ITEM 1. BUSINESS
Background
We were incorporated under the laws of the state of Nevada on April 4, 2001. Our former subsidiary, Essential Innovations Corporation (“EIC”), was engaged in the manufacturing and distribution of the “EI Elemental Heat Energy System” family of geoexchange heat pump products and technology for global markets. On March 6, 2006, we acquired all of the issued and outstanding shares of Pacific Geoexchange Inc. (“PGE”) and its wholly owned subsidiary, Earth Source Energy Inc. (“ESE”), which was engaged in the design and installation of geoexchange systems in western Canada and acted as a geoexchange project consulting company.
In order to secure the above acquisition, we took on funding through a secured lender, Laurus Master Fund (and associated companies). The operations of the acquired entities became highly detrimental to the business of our company and we were forced into litigation against the former owners, as well as other ancillary lawsuits against the acquired businesses, PGE (the holding company), and most principally ESE, (the operating company). Ultimately, we could not service the debt held by Laurus, the secured lender. The note was amended a number of times, but we were not able to fulfill our obligations. As a condition to not exercising their security on the loan, Laurus instructed us to file for de-registration from our securities disclosure obligations, which we did in December 2008.
Following this period, a new lender was found that in turn negotiated an agreement with Laurus, to take over their debt and replace them as the secured lender. Immediately after this agreement was formalized, the new lender foreclosed on the assets held by our company and our former subsidiaries as settlement of a substantial portion of the outstanding debt. Since the date of foreclosure, March 27, 2009, we have worked diligently to find appropriate opportunities to establish business operations. In October 12, 2009, we also disposed of all of our subsidiaries and more recently we became the owners of various alternative energy and water treatment technologies which have become the focus of our operations.
We are a development stage company with no revenues, have net losses and have not yet commenced the sales, manufacturing or the production of any products.
Business Description
We have secured exclusive worldwide rights to certain unique technologies each with significant potential for environmental and economic benefit and impact.
On January 15, 2012, we entered into an exclusive technology agreement with Vortex Energy Research Inc. for the exclusive rights to certain technologies for use within the field of environmental and green solutions on a worldwide basis. Vortex Energy will retain ownership of the intellectual property.
Pursuant to the terms of the exclusive technology agreement with Vortex Energy, our company will provide funding to be released as follows:
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$100,000 cash on or before January 1, 2013, to be used for further prototyping and completion of proof of concept testing along with patent search, analysis and patent filing costs;
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$400,000 cash on or before June 1, 2013, but not earlier than April 30, 2013, in order to then complete their required R&D, and engage a full field-test program with no less than 3 separate sites in 3 different global geographic locations.
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Following this our company will work with the inventors to bring it to a state ready for manufacturing and full-scale commercialization. Subsequently, as at December 31st, 2013, our company will then retain Vortex Energy under a separate agreement as design and manufacturing consultants with a plan to complete a larger financing round solely for manufacturing, marketing, and distribution.
On December 15, 2012, we entered into a formal
addendum to the above referenced exclusive technology agreement with
Vortex Energy Research Inc., dated January 15, 2012. The formal addendum relates specifically to the terms of the release of funding as described above herein, and the fact that the language defining such fund release within the original agreement did not properly reflect the original intent of the parties. The addendum is included by Exhibit to this filing.
Pursuant to the terms of the formal addendum agreement with Vortex Energy, our company will now provide funding on a “best efforts” basis to be released if/when available, up to a total of no more than $500,000 with partial amounts of such funding being potentially first released no earlier than May 15, 2013, and continuing onwards to a period no later than October 31, 2014, in order to then complete their required research and development, and to facilitate engagement of a full field-test program with no less than three separate sites in three different global geographic locations for each of the two technologies.
Subsequently, our company will work with the inventors to bring it to a state ready for manufacturing and full-scale commercialization. Following this the target date, as at December 31, 2014, our company will retain Vortex Energy under a separate agreement as design and manufacturing consultants and would plan to complete a larger financing round solely for manufacturing, marketing, and distribution.
We will focus our activities on development and commercialization of these two primary technologies.
Technology A
The first technology is a new and improved method for the design of equipment used in the heating of a variety of fluids such as oil, water (to steam). Equipment constructed with our technology would also be able to provide continued evaporative techniques allowing for the preparation of fresh water from seawater (desalination). The invention relates generally to the heating effects of electrical resonance (sound) phenomena that are generated by a specific arrangement(s) of electrical heating elements in either direct or indirect contact with fluid mediums such as oil or water. The outcome of this process ultimately alters temperature, viscosity and surface tension and includes the potential for phase changes such as the production of steam and the evaporation of seawater for further collection and processing to fresh (potable) water. We believe that this technology is highly unique as it is not a conventional electric resistance heater and following extensive testing, data collection and analysis, the energy exchange appears to occur due to the resonance (or sonic) conditions imposed on the liquid. Our initial efforts will focus on the desalination capabilities of this technology.
Some of the largest global markets for the application of desalination technology, where the combination of rapidly growing populations, and significantly depleted ground water resources are prevalent are China, India and the Middle East region. China and India represent key target markets for our company initiatives given strong market relationships we already have existent in these countries and we believe that they are presently focused on finding near-term solutions for the large-scale seawater desalination market. Both countries have enormous populations in water stressed regions, and political backing for higher water tariffs, and absolutely requires new and effective means to supply their people with available potable water supply.
The desalination market is driven by growing demand for water and rising marginal costs of supply. Falling costs of desalination have dramatically increased the size of the potential market. Traditional desalination poses an environmental issue because it involves energy use and brine discharges. As a whole, the desalination industry is unconsolidated, with a large number of small and medium sized players serving different niches. The strongest players can expect strong market growth as well as increases in market share.
Given that our technology offers a new and unique means of desalination through separation of the mineral content during the evaporation/condensation process (similar to a distillation outcome), we believe that we are able to mitigating the matter of large brine discharge. Additionally, our technology itself is far more energy efficient that the current conventional offerings. We believe that this technology offers potential for significant market impact for desalination by offering an economic benefit while considering the environmental sensitivity of the overall desalination process.
This technology has been granted patent-pending status with the US Patent and Trademark Office.
Technology B
The second technology is a new and improved method for the combined mechanical heating and transport of fluids. This technology particularly relates to the field of heat generation and most specifically to the heating of fluid mediums by mechanical means rather than by electrical means as with conventional electrical heating coils, through utilization of boundary layer principals and the process of cavitation. The technology is a distinct departure and differentiation from current market technology in that a single device may serve as both the source of the heat generation and also as the fluid transport or pumping mechanism.
Cavitation heaters are devices that transfer mechanical energy into thermal energy in a working fluid. The energy conversion in a cavitation heater has well known advantages in industrial applications where the working fluid can be damaged by contact with heating elements with a significant temperature differential (for example some food processing and chemical processing applications). Due to this differential some constituents of the fluid may come out of solution on a heat transfer surface (as in mineralization in water heaters and boilers) or where on-demand heating is needed (as in water for residential or commercial uses). These are examples of potential global markets where this technology could serve in offering substantial savings through operating efficiencies and reduction in service and maintenance costs.
For definition, "cavitation" refers to the formation of bubbles in the fluid so that the impeller is working in a mixed phase (liquid with gas bubbles) environment. Conventional pumps are not typically designed for mixed phase flow such as this. Cavitation heaters on the other hand can be designed to induce this mixed phase laminar flow as part of the agitation of the fluid that results in the thermal conversion.
In commercial cavitation heaters, the mechanical energy driving the heater (the input energy - for example the motor driving the heater), is slightly less than the thermal energy which can then be found in fluid (as seen in the rise in temperature). This is because of the loss of energy in the conversion of mechanical to thermal energy due to inefficiencies of mechanical equipment.
Ultimately, equipment that may be commercialized around this technology offers a more efficient option for heating water than that of a standard boiler which will also require significantly less maintenance as they are self cleaning and will not experience mineral build-up which reduces the efficiency of standard boilers.
This technology has been granted patent-pending status with the US Patent and Trademark Office.
Our intentions are to develop these technologies to the point where they will be commercially viable for us to license to manufacturers who make equipment for the heating of water or desalination (Technology A), as well as industry which requires the transportation and heating of large amounts of liquids. If we develop our technologies in accordance with our current plans, and they are accepted by industry as commercially viable, we believe that we will be able to license them in a number of ways and collect revenue from the licensing stream. At this point however, the technologies are in their initial stages and we have recently made patent application to the US Patent and Trademark office. There can be no assurance that we will be able to develop our technologies to the point where they will be commercially viable to license.
We believe that each of these technologies can be scaled to suit a wide range of applications including residential, commercial, and even industrial. Each technology can potentially offer environmentally friendly, more-efficient operation than conventional technologies presently used in the marketplace. We plan to embark on a diligent and aggressive research and development effort to now build a data base of operating parameters and design considerations to optimize performance.
In this regards, we are currently focusing our efforts on:
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continued research and development of the technologies with field-testing and concurrent market entry strategies for our two proprietary technologies targeted towards active implementation of multiple pilot projects in the next 12 – 24 months;
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development of synergistic industry relationships and alliances with other technology companies or manufacturers of equipment which could be improved through the use of our technologies;
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providing of project design and consultative services to governments (primarily in Asia) and particularly large builders and developers that recognize environmental sensitivity and energy and water conservation as an important feature of land planning and infrastructure development; and
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execution of product licensing and distribution agreements for our proprietary technologies with such efforts initially directed towards key Asian markets of China, India, the Philippines, Vietnam, Thailand, as well as in the Middle East region, North, Central and parts of South America.
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Intellectual Property
We have filed patent documentation for the two technologies we have acquired with the United States Patent and Trademark Office.
Competitive Business Conditions
There are a number of companies already active in the areas of environmental and renewable energy technology development and deployment that are substantially larger and better funded than we are and that have significantly longer histories in the respective marketplace. Our principal competitors for the commercialization of our technology set almost all of which have greater financial, technical, managerial, and marketing resources than we have.
We believe competition in marketing innovative environmental and renewable energy technology is based principally on the initial price of units as compared with traditional conventional systems, the period estimated to be required to recoup any higher installation costs from energy savings during operation, the reliability of the system, public familiarity with and acceptance of new technologies and systems, and the reputation of the manufacturer. To help us compete with other manufacturers with greater resources and established distribution channels, we will work to create synergistic relationships, strategic alliances and joint ventures with such larger entities if/when possible to assist to enhance our credibility and capabilities.
In our effort to compete, we intend to initiate discussions with potential candidates for joint venture or partnership possibilities. In seeking relationships, we emphasize the possible public image benefits from using environmentally friendly technologies, as well as marketing and revenue benefits. In endeavoring to this extent we have engaged the efforts of third-party sources with strong industry, private and governmental contacts in various global markets to assist us to launch our commercialization and market entry strategies over the next 12 – 24 months with the goal of establishing multiple pilot project sites for the different technologies herein.
We do not yet have any definitive joint venture or partnership relationships in place and we cannot be certain that any will materialize. We have recently had contact with an environmental solutions provider headquartered in the Philippines and we are in initial discussions with this group regarding the launching of a pilot project on Technology A at some time in 2013. We have also started discussions with a renewable energy focused development company, headquartered in India. These early discussions are premised on the possibility of deploying Technology B on a pilot basis on one of their upcoming projects in the next 12 months. Neither of these relationships has resulted in any definitive agreements to move forward and we cannot be certain that any agreements will materialize.
While the competitors may be operating similar business models, we plan to build our competitive position in the industry through the following ways:
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build out our board of directors and executive management team with skilled and proficient professionals;
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continue to develop and acquire highly innovative technologies that can be considered of a disruptive nature to those conventional technologies applied in the current marketplace
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provide a comprehensive range of environmental project and design consultative services;
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provide marketing and promotion services for the public awareness and reputation of sustainability initiatives.
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However, since we are a newly-established company, we face the same problems as other new companies starting up in an industry. Our competitors may develop similar technologies to ours and use the same methods as we do and generally be able to respond more quickly to new or emerging technologies and changes in legislation and regulations relating to the industry. Additionally, our competitors may devote greater resources to the development, promotion and sale of their technologies or services than we do. Increased competition could also result in loss of key personnel, reduced margins or loss of market share, any of which could harm our business.
Compliance with Government Regulation
Some aspects of our intended operations will be subject to a variety of national, federal, provincial, state and local laws, rules and regulations in North America and worldwide relating to, among other things, worker safety and the use, storage, discharge and disposal of environmentally sensitive materials. For example, there is a federal law, the Resource Conservation Recovery Act (“RCRA”). RCRA is the principal legislation regulating hazardous waste generation, management and disposal. Under some of the laws regulating the use, storage, discharge and disposal of environmentally sensitive materials, an owner or lessee of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in, or emanating from, such property, as well as related costs of investigation and property damage. Laws of this nature often impose liability without regard to whether the owner or lessee knew of, or was responsible for, the presence of hazardous or toxic substances. These laws and regulations may require removal or remediation of pollutants and may impose civil and criminal penalties for violations. Some of the laws and regulations authorize the recovery of natural resource damages by the government, injunctive relief and the imposition of stop, control, remediation and abandonment orders. The costs arising from compliance with environmental and natural resource laws and regulations may increase operating costs for both us and our potential customers. We are also subject to safety policies of jurisdictional-specific Workers Compensation Boards and like agencies regulating the health and safety of workers.
In addition to the forgoing, in the future our United States, and global operations may be affected by regulatory and political developments by federal, state, provincial and local laws and regulations including but not limited to restrictions on trading of offset credits, verification of offset projects and related offset credits, price controls, tax increases, expropriation of property, modification or cancellation of contract rights, and joint ventures or other strategic alliances controls.
We are not aware of any material violations of environmental permits, licenses or approvals issued with respect to our operations. We expect to comply with all applicable laws, rules and regulations relating to our intended business. At this time, we do not anticipate any material capital expenditures to comply with environmental or various regulations and requirements.
While our intended projects or business activities have been designed to produce environmentally friendly green energy or other alternative products for which no specific existing regulations present barriers on our proposed business, any regulatory changes that impose additional restrictions or requirements on us or on our potential customers could adversely affect us through increased operating costs and potential decreased demand for our technologies or products or services, which could have a material adverse effect on our results of operations.
Research and Development
We plan to fund, up to October 31, 2014, Vortex Energy with up to Cdn $500,000 to be used for further prototyping, completion of proof of concept and field testing of the technologies which have been acquired.
Employees
Currently, we do not have any employees other than our sole director and officer. We do not expect any material changes in the number of employees over the next 12 month period. We do and will continue to outsource contract employment as needed.
We engage contractors from time to time to consult with us on specific corporate affairs or to perform specific tasks in connection with our development programs.
ITEM 1A. RISK FACTORS
Risks Associated with Our Financial Condition
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.
At October 31, 2012, and for the fiscal year then ended, as in previous years, we had a net loss and negative working capital, which raises substantial doubt about our ability to continue as a going concern and caused our independent auditors to include an explanatory paragraph in their report on our financial statements with respect to that uncertainty. For the fiscal year ended October 31, 2012, we had revenues of $nil from operations. We are currently insolvent, and we are in arrears on our current accounts. Our ability to continue operations will depend on the successful implementation of management’s initiatives to raise additional funding and bring our business to profitability. If we are unable to raise or obtain needed funding, we may be forced to discontinue operations.
Our current liabilities are significant, and if those to whom we owe accounts payable were to demand payment, we would be unable to pay.
At October 31, 2012, we had total current liabilities of approximately $957,000, including accounts payable at approximately $346,000 and accrued expenses of approximately $23,000. As of the same date, we had cash of only $146. If those to whom these payments are due were to demand immediate payment, as they are entitled to do, we would not be able to make the required payments and would be subject to liability if our creditors chose to enforce their rights, which could result in our bankruptcy and liquidation, at worst. Under such a scenario, our assets would be distributed to our creditors leaving nothing to be distributed to our stockholders.
We currently have no significant operating capital and will need to raise additional capital to implement our business plan.
We presently have no significant operating capital. We believe that we will need to raise approximately $1.0 million to meet our preliminary targets by the end of fiscal year 2013. We have no commitments for that funding, and we cannot provide any assurance that we will raise any meaningful amount of capital. We will need to seek additional financing from the sale of equity or from commercial lenders or other sources, for which we have no commitments or arrangements, or we will be required to delay the implementation of our business plan.
If we are unable to obtain financing in the amounts and on terms and dates acceptable to us, we may not be able to expand or continue our operations and developments and so may be forced to scale back or cease operations or discontinue our business and you could lose your entire investment.
We do not currently have any arrangement for financing. For the foreseeable future, we intend to fund our operations and capital expenditures from limited cash flow and our cash on hand. If our capital resources are insufficient, we will have to raise additional funds for the continued development of our business and the marketing of our products. Such additional funds may be raised through the sale of additional stock, stockholder and director advances and/or commercial borrowing. There can be no assurance that a financing will continue to be available if necessary to meet these continuing development costs or, if the financing is available, that it will be on terms acceptable to us. The issuance of additional equity securities by us will result in a significant dilution in the equity interests of our stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may not be able to expand or continue our operations and developments and so may be forced to scale back or cease operations or discontinue our business and you could lose your entire investment.
We currently have no significant operating capital and are dependent upon the success of this offering to be able to implement our business plan. We presently have no significant operating capital and are substantially dependent upon receipt of the proceeds from our sale of a substantial number of shares of this offering to provide the capital necessary to execute our business plan. No person has committed to purchase any shares in this offering, and we have no commitments for other funding. There is no minimum offering amount, and we cannot provide any assurance that we will raise any meaningful amount of capital in this offering. In the event that the proceeds from this offering are not sufficient, we will need to seek additional financing from commercial lenders or other sources, for which we have no commitments or arrangements, or we will be required to delay the implementation of our business plan.
Our management has identified significant internal control deficiencies, which management and our independent registered public accountants believe constitute material weaknesses.
In connection with the preparation of our financial statements for the year ended October 31, 2012, certain significant internal control deficiencies became evident to management that, in the aggregate, represent material weaknesses, including:
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lack of sufficient independent directors to form a separate audit committee;
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insufficient corporate governance policies; and
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segregation of duties in the accounting and finance department.
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As part of the communications respecting its audit procedures for the year ended October 31, 2012, our independent registered public accountants informed the audit committee that these deficiencies constituted material weaknesses, as defined by Auditing Standard No. 5, “
An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments
,” established by the Public Company Accounting Oversight Board. We cannot be certain that we will have the necessary financing to address these deficiencies or that we will be able to attract qualified individuals to serve on our board. Our failure to successfully remediate these issues could lead to heightened risk for financial reporting mistakes and irregularities and a further loss of public confidence in our internal controls that could harm the market price of our common stock.
During the 2013 fiscal year, management plans to undertake appropriate and reasonable steps to make the necessary improvements to implement changes to remediate the deficiencies, including attracting independent directors, reorganizing our corporate governance policies and processes and hiring employees providing we have the proper financial resources.
Risks Associated with Our Business
We may not succeed if we are unable to attract employees and retain the services of our key personnel.
Our performance is substantially dependent on retaining current management and key personnel and on recruiting and hiring additional management and key personnel. In particular, we will rely on the expertise of Jason McDiarmid, our chief executive officer and chief financial officer. If we are unable to retain Mr. McDiarmid, or if we are unable to hire suitable sales, marketing, and operational personnel, we may not be able to successfully develop, improve, market, and sell products based on our technology. We have not obtained key-man life insurance on our officers or directors. Competition for individuals with the qualifications that we require is intense, and we may not be able to attract, assimilate, or retain these highly qualified people. The failure to attract, integrate, motivate, and retain these employees could harm our business.
It may be difficult for our stockholders to enforce any civil liabilities against us or our officers or directors because many of our officers and substantially all of our operations are currently outside the United States.
Many of our assets are located outside the United States, a majority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons' assets are located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state.
If we are unable to protect our intellectual property rights, we may be unable to compete successfully.
We believe that our success will be dependent to a large extent on proprietary features of our technologies we have licensed. We expect that we may continue to use proprietary technologies for future product enhancements. Unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. We have filed patent applications for our technologies but as yet have not obtained full patent protection or obtained any copyright or trademark protection and we have not entered into confidentiality or noncompetition agreements with any of our officers, directors, or employees. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where applicable laws may not protect our proprietary rights as fully as in the United States. We may be unable to adequately protect our proprietary technology and preclude competitors from independently developing products with functionality or features similar to those of our products.
Claims that we infringe upon the intellectual property rights of others could be costly to defend or settle.
Litigation regarding intellectual property rights is common. We may, from time to time, encounter disputes over rights and obligations concerning intellectual property. Although we believe that our intellectual property rights will be sufficient to allow us to market products and services without incurring third-party liability, third parties may bring claims of infringement against us. Any litigation to defend against claims of infringement or invalidity, whether or not meritorious, could result in substantial costs and diversion of resources. Furthermore, a party making a claim could secure a judgment that would require us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling products or services. Our business, operating results, and financial condition could be harmed if any of these events occurred.
We may be exposed to the risk of product liability claims in the future related to our environmental technologies under development.
Any future sales of the technologies will carry significant risks of product liability. Damage may exceed our product liability insurance and any successful product liability claim made against us could substantially reduce or eliminate any economic return to our stockholders or us.
We have chosen to limit the liability of our directors and indemnify our officers and directors to the maximum extent permitted by law, which may result in significant costs to us.
Our articles of incorporation limit the liability of directors to the maximum extent permitted by Nevada law. In addition, our bylaws require us to indemnify our directors and officers and allow us to indemnify our other employees and agents to the fullest extent permitted at law. Our chief executive officer, our former chief financial officer, and one of our employees have been named as defendants in a counterclaim against us, and we are advancing legal fees on their behalf and will indemnify them unless doing so is not allowed under Nevada law. These claims for indemnification may result in significant costs to us. If we permit indemnification for liabilities arising under the Securities Act of 1933 to directors, officers, or controlling persons under these provisions, we have been informed that, in the opinion of the Securities and Exchange Commission, this indemnification is against public policy as expressed in the Securities Act and is unenforceable.
Fluctuations in the value of the United States dollar as compared to other currencies may affect our financial performance.
We expect a substantial portion of our revenues to be based on sales and services rendered to customers outside the United States and Asia. As a result, if the relative strength of the dollar increases as related to the value of the relevant Asian currency, our financial performance would likely be adversely affected and it would become more difficult to compete with entities whose operations were conducted outside the United States in the relevant currencies. We have no plan or policy to utilize forward contracts or currency options to minimize this exposure, and even if these measures are implemented, they may not be cost-effective or fully offset such future currency risks.
If we are unable to successfully manage growth, our operations could be adversely affected, and our business may fail.
Our progress is expected to require the full utilization of our management, financial and other resources. Our ability to manage growth effectively will depend on our ability to improve and expand operations, including our financial and management information systems, and to recruit, train and manage sales personnel. There can be no assurance that management will be able to manage growth effectively.
Because we do not have sufficient insurance to cover our business losses, we might have uninsured losses, increasing the possibility that you may lose your investment.
We may incur uninsured liabilities and losses as a result of the conduct of our business. We do not currently maintain any comprehensive liability or property insurance. Even if we obtain such insurance in the future, we may not carry sufficient insurance coverage to satisfy potential claims. We do not carry any business interruption insurance. Should uninsured losses occur, any purchasers of our common stock could lose their entire investment.
We may have liabilities to affiliated or unaffiliated third parties incurred in the regular course of our business.
We will regularly do business with third party vendors, customers, suppliers and other third parties and thus we are always subject to the risk of litigation from customers, employees, suppliers or other third parties because of the nature of our business. Litigation could cause us to incur substantial expenses and, negative outcomes of any such litigation could add to our operating costs which would reduce the available cash from which we could fund our ongoing business operations.
Our market is characterized by rapid technological change, and if we fail to develop and market new technologies rapidly, we may not become profitable in the future.
The environmental and renewable energy industries are characterized by rapid technological change that could render our existing technologies obsolete. The development of our technologies entails significant technical and business risks. We can give no assurance that we will successfully use new technologies effectively or adapt our technologies to other customer requirements or needs. If our management is unable, for technical, legal, financial, or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, we may never become profitable which may result in the loss of all or part of your investment.
Our technical systems are vulnerable to interruption and damage that may be costly and time-consuming to resolve and may harm our business and reputation.
A disaster could interrupt our services for an indeterminate length of time and severely damage our business, prospects, financial condition and results of operations. Our systems and operations are vulnerable to damage or interruption from fire, floods, network failure, hardware failure, software failure, power loss, telecommunication failures, break-ins, terrorism, war or sabotage, computer viruses, denial of service attacks, penetration of our network by unauthorized computer users and "hackers" and other similar events, and other unanticipated problems.
We may not have developed or implemented adequate protections or safeguards to overcome any of these events. We may also not have anticipated or addressed many of the potential events that could threaten or undermine our technology network. Any of these occurrences could cause material interruptions or delays in our business, result in the loss of data or render us unable to provide services to our customers. In addition, if anyone can circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations. Our insurance, if any, may not be adequate to compensate us for all the losses that may occur as a result of a catastrophic system failure or other loss, and our insurers may decline to do so for a variety of reasons.
If we fail to address these issues in a timely manner, we may lose the confidence of our customers, and our revenue may decline and our business could suffer.
The loss of the services of our executive officer would disrupt our operations and interfere with our ability to compete.
We depend upon the continued contributions of our executive officer. Our executive officer handles all of the responsibilities in the area of corporate administration and business development. We do not carry key person life insurance on any of their lives and the loss of services of any of these individuals could disrupt our operations and interfere with our ability to compete with others.
Our sole officer and director will allocate some portion of his time to other businesses thereby causing conflicts of interest in his determination as to how much time to devote to our affairs as well as other matters.
Jason McDiarmid, our current sole executive officer and director, is not required to commit his full time to our affairs, which could create a conflict of interest when allocating his time between our operations and his other commitments. He is not obligated to devote any specific number of hours to our affairs, but it is estimated that he will devote approximately 20 hours per week on our business.
Mr. McDiarmid is an entrepreneur and gets involved in ventures relating to new technologies in fields that do not compete with our business. However, if his other activities require him to devote more substantial amounts of time to them, it could limit his ability to devote time to our affairs and could have a negative impact on our ability to pursue our business plan. Additionally, Mr. McDiarmid and future company officers and directors may become aware of business opportunities that may be appropriate for presentation to us and the other entities to which they owe fiduciary duties. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. We cannot assure anyone that these conflicts will be resolved in our favor.
Risks Associated with Our Common Stock
Trading on the OTC Bulletin Board may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.
Our common stock is quoted on the OTC Bulletin Board service of the Financial Industry Regulatory Authority. Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like Amex. Accordingly, shareholders may have difficulty reselling any of their shares.
Sales of a substantial number of shares of our common stock into the public market by the selling stockholders may result in significant downward pressure on the price of our common stock and purchasers who acquire shares from the selling stockholders may lose some or all of their investment.
Sales of a substantial number of shares of our common stock in the public market could cause a reduction in the market price of our common stock, when and if such market develops. As a result of any such decreases in price of our common stock, purchasers who acquire shares from the selling stockholders may lose some or all of their investment.
Because we can issue additional shares of our common stock, purchasers of our common stock may experience dilution in their ownership of our company in the future.
We are authorized to issue up to 500,000,000 shares of common stock. As of February 4, 2013 there were 17,332,445 shares of our common stock issued and outstanding and no shares of our preferred stock issued and outstanding. Our board of directors has the authority to cause our company to issue additional shares of common stock or preferred stock without the consent of any of our stockholders. Consequently, our stockholders may experience dilution in their ownership of our company in the future.
Because we do not intend to pay any dividends on our common stock, investors seeking dividend income or liquidity should not purchase shares of our common stock in this offering.
We do not currently anticipate declaring and paying dividends to our stockholders in the foreseeable future. It is our current intention to apply net earnings, if any, in the foreseeable future to increasing our working capital. Prospective investors seeking or needing dividend income or liquidity should, therefore, not purchase our common stock. We currently have no material revenues and a history of losses, so there can be no assurance that we will ever have sufficient earnings to declare and pay dividends to the holders of shares of our common stock, and in any event, a decision to declare and pay dividends is at the sole discretion of our board of directors, which currently do not intend to pay any dividends on shares of our common stock for the foreseeable future.
Our stock is a penny stock. Trading of our stock may be restricted by the Securities and Exchange Commission's penny stock regulations which may limit a stockholder's ability to buy and sell our stock.
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors". The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority sales practice requirements may also limit a stockholder's ability to buy and sell our stock.
In addition to the "penny stock" rules described above, the Financial Industry Regulatory Authority, which we refer to as FINRA, has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our common stock and have an adverse effect on the market for shares of our common stock.
Please read this prospectus carefully. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. You should not assume that the information provided by the prospectus is accurate as of any date other than the date on the front of this prospectus.
Risk Related to Potential Operations in China
Uncertainties with respect to the People’s Republic of China’s (“PRC”) legal system could limit the legal protections available to you and us.
The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. As a result, it could be difficult for investors to affect service of process in the United States
or
to enforce a judgment obtained in the United States against our Chinese operations.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which any potential sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People's Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Restrictions under PRC law on our PRC subsidiaries' ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of dividends by any PRC subsidiaries we may have in the future only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Any limitations on the ability of any future PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.