (16) 1,428,571 shares of our common stock at
$0.35 per share and (17) 1,250,000 shares of our common stock at $0.40 per share
upon surrender of the Warrants (or as subsequently adjusted pursuant to the
terms of each Warrant) . Each Warrant has "piggy back" registration rights and
shall expire five (5) years from the date of issuance, on or about April 24,
2011.
There are certain risks related to sales by Cornell Capital Partners, Taib
Bank, B.S.C. and Certain Wealth, Ltd. including:
o The outstanding shares will be issued based on discount to the
market rate. As a result, the lower the stock price, the greater
number of shares that will be issued to these selling stockholders.
This could result in substantial dilution to the interests of other
holders of common stock.
o To the extent the selling stockholders sell their common stock, the
common stock price may decrease due to the additional shares in the
market. This could allow these selling stockholders to sell greater
amounts of common stock, the sales of which would further depress
the stock price.
o The significant downward pressure on the price of the common stock
as the selling stockholders sell material amounts of common stocks
could encourage short sales by others. This could place further
downward pressure on the price of the common stock.
Other Information Regarding The Selling Shareholders
Cornell Capital Partners. All investment decisions of Cornell Capital
Partners are made by its general partner, Yorkville Advisors, LLC. Mark Angelo,
the managing member of Yorkville Advisors, makes the investment decisions on
behalf of Yorkville Advisors. Cornell Capital Partners acquired all shares being
registered in this offering in financing transactions with EYI Industries.
Taib Bank, B.S.C. All investment decisions of Taib Bank, B.S.C. are made
by Larry Chaleff, its Managing Director.
Certain Wealth, Ltd. All investment decisions of Certain Wealth, Ltd. are
made by Larry Chaleff, its Managing Director.
Rajesh Raniga is our Company's Chief Financial Officer.
18
USE OF PROCEEDS
This Prospectus relates to shares of our common stock that may be offered
and sold from time to time by Cornell Capital Partners. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we did receive proceeds pursuant to the issuance of secured convertible
debentures in the principal amount equal to $4,500,000, which we are using for
general working capital purposes, including, among other things, sales and
marketing, product development, operations, international expansion, sales
communication and debt retirement.
19
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
EYI Industries' common stock owned by the selling stockholders may be effected
directly to purchasers by the selling stockholders or by pledgees, transferees
or other successors in interest, as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or in any other market on which the price of EYI
Industries' shares of common stock are quoted or (ii) in transactions otherwise
than on the over-the-counter market or in any other market on which the price of
EYI Industries' shares of common stock are quoted. Any transferees and pledges
will be identified by a post-effective amendment to the accompanying
registration statement. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by a selling stockholder or by
agreement between a selling stockholder and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of EYI Industries' common stock to or through underwriters,
brokers, dealers or agents, such underwriters, brokers, dealers or agents may
receive compensation in the form of discounts, concessions or commissions from
the selling stockholders or commissions from purchasers of common stock for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved). Any brokers, dealers or agents
that participate in the distribution of the common stock may be deemed to be
underwriters, and any profit on the sale of common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are stock: (i) with a price of less than $5.00 per share; (ii) that are not
traded on a "recognized" national exchange; (iii) whose prices are not quoted on
the Nasdaq automated quotation system (Nasdaq listed stock must still have a
price of not less than $5.00 per share); or (iv) in issuers with net tangible
assets less than $2.0 million (if the issuer has been in continuous operation
for at least three years) or $5.0 million (if in continuous operation for less
than three years), or with average revenues of less than $6.0 million for the
last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
estimate that the expenses of the offering to be borne by us will be
approximately $85,000. The estimated offering expenses consist of: a SEC
registration fee of $2,375, printing expenses of $5,000, accounting fees of
$20,000, legal fees of $50,000 and miscellaneous expenses of $7,625. We will not
receive any proceeds from the sale of any of the shares of common stock by the
selling stockholders.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of common stock of EYI Industries while such selling
stockholder is distributing shares covered by this Prospectus. Accordingly,
except as noted below, the selling stockholders are not permitted to cover short
sales by purchasing shares while the distribution is taking place. The selling
stockholders are advised that if a particular offer of common stock is to be
made on terms constituting a material change from the information set forth
above with respect to the Plan of Distribution, then, to the extent required, a
post-effective amendment to the accompanying registration statement must be
filed with the Securities and Exchange Commission.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF EYI AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION AND ELSEWHERE IN THIS PROSPECTUS THAT ARE NOT
STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE "FORWARD-LOOKING
STATEMENTS."
Overview
We are in the business of selling, marketing, and distributing a product
line consisting of approximately 27 nutritional products in three categories,
dietary supplements, personal care products and drinking water filtration
systems. Currently, our product line consists of: (i) 18 dietary supplement
products; (ii) 7 personal care products consisting primarily of cosmetic and
skin care products; and (iii) 2 drinking water filtration products that make up
the Code Blue(TM) which removes contaminants from potable water. Our products
are primarily manufactured by Nutri-Diem, Inc. a related party, and sold by us
under a license and distribution agreement with Nutri-Diem, Inc. Certain of our
own products are manufactured for us by third party manufacturers pursuant to
formulations developed for us. Our products are sold in the United States,
Canada and Asia. Our products are marketed through a network marketing program
in which independent business associates purchase products for resale to retail
customers as well as for their own personal use. We have a list of over 380,000
independent business associates, of which approximately 8,500 we consider
"active". An "active" independent business associate is one who purchased our
products within the preceding 12 months.
Our independent auditors have added an explanatory paragraph to their
audit issued in connection with the financial statements for the period ended
December 31, 2005, relative to our ability to continue as a going concern. We
have negative working capital of approximately $1,965,000 and an accumulated
deficit incurred through December 31, 2005 of $11,347,215, which raises
substantial doubt about our ability to continue as a going concern. As of March
31, 2006, we had a working capital deficit of $1,578,076 and an accumulated
deficit of $12,223,137. Our ability to obtain additional funding will determine
our ability to continue as a going concern. Accordingly, there is substantial
doubt about our ability to continue as a going concern. Our financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
We have a history of losses. We have incurred an operating loss since
inception and had an accumulated deficit of $12,223,137 as of March 31, 2006.
For the three months ended March 31, 2006, we incurred a net loss of $875,922.
For the year ended December 31, 2005, we incurred a net loss of $4,262,011. For
the year ended December 31, 2004, we incurred a net loss of $4,462,795.
Consequently, we will in all likelihood, have to rely on external financing for
all of our capital requirements. Future losses are likely to continue unless we
successfully implement our business plan, which calls for us to secure both debt
and equity financing.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires our management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results may differ from those estimates.
Our management routinely makes judgments and estimates about the effects
of matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. We have
identified certain accounting policies, described below, that are the most
important to the portrayal of our current financial condition and results of
operations.
Accounting For 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. We have adopted this
method, which measures compensation costs based on the estimated fair value of
the award and recognizes that cost over the service period.
21
Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (hereinafter "SFAS No. 133"), as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
These statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value.
At December 31, 2005, EYI has not engaged in any transactions that would
be considered derivative instruments or hedging activities.
Earnings Per Share
EYI has adopted Statement of Financial Accounting Standards No. 128,
which provides for calculation of "basic" and "diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing net
income (loss) available to common shareholders by the weighted average common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity
similar to fully diluted earnings per share. Basic and diluted loss per share
were the same, at the reporting dates, as inclusion of the common stock
equivalents would be anti-dilutive.
Foreign Currency Translation And Other Comprehensive Income
EYI has adopted Financial Accounting Standard No. 52. Monetary assets and
liabilities denominated in foreign currencies are translated into United States
dollars at rates of exchange in effect at the balance sheet date. Gains or
losses are included in income for the year. Non-monetary assets, liabilities and
items recorded in income arising from transactions denominated in foreign
currencies are translated at rates of exchange in effect at the date of the
transaction.
As EYI's functional currency is the U.S. dollar, and all translation gains
and losses are transactional, EYI has no assets with value recorded in Canadian
dollar and there is no recognition of other comprehensive income in the
financial statements.
Foreign Currency Valuation And Risk Exposure
While EYI's functional currency is the U.S. dollar and the majority of its
operations are in the United States, EYI maintains its main operations office in
Burnaby, British Columbia. The assets and liabilities relating to the Canadian
operations are exposed to exchange rate fluctuations. Assets and liabilities of
EYI's foreign operations are translated into U.S. dollars at the year-end
exchange rates, and revenue and expenses are translated at the average exchange
rate during the period. The net effect of exchange difference arising from
currency translation is disclosed as a separate component of stockholders'
equity. Realized gains and losses from foreign currency transactions are
reflected in the results of operations.
Income Taxes
EYI accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
statement requires the recognition of deferred tax liabilities and assets for
the future consequences of events that have been recognized in EYI consolidated
financial statement or tax returns. Measurement of the deferred items is based
on enacted tax laws. In the event the future consequences of differences between
financial reporting bases and tax bases of EYI assets and liabilities results in
a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of
being able to realize the future benefits indicated by such an asset. A
valuation allowance related to a deferred tax asset is recorded when it is more
likely than not that some portion or all of the deferred tax asset will not be
realized.
Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This standard
establishes a single accounting model for long-lived assets to be disposed of by
sale, including discontinued operations, and requires that these long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or discontinued operations.
22
Accordingly, EYI reviews the carrying amount of long-lived assets for
impairment where events or changes in circumstances indicate that the carrying
amount may not be recoverable. The determination of any impairment would include
a comparison of estimated future cash flows anticipated to be generated during
the remaining life of the assets to the net carrying value of the assets. For
the year ended December 31, 2005, no impairments have been identified.
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 $128,967 and $190,340 for the year
ended December 31, 2005 and December 31, 2004 respectively.
Segment Information
EYI adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
(hereafter "SFAS No. 131") which supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," replacing the "industry segment"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of EYI reportable segments. SFAS No. 131
also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS No. 131 did not affect EYI results of
operations or financial position.
Recent Accounting Pronouncements
New accounting pronouncements that have a current or future potential
impact on our financial statements are as follows:
In March 2006, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 156, "Accounting for Servicing of
Financial Assets--an amendment of FASB Statement No. 140." This statement
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
servicing contract in any of the following situations: a transfer of the
servicer's financial assets that meets the requirements for sale accounting; a
transfer of the servicer's financial assets to a qualifying special-purpose
entity in a guaranteed mortgage securitization in which the transferor retains
all of the resulting securities and classifies them as either available-for-sale
securities or trading securities; or an acquisition or assumption of an
obligation to service a financial asset that does not relate to financial assets
of the servicer or its consolidated affiliates. The statement also requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable and permits an entity to choose either
the amortization or fair value method for subsequent measurement of each class
of servicing assets and liabilities. The statement further permits, at its
initial adoption, a one-time reclassification of available for sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available for sale securities under
Statement 115, provided that the available for sale securities are identified in
some manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value and requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. This statement is effective for
fiscal years beginning after September 15, 2006, with early adoption permitted
as of the beginning of an entity's fiscal year. Management believes the adoption
of this statement will have no impact on the Company's financial condition or
results of operations.
23
In February 2006, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 155, "Accounting for Certain
Hybrid Financial Instruments, an Amendment of FASB Standards No. 133 and 140"
(hereinafter "SFAS No. 155"). This statement established the accounting for
certain derivatives embedded in other instruments. It simplifies accounting for
certain hybrid financial instruments by permitting fair value remeasurement for
any hybrid instrument that contains an embedded derivative that otherwise would
require bifurcation under SFAS No. 133 as well as eliminating a restriction on
the passive derivative instruments that a qualifying special-purpose entity
("SPE") may hold under SFAS No. 140. This statement allows a public entity to
irrevocably elect to initially and subsequently measure a hybrid instrument that
would be required to be separated into a host contract and derivative in its
entirety at fair value (with changes in fair value recognized in earnings) so
long as that instrument is not designated as a hedging instrument pursuant to
the statement. SFAS No. 140 previously prohibited a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
statement is effective for fiscal years beginning after September 15, 2006, with
early adoption permitted as of the beginning of an entity's fiscal year.
Management believes the adoption of this statement will have no impact on the
Company's financial condition or results of operations.
In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections," (hereinafter "SFAS No. 154") which replaces Accounting Principles
Board Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion
No. 28." SFAS No. 154 provides guidance on accounting for and reporting changes
in accounting principle and error corrections. SFAS No. 154 requires that
changes in accounting principle be applied retrospectively to prior period
financial statements and is effective for fiscal years beginning after December
15, 2005. The Company does not expect SFAS No. 154 to have a material impact on
its consolidated financial position, results of operations, or cash flows.
In March 2005, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset Retirement
Obligations." FIN 47 clarifies that the term "conditional asset retirement
obligation," which as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The entity
must record a liability for a "conditional" asset retirement obligation if the
fair value of the obligation can be reasonably estimated. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005.
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 supersedes 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.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (hereinafter "FIN 46"). FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. The provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The Company does not have any entities that require disclosure or new
consolidation as a result of adopting the provisions of FIN 46.
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.
24
Results Of Operations
The following table summarizes operating results as a percentage of
revenue, respectively, for the periods indicated:
Three Months Ended March 31, 2006 As Compared to March 31, 2005
Three Three
Months Months
March 31, March 31,
2006 2005 Variance
---------- ---------- -------------------------
Revenue $1,108,759 $1,313,768 -$205,010 -15.60%
Cost of goods sold $287,952 $251,149 $36,803 14.65%
---------- ---------- ------- ----
Gross profit before commissions expense $820,807 $1,062,619 $241,813 -22.76%
Commission expense $385,443 $471,605 -$86,162 -18.27%
Gross profit after cost of goods sold and commissions $435,364 $591,015 -$155,651 -26.34%
---------- ---------- ------- ----
Operating expenses $1,324,361 $1,237,108 $87,253 7.05%
---------- ---------- ------- ----
Loss from operations -$888,996 -$646,093 -$242,903 -37.60%
========== ========== ======= ====
Revenues
During the three months ended March 31, 2006 we had total revenues of
$1,108,759 as compared to revenues of $1,313,768 for the same period in 2005
which represents a decline of $205,010 or 15.6%. The decrease in our revenues
can be primarily attributed to the following factors:
o Our inability to attract new IBA's
o Lack of IBA participation in our auto-ship program
o our inability to fund marketing initiatives and programs that may
promote growth within new markets and existing ones
Gross Profit
During the three months ended March 31, 2006 as compared to the same
period in 2005, we had gross profits of $820,807 and $1,062,620 respectively.
This represents a decline of $241,813 or 22.76%. The decline in our gross profit
is primarily attributed to our decreased binary sales in relation to other
revenue segments that have a higher percentage of cost-of-goods.
Revenue By Segments
The following table summarizes our four revenue segments as a percentage
of total revenue, respectively, for the periods indicated:
Three Months Three Months
Revenue by Segments March 31, 2006 March 31, 2005 Variance
------------------- -------------- -------------- --------------------
Administration fees $39,990 $41,096 -$1,106 -2.69%
Binary Sales $762,195 $948,422 -$186,227 -19.64%
Direct sales $201,677 $212,741 -$11,064 -5.20%
Affiliate sales $100,612 $82,745 $17,867 21.59%
Sales Aids $4,285 $4,065 $220 5.41%
Warehouse -- 24,700 -24,700 -100%
---------- ---------- -------- -----
$1,108,759 $1,313,768 -$205,010 -15.60%
========== ========== ======== =====
25
Details of the most significant changes from the quarter ended March 31,
2006 to the year ended March 31, 2005 are detailed below:
Binary sales - The binary sales segment represents $762,195 or 69% of the
total revenue earned during the quarter ended March 31, 2006, as compared to
$948,422 or 74% of the total revenues earned during the quarter ended March 31,
2005. Management believes that our inability to properly fund our marketing
initiatives hindered growth and retention in this segment. EYI pays out a
maximum of 50% commission on binary sales.
Direct sales - The direct sales segment represents $201,677 or 18% of the
total revenue earned during the quarter ended March 31, 2006, as compared to
$212,741 or 17% of the total revenues earned during the quarter ended March 31,
2005. No commissions are paid out on direct sales.
Affiliate sales - The affiliate sales segment represents $100,612 or 9% of
the total revenue earned during the quarter ended March 31, 2006, as compared to
$82,745 or 6% of the total revenues earned during the quarter ended March 31,
2005. EYI pays approximately 31% commissions on direct sales.
Expenses
Operating Expenses
The following table summarizes operating expenditures for the periods
indicated:
Operating Expenses
Three Months Three Months
March 31, 2006 March 31, 2005 Variance
-------------- -------------- --------------------
Consulting fees $259,736 $237,962 $21,774 9.15%
Legal and professional fees $74,482 $69,125 $5,357 7.75%
Customer service $40,416 $86,534 -$46,118 -53.29%
Finance and administration $499,973 $208,080 $291,893 140.28%
Sales and marketing $78,624 $3,718 $74,906 2014.68%
Telecommunications $30,660 $119,162 -$88,502 -74.27%
Wages and benefits $277,571 $406,627 -$129,056 -31.74%
Warehouse expense $62,898 $105,900 -$43,002 -40.61%
---------- ---------- ------- ----
$1,324,360 $1,237,108 $87,252 7.05%
========== ========== ======= ====
We incurred operating expenses in the amount of $1,324,361 during the
three months ended March 31, 2006, compared to $1,237,108 for the three months
ended March 31, 2005. The following explains the most significant changes for
the periods presented:
Consulting Fees - For the three months ended March 31, 2006, consulting
fees totaled $259,736 as compared to $237,962 for the three months ended March
31, 2005. The net difference of $21,774 or 9.15% is attributed to additional
fees paid to consultants to assist in Sales & Marketing, Operations and Investor
Relations
Customer Service - For the three months ended March 31, 2006, customer
services fees totaled $40,416 and represented 3% of our total operating
expenditures, as compared to $86,534 or 7% of the total operating expenditures
for the three months ended March 31, 2005. These expenditures represent the
services provided by EYI Corp. pursuant to the terms of their management
agreement with our subsidiary Essentially Yours Industries, Inc. ("EYII"). The
reduction of expenditures is related to EYII utilizing other service providers
to provide the services that were previously provided by EYI Corp.
Finance and Administration - For the three months ended March 31, 2006,
finance and administration fees totaled $499,973 and represented 38% of our
total operating expenditures, as compared to $208,080 or 17% of the total
operating expenditures for the three months ended March 31, 2005. The net
increase of $291,893 or 140.28% is primarily attributed to three main factors:
o Additional finance charges of approximately $165,000
26
o Expenditures relating to Hong Kong operations of $67,000
o Investor relations fees of $58,000
Sales and Marketing - The Sales and Marketing expenses for the three
months ended March 31, 2006 were $78,624 as compared to $3,718 for the three
months ended March 31, 2005. We expensed approximately $28,000 for cost
associated with the registration of Code Blue in China. In addition, we expensed
approximately $40,000 for the Hong Kong Grand Opening event.
Wages and Benefits - For the three months ended March 31, 2006, wages and
benefits totaled $277,571 and represented 21% of our total operating
expenditures, as compared to $406,627 or 33% of the total operating expenditures
for the three months ended March 31, 2005. During the quarter ended March 31,
2005, we expensed approximate $134,000 for vested employee stock options whereas
for the same quarter in the 2006, no employee stock options vested.
Warehouse Expenses - For the three months ended March 31, 2006, warehouse
expense totaled $62,898 and represented 5% of our total operating expenditures,
as compared to $105,900 or 9% of the total operating expenditures for the three
months ended March 31, 2005. The decline in attributed primarily to our decision
to close our fulfillment center, Halo Distribution LLC in April 2005 and
outsource this service to a third party provider.
Summary Of Year End Results
Year Ended December 31, 2005 As Compared To December 31, 2004
Year ended Year ended
December 31, December 31,
2005 2004 Variance
----------- ----------- ----------------------
Revenue $4,980,408 $6,085,830 -$1,105,422 -18.16%
Cost of goods sold $1,165,976 $1,252,118 -$86,142 -6.88%
---------- ---------- ----------- -------
Gross profit before commissions expense $3,814,432 $4,833,713 -$1,019,280 -21.09%
Commission expense $1,930,925 $2,486,970 -$556,045 -22.36%
---------- ---------- ----------- -------
Gross profit after cost of goods sold and $1,883,508 $2,346,742 -$463,235 -19.74%
commissions
Operating expenses $5,550,077 $6,286,641 -$736,564 -11.72%
---------- ---------- ----------- -------
Loss from operations -$3,666,570 -$3,939,899 -$273,329 -6.94%
========== ========== =========== =======
Year Ended December 31, 2005 Compared To Year Ended December 31, 2004
Revenues
During the year ended December 31, 2005 we had total revenues of
$4,980,408 and gross profits of $1,883,508 or 38% compared to revenues of
$6,085,831 and gross profits of $2,346,743 or 39% during the period ended
December 31, 2004. We experienced a total decline in revenue of $1,105,422 or
18% primarily due to the following factors:
o our inability to attract new IBAs and retain existing IBAs in our
network.
o our inability to fund marketing initiatives and programs that may
promote growth within new markets and existing ones.
o Lack of IBA participation in our autoship program.
27
Revenue By Segments
The following table summarizes our four revenue segments as a percentage
of total revenue, respectively, for the periods indicated:
Revenue By Segments
Year ended Year ended
December 31, December 31,
2005 2004 Variance
----------- ----------- -----------------------
Administration fees $128,967 $190,340 -$61,373 -32.24%
Binary Sales $3,758,260 $4,734,697 -$976,437 -20.62%
Direct sales $779,028 $885,314 -$106,286 -12.01%
Affiliate sales $304,568 $265,435 $39,134 14.74%
Sales Aids $9,585 $10,045 -$460 -4.58%
---------- ---------- ---------- -----
$4,980,408 $6,085,830 -$1,105,422 -18.16%
========== ========== ========== =====
Details of the most significant changes from the year ended December 31,
2005 to the year ended December 31, 2004 are detailed below:
Binary Sales - The binary sales segment represents $3,758,260 or 75% of
the total revenue earned during the year ended December 31, 2005, as compared to
$4,734,697 or 78% of the total revenues earned during the short period ended
December 31, 2004. Management believes that our inability to properly fund our
marketing initiatives hindered growth and retention in this segment. EYI pays
out a maximum of 50% commission on binary sales.
Direct Sales - The direct sales segment represents $779,028 or 16% of the
total revenue earned during the year ended December 31, 2005, as compared to
$885,314 or 15% of the total revenues earned during the year ended December 31,
2004. No commissions are paid out on direct sales.
Affiliate Sales - The affiliate sales segment represents $304,568 or 6% of
the total revenue earned during the year ended December 31, 2005, as compared to
$265,435 or 4% of the total revenues earned during the year ended December 31,
2004. EYI pays approximately 31% commissions on direct sales.
Expenses
Operating Expenses
The following table summarizes operating expenditures as a percentage of
total operating expenses, respectively, for the periods indicated:
Operating Expenses
Year Ended Year Ended
December 31, December 31,
2005 2004 Variance
----------- ----------- -------------------
Consulting fees $1,250,278 $1,438,362 -$188,083 -13.08%
Legal and professional fees $306,948 $321,713 -$14,765 -4.59%
Customer service $198,500 $393,244 -$194,744 -49.52%
Finance and administration $1,378,118 $2,101,842 -$723,724 -34.43%
Sales and marketing $15,741 $154,638 -$138,897 -89.82%
Telecommunications $946,331 $492,847 $453,483 92.01%
Wages and benefits $1,282,438 $1,152,728 $129,711 11.25%
Warehouse expense $171,724 $231,268 -$59,544 -25.75%
---------- ---------- --------- -----
$5,550,077 $6,286,641 -$736,564 -11.72%
========== ========== ========= =====
28
We incurred operating expenses in the amount of $5,550,077 for the year
ended December 31, 2005, compared to $6,286,641 for the period ended December
31, 2004. The overall decline was 736,564 or 12%. The following explains the
most significant changes during the periods presented:
Consulting Fees - For the year ended December 31, 2005, consulting fees
totaled $1,250,278 and represented 23% of our total operating expenditures, as
compared to $1,438,362 or 23% of the total operating expenditures for the period
ended December 31, 2004. The total decline of $188,083 or 13% s attributed to a
lesser amount of vested stock options issued to consultants during 2005.
Customer Service - For the year ended December 31, 2005, customer services
fees totaled $198,500 and represented 4% of our total operating expenditures, as
compared to $393,244 or 6% of the total operating expenditures for the period
ended December 31, 2004. In April 2004, we acquired our customer service support
department through a management agreement with EYI Corp. Also in April 2004, we
hired our own employees to perform this function and therefore, the related
expenses are included under Wages and Benefits.
Finance and Administration - For the year ended December 31, 2005, finance
and administration expenditures totaled $1,378,118 and represented 25% of our
total operating expenditures, as compared to $2,101,842 or 33% of the total
operating expenditures for the period ended December 31, 2004. The results for
2004 were higher as a result of expensing of stock options and due to expensing
$390,000 in financing costs during the year ended December 31, 2004.
Telecommunications - For the year ended December 31, 2005,
telecommunications totaled $946,331 and represented 17% of our total operating
expenditures, as compared to $492,483 or 8% of the total operating expenditures
for the period ended December 31, 2004. Telecommunications increased $453,483 or
92% as we fully expensed the remaining balance of the Eyewonder communication
component and application fees in the amount of $466,666.
Wages and Benefits - For the year ended December 31, 2005, wages and
benefits totaled $1,282,438 and represented 23% of our total operating
expenditures, as compared to $1,152,728 or 18% of the total operating
expenditures for the period ended December 31, 2004. The increased wages and
benefit expense is attributed to our increased staffing during 2005.
Warehouse Expense - For the year ended December 31, 2005, warehouse
expenses totaled $171,724 and represented 3% of our total operating
expenditures, as compared to $231,268 or 4% of the total operating expenditures
for the period ended December 31, 2004. The overall decrease of $59,544 or 26%
is attributed to the discontinuation of operations of Halo Distribution LLC.
Liquidity And Financial Condition
Cash and Working Capital
As at As at
March 31, December 31,
2006 2005 Variance
----------- ----------- ---------------------
Current assets $582,666 382,057 $200,609 52.51%
Current Liabilities 2,160,742 2,347,087 -$186,345 -7.94%
----------- ----------- --------- ------
Working Capital (deficit) -$1,578,077 -$1,965,030 $386,953 19.69%
=========== =========== ========= ======
We had cash of $190,837 as at March 31, 2006, compared with cash of
$25,639 as at December 31, 2005. We had a working capital deficit at March 31,
2006 and December 31, 2005 of $1,578,077 and $1,965,030 respectively.
Liabilities
As at As at
March 31, December 31,
2006 2005 Variance
----------- ----------- ---------------------
Accounts payable and accrued liabilities $1,427,120 $1,929,049 -$501,929 -26.02%
Accounts payable - related parties $643,622 $328,038 $315,584 96.20%
Notes payable - related party $90,000 $90,000 $0 0.00%
---------- ---------- --------- ------
$2,160,742 $2,347,087 -$186,345 -7.94%
========== ========== ========= ======
29
We had a decrease of 26.02% in Accounts Payable and Accrued Liabilities
during the three months ended March 31, 2006. We also experienced an increase of
96.20% in Accounts Payable-Related Parties during this same period. In both
cases, the majority of the variance is due to a reclassification of debt owed to
two of our officers in the amount of $334,175. This amount was reclassified from
Accounts Payable and Accrued Liabilities to Accounts Payable - Related Parties.
Cash Used in Operating Activities
Cash used in operating activities for the three months ended March 31,
2006 was $901,226 compared to $157,219 for the comparative period in 2005,
representing an increase of $743,707 or 472%.
Cash Provided by Financing Activities
Cash provided by financing activities for the three months ended March 31,
2006 was $1,084,565, compared to $141,324 for the three months ended March 31,
2005. Our financing activities are primarily through our financing agreements
with Cornell Capital LLC.
Financing Requirements
Our consolidated interim financial statements included in this Prospectus
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 $1,578,000 and an accumulated deficit of approximately $12,223,000
incurred through March 31, 2006.
Our current sources of working capital are sufficient to satisfy our
anticipated current working capital needs. On April 24, 2006 we entered into a
Securities Purchase Agreement with the Cornell Capital Partners, Taib Bank,
B.S.C., and Certain Wealth, Ltd. Pursuant to this agreement, we agreed to sell
to these entities secured convertible debentures in the aggregate principal
amount of $4,500,000. We believe that this financing arrangement will provide
the necessary cash flow to meet our operational needs for the next 24 months.
In the event that this financing does not support our operational cash
flow requirements, 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.
30
DESCRIPTION OF BUSINESS
Overview
We are in the business of selling, marketing, and distributing a product
line consisting of approximately 27 nutritional products in three categories,
dietary supplements, personal care products and water filtration systems. Our
most successful product is Calorad, a liquid collagen-based dietary supplement
presently available in 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 8,500 we consider
"active". An "active" IBA is one who purchased our products within the preceding
12 months. Over 1,200 of these IBAs are considered "very active". A "very
active" IBA is one who is on our automatic Convenience Program and is current
with their annual administration fee.
The IBAs in our network are encouraged to recruit interested people to
become new distributors of our products. New IBAs are placed beneath the
recruiting IBA in the "network" and are referred to as being in that IBA's
"down-line" organization. Our marketing plan is designed to provide incentives
for IBAs to build, maintain and motivate an organization of recruited
distributors in their down-line organization to maximize their earning
potential. IBAs generate income by purchasing our products at wholesale prices
and reselling them at retail prices. IBAs also earn commissions on product
purchases generated by their down-line organization.
On an ongoing basis we review our product line for duplication and sales
trends and make adjustments accordingly. As of March 31, 2006, our product line
consisted of: (i) 18 dietary supplement products; (ii) 7 personal care products
consisting primarily of cosmetic and skin care products; and (iii) 2 water
filtration system products. Our products are primarily manufactured by
Nutri-Diem, Inc., a related party, and sold by us under a license and
distribution agreement with Nutri-Diem Inc. Certain of our own products are
manufactured for us by third party manufacturers pursuant to formulations
developed for us. Our products are sold to our IBAs located in the United
States, Canada and Asia.
We believe that our network marketing system is suited to marketing
dietary supplements, personal care products and water filtration products
because sales of such products are strengthened by ongoing personal contact
between IBAs and their customers. Our network marketing system appeals to a
broad cross-section of people, particularly those looking to supplement family
income or who are seeking part-time work. IBAs are given the opportunity,
through our sponsored events and training sessions, to network with other
distributors, develop selling skills and establish personal goals. We supplement
monetary incentives with other forms of recognition in order to motivate IBAs.
Recent Corporate Developments
We experienced the following significant developments through the date of
this filing and during fiscal 2006:
o On April 24, 2006, we entered a Securities Purchase Agreement with
Cornell Capital Partners, Taib Bank, B.S.C. and Certain Wealth, Ltd.
pursuant to which we entered into the following agreements: an
Investor Registration Rights Agreement, Irrevocable Transfer Agent
Instructions and a Security Agreement. Pursuant to the terms of the
Securities Purchase Agreement, we may sell convertible debentures to
these entities in the principal amount of $4,500,000 plus accrued
interest which are convertible into shares of our common stock. Of
this amount $1,500,000 has been received, $1,500,000 must be paid
two (2) business days prior to the date a registration statement is
filed with the Securities and Exchange Commission and $1,500,000
shall be paid two (2) business days prior to the date that such
registration statement is declared effective by the Securities and
Exchange Commission. We received net proceeds of $1,305,000 (net of
fees associated with the issuance of the convertible debentures) on
April 27, 2006 in connection with the issuance of $1,500,000 of
convertible debentures in the following principal amounts: $750,000
to Cornell Capital Partners, $416,667 to Taib Bank, B.S.C., and
$333,333 to Certain Wealth, Ltd. pursuant to the terms of the
Securities Purchase Agreement.
31
o Pursuant to the terms of the Securities Purchase Agreement and the
issuance of our convertible debentures, on April 24, 2006 we issued
to Cornell Capital Partners seventeen (17) warrants to purchase up
to an aggregate 124,062,678 shares of our common stock at the
discretion of Cornell Capital Partners each for good and valuable
consideration. Pursuant to the terms of the warrants Cornell Capital
Partners is entitled to purchase from us: (1) 10,416,650 shares of
our common stock at $0.02 per share, (2) 13,888,866 shares of our
common stock at $0.03 per share, (3) 10,416,650 shares of our common
stock at $0.04 per share, (4) 8,333,320 shares of our common stock
at $0.05 per share, (5) 6,944,433 shares of our common stock at
$0.06 per share, (6) 5,952,371 shares of our common stock at $0.07
per share, (7) 11,250,000 shares of our common stock at $0.08 per
share, (8) 10,000,000 shares of our common stock at $0.09 per share,
(9) 19,000,000 shares of our common stock at $0.10 per share, (10)
8,181,818 shares of our common stock at $0.11 per share, (11)
7,500,000 shares of our common stock at $0.12 per share, (12)
3,333,333 shares of our common stock at $0.15 per share, (13)
2,500,000 shares of our common stock at $0.20 per share, (14)
2,000,000 shares of our common stock at $0.25 per share, (15)
1,666,666 shares of our common stock at $0.30 per share, (16)
1,428,571 shares of our common stock at $0.35 per share and (17)
1,250,000 shares of our common stock at $0.40 per share upon
surrender of the Warrants (or as subsequently adjusted pursuant to
the terms of each Warrant) . Each Warrant has "piggy back"
registration rights and shall expire five (5) years from the date of
issuance, on or about April 24, 2011.
o On April 6, 2006, Essentially Yours Industries (International)
Limited ("EYIINT"), our wholly owned subsidiary, signed a Letter of
Intent and Good Faith Commitment ("LOI") with Raul Bautista and
Rommel Panganiban to act as managing partners and distributors for
the Philippines. The LOI is subject to the entry into a definitive
agreement between the parties on or before July 1, 2006.
o On April 3, 2006, we signed a termination agreement ("Termination
Agreement") with Cornell Capital Partners terminating our Standby
Equity Distribution Agreement, Registration Rights Agreement and
Escrow Agreement previously entered into with Cornell Capital
Partners on May 13, 2005.
o On March 14, 2006, we entered into an agreement with Porter Public
Relations, Inc. ("Porter") pursuant to which Porter will provide us
with certain public relations services to promote the launch of the
Code Blue water filtration system and the Longevity Series
consisting of Calorad(R), Prosoteine(R) and Calorad(R) Cream. In
consideration of which we agreed to pay Porter a fee of $5,000 per
month for up to 40 hours per month. The agreement is based on a
month to month term.
o On February 6, 2006, the Jay Sargeant Trust was dissolved and the
related shares were disbursed to the beneficiaries. In connection
with this transaction, 268,639 common shares were returned to
treasury at par value.
o On January 27, 2006, we entered into a Consulting Agreement with Mr.
Lou Prescott, for a period of six (6) months and US$5,000 per month
to provide EYI with assistance in developing Mr. Prescott's business
to business marketing model for EYI. Pursuant to the terms of the
agreement we also agreed to purchase Mr. Prescott's gold lead system
and during the term of the agreement, to provide Mr. Prescott with
100% of the leads generated by the system.
o On January 19, 2006, we entered into an agreement with Global
Consulting Group Inc. ("Global") on a month to month basis. Global
provides investor relations services and creates investor awareness
for a fee of $15,000.00 USD per month. This agreement was terminated
on April 17, 2006.
o On December 21, 2005, we entered into a Settlement Agreement and
Mutual Release with Business Centers, LLC and Halo Distribution, LLC
in settlement of the legal action commenced against EYI by Business
Centers, LLC On June, 2005. See "Item 3. - Legal Proceedings",
below.
o On December 6, 2005, we incorporated a wholly owned subsidiary,
Essentially Yours Industries (International) Inc. ("EYI INTL") to
facilitate our expansion throughout other Southeast Asian countries.
o On December 2, 2005, we held our 2005 Annual General Meeting ("AGM")
in Las Vegas, Nevada. At the AGM the stockholders voted to increase
the number of our authorized shares of common stock from 300,000,000
to 1,000,000,000 and appointed Mr. Dori O'Neill and Mr. Jay Sargeant
as Directors.
32
o On September 23, 2005, EYI and Essentially yours Industries (Hong
Kong) Limited ("EYI HK"), our wholly owned subsidiary, entered into
an agency agreement (the "Agency Agreement") with Guangzhou
Zhongdian Enterprises (Group) Co. Ltd. ("GZE") and China Electronics
Import and Export South China Corporation ("CEIEC"). Pursuant to the
terms of the Agency Agreement, EYI HK granted to CEIEC and its
wholly owned subsidiary GZE, the exclusive right to distribute EYI's
Code Blue(TM) water filtration systems (the "Water Filtration
Systems") in China for a period of two years subject to, among other
things, the following conditions: (i) CEIEC purchasing a minimum of
4,000,000 Water Filtration Systems in each year commencing in 2006;
(ii) EYI HK issuing an exclusive agency certificate to CEIEC
confirming the grant of agency rights; (iii)EYI HK guaranteeing the
safety of its products to be sold on the Chinese market and that the
packaging specifications will meet the product safety standard and
packaging standards as required in China; (iv) CEIEC committing to
the purchase (the "Purchase Plan"): of the amount of Water
Filtration Systems outlined in the following purchase plan; (v) If,
in any year CEIEC purchases fewer than 4,000,000 Water Filtration
Systems in the Purchase Plan it will cease to have the exclusive
agency rights to the Water Filtration Systems but continue to be
non-exclusive agents of EYI HK; (vi) If, in any year CEIEC purchases
fewer than one-half of the Water Filtration Systems in the Purchase
Plan, EYI HK may at its option adjust the price of the Water
Filtration Systems supplied to CEIEC under the Purchase Plan; and
(vii) CEIEC agree to obtain all required regulatory approvals in
China relating to the marketing and distribution of the Water
Filtration Systems. Pursuant to the terms of the Agency Agreement,
CEIEC reserves the right, upon reasonable notice to EYI HK, to
increase, or decrease the number of Water Filtration System units
that it purchases under the Purchase Plan, based on its evaluation
of market demand in China, and agreed to commence purchases under
the Purchase Plan in October 2005, and place subsequent purchase
orders on a quarterly basis. The parties agreed that CEIEC may upon
reasonable notice to EYI HK, assign its interest in the Agency
Agreement to its nominee company, but remains a party to the
agreement notwithstanding any such assignment. As of March 30, 2006,
the Company has not received any purchase orders from CEIEC. Due to
delays by MARTI not providing adequate Code Blue pitcher/filter
samples, the product was unable to meet the deadline for the
December product review. Code Blue pitcher/filters are now slated to
be included in the March 2006 quarterly Chinese government product
review.
o EYI HK entered into a Logistics Management Agreement dated September
1, 2005 with All In One Global Logistics Ltd. to provide
international freight, warehousing and distribution services in Hong
Kong for a period of two years.
o On September 1, 2005, EYI entered into an agreement for legal
services with M. Ali Lakhani Personal Law Corporation (the
"Contractor") to provide EYI and its subsidiaries with certain legal
services in exchange for a monthly fee of US $8,000 and a one time
issuance of 500,000 restricted shares of our common stock to the
Contractor or its nominee, pursuant to Regulation S of the
Securities Act of 1933. The contract is on a month-to-month basis.
o On August 28, 2005, we incorporated a wholly subsidiary, EYI HK. The
EYI HK office consists of the entire 15th floor in a centrally
located building at No. 1 Minden Avenue, Tsim Sha Tsui, Kowloon. The
office is intended to be used to service distributors and provide a
product pick up depot for Code Blue(TM) water filtration systems,
Calorad(R), Prosoteine(R) Agrisept-L(R), Definition(R) cream and
drops and the newest EYI product, Calorad Cream. The new office will
also play a role in supporting the sales, distribution and logistics
of the CEIEC agency agreement. In connection with opening our new
office in Hong Kong, on September 28, 2005 EYI HK entered into a
Lease with Dombas Estates Limited for the lease of office space
located at Nos. 1-3, 15th Floor of No. 1 Minden Avenue, Tsim Sha
Tsui, Kowloon. The lease is for a two year term at a monthly rent of
approximately $3,500 USD (HK$22,920).
o On September 12, 2005, we retired $5,000 of the Taib Bank, E.C.
debenture plus $14,245 in interest by converting 375,146 common
shares.
o On August 16, 2005, we retired $170,000 of the Taib Bank, E.C.
debenture plus $10,830 in interest by converting 4,487,096 common
shares.
o On August 15, 2005, we retired $75,000 of the Taib Bank, E.C.
debenture by converting 2,027,027 common shares.
o On August 1, 2005, we entered into a promissory note with Cornell
Capital Partners, LP ("Cornell") for the principal sum of One
Million (U.S.) dollars ($1,000,000) and payable by one initial
payment of One Hundred Thousand Dollars ($100,000); eleven equal
weekly installments of Seventy Five Thousand Dollars ($75,000); and
one additional installment of One Hundred Five Thousand Eight
Hundred Eighty Seven Dollars and Sixty Seven Cents ($105,887.67)
commencing September 3, 2005. Interest on this note is twelve
percent (12%) per annum. The promissory note was fully retired on
December 16, 2005.
33
o On August 3, 2005, the Company retired the Cornell $250,000
debenture signed on June 22, 2004, plus a 20% premium of $50,000 by
using the cash proceeds of the promissory note signed on August 1,
2005.
o On July 28, 2005, we entered into an Investor Relations Agreement
(the "IR Agreement") with Agora Investor Relations Corp ("AGORA").
Pursuant to the terms of the agreement AGORA agreed to provide us
with certain services including marketing, branding and investor
communication services, in consideration of which we agreed to: (i)
pay AGORA a fee of $2,500 per month commencing August 1, 2005 (which
fee has been paid); and (ii) issue to AGORA warrants to be
registered by us to purchase 350,000 shares of our common stock
exercisable at 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 October 5,
2005 we amended the IR Agreement with Agora. The IR Agreement was
amended to provide for the issuance of 250,000 restricted shares of
our common stock in place of the warrants to be received by Agora
initially under the IR Agreement. The shares were issued pursuant to
Regulation 5 of the Securities Act of 1933 and Canadian National
Instrument 45-106 on the basis that Agora is an accredited investor.
o On May 27, 2005, we filed a registration statement on SB-2
(Registration No. 333-125344) registering the resale of up to
97,264,558 shares of our common stock to be sold by certain of our
stockholders, including up to an aggregate of 85,000,000 shares of
our common stock pursuant to our Standby Equity Distribution
Agreement with Cornell Capital Partners. The registration statement
was subsequently declared effective by the SEC on July 29, 2005.
o On May 13, 2005, we entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, 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 Capital Partners will purchase
shares of our common stock for 98% of the lowest volume weighted
average price on the Over-the Counter Bulletin Board or other
principal market on which our common stock is traded for the 5 days
immediately following the advance notice date. Cornell Capital
Partners will retain 5% of each advance under the 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
Capital Partners, we agreed to register and qualify, among other
things, the additional shares due to Cornell Capital Partners under
the Standby Equity Distribution 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 Capital Partners on
June 22, 2004. During the year ended December 31, 2005, the Company
issued 40,874,047 common shares to Cornell in exchange for
$1,700,000.
o On May 11, 2005, we 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 provided 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.
o On April 29, 2005, Essentially Yours Industries, Inc., our wholly
owned subsidiary ("EYII") signed a letter of intent with Metals &
Arsenic Removal Technology, Inc. ("MARTI") for the purpose of
marketing certain of MARTI's products provided to EYII on a
consignment basis and assigning marketing rights to certain of
MARTI's product lines to EYII, subject to EYII's entry into a
definitive agreement with MARTI by November 1, 2005. Subsequently,
on May 11, 2005 EYII entered into 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 provided 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.
34
o On April 25, 2005, we filed a letter with the Securities and
Exchange Commission requesting the withdrawal of our registration
statement on Form SB-2, originally filed on September 17, 2004. We
intend to file a new registration statement on Form-SB-2 registering
the resale of 97,264,558 shares of our common stock held or to be
sold by certain of our stockholders, including Cornell, which
intends to sell up to an aggregate of 85,000,000 shares of our
common stock pursuant to our Standby Equity Distribution Agreement
with Cornell.
o On April 22, 2005, EYII entered into a Fulfillment Services
Agreement with Source 1 Fulfillment ("Source One") to warehouse and
ship our products. Pursuant to the terms of the agreement, Source
One agreed to provide certain storage and fulfillment services to
EYII at the rates set out in the schedules to the agreement. Source
One also agreed to pay a referral commission of 10% of all handling
fees for any client EYII brings to Source One. The agreement is for
a term of one year and automatically renews each year unless
terminated by either party in accordance with the terms of the
agreement. Subsequently, in May, 2005, we ceased warehousing and
distributing our products through Halo Distribution LLC ("Halo"),
our wholly owned subsidiary. We presently intend to continue
warehousing and shipping our products through Source one.
o On April 4, 2005, we entered into a redemption agreement with TAIB
Bank E.C. pursuant to which TAIB agreed to acquire by assignment a
two year 5% secured convertible debenture issued to Cornell Capital
Partners, L.P. in the amount of $245,000, and a two year 5%
convertible debenture in the amount of $5,000 held by Kent Chou, in
consideration of which we agreed not to modify or renegotiate the
terms of our Standby Equity Distribution Agreement with Cornell
Capital Partners, and to use any proceeds obtained by EYI under the
Standby Equity Distribution Agreement to make payments on the
debentures. The debentures were assigned to TAIB on April 4, 2005.
o On February 24, 2005, we received a loan of $200,000 from Cornell
Capital Partners secured by a secured promissory note. Under the
terms of the Secured Note, the loan is payable by April 24, 2005 and
accrues interest at a rate of 12% per annum. In connection with the
issuance of the Secured Note, we agreed to: (i) pay Cornell Capital
Partners 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 Capital Partners' entry into the Secured Note
on February 24, 2005, an employee of EYI, Janet Carpenter, entered
into a guaranty agreement with Cornell Capital Partners and a 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 Capital Partners 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 were issued to Ms.
Carpenter pursuant to Regulation S of the Securities Act on April
29, 2005.
o On February 10, 2005, we entered into a loan agreement with Janet
Carpenter, pursuant to which we loaned Ms. Carpenter $180,000 for
the purpose of exercising 3,000,000 incentive stock options issued
to Ms. Carpenter under our stock compensation program. The loan is
payable on demand and accrues interest at a rate of 4% per annum.
The loan was secured by a promissory note dated effective February
10, 2005 and deemed to be a subscription receivable. On August 10,
2005, the promissory note was re-assigned to Winslow Drive in
exchange for the 3,000,000 shares.
o In January, 2005, our wholly owned subsidiary 642706 B.C. Ltd.,
doing business as EYI Management, entered into a lease agreement
with Golden Plaza Company Ltd. and 681563, for the purpose of
leasing a 12,200 square foot building located in Burnaby, British
Columbia, Canada. The lease is for a term of seven years ending
December 31, 2011 and renewable for an additional period of five
years.
Corporate Organization
We were incorporated under the laws of the State of Nevada on June 27,
1996, under the name of "Inter N. Corporation". From 1999 to 2002, our business
plan was to create a product line of miniaturized microchip technology for
insertion into inanimate objects or injection under the skin of animals. We
again changed the focus of our business, to oil and gas opportunities in 2002.
From 1999 to 2003 we were a non-operating company with limited assets and were
not able to raise sufficient funds to fund our business operations. On December
31, 2003, we completed a share exchange (the "Exchange") with certain of the
shareholders (the "EYI Shareholders") of Essentially Yours Industries, Inc. a
Nevada Corporation ("EYI Nevada"), under a Share Exchange Agreement, dated
November 4, 2003, (the "Exchange Agreement").
35
Under the terms of the Exchange Agreement, we issued 117,991,875 shares of
our common stock, representing approximately 79.9% of our then-outstanding
common stock, to the EYI shareholders in exchange for 15,372,733 shares of EYI
Nevada common stock held by them. As a result, we underwent a change of control.
Following completion of the Exchange, the EYI shareholders controlled
approximately 79.9% of our outstanding common stock and we owned approximately
97.9% of EYI Nevada's issued and outstanding capital stock. As a result of the
transaction, we acquired the business of EYI Nevada and EYI Nevada became our
majority-owned subsidiary. Concurrent with the acquisition, we changed our name
to "EYI Industries, Inc.", our officers and directors resigned, and nominees of
the EYI Shareholders were elected as successors.
Subsidiaries And Affiliates
We presently have eight subsidiaries through which we conduct our
operations, described as follows:
o Essentially Yours Industries, Inc., a Nevada Corporation (Majority
Owned). EYI Nevada was organized on June 20, 2002 upon the
completion of a merger between Burrard Capital Corp., a Nevada
Corporation, and Essentially Yours Industries, Inc., a Nevada
Corporation. The resulting merged entity continued under the name
Essentially Yours Industries, Inc. EYI Nevada is our majority owned
subsidiary which presently conducts our US business operations.
o 642706 B.C. Ltd., dba EYI Management, located in Burnaby, British
Columbia (Wholly Owned), provides accounting, customer service,
marketing and financial advisory services to us. 642706 B.C. Ltd. is
our wholly owned subsidiary and has experience in marketing health
and wellness products and experience in financial reporting for the
United States and Canada.
o Essentially Yours Industries (International) Limited, located in
Hong Kong, (Wholly Owned), subsidiary of EYI Industries Inc.
incorporated on December 6, 2005.
o Essentially Yours Industries (Hong Kong) Limited, located in Hong
Kong, (Wholly Owned), subsidiary of EYI Industries Inc. incorporated
on August, 22, 2005.
o Essentially Yours Industries (Canada), Inc. (Wholly Owned), a
Canadian Federal Corporation, was incorporated in September 2002 and
is located in Burnaby, British Columbia, and handles Canadian sales,
Canadian sales taxes and Canadian reporting.
o World Wide Buyers' Club Inc., a Nevada Corporation (51% Owned).
World Wide Buyers' Club Inc. was organized by a joint venture
agreement effective May 6, 2004.
o RGM International, Inc., a Kentucky Corporation (Wholly Owned). RGM
was incorporated in July 1997. RGM is a dormant investment company
which holds 1% of Halo.
o Halo Distribution LLC, 7109 Global Drive, Louisville, Kentucky. Halo
was organized on January 15, 1999 in the state of Kentucky. Halo is
owned 99% by Essentially Yours Industries, Inc. and 1% by RGM
International, Inc. Halo 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.
The following are our affiliates who are controlled by certain of our
directors and shareholders, as described below:
o Nutri-Diem, Inc., 470, Boul. Sir Wilfrid-Laurier bureau 103
Mont-St-Hilaire, Quebec, Canada. Nutri-Diem, Inc. is the
manufacturing facility in Quebec that supplies approximately 87% of
our products. EYI Nevada negotiated with Nutri-Diem Inc. an
exclusive Distribution and Licensing Agreement where by EYI Nevada
will sell the products of Nutri-Diem Inc., such as Calorad and
Agrisept-L, in the United States and Canada, and elsewhere in the
world, subject to suitable arrangements. Michel Grise, President of
Nutri-Diem, Inc. is one of our shareholders and a director of one of
our subsidiaries.
36
o Essentially Yours Industries Corp., located in Burnaby, B.C.,
provides services to EYI Nevada under a management agreement. These
services consist of the following: computer and management
information systems and support. Payments due under the management
agreement are at cost of services plus a mark-up of approximately
5%. Essentially Yours Industries Corp. is controlled by certain of
our shareholders including Jay Sargeant, our President and Chief
Executive Officer.
Key Operating Strengths
We believe the source of our success is primarily attributed to our IBA
support programs coupled with our IBA compensation programs. We provide our IBAs
with quality products and competitive commission programs, along with training
and motivational events and services. We believe that we have established a
strong operating platform to support IBAs and facilitate future growth. The key
components of this platform include the following:
o quality dietary supplements, water filtration systems and personal
care products that appeal to consumers demands for products that
contribute to a healthy lifestyle;
o a compensation program that permits IBAs to earn income from profits
on the resale of products and residual income from product purchases
within an IBAs' down-line organization, as well as to participate in
various non- cash awards;
o a communications program that seeks to effectively and efficiently
communicate with IBAs by utilizing new technologies and marketing
techniques, as well as motivational events and training seminars;
o a continual expansion and improvement of our product line and
marketing plan;
o an in-house marketing department; and
o employment of computer technology to provide timely and accurate
product order processing, weekly commission payment processing and
detailed IBA earnings statements.
Growth Strategy
New Product Introduction. During 2005, we introduced our new product, Code
Blue(TM). The initial shipment of Code Blue Filters did not meet EYI product
specifications. However, in January of 2006, we received a revised version of
the Code Blue filter called the G-4 which we believe, meets our product
specifications.
We intend to aggressively promote Code Blue systems through a year long
promotional tour campaign ("North American Tour" or "Tour"). Our intent is to
host approximately 120 regional training meetings with audiences of up to 100
people and 30 larger conferences in targeted cities where we can train and
market to larger audiences of 150 to 300. We have selected cities to host these
events where we believe there is a greater interest in the product and a
concentration of our active IBAs. We intend to use a group of 5 to 6 veteran
IBA's to act as our Regional Trainers and to work in concert with our management
team to promote, coordinate, and host these events. We anticipate that the total
cost of the North American Tour campaign will be approximately $240,000. We
anticipate an offset to this cost by way of sales that occur at these events and
through ongoing residual sales generated by the new IBAs enrolled in our system
as a result of this Tour.
International Expansion. We opened our Hong Kong office in September 2005.
The office is intended to be used to service distributors and provide a product
pick up depot for Code Blue(TM), Calorad(R), Prosoteine(R), Agrisept-L(R) and
Definition(R) drops and cream, and the newest EYI product, Calorad Cream. The
new office will also play a role in supporting the sales, distribution and
logistics of the CEIEC agency agreement.
In January 2006, we relocated our Executive Vice President and COO, Dori
O'Neill to Hong Kong for six months after which, Mr. O'Neill will continue his
work in Asia from his office in Burnaby, BC and through periodic trips to Asia.
Mr. O'Neill is expected to play a key role in our Asian market initiative. His
initial focus will be to introduce and train our unified global binary program
to new Asian IBAs. In addition, Mr. O'Neill will also focus on researching and
reviewing other locations and markets for expansion.
In April 2006, our subsidiary, Essentially Yours Industries
(International) Limited, signed a Letter of Intent and Good Faith Commitment
with Raul Bautista and Rommel Panganiban to act as managing partners and
distributors for the Philippines. Once a definitive agreement is reached, EYI
will work with this group to get them operational within one to two months.
37
Industry Overview
Over the past several years, widely publicized reports and medical
research findings have suggested a correlation between the consumption of
dietary supplements and the reduced incidence of certain diseases. Thousands of
such reports and research findings can be found on the International
Bibliographic Information on Dietary Supplements (IBIDS) database produced by
the Office of Dietary Supplements. In 1995, US Congress established the Office
of Dietary Supplements, a division of the National Institutes of Health, to
conduct and coordinate research into the role of dietary supplements in
maintaining health and preventing disease. In addition, Congress has established
the Office of Alternative Medicine within the National Institutes of Health to
foster research into alternative medical treatments, which may include natural
remedies.
Products
Our product line consists of products in the categories of dietary
supplements, water filtrations systems and personal care products. We currently
market approximately 27 products. For the year ended December 31, 2005, Calorad
sales represented over 87% of our net sales and is expected to provide a large
portion of our net sales in the foreseeable future.
Dietary Supplements
We offer 18 products in the dietary supplement category which contain
herbs, vitamins, minerals and other natural ingredients. As stated above, the
dietary supplement product Calorad is expected to provide a large portion of our
net sales in the foreseeable future. The following products represent the
majority of our product sales in the dietary supplement category:
o Agrisept-L(R): Agrisept-L is a dietary supplement of citrus extracts
used as a germicide.
o Calorad(R): Calorad is a liquid collagen-based dietary supplement.
Calorad is available in three formulas: beef, fish, and AM.
o Definition(R) (drops): Definition is a natural herbal product
designed to feed and nurture the female breast. This product is
available in both cream and drop formulations.
o Iso-Greens(R): Iso-Greens is a nutrient-rich green food supplement.
The vegetables in Iso-Greens combine to supply 39 of the vitamins,
minerals and amino acids found in food, including Vitamin B-12.
o Noni Plus(R): Noni fruit is an extract of organic noni and liquid
trace minerals and it is has been around for centuries, used by
natives and ancient healers of many countries during the last
several thousand years to treat many ailments. We have combined this
fruit with our own Dead Sea ionic minerals.
o Oxy-Up(R): Oxy-Up is a liquid stabilized oxygen supplement.
o Prosoteine(R): Prosoteine is a plant based, natural, stimulant-free
liquid protein supplement.
o Triomin: Triomin is a liquid trace mineral dietary supplement.
Personal Care Products
We offer 7 personal care products. The following product represents the
majority of our product sales in the personal care category:
o Calorad(R) (cream): Calorad cream is a topical serum with a base of
nourishing collagen that lavishes and aids the skin during the
natural aging process. The exclusive mixture of ingredients in
Calorad cream stimulate, moisturize and nourish to bio-illuminate
skin. The active ingredients in Calorad cream are extremely
compatible with the biologic structure of the human skin. The
formulation is a unique selection of the most recent biotechnology
ingredients, working in perfect synergy, easily penetrating the
cellular metabolism level of the skin.
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o Definition(R) (cream): Definition is a safe, non-invasive, natural
herbal product designed to feed and nurture the female breast. The
perfectly selected ingredients work in harmony, helping the body to
maintain the nutritional needs of the mammary glands. It works with
the body's natural capabilities to maintain the shape and tone of
youth in the female breast.
Water Filtration Systems
o Code Blue(TM) Water Filtration System: Code Blue is a pour through
drinking water filtration system (containing a pitcher and filter)
that reduces Arsenic, Chlorine, Nitrates, Nitrites, Mercury and
other contaminants from potable water.
o Code Blue(TM) Filter: Code Blue(TM) Filter is a filter that reduces
Arsenic, Chlorine, Nitrates, Nitrites, Mercury and other
contaminants from potable water.
Promotional Materials. We will also derive revenues from the sale of
various educational and promotional materials designed to aid our distributors
in maintaining and building their businesses. Such materials include various
sales aids, informational videotapes and cassette recordings, and product and
marketing brochures. We produce many of our promotional materials in-house and
have the capability to create just-in-time marketing pieces as needed and
constantly update our marketing material.
New Product Identification. We expand our product line through the
development of new products. New product ideas are derived from a number of
sources, including trade publications, scientific and health journals,
consultants, distributors and other third parties. Prior to introducing new
products, we investigate product formulation as it relates to regulatory
compliance and other issues.
We rely upon Nutri-Diem, Inc. and other manufacturers, independent
researchers and vendor research departments for product development services.
When a new product concept is identified or when an existing product must be
reformulated, the new product concept or reformulation project is generally
submitted to Nutri-Diem, Inc. or other manufacturers for technical development
and implementation. Nutri-Diem owns all of the rights to the products that they
produce. We do not incur any expense for the development of any products by
Nutri-Diem. We continually review our existing products for potential
enhancements to improve their effectiveness and marketability. While we consider
our product formulations to be proprietary trade secrets, such formulations are
not patented. Accordingly, there is no assurance that another company will not
replicate one or more of our products.
Product Procurement and Distribution Insurance. More than 87% of our
product line in the dietary supplement category is manufactured by Nutri-Diem,
Inc., a related party, utilizing theirs and our product formulations, as well as
product formulations it licenses to us. A majority of our product line in the
personal care category is also manufactured by Nutri-Diem, Inc.
We have contracts with Nutri-Diem, Inc. that grant to us the exclusive
license and right to market, sell and distribute in Canada and the United States
and a non-exclusive right to market on the Internet certain products owned by
Michel Grise Consultant, Inc., a Quebec corporation, which is controlled by
Michel Grise. To maintain the license and distribution rights granted by those
contracts, we are obligated to purchase from Nutri-Diem, Inc. during that period
commencing on June 1, 2003, and continuing through and including May 31, 2004,
products totaling $1,530,000. Those contracts also specify that for the period
from June 1, 2004 to May 31, 2005, we are required to purchase from Nutri-Diem,
Inc. products totaling $3,825,000. Additionally, those contracts specify that
for each year commencing on June 1, and ending on May 31 thereafter during the
term of that agreement we are required to purchase products totaling $5,355,000.
The provisions of those contracts specify that Nutri-Diem, Inc. will offer
us the right to sell, market and distribute in those territories any new product
developed by Nutri-Diem, Inc.
If we are not in default at the expiration of the initial five year
period, those contracts will be automatically renewed for another five year
period. In the event we fail to make the minimum purchase during any year,
Nutri-Diem, Inc. has the option, to require us to pay Nutri-Diem, Inc. an amount
equal to 15% of the difference between the minimum amount for the respective
year and the amount of actual purchases during that year. Additionally, in the
event that we do not purchase the minimum amount during any particular year and
do not pay Nutri-Diem, Inc. that 15%, Nutri-Diem, Inc. at its sole discretion,
may terminate the respective contract or cause the license granted in the
contract to be non-exclusive.
39
In the event the relationship with any of our manufacturers becomes
impaired, we will be required to obtain alternative manufacturing sources for
our products.
In such event, there is no assurance that the manufacturing processes of
our current manufacturers can be replicated by another manufacturer. We believe
that we would be able to obtain alternative sources of our dietary supplement
and personal care products. A significant delay or reduction in availability of
products, however, could have a material adverse effect on our business,
operating results and financial condition. We, as with other marketers of
products that are intended to be ingested, face the inherent risk of exposure to
product liability claims in the event that the use of our products results in
injury. We maintain product liability insurance coverage with coverage limits of
$2,000,000 per occurrence and $2,000,000 aggregate. Although we have not
experienced any successful product liability claims, such claims could result in
material losses.
All of the items in our product line include a customer satisfaction
guarantee. Within 30 days of purchase, any retail customer or IBA who is not
satisfied with our product for any reason may return it or any unused portion to
the distributor from whom it was purchased or to us for a full refund or credit
toward the purchase of another product. IBAs may obtain replacements from us for
products returned to them by retail customers, if they return such products on a
timely basis. Furthermore, in most jurisdictions, we maintain a buy-back
program. Under this program, we will repurchase products sold to a distributor
(subject to a 10% restocking charge), provided that the distributor resigns as a
distributor and returns the product in marketable condition within one year of
original purchase, or longer where required by applicable state law or
regulations. We believe this buy-back program addresses a number of the
regulatory compliance issues pertaining to network marketing systems. We expect
that the cost of products returned to us will be less than 2% of gross sales.
Below is a summary of return information based on our sales transactions
that were paid by credit card for the year ended December 31, 2005:
Month Deposit Sales Returns Chargebacks Adj./Disc. Net Deposit
----- ------- ----- ------- ----------- ---------- -----------
January-05 $450,314 $454,121 $3,389 $321 $13,955 $436,456
February-05 $461,522 $468,356 $6,834 $187 $13,799 $447,536
March-05 $437,991 $441,628 $2,912 $602 $13,744 $424,371
April-40 $407,146 $410,358 $2,799 $283 $13,221 $394,055
May-05 $396,850 $398,839 $1,583 $0 $12,788 $384,468
June-05 $396,087 $399,330 $2,901 $615 $12,519 $383,295
July-05 $482,022 $484,192 $2,170 $0 $15,550 $466,472
August-05 $405,372 $407,915 $2,125 $0 $12,829 $392,961
September-05 $362,821 $371,611 $8,664 $120 $11,774 $351,053
October-05 $407,788 $410,394 $2,009 $567 $12,835 $394,984
November-05 $418,535 $425,971 $6,941 $142 $13,867 $405,021
December-05 $310,393 $318,161 $7,769 $3,529 $10,185 $296,680
---------- ----------- ------- ------ -------- -----------
$4,936,840 $4,990,877 $50,096 $6,365 $157,066 $4,777,351
========== =========== ======= ====== ======== ===========
100.00% -1.00% -0.13% -3.15% 95.72%
Our specific refund policies are as follows:
Retail Customer Guarantee
o A retail customer may return defective, unused product (at least
50%) to his/her IBA within thirty (30) days of purchase for exchange
or full refund.
o A written statement must be obtained from the customer stating the
reason for dissatisfaction.
o The original retail receipt showing the date of purchase must
accompany a written request for a return.
o A copy of the Customer Refund Form must be completed in full and
returned to EYI with the aforementioned documentation and product
(when product is requested).
o Upon receipt of the statement, retail receipt and the returned
product, EYI will promptly replace any returned product to the IBA.
40
o IBAs failure to comply with this guarantee policy may be reason for
termination.
o On product purchases of more than a one (1) month supply, the thirty
(30) day rule applies to the purchase (unless otherwise promised by
IBA to his/her retail customer. In this instance, the IBA is
responsible to uphold his/her retail guarantee to the customer not
EYI).
Refund To Independent Business Associates
If an IBA is not satisfied with a given EYI product, EYI will replace the
product with a product of same or like value, less shipping and handling
charges. If requested EYI will issue a credit for the purchase less shipping and
handling. This credit must be used within thirty (30) days of being issued. The
request for a replacement must occur within thirty (30) days of receipt of the
product by the IBA and the product must be in re-sale condition upon return.
IBAs must provide proof of purchase and cover the cost of the product
return.
Note the following condition for refunds:
o EYI does not issue any refunds for product(s) previously certified
as sold under the 70% rule. The 70% rule is described in our IBA
Policies and Procedures as their requirement to have sold at least
70% of their previous order before reording. As well, the refund
will be less commission paid on the returned product.
Distribution And Marketing
Our product line is distributed from a third party warehouse in Bensalem,
PA, our facility and warehouse in Burnaby, British Columbia, our 18 consignment
centers located throughout USA and Canada, or from our office in Kowloon, Hong
Kong.
We distribute our product line through our network marketing system where
Independent Business Associates ("IBAs") purchase product at wholesale and
through person-to-person contact, re-sell the product at retail prices. At
December 31, 2005, we had approximately 8,500 "active" IBAs. To be considered
"active" a distributor must have purchased our products within the preceding 12
months. Our IBAs are independent contractors who purchase products directly from
us for resale to retail consumers. IBAs may elect to work on a full-time or
part-time basis. We believe our network marketing system appeals to a broad
cross-section of people, particularly those seeking to:
o supplement family income,
o start a home business, or
o pursue employment opportunities other than conventional, full-time
employment.
o A majority of our IBAs sell our products on a part-time basis.
o We believe that our network marketing system is ideally suited to
marketing our product line because sales of our products are
strengthened by ongoing personal contact between retail consumers
and IBAs, many of whom use our products themselves. Sales are made
through direct personal sales presentations, as well as
presentations made to groups. These sales methods are designed to
encourage individuals to purchase our products by informing
potential customers and IBAs of our product line and results of
personal use, and the potential financial benefits of becoming a
distributor. Our marketing efforts are typically focused on
middle-income families and individuals.
Our network marketing program encourages individuals to develop their own
down-line network marketing organizations. Each new IBA is either linked to:
o the existing distributor that personally enrolled the new
distributor into our network marketing program, or
o the existing distributor in the enrolling distributor's down-line as
specified by the enrolling distributor at the time of enrollment.
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Growth of an IBAs' down-line organization is dependent on the recruiting
and enrollment of additional IBAs by the distributor or the IBAs within such
distributor's down-line organization. We currently do not keep records that
would enable us to calculate IBA turnover frequency. We are currently working on
a program that may enable us in the future to track IBA turnover.
IBAs are encouraged to assume responsibility for training and motivation
of other IBAs within their down-line organization and to conduct opportunity
meetings as soon as they are appropriately trained. We strive to maintain a high
level of motivation, morale, enthusiasm and integrity among the members of our
network marketing organization. We believe this result is achieved through a
combination of products, sales incentives, personal recognition of outstanding
achievement, and quality promotional materials. Under our network marketing
program, IBAs purchase sales aids from us and assume the costs of advertising
and marketing our product line to their customers, as well as the direct cost of
recruiting new IBAs. We believe that this form of sales organization is cost
efficient, because our direct sales expenses are primarily limited to the
payment of commissions, which are only incurred when products are sold.
We continually strive to improve our marketing strategies, including the
compensation structure within our network marketing program and the variety and
mix of products in our line, to attract and motivate IBAs. These efforts are
designed to increase IBAs' monthly product sales and the recruiting of new IBAs.
Growth of our network marketing program is in part attributable to our
incentive structure. IBAs earn profits by purchasing from our product line at
wholesale prices and selling our product line to their customers at retail.
Additionally, we have a commission structure which provides for payment of
commissions on product purchases made by other IBAs in a distributor's down-line
organization.
IBAs derive this commission income mainly through their Business Volume,
as described below.
Business Volume is assigned to most of our products and is used to
calculate sales commission. The Business Volume, in most instances, is 50% of
the wholesale cost of a product. Commissions are based on the total Business
Volume which has been generated both personally and through the IBAs' down-line
activity. Therefore, as a down-line grows, it is possible for greater
commissions to be earned. None of our IBAs have derived $1 million per year or
greater for the years ended 2005, 2004, 2003 or 2002.
In order for an IBA to earn commissions, there are four requirements:
o an IBA needs to create a Business Center by filling out our IBA
Application and Agreement Form;
o an IBA needs to qualify his Business Center with a 100 Business
Volume order of our products;
o an IBA needs to activate his Business Center by making two personal
sales to two people who become qualified IBAs within one year of
entry into the business; and
o to be eligible for commission, an IBA needs to be current with their
annual administration fee.
The average commission earned by our IBAs during the twelve month period
starting on January 1, 2005 and ending on December 31, 2005 was approximately
$210.
To aid IBAs in easily meeting the monthly personal product purchase
requirement to qualify for commission, we developed the "Auto-ship Program."
Under the Auto-ship Program purchasing arrangement, each Business Center
establishes a standing product order (20 Business Volume minimum) which is
automatically charged to a credit card or deducted from a bank account each
month prior to shipment of the ordered products. Additionally, Auto-ship allows
IBAs to purchase certain products at reduced prices. As of December 31, 2005, we
had over 1,200 IBAs participating in the Convenience Program.
Under our Consignment Center Program, we designate IBAs to operate
consignment centers. Each Consignment Center functions as our product
distribution center, carrying our products. As of December 31, 2005, we had 18
consignment centers. Consignment centers provide hubs of local product and
business training. They sell to customers at the point of purchase, teach sales
and marketing techniques, distribute literature about our products and business
while lowering our shipping and data-entry costs.
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EYI CONSIGNMENT CENTER LIST
--------------------------------------------------------------------------------
OWNER NAME ADDRESS CITY STATE ZIP
---------- ------- ---- ----- ---
Petra Olivares #320 Calle Benitez Castano San Juan PR 00912
Audrey Franklin 102 Merchants Drive Norcross GA 30093
Vicki Oei 15300 N 90th Street, Suite 700 Scottsdale AZ 85260
Gary Young 52 Lurline Drive Covington LA 70433
Brenda Noble 223 Centre Street North Brampton ON L6V 2R2
Mercy Girala-Tye 3325 W 183 Street Torrance CA 90504
Paula Cabunoc 16312 45th Place South Tukwila WA 98188
Ron & Donna Boersema 86 East 33rd Street Holland MI 49423
Monty Pearson HC 11 Box 69B Kamiah ID 83536
Libby Lefler 222 Valleyview Rd. Highland MO 65669
Jose Corzo #3750 SW 185 Avenue Miramar FL 33029
Michael Degroat 9 Volunteer Way Waymart PA 18472
Wyla Wilkie 310 Woolworth Street Houston TX 77020
Richard Ridley 4716 Western Ave Knoxville TN 37921
Denise Hulse 2208 N. Stoneybrook Wichita KS 67226
Jack Herd 2704 Market Street Camphill PA 17011
Michael Whelan Sr. 2476 Pine Road Huntingdon Valley PA 19006
Robert Norton 6881 Creekcove Way Midvale UT 84047
We maintain a computerized system for processing distributor orders and
calculating commission payments, which enables us to remit such payments
promptly to IBAs. We believe that prompt and accurate remittance of commissions
is vital to recruiting and maintaining IBAs, as well as increasing their
motivation and loyalty to us. We calculate the commissions weekly and pay
commissions biweekly.
We are committed to providing the best possible support to our IBAs. IBAs
in our network marketing program are provided training guides and are given the
opportunity to participate in our training programs. We sponsor weekly
conference calls for our IBAs, which include testimonials from successful IBAs
and satisfied customers, as well as current product and promotional information.
We produce weekly newsletters which provide information on us, our
products and network marketing system. The newsletter is designed to help
recruit new IBAs by answering commonly asked questions and includes product
information and business building information. The newsletter also provides a
forum for us to give additional recognition to our IBAs for outstanding
performance. In addition, we sponsor training sessions for our IBAs across the
United States and Canada. At these training sessions IBAs are provided the
opportunity to learn more about our product line and selling techniques so that
they can build their businesses more rapidly.
We also maintain an Internet site, www.eyicom.com, which is an integral
part of our product sales, customer retention, IBA recruitment and IBA
development efforts. Approximately 7,300 of our IBAs are networked
electronically, allowing them access to marketing information and sales leads.
Further, we provide IBAs with a free e-commerce Internet "home page" to aid
their marketing efforts.
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Government Regulation
In the United States (as well as in any foreign markets in which we may
sell our products), we are subject to laws, regulations, administrative
determinations, court decisions and similar constraints (as applicable, at the
federal, state and local levels) (hereinafter "regulations"). These regulations
include and pertain to, among others:
o the formulation, manufacture, packaging, labeling, distribution,
importation, sale and storage of our products,
o our product claims and advertising (including direct claims and
advertising as well as claims and advertising by distributors, for
which we may be held responsible), and
o our network marketing organization.
We believe we are currently in compliance with all regulations. In the
past, we have met and passed inspections by the United States Food and Drug
Administration ("FDA"). Our past FDA violations are as follows: on October 7,
2002, we had a Food and Drug label inspection. A notice to re-label on Calorad
was submitted on October 9, 2002. A panel was added to our Calorad product to
round the calories to be in compliance with the DSHEA Act of 1994. The "may
proceed" release was issued on November 6, 2002. On February 2, 2004, a notice
to redeliver from the Department of Treasury/United States Customs Service in
Detroit, Michigan was issued requesting an inspection and import permit along
with an original CFI certificate (Canadian Food Inspection Agency Certificate).
On entry number #336-0214262-5. We met all requirements and the shipment was
released on February 27, 2004. On August 16, 2005 a hold was designated on entry
number #336-0524098-8. Samples were collected by the FDA and sent to a lab for
analysis on August 18, 2005. This was a routine sampling that the FDA performs
on products at any given time to ensure product contents match the product
labels. Testing was completed and the product was released on September 8, 2005.
On October 5, 2005 we received a hold from the FDA for two products, requesting
label clarification on one product and clarification on website claims for
another product. On November 21, 2005 the first product was released under
direction to make a small label adjustment on the next product run. We intend to
comply with this request. On November 15, 2005 the second product was released
after review of marketing materials available on the internet.
Formulations: We are reliant on our manufacturers' knowledge and expertise
as they develop our formulas. We do investigate the individual ingredients to
ensure they fall under the 1994 DSHEA Act definitions as well as the Food and
Drug Administration ("FDA") cosmetic regulations. We also receive confirmation
that all preservatives are GRAS (generally recognized as safe).
Manufacturing: We are reliant on our manufacturers that they are compliant
with GMP regulations and safety regulations put forth by the FDA.
Packaging: We are reliant on our manufacturers that our packaging is in
compliance with FDA regulations.
Labeling: We consult with our FDA attorneys on a need-to-know basis
regarding labeling and have an in-house labeling specialist that is experienced
in the 1994 DSHEA Act.
Distribution: Our facility has Food Grade Certification within the State
of Pennsylvania and is also registered with the FDA as a Food Grade Facility.
Sale and Storage: We have an in house Quality Control department that
oversees this area, as well as ensures our distribution facility is compliant
with all applicable laws in this area.
Importation: We have an in-house purchasing agent that works with all
applicable laws with respect to NAFTA, bio-terrorism and agricultural
requirements, as well as a brokerage firm that works for us. We have always
successfully imported product to the United States with very few inspections or
violations.
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Products
The formulation, manufacture, packaging, storing, labeling, advertising,
distribution and sale of our products are subject to regulation by federal
agencies, including the Food and Drug Administration, the Federal Trade
Commission, the Consumer Product Safety Commission, the United States Department
of Agriculture, the Environmental Protection Agency, and the United States
Postal Service. Our activities are also regulated by various agencies of the
states, localities and foreign countries in which our products are or may be
manufactured, distributed and sold. The Food and Drug Administration, in
particular, regulates the formulation, manufacture and labeling of dietary
supplements, cosmetics and skin care products, including some of our products.
Food and Drug Administration regulations require us and our suppliers to meet
relevant regulatory good manufacturing practices for the preparation, packaging
and storage of these products. Good manufacturing practices for dietary
supplements have yet to be promulgated, but are expected to be proposed. The
Dietary Supplement Health and Education Act of 1994 revised the provisions of
the Federal Food, Drug and Cosmetic Act concerning the composition and labeling
of dietary supplements, which we believe is generally favorable to the dietary
supplement industry. The Dietary Supplement Health and Education Act created a
new statutory class of "dietary supplements." This new class includes vitamins,
minerals, herbs, amino acids and other dietary substances for human use to
supplement the diet. In general, a dietary supplement is a product (other than
tobacco) that is intended to supplement the diet that bears or contains one or
more of the following dietary ingredients: a vitamin, a mineral, a herb or other
botanical, an amino acid, a dietary substance for use by man to supplement the
diet by increasing the total daily intake, or a concentrate, metabolite,
constituent, extract, or combinations of these ingredients; is intended for
ingestion in pill, capsule, tablet, or liquid form; is not represented for use
as a conventional food or as the sole item of a meal or diet; and is labeled as
a "dietary supplement." However, the Dietary Supplement Health and Education Act
("DSHEA") grandfathered, with certain limitations, dietary ingredients that were
on the market before October 15, 1994. A dietary supplement containing a new
dietary ingredient and placed on the market on or after October 15, 1994 must
have a history of use or other evidence establishing a basis for expected
safety. Manufacturers of dietary supplements having a "structure-function"
statement must have substantiation that the statement is truthful and not
misleading.
The majority of our sales come from products that are classified as
dietary supplements under the Federal Food, Drug and Cosmetic Act. The labeling
requirements for dietary supplements have been set forth in final regulations
with respect to labels affixed to containers beginning after March 23, 1999.
These regulations include how to declare nutrient content information, and the
proper detail and format required for the "supplemental facts" box. We revise
our product labels in compliance with these regulations. The costs of product
re-labeling were immaterial. Many states have also recently become active in the
regulation of dietary supplement products. These states may require modification
of labeling or formulation of certain of our products sold in these states.
In January 2000, the FDA published a final rule that defines the types of
statements that can be made concerning the effect of a dietary supplement on the
structure or function of the body pursuant to the DSHEA. Under the DSHEA,
dietary supplement labeling may bear "structure/function" claims, which are
claims that the products affect the structure or function of the body, without
prior FDA approval. They may not without prior FDA approval, bear a claim that
they can prevent, treat, cure, mitigate or diagnose disease, otherwise known as
a "drug claim". The final rule describes how the FDA will distinguish drug
claims from structure/function claims. Dietary supplements, like conventional
foods, are also permitted to make "health claims", which are claims that are
exempt from regulation as "drug" claims pursuant to the amendments to the FDCA
established by the NLEA in 1990. A "health claim" is a claim, ordinarily
approved by the FDA regulation, on a food or dietary supplement product's
labeling that "characterizes the relationship of any substance to a disease or
health-related condition". To help assure that foods, dietary supplements and
cosmetics comply with the provisions of the FDCA and FDA's regulations, the FDA
has numerous enforcement tools, including the ability to issue warning letters,
initiate product seizures and injunctions and pursue criminal penalties.
The manufacturer of dietary supplements is subject to existing FDA current
good manufacturing practices, or "cGMP", regulations for food. In March 2003,
the FDA proposed detailed cGMP regulations specifically for dietary supplements.
The FDA is expected to publish final cGMP regulations for dietary supplements in
the near future.
Personal care products are intended to be applied to the human body for
cleansing, beautifying, promoting attractiveness, or altering the appearance
without affecting the body's structure or functions. Included in this definition
are products such as skin creams, lotions, perfumes, lipsticks, fingernail
polishes, eye and facial make-up preparations, shampoos, permanent waves, hair
colors, toothpastes, deodorants, and any material intended for use as a
component of a cosmetic product. The Food & Drug Administration has a limited
ability to regulate personal care products. The Food & Drug Administration can
regulate personal care products after they are introduced into the market and
can review personal care products and their ingredients after they are sold to
the public.
As a marketer of products that are ingested by consumers, we are subject
to the risk that one or more of the ingredients in our products may become the
subject of adverse regulatory action.
A small portion of our products sold in Canada have separate labels or
combination labels to satisfy Canadian compliance organizations, such as the
Food Inspection Agency and Health Canada. Health Canada is moving towards
stricter compliance guidelines for dietary supplement products through its
recently created Office of Natural Health Products. New compliance guidelines
through the Office of Natural Health Products may affect the formulation,
manufacture, packaging, storing, labeling, advertising, distribution and sale of
our products in Canada. We plan to comply with all regulations promulgated by
Office of Natural Health Products. Due to the small percentage of sales in
Canada, we do not hold separate Canadian labels for our complete product line.
45
In foreign markets, prior to commencing operations and prior to making or
permitting sales of our products, we may be required to obtain an approval,
license or certification from the country's ministry of health or comparable
agency. Prior to entering a new market in which a formal approval, license or
certificate is required, we will be required to work extensively with local
authorities to obtain the requisite approvals. The approval process generally
will require us to present each product and product ingredient to appropriate
regulators and, in some instances, arrange for testing of products by local
technicians for ingredient analysis. Such approvals may be conditioned on
reformulation of our products or may be unavailable with respect to certain
products or ingredients.
Product Claims And Advertising
The Federal Trade Commission and certain states regulate advertising,
product claims, and other consumer matters, including advertising of our
products. All advertising, promotional and solicitation materials used by
distributors require our approval prior to use. The Federal Trade Commission has
in the past several years instituted enforcement actions against several dietary
supplement companies for false and misleading advertising of certain products.
In addition, the Federal Trade Commission has increased its scrutiny of the use
of testimonials. We have not been the target of Federal Trade Commission
enforcement action. There is no assurance that:
o the Federal Trade Commission will not question our advertising or
other operations in the future,
o a state will not interpret product claims presumptively valid under
federal law as illegal under that state's regulations, or
o future Federal Trade Commission regulations or decisions will not
restrict the permissible scope of such claims.
We are also subject to the risk of claims by distributors and their
customers who may file actions on their own behalf, as a class or otherwise, and
may file complaints with the Federal Trade Commission or state or local consumer
affairs offices. These agencies may take action on their own initiative against
us for alleged advertising or product claim violations or on a referral from
distributors, consumers or others. Remedies sought in such actions may include
consent decrees and the refund of amounts paid by the complaining distributor or
consumer, refunds to an entire class of distributors or customers, or other
damages, as well as changes in our method of doing business. A complaint based
on the practice of one distributor, whether or not we authorized the practice,
could result in an order affecting some or all distributors in a particular
state. Also, an order in one state could influence courts or government agencies
in other states considering similar matters. Proceedings resulting from these
complaints may result in significant defense costs, settlement payments or
judgments and could have a material adverse effect on us. The FTC has increased
its scrutiny of the use of distributor testimonials. Although it is impossible
for us to monitor all the product claims made by our independent distributors,
we make efforts to monitor distributor testimonials and restrict inappropriate
distributor claims. The FTC has been more aggressive in pursuing enforcement
against dietary supplement products since the passage of DSHEA in 1994, and has
brought numerous actions against dietary supplement companies, some resulting in
several million dollar civil penalties and/or restitution as well as
court-ordered injunctions.
Compliance Efforts
We attempt to remain in full compliance with all applicable laws and
regulations governing the manufacture, labeling, sale, distribution, and
advertising of our dietary supplements. We retain special legal counsel for
advice on both US Food and Drug Administration and US Federal Trade Commission
legal issues.
Network Marketing System
Our network marketing system is subject to a number of federal and state
regulations administered by the Federal Trade Commission and various state
agencies. These regulations are generally directed at ensuring that product
sales are ultimately made to consumers (as opposed to other distributors) and
that advancement within an organization be based on sales of the organization's
products, rather than investment in the organization or other non-retail sales
related criteria. For instance, in certain markets there are limits on the
extent to which distributors may earn royalties on sales generated by
distributors that were not directly sponsored by the distributor.
46
Our network marketing program and activities are subject to scrutiny by
various state and federal governmental regulatory agencies to ensure compliance
with various types of laws and regulations. These laws and regulations include
securities, franchise investment, business opportunity and criminal laws
prohibiting the use of "pyramid" or "endless chain" types of selling
organizations. The compensation structure of such selling organizations is very
complex, and compliance with all of the applicable laws is uncertain in light of
evolving interpretation of existing laws and the enactment of new laws and
regulations pertaining to this type of product distribution. We have an ongoing
compliance program with assistance from legal counsel experienced in the laws
and regulations pertaining to network sales organizations. We are not aware of
any legal actions pending or threatened by any governmental authority against us
regarding the legality of our network marketing operations.
We currently have IBAs in the United States, Canada and Southeast Asia. We
review the requirements of various states, as well as seek legal advice
regarding the structure and operation of our selling organization to ensure that
it complies with all of the applicable laws and regulations pertaining to
network sales organizations. On the basis of these efforts and the experience of
our management, we believe that we are in compliance with all applicable federal
and state regulatory requirements. We have not obtained any no-action letters or
advance rulings from any federal or state security regulator or other
governmental agency concerning the legality of our operations, nor are we
relying on a formal opinion of counsel to such effect. We, accordingly, are
subject to the risk that, in one or more of our markets, our marketing system
could be found to not comply with applicable laws and regulations. Our failure
to comply with these regulations could have a material adverse effect on us in a
particular market or in general.
We are subject to the risk of challenges to the legality of our network
marketing organization, including claims by our distributors, both individually
and as a class. Most likely these claims would be based on our network marketing
program allegedly being operated as an illegal "pyramid scheme" in violation of
federal securities laws, state unfair practice and fraud laws and the Racketeer
Influenced and Corrupt Organizations Act.
We believe that our network marketing system is not classified as a
pyramid scheme under the standards set forth in applicable law. In particular,
in most jurisdictions, we maintain an inventory buy-back program to address the
problem of "inventory loading." Pursuant to this program, we repurchase products
sold to a distributor (subject to a 10% restocking charge) provided that the
distributor returns the product in marketable condition within one year of
original purchase, or longer where required by applicable state law or
regulations.
Our literature provided to distributors describes our buy-back program.
However, as is the case with other network marketing companies, the commissions
paid by us to our distributors are based on product purchases, including
purchases of products that are personally consumed by the down-line
distributors. Basing commissions on sales of personally consumed products may be
considered an inventory loading purchase. Furthermore, distributors' commissions
are based on the wholesale prices received by us on product purchases or, in
some cases, based upon the particular product purchased, on prices less than the
wholesale prices.
To further address the problem of "inventory loading," our IBAs must sell
at least 70% of their inventory before they can reorder.
In the event of challenges to the legality of our network marketing
organization by distributors, we would be required to:
o demonstrate that our network marketing policies are enforced, and
o demonstrate that the network marketing program and distributors'
compensation thereunder serve as safeguards to deter inventory
loading and encourage retail sales to the ultimate consumers.
Competition
We are subject to significant competition in recruiting IBAs from other
network marketing organizations, including those that market products in the
dietary supplement and personal care categories, as well as other types of
products. There are more than 300 companies worldwide that utilize network
marketing techniques, many of which are substantially larger, offer a greater
variety of products, and have available considerably greater financial resources
than us. Our ability to remain competitive depends, in significant part, on our
success in recruiting and retaining IBAs through an attractive commission plan
and other incentives. We believe that our commission plan and incentive programs
provide our IBAs with significant income potential. However, there can be no
assurance that our programs for recruitment and retention of IBAs will continue
to be successful.
47
In addition, the business of marketing products in the dietary supplement
and personal care categories is highly competitive. This market segment includes
numerous manufacturers, other network marketing companies, catalog companies,
distributors, marketers, retailers and physicians that actively compete in the
sale of such products. We also compete with other providers of such products,
especially retail outlets, based upon convenience of purchase and immediate
availability of the purchased product. The market is highly sensitive to the
introduction of new products or weight management plans (including various
prescription drugs) that may rapidly capture a significant share of the market.
As a result, our ability to remain competitive depends, in part, upon the
successful introduction and addition of new products to our line.
Depending on the product category, our competition varies. Calorad
competes directly with Colvera, a product with different ingredients but a
similar concept. Additionally, Calorad competes indirectly with food plans such
as Weight Watchers and meal replacement products such as Slim Fast. Our Noni
Plus product competes with Tahitian International 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.
Our network marketing competitors include small, privately held companies,
as well as larger, publicly held companies with greater financial resources and
greater product and market diversification and distribution. Our competitors
include Reliv International, Mannatech Incorporated, Usana Health Services,
Alticor Inc. (Amway Corp.), Avon Products Inc., Herbalife Ltd., Mary Kay Inc.,
Metaluca, Inc., Nature's Sunshine Products Inc., Nu Skin Enterprises Inc. as
well as mass retail establishments.
Employees
As at June 1, 2006 we had 37 employees and managers. Of this total, 3 are
executive officers, 4 are in accounting, 11 are in operations, 4 are in sales
and marketing, 4 are in sales communication, 4 are in information systems, 1 is
in product development, 4 are in our warehouse and 2 are in administration. We
consider our employee relations to be good. None of our employees or managers
are members of a trade union and we have not experienced any business
interruption as a result of any labor disputes.
Research And Development Expenditures
We have not incurred any research or development expenditures during our
last two fiscal years.
Intellectual Property
We use several trademarks and trade names in connection with our products
and operations, as further described below. We rely on common law trademark
rights to protect our unregistered trademarks. Common law trademark rights do
not provide with the same level of protection as afforded by a United States
federal registration of a trademark. Also, common law trademark rights are
limited to the geographic area in which the trademark is actually used. In
addition, our product formulations are not protected by patents and are not
patentable. Therefore, there can be no assurance that another company will not
replicate one or more of our products.
We have a License Agreement with Nutri-Diem that gives EYI the exclusive
right to use the trademarks solely in connection with the sale, marketing and
distribution of the products. Our agreement states that we have non-exclusive
rights to use the trademarks on the Internet. The agreement is based on a five
year term, with automatic renewal for another five year period. We also have
license agreement which gives EYI the exclusive right to the trademarks for the
purpose of sales and marketing activities. The agreement is based on a 50 year
term with a yearly renewal each year thereafter.
On June 30, 2002, the following Nutri-Diem trademarks were licensed to EYI
Nevada pursuant to the Marketing and Distribution Agreement in place between
Nutri-Diem and EYI Nevada. The owner of the trademarks set out in the table
below is Michel Grise Consultants Inc., an associated company of Nutri-Diem and
is controlled by Michel Grise, one of the directors of EYI Nevada:
48
Product Status
------- ------
Agrisept-L(R) Registered Trademark
Beaugest(R) Registered Trademark
Bellaffina(R) Registered Trademark
Calorad(R) Registered Trademark
Citrex(R) Registered Trademark
Citrio(R) Registered Trademark
Definition(R) Registered Trademark
Emulgent(R) Registered Trademark
Fem Fem(R) Registered Trademark
Golden Treat(R) Registered Trademark
Hom Hom(R) Registered Trademark
Invisible(R) Registered Trademark
Livocare(R) Registered Trademark
Melan Plus(R) Registered Trademark
Neocell(R) Registered Trademark
NRG(R) Registered Trademark
Parablast(R) Registered Trademark
Parattack(R) Registered Trademark
Prosoteine(R) Registered Trademark
Sea Krit(R) Registered Trademark
On June 30, 2002, EYI Nevada acquired a license from Essentially Yours
Industries Corp., an affiliated company, to use the below trademarks and
formulas for a term of 50 years, renewable at the option of EYI Nevada on a
yearly basis thereafter at the same yearly rate of $1.00 per year, from year to
year:
Copyright/Trademark Status of Application
------------------- ---------------------
Citri-plus(R) Registered Trademark
EYI w/design(R) Registered Trademark
Essential Marine(R) Registered Trademark
Essentially Yours(R) Registered Trademark
Essentially Yours Industries Corp. (with design) (R) Registered Trademark
49
Copyright/Trademark Status of Application
------------------- ---------------------
Iso greens(R) Registered Trademark
The following additional products are licensed to EYI Nevada:
Just Go Pro!(R) Registered Trademark
Oxy Up(TM) Registered Trademark
The Ultimate Performance Enhancer!(R) Registered Trademark
Code Blue DRINK ONLY THE WATER(R) Pending Trademark
How do you take your water...with or without Arsenic?!(R) Pending Trademark
50
MANAGEMENT
Directors And Executive Officers
Our directors, executive officers and key employees as of June 1, 2006 are
as follows:
Name Age Position with the Company Date First Elected or Appointed
---- --- ------------------------- -------------------------------
Jay Sargeant 58 President, Chief Executive Officer and Director, Chief Executive Officer and
Director President since December 31, 2003
Dori O'Neill 46 Executive Vice-President, Treasurer, Chief Executive Vice-President, Treasurer, Chief
Operations Officer, Secretary and Director Operations Officer, Secretary and Director
since December 31, 2003
Rajesh Raniga 40 Chief Financial Officer Chief Financial Officer since January 1, 2004
Set forth below is a brief description of the background and business
experience of each of our executive officers and directors for the past five
years:
Jay Sargeant. Mr. Sargeant has been our President, Chief Executive Officer
and a member of our Board of Directors since December 31, 2003. Mr. Sargeant
graduated from Boston State College in 1979 with a Bachelors Degree in English
Literature and Psychology. From 1995 until June 30, 2002, the date of our merger
with Essentially Yours Industries, Inc., Mr. Sargeant was a director of
Essentially Yours Industries, Corp. a Canadian Federal corporation. Mr. Sargeant
has resigned as a member of the Board of Directors of Essentially Yours
Industries, Corp. to concentrate on our sales and marketing efforts. Mr.
Sargeant was a founder of Essentially Yours Industries, Corp.
Dori O'Neill. Mr. O'Neill has been our Executive Vice President, Chief
Operations Officer and a member of our Board of Directors since December 31,
2003. From 1997 to June 2002, Mr. O'Neill served as a Vice President and a
member of the Board of Directors of Essentially Yours Industries Corp., a
Canadian Federal corporation, from December 2001 to June 2002. From 1994 through
1998 Mr. O'Neill was a self-employed consultant.
Rajesh Raniga. Mr. Raniga has been our Chief Financial Officer since
January 1, 2004. Mr. Raniga is a Certified General Accountant. From 1989 to
present Mr. Raniga has practiced with Delves Freer Anderson Raniga Caine as a
general partner. In his private practice, prior to joining us, he specialized in
auditing publicly-listed companies as well as acquisitions and mergers. He has
also sat on the Board of Directors and served as the Chief Financial Officer of
Uniserve Communications Services Inc., an internet service provider listed on
the TSX Venture Exchange in Canada.
Family Relationships
There is no family relationship between any of our officers or directors.
Directors
Our Board of Directors consists of 3 (three) seats. Directors serve for a
term of one year and stand for election at our annual meeting of stockholders.
Pursuant to our Bylaws, as amended, a majority of directors may appoint a
successor to fill any vacancy on the Board of Directors.
Terms Of Office
Our directors are appointed for one-year terms to hold office until the
next annual general meeting of the holders of our common stock or until removed
from office in accordance with our by-laws. Our officers are appointed by our
Board of Directors and hold office until removed by our Board of Directors.
51
Committees Of The Board Of Directors
Audit Committee
The entire board of directors performs the functions of an audit
committee, but no written charter governs the actions of the board of directors
when performing the functions of an audit committee. The board of directors
approves the selection of our independent accountants and meets and interacts
with the independent accountants to discuss issues related to financial
reporting. In addition, the board of directors reviews the scope and results of
the audit with the independent accountants, reviews with management and the
independent accountants our annual operating results, considers the adequacy of
our internal accounting procedures and considers other auditing and accounting
matters including fees to be paid to the independent auditor and the performance
of the independent auditor.
We presently do not have a compensation committee, an executive committee
of our board of directors, stock plan committee or any other committees.
However, our board of directors will consider establishing various committees
during the current fiscal year.
Audit Committee Financial Expert
Our Board of Directors has determined that we do not presently have a
director who meets the definition of an "audit committee financial expert." We
believe that the cost related to appointing a financial expert to our Board of
Directors at this time is prohibitive.
Nomination Committee
Our board of directors does not maintain a nominating committee. As a
result, no written charter governs the director nomination process. The size of
EYI and the size of the board of directors, at this time, do not require a
separate nominating committee. Our independent directors annually review all
director performance over the past year and make recommendations to the board of
directors for future nominations. When evaluating director nominees, our
independent directors consider the following factors:
(i) The appropriate size of EYI's board of directors;
(ii) The needs of EYI with respect to the particular talents and
experience of its directors;
(iii) The knowledge, skills and experience of nominees, including
experience in finance, administration or public service, in light of prevailing
business conditions and the knowledge, skills and experience already possessed
by other members of the board;
(iv) Experience with accounting rules and practices; and
(v) The desire to balance the benefit of continuity with the periodic
injection of the fresh perspective provided by new board members.
Other than the foregoing, there are no stated minimum criteria for
director nominees, although the board of directors may also consider such other
factors as it may deem are in the best interests of EYI and its stockholders. In
addition, the Board of Directors identifies nominees by first evaluating the
current members of the board willing to continue in service. Current members of
the board with skills and experience that are relevant to our business and who
are willing to continue in service are considered for re-nomination. If any
member of the board does not wish to continue in service or if the board decides
not to re-nominate a member for re-election, the board then identifies the
desired skills and experience of a new nominee in light of the criteria above.
Current members of the board of directors are polled for suggestions as to
individuals meeting the criteria described above. The board may also engage in
research to identify qualified individuals. To date, we have not engaged third
parties to identify or evaluate or assist in identifying potential nominees,
although we reserve the right in the future to retain a third party search firm,
if necessary. The board of directors does not typically consider stockholder
nominees because it believes that its current nomination process is sufficient
to identify directors who serve our best interests.
52
Code Of Ethics
We adopted a Code of Ethics applicable to our Chief Executive Officer,
Chief Financial Officer, Corporate Controller and certain other finance
executives, which is a "code of ethics" as defined by applicable rules of the
SEC. Our Code of Ethics is attached to our Annual Report on Form 10-KSB filed
with the SEC on April 14, 2004. If we make any amendments to our Code of Ethics
other than technical, administrative, or other non-substantive amendments, or
grant any waivers, including implicit waivers, from a provision of our Code of
Ethics to our chief executive officer, chief financial officer, or certain other
finance executives, we will disclose the nature of the amendment or waiver, its
effective date and to whom it applies in a Current Report on Form 8-K filed with
the SEC.
Compliance With Section 16(a) Of The Securities Exchange Act
Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who beneficially own more than ten percent of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent shareholders are required by SEC regulation to furnish us with copies of
all Section 16(a) forms they file. Based on our review of the copies of such
forms received by us, we believe that up to June 1, 2006 all such filing
requirements applicable to our officers and directors were complied with
exception that reports were filed late by the following persons:
Transactions Known Failures
Number of Late Not Timely to File a
Name and Principal Position Reports Reported Required Form
--------------------------- -------------- ------------ --------------
Jay Sargeant,
President, Chief Executive Officer, and Director 2 2 --
Dori O'Neill
President, Chief Operations Officer, Secretary, Treasurer and Director 1 1 --
Bruce A. Nants
Former Director N/A N/A N/A
53
ITEM 10. EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid by EYI
Industries, as well as certain other compensation paid or accrued, during the
fiscal years ended December 31, 2005, 2004 and 2003 to EYI Industries' named
executive officers. No restricted stock awards, long-term incentive plan payouts
or other types of compensation, other than the compensation identified in the
chart below, were paid to these executive officers during these fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
---------------------------------------- -------------------------------------------------
LTIP
Other Annual Restricted Options/* payouts All Other
Name Title Year Salary Bonus Compensation Stock Awarded SARs (#) ($) Compensation
----------------------------------------------------------------------------------------------------------------------------
Jay Sargeant(1) President, 2005 -- -- $240,000 (2) -- 1,500,000 -- --
CEO and 2004 -- -- $240,000 (2) -- 4,200,000 -- --
Director 2003 -- -- $240,000 (2) -- -- -- --
Dori O'Neill(3) Chief 2005 -- -- $240,000 (2) -- 1,500,000 -- --
Operations 2004 -- -- $240,000 (4) -- 7,400,000 -- --
Officer, 2003 -- -- $180,000 (4) -- -- -- --
Secretary,
Treasurer
And Director
Maurizio Former 2005 N/A N/A N/A N/A N/A N/A NA/
Forigo(5) President 2004
and N/A N/A N/A N/A N/A N/A N/A
CEO 2003 -- -- -- -- -- -- --
---------------
(1) Mr. Sargeant was appointed as our President and Chief Executive Officer on
December 31, 2003.
(2) We paid management consulting fees to Flaming Gorge, Inc., a private
company controlled by Mr. Sargeant, our President, CEO and director, for
his management of the operation of the company and our subsidiaries,
reporting to the Board of Directors, and appointing managers to oversee
certain departments. Mr. Sargeant is compensated at the rate of $20,000
per month, on a month to month basis commencing November 5, 2002. The
agreement was for an initial five-year term, which is automatically
renewable on a year-to-year basis. Effective January 1, 2004, we extended
the consulting agreement of Mr. Sargeant for an additional five years.
(3) Mr. O'Neill was appointed as our Executive Vice-President, Chief
Operations Officer, Secretary, Treasurer, on December 31, 2003.
(4) We paid management consulting fees to O'Neill Enterprises Inc., a private
company controlled by Mr. O'Neill, our Executive Vice-President, COO,
Secretary, Treasurer and director, for the management of day to day
activities and operations of the company and our subsidiaries. Mr. O'Neill
is compensated at the rate of $15,000 per month, on a month to month basis
commencing November 5, 2002. The agreement was for an initial five-year
term, which is automatically renewable on a year-to-year basis. Effective
January 1, 2004, we increased the consulting fees payable to O'Neill to
$20,000 per month, and extended the term by five years.
(5) Mr. Forigo resigned as our President and CEO on December 31, 2003.
The following table contains information regarding options granted during
the year ended December 31, 2005 to EYI Industries' named executive officer.
54
OPTION/SAR GRANTS TABLE
% Total
Options/SARs
Granted to
No. of Employees in
Securities year ended
Underlying December 31 Exercise or
Options/SARs 2005 Base Price
Name Granted (#) (%) ($ per Share) Expiration Date
---- ------------ ------------ ------------- ---------------
Jay Sargeant 1,500,000 20% $0.06 02/09/07
President, Chief Executive Officer
and Director
Dori O'Neill 1,500,000 20% $0.06 02/09/07
Secretary, Treasurer and Director
The following table contains information regarding options exercised in
the year ended December 31, 2005, and the number of shares of common stock
underlying options held as of December 31, 2005, by EYI Industries' named
executive officer.
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs
Shares at FY-End at FY-End
Acquired on Value ----------------------------- ---------------------------
Exercise Realized (#) ($)
----------- -------- ----------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Jay Sargeant -- $ -- 2,299,750 -- -- --
President,
Chief Executive Officer and
Director
Dori O'Neill -- $ -- 2,500,000 -- -- --
Secretary, Treasurer and
Director
Security Ownership Of Management
We are not aware of any arrangement that might result in a change in
control in the future.
Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth certain information concerning all equity
compensation plans previously approved by stockholders and all previous equity
compensation plans not previously approved by stockholders, as of the most
recently completed fiscal year. On February 17, 2004, our board of directors
approved the Stock Compensation Program (the "Plan"). The Plan became effective
on March 30, 2004. Under the Plan, options to purchase up to 25,000,000 shares
of our common stock may be granted to our employees, officers, directors, and
eligible consultants of our company. The Plan provides that the option price be
the fair market value of the stock at the date of grant as determined by the
Board of Directors. Options granted become exercisable and expire as determined
by the Board of Directors.
55
EQUITY COMPENSATION PLAN INFORMATION AS AT June 1, 2006
-------------------------------------------------------
Number of securities
Weighted-average remaining available for
Number of securities to exercise price of issuance under equity
be issued upon exercise outstanding compensation plans
of outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
Plan Category (a) (b) (c)
------------- ----------------------- ------------------ ------------------------
Equity Compensation Plans approved by
security holders Nil N/A N/A
Equity Compensation Plans not approved by
security holders 16,252,390 $0.14 per share 211,000
----------------------- ------------------ ------------------------
Total 16,252,390 $0.14 per share 211,000
======================= ================== ========================
Stock Compensation Program
On February 17, 2004, we established our Stock Compensation Program. The
purpose of the Plan is to advance the interests of our company and our
stockholders by strengthening our ability to obtain and retain the services of
the types of employees, consultants, officers and directors who will contribute
to our long term success and to provide incentives which are linked directly to
increases in stock value which will inure to the benefit of all our
stockholders. The Plan is administered by our Board of Directors or by a
committee of two or more non-employee directors appointed by the Board of
Directors (the "Administrator"). Subject to the provisions of the Plan, the
Administrator has full and final authority to grant the awards of stock options
and to determine the terms and conditions of the awards and the number of shares
to be issued pursuant thereto. Options granted under the Plan may be either
"incentive stock options," which qualify for special tax treatment under the
Internal Revenue Code of 1986, as amended, (the "Code"), nonqualified stock
options or restricted shares.
All of our employees and members of our Board of Directors are eligible to
be granted options. Individuals who have rendered or are expected to render
advisory or consulting services to us are also eligible to receive options. The
maximum number of shares of our common stock with respect to which options or
rights may be granted under the Plan to any participant is 25,000,000 shares,
subject to certain adjustments to prevent dilution.
The exact terms of the option granted are contained in an option agreement
between us and the person to whom such option is granted. Eligible employees are
not required to pay anything to receive options. The exercise price for
incentive stock options must be no less than 70% of the fair market value of the
common stock on the date of grant. The exercise price for nonqualified stock
options is determined by the Administrator in its sole and complete discretion.
An option holder may exercise options from time to time, subject to vesting.
Options will vest immediately upon death or disability of a participant and upon
certain change of control events.
The Administrator may amend the Plan at any time and in any manner,
subject to the following: (1) no recipient of any award may, without his or her
consent, be deprived thereof or of any of his or her rights thereunder or with
respect thereto as a result of such amendment or termination; and (2) any
outstanding incentive stock option that is modified, extended, renewed, or
otherwise altered must be treated in accordance with Section 424(h) of the Code.
The Plan terminates on March 30, 2014 unless sooner terminated by action
of the Board of Directors. All awards granted under the Plan expire ten years
from the date of grant, or such shorter period as is determined by the
Administrator. No option is exercisable by any person after such expiration. If
an award expires, terminates or is canceled, the shares of our common stock not
purchased thereunder may again be available for issuance under the Plan.
We filed a registration statement under the Securities Act of 1933, as
amended, to register the 25,000,000 shares of our common stock reserved for
issuance under the Plan on March 30, 2004.
Repricing of Options in 2004
During the year ended December 31, 2004, our board of directors approved
the re-pricing of: (i) options to purchase 3,200,000 shares of our common stock
granted in favor of Mr. Sargeant, our President and Chief Executive Officer on
April 30, 2004 at a price of $0.19; and (ii) options to purchase 3,200,000
shares of our common stock granted in favor of Mr. O'Neill, our Chief Operating
Officer on April 30, 2004 at a price of $0.19. The option price was reduced to
$0.08 per share in order that the exercise price was more reflective of the then
current trading price of our common stock and in order to provide a continuing
performance incentive. The 6,400,000 options were cancelled on December 27, 2004
and 3,200,000 options were issued on December 27, 2004 to each of Mr. O'Neill
and Mr. Sargeant to replace their cancelled options. The new options have a
$0.08 exercise price and expire December 27, 2006. On February 9, 2005 the
Company cancelled 3,200,000 options for both Mr. O'Neill and Mr. Sargeant. On
the same date the Company issued 1,500,000 options at $0.06 to both Mr. O'Neill
and Mr. Sargeant.
56
Compensation Arrangements
Compensation Of Directors
All of our directors receive reimbursement for out-of-pocket expenses for
attending Board of Directors meetings. From time to time we may engage certain
members of the Board of Directors to perform services on behalf of the Company
and may compensate such persons for the performance of those services.
In November 2002, we entered into a consulting agreement with Flaming
Gorge, Inc., a company controlled by Jay Sargeant, our President, Chief
Executive Officer and a member of our Board of Directors. Pursuant to this
agreement, we agreed to pay Flaming Gorge, Inc. $20,000 per month in
consideration of management consulting services provided by Mr. Sargeant to us.
The agreement automatically renews on a year-to-year basis at the end of the
initial five (5) year term. Effective January 1, 2004, we extended the term of
the agreement for five years.
In November 2002, we entered into a consulting agreement with O'Neill
Enterprises, Inc., a company controlled by Dori O'Neill, our Executive Vice
President, Chief Operations Officer, Secretary, Treasurer and a member of our
Board of Directors. Pursuant to the agreement, we agreed to pay $15,000 per
month in consideration of management consulting services provided by Mr. O'Neill
to us. This agreement automatically renews on a year-to-year basis at the end of
the initial five (5) year term. Effective January 1, 2004, we increased the
consulting fees payable to O'Neill Enterprises, Inc., to $20,000 per month for
management consulting services provided by Mr. O'Neill and extended the term for
five years.
Long-Term Incentive Plans
We do not have any long-term incentive plans, pension plans, or similar
compensatory plans for our directors or executive officers.
57
DESCRIPTION OF PROPERTY
Our principal office is located at 7865 Edmonds Street, Burnaby, B.C.,
Canada, V3N 1B9. The rent from January 1, 2005 to December 31, 2005 was at a
rate of CDN$12,000.00 plus GST per month. January 1, 2005 to April 30, 2005 was
a rent free period. The lease is for a period of seven years commencing January
1, 2005 and our monthly rent increases by CDN$500 per month in January of each
year.
We also have an office located at Units 1-2, 15th Floor, No. 1 Minden
Avenue, Tsim Sha Tsui Kowloon. On September 28, 2005 EYI HK entered into a Lease
with Dombas Estates Limited for the lease of the office space. The lease is for
a two year term at a monthly rent of approximately $3,500 USD (HK$22,920).
Location Term of Lease Square Feet Monthly Lease Commitment
-------- ------------- ----------- ------------------------
Burnaby, B.C. Seven years, commencing 12,200 CDN$12,000 + GST per month
January 1, 2005 from January 1, 2005 to
December 1, 2005 (January
1, 2005-April 30, 2005 was
a rent free period).
Hong Kong Two years, commencing 1,200 US $3,500(HK $22,920)per
September 28, 2005 month
58
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. On May 1, 2006 we entered into a settlement agreement with Thomas Viccars,
pursuant to which we will pay $60,000 to Mr. Viccars in full and final
settlement of all claims against EYI.
2. Action By Suhl, Harris and Babich
In 2003 a consolidated action was brought by the plaintiffs Wolf Suhl,
Christine Harris and Edward Babich in the Supreme Court of British Columbia
pursuant to an order pronounced in the New Westminster Registry under Action No.
S061589 on May 7, 2003, which allowed the plaintiffs to proceed with an action
against Essentially Yours Industries, Inc. The plaintiffs allege that
Essentially Yours Industries, Inc. holds certain of its products or revenues
derived therefrom as trust property for the benefit of the plaintiffs.
The claim is for 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 defense 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. In February 2006, the Supreme Court of British
Columbia made an order that EYI and Mr. Jay Sargeant be added to the lawsuit,
and the Writ of Summons and Statement of Claim be amended to add the following
claims: (a) against EYI, damages for unjust enrichment and breach of trust for
any amount found to be owing by Essentially Yours Industries, Inc. plus interest
and costs; and (b) against Jay Sargeant, damages for unjust enrichment and
breach of trust for any amount found to be owing by Essentially Yours
Industries, Inc. or Barry La Rose, plus interest and costs. The Plaintiffs'
total claim is approximately $478,000. On April 13, 2006, the plaintiffs amended
their pleadings to assert claims against EYI and Jay Sargeant. EYI has entered
an Appearance to the action and plans to file a Defence. Jay Sargeant has not
been served with process. This matter is set for trial commencing September 11,
2006. The parties are presently negotiating to settle these claims.
3. 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 received a statement of claim from the landlord in November, 2005
naming Halo and us as defendants and requesting payment of the defaulted lease
payments. On December 21, 2005 we entered into a written Settlement Agreement
and Release with Halo Distribution, LLC and Business Centers, LLC agreeing to
the terms and conditions of the settlement set forth in the agreement. Pursuant
to the terms of the settlement agreement we agreed to transfer property with a
value of $46,875 to the Landlord in exchange for a release of all claims against
EYI or its subsidiaries.
59
PRINCIPAL SHAREHOLDERS
Security Ownership Of Certain Beneficial Owners And Management
The following table sets forth information about the beneficial ownership
of our common stock as of June 1, 2006, by (i) each person who we know is the
beneficial owner of more than 5% of the outstanding shares of common stock (ii)
each of our directors or those nominated to be directors, and executive
officers, and (iii) all of our directors and executive officers as a group.
Name and Address Amount and Nature Percentage
Title of Class of Beneficial Owner of Beneficial Ownership of Common Stock(1)
-------------- ------------------- ----------------------- ------------------
Directors and Executive Officers
--------------------------------
Common Stock Jay Sargeant 44,958,896 shares 17.30%
3324 Military Avenue Direct and Indirect(2)
Los Angeles, California
Common Stock Dori O'Neill 12,363,361 shares 4.75%
6520 Walker Avenue Direct and Indirect (3)
Burnaby, British Columbia
Canada
Common Stock Rajesh Raniga 350,000 shares *
13357-56 Avenue Direct and Indirect(4)
Surrey, British Columbia
Canada
Common Stock All Directors and Executive Officers 57,672,257 shares 22.15%
as a Group (Three Persons) Direct and Indirect
Holders of More than 5% of Our Common Stock
-------------------------------------------
Common Stock Barry Larose 22,067,084 shares 8.47%
20080 84th Avenue Indirect (5)
Langley, British Columbia
Canada
Common Stock Jay Sargeant 44,958,896 shares 17.30%
3324 Military Avenue Direct and Indirect(2)
Los Angeles, California
Common Stock Dori O'Neill 12,363,361 shares 4.75%
6520 Walker Avenue Direct and Indirect (3)
Burnaby, British Columbia
Canada
-------------
* Represents less than 1%.
(1) Applicable percentage of ownership is based on 260,273,921 shares of
common stock outstanding as of June 1, 2006 together with securities
exercisable or convertible into shares of common stock within 60 days of
June 1, 2006 for each stockholder. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to securities exercisable or convertible into shares of common
stock that are currently exercisable or exercisable within 60 days of June
1, 2006 are deemed to be beneficially owned by the person holding such
options for the purpose of computing the percentage of ownership of such
person, but are not treated as outstanding for the purpose of computing
the percentage ownership of any other person.
(2) The shares are held as follows: (i) 146,419 shares held by Mr. Jay
Sargeant (ii) 50,000 shares are held by Northern Colorado, Inc., a company
controlled by Mr. Sargeant; (iii) 42,462,727 shares are held by Viper
Network Inc., a company controlled by Mr. Sargeant; (iv) 2,299,750 shares
which may be acquired by Mr. Sargeant on exercise of incentive stock
options within 60 days of June 1, 2006.
(3) The shares are held as follows: 2,454,500 shares of our common stock are
held by Dori O'Neill directly, 7,308,861 shares are held by O'Neill
Enterprises Inc., a company controlled by Mr. O'Neill and 2,500,000 shares
may be acquired by Mr. O'Neill on exercise of incentive stock options
within 60 days of June 1, 2006.
60
(4) Consists of 250,000 shares held directly by Mr. Raniga and 100,000 shares
which may be acquired by Mr. Raniga on exercise of incentive stock options
within 60 days of June 1, 2006.
(5) Barry Larose indirectly holds 23,249,249 shares which are currently held
in trust.
61
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as described below, none of the following parties has, since our
date of incorporation, had any material interest, direct or indirect, in any
transaction with us or in any presently proposed transaction that has or will
materially affect us, other than noted in this section:
o Any of our directors or officers;
o Any person proposed as a nominee for election as a director;
o Any person who beneficially owns, directly or indirectly, shares
carrying more than 10% of the voting rights attached to our
outstanding shares of common stock;
o Any of our promoters; and
o Any relative or spouse of any of the foregoing persons who has the
same house as such person.
In November 2002, we entered into a consulting agreement with O'Neill
Enterprises, Inc., a company controlled by Dori O'Neill, our Executive Vice
President, Chief Operations Officer, Secretary, Treasurer and a member of our
Board of Directors. Pursuant to the agreement, we agreed to pay $15,000 per
month in consideration of management consulting services provided by Mr. O'Neill
to us. This agreement automatically renewed on a year-to-year basis at the end
of the initial five (5) year term. Effective January 1, 2004, we increased the
consulting fee payable to Mr. O'Neill to $20,000 per month with a five year
extension.
In November 2002, we entered into a consulting agreement with Flaming
Gorge, Inc., a company controlled by Jay Sargeant, our President, Chief
Executive Officer and a member of our Board of Directors. Pursuant to the
agreement, we agreed to pay $20,000 per month in consideration of management
consulting services provided by Mr. Sargeant to us. This agreement automatically
renewed on a year-to-year basis at the end of the initial five (5) year term.
Effective January 1, 2004, we extended the consulting agreement of Mr. Sargeant
for an additional five year extension.
On May 27, 2002, pursuant to a Declaration of Trust and the revised First
Amendment to Trust Agreement dated December 23, 2003, 91,874,538 shares of our
common stock were held by Jay Sargeant as trustee on behalf of certain
beneficiaries. Of the 91,874,538 shares held pursuant to the trust, 26,397,436
of the shares were owned by Mr. Sargeant beneficially. The trust was unwound in
March, 2006.
In January 2004, the Company entered into a consulting agreement with
Rajesh Raniga Inc ("RR INC") whereas Rajesh Raniga, the principal of RR INC., is
to act as our Chief Financial Officer on a month to month basis for
consideration of $150 CAD per hour with a minimum charge of $2,000 CAD per month
and 250,000 shares of our common stock. In January, 2004, we issued 250,000
shares of restricted common stock to Rajesh Raniga Inc. as compensation for the
high degree of responsibility associated with the position, and the assistance
provided with the share exchange transaction with Safe ID. Mr. Raniga became our
chief financial officer on January 1, 2004. Rajesh Raniga, nor RR INC., is an
employee of the Company, but rather RR INC. is an independent contractor.
During the year ended December 31, 2004, we purchased approximately 90% of
our products for resale from Nutri-Diem Inc., a company owned in part by a
director of our company.
On April 30, 2004, we entered into an amendment to our License and
Distribution Agreement with Nutri-Diem, lowering the amount of expenditures we
are required to make under the agreement. Pursuant to the term of the original
License and Distribution Agreement, we were required to expend the following
amounts on purchasing the products of Nutri-Diem over the term of the Agreement:
(i) from June 1, 2003 to May 31, 2004, the minimum amount of CDN$7,000,000, (ii)
from June 1, 2004 to May 31, 2005 the minimum amount of CDN$20,000,000 and (iii)
for each year thereafter, CDN$50,000,000. Pursuant to the terms of the amendment
to the License and Distribution Agreement we are presently required to expend
the following amounts on purchasing the products of Nutri-Diem over the term of
the License and Distribution Agreement: (i) from June 1, 2003 to May 31, 2004,
$1,530,000, from June 1, 2004 to May 31, 2005, $3,825,000, and (iii) for each
year thereafter, $5,355,000. We reduced the minimum purchase amounts as
management did not believe that those amounts were achievable in the respective
time period. For the twelve months ended December 31, 2004 and December 31, 2003
we purchased product from Nutri-Diem totaling $1,640,857 CAD and $2,318,073 CAD
respectively. Nutri-diem earns a gross profit of 34% to 39% on all product sales
to EYI.
62
Effective January 1, 2004, we: (i) increased the consulting fees payable
to O'Neill Enterprises Inc., a private company controlled by Mr. O'Neill, our
Executive Vice-President, COO, Secretary, Treasurer and director to $20,000 per
month, and extended the term by five years; (ii) extended the consulting
agreement with Flaming Gorge, Inc., a private company controlled by Mr.
Sargeant, our President, Chief Executive Officer and a member of our Board of
Directors for an additional term of five years; and (iii) entered into a
consulting agreement with Rajesh Raniga to act as our Chief Financial Officer on
a month to month basis for consideration of CDN$150 per hour with a minimum
charge of CDN$2,000 per month and 250,000 shares of our common stock to be
issued pursuant to Regulation S of the Securities Act.
We have contracts with Nutri-Diem, Inc. that grant to us the exclusive
license and right to market, sell and distribute in Canada and the United States
and a non-exclusive right to market on the Internet certain products owned by
Michel Grise Consultant, Inc., a Quebec corporation, which is controlled by
Michel Grise. Mr. Grise is a director of our subsidiary EYI Nevada. To maintain
the license and distribution rights granted by those contracts, we are obligated
to purchase from Nutri-Diem, Inc. during that period commencing on June 1, 2003,
and continuing through and including May 31, 2004, products totaling $1,530,000.
Those contracts also specify that for the period from June 1, 2004 to May 31,
2005, we are required to purchase from Nutri-Diem, Inc. products totaling
$3,825,000. Additionally, those contracts specify that for each year commencing
on June 1, and ending on May 31 thereafter during the term of that agreement we
are required to purchase products totaling $5,355,000. The provisions of those
contracts specify that Nutri-Diem, Inc. will offer us the right to sell, market
and distribute in those territories any new product developed by Nutri-Diem,
Inc.
On February 10, 2005, we entered into a loan agreement with Janet
Carpenter, pursuant to which we loaned Ms. Carpenter $180,000 for the purpose of
exercising 3,000,000 incentive stock options issued to Ms. Carpenter under our
stock compensation program. The loan is payable on demand and accrues interest
at a rate of 4% per annum. The loan was secured by a promissory note dated
effective February 10, 2005. On August 10, 2005 the promissory note was
re-assigned to Winslow Drive in exchange for 3,000,000 shares.
63
MARKET PRICE OF AND DIVIDENDS
ON THE REGISTRANT'S COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
Our common stock has been listed on the NASD OTC Electronic Bulletin Board
sponsored by the National Association of Securities Dealers, Inc. under the
symbol "EYI" since January 30, 2004 following completion of the Exchange
Agreement among our company, certain of our shareholders and Safe ID
Corporation, see "Item 1. Description of Business" above. The shares of Safe ID
Corporation traded on the OTC BB under the symbol "MYID" from January 17, 2001
to January 30, 2004. The following table contains the reported high and low bid
prices for the common stock as reported on the OTC BB for the periods indicated.
The following table sets forth the high and low bid prices for the common
stock as reported on the Over-the-Counter Bulletin Board for each quarter since
January 2003 for the periods indicated. Such information reflects inter dealer
prices without retail mark-up, mark down or commissions and may not represent
actual transactions.
The following table sets forth, for the period indicated, the bid price
range of our common stock.
YEAR 2003 High Bid Low Bid
--------- -------- -------
Quarter Ended March 31, 2003 $0.265 $0.051
Quarter Ended June 30, 2003 $0.110 $0.032
Quarter Ended September 30, 2003 $0.340 $0.050
Quarter Ended December 31, 2003 $0.335 $0.190
YEAR 2004 High Bid Low Bid
--------- -------- -------
Quarter Ended March 31, 2004 $0.300 $0.190
Quarter Ended June 30, 2004 $0.320 $0.180
Quarter Ended September 30, 2004 $0.300 $0.110
Quarter Ended December 31, 2004 $0.140 $0.050
YEAR 2005 High Bid Low Bid
--------- -------- -------
Quarter Ended March 31, 2005 $0.190 $0.030
Quarter Ended June 30, 2005 $0.060 $0.020
Quarter Ended September 30, 2005 $0.190 $0.030
Quarter Ended December 31, 2005 $0.120 $0.020
YEAR 2006 High Bid Low Bid
--------- -------- -------
Quarter Ended March 31, 2006 $0.052 $0.0170
Quarter Ended June 30, 2006 (Through June 1) $0.040 $0.0230
On June 1, 2006, the closing price of our common stock as reported on the
Over-the-Counter Bulletin Board was $0.03 per share. As of June 1, 2006, we had
approximately 159 holders of common stock and 260,273,921 shares of our common
stock were issued and outstanding. Many of our shares are held in brokers'
accounts, so we are unable to give an accurate statement of the number of
shareholders.
Dividends
We have not paid any dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We intend to retain any
earnings to finance the growth of the business. We cannot assure you that we
will ever pay cash dividends. Whether we pay any cash dividends in the future
will depend on the financial condition, results of operations and other factors
that the Board of Directors will consider.
64
Recent Sales Of Unregistered Securities
On April 24, 2006 we entered a Securities Purchase Agreement with Cornell
Capital Partners, Taib Bank, B.S.C. and Certain Wealth, Ltd. pursuant to which
we entered into the following agreements: an Investor Registration Rights
Agreement, Irrevocable Transfer Agent Instructions and a Security Agreement.
Pursuant to the terms of the Share Purchase Agreement, we may sell convertible
debentures to these entities in the principal amount of $4,500,000 plus accrued
interest which are convertible into shares of our common stock. Of this amount
$1,500,000 has been paid, $1,500,000 must be paid two (2) business days prior to
the date a registration statement is filed with the Securities and Exchange
Commission and $1,500,000 shall be paid two (2) business days prior to the date
that such registration statement is declared effective by the Securities and
Exchange Commission. We received proceeds of $1,305,000 (net of fees associated
with the issuance of the convertible debentures) on April 27, 2006 in connection
with the issuance of $1,500,000 of convertible debentures in the following
principal amounts: $750,000 to Cornell Capital Partners, $416,667 to Taib Bank,
B.S.C., and $333,333 to Certain Wealth, Ltd. pursuant to the terms of the
Securities Purchase Agreement. Each of the convertible debentures was issued
pursuant to section 4(2) and Rule 506 of Regulation D of the Securities Act.
Pursuant to the terms of the Securities Purchase Agreement and the
issuance of our convertible debentures, on April 24, 2006 we issued to Cornell
Capital Partners seventeen (17) warrants to purchase up to an aggregate
124,062,678 shares of our common stock at the discretion of Cornell Capital
Partners each for good and valuable consideration. Pursuant to the terms of the
warrants, Cornell Capital Partners is entitled to purchase from us: (1)
10,416,650 shares of our common stock at $0.02 per share, (2) 13,888,866 shares
of our common stock at $0.03 per share, (3) 10,416,650 shares of our common
stock at $0.04 per share, (4) 8,333,320 shares of our common stock at $0.05 per
share, (5) 6,944,433 shares of our common stock at $0.06 per share, (6)
5,952,371 shares of our common stock at $0.07 per share, (7) 11,250,000 shares
of our common stock at $0.08 per share, (8) 10,000,000 shares of our common
stock at $0.09 per share, (9) 19,000,000 shares of our common stock at $0.10 per
share, (10) 8,181,818 shares of our common stock at $0.11 per share, (11)
7,500,000 shares of our common stock at $0.12 per share, (12) 3,333,333 shares
of our common stock at $0.15 per share, (13) 2,500,000 shares of our common
stock at $0.20 per share, (14) 2,000,000 shares of our common stock at $0.25 per
share, (15) 1,666,666 shares of our common stock at $0.30 per share, (16)
1,428,571 shares of our common stock at $0.35 per share and (17) 1,250,000
shares of our common stock at $0.40 per share upon surrender of the warrants (or
as subsequently adjusted pursuant to the terms of each warrant) . Each warrant
has "piggy back" registration rights and shall expire five (5) years from the
date of issuance, on or about April 24, 2011.
On October 10, 2005, we issued 500,000 shares of restricted common stock
to our legal consultant pursuant to a contract for legal services. All
securities were endorsed with a restrictive legend pursuant to Regulation S of
the Securities Act of 1933 confirming that the securities cannot be resold
without registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act.
On October 10, 2005, we also issued 250,000 shares of restricted common
stock to Agora pursuant to our investor relations agreement with Agora. All
securities were endorsed with a restrictive legend pursuant to Regulation S of
the Securities Act of 1933 confirming that the securities cannot be resold
without registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act.
On June 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.
On January 1, 2004 the Company entered into an agreement with a consultant
to provide services in exchange for 250,000 common shares at $0.28. During the
quarter ended March 31, 2004 we issued 100,000 shares of our common stock at a
price of $0.28 per share to a consultant in respect of fees owed for certain
consulting services provided to us by the consultant. All securities issued were
endorsed with a restrictive legend confirming that the securities cannot be
resold without registration under the Securities Act or an applicable exemption
from the registration requirements of the Securities Act. The issuance was
completed pursuant to Section 4(2) of the Securities Act on the basis that the
consultant was a sophisticated investor.
During the quarter ended June 30, 2004, we issued 50,000 shares of our
common stock at a price of $0.22 per share to a consultant in respect of fees
owed for certain consulting services provided to us by the consultant. All
securities issued were endorsed with a restrictive legend confirming that the
securities cannot be resold without registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
The issuance was completed pursuant to Section 4(2) of the Securities Act on the
basis that the consultant was a sophisticated investor.
During the quarter ended June 30, 2004, we issued 5,476,190 units at a
price of $0.21 per unit to Eyewonder in respect of certain amounts owed to
Eyewonder under our Letter Agreement with Eyewonder. Each unit was comprised of
one share of our common stock and one share purchase warrant entitling Eyewonder
to purchase one share of our common stock at an exercise price of $0.30 per
share for a period expiring May 4, 2009. Eyewonder is a subcontractor, which
provides streaming video technology to EYI. The Company believes that the
Eyewonder transaction was not a related party transaction, as the Company and
Eyewonder had no prior relationship and no individuals and/or entities were
related to the Company and Eyewonder. The issuance was completed pursuant to
Section 4(2) of the Securities Act on the basis that Eyewonder was a
sophisticated investor.
65
As of June 7, 2004, we completed the sale of 136,548 units at a price of
$0.21 per unit for proceeds of $28,675 to seven investors. Each unit was
comprised of one share of our common stock and one share purchase warrant. Each
share purchase warrant entitles the holder to purchase one share of our common
stock at a price of $0.30 per share for the three year period following closing.
A total of 136,548 shares and 136,548 share purchase warrants were issued. The
purchasers consisted of seven "accredited investors", as defined by Rule 501 of
Regulation D of the Securities Act. The sales were completed pursuant to Rule
506 of Regulation D of the Securities Act. All securities issued were endorsed
with a restrictive legend confirming that the securities cannot be resold
without registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act.
On June 22, 2004, we issued 1,266,589 and 33,411 restricted shares of our
common stock to Cornell Capital Partners and Newbridge Securities Corporation,
respectively in payment of certain fees owed to Cornell Capital Partners and
Newbridge under the terms of the Standby Equity Distribution Agreement and a
Placement Agent Agreement. All issuances were completed pursuant to Rule 506 of
Regulation D of the Securities Act on the basis that Newbridge and Cornell are
"accredited investors", as defined by Rule 501 of Regulation D of the Securities
Act. All securities issued were endorsed with a restrictive legend confirming
that the securities cannot be resold without registration under the Securities
Act or an applicable exemption from the registration requirements of the
Securities Act.
On June 22, 2004, we entered into a secured convertible debenture
transaction with Cornell Capital Partners in the principal amount of $500,000.
The sale of these Secured Convertible Debentures is complete. EYI Industries
received $250,000 from the issuance of the first Secured Convertible Debenture
on June 22, 2004, and we received $250,000 five business days following the
filing of the accompanying registration statement. The Secured Convertible
Debentures are convertible at the holder's option any time up to maturity at a
conversion price equal to the lower of (i) 120% of the closing bid price of the
common stock as of the date of issuance, or (ii) 80% of the average of the
lowest daily volume weighted average price of our common stock for the 5 trading
days immediately preceding the conversion date. At maturity, the remaining
unpaid principal and accrued interest under the debentures shall be, at our
option, either paid or converted into shares of common stock at a conversion
price equal to the lower of (i) 120% of the closing bid price of the common
stock as of the date of issuance or (ii) 80% of the lowest closing bid price of
the common stock for the lowest trading days of the 5 trading days immediately
preceding the conversion date. The Secured Convertible Debenture is secured by
all of EYI Industries' assets. The Secured Convertible Debentures accrue
interest at a rate of 5% per year and have a term of 3 years. In the event the
Secured Convertible Debentures are redeemed, then EYI Industries will issue to
the holders a warrant to purchase 50,000 shares for every $100,000 redeemed at
an exercise price of 120% of the closing bid price as of June 22, 2004. The
holders purchased the Secured Convertible Debentures from EYI Industries in a
private placement on June 22, 2004. On September 24, 2004, we issued the second
secured convertible debenture in the principal amount of $250,000 to Cornell
Capital Partners on the same terms and conditions as the secured convertible
debenture described above. EYI Industries is registering in this offering
8,352,823 shares of common stock underlying the Secured Convertible Debentures.
On April 4, 2005, Cornell Capital Partners assigned all of its rights and
interests in the secured convertible debentures to Taib Bank E.C. All investment
decisions of Taib Bank E.C. are made by Larry Chaleff, its Managing Director. In
addition, on April 4, 2005, EYI Industries and Taib Bank E.C. entered into a
Redemption Agreement, whereby EYI Industries agreed to first use any proceeds
received by EYI Industries under the Equity Distribution Agreement with Cornell
Capital Partners to redeem any remaining principal and accrued interest under
the assigned Secured Convertible Debentures.
66
Share of
Common Stock
Year Name of Holder Date Sold Reason Shares Issued
---- -------------- ---- ------------ --------------------
2005 Janet Carpenter February 2005 800,000 Shares in lieu of guarantee and
pledge
Private Placement at $0.02 per
unit warrants at $0.02 June 2005 1,000,000 Private Placement, raise capital
Shares issued in connection
with investor relations
AGORA Investor Relations Corp. July 2005 250,000 agreement
M. Ali Lakhani Personal Law Shares issued as signing bonus
Corporation September 2005 500,000 for agreement for legal services
2004 Private Placement at January 2004 857,143 Private Placement
$0.14 per unit: warrants raise capital
at $0.20
Rajesh Raniga Inc. January 2004 250,000 Consulting Fees
valued at $0.28 per share
Private Placement at March 2004 609,312 Private Placement
$0.21 per unit; warrants raise capital
at $0.30
Equis Capital Corp. March 2004 100,000 Consulting Fees
Eyewonder Inc. May 2004 5,476,190 Service Fees
Michael Hatrak May 2004 50,000 Consulting Fees
Private Placement at June 2004 566,833 Private Placement to
$0.21 per unit; warrants raise capital
at $0.30
Cornell Capital Partners, LP June 2004 1,266,589 Commitment fee
pursuant to Standby
Equity Distribution Agreement
Newbridge Securities June 2004 33,411 Placement Agent fee
Corporation in connection with
Standby Equity Distribution
Agreement
2003* PNG Trading Co. Ltd. February 2003 250,000 Issued in lieu of funds
received
Hightech International March 2003 2,120,000 Settlement of Debt
Private Placement at September 2003 3,573,924 Private Placement to
$0.14 per unit; warrants raise capital
at $0.20
Michel Grise December 2003 357,143 Private Placement to
raise capital
67
In February 2005, the Company issued 800,000 shares of our common stock at
a deemed price of $0.05 per share to Janet Carpenter. These shares were given to
Ms. Carpenter in consideration of her providing the guarantee and pledge
required for our loan agreement with Cornell Capital.
In June 2005, we completed the sale of 1,000,000 units at a price of $0.02
per unit for proceeds of $20,000 to one investor. Each unit was comprised of one
share of our common stock and one share purchase warrant. Each share purchase
warrant entitles the holder to purchase one share of our common stock at a price
of $0.02 per share for a one year period following closing. A total of 1,000,000
shares and 1,000,000 share purchase warrants were issued. The purchaser is an
"accredited investor", as defined by Rule 501 of Regulation D of the Securities
Act. The sale was completed pursuant to Rule 506 of Regulation D of the
Securities Act. All securities issued were endorsed with a restrictive legend
confirming that the securities cannot be resold without registration under the
Securities Act or an applicable exemption from the registration requirements of
the Securities Act.
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding EYI so as to make an informed investment decision. More specifically,
EYI had a reasonable basis to believe that each purchaser was an "accredited
investor" as defined in Regulation D of the 1933 Act and otherwise had the
requisite sophistication to make an investment in EYI's common stock.
-------------------
* Current management of EYI Industries has limited information with respect
to the issuances of unregistered securities prior to the Share Exchange
transaction consummated on December 31, 2003 between our company and
certain shareholders of Essentially Yours Industries, Inc.
68
DESCRIPTION OF SECURITIES
Common Stock
Our Articles of Incorporation authorize the issuance of 1,000,000,000
shares of common stock, $0.001 par value per share. As of June 1, 2006,
260,273,921 shares of common stock were issued and outstanding. The following
description is a summary of the capital stock of EYI Industries and contains the
material terms of the capital stock. Additional information can be found in EYI
Industries' Articles of Incorporation and Bylaws.
Each holder of our common stock is entitled to one vote per share of
common stock standing in such holder's name on our records on each matter
submitted to a vote of our stockholders, except as otherwise required by law.
Holders of our common stock do not have cumulative voting rights so that the
holders of more than 50% of the combined shares of our common stock voting for
the election of directors may elect all of the directors if they choose to do so
and, in that event, the holders of the remaining shares of our common stock will
not be able to elect any members to our board of directors. Holders of our
common stock are entitled to equal dividends and distributions, per share, when,
as and if declared by our board of directors from funds legally available.
Holders of our common stock do not have preemptive rights to subscribe for any
of our securities nor are any shares of our common stock redeemable or
convertible into any of our other securities. If we liquidate, dissolve or wind
up our business or affairs, our assets will be divided up pro-rata on a
share-for-share basis among the holders of our common stock after creditors and
preferred shareholders, if any, are paid.
Preferred Stock
Our Articles of Incorporation authorize the issuance of 10,000,000 shares
of preferred stock, $0.001 par value per share, the designation and rights of
which are to be determined by our Board of Directors. As of June 1, 2006, no
shares of preferred stock were issued and outstanding.
Our Board of Directors has authority, without action by the shareholders,
to issue all or any portion of the authorized but unissued preferred stock in
one or more series and to determine the voting rights, preferences as to
dividends and liquidation, conversion rights, and other rights of such series.
We consider it desirable to have preferred stock available to provide increased
flexibility in structuring possible future acquisitions and financing and in
meeting corporate needs which may arise. If opportunities arise that would make
desirable the issuance of preferred stock through either public offering or
private placements, the provisions for preferred stock in our Articles of
Incorporation would avoid the possible delay and expense of a shareholder's
meeting, except as may be required by law or regulatory authorities. Issuance of
the preferred stock could result, however, in a series of securities outstanding
that will have certain preferences with respect to dividends and liquidation
over the common stock which would result in dilution of the income per share and
net book value of the common stock. Issuance of additional common stock pursuant
to any conversion right which may be attached to the terms of any series of
preferred stock may also result in dilution of the net income per share and the
net book value of the common stock. The specific terms of any series of
preferred stock will depend primarily on market conditions, terms of a proposed
acquisition or financing, and other factors existing at the time of issuance.
Therefore, it is not possible at this time to determine in what respect a
particular series of preferred stock will be superior to our common stock or any
other series of preferred stock which we may issue. Our Board of Directors may
issue additional preferred stock in future financing, but has no current plans
to do so at this time.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. We intend to furnish holders of our common stock annual reports
containing audited financial statements and to make public quarterly reports
containing unaudited financial information.
69
Convertible Debentures
Summary Of Warrants Outstanding
Issued
Period Issued Warrants Purchase Price Aggregate Value Details of Issuance
------------- --------- -------------- --------------- -------------------
4th Quarter 2003 3,668,413 $ - $ - Balance of Safe ID warrants
1st Quarter 2004 857,143 $ 0.20 $ 171,429 Private Placement $0.14 per unit; warrants
exercise price is $0.30
609,312 $ 0.30 $ 182,794 Private Placement $0.21 per unit; warrants
exercise price is $0.30
916,667 $ 0.24 Balance of reverse acq/share exchange not
properly determined December 31, 2003(expired)
2nd Quarter 2004 5,476,190 $ 0.21 $1,150,000 Pursuant to an Agreement with Eyewonder dated May
4, 2004
566,833 $ 0.30 $ 170,050 Private Placement $0.21 per unit; warrants
exercise price is $0.30
26,129 $ 0.31 $ 8,100 Pursuant to an agreement dated May 25, 2004 with
Source Capital Group, Inc.
2nd Quarter 2005 1,000,000 $ 0.02 $ 20,000 Private Placement $0.02 per unit, warrant
---------- ------------ -------------- exercise price is $0.02
Total 13,120,687 $1,702,372
========== ==============
Summary Of The Grant Of Options
Number of Exercise Options
Date of Grant Options Price (US) Exercised Vesting Period Capacity of Grant
------------- --------- ---------- --------- -------------- -----------------
March 30, 2004 3,200,000 $0.165 3,200,000 March 30, 2004 Consultant
1,000,000 $0.165 1,000,000 March 30,2004 Employee
April 5, 2004 1,439,000 $0.20 300,000 50% August 5, 2004 and 50% Canadian Consultants and
August 5, 2005 Employees
April 5, 2004 2,990,000 $0.20 36,360 Fully vested upon issuance Senior Management and
Executives
April 30, 2004 6,400,000 $0.19 0 Fully vested upon issuance Consultants (Executive
Officers)
April 30, 2004 2,910,000 $0.19 0 50% October 1, 2004 and US Consultants providing
50% October 1, 2005 services in various to EYI
70
Number of Exercise Options
Date of Grant Options Price (US) Exercised Vesting Period Capacity of Grant
------------- --------- ---------- --------- -------------- -----------------
April 30, 2004 2,000,000 $0.19 0 Vesting on October 1, 2004 Consultant working with
EYI with respect to
products in Latin
Countries
June 1, 1004 100,000 $0.22 0 Vesting on August 1, 2004 Consultant working with
EYI in assisting in the
development and marketing
of new EYI products
July 2, 2004 100,000 $0.26 0 50% October 4, 2004 and Consultants providing
50% October 4, 2005 assistance to EYI Senior
Management
September 30, 2004 2,650,000 $0.11 400,250 Vesting on September 30, Senior
2004 Management/Consultants
October 13, 2004 500,000 $0.08 250,000 Vesting October 13, 2004 Consultant
November 1,2004 250,000 $0.20 0 50% February 1 2005 and Consultant
50% February 1 2006
December 27, 2004 7,450,000 $0.08 100,000 100% December 31, 2004 Senior
Management/Consultants
and Employees
February 9, 2005 6,000,000 $0.06 3,000,000 100% February 9, 2005 Senior Management
March 10, 2005 250,000 $0.04 250,000 100% March 10, 2005 Consultant
May 30, 2005 500,000 $0.03 0 100% May 30, 2005 Senior Management
June 1, 2005 500,000 $0.10 0 50% October 1, 2005 and Consultant
50% August 1, 2006
November 29, 2005 140,000 $0.02 0 50% May 29, 2006 and 50% Employees
November 29, 2006
*** In addition under an Agreement dated May 4, 2004, EYI Industries has
agreed to issue options to purchase 1,100,000 shares of common stock at a
price of $0.22 per share to certain individuals designated by Eyewonder.
Transfer Agent
The transfer agent for our common stock is Corporate Stock Transfer of
Denver, Colorado and its telephone number is (303) 282-4800.
Disclosure Of SEC Position On Indemnification For Securities Act Liabilities
Our Articles of Incorporation, as well as our By-Laws provide for the
indemnification of directors, officers, employees and agents of the corporation
to the fullest extent provided by the corporate laws of the State of Nevada, as
well as is described in the Articles of Incorporation and the By-Laws. These
sections generally provide that the Company may indemnify any person who was or
is a party to any threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative except for an action by
or in right of the corporation by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation. Generally, no
indemnification may be made where the person has been determined to be negligent
or guilty of misconduct in the performance of his or her duties to the Company.
71
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons of EYI
Industries, pursuant to the foregoing provisions, or otherwise, we have been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933, and is, therefore, unenforceable.
Anti-Takeover Effects Of Provisions Of The Articles Of Incorporation Authorized
And Unissued Stock
The authorized but unissued shares of our common and preferred stock are
available for future issuance without our shareholders' approval. These
additional shares may be utilized for a variety of corporate purposes including
but not limited to future public or direct offerings to raise additional
capital, corporate acquisitions and employee incentive plans.
72
EXPERTS
The financial statements of EYI Industries incorporated herein have been
so incorporated in reliance upon the report of independent certified public
accountants, Williams and Webster, P.S., given upon their authority as experts
in auditing and accounting. The accountants are not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for their report on the
unaudited interim financial information because that report is not a "report" or
a "part" of the Registration Statement prepared or certified by the accountants
within the meaning of Section 7 and 11 of the 1933 Act.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us Burton Bartlett & Glogovac of Reno, Nevada.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the to the exhibits for a
complete statement of their terms and conditions. The registration statement and
other information may be read and copied at the Commission's Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the
Commission.
73
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS FOR MARCH 31, 2006
---------------------------------------
Consolidated Balance Sheets as of March 31, 2006 (unaudited)
and December 31, 2005 (unaudited) F-1
Consolidated Statement of Operations for the three months ended
March 31, 2006 (unaudited) and March 31, 2005 (unaudited) F-2
Consolidated Statement of Stockholders' Equity (Deficit) from
June 21, 2002 through March 31, 2006 (unaudited) F-3 - F-4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2006 (unaudited) and March 31, 2005 (unaudited) F-5
Notes to Financial Statements F-6 - F-12
FINANCIAL STATEMENTS FOR DECEMBER 31, 2005
------------------------------------------
Report of Independent Registration Public Accounting Firm F-13
Consolidated Balance Sheets as of December 31, 2005 F-14
Consolidated Statements of Operations F-15 - F-16
Consolidated Statement of Stockholders' Equity Deficit for the
period from Inception to December 31, 2005 F-17 - F-22
Consolidated Statement of Cash Flows For the period from
Inception to December 31, 2005 F-23 - F-24
Notes to Financial Statements F-25 - F-39
F-i
EYI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
(Unaudited)
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 190,837 $ 25,639
Accounts receivable, net of allowance 94,119 48,783
Prepaid expenses 18,485 12,387
Inventory 279,225 295,248
------------ ------------
TOTAL CURRENT ASSETS 582,666 382,057
------------ ------------
OTHER ASSETS
Property, plant and equipment, net 63,720 49,671
Deposits 62,336 67,603
------------ ------------
TOTAL OTHER ASSETS 126,056 117,274
------------ ------------
INTANGIBLE ASSETS 14,487 15,044
------------ ------------
TOTAL ASSETS $ 723,209 $ 514,375
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,427,120 $ 1,929,049
Accounts payable - related parties 643,622 328,038
Notes payable - related party 90,000 90,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,160,742 2,347,087
------------ ------------
Net liabilities from discontinued operations 375,344 375,344
MINORITY INTEREST IN SUBSIDIARY 244,636 262,057
------------ ------------
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; 1,000,000,000
shares authorized, 260,273,922 and 217,600,875
shares issued and outstanding, respectively 260,273 217,600
Additional paid-in capital 7,397,617 6,155,518
Stock options and warrants 2,702,734 2,698,984
Subscription receivable (195,000) (195,000)
Accumulated deficit (12,223,137) (11,347,215)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,057,513) (2,470,113)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 723,209 $ 514,375
============ ============
The accompanying condensed notes are an
integral part of these financial statements.
F-1
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months
Ended Ended
March 31, 2006 March 31, 2005
(Unaudited) (Unaudited)
------------ ------------
REVENUE, NET OF RETURNS AND ALLOWANCES $ 1,108,759 $ 1,313,768
COST OF GOODS SOLD 287,952 251,148
------------ ------------
GROSS PROFIT BEFORE COMMISSION EXPENSE 820,807 1,062,620
COMMISSION EXPENSE 385,443 471,605
------------ ------------
GROSS PROFIT AFTER COST OF GOODS SOLD AND
COMMISSION EXPENSE 435,364 591,015
------------ ------------
OPERATING EXPENSES
Consulting fees 259,736 237,962
Legal and professional fees 74,482 69,125
Customer service 40,416 86,534
Finance and administration 499,973 208,080
Sales and marketing 78,624 3,718
Telecommunications 30,660 119,162
Wages and benefits 277,571 406,627
Warehouse expense 62,898 105,900
------------ ------------
TOTAL OPERATING EXPENSES 1,324,360 1,237,108
------------ ------------
LOSS FROM OPERATIONS (888,996) (646,093)
------------ ------------
OTHER INCOME (EXPENSES)
Interest and other income (8,565) 3,149
Interest expense (450) (20,136)
Foreign currency gain (discount) 4,669 (136,296)
------------ ------------
TOTAL OTHER INCOME (EXPENSES) (4,346) (153,283)
------------ ------------
NET LOSS BEFORE TAXES (893,342) (799,376)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS BEFORE ALLOCATION TO MINORITY INTEREST (893,342) (799,376)
ALLOCATION OF LOSS TO MINORITY INTEREST 17,420 15,588
------------ ------------
NET LOSS $ (875,922) $ (783,788)
============ ============
BASIC AND DILUTED
NET LOSS PER COMMON SHARE $ nil $ nil
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK SHARES OUTSTANDING
FOR BASIC AND DILUTED CALCULATION 250,936,751 164,653,292
============ ============
The accompanying condensed notes are an
integral part of these financial statements.
F-2
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
------------------------- Additional
Number of Paid-in Subscription Option/ Retained
Shares Amount Capital Receivable Warrants Earnings Total
----------------------------------------------------------------------------------------------
Balance December 31, 2004 162,753,292 $ 162,753 $ 3,048,606 $ (15,000) $ 2,563,044 $ (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
Consultant-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) -- --
Cancelled stock options
issued for compensation
at $0.20 -- -- 2,400 -- (2,400) -- --
Stock issued to TAIB Bank
to retire $75,000 of
$300,000 debenture 2,027,027 2,027 72,973 -- -- -- 75,000
Stock issued to TAIB Bank
to retire $170,000 of
$300,000 debenture plus
interest of $10,830 4,487,096 4,487 176,343 -- -- -- 180,830
Stock issued to TAIB Bank
to retire $5,000
debenture plus interest
of $14,245 375,146 375 18,870 -- -- -- 19,245
Stock issued to Agora as
part of contract 250,000 250 12,250 -- -- -- 12,500
Stock issued to Consultant
as part of contract 500,000 500 34,500 -- -- -- 35,000
Stock issued for exercise
of options at $0.08 per
share 100,000 100 7,900 -- -- -- 8,000
Stock issued to Cornell to
retire prom note 22,789,581 22,789 1,008,099 -- -- -- 1,030,888
Vested stock options issued
for consulting at an
average price of $0.20
per share -- -- -- -- 33,500 -- 33,500
F-3
Common Stock
------------------------- Additional
Number of Paid-in Subscription Option/ Retained
Shares Amount Capital Receivable Warrants Earnings Total
----------------------------------------------------------------------------------------------
Vested stock options issued
for employee and
management compensation
at an average price of
$0.20 per share -- -- -- -- 27,840 -- 27,840
Stock issued to Cornell in
exchange for $700,000
pursuant to SEDA 19,268,733 19,269 680,731 -- -- -- 700,000
Cancelled stock options
issued for compensation -- -- 10,500 -- (10,500) -- --
Vested stock options for
consulting at an average
price of $0.20 per share -- -- -- -- 271,550 -- 271,550
Beneficial conversion of
convertible debt -- -- 422,096 -- -- -- 422,096
Net loss for period ended
December 31, 2005 -- -- -- -- -- (4,262,010) (4,262,010)
----------------------------------------------------------------------------------------------
Balance, December 31, 2005 217,600,875 $ 217,600 $ 6,155,518 $ (195,000) $ 2,698,984 $(11,347,215) $ (2,470,113)
Vested stock options issued
for consulting at an
average price of $0.20
per share -- -- -- -- 3,750 -- 3,750
Stock issued to Cornell in
exchange for $1,084,565
pursuant to the SEDA 42,941,686 42,942 1,041,623 -- -- -- 1,084,565
Shares returned to treasury (268,639) (269) 269 -- -- -- --
Beneficial conversion of
convertible debt -- -- 200,207 -- -- -- 200,207
Net loss for period ended
March 31, 2006 -- -- -- -- -- (875,922) (875,922)
----------------------------------------------------------------------------------------------
Balance March 31, 2006
(Unaudited) 260,273,922 $ 260,273 $ 7,397,617 $ (195,000) $ 2,702,734 (12,223,137) $ (2,057,513)
==============================================================================================
The accompanying condensed notes are an
integral part of these financial statements.
F-4
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31, 2006 March 31, 2005
(Unaudited) (Unaudited)
-------------- --------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net loss $ (875,922) $ (783,788)
Loss allocated to minority interest 17,420 15,588
(893,342) (799,376)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 4,648 16,949
Stock and warrants issued for employee compensation and consulting 3,750 169,000
Stock issued for deferred financing costs -- 40,000
Discount recognized on convertible debt -- 38,162
Beneficial conversion of convertible debt 200,207 --
Decrease (increase) in:
Related party receivables -- 4,996
Accounts receivable (45,336) (16,634)
Prepaid expenses (6,098) 33,123
Inventory 16,023 44,570
Deposits 5,266 24,361
Increase (decrease) in:
Accounts payable and accrued liabilities (501,929) 180,138
Accounts payable - related parties 315,584 101,327
Customer deposits -- 6,165
-------------- --------------
Net cash used by operating activities (901,226) (157,219)
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Decrease (increase) in restricted cash -- (122)
Decrease (increase) in property, plant, and equipment (18,140) (11,551)
-------------- --------------
Net cash provided by investing activities (18,140) (11,673)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Net change in bank indebtedness -- (58,676)
Proceeds from Cornell SEDA 1,084,565 --
Proceeds from Cornell Promissory Note -- 200,000
-------------- --------------
Net cash provided by financing activities 1,084,565 141,324
-------------- --------------
Net increase in cash and cash equivalents 165,198 (27,568)
CASH - Beginning of Year 25,639 33,018
-------------- --------------
CASH - End of Period $ 190,837 $ 5,450
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ 450 $ 20,136
Income taxes paid $ -- $ --
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Beneficial conversion of convertible debt $ 200,207 $ --
Stock options vested for employee compensation and consulting $ 3,750 $ 169,000
Stock issued for financing guaranty & pledge $ -- $ 40,000
Discount recognized on convertible debt $ -- $ 38,162
The accompanying condensed notes are an
integral part of these financial statements.
F-5
EYI INDUSTRIES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
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 concerning EYI's reorganization. On
December 31, 2003, EYI entered into a share exchange agreement of its stock with
Safe ID Corporation ("Safe ID"). This transaction was accounted for as a share
exchange and recapitalization. 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 primarily through network
marketing distributors, which in turn sell the products to the end customers.
The Company also sells product directly and through affiliates. 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 six 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. Halo was dissolved on
November 1, 2005. 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 incorporated on September 13, 2002 under the Canada Business
Corporations Act. 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, customer service and
marketing services to the consolidated entity. The fifth subsidiary is
Essentially Yours Industries (Hong Kong) Limited ("EYI HK"). EYI HK was
organized on August 23, 2005 in Hong Kong. EYI HK markets health and wellness
care products for use in Hong Kong and China. The sixth subsidiary is
Essentially Yours Industries (International) Limited ("EYI INTL"). EYI INTL was
organized on December 6, 2005 to facilitate our expansion throughout other
Southeast Asian countries.
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. ("WWBC"), 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, 2005. 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.
F-6
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
This summary of significant accounting policies of EYI Industries, Inc., is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America, and have been consistently applied in the preparation of the
financial statements.
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.
Revenue Recognition
The Company is in the business of selling nutritional products in three
categories: dietary supplements, personal care products, and water filtration
systems. Sales of personal care products and water filtration systems 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 the customer. Administrative
fees charged to the Independent Business Associates are included in the gross
sales and amounted to $39,990 and $41,096 for the three months ended March 31,
2006 and March 31, 2005 respectively.
Stock Options and Warrants Granted to Employees and Non-Employees
Statement of Financial Accounting Standards No. 123R, "Accounting for
Stock-Based Compensation" ("SFAS No. 123R"), defines a fair value-based method
of accounting for stock options and other equity instruments. The Company has
adopted this method, which measures compensation costs based on the estimated
fair value of the award and recognizes that cost over the service period.
Going Concern
As shown in the accompanying financial statements, the Company had negative
working capital of approximately $1,578,000 and an accumulated deficit at March
31, 2006. The Company also has limited cash resources and a history of recurring
losses. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
Management has established plans designed to increase the sales of the Company's
products, and decrease debt. The Company plans on continuing to reduce expenses,
and with small gains in any combination of network sales, direct sales,
international sales, and warehouse sales, believe that they will eventually be
able to reverse the present deficit. Management intends to seek additional
capital from new equity securities offerings that will provide funds needed to
increase liquidity, fund internal growth and fully implement its business plan.
Management plans include negotiations to convert significant portions of
existing debt into equity.
The timing and amount of capital requirements will depend on a number of
factors, including demand for products and services and the availability of
opportunities for international expansion through affiliations and other
business relationships.
NOTE 3 - ACCOUNTS RECEIVABLE AND CREDIT RISK
Accounts receivable at March 31, 2006 and December 31, 2005 consist primarily of
amounts due from direct retail clients of EYI.
F-7
NOTE 4 - PROPERTY AND EQUIPMENT
Capital assets are recorded at cost. Depreciation is calculated using the
straight line method over three to seven years.
NOTE 5 - 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 6 - CAPITAL STOCK
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock with a
par value of $0.001. As of March 31, 2006 and December 31, 2005 the Company has
not issued any preferred stock.
Common Stock
The Company is authorized to issue 1,000,000,000 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.
Between January 1, 2006 and March 31, 2006, the Company issued 42,941,686 shares
to Cornell Capital in exchange for $1,084,565.
On February 6, 2006 the Jay Sargeant Trust was dissolved and the related shares
were disbursed to the beneficiaries. In connection with this transaction,
268,639 common shares were returned to treasury.
NOTE 7 - COMMON STOCK OPTIONS AND WARRANTS
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (hereinafter "SFAS No. 123"), defines a fair value-based method of
accounting for stock options and other equity instruments. The Company has
adopted this method, which measures compensation costs based on the estimated
fair value of the award and recognizes that cost over the service period.
In accordance with SFAS No. 123, the fair value of stock options and warrants
granted are estimated using the Black-Scholes Option Price Calculation. The
following assumptions were made to value the stock options and warrants for the
period ended December 31, 2005: estimated risk-free interest rate of 4%; no
dividends to be paid; estimated volatility of 144% and term of two years.
Stock Options
During the period ending December 31, 2004, the Company's board of directors
approved the Stock Compensation Program to allow up to 25,000,000 shares of
stock to be issued under the program. This plan enables the Company to grant
stock options to directors, officers, employees and eligible consultants of the
Company. There was no Company stock option plan in effect prior to 2004.
During the period ended March 31, 2006, the Company recognized an expense to
consulting of $3,750 for all vested options.
Following is a summary of the status of the stock options during the three
months:
F-8
Weighted
Average
Number Exercise
of Shares Price
------------ ------------
Outstanding at December 31, 2005 16,252,390 $ 0.14
Granted -- --
Exercised -- --
Forfeited -- --
------------ ------------
Options outstanding at March 31, 2006 16,252,390 $ 0.14
============ ============
Options exercisable at March 31, 2006 15,862,390 $ 0.15
============ ============
Weighted average fair value of options granted $ --
============
Summarized information about stock options outstanding and exercisable at March
31, 2006 is as follows:
Options Outstanding
--------------------------------------------
Weighted Weighted
Exercise Ave. Ave.
Price Number Remaining Exercise
Range of Shares Life Price
------------------- -------------- -------------- --------------
$0.02 - $0.26 16,252,390 0.61 $ 0.14
Options Exercisable
--------------------------------------------
Weighted Weighted
Exercise Ave. Ave.
Price Number Remaining Exercise
Range of Shares Life Price
------------------- -------------- -------------- --------------
$0.03 - $0.26 15,862,390 0.59 $ 0.15
Summarized information about unvested but granted stock options outstanding at
December 31, 2005 is as follows:
Unvested Granted Options Outstanding
--------------------------------------------
Weighted Weighted
Exercise Ave. Ave.
Price Number Remaining Exercise
Range of Shares Life Price
------------------- -------------- -------------- --------------
$0.02 - $0.10 390,000 1.35 $ 0.07
Weighted Average
Number of Average Exercise
Warrants Remaining Life Price
-------------- -------------- --------------
Outstanding and 11,516,621 3.50 $ 0.21
exercisable
NOTE 8 - 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 87% of the Company's sales volume results from products supplied
under this licensing agreement.
F-9
Pursuant to the agreement, the Company is required to purchase a minimum amount
of $6,035,000 of product in each of the remaining years.
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. The period for which the Licensor could request payment per the
penalty clause has expired for the year and therefore we have not made any
accrual to the Financial Statements. As well, we continue to purchase Nutri Diem
products.
Lease Payments
The Company has operating lease commitments for its premises, office equipment
and an automobile. The minimum annual lease commitments are as follows:
Minimum
Year ended December 31, Amount
--------------------------------------------------------------------------------
2006 $ 218,469
2007 163,285
2008 141,841
2009 147,013
2010 and thereafter 309,544
Regulatory Risks and Claims
The Company's products are subject to regulation by a number of federal and
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.
Standby Equity Distribution Agreement
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.
Other Matters
The Company's predecessor organization, Essentially Yours Industries Corp.
("EYIC"), a British Columbia corporation, has outstanding claims from the
Internal Revenue Service for penalties and interest of approximately $2,000,000.
Furthermore, one or more states may have claims against EYIC for unpaid state
income taxes. Management believes that these claims are limited solely to EYIC
and that any prospective unpaid tax claims against the Company are remote and
unable to be estimated.
F-10
NOTE 9 - DISCONTINUED OPERATIONS
During the period ended December 31, 2005, the Company elected to discontinue
the operations of Halo Distribution LLC (hereinafter "Halo"), a subsidiary of
the Company. The Company's balance sheet reports net liabilities from
discontinued operations of $375,344 as at March 31, 2006 and December 31, 2005.
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 10 - RELATED PARTY NOTE PAYABLE
The Company issued two promissory notes for a total of $90,000 in December 2003.
The notes are unsecured, non-interest bearing and are payable upon demand.
NOTE 11 - CONCENTRATIONS
Bank Accounts
The Company maintains its cash accounts in one commercial bank. During the year,
the Company may maintain balances in excess of the federally insured amounts in
the accounts that are maintained in the United States. The Company also
maintains funds in commercial banks in Vancouver, British Columbia, in which
funds in U.S. dollars are not insured or in Hong Kong where none of the funds
are insured. At March 31, 2006 and December 31, 2005, a total of $59,016 and
$56,088 respectively, was not insured.
Economic Dependence
During the year, the Company purchased approximately 90% of its products for
resale from one company, Nutri-Diem Inc., which is the sole supplier of the
Company's flagship product Calorad. Pursuant to a purchase agreement, the
Company is subject to minimum purchases per annum. (See Note 8.)
NOTE 12 - 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.
Accounts payable to related parties represents amounts due to the President and
Chief Executive Officer and to the Chief Operations 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.
The Company purchases approximately 90% of its products for resale from one
company, Nutri-Diem Inc., which is owned in part by a director of the Company.
F-11
NOTE 13 - SUBSEQUENT EVENTS
On April 3, 2006 we signed a Termination Agreement with Cornell Capital
Partners, L.P for the purpose of terminating our Standby Equity Distribution
Agreement, Registration Rights Agreement and Escrow Agreement all of which are
dated as of May 13, 2005.
On April 24, 2006 the Company entered into a Securities Purchase Agreement with
the Cornell, TAIB Bank, and Certain Wealth (collectively the "Buyers" and
together with the Company, the "Parties"). Pursuant to the Securities Purchase
Agreement, the Company shall sell to the Buyers, and the Buyers shall purchase
from the Company, convertible debentures in the aggregate principal amount of
Four Million Five Hundred Thousand Dollars ($4,500,000), plus accrued interest,
which are convertible into shares of the Company's common stock, par value
$0.001 per, at the Buyers discretion. Of this aggregate amount, (a) One Million
Five Hundred Thousand Dollars ($1,500,000) was funded on April 28, 2006, (b) One
Million Five Hundred Thousand Dollars ($1,500,000) shall be funded two (2)
business days prior to the date a registration statement ("Registration
Statement") is filed with the U.S. Securities and Exchange Commission ("SEC")
and (c) One Million Five Hundred Thousand Dollars ($1,500,000) shall be funded
two (2) business days prior to the date that such Registration Statement is
declared effective by the SEC.
The Debentures mature on April 24, 2009, accrue interest at an annual rate of
ten percent (10%) and shall be convertible into shares of the Company's common
stock at the option of the holder, in whole or in part at any time and from time
to time, at a conversion price equal to (a) $0.06 or (b) eighty percent (80%) of
the lowest Volume Weighted Average Price of the Company's common stock during
the five (5) trading days immediately preceding the date of conversion as quoted
by Bloomberg, LP.
The Company also executed a registration rights agreement pursuant to which the
Company agreed to provide certain registration rights to the Investors. The
Parties have also executed a Security Agreement, pursuant to which the Company
has agreed to provide to the Buyers, a security interest in Pledged Collateral
to secure the Company's obligations under the Debentures, the Securities
Purchase Agreement, the Investor Registration Rights Agreement, the Irrevocable
Transfer Agent Instructions, the Security Agreement, or any other obligations of
the Company to the Buyer.
On April 24, 2006 the Company issued to Cornell pursuant to the above mentioned
debentures, seventeen (17) warrants to purchase up to an aggregate 124,062,678
shares of the Company's common stock at $0.02 and $0.40 per share. Each Warrant
has "piggy back" registration rights and shall expire five (5) years from the
date of issuance, on or about April 24, 2011.
F-12
Board of Directors
EYI Industries, Inc.
Burnaby, British Columbia, Canada
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of EYI Industries,
Inc. as of December 31, 2005 and December 31, 2004 and the related consolidated
statements of operations, stockholders' deficit and cash flows for the periods
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EYI Industries, Inc.
as of December 31, 2005, and December 31, 2004 and the results of its
operations, stockholders' equity and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has recorded significant losses
from operations, ahs insufficient revenues to support operational cash flows and
has a working capital deficit which together raise substantial doubt about its
ability to continue as a going concern an accumulated deficit, and a negative
working capital position. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regards
to these matters are described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Williams & Webster
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
March 31, 2006
F-13
EYI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2005 2004
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 25,639 $ --
Restricted cash -- 100,248
Accounts receivable, net of allowance 48,783 36,061
Related party receivables -- --
Prepaid expenses 12,387 852,764
Inventory 295,248 239,641
------------ ------------
TOTAL CURRENT ASSETS 382,057 1,228,714
------------ ------------
OTHER ASSETS
Property, plant and equipment, net 49,671 32,596
Deposits 67,603 2,236
------------ ------------
TOTAL OTHER ASSETS 117,274 34,832
------------ ------------
INTANGIBLE ASSETS 15,044 16,561
------------ ------------
TOTAL ASSETS $ 514,375 $ 1,280,107
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank indebtedness $ -- $ 72,456
Accounts payable and accrued liabilities 1,929,049 1,141,001
Accounts payable - related parties 328,038 159,455
Interest payable, convertible debt -- 10,616
Convertible debt - related party, net of discount -- 379,724
Customer deposits -- --
Notes payable - related party 90,000 90,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,347,087 1,853,252
------------ ------------
Net liabilities from discontinued operations 375,344 405,838
MINORITY INTEREST IN SUBSIDIARY 262,057 346,819
------------ ------------
STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value; 10,000,000
shares authorized, no shares issued
and outstanding -- --
Common stock, $0.001 par value; 1,000,000,000
shares authorized, 217,600,875 and 162,753,292
shares issued and outstanding, respectively 217,600 162,753
Additional paid-in capital 6,155,518 3,048,606
Stock options and warrants 2,698,984 2,563,043
Subscription receivable (195,000) (15,000)
Accumulated deficit (11,347,215) (7,085,205)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (2,470,113) (1,325,802)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 514,375 $ 1,280,107
============ ============
The accompanying notes are an
integral part of these financial statements.
F-14
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended
December 31, December 31,
2005 2004
------------- -------------
REVENUE, net of returns and allowances $ 4,980,408 $ 6,085,831
COST OF GOODS SOLD 1,165,976 1,252,118
------------- -------------
GROSS PROFIT BEFORE COMMISSION EXPENSE 3,814,432 4,833,713
COMMISSION EXPENSE 1,930,925 2,486,970
------------- -------------
GROSS PROFIT AFTER COST OF GOODS SOLD AND
COMMISSION EXPENSE 1,883,507 2,346,743
------------- -------------
OPERATING EXPENSES
Consulting fees 1,250,278 1,438,362
Legal and professional fees 306,948 321,713
Customer service 198,500 393,244
Finance and administration 1,378,118 2,101,842
Sales and marketing 15,741 154,638
Telecommunications 946,331 492,847
Wages and benefits 1,282,438 1,152,728
Warehouse expense 171,724 231,268
------------- -------------
TOTAL OPERATING EXPENSES 5,550,077 6,286,642
------------- -------------
LOSS FROM OPERATIONS (3,666,570) (3,939,899)
------------- -------------
OTHER INCOME (EXPENSES)
Interest and other income 3,978 16,847
Interest expense (179,717) (308,572)
Foreign currency gain (discount) (124,096) 20,379
------------- -------------
TOTAL OTHER INCOME (EXPENSES) (299,835) (271,346)
------------- -------------
NET LOSS BEFORE TAXES (3,966,405) (4,211,245)
PROVISION FOR INCOME TAXES -- --
------------- -------------
NET LOSS BEFORE ALLOCATION TO MINORITY INTEREST (3,966,405) (4,211,245)
ALLOCATION OF LOSS TO MINORITY INTEREST 84,762 88,755
LOSS FROM DISCONTINUED OPERATIONS (380,368) (340,305)
------------- -------------
NET LOSS $ (4,262,011) $ (4,462,795)
============= =============
BASIC AND DILUTED
NET LOSS PER COMMON SHARE $ (0.02) $ (0.03)
============= =============
F-15
Year Ended Year Ended
December 31, December 31,
2005 2004
------------- -------------
WEIGHTED AVERAGE NUMBER OF
COMMON STOCK SHARES OUTSTANDING
FOR BASIC AND DILUTED CALCULATION 200,846,048 157,060,345
============= =============
The accompanying notes are an
integral part of these financial statements.
F-16
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
--------------------------- Additional
Number of Paid-in Discount on Subscription
Shares Amount Capital Common Stock Receivable
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 148,180,670 148,181 827,972 (53,598) --
Common stock issued at$0.20 including
warrants less expenses of$28,715 1,466,455 1,466 146,930 -- --
Stock issued at$0.165 per share for cashless
exercise of options in form of foregone
debt 3,200,000 3,200 524,800 -- --
Stock issued for exercise of options at$0.20
per share in lieu of payment of legal fees 300,000 300 59,700 -- --
Stock issued at$0.165 per share for cash and
promissory note for exercise of options 1,000,000 1,000 164,000 -- (15,000)
Common stock issued at$0.21 including
warrants 5,476,190 5,476 487,381 -- --
Common stock issued at$0.21 including
warrants less expenses of$3,231 566,833 567 36,369 -- --
Stock issued for exercise of options at$0.22
per share in lieu of consulting fees 50,000 50 10,950 -- --
Stock issued for deferred offering costs 1,300,000 1,300 388,700 -- --
Adjustment to subsidiaries stock held by
minority interest 176,534 177 33,126 -- --
Stock issued at$0.28 per share for
consulting 350,000 350 97,650 -- --
Vested stock options issued for consulting
at an average price of$0.18 per share -- -- -- -- --
Vested stock options issued for consulting
at an average price of$0.18 per share -- -- -- -- --
Stock issued at$0.165 per share for cash and
promissory note for exercise of options 36,360 36 7,236 -- --
Stock issued for exercise of options at$0.08
per share in lieu of consulting fees 200,000 200 15,800 -- --
Stock issued for exercise of options at$0.08
per share in lieu of consulting fees 250,000 250 19,750 -- --
Stock issued for exercise of options at$0.11
per share by the CEO 200,250 200 31,840 -- --
Cancellation of discount on common stock -- -- (53,598) 53,598 --
Beneficial conversion of convertible debt -- -- 250,000 -- --
Vested stock options issued for compensation
and consulting at an average price of$0.12
per option -- -- -- -- --
Cancelled stock options issued for
compensation and consulting at an average
price of$0.19 per option -- -- -- -- --
Net loss for period ended
December 31, 2004 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 162,753,292 $ 162,753 $ 3,048,606 $ -- $ (15,000)
F-17
Common Stock
--------------------------- Additional
Number of Paid-in Discount on Subscription
Shares Amount Capital Common Stock Receivable
------------ ------------ ------------ ------------ ------------
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 -- -- -- -- --
Vested stock options issued for employee
management compensation at an average
price of$0.07 per share -- -- -- -- --
Stock issued to employee for financing
guaranty & pledge valued at$0.05 per share 800,000 800 39,200 -- --
Nazlin - options exercised 250,000 250 14,750 -- (5,000)
Gladys Sargeant 506 Subscription Agreement 1,000,000 1000 4,000 -- --
Vested stock options issued for consulting
at an average price of$0.03 per share -- -- -- -- --
Cancelled stock options issued for
compensation and consulting at an average
price of$0.08 per option -- -- 425,300 -- --
Cancelled stock options issued for
compensation at$0.20 -- -- 2,400 -- --
Stock issued to TAIB Bank to retire$75,000
of the$300,000 debenture 2,027,027 2,027 72,973 -- --
Stock issued to TAIB Bank to retire$170,000
of$300,000 debenture plus interest$10,830 4,487,096 4,487 176,343 -- --
Stock issued to TAIB Bank to retire$5,000
debenture plus interest of 14,245 375,146 375 18870 -- --
Stock issued to Agora as part of contract 250,000 250 12250 -- --
Stock issued to Lakhani as part of contract 500,000 500 34500 -- --
Stock issued for exercise of options at$0.08
per share 100,000 100 7900 -- --
Stock issued to Cornell to retire
promissory note 22,789,581 22,789 1,008,099 -- --
Vested stock options issued for consulting
at an average price of$0.20 per share -- -- -- -- --
Vested stock options Issued for employee and -- -- -- -- --
management compensation at an average
price of$0.20 per share
Stock issued to Cornell in exchange for
$700,000 pursuant to SEDA 19,268,733 19,269 680,731 -- --
Cancelled stock options issued for
compensation -- -- 10,500 -- --
F-18
Common Stock
--------------------------- Additional
Number of Paid-in Discount on Subscription
Shares Amount Capital Common Stock Receivable
------------ ------------ ------------ ------------ ------------
Vested stock options issued for compensation
And consulting at an average price of$0.20 -- -- -- -- --
Beneficial conversion of convertible debt -- -- 422,096 -- --
Net loss for period ended
December 31, 2005 -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 217,600,875 $ 217,600 $ 6,155,518 $ -- $ (195,000)
------------ ------------ ------------ ------------ ------------
F-19
Option/ Retained
Warrants Earnings Total
------------ ------------ ------------
Balance, December 31, 2003 $ 128,385 $ (2,622,410) $ (1,571,470)
Common stock issued at $0.20 including warrants less expenses
of $28,715 70,844 -- 219,240
Stock issued at $0.165 per share for cashless exercise of options in
form of foregone debt -- -- 528,000
Stock issued for exercise of options at $0.20 per share in lieu of
payment of legal fees -- -- 60,000
Stock issued at $0.165 per share for cash and promissory note for
exercise of options -- -- 150,000
Common stock issued at $0.21 including warrants 657,143 -- 1,150,000
Common stock issued at $0.21 including warrants less expenses of $3,231 78,869 -- 115,805
Stock issued for exercise of options at $0.22 per share in lieu of
consulting fees -- -- 11,000
Stock issued for deferred offering costs -- -- 390,000
Adjustment to subsidiaries stock held by minority interest -- -- 33,303
Stock issued at $0.28 per share for consulting -- -- 98,000
Vested stock options issued for consulting at an average price of
$0.18 per share 128,250 -- 128,250
Vested stock options issued for consulting at an average price of
$0.18 per share 1,078,277 -- 1,078,277
Stock issued at $0.165 per share for cash and promissory note for
exercise of options -- -- 7,272
Stock issued for exercise of options at $0.08 per share in lieu of
consulting fees -- -- 16,000
Stock issued for exercise of options at $0.08 per share in lieu of
consulting fees -- -- 20,000
Stock issued for exercise of options at $0.11 per share by the CEO (10,013) -- 22,028
Cancellation of discount on common stock -- -- --
Beneficial conversion of convertible debt -- -- 250,000
Vested stock options issued for compensation and consulting at an
average price of $0.12 per option 1,087,900 -- 1,087,900
F-20
Option/ Retained
Warrants Earnings Total
------------ ------------ ------------
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 $ 2,563,044 $ (7,085,205) $ (1,325,802)
Stock issued at $0.06 per share for promissory note for exercise of
options -- -- --
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 management 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 -- -- 40,000
Nazlin - options exercised -- 10,000
Gladys Sargeant 506 Subscription Agreement 15,000 -- 20,000
Vested stock options 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) -- --
Cancelled stock options issued for compensation at $0.20 (2,400) -- --
Stock issued to TAIB Bank to retire $75,000 of the $300,000 debenture -- -- 75,000
Stock issued to TAIB Bank to retire $170,000 of $300,000 debenture
plus interest $10,830 -- -- 180,830
Stock issued to TAIB Bank to retire $5,000 debenture plus interest
of 14,245 -- -- 19,245
Stock issued to Agora as part of contract -- -- 12,500
Stock issued to Lakhani as part of contract -- -- 35,000
Stock issued for exercise of options at $0.08 per share -- -- 8,000
Stock issued to Cornell to retire promissory note -- -- 1,030,888
Vested stock options issued for consulting at an average price of
$0.20 per share 33,500 -- 33,500
Vested stock options Issued for employee and management compensation
at an average price of $0.20 per share 27,840 -- 27,840
Stock issued to Cornell in exchange for $700,000 pursuant to SEDA -- -- 700,000
F-21
Option/ Retained
Warrants Earnings Total
------------ ------------ ------------
Cancelled stock options issued for compensation (10,500) -- --
Vested stock options issued for compensation And consulting at an
average price of $0.20 271,550 -- 271,550
Beneficial conversion of convertible debt -- -- 422,096
Net loss for period ended December 31, 2005 -- (4,262,010) (4,262,010)
------------ ------------ ------------
Balance, December 31, 2005 $ 2,698,984 $(11,347,215) $ (2,470,113)
============ ============ ============
The accompanying notes are an
integral part of these financial statements.
F-22
EYI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, December 31,
2005 2004
------------ ------------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net loss $ (4,262,010) $ (4,462,795)
Loss allocated to minority interest 84,762 88,755
------------ ------------
(4,346,772) (4,551,550)
------------ ------------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 52,645 87,054
Stock and warrants issued for employee compensation and consulting 547,800 1,735,814
Stock issued for deferred financing costs -- 390,000
Stock issued for options exercised in lieu of debt -- 11,500
Stock issued for options exercised in lieu of consulting and legal fees 57,500 207,000
Stock issued for interest on convertible debt 44,570 --
Stock issued for financing guaranty & pledge 40,000 --
Discount recognized on convertible debt 120,276 --
Beneficial conversion of convertible debt 422,096 250,000
Decrease (increase) in:
Related party receivables -- 469
Accounts receivable (12,722) 6,517
Prepaid expenses 840,377 221,430
Inventory (55,607) 14,726
Deposits (65,367) (24,361)
Increase (decrease) in:
Accounts payable and accrued liabilities 788,048 392,043
Accounts payable - related parties 168,583 450,808
Interest payable, convertible debt (10,616) --
Customer deposits -- (6,250)
Liabilities in excess of assets on discontinued operations (30,494) --
------------ ------------
Net cash used by operating activities (1,428,183) (826,300)
------------ ------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Decrease (increase) in restricted cash 100,248 123,434
Decrease (increase) in property, plant, and equipment (39,797) (711)
Purchase of trademarks (674) --
------------ ------------
Net cash provided by investing activities 59,778 122,723
------------ ------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Net change in bank indebtedness (72,456) (187,521)
Issuance of stock, net of private placement costs & warrants 16,500 492,316
Repayment of convertible debt (250,000) --
Proceeds from Cornell SEDA 700,000 --
Proceeds from Cornell Prom Note 1,000,000 --
------------ ------------
Net proceeds from convertible debt -- 379,725
------------ ------------
Net cash provided by financing activities 1,394,044 684,520
------------ ------------
Net increase in cash and cash equivalents 25,639 (19,057)
------------ ------------
CASH - Beginning of Year -- 52,075
------------ ------------
F-23
Year Ended Year Ended
December 31, December 31,
2005 2004
------------ ------------
CASH - End of Period $ 25,639 $ 33,018
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ 179,717 $ 47,956
Income taxes paid $ -- $ --
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Stock and warrants issued for employee compensation and consulting $ -- $ 1,735,814
Stock issued for options exercised in lieu of debt $ -- $ 646,028
Stock issued for options exercised in lieu of consulting and legal fees $ -- $ 207,000
Stock and warrants issued for prepaid expenses $ -- $ 1,150,000
Stock issued for financing fees $ -- $ 390,000
Beneficial conversion of convertible debt 422,096 $ 250,000
Stock options vested for consulting and compensation $ 547,800 $ --
Stock issued for options exercised in lieu of debt $ 11,500 $ --
Stock issued for options exercised in lieu of legal fees $ 10,000 $ --
Stock issued for options exercised in lieu of consulting and legal fees $ 57,500 $ --
Stock issued to retire part of prom note $ 175,000 $ --
Stock issued for redemption of convertible debenture $ 250,000 $ --
Stock issued for interest on convertible debenture $ 44,570 $ --
Stock and warrants issued through 506 Private Placement $ 20,000 $ --
Stock issued for financing guaranty & pledge $ 40,000 $ --
Discount recognized on convertible debt $ 120,276 $ --
The accompanying notes are an
integral part of these financial statements.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 concerning EYI's reorganization. On
December 31, 2003, EYI entered into a share exchange agreement of its stock with
Safe ID Corporation ("Safe ID"). This transaction was accounted for as a share
exchange and recapitalization. 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 primarily through network
marketing distributors, which in turn, sell the products to the end customers.
The Company also sells product directly and through affiliates. 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 six 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 it's operations. 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 incorporated on September
13, 2002, under the Canada Business Corporations Act. 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, customer service and marketing services to the consolidated entity.
The fifth subsidiary is Essentially Yours Industries (Hong Kong) Limited ("EYI
HK"). EYI HK was organized on August 23, 2005 in Hong Kong. EYI HK markets
health and wellness care products for use in Hong Kong and China. The sixth
subsidiary is Essentially Yours Industries (International) Limited ("EYI INTL").
EYI INTL was organized on December 6, 2005 to facilitate our expansion
throughout other Southeast Asian countries.
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. ("WWBC"), a Nevada corporation, which was
organized by a joint venture agreement effective May 6, 2004.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
This summary of significant accounting policies of EYI Industries, Inc., is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America, and have been consistently applied in the preparation of the
financial statements.
Accounting Method
The Company's financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America.
Accounting Pronouncements - Recent
F-25
In March 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 156, "Accounting for Servicing of Financial
Assets--an amendment of FASB Statement No. 140." This statement requires an
entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract in any of the following situations: a transfer of the
servicer's financial assets that meets the requirements for sale accounting; a
transfer of the servicer's financial assets to a qualifying special-purpose
entity in a guaranteed mortgage securitization in which the transferor retains
all of the resulting securities and classifies them as either available-for-sale
securities or trading securities; or an acquisition or assumption of an
obligation to service a financial asset that does not relate to financial assets
of the servicer or its consolidated affiliates. The statement also requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable and permits an entity to choose either
the amortization or fair value method for subsequent measurement of each class
of servicing assets and liabilities. The statement further permits, at its
initial adoption, a one-time reclassification of available for sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available for sale securities under
Statement 115, provided that the available for sale securities are identified in
some manner as offsetting the entity's exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value and requires separate presentation of servicing assets and
servicing liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities. This statement is effective for
fiscal years beginning after September 15, 2006, with early adoption permitted
as of the beginning of an entity's fiscal year. Management believes the adoption
of this statement will have no impact on the Company's financial condition or
results of operations.
In February 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 155, "Accounting for Certain Hybrid Financial
Instruments, an Amendment of FASB Standards No. 133 and 140" (hereinafter "SFAS
No. 155"). This statement established the accounting for certain derivatives
embedded in other instruments. It simplifies accounting for certain hybrid
financial instruments by permitting fair value remeasurement for any hybrid
instrument that contains an embedded derivative that otherwise would require
bifurcation under SFAS No. 133 as well as eliminating a restriction on the
passive derivative instruments that a qualifying special-purpose entity ("SPE")
may hold under SFAS No. 140. This statement allows a public entity to
irrevocably elect to initially and subsequently measure a hybrid instrument that
would be required to be separated into a host contract and derivative in its
entirety at fair value (with changes in fair value recognized in earnings) so
long as that instrument is not designated as a hedging instrument pursuant to
the statement. SFAS No. 140 previously prohibited a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This
statement is effective for fiscal years beginning after September 15, 2006, with
early adoption permitted as of the beginning of an entity's fiscal year.
Management believes the adoption of this statement will have no impact on the
Company's financial condition or results of operations.
In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections," (hereinafter "SFAS No. 154") which replaces Accounting Principles
Board Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements - An Amendment of APB Opinion
No. 28." SFAS No. 154 provides guidance on accounting for and reporting changes
in accounting principle and error corrections. SFAS No. 154 requires that
changes in accounting principle be applied retrospectively to prior period
financial statements and is effective for fiscal years beginning after December
15, 2005. The Company does not expect SFAS No. 154 to have a material impact on
its consolidated financial position, results of operations, or cash flows.
In March 2005, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset Retirement
Obligations." FIN 47 clarifies that the term "conditional asset retirement
obligation," which as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The entity
must record a liability for a "conditional" asset retirement obligation if the
fair value of the obligation can be reasonably estimated. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153. This statement addresses the measurement
of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement is effective for financial statements for fiscal
years beginning after June 15, 2005. Management believes the adoption of this
statement will have no impact on the financial statements of the Company.
F-26
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 152, which amends FASB statement No. 66,
"Accounting for Sales of Real Estate," to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing
Transactions." This statement also amends FASB Statement No. 67, "Accounting for
Costs and Initial Rental Operations of Real Estate Projects," to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
statement will have no impact on the financial statements of the Company.
In December 2004, the Financial Accounting Standards Board issued a revision to
Statement of Financial Accounting Standards No. 123R, "Accounting for Stock
Based Compensation" (hereinafter "SFAS No. 123R"). This statement supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. This statement establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value
of the entity's equity instruments or that may be settled by the issuance of
those equity instruments. This statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. This statement does not change the accounting guidance for share
based payment transactions with parties other than employees provided in
Statement of Financial Accounting Standards No. 123. The Company has previously
adopted SFAS No. 123 and the fair value of accounting for stock options and
other equity instruments. The Company has determined that there was no impact to
its financial statements from the adoption of this new statement.
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151, "Inventory Costs-- an amendment of ARB
No. 43, Chapter 4". This statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges. . . ." This statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Management
does not believe the adoption of this statement will have any immediate material
impact on the Company.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" (hereinafter
"SFAS No. 150"). SFAS No. 150 establishes standards for classifying and
measuring certain financial instruments with characteristics of both liabilities
and equity and requires that those instruments be classified as liabilities in
statements of financial position. Previously, many of those instruments were
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
has determined that there was no impact from the adoption of this statement
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (hereinafter "FIN 46"). FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. The provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The Company does not have any entities that require disclosure or new
consolidation as a result of adopting the provisions of FIN 46.
Accounts Receivable and Bad Debts
The Company estimates bad debts utilizing the allowance method, based upon past
experience and current market conditions. The Company recorded an allowance to
cover accounts receivable balances over 60 days of $26,346 and $16,321 for
December 31, 2005 and December 31, 2004 respectively.
F-27
Advertising Expenses
Advertising expenses consist primarily of costs incurred in the design,
development, and printing of Company literature and marketing materials. The
Company expenses all advertising expenditures as incurred. The Company's
advertising expenses were $39,208 and $118,937 for the year ended December 31,
2005 and December 31, 2004 respectively.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments and short-term debt instruments with original maturities of
three months or less to be cash equivalents.
Restricted Cash
Restricted cash includes deposits held in a reserve account in the amount of $0
and $100,248 at December 31, 2005 and December 31, 2004 respectively. Such
deposits are required by the bank as protection against unfunded charge backs
and returns of credit card transactions. Effective June 9, 2005, the bank deemed
that this deposit is no longer necessary and released the funds to the Company.
Compensated Absences
Employees of the Company are entitled to paid vacation, and sick days, depending
on job classification, length of service, and other factors. The Company accrued
vacation pay in the amounts of $61,686 and $60,186 at December 31, 2005 and
December 31, 2004 respectively.
Cost of Sales
Cost of sales consists of the purchase price of products sold, inbound and
outbound shipping charges, packaging supplies and costs associated with service
revenues and marketplace business.
Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (hereinafter "SFAS No. 133"), as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
These statements establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
At December 31, 2005 and December 31, 2004 the Company has not engaged in any
transactions that would be considered derivative instruments or hedging
activities.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128,
which provides for calculation of "basic" and "diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing net
income (loss) available to common shareholders by the weighted average common
shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity
similar to fully diluted earnings per share. Basic and diluted loss per share
were the same at the reporting dates, as inclusion of the common stock
equivalents would be anti-dilutive.
F-28
Estimates
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
Fair Value of Financial Instruments
The Company's financial instruments as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments," include cash, trade accounts receivable, and accounts payable and
accrued expenses. All instruments are accounted for on a historical cost basis,
which, due to the short maturity of these financial instruments, approximates
fair value at December 31, 2005 and December 31, 2004.
Foreign Currency Translation and Other Comprehensive Income
The Company has adopted Financial Accounting Standard No. 52. Monetary assets
and liabilities denominated in foreign currencies are translated into United
States dollars at rates of exchange in effect at the balance sheet date. Gains
or losses are included in income for the year. Non-monetary assets, liabilities
and items recorded in income arising from transactions denominated in foreign
currencies are translated at rates of exchange in effect at the date of the
transaction.
As the Company's functional currency is the U.S. dollar, and all translation
gains and losses are transactional, the Company has no assets with values
recorded in Canadian dollars or Hong Kong dollars and there is no recognition of
other comprehensive income in the financial statements.
Foreign Currency Valuation and Risk Exposure
While the Company's functional currency is the U.S. dollar and the majority of
its operations are in the United States, the Company maintains its main office
in Burnaby, British Columbia. The Company also maintains an office in Kowloon,
Hong Kong. The assets and liabilities relating to both the Canadian and Hong
Kong operations are exposed to exchange rate fluctuations. Assets and
liabilities of the Company's foreign operations are translated into U.S. dollars
at the year-end exchange rates, and revenue and expenses are translated at the
average exchange rate during the period. Realized gains and losses from foreign
currency transactions are reflected in the results of operations.
Impaired Asset Policy
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for Impairment of Long-lived
Assets." In complying with this standard, the Company reviews its long-lived
assets quarterly to determine if any events or changes in circumstances have
transpired which indicate that the carrying value of its assets may not be
recoverable. The Company determines impairment by comparing the undiscounted
future cash flows estimated to be generated by its assets to their respective
carrying amounts.
The Company does not believe any adjustments are needed to the carrying value of
its assets at December 31, 2005 or December 31, 2004.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(hereinafter "SFAS No. 109"). This statement requires the recognition of
deferred tax liabilities and assets for the future consequences of events that
have been recognized in the Company's consolidated financial statement or tax
returns. Measurement of the deferred items is based on enacted tax laws. In the
event the future consequences of differences between financial reporting bases
and tax bases of the Company's assets and liabilities results in a deferred tax
asset, SFAS No. 109 requires an evaluation of the probability of being able to
realize the future benefits indicated by such an asset. A valuation allowance
related to a deferred tax asset is recorded when it is more likely than not that
some portion or all of the deferred tax asset will not be realized. (See Note
10.)
F-29
Inventories
The Company records inventories at the lower of cost or market on a first-in,
first-out basis.
Long-lived Assets
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This standard
establishes a single accounting model for long-lived assets to be disposed of by
sale, including discontinued operations, and requires that these long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or discontinued operations.
Accordingly, the Company reviews the carrying amount of long-lived assets for
impairment where events or changes in circumstances indicate that the carrying
amount may not be recoverable. The determination of any impairment would include
a comparison of estimated future cash flows anticipated to be generated during
the remaining life of the assets to the net carrying value of the assets. For
the years ended December 31, 2005 and, December 31, 2004, no impairments have
been identified
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets, which range from three to seven years. (See Note 4.)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant transactions and balances among
the companies included in the consolidated financial statements have been
eliminated.
Revenue Recognition
The Company is in the business of selling nutritional products in two
categories: dietary supplements and personal care products. Sales of personal
care products represent less than 5% of the overall revenue and therefore are
not classified separately in the financial statements. The Company recognized
revenue from product sales when the products are shipped and title passes to
customer. Administrative fees charged to the Independent Business Associates are
included in the gross sales and amounted $128,967 and $190,340 for the year
ended December 31, 2005 and December 31, 2004 respectively.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
(hereafter "SFAS No. 131") which supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," replacing the "industry segment"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS No. 131 also requires disclosures about products and services, geographic
areas and major customers. The adoption of SFAS No. 131 did not affect the
Company's results of operations or financial position. (See Note 14.)
Stock Options and Warrants Granted to Employees and Non-Employees
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), defines a fair value-based method of accounting
for stock options and other equity instruments. The Company has adopted this
method, which measures compensation costs based on the estimated fair value of
the award and recognizes that cost over the service period.
Going Concern
As shown in the accompanying financial statements, the Company had negative
working capital of approximately $1,965,000 and an accumulated deficit incurred
through December 31, 2005. The Company also has limited cash resources and a
history of recurring losses. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue in existence.
F-30
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 - ACCOUNTS RECEIVABLE AND CREDIT RISK
Accounts receivable at December 31, 2005 and December 31, 2004 consist primarily
of amounts due from direct retail clients of EYI.
NOTE 4 - PROPERTY AND EQUIPMENT
Capital assets are recorded at cost. Depreciation is calculated using the
straight line method over three to seven years. The following is a summary of
property, equipment and accumulated depreciation at December 31, 2005 and
December 31, 2004.
December 31, 2005 December 31, 2004
--------------------------- ---------------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------------ ------------ ------------ ------------
Warehouse equipment $ 0 $ 0 $ 223,927 $ 207,525
Furniture and fixtures 1,569 371 18,698 18,083
Computer Equipment & Software 105,447 83,068 115,392 83,995
Office equipment 14,859 901 3,510 3,410
Leasehold improvements 13,544 1,409 32,523 20,696
------------ ------------ ------------ ------------
Total 135,420 $ 85,749 394,050 $ 333,714
============ ============
Less: accumulated depreciation 85,749 333,714
------------ ------------
Total property, plant and equipment, net $ 49,671 $ 60,336
============ ============
Depreciation expense for the periods ended December 31, 2005 and December 31,
2004 was $52,645, and $56,154 respectively.
NOTE 5 - CONVERTIBLE LOANS PAYABLE
On June 22, 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 was 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 was allocated as discount on
debt. The convertible securities were guaranteed by the assets of the Company.
Under the agreement, the Company was 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. On
August 3, 2005, the Company retired the debenture plus a 20% premium of $50,000
by using the cash proceeds of a promissory note between the Company and Cornell
Capital signed on August 2, 2005.
F-31
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 the debenture B to an individual. Under the debenture agreement, the
Company's failure to issue unrestricted, freely tradable common stock to Cornell
or Taib Bank or the individual upon conversion after the registration statement
filed pursuant to this transaction has been declared effective would be
considered an event of default, thereby entitling Cornell to accelerate full
repayment of the convertible securities then outstanding. Under the agreement,
the Company was required to maintain available common stock duly authorized for
issuance in satisfaction of the convertible. One September 24, 2004 the Company
received the $250,000 loan less related expenses of approximately $55,000. The
convertible securities were guaranteed by the assets of the Company. Under the
agreement, the Company was required to keep available common stock duly
authorized for issuance in satisfaction of the convertible. The conversion
amount was 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 On
August 15, 2005, the Company retired $75,000 of the Taib Bank, E.C. debenture by
converting 2,027,027 common shares. On August 16, 2005, the Company retired
$170,000 of the Taib Bank, E.C. debenture plus $10,830 in interest by converting
4,487,096 common shares. On September 12, 2005, the Company retired $5,000 of
the remaining debenture plus $14,245 in interest by converting 375,146 common
shares valued at $0.0513.
The convertible debentures contained a beneficial conversion feature computed at
its intrinsic value that was the difference between the conversion price and the
fair value on the debenture issuance date of the common stock into which the
debt was convertible, multiplied by the number of shares into which the debt was
convertible at the commitment date. Since the beneficial conversion feature was
to be settled by issuing equity, the amount attributed to the beneficial
conversion feature, or $250,000, was recorded as an interest expense and a
component of stockholders' equity on the balance sheet date.
Standby Equity Distribution Agreement
In June, 2004, the Company entered into a standby equity distribution agreement
with Cornell Capital Partners, LP ("Cornell"). Pursuant to this agreement,
Cornell agreed to 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.
During the year ended December 31, 2005, the Company issued 40,874,047 common
shares to Cornell Capital in exchange for $1,700,000. These transactions
resulted in a beneficial conversion feature computed at its intrinsic value that
was the difference between the conversion price and the fair value on the
issuance date of the common stock. The amount attributed to the beneficial
conversion feature, or $422,096, was recorded as a financing expense and a
component of stockholders' equity on the balance sheet.
NOTE 6 - 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.
The following is a summary of the intangible assets at December 31, 2005 and
December 31, 2004:
Accumulated
Cost Amortization Net
------------ ------------ ------------
Balance, December 31, 2004 $ 21,601 $ (5,040) $ 16,561
Activity in last twelve months 674 (2,193) (1,519)
------------ ------------ ------------
Balance, December 31, 2005 $ 22,275 $ (7,233) $ 15,042
============ ============ ============
F-32
NOTE 7 - BANK INDEBTEDNESS
Bank indebtedness consists of checks written in excess of funds on deposit.
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 December 31, 2005 and December 31, the Company has
not issued any preferred stock.
Common Stock
The Company is authorized to issue 1,000,000,000 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. On August 10, 2005
the promissory note was re-assigned to Winslow Drive in exchange for the
3,000,000 shares (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.
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.)
On July 28, 2005, the Company issued 250,000 common shares to AGORA Investor
Relations Corp pursuant the terms of it's agreement with the Company dated July
28, 2005.
On August 15, 2005, the Company issued 2,027,027 common shares to TAIB Bank to
retire $75,000 of the $300,000 debenture.
On August 16, 2005, the Company issued 4,487,096 common shares to TAIB Bank to
retire $170,000 of the $300,000 debenture plus interest of $10,830.
On September 1, 2005, the Company issued 500,000 shares of restricted stock as
an initial signing bonus to M. Ali Lakhani Personal Law Corporation pursuant to
the terms of his contract with the Company dated September 1, 2005.
On September 12, 2005, the Company issued 375,146 common shares to TAIB Bank to
retire a $5,000 debenture plus interest of $14,245.
On September 26, 2005 an employee of the Company exercised 100,000 stock options
at $0.08 per share for an the aggregate exercise price of $8,000.
During the quarter ended December 31, 2005, the Company issued 22,789,581 common
shares to Cornell Capital to retire the Promissory Note dated August 1, 2005.
F-33
During the quarter ended December 31, 2005, the Company issued 19,268,733 common
shares to Cornell Capital in exchange for $700,000 pursuant to the terms of the
Standby Equity Distribution Agreement.
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 December 31, 2005: estimated risk-free interest rate of 4%; no
dividends to be paid; estimated volatility of 144%, 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 receive
warrants to purchase three additional shares of common stock for each share
purchased, exercisable at $0.02 per share for a period of two years.
Stock Options
During the period ending December 31, 2004, the Company's board of directors
approved the Stock Compensation Program to allow up to 25,000,000 shares of
stock to be issued under the program. This plan enables the Company to grant
stock options to directors, officers, employees and eligible consultants of the
Company. There was no Company stock option plan in effect prior to 2004.
During the period ended December 31, 2005, the Company granted stock options to
purchase a total of 7,390,000 shares of common stock to its employees,
directors, and consultants. The options were granted from $0.02 to $0.10 per
share. The Company recognized an expense to services and consulting of $564,140
during the period ending December 31, 2005 for all vested options.
Following is a summary of the status of the stock options during the twelve
months:
Weighted
Average
Number Exercise
of Shares Price
------------ ------------
Outstanding at December 31, 2004 19,747,390 $ 0.14
Granted 7,390,000 0.13
Exercised (3,350,000) 0.12
Forfeited (7,535,000) 0.08
------------ ------------
Options outstanding at December 31, 2005 16,252,390 $ 0.14
============ ============
Options exercisable at December 31, 2005 15,617,390 $ 0.14
============ ============
Weighted average fair value of options granted $ 0.13
============
Summarized information about stock options outstanding and exercisable at
December 31, 2005 is as follows:
F-34
Options Outstanding
-------------------------------------------------------------
Exercise Weighted Ave. Weighted Ave.
Price Number Remaining Exercise
Range of Shares Life Price
------------- ------------- ------------- -------------
$0.02 - $0.26 16,252,390 2.23 $0.14
Options Exercisable
-------------------------------------------------------------
Exercise Weighted Ave. Weighted Ave.
Price Number Remaining Exercise
Range of Shares Life Price
------------- ------------- ------------- -------------
$0.03 - $0.26 15,617,390 1.00 $0.14
Summarized information about unvested granted stock options outstanding at
December 31, 2005 is as follows:
Unvested Granted Options Outstanding
-------------------------------------------------------------
Exercise Weighted Ave. Weighted Ave.
Price Number Remaining Exercise
Range of Shares Life Price
------------- ------------- ------------- -------------
$0.02 - $0.20 515,000 1.41 $0.10
Weighted
Number of Average
Warrants Remaining Life Average Price
------------- ------------- -------------
Outstanding and exercisable 11,516,621 3.50 $0.21
NOTE 10 - INCOME TAXES
The significant components of the deferred tax asset at December 31, 2005 and
December 31, 2004 were as follows:
December 31, December 31,
2005 2004
------------ ------------
Net operating loss carry forward $ 11,628,000 $ 7,082,200
============ ============
Deferred tax asset: $ 3,954,000 $ 2,408,000
Less valuation allowance for tax asset -3,954,000 -2,408,000
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
At December 31, 2005 and December 31, 2004, the Company has net operating loss
carry forwards of approximately $11,628,000 and $7,082,200 respectively, which
expire in the years 2023 through 2025. The change in the allowance account from
December 31, 2004 to December 31, 2005 was $1,546,000.
The Company's subsidiaries in Canada are required to file income tax returns in
British Columbia, Canada. The losses from operations are allocated to both
United States and Canadian operations.
Utilization of the net operating losses is contingent upon the company's filing
of federal income tax returns, currently in arrears. See Note 6 regarding
Company's liability for state income tax reporting.
F-35
NOTE 11 - 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 87% of the Company's sales volume results from
products supplied under this licensing agreement.
During the quarter ended March 31, 2004, the Company negotiated the lowering of
the purchasing threshold, and pursuant to the agreement, the Company is required
to purchase the following amounts of product during the term of the agreement:
From June 1, 2004 to May 31, 2005 $3,964,000
For each year thereafter, during the term of this agreement, the Company is
obligated to purchase a minimum amount of $5,549,000 of product.
In the event that the Company is unable to meet the minimum purchase
requirements of the licensing agreement or the terms requiring it to pay 15% of
the difference between the minimum purchase amount referred to above and actual
purchases for that year in which there is a shortfall, then the licensor has
various remedies available to it including renegotiating the agreement, removing
exclusivity rights, or terminating the agreement.
As of the date of these financial statements, the purchase requirements have not
been made. The period for which the License could request payment per the
penalty clause has expired for the year and therefore we have not made any
accrual to the financial statements. As well we continue to purchase Nutri Diem
products.
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
----------------------- --------------
2006 $218,469
2007 163,285
2009 141,841
2009 147,013
2010 and thereafter 309,544
Management Agreement
EYI Corp. has agreed to perform various services and administrative assistance
to the Company on a month to month basis commencing April 1, 2004. The services
and duties to be provided and performed by EYI Corp. for EYII shall be
determined and agreed upon by the parties, from time to time, as required,
provided however, it is understood and agreed that such services will primarily
consist of assisting EYII in the sales and marketing business.
The remuneration to be paid by EYII to EYI Corp. for the aforementioned services
shall be the cost of actual expenses plus a fee of five (5%) percent for
services provided.
Regulatory Risks and Claims
The Company's products are subject to regulation by a number of federal and
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.
F-36
Promissory Note
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 payable in thirteen weekly installments beginning September 23,
2005 and ending on December 16, 2005. Interest on this note is twelve percent
(12%) per annum. The Company agreed to repay this loan by issuing common stock
pursuant to the terms of the Standby Equity Distribution Agreement (Note 5).
Secured Promissory Note
On February 24, 2005 the Company 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, the Company
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.) On August 3, 2005, this
promissory note was fully retired.
Standby Equity Distribution Agreement
On June 22, 2004, the Company entered into a two-year standby equity
distribution agreement with Cornell Capital Partners LP ("Cornell"). Pursuant to
this agreement, Cornell will purchase up to 10,000,000 shares of the Company's
common stock through a placement agent. The Company issued 1,300,000 shares of
its common stock to Cornell and the placement agent upon the inception of this
agreement. The $390,000 value of these shares was based on the fair market value
of the shares on the date of the contract and is recognized as a period expense
due to the fact that the 1,300,000 shares have been deemed to be fully earned as
of the date of the agreement. (See Note 8.)
On May 13, 2005 the Company entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, LP ("Cornell") pursuant to which we entered into
the following agreements: a Registration Rights Agreement, an Escrow Agreement,
and a Placement Agent Agreement. Pursuant to the terms of the new Standby Equity
Distribution Agreement, we may, at our discretion, periodically issue and sell
shares of our common stock for a total purchase price of $10 million. If we
request advances under the Standby Equity Distribution Agreement, Cornell will
purchase shares of our common stock for 98% of the lowest volume weighted
average price on the Over-the-Counter Bulletin Board or other principal market
on which our common stock is traded for the 5 days immediately following the
advance notice date. Cornell will retain 5% of each advance under the new
Standby Equity Distribution Agreement. We may not request advances in excess of
a total of $10 million. Pursuant to the terms of our Registration Rights
Agreement and the Standby Equity Agreement with Cornell, we agreed to register
and qualify, among other things, the additional shares due to Cornell under the
Standby Equity Agreement under a registration statement filed with the SEC. We
signed a Termination Agreement on May 13, 2005, for the purpose of terminating
our Standby Equity Distribution Agreement, Registration Rights Agreement and
Escrow Agreement previously entered into with Cornell on June 22, 2004.On 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.
Reseller Agreement
On May 11, 2005 the Company entered into a reseller agreement with Metals &
Arsenic Removal Technology, Inc ("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.
F-37
Service 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
Company ceased warehousing and distributing our products through Halo
Distribution LLC ("Halo"), our wholly owned subsidiary.
On September 1, 2005, EYI entered into an agreement for legal services with M.
Ali Lakhani Personal Corporation (the "Contractor") to provide EYI and its
subsidiaries with certain legal services in exchange for a monthly fee of US
$8,000 and a one time issuance of 500,000 restricted share of our common stock
to the contractor. The contract is on a month-to-month basis.
Investor Relations Agreement
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. This agreement was amended on October 5, 2005 at
which time the warrant provision was replaced with the issuance of 250,000
restricted shares of our common stock. The issuance of these shares are
reflected in the accompanying financial statements.
Escrow Fund
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.
Other Matters
The Company's predecessor organization, Essentially Yours Industries Corp.
("EYIC"), a British Columbia corporation, has outstanding claims from the
Internal Revenue Service for penalties and interest of approximately $2,000,000.
Furthermore, one or more states may have claims against EYIC for unpaid state
income taxes. Management believes that these claims are limited solely to EYIC
and that any prospective unpaid tax claims against the Company are remote and
unable to be estimated.
NOTE 12 - DISCONTINUED OPERATIONS
During the period ended December 31, 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
$380,368 for the period ended December 31, 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 $340,305 for the period ended December 31, 2004.
The assets and liabilities disposed of from discontinued operations at December
31, 2005 were as follows:
Total Assets $ --
Accounts payable $ 79,049
Accrued liabilities 275,368
Accounts payable - related party 105,000
------------
Liabilities in excess of assets $ 380,368
============
F-38
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 13 - RELATED PARTY NOTE PAYABLE
The Company issued two promissory notes for a total of $90,000 in December 2003.
The notes are unsecured, non-interest bearing and are payable upon demand.
NOTE 14 - CONCENTRATIONS
Bank Accounts
The Company maintains its cash accounts in two commercial banks. During the
year, the Company may maintain balances in excess of the federally insured
amounts in the accounts that are maintained in the United States. The Company
also maintains funds in commercial banks in Vancouver, British Columbia, in
which funds in U.S. dollars are not insured. At December 31, 2005, December 31,
2004 a total of $248 and $140 respectively, was not insured.
Economic Dependence
During the year, the Company purchased approximately 90% of its products for
resale from one company, Nutri-Diem Inc., which is the sole supplier of the
Company's flagship product Calorad. Pursuant to a purchase agreement, the
Company is subject to minimum purchases per annum. (See Note 11.)
NOTE 15 - STATE OR FEDERAL TAX LIABILITY
For the years ended December 31, 2005 and 2004, the Company estimated it
California corporate tax liability to be $23,813 and $22,897, respectively. The
Company has not filed a return with the State of California for several years
and because of that the Company has been suspended from operating as a
corporation in California. In order to revive its authorized corporation status
in California, the Company must file all delinquent tax returns and pay all
related California corporate income taxes, penalties and interest.
In the year ended December 31, 2005, the Company's state tax liability increased
by $708.
NOTE 16 - SUBSEQUENT EVENTS
Between January 17, 2006 and March 23, 2006, the Company issued 42,941,686
shares to Cornell Capital in exchange for $1,084,564.51.
F-39
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
EYI Industries' bylaws, as amended provide that we have the power to
indemnify any officer or director against damages if such person acted in good
faith and in a manner the person reasonably believed to be in the best interests
of our Company. No indemnification may be made (i) if a person is adjudged
liable unless a Court determines that such person is entitled to such
indemnification, (ii) with respect to amounts paid in settlement without court
approval or (iii) expenses incurred in defending any action without court
approval.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. All expenses will be paid by EYI Industries.
Securities and Exchange Commission Registration Fee $ 2,375
Printing and Engraving Expenses $ 5,000
Accounting Fees and Expenses $ 20,000
Legal Fees and Expenses $ 50,000
Miscellaneous $ 7,625
----------
TOTAL $ 85,000
==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On April 24, 2006 we entered a Securities Purchase Agreement with Cornell
Capital Partners, Taib Bank, B.S.C. and Certain Wealth, Ltd. pursuant to which
we entered into the following agreements: an Investor Registration Rights
Agreement, Irrevocable Transfer Agent Instructions and a Security Agreement.
Pursuant to the terms of the Share Purchase Agreement, we may sell convertible
debentures to these entities in the principal amount of $4,500,000 plus accrued
interest which are convertible into shares of our common stock. Of this amount
$1,500,000 has been, $1,500,000 must be paid two (2) business days prior to the
date a registration statement is filed with the Securities and Exchange
Commission and $1,500,000 shall be paid two (2) business days prior to the date
that such registration statement is declared effective by the Securities and
Exchange Commission. We received proceeds of $1,305,000 (net of fees associated
with the issuance of the convertible debentures) on April 27, 2006 in connection
with the issuance of $1,500,000 of convertible debentures in the following
principal amounts: $750,000 to Cornell Capital Partners, $416,667 to Taib Bank,
B.S.C., and $333,333 to Certain Wealth, Ltd. pursuant to the terms of the
Securities Purchase Agreement. Each of the convertible debentures was issued
pursuant to section 4(2) and Rule 506 of Regulation D of the Securities Act.
Pursuant to the terms of the Securities Purchase Agreement and the
issuance of our convertible debentures, on April 24, 2006 we issued to Cornell
Capital Partners seventeen (17) warrants to purchase up to an aggregate
124,062,678 shares of our common stock at the discretion of Cornell Capital
Partners each for good and valuable consideration. Pursuant to the terms of the
warrants, Cornell Capital Partners is entitled to purchase from us: (1)
10,416,650 shares of our common stock at $0.02 per share, (2) 13,888,866 shares
of our common stock at $0.03 per share, (3) 10,416,650 shares of our common
stock at $0.04 per share, (4) 8,333,320 shares of our common stock at $0.05 per
share, (5) 6,944,433 shares of our common stock at $0.06 per share, (6)
5,952,371 shares of our common stock at $0.07 per share, (7) 11,250,000 shares
of our common stock at $0.08 per share, (8) 10,000,000 shares of our common
stock at $0.09 per share, (9) 19,000,000 shares of our common stock at $0.10 per
share, (10) 8,181,818 shares of our common stock at $0.11 per share, (11)
7,500,000 shares of our common stock at $0.12 per share, (12) 3,333,333 shares
of our common stock at $0.15 per share, (13) 2,500,000 shares of our common
stock at $0.20 per share, (14) 2,000,000 shares of our common stock at $0.25 per
share, (15) 1,666,666 shares of our common stock at $0.30 per share, (16)
1,428,571 shares of our common stock at $0.35 per share and (17) 1,250,000
shares of our common stock at $0.40 per share upon surrender of the warrants (or
as subsequently adjusted pursuant to the terms of each warrant) . Each warrant
has "piggy back" registration rights and shall expire five (5) years from the
date of issuance, on or about April 24, 2011.
II-1
On October 10, 2005, we issued 500,000 shares of restricted common stock
to our legal consultant pursuant to a contract for legal services. All
securities were endorsed with a restrictive legend pursuant to Regulation S of
the Securities Act of 1933 confirming that the securities cannot be resold
without registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act.
On October 10, 2005, we also issued 250,000 shares of restricted common
stock to Agora pursuant to our investor relations agreement with Agora. All
securities were endorsed with a restrictive legend pursuant to Regulation S of
the Securities Act of 1933 confirming that the securities cannot be resold
without registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act.
On June 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.
On January 1, 2004 the Company entered into an agreement with a consultant
to provide services in exchange for 250,000 common shares at $0.28.During the
quarter ended March 31, 2004 we issued 100,000 shares of our common stock at a
price of $0.26 per share to a consultant in respect of fees owed for certain
consulting services provided to us by the consultant. All securities issued were
endorsed with a restrictive legend confirming that the securities cannot be
resold without registration under the Securities Act or an applicable exemption
from the registration requirements of the Securities Act. The issuance was
completed pursuant to Section 4(2) of the Securities Act on the basis that the
consultant was a sophisticated investor.
During the quarter ended June 30, 2004 we issued 50,000 shares of our
common stock at a price of $0.22 per share to a consultant in respect of fees
owed for certain consulting services provided to us by the consultant. All
securities issued were endorsed with a restrictive legend confirming that the
securities cannot be resold without registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
The issuance was completed pursuant to Section 4(2) of the Securities Act on the
basis that the consultant was a sophisticated investor.
During the quarter ended June 30, 2004, we issued 5,476,190 units at a
price of $0.21 per unit to Eyewonder in respect of certain amounts owed to
Eyewonder under our Letter Agreement with Eyewonder. Each unit was comprised of
one share of our common stock and one share purchase warrant entitling Eyewonder
to purchase one share of our common stock at an exercise price of $0.30 per
share for a period expiring May 4, 2009. The issuance was completed pursuant to
Section 4(2) of the Securities Act on the basis that Eyewonder was a
sophisticated investor.
As of June 7, 2004, we completed the sale of 136,548 units at a price of
$0.21 per unit for proceeds of $28,675 to seven investors. Each unit was
comprised of one share of our common stock and one share purchase warrant. Each
share purchase warrant entitles the holder to purchase one share of our common
stock at a price of $0.30 per share for the three year period following closing.
A total of 136,548 shares and 136,548 share purchase warrants were issued. The
purchasers consisted of seven "accredited investors", as defined by Rule 501 of
Regulation D of the Securities Act. The sales were completed pursuant to Rule
506 of Regulation D of the Securities Act. All securities issued were endorsed
with a restrictive legend confirming that the securities cannot be resold
without registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act.
II-2
On June 22, 2004, we entered into a secured convertible debenture
transaction with Cornell Capital Partners in the principal amount of $500,000.
The sale of these Secured Convertible Debentures is complete. EYI Industries
received $250,000 from the issuance of the first Secured Convertible Debenture
on June 22, 2004, and we received $250,000 five business days following the
filing of the accompanying registration statement. The Secured Convertible
Debentures are convertible at the holder's option any time up to maturity at a
conversion price equal to the lower of (i) 120% of the closing bid price of the
common stock as of the date of issuance, or (ii) 80% of the average of the
lowest daily volume weighted average price of our common stock for the 5 trading
days immediately preceding the conversion date. At maturity, the remaining
unpaid principal and accrued interest under the debentures shall be, at our
option, either paid or converted into shares of common stock at a conversion
price equal to the lower of (i) 120% of the closing bid price of the common
stock as of the date of issuance or (ii) 80% of the lowest closing bid price of
the common stock for the lowest trading days of the 5 trading days immediately
preceding the conversion date. The Secured Convertible Debenture is secured by
all of EYI Industries' assets. The Secured Convertible Debentures accrue
interest at a rate of 5% per year and have a term of 3 years. In the event the
Secured Convertible Debentures are redeemed, then EYI Industries will issue to
the holders a warrant to purchase 50,000 shares for every $100,000 redeemed at
an exercise price of 120% of the closing bid price as of June 22, 2004. The
holders purchased the Secured Convertible Debentures from EYI Industries in a
private placement on June 22, 2004. On September 24, 2004, we issued the second
secured convertible debenture in the principal amount of $250,000 to Cornell
Capital Partners on the same terms and conditions as the secured convertible
debenture described above. EYI Industries is registering in this offering
8,352,823 shares of common stock underlying the Secured Convertible Debentures.
On April 4, 2005, Cornell Capital Partners assigned all of its rights and
interests in the secured convertible debentures to Taib Bank E.C. All investment
decisions of Taib Bank E.C. are made by Larry Chaleff, its Managing Director. In
addition, on April 4, 2005, EYI Industries and Taib Bank E.C. entered into a
Redemption Agreement, whereby EYI Industries agreed to first use any proceeds
received by EYI Industries under the Equity Distribution Agreement with Cornell
Capital Partners to redeem any remaining principal and accrued interest under
the assigned Secured Convertible Debentures.
In February 2005, the Company issued 800,000 shares of our common stock at
a deemed price of $0.05 per share to Janet Carpenter. These shares were given to
Ms. Carpenter in consideration of her providing the guarantee and pledge
required for our loan agreement with Cornell Capital.
Share of Common
Year Name of Holder Date Stock Sold Reason Shares Issued
---- -------------- ---- ---------- --------------------
2005 Janet Carpenter February 2005 800,000 Shares in lieu of guarantee and
pledge
Shares issued in connection with
AGORA Investor Relations Corp. July 2005 250,000 investor relations agreement
M. Ali Lakhani Personal Law Shares issued as signing bonus
Corporation September 2005 500,000 for agreement for legal services
2004 Private Placement at January 2004 857,143 Private Placement
$0.14 per unit: warrants raise capital
at $0.20
Rajesh Raniga Inc. January 2004 250,000 Consulting Fees
Private Placement at March 2004 609,312 Private Placement
$0.21 per unit; warrants raise capital
at $0.30
Equis Capital Corp. March 2004 100,000 Consulting Fees
Eyewonder Inc. May 2004 5,476,190 Service Fees
Michael Hatrak May 2004 50,000 Consulting Fees
Private Placement at June 2004 566,833 Private Placement to
$0.21 per unit; warrants raise capital
at $0.30
Cornell Capital Partners, LP June 2004 1,266,589 Commitment fee
pursuant to Standby
Equity Distribution Agreement
Newbridge Securities June 2004 33,411 Placement Agent fee
Corporation in connection with
Standby Equity Distribution
Agreement
2003* PNG Trading Co. Ltd. February 2003 250,000 Issued in lieu of funds
received
II-3
Share of Common
Year Name of Holder Date Stock Sold Reason Shares Issued
---- -------------- ---- ---------- --------------------
Hightech International March 2003 2,120,000 Settlement of Debt
Private Placement at September 2003 3,573,924 Private Placement to
$0.14 per unit; warrants raise capital
at $0.20
Michel Grise December 2003 357,143 Private Placement to
raise capital
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding EYI so as to make an informed investment decision. More specifically,
EYI had a reasonable basis to believe that each purchaser was an "accredited
investor" as defined in Regulation D of the 1933 Act and otherwise had the
requisite sophistication to make an investment in EYI's common stock.
-------------------
* Current management of EYI Industries has limited information with respect
to the issuances of unregistered securities prior to the Share Exchange
transaction consummated on December 31, 2003 between our company and
certain shareholders of Essentially Yours Industries, Inc.
ITEM 27. INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1 Articles of Incorporation.(1)
3.2 Certificate of Amendment to Articles of Incorporation dated December 29, 2003.(11)
3.3 Certificate of Amendment to Articles of Incorporation dated December 31, 2003.(11)
3.4 Bylaws.(1)
3.5 Amended Bylaws. (12)
3.6 Certificate of Amendment to Articles of Incorporation dated March 30, 2006(23)
5.1 Opinion re: legality (26)
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 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)
10.4 Stock Compensation Program(4)
10.5 Consulting Agreement dated December 27, 2003 between Rajesh Raniga Inc. and Safe ID Corporation.(6)
10.6 Consulting Agreement dated January 1, 2004 between EYI Industries, Inc. and O'Neill Enterprises Inc.(6)
10.7 Consulting Agreement dated January 1, 2004 between EYI Industries, Inc. and Flaming Gorge, Inc. (6)
10.8 Addendum to the Distribution and License Agreement between Essentially Yours Industries, Inc. and
Nutri-Diem Inc. dated April 30, 2004.(6)
II-4
Exhibit Number Description of Exhibit
-------------- ----------------------
10.9 Letter Agreement dated May 4, 2004 between Eye Wonder, Inc. and EYI Industries, Inc.(6)
10.10 Standby Equity Distribution Agreement, dated June 22, 2004 by and between EYI Industries, Inc. and
Cornell Capital Partners, LP(6)
10.11 Registration Rights Agreement, dated June 22, 2004 by and between EYI Industries, Inc. and Cornell
Capital Partners, LP(6)
10.12 Escrow Agreement, dated June 22, 2004 by and between EYI Industries, Inc. and Cornell Capital Partners,
LP(6)
10.13 Placement Agent Agreement, dated June 22, 2004 by and between EYI Industries, Inc. and Cornell Capital
Partners, LP(6)
10.14 Compensation Debenture, dated June 22, 2004(7)
10.15 Securities Purchase Agreement, dated June 22, 2004 by and between EYI Industries, Inc. and Cornell
Capital Partners, LP(6)
10.16 Investor Registration Rights Agreement, dated June 22, 2004 by and between EYI Industries, Inc. and
Cornell Capital Partners, LP(6)
10.17 Security Agreement, dated June 22, 2004 by and between EYI Industries, Inc. and Cornell Capital
Partners, LP(6)
10.18 Irrevocable Transfer Agent Instructions, dated June 22, 2004, by and among EYI Industries, Inc., Cornell
Capital Partners, LP and Corporate Stock Transfer(6)
10.19 Escrow Agreement, dated June 22, 2004 by and among EYI Industries, Inc., Cornell Capital Partners, L.P.
and Butler Gonzalez, LLP(6)
10.20 Form of Secured Convertible Debenture(6)
10.21 Form of Warrant(7)
10.22 Letter Agreement dated May 25, 2004 between EYI Industries, Inc. and Source Capital Group, Inc.(8)
10.23 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)
10.24 5% Secured Convertible Debenture dated September 24, 2004 between EYI Industries, Inc. and Cornell
Capital Partners, LP(8)
10.25 5% Secured Convertible Debenture dated September 27, 2004 between EYI Industries, Inc. and Kent Chou(8)
10.26 5% Secured Convertible Debenture dated September 27, 2004 between EYI Industries, Inc. Taib Bank, E.C.(8)
10.27 Assignment Agreement dated September 27, 2004 between Cornell Capital Partners, LP and Taib Bank, E.C.
(8)
10.28 Assignment Agreement dated September 27, 2004 between Cornell Capital Partners, LP and Kent Chou(8)
10.29 Joint Venture Agreement dated May 28, 2004 between EYI Industries, Inc., World Wide Buyer's Club Inc.
and Supra Group, Inc.(9)
10.30 Indenture of Lease Agreement dated January 3, 2005 between Golden Plaza Company Ltd., 681563 B.C. Ltd.,
and 642706 B.C. Ltd.(10)
10.31 Consulting Services Agreement dated March 5, 2004 between EYI Industries, Inc. and EQUIS Capital
Corp.(13)
10.32 Letter dated May 25, 2004 between Source Capital Group, Inc. and EYI Industries, Inc.(14)
10.33 Loan Agreement between Janet Carpenter and EYI Industries, Inc., dated February 10, 2005(15)
10.34 Promissory Note dated February 10, 2005 between Janet Carpenter and EYI Industries(15)
10.35 Bonus Share Agreement between Janet Carpenter and EYI Industries, Inc. dated February 14, 2005(15)
10.36 Pledge and Escrow Agreement dated February 24, 2005 between Janet Carpenter, Cornell Capital Partners,
LP and David Gonzalez.(15)
10.37 Guaranty Agreement dated February 24, 2005 between Janet Carpenter, Cornell Capital Partners, LP(15)
II-5
Exhibit Number Description of Exhibit
-------------- ----------------------
10.37 Secured Promissory Note dated February 24, 2005 between EYI Industries, Inc. and Cornell Capital
Partners, LP(15)
10.39 Agreement dated April 22, 2005 between Essentially Yours Industries Inc. and Source 1 Fulfillment(17)
10.40 Reseller Agreement dated May 11, 2005 between Essentially Yours Industries Inc. and Metals & Arsenic
Removal Technology, Inc.(16)
10.41 Termination Agreement dated May 13, 2005 between EYI Industries Inc. and Cornell Capital Partners, LP(17)
10.42 Standby Equity Distribution Agreement dated May 13, 2005 between EYI Industries Inc. and Cornell Capital
Partners, LP(17)
10.43 Registration Rights Agreement dated May 13, 2005 between EYI Industries Inc. and Cornell Capital
Partners, LP(17)
10.44 Escrow Agreement dated May 13, 2005 between EYI Industries Inc. and Cornell Capital Partners, LP(17)
10.45 Placement Agent Agreement dated May 13, 2005 between EYI Industries Inc. and Cornell Capital Partners,
LP(17)
10.46 Consulting Agreement dated June 1, 2005 between EYI Industries, Inc. and Eliza Fung(18)
10.47 Addendum to the Reseller Agreement dated June 1, 2005 between Essentially Yours Industries Inc. and
Metals & Arsenic Removal Technology, Inc.(18)
10.48 Non-Circumvention and Non-Disclosure Agreement dated July 14, 2005 between Essentially Yours Industries
Inc. and Metals & Arsenic Removal Technology, Inc.(18)
10.49 Promissory Note dated August 1, 2005 between EYI Industries Inc. and Cornell capital Partners, LP(18)
10.50 Investor Relations Agreement dated July 28, 2005 between EYI Industries, Inc. and Agora Investor
Relations Corp.(18)
10.51 China Agency Agreement entered into with Guanghzhou Zhongdian Enterprises (Group) Co. Ltd. and China
Electronics Import and Export South China Corporation. Dated September 15, 2005(19)
10.52 Logistics Management Agreement dated September 1, 2005 between Essentially Yours Industries (Hong Kong)
Limited and All In One Global Logistics Ltd.(20)
10.53 Contract for Legal Services dated September 1, 2005 between EYI Industries Inc. and M. Ali Lakhani Law
Corporation(21)
10.54 Amended Investor Relations Agreement dated October 5, 2005 between EYI Industries, Inc. and Agora
Investor Relations Corp.(22)
10.55 Settlement Agreement dated December 21, 2005 between EYI Industries, Inc., Halo Distribution, LLC and
Business Centers, LLC.(23)
10.56 Global Consulting Group Agreement dated January 19, 2006 entered into with Global Consulting Group Inc.
and EYI Industries Inc.(23)
10.57 Consulting Agreement dated January 27, 2006 entered into with Lou Prescott and Essentially Yours
Industries, Inc.(23)
10.58 Termination Agreement dated April 3, 2006 between EYI Industries Inc. and Cornell Capital Partners,
LP(25)
10.59 Letter of Intent dated April 6, 2006 between Essentially Yours Industries (International) Limited and
Rommel Panganiban and Raul Batista(25)
10.60 Securities Purchase Agreement, dated as of April 24, 2006, by and between EYI Industries, Inc. and the
Buyers listed therein(24)
10.61 Registration Rights Agreement, dated as of April 24, 2006, by and between EYI Industries, Inc. and the
Buyers listed therein(24)
10.62 $750,000 Secured Convertible Debenture No. CCP-1, dated as of April 24, 2006, issued to Cornell Capital
Partners, LP(24)
10.63 $333,333 Secured Convertible Debenture CW-1, dated as of April 24, 2006, issued to Cornell Capital
Partners, LP(24)
II-6
Exhibit Number Description of Exhibit
-------------- ----------------------
10.64 $416,667 Secured Convertible Debenture TAIB-1, dated as of April 24, 2006, issued to Cornell Capital
Partners, LP(24)
10.65 Security Agreement, dated as of April 24, 2006, issued to Cornell Capital Partners, LP(24)
10.66 Warrant No. CCP-001, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.67 Warrant No. CCP-002, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.68 Warrant No. CCP-003, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.69 Warrant No. CCP-004, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.70 Warrant No. CCP-005, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.71 Warrant No. CCP-006, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.72 Warrant No. CCP-007, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.73 Warrant, No. CCP-008, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.74 Warrant No. CCP-009, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.75 Warrant No. CCP-010, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.76 Warrant No. CCP-011, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.77 Warrant No. CCP-012, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.78 Warrant No. CCP-013, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.79 Warrant No. CCP-014, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.80 Warrant No. CCP-015, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.81 Warrant No. CCP-016, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.82 Warrant No. CCP-017, dated April 24, 2006, issued by the Company to Cornell Capital Partners, LP(24)
10.83 Irrevocable Transfer Agent Instructions, dated April 24, 2006, by and among the Company, the Buyers
listed therein and Corporate Stock Transfer, Inc.(24)
10.84 Consulting Agreement dated May 1, 2006 between Essentially Yours Industries (Hong Kong) Limited and Siu
Chung (Freeda) Chan(25)
14.1 Code of Ethics(5)
21.1 List of Subsidiaries(23)
23.1 Consent of Williams & Webster, P.S.(25)
(1) Filed as an exhibit to the registration statement on Form 10-SB/A of Safe
ID Corporation, filed with the SEC on September 21, 2000.
(2) Filed as an exhibit to the registration statement on Form SB-2 of
Essentially Yours Industries, Inc., filed with the SEC on November 12,
2002.
(3) Filed as an exhibit to our Current Report on Form 8-K, filed with the SEC
on January 8, 2004.
(4) Filed as an exhibit to our Registration Statement on Form S-8, filed with
the SEC on March 30, 2004.
II-7
(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 23, 2005.
(18) Filed as an exhibit to our Quarterly Report on Form 10-QSB for the period
ended June 30, 2005, filed with the SEC on August 19, 2005
(19) Filed as an exhibit to our Current Report on Form 8-K, filed with the SEC
on September 27, 2005
(20) Filed as an exhibit to our quarterly report on Form 10-QSB for the period
ended September 30, 2005, filed with the SEC on November 21, 2005
(21) Filed as an exhibit to our quarterly report on Form 10-QSB for the period
ended September 30, 2005, filed with the SEC on November 21, 2005
(22) Filed as an exhibit to our quarterly report on Form 10-QSB for the period
ended September 30, 2005, filed with the SEC on November 21, 2005
(23) Filed as an exhibit to our annual report on Form 10-KSB for the period
ended December 31, 2005, filed with the SEC on March 31, 2006
(24) Filed as an exhibit to our Current Report on Form 8-K, filed with the SEC
on April 28, 2006
(25) Filed as an exhibit to our Quarterly Report on Form 10-QSB for the period
ended March 31, 2006, filed with the SEC on May 16, 2006 (26) Provided
herewith.
(26) To be filed by amendment.
II-8
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a) (3) of the
Securities Act of 1933 (the "ACT");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(iii) Include any additional or changed material information on the plan
of distribution;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the end of the offering. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on this Form SB-2 and authorized this
registration statement to be signed on our behalf by the undersigned, in
Burnaby, British Columbia, Canada June 5, 2006.
EYI INDUSTRIES INC.
By: /s/ Jay Sargeant
----------------
Name: Jay Sargeant
Title: President, Chief Executive Officer,
Principal Executive Officer and
Director
By: /s/ Rajesh Raniga
-----------------
Name: Rajesh Raniga
Title: Chief Financial Officer and
Principal Accounting Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jay Sargeant his true and lawful attorney-in-fact
and agent, with full power of substitution and revocation, for him and in his
name, place and stead, in any and all capacities (until revoked in writing), to
sign any and all amendments (including post-effective amendments) to this
Registration Statement and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done as fully
for all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or is substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jay Sargeant President, Chief Executive Officer, June 5, 2006
----------------
Jay Sargeant Principal Executive Officer and Director
/s/ Dori O'Neill Executive Vice President, Chief Operations June 5, 2006
----------------
Dori O' Neill Officer, Treasurer, Secretary and Director
/s/ Rajesh Raniga Chief Financial Officer and June 5, 2006
-----------------
Rajesh Raniga Principal Accounting Officer
II-10